Scott Townes, Easy Street Capital’s managing partner for our California division, gives his insight into what he has witness be a top determining factor in a projects chance at success.
Scott managed hedge fund capital and oversaw the investments of over 2,000 fix-and-flip transactions in California. Having been involved in so many deals, he began looking for ways to optimize operations. He spent a significant amount of time reviewing the numbers in just about every way imaginable, starting with the analysis of trends and diving deep into questions such as, how much should be spent on the renovation based on age and home size? Do homebuyers in different markets value pools over other markets? What resale price is outperforming the portfolio average in different zip codes?
The key finding in his analysis, while sifting through the noise, was the right time of year to buy remained a constant in successful investment returns.
Over the years, Scott observed properties purchased between October and February, lets call those the “winter” months, outperformed the June to July, the “summer” months, purchases. And these purchases are investors buying properties to flip in order to sell to a “retail” buyer. After sponsor fees and commissions, the winter buys returned around a 20% internal rate of return (IRR), while the summer hovered around 9%.
This is a significant difference, and the consistency in these results made it statistically impossible that time of year could not be a driving factor in the results.
Lets dig into the Why?
Let's start with supply and demand. In the winter, you are competing with less buyers, while in the summer you need to increase your purchase price offer to stand out amongst the competition and close the deal. Conversely, buying in the winter means you can use the spring/summer real estate rush to your advantage. When you are selling your winter buys in the spring and summer, you are exposing your sale to the greatest number of buyers and will likely fetch a higher price for your property as a result.
The time of year most people buy increases the value of your investment property. Younger families made up the majority of the buyers’ pool on our properties, and oftentimes they were first-time home buyers. These buyers don’t tend to move as frequently over the non-summer months, so you want to time your buy appropriately to be ready to bring your property to market when the most buyers are looking and ready to move, which is during non-winter months.
Every month you hold onto your property you are trying to flip that is money you are spending on interest, insurance and property tax. The faster you flip and sell your property, the more you’ll make on your investment. Buying during the spring or summer may put you in a position where you’ll have to hold onto that property until the next wave of buyers is ready next year. But a winter buy can help you decrease your hold times.
While financing now is less expensive than it was when I was buying, even just turning a 9-month hold to a 7-month, will likely increase your IRR by about 50% due to the net savings in financing charges, taxes, and faster turning of your capital.
During your due diligence period, you typically look back 90 days in a liquid market, and that paints a distorted picture of the exit when you buy in the winter. For example, if you enter escrow in December, you are likely looking at ARV comparables from September through November, but realistically if you sell your property in the spring it will experience that spring/summer bump. Which means you’ll fetch a higher exit price and quicker exit.
Considering both Texas and California have very favorable weather year round, meaning not a ton of snow, you can easily find a property in the winter months and have it renovated and ready for the spring buyers without a lot of hiccups. Buying in the winter is certainly not more important than a well executed approach to your acquisition while running a solid, efficient operation, it is a variable that will give you tailwind in your investments, which is always welcomed in the challenging fix-and-flip market.
In conclusion, as an investor it is in your best interest to purchase your investment property (with the intent to flip) in the winter months and work to have it ready for the retail market in the spring.