Real Estate Investing: An Overview Of Timing The Market
The streets (both Main and Wall, to abuse already tired metaphors) are filled with
murmurs of both caution and hope, when it comes to real estate markets nationwide reaching the bottom of their tumble and starting to turn upward. Have we seen the bottom? Is it yet to come, perhaps this winter?
Some schools of real estate investing thought contend that prices are low, making for a good time to buy. Others believe that the market may not have hit bottom yet, so they prefer to wait and see. What's the right answer?
The fact is, it doesn't matter whether the real estate market has reached the bottom, or whether it has a few more points to drop. To begin with, it's impossible to predict the market, and even more disturbingly, it's impossible to even gauge in real time where the market is now! All of the data used to determine market strength is delayed, sometimes by as much as a few months. What that means is that the bottom will have come and gone by the time anyone even knows it happened!
Trying to time the market (in an exact sense) is a fool's game. The entire point of timing the market is to buy low and sell high, which may sound elementary, but too many investors lose sight of this simple fact. You can buy low right now, if you are clever in your investing strategies, and you can sell high later, by passing your ownership expenses to someone else until you like the sellers' market better. Timing the market doesn't mean buying at the absolute nadir and selling at the absolute zenith of property values; it means buying low (which it's easier to do in a low market such as ours) and selling high (which it's easier to do when values are on the rise), which means timing the market in a much broader, more general sense.
Buying Low: A Few Thoughts
It's an unpleasant time to sell real estate, with prices substantially down from their peak a few years back. The lower prices lull some investors into a false sense of accomplishment, when they purchase a property for its current market value, and compare it to its market value in 2006. What real estate was worth in 2006 means absolutely nothing; what it's worth now is what matters, and what it will be worth in five years from now.
If you want to get a bargain, there are several common approaches to take. You can buy from a wholesaler (little work or expertise required, but you'll be paying only slightly less than retail), you can try to wholesale a deal yourself (finding a good deal directly from its source, before other wholesalers snatch it), or you can try to find a good retail deal.
Buying from a wholesaler is easy to do; you contact as many wholesalers as you can, and ask for copies of their inventory and pricing lists. If you don't know where to find wholesalers, they can be easily spotted by their "We Buy Houses" signs, and can be located through other investors, appraisers, and hard money lenders. A word of caution, however: wholesalers do not have your best interests at heart, and will squeeze as much purchase price as they can out of you. Negotiate hard, and be aggressive.
Wholesaling deals yourself is a lot harder, which is why wholesalers exist in the first place: not everyone can do it well. The trick to wholesaling is creating a network of bird dogs (people who call you when they stumble on a good deal) that's both diverse and extensive, and this kind of networking takes time and money. It's a complex and challenging approach, and outside the scope of this overview.
Finally, there's buying through a real estate agent, which can yield some excellent results, if you're willing to take more a shotgun approach to investing. The trick to finding good retail deals is to find desperate sellers, who are willing to sell for far less than market value. Desperate sellers can sometimes be found by filtering your search results for properties that have been on the market for a long time, or properties that have just hit the 3- or 6-month mark (the listing agent will view these marks as significant, and urge the seller to take a lower offer). Alternatively, you can simply make dozens of lowball offers, and occasionally a seller will dignify your offense with a counteroffer, indicating that they are so desperate they're willing to talk to you despite your offensively low offer. Talk to a competent, full-time real estate agent with a lot of investor experience, and establish a relationship with them if they know what they're doing (most don't).
Selling High: Rent Out to Wait Out the Market
Buying low is a lot easier in this market than selling high, which means that "timing the market" involves waiting until you like the sellers' market better. Let someone else pay your mortgage, pay your real estate taxes, pay your insurance... you can even make some money off of these properties every month, from your rental agreement. In the meantime, the real estate market bottoms out and slowly starts its upward climb again, appreciating in value even as your mortgage balance drops. Within a few years, you'll have some substantial equity, leaving you in the enviable position of choosing between consistent monthly cash flow or a hefty payout from selling. In the meantime, you can write off your rental expenses on your taxes, and enjoy collecting rental income.
The exact timing of the bottom doesn't matter. What matters is that it's a buyers' market now, and in a few years it will be a sellers' market. Don't get bogged down in trying to divine the exact bottom of the market; instead, spend your energy working to secure excellent deals on real estate investments, and sign a rental agreement to hold them tightly. When it's a sellers' market again, you'll be in a position to unload your investments for an excellent return.
by: Kevin Kiene
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