As any property investor will tell you, the last 3-4 months have been unpredictable (to say the least).
Back in February, mortgage applications were at an 11-year high. It’s safe to say no one could have foreseen what happened next.
COVID-19 brought real estate, industry, and normality to a grinding halt. In April, sales of existing homes dropped by nearly 18% compared to the previous year. However, there does seem to be light at the tunnel for fix and flip investors. At the end of May, purchase volume showed signs of encouragement, with a mere 1.5% drop off when compared to May 2019.
However, the signs of recovery vary throughout the country. And, if the last few months have shown us anything, we have to anticipate the unpredictable in all areas of life. As a result, you may need to adjust your fix and flip strategy to reflect these tumultuous times. Not just your exit strategy, but every step of your investment.
Recalculating the ARV of your property
If you’re in the middle of a fix and flip, it’s vital that you revisit the initial ARV (after repair value) figure you landed on. As we outlined before, the real estate market is now in a much different place than it was in February. Therefore, you should alter your expectations accordingly.
How do you calculate ARV?
We cover this and more in our hard money loans explained blog. However, it’s a relatively simple equation:
ARV = Property’s Current Value + Value of Renovations
As your previous appraisal value may not reflect the current value of the property, it’s important to keep track of current and likely future values in the new climate. Being aware of any changes to the ARV mid-project is vital in terms of readjusting renovation costs in order to hit target profit.
If you’ve financed your fix and flip through hard money, you should speak to your lender. They probably have experience in reassessing the ARV of fix and flip projects and can help you decide on a new renovation budget. To prepare for these kinds of situations arising, it’s important to have a go-to hard money lender, like We Lend, as part of your expert real estate team.
In addition, if you want to tick all the boxes, you could get another appraisal or ask the licensed inspector who carried it out for a second opinion. However, keep in mind that due to COVID lockdowns, there are restrictions on home inspections in some states.
Revisiting how you finish your renovations
Keeping tight control of renovation costs has never been more important than now.
You might be planning to scale back some finishes and other non-essential features to cut down your budget. Here are some common ways flippers can reduce their reno costs:
- Prioritize certain rooms over others – Instead of giving the whole property a complete finish, you can focus on the rooms that add the most value: kitchens and bathrooms.
- Downgrading fixtures – You could opt for less expensive kitchen cabinets and bathroom fixtures, as well as lower cost doors, wood flooring, and/or carpets.
To make a more informed decision on where to cut back, you can look at other properties in the area and assess the threshold you need to meet. It’s also definitely worth asking your lender, contractor, or realtor for advice on the subject.
Pivoting towards rental
During these unpredictable times, flippers may have the urge to hold onto the property and make a play at the rental market.
However, while the BRRRR method works from some, it’s worth considering the pros and cons of pivoting towards rental – especially in the current market.
As the recent figures from May have indicated, your local real estate sales market could be on the up again. Moreover, larger property developers could begin disposing of a lot of their inventory via the rental market – a trend that was already on the rise last year. An oversaturated rental market could result in potential rental yields declining in some areas.
We recommend that before making any decisions on shifting your fix and flip exit strategy during COVID towards BRRRR, you speak with your lender and other successful, local property investors and get their advice and insight on where the market is heading.
Planning for a longer sales window
Despite the initial recovery of the real estate market, there may still be lower demand levels for property purchases. As a result, your property might be on the market longer than you originally anticipated, taking you beyond your loan repayment date.
If you’re at the beginning of your fix and flip project, you need to factor this into your plans. You may try to negotiate a longer-term loan when applying for financing or you may focus on shortening the amount of time you spent on renovations.
On the other hand, if you’re in the middle of fix and flipping and see problems selling the property within your current window, you’ll be looking at a refinance loan. Before that stage, speak to your lender. They will understand your situation and may be able to get you over the line. When you’re shopping for refinance loans, make sure your lender knows all the facts of the property. These include:
- The estimated value
- Your existing loan terms
- The occupancy status
The Bottom Line
As you can see from the slight resurgence in May, the real estate market is slowly gaining momentum again. Like every industry, the coronavirus pandemic has had a major impact on real estate. However, you can still apply for hard money loans during COVID-19, and fix and flipping the right property is still a good investment in 2020.
It’s not quite business as usual, but a small tweak to your strategy can still see you reap rewards in the property market.