Success Strategies: Generating Profit in a Down Market
By Mike Ouellette
With at least ten and half months of inventory, and the number of foreclosures expected to rise, the current market is more than a "buyers market," it's a literal tsunami with realtors and lenders being pummeled with inventory.
The market is also facing a correction, which has negatively affected home sales: in order to recoup their losses, banks are tightening credit, blocking REO sales, and moving to large-style auctions, making it difficult for the typical home buyer to purchase a home.
However, it's also a great time to get into the market if you're a first time investor - and it's more important than ever that you ensure the properties you do buy deliver a return on investment (ROI).
With properties depreciating in value across the board, and sellers and banks not willing to lower prices, you can easily pay more for a property than it's really worth and thus lose any profit you might have gained. What follows are my four strategies for generating profit in this down market.
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1. Buy on value, not emotion.
When considering a property for purchase, don't look at its present market value or apprised value. Instead, determine the property's ARV (After Repair Value) -- what the property is worth after repairs. Any property you're considering should be at least 70% of ARV or less.
Due to the glut of inventory, if you decide to sell the property (or flip it) rather than hold it long-term, you'll have to sell it at a discounted price in order to move it quickly. (Generally, you can assume it costs approximately 1% of the property's value per month to hold it while you wait for a buyer.)
Buying at 70% ARV (or less) allows you to factor in the cost of rehabbing, holding the property, and selling at a discount while building in appreciation.
One caveat: Be wary of buyers low-balling your efforts. We recently purchased a property at .35 cents on the dollar, refurbished it, and put it up for sale. However, a few buyers knew we were investors and put in lowball bids, and consequently, we didn't get an offer above .70 cents on the dollar. We didn't want to give away the profit, so we refinanced and rented out the property.
2. Understand why people are selling.
When considering a property, ask the "WWOW" questions: why are the owners selling, what is the property worth, what do they owe on it, and what do they want?
Generally, you have three types of sellers:
- Those that want to sell but waver between pulling the property off the market and sticking it out.
- Those that need to sell due to moving or divorce.
- Those that have to sell due to estate issues, being upside down on the loan, job loss, or divorce.
It's easier to make deals with those who need or have to sell. If someone has bought a property in the last three years, mostly likely they are upside down on it, which means you can try a short-sale (these take a lot of work and generally have low ROI), or you can consider one of the exit strategies outlined in point #4 below.
3. Consider the long-range forecast.
If you specialize in flips, you may want to consider a longer-term strategy that nets greater profits and appreciation - for example, buying and holding. The long-term forecast for the current market is that it will take at least three to five years before property values will begin to appreciate. By renting out your property or properties, you'll generate monthly passive income; over time, you'll gain back any equity you've lost.
The current market is great for new investors because it can make you feel accomplished quite easily: get the deal, generate passive income by renting out the property, and realize your projected profit in 3 - 5 years. (Remember, you make your profit when you buy a property, you realize your profit when you sell.)
4. Specialize in long-term exit strategies.
Because lending criteria have changed, which makes harder for people to get loans, and because people have been forced out of their homes due to foreclosure, you have a large pool of people who want to buy an affordable home or rent long-term in order to get back on their feet and repair their credit scores. For real estate investors, now is a great time to specialize in lease options or owner-finance programs.
My company, The Hom BuyR Network, Inc., for example, has created programs for renters and homebuyers. For Pre-Home Buyers (renters), we offer monthly rental leases and pre-rent-to-own programs where renters can lease a property and after a year "graduate" to a rent-to-own program.
For homeowners forced out of their homes due to foreclosure, we offer a number of options including rent-to-own programs, which feature an agreed lease/term with an option to purchase the home, owner carrying financing, discount sales of the property, and private money programs.
Surviving a down market can take some skill and fortitude - especially when each day brings dire financial news. To ensure you generate ROI long-term, look at a property's ARV versus market value, keep in mind the long-range forecast when determining your exit strategies, and consider offering lease options or owner-finance programs to generate passive income and long-term profits. Once the market up ticks again, you'll be in a great place financially.
Michael Ouellette is president of The Hom BuyR Network, Inc., an Uxbridge, MA-based company specializing in home buying and home selling solutions. Mike can be reached by phone at 508-277-0974 or by via his website at www.thehombuyrnetwork.com
