Experienced flippers always analyze and underwrite the worst-case scenario of every potential deal.
Before they question how much money they can make, they think about how they can protect their capital if things don’t go to plan.
The most successful entrepreneurs tend to be largely risk averse – they prefer taking calculated risks rather than reckless gambles.
It’s a strategy that holds up very well in the lucrative but often treacherous California real estate market.
That’s because so many variables are in play over the lifetime of a project such as:
- construction
- financing
- interest rates
- regulations
- insurance
- market conditions
Successful flippers in California understand that one poor decision can kill a project and erase the profits from several successful ones.
That’s why their first instinct is always: Don’t lose capital.
Only after the worst-case scenario is underwritten do they focus on potential returns.
California’s aging housing stock
The average home in California is approximately 44 years old.
That’s four years higher than the national average.
Many are closer to 80 years old.
As that housing stock continues to age, the chances of flippers uncovering hidden and costly issues increase.
These issues may include:
- plumbing
- electrical
- roofing
- structural repairs
- termite or dry rot damage
- water intrusion or mold
- asbestos-containing materials
- lead-based paint in homes built prior to 1978
California’s seismic vulnerabilities add a further layer of risk with many older homes requiring foundation bolting and cripple wall bracing.
Modern building codes may also demand investment including ones to meet energy efficiency and fire safety standards.
Home improvements
According to the Harvard Joint Center for Housing Studies (JCHS), the demand for home improvements and repairs remains at an historical high not just in California but across the entire US.
And while it says that spending has leveled off since the pandemic-driven surge, it remains well above pre-2020 levels.
In California, the high demand is tied closely to the aging inventory with many older homes requiring ongoing modernization.
This has put significant upward pressure on labor and material costs.
California’s housing shortage
Despite an environment of higher interest rates, California’s remodeling industry remains one of the most dynamic and heated in the country.
This is fuelled largely by the enormous demand for housing and need for more accommodation in existing properties.
The result is that competition for contractors is fierce.
That competition has forced the cost of labour upwards and can contribute to lengthy project delays causing holding costs to spiral.
Holding costs
Holding costs can quickly devour the projected margin of any flip.
Imagine a hard money loan of $700,000 at 12% interest.
Interest payments alone cost $7000 per month.
If a project is delayed for three months for whatever reason, holding costs are $21,000 plus three months’ worth of:
- property taxes
- insurance
- utilities
- landscaping
That may amount to something in the order of $30,000.
There’s also the opportunity cost of not being able to source new inventory and begin the next project.
Stress testing your exit strategy
The best way to avoid holding costs that eat your margin for dinner and hook into your capital for dessert is to stress-test your exit strategy.
Rather than relying on a single successful sale, experienced flippers are always ready for the worst-case scenario because they have asked themselves questions such as:
- What if the property takes six months longer to sell?
- What if values fall by 10%?
- What if construction costs rise by 15%
- What if interest rates remain higher for longer?
- Can the project still be refinanced?
- Can it become a rental property if the sales market weakens?
Experienced flippers build buffers of up to 15% into their project budget.
And they prepare multiple exit strategies, any one of which can be executed on the fly depending on the circumstances.
It’s the best way to protect their capital.
How lenders assess a loan application
Experienced lenders don’t underwrite assuming everything will go to plan.
They also prepare for the worst-case scenario and look for borrowers with:
- realistic resale values
- realistic timelines
- well-defined collateral
- contingency funding
- adequate borrower liquidity
- multiple exit strategies
- downside protection
Flippers who adopt the same mindset are generally positioned to secure faster financing because they demonstrate a mature outlook and show they have considered the risks from the lender’s perspective.
Get funding and support today
Flipping projects rarely go perfectly to plan.
Even minor delays can prove costly if adequate precautions have been overlooked and contingencies not built in.
The risks are even greater in California where an abundance of older housing stock with hidden issues and the expense and challenge of sourcing labor can quickly erode margins.
That’s why a chat with the experts at Equidy can help ensure you are adequately prepared for the worst-case scenario and set up with a great hard money deals that covers all bases.
Equidy has an intimate and personal history with all aspects of property development in California and has done so for well over 40 years.
Their sole focus is to help you maximize the return on your investment without putting yourself at unnecessary financial risk.
And the best part?
Equidy is also a hard money lender that can finance flippers and developers in as little as 48 hours.
They stand by their core belief that anything is possible and they strive to prove it every single day.
Even in tough times, they are determined to reward entrepreneurship and resolve to help their clients crystallize their wealth creation dreams.
Equidy enjoys long and established relationships with serious investors, sellers and real estate professionals while leveraging their reputation and trust, using clear communication to minimize the risk to all parties.
Contact Equidy today to book your free strategy call.
