What a difference a few short months can make. Back in February of this year, mortgage applications reached an 11-year high and it’s safe to say that no one in real estate, or any industry for that matter, foresaw what was about to happen. By April, sales of existing homes fell by 17.2% compared to the previous year as statewide COVID-lockdowns severely curtailed supply and demand.
Now as we enter summer, the data is beginning to show the first signs of recovery in the residential market. In late May, purchase volume was just 1.5% lower than a year ago. Pent up demand, the lifting of lockdowns, and record low-interest rates are all helping to get the wheels moving again. However, the picture across the country is uneven, with property markets in some regions yet to experience a bounce-back.
Therefore, for some fix-and-flippers who are currently during or near the end of a project, the COVID market conditions in their location may be causing some worries. Chief among these will be a prolonged slump in demand which could leave the property on the market longer than budgeted for or a reduction in ARV which could squeeze margins. But as real estate investors, your natural instinct is to never give up, so here is how to keep calm and pivot your fix and flip.
Bringing Other Investors into Your Fix and Flip to Reduce Exposure
If you’re looking to reduce your exposure, but are still expecting to make a good return on the flip, then getting other investors to buy into your project is an option. For example, maybe your local market is already showing signs of a bounce-back, but personal circumstances dictate that it would be prudent to reduce your risk.
The natural first place to look when it comes to smaller or inexperienced flippers is friends and family. However, I would strongly advise against this route. It’s unlikely that they’ll have the required experience, so you could end up increasing the risk for all involved. Instead, you want to approach competitors who are familiar with your position. Social media groups are a great way to make these connections. Alternatively, you could ask your lender to see if they have any investors in their network who are interested in buying into your flip.
When you get down to negotiating the terms of the buy-in, you should expect and be willing to give up a higher cut of your profit versus the value of the investment. But what you get in return isn’t just a dilution of your risk in terms of cold hard cash, you also benefit from the experience that the other investor brings. For example, cost control during the renovation is crucial during difficult market conditions, but if you’re a novice flipper it can be difficult to determine where to draw the line on fit-out and finishes.
Finding Alternate Financing if You Lose Your Loan Offer Mid-Deal
Another problem flippers can face during a downturn is losing their loan offer mid-deal due to lenders adjusting their criteria without notice. This can obviously be very frustrating and cause delays which then ripple through your project timeline, such as if you already have contractors booked on-site by a certain date.
However, just because one lender has reneged on the offer doesn’t mean that you won’t be able to find other lenders willing to finance your project. This is especially the case if your project is within a local market that is already showing signs of recovery. Local hard money lenders, in particular, will know the current state of the market and will generally be willing to lend if the appraised ARV represents a good profit margin for the investor.
All reputable hard money lenders should be willing to provide a free deal review to investors caught in this position but check this first. Conventional lenders may be more likely to charge application fees, as their business models are more dependent on these fees. Also – as in the previous section, experience is key here. Therefore you want to find a lender that has specific expertise with your type of project.
Refinancing Options or to Cover a Longer Sales Window
A natural reflex for flippers caught in difficult market conditions is to hold onto the property and refinance it into a rental. However, you need to carefully consider the pros and cons of this. Is sales data already showing a bounceback in your local market? Could the ARV, therefore, return to the pre-crisis estimate by the time you refinance and find a tenant? Are rents, and therefore rental yields, going to suffer a decline due to larger property developers dumping stock onto the rental market in your area?
So before making any decisions on rental refinancing, talk to your lender and other investors to get their expertise and thoughts on where the market is heading. You want to consider the likely direction of both prices and rents for properties with your spec in your local area.
The other reason you may need to refinance during a crisis is when your sales window is much longer than originally planned, due to reduced demand. Again, your existing lender should be your first call, as they’ll understand the situation you find yourself in and may be able to guide you to the finish line. When it comes to shopping for your refinance options, make sure that your lender knows all the facts of the property, including the estimated value, your existing loan terms, the property’s occupancy status, and the current or future rental income expectations.
Immediate Exit Strategies for Investors Who Need to Dispose of Inventory
In some instances, flippers may determine that it’s better to find an immediate exit strategy rather than continuing with the project. If you find yourself in this position then your lender should once again be able to help. For example, we’re currently working with a borrower who wants to exit the market and dispose of 38 properties. We’re helping the client by putting together a campaign to market the properties to other investors within our network.
Another option here is to negotiate a cash for keys deal with your lender. This is different from the cash for keys deals that landlords make with non-paying tenants or lenders make with owner-occupiers in foreclosure. When it comes to fix-and-flips, this is when a borrower wants a return of their down payment in exchange for transfer of ownership of the property. The borrower will make a small loss due to the closing costs, mortgage payments or renovation costs they’ve already paid. However, if faced with a project that is no longer viable due to market conditions, this course of action can be the cheapest exit strategy in a worst case scenario.
It goes without saying that we’re in completely unchartered waters. But it also goes without saying that we’re all in this together. Remember, the success of the borrower is the success of the lender, so during these trying market conditions of COVID-19 your lender is here to help. And to end on an uplifting note, while it’s still too early into the crisis to determine the medium to long term outlook for the residential market, recent data is suggesting we could be seeing those green shoots of recovery already.