When the real estate market starts to change, as it is right now, wholesalers are the first to be affected—and if you’re not ready to adjust your business when it does, it can be devastating for your income.
When the real estate market is “Hot” (which is another way of saying it’s a seller’s market, with less inventory than demand), it’s harder to find deals at true wholesale prices, but very easy to find buyers, many of whom will pay MORE than the usual 70% of value minus repair costs for deals. This is the situation a lot of new-ish wholesalers are used to; the market has been increasingly hot for over 7 years now.
When the market is “cold”—that it, there are more sellers in the market than buyers—getting deals under contract at pennies on the dollar is easy, but the hoards of anxious investor-buyers available in a “hot” market shrink enormously, and the ones who remain are relatively sophisticated, and get very picky when there are a lot of deals to choose from.
It’s when the market is in the process of changing, as it is right now, that wholesalers find themselves thrown for a proverbial loop.
As it transitions from cold to hot, wholesalers who actually know how to evaluate properties have a booming business; there are still lots of motivated sellers in the market during this period, but more and more buyers looking to grab some deals.
It’s the transition from hot to cold markets that present a real challenge to wholesalers, and that’s what we’re facing right now.
We’re already at the leading edge of a mid-cycle slowdown, and my prediction for the next 2 years of the real estate market is that it will continue to slow down until this looming recession finally hits. Once the stock market takes the dive it’s due for, we’ll be in full-on buyer’s market mode, and won’t come out of it until 2022 or so.
Here’s what you’ll see as this happens:
- Days on market will increase first; then when
inventory increases enough, prices will start to fall, as they already have in some
of the traditionally hot markets like San Francisco.
- This will start to make buyers who are retailers
more conservative; in a market with falling prices, today’s after-repaired
value isn’t trustworthy; by the time the property is ready for market, it might
be worth less than it is today—AND, because the hard money loans they typically
use to buy and fix properties have a high monthly carrying cost, and extra 2-3
months on the market eats into their profit significantly.
- Landlord buyers will also be affected by a full-in recession; vacancy rates will increase and rents will probably decline slightly. With more vacancies and turnovers to handle, they have to see a no-brainer deal to take on additional rentals
- Initially, most sellers won’t get the memo, and will still be basing their asking prices on what their neighbor sold for 6 months ago
- Months after your buyers have started expressing concerns about the market, the media will notice that there’s a decline in prices, and will start trumpeting that from the rooftops, and at that point, the thousands of new investors who seem to be entering the market every week will disappear, leaving only experienced buyers who are bargain hunting as potential customers for your deals.
I’ve been through 2 other mid-cycle slowdowns (and, of course, one major market crash), and here’s my best advice for not just surviving, but thriving while the market is down:
- Make sure you’re bulking up your buyer’s list with experienced buyers. They’re smarter and pickier than first-time investors, but they’re also looking forward to this slowdown, so they can pick up some bargains for their portfolios. Just ask them. They’re practically bursting with excitement about it.
- Make SURE you have your evaluation skills honed. A first time investor-buyer might believe the Zestimate is the real value of the property, and that a bathroom only costs $1,200 to gut and replace, but experienced buyers know better, and they’re your customers. At least, they are if you’re offering good deals. Which you can’t, if you don’t know what they’re worth.
- Dial back your offers. It’s been easy to sell properties at 75%, or even 80%, of ARV less repair costs over the past few years. It won’t be when there’s more inventory. 70% is a good estimate of what a property will sell for as the market declines; when it gets full-on cold, you’d better plan at selling at 65% less repair costs.
- Dial up your follow up. The market will eventually tell those sellers who still think their property is worth a zillion dollars today that they need to modify their expectations; you need to be following up with them regularly so that when they do get their reality check, you’re the one they contract with.
- Think about grabbing some of those bargains for yourself. The thing that typically happens after a mid-cycle slowdown is the hottest part of the market cycle. When prices start to recover, they do it FAST, and then continue to shoot up until the eventual crash, 4-5 years later. While properties are cheap, why not get some to hold? After all, you don’t want to always be looking for the next deal, forever, right?
Getting you prepared to make MORE money in the coming slow market is one of the main goals of my upcoming wholesaling academy, on August 22nd-25th in Cincinnati. If you’ve been meaning to register, but haven’t, better get on it…I expect it to be at capacity within a week or 2. Learn more and get a seat HERE.