Flipping Houses Industry Analysis, Research Paper Example

Introduction

The aim of the new business venture is to utilize abandoned and foreclosed properties in the state of Detroit, in order to make a profit, provide affordable homes for families, and to improve communities. There is currently a government-funded project and initiative in place that is aiming to end homelessness and create affordable homes in the state. The rapid re-housing project by the Homeless Action Network (2010) is in line with the new company’s goals: “Provide safe, affordable, supportive, and long-term housing solutions for people who are homeless or at risk of becoming homeless” (Homeless Action Network, 2010, p. 4).

The founders of the new company would like to buy, renovate, sell abandoned, neglected, and foreclosed properties in Detroit, in order to provide a safe and affordable option for middle-class and disadvantaged families through government funding and collaboration. The housing market is just recovering from the affects of the long term recession, and the low availability of homes drives prices up. The authors believe that by increasing the pool of affordable, quality homes, the company can create long lasting advantage for potential buyers.

Detroit is considered to be a declining city of The United States, and there are some alarming trends identified by Follain’s (2011) report on housing. The study determines declining cities’ impact on neighborhoods, communities, and quality of living.

Industry Review

There is a general trend for buying low cost homes in the United States, as a consequence of the aftermath of the long lasting recession. According to a recent  Detroit News article (Crutsinger, 2014), the sale of pre-occupied homes increased by 4.9 per cent in May, 2014. The low rates on mortgages have made potential home buyers more adventurous, however, pre-owned homes have a price advantage over new developments.

The share of the distressed mortgages (and foreclosed properties), according to a recent publication by the U. S. Department of Housing and Urban Development and the U.S. Department of the Treasury (2013) was higher in Detroit than the national average. The foreclosure rate in Detroit was 0.3 percent, compared to 0.1 percent nationally. In order to stabilize the housing market and increase the availability of affordable homes in the area, the government is committed to re-utilize properties. Based on the aims of the Neighbourhood Rehablilitation Program, rehabilitation, reconstruction is likely to be supported by governments, and the aids provided for potential buyers will make the market for renovated homes more viable.

A recent Joint Center for Housing Studies of Harvard University (2013) study states that the U.S. housing stock is ready for renewal. Housing inadequacy is a great problem that needs to be tackled. The average expenditure per unit, according to the study (Joint Center for Housing Studies of Harvard University, 2013) by investors is around $15.600. This means that those properties that are re-developed and renovated by companies that buy, improve, and sell homes for profit are finished to a higher standard than those repaired by owners or banks.

Related Research

Regulation and Legal Concerns

The Michigan Article 25 of Public Act 299 of 1980 regulates real estate agents and sales intermediaries. Real estate prelicensing courses need to be taken in order to start operating in the industry.

The 2005 hearing document of the Ninth Congress (2005) indicates that the government is trying to make the real estate market more liberal, embracing competition among companies in order to benefit customers.

The Department for Licensing and Regulatory Affairs (n.d.) website confirms that a maintenance and alteration contractor (M&A) needs to be licensed in order to perform trades and business activities. There is a 60 hours course that all contractors need to complete, related to safety, marketing, liability, and risk management. Further, the website also states that contractors detailed above need to be registered as salespersons.

The Joint Center for Housing Studies of Harvard University report (2013) confirms high vacancy rates in Detroit. A comparison table (p. 43) confirms that in the second quarter of 2010 there were 91.892 vacant properties in the area, significantly higher than the rest of the counties. Vacancy rates increased by 12.4 percent between 2008 and 2010 in Wayne County (p. 45).

Location and Business Environment

It is important to consider the real estate market’s local characteristics, as well as the business environment for investing into residential homes. A market update by Real Estate One (2014, p. 4) confirms that within the next year, the availability of low priced properties is going to decline in Michigan by 49 percent. The trends determined by the research show that there will be a general decline in the number of available homes, while the median asking price is going to increase over time. This means that there is likely to be a difference between supply and demand. Given that about 2 per cent of the homes in the area are vacant and foreclosure rates are above national average (U.S Department of Housing and Urban Development & U.S. Department of the Treasury, 2013), the supply of homes available for sale can be increased through renovation and sales of foreclosed, long term vacant, and under-utilized properties.

The newly founded company would be able to fill a gap in the market and serve buyers who are interested in good value for money and would not like to go with homes offered by the government. Many buyers would decide to buy from a trusted and experienced property developer, instead of participating in government revitalization schemes. A recent article by Macdonald (2014), Detroit city officials have a bad reputation for flipping homes in the area. The article confirms that the renovation projects resulted in a financial loss for the local government. Therefore, the asking price of these properties was affected by the lack of cost-effective project management. Detroit city spent over 8 million dollars to bring in 2 million, according to Macdonald (2014).

Another important aspect of the business environment is that Detroit is considered to be a declining city. The local government has existing initiatives to create jobs, improve the quality of living, strengthen communities, and

The Joint Center for Housing Studies of Harvard University study (2013) states that there are new opportunities for remodelers in the current U.S. housing market environment. The document states that “the growing supply of homes that have been through the pro­tracted foreclosure process represents a major opportunity for remodeling firms. In 2011 alone, renovations of just over a mil­lion distressed properties generated about $10 billion in spend­ing. With nearly 3 million additional homes currently in or at risk of foreclosure, many more billions will be necessary to upgrade these properties for return to the market” (Joint Center for Housing Studies of Harvard University, 2013, p. 10).

Real estate markets in declining cities, based on Follain’s study (2010), have specific characteristics. Home values start are reduced, due to the lack of employment opportunities, infrastructure, and the low quality of living. Due to the high number of foreclosed and vacant homes, neighborhoods become distressed, communities break down.

Zoning Issues

According to the Detroit Zoning Ordinance (2012), the geographical area of Detroit has several residential zoning districts: R1 for single families, R2 for two-family homes, and there are districts created for low, high, medium, and thoroughfare density housing areas. This issue is likely to affect the developing company: major extensions and expansions are not likely to be approved by regulators. However, homes located in planned development districts will need to be renovated according to the initiatives of the local government. The City of Detroit

Neighborhood Clusters document (n.d.) needs to be studied before initiating development and investment projects.

Business Licensing

Business licenses are issued by the City of Detroit. Business locations are inspected by officials, and permissions are subject to training and fees.

Research Documents

The newly founded company will need to obtain information from the Detroit Planning & Development office, in order to gain an insight into current projects, initiatives, and housing preferences. Trends analysis, statistics, and forecasts are likely to be supplied by the government agency, and details of the Neighborhood Stabilization Program are available to download from the Detroit government website. Further, funding is available for creating neighborhood regeneration projects in line with the government’s initiatives. According to the Detroit website (n.d.), $21.922.710 was recently allocated for the purpose of planning and redevelopment.

Business Entity Type

The newly funded business is going to apply for a business license as a small business corporation. First of all; in order to attract investors, the company would like to create stocks. In order to create market confidence, the organization needs to accept certain liabilities that come with the corporation status. As many regular corporations are subject to double taxation, and it is likely that the new firm will have limited partners, the small business corporation option seems to be the most viable solution. This way, the business can maintain a healthy cash flow by avoiding double taxation.

Current Regulations

Local government regulations are in place to support redevelopment of housing in Detroit. The Detroit city website (n.d.) has two important grant programs in place, in line with the Housing and Economic Recovery Act (2008) and the American Reinvestment and Recovery Act.

Pending Regulations

According to a Detroit Free Press article (2013), it is likely that a new Michigan bill is going to be introduced to speed up the sale of foreclosed properties. The current six month time frame given to owners is likely to be reduced to sixty days. For the new business venture, this would mean that more properties will be available for sale at a low price, and the effectiveness of the business operation can be increased.

Competitive Analysis

Competitive Landscape

The main competitors of the newly founded company are likely to be government backed construction companies, new home developers, and other companies that engage in renovating and selling pre-owned homes. Further, real estate agents, offering low cost-owner renovated homes will pose threat to market share. Land banks, featured by Sage Computing (2009) are also creating a competition for the new service. These agencies acquire homes that have been foreclosed and promote redevelopment of the properties. These agencies,  based on their existing working relationship with government offices would be able to acquire permissions, tax exemption licenses, and maintain properties assuming ownership. Further, these land banks act as property managers for tax foreclosed homes. Even though land banks create a large competition on the marketplace in Michigan, Detroit, they can also be viewed as potential partners for development projects. Land banks do not buy, maintain, manage, and sell bank foreclosed homes, only deal with tax foreclosures.

Key Competitors’ Names

Major real estates offering quality family accommodation will be the key competitors of the new company. Higbie Maxon Agney, Inc. operating in Detroit, Lucido Real Estate, and Real Estate Dreams are the main players in the pre-owned property market.

Competitors Strengths and Weaknesses

Most of the companies are realtors and sales agents in one. The agencies offer bank owned, privately owned, to be developed, and neglected properties. The main strength of the existing real estate companies and chains is the existing reputation, expertise, licenses, and the large pool of existing, past customers. They also have dozens of properties featured on their website. The process of buying a new home, however, can be lengthy, using a realtor, as many homes would be available only when the owners find an alternative property. The weaknesses of the companies, therefore, can be concluded as: slow process, legal procedures, and a variety of homes available, of which it is hard to choose from.

Land banks, however, have an important advantage over the newly created company: legislation, the fact that the banks are backed by the local government, and experience in property maintenance, legal issues, such as clearing titles, applying for tax exemptions, dealing with creditors and transfers. One of the main disadvantages of land banks is the slow process and low availability of funding for new projects. They are unable to materialize the return on investment in a reasonable time frame.

Competitors’ Market Share Data

Market share data of competitors is not available at this time, however, it can be obtained from the local government’s Planning & Development department. It is likely that two or three real estate agents complete more than half of the residential home sales in the area. Further, government owned and renovated properties might account for around ten percent of the exchanges.

Capturing Market Share

In order to capture market share in the Detroit area, it is important that the new company effectively communicates the benefits of buying a home that has been renovated to the highest standards over buying a new property. The price advantage is evident, however, customers need to understand that they will not need to wait long months until the house is available to move in. Further, focusing on customers who are looking for value for money, the company will offer lower prices per square feet, guarantee on repairs completed, and a speedy procedure. As houses will be marketed directly to customers, the legal and professional costs can be reduced. Finally, building upon the price advantage, the company will also offer fast moving packages.

Competitors’ Reaction

Competitors are likely to engage in an aggressive marketing behavior. They might seek extra funding for speeding up the process of buying, renovating, and selling properties. They are likely to increase market activity; advertise, and recruit staff for locating available homes that have the potential of a large profit margin and a quick sale. In order to ensure that the market share gained by the new company will remain stable, a response needs to be created to prevent other companies from being the first to bid on properties. The corporate strategy needs to include a cash flow management project that will ensure that the firm can buy homes immediately after they are available for purchase.

Swot Analysis

In order to break into an existing and already served marketplace, it is important that a SWOT analysis is completed. This will help the management eliminate weaknesses and threats, build upon the strengths, and make the most out of the opportunities offered by the market segment.

In order to eliminate weaknesses and threats, it is important that the management of the new company becomes familiar with related regulations, license and training requirements, and the firm has adequate liability cover. In order to make the most out of the market opportunities, the company needs to locate potential buyers who are looking for alternatives to government housing or new developments, while saving money on the price of the properties. Funding needs to be available and cash flow needs to be managed in order to reduce the time it takes to sell a property that was acquired through foreclosures.

References

Crutsinger, M. (2014) Sales of U.S. existing homes up 4.9% in May. Detroit News. June 23, 2014.  Retrieved fromhttp://www.detroitnews.com/article/20140623/BIZ03/306230059#ixzz389DIVRsv

City Data (2014) Detroit, MI (Michigan) Houses and Residents. Retrieved from http://www.city-data.com/housing/houses-Detroit-Michigan.html

Department of Licensing and Regulatory Affairs. (n.d.) Licenses and requirements. Retrieved from http://www.michigan.gov/lara/0,4601,7-154-35299_61343_35414_60647_35455-193789–,00.html

Detroit Free Press (2013) Michigan bill could cut foreclosure redemption period. Detroit Free Press. June 2, 2013. Retrieved from http://www.freep.com/article/20130602/NEWS06/130602001/Michigan-bill-could-cut-foreclosure-redemption-period

Detroit City Website (n.d.) City of Detroit neighborhood clusters. Retrieved from http://www.detroitmi.gov/Portals/0/docs/planning/pdf/Neighborhood%20Maps/Neighborhood%20Clusters.pdf

Detroit City Council Website. Provisions. Retrieved from http://www.detroitmi.gov/DepartmentsandAgencies/BuildingsSafetyEngineeringEnvironmental/Divisions/LicensesPermits/Permits/PermitApplicationProcedure.aspx

Follain, J. (2010) A Study of real estate markets in declining cities. Retrieved from http://www.housingamerica.org/RIHA/RIHA/Publications/75154_10296_Research_RIHA_ShrinkingCities_Report.pdf

Homeless Action Network of Detroit (207) Moving forward together. A ten-year plan to end homelessness in Detroit, Hamtrmack, and Highland Park, Michigan. Retrieved from       http://www.handetroit.org/documents/Action%20Plan%20(2007-2010).pdf

Joint Center for Housing Studies of Harvard University (2013)  The US housing stock ready for renewal. Improving America’s housing 2013. Retrieved from http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/harvard_jchs_remodeling_report_2013.pdf

Macdonald, C. (2014) Detroit spends $8.7 million to flip 30 homes that bring in $2 million. Detroit News. May 29, 2014 Retrieved from http://www.detroitnews.com/article/20140529/METRO01/305290038#ixzz389Dvd4nX

Real Estate One (2014)  June 2014 monthly market update. Retrieved from http://www.realestateone.com/pdfs/June2014MonthlyUpdateREO.pdf

U.S. Congress (2005) Hearing before the Committee On Financial Services. U.S. House Of Representatives. One Hundred Ninth Congress. First Session June 15, 2005 (Printed For   The Use Of The Committee On Financial Services) Serial No. 109–37

U.S. Department of Housing and Urban Development Office of Policy Development and Research (2009) Revitalizing foreclosed properties with land banks. Retrieved from http://www.huduser.org/portal/publications/landbanks.pdf

U.S. Department of Housing and Urban Development & U.S. Department of the Treasury (2013) Spotlight on the housing market in the Detroit-Warren- Livonia, Michigan MSA. Retrieved from http://portal.hud.gov/hudportal/documents/huddoc?id=HUDJanRegSCSL_Detroit.pdf