Real Estate Strategies by Market Cycle

Last week we discussed Identifying Target Real Estate Markets, Cycles & Locations and found seven common points within the real estate market cycle. Now that we’ve reviewed the typical strategies applied to each point of the market cycle, let’s explore the identification process and expand upon those strategies to help you identify the current state or your local real estate market.

1) Peak: Sell

Like most experiences in life, there is a time to sow and a time to harvest. In a peak real estate market supply (inventory) is low, and demand (buyers seeking to purchase) is high.

Remember when Beanie Babies and 1980’s sports cards were the hottest toys and collectibles around, with dealers fetching prime dollar for even some of the most common items around? People followed the crowd, some to the point of hoarding their future retirement “investments”, only to find that some years later most of what they had held was pretty much worthless because it was overvalued. Like the dealers who saw prime opportunity to off their inventory for massive prices and profits while everyone was buying, as opposed to holding, smart real estate investors sell, sell, and sell in a peak market. They’re honestly is only one strategy, SELL, and do not buy.  

2) Early Downturn: Sell or Hold

Almost every aspect of the real estate market begins to see the effects of reaching maximum capacity. Cap rates begin to trend upward and purchase prices are starting to fall. The influx of demand slowly starts to dissipate and the market sees a bit more inventory, with homes starting to extend their recent listing period on the market. Any fix-n-flips should be turned over expediently, and hopefully those income properties invested in earlier have already been sold during the peak market or beginning of the early downturn.

Renovations should be held to a minimum, but new home construction, such as the last models within newly developed areas, might be found for a steep discount. Reason being, those companies have made their profits during the peak market and you may get a steal for being late to the party, similar to buying a display Christmas tree for 10% cost of the original purchase price. Sure, it might be January, but there’s a time to sow and a time to harvest, remember?

3) Full Downturn: Hold or Acquire

As the bottom has dropped out of demand, landlords are doing all they can to extend leases and hold current tenants, while foreclosures are increasing and sales volume has decreased drastically. Inventory begins to rise, and prices that do sell are falling steeply. Banks risk less on credit, with higher interest rates, leaving property purchased with cash as the best option. Any development homes still left are on full clearance, investments are being dumped, and renovations a time of the past. If you missed the early downturn and choose to sell now, you may lose deeply. Holding may very well be the best option, and may take a longer period of time to see recovery. Any relocations or necessary moves, for instance, may need to involve a long-term lease at the most affordable property management costs.

4) Bottom: Acquire

Homeowners who purchased their home during a peak market may have their stomachs turned upside down at this point. During this stage, supply is up and demand is down, driving down purchase prices for investors to acquire and hold, or acquire and lease. Typically strategies involve buying income properties for cheap.

You will tend to see an influx of foreclosures (some due to people who don’t want to pay a mortgage for a property that is worth 25-30% less than what they owe –don’t be ‘that guy’), which is a great example of a quality income property. Buying property at this stage, when most people are too scared, or have switched focus to the stock market or other investment areas, is a prime opportunity. As rental prices are lowest at this point, this is about the only time we would recommend exploring renting, as necessary. In addition, homeowners should be holding, and investors acquiring.

If you’re planning on purchasing a home in six months, you may want to consider purchasing now.

5) Early Recovery: Acquire, Develop and Explore Renting

Inventory is available below replacement cost and trading for above replacement cost. Meaning, if you put $5,000 in renovations within your property, you should see a $10,000 return on the purchase price or equivalent increase in monthly rent.

As the rental market may be gaining some steam, and prices leveling, wise real estate investors put as little, or much, as necessary into leased income property as possible. With vacancy rates decreasing, occupancy is still low, but demand is improving. Foreclosures may be lightening up, but affordable property in ideal locations should be acquired and developed, or held until the late stable market. One year leases may be the best option to prohibit a vacancy period, expiring within the late stable to peak point where selling may be explored.

6) Late Stable: Rent, Refinance, Improve, and Prepare for Selling

Credit is affordable, vacancy rates are decreasing, rentals are increasing, and purchase prices are gaining steam. It’s time for the fix-n-flip, leases, and renovations.  

7) Peak: Sell

Repeat step 1 and watch closely to determine the next early downturn. In our opinion, (which is the minority opinion, to be fair) this is where we believe most real estate markets across the nation currently sit as of February 2016. Most people would tell you we’re in Step 6, late stable, preparing to Peak with a good year or so left in high-priced inventory. So with that being said, even professionals will not always agree, and only time will tell.

What stage do you think your local real estate market is currently in? Any different nationally?

Next week we will explore different local, state, regional and national factors that contribute to real estate market cycles and strategies. Until then, Nationwide Home Fax™ and Home Fax™ Inspections will help you Know the Home Before You Buy™.

Expectations v. Reality During a Home Inspection

A home inspection is a standard procedure during most home purchases, but many common expectations are met with misconceptions.

#1: A home inspection is a limited visual observation

Many buyers expect an inspector find hidden issues, sometimes discovered later on during the home tenure, such as issues within wall framing, footing drains, and other areas of the inspection that are not exposed. In reality, inspectors can only inspect what is visible and typically exposed. Good inspectors understand the cause-and-effect of one observation to a defect, or set of defects, but the reality is that no inspector can ever determine all of the defects that may exist within or around a home.

#2: A home inspection is not a code inspection

Home inspectors are not code inspectors. Codes vary by city, county, and state. Code inspectors, sometimes referred to as building inspectors, are employed within the city or county and are familiar with specific codes within their specific jurisdiction. Home inspectors are not required to know each city’s codes, which would be very difficult if not impossible, and therefore are not code inspectors. This does not mean your inspector is not a professional or expert. The responsibilities are not the same and buyers should understand that an inspector may not be able to speak to specific codes during an inspection.

#3: Not everything visible is required to be inspected.

Every buyer needs to understand the contingencies around what is not inspected during a standard home inspection. Home inspectors are trained to inspect and describe major systems and components of any home, but often do not include accessories and areas that are excluded from the Standards of Practice and expose the inspector to unnecessary risk. For example, window awnings, pools, furnace humidifiers, gazebos, well water and well depths, and other areas and components are not typically inspected. Buyers should fully understand the contingencies that apply to their inspection, as noted within the pre-inspection agreement.

Whether you are a buyer, seller, or agent let the professionals at Home Fax Inspections fulfill all of your home inspection and seller inspection needs by visiting our website or contacting us directly at 248-229-0945. God Bless!

3 Uncommon Home Inspection Benefits

Although a home inspection is always a smart investment, many home inspectors facilitate a bland, checklist style report. Hard to read and engage in, sometimes with unclear explanations and photos that provide little clarity. Eventually it’s filed and forgotten about, with education and impact opportunities fallen by the wayside. 

An industry with relatively no change or adaption requires changing, at least a new perspective or unique way of presenting the information. Inspection companies, such as Home Fax™ Inspections, utilize creative ways to enhance and change the way inspection reports are viewed.

#1: No home is perfect. Every home requires continuous maintenance.

One of the most important purposes of an inspection is to show a buyer what’s truly impacting their safety, well-being, and investment. People perceive differently, but consistency and clarity help avoid confusion and misunderstanding.  The way many reports are presented and communicated often determine a buyer’s perspective.

A checklist with multiple ‘defects’ running down a seemingly never ending list has a different effect than a consistent set of impact ratings that change “Satisfactory” comments (which is the most positive expression used by most inspectors) into Low Impact ratings that show a buyer, ‘this is a positive aspect’, not a defect or deterrent.

#2: Every home has a story

Streamlined processes and organized flow of observations tell the story about your home, instead of checklists that fail to paint a picture because they’re disorganized to readers. Understand how a missing downspout extension affects the vapor barrier that led to mold and water penetration in the basement windows through a process of organized steps, for instance. 

#3: Limitations on reports  

Many inspectors are restricted and prohibited from fully inspecting the property and gathering additional information that reaches beyond the scope of the inspection. As a result, many buyers do not receive supplemental records, such as Environmental Records and Hazards Reports, which may have a serious effect on their family’s well-being, health and safety.

True story: Home Fax Inspections viewed a 1,200 sq. ft. single story residence that was 20 years old, built in 1994, on 3 acres of land. Vertical cracks were present on the interior kitchen floor, with small staircase cracks along the wall facing the exterior. The outside corner, near the same exterior wall, had a 2” separation along the foundation. Environmental records showed that an underground river was running directly through that same section of the homes foundation; the home was destined to crumble from the moment it was constructed.

If you’re thinking everyone, or at least everyone you hired would know that, why was a house constructed on a 3 acre parcel in the only small area that had an underground river? They didn’t know. 

Even more, a standard inspection report would only tell you that 1) a structural crack was observed, and 2) staircase cracks were observed along the wall. 

Which example paints the true picture? Know the Home Before You Buy™