Whenever I coach people on how to flip houses, I always stress the importance of doing your homework, especially when it comes to market trends in the areas where you flip homes. If you find a house at an incredibly low price in an area you’re not familiar with, there could be a reason for that low price that you won’t like. It could be that the neighborhood is in decline or that market values in the area peaked and are now descending, which could bode poorly for you when you finish with rehabs and you’re ready to sell the property.
In general, if you look at the tax records for the area over the past 18–24 months, you’ll see the market behavior for houses like yours, and you’ll be able to make a pretty good estimation of how much your flip house will be worth when you sell. Unfortunately, though, unexpected turns happen. And with several analysts and experts expecting a stock market crash this year, the idea that the market in your area could crash while you’re in the middle of a flip isn’t as farfetched as you might think.
So, what do you do if you’re halfway through rehabs and your flip house’s ARV (after-repair value) suddenly plummets? While this situation is definitely not ideal, if you have a couple of exit strategies in place, you won’t feel the crash as much or at all.
Finish Rehabs and Rent the Property for a Profit
If you’re working with your own capital, this is almost always going to be the best option because you won’t be worried about paying back an investor or paying off a high-interest loan. If you got a hard money loan for this investment, though, it might still be a good idea.
Find out about average rental rates in the area and talk with a couple of property management firms to find out what they charge to take care of the property and acquire tenants for you. Subtract the property manager’s fee, your monthly loan payment, and any taxes and other costs associated with the property from your rental fees for the property. If you get a positive number, this is probably the best option for you to weather the crash until the market stabilizes and you can sell the house at a profit.
Likewise, if you’re working with an investing partner, you may want to talk with them about the contingency of a market crash. They may be open to the idea of splitting the profits from rental fees until you can sell the property.
Sell Now and Cut Your Losses
Of course, there’s a very good chance that you won’t be able to make a profit renting the property, especially if there isn’t a high demand for rentals in the area. If this is the case, the best option is almost always to cut your losses. Selling the property at a price where you can break even or only suffer a small loss will free up your investment capital so that you can buy another distressed property in a more attractive market.
Remember, every investment on earth comes with at least some risk. Flipping houses—if you do your homework and invest in the right market—is almost always a low-risk investment, but things like local market crashes do happen. Taking a small loss now isn’t a failure. It’s a slight setback that you can correct as soon as you find your next flip house. So, if you find yourself in this situation, assess your options and choose the best exit strategy for you.