Here Comes the Real Estate Recovery…and a Seller’s Market

Posted by Robb Terranova under Real Estate Investing, Selling Real Estate | Read the First Comment

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”