Preparing for a recession

[Patrick Philip]

Warren Buffett recently told his shareholders that they should expect stock in his company to lose 50% of it's value sometime in the near future. In other words, expect a recession.

How does this affect the flipping business? More foreclosures, less buyers, lower home prices, more inventory of distressed/foreclosed homes. I am not sure if that is a good or a bad thing for a flipper. More inventory sounds good, but I honestly have enough inventory now. Lower ARV also means lower discounted price, so that might be neutral. Of course, common sense would tell you that a recession is bad for any business. Perhaps longer expected days on market due to less buyers?

Another question, why do foreclosed homes make good flips? Just because something was foreclosed doesn't mean it is distressed. I could understand why a short sale would make a good flip because the price is discounted, but regular foreclosures?

[Dave Passey]

From what I hear, flippers have the most difficult time continuing their normal business in recessions. I think as long as you are able to adapt to your market then you will always be able to get things to work. I was not investing during the last recession so I don't have personal experience, but I know there are a lot of other options. I would look forward to a lot more rental properties and Subject To type situations. Prices are lower which is good for buy and hold and people will be needing creative ways to off load their houses which makes Subject To attractive. 

To me, flipping would be tough because, like you said, there is a lot longer holding times. 

[Jay Hinrichs]

well foreclosures take a long time to start and germinate in most states.. so even if they started today in many states you would not see them coming up for 18 to 36 months from today.. long lag times in those.

but it does not matter what the economy Is doing there are always forclsoures.

due to

1. divorce

2. death

3. health

4. strategic

5. mismanagement of personal finances  ( probably the largest)

[J Scott]

Recessions are no better or worse for flippers then boom economies...only different.  If you have the skills, the resources and the perseverance, you can make just as much money during a recession (if not more) than during strong economies.  As an example, I started flipping in 2008, during the worst recession in the past 80 years.  I made more money in 2009-2012 than I made in 2015-2017.

But, to thrive during a recession, you need to be good at this business and you need cash.

Btw, the worst thing for a flipper is buying during a boom but then not selling until the recession starts.  That's when you lose a lot of money.  If you're currently holding property (or will be buying anytime before the economy turns), I highly recommend trying to get it rehabbed and sold as quickly as possible.    

[Patrick Philip]

Originally posted by @J Scott:

Recessions are no better or worse for flippers then boom economies...only different.  If you have the skills, the resources and the perseverance, you can make just as much money during a recession (if not more) than during strong economies.  As an example, I started flipping in 2008, during the worst recession in the past 80 years.  I made more money in 2009-2012 than I made in 2015-2017.

But, to thrive during a recession, you need to be good at this business and you need cash.

Btw, the worst thing for a flipper is buying during a boom but then not selling until the recession starts.  That's when you lose a lot of money.  If you're currently holding property (or will be buying anytime before the economy turns), I highly recommend trying to get it rehabbed and sold as quickly as possible.    

 Problem is, it's impossible to predict when the economy will crash.

You could put 10 economists in a room and they'd all disagree with each other.

[Tae C.]

@J Scott

What about during a downturn, meaning while the market is in active decline from a peak as it heads into ultimately the bottom? It just seems to me it would be rather difficult with, in theory, a continually declining ARV from the time you begin the rehab process to the time you finish the project and get ready to list at who-knows-what-price at that point. Almost seems like it would be "easier"/better to flip at the bottom of the market bc at least values have seemingly leveled out and you can gauge ARV more accurately at that point.

[Patrick Philip]

Originally posted by @Tae C.:

@J Scott

What about during a downturn, meaning while the market is in active decline from a peak as it heads into ultimately the bottom? It just seems to me it would be rather difficult with, in theory, a continually declining ARV from the time you begin the rehab process to the time you finish the project and get ready to list at who-knows-what-price at that point. Almost seems like it would be "easier"/better to flip at the bottom of the market bc at least values have seemingly leveled out and you can gauge ARV more accurately at that point.

 But there's no way to know what part of the cycle you're in until it's over and you look back on it.

[Tae C.]

Originally posted by @Patrick Philip:

Originally posted by @Tae C.:

@J Scott

What about during a downturn, meaning while the market is in active decline from a peak as it heads into ultimately the bottom? It just seems to me it would be rather difficult with, in theory, a continually declining ARV from the time you begin the rehab process to the time you finish the project and get ready to list at who-knows-what-price at that point. Almost seems like it would be "easier"/better to flip at the bottom of the market bc at least values have seemingly leveled out and you can gauge ARV more accurately at that point.

 But there's no way to know what part of the cycle you're in until it's over and you look back on it.

Yes, but the question to j Scott was just hypothetical what-if. But, having said that, at least during a decline it would seem to be fairly doable to see values consistently dropping with each passing month to recognize that the market is in decline. But maybe i am oversimplifying it. 

[Manolo D.]

Tae C. You wait and hold on to your cash like it’s a life jacket on a tidal wave, once recession hits rock bottom or settles, buy a ton of properties and start rehabbing. It needs to bounce back a little so people will have money or job to pay for the mortgage. It’s a timing game on when is the rock bottom and when it will start to bounce

[Tae C.]

@Manolo D.

That makes sense.  Just heard on a podcast today, one guy's strategy specifically at or near the bottom of the market is to basically over-rehab to make sure his property really stands out to prospective buyers, recognizing he is probably drawing from a smaller pool of retail buyers at that time.  Would you agree? 

[Greg H.]

For those of us that do this for a living,  I am going to keep on flipping no matter what the state of the economy.  I have been doing this since the early 90s and have weathered a few downturns.  For the most part, i use my own funds so it helps me sleep a little better at night knowing that in the worst case I can hold out or turn it in to a rental

My golden rule of flipping is....."It just ain't personal".  There is no deal...no house that I have to have.  If I cannot buy it at my price then I just move on to the next one.  I cringe when I see posts on BP about the house they just have to have

A profit is a profit.  Not every deal is a home run as even Babe Ruth hit a singles from time to time

[Kenny Lee]

Just have to know your local market.  Here, jobs are moving in by the thousands that aren't going anywhere and the state and more specifically local economy is booming.  Some markets/states do okay during a recession, some are God awful.

That said, you still have to buy not like you're in an upward swing, but based on flat at best or even anticipating a small downturn where if I buy at X, rehab costs Y, the least I can make is Z if everything goes to hell in a handbasket in the next three months.  Does seem like many are way overpaying based on continued rising of home prices lately however.       

[Jay Hinrichs]

@Tae C.  that's what we did in the trench of the recession.. our little starter houses all had slab granite stainless .. new wood floors designer paints etc.. prior to that starter houses.. had formica  paint the walls white appliances  shampoo the carpets and call it a day.

[Tae C.]

@Jay Hinrichs and you found that this approach did allow your homes to sell rather quickly, relative to the down market?

[Jay Hinrichs]

@Tae C.  YUP in Oregon and WA that worked.. sales did not come to a complete stop and exisiting homes sold because new construction came to a screeching halt people still pass away still were moving  etc etc ..

if you think of our PDX metro in 07 we pulled 12,000 building permits or that's permits for 12,000 doors some of that is multi of course.. in 09 we pulled 700... ergo pretty much ever contractor and sub just about went banko..

so in the trench we got great pricing ( for those still in business)  right now in the go go market pricing is quite high its costing me about 20% more to build the same house as 6 years ago.. for instance..

we call that inflation LOL

[Tae C.]

@Jay Hinrichs

That is an extreme turn around on decrease of building permits during the recession. So 20% higher now than back then...I guess it still works because the values have outpaced even the 20% cost increase, at least in your neck of the woods I would assume. 

So do you agree as well that in an actively declining market, it’s best to just hold your cash position rather than try to risk a flip, and then just wait until the bottom hits/market starts increasing a bit before putting your money back in play?

@Greg H.

So how did you keep doing it in volume during an active declining market back in 08-09?

[Jay Hinrichs]

@Tae C.  I personally think its regional I have never stopped anything in 44 years.. may pivot from one thing to the next but if I stop I stop eating as well.

when RE got really bad for instance in the mid 80s with 20 % interest rates we went to owner financing

when it crashed In the bay area I went to ORegon and started Logging and made HUGE money.

when Japan crashed and the log prices went with them I went back into buying and subdividing and Hard money lending.. etc etc.

08 to 2011 of course were very very bad but we did not stop.

[Sam Shueh]

Need to have deep pockets to survive when the investment property values tanked and passive income(i.e. rental) stopped. Control your cost by getting below market price. Those overleverage investors are the first to get burned. 

[Matthew Paul]

I just ignore a recession .  Just roll with the times .  I started by business in the 1980's , bought a house in the 80's with 12% interest . Still have both . when times are good bank money when times are bad buy deals 

[Anthony Palmiotto]

It is not that a foreclosure is a good candidate for a flip per se, rather it is that these properties are aoften able to be acquired for a steep discount. As such, any property that you can purchase under its as-is value is at least a good starting point in determining what would make a good flip.