Is it Possible to Flip for Profit in Phoenix?

A great question was just posted on Trulia Voices. It’s a question that is asked with some frequency, so I thought I’d take a moment to answer it here.

Considering todays market is it possible to “flip” for profit in Phoenix, mesa, tempe, glendale, scottsdale etc. I have heard of some investors lately taking advantage of some great deals on property and then turning them around for a profit in the Metro phoenix area. Anyone care to share their thoughts and experiences on here?

Personally I feel that unless you have nerves of steel (and a stomach to match) “flipping” — buying property and quickly reselling it — is not a wise move at this time in the Phoenix real estate market.

Much of Phoenix is labeled a “declining market”. That means that generally speaking, property values are still declining across most of the Phoenix metro area. That’s not to say that there are not any amazing deals out there. There are. If you look deep enough, you can often find homes listed below current market value. It would seem logical then that you should be able to purchase such a home and turn around and sell it at market value — the difference being your profit.

Here’s the issue. If a home is listed well below the surrounding market value it is likely to fall into one of two categories: 1) the home is in need of repair, maybe substantial repair; or 2) the home is a short sale and is listed at a low price to attract offers — offers which the lender may never accept (not to mention that during the weeks on end you are waiting for lender approval the value continues to decline).

Flipping for profit in Phoenix real estate
requires nerves of steel

But let’s say you find a real gem — a well maintained home that you won’t need to hire Bob Villa to repair and it’s listed under market value. So you purchase it with visions of dollar signs dancing in your head. You’ve called the CPA and booked flights to Maui.

And now you have to sell it.

What are you in for?

Well, you’re competing with 52,000 other Phoenix homes listed for sale (plus FSBOs). And to pay for that Maui flight it’s probably safe to assume you’re going to list it at market value. So now you have a home on the market — a market where depending on where in the Valley you’ve bought, there is anywhere from (roughly) 4.5 months to 50 months worth of available inventory for sale.

Once you do sell, don’t forget that you’ll have closing costs (on both purchase and sale). Unless you want to sell it on your own, you’ll also have to pay commissions. Even if you do decide to go FSBO (For Sale By Owner), unless you offer a buyers agent a commission there is little chance you’ll be able to sell it.

You could try renting it and deal with all that involves — and thereby restrict your future buyer pool to investors looking for rented property.

I’m not saying it is impossible to flip for profit in Phoenix. But you had better be a very experienced investor and even then, you better be willing and able to take on considerable risk.

—
Special thanks to Linsey at the OC Real Estate Voice for the kind words in her answer to this Trulia Voices question!

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Linsey

I might add one more element about that flipping process. When you buy low - you've just set the new bar for the neighborhood. In a declining market, buyers are looking at the last closed comps and looking for a 'deal' beyond that. I would be hard pressed to find a buyer that would be willing to pay significantly more than a seller paid only 3 months ago for the same property. In addition, an appraiser is going to struggle to bring in a much higher price than the comp that you just created in a 'bargain purchase'.

<abbr>Linseys last blog post..Honey, Can We Lower Our Property Taxes?</abbr>

Jon Griffith

One of the most frustrating things that I see today in the Phoenix market is the overuse of the term "Short Sale." When we as Realtors provide a BPO or Comparative Market Analysis, we typically use the Sold prices to determine the comparables. If there aren't enough solds, and the last sold was old enough, then we get stuck using active listings to determine the "comps."

If I list a property for a seller who owes more than the home is worth, and I call it a short sale, aren't I saying that this home has been sold short? Aren't I assuming that the bank will approve my price opinion? Isn't it absolutely a disservice to the rest of the professional community to bill a listing as a "short sale" when the bank hasn't even approved the sale short of what's owed? I think we need to change this problem. Homes that are not approved are not short sales any more than the value of your home is the same as the asking price of the next door neighbor's exclusive listing. It drives me mad.

If your listing isn't approved by the bank, then it's not a short sale. It's a "lender approval required." And, furthermore, I believe that pricing the property arbitrarily below obvious market value to attract offers is a total waste of everyone's time.

There, I have vented now. I wonder how many of you agree or disagree. In fact, I'll post a poll on my site if you'd like to help me collect some useful data. Thanks Jay!!!! You're the best.

http://www.realscottsdaleliving.com

Edge@The Foreclosure and Credi

Agree and disagree Jon. I think the term is put out there more to indirectly point to the fact that financing and timelines are tight and that should be kept in mind. I can see where the annoyance comes in, but with so many short sales not being approved now, it seems timing is of the essence.

As far as flipping, as a huge fan of Property Ladder (my guilty pleasure), I often think about this, but as you mentioned, the work needed is usually the killer unless you were a general contractor in your past life.

Even then, I don't see flipping as really possible given the market inventory as Jay mentioned. Finding a property that would easily cash flow and renting it out, now that's another story.

Tucson Michael

I agree I think the buys are for sure out there but when it comes to selling its almost impossible. Plus there is a lot of buyer physiology if they look up the fact that you bought it for x and are selling for y the buyer may decide that they will try to really lowball you down. There's just way too much competition on the sell side right now for flipping to work out.

Paul Slaybaugh

Excellent post, Jay. Flips should really be long term propositions in most instances right now. I like the strategy of finding something that is rentable with a little paint and carpet, while saving the major renovations for later. As long as the deal is sweet enough to pencil at a break-even (rent to mortgage), you can keep a tenant indefinitely. When market conditions turn around, then you can transition from rental to flip. Obviously not a great strategy for immediate income, but flipping for immediate profit is a fool's errand at present. Better to fill the pipeline with rentals that can become flips down the line.

<abbr>Paul Slaybaughs last blog post..Where Should You Invest Your Last Six Bucks?</abbr>

bill@IT Governance

Isn't it flipping for profit that got us into a lot of the housing mess we are currently in? Beware of catching falling knives as they say - while those deals look great now they aren't so good if we go into a great depression.

Fred

to all you Flippers out there, Is there a timeframe legally from buying a property at the courthouse at 130,000 and selling right away for 175,000 two days later, how long should the wait be? and will the buyer have any problems buying on a conventional loan 90LTV? Could this a problem for seller or buyer?
Thank you