Impact of Denver Fix and Flips
The real estate industry in the Denver market might be a case study through which interested folks might learn about the opportunity presented by the real estate crisis.
Perhaps the government should just let the private sector move us out of this crisis. It seems to be proceeding nicely and with great aplomb in Denver. Despite the positive impact investors are having in the revitalization of neighborhoods with a high percentage of foreclosures, the Federal Government, through HUD’s Neighborhood Revitalization Program, has offered the City and County of Denver $6 million to do exactly what the private sector is doing.
Your Castle Real Estate has used GIS software to map real estate transactions by the ~450 neighborhoods in the Denver Metropolitan area. We have then used some analytics to determine where there is a high foreclosure rate, whether it is increasing or decreasing, what prices are doing, the correlation among those factors and with days-on-market, which our analysis shows is a leading indicator of price changes.
We then looked at all transactions over the last 36 months and filtered them by those homes that had sold twice within any 12-month period. We filtered further by those with a difference between the first and second sale of greater than $25,000, the gross margin. There were roughly 3600 transactions that met our criteria. Our thesis was that those houses would be fix and flips. To test the theory, we took a random sample of 100 and checked the descriptions for both transactions. What we found for 99 out of the 100 were descriptions of the first transactions that typically looked like this: “Bank sale. Sold as is. Bring your tool belt. Needs TLC.” For the second transaction we typically found descriptions that described the house as “A complete remodel. Slab granite, travertine tile, cherry kitchen cabinets. Bring your pickiest buyers.”
Our conclusions?
· The low-end neighborhoods that historically have had high foreclosure rates today have a significantly lower percentage of bank sales and more remodeled sales.
· It is becoming more and more difficult to buy properties in these neighborhoods at bargain prices.
· Really good deals attract multiple offers and contracts are written within days of the listing, with premiums being paid over the asking prices.
· The gross margins for fix and flips (the difference between the first sales price and the second sales price) are steadily increasing and for all of Denver now average more than $80,000.
· Using our data analyses it is possible to identify which neighborhoods have considerable price decline still to pass through, which ones are at the bottom, and which ones are on the rise.
· Below sales price of $325,000 is a seller’s market, above it is a buyer’s market.
The City and County of Denver’s Office of Economic Development that is charged with developing a plan to use the $6 million mentioned earlier.
The neighborhoods where they had planned to spend the monies were some of the neighborhoods with the greatest fix and flip activity, where the bottom had been reached and where prices were on the rise. Their plan was to compete with the private sector. In effect, they would take the private sector’s money to do a chore not needed and in so doing, compete with the private sector, driving up prices further and making housing more unaffordable for those who need affordable housing the most.
Further conclusions:
· Not all low-end homebuyers have bad credit. There is significant pent up demand that can be met by competent fix and flip activity.
· Real estate investors are not all ravenous heartless pigs. There are many who are providing a needed service to their communities: making nice, ready-to-move-in properties available to the first-time homebuyer.
· The Office of Economic Development of the City and County of Denver has a $6 million pile of cash burning a hole in its pocket and it does not know where to invest it. Can they give it back?
Our point is this. The private sector can fix this problem. Keep the government out of it. If there is an opportunity to buy low (first year of business school) and to sell high (second year) the private sector will find it.
Your mission, dear reader, if you chose to accept it, is to inform the world that there are opportunities in the real estate market that we have not seen since the great depression. If you have moved cash into your 401K, move to investing in real estate.