How to survive & thrive during a potential real estate recession: Part 3
As of this writing, our buying strategy during the coronavirus crisis still involves us actively looking at houses and making offers. However, we have changed our buying criteria significantly.
What we're buying
Prior to this pandemic hitting the United States, Matt and I were actively searching for single-family ranches or capes in A-rated towns where we could rip the roof off and build a 4-5 bedroom home that could list for $800,000 or greater. While we're still watching these types of properties, I would say our risk tolerance has plummeted. The buy-in point for these homes is around $400,000, plus over $200,000 in renovation costs. That's a heavy lift. And we know there will be less buyers who can afford $1 million homes after this crisis.
We're now exclusively interested in small multi-family properties and single-family flips that can resell for $300,000-$400,000. If you thought the market inventory was low before for an affordable, fully-renovated home in our high-priced market in the suburbs of New York City, it's probably going to be even lower when the market reopens for business because so many flippers are now sitting on the sidelines.
I think there is a tremendous opportunity for flips at this price point. Data out of China shows that buyers did return to the market with gusto. Anyone who lost their job or got a fiscal wake up call from this disaster is still going to need a place to live, but if they'll probably want to downsize or tighten their budget. A 4-bedroom with brand new finishes for $300,000 and 30-minutes from NYC sounds pretty good right now to anyone stuck in their small apartment for months.
And at this low price point, it's also possible for us to rent out these single-family houses and still make money if we can't sell them. That's a level of risk we can feel good about.
How we're buying
We're still looking at MLS listings everyday, but we are even more focused on our efforts to reach sellers directly through mail, voicemails and text. We have gotten a deluge of phone calls directly from sellers since the crisis started. I think sellers are afraid to list because they know many people are not house hunting right now. Suddenly, those investor letters they've been hanging onto look pretty enticing and they are giving us a call.
"We're offering about 15-30% less than what we would have offered before..."
We are discounting our offers compared to what we might have paid just 2-months ago. We're offering about 15-30% less than what we would have offered before, and this is on top of the deep discount that a seller might list it for with a realtor. Depending on how much work a house needs, we are offering 50% or less of the home's ARV (after-repair-value).
For example, we looked at a house in an A-rated neighborhood on a 1-acre lot (that's huge in New Jersey) and it needed a super simple interior renovation - swap out the kitchen and baths, paint and re-finish floors. It didn't need any walls moved, the layout was great. We think it could sell for $800,000. We offered $400,000 or 50%.
We also recently looked at a single-family in a decent working class neighborhood. It needed all new electric, plumbing and heating; plus new baths, kitchen and flooring - but no layout changes. We offered $100,000 and we think it could sell for $315,000-$330,000. That's 30% of the home's ARV! A fantastic deal.
Why we're buying
We have not closed on anything since this crisis began in March, however we are ALWAYS looking. Being an active participant allows us to be as close as possible to what's happening day-to-day. If we had stopped sending mail to sellers, we wouldn't have known about the surge in calls to investors right now. The two deals I mentioned above are both from direct mail. By making offers at even greater discounts, we'll also be able to gauge what sellers are willing to accept and where prices may be headed (on a micro level). If the market reopens for business in May and a surge of buyers come out, we would have missed this opportunity get homes at a deeper discount now when we are one of the few buyers still actively shopping.
That being said...
You should do your own research and make sure you are 100% comfortable holding onto whatever you buy right now for the long-term. Some in the real estate world are predicting housing prices to drop by as much as 50%. I don't think it will be that much, but I do think housing prices will be impacted.
"...make sure you are 100% comfortable holding onto whatever you buy right now for the long-term..."
The best way to prepare is to plan for the worst but hope for the best. You can read Part 1 and Part 2 to get some ideas. If this article helped you, please share! I'd love to answer any questions or comments below.