Hawaii flips 2019-2020

[Kate J.]

I am thinking to pick up a property in Hawaii to flip. My worry is that the vacation houses are too volatile, i.e. they are the first to lose value in recession and the last to recover. Does it make sense to do a flip in 2019-2020 if the current market value make sense?

[Isi Nau]

Hi @Kate J.

No problem.  Housing prices are cyclical, with ups and downs over time.

Right now the market in Hawaii is at the crest and is starting to take a breather.  Breather is a good word to describe the down (or approaching down) side of the cycle here because we rarely experience a downturn, fall out, crash, etc. in Hawaii.  Prices may drop 10-20%, not 50-75%.

From a flipping perspective, we are at what I believe to be the most risky part of the cycle, which is at the crest of the wave.  The market and those in it are confused. Sellers think it's still going up, buyers think it's coming down.  Flippers get caught in the middle and have to deal with both sellers and buyers and not get burned.  

When you flip homes, hopefully you do it quickly (ideally in a few months, purchase to sale).  This means you are dealing with sellers and buyers at virtually the same point in the market.  When you are dealing with sellers at this point (the crest of the wave) they are still optimistic about the market and their home, and they keep their prices high.  This may cause a flipper to pay a premium for the property, if they aren't patient or wise.

After the remodel you are now dealing with buyers.  At this point in the cycle (crest of the wave) many of the hungry buyers have already purchased.  Many of the remaining buyers have been sitting on the fence for the past few years for one reason or another.  Their urgency and need to buy is fairly low.  If they don't purchase, they'll likely be okay staying where they are.  This causes properties to sit longer and reduce prices more.

To answer your question succinctly; people get burned at this point in the cycle by paying too much, and then having to sell for less than what they had projected they could sell for. Ultimately it's the ARV that will kill you, projected vs. actual.

In previous years, almost anyone could make money flipping.  The market was very generous and forgiving.  Put a home on the market and it would would sell, higher than the last sale.  Now the market is ready to teach people lessons.   ;)

With all this said, it is still possible to successfully flip in this stage of the cycle. You'll have to look at recent sales with a critical and skeptical eye. Over recent years a flipper could look at a neighbor generally for ARV comps. Now it needs to be done with a finer tooth comb. Also, assume your subject property isn't as awesome or unique as you initially believe. Assume you won't be able to sell at or above what the most recent ARV comp sold for. Increase your profit margin criteria to build in a buffer for sales price adjustments.