How is the rehab market in your area?

Question

I am in the Tampa Bay area and Wall Street has completely screwed things up here. They have pumped so much money into homes here to rent them out that the inventory is now just crack houses. I am sitting on money but can't find decent single family houses to rehab. I need to start looking outside this area.

Frank Chirkinian · Answer

@David Weis I'd like to chime in here having been an active investor in South Florida for the past 6 years.  You are not alone my friend.  This market is overheated with new investors and deals are extremely sparse.  This is NOT the right time to be investing, wholesaling or rehabbing in my opinion.  Our prices have topped out and are starting to retreat.  If we're hit with a large correction in the stock market (witness today's 300 point drop), home buyers will probably take a blow to their consumer confidence.  This market is like any other.  One day the buyers are everywhere, the next minute they've disappeared.  You don't want to be caught on the wrong side of that curve (see @Giovanni Isaksen comments and graph above).

For the past 7 months my deal flow has dropped off a cliff.  I'm also seeing inventory building once again which is a red flag for any investors.  Newbie investors abound and property owners are demanding higher and higher prices.  I've elevated my direct mail campaigns and online advertising to stratospheric heights with little results in Palm Beach and Broward markets.

Being licensed, I also have access to the MLS, and the below chart showing inventory tells the story.  I've published this on more than one occasion in the BP forums in an attempt to warn my fellow investors from being too aggressive in this market.  And by the way, I take this data directly from the MLS each day and chart it myself.

Now I'm not saying abandon ship, just warning about market changes and how quickly they can happen.  I watched and warned in 2004.  I'm seeing the same behavior from investors again.  I'm fascinated to see how the memory of 2005 has faded from consciousness.

David Thomas · Answer

@David Weis the rehab market in NJ is very competitive and high quality rehabs of SFR flips are selling very quickly.  Deals are out there for cash buyers.  I agree with @Giovanni Isaksen in his comments regarding cycles and alternative strategies & markets.  Some of the most successful investors adjust their strategies over time based on the RE cycles and trends (look at @Will Barnard as a prime example!) , otherwise you will have to wait it out.

I know this isn't your niche as you noted, its just interesting to see that the demand for new housing is strong and will keep growing as the US housing stock is aging, less energy efficient, costly to upgrade, etc. vs new homes.   Can you partner or JV with a local builder?

http://eyeonhousing.org/2012/01/31/an-aging-housing-stock/

http://www.constructiondive.com/news/builders-put-positive-spin-on-negative-number-for-housing-starts/218564/

http://www.demandinstitute.org/sites/default/files/blog-uploads/tdihousingdemand.pdf

http://www.bloomberg.com/news/2013-12-24/sales-of-new-homes-in-u-s-exceeded-forecasts-in-november.html

Giovanni Isaksen · Answer

A little food for thought... Maybe the market is telling you the cycle is peaking and you need to find a different strategy or a different market. As value oriented bargain hunters when 'everybody' is buying we want to be sellers and when they're 'all' selling we want to be buyers. Real estate is one of the most cyclical businesses on earth and paying attention to where your market is in its cycle is critical for long term success.

Sometimes you have to wait patiently or develop a second strategy that works from peak to trough to compliment your main up cycle strategy. I'm sure everyone knows or has heard of builders who have gone broke three or four times because they only know to build, build, build.

Matthew Gardner over at Gardner Economics (http://gardnereconomics.com/) has a chart that illustrates the cyclicality of real estate markets. Notice that demand typically tops out before supply:

Where is your local rehab market in its cycle?

Good hunting-

Ramon Jenkins · Answer

If you ever consider the buy-hold route:

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Milwaukee, Indiana, Ohio or Kansas City

just to name a few Midwest 2% communities

Might be of some interest to you 10 Cities

Account Closed · Answer

Is this still the case where you are at?

Giovanni Isaksen · Answer

Great post @Frank Chirkinian. There's an old saying that real estate has 10-year cycles, but real estate professionals only have five-year memories.;)

Will Barnard · Answer

I agree that you must adjust to market conditions. That could mean you need to switch strategies all together, switch areas of focus, or simply switch acquisition strategies (one example would be to do direct marketing for motivated home sellers as opposed to shopping the MLS)

Daniel Miller · Answer

@David Weis

I feel your pain David. St. Petersburg, being your next door neighbor and part of the same Metro area, has suffered from the same hedge fund activity. I am a Commercial Real Estate Agent with a focus in the multi-family sector and I have seen small multi-families (properties more in my budget) go for the following

Duplex $650 rent each unit  - $90,000

Multiple examples of these deals scattered all around St. Petersburg. You can find the occasional one for $60,000 but it normally has some baggage.

Typical Fourplex $650 rent each unit $180,000+

In the area where I live (rents are $700-$750) the fourplexes go for $275,000.

I'm just holding on right now. I can't find anything. I'm under contract right now but it took me 9 months to find a property that fits my criteria. I have more cash to spend but the multi-family deals are all outrageous either by sellers asking too much or buyers bidding over the list price.

In 2012 and 2013 Middle-class buyers in the greater St. Petersburg submarket had the option of either increasing the size of their down payment to compensate for the fact that the house didn't meet the appraised value (artificially high values due to hedge funds' massive purchases) or look for a different, less expensive, house.

SFHs were going for $400,000 for 2,000 square feet. Quadplexes were going for $250,000. Persons wanting to live in the neighborhood could if they took on the added responsibility of managing a building. Many unqualified person took this gamble and thus due to the exorbitant hedge fund SFH purchases in the greater Tampa Bay Area residential multi-family dwellings were artificially enhanced as well.

Jeff Pollack · Answer

Hey David,

If you want to stay in your area I'd go with Dell's suggestion and do some direct marketing (mailers, door hangers, bandit signs, door knocking, etc) to find off market deals.  No matter how much money hedge funds are spending in your market those deal are always there.  Or if you are comfortable with it, go out of state or into secondary markets in your area where the hedge funds are not playing.

Happy hunting!

Cheers,

Jeff

How is the rehab market in your area?

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