Fix and Flippers: How are you adjusting your underwriting???

Question

Hello BP Community,

To all the Fix and Flipper's out there, I am curious about what everyone is doing to pivot and adjust their underwriting during these times.

I have completed a few successful flips and generally speaking, Q4 is an amazing time to acquire the next project. However, with rates increasing and the market slowing, everything tells me to proceed with caution and be very conservative with underwriting. On the other hand, there are plenty of deals that are coming across my desk. I see plenty of investors out there that are very active and picking up solid rehab projects. I know that nobody has the crystal ball, but I'm curious about what investors are doing to consider their ARV in 2023, or if they think it's highly unpredictable.

My market is Denver, and although we are slowing, prices are not quite dropping as you hear in the headlines (depending on neighborhood location). Although home values are a lagging indicator, we are still at about 1.8 months' supply of inventory, so we are technically still in a seller's market with a long way to go until we are in a market "of balance".

Just interested to hear everyone's thoughts...

Cody Neumann · Answer

@Kevin Merlander For flips I am going with the lowest comparable sale in the area and taking 10% off that to account for a potential market shift as a cushion to protect myself.

William Harvey · Answer

We are doing something similar to @Cody Neumann where we are being super conservative with the ARV and are using an ARV that is a "no brainer" that the property would sell for. For instance we just bought a townhouse that has comps going in the $350k range, but we used $300k as our ARV. I'd be surprised if the house sells as low as $300k, but we are covered just in case!

Ricardo Hidalgo · Answer

I am noticing appraisal coming in lower for flip and it could be because banks are trying to limit the appreciation gain in this market. Most of the flips I am seeing are offering 20-30k net profits in the current market and it seems we are headed into a buy and hold market to resell into 2024 or later.

Kevin Merlander · Answer

Thanks to all, I definitely like the strategy of taking the lowest comp and knocking a percentage off of that, whether it be 10%, 15%, or even more depending on your appetite. I'm running the 65% LTV or 60% LTV if the property has some hair on it. In my market we see a spike in demand come spring, however, the rates will dictate that a bit more this year. I appreciate all the thoughts!

Eliott Elias · Answer

Am knocking off 15% on ARV and running 70% rule

Brady Hales · Answer

@Kevin Merlander I know a lot of my partners are taking 10% off of ARV if the comps are more than 90 days old. They are also targeting a 15% profit based on that .odified ARV whereas previously it was only 10%

Zackary C Dunn · Answer

As others have said multiple exit strategies are key. I like to make sure as a long-term rental I will cashflow a minimum of $300 with the rent staying within 20% of my counties average rent. In my local market buyers have lost 40% of their buying power and the home prices have corrected roughly 20%. When I calculate todays ARV I take off 30%. 20% to meet the current loss of buying power and an extra 10% because I believe the economy will be in worse shape in 6-8 months when the project will be complete.

Nate Sanow · Answer

I’ve got one on the mls that I’m sitting on longer than my original calculation for dom. Lesson learned. Days on market really matter and for my own stuff / my clients I’m running 3 versions of comps: traditional 180 days, a tighter 90 days, and if enough comps there one that’s 30 days. I also do a version with pending included on the last two. I’m really trying to study days on market especially pre-listing as it gives me some sanity as we sit and wait. Moving forward I predict it to go up and down somewhat.

Kevin Merlander · Answer

Thanks for all of this input! Very beneficial to understand different perspectives, regardless of the market conditions.

Andy Sabisch · Answer

Whenever you buy - regardless of the market - you need to have more than one exit strategy. If flipping does not work due to interest rates or the buyer pool, see what other options there are . . . possibly rent it out, possibly a STR . . . see what is an option. With that, as far as a flip today, you need to be a lot more cautious with the buys than 6 months ago. Without a crystal ball, the market when you are ready to sell the flip may be drastically different . . . or not . .. from what it is today. Take a look at the market in the March-April time frame which was the peak. Then see what has sold since and how much less than the peak for similar properties. Factor in the interest rate increase and see how they correlate with list price, sales price and DOM. Then try to extrapolate that drop to where interest rates are heading and see what it looks like in your area.We just listed a flip that gave us a decent return based on buying right. We went under contract in 10 days while the average DOM is 45 days with price drops. We had a buyer concession on closing costs but that was it. Had we listed it for $25K more, it would be lost in the clutter and still waiting for a buyer. If you can buy low and give a buyer a good deal it will sell.Hope this helps . . .