Do I Wait For the Bottom to Buy?
What are we, as real estate investors, supposed to do?
Everywhere we look, we get news that “The bottom hasn’t yet been reached” and that “Things will get worse before they get better” etc.
We cannot deny the outstanding bargains available in so many markets right at this moment. But.. shouldn’t we wait for even better bargains?
In the meantime, it is not even clear what to do with our money. Savings? A tiny interest return, surely less than the real inflation, may cause a loss of money in real terms.
Stocks? Very unclear. Real estate actually seems like a very decent place to invest in right now, what with buying properties at half the construction costs and getting very solid cash flows. But will it get even better?
Well of course we don’t know what the future will bring. However a few points can be made:
1) There are markets in the country that have gone down quite a bit. The statistics tell us that Phoenix, for example, went down 34% from the peak (it was in today’s newspapers actually). This seems like a major drop – If a house cost $300,000 at the peak, today’s news tell us it is now only worth $300,000x(100-34)% = $198,000. This is based on serious study data. The media also uses data such as this when predicting (very possibly correctly) that values will still continue to drop. But here’s the rub: the market value of the house may well be $198,000 and it is possible that it will indeed keep going down to a market value of $158,000 (that’s ANOTHER 20% drop – more than most negative-minded experts are predicting, incidentally). However the point missed is that the neighboring house, of identical value, may have been seized by a bank. The bank may behave quite irrationally and offer the neighboring house for a ridiculous price of $120,000. Why would the bank do that? Well, banks could never be accused of exercising too much logic. These properties are sold by a bank clerk who may even get a bonus if a certain number of properties are unloaded. Does the bank employee necessarily care about the exact price? Perhaps not. In addition, holding the house keeps costing the bank money and it is subject to vandalism and other potential expenses. The bank may have considerations which don’t necessarily mirror the current market values.
As a result, there are many anomalous cases such as the one I described here. Buying the neighbor’s house from the bank for $120,000 is actually buying it for quite a bit less than the future bottom predicted by most negative-minded experts. So in essence there is a situation now where we can, at this very moment, possibly pick up houses for much less than the projected bottom prices of the future.
2) In our recent lectures we discussed the sellers’ mentality and how it changes on the way down towards the bottom, at the bottom, and after the bottom had been reached. When properties are still going down towards the bottom, sellers’ mentality is negative. Sellers may feel that time is “not on their side” and as the days go by, their properties become less valuable. Sellers feel a pressure to sell as quickly as possible, for a good price, before the properties go down even more and get below the current low sales price. The general thinking is negative – like right now.
How do we know that the bottom had been reached? The only way to know is when prices actually start inching up. In other words – recognizing the bottom can actually only happen in hindsight.
Right after the bottom had been reached, the media starts reporting that happy fact, and also reporting how prices are now starting to go up again. What is likely to happen to sellers’ mentaility? Isn’t it obvious that sellers will think more along the lines of “Time is on my side?” and “the longer I wait the more I can get for my property”? Why would sellers, after the bottom is reached, bend over backwards to accommodate buyers? In addition, before the bottom is reached, buyers are scarce and sellers don’t wish to lose them. After the bottom is reached, buyers start jumping in in ever-growing numbers (fueled by the media, no doubt). Isn’t it clear that a buyer is far better served buying before the bottom than after the bottom? Yes everyone would love to be one of the 2.5 people who actually bought at the exact nano-second which was AT the bottom, but realistically most buyers will purchase either before or after the bottom.
3) As I mentioned before, there are many markets where houses can be bought for a lot less than the raw construction costs. These are prices that are already below the intrinsic value of the materials and labor, even if we consider the land cost as zero (and it’s not). Unlike an expensive home that used to sell for $8M and now can be had for $5M but actually only costs $2M to build, there are places where the construction costs may be $180,000 yet the house can be had for $110,000. Buying well below the basic intrinsic costs is also a signal of great future value.
When is the bottom going to be reached? People can only speculate. Most experts talk about either late in 2009 or sometime in 2010 (especially with trillions thrown around in stimulus money from the government). I feel that no matter when the bottom is reached, there is a window of time, possibly of one year, maybe one to two years, when the “perfect storm” of buying at anomalous prices set by hysterical banks, that bear little relationship to any real values, will be possible. I believe that investors who can buy, will most likely benefit by buying now, during that window.
No doubt, financing are harder to come by (especially if the investor already owns more than 10 properties), down payments need to be higher, and in some cases buying for cash may be the best strategy. However it is hard to ignore what is going on around us. Buying during this current window may be possibly seen, from a future perspective, as the best time to buy in nearly a century.
It is quite important to use realtors who will sift through the garbage and get only the houses that are worthy. Getting quality real estate and sitting on it for a few year while getting cash-flow, may end up being one of the best investment strategy for 2009.
