Denver Flipping Market Update for Q2 2020 w/ Derek Marlin

A couple of months ago we did an eight-part series called “Elevate Your Flip” with Derek Marlin.  We got such good feedback from the series that we wanted to continue with it and do a quarterly update to talk about what’s going on in the market, what Derek is seeing on the flipping side, go over some statistics, and review some deals.

A lot has changed from January when we first recorded the series to May now that the world has undergone this huge transition.  While we will still be talking about the updates, we will also touch on how the COVID-19 pandemic has played a part in the flipping world.

Derek starts by saying he feels very lucky that his company had a lot of inventory in January and February that they were lucky enough to offload before the big effects of the pandemic hit the real estate market.  By the end of February, Derek’s team had sold their 13th project and only had 2 active projects in the works.  This allowed Derek’s team to quickly evaluate the situation and make adjustments but not “panic” and worry about having to hold projects longer than they expected.

Derek emphasizes that in uncertain times, it’s important to stick to your plans and really focus on what you can control.  As he pointed out in the last series, they are a company that is heavily focused on data.  During this time, Derek and his team were even more focused on the data as things were changing so quickly.  Focusing on the data helped eliminate the fear as they were looking at things from both a daily basis and a weekly basis, not just monthly.

Denver Flipping Market Update and Takeaways

• Shelter in place slowed/eliminated showings in February, March, April
• Your Castle RE and 8z RE gave good weekly data.  Took a 6-week compression to compare numbers and were pleasantly surprised that the market looked promising from the flipper standpoint
  • Selling Side – Overall, all these factors worked in Derek’s favor and built confidence that their products would be able to sell once they were listed:
    • New Listings – shockingly, very similar to last year.  About 2,810 properties were put onto the market
    • U/C – about 2,932 listings went under contract.  This really shows the power of supply and demand 
    • Withdrawn – several weeks there were 500 to 700 properties that were pulled off the market.  This is actually a good thing for Derek as there’s less competition.
  • Buying Side – Overall, Derek thought there would be more distressed properties, “deals,” and opportunities to go in and acquire a few properties.  He had capital ready to deploy but just didn’t find anything worth pursuing.
    • Zillow and Open Door not making cash offers.  This means that there is a better opportunity for flippers like Derek as they don’t have to compete with them. But Derek feels that there are really too many factors and a lagging timeline to really get a good feel for what numbers will be coming down the pipeline eventually as a direct result of iBuyers putting a pause on acquiring properties
    • Derek got a call from an investor to see about buying a property as they WERE making cash offers.  Derek needed to be a little bit more conservative as still an uncertain time. But even with the cash offer, the deal didn’t come together.
    • Small spike in distressed properties but no “amazing” deals
    • Less to pick from with everyone pulling listings off MLS
    • Compared to same time last year, seeing less/worse inventory and potential properties to purchase for flip projects
    • Found that unless people were in really distressed situations financially, people were choosing to wait and “ride it out” even with Derek’s cash offers, because they didn’t want people in their homes.
      • He offered only 2 people with masks and gloves for 1 hour to come look at property and have cash offer by end of the day = No takers!
      • Offered that if your renters weren’t paying rent, still offer cash and take on property = No takers!
• Predict that in the next 6-12 months we will see a small increase but not a surge of distressed properties and foreclosures in the Denver market
  • Overall people have had to buy significantly more expensive properties in CO which can put them at risk financially if they lose their job and are not able to make payments.
  • Difference between this slow down and 2008 was people now have equity in their properties where in 2008 they did not.  This means that even if people are late on their payments, they will be able to sell their property if needed and not get to the foreclosure stage.
  • Forbearance can kick the can down the road 3-6 months as well, so it gives more time to sell on the market and avoid a distressed sale.
  • Still so much demand! – prices aren’t going to decrease significantly.  Even if buyer pool is decreased, it’s eliminating the “casual buyer,” but serious buyers are still looking
  • Showings will be down, but those showings will be more significant as most of the buyers are “serious” versus the looky-loos who are just “out and about.”

Important factors for moving forward:

• Key to getting properties sold will be to finish a quality product and price it well.
  • Derek’s strategy: list about 2% below fair market value
  • Always like to generate multiple offers and pick best buyer
• Bolster digital presence: 
  • Better staging – spent about $400-$500 more and staging rooms they normally wouldn’t. (e.g. stage an office since a home office will be needed for a lot of people moving forward.  Or stage small AirBnB space to show options for additional income)
  • Best Photographers – booking specifically instead of “luck of the draw” from big
  • Zillow 3-D tours
  • 90 second “guided” videos for future in case there are shut downs in fall, so people can tour virtually at home

Day to Day Changes During This Pandemic:

• New Normal – not necessarily a bad thing.  Focus on the core and essence of putting out a good product
  • Mindset – Daily Stoic by Ryan Holiday: “New normal” rituals (exercise/nutrition/sleep/family time/helping others)
• Pivots/Double Down
  • Location, Location, Location!
  • smaller/quick condos in great locations – spreads are a little thinner but able to do very quickly and more turn-key so able to offload it fast
  • Cosmetic suburban homes (kitchen, baths, carpet/paint, fixtures) lower sales point.
  • No properties that require a jumbo loan for the buyer, since the jumbo lending world has contracted.

Flip Deal Analysis: 22141 Wintergreen Way

• Single Family Home
• Located in Parker
• 5 bedrooms 3 bathrooms
• $500k ARV with new comps $525k all day/low inventory
• Listed 4/1: 8 showings in 3 days, 1 full price offer
  • Vetting buyer is absolutely key!  Making sure they had solid and stable employment
• 74 days close to close (purchased mid-February and sold May 1), full basement finish, permits, kitchen finish level
  • City of Parker was a little slower with permits but still worked in timeline
• Mostly cosmetic updates as home was built in 2000 so no major issues.  Able to quickly update to “New Build” finishes but able to price $100-$200k cheaper than new build
  • Bought for $344k.  Rehab costs = $79k.  Sold for $500k (tighter margins but priced lower to be sure it sold)
  • Great layout, just dated
  • Finished out basement and added a conforming bedroom (egress window already in place)
  • Finished out living room
  • Quasi-master suite in basement
  • Painted lower cabinets navy, upper cabinets white, gold hardware
• MLS Listing/After Photos:  https://matrix.recolorado.com/Matrix/Public/Portal.aspx?ID=9003417708

Flip Deal Analysis: 3186 W Clyde Place:

• Half Duplex
• Located in West Highlands
• 3 Bedrooms 2 bathrooms
•  $500K ARV, comps showed $525, nothing on market so list $515k
• Listed 5/1: 76 showings 4 days, 36 offers, most ever over asking
  • Best appraisal gap
  • Buyers who loved property and were best qualified
  • Good agent on other side
  • Good lender and are buyers 100% approved and through underwriting
    • Buyers only putting down 5%-10% so they can keep more money in the bank during pandemic even though they are qualified to put down 20%
• 89 days close to close (purchased mid-February.  Scheduled to close June 15)
• Strategic Improvements:
  • Have to consider possible $25k less if on busy/main street vs off a few blocks = quieter
  • Not many 3 bed 2 baths in the area
  • Finished “Black Contemporary” style – White cabinets, quartz countertops, black hardware 
  • Higher end finishes – spent extra $3,300 on Quartz/metal railing/landscaping
  • New AC
  • Install radon system)
  • Bought for $352k.
• Communication through listing/contract process
  • Original offer wasn’t accepted but when original buyer fell through, listing agent called Derek’s team
• Before Pictures:

• MLS Listing/After Photos: https://matrix.recolorado.com/Matrix/Public/Portal.aspx?ID=9003525320

Flip Deal Analysis: Congress Park Condo 1/1 on Lafayette St:

• Located in Congress Park
• 1 bedroom 1 bathroom – 600sq ft
• Purchased May 15 – bought at 9:00am and rehab work started at 12:00pm
• 60 days close to close goals(hope to list in just under 3 weeks for just under $300k)
• No major structural issues
• Will finish “Chrome Contemporary” style = White upper cabinets, gray lower cabinets, chrome hardware (more green color pallet than gray)
• Not worried that they will not be able to accept FHA buyers because in a great location which will bring good buyers who will be able to do conventional loans

New Finishing Styles

Always defers to women when it comes to choosing styles as they typically have a better eye and will ultimately be the final say on real estate transactions.  Derek and his team just recently updated their finishing “styles” and now have 5 levels to choose from.

1. Black Contemporary
2. Chrome Contemporary
3. Farm House 
4. Mid-Century Modern 
5. Rental 

Contractor Relationships

The contractor relationship has been very important through this time as many have not been able to work.  It’s essential that the contractors work quickly and with high integrity to get a quality product.  Derek’s company has been able to still hire contractors and keep their promise that “if you treat us fairly, we will treat you fairly in good times and bad.”  This means that their checks have been able to clear, and the work goes to the contractors that have been fair and loyal to Derek’s team.  Derek credits a lot of this to “attitude” and working with a “win/win mentality” during the easy times to show true colors of how contractors will act during difficult times.  Be reasonable and fair to everyone involved.

3 Key Takeaways

• Have a plan written down, but make smart/strategic pivots or ramp up areas in your current model which are set up for success
  • DATA is key both quantitative in looking at residential real estate related, economy (unemployment, interest rates, government regulations, etc.) NOT emotional decisions or talking to emotional people who are not looking at data and are instead shooting from the hip
  • Smaller 1/1 condos in great areas @ $40/sf rehab cost
• Provide value and be a resource – personally and professionally. 
  • Cross market with those who are really taking a hit. Create more content or give things away for free.
• Business fundamentals: 
  • Location
  • Superior product/finish level
  • Speed of rehab – not cutting corners but quick and good quality
  • Stick to plan/new normal
  • Mark Devine – SealFit “Slow is smooth and smooth is fast”

Very important as a flipper to have great relationships with local hard money lenders.  Big national lenders especially have been tightening up qualifications and pulling back on how much they lend.  More important now than ever to have those local lender relationships established and create a good reputation, so there are no issues to lend money. 

One lender Derek knows is actually taking the opposite approach and cutting his rates so that he can gain market share.  This is a sign of a healthy and strategic lender and one that would be a good one to establish a relationship with.

It’s also important to play to the market.  Derek’s team has shifted to a product with a smaller price point so that their buyers don’t have to qualify for JUMBO loans.  The JUMBO loan market is still a big mess.  If you are borrowing between $600-$800k, you are a higher risk and therefore harder to get qualified.  Until that settles down, Derek suggests to not flip products in that price range but pivot to a more realistic strategy and focus on the lower range, typically $500k or below.

Resources

• Deal Analyzer 3.0 
  • Helps you analyze if a property is a good deal to flip or not
  • Updated metrics for Condos
  • Updated metrics for Single Family Homes
  • Additional analysis for true cosmetic flips
  • 3 different analysis tabs to run several different scenarios
• Books & Podcasts:
  • Ryan Holiday- Obstacle is the way
  • Chase Jarvis- Creative Calling
  • Ray Dalio-Principles
  • Tony Robbins
  • Jay Shetty – On Purpose (Lifestyle, mental health)
  • Reid Hoffman – Masters of Scale
  • Peter Attia – The Drive (medical, Tim Ferris, Sam Zell) – https://tim.blog/2020/03/08/sam-zell-transcript/

That’s all for this update!  As mentioned before, the plan is to do an update each quarter, so be on the lookout for that come quarter three!  If you have specific questions or topics you would like us to discuss, let us know.

Interested in flipping or improving your business? Then schedule a fix and flip investment consultation with Derek and his team.