Prior to joining First Bridge Lending, I managed hedge fund capital and oversaw the investments of over 2,000 fix-and-flip transactions in California. Being involved in so many deals, I began looking for ways to optimize operations, and have sliced and diced the numbers in just about every way imaginable. I started analyzing trends and diving deep into questions like:
- What resale price is outperforming the portfolio average in different zip codes?
- How do buyers in different markets value pools?
- What is the right amount of renovation to spend on different age and sized homes?
While much of the analysis I did was filled with significant noise, the right time of year to buy remained a constant in successful investment returns.
Year after year, I observed that properties purchased between October and February (Winter) outperformed the June to July (Summer) purchases for investors. 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.
Economics 101 → 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.
Buyer Timing. Younger families made up the majority of the buyers’ pool on our properties, and often times 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.
Hold Time is an IRR Killer. 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 the 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.
Undervaluing the ARV on Winter Buys. 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 your sale will likely experience a spring bump, meaning you’ll fetch a higher exit price and quicker exit.
While buying in the Winter is certainly not more important than a deliberate approach to your acquisition (or running solid, efficient operations) it is a variable that will give you tailwind in your investments, which is always welcomed in the challenging fix-and-flip market.