Fifteen years ago, at the company where I worked, we decided to transform a commercial premise located in the San Blas district into a house. Although it was, technically, a simple business, at that time, it was not as usual as it is today in terms of management.
This operation allowed us to monetize premises that had been unused for more than 20 years. However, it was a one-off business, those were other times, and the real estate business was not yet there. Madrid was an orchard of cranes and the large PAUs ((urban planning projects in Spanish), such as Montecarmelo and San Chinarro, were growing with copy-and-paste urbanizations.
Surprisingly, I had no idea that this one-off business could become a replicable model that would make perfect sense in a market like the one we are in today. The real estate business has changed completely today. The structure is different, and the financing is different. In the past, prominent real estate developers could coexist with other medium-sized or small ones and compete in some market niches. However, today it is no longer the case.
The financial bottleneck for land purchase and part of the construction work in real estate developments has led to a limited situation for small and medium-sized developers who lack the resources to grow and often to continue. On the other hand, large developers, more accustomed to working with the financial system, can access corporate guarantees and regulated markets to obtain financing.
There are two important conclusions to be drawn from all these developments. Firstly, a large part of the new housing that came onto the market in the urban centers of large cities such as Madrid came from small developments of no more than 10 or 15 homes, which were the niche market for small developers. These properties are now awaiting development due to a lack of financing and the cost overruns of the inability to execute an economy of scale with several projects underway.
The second is a consequence of the first. This lack of supply in urban centers has created a need to satisfy existing demand. The conversion of premises into housing has become a logical way to give added value to assets that no longer have it and to meet a work demand for those who can no longer work in real estate promotions and are dedicated to renovations.
What is HOUSE FLIPPING?
The first thing you will find on the Internet is the definition of an Anglo-Saxon term that can be summarized as the purchase, renovation, and quick sale of a house to obtain capital gains. In short, and in a simple way, that is what it is, but if we go into detail, we could say that reality is much more complex.
The business involves adding value to an asset. But this process is not so simple, firstly because not all assets have the potential to increase in value and, secondly, because before entering into this type of business, you have to analyze the underlying asset from a technical, urban planning, legal and economic point of view, not to mention defining the added value that is being contributed.
In essence, what I am trying to express is that to do it correctly, you need to understand what you are doing, and although you may see programs on TV where they transform a house in 15 minutes and then sell it for a 35% profit, it is not that simple. If the work has not been done at a professional level and the necessary experience in the execution of the work and its management, it can reach a point of no return.
Alternative financing bets on house flipping
It is logical that at the investment level, there is interest in this business model. If well structured and with the appropriate previous work, it is possible to enter into a business with the risk of a Value Added business strategy and Opportunistic short-term profitability, which means that a company can offer fast and above-average profitability with acceptable risks.
The market will continue to evolve, and margins will be reduced to a point where the risks begin to be high for the profitability obtained. However, until this happens, it may take some time, as it is still a niche market for small and medium-sized entrepreneurs. Therefore, it will remain so for the time being, which allows small investors to enter into this type of business accompanied by good professionals.
Alternative financing is becoming an indispensable tool for such businesses, either as a complement to traditional bank financing or as a vehicle for direct investment in projects since their investment volumes contain tangible guarantees that provide greater security.
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