A case study in underwriting a Sun Belt flip on 2021 comp behavior and losing 9k on it

Consider a purchase at 291 in a metro that ran hot through 2021 and 2022. 1,900 square feet, 2004 build, everything sound. Scope 34k of paint, flooring, fixtures, kitchen counters and appliances. ARV called at 372 off six comps averaging 61 days on market. The comps were right about price and wrong about time, and that is the detail worth studying. Listed at 372 on day 51. Seven showings in three weeks. Cut to 362 on day 74. Cut to 351 on day 96. Under contract day 108 at 348, closed day 137. Carry at 2,050 a month put actual holding cost near 9,350 instead of the 4,100 budgeted for a 60 day hold. Final math: 291 plus 34.6 rehab plus 9.35 carry plus 5.2 acquisition closing plus 22.4 selling and credits equals 362.55 against a 348 sale. Down about 14.5 on paper. The specific error was using six comps drawn from a nine month window that ended eight months before listing, all of which sold into a market with less standing inventory than the one the property actually listed into. Active inventory in that submarket had roughly doubled between when those comps closed and when the house hit the MLS, and the underwriting never looked at active listings at all, only solds and price per foot. The lesson generalizes well: underwrite against active and pending inventory, not just closed comps, and price the hold off current absorption rather than off what days on market was doing a year earlier. If there are 40 competing actives and 6 pendings a month, that is roughly a seven month supply, and a 60 day exit plan built against that backdrop is fiction from the day the contract is signed.

luis_carrera CS1CPRO 12

Answer

jessreyes12ActivePRO

I want to make sure I follow the inventory point because it seems like the actual lesson and I've never seen anyone explain it.

Solds tell you what buyers paid for finished houses in the past. Actives tell you who you'll be standing next to on the shelf. Pendings tell you how fast the shelf empties. So if actives are high and pendings are low, you can be right about price and still sit long enough that carry eats you, which is exactly what happened here.

What I don't understand is whether you could have known at purchase. Was the inventory already building when you signed, or did it double after? Because if it was already visible in the data on day one, that's a checklist item. If it doubled in month three, that's a risk you can only reserve against, not underwrite away.

jessreyes12ActivePRO

2 replies

samantha_ruizPassivePRO

@jessreyes12 in most markets it was already visible. Active count and months of supply are published monthly by local associations and you can usually see the trend six months back for free.

@luis_carrera the piece I'd add is that the chapter framing about returns being intensely local is exactly this. Affordable Midwest and Northeast metros posting well above average while several Sun Belt metros sit near breakeven isn't a mystery, it's inventory and it's what happened to price growth after the run. You bought into the second group using the first group's playbook.

One disagreement though. You're blaming the comp window and I'd blame the exit strategy. At day 74 you cut 10. At day 96 you cut 11 more. Two small cuts on a slow shelf usually means chasing the market down, and each one bought you 22 more days of carry at 2,050. A single cut to 352 on day 74 might have closed by day 100 and saved you 2,500. Also, at 348 with a 372 plan, what was the rent? On a 2004 build in a metro with that much inventory I'd have wanted the rental number underwritten before I bought, so a bad listing season has somewhere to go besides three price cuts.

samantha_ruizPassivePRO

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