Sept. 26, 2019
By: Baron Marsh, Realtor
This is the first of two articles discussing real estate investing during a seller’s market. Be sure to read the second installment after reading this post.
You can be more profitable in a hot market that’s appreciating regardless of the investment strategy that you’re using (buy and hold, flipping, buy to lease, etc.). You know the expression, “All ships rise with the tide”? Well, that’s the idea at work in a hot market. The downside is you will be competing with more investors who are able to beat you to the best deals, especially in the latter stages of a hot market when everyone is on the bandwagon. So when decent investments are hard to find you have to work smarter.
For the most part, the whole country is experiencing a seller’s market, and if you haven’t framed your strategies accordingly your business of real estate investing is about to experience a rapid decline, as will your income.
You may remember hearing investors complain about the housing market in ‘07 as the real estate market started in downturn leading up to the ‘08 crash. Well, we’re about to hear even more complaining as it gets even more difficult to find the investment gems we were able to find when the current market started heating up. If you haven’t been hit by the tightening of the seller’s market, strap in, it’s coming for you.
Now that you have decided to take on real estate investing. Maybe you own a couple of income properties or maybe you have just begun your journey as a real estate investor and are shopping around to make your first real estate investment. Wherever you are on the investor path, regardless of your experience, you have to study the national, regional, and local real estate markets before you make your next offer.
Before entering a transaction as a buyer or seller, you need to know if it’s currently a buyer or seller's market. Why might you need to know that?
Most importantly, there are different strategies to be used it you’re buying in a buyer’s market versus buying in a seller’s market. In order to get the most for your investment, you have to know which strategy will work best for you and your circumstances.
Don’t make the mistake so many other real estate investors make by not studying the national, regional, and local real estate markets.
So what are buyer and seller markets, and how do we define them?
A buyer’s market is one that favors the people who want to buy a piece of real estate. Even without being an economist you can see this occurs when there are more properties on the market than there are people willing to buy them. In a buyer’s market, buyers have a lot of options to choose from with little competition for other buyers. This is the perfect market for a first-time homebuyer or a real estate investor who is just starting out because the best properties are available to them at the lowest prices. These conditions allow a real estate investor to build their portfolio much more quickly.
- Characteristics of a buyer’s market:
- Six months or more of inventory available for sale
- Properties spending a lot of time on the market
- A greater number of properties on the market than in the past periods
- Current asking prices are below previous sales prices
- A lower percentage of closings overall
- Declining average home prices
- A flood of real estate advertising trying to entice buyers to buy
You can search the online portals to find current housing prices and inventories. As a buyer you can search for projected returns of potential investment properties very easily by looking at the sales price history of any property.
Or, make it even easier and build a relationship with a Realtor who you can put to work finding potential investment properties for you!
Characteristics of a seller’s market
Simply put, a seller’s market is the opposite of a buyer’s market. In this market, the conditions favor the seller. A seller’s market comes about when there are fewer properties available for sale than there are people who want to buy a place. Due to the buying pressure (the competition among buyers), buyers are willing to pay the full asking price or more to get the property they want. This is great for sellers since they can expect to have a quick sale at a greater than expected price.
- Characteristics of a buyer’s market:
- There are fewer properties available for sale than in past periods
- No more than three months of inventory available for sale
- Properties are on the market for less time
- Current asking prices above previous sales prices
- A higher percentage of closings overall
- Increasing average home prices
- Fewer and less impressive real estate advertisements
The buyer and seller’s markets are the extremes of the real estate market spectrum. So what’s in between? A neutral market.
Characteristics of a neutral market:
- The number of properties available for sale is the same average number as the past period
- Three to six months of available housing inventory
- Current asking prices are similar to previous sale prices
- Average housing prices are stable
- Properties are on the market for a “normal” amount of time
- Advertisements for real estate are comparatively mediocre
- The number of buyers and sellers is more or less equal and stable
Great, now what? What type of market is the country currently in? Generally speaking, it's difficult to make a claim about the national market due to all the local markets that can be experiencing any of the three market conditions that make the national average. But there are trends that are happening in the national market. And if you can figure out the relationship between the national market and your local market, all the better. So if you can, work out if your local market leads or follows the national trend, and by what time-frame (months, quarters, years).
Currently the national market is favoring sellers for these reasons
- Real estate inventory is low. The market has moved from a position of high supply to something that’s looking like a housing shortage. The overall housing inventory has declined more than 35% in the past four years. This is good news for current homeowners and investors because their properties are now in high demand.
- Real estate prices have been increasing. Since the bottom of 2008, real estate prices have been steadily increasing. Economist are predicting property prices will hit an all-time high equivalent to the peak of the housing bubble. Also, job growth has been strong with record employment levels and increasing wages. Taken together this means employed people can afford to have a mortgage on their new home.
- Mortgage rates are increasing. Increasing mortgage rates and improving employment opportunities will become a greater factor over time.
- A greater number of millennials are beginning to purchase houses. This is the largest generation so far in U.S. history and as they enter the housing market demand for real estate will increase. Additionally, it is still more financially prudent to own your own home rather than to rent, this increases demand as well.
If all of the data is making you think about selling you own income property, remember these are national averages. Your local market may be different, be sure to do a thorough market analysis before listing it.
Again, keep in mind that the national market is not uniform. Different areas will likely be experiencing different market conditions. Even within a state one city can be in a seller’s market while another is in a buyer’s market. That holds for individual cities too. One part of town can be in high demand and another not so much. Your local market analysis is crucial! This is something your Realtor can do quite easily for you since they have access to all the local market data.
- What does a real estate investor have to do to be in a strong position during a seller’s market?
- Improve your negotiating skills
- Increase your negotiating power by building your brand
- Streamline your bidding process
- Develop a real estate team with top lenders, a Realtor, and others so you’re in a position to move quickly when a deal presents itself
This was the first part of a two-part series. Read part 2 where we will cover 8 practical and tactical tips that will help you to strike good investment property deals.
We here at EP Realtors can help you with a variety of investment property types including our “managed investment properties”. Call us, and let's get started! (407) 704-8030.