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The Economic Reality of a Sub-$50K Fix and Flip in the Phoenix Real Estate Market

The Economic Reality of a Sub-$50K Fix and Flip in the Phoenix Real Estate Market

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.

Comments

  • BawldGuy says:

    If these homes are located in poor areas, I pass. On the other hand, if their in average blue collar areas, the recovery ‘tide’ will float those boats first and highest as far as percentage of increase and velocity.

    That said, it’s still much more of a gamble then what you’re recommending. You’d think the risk factor would be #1 on the hit parade after all we’ve been through. I like what you’re saying — at least for the amateur. Even the pros will tend to shy away from the poorly located homes when there are plenty of decently located options available.

  • If it were apples to apples, then I’d be inclined to agree. But this is more like apples to road apples, if you get me. You may see a more substantial increase on a percentage basis but you’ve investing a higher percentage in just to get the house in condition to move.

    And that also assumes a buy-and-hold strategy of some duration, whatever it may be, though it’s almost certainly more than the “only until I fix it up” time frame that seems to be the plan for those calling.

    I’m with you on pros weighing location … which also leads to a little higher price point than the $5 discount bin everyone seems to be searching.

  • BawldGuy says:

    Road apples — no room for misunderstanding there. 🙂

    Since that’s the case, what you say makes total sense.

  • Whizzer says:

    The analysis should be of $$ amount discounted from market value ie.
    the cost needed to bring house up to snuff. If the discount covers
    the cost of a new a/c, for example, then there is peace of mind that
    you won’t have to deal with that expense any time soon. Unless, of
    course, the tenant or passer-by takes it with them.

  • If someone’s looking for owner occupied or is looking for a long term hold, Whizzer, then I agree. But those haven’t been the kind of calls that have been coming through.

  • John says:

    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!

  • Jonathan Dalton says:

    I have to admit, John, my wisdom isn’t anywhere near as deep as “LMFAO” … was that Shakespeare.

    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.

  • John says:

    Actually it does not suck for realists. 2010 dead cat bounce is over. We will see what you say at the end of this year. But I am sure you will spin the with NAR conviction.

  • John says:

    I feel sorry for all the people you screwed with your insight. Buy higher!! Keep it going!!

  • Jonathan Dalton says:

    So far the only one who has said “buy higher” is you, John.

    I’m sure I won’t spin with the NAR conviction as I never have – need to read more than one post. I’m also sure at year’s end you still won’t have anything original to say.

  • Dave says:

    tick-tock the prices drop……

  • Jonathan Dalton says:

    Depends on the city, on the neighborhood. Blanket observations about home prices, considering even gas prices vary from area to area, aren’t irrelevant. Your IP shows Kansas/Oklahoma, is it different there?

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