To Buy and Hold or Fix and Flip?
The age-old question for real estate investors is: should I buy a property to rent out (“buy and hold”) or should I purchase it, fix it up, and sell it (“fix and flip”)? Buy and holds are a long-term investment whereas fix and flips are a short-term investment. Fix and flips require much more concentrated attention in a short time span, but a successful fix and flip obviously yields quicker rewards. There is no hard and fast rule in terms of which strategy is “better.” It will depend on a myriad of considerations. And it may be that an investor chooses to pursue both strategies simultaneously. Below we present some of the considerations for each of the REI strategies.
What are some of the factors that drive the decision about whether to do a fix and flip?
One consideration is how easy it is to find distressed properties for fix and flips in the investor’s geography. There are various ways in which an investor can locate a distressed property:
- Tax sales. A tax sale is the process where tax lien certificates are auctioned publicly to the highest bidder. Each county has its own rules regarding bidding. Once a lien certificate is sold, the county’s lien on the property conveys to the winning bidder. If the property owner fails to redeem the certificate by paying the overdue taxes, the certificate holder may obtain title to the property by foreclosing the property owner’s right of redemption.
- Property auctions. Some auctions do not even require attendance in person and are moderated entirely online. No matter what format the auction takes, be sure to read the purchase contract before bidding. Also, even if you cannot view the interior of the property before the auction, it is worth looking at the exterior. For example, one online commentator on real estate investment website BiggerPockets reporting seeing a “not fit for human occupancy” notice affixed to the exterior of the house going up for auction. Also, be wary of getting into a bidding war where you may be bidding against a shill bidder.
- Scouting target neighborhoods (“driving for dollars”). Once target homes are identified, employ a direct-to-seller strategy. This can mean calling the homeowner, using door hangers, or mailing letters. It should be noted that placing flyers or letters without stamps in mailboxes is actually illegal. Only authorized U.S. postal carriers are allowed to place items in a mailbox and by law, a mailbox is intended only for postage-paid U.S. mail.
- Networking. Successful real estate investors often find fix and flip opportunities through relationships they have developed with other local investors, with wholesalers, and with realtors.
- Foreclosure sales. Lists of foreclosure sales are typically published in a local newspaper in advance of their sale, which affords the investor an opportunity to visit the property (though they are typically not able to inspect the interior). It may also be possible to visit the County Clerk’s office to find homes in the foreclosure process. Foreclosure sales have a few challenges, in addition to it being unlikely that the prospective buyer can inspect the interior. There will usually be a requirement that the buyer post 10% of the purchase price in cash at the time of the sale, and the purchase must typically be completed within 30 days else the buyer will lose his deposit.
- For Sale by Owner (FSBO) properties. Some sellers opt to forgo the use of a realtor and sell their house themselves. They may advertise the sale of their home in one or more ways: post a sign on their lawn, list their house for sale on Craigslist, list their house for sale on social media, and/or list their house for sale in a weekly free shopper newspaper. These properties may be at below market prices if the seller is anxious for a speedy close.
- Probate court sales. Probate court sales are sales of properties inherited by heirs of deceased persons. Properties available for sale through probate are listed in local newspapers like foreclosure properties are in order to provide notice of the sale to potential creditors or heirs not included in the will. Some downsides of probate sales are that the properties are often sold “as is” and the buyer may be negotiating with multiple heirs. Conversely, the sellers may be looking to quickly unload the property, such that a buyer can make an offer before the probate process closes and negotiate a better price.
- Rentals. A real estate investor can keep an eye on rental properties with vacancies; perhaps there are vacancies because the property needs work and the landlord doesn’t have the financial means to undertake the work. An investor can propose to purchase the property as a fix and flip opportunity.
- The Multiple Listing Services (MLS). While this may not seem like a route that would produce worthwhile leads, it is always possible that an investor could identify a foreclosure property on the MLS, or a listing that has expired (meaning that the seller is likely a motivated one). Also, when a listing goes under agreement, but the deal falls apart, it will be listed as “Back on Market” (BOM) for the first three days before reverting to “Active” status. It may be worthwhile to check for BOM listings as those sellers are likely motivated to get a deal done after having fail to close.
- Researching properties for sale on Trulia, Zillow, Redfin, NeighborhoodScout, Homesnap, Realtor.com, Homes.com, etc. These sites have various advantages and disadvantages as compared to the MLS. For example, since there is public access to these sites, there is always the possibility that information will be inaccurate. On the flip side, in comparing Zillow to the MLS, Zillow provides “coming soon listings”—ones where the home is not officially on the market but is expected to be within 30 days. These might present an opportunity to jump on a deal before others do.
- Create a motivated seller website. This should be SEO optimized and can be operated in conjunction with ads on Google and social media marketing.
If it is not too difficult to locate distressed or underpriced properties, then fix and flip can be a good strategy.
Below we provide some county-specific information that may be of assistance in identifying fix and flip properties locally.
- Tax Sales
- The tax lien certificates for Baltimore County properties with unpaid real property taxes, accrued interest or penalties may be auctioned at the County’s annual tax sale. The notice of advertisement is published once per week for four successive weeks prior to tax sale. The advertisements are updated weekly. Baltimore County advertises in the Jeffersonian newspaper. More information about Baltimore County’s annual tax sale is available here.
- Baltimore City has its own process for auctioning the tax lien certificates for properties that have delinquent City taxes and charges. That process is described here.
- Education. For the newbie real estate investor, Baltimore City is planning to soon offer a series of educational “how to” PowerPoint presentations. These will include how to handle the purchase, construction, and permitting of City-owned property.
- Auctions. There are many websites where properties that are up for auction in Baltimore are listed. Some examples are J. Billing & Co. Auctioneers, Alex Cooper, and Ashland Auction Group.
- Apply to be a buyer with One House at a Time (OHAAT). OHAAT acts as a court-appointed, non-profit agent to convey, raze, or rehabilitate vacant and nuisance properties. The objective is to create safer, more stable neighborhoods. OHAAT auctions are held approximately monthly, with 25-40 properties offered each month. There are also vacant properties available for immediate sale to prequalified buyers.
- Purchase City-owned property. Take advantage of Baltimore City’s “Vacants to Value” (V2V) program. This program offers small developers and homeowners the opportunity to invest in single or small bundles of City-owned properties that are vacant or abandoned. The City provides an online tool that allows these properties to be identified.
Another consideration is whether the investor has the expertise to fix the property himself. A contractor who is also a fix and flipper will have an advantage when it comes to being able to forecast repair costs accurately and stay within budget. If the fix and flipper plans to outsource the repair work, he needs to have a strong relationship with a skilled and trustworthy contractor, else he will find himself in a position where he needs to devote his time and attention to monitoring and potentially redirecting the work of the contractor. For many fix and flippers, REI is not their full-time job. An investor who has to contract out the repair work may not have the appetite to pour his time and attention into a project with a quick turn-around time—so he will need to be sure that won’t be what happens if he doesn’t have the bandwidth to manage it. Properly vetting a licensed contractor and checking his references and prior work is a must-do for every new investor.
What are some of the factors that drive the decision about whether to buy and hold?
A buy and hold strategy will generate value in two ways: from the stream of rental income and from the appreciation of property value over time. This can be a very appealing strategy for investors, especially once a property is stabilized and rented. Most lease agreements are one year in length and may contain auto renewals. That means that this type of strategy can be one that is not time intensive after the initial investment in stabilizing the property and getting leases locked into place.
One of the important considerations, however, is whether the investor is ready, willing, and able to serve in the capacity of landlord. That will require being readily accessible when a renter has a maintenance issue (or hiring someone who will hold that responsibility). This also means vetting prospective tenants (to which we have devoted an entire guidance document), tracking the receipt of rent payments, following up on unpaid rent, potentially dealing with tenant-landlord disputes, etc. There can be different landlord/tenant laws at the local level which would require a landlord to be knowledgeable about each jurisdiction in which she has a rental property. It should also be noted that Maryland was not included as one of the “Top 5 Most Landlord Friendly States in 2019” by Auction.com. Another site that lists “The Top 7 Landlord Friendly States of 2021” did not include Maryland on its list, either. If the landlord responsibilities are not appealing, then a “buy and hold” strategy will not be the right one for the investor—unless the investor wants to retain the services of a property management company.