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.

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”