Valuations: Same House Different Numbers
Imagine: One day, you see a foreclosure that you could envision flipping. It’s a three bedroom, two bath, 1,600 square foot dwelling. A similar house just sold for big money in the same neighborhood. You’re excited and think, “Now’s the time!”
Hold on! Here are some things to consider.
Higher or Lower Home Valuations?
Certain markets are better for flipping than others. Do you choose a market with higher home valuations or one with lower?
Auction.com‘s Rick Sharga states, “Real estate investors appear more likely to flip a property in those regions where home values are higher.” Higher valuations mean a faster, stronger gross profit. On the “flip” side, Dan Blomquist with RealtyTrac, asserts that “flippers are attracted to less expensive markets.” For the price of one house in an expensive market, you can buy five in a less expensive market and diversify your risk. If you put everything into that one home and it doesn’t sell, you’ve lost big. However, if you buy five houses, at least two or three of them will sell well.
The reality is that a house you purchase in San Francisco will buy you five similar houses in Phoenix. In San Francisco, that three bedroom home you were eyeing, once flipped, could sell for $1,200,000; whereas, in Phoenix that same home would probably garner $200,000. Do you buy and flip six houses in Phoenix or one in San Francisco?
Economy Plays a Role
What does the local economy look like? Is it stagnant, recovering or flourishing?
You don’t want to flip in a stagnant city. There must be enough employment and economic activity to sustain the flip. The city must be in a long term economic upswing. Consumer confidence has to be at a minimum threshold: People must have enough confidence in that particular market to be willing to invest in the finished house. If all of these are in place, the question becomes: Will they buy into that neighborhood?
It’s all about the Neighborhood
What are the home valuations in that neighborhood? Will the neighborhood garner a profitable selling price or much less? Is the neighborhood up and coming?
You want a neighborhood that can “sustain” the flip. You don’t want that once you’ve flipped the house, its value far exceeds all the other homes. If you do, you’ve just flipped yourself out of a sell.
Up and Coming Does Pay
Realize there’s a risk with a neighborhood that the city is attempting to revitalize. It may or may not spring back to life and until it does the valuations will be lower. If it doesn’t, you’ll be left with a home that won’t sell (or will undersell, at best). If it does, the corresponding valuations of the neighboring homes will help yours to sell well. This is where risk enters. It’s hard to predict which neighborhood will revitalize and which won’t.
At first glance a neighborhood may seem better than it really is, and it may throw off the valuations. There are several factors to consider and different lending agencies will view properties differently. Things like schools, parks, and multi-family dwellings may cause lower valuations even between homes that appear to be in the same neighborhood.
Go for It!
So, before you purchase that foreclose, make sure you’ve considered the location. Location will determine whether or not that newly flipped house will sell and if it will sell well. Use good judgment, pay attention to economic currents and market trends and go for it!