Investing in a Changing Market
by Bill Bronchick
I get a lot of questions from people asking, “Will real estate investing work in
my market?” The truth is, real estate investing works in every market, but you
need to learn your market and adapt the techniques that it requires.
There are many ways to describe real estate markets, including “hot” versus
“flat” or “rising” versus “falling” or “buyer’s” versus “seller’s.” All real
estate markets are subject to fluctuations, but these fluctuations typically do
not greatly influence the ability for the informed investor to make a profit. In
fact, some strategies, such as flipping, can be the least risky way for a
beginning investor to make a profit in an uncertain market simply because of the
relatively short amount of time the flipper will own the property. Unlike the
stock and commodities markets, real estate markets don’t rise and fall rapidly.
For long-term investing, additional market factors are important to your buying
decision. Investors who plan for short-term real estate market appreciation are
speculating, which is outside of the basic model of low-risk investing.
What Is the Ideal Market for Investing?
Let’s be clear: there is no such thing as an ideal real estate market for
investing. It tends to be more difficult to find bargains in rising markets,
however, because if the market keeps rising, the probability of selling the
property quickly for a large profit increases. In contrast, when property values
are falling, more so-called bargains become available. Yet you need to assess
the true value of these properties based on when you expect to sell the
property. Thus, your purchase must be made at a steep discount to allow for a
profitable sale later.
Basic Strategies to Limit Risk
Some basic strategies can be used successfully in virtually all market
conditions. Become educated in your local market first by understanding the
large-scale trends—from global down to national, regional, and specific
neighborhoods. Learn about target neighborhoods, enlisting the aid of successful
real estate professionals along the way. These professionals will help interpret
market indicators, such as the average length of time houses are sitting on the
market this month versus last month or last year. Armed with this type of
information, you will be able to make good decisions.
Inventory Trends
Inventory, defined as the number of properties offered for sale, is a good
indicator of current market trends. If inventory is low because of building
restrictions or geography, then high demand will lead to rising prices. In
rising markets, sellers often capitalize on the excitement of new listings to
get properties under contract quickly, at premium asking prices.
There are also seasonal fluctuations in inventory, such as fewer listed
properties in the winter months than in summer and a surge of listings in the
spring. Some areas, such as resort destinations, follow seasonal trends.
Generally, seasonal drops in inventory reflect the trend to market properties
more aggressively in spring and summer months when real estate markets are more
active. Properties sell year-round, though investors should plan to reduce the
price for winter listings or at least know that properties take longer to sell
during those months.
Falling Markets
While most markets have risen over the last five years, some are flattening out,
and some may have already dropped. This type of market offers great opportunity
to the savvy investor. When property values are falling, inventory often rises,
and many sellers become highly motivated when their properties fail to sell
quickly. Motivated sellers will do whatever it takes to sell their property.
Whether sellers need to move from the area, are struggling financially, or have
other pressing reasons to sell, they may well accept a below-market offer.
Investors know that a weak market can offer extraordinary deals, though flippers
need to proceed with caution. In a falling market, even a few months’ delay can
turn a sound deal into a headache. It always pays to know the market and
purchase the property at a price low enough to net an eventual profit, even if
the market continues to fall. The common myth is that you cannot make money by
in a bad real estate market. In a bad real estate market, you can often buy
“junker” properties for 50 cents on the dollar and sell them for 60 cents. It’s
all in how you do the math.
It is also worth noting that markets can and will change. If the market rebounds
after a purchase, then all is well for the investor. However, if the market
takes a downturn after a purchase, there can be trouble ahead. Markets commonly
show signs of slowing or turning over several months. Sometimes the early signs
come from national economic trends, such as rapidly rising interest rates or
sweeping changes in tax policies that affect homeownership or investment (e.g.,
the rapid change in depreciation rules for real estate investors in the late
1980s). More likely, clues come from local market conditions, such as
unemployment, oversupply, or a change in demand because of living conditions.
Exit Strategies
More important than guessing the future of a local market, you need to have a
clear plan in mind when purchasing property. A smart investor knows exactly how
he will exit the property before he buys. An even smarter investor will have a
backup plan or two, in case the first course of action doesn't work. In short,
know your market and your plan before you begin to invest.
Bio:
William Bronchick, CEO of Legalwiz Publications, is a Nationally-known attorney,
author, entrepreneur and speaker. Mr. Bronchick has been practicing law and real
estate since 1990, having been involved in over 600 transactions. He has
appeared as a guest on numerous radio and television talk shows including CNBC
Power Lunch. He has been featured in Who's Who in American Business, Money
Magazine, the Los Angeles Times and the Denver Business Journal. William
Bronchick has served as President of the Colorado Association of Real Estate
Investors since 1996.