Flipping is back: Numbers tell the tale
SUBSCRIBER CONTENT: Feb 6, 2015, 6:00am EST
by Robert Thompson
From the Atlanta Business Chronicle
Cornerstone Realty Partners has a very myopic focus: we invest tactically in detached single family homes and build new construction. Our target investment holding period is from two to 16 months and ranges from wholesale "fixer-uppers" (sales to other investors) or buy, renovate and sell new construction to the retail market. Over the past 12 years we have primarily focused on the Georgia counties of Fulton, DeKalb, Clayton and Cobb.
In 2014 we noticed two things happening in our field of vision into the Atlanta real estate market. First we saw a surge of new investors step back in the flipping market. Turn on any radio these days and you will more than likely hear commercials from "Get Rich Quick in Real Estate" gurus selling seminars and books on how to become the next billionaire real estate investor. We viewed this as a pretty good barometer for when the flipping market may be approaching the end of the runway for a while. This mentality in real estate investing is one that we personally believe contributed to the crash in the first place. It boils down to unrealistic expectations and inflated numbers. We have started to pivot from buy-fix-sale to a renewed focus on wholesaling.
We recently had a "bird dog" (aka: property locator) call and ask if we wanted to purchase a fixer-upper in zip code 30316 for $125,000. After he told us the address, I almost choked because in 2013 we had acquired a foreclosure on the same street just a few houses down for half the price. We feel the price increases in those areas have to do with lack of inventory and new investor exuberance. The large real estate funds that were buying distressed homes in these neighborhoods sight-unseen in 2011-2012 have all but gone away, absorbing much of the property at higher prices along the way. Short sales are more prevalent than they ever were before, meaning less foreclosures on the market. Couple that with new investors getting back in the market and you have a recipe for what on average has been 50 percent to 100 percent price increases for low-end distressed property over the past 24 months.
The past six years have been a great place for seasoned investors to find deals mostly done with cash, LLP's or private lenders. For the most part, new investors to the market recklessly bid up distressed property prices. New investors are often underfunded and turn to hard-money lenders to help aid in the acquisition and renovation cost. We are ramping up our distressed-property buying program in 2015 and have strategically partnered with several preferred hard-money lenders that can work with investors who are interested in purchasing our properties.
Secondly, we saw a surge of speculative new home construction in the $600,000-$900,000 price point. Cornerstone spent 2013 and 2014 focused on building new construction in high demand, in-town neighborhoods primarily in North Atlanta inside the Perimeter. To speak to the demand in these areas we only need to look at the price increase in tear-downs in 30319 and 30327. For example, we purchased a tear-down lot in Brookhaven in 2013 for $195,000; after construction the house sold for high $600's. During this period we acquired another tear-down one block over for $230,000. It's now on the market in the $700's with several similar comps sold only a few hundred feet away. Just recently the tear-down directly across the street from our recent new construction sold for $270,000. That is a 40 percent price increase in less than two years for homogenous lots! Need more proof of possible irrational exuberance? Soon after the closing of the $270,000 tear-down a promotional yard sign for a local hard-money lender was stuck in the front yard.
That type of price increase over 24 months makes us raise an eyebrow as builders, but no so much as an investor. There is always opportunity in real estate; you just have to be on cusp of the demand. If new investors and well-funded spec builders are gobbling up tear-downs at elevated prices, it means 2015 will be a great time to start marketing pre-packaged development projects. That was our thought mid-2014 when we partnered with Atlanta-based developer Larry Edge, owner of The Medallion Group. We partnered to research and acquire larger parcels outside the Perimeter that could possibly be rezoned and subdivided for multiple single family homes.
Looking ahead to 2015 our tactical strategy is to swim upstream and get closer to the source of the transaction. Flipping will always be viable but buying from the courthouse steps gets you closer to the source and eliminates dealing with some of the new money chasing inventory right now. The same goes for new construction as well. There are still undiscovered pockets in North Atlanta that have tear-down price points that make new construction enticing. We may see some of the other super-hot markets of the past few years see pricing stall in 2015 as new investors pay more for tear-down and realize they have to reduce market price to move the property. To avoid this, we are again moving upstream to acquire parcels that we can add value to through use change.
Robert Thompson is managing director of Cornerstone Realty Partners Inc.