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SHOW NOTES FOR EPISODE 238: REAL ESTATE INVESTING IN A SELLER’S MARKET
Whether you’re a flipper or long term real estate investor, you’ll be more profitable in Hot, appreciating markets. The downside is that you’ll have more investors beating you to the punch. That’s why deals are harder to find, especially in late-stage hot markets. In this podcast episode, Bill shares strategic tips for effectively investing in a seller’s market.
When decent acquisitions are tough to find, you need to work smarter.
A seller’s market is sweeping the country and, if you aren’t prepared for it, your real estate investing business may be about to come to a sudden halt — along with your cash flow.
If you heard investors complaining as the housing market fell in 2007, you are about to hear a lot more whining as the easy days of cherry picking only the properties with the hugest spreads from thousands becomes a thing of the past and getting great discounts becomes a mission. If the seller’s market hasn’t hit you yet buckle up because it is on its way.
So, you have made the important decision to be a part of the vast world of real estate investing. You already own one or a few rental properties. Or, maybe you have just started looking for your first investment property. In any case, whether you are new to real estate investing or have rich experience in the business, don’t forget to study the US and regional housing markets before you make your next investment move.
Before you decide to sell or buy a rental property, you have to answer one very important question: Is it a buyer’s market or is it a seller’s market right now? Why is that important?
First off, there are different strategies you employ when buying in a buyer’s market versus a seller’s market. And for you to get the best deals for your investment dollar you need to know what strategy is most effective.
Don’t make the same mistake that so many people make by not studying the current state of the housing market. Not only the national market but the local markets as well.
To begin with, what is a buyer’s market and what is a seller’s market and how do we distinguish between the two?
What’s a Buyer’s Market?
A “buyer’s market” – or a “cold” real estate market is a market in which conditions favor those willing to buy a property. Even without being an expert on economics, you might have guessed that this happens when more people are trying to sell their homes (or rental properties) than those who are looking for a home (or rental property) to buy. A buyer’s market leaves buyers with a wide range of properties to choose from and very little competition. A buyer’s market is especially good for first-time home buyers or people just starting out with real estate investing as it allows you to buy the best properties at the lowest price and to leverage your real estate portfolio rather quickly.
Some of the identifying features of a Buyer’s Market are you’ll see:
- More properties on the market than in past periods
- 6 months or more of inventory on the market
- Listed properties spending more time on the market
- Current listing prices below previous sales prices
- Lower overall closing percentages
- Falling average home prices
- Flourishing real estate ads trying to attract buyers
Search common real estate portals like Realtor.com, Zillow and Trulia to see what home prices and inventories are like. For commercial and multifamily properties, look at Loopnet.com and CoStar.com. A buyer looking for an investment property can view projected returns fairly easily by viewing any property’s sales price history.
What’s a Seller’s Market?
Well, a seller’s market – or a hot real estate market – is the opposite of a buyer’s market. This is when conditions are favorable for those selling a property. A seller’s market materializes when more people are trying to buy a property than those who are willing to sell at the moment. Of course, this must benefit the few ones who are looking forward to selling their home. In a seller’s market, buyers are willing to pay asking or above asking price in order to secure the property they want. It’s good for sellers as they are likely to make a quick sale at a higher-than-expected price.
The signs of a seller’s market are the reverse of a buyer’s market.
- Fewer properties on the market than in past periods
- 3 months or less of inventory on the market
- Listed properties spending less time on the market
- Current listing prices above previous sales prices
- Higher overall closing percentages
- Rising average house prices
- Less impressive real estate ads
But what if it is neither a buyer’s market nor a seller’s market?
Well, then it’s a neutral real estate market.
What’s a Neutral Market?
A neutral property market, or a balanced real estate market, is when the prevailing conditions favor neither buyers nor sellers. Generally, it means no major changes in demand, supply, and prices.
Features of a Neutral Market:
- The same average number of properties on the market compared to past periods
- 3-6 months of inventory on the market
- Listed properties spending regular time on the market
- Current listing prices similar to previous sales prices
- Stable average house prices
- Regular real estate ads
- Stable number of sellers and buyers
So what is it now? Is it a seller’s market, buyer’s market or neutral market in the US right now? I don’t generally like to even refer to a U.S. market because I recognize that there are many micro-markets where you can experience any of the 3 markets I just mentioned. But, because I invest in many different markets across the country, there are obviously trends that are occurring on a national level.
Experts seem to agree that the current US housing market tends to favor sellers. This means, that for those engaged in real estate investing, now is the right time to sell a rental property rather than to buy a new one.
Why it is Most Likely a Seller’s Market in the US Right Now:
- Property supply is low. The housing market has shifted from vast oversupply to what looks more like a shortage in 2018. The inventory of all homes for sale has gone down by more than 35% in the last 4 years. That’s great for existing real estate investors and homeowners as it means that their homes are in high demand at the moment.
- Prices have been on the rise. After prices hit the bottom in 2008, they started steadily going back up. Actually, nationwide levels are forecast to reach all-time peaks as those seen during the housing bubble.
- Job growth has been strong. The economy is experiencing record employment levels. In addition, wages are increasing. All this means that working people will be able to afford to take loans to pay for their newly purchased properties.
- Mortgage rates are on the rise. Combined with an improving job market, this becomes more of a factor over time.
- More Millennials are now starting to buy homes. This is the largest generation in the US till now, and once they enter the housing market, demand will be huge. Moreover, it still remains more beneficial to buy your own home instead of renting, so this puts additional upward pressure on demand.
If these arguments are causing you to explore the possibility of selling your own rental property, make sure to perform a proper real estate market analysis first.
Of course, as I mentioned earlier, we should also remember that the US housing market is not a homogeneous one. Different states and regions are likely to experience some major differences, so while one state or region might be a seller’s market at the moment, another one might just as well be a buyer’s market.
What do real estate investing pros need to be doing to strengthen themselves and prepare for a seller’s market?
- Tighten up your offer and bidding processes and systems
- Look to improve your negotiation skills
- Build your brand for more negotiating power
- Be ready to move fast and develop relationships so that you get the first shot at deals as they become available
- Get the best lenders and mortgage brokers on your side as financing is going to make all the difference in who gets the max price for their homes and wins the most buyers in the frenzy that is brewing.
Here are a few practical tips that can help you still get good deals on your investment property purchases:
Tip #1: Get pre-approved or have a Letter of Commitment
Buying a rental property is a two-way transaction. As much as it may feel like it’s all about you, remember that there’s a lot at stake for the seller, too.
Getting pre-approved, or having your lender verify your ability to afford a loan for a specific amount, lets the seller know you’re qualified—and motivated. It demonstrates financial security, giving the seller confidence that the sale will go smoothly with you as the buyer. The process is different than getting pre-qualified as pre-approval requires documentation and is not based on estimates.
Tip #2: Make sure you have a top-notch real estate agent or broker on your side
You don’t need an agent or broker to buy a property. But hiring a good one one (especially one with experience) could give you a serious advantage when buying a property in a competitive market.
Find an agent or broker who has a proven track record of winning offers, and who hears about listings as soon as they hit the market or, better yet, BEFORE they hit the market. Start your research by talking to friends, family, fellow experienced investors, looking at reviews online, and even driving through your desired neighborhood to find “sold” signs with agent or broker’s information attached. In a seller’s market, things move quickly. Your agent/broker should be on the front lines, keeping you in the know at all times.
Tip #3: Buyer be nimble, buyer be quick
In a seller’s market, a listing today could be a memory tomorrow. What does that mean for investors? It means you can’t always wait to see the property. Try to be flexible and make yourself available for showings as listings become available.
After you’ve seen a property and you’re comfortable moving forward, consider submitting an offer on the spot. Sometimes agents or brokers will begin the negotiation process onsite with the buyers stationed outside. This way, the agent or proker can modify the offer if needed to expedite the process.
Tip #4: Place a fair bid
No one wants to pay more than necessary for an investment property. But you also don’t want to risk losing the right property by submitting a low ball offer.
Work with your agent or broker to determine an offer strategy. Or, if you’re not working with anyone yet, research comparable property sale prices in the area to get a better idea of what you should be paying. At the end of the day, you have to be comfortable paying what you offer.
Tip #5: Make your offer more attractive
There are a number of techniques to help your offer stand out among others. Here are just a few:
- If possible, consider putting down a larger deposit. It communicates to the seller that you’re serious about the transaction.
- Reduce hassle for the seller by agreeing to terms that make their transition easier. For example, if there’s a basement full of junk they’d rather not deal with, offer to take care of it for them! If it helps, move the sale forward, it could be beneficial to remove it yourself.
- Be flexible with the closing date to accommodate the seller’s schedule is another way to demonstrate your interest level–and willingness to make the process easier for the seller.
Tip #6: Write a personal note to the seller
Many investors develop an emotional attachment to their properties, and sometimes selling can be difficult for the seller, especially if they really care for their tenants. Show them that you’re both serious and emotionally invested in this sale by writing a personal letter to them. Tell them why you love the place and how you plan to take good care of it and their tenants. The seller may be glad to know their former property is in good hands, giving you some leverage in the situation.
Tip #7: Decide where you can compromise
Everyone has an image of the perfect investment property. Although when you’re searching in a hot market, it may not be easy to find that perfect property. Do some soul searching and consider what matters most to you in a rental property. Is it the size? The style? The location?
Once you’ve figured out your must-haves, then consider making compromises on those less-important features. criteria.Don’t compromise your primary
Tip #8: Exercise patience
You may encounter some stiff competition out there. Above all else, stay focused on your goal, and try to be patient. The right property is out there. Equip yourself with these tips and soon you’ll be the one packing moving boxes!
Don’t just buy to buy. It still needs to meet your financial and market criteria. It’s more important to wait for the right property than to buy the wrong one out of impatience.
In a seller’s market, you need to approach buying differently. You have to be informed and you need to know your market well. You have to know what the market is doing and what stage its in. Dig in to get the best market information but be ready to move quickly! That’s the name of the game in a seller’s market!
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