Gone are the low lying fruit of real estate investing

May 22, 2013

(Photo by Justin Pierce)

Back in 2009, you could do a simple search in the multiple listing service and take your pick from dozens of deals that were good potential rehab (flip projects).

I, and most other real estate investors, treaded lightly in fear of a variety of financial, economic and industry worst case scenarios. But there were a lot of deals to be had and much less competition.

Now there is no denying we are in an upswing in the local real estate market. With prices rising and growing confidence in the economy, there are many more people out there trying to buy fixer-upper homes.

From 2008 to 2012, I got most of my projects off of the open market. Using my own real estate license and the services of other real estate agents and brokers, I was able to keep my portfolio and pipeline relatively full. However, my profit margins dropped dramatically in 2012. I took much tighter deals to keep my contractors busy and to grow my market share. But the profit on several of the deals I completed were just not worth the effort and my investors, who had grown accustomed to 20 percent plus return on their investments, began to grumble when their margins dropped to the high teens.

It is clear that the low-lying fruit for real estate flippers have been snatched up and now those of us trying to maintain a business have to work harder to find deals. I still work the multiple listing service but most properties there cannot be secured at a price low enough to sustain my business.

In March, I made an offer on a foreclosure that was $45,000 above the list price and I was still outbid by $10,000.

The cost of just buying and selling a home is around 12 to 15 percent of the end or after-repairs sales price. Then the cost of renovation has to be added in and a profit has to be made. Normally, I shoot for around 15 percent profit. That means that most homes need to be purchased at about 40 to 60 percent of the end price. That is not easy to achieve these days.

Now much of my efforts have gone from distressed homes on the multiple listing services to finding sellers directly. There is a pool of sellers out there who want to close quickly. They don’t want to deal with real estate agents. They don’t want to be hassled with home inspections or jump through hoops for the buyer’s lender.

Finding these people is the real trick. In order to make contact with the target market, I have more than tripled my marketing expense. I’ve taken out a quarter page ad in the yellow pages. I am redesigning my Web site and started another feeder site to rank higher on the search engines.

I have hired an assistant who is putting out about 500 mailers per week. He also drives neighborhoods and searches Craigslist and for sale by owner Web sites to identify properties. I have advertised some on Facebook and I’m experimenting with e-mail and newspaper advertising. I am increasing my networking efforts and taking more time to have face-to-face meetings with other investors, real estate agents, wholesalers and other market players.

I have closed two deals so far this year directly with sellers. I purchased one last Wednesday in Temple Hills. This seller had owned the home since 1976. She had moved out some time ago and the home was sitting vacant. I did not know it at the time but the home was about to go up for auction for delinquent taxes.

It was in their interest to sell the home quickly before it went on the auction block. I was very open with them. I gave them my very best price and I told them that they could likely get more money for the home if they listed it on the open market. There were several investors interested in the home but I was professional, completely honest and I showed them the money.

Luckily for them this particular home was in an area of much bigger homes. This gave me the option of adding more value to the home by doing an addition.

We plan to take the entire roof off of this home and add a full second level. This particular home was so small that it would have been difficult to sell since it would not really accommodate a family. Selling to me got her much more than she probably would have received from a tax sale and it was much easier and faster than selling on the open market.

Pierce, a real estate investor based in Northern Virginia, over the next few months will chronicle his experiences renovating and selling the Temple Hills house. Follow him on Twitter at @justinpierce1

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