Why Seattle Flipping Is Now Risky

[Ryland Taniguchi]

Real estate is all about timing. Between 2009 and 2014, it was quite easy to flip here in Seattle. In those years, you could find REOs and short sales to buy or buy at the auction. Construction labor and contractors were readily available. 

As of writing this on November 1, 2016, flipping is ultra risky in Seattle.   Construction prices have gone up 40% to 50% in the last twelve months. Contractors complain that flippers underbudget their rehab by 50%. The commercial construction companies come around in buses to "steal" your crews. Hiring supervisors is very expensive. Permits are taking forever. Subcontractors delay for months. 

You know it's bad when you have friends saying they can't find a single contractor to install one window. Or it takes a month to get an reputable electrician to show up to fix four outlets.

It is nearly impossible to find 70% of ARV minus construction costs. Construction costs per multiple experienced rehabbers are going for $75 per sq ft to $100 per sq ft on a "gut out" REHAB.

Some could point to this experienced flipper or that one and say it works. When I look at the risk they are taking on their flips, these experienced flippers all have one thing in common. None of them was doing this prior to 2008. In other words, they have no idea how much risk they are taking.

Yes there are some that really know what they are doing and are still making it work. But I virtually guarantee that all of them are also hard money lenders as well. They are making more money doing hard money lending than their flips. 

The only areas that I would flip in now are Seattle and the Eastside. That's because I seen prices fall like crazy in every other area. In 2010, the houses in Bonney Lake, Summer and Puyallup went from $350,000 to $100,000. Kent, Lynnwood, and Lake Stevens dropped from $350,000 to $180,000. The Newcastle China Creek area and Reserve dropped from $2 million to zero buyers. Oh how people forget.

With all the construction delays going on, it is risky to use a hard money loan at 1% a month interest, 3 points and 2-point extension fees after the 180-day and 270-day mark. Hard money will eat up 8% of ARV every 6-months. If the market crashes and the days on market drop to 24-months, be prepared to pay 32% of ARV if you use hard money.

Hard money lenders make a lot of money but what they are doing is ultra risky too. Here is how it works. You raise $20 million on a reg D rule 506(c) exemption. You get a $20 million warehouse line from Columbia bank. You make a fortune on the velocity of other flippers while THEY take all the risk. The market crashes and you lose your warehouse line. You lose your warehouse lines and your top 3 investors freak out and exit. You hard money fund is down to $10 million, you have huge overhead and now your borrowers give back the keys to the property. If you loan hard money and keep your notes, you are subject to the same market price drops mentioned above. In my opinion, this hard money model is ultra risky. I have seen many hard money lenders go bankrupt during the 2008 crash and it will happen again in the next crash.

So I hear others argue that they put 100% cash on their flip. This is crazy as well if their IRR is less than 60%. Why take all the risk for such a low return. I see people happy to get a 6% IRR with 100% cash. How does that make sense?

If you can't win the game, it is better to sit on the sidelines and wait. My business now is pretty much all hard money lending but we sell the paper through our FINRA broker/dealer in 60-90 days. We loan at a 50% LTV on cash flow turnkey properties in the Midwest. I think hard money lending in Seattle is ultra risky.

I like flipping notes and flipping development projects. Flipping properties in Seattle is virtually crazy. I love flipping though and if you can do it in 90-days with the right numbers, it can be extremely profitable. I am moving to Florida halftime to flip and do BRRRR.

There are still BRRRR deals in Pierce and Thurston county... And urban townhouses deals in Seattle (only). I also avoid West Seattle like the plague. Other than these niches, I am getting out of this Seattle market. I cannot invest money other people's money with the risks being so crazy high.