Anyone else finding flips to not pencil out lately?

Question

For some context I have completed 3 BRRR's and brokered dozens of deals to investors both on the buy and sell side. But lately have had a hard time finding anything to BRRR or even with enough skin to flip. I bought all my deals off MLS but also get lots of emails from wholesalers. The wholesale deals are even worse then what I can negotiate off MLS. Some example...

$135k firm counter from seller and needs $40k rehab. Close costs/carry on both sides will be around $17k. All in $192k and could sell hopefully $215k. It's OK but super skinny and a lot of work doing a rehab loan for $23k profit if everything goes perfect. Thats with my cheap subs and me paying them cash using a GC this would be a $70k rehab and negative equity.

Other deal $137k lowest and needs $25k rehab ARV $180k. Would be a buy/hold and cashflows decent probably get $1800 but skinny from equity standpoint and in a C area with a basement that needs atleast $10k alone.

My guess is most of the deals selling go to newbies who have no idea what a rehab really costs or that once you open the walls the costs often go up 10's of thousands so you need a solid margin to make money.

Stuart Udis · Answer

It sounds like you have to adjust your strategy. For your strategy to work you have to focus on markets where there are strong indicators the C neighborhood can transition into a B neighborhood. Appreciation is how you can make money in markets where price points are disproportionately impacted by construction costs not with cash flow or flipping.  Not to mention flipping homes at this price point is a painful proposition. Its the bottom of the bottom of FHA. The buyers need (not request) a full 5%-6% seller assist and become complete menaces and eat into your margins with lengthy repair addendums following inspections.

As you alluded to you will also be competing with unsophisticated buyers. There are a ton of properties that are purchased wrong either because the buyers construction budget is off or their projected out sale/rents are incorrect. Both lead to that buyer overpaying and taking an opportunity off the board for the investors who have their underwriting completed accurately.

I believe its somewhat market dependent but it has become increasingly difficult to make construction oriented deals work in the price points you mentioned. I invest in Philadelphia and nine years ago I was able to complete a two story 1200 SF rowhomes rehab for $50,000 with no shortcuts, fully permitted etc. That same renovation now costs $100,000 with added permitting/design expenses and lengthier permitting timelines.

Sometimes you must adapt to what the market is telling you as well. My bread and butter for a number of years were ground up $250/sf outsale single family homes and condos but that was when I could build for $100/SF. Now my focus is on heavy rehab mix use/ multi-families that can be delivered below replacement costs and  $400/sf+ outsale new construction opportunities. I can't make the former strategy work even if I were to acquire the land well and that goes back to construction costs.

Henry M. · Answer

You hit the nail on the head... And regarding wholesalers, probably 99% of those deals are garbage. Unless you're direct to a seller, you'll often find yourself with a short pencil.

Here in Texas, I’ve gone through hundreds of deals this year and maybe half a dozen deals were worth the investment.

We'll see what occurs this coming year and how it will affect real estate. In the meantime, hang in there. 😎

"Big" Henry

Bob Stevens · Answer

Not really sure what else to say except find better deals and or go to a different market. I live OOS and have done let's just say one or two deals. Ex, all in 75kish value 130k, All in 90k value 140k, ( I can provide 100s of examples.) Now most of these I am keeping as rentals as they exceed the 2% YES 2% Rule, 75k rent 1700, 90k rent 2k, all in 230k (7 unit) rent 55k.

Good luck to you

Jaron Walling · Answer

Winter season. That's another reason we started looking again. We have bought two properties in the winter. There's less listings but less eyes on properties. Best of luck man! Maybe you find a deal you can't pass up.

Alan Asriants · Answer

Seems like many deals don't pencil out in many markets. As Stuart mentioned, it gets even tougher with lower price point homes. It takes the same amount of money to rehab a 1200sqft home in A class or D class neighborhood, but likely you can build better margin in better neighborhoods.

That being said, as soon as it hits the market, everyone wants in, and even off market, after receiving 3 calls a day from investors, sellers want the most for their home.

I think the market has to really shift, where people just don't want to take on rehabs for there to be equity built into the deal.

Really not much room from what I try to analyze. I'd suggest looking into higher price points where there is more "room"

Jaron Walling · Answer

We have walked a few wholesaler deals, looked at the MLS, and sent a few letters (no where near enough) trying to get back into the market. I'm getting the same results. Lots of skinny deals, overpriced vs. sqft/layout, bad street, or a combination. Most of the distressed wholesaler stuff is the bottom of the barrel, C class, or worse. MLS has some opportunities if you can negotiate down on distressed property. That's a big ask though. We need more cash and need to quit looking in these locations. We found success there so it's hard to switch off the brain, and level up to better locations.

JD martin said in another post we have a log jam in the housing market with no end in sight. Federal debt and fear of hyper inflation has homeowners in a gridlock. Nobody with a 3% rate would sell (unless the economy forces them) and jump into a 6%+ rate.

Profiting $23k NET would be a homerun flip in our book but to each there own!! Haven't found that deal yet.

Caleb Brown · Answer

I've noticed the last couple weeks open up on deals. Still tight but not as skinny as Q1/Q2/Q3. We'll see how 2025 starts

Russell Brazil · Answer

People are still flipping in high volume.

So what you need to look at is what are active flippers paying for properties, and what are they paying to rehab them. Then you need to get your costs in line with theirs.

Henry Lazerow · Answer

@Stuart Udis thanks for the feedback great read. I think I do need to adjust my strategies a bit. I also can go higher prices by tapping into a heloc for part of downpayment.

Anyone else finding flips to not pencil out lately?

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