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”

Taking a minute to understand the people side of real estate investing may help you to quickly become more profitable.

Ask yourself a question: why am I in real estate investing? Answer, to make money. But how is money really made? Can you force your way into deals just because you want to do them?

Taking a minute to understand the people side of real estate investing may help you to quickly become more profitable.

Start by taking a look at yourself. It is possible you have a tendency to think real estate investing is a business, that everyone involved should act logically, and you should be able diagram your profits like a scientist calculating the geologic age of a rock.

The house is worth X, so I should be able to buy it at Y because the seller should agree that a cash sale is worth the discount.

Then I hire several contractors who all, like synchronized swimmers, coordinate the completion of their tasks and finish my house in 3 weeks with no holding costs.

Everyone wants to live in my neighborhood, so I’ll discount the house 1% under market for a quick sale, voila! I’ve made Z dollars, and I’m off to the next deal.

Go ahead and try it this way, everybody does at some point. When nobody listens to you, then you might realize, oops, you forgot to calculate in the people factor.

Every step of the way, the people involved have their own motives, some emotional and NOT financial, and you will make more money figuring out what those are than trying to insist everyone understand yours.

The key to the people side of real estate investing means standing in the other person’s shoes while maintaining a grip on your ultimate objective. Remember, you’re not going to fool anyone, you actually have to understand their perspective, not just pretend like you care.

First, what’s your house worth? It depends not totally on comps, but who is willing to buy it. Who is willing to buy it depends on what people LOVE about the house. They may love the neighborhood, or they may love the schools, or they may love the patio in the back yard.

So it becomes financially important to you what the buyer LOVES about your house. You can research and emphasize these emotional triggers in your advertising, then customize them to the particular buyer in your face to face pitches to sell the house more quickly for a better price.

Second, what’s a seller willing to take? They may think the house is worth twice what they paid for it because they always wanted to sell it for that, or their neighbor’s house for sale is worth that so they should be able to get that too. What the seller will take depends on what they FEEL it is worth.

So it becomes financially important to you how the seller FEELS about the house’s worth. Interviewing a seller with careful listening skills, you can gather a literal wealth of information. You can skillfully address these points in your negotiations to get closer to what you want to pay for the house.

Third, contractors are very independent, not only from each other but from you. They usually have several irons in

the fire at once and cycle in your job based on their priorities, not yours. Coordinating contractors depends on diplomatic handling of their NEEDS interacting with yours.

So it becomes financially important to you what your contractor’s NEEDS are. Sizing up a contractor’s profile in early meetings can help you find those you can work well with and avoid hiring those that you will have trouble with later, which will save during renovation and ultimately make you more money when you sell.

You can find tremendous insight into the people side of real estate investing in my book “The People Side of Real Estate Investing”.

I use deals from my own investing career to demonstrate how to integrate the people side into real world deal making, and provide line-by-line dialogues for successfully handling common real estate investing scenarios.

Even if you think your people skills are terrible, by the time you finish reading this book you will have a significantly better understanding of people’s motives and how to capitalize on them for bigger real estate profits.

If you imagine it realistically for a moment, your heirs have immediate financial needs that will likely take precedence over long term investment.

The choir is singing, your beloved family and dear friends are all gathered ‘round, huge cascades of blossoms draping your gleaming, er, final container… Yes, this is how you picture it as you vigilantly prepare your real estate legacy for the next generation to inherit.

Cut to the next scene – the dour executor of your estate, appropriately Dickensian in his starched collar, takes measured pains to manage your assets with the highest professional skill. His centuries old and reputable firm at some point generations from now will ultimately yield top dollar from these long cherished and nurtured fruits of your real estate investing career.

Cue the scratching record sound effect. Hey wake up! You are not living in a financial services commercial! The dourest person in the scene is you because you’re, uh, well not in the best shape.

With few exceptions, everyone else is probably a complex jumble of emotional sorrow at your loss combined with relative apathy toward your life’s work. Try this shocking test – if they didn’t pay much attention to it while you were alive, chances are they’ll be even less interested when you’re dead.

Once everyone is done the worst part of grieving, they will eventually turn their focus to cashing in your bountiful gift to their future, but in most cases not on the timeline or with the dexterity you envision.

Their watchword will in all likelihood be not “care” but “dispatch” because unless you trained a successor carefully, I’m sorry to be the one to inform you that they don’t have the time, the expertise, or the inclination to do it right.

Your heirs are probably a lot younger, crazy busy with their lives, their jobs, their children. They may not yet be preoccupied with financial security and retirement and all other those other wise lessons you learned later in life.

Which means their plans for your goodies probably have more to do with living in the present day than earning for tomorrow.  If you imagine it realistically for a moment, your heirs have immediate financial needs that will likely take precedence over long term investment.

Almost nobody wants to manage property they didn’t kill themselves to acquire and cultivate, especially if it involves unplugging, ugh, toilets and collecting rents. Sure they could hire somebody to do all that, but that concept requires a second level of thought about the whole thing that nobody is working on.

They could faintly realize somewhere in the back of their brains that these things may be worth more some day, but right now they have credit card bills, car payments, college tuitions, durable goods to buy, and that bigger house they’ve been wanting (hey – at least it’s a real estate investment!)

Here’s how they’ll do it. (Caution – may be too difficult for some readers!) They need to sell a dead relative’s property, which is unsavory in and of itself, so their haste may even be accelerated.

They will likely hire the first real estate agent they come across, someone with a sign in their neighborhood or someone their co-worker recommended.

Because the agent was chosen randomly, and not qualified as a particularly high performer, odds are the agent will be average. They will list ALL the properties with this one agent, even though the agent may be unfamiliar with the neighborhoods the assets are located in.

The agent probably touted the high end of retail for a sales price when they got the listings to sink the hook, so the properties are probably overpriced.

The minimally attended listings will then sit on the market for 30 days, during which the beneficiaries have been fantasizing about paying their bills, their wide screen TV, cruise vacation, etc.

At the 30 day mark, they will become impatient, and demand action from the agent. The agent will then suggest a slash in price to move the assets quickly. Good idea – they’re sick of thinking about it, sick of waiting, it’s all free money anyway, let’s price to sell!

Voila, contracts materialize one after the other and the spoils are divided. Your lifetime of investing, all your hard work is gone in a flurry of paperwork. A year or so later, your legacy is spent, and in all honesty, probably all but forgotten.

This doesn’t have to happen to you. If you have the ability to envision a real world outcome ahead of time, there are a couple of ways to avoid it.

If you’re lucky enough to have a worthy candidate, teach someone you love to manage your assets to their fullest potential after you’re gone.  If not, maybe the best thing to do is to divest the assets yourself on their behalf before you can’t. Don’t let your fantasies of future value cloud your judgment, because it may never be realized. 

Consider using your expertise to get the best value out of the assets today, and it will probably be far more than the anemic results of your non-professional heirs.  You can then tuck the money into a less hands-on investment vehicle for your heirs that they are more likely to let sit and grow.

Bottom line is, in your mind right now everything will be done the way you dream, but a realistic look at human behavior says it might be closer to your nightmare.  An early sober look and smart planning could give your dream the fighting chance it deserves, and everyone will benefit.