Discover how to successfully flip houses in a real estate downturn. You'll learn the 3 biggest mistakes when house flipping during an economic slow down as well as the 3 best house flip techniques in a market when prices are dropping. The wisdom you'll gain can make and save you a ton of money!
3 Biggest Mistakes in a Downturn
1 - Sit on the Sidelines
A sure-fire way to fail is to sit on the sidelines. When you're not in the game, you miss opportunities, and therefore you lose. I know there’s a lot of fear out there and people are predicting the worst real estate collapse ever. But I made a lot of money after the bubble burst in 2008 and those years following. And then more recently, right after the pandemic hit, while basically every real estate investor, hard money lender, and iBuyer, literally closed shop. While everyone else was on the sidelines I was full steam ahead and I made a fortune because of it.
There's always opportunities and what both myself and those that I mentor are already seeing is a lot of opportunities coming our way right now. Warren Buffett was once asked, "What's the easiest way to get rich?" And you know what his answer was? "Be greedy when others are fearful and fearful when others are greedy." So don't make mistake number one. Don't sit on the sidelines right now. More and more opportunities are going to present themselves. And if you're not in the game, you lose.
2 - Major Rehab
Mistake #2 is to take on a major rehab project. In a real estate downturn, real estate prices can drop. That means your initial analysis of what the final sales price would be after you fixed it up could be very wrong several months later.
That said, conditions around the United States do vary dramatically. In parts of Florida, the market's still extremely strong, whereas in certain areas of the Western United States prices are dropping drastically. You also need to consider that within those markets, the amount of inventory varies depending on price point.
Regardless of where you're located, why take on this added risk? You could make a tremendous number of improvements which increase the value while at the same time the prices are dropping. So basically, all your work could be for naught. Why do that to yourself?
Furthermore, local government building inspectors that issue approved permits, they're in no hurry to help you during a downturn. In fact, I would argue that they'll go out of their way to move slower and to not approve things, just so you'll lose money. Almost every planning, zoning, building person of any local government I've dealt with in my entire career get a kick out of drilling pins and needles in entrepreneurs like us. So why put your financial future in the hands of people like that?
If you still aren’t convinced, I have a great video called The Renovation Delusion, which I suggest you watch and that will make you a believer.
3 - On Market Properties
The third mistake is pursuing on-market properties. On-market properties are those that are listed by a real estate agent on the MLS or that are going to auction. In either instance, the entire market already knows about it. And real estate markets are very efficient, meaning they sell for the highest amount the market will bear. So, ask yourself this question, why would you start a house flip during a downturn at the highest price the market will bear? Why start at the top when there's only one place to go and that's down?
Instead, you want to focus on off-market deals. These are properties that other people don’t know about, and no agent is involved. You are contracting and negotiating directly with the seller. Now sure, maybe one or two other competitors might know, but it may just be you. And that allows you not only to have a better starting point, but also to structure creative financing, a key component of how to monetize a downturn.
Now, if you want to know how to find off-market deals, I don't share that information here for the protection of my mentees and those that have graduated from my program. So, if you don't know how to find off-market deals, you will need to hire someone to teach you that skill. For those who already know, focus all your energy during this downturn on off-market deals.
3 Money Making Techniques in a Downturn
1 - No Risk Flips
Moneymaker #1 is no-risk flips. This is a technique we pioneered over a decade ago and these are the steps:
- Get the deal under contract with the seller.
- Establish equitable interest.
- List your equitable interest on the MLS.
- Lock in and find the highest paying buyer.
- Sell the property to that buyer all before closing with the seller.
This strategy reduces your risk to basically nothing because you haven't put any money into the deal. Also, you get to save in closing costs because you didn't have to close on it and resell it. Plus, if the deal doesn't sell for what you thought it would, maybe your assumptions were wrong or the market dropped faster than you anticipated, you can always give the deal back to the seller.
It sounds great, right? And it is, but it's not for the beginner investor because every detail and all the paperwork must be perfect. If it's not, it can blow up in your face. This technique presents all kinds of challenges. For example, how do you list a property for sale that you're not the title holder of? Or how do you show a property to buyers when the seller's living in it? It took us a long time to master this art and to figure out solutions to all these problems. And of course, it comes in handy during a downturn like this.
2 - Cosmetic Flips
Even though interest rates are at 20-year highs, there is still demand for people to buy a home. But unlike the second half of 2020 up to the first half of 2022, those buyers are a little pickier now. They expect new paint, new flooring, and other cosmetic updates. Now thankfully, cosmetic updates can be done quickly and don't require permits. You can get in, make those improvements in less than a month and already have it back on the market.
However, there's one caveat to this. You don't want to acquire these cosmetic flips with hard money loans or even all your own cash. Why? Because the interest rate of a seller's loan will be lower than today's 20-year high. Also, this is a time when you can make the seller your bank because of the circumstances. So, you want to structure a subject to or owner financing or a combination of the two. If you're taking over somebody's 3% loan or 4% loan, why not? Why go throw a 12 or 14% hard money loan on a property when you can make the seller your bank?
So, cosmetic flips are a great opportunity right now to get in and out, but you need to layer in creative financing because otherwise those hard money rates are going to crush whatever profit you're trying to create. If you don't know much about creative financing, I have a great video called Creative Financing Comparison so you can get a more in depth understanding of what that really means.
3 - Selling Rent to Own
Moneymaker #3 is selling properties on a rent-to-own. In a downturn, lenders tighten up their standards so it's more difficult to get a mortgage, which means it pushes more of the marginal credit buyers into the realm of a rent-to-own. That creates massive demand and very little supply right now.
One of my apprentices last week put up four rent-to-own signs in strategic busy intersections. He put them up on a Friday afternoon, and by Sunday he had over 100 voicemails. The tenant buyer he chose had $30,000 to put down and had a great job working for the local college. The only reason he couldn't get a loan was because some five years ago he had a bankruptcy. With such limited supply and high demand, my apprentice was able to pick the best of the best.
Structuring a Rent to Own Deal:
But just like with cosmetic flips, you need to acquire these properties with creative financing. Again, you can get much lower monthly payments by either taking over somebody's existing mortgage or negotiating owner financing. This is how my apprentice structured his deal:
- He negotiated owner financing with the seller at $175,000, no money down.
- It was a 3% interest rate loan on a 30-year am with a five-year balloon.
- His monthly payment maxes out with taxes and insurance at about $900. Meanwhile, the tenant buyer's willing to pay $1,500 a month in rent. So that's $600 a month in positive cash flow.
- He got a down payment of $30,000 up front.
- Then he also structured a three-year option agreement with this tenant buyer at a purchase price of $225,000.
- He's in it at $175,000 minus the $30,000, that's an additional $20,000 on the backend.
Look at those numbers! This is how you flip a deal in a downturn. The rent-to-own opportunity is huge, and you can structure creative financing which allows you to put these deals together with little or no risk.
To learn more about how to sell your home on a rent-to-own, I have a great video that gives you the step-by-step details:
Freedom Mentor Opportunity
If you're serious about making a lot of money during this real estate downturn, consider my apprentice program where my mentoring team and I will show you how to find off-market deals and structure no-risk flips. We'll coach you on how to structure creative financing and negotiate with sellers and train you to work with rent-to-own tenant buyers so you can structure great deals in this market downturn.
Apply Here: Freedom Mentor Apprentice Program