Thursday, January 11, 2007

Investing - make me some money!

Real estate has been a great way to achieving wealth for a long time, but the fast-paced market and the flurry of activity over the last couple of years has brought more "investors" to our market than any other time in history. And all those investors competing with each other, along with the shift in market conditions, have reduced profit margins and increased risk.

Back in the old days (say, before 2003 and the start of "crazy time"), real estate investors would look to find just the right property to match their investment criteria. In the case of a residential "fix & flip" strategy, they wanted a down-trodden home in a desireable neighborhood, and a seller who was willing to take a significantly reduced price. This would ensure that once the home was fixed up and looked great, they would be able to sell it for a profit.

Then came a couple of years where it was just too easy. Home prices were rising so fast that people could buy any home at just about any price, and sell it a few months later in a matter of days for a profit. This brought more and more "investors" into the market, and every success story brought even more... they'll tell 2 people, and they'll tell 2 people, and they'll tell 2 people - I'm picturing the screen getting filled up with first-time investors! Eventually the music stopped, and some of these investors were left without chairs. So where does that leave us today?

Can you make money in today's market. Sure. But it's not easy. And the strategies from the last couple of years are probably outdated. You need to understand today's market, and you need to understand how much competition you have (other people out there thinking the same way you are.) Here are the most common "great ideas" I hear:

Foreclosures - "the bank doesn't want to own property - they'll basically give it away!" Right - do you think you're the only one with this idea? If you can find a list of foreclosed properties online, don't you think 10,000 other people can look at the same list. The bank DOES want to get rid of the property quickly, and will probably use a less-than-market price to do so, but they aren't going to give it away at the riduculous price it'll take for you to make a quick profit.

Pre Foreclosures - "the homeowner is going to lose his house & ruin his credit if he doesn't get out quickly". Again, same arguement as above: if 10,000 people can find this home online, he's going to have multiple people asking for him to sell to them. He'll be able to bid each against the others until the price gets high enough that most profit margins have been erased, which also means there's more downside risk of losing money if you can't sell the home quickly.

Vacant &/or Long-time listings - "let's set up a search in the MLS to look for all the homes that meet ... certain criteria." Brilliant - but once again, you're competing against an awful lot of others looking at the same data.

The whole problem can be boiled down to a couple of facts. 1) If the investment property is easy to find, then lots of people will find it. This increases competition, raises the price, and lowers the profit. Simple economics - supply & demand. 2) I have had 10 or more clients tell me directly that if I find a perfect, can't-miss money maker to call them & they'll buy it right away. I'm sure most other realtors have heard the same thing. And there just aren't many can't miss choices out there right now.

So what's the solution? There are a few of them.

Think Long Term. I've advised my investors to focus on a longer-term approach right now. The market may or may not be at its bottom, but the bottom isn't far away. This is a great buying opportunity for a good home in a good neighborhood at a good price. You'll be rewarded down the road for your purchase today.

Do your own digging. If you insist on looking for short-term profits, I recommend not using the internet, or the MLS, to aid in your search. You should look for opportunities that you find with your own eyes; these are the opportunities that hoardes of other investors won't find. Maybe the FSBO in your neighborhood that the family moved out 3 months ago, or you know a friend of a friend who is in dire straits. These are going to be your best opportunities.

Open your options. And finally, be open to a different style of real estate - maybe mulit-family housing, or commercial, or land - there are lots of options depending on your time horizon & your risk tolerance.

Give me a call if you want to discuss your investment ideas or strategies personally.