REAL ESTATE

When Will Home Prices Fall? +The Affordable Housing Solution

When will housing prices drop? Will real estate prices go down, or are we stuck with ever-worsening affordability as home prices continue to rise? What’s the solution to affordable housing, and why can’t investors just build smaller, more affordable homes? Our panel of expert investors gets asked these questions all day, so in this episode, we’re taking the above questions and some others from the BiggerPockets Forums and throwing them at our seasoned investors to get their takes.

First, we ask, “What would have to happen for home prices to drop?” Investor or first-time homebuyer, you’ve probably asked yourself this question. We’ll give an in-depth scenario of the exact supply and demand factors that could cause prices to finally fall. Next, how to create affordable housing and why investors might be the answer. With high home prices, is it better to buy and hold or flip houses in today’s market? Plus, the experts share exactly WHICH markets they see the most potential in today. Finally, you’ll get the pro flipper’s tips for comping properties in a market with barely any home sales.

Do you have a question to ask the experts? Post it in the BiggerPockets Forums, and we may answer it on a future show! 

Henry:

What burning questions do real estate investors in our community have today? We’re going to be answering your questions about the economy and the housing market, and we’ll take our experience as active investors and give you our take so that you can make more informed decisions as investors. What’s going on everybody? Welcome to On the Market podcast. I am one of your hosts today, Henry Washington, and I am joined by my good friends James Dainard and Kathy Fettke. Unfortunately, Dave is not here with us because he’s off in some Scandinavian country doing something outdoorsy like hiking or camping or something. That sounds terrible, but I’m glad you guys are here with me.

Kathy:

That actually sounds pretty fabulous to me. I would say I knew you’d say that I could be hiking.

James:

The only time I have to go hiking is when my wife drags me up a hill. I definitely prefer beaches and boats over hills.

Henry:

Yeah. James, do you and I vacation similarly? So when you go on vacation, I’m in, but I’m out for hiking and camping with Dave and Captain

Kathy:

All. Well, today what we are going to do is answer some of our listener questions, as you said, and our goal is to try to help make some sense of this crazy real estate market that’s been up and down and all over the place. We’ll be going over topics like the rise in housing prices and why that keeps happening, flipping versus buying and hold investing. Today we’ll talk about inventory and affordable housing, housing markets and we’ll end with a question about comping and pricing a home when nothing else has sold on the market,

James:

Which is always of riddle, finding that right comp. Many of these questions were pulled from the BiggerPockets forum. Make sure you visit www.biggerpockets.com/forums. There you can have any questions that you’d like to be answered by one of us or our community. Alright, Kathy and Henry, let’s jump into the first question. In what world do you actually see a decrease in housing prices? Do you think we will continually be on this upward trend that we’ve seen for the last, what, four or five years actually since 2010? We’ve seen an upward trend. Do you think that’s going to continue?

Kathy:

Well, it always comes to supply and demand, right? So you’d have to look at what are the factors that would affect supply and what are the factors that would affect demand and demand being people who want to buy homes and are able to, there’s plenty of people that like to own a home or 10 or a hundred, but are they able to? So looking at the things that would affect, let’s just say demand, it would be job losses in a certain area. If we’re looking nationally, it would have to be a recession where lots and lots of jobs were lost. Or if you’re looking at a specific market, it would be what’s happening in that market did a major employer pull out? And that could lead to population decreases and there goes your demand. If people have to leave because they can’t work, then you’ve got homes on the market. Other things that might affect demand is costs going up, insurance costs. We’re seeing that a lot. I’ve heard that parts of Florida home prices are coming down because the insurance rates have gone up so much. So you’re trying to apply for a loan, they look at your ratios, can you afford it? And when the cost of insurance go up so much, people just can’t and that could cost prices to come down. So Henry, I’ll leave it to you on the other one of supply. What could change that?

Henry:

Yes, you’re absolutely right. The two things that are going to impact this the most would be either demand drops because the things that are impacting demand are the prices and the interest rate. So less buyers and the less buyers we have, then that can cause price correction as well as supply increase. So if we get supply increase, that can cause price drops and if you get both at the same time, well then now that’s when you have this perfect storm of what could potentially be what people see as a crash. So what do I see from the supply side? It just depends on how creative and how not the word creative. What’s it okay there? It just depends on how creative and how aggressive people become and cities, municipalities, and governments become to solving the affordable housing problem, right? Because if we as a country come up with a cost effective way to create more sustainable, affordable housing in a short period of time, that could increase supply, which could bring down the pricing. So I look at things like we’ve got tons of vacant commercial real estate out there because commercial real estate is having a problem right now and there’s lots of spaces empty. If the powers that be come together and allow for people to convert vacant commercial space into affordable housing, well then you get a lot of inventory in a short-ish period of time, which could affect supply and demand.

James:

I think one thing that is always going to factor in whether we’re going to see prices come down, supply go up is just access to capital. And what we saw in 2008, we were flipping a lot of properties during that time. What happened? The banks froze their liquidity. There wasn’t money in the market to move and that’s where we saw this massive decline in housing prices and inventory exploded during that time and that came from obviously bad loans, liar loans that were getting done, but it really was just a change in how people were financing at the time and what was that access to capital. And if we’re going to see some sort of massive decrease, it’s going to come down to affordability and capital and the things that we are seeing right now where we could see pricing drop is rates are high, it’s hard to make your payment.

And then American savings accounts are going down right now in March of this year, we have officially gone below pre pandemic savings accounts. That means as we saw rates go up, we didn’t see the housing market move that much outside that first four five month period. But what’s happening is we’re starting to see it slow down because people have burned through their savings. Things are expensive, inflation, cost of money, credit cards, everything’s more expensive. And so when it becomes too unaffordable, that’s where we can see supply start to also increase because if you run out of cash and you got to sell your house to access that cash, people are going to do that. People will do what they need to do and a lot of people have a lot of equity in their properties and I think that’s what could cause supply to go up is just because people need to be able to get the equity out of their properties and it’s more difficult, it’s more expensive and they might need to trade down to kind of stay with the current cost today. So I think that’s always something you want to be looking at. What’s the access to capital, what’s going on with banking and what is going on with affordability and whether people can make their payments and afford what you’re going to be selling or buying or in any type of market.

Kathy:

And with all that said, there’s recent headlines showing that the disparity has grown even more in terms of the amount of housing that’s needed. So the last report was like four and a half million homes are needed to keep up with demand and I don’t see that being solved anytime soon. Again, this is a national number, so what world would all this happen in? It wouldn’t be a world that we’re going to see in the next couple of years until we can build four and a half million homes and that hasn’t been easy to pull off by any means. Four and a half million more than is already being built. Well, we do have to take a quick break, so stick around, we’ll be right back with more from on the market when we return.

Henry:

Welcome back to the show. Let’s jump back in. Well, I actually think that’s a perfect segue into our next question because the next question is how do we get more affordable single family homes for first time home buyers on the market? How can investors and developers assist with this? So I’m curious, James, how do you think we can tackle this affordable housing?

James:

This is a tough one. I mean really what it comes down to is core cost for builders, right? What are you selling? Well, we’re selling things at a certain price, not because we’re the greedy developers in the market. We had to pay a certain amount for that land and then we also had to pay a certain amount to build that product, which is a lot more. We’re talking 30, 40% more than it was costing us four years ago on housing costs. And so I don’t think it’s something that investors can just do. I think it also has to be the government has to be involved as well. And if we want more affordable housing, which we definitely need, there needs to be more programs rolled out that actually makes sense to where builders can, maybe they can apply for a credit from the government to buy down their building costs if then they offer a lower product in the market.

And yes, there is programs like that out there, but they’re not efficient. You cannot make money really as a developer. It’s really tough and so you still have to make money, right? It’s a business. Other things that we’re seeing for affordability is density is being increased across the nation, especially in metro areas. Middle America, there’s a lot more land that you can build on so you can buy the land a lot cheaper. There’s also less of economy in a lot of these more rural places, not just middle America but rural because there’s less of economy labor’s less. It’s cheaper to live there and so you can build houses cheaper there, but to get ’em more affordable in metro areas, la, Seattle, Chicago, New York, they have to increase this density and that’s where we’re seeing this dadoo and a DU boom where you can build units in your back and then sell ’em off because they’re smaller. People are realizing they don’t need the mega mansions anymore and they can go into a smaller property. And so that’s really the option on the table now, unless the government and the investors really work together to put it out there, it is just not going to work. The math doesn’t add up and if the math doesn’t add up, no one’s going to build it anyways. And so it has to be a tangible solution.

Henry:

Exactly right. Perfect transition to my point because I feel like in order for this problem to be solved as a country, we need to work together as a country. That means cities, municipalities, builders, developers, investors all need to be able to come together, put our collective powers, let them combine, and then we create Captain planet. That’s what they did in the cartoon. Everybody puts their powers together and then for the greater good, so if we’re going to solve the affordable housing, then we do need to be able to make it affordable for developers. They can’t lose money and run a business. And so what can be done? Cities and municipalities can offer tax incentives for builders to build certain types of properties because if we can’t make profit, then you got to be able to offset taxes. And so the cities are going to have to be able to offer some sort of incentive or opportunity to builders and then builders are going to have to be able to build something that people actually want to buy.

And then you need to be able to educate and qualify people to be able to buy this properties so that they can actually buy, afford to live there and pay the mortgage. One example of this was a recent development in Atlanta, Georgia. I talked about this on a previous podcast, but we had a developer go out into Atlanta. He bought a piece of land from the city that was underperforming, meaning that it wasn’t generating any income for the state, the taxes weren’t being paid on it, it was just sitting there costing the city money. So he was able to go in purchase this land very inexpensively because of that. And then they developed a micro home community. And so they built homes bigger than tiny homes, but smaller than your traditional 1500 square foot home starter home blueprint. And they were able to pre-sell these homes before the development I think had even really begun because the people were able to get mortgage payments that were less than what they were going to have to pay in rent in other areas of that same city.

And so people were able to qualify for these homes because of their low purchase price and they were able to have a payment that was sustainable and affordable to them and the city was able to get rid of a problem because now they took an underperforming piece of land and it was now performing and the taxes are being paid on it. And so it was kind of a win-win. And so I think that that’s kind of a great model where cities can see, alright, well where do we have land that we can offer at a affordable price point and then work with builders to build certain types of homes that are actually affordable homes where they can still make money, the people can still afford the property, and then it’s one baby step to solving some affordable housing.

Kathy:

Kind of in response to some of the things that James said earlier about how you can get tax credits for building affordable housing and how onerous that process is. There are programs, and let me just tell you some of them that people should be aware of. So there is the low income housing tax credit, but there are lots of rules on how to get that. You can also work with your local city, definitely go to your local city to find out what kind of tax credits they have in place. When you are building subdivisions or apartments, generally a lot of cities will require that you build affordable. So if you can get tax credits for that, that’s super helpful. And I do mean 30% in California can be around 30% of what you build needs to be affordable. Some of the ways that don’t work, I can tell you is what we’re doing here in California.

There’s this headline in Los Angeles Times, it is California spent billions on homelessness without tracking if it worked and really without tracking it at all. So oftentimes when we leave the government to do the job of the private sector, maybe it’s just the politicians aren’t experts in that, so leave it to the experts, the tax credits is the better way to go. Another thing that seems to be really interesting lately is large companies, these mega corporations providing housing for their employees, you’ve probably seen the housing trust of Silicon Valley. This is Apple’s affordable housing fund and they announced they have a 2.5 billion plan to help address affordable housing in the area. You I’m sure James, you know about Amazon’s, Amazon’s housing equity fund providing more than 3.6 billion in below market loans and grants to preserve and create more than 35,000 affordable homes in Puget Sound and near Washington and Nashville. So again, if you can take it out of the government hands where things tend to get much more expensive, there’s far more regulation and waste and get it into the hands of builders who know how to get it done, tax credits is the way to go. That’s how I see solving this problem.

James:

And it’s also about the fact that the California built all these affordable houses and they don’t know what it costs. You can’t build properties and not understand your costs that you will lose money and bankrupt yourself as a builder. And so that program’s bankrupt, right? If you can’t control the cost, it doesn’t even make sense. You should just, honestly with the amount they spent on per unit, they could have bought a mobile home and stuck it there and spent half the amount of money and had the same type of product. But one of the biggest issues is you can get the credit, but it’s the time that gets you is these cities don’t work at the same pace. They want all affordable housing, but there’s just constant roadblocks. There’s something recently that we had where we bought a property, we can condo off the back and build A-D-A-D-U, we could also put a container house on this property and we’re like, Hey, should we explore this?

It would be a lot cheaper. We’d be able to put this property up for 399,000 if we put the container home on the property. It’s affordable. It’s kind of cool. Who doesn’t want a house for 3 99 in Seattle? But it was going to take us nine months to get permits with that plan because the city wasn’t used to it. And instead we go, well, that’s too long. So now we’re building a house A-D-A-D-U, and now the property will be $750,000 and the permits will be issued in three months. And so if they get on the same plan with what they actually want to achieve and streamline permits, help these developers get in and out of projects quickly, I would’ve put a $399,000 product to the market, which is well below the median home price, but they made it too complicated. So now we’re putting the expensive stuff out and so they got to get on the same page instead of just talking about it and chirping about it. Make a plan. The plan needs to be able to help developers get through these properties, watch the margins, and then let people transact, but they slow everything down.

Kathy:

This is a perfect transition to our next question, which is do you believe now is a better time to flip than purchase a buy and hold property? And what other strategies do you think would work today? So you guys are both buy and hold and flip masters. Flipping of course is one way to take old homes and bring them on as new homes. So it’s like building a new home and bringing on more supply of homes that maybe a first time buyer couldn’t buy or couldn’t finance. So let’s start with Henry and I’ll say the question again. Do you believe now is a better time to flip than purchase a buy and hold?

Henry:

Yes,

Kathy:

I agree.

Henry:

No. Look, we all know that buy and hold is harder now because interest rates are higher and not just interest rates are higher, but taxes are higher and insurance is higher. And so all of the things that play into what would make a deal cashflow are costing us more money. The cost of the home is higher and so cashflow is more challenging to come by and because of all of the problems we talked about in the beginning of the show with lack of inventory, you are now potentially creating inventory to satisfy some of that demand out there. And so all of those factors make it a better time to flip than to buy and hold. Now that doesn’t mean you can’t find properties that don’t work as buy and holds. It just means it’s typically easier to find a property that you can renovate and sell for a 20, 30, 40, 50% profit margin than it is to find a property that’s going to hit you a 10 to 15% cash on cash return as a rental property.

James:

I mean flipping works in any market and so does buy and hold. I firmly believe right now that flipping is a great thing for all investors because everything’s expensive. Cost of money is expensive and it is the best way to grow your capital quickly though the shortest duration projects compared to development, they require the least amount of capital. If you structure your debt correctly and the returns you can make cash on cash wise, there’s not really an asset class in my opinion that will hit this in real estate. And so what it allows you to do when it’s hard, we were all growing a lot when money was cheap. Why? We can go buy whatever we want, everything penciled now you need cash to pay down loans to buy and hold. I still think you should be buying and holding right now and picking up more portfolio product, but you have to solve the problem.

The problem is you need more cash in that deal to make a cashflow and pencil outright. How do you do that? You create more cash. You create more cash by short term high yielding investments and that is flipping homes. You can buy a property, structure it with debt, create a high margin on average, we are going to hit 30 to 35% in a five to six month window, cash on cash return that if I compound that, that’s some exponential growth, which gives me that extra gunpowder to go buy another property at that point. In addition to flipping teaches you how to renovate homes and how you make a rental pencil right now is you buy the grossest nastiest one because it’s cheap. You’ve got to buy the cheap and you get the cheap by buying the ones that everyone’s freaked out by. So it gives you that skillset to be able to increase that value, leverage it correctly, and keep your basis low enough to where you can break even or even make a little bit of money on it. And not only that, for that affordability, we’re putting homes to market that you can’t finance anymore. So it does create new supply for buyers that couldn’t buy it before. It’s funny, flippers have such a bad wrap, but we bring homes to the market that other buyers can’t buy. It’s cheaper than new construction and it’s one of the best ways to grow your capital, go buy more real estate. Well

Kathy:

I think what I want to point out again is that there are two different business models completely. It’s like saying should I start a business or invest in the stock market? They’re just different. So yeah, do both. That’s the whole point is to do both. One is a business, it’s active and the other should be as close to passive as possible. So like James said, and what Henry’s doing is you have an active income business and you take some of the profits of that to put into buy and hold. So you should always be doing both. If you’re not a flipper and I’m not, then you need another business. Another thing that brings you income so that you can do the buy and hold with buy and hold really being the ultimate goal generally for that lifestyle that most people want, which is freedom, right?

When you’ve got properties that are going up in value and paying you cash while you are doing the things you love to do, that’s the ultimate goal. How many do you want to have in a portfolio so that you have passive income coming in and you can do whatever you want with your time? So again, flipping buy and hold, it doesn’t matter the market. In fact, if anything, if we’re talking just about market, market meaning the economy, this is a great time for both because it’s so difficult for everyone else. For most people it’s not. The numbers aren’t working. So if you’ve got the skills as an investor, which you should and need to have, and if you don’t go get them, go learn or work with an expert who can teach you, it’s always a good time and this is a great time because you don’t have as much competition.

Henry:

Alright, so the general consensus is go flip houses. It’s a good time to build up some capital right now, but don’t forget about buying and holding a property or two. And trust me, if you’re going to flip a few houses, you’re going to want to rental property to offset some of those capital gains. But that’s a story for another day. We have to take one final break, but we have more listener questions when we come back.

Kathy:

Welcome back to On the Market.

Henry:

Our next question reads, if you were to pick a new market today to invest in, what market would you pick and why? Let’s start with, well, Kathy picks new markets all the time. Let’s start with James because he likes to pick Seattle for everything and now he can’t. So where would James invest if he couldn’t invest in Seattle?

Kathy:

Oh, pressure’s on James. Where’s it going to be?

Henry:

But you have to explain why.

James:

It’s because I’m a backyard investor. Investing as great as it can be. It can also go the other way very quickly. This is investing, right? There’s risk in investing, whether it’s flipping buy and hold, syndicating, whatever it is, things can change. And so that’s why I love Seattle. I’m a backyard investor, my resources are there, my people are there. I understand the market. I can mitigate risk by understanding that market. And so no matter how difficult it can be to invest in Seattle, I always force it through that way. But if I had to pick another market right now, I like quality of living places that are affordable. I like areas like the Carolinas off the coast, they’re more affordable. There’s a high quality living, there’s a high quality standard. And so that’s what I would really explore. What’s around that median home price, what’s in that affordable price range?

High quality living where people can enjoy where they live. But where I will start investing on a new market will be Arizona, moving to Arizona. And if I’m in the backyard, I’m going to get a little dirty in that and I just like to be able to control my costs and control and no matter what’s going on, I like to be able to walk to that job site. I like to be able to drive those streets. Whenever’s going on. When you’re in the market, you can feel the pulsation of the market and what’s going on. If it’s a couple states away and I’m not there often you can’t get the same feel. Data’s one thing, but then sometimes there’s just the read right now in Newport, things are kind of slowing down a little bit and the data would show otherwise, but I can feel it slowing down and that tells me to pivot, change and move on any project before it’s too late.

And that’s why I’m a backyard guy. And there’s not to say that that’s the right way to do it, but maybe I’m also a control freak. I like to put my hands on it maybe. But the new market would be Arizona. I like it. There’s a lot of transplants, there’s a lot of people in California still moving there. A lot of need, a lot of infrastructure going in and there’s everything that you want to be able to do is going into these cities, they’re developing among businesses are growing. And that’s where I would target it and that’s why I’m moving there. And then we’re going to start ripping some. I’m going to be installing Cactus very soon instead of our providing.

Kathy:

James, I’m just curious, in your backyard guy. So are there new markets in your backyard that you look at?

James:

I would say new types of asset classes that we look at in our backyard? Yeah, we’re always exploring how can we maximize the deal and we will shift that model over. I didn’t build ADUs, we would only build before when we would build homes in Seattle, we wanted to be efficient so we stuck to town homes. We can build more units on one site, get higher density, get higher profit. And so if we couldn’t build four to eight units on that site, not really for us because it was inefficient. So now we’re building little small one houses in the back of our flips. That’s a different type of built. It’s a different type of process I will always explore. But if I can’t drive to it within 30, 40 minutes,

Kathy:

What we’re starting to see as trends is these big cities are becoming expensive. And so there’s little submarkets around the hot markets that are becoming hotter. There’s like Tampa, Tampa’s overpriced, it’s a difficult city to invest in but just go outside a little bit of the area or Dallas like we are. Dallas has gotten expensive, so we’re just going a little further out into the suburbs. So that’s what I meant. That’s what we love to do and find is just right outside the areas where everyone wants to live in Austin. Austin’s another example. It’s hard to make the numbers work there, just go outside a little bit. We’re really focused at real wealth on San Antonio and the area between Austin and San Antonio because Austin’s gotten expensive and people are moving out in the suburbs and that to me counts as a new market when we find a new town.

James:

It’s that path to progress that’s always a good investing model. As things get expensive, it’s going to overflow to those surrounding cities and it’s going to pull ’em up and we would buy outside Seattle more and we do basically we’ve been buying outside our outside Seattle, north, south, east, west, whatever it’s going to be, we will buy in that zone. It’s just harder to get product for us there because it is more affordable, there is more competition and we can’t get the same margins, but when we can, I love to be on the fringe. I love the French,

Kathy:

It’s cheaper,

James:

Easier renovation.

Kathy:

I do love the fringe myself. Yes, taxes tend to be lower too, not always and it tends to be a little bit easier to build and get things done when you’re not in a major metro. We got to go to the verbs.

Henry:

Alright Kathy, let’s hear yours. Where would you invest?

Kathy:

Okay, well I did kind of mention we do love that area between Austin and San Antonio. There’s just massive growth happening there. There’s a lot, as you guys know, a lot of reshoring happening and as a result, new methods for transferring or transporting all the goods around the country. So the Midwest is really starting to take off as a result of this. It’s got to be cheap to manufacture things. So a lot of these corporations are going into super affordable markets where they’re getting tax credits like we talked about earlier. And so don’t ignore the Midwest that area is growing and keep and pay attention to where new freeways are coming in and new forms of transportation to haul all the stuff that we’re going to be manufacturing here in the us. So again, to come to a city we love Indianapolis. Even that property you guys, I said in North Dakota that we’ve just been sitting on, there’s talk about expanding 85 where our property just sits right on that into becoming a major transportation zone and that could absolutely drive the property values up on that property that I thought is just going to sit there forever.

So again, just pay attention to the reshoring because this is going to be a trend for the next decade

James:

And it depends on your strategy. I’m a backyard investor, we’re heavy value add. There’s a lot of construction going on and that’s just where I came from and what we do if you’re more passive, what Kathy’s talking about, going to where infrastructure’s going in, where there’s shoring, I mean that those are more long-term plays that can get you big hits later down the road. You can’t really just turn an area in a six month timeframe unless it gets some magical, but that long-term approach that can get pretty big hits. I know Henry’s backyard is getting some pretty good growth potential down the road,

Henry:

But I can’t pick my backyard. I can’t pick my backyard. So I’m going to cheat a little bit and I’m going to pick two markets. I want to pick one. If I was going to look to buy and hold, I’ll tell you what I would be looking for. So I would be looking for a market that has a median home price under the national average that has diversity of jobs. So technology, jobs, university jobs, hospital jobs, things that aren’t going anywhere anytime soon. That market needs to have job growth over the last three to five years. Steady job growth and then steady population growth over the last three to five years. But an average median rent that’s somewhere close to the national average. So I think that that is a good mix of elements to look for because the homes would be affordable, but rents would be fairly reasonable for you to be able to cashflow.

And you’ve got a steady supply of people in good paying jobs to be able to afford those rents. So markets that make up markets that hit some of these boxes are going to be your Clevelands, Ohio, Cincinnati, that Midwest, somewhere in the Indianas, like those are great places for that cash flow. If I was going to invest from a cashflow perspective, from a more of an equity play, I would be looking at markets similar to what James said. So places where people like to go but they’re not super high on the affordability scale. So places like the Carolinas, places just outside of major cities like outside of Charlotte, North Carolina, so not the major super hotspots like the New York’s and the LA’s, but you want the places that are still popular but where you get the median home prices lower than those coastal towns. People enjoy going there and living there.

There’s a good quality of living. But I would be looking for of those places, which one of them has the lowest cost per square foot to build and who has population growth over the last five years and who has steady home value growth over the last five years. So not something that hockey sticked up, but something that’s just been kind of steadily growing over the last five years. I think that’s a great market for you to look at. Can I go and build a rental property? Can I build to rent in those markets? Because then you get the appreciation over time and while you don’t have the cashflow on the front end, you also don’t have the maintenance expenses because it’s a brand new construction. So those are the things I’d be looking to do.

Kathy:

Alright you guys, we have one final question and it is, how do you comp and price a property when there’s no inventory and nothing sold in the past several months? That’s a challenge. So James, what do you do?

James:

Yeah, this is a tough one. No inventory, no sales, no data. Hard to analyze. And so the things that we do when we buy a lot of property and have to flip, so we got to be accurate on our numbers. First thing is we go back in time, we go back in time especially, we like to go back to the dates when rates just started jumping, that’s when properties were the weakest values. And if we can get a comp during that time, we feel like we’re really safe underwriting that deal because the market was worse back then. The second thing we do is we go into outside neighborhoods that are statistically worth less and that’s another good way to be safe. I will always comp down, but I’m not going to comp up to a neighborhood. And so many times we can actually go out a mile even in a metro area because we’re going into worse neighborhoods and sometimes that’s only where the product is.

And if we’re getting the value from there, we know our numbers are fairly safe, we can make small adjustments, but if we’re using that as the baseline safe deal, the third thing that we do is we call every pending broker in the area and we go, how many people are coming through these properties? How many offers did they get? And what is their true pending price? Because that number moves up and down and that is a really good way to establish your value. So you can’t do it the traditional way, like using the appraiser methods on half these properties. You got to go out, but always calm down, always use less, always go back in time to worse times. And that’s a very safe way to understand your value and whether you should pull the trigger on that and move forward.

Kathy:

Henry, anything to add?

Henry:

Nope, James nailed it. You always want to comp down, never comp up. So you’re always looking backwards. You can play it safe that direction. One of the things we do is I ask my agent, I say, look bud, what is the guarantee you can sell this property at this price point number, not the pie in the sky number. What’s the fire sale number where if I give you this listing and you’re going to try to sell it super fast, what’s that fire sale number? And then we’ll underwrite based on that.

Kathy:

Awesome. Alright, so as we said earlier, many of these questions were pulled from the BiggerPockets forums. You can get so much information and advice there. Remember that advice is coming from lots of people, some of whom may be brand new, so you’ve got to sift through it. But just make sure to visit biggerpockets.com/forums. If you have a question that you’d answered by one of us or our community, put it there and we’ll be so happy to go over it here on the market. Thank you so much for joining us here on the market. We’ll see you soon

Dave:

On the Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it!

Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [email protected].

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.


Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button