By Douglas Katz – 08/10/2022
The housing market has been on a tear for a long time, much to the dismay of investors looking for properties that fit their business models. Exceptionally high prices for even distressed properties have kept many investors on the sidelines. When you add to this the inflationary pressure on materials for materials needed for renovation and a tight labor market that makes finding contractors and subcontractors, you have a hostile market for investors. Things, however, are turning in favor of investors.
- LISTINGS – While not a 2008 style crash, indicators such as number of listings, price reductions and cancelled deals are steadily painting the picture of buyers regaining some control and a shift from greed to fear in for seller. Specifically, listings have increased by 15% in June as sellers clamor to get their homes sold before the market drops more and those already on the market. Seller FOMO drives sellers to want to get their homes listed and sold before they drop more. While this has not dropped prices significantly enough to create bargains, this has opened the door to further drops as the trend continues.
- PRICING – Buyers have been patiently waiting to get leverage in their deals. Forget getting the upper hand, they just want to pay a fair price and for several years, this has been a pipe dream. Now, higher mortgage rates, inflation and frustration have put many buyers ion the sideline. Less buyers means less competition among buyers anchoring prices to a more reasonable level. Price reductions are more and more common as sellers become more accepting of a new market. Buyers see the price reductions and this becomes part of their buying psychology. They see that if they wait that prices will come down and they are patient.
- DEAL CANCELLATIONS – Simply put, buyers are starting to walk when they feel like they are uncomfortable with their purchase. Most often pricing, property condition and crazy contractual requirements that overly favor the seller are irritating buyers who have been desperate to find a home to purchase and now are awakening to the illogic driven previous few years. This is driving a deal cancellation number that has not been this high since 2020. Inspections are becoming more important and flawed properties are getting harder to sell as they compete with turnkey or well-maintained ones. Sellers of distressed or less desirable properties will need to either make their home more desirable or sell at a discount, which is great for investors.
The most important thing to remember is that the housing market is definitely a trend driven market. As the numbers degrade for sellers, more and more will adjust their expectations or even panic sell if they need to for a move or if they are in financial distress. This will eventually lead to a favorable market for investors, but now is the time to plan. This is the time to refine your strategy and get in place the partners that you need to succeed, such as lenders, contractors and property managers. While many investor specific lenders will not want the same information as a residential lender, they will want to know all of these components of your business to have confidence in your execution. Additionally, ensuring that there are no credit driven snags dragging down your score is also a must to ensure that you don’t stall getting out of the gate.