REI INK

Valuation

The Impact of Digital Appraisal on Investment Property Valuations

The Benefits of Property Data Collection By Mark Walser The valuation of investment properties in private lending has and will always be one of the most critical aspects of investment property transactions. However, in recent years, getting accurate and timely valuations has become more challenging due to many factors. Perhaps the most significant factor is the growing appraiser shortage, which is largely due to retirement. As it stands now, this issue will only intensify. According to the U.S. Bureau of Labor Statistics, the median age of appraisers is 53. In 2023, the Appraisal Institute reported that over 66% of appraisers are over the age of 50 and only 7% are under the age of 35. This reveals the compounding issue: Not only are appraisers aging out, but trainees are not rising in enough numbers to replace them. Investors should understand that this problem has been building for the past 10 years and is systemic across the entire lending industry, from GSE forward mortgage lending to every other part of the profession. Further exacerbating the situation in private lending is the fact that the appraisals in the REI space tend to be more complicated than the standard Fannie Mae 1004 SFR appraisal used in a conventional real estate loan. Often, the appraisals in investment/rehab properties will need more complex analysis, two values for “As Is” and “As Repaired” value, and require deeper knowledge of factors like rental value and building/flip considerations that many appraisers do not specialize in. Paired with accelerating retirements, this limits the number of appraisers that can serve investor loans in many areas, creating chokepoints for price, turnaround time, and quality in the appraiser availability. An easy visual of this paradigm can be seen in the GSEs’ tracking of appraiser capacity. As demonstrated, the number of active appraiser licenses has decreased significantly, which is driving the need for change. Appraisal bias is another huge issue for regulators, and they want to see appraisers and lenders address the issue along with mitigating high fees and turnaround times for borrowers. What is the solution to these issues? The answer is appraisal modernization. The technology underpinning appraisal modernization addresses much of this concern by giving the appraiser immense property data to review and allows them to create a valuation without physical interaction with a potential tenant. As the market recovers, the appraisal industry is transforming to use 3D imagery, location-based data collection, and AI to reduce turn times, enhance property risk mitigation, and reduce the need for appraisers to physically visit properties. The technology is able to create detailed interior and exterior imagery and virtual tour walk-throughs of homes and identify home condition and quality along with amenities and finishes in a consistent manner. The term “appraisal modernization” often refers to any combination of this data collection paired with a property appraisal waiver decision, or paired with a full appraisal analysis done by a licensed local appraiser who resides at their office desk and uses the entire data packet to create an appraisal report on the Hybrid or Desktop Appraisal forms. It is important to note that these appraisals are considered “Full” appraisals and are equivalent in analysis to the traditional 1004 URAR appraisal, often with even better data. The timing for investors couldn’t be more fortuitous, as appraisal modernizations initiatives are being created and enacted across the industry to combat the same issues outlined above. From mitigating appraisal bias to solving for a worsening appraiser shortage, appraisal modernization is touching every stakeholder in the housing industry. The impact of these changes flows downstream to benefit every lending sub-market. The way this works in the case of a normal appraisal or a pre-rehab property is that a property data collector visits a property with their smartphone and specialized software from the appraisal provider. Depending on the technology available to them from the appraisal provider, property data collectors can use software applications and their phone’s cameras to capture 3D imagery from the exterior and interior of the property. Some physical 3D captures can generate up to 900 HDR-quality images per capture, along with a virtual tour that is like an interactive walkthrough of the entire home. On top of that, the data collector also captures vital information about the property’s condition, quality, and amenities on a form. Everything from the type of utilities present to the condition of the cabinets, to deficiencies or remodel specs are captured in detail, room-to-room, for the appraiser to use. Crucially, the technology used in these captures uses the LIDAR technology and photogrammetry built into today’s smartphones to accurately image the interior spaces of the home, and software can build out an extremely accurate floorplan complete with labels and square footage that follow ANSI standards. The combination of the imagery, 3D tours, condition/quality data, and the floor plan give the appraiser and the lender a “data packet” that immerses them in the property. The Benefits of Property Data Collection So, what is the result of this process applied to a two-value appraisal report (pre- and post-rehab) for an REI property? The first benefit is the speed of inspection and appraisal delivery. The daily carrying costs of investor loans are significantly higher than conventional mortgage loans, and the faster the appraisal process can be finished, the more money that is saved by all parties. Today’s leading providers can get inspections and data collections of homes done within 48 hours or less after receipt of order, with the majority being next day inspection if the property contact is available. The inspection takes approximately one hour to complete and captures everything at the site, both exterior and interior. A local appraiser can take the data packet and view the pre-rehab condition of the home, provide an “As Is” value and factor in the budget to provide an “As Repaired” value. This process can be consistently completed in two to three days by prepared, local appraisers who await the data packet. This brings a consistent appraisal experience with a turnround

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Purchase Price vs Market Value

“Price is what you pay. Value is what you get.” — Warren Buffet By Julie Parker The booming market of residential real estate we experienced nationwide in 2021 through the first half of 2022, saw buyers purchasing homes at well over list price. The buying phenomenon of that time is now causing some waves in the appraisal industry as current valuations of those properties purchased during that time period are being requested. Many of those new homeowners are feeling the fallout of paying sales prices which exceeded the value of the property at the time of purchase. After a year+ of ownership, some homeowners are seeking appraisals or other forms of valuation of their recently purchased properties to determine value for various transactional purposes. The answer to the question, “What is my property worth?” is one that may be a bit disappointing for some. The owner’s expectation is generally that the property’s appraised value will meet or exceed the sales price previously paid. The Key Words to Note are “Price” and “Value” Expectation born without consideration of all elements at play, when forecasting the most probable result, can lead to disappointment. The failed expectation in this case is the result of regarding the accelerated sales price of the property and its actual market value at the time of the sale, as one and the same; or price=value. The reality is that during the purchase frenzy of that time, buyers were knowingly paying prices well over market value. The buyer’s willingness to do so was the result of a perfect storm of low volume, high demand, and historically low interest rates. In 2022 as interest rates began to rise, sales prices continued to increase and buyers still sought to quickly purchase out of fear that interest rates would continue to increase. A telling indicator of these noted factors at play is that realtors were educating their buyers and confirming that they were willing and able to pay an appraisal gap due to an accelerated purchase price that would be necessary to capture the sought after listed property in such a market. It became standard practice for appraisal gap clauses to be placed within purchase contracts with buyers agreeing to pay the difference between the purchase price of the property and the appraised value.  It is an interesting notion that an informed buyer, who knowingly paid the appraisal gap, would now have an expectation that the current appraised value would be equal to or greater than the accelerated sales price previously paid. Especially given market trends since that time, the second half of 2022 saw sales prices decrease; while the first half of 2023 has seen most markets stabilize and some markets have had only moderate increases reported.  Homeowner Expectations Today, appraisers throughout the country are dealing with the brunt of delivering current appraised value results that do not meet the expectations of these homeowners when those opinions of market value are compared to the prior purchase price paid for the property. Clients and borrowers may point to market trends, i.e., the percentage of increased values within the various markets to prove their case for a higher appraised value. Regardless of the market trend since the property’s purchase, the underlying issue is that the purchase price paid during this escalated period of sales activity did not necessarily equal actual market value at the time of sale.  With that in mind, if applicable market trends were applied to the actual market value of the property at the time of sale, rather than being applied to the accelerated purchase price, the present-day market value in most cases, where significant appraisal gaps were paid at time of purchase, still would not support the prior purchase price. However, this is not to say that the property has decreased in “value”, which is typically the rebuttal from the borrower and/or client.  Their frustration lies in the belief that market trends to date do not support an overall decline in the property’s market value since the time of purchase; therefore, the subject’s current appraised value has been understated as it does not support or exceed the prior purchase price. In part, this theory is correct as there has not been an overall decline in the property’s market value. However, there has not been a large enough percentage increase in market values that would raise the property’s market value to the threshold that would now support the accelerated purchase price that was previously paid. Again, the key words to note are “price” and “value.” The difference in purchase price and market value is significant enough that combined with a stalling of market trends since time of purchase, many of those buyers are still a bit underwater.  Oftentimes in these instances, when an expectation of value is not met, appraisers are experiencing pushback from clients and borrowers to further analyze market trends, additional market data, etc. in hopes that the additional data will provide the support needed for the appraiser to revise the appraisal report and appraised value in a beneficial way. “Price” and “Value” are not Interchangeable It is always the appraiser’s responsibility to communicate the appraisal and its results in such a way that it can be clearly understood by the intended users, and it is no different in these instances. The appraiser would analyze additional, relevant data presented to them by the client. However, the primary point that must be made clear to the intended users, to fully understand what may appear at first glance to be an understated appraised value, are the terms and various factors that surrounded the prior purchase, and the accelerated purchase price of the property as a result of the bullish residential real estate market during that time period.  The distinction that the purchase price does not always equal market value is key. An obvious indicator of that would be when you, the buyer, agree to pay an appraisal gap as part of the purchase price. And for significant appraisal gaps

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Market Value and Replacement Cost Valuation

Understanding the Differences Will be Key for Success Moving Forward By Alexandra Glickman and Robby Kunz The U.S. Federal government declared an end to the COIVD-19 Public Health Emergency on May 11th, 2023. While the pandemic might be “over,” the lingering effects are something the real estate industry will be dealing with for years to come. The market value of assets and their replacement cost valuation are both being challenged by persistently high inflation and increasing interest rates. Both have been influenced by the post-pandemic economic era. Asset owners trying to pencil out their deals should take note of the differences between an asset’s market value and its replacement cost value. Understanding the differences and the resulting impact on financials will be key to sailing through the rough waters ahead. Market Value vs. Replacement Cost Value The market value of an asset is fairly easy to grasp for anyone in the real estate industry. The market value refers to the price that potential buyers and sellers could expect the asset to fetch in the marketplace. It includes things like the value of the land, the current condition of the asset, and many other intangible characteristics like demand and scarcity of supply. On the other hand, the replacement cost value of an asset is much more formulaic. A replacement cost valuation is used for insurance purposes to determine the cost to repair or replace a physical structure and its contents with materials of like kind and quality. An insurance-based property valuation may also include business interruption values. This refers to potential income generated by a property that is at risk in the wake of a loss. The key takeaway here is that these valuation methods are affected by inflation and interest rates in very different ways. Persistently high inflation has contributed to elevated costs for labor, fuel, and materials. This means that the replacement cost values of assets in a portfolio are continuing to rise year after year at a faster pace than usual. To combat inflation, central banks around the world are increasing interest rates. This has the effect of increasing borrowing costs for real estate organizations while simultaneously decreasing the market value of their assets. This inverse relationship has resulted in a scenario where some real estate organizations are insuring assets for values greater than they can sell them for. This is a complicated problem for CFOs and risk managers alike. Real estate organizations that do not have a firm grasp of their assets’ replacement cost values will encounter a greater deal of volatility in their insurance costs. They may also run into unwelcome financial surprises when trying to rebuild in the aftermath of a loss. First, we will define the problem with inaccurate replacement cost values and their resulting financial impact. Second, we will address ways to verify the replacement cost values with defensible data. The Chief Concern of Property Underwriters The Council of Insurance Agents & Brokers noted that Q1 2023 was the 22nd consecutive quarter that premiums increased for accounts of all sizes, regardless of geography, industry, or asset class. The most difficult pocket of the marketplace is property insurance, a major line item for real estate organizations. Insureds should expect premiums to go up for the remainder of 2023. The key will be to secure the best achievable results in the marketplace, and property valuation is front and center in this conversation. The chief concern of property underwriters is true and accurate replacement cost values submitted to them during the underwriting process. An underwriter who perceives that valuations may not be in line with accurate replacement costs has a number of strategies available to underwrite defensively and ensure the profitability of their book. All of these strategies will have a financial impact on the asset owner. An underwriter might choose to:  »         Accept the lower values, but charge higher rates/premiums that they feel are in line with the true exposure they are taking on. They will always err on the side of caution and this could result in drastically higher costs for the same coverage limits, deductibles, terms, and conditions.  »         Offer less limit capacity and decrease coverage. In this scenario, an asset owner may need to enlist multiple insurers to achieve the same level of coverage which typically comes at a higher cost.  »         Require that insureds take on more risk in the form of increased deductibles.  »         Change the terms and conditions under which a policy would pay for a loss. This could be in the form of Margin Clauses or Occurrence Limit of Liability Endorsements. Any combination of these strategies could be enacted at renewal. Real estate organizations will have to evaluate how these changes impact the terms of the loan covenants they agreed to, in addition to increasing the cost of risk transfer. What to Do? Real estate organizations that can provide data-backed, defensible replacement cost valuations to underwriters will have less difficulty negotiating their renewals. The first and most reliable way to confirm an asset’s replacement cost value is to enlist a 3rd party appraisal and valuation services firm. Many firms that operate all over the U.S. also have capabilities to conduct international valuations. Once a professional valuation has been completed or if an asset owner already has one on hand, insurance industry-accepted cost indices can be used to trend the values through time. This helps minimize the cost associated with confirming an adequate valuation. It is important to note, that if you cannot verify the starting value that you plan to trend, then you cannot rely on the resulting value from the index. Real estate finance can be complicated, especially in times of economic turmoil. By making a conscious effort to maintain adequate replacement cost values, real estate organizations can minimize some of the volatility associated with penciling out deals in a high-interest rate and high-inflationary environment. The cost of insurance will become more predictable and will provide an easier path to determining the net operating income associated

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Valuations 101

Optimizing Your Valuation Strategy to Maximize Profit and Minimize Risk By Kade Clark Over the past two years, the COVID-19 pandemic has accelerated the adoption of technology and digital processes across the real estate industry, from search to close. For investors, evaluating properties at scale locally, regionally, or nationally requires a technological edge. New valuation tools leveraging the latest advances in artificial intelligence (AI) and data science are making it easier for investors to make intelligent decisions based on data and insights. There is now a wide range of valuation types available to investors that can help reduce cost, streamline their processes, and more appropriately offset risk. The trick is to use the right tool for the specific scenario. That is why many investors leverage a “waterfall” of multiple valuation products arranged in a cascading order to create a balance of cost, time, and quality that is customized to the organization’s unique needs. This strategy is most beneficial when cost is a concern or constraint, when staff resources are limited or lack expertise, or when time and efficiency are critical. Let’s review the different valuation tools widely available in the market and where they might fit in an investor’s waterfall: Home Price Index A home price index (HPI) is a tool designed to measure changes in single-family home prices across a designated market. Some of the well-known legacy indices have been around for decades, but there are also newer indices that use modern methodologies to deliver faster, more accurate results. An example of this is the Home Price Index provided by homegenius Real Estate LLC, which uses the latest data science and analytical technologies to produce micro-market level insights based on the estimated values of more than 70 million unique addresses. Investors can use HPIs to understand trends in real estate markets and see pockets of investment opportunity and to build a portfolio that increases in value over time. The modern HPI can provide instant viewpoints on thousands of geographies, including ZIP codes. It can generate a custom index profile for any investor buy box and apply it across markets, provide early indicators of market changes, and can isolate the value difference by attributes within a geography to help identify areas where the cost to renovate an investment or rental property will generate an acceptable return on investment. Automated Valuation Model An Automated Valuation Model (AVM) applies statistical modeling to a database of historical property values and sales information to generate an estimated property value. The most popular modeling methodologies are based on average and median house prices, repeat sales or hedonic valuations. AVM results may vary based on the type of statistical modeling incorporated and also by the depth and history of data in the reference database. Because an AVM is entirely technology-driven, it can be the fastest and most cost-effective way to get a quick value estimate of a home. There is no fieldwork or analysis by an appraiser or real estate agent — which may reduce cost and time and decrease human bias and fraud risk. AVMs are also tested rigorously for accuracy. AVMs include a “confidence score” that indicates how close the estimate is likely to be to the final sale price. Because of their speed, AVMs are especially useful for bulk portfolio valuation analysis. Interactive Tools Since an AVM does not include an inspection of the subject property, it does not account for property condition — including any damages or recent improvements — in the price estimate. Simply put, an AVM will not be as successful if the property’s condition is significantly different from the surrounding comparables. In scenarios like this, an interactive valuation platform can provide a more detailed view of the property and comparables. These platforms give the user access to photos, maps, and other data simultaneously, leveraging thousands of data points to identify patterns that can be measured and translated. Unlike an AVM, an interactive tool lets users see the condition of the property and hand select the best comparables to reconcile and conclude an estimate of value. Technology and automation make interactive valuation platforms a quick and affordable option as well. Interactive tools with a rental analysis module can also be helpful to determine the ROI for a potential rental opportunity or help set proper market-rate rental prices. With visibility into comparable rental properties and their prices, interactive tools can provide a complete picture of the rental environment around the subject property. Broker Price Opinion A Broker Price Opinion (BPO) is an estimate of the potential selling price of a property that is performed by a local licensed real estate agent or broker. A BPO is typically done as an exterior drive-by but can occasionally include an interior walkthrough. The agent or broker will examine the property at a high level and leverage comparables and basic neighborhood information to develop an estimated opinion of price. Although the processes sound very similar to an appraisal, the main difference is the professional providing the valuation. Whereas a BPO constitutes the opinion of a real estate agent or broker, an appraisal represents a valuation provided by a licensed real estate appraiser. Incidental differences may include the extensiveness of the inspection, the level of analysis, and the regulations involved. For these reasons, a BPO is cheaper and typically will have a faster turnaround than a full appraisal or hybrid appraisal. Many investors are familiar with the BPO as it is commonly utilized for single-family rental due diligence because it offers speed and flexibility to get funding quickly. A BPO can be used in place of an appraisal in specific cases, such as a mortgage-backed security review, asset- or portfolio-management or other mortgage loan situations that don’t involve a credit decision. Hybrid Appraisals Hybrid appraisals—also sometimes called bifurcated appraisals or evaluations—split the property inspection and appraisal report between two separate parties. First, a property inspection is done by a third party, usually a local real estate agent. Then, they will report their findings to the

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Valuations in the Single Family Rental Space

Here’s What’s Happening with Rental Investments by Kevin Ortner Housing prices continue to march upwards. But what’s driving prices in the SFR space? What is responsible for this boom, and should we expect more of the same in the months ahead? As Renters Warehouse CEO, I have seen a lot of changes in the housing market over the last year. Here are a few things that stand out. There’s good news for investors who own rental property: the single-family rental property market has continued to thrive, despite the events of the last year. Nationally, 5.6 million homes were sold in 2020 –and the median cost of a home shot up 15%, increasing from $300,000 in 2019 to $340,000 by the end of 2020, according to the National Association of Realtors.  Both home values and rents alike have soared over the past year, and it is still very much a seller’s market. Demand is high, and there’s just not enough inventory to keep up.  Still, we cannot assume that home appreciation will continue at its current pace. It is safe to conclude that at some point appreciation will start to level off and growth begin to slow. At some point, we could start to see home value appreciation that is a lot more modest, rather than the extreme increases that we have seen over the last few months. If this holds true, then you will want to keep in mind that you are paying for future appreciation today. It may be a slow housing price appreciation climb over the next 18-24 months. No one knows exactly when appreciation will begin to slow down, so investors should not assume that the next month will be the same as the last.  There are a number of factors that are at play, all of which are impacting housing prices. Here is a look at some of the things that we have noticed in recent months. A Housing Shortage Currently, there is a shortage of housing inventory. In fact, the U.S. housing market is short 3.8 million homes according to recent data from Freddie Mac.  While builders have started to increase output in the past year, up 18% from 2019, lumber shortages have made home construction considerably more expensive. A global lumber shortage caused by lower production in 2019 is one contributing factor. The soaring cost of lumber could easily add $24,000 to the cost of a new house.  And it is not just lumber that is on the rise, other costs are increasing as well, including labor. Labor costs, largely due to worker scarcity, have increased more than expected during the first quarter of the year. New Homes Cost More to Build Many builders have been telling us that we are starting to hit the affordability ceiling, with buyers and builders starting to max out. When this happens, it could put pressure on prices to slow.  Builders are building what can be sold. Values in almost all tiers of housing have risen, with housing prices increasing in most markets. In 99% of metro areas tracked by the National Association of Realtors, prices in the first quarter of 2021 increased over the same period last year.  Of course, these price increases are pushing out the first-time buyer. This is leading to an increased demand for rentals as more people opt to rent rather than buy.  For investors, there is still opportunity in affordable rental homes. There are a great number of renters who have lost their jobs or are still on extended furlough. With the hospitality and service sectors being especially hard hit and many places closing their doors for good, there are a great number of jobs that are at risk. While there will be opportunities for new jobs in many places as things slowly ease back to normal, we still have a way to go. These workers will still need accommodation, and affordable rentals will continue to be in demand. The Institution-alization of the SFR Space While SFR has long been an asset class that has been dominated by small investors, for a few years now we have been seeing this space slowly start to tilt toward the institutional investor. There are a few reasons for this. For one thing, institutional investors have the money to secure the best deals for themselves. They can buy materials at-scale and for a better deal than small scale investors, helping to mitigate costs. Large and medium builders are buying up the small guys, or, in some cases just pushing them out. They can lock in lumber prices with a longer timeline than the small builder. This allows them to have a bigger market share and control the pricing as well. Some are building more homes and making a bigger profit. Then there are the impact fees—the cost of doing business, and low rates that give institutional investors an edge. Institutional debt is almost always free. This, of course, is helping to drive prices even higher.  Additional factors are compounding to make SFR more challenging for the everyday investor. Eviction moratoriums have provided protection for tenants who cannot pay the rent, but often at the expense of landlords—forbearance for landlords is spotty. In many areas, it is also becoming increasingly difficult to manage a rental home, due to local legislation and changing laws. Landlords today need to continually keep on top of things to ensure that they are in compliance. These days, it is just not that cost effective to manage one or two properties.  Institutional investors, though, have cheap debt and the processes in place that allows them to buy and manage homes at scale, making these investments far more profitable –and feasible. We are seeing a flood of capital into these investments that is going to consolidate the SFR space. Are Investors to Blame? Many people have bought into the narrative that investors are to blame for rising home values; that investors keep would-be homeowners out of the housing market. Of course, the reality

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ROI Starts with Understanding the True Value of the Property You Are Going to Purchase

The Bottom Line for Investors is Still the Bottom Line by Rick Sharga Perhaps nothing is more important to the success of a real estate investor than properly valuing a property. Over-paying for an investment property is one of the most common mistakes made—particularly by inexperienced investors—and can often be the difference between making a reasonable return on an investment and financial ruin. To a certain extent, investors buying properties to rent have a little more latitude than fix-and-flip investors, since they probably have a longer time horizon, and are less dependent on making a short-term profit on a sale. But, particularly in the case where a property is financed, the costs of over-paying can add up over time in terms of higher interest payments and lower monthly cashflows. And ultimately, when it’s time to sell the property, the profit will be smaller since the purchase price was higher than it should have been. But ultimately, most properties go up in value over time, so the rental property investor can make an error in valuing a property and still come out ahead in the long run. This is especially true in a housing market like today’s, with high demand and low inventory driving home prices to unprecedented levels. According to a recent report by RealtyTrac parent company ATTOM Data Solutions, median home prices nationwide rose 16 percent year over year in the first quarter of 2021 and were up at least 10 percent in most markets across the country. During what has now become a nine-year U.S. housing-market boom, equity has continued to improve because price increases have widened the gap between what homeowners owe on mortgages and the estimated market value of their properties. Freddie Mac recently noted that homeowner equity had increased to a record $23 trillion, as overall housing stock values rose to over $33 trillion. The ATTOM report said that the percentage of homeowners considered “equity rich,” (homeowners whose mortgage debt was less than 50 percent of their home’s value) had risen in 41states from the fourth quarter of 2020 to the first quarter of 2021. On the other end of the spectrum, homeowners who are seriously underwater on their loans (owing more than 125 percent of their home’s value) decreased by 49 percent during the same period. But the ATTOM report did suggest that some markets might be better than others for investors looking for good deals. For example, there are parts of the country where there are still a large number of homeowners who owe more than their homes are worth and might be candidates for short sales with their lenders. The top 10 states with the highest shares of mortgages that were seriously underwater in the first quarter of 2021 were all in the South and Midwest, led by Louisiana (13 percent seriously underwater), West Virginia (10.5 percent), Illinois (10.4 percent), Arkansas (9.2 percent) and Mississippi (9.1 percent). These are also all states where home prices are still affordable enough that an investor can buy a property, rent it out at a reasonable rate, and generate positive cashflow—something not as easy to do in some of the higher priced states like California, where the median property price is now over $800,000. Clearly, even though home prices don’t always go up in a straight line, the odds are in an investor’s favor if they plan to hold a property for any significant period of time. A small overpayment by a rental property owner—especially in one of the lower-priced markets noted above—can look somewhat trivial a decade later when a property has doubled in value, assuming the landlord has charged market-priced rent and kept the property occupied most of the time. For fix-and-flip investors, valuations can be a lot less forgiving The two most common mistakes made by fix-and-flip investors are overestimating the value of a property and underestimating the cost of necessary repairs. A 10 percent swing on these estimates, especially in an expensive market, can wipe out most or all of the profits. Flippers are also sometimes victimized by market timing—paying top dollar for a property expecting home prices to continue rising, only to see a market correction. In today’s red hot housing market, the temptation is to spend whatever it takes to buy a property, since prices have now gone up nationally for over 110 consecutive months, and demand continues to outpace supply. But it’s important to watch trends carefully, and to remember that local market conditions don’t always play out the same way the national headlines might suggest. Just to use two items from recent news headlines to put this into perspective, consider supply chain disruption and inflation—both results in one way or another of the COVID-19 pandemic. Flippers need to factor in material costs to their repair estimates. It seems unlikely that many of them planned on lumber prices increasing by almost 300 percent in the past year, but that’s exactly what happened. They probably also didn’t factor in appliances being on back-order for six months or more, yet real estate investors, homebuilders and homeowners alike are all still waiting for that new washer and dryer. For an investor with relatively high cost financing, extra months waiting to market the property can mean lower profits. As for inflation, many market analysts warn that if inflation continues to rise, mortgage rates are likely to follow. Most housing market experts agree that an increase in interest rates by as little as a point could seriously weaken demand among prospective homebuyers due to the historically high price of homes—affordability has been propped up by low interest rates and would suffer significantly if those rates suddenly went from 3 percent to 4 percent. Usually, this scenario results in home price appreciation slowing down, or even prices falling slightly. That’s good news for a flipper getting ready to buy a home, but not good news for a flipper who just bought one and now needs to sell it at a profit. Due to competition

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