The Science of Flipping - Investors Increase Flipping Profits

Episode Date: January 12, 2022

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All right, the data has just been reported. Adam Data has just reported that almost 95,000 homes nationwide were flipped in third quarter of 2021. That means roughly 5% of all homes were flipped in that quarter. Now here's the crazy part. Each deal almost brought home $69,000 per deal that was flipped, which is up from the second quarter. And even more

shocking, it's actually below what happened in the first quarter of 2021. What's up guys, I am Justin. This episode of the Science Flipping Podcast is going to be fire, super data driven as we're getting all the reports specific to us investors, home buyers, flippers, iBuyers, hedge funds. We're going to do a deep dive of what's really going on in the market and how we can take advantage of it is small mom and pop shops. Now, as I mentioned, roughly $69,000 or so was the gross profit margin on these flipped homes in Q3 of 2021. So here's the deal. That's actually down almost 33% from Q2 of 2021. And the reason being is actually because the pricing is getting much more difficult. The reason why there was a decrease in profit margin is because appreciation slowed down a

little bit. Now here's something that can be very relatable to you real estate investors, the mom and props, just like myself. The average price point of these flipped homes was $280,000 on average. Why is that important to us? Well, because if you've listened to me or been taught by me or anything that you've been following me, you've realized that I try to stay under the median price point of the nation. Now, that seems to be true as most flippers are following that rule, and this includes hedge funds and i buyers now that number was the highest increase since 2005 all right so how does this really kind

of affect us well what will be interesting to see since 280 000 was the average flip price point which was way higher than anything we've seen in recent history, what I would like to be continuing to take a look at is what kind of trend is really happening for us small and pop flippers? Is that number going to continue to appreciate and appreciate and appreciate, which might price some mom and pop flippers out of the space? Obviously, we've talked a lot about the iBuyers and hedge funds, and they can spend a ton of money. But one thing you know about me is I want to always stay within a good rental and flip market. What that means is when you start flipping homes that are $350, $400, $450, $500 or higher, you're really only using one exit strategy. Your really only option is to flip it.

Where I like to buy properties that give me an option, I can flip it. It's still a good flip, but I also could make it a good rental. The highest rental I personally bought the year of 2021 is $179,000. And that was the highest price point rental. So already the price point, the median price point of these flips nationally being $280,000, that's already getting me to a place where I'm not in love with the opportunity there. So it might actually price me out of even buying a home because I'm typically going to flip a home, rehab, flip a home, if it also potentially fits the buy-in hold bucket, meaning I have two exit strategies. If it sells for top dollar, great. And if it doesn't, okay, I'm putting it in my

portfolio. That's the business model, right? So this data is really important to me. It really should be really important to you. Now onto some other topics like the iBuyers and hedge funds. It has been now reported that they have bought $77 billion worth of homes just in 2021. And that still doesn't accumulate for the, or that doesn't account for the entire year. That's just accounting for the last six months. So essentially the middle part, beginning and middle part of 2021. Here's what this means. Again, if you've watched any of my other podcasts or listen to my other podcasts, this means the market is going to stay on fire. These guys are raising more capital and you can already see they spent 77 billion

on real estate in the last six months. That's a huge difference than what they did in 2020. Now we can all realize in 2020, things weren't exactly the same. COVID hit. There was definitely some pauses, but quite literally based around the data shown in this article, they went from 55 billion spent in 2020 to 77 billion in 2021. Do you think for a second they're going to slow down going into 2022? I guess not. Now, here's something I thought was super interesting given this article. They're talking about how these investors, the institutional funds, the institutional money have now gotten more creative with their home buying strategy coming in with all cash offers. Guys, just so we're clear, if any of you guys are listening, that's what us little mom and pops have been doing since day one.

So you haven't really set the tone there. What you have done is you've priced us out, right? That's what they're really doing is they can pay way more than we can. Now, if you listened to my last episode, and if you haven't, you should go re-listen to that or go re-watch it. By the way, guys, if you listened to my last episode, and if you haven't, you should go re-listen to that or go re-watch it. By the way, guys, if you're listening to these, make sure you go over to the YouTube channel, subscribe to my channel. I drop the videos, which a lot of times can be easier to watch and much more entertaining as I get very animated during these. Go to my YouTube channel.

Just look me up, Justin Colby, or go to the youtube.com forward slash Justin Colby, and you will be able to subscribe and watch these. Now, if you haven't watched or listened to my last episode, you will understand that these guys are actually raising a ton more money and they're going to be buying at top dollar. And what's happening is that iBuyers are actually selling directly to the institutional funds, such as Blackstone or Invitation Homes, without even putting it on the market. So the best thing you guys can be doing is pay attention to that last episode, because I talk about how you need to find the iBuyer representatives to work with, as well as the hedge fund buyer representatives to work with, because they could be your buyers. Also, if you're looking to

buy and hold, you might want to find the iBuyers selling representative, if you will. Meaning, if they've remodeled it and it's a good remodel and it's good enough for the hedge funds like Blackstone, you need to be thinking it's damn sure good enough for you and to see if you can maybe get in front of Blackstone on a couple of these deals and continue to build your portfolio. Now, according to this article on Redfin, the median home price now is roughly $380,000. Now, as I've mentioned on previous podcast episodes,

I usually will see data from 350 to 375. 380s, the top of the number right now. But again, as I just mentioned, in my world as the mom and pop buyer, I want to stay roughly 30% under the median price point. So when we just talked about how the average flip price was about 280,000, I want to be around that number, not the 380 number, right? So that gives more validity to this 280,000, which says, okay, if I can flip that and hold it, it might be a good option. 380 is going to just price me out. I want to stay 30% under the actual national average. Now, Redfin data is actually saying that this went from 325 or so all the way up to 380. That is a massive increase

in just one year. And this is really predicated by a bunch of different stuff that you've seen or heard on my podcast episodes, meaning the investors are here to stay. They're going to be paying top dollar. The interest rates are continuing to stay low and there's just no supply. You put all these things together and the numbers are going to keep going. Now, my hypothesis for 2022, if you will, is the numbers are going to continue to raise. There's going to continue to be a shortage. Some of these investors, institutional investors, are actually buying and buying land to build and hold, which is so different. And again, is going to be a different, I guess I should say it's, you got to adapt, right? Because this is going to be such a

change in industry as well. One thing I can tell you for certain, after 14 years of doing this and almost 2000 deals, the one constant is always going to be change and your ability to adapt. If you want to be in this long term, you need to adapt to the reality of what's happening in the real estate market. Don't worry about whether they're profitable. That's not your issue. That's theirs. You need to worry about how are you adapting to the things they're doing to change the landscape of the real estate economy. So guys, listen up. How does this relate to us? How do we care? Why do we care? Well, that's the point of what I'm trying to say is we need to find a way to adapt. At the end of the day, I've had to make several major adaptions in my career. Adaptions may or

may not be the right word. We'll figure that out later. But I've had to make sure I adapted or became fluid to what was happening. First, when the hedge funds came into Phoenix they started initially buying from auction I was also an auction buyer so again being a little guy being able to buy maybe one two three homes a week these guys were buying 30 a day right and so I had to make sure I knew how to adapt the other other adaption, again, I hope that's the right word, that I made was when I was buying strictly from wholesalers. I had to realize the wholesalers were taking a lot of the spread out of the deal for me.

So I would do deals and after 90 days, I'd make $8,000, right? After money costs, et cetera, contractors, this, that, and the other. I was like, wow, how do I increase my profit margin here? How do I make sure I can make more money? Well, I had to start going direct to homeowner. Another thing that I had to be flexible, because I don't want to use that word again, because I'm not sure if it's a real word, is I had to figure out how to navigate the difference in marketing strategies. I was such

a heavy direct mail marketer. I mean, quite literally, I would send hundreds of thousands a month. And then all of a sudden, the callback ratio started to decrease. And when that happens, that means I get less leads. When that happens, it means I can buy more deals. When that happens, I make less money. So I had to make some big pivots on that. So here's the reality of all this. You need to make sure you're in front line. You need to make sure you're listening to my podcast. I'm going to do some, you know, new type of podcast episodes where I'm going to try to be pretty relevant to what's actually happening in the real estate economy, as well as teaching you tactical strategies and processes in your business. But I'm also going to be bringing, highlighting what's going on in the real estate space, because it really means a lot to us. There's been massive changes since COVID and even before that. So the things that I would

tell you guys right now, things you guys can take from this, just aside from the data, is you really need to be in sync with these iBuyers and hedge funds. They are moving the needle. They are changing the game for all of us. They're helping the price appreciation, which can be great. But if the appreciation isn't going as much as you need for these flips, meaning you're speculating, right? You're thinking, okay, if I buy this based around how the market is trending, I think I can sell it here. Speculating is not the right business model for most people,

right? I would say for really anyone, you can hit it big if you're really good and you get some luck behind you. But again, based around some of this data, the appreciation has started to slow down. Well, that can be scarier if you're speculating. So I try to refrain from speculating. Make sure you have real data. Make sure you're not trying to outprice the market. Listen, I have been doing this a long time and have some very, very good friends of mine in Phoenix and other markets that are murdering it, flipping homes, just crushing it, setting their own records by like millions of dollars more than they've ever made in their entire life. Millions. And they keep coming back to me and say, Colby, why do you keep

wholesaling these homes and making 10, 15, $20,000 to me when I'm making 70, right? We just talked about that the number was about 68, 69,000. That's what they're making. And I'm making 10, 15, 20. Well, because of this, I've been through the crash. I made it through. And most of these guys did too, but I'm a little bit more reserved because it just takes that one day where the music turns off. It takes that one day where the Fed increases interest to 6% out of nowhere. And that's extreme, but I think you get it where all of a sudden something changes. COVID I thought was going to be that. And I was like, oh my God, I'm so grateful. I think at the time I literally had one flip. I'm like, oh my God, thank God. I only have one flip

going. Um, and lo and behold, COVID wasn't that. But I would just be cautious, right? Things are looking great. I'm super bullish on 2022, by the way. I believe the appreciation is going to happen. Just make sure two things. You know your iBuyers, you know your hedge funds. And if you can align yourself with those, you should have a great year, not just wholesaling, but flipping, buying rentals, because the iBuyers are a great resource for your own rentals. And then make sure this, make sure you know how to go into every opportunity and maximize the opportunity. If you're just a cash offer one trick pony, you will not nearly do as well in 2022 as you would have if you had multiple avenues to acquire properties. If you

do that, you're going to be set. Again, if you have not yet, give me a five-star review on iTunes and go subscribe to my YouTube channel, youtube.com forward slash Justin Colby. Subscribe, hit the like button, hit the thumbs up. I really appreciate it. And I'll see you guys on the next podcast episode. Peace.