My previous article suggesting today was the right time to start getting back to real estate investing was met with expected cynicism. Investors make money by going against the crowd, not with it, right? By the time everyone agrees that you should be getting back into real estate, you really should have been back six months earlier.
But it is important to address the very legitimate concerns of those still urging caution. The major concern was what if the market gets worse. I would answer this concern by first looking at what would need to happen for things to get worse. Inventory is already running pretty high and building has been stalled for almost a year. In order for things to get worse, even more inventory would have to hit the market, but would that really make things worse? In places like Florida and California with hundreds of thousands and homes and condos already on the market, ranging from vacant, bank owned, distressed sellers, non-distressed sellers, etc. what would a few thousand more do? In my opinion, not very much.
The economy could also get worse. Investors are demanding a stiff return on capital today under Draconian underwriting, so fire sale prices are in effect in most parts of the country. Sure, it’s currently tough to get financing and it’s expected to remain so over the next couple of years, but investors are pricing that in to their offer price. Rents are low and expected to remain so for the next year. Great, price that thinking into your offer price, every other investor has been doing that for the last six months.
Ok, so the final argument is no one would sell at those prices. The great thing about millions of homes being for sale is that someone will sell at that price; you just have to find the right property. Smart sellers are wising up to the fact that a low offer is better than foreclosure. Banks are wising up to the fact that a low offer is better than a vacant property.
We will get into choosing the right properties and the right cities in short order, but for now understand that these are the right dynamics to get back into the real estate investment market. Be aggressive in negotiation and be diligent in underwriting. In my opinion the likelihood of upside under these factors far outweighs the downside. There is no need to rush the diligence process, but at the same time, there is no need to wait for even lower prices.
Jerry Robertson says:
I gotta believe you have it right!! The crowd is still waiting but some investors are getting back in. One of my clients has sent me an article from Forbes.com showing the top ten places where they say prices have bottomed out. Funny how most of them are places where all that inventory has hit and now they are selling it off at bargain prices. Keep waiting and you will be behind the wave but that is always the way it is.
Great article and I am anxious to read the rest of the story.
September 21, 2009 — 10:48 am
matt mathews says:
I would agree with your opinion overall if we were experiencing a normal market cycle recession. However, after being witness to 4 market cycles and numerous tax law changes over the past 30years, I can say from experience that this one isn’t anywhere close to recovering. Investors who purchased properties back in Feb, Mar of this year at what they thought was a deep discount are now upside down on average by about $20K. The few thousand properties you refer too as being no big deal is closer to a million, most of which are located in Ca. Fl. Az. & Nv. This Shadow Inventory (REO’s) sitting on the Banks books must sooner or later make an appearance. The single family and Multi Family vacancy factor is up around 12%. The Commercial/Industrial factor is close to 45%. You can perform all the due diligence you want but the math isn’t in line with a prudent investing scheme. In this market-Stability is more important than Price when taking on risk such as your seeing today. To Note! California has always led the nation out of every RE market cycle recession. Whether that happens again, remains to be seen of course.
September 21, 2009 — 11:15 am
Cooksquared says:
Matt,
I think you are correct for some areas. There are areas in Florida that will remain exactly as they are for the next five plus years, but at the same time, there are also areas in those states that you mentioned that were not over built. Furthermore, there are great opportunities across the US in cities that were unduly hit from the general real estate fall out.
Dont throw the baby out with the bath water. As much as it would be wrong for me to over generalize that its time to invest in every market, I think its wrong to assume that every market is in for another five plus years of down prices. I think you will miss out.
September 21, 2009 — 12:29 pm
matt mathews says:
Being what you would call a Old School Buy & Hold conservative Investor, I prefer creating wealth in my own back yard so I can manage it and kick the tires so to speak. As a RIA/Realtor and Retirement Planning Specialist for close to 30yrs now, I don’t share your optimism about our current Real Estate Market not to mention the future state of our economy. Preservation of Capital should be your number one priority. If you are a speculator then by all means, take the risk and seek out all those great opportunities you speak about. Food for thought! Texas who for the most part represents one of those states that didn’t get hit as hard as you say, has taken more than eighteen (18) years from their last bust cycle in the late 70’s/early 80″s to recover price equity break-even values in comparison to Real Estate highs attained in most every other state.
September 21, 2009 — 6:55 pm
Greg Dallaire says:
If your a newbie investor I would think now is going to be an extremely difficult time to learn the ins and outs. I do agree with your opening paragraph when the time is right you’ve already missed the real opportunity. How to tell when to pull the trigger is the hardest and most crucial part of investing.
To make good investments you must take risks! Sometimes you make the right investments sometimes you make mistakes. All I know from my personal experience is that every mistake I made I learned a huge valuable lesson.
Hopefully your opinion is correct and investors will start jumping back in to help clear up the inventory.
September 21, 2009 — 8:42 pm
Cooksquared says:
Matt,
If I was working with anyone 50+, I would be right where you are. At that age, the risk profile does not mesh with investing in today’s market.
The problem with your analysis on Texas, is that you assume an investor gets in at the top of the market and then waits for the market to recover. Thats always a bad idea. Most of the time, its best to take your losses early, reevaluate the best place to put your capital and try again. Over the last 18 years, there would have been plenty of opportunities to get into several strong Texas markets (Dallas, Houston, etc.) and make very good money getting out before a short term peak or trough.
Even buy and hold investors should use this strategy. Every year (spring is a good time for this) an investor should be saying is this the best place to have my money invested. Keeping transaction costs in mind, can I get better growth elsewhere. If the answer is yes, its time to cash out. Just because an area grew 10% this year, doesnt mean it will do the same the next and just because it lost 10% this year doesnt mean it will do the same the next.
September 22, 2009 — 6:51 am
Cooksquared says:
Greg,
I disagree with you. I think a new investor can make money in this environment. If they are cautious and take moderate risk, they can get great experience and make some money.
With prices this low and fixed interest rates this low, its fairly easy to find a property that cash flows. A new investor should start with a cash flowing property in need of some cosemtic repairs in an up and coming neighborhood. If they avoid overbuilt neighborhoods, they have some upside potenital for appreciation and they have the safety of the cash flow. While I wouldnt expect these kinds of investments to hit homeruns in the next year or two, I would expect them to offer a nice return of 5-10%, with no appreciation. Maybe in a year or two they start appreciating at 2-3%. Again, even if the property is worth less than you paid for it, you have a 5-10% cash on cash return to wait out the storm.
This simple exercise will also help them see if they like being a landlord and if they can handle having their valuable collateral in the hands of someone else. A $100k – $150k investment ($20k – $30k equity) would be a good start.
September 22, 2009 — 6:58 am
David Losh says:
I am also older with thirty years in the investor market. I buy and sell, or help other people buy and sell. Most of the people who have stayed with me over the years buy and hold. My job is for them to buy well.
Here’s the deal today. Bank reserves are dead money unless they come out to invest. In my opinion that is what is happening. I think banks are investing capital, Warren Buffet really comes to mind here, to boost stock performance. The stock market has no data to justify it’s price per share increases. I think these are institutional dollars driving this recovery from recession.
I’ll stop short of claiming market manipulation because I see real opportunities in some sectors of the economy; housing doesn’t happen to be one of those.
I have now talked with several people who are doing well in today’s Real Estate market. They are buying and selling, making profits and reinvesting. God bless them. For me the risk is way too great.
On September 15th the report on an explosion of option ARM resets and foreclosures came out to a whimper of back lash. Notice of Trustee Sales went unnoticed. Builders are breaking new ground and the buzz is about investing in apartment buildings.
What’s going to happen is that people will wake up to see it’s much cheaper to rent than own. If you are in the Real Estate business that’s not too good, but if you are a programmer, attorney, construction worker, secretary, two income, or retiree, it’s a golden time to bank cash while property values tumble.
In the mean time strategic defaults will become more common and bankruptcy will be a normal course of doing business. The financial industry is ultimately where the trouble is.
In five to ten years Real Estate will be back to normal with lenders and banks being the vliians we try to beat. Owning free and clear is the only equity you can count on.
September 22, 2009 — 7:51 pm
Tim Shepard says:
Investor’s make money by taking risk. The most successful investors are either the best in their risk analysis or the luckiest.
5 years ago, I worked with a lot of “investors” that were between 25 and 45 years old. For the most part, they were in it for the quick flip buck. The majority are now in foreclosure or bankruptcy.
About 8 months ago, I started to see a new breed of investor shopping around. Most of these buyers were over 50, have significant cash, and understand numbers. None were looking for a quick flip, in fact, most told me that they weren’t sure that we are at the bottom yet.
However, they all had one common philosopy: We may not be at the bottom yet but we are as close as anyone can reasonably predict. I have some cash that I need to invest and the future risk of the real estate market is less than that of the available equity, bond, or cash investments. In 3 or 4 years, I may loose 10-20% but over the long term, I’m gonna make money from todays levels.
For the first time in 5 years, inventory in some price ranges, is almost non-existant. There were better deals available 5 months ago than there are today.
This development is significant. General economic conditions must now worsen for home prices to fall further.
These new (really older) investors are coming back because they believe that Real Estate, as an asset class, is undervalued. I hope they are right and I wouldn’t bet against them.
September 23, 2009 — 8:42 am
Cooksquared says:
Tim,
I wouldnt bet against them either. In highly volatile markets, rebounds happen fast. A 10% lost over the next year our two could also be a 5% or 10% gain in some markets. There is more risk now to missing the upside and catching even more downside.
September 24, 2009 — 2:04 pm
David Losh says:
I talk with older guys every day here in Seattle. Dino Rossi, probably the most visible character in Real Estate today in Seattle says his group hasn’t bought anything since 2005.
We are nowhere near the bottom in pricing for Real Estate. We will lose another 10% this year which will put more downward pressure on future pricing models.
2011 and 2012 will be the first big waves of commercial loan balloon payments due from the 2006/2007 exuberance in commercial speculation. That will be much closer to a bottom call for housing units.
It will get messy for years to come and if an investor ties up cash they had best figure on breaking even in 7 years.
September 25, 2009 — 12:08 am
Robert Kerr says:
I respectfully disagree, Mike, it’s not time yet. There’s still a large downside risk, even at the ground zeroes: Las Vegas, Phoenix, South Florida, etc.
It looks to me like we’re still 2-3 years away from a return to appreciation. And there seems to be zero risk of a V-shaped recovery, so what’s the hurry?
Good luck whatever you decide.
September 25, 2009 — 9:59 pm
Tim Shepard says:
Robert.
Back in 2004, the gilded age, prices were appreciating at unsustainable rates. Most everyone (including Realtors, the Media, and Buyers) agreed that this would not continue indefinitely.
However, all made the flawed assumption that prices would just level out. In other words, we would transition smoothly from a strong sellers market to a normal one. That didn’t happen. Instead we transitioned directly to a strong buyers market. The transition period was marked by almost zero activity in some markets with prices falling off a cliff.
I make these points to answer your question “what’s the hurry?”. I agree that there is little risk of a V-shaped recovery but when the motivated sellers (foreclosures, short sales, etc.) are gone, prices will jump 10% or more. It will be a discontinuous price adjustment just like we seen on the same down. Now don’t get me wrong, I don’t expect yearly appreciation rates anywhere near what we had before, but I do envision a 20% or more swing between the bottom and the sales within an 18 month period.
The market is fragmented in my area (Destin, FL) and generalized statements can’t be made. We have liquidated over 75% of the inventory in the most toxic neighborhoods already. For example, we have one neighborhood that has 92 homes. There have already been 12 bank owned foreclosures and 9 short sales closed. There are 7 other short sales pending. That represents 30% of the homes already accounted for as distressed. I estimate that there will be less than 10 more available in the next few years. So, if you want a home in this neighborhood, you better not wait too long.
The other significant risk to “waiters” is cash flow. I am seeing many distressed properties selling that provide a 7% – 10% or more cash on cash return. So, if you are sitting on cash in the bank, paying 2%, I ask,
Why is anyone waiting?
September 26, 2009 — 7:48 am