Posted by Robb Terranova under Buying Real Estate | 
If you are buying real estate right now, there’s an argument to be made you are either rich, brave, or foolish.
Every time I evaluate a deal, there is a better chance I will do nothing at all than take action. Good deals are far fewer than bad ones, and I’ve made a lot of money in real estate NOT buying something.
With all of the low prices, distressed properties and desperate sellers out there right now, it is really tempting to start snapping up bargains.
But the wise move may still be to wait. If you are buying real estate right now, there’s an argument to be made you are either rich, brave, or foolish.
You’re rich: You’ve watched as real estate prices plummeted. Now signs of recovery mean it’s time to invest. If you have the spare capital, you stand to make a lot of money in this market of incredible opportunity. You can afford to gobble up the discounts and hold them for three years. It’s great to be you, and you are part of a fortunate and elite crowd.
You’re brave: You have both ends of the financing worked out, and you buy bargains to sell, for the most part, at small margins. Most likely you are forced to run a volume business. Do enough deals and you can still cash in on the current market conditions. But you are probably working yourself sick to make the same money that will take half the effort as the market improves.
You’re foolish: You know you can get bargains, so you buy them any way possible. But did you plan how you are going to get rid of them? If you’re trying to make a killing and price your resale high, your short-term financing may come due before you can resell. Quick sell it at a discount, and you may have so little margin by the time you unload you could wind up breaking even. If you get stuck holding, you still have to pay off your short-term lender. The unhappy possibilities are endless.
You could be wise. Even though there are juicy discounts out there, as the siren song of equity beckons, you could remind yourself about the resale profile of your deal in this market. It’s simple, really: don’t buy, and you don’t have to sell. You’ve waited all this time, maybe there’s wisdom in waiting just a little while longer.
Posted by Robb Terranova under Real Estate Investing |
The first Monday of the new month, at 6:00 PM, I got a phone call from my accountant. He had had a few drinks, and I had a little trouble understanding what he was saying.
How I Got the Deal:
My accountant knew I was a real estate investor and called me with a deal. He was trying to sell his personal residence. He had already tried to sell the house for a while, unsuccessfully.
He had title trouble. His partner had died with the house in her name, and they weren’t married. The house was in probate and there was an executor, and my accountant was going to inherit it, but that process wasn’t completed.
He had the right to sell the house, but he wanted to move out of state, and more than anything he wanted to put all of this behind him, hoping I could take care of everything.
He had run out of money, and couldn’t afford the payments on the first mortgage. I would need to make two back payments to keep the house out of default. He also mentioned at the time there was a small second mortgage.
After a walk-through, I told him the house needed minor cosmetic repairs and that meant I would need to front fix-up costs.
Once I did the comps, I felt there was reasonable equity in the house. I could put out a couple thousand, split the profits on the sale, maybe make $10-$15K each very little effort.
It was a small margin, but because the numbers worked, and also as a favor to him, we agreed that I would step in, complete the fix-up, find a buyer, and we would split any profit 50/50 at closing. We created a trust with each of us as partial beneficiaries, both for my protection and so I could manage the marketing and sale as the owner.
I then caught up the first figuring that bought us some time to get the house cleaned up. My accountant moved out of state.
The Fix-Up:
The house was relatively well kept because it was his personal residence, but it needed updating of kitchen fixtures and so forth, carpeting and paint.
I began repairing the house to get it ready for market.
The Snag:
About two weeks later, the first Monday of the new month, at 6:00 PM, I got a phone call from my accountant. He had had a few drinks, and I had a little trouble understanding what he was saying. He was asking me for advice, complaining about some pesky letters he keeps getting from some lawyer. Since they were jumbled in with all of the pre-foreclosure solicitations from investors, he had been ignoring them, but for some amazing reason he decided to call me that night.
I asked him to fax me the latest letter, and I was able to decipher that these were notices from the attorney for the lender on the second mortgage, and I realize they are talking about foreclosure. And in fact, the house was scheduled to go to the courthouse steps in less than 24 hours.
You would think an accountant who is trying to sell his house would be aware of a second mortgage default. My mistake was in making the assumption that this was business as usual. In the real world, he was a human being, steeped in sorrow, barely able to deal with the sale of his dead partner’s house, and his head was buried firmly in the sand.
Well, it was after business hours on Monday night, and this thing was toast. There was $38K and change owed on the second, and that was the opening bid. It had mushroomed from the “small second” we originally factored into the payoff to now include interest, penalties and attorney’s fees. Suddenly, this took a lot of margin out of the deal.
I told him the only way we could protect ourselves and get anything out of it was for one of us to go bid on the courthouse steps next day. Since he was cash poor and out of state, he was not an option. I told him that I would do it.
The Retrieval:
I felt that there was a very good chance that I would be the only person bidding on this house. Because of the small margin, it was not attractive to investors. There was always a chance some idiot may miscalculate things and start bidding the house up, but it was remote.
At the open of business the next day, I was at the lawyer’s office trying to cure the default before it ever went up for bid. They said too late.
I went to the bank and drew out a cashier’s check for $40K.
At the courthouse, I waited for the property to come up in queue. There are always a couple of people gathered around just listening, but you never know if they are there to bid against you or just curious onlookers. The foreclosure attorney came out, and opened the bid. I met the opening bid, and nobody else bid against me, but I remember a couple of bystanders looking puzzled as they watched me bid on what they saw as a lousy deal.
Sold. I now had control of the property.
The Outcome:
All at once this deal took an unexpected turn for the better. By winning the bid on the house, the title had transferred solely to me. I was now in control of the first, and the second.
Before foreclosure, my accountant was in the driver’s seat. I was not in a position of leverage, relying on our trust agreement and longstanding friendship to make sure I got my share of the deal.
This change of events rendered our trust document void. The trust no longer owned the property, my accountant no longer owned the property, I did.
It was an interesting position. Now that the title was fully in my name and my accountant had no legal interest in the property whatsoever, our longstanding friendship was the only thing supporting whatever equity share he could collect.
Was I going to stiff him? Absolutely no way. But I did feel, and I knew he would agree, the sheer act of fronting the $40K on short notice meant strong justification for full share on my part, and that any added costs of foreclosure would be on his side.
I also had a couple of other new advantages. I no longer had to work with him on pricing the property or accepting an offer. I was free to market the property the way I wanted to. I could execute all the paperwork, never having to involve my accountant at all. From the nightmare it seemed like the day before, it had turned into a happy accident. I was now where I always prefer to be in a deal, in control with no partner.
Now confident that I would realize what I expected out of the deal, I went back and finished repairing the house.
I advertised the house for sale, and shortly after that, I had it under contract with a good buyer who was pre-qualified for $5K less than I was asking. After closing, I collected all that I was expecting out of the deal, and sent the remainder to my accountant.
The Conclusion:
You can never make an assumption, even if you’re dealing with the President of the United States or your brother. This deal seemed pretty straightforward, and I was comfortable with the risk, especially since the person I was working with was not only a friend of mine who wouldn’t intentionally rip me off, but also an accountant whose very business relies on management of financial details. I never dreamed he would let the ball drop on his own house with which he was presumably most familiar. I admit I underestimated his emotional state.
At one point there was a chance I would never see any profit, and even get hung out to dry for what I had in it. It didn’t turn out that way thanks to some fancy footwork, in fact quite the reverse. Nevertheless, lesson learned on the people side of real estate investing.
Posted by Robb Terranova under Entrepreneurs Only, Internet Marketing |
Ad hoc web skills only get you so far. You are losing money by not getting basic internet marketing training.
You may think you’re getting away with it. You’ve built a free web site, even monetized it with Adsense. You know how to blog, advertise on Craigslist, post deals on a forum.
But you are losing money by not getting basic internet marketing training.
Ad hoc web skills only get you so far. Internet marketing training can quickly give you the more powerful foundation you need to control the internet marketplace.
There are two different types of real estate investors – those who are internet savvy and those who are not.
If you acknowledge the critical importance of the internet, you owe it to yourself to take a step back and get basic internet marketing training. You can then take full advantage of the networking and marketing opportunities the booming internet has to offer.
Internet marketing training will enhance your real estate investing business, but if you explore further you might discover a way to make money you never even knew existed.
Internet marketing is business in and of itself, a massive and rapidly expanding industry with an unlimited ceiling that can also help you reach your entrepreneurial goals.
Understanding internet marketing means knowing how to drive traffic to your web site, run paid advertising campaigns, develop mailing lists, and profit from articles, forums and social networking sites. You can even learn how to market your own e-books and information products.
A great way to get started is through Wealthy Affiliate University which is the #1 training resource on the web. It has all of the tools, courses and support channels you need to become successful and profitable online.
At the very least, you should get the basic internet marketing training you need to fully capitalize on the internet for your real estate investing business.
And, since you can never have too much money, you may also find that internet marketing is a profitable business you want to develop all on its own.
Posted by Robb Terranova under Renovation/Building |
You would think that hungry contractors would always charge less. Sometimes it doesn’t work that way.
You would think that hungry contractors would always charge less. But lately I have been getting sticker shock on invoices from contractors I have known for years who always give me builder’s rates.
Your logic keeps saying that in the market slowdown your contractor would charge you your same old rates, or maybe better, to keep you calling him first. He obviously doesn’t want to drive you away, especially if you’re one of the few builders offering him work during the slump. Sometimes it doesn’t work that way for some reason.
It seems like exactly the opposite of what should be happening. If they have fewer jobs, they obviously need money more. Exactly. Maybe the longer they sit around thinking about that truck payment they need to make, the more they try and maximize cash flow every time the phone rings.
What you can’t see is how the dead air is affecting them between your phone calls. With less coming in, your contractor may be in kind of a panic, and when he gets your call, he might have a lot of ground to make up. Bingo, you get the platinum plated price.
This will only work in the contractor’s favor for the first job. Then he will start to get the reverse of what he’s looking for. You will have a tendency to look for new contractors who are also hungry, but who are in a position of courting you as a new customer. In contrast, the old contractor will be spending his longstanding goodwill by breaching your trust, charging you that price you didn’t expect.
When I get a high bill from one of my old guard, the first thing I do is call him on it. “Wow, Joe – that much for that job? OK.” Then I pay it. Then I start calling around.
If Joe doesn’t hear me call for a while after that, he’ll start to get the message. Meanwhile, on the next job I try to get a good rate from somebody new.
Hungry new contractors don’t always give good rates either. They have nothing invested in you, and not every one is looking for repeat business. Some treat you as a one shot deal.
But I’m always looking for that second and third contractor so I can get multiple bids on jobs that come up, and to call in case my regular guy isn’t available. It never hurts to have a few more contractors on your call list.
At some point, I’ll call my regular contractor back and ask for a bid on a job. By then, the price is usually back to normal, and he’s got my business again.
Posted by Robb Terranova under Property Management |
Often, your tenant is a good guy who actually feels bad about not paying you. You might try putting the tenant into "rehab."
Your tenant is late with the rent. Call him on the phone and you’re suddenly immersed in a soap opera script.
His sister is critically ill and he’s somehow responsible for her medical bills, he just got in a car accident and missed a lot of work, but he’ll get caught up as soon as he gets better.
The economy is bad and unemployment is through the roof, so your tenant lost his job again, but it was really because he didn’t like his boss who made him do ugly things, like…uh… work, and besides he just plain got sick of it so he quit.
He’s going to pay you though – the end of next week.
Don’t worry you’re in good company – the tenant owes the electric company, the gas company, the water department, he hasn’t made his car payment, and owes on his cell phone bill.
The tenant is at the bottom of his financial cycle, the part where he’s losing ground. He hates his life lately, life should be more fun, so those bills are not his priorities. More important than those, he needs beer and cigarettes, and ultimately he has to buy that new TV, then go to Vegas so he can solve all his problems by winning a bunch of cash.
You can kick him out, or maybe he can be salvaged. Remember, turnover is expensive too. You might try putting the tenant into “rehab.”
Once a tenant gets behind in the rent, you can become his “rehab doctor” helping him through this period of bad “habit.” He’s “using” (his creditors), actually working harder at dodging his bills than just getting a new job and paying them. You need to do him and yourself a favor and help him kick the “stuff.”
Most often, beneath it all your tenant is a good guy who actually feels bad about not paying you, especially if you’ve been really fair with him throughout your relationship.
He knows he’s being a jerk, and he doesn’t like that feeling. That’s the real reason why he doesn’t want to talk to you, and won’t return your calls. Believe it or not, this is your point of leverage.
To get him “on the wagon” you have to first get communication restarted. Make sure he knows you just want to talk to him and find out what’s going on. Be sure not to sound angry or threatening. Call him, e-mail him, and finally go to his house. Once you’ve contacted him, you have some smooth talking to do.
Assure your tenant you can develop a payment plan for him to get caught up on past rent. When a tenant is behind, he’ll start to worry he’ll never get caught up and begin to feel hopeless. Make sure he knows it’s OK with you if, for example, he adds a small amount to monthly rent until it is repaid, propose it and get agreement.
Now he feels a little better – this is the start of getting “clean.”
Next, it’s critical that he get no further behind because then he’ll feel so bad he has to run away from home entirely (i.e. go get another apartment). Get him to acknowledge that he has to make his next regular payment, and make him promise to do it on the due date.
You should then give him a chance to follow through on his promise so he feels empowered and in control of his life again, on the good path. A word of caution – if you get tempted to call him beforehand, you’ll run the risk of developing a pattern of becoming his “mother,” nagging him into paying his rent each month.
If he does NOT make his payment on time as promised, call him within the next business day or two and ask him if he DID (you know he didn’t, but you don’t want to corner him). You need to hear something like, “I’m doing it today.”
If necessary, call daily until he does, and with all this daily contact he usually will. He doesn’t want personal attention from you, believe me.
Congratulations, your tenant is “sober.” Now he just has to stay that way.
Next month, if he doesn’t make his payment on time, repeat the follow-up procedure above. If you manage all of this with patience and finesse, at some point he’ll get back in the habit of paying you rather than in the habit of not paying you.
Posted by Robb Terranova under Entrepreneurs Only |
There’s no substitute for the ability to handle a negotiation on the fly.
I like the hands-on investing of real estate and internet marketing because my success really depends on me. The more removed I am from the action, the more uncomfortable I get.
When other people are controlling the level of effort and the results, I’m never sure about the outcome. I know what I produce, and I can always count on myself.
As much as the gurus would like to tell you that there are formulas for successful real estate investing and internet marketing that you can follow like a mindless drone, I have never found it to be the case. The real world of investing is a little bit of training and a lot of instinct.
That’s what I call “gut investing” where you are listening to the smartest part of yourself – the part that knows when a deal is hot, when a seller is ready to sell, when a buyer is ready to buy. Everyone has this instinct, we just have to realize its importance and hone it.
Go to a lot of seminars, read a lot of books, and before you know it you’re over thinking everything.
How do you research a hot keyword? You think like the interested buyer. Is the buyer following a formula, have they taken a million seminars? No, they’re just typing in the first thing, the most human thing that comes into their head. If you lose the ability to tune into this wavelength, you’ve lost the ability to connect with your source of income.
There’s a time for designing strategy, and there’s a time to think on your feet. You can lay out all the plans in gruesome detail, but when you’re face to face with a prospect, there’s no substitute for the ability to handle a negotiation on the fly.
Gut investing doesn’t mean getting carried away with emotion, quite the opposite. You’re not going to fantasize your way to riches, because fantasies don’t work at the street level. Your gut does. The point of contact is the gut’s domain.
I will never sell you a fantasy. I don’t believe in capitalizing on people’s unrealistic delusions about what it takes to make money in investing. I promise you will get tough talk about the ground level, the place where real money is made, and I’ll arm you with some bubble bursting truths so you can avoid ugly surprises that will cost you a ton of money and heartache.
Gut investing is the right approach to the volatile world of hands-on investing, because when you’re in the middle of a deal and the curve balls seem to be coming from a runaway pitching machine, the generic scenarios you read about in those guru programs are nowhere to be found.
You can find tremendous insight into gut investing in my book “The People Side of Real Estate Investing”.
I use deals from my own investing career to demonstrate how to integrate gut investing into real world deal making, and provide line-by-line dialogues for successfully handling common real estate investing scenarios.
Even if you think your instincts are terrible, by the time you finish reading this book you will have a significantly better understanding of how to listen to the smartest part of yourself and capitalize on it for bigger real estate profits.
Posted by Robb Terranova under Entrepreneurs Only |
Nobody is going to make you listen to good ideas or do the smart thing. You have to be the type. Are you the RPI type?
The Real People Investing member can see through hype, knows no one becomes a millionaire in three days without any hard work.
We know it takes guts, tenacity and a love of the chase to get where we want to go. We are a tough breed, bold and fearless but evolved.
Our fortunes are creatively designed and managed, our strategies self-driven and engaged. We are hot for action, but we are grounded.
We are questioners, instigators, renegades within a renegade industry in pursuit of survival first because we know it’s the true path to success.
Some of our members are people whose first thought about investing came when they read this article.
Some of us are rapidly up and coming, a few victorious deals under the belt, who want more, better, faster.
Seasoned veterans come here to hear echoes of the reality they’ve lived through, and glean some nuggets from an experienced peer.
- If you are always looking for a hot opportunity, but are skeptical of everything, you might be the RPI type.
- If you can’t stand to work for someone else, you might be the RPI type.
- If you are willing to listen to a new idea, have enough confidence in your own judgment to decide it might work, and then actually try it, you might be the RPI type.
- If you need entrepreneurial action in your life, you might be the RPI type.
- If you want what you do for a living to be a challenge with unlimited reward, you might be the RPI type.
Nobody is going to make you listen to good ideas or do the smart thing. You have to be the type. Are you the RPI type?
Join Real People Investing today to receive premium benefits exclusive to our members.
Posted by Robb Terranova under Entrepreneurs Only, Internet Marketing |
In this market, hungry real estate entrepreneurs can get income streams from diverse sources.
I love spotting a real estate deal, analyzing what it needs to be profitable, developing a plan and executing it with determination and creativity. It ’s what gets my motor running.
But the current housing market has taken some steam out of my engine. Real estate investing is yielding less lucrative deals in the short term, at least.
I am an entrepreneur first and a real estate professional second, so I continue to search my environment for opportunities that make investment sense.
I spent some time reading about internet marketing and affiliate sales, and I started to see how to leverage the core investor inside me in a new way.
Internet marketing exercises the same investment skills as traditional real estate does without anywhere near the level of risk and exposure from owning real property.
It’s just a fact that running 10 PPC (pay per click) campaigns will cost a lot less money and require less time and management than 10 rental properties, yet the positive cash flow can easily be higher than what rental income would produce.
That’s particularly true in these times where rentals are more competitive, rent is harder to collect due to increasing unemployment, and appreciation on your investment is delayed until the recovery.
Of course the physical nature of real estate is not part of the process but the entrepreneurial results are. Frankly, its a nice change to work with an investment that requires very little cash out of pocket and no long-term commitment in order to generate a monthly income stream with the same unlimited growth potential.
After looking more closely at what attracts me to real estate investing, it became apparent how many similar skills are used to build an income stream from internet marketing.
A simple summary of the internet marketing process looks like this:
- Analyze products or offers to identify ones with strong niche appeal and research their search and competition ratios.
- Develop a promotional campaign based on effective keywords that show good search results.
- After one or two weeks of general promotion and analysis, optimize the best keywords for promoting the product and converting sales.
- Scale the campaign to it’s best performance level. At that point, I’m free to start another campaign.
Some of the details of the process may sound a bit esoteric and unfamiliar, but so did real estate when we first got started. Like me, you probably became active with your local REIA group and got a lot of education in a short time.
Internet marketing has something similar called Wealthy Affiliate University which is the #1 training resource on the web. I’m logged in every day, all day long. It has all of the tools, resources and support channels you need to become successful and profitable online.
I love real estate investing and I can’t wait for things to get back on track. But I also believe the good times are a little way off, and I just don’t have the patience to sit around and wait.
I get great satisfaction building income streams from diverse sources. Internet marketing is exciting, affordable and profitable. It is also a particularly good fit for real estate entrepreneurs looking for more cash generating opportunities.
Posted by Robb Terranova under Real Estate Investing, Selling Real Estate |
Deals in seller's and buyer's markets merely have different profiles, which makes this is a good time for a pro’s and con’s refresher.
The real estate recovery will soon be on the way, but it’s been so long you may have forgotten the down side of a seller’s market. The best time to remember is before it gets here again so you can capitalize on the sweet spot in the cycle.
Deals in seller’s and buyer’s markets merely have different profiles, and in the midst of either, one looks wistfully over at the green grass of the other.
Which makes this is a good time for a pro’s and con’s refresher.
SELLER’S MARKETS:
In a seller’s market, it’s easy to remember the pro’s. Seller’s markets seem like summer days, easy to take and what investor would mind if they never ended? But few remember the down side of the seller’s market so I’ll re-enlighten everyone.
SELLER’S MARKET PRO’S:
- Property prices are appreciating:
- Ah, the beautiful sound of money growing while you’re just standing around. When buying investments right, I have had property double in value in a couple of years. And I have sold them at those prices. Nothing gets you more addicted to real estate investing than this phenomenal experience.
- Money is plentiful for both fix-up and refi:
- When property is appreciating, banks and alternative lenders are usually more comfortable with collateralized loans. It should be noted that while the financial picture has changed a bit since the sub-prime crisis, lenders still must lend to make money, so terms should ease again at some point, especially if property begins appreciating again.
- Days on market are few, quick turnaround, lower carrying costs:
- Quick turnaround is a critical profit factor in real estate deals. The fact that time is money really becomes personal when holding a flip that you want off the books as fast as possible. In a seller’s market, the climate is good for quick turnaround and you can get your capital out and working on a new deal fast.
- FSBO is viable, saves on real estate commissions:
- I had just bought a house in a northern suburb, and as I was standing on the front lawn taking “before” pictures, a guy pulled up in a pickup truck and said he was interested in buying the house. I never touched the property, never made a mortgage payment, and sold it to him a couple of weeks later for a respectable wholesale profit. I love those falling off a log FSBO days!
- Fix-up is minimal, lower renovation costs:
- Speaking of critical profit factors, fix-up costs can kill deal margins quicker than a New England spring. We all do nice renovations and want buyers to have nice houses, but palaces? Maybe not at the bread and butter deal level. The fewer extras, like Jacuzzi tubs and wet bars, the less deluxe the finishes like imported Italian stone and Koa wood, the more money in your pocket at the end of the deal.
- Demand outstrips supply, fewer closing concessions:
- Will you do me a favor? Will you pay my attorney’s fee? In a seller’s market, buyers wouldn’t dare ask you to pay closing costs. In fact, they might even come out of pocket for some of your expenses.
SELLER’S MARKET CON’S:
- Acquisition costs are higher for fixer-uppers, just like everything else:
- Sellers of unfixed properties next door to three renovations want fully renovated retail for their leaky roofed, termite munched, cockroach riddled wrecks, and the trouble is there are several investors who will pay it.
- Easy to flip, but temptation to hold investment increases because of price jumps:
- The investor base increasingly holds property which tightens the rental market, which lowers rents to the point you can’t cover the first on your fix-up if you bought it too high. You then have to count on appreciation to make up the difference, which is paper wealth if you don’t divest the property. You’re still in a negative cash flow situation on a monthly basis.
- Competition is stiff among investors, deals are harder to find:
- During the seller’s market it’s hard to find deals. Everyone’s odd uncle is a real estate investor. I’ll never forget walking into a convenience store and overhearing a neighborhood transient sitting on a stack of newspapers in a corner exclaiming, “I’m gonna buy me a house and fix it up and flip it!” even though they didn’t have enough money to buy one of the newspapers they were sitting on.
CONCLUSION:
The market is in constant flux, and there are better and worse phases in the market cycle to make money. The end of a buyer’s market and the beginning of a seller’s market are probably the best for investors, so keep your eye on the horizon.
Read the companion to this article, a refresher on buyer’s market pro’s and cons: “Bad Real Estate Market? Whatever. The Deals Are Out There”
Posted by Robb Terranova under Buying Real Estate, Real Estate Investing |
Deals in buyer’s and seller's markets merely have different profiles, which makes this is a good time for a pro’s and con’s refresher.
Are there real estate investment deals out there right now? Surprisingly, no matter how bad market conditions seem, the answer is always, “Yes!”
Deals in buyer’s and seller’s markets merely have different profiles, and in the midst of either, one looks wistfully over at the green grass of the other.
Which makes this a good time for a pro’s and con’s refresher.
BUYER’S MARKETS:
In a buyer’s market it’s easy to remember the con’s. Buyer’s markets seem like winter days, painful and what investor can’t wait for them to end? But, buyer’s markets have an up side, which once again bears repeating.
BUYER’S MARKET CON’S:
- Property prices are falling:
- Wow. Nothing highlights paper wealth like depreciating property. It will make you feel like the holder of a mattress full of Confederate currency when you go to sell your assets in a buyer’s market. The best thing to do is hang in there until the seller’s market returns, but what does “hanging in there” actually entail? Translated, it means finding the money required for holding power. This grim waiting game can be a real test of nerves and can exercise your ingenuity. Will the bottom ever arrive? It doesn’t seem like it!
- Money is tight for both fix-up and refi:
- What lender wants to back a loan with collateral that’s losing value? No such entity exists. Its harder to borrow money in a normal down cycle, to say nothing of the impact of sub-prime complications in today’s market. In a buyer’s market it’s also harder to divest assets to raise your own capital. Unless you have a rainy day fund (or a partner with one) to continue doing business, you have to hold tight. Pinochle anyone?
- Days on market are long, slow turnaround, higher carrying costs:
- One of our properties was on the market for a year, but nobody balked at our DOM because it was becoming the norm. OK, hooray, my property’s not stigmatized, but it’s also not selling! In this case the property was free and clear (except for property taxes and insurance), but it was still lost income from the capital I could be using for other deals. In most cases, properties have financing that needs to be serviced, which makes you feel like you’re sitting in a traffic jam in the world’s most expensive taxi cab with the meter running.
- FSBO becomes less viable, which means real estate commissions:
- A good real estate agent can pay for their commission if they are highly skilled. A real professional agent can provide advertising far and wide, word of mouth promotion, open houses and other sales techniques that you may not be as practiced in as an investor. Nevertheless, if you can cut out the middleman and sell your property direct to the consumer, that’s another critical profit factor in your favor. Real estate agents almost become a necessity in a buyer’s market because competition is so stiff you need all the traffic you can get.
- Properties must be fixed to the max, higher renovation costs and longer renovation times:
- Nothing can be wrong with the property. Nothing. We had a house for sale, immaculate on the inside, but the yard was average and not professionally landscaped. We discovered that this curb appeal issue had become a major stumbling block in the buyer’s market, and buyers wouldn’t even go inside to see our granite countertops, all new stainless steel appliances, master bath with vaulted ceilings, etc. You know what? It’s really expensive to fix everything to perfection.
- Supply outstrips demand, more concessions to get a sales contract and close:
- There are lots of horror stories out there about seller concessions in a buyer’s market. At the worst point in the market, we had a buyer ask us to come down 5% on our already reduced asking price, pay not only his closing costs but his down payment, and then allow for inspection and repairs on the property. We decided to rent the property instead.
BUYER’S MARKET PRO’S:
- Acquisition costs are lower for fixer-uppers, just like everything else:
- Desperate sellers mean lower prices. This is obviously good for acquiring bargains, discounts, and steals.
- Hard to flip, but easy to justify holding for much higher prices later on:
- Even if property is hard to sell, if you can buy it low enough and hold onto it, this is exactly where real estate wealth really comes from. Flipping fast is fine, but holding longer usually means greater profits from appreciation. You just have to remember to sell in order to get those profits, which turns it into a really long, slow flip. You can even save on taxes with long term capital gains.
- Competition is low among investors, deals are plentiful:
- The harder it is to do business, the more the investor field is winnowed out. This means, if you’re still doing business you’re in elite company, and you can take advantage of the open field. Buyers are few and property availability is high, which means you can get your hands on some nice stuff for cheap.
CONCLUSION:
The market is in constant flux, and there are better and worse phases in the market cycle to make money. The end of a buyer’s market and the beginning of a seller’s market are probably the best for investors, so keep your eye on the horizon.
Read the companion to this article, a refresher on seller’s market pro’s and cons: “Here Comes the Real Estate Recovery…and a Seller’s Market”
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