July 17, 2020

3 Real Estate Investing Pitfalls During the Coronavirus Pandemic

By Charles Sells

When the United States essentially shut down in March 2020, no one really knew what the national economy or the national housing market would look like when things “reopened.” In fact, no one really knew exactly when the economy would “reopen” or the details of what that process would look like. However, there was a universal consensus that things would be different than they had ever been before, with the exception of the real estate sector. Then, as now, predictions about the real estate market and, more specifically, the residential housing market, are extremely varied and span the spectrum.

One thing that is clear is that real estate investors and the buyers and sellers upon whom they rely are not taking the COVID-19 pandemic lying down. In every state where the stay-at-home orders permit, investors are still renovating, renting, showing, and selling properties to whatever extent they are legally and safely able to do so. In fact, by the end of April 2020, when roughly a fifth of the population had not received a paycheck in more than a month, homebuyer demand had begun climbing when measured by pending home sales, rising 6.2 percent from the middle of the month to the end.

Investors know that if homebuyers are actively looking, then it pays to be actively selling, and that means it will be increasingly important for fix-and-flip investors to become active in the real estate market again as quickly as possible. These investors are likely better positioned than their fix-to-rent counterparts simply because the rental market incorporates a greater degree of uncertainty due to eviction moratoriums and “rent strikes” that could affect rental owners’ ability to collect rents. However, single-family rentals remain a very attractive product right now as a result of the weeks spent under stay-at-home orders and a rising inclination to physically and socially distance even once states reopen.

Real Estate Investors Must Stay Alert

Because of the widely varied degrees of infection around the country and the varying types of response in different markets, investors must not make any assumptions about markets or investing strategies. It is imperative to monitor your investments closely, particularly if you work with a project manager or turnkey provider to keep your projects moving. There is a great deal of opportunity for real estate investors in today’s market, but there are some documented pitfalls associated with the pandemic as well. Here are three common issues investors are reporting:

  1. Deposits being held but not used.

Although real estate was identified as an essential service on a federal level, many of the professionals upon whom real estate investors rely in order to get projects done are not considered essential in all states. This means that in some states, contractors, plumbers, and carpenters might not be able to go to work on your project even if you implement stringent physical distancing protocols or even elect to have only one person working in the property at a time. In areas where these individuals cannot go to work, many real estate investors report being concerned about deposits made before the shut-down.

For example, one Pennsylvania flipper told the Pittsburgh Post-Gazette he is expecting to ultimately “double down” on a deposit on new ductwork he made shortly before the state went into lock-down. Because the contractor cannot presently do the work, the investor said he expects the individual will be forced to use the deposit to support his family rather than buy materials for work he cannot presently do. The investor said he has little recourse since it will be more expensive to file a lawsuit to try to get the money back than to hire another contractor.

  1. Every timeline is unpredictable and probably extended.

Even in markets where remote showings and closings are keeping things moving, investors cannot assume their timeline will be predictable in any way. This affects not only how long an investor will pay holding costs like interest on private loans, insurance, and taxes, but also how many projects a flipper can get done in a year. For example, if an investor typically does six flips a year, they might only be able to do two or three in 2020. This will dramatically impact the real estate investing population and private lenders who rely on those investors for income, since there could be far fewer qualified borrowers and deals out there by the end of 2020.

  1. Coronavirus addendums are not always legal or enforceable.

It surprised no one when contracts to buy and sell homes began to sport “coronavirus addendums” designed to protect the timeline of the deal, potential oversights during inspections, and any parties who might start to feel sick or turn out to be infected. Some real estate attorneys say these clauses are not necessary because the coronavirus has officially been designated a pandemic, meaning it is “an unanticipated or uncontrollable event” and, therefore, is covered by force majeure language already included in purchase and sale agreements. However, many investors, buyers, and sellers want to be sure they are leaving nothing to chance, so they are including coronavirus addendums to protect themselves.

“It’s worth pointing out that a coronavirus clause isn’t meant to serve as an easy out if a buyer or seller is simply fearful of contracting the virus,” warned HomeLight contributor Summer Rylander. “The clause is in place to offer flexibility during these times of uncertainty.”

If all parties are not equally clear on the purpose of the clause, deals may end up delayed indefinitely or even falling through simply due to one party’s unwillingness to move forward and belief they are entitled to back out of the contract. The biggest reason to include this type of clause is to define the length of any acceptable extension of the timeline and define who gets the earnest money in the event that the deal falls through. However, with many courts closed, investors may find the cost associated with enforcing such a clause may be prohibitive and, ultimately, too slow.

Keep Both Eyes on the Prize: Housing and Economic Recovery

Regardless of preferred strategy, real estate investors will play a substantial role in the post-coronavirus-shutdown recovery just as they have in every other economic recovery in U.S. history. Ultimately, successful investors must remain focused on the ultimate goal of generating returns and creating lasting, sustainable investing businesses in the post-COVID-19 economy. While the outlook is certainly clouded at present, the true value of real estate and real estate-related assets shines clearly as the country shelters in place. Real estate investors must rely on their creativity and perseverance to keep deals moving and businesses running without falling prey to pandemic-related pitfalls.

Learn more about passive flipping tactics in today’s uncertain economic environment from Charles Sells, founder and president of the PIP Group, a push-button, turnkey service provider that allows passive investors to retain 100-percent control and ownership of their investments with full transparency, by going to PIPGroup.com.

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