The Science of Flipping - Episode 7 – URGENT!! What Has Happened In The last 60 Days? | Real Estate Investing Podcast

Episode Date: October 4, 2013

document.addEventListener("DOMContentLoaded", function () { podlovePlayer("#player-5eb5ab3262e36", "https://thescienceofflipping.com/wp-json/podlove-web-player/shortcode/post/160", "https://thescienceofflipping.com/wp-json/podlove-web-player/shortcode/config/default/theme/default"); }); document.addEventListener("DOMContentLoaded", function () { podlovePlayer("#player-5eb5ab3262e8c", {"title":"Real Estate Investing Podcast u2013 Episode 7 | URGENT!! What Has Happened In The last 60 Days?","subtitle":null,"summary":null,"duration":"","poster":null,"chapters":"","transcripts":"","audio":[{"url":"http://thescienceofflipping.com/audio/Podcast-Episode-7-What-is-happening-in-market.mp3","mimeType":"audio/mpeg","title":"AUDIO/MPEG","size":0}]}, "https://thescienceofflipping.com/wp-json/podlove-web-player/shortcode/config/default/theme/default"); }); Todays podcast reviews what everyones biggest question is: What has happened to the market, over the last 60 days. I review what the loan interest rates mean to your buyer. How the hedge funds play a role in the days on market. How to calculate your holding cost with this market shift. How to look at the numbers of solds and actives over the last 60 days and find what price point you should be buying in.  If your flipping homes you must hear this podcast.

Welcome to the Science of Flipping Podcast. I'm your host, Justin Colby. Welcome, welcome, welcome to the Science of Flipping Podcast, Episode 7. Welcome, guys. If this is your first time here to our podcast, to listening to me, I'm your host, Justin Colby. I really recommend you guys get on over to our website, thes we are giving away the biggest, the baddest, the most important e-book that you could possibly download on the internet. It is the 15 most costly mistakes a real estate investor can make today in this market. Guys, you need this e-book. This e-book we are giving away for free. This is by far the most valuable e-book that you can get. Get to our website, thescienceofflipping.com. Download our e-book. You will make more money in a faster amount of time. I promise you, if I could have had this e-book when we first started,

we'd be way ahead of even where we are now. And trust me, guys, we're doing quite well for ourselves. So you got to get to our website, thescienceofflipping.com. Today's lessons, guys, over the last, let's call it two, three weeks, I'm getting emails and text messages and phone calls from hundreds of our students asking, what's going on today's market? As a matter of fact, I got a call today from a student of ours here in the Phoenix, Arizona market saying, what's going on with one of our properties? Why has it been on the market? Why aren't we getting offers? Guys, today's podcast is going to be revolving around what is happening in today's market over the last 60 to 75 days.

Because I know if you're out there and if you're an experienced investor, you know there's been a big change and a big swoop into our market. So today is going to be the day that we talk about what's going on in the market. If you guys have never heard this podcast before, welcome again. I am your host, Justin Colby. We're here in Phoenix, Arizona, and this podcast is all about giving you guys the systems to put and implement into your fix and flip business. We are fix and flippers ourselves and we have created systems over the last seven years that have allowed us to live the life we've always dreamed of.

That's why we are out here giving back on the podcast about how we do our business, how we work our business, and how we create the systems to run our business from a different state while on vacation in a different country or even from the comfort of our own home. This podcast, if you stay tuned week after week, if you subscribe to our podcast, you will hear the systems each and every week that you can create in your fix and flip business that will allow you to live the life that you want to be living, taking the vacations you want to be taking,

spending time with your friends and family. That's what this podcast is about, guys. Creating the wealth that you want to create so you can go do what you want to go do. A little bit about me, guys. Me and my business partner, Eddie Rosefield, and you guys have heard him on previous podcasts, and you're going to hear him again on future podcasts. We created a company, Phoenix Wealth Builders, years ago. We've been flipping homes here in the Phoenix Valley for almost seven years now, if I have my numbers right. And, you know, it was not all puppy dogs and rainbows. And I know you guys have heard me say that before, but it really wasn't.

You know, we had to take our lumps. We had to learn by just jumping in, both feet in, and not knowing everything. You know, again, if I had that e-book, I wish I had that e-book because if I would have had it, we would have made less mistakes over time. So we started back in 2007 and guys, it took us nine months to get our first deal done.

Nine months. I was a grown man sleeping on a friend's couch. I was losing everything. My business partner as well was losing everything and we were taking our lumps. So if you're out there listening to this and you're an experienced investor thinking to yourself, man, I've had a hard go of it over time, we've been there with you. And it's been only over the last several years that we've been able to implement our systems and create the systems in our business so that we can run our business at a high level. We did 96 flips last year alone. We're well over 50 now at this point,

or I guess we just broke 50 as of last week. And we're doing 79 townhomes out in Mesa, Arizona. When I say doing, guys, we're developing them. We bought a piece of land. We did the on and off sites, and we're developing 79 townhomes over in Mesa, Arizona, guys. So right now, picture in time, we're doing very, very well for ourselves. But it wasn't

always the case. When we first started, it took us nine months. So if you're a rookie investor out there and you're just looking for a little guiding light, if you're just looking for someone to say, you know, I feel your pain, I know what you're going through, I know the struggles, I know it's hard to get deals or you may not have the buyers for the deals that you're getting. I'm here to tell you guys we've done that too. We have been there at one point in our business. And you need to make sure you stay consistent. You need to have fortitude.

And you need to keep pushing forward. Because that's what we did. And that's why we're the success we are today. We never gave up. We never gave up on our dream. We committed to our, you know, Eddie and I committed to each other in 2007 that we're never going to give up on the dream of being successful real estate investors. And we never did. And today we stand here today with a beautiful office here in Scottsdale, Arizona and beautiful homes and a wonderful life and we're traveling

all the time and we're giving back and we're coaching and we're speaking on stage and again, like I said, we've done just over 50 deals this year alone. So guys, it can be done. Stay tuned to this podcast because today, guys, we're talking about what's going on in the market. What is going on in the market. What is going on in this market? What's happened? Are there as many deals going right now? Are homes flying off the shelves like they were? Well, I'm here to tell you guys, you know, I'm in Phoenix, Arizona. This is, I think it's the fifth largest city in the nation.

And things have been changing. Over the last 75, 60, 75 days, there's been a little change in weather, let's say. And why is that? Well, I'm going to tell you a couple reasons that we know here in Phoenix why that is. I know nationally some of the answers and people are out there listening saying, oh, well, it's because interest rates have gone up. Well, I'm going to give you guys some numbers today about the interest rates. I'm also going to give you guys some more numbers about inventory and how inventory has gone up.

Why is that? How is that when people are still out there saying they can't find deals? So, why aren't homes flying off the shelves? That's the number one complaint right now I'm getting from students all across the country, from New York, Philadelphia, all the way to California. They're asking, what am I doing wrong? Am I marketing this right? Is there the right terminology in the MLS listing? Is all the money gone? What's happening? I've had this home on the market for 42 days and only one offer that wasn't even acceptable. Or I've had this on the market for 30 days already and I haven't gotten an offer. Well, first of all, guys, let me stop right there.

I think over the last year or so, I think us as experienced investors have gotten very comfortable in what has been happening in the market with our quick sales. There was a time within the last 60 days or so or up until about 60 days ago that if you got a deal and you put some decent money into that deal and you put it back on the retail market, it was gone in a day. Same day you listed it, you had three or four or five offers, minimum.

We've had 10 offers on certain homes, guys. And we got very comfortable with that you know and and we have to be weary as real estate investors because we all saw what happened back in the early 2000s in the mid 2000s so we need to look at the comfort we have when when you know little things change like interest rates or i know I know if you pay attention to politics, which by the way, I don't pay a ton of attention to it. I'll tell you guys that now. But I pay enough attention to know a little bit about what's going on. And there's people that pay enough attention to politics that they get scared because of what possibly is going on with Syria, right? So Syria is the big news in politics right now.

And so some of those buyers, some of those sellers, whoever they may be, some of those lenders, they're pulling back in the real estate market because they're a little scared about what's going on in Syria. D is the answer. Obviously, the interest rate's gone up. So why are the homes not flying off the shelves? Well, we talked about the political reasons, Siri. We talked about the interest rates going up.

Let's talk about the fact that the inventory's gone up. I ran numbers yesterday, guys, here in Phoenix, and I didn't do it nationally. I apologize. I know I have a lot of listeners that are from New York to Florida all the way to California. But inventory has skyrocketed. Skyrocketed. I mean, here in Phoenix, we have seen the price point from $120 to $160 go up 20%.

20%. We've seen the price point from $160 to $200 go up 42%. We've seen $200 to $250 go up 39%. And $250 to $300 go up a whopping 62 percent. Guys, these numbers are real. The inventory is growing. Why is the inventory growing and how does that affect us? Well, guys, the way that affects us is you're no longer the only deal on the market. Again, I just brought up the fact that we got very comfortable being able to get a deal, dump some good money into it, and it's sold in a day because there's nothing else on, 62% increases in inventory.

Now I will mention, guys, a lot of that also correlates with closes. Closings have gone up, and rightly so. And rightly so. Homes are still affordable, so people are still buying homes here in Phoenix. But you need to know whatever market you're in, because I have students from, again, coast to coast, you need to know the inventory. How much has active inventory increased over the last 30 days?

Look that up. Pay attention to that every 30 days. Know the numbers so you can make educated decisions. So what does that mean? Where did all this inventory come from? Well, let's think about one thing. We've been going at a huge increase in value over the last year, year and a half, all the way across the country. People are no longer underwater. They no longer have to short sale their home. They may no longer lose their home and they want to get out of it. They want it gone. That's one reason. They want under from this thing. They may still not be

employed, but the equity they've gained over the last year, year and a half, has gotten them out of being underwater. And now there's actually equity. So if they're able to sell it at the price and the value that it's at today, they might be able to pay off the bank in full with all interest due. That's one reason that there's more inventory. People want to get out from under their house. It's a burden. They still may be unemployed, but now they don't have to worry about it and they can sell it and make the bank whole and

they don't have a short sale on their credit score or they don't have a foreclosure on their credit score, but they're out from under the home. What about all the investors across the nation? A lot of investors doing deals. They're putting their homes up for market. There's a lot of investors that bought a home, didn't do anything to it, and put it on the market. Let's just simply talk about the fact that over the last year, year and a half, the values have been going up so much that people who just simply own homes understand what happened in the early and mid 2000s and say, this is the time to sell. Get me out now. I don't even need to sell,

but I want to sell because it's a good time to sell. People are dying for deals. People are dying to find homes. Inventory is low. Interest rates are low. Let me sell. Good time to sell. Interest rates are going up. People are going to be a little bit scared. Let's not try to ride that.

Let's sell now while people are still pulling the trigger. And guys, let's bring up hedge funds. Let's bring up hedge funds for a second. Now, here in Phoenix, we've been beaten to death by the hedge funds. It is an amazing feat that people like myself and Eddie and several other very good investors here in Phoenix have been able to maintain and grow a business. We've grown year after year after year. Every year in business, we have grown. Over the last year and a half, two years, we've also seen hedge funds that have millions and billions of dollars to spend on inventory. Buy everything you can find. I'll tell you a little story that we used to be at the auction

very heavy back in 2011. Probably 90% of our deals were bought at auction. Towards the end of 2011, the beginning of 2012, we could not find a deal. We started freaking out because all of a sudden our business model that has been so lucrative for us

was going away because the hedge funds were here killing us, overpaying by 110, 120% of the value because the homes are great rental homes. They still penciled for them. So they were willing to overpay, especially for a little fix and flipper looking to make a quick nickel on a fix and flip. They want to hold it so they can get 6, 8, 10% rate of return or a cap rate. So let's talk about those hedge funds. If you guys have hedge funds, you will see and you will realize they've pulled back.

They are no longer buying as hot and heavy as they used to be and if they are still buying hot and heavy if your market is a little bit behind phoenix which very well could be the case be very wary i don't know i don't work at these hedge funds myself i do have friends and colleagues that do and they have told us that they're going to be pulling back. Now, things happen and every day could change, so I'm not predicting that by any means, but be very wary about the fact that they pull back. Because if they do pull back, inventory spikes again. They're not buying everything that's out there. So for here in Phoenix, guys, they pulled back over the last two months.

And guess what? All of a sudden, there's a lot more inventory. There's a lot more active inventory. And there's a lot more inventory that's on the market for over 30 days. So guys, that's a very real situation. If you're in Atlanta, if you're in California, San Francisco, LA, if you're in anywhere in Florida, where else do I know that, you know, I think they're jumping into Ohio next, guys, I'm telling you, you need to know about the hedge funds, and you need to know when they're buying heavy and then when they're going to pull back. That is a huge reason about what's happening in this market. You know, everyone, again, they keep blaming the interest rates, but people don't think

about these big hedge funds that have been buying millions and millions, if not billions of dollars worth of real estate, them pulling back will now increase the volume that is still on the market. Which is a good thing, guys. It's a good thing. Now you guys are going to realize a little bit of a stable economy. Now when I'm teaching you the marketing strategies, the economy is not quite as volatile as dropping or shooting straight up and gaining all this equity. You're going to have a little

bit more of a normal 2%, 3%, 5% equity growth a year. People forget about those days. They forget about the history of our economy. They've said the real estate market is going to gain equity, 5% equity every single year, 5% value every single year. They forget about the history of the real estate market. And they only remember the last 10 years or so that have been so brutal. So brutal. So remember, the hedge funds is a huge reason. Now, let's talk about the interest rates, guys. Let's really get into the interest rates.

You know, we do a lot of deals on the fix and flip side. So we are primarily looking for retail buyers. Now guys, if you're wholesalers out there, I love wholesaling. I absolutely love it. I love to be able to make the quick nickel over the slow dime. So we absolutely wholesale. It is the smaller part of our business, but we are wholesalers ourselves here in Phoenix, Arizona. But 90% of our business is fix and flipping.

So let's talk about the interest rates because they affect our buyers. We are looking for the retail market. So when interest rates jump, which everyone's been complaining about, it affects us. Well, let's talk about, let's use a big bank that a lot of individuals will get loans from. Let's use Well Fargo. For a 30-year loan, you can still get an interest rate in the mid-4s to low-5s. For a 15-year FHA loan, you can still get an interest rate from the mid-3s. And for a 30-year jumbo loan, you can get it in the mid-4s, low to mid-4s. Now, this is from Wells Fargo's website. Guys, I don't know about you, and I'm not sure if you've ever personally purchased a home and got a home loan, and I'm not sure how old you may be, but I can tell you,

when I bought my first home in Northern California, I bought it at 6% interest. One loan, 100% financing from Wells Fargo. 6% interest. I bought a $500,000 condo in Northern California at 6% interest. My payment every single month was $3,000 every single month. Nothing down, $3,000 a month. And I was stoked. Are you kidding me, guys? I loved it. I had to put nothing down and I got to pay $3,000 a month at 6%. That was an awesome interest rate.

6% was an awesome, awesome interest rate. I didn't even get close to 6% with the numbers I just read. What did I say? Mid 4s to low 5s. Low 5s were the highest loans I just read. So let me give you guys some more numbers. Do you guys know what apr stands for annualized percentage rate well for a 30-year fixed loan the interest rate is 4.375 the apr annualized percentage rate, is 4.96.

APR includes the fees you would have to pay to get that interest rate. Your payment on a 4.96 APR is $1,026.97 on a $200,000 home. On a $200,000 home, at 4.9%, you, your interest rate would be 4.125. Your APR would be 5.598. So you're paying way more points on that loan. And your payment would be $1,111.14. Hmm. so that afha loan is not even as good as you're just your 30 year fixed now you're 15 year fixed this is the best one interest rate wise you get a 3.375 interest rate your apr annualized percentage rate, 3.93.

But your payments are $1,399.08. Well, why would your payments be more? Remember, that was the 15 year, not the 30 year. So guys, homes are still affordable. That's what I'm here to tell you guys. People are still buying, I don't want you guys out there saying, oh, you know, my home's not selling because buyers are scared now, and the interest rates are super high, and I just read you Wells Fargo's interest rates, not one of them was at 6%, the highest I read was 5.598, and that's because that's including the points you'd have to pay for the loan.

But your mortgage would still be $1,111.14, guys. So I don't want you all out there. And again, I've received hundreds of text message, emails, phone calls, and I apologize for all of you for not being able to get back to you, but it's a bit overwhelming. But don't sit here and blame the interest rates. It's just not true.

And I just had a meeting with a real estate agent who is very integrated, I guess, with a couple loan officers that say that 100% financing is coming back. Now, don't blame the messenger, guys. I'm just the messenger, but I've heard that rumor. It may not be everywhere and it may not be for everybody, but I have heard it is absolutely coming back if it's not already back already, guys. The interest rates are not the entire problem. So I want you guys to take a step back. I want you guys to ask yourself, why is there high inventory? Why is inventory sitting on the market longer than one day? Guys, we got too used to that. We got too used to getting

multiple offers within a day, two days, three days, four days, through a weekend. We started to sit back on our laurels and we started to look at it and say, oh, well, this is, you know, there's no inventory. No inventory at all, so this is going to keep going until inventory. And then everyone wants to blame the interest rates for why buyers aren't buying. Absolutely not. There is now more inventory. That is part of the reason why you're not getting the buyer as quick as you would like. Interest rates do play a little bit of a game with people because, listen,

guess what? If you really could only afford $900 a month and your loan now is $1,026.97, well, you're not going to find the $126 every single month, right? You can't. You can really only afford $900. That's what your prequalification letter is for, to say what you can and can't afford. So, of course, the interest rates do play in. Of course, the economy does play in, and unemployment does play in, and politics do play in. But let's not fool ourselves. There's other variables out there on why some of these homes aren't moving as fast as they used to move. We all know short sales, guys, have for the most

part gone away, right? People were gaining equity hand over fist over the last year. So short sales were going away because you were no longer going to sell your home short of your loan. You were gaining equity. But as people were gaining equity, they realized they wanted to sell. They may not need to sell, but they wanted out from under their home. Maybe they want some retirement money. Maybe they realize this is a good time to sell because of what we just went through with all the gaining equity. Realize that right now, some of the bigger hedge funds are pulling back a little bit. They need to adjust. They need to account for their inventory and see what's out there. How much do they have?

What's rented? What type of returns am I getting? So they're pulling back for a little bit. I don't know when they're going to jump back in. I don't know how and I don't know how heavy. But they'll jump back in somewhere, somewhere. They wouldn't have spent those millions and billions of dollars just to just disappear one day.

And at the end of the day, people are getting equity. You know, I go back to it. It's just a good time to get out from under. So what do we need to do as fix and flip investors, right? You know, I know you're out there thinking, oh, okay, Justin, thank you. I appreciate you at least explaining that it's not all the interest rates, but what do we need to do?

Well, we need to start adjusting how we're buying deals. We need to start looking specifically at the numbers of days on market in what price point. How many of these properties at $100,000 to $150,000, how many active over the last 30 days, how many closings? Do the same thing with $150,000 to $200,000, $200,000 to $250,000. If you're in California, let's use $500,000. $500,000 to $550,000, $550,000 to $600,000, $600,000 to $650,000, so on, so on.

Look at days on market. Look at price points. And then look at closings. Because if your days on market are high and your closings are low, that is not the price point you want to be flipping homes in. If there's not that many closings and your days on market are real high,

that's just a price point. There's not a lot of buyers. If you're, you know, there was buyers. I forget the price point exactly, but I want to say it was 100 to 120 grand where there was an increase in inventory by let's just say 20%, but there was also an increase of closing by 40%. The numbers doubled on closings as they did on the inventory. So there was so much, you know, 20% of inventory is a big number. But if you're even add another 20% to that on the closings, that's a market I would strongly be looking at. There's that many more buyers in that price point. So look at days on market, look at the active inventory,

meaning how many new active homes were listed on the MLS, and then how many closings happen in those 30 days. If you start doing that across certain price points, you may find a price point that would do exactly what I just explained. There may be 20% more inventory, but there's 40% more closings, meaning the buyers are in that price point. So we need to go back to the drawing boards, guys. We need to act like you're a rookie investor. And if you are a rookie investor, this is exactly what you need to be doing, is you need to be looking at the numbers.

Where are the buyers that are still buying homes, that can still afford a 30-year fixed, a 15-year FHA, or whatever loan that they get? Another thing, guys, that we need to do is the fix and flippers. We need to account for cost of money. Plenty of students are out there, you know, complaining about, oh my God, this deal was so good, but now I've held it for 60 days and, you know, the cost of money is so high and I'm spending 18% on my interest rate and it was a hard money loan.

I'm already spending $2,500 a month, $30,000 a month for this loan and it's just eating all my profit away. What happens if it's on the market for another four or five months? The home, I'll end up losing money on this home. I'm hearing that. I'm telling you, week after week, I'm getting these emails and people are asking me these questions. You need to adjust how you account for your money. When you run your numbers, bring it all the way back to the numbers, guys. When you run your numbers, are you running your numbers with holding costs for two months or are you running it with six months? Huge difference, right? If you're paying $3,000 for your money and holding costs, and you have to hold that for six months,

that's $36,000. Is it $36,000? I'm sorry. It's $18,000. $18,000. Right? So you need to account for your money because if you're only holding that for two months, it's $6,000. So you need to start adjusting how you run those numbers. You can't just simply assume that you're going to be able to sell a home in two months anymore. That used to be the case. We were resting on our laurels, right? We're resting on

our laurels. We know we should be looking at the numbers. We know it. We know we should be accounting for a longer time of holding. But we got so excited and involved with the market and what it was doing and how many offers you got on the first day that you listed it that you stopped accounting for holding it for six months. Get back to that. Start accounting for your holding for six months. Cost of money, your taxes, commissions, whatever that may be. Those holding and closing costs need to be adjusted. That's

what you can do as the fix and flip investor. That's what's going to help you. So I'll repeat those two major things. It all goes back to the numbers, guys. First, find the price point where the closing of closing percentage is larger than the increase of inventory percentage. Because that's where your buyers are. That's still a good market to play in. Go back to the numbers. Find where those closings are happening. What zip code?

What price point? Secondly, guys, act like a businessman. Don't act like a businessman, but be a businessman. Go back to doing it the right way. Understand that it may take up three, four, to six months for you to close a flip. If you can't hold that home for six months, do not buy it. Calculate your cost of money. Calculate your closing costs. Calculate all of your closing costs and holding costs. Power,

water, utilities, taxes. Updating the yard every two, three weeks. Put that in there. Spending $50, $100 a month for someone to keep the yards clean, the pools clean because it may sit on the market a little bit longer than what we're used to. Guys, tomorrow this all could change. That's the great fun part about being a real estate investor

is you got to be flexible. You got to ride the waves and when you know the wave is going down or the wave is getting too big, get onto a different wave. Get creative. This is what I really excel at. I start getting creative in figuring out ways to find different deals that make us a profit. What areas, what zip codes, what price points, where are the buyers, how do I get cheaper money? All of those things is what I focus on

and it's what you guys should be focusing on as well. So guys, that's all I got for today. Thank you again for listening. Each and every podcast, I give you everything I got. I really appreciate it. This is podcast number seven. I am your host, Justin Colby. Go ahead and visit our website, thescienceofflipping.com.

Get our free e-book on the 15 most costly mistakes an investor can make in this market. And what I just reviewed was what is happening in the market, guys. That's all the time I got for you. I'll talk to you next podcast. Peace.