Understand Your Market and Act Accordingly

Times like these spell opportunity for real estate investors.

This may sound a little strange, considering that real estate markets are falling pretty much across the board, but the truth is that astute investors can make money in any market, as long as they recognize what’s actually happening, and act accordingly.

The first step: Don’t kid yourself. Markets fluctuate, and your investments will fluctuate with them. Pay close attention to what’s happening in your market and, most of all, don’t fall into the trap of thinking there’s something special about your properties.

In fact you’ll do best if you start off by assuming there’s nothing special about them: This will relieve you of the handicap of thinking your investments have unique features that protect them from market forces. Nothing can do that, and no one escapes the market.

That doesn’t mean there aren’t strategies that can minimize your investment risks. The most important: Before you advance, secure your line of retreat. Buying quality construction, attractive design, excellent maintenance and, of course, location, location, location should figure in any prudent investment decision, because those qualities make your investment easier to sell or rent.

In part, this is because your buyer or tenant will be using the same criteria when making their own decisions. But remember that even if you were smart and bought, say, a 2,500 square-foot, two-bedroom condo in a new, full-service high rise, with a water view, terrace, concierge and health club, you’re competing with hundreds of similar apartments, some of which are owned by over-extended investors willing to take a loss if it means protecting their overall portfolio.

That’s your real competition, and you’ve got to let the facts dictate your decisions. If your idea was to let a tenant buy your condo or house for you, and make your profits in long-term capital gains—a time-honored idea—your best bet, depending on your market, may be to lease for just enough to cover your costs; you’ll still have your tax benefits, and those rents will rise as the rental market recovers. And it will eventually recover.

The alternative--insisting on getting top dollar just because you think you’ve got the best apartment in the city--will more likely mean months of waiting while you pay your mortgage out of your own pocket. And while in the end you may get much of what you’re asking, you’re more likely to wind up taking a market rent when and if it’s offered—unless you wind up in foreclosure.

The same premise applies to a buy-and-sell strategy. If the local market is falling from an oversupply of product in your niche, keep ahead of it by re-setting your price just under prevailing prices. This will protect you from taking a larger loss. The market is unforgiving. Buyers will begin avoiding a unit that’s over priced, and so will brokers, because they’ll suspect they’ll be dealing with an unrealistic, demanding seller. Eventually the listing goes stale, traffic falls, and you’re left with monthly expenses instead of that quick profit you’d expected.

But the same idea can work in your favor, which is why many pros consider falling markets great buying opportunities. Assuming you’ve been realistic as the market was rising, didn’t over-extend yourself, and didn’t overpay, you should have built a portfolio of solid assets producing reliable cash flow. This puts you in a strong bargaining position with both sellers and lenders.

Properties may not be unique, but sellers are: Each has their own situation to deal with, and to the extent you can understand it, you can make an offer that solves their problems. Do your research: Condos and houses are fee-simple properties, and your county real property office has a complete file on each one.

Learning how to build a complete dossier on something you’re interested in is part of the real estate investor’s job, and that dossier will tell you how to identify and acquire good properties without overpaying. Don’t be shy, consult your attorney, and you can be on your way to substantially improve both your cash flow, and your eventual capital gains.

Lenders—especially banks—are less unique, and more at the mercy of market forces, because they’re in the business of selling money. This means they have production goals to meet, and if the market is falling and foreclosures are rising, hitting that mark can be tough.

As a result, lenders in falling markets may be cautious about lending in general, but happy to lend to people who can prove they can repay a loan. Be that person; buy good properties that already have tenants—or line up a tenant willing to cover all or most of your costs—and you’ll be making life easier for your lender.

And if you make life easier for your lender, your lender may make life easier for you. Even in the best of times, every lender—especially, every bank—has some mortgages that are delinquent or actually in foreclosure. If a bank forecloses on a property, they have to pay their lawyers, mark the mortgage to market, reserve against the loss, and carry it on their books as a liability called “other real estate owned”.

This typically costs the bank 40 percent of the value of the property—more, if like many banks they ignored prudent underwriting standards during a boom, and figured the market would bail them out of mistakes. It doesn’t take much imagination to see that you’re almost doing lenders a favor by taking foreclosed properties off their hands.

The problem, though, is that that property may be in rough shape by the time title actually changes hands: After all, a former owner who’s losing something doesn’t have much incentive to maintain it, and in fact, if they’re in such bad financial shape that they’re being forced to give it up, they may also be forced to squeeze every cent they can out of that property.

A better idea: Ask your lender for a list of properties that are merely delinquent—less than 90 days past due on their mortgage. These are owned by what every real estate investor is looking for—motivated sellers. These properties are likely to be in relatively good shape, and reasonably priced. If you buy them, you’ll be doing everybody a favor—including yourself.