“No Deal is Better Than a Bad Deal” - Especially in a Tight Market
Are you wondering if it really has been hard to find single family home deals lately or is it just your imagination?
In my never humble opinion, it’s not your imagination.
I have not found a good enough deal this year yet that meets my conservative investment criteria and I have been using the same techniques to find deals like I have since 2011. Something has changed in the single family home real estate market in the past 6 months.
Let’s start with hard facts for the 2 counties in which I invest.
According to the most recent quarterly market report from TrendMLS, in Camden County, NJ the 1-year change in the number of homes for sale in the 1st quarter of 2017 saw a drop of 18.5% and the number of closed sales was up 21.9%. Sounds like a tight market to me.
The numbers are similar for my other market in Gloucester County, NJ where I live and invest. The 1-year change in the number of homes for sale in the 1st quarter of 2017 saw a drop of 12.2% and the number of closed sales was up 22.3%. Inventory accumulation in my county was 6.1 in April 2017 versus 7.6 in April 2017. Again, this is a tight market if you are looking to buy.
Even more recently, the number of pending sales in Camden County in May 2017 was up about 40% from May 2016 and the number of pending sales in Gloucester County in May 2017 was up about 30% from May 2016. While prices have not changed in these two counties as much as some would predict, there is definitely a shortage of houses for sale in the retail real estate market..
We transitioned from a strong seller’s market in 2001-2007 to a strong buyer’s market in 2008-2011 to a balanced market in 2012-2016 and now we seem to be transitioning to a mild seller’s market in 2017.
What does this mean for part-time real estate investors like me?
It means that it’s getting tougher to find single family homes deals on MLS which has been the tried and true easiest source of deals, including REO’s, HUD homes and pre-approved short sales that have worked well for me for the previous 5 years. I was able to find deals sitting in my La Z Boy using a technique I teach in my training video “How to Choose Houses for Rentals.” The market has changed and I may have to start “making an effort” again. That’s not terrible, but we have been spoiled by easy deals for a bunch of years.
We may have to revert back to direct marketing to motivated sellers. I haven’t done that since 2008!
As a part-time investor, I need only 2-4 good deals per year and they’re just not showing up easily on MLS so far in 2017.
From 2008 to 2011, wholesalers were pitching good deals as the market dropped and I bought houses from 5 different wholesalers during those years. But I have not bought any deals from wholesalers since 2012 when the market transitioned into a balanced market.
Why is the market tightening for investors?
I think there are three reasons.
Two of the reasons were laid out convincingly by Paul Sloate, Chief Executive Officer of Green Drake Advisors (www.greendrakeadvisors.com). Mr. Sloate gave an outstanding extremely well-supported presentation to South Jersey REIA this month (June 2017) about macroeconomic trends that data freaks like me love to hear. Among the many insightful graphs and conclusions presented by Mr. Sloate, two in particular addressed the single family home market.
According to Mr. Sloate, one reason for the increased demand for single family homes follows birth demographics by which millennials, who have been renting after college or entering the workforce, are now progressing into buying homes. With 5-10 years of work experience under their belts, they are better mastering their occupations resulting in higher income, they are building families that want homes and interest rates are low enough to make homeownership competitive with renting.
As the millennials shift from tenancy to homeownership, single family homes are in demand and apartment complexes are now starting to advertise “first month rent is free” to attract tenants after tenancy peaked very recently and is starting to slow ever so slightly but perceptibly.
The second reason cited by Mr. Sloate is that the number of foreclosures has dropped dramatically. Homeowners who lost their homes and flocked to rentals in 2008 to 2011 and beyond, are now returning to home ownership. The recession that started in 2008 is long over, unemployment is way down and wage growth is up. Apartment complexes that were overbuilt are now seeing vacancy rise as homeownership increases. Remember that since the ratio of homeowners to tenants hovers roughly around the ratio of 2:1, every 1% swing toward homeownership has a much larger impact on the number of tenants who are renting.
The third reason for the tightness has to do with the type of homes that investors buy. We buy distressed properties. As real estate prices stabilized and inventory is shrinking, we are now seeing over the past year, that new real estate investors are flooding REIA membership. These newbies are bidding up prices of distressed properties and while they overpay, us veteran investors are experiencing a shortage of good deals which are now harder to find.
We have seen this before. When the real estate market goes up, many new aspiring investors enter the market as the general public starts seeing opportunity (not just experienced investors). When this happens, REIA membership increases. When the real estate market is stagnant or goes down, inexperienced new investors/wannabes exit and REIA membership decreases. This up-and-down behavior is exactly what happened to membership at our local REIA's (SJREIA and DIG) from 2004 to today.
The irony is that there is more opportunity when the market is stagnant and there is even opportunity when the market goes down. I have done best when the market was stagnant in our area in 2012-2016 and I did relatively well when the market went down in our area in 2008-2011.
Right now, the demand in real estate markets is going up in most locations. Even in the locations in which prices are going up slowly, there is a mad rush of new investors and they are bidding up the prices of the distressed properties, which are the ones investors are seeking!
I think that it is currently hard, though not impossible, to find a great deal in most locations unless you are doing "direct marketing."
Don’t get me wrong. I’m not saying there aren’t good deals out there. Let's be clear, there ARE good deals out there! It's just that most of the people who are getting them are investing significant time and money in prospecting. For example, one of my coaching clients is making many hundreds of thousands of dollars per year flipping, even now in 2017! But he has a full time person marketing, he has a full time administrative assistant and he has crews of contractors who work only for him. He is also satisfied to make $20,000-$25,000 on each deal whereas I am looking for a minimum of more than that per deal.
In addition, the worst time to look for deals is spring and summer. Fall and winter are usually much better. The two good deals I got in 2016 were in January and October. They each had $45,000-$49,000 in profit or equity which is pretty good considering that their ARV's were $140k and $170k.
In real estate investing there is a very important saying "no deal is better than a bad deal." That is why, as a part-time investor who buys only very good deals, usually with little investment of resources (time and money), I have not YET bought anything in 2017. Now, I too have to make the decision whether I'm willing to do direct marketing, or wait and hope to find a very good deal on MLS tomorrow or just stay on the sidelines for a few months. One of the luxuries of being a part-time investor is that I don’t HAVE to get a marginal deal at any moment to stay afloat. I can wait for the very good ones while I make money in other non-real estate occupations.
I have no doubt that with enough effort, we all can find good deals, even in this market.
In summary, if you subscribe to the buying approach “no deal is better than a bad deal,” you might want to consider three options in a tight inventory market like we have today:
invest in enhance marketing methods (such as direct marketing to motivated sellers) to get very good deals, which are out there just in smaller numbers than in the past few years
use the same deal identification methods that work in looser markets and be prepared to wait longer between good deals
park your money on the sidelines until the market changes
Biography: Marc Halpern is a successful part-time investor who has achieved financial freedom in terms of passive income and net worth mostly through rentals and flips using “regular” money and self-directed 401(k) funds.
E-mail Marc Halpern directly if you want to improve your profits through coaching by a local expert in South Jersey/Philadelphia with track record.
Do not take any action or make any decisions based in whole or in part on the content of this article. ALWAYS consult with licensed professionals in YOUR state before making any investment.