A man walking down the street bumps into an old friend. His friend asks “how have you been?” The man replies, “Good, I recently got married!” His friend says that is good! The man answers “actually, that’s bad, she’s very ugly.” His friend agrees that this is bad. But then the man says, “No, it’s good because she’s rich.” His friend quickly shouts “that’s really good!” The man responds “No, that’s bad; she’s very stingy with her money.” His friend, confused at this point says “well I guess that is bad.” The man disagrees with his friend again and says “it’s not really bad because she bought us a huge new house.” His friend excitedly replies, “That’s very good!” The man says “no, that’s bad too… it just burned down.” Well, his friend says “that is very bad news.” The man happily replies, “No, that’s good news. She was in it!”
The Law of Relativity, explained by Bob Proctor in the Science of Getting Rich seminar goes like this… if something is just a little bad, then only a little good will come from it. If something is considered really bad then expect a lot of good to come from it. The gulf oil spill comes to mind. This is a horrible tragedy and there is plenty of blame to go around, starting with BP and the federal government for their lax oversight of the project. But as the region begins to heal there will be a tremendous amount of positive changes that will take place. Oil companies will find safer, more efficient ways to drill for oil and the government will increase its support for the development of cleaner energy sources.
Today’s housing market is no different. If you’re a real estate investor it’s important to find the good in the bad. In yesterday’s Arizona Republic newspaper column, Falling Prices Prompt Concern over Home Values, it was reported that price per square foot was down 4% last month and that experts predict a similar decrease this month. So given this information what is the most effective exit strategy in today’s housing market? Well, since there are only four I’ll rank them in order, from best to worst:
- Buy and hold – even though values have dropped here in the Phoenix market since the expiration of the tax credit it is still a great time to purchase a long-term investment property. There are a lot of renters in the market looking for clean homes in desirable locations. Because prices are so low, cash flow is easy to find and the ROI is much higher than anything you could get in the stock market.
- Seller financing – if you have the capital to offer financing to buyers who have dinged up credit from a recent short sale or foreclosure then this is an excellent exit strategy in today’s housing market. It’s like a hybrid buy and hold/fix and flip strategy. You get a chunk of money upfront from the buyer (down payment), cash flow (mortgage payment) and a huge payoff at the end of the term when the owner refinances in 1-3 years. We’re implementing this model now and the ROI is about the same as our fix and flip business. The only downside is our investors have their capital tied up for a longer period of time.
- Wholesaling – this is becoming more difficult in the Phoenix market because of the competition (if you are wholesaling properties to fix and flip investors.) While retail values are trending downward here, prices at the courthouse steps and for REOs seem to be trending slightly upward, killing the margins we were seeing 6-8 months ago. I’m not sure why this is but it could be because long-term investors are willing to pay more for properties, content with just 15-20% in equity in a property.
- Fix and Flipping – the most risky exit strategy of them all, my company was doing this exclusively up until the tax credit expired. Now, pending sales are down here 17% and nationwide new mortgage applications are down more than 30%. Due to the tax credit expiring, tighter lending restrictions and unemployment there are fewer qualified buyers in the market which makes turning a profit with this strategy difficult. However, we are seeing good margins on homes priced at or above 400K.
My advice to you is keep up to date with what is going in your real estate market. Talk to real estate agents that work with investors. Talk to title company representatives. Attend local real estate investment club meetings. Keep your finger on the pulse of the market you live in and remember there is never a wrong time to buy real estate, only a wrong way.