Making Money in this Real Estate Market

A real estate investor has to be just a little bit smarter today than a couple years ago.

Why?

Three reasons:

1. Houses are selling at lower prices today. So, the investor has to either a) buy them lower, or b) be more frugal about the labor and materials to put them in retail condition.
   
2. There's more competition. More homes on the market. So your buyers have more choices. Your home should show better than other comparably priced homes in the neighborhood, if you intend to sell it quickly. And, don't forget about title seasoning issues!
   
3. Homes are taking longer to sell. Days-on-market are up - pretty much across the board. Your holding costs today will be higher than they were a couple years ago, because it'll likely take you longer to sell the home, once it's on the market.
   

The Obama $8K tax incentive has brought a lot of people into the market who otherwise might have held off on buying a home till next year or later.

And, with the ability to use the $8K tax incentive as a down payment, even more people jumped into the market.

So, the first time buyers are out in pretty strong numbers these days, and home sales are climbing for the first time in a while. Here's an example of the effect that's having on the Cincinnati real estate market (where I work). In June 2008 the average sold home price was around $190K. Now, in June 2009, the average sold price is just under $135K.

Of course, much of the national press will suggest that that means that housing prices are off by 30%. WRONG. What it means is that the ratio of first-time buyers to the overall market is significantly up. And those buyers aren't buying $190K homes. They're buying homes in the $80K-150K range. At least around Cincinnati.

What does this mean for the fix-n-flip real estate investor?

It means that you should be targeting homes that will sell to the first-time home buyer. Because that's where the market momentum is. At least, until December 1, 2009 - when the $8K tax credit expires.

And, don't forget... unless they extend the tax credit, your home should be under contract by no later than mid-October, in order to close by December 1. The lenders will be swamped, coming into the closing days of the tax credit.

It's the same as it always was.

Start with the after-repaired value (ARV). In other words, what will the fixed up house sell for?

Subtract your costs.

1. Purchase costs - home price, closing costs, homeowners insurance, any escrow items (i.e., taxes, insurance), points on the mortgage, etc.
   
2. Repair costs - labor & materials. Even if you're doing the work, you should figure that your time is worth something. Figure that in labor costs. Don't forget to put some slop into this figure to account for unplanned expenses.
   
3. Holding costs - mortgage payments, utilities, and the like. Take the average days on market for your area and add selling time to the time it'll take you to fix up the house to figure holding period.
   
4. Selling costs - Realtor commissions, deed preparation, transfer taxes, prorated property taxes.
   

Subtract your profit. Believe it or not, a lot of "newbie" investors neglect to figure their profit into the deal! Go figure...

How do you figure the profit? I'd start with your cash outlay. Let's say you have to put $20K into the deal - down payment + repair costs. What kind of return do you want on that? 20%? 30%? Don't forget - if you only hold the house for 6 months, your annual return on investment will be twice the return you expect.

Now, you've arrived at your target purchase price.

So let me go over that again, in case you weren't paying attention.

Purchase price = ARV - (Costs + Profit)

Simple, right? You can thank me once you've done your next deal.

Where do I find deals that I can buy cheap like that?

Ahhhhhh, Grasshopper.... that's the subject of the NEXT Hubpage. Stay tuned. In fact, you might just subscribe to my RSS Feed to be notified of all the great tips for real estate investors that I'll be writing here!

Suffice it to say that developing a working relationship with a good Realtor is the best thing you can do for yourself.

If you happen to be in Cincinnati, that would be me. And if you'd like to be added to my pre-screened email list of Cincinnati foreclosures, just click that little link there - it'll take you right to the signup page of my website!

And for more great information of value to real estate investors, be sure to check out my blog. That'd be the link right above.

To your wealth!