During the past four to five years of the housing bubble burst, many investors have taken advantage of the opportunity to buy houses at a discount either through foreclosures, short sales or REO's and resell them for a quick profit. The “fix and flip” strategy as it is commonly known, was out in full force. Anyone that could get the capital needed to buy these properties and repair them over the short term was out doing so in force. However, the latest market news is beginning to show some cracks in this business model.
The real estate market is starting to show signs of recovery. Real estate price tracker company Corelogic has reported rising prices in many markets across the country for the past four months straight. While this may be good news for homeowners and the overall economy, it is bad news for the fix and flip investor. When property values go up, other types of investors begin to enter into the market. The most common of these are the buy and hold investors.
Buy and hold investors are looking at properties as long term investments. Their goal is to buy the property at a price where they can rent it out and cover their carrying costs on the property while still maintaining a positive cash flow. They are waiting for property values to continually increase over time and thereby build equity in their investments. Because they are looking at the longer term prospects of the property, they are not concerned with getting the property at the absolute rock bottom price. They don't need to have a sizable profit margin built into their purchases because they have no intention of selling the properties anytime soon. This allows them to pay more for the properties.
How this effects the fix and flip investor is it makes it harder for them to get steeply discounted deals. For example many investors purchase properties at foreclosure auctions. When property values are unstable, many long term investors shy away from these types of auctions because they don't want to take a chance on the value of the property declining. However, the fix and flip investor doesn't care about that. So long as he can get the property at auction at a good enough discount he can buy it, repair it, and sell it for a profit. Once property values are showing a steady sign of increasing, the buy and hold investors are more comfortable purchasing properties at auction. And since they aren't concerned about turning their investments over for a quick sale, they normally will pay more for the property than a fix and flip investor. This means they will outbid other investors for the same property. This makes it harder and harder for the fix and flip investor to find a good deal.
Also, with rental prices showing steady climbs across the country, a buy and hold investor can get more money in rent for a unit which means they can afford to pay more for it up front because their expenses will be covered by higher rental income.
What this means is the quick sale, fix and flip investor is going to have to work harder to find deals and look outside of auctions and short sales for leads. Like all aspects of real estate investing, you either adapt or die. Fix and Flip investors are beginning to see the writing on the wall and the good ones are already adapting to these changing market conditions.
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