Lawrence Childress - Real Estate in Denver & Surrounding Areas

Monthly Newsletter May 2020

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THE VIRUS AND REAL ESTATE…WHERE DO WE GO FROM HERE?

As we move slowly through the month of May and closer to Summer, I have been getting many questions from clients about how the Coronavirus has affected the local real estate market. “Have we shifted into a buyer’s market?”, “Will real estate recover from the current crisis?”, or “Can I even safely buy or sell a home right now?”, just to name a few. These questions are understandable. Just as we approached our Spring peak selling season, the virus struck and completely disrupted the economy in an unprecedented way. The stock market tumbled, people were forced to stay home to avoid exposure, and unemployment spiked to record highs. As real estate agents, we went from preparing for our busiest showing time of the year to being cloistered at home, trying to navigate our businesses to a fully virtual format while coping with constant updates from state officials. Although it is impossible to say what the full effect of the pandemic will be on real estate since it is ongoing, I am gingerly optimistic based on a few key details.

 

STAY-AT-HOME MOVES TO SAFER-AT-HOME

Much caution is warranted since there is still an active pandemic, but one reason for my optimism is the progress made recently to kickstart our local economy. Colorado moved from the “Stay-at-Home Order” to the “Safer-at-Home Order” as of April 27th. The order was later amended as recently as May 8th. This allowed many businesses to reopen that were previously shuttered and more workers to return to their jobs. The influx of workers has already begun to ease the record unemployment applications, and may bolster the start of a recovery to local Consumer Confidence as people have more income and more options of what to do with their time.

 

SHOWINGS MAKE A STRONG COMEBACK

It is still far from business as usual for real estate industry, but showing restrictions have begun to ease in many counties. Denver County is one of many areas currently allowing property showings if they conform to strict safety restrictions. Some of these include disinfecting homes in between each showing, requirements to wear masks, gloves, and shoe booties, and adhering to the 6 ft. social distancing guidelines as outlined by the CDC. Open houses are still off limits, but many have turned to virtual open houses or virtual showings to safely build engagement with prospective buyers.

We expected showings to recover quite dramatically sometime during the Summer or early Fall due to pent up demand, but almost the moment the showing restrictions lifted, showing traffic exploded. At least in terms of local real estate, this is a strong indicator of what economists refer to as a “V” shaped recovery, where the economy dips quickly into a trough and then shoots back up nearly as fast into a recovery. You can see a strong “V” pattern emerging in the trends graphs on the right for 2020. Below are more details broken down by price point:

 

Homes Under $300K

Showings have returned to last year’s rates! New listings doubled from numbers seen over the last few weeks. The number of under contract homes more than doubled, bringing it closer to last year’s levels.

 

Homes $300K-$500K

Showings are above last year’s rates. New listings are up 2.5x from the last few weeks and there are plenty of homes to look at! The number of under contract homes more than doubled and is getting close to last year’s run rate.

 

Homes $500K-$900K

Showings are above last year’s rates and tripled overnight!!! New listings also tripled from the last few weeks and there are plenty of homes to look at. The under contact count more than doubled, getting close to last year’s run rate.

 

Homes $900K and Over

Showings are up 70% from a lackluster performance last month. They are still below last year but improving. New listings about tripled from the last few weeks! There are many homes to look at. The under contract count more than doubled but is still below last year’s run rate.

 

 

 

LOW INVENTORY AND INTEREST RATES

Finally, another key factor in my optimism about the real estate market is the low housing inventory. Despite the unprecedented health crisis and slight drop in home prices, it is still a seller’s market. New construction has been anemic for years. Without enough new supply, active inventory is being driven down by strong demand, continuing to keep home prices strong until more supply can be added to the market. Given the broader scope of the current economy, I do not see that happening any time soon.

It is still a great time for many trade-up buyers to capitalize on low interest rates and move up to a higher price point, and for new buyers secure in their jobs to lock in low rates if they are able to. If everyone follows their local safety rules, there are still deals to be found in this market.

 

CONTACT ME TODAY!

For more on the local real estate market, give me a call today! At Your Castle Real Estate we have all the latest trends data to help you accurately price your home, navigate a home purchase, or even make an investment!

Flip Tips 101: Analyzing A Deal

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Where do I even look to find my flip home, and how much is this going to cost me?

Types of Flips

Before you even begin to search for a home, you need to decide what type of flip you are willing and able to tackle. We take into consideration four different types of flips:

Cosmetic flips tend to be standard updates that make a home more visually modern, including new floors, kitchen, bathroom(s), touching up the paint, and patching up the nail holes in the walls.

Full Rehab flips essentially gut the insides and start design from scratch.

Pop-Top flips consist of major updates such as adding second stories, enlarging the master bedroom, etc.

Scrapes mean you intend to knock down the entire house and work from ground-up construction.

Decide on one or two variations that you can be successful on and hone in on those. Narrowing down what type of flip you want to focus on will help you save time during the search process.

Finding Deals

There are a handful of traditional and non-traditional routes you may take to find the flip house that best fits your needs. Our top search suggestions include:

  • Your local MLS (for Denver, that’s REcolorado)
  • Local real estate experts
  • Networking groups
  • Research on investment forums such as BiggerPockets
  • Scanning foreclosure websites
  • Working with wholesalers

Some of these avenues may be more fruitful than others, but they are a great place to start your investment journey. For those that are new to the fix & flip (F&F) journey, we highly recommend that you work closely with an experienced agent that can help guide you through the process until you are comfortable and confident enough to navigate on your own.

Big Picture Monetary Considerations (ROI, ARV, DPD)

In our previous Flip Tips 101 blog post, we discussed what to look for in potential homes to use as flips. This outline will be useful for any of the flip types mentioned above (except for scrapes, in which case, the house is essentially irrelevant).

Beyond the cosmetic checklist we provide, there is an extensive list of monetary considerations as well. First and foremost, you need to think about what your max buy price/budget is. Do not waste your time looking for a flip in a high-price neighborhood if you cannot qualify for a loan for a house in that area.

ROI (return on investment), ARV (after rehab value), and DPD (dollars per day, or net profit for each day it takes to hold a project) are also critical monetary factors.

ROI needs to be calculated on a project-by-project basis. The ROI calculation includes dollar amounts that are specific to each property, like purchase price, which includes:

  • ARV
  • Rehab expenses
  • Holding costs (personal capital, hard money loans, etc.)
  • Contingency costs (a.k.a. “just in case” costs)
    • Simple projects should calculate contingency costs at about %5 of overall budget
    • Traditional whole-house lift should calculate at about 10% of overall budget
    • Houses with structural problems should calculate at about 12% of overall budget
  • Costs to sell the property
    • Commissions on the buy side
    • Commissions on the sale side
    • Referral fees
    • Insurance on the property
    • Closing costs
    • Staging costs
    • Inspection fees
    • Etc.

Not all of these costs will apply to every property, but will likely apply to most.

DPD, a less common financial term, helps you to decide which properties will make you the most money in the shortest amount of time. To calculate DPD, use calculated net profit/anticipated number of days to complete a project. Example:

      • You buy a ranch house at $300k, spend $75k in rehab, and finish the project in 140-150 days with a net profit of $50k. You total at approximately $350 DPD.
      • You buy a townhome at $200k, spend $25k in rehab, and finish the project in 30-40 days with a net profit of $15k. You total at approximately $400 DPD.

Theoretically, consistently flipping townhomes will make you more overall. On the other hand, you also need to calculate daily burn, or how much money you are spending every day. This will depend entirely on the scope of your rehab project.

Things That Will Eat Up Your Budget

Are there cracks in the structure? Are there windows that need replaced, or PVC sewer line cleanups in the front or back yard*? None of these are horribly expensive alone, but they can add up very quickly. More costly updates include:

  • Roofing problems – a roof can range anywhere between $5,000-$15,000 to replace
  • Furnace or boiler – ensure that this has been cleaned and maintained
  • Hot water heater – a few years ago this was not a necessary expense, but in today’s market, you will likely need to update/replace this

There are a few specific expenses that we would like to highlight. The first is electrical, which is tricky to navigate. When examining a home, take care to notice if a home is filled with 2-prong or 3-prong outlets. If necessary, 2-prong outlets will require you to spend approximately $7,000-$12,000 for new wires, breakers, etc. For comparison, upgrading electrical in a home with 3-prong wires averages about at $3,000. Older homes will require these modifications more often than newer, so be conscious of this and take note.

Plumbing is not a legal responsibility, but if the plumbing is bad it will cause more problems in the future, so it is always better to take care of this immediately. Have a professional examine the sewer line for a shift in position, a low belly line, cracks, or breaks. These are considered spot repairs, and will typically be billed at $2,000-$4,000 per section.

If it is necessary to replace a full sewer line, depending on how deep the line runs (a.k.a. how far from the house to the pump) we estimate $7,000-$8,000 to replace. Longer sewer line replacements (65ft+) can cost up to $12,000 to replace!

So, what we are trying to convey to you is to not get caught up in counting costs for new handles for the cabinets. These are all costs that happen before you initially purchase the house, and will take up a majority of your flipping budget.

Flipping houses is worth the risk if you make the right investment. Whether or not an investment is right is a personal choice and up to you.

If you have any other common flipping expenses, let me know!

 

*It’s worth the money to scope the sewer line – always scope the sewer line! At the very least, if you find any major concerns, you can use that to negotiate the price of the house.