It’s rare I’ll pull a post back from the archives in full but a truly brilliant comment caused me to do so.
Says John, on this post from August of 2009,
Small window of opportunity huh? lol
Internet sucks for Realtors and their amazing wisdom. Tell me about how few 45K houses there will be come this year with the next 1,2 million foreclosures. LMFAO!
This naturally brought to mind the Douglas-Lincoln debates in which Honest Abe said, “WTF? No time for this, GTL.”
Sadly, the facts don’t quite back John’s argument, if you can call it an argument. Stretching greatly to give him an argument, that the market is going to be flooded with $45,000, I replied …
Not sure if you read the entire post but other than lowering the $100K to approximately $80K, there’s nothing in there I don’t stand behind today.
By the way, in Maricopa County there were 6,804 single family detached homes that sold for $45,000 or less in 2009, the year of this post. Last year, that figure dropped to 4,198 – a 38 percent decline in a year when overall sales fell less than 6 percent.
Guess that means the Internet sucks for trolls, too.
And with that, step back into the archives with me, would you?
At least once a week I’ll receive a call or e-mail from someone looking for homes in the $50,000 and lower price range here in the Phoenix real estate market. While the order in which they’re presented varies, the two primary factors rarely do:
1) The would-be buyer wants a property that might need a little work, either so they can build their own sweat equity or later sell the home for a profit.
2) The would-be buyer will be paying with cash and can close quickly.
Let’s take the second part first. If you’re looking under $50,000, you almost have to be paying in cash. Lenders have a floor below which they won’t write a mortgage. And more importantly, there are dozens of investors looking in this price range, all paying cash and all promising a quick close. Cash in this price range doesn’t give you advantage, it only gets you a ticket to the game.
As for the first part, the basic economics tend to get in the way. Many buyers operate under the assumption that when fixed up – either renovated, repaired or updates – a home selling in the $35,000 range will be worth twice that. Except … given the market in the areas where these homes are located (and keeping in mind they’re priced based on the recent sales in the area) a $35,000 home when fixed up isn’t worth much more than that $35,000 and won’t be until positive appreciation begins.
The other major obstacle is the price of repair as a percentage of the overall cost is far too high to create a margin to resell the home. A new air conditioner is going to cost between $4,000 and $5,000, give or take a couple of hundred. That price doesn’t change based on the cost of the house you’re buying that may need one. On a $50,000 house, that air conditioner already has added 10 percent to the money out the door to repair.
That’s just the air conditioner … built-in appliances, kitchen cabinets, plumbing fixtures and/or whatever else may be missing or in need of repair carry similar (relatively) fixed costs – costs that are a significant portion of the sales price.
So what’s the solution for a would-be investor looking for properties to purchase, improve and still sell at a profit? Aim a bit higher price-wise. Look above the $100,000 mark – in this area, the repairs are a smaller percentage of the overall cost and will be less of a drain percentage-wise on the possible profit.
This, as you can imagine, isn’t always the most welcome advice in a market where all folks seem to hear about are the $45,000 homes flying off the shelves. So be it. The reality is there is a very small window here for investors wanting to fix and flip, whether for the altruistic idea of FHA-eligible homes or simply for the profit. It’s far better to crunch the numbers up front, even if only theoretically, before spending too much time chasing a pot of gold that simply doesn’t exist.