When it comes to finding great real estate deals, I am a firm believer that you can find deals in any market and any time. But what is the probability that you can cherry pick from many home run deals have little competition, multiple exit strategies? The best markets allow you to consistently find successful deals, create efficient systems and duplicate over and over. The media has a much different approach in that they look at hot markets speculatively as ones that will appreciate, our approach is much different. To identify markets to invest in it is recommended to have not 1 or 2 of the following, but all 4: Little chance of depreciation, lots of available deals, low competition and multiple exit strategies. I break down these 4 criteria and use some compelling research from PMI to estimate risk. The formatting of the table did not work here, read the whole article at this link
PM me if you would like a copy of it.
Here is the whole article. The formatting of the table did not work to well.
When it comes to finding great real estate deals, I am a firm believer that you can find deals in any market and any time. But what is the probability that you can cherry pick from many home run deals have little competition and multiple exit strategies? The best markets allow you to consistently find successful deals, create efficient systems and duplicate over and over. The media has a much different approach in that they look at hot markets speculatively as ones that will appreciate, our approach is much different. To identify markets to invest in it is recommended to have not 1 or 2 of the following, but all 4: Little chance of depreciation, lots of available deals, low competition, multiple exit strategies.
Probability of depreciation – If you haven’t heard of PMI, Private Mortgage Insurance, let me introduce you. PMI provides insurance to lenders to protect them from buyers who default. PMI also applies leading research, analytics, and pricing principles to manage risk concentration, and release a monthly market review and quarterly Market Risk Index report. The PMI U.S. Market Risk Index score translates to a percentage that predicts the probability that house prices will be lower in two years. Based on this report many of the hot areas during the boom such as CA, Vegas, FL, etc have a High probability of lower home values in 2 years. However, many areas of OH, TX and the Midwest have Minimal risk rank.
PMI US Market Risk Index
Risk Rank 1st qtr 2009 4th qtr 2008
Riverside-San Bernardino-Ontario CA CA
High
99.9
99.9
Miami-Miami Beach-Kendall FL FL
High
99.9
99.9
Los Angeles-Long Beach-Glendale CA CA
High
99.9
99.9
Fort Lauderdale-Pompano Beach-Deerfield Beach FL FL
High
99.9
99.9
Las Vegas-Paradise NV NV
High
99.9
99.8
West Palm Beach-Boca Raton-Boynton Beach FL FL
High
99.9
99.8
Orlando-Kissimmee FL FL
High
99.9
99.6
Tampa-St. Petersburg-Clearwater FL FL
High
99.9
99.7
Santa Ana-Anaheim-Irvine CA CA
High
99.9
99
Phoenix-Mesa-Scottsdale AZ AZ
High
99.9
98.8
Jacksonville FL FL
High
99.9
98.9
Sacramento–Arden-Arcade–Roseville CA CA
High
99.9
97.9
San Diego-Carlsbad-San Marcos CA CA
High
99.8
97.2
Providence-New Bedford-Fall River RI-MA RI
High
99.3
98.3
Detroit-Livonia-Dearborn MI MI
High
98.8
86.3
Edison-New Brunswick NJ NJ
High
96.7
89.4
Oakland-Fremont-Hayward CA CA
High
96.4
80.7
Newark-Union NJ-PA NJ
High
96
84.1
Nassau-Suffolk NY NY
High
91.9
78.3
Washington-Arlington-Alexandria DC-VA-MD-WV DC
High
91.7
88.2
Portland-Vancouver-Beaverton OR-WA OR
High
89.8
66.4
Baltimore-Towson MD MD
High
89.6
83.8
Virginia Beach-Norfolk-Newport News VA-NC VA
High
89
77.6
New York-White Plains-Wayne NY-NJ NY
High
87.8
67.6
Atlanta-Sandy Springs-Marietta GA GA
High
80.7
55.8
Boston-Quincy MA MA
High
79.5
56.6
San Jose-Sunnyvale-Santa Clara CA CA
High
78.4
51.4
Minneapolis-St. Paul-Bloomington MN-WI MN
High
74.5
58.5
San Francisco-San Mateo-Redwood City CA CA
Elevated
66.2
31.6
Warren-Troy-Farmington Hills MI MI
Elevated
57.9
23.6
Seattle-Bellevue-Everett WA WA
Moderate
46
30.3
Milwaukee-Waukesha-West Allis WI WI
Moderate
44.6
27.5
Cambridge-Newton-Framingham MA MA
Moderate
40.6
27.3
Chicago-Naperville-Joliet IL IL
Moderate
36.2
13.7
Philadelphia PA PA
Moderate
30.3
27.5
Indianapolis-Carmel IN IN
Low
28.8
9.6
Austin-Round Rock TX TX
Low
28.1
17.4
Cincinnati-Middletown OH-KY-IN OH
Low
27.4
12.1
Kansas City MO-KS MO
Low
26.2
11.2
Denver-Aurora CO CO
Low
21.2
14.2
Nashville-Davidson–Murfreesboro–Franklin TN TN
Low
16.6
12
Charlotte-Gastonia-Concord NC-SC NC
Low
15
5.7
St. Louis MO-IL MO
Low
12.9
13.8
Fort Worth-Arlington TX TX
Minimal
5.8
2.5
Dallas-Plano-Irving TX TX
Minimal
3.8
2.5
Houston-Sugar Land-Baytown TX TX
Minimal
3.7
2.7
San Antonio TX TX
Minimal
2.8
3.8
Columbus OH OH
Minimal
2.1
2.4
Pittsburgh PA PA
Minimal
1.5
1.7
Cleveland-Elyria-Mentor OH OH
Minimal
1.5
2.3
Lots of available deals – It is safe to say that the US economy has impacted every market in the country. Foreclosures have hit all time highs and many areas have an oversupply of opportunity. Some areas have more deals than others, but there are plenty of distressed properties out there.
Competition – Have you ever been in a bidding war? 5-10 offers and the seller counters or asks for best and final? I have experienced this many times and almost always the property sells for much more than I am willing to pay. Competition drives up prices. A perfect example is the way prices soared in hot areas like CA, Vegas and Florida. Homes would be put on the market for 15% higher than the comparables justify and still multiple offers as much as 20K over asking price. Investors are in the best situation where they are the only offer and thus have much more leverage in negotiations. My experience is that there is a lot of competition in the desirable areas that were very hot during the boom such as CA, Vegas, Florida, TX etc. Other less desirable areas have less speculation and competition which often results in lower purchase prices for distressed properties. Many smaller cities and areas of the Midwest such as OH have much less competition.
Multiple Exit Strategies – I have written about this topic in the past articles. Having multiple exit strategies is often crucial to avoiding loses. If you are unsuccessful flipping a property you may be able to rent, lease option and even get a lower payment or take cash out with a refinance. Or if you cannot find good property management or good tenants then you can flip or wholesale the property because you have plenty of equity. Multiple exit strategies give investors backup plans if your 1st exit is unsuccessful. Simply put, multiple exit strategies will lower risk, not to mention, let you sleep at night. Many high priced areas are difficult to cash flow and have multiple exit strategies. Again, many smaller cities and areas of the Midwest such as OH have an oversupply of deals with tremendous equity, tremendous cash flow and multiple exit strategies.
Summary – It is strongly recommended to identify areas with all 4. High priced areas that were hot during the boom have a high probability of depreciation based on PMI’s research, there is a lot of Competition and Multiple Exit Strategies is difficult to achieve. While there are many foreclosures in CA, Vegas, Florida, etc, they are not areas that are recommended. Many people will do well on deals, but many deals will also tank. TX is an interesting market as it is very stable. You can achieve multiple exit strategies but there is a lot of competition fighting over the available properties. Many smaller cities, areas in the Midwest and OH however hit on all 4. Minimal chance of home values decreasing, tons of available deals, low competition and ability to find deals with tremendous equity and tremendous cash flow. The success of a deal is still dependant only on that specific property and not the market as a whole, but the Midwest and OH are the areas strongly recommended as areas to invest at this time.
All this articles and news stories are such BS I hate to tell you. We CAN NOT predict the market. Many people bought on SPECULATION. They speculated profits and instead lost money.
Right now the main factor in controlling the market is tied into the unemployment ratio. How can anyone expect prices to be stable when more and more people are losing jobs. Goto an area with strong job growth or stability and you will have solid pricing. Find a town where 5000 people were laid off and prices will crash in 6 months when the payments stop.
Don’t ever depend on the media to give you the truth regarding economic conditions and the housing market. They have a vested interest in reporting “the recession is over”, (which they have already done, by the way).
I agree with you guys. You cannot predict the market. You can take accurate information and make informed business decisions. I strongly frown upon speculation which is why I like to buy around 50% LTV with tremendous cash flow that way I have multiple exit strategies and can withstand surprises such as job loss, vacancy, inability to flip and any other unpleasant surprises. I also agree that the Media reports are just about useless. The media creates drama and fear because it sells ratings. Most of the information is massaged to create a Wow or drama effect and 95% of people use this useless info to make decisions which is unfortunate. I check the sources to make sure it is credible, accurate and info worthy to use to make an informed business decision. I do like PMI’s info. They insure mortgages so they do tons of research on all the factors that effect a market. Their goal is not to get ratings. PMI is only one of my criteria when chosing where to invest and probably the least important. Finding great deals that can withstand worst scenarios is a must.
Just wondering how you are buying at true 50% of value based on actual comps?
In areas where properties are cheap and there are lots of REOs , it seems pretty much impossible to get something at 50% of value.
REOs are going for at or above the asking price , these prices then become the new comps.
But I guess every market is different.
Good question. The areas we invest in often have older homes. Some are in good shape, others are in need of repairs. Most of the REOs are in need of repairs and go for much cheaper. For flips we try to find areas with very few REOs and low comps. There are examples illustrations of deals on my website with numbers, here are some examples. For rehabbed homes we use comps in similar condition and obviously lower the expected sales price when a lot of low REOs exist. Often we find deals with 7 retail sales and 3 REO sales with a similar ratio of actives. The REOs have an impact but for flips we use areas that are not 50% REOs or more. Those areas are better for rentals which we end up purchasing for much less and only do repairs to make them rentable. I hope this helps. Where are you located by the way? I have found many stable areas to have strong demand and limited REOs and distressed property leaving very little discount. There is always that diamond in the rough if you look hard enough.
I am in California, looking in the Central Valley area. This is one of the top foreclosure markets in the country. Homes that sold at the peak for over 200k now w/ REO asking prices under 60,000 or so.
It seems that probably 95% of listings are REOs or short sales, which makes sense as people that can sell at these prices probably have their homes paid off and don’t need to sell or waiting for the REOs to disappear and sell when the market is better. Or they are probably renting it out in the meantime.