Posted on September 18, 2012
Anyone connected to residential construction is aware of the decimating impact of the global economic crisis on the credit markets. As credit tightened, the ripple effects included severely diminished mortgage values, drastic reductions in the number of buyers, and eventually a glut of REO, foreclosed properties that further retarded new construction and mortgage values. Architects, designers, builders, landscapers, and the tradesmen they employ, all found themselves scrambling to find new ways to survive and thrive in the “new economy.”
Builders began to compete for a shrinking market of small to mid-sized investors that, over the previous decade, had leveraged their cash investments, against borrowed assets, to control large numbers of property improvement projects across the country, from single-family spec homes to large housing developments and sprawling multifamily homes. As the lending froze, new home starts slowed, almost to a stop and though the market was unworkable for most, in some ways it was optimal for investors who were cash heavy—everything was on sale.
Many in the industry did not survive. materialsDIRECT, actively pursued projects in cash-based economies, in developing countries, where they were less likely to be dependent on credit; but recently, materialsDIRECT has found an interesting trend, developing here in the US: institutional investors are acquiring REO properties in large quantities, as investments. The properties are remodeled and either sold (flipped) or rented out. In some cases, they are sold as a cash flow investment, after a residential lease has been signed and the tenant has made several on-time payments. Some of these investors also source properties from the MLS and buy through an agent. The big players in the market are moving hundreds of homes each month, and smaller interests often turn less than one per month—with monthly foreclosure sales in the hundreds of thousands[i], there are plenty to go around. Even nonprofits are getting in on the flipping foreclosures business.[ii]
Smaller operators work with much smaller margins than the larger investors, so they have to be far more selective about the properties they choose. Once a property has been acquired, partnering with a reliable contractor and finding the best prices on parts and supplies is a critical part of making sure the bottom line is black, and not red.
Institutional investors are often able to negotiate more favorable rates by buying in bulk. This advantage reduces the risk of taking a loss, and the sheer volume of properties mitigates individual risk through averages; however, expectations of profitability are very high, and that expectation also includes expectancy that economies of scale will compress all costs: labor, materials, and even transaction costs.
Fortunately, materialsDIRECT’s optimized supply chain provides a simple and effective means by which property investors of any size can significantly reduce the cost of remodeling materials by reducing the number of times products change hands between them and the manufacturers (by reducing the number of middlemen.) materialsDIRECT is primarily a logistics partner that configures a custom solution for each builder. Our goal is finding the shortest path between your job and the manufacturers that make the materials for the job—that’s it! While supply seems to be almost endless, flipping foreclosures and finding qualified buyers is becoming more competitive, month by month. One of the best ways to make a process stand out with high quality at a great price, is by buying smart: buying factory direct.