In every crisis, financial opportunities arise. COVID-19 is no different. The economic downturn associated with the lock downs and business closures have presented upsides. Some are fraudulent, and those aren’t the subject of this post. What I’m talking about are legitimate opportunities that come with lots of risk. In the last recession of 2008-2010, huge opportunities arose in foreclosed real estate. That’s where the “fix and flip” strategy of buying houses at foreclosure, fixing them up by making repairs and upgrades, and reselling in a short time, originated.
As with the 2008 recession, there are opportunities in real estate, and more will undoubtedly arise. These often use a fix and flip strategy. Fix-and-flip sounds great until the reality of what has to be done sets in. Many properties have hidden work that goes far beyond a new coat of paint, new flooring and landscaping. Buying at foreclosure is risky because other than an exterior examination of the property, a potential investor can’t make a detailed inspection. Foreclosure sales are final; they come without warranty; and it’s a very real “buyer beware” situation.
In recent years, promoters of fix and flip plans have come into vogue. Rather than the investor doing all the work himself, a promoter will use the investor’s money to oversee the fix up process by hiring the various contractors that are needed. In larger projects or to allow investors without the necessary money to take part, the promoter might pool money from several investors. The promoter will typically take a small percentage, 3%-5% of all the money invested as a “management fee” for overseeing everything. The promoter doesn’t actually do any of the fix-up work herself; she hires contractors to do that. Some promoters even turn over day to day oversight of the fix-up to a property manager. These fix and flip programs, while generally legal, are rife with fraud and mismanagement potential.
As this recent article in the Wall Street Journal shows, small, first-time investors are taking advantage of the financial woes of some public companies. The article relates the experiences of a few small investors who have purchased shares in companies such as Hertz, which recently filed bankruptcy. One investor bought Hertz shares at $.74. Hertz closed at $4.18 on Tuesday, June 9. Another purchased at $1.43 and sold at $2.76, netting $47,000 in profit. In May, Chesapeake Energy warned that it might have to file bankruptcy. Regardless, its shares have risen from $13 to over $69 just in June.
With stories like this floating around, the urge to take money from low-performing assets like 401(k)s or IRAs, or, worse, getting a second mortgage or home equity credit line, might seem overwhelming and smart. It might not be so smart, and certainly isn’t if there might be a near-term need for the money. Contrary to what one of the investors in the Wall Street Journal article said, stocks do go down; they don’t only go up. They can go down as quickly or quicker than they went up.
These are challenging times, physically, emotionally, and financially. The desire to make money is increased in times like these. Before you jump into any financial investment, make sure you understand what you’re doing and be able to afford the complete loss of your investment. If you experience financial difficulty, please contact us here, or call or text (801) 413-3708, or email email@example.com.