At this time in Denver there are 2 types in buyers in what has become a very hot market for single family dwellings priced under $200,000. One type is the "First Time Buyer", using predominately FHA financing to acquire that "Dream Home". Make no mistake, the dream of owning a home is part of the American culture, and an unstable economy will not completely quash that dream. The other type of buyer is the "fix and flip" investor. Those two types of buyers have come together in an unintended symbiotic relationship that is fueling the lower spectrum of the Denver market. Here's why:
- There are many "bank owned or REO" properties available for sale. These properties are relativity easy to acquire if a buyer will pay slightly more than asking price. The devaluation loss has been absorbed by the financial institution.
- There are few if any new built homes priced below $200,000.
- A well done "rehab" project provides the "First Time Buyer" with a solid, amenity filled home in an established neighborhood at an affordable price, perfect for FHA financing.
Here is how it works. The example is a real situation that occurred in southwest Denver this year.
- The subject was acquired by the "bank" in April of 2008. It was placed on the market immediately. It was sold and closed in late May, with the buyer paying cash at slightly more than the asking price.
- Clean-up and rehabilitation began in early June, and was completed in early September.
- The property was resold to the "First Time Buyer" using FHA financing, with the closing occurring in mid-October. The total holding time was approximately 145 days.
- Here are the numbers:
o Acquisition Price - $75,000.
o Rehabilitation expense - $36,500.
o Total Expense - $111,500.
o Sale Price - $160,000.
o Less Cost of Sale - $14,625.
o Gain before Expenses $145,375.
o Profit before taxes - $ 33,875
- The investor committed $111,500 to the project for 145 days, and realized a before tax profit of $33, 875. That is an annualized return of 76%.
- Is there risk? Absolutely, yes there is risk. Not every distressed property will work as well as this example, although research has revealed many similar situations. The property must be sound in structure, or the rehabilitation expenses become exorbitant. There must be a good contractor involved, with a focus on time and minimizing expense. Having said that, cutting corners will result in a slow sale. The materials and workmanship must be of good or better quality. The prospective "First Time Buyer" must perceive the newly remodeled house as having a high "WOW" factor.
- The investor cannot get greedy. Completing the re-habilitation "on the cheap" or trying to sell the property above a fair market value will provide poor results.
- The investors purchase price must be low enough to absorb the total expense and realize an acceptable profit from the post-rehab sale.
- The entire project must be researched and managed by someone with experience. The risk is lessened with good analysis and investor understanding.
There you have it, how to make a "deal" in real estate in Denver. Is it easy? No, but neither is it particularly difficult. True, the process does not produce enormous profits, but then again, what is the interest being paid on CD's today?