Anyone who doesn’t live in a cave has to know that we are currently in one of the best real estate “buyer’s markets” in a generation or more. Home prices have been pushed down by the steady stream of distressed properties into the market, and mortgage interest rates are at nearly historic lows. But many potential buyers remain paralyzed by the fear that what happened to a friend or a relative could happen to them: you buy a home at what seems to be a great price, only to find a year or two later that prices in the neighborhood have continued to decline, and you are “upside down;” that is, you owe more on the home than it is worth. For an investor, the fear may be that market values in a neighborhood decline even slightly, while the investment sits empty and potential profits are consumed by debt service.
Those of you who read this blog regularly know my motto: “Solid analysis identifies great opportunities.” Whether or not an opportunity really is a good one should be revealed by solid analysis. And the really dangerous ones should be identified and eliminated. But what specifically should we be looking for?
First, let’s target a general geographical area. There may be reasons for targeting an area that are beyond your control. Commuting distance to work would be one of those. The need for quick access to transportation or major transportation routes would be another. But beyond the things over which we may have little control, what else should we be looking for?
Whether you are a homebuyer with school-aged children or an investor looking to attract responsible tenants, one of the first factors I consider is the performance of a school district, as measured by unbiased data. There are a number of websites that analyze school performance. I prefer www.ncreportcards.org because it just presents the data and lets you draw your own conclusions. In a real estate market where mistakes can be costly, whether you have children or not, a property located in high-performing school district is more likely to retain its value, limit investor risk, and see values bounce back after the market stabilizes. In Mecklenburg County, the Providence, Myers Park and Ardrey Kell High School districts consistently receive high accolades. In Union County, Marvin Ridge, Weddington and Cuthbertson school districts consistently perform at the top. But don’t take my word for it; visit the website and draw your own conclusions.
What else should we be looking for? If you’re one of those people who insists they don’t like the idea of working with a real estate professional, you’re not going to like this next one. Beyond general location, the research should focus on recent “comps” (comparable sales and active listings in the MLS system). Of course, the key here is that database called the “multiple listing service” or MLS system. In my estimation, there is no better or more accurate single resource for thoroughly doing your homework. Most of the popular websites gather all their information from the MLS, but the information the free sites– and many of the subscription sites– report is not up to date or completely accurate because they are reporting information “second hand.” The only way to have access to the MLS system is to subscribe to it; and the only way one can subscribe to it is to be a licensed Realtor. Are all Realtors alike? Of course not. Are all bankers or investment advisers or attorneys alike? No! It might sound self-serving, but I think you would be well advised to hitch your wagon to someone who really knows what he or she is doing. You have a great deal riding on the soundness of the decision you are about to make.
So you have access to the MLS data. What should you be looking for? There are things that will be obvious from the data, and things that will be implied. How many active listings are there in a community? How many REO’s (bank-owned properties) or short sales (homes in which the seller is attempting to sell for less than he/she owes and must secure his lender’s approval before a contract is binding) are actively listed for sale in the community? If there are four or five REO’s and two or three short sales, values have probably not finished dropping in that community.
I generally look back six months at SOLD comps. And, again, be sure you know what you are doing when you assemble your “comps.” (Comparable sales and active listings) This will tell you how active sales are in a community… whether prices are still trending downward or have begun to stabilize… what sort of offer should we make? In this market, unless there is some extraordinary explanation for the lowest comparable sale price (e.g. sale to a relative), I suggest an offer below the lowest sold comp in the last six months. And, depending on the myriad of other factors, I might suggest an offer well below the lowest sold comp to make sure we have some “room” for further declines in value or for periods of vacancy in the case of investor properties.
With respect to investor properties, the MLS will allow us to see what homes or condos are currently available for rent in a particular community, what price they are offered for, what properties are currently leased, how long they were available before they were leased and what the current lease price is. There is no guarantee that your investment will lease within a certain time frame, but the historical data in the MLS system can certainly give you some solid insight into this.
Solid analysis identifies great opportunities– and can avoid big mistakes. We are currently experiencing the best “buyer’s market” in a generation or more. Anyone who is able to take advantage of it would be very wise to do so. But, for the uninformed or poorly advised, what might appear to be a good opportunity can become a costly error. As with most things in life, there is no way to eliminate risk completely. But sound research and thorough preparation can go a long way toward limiting that risk… and toward finding one of the many great opportunities that still exist in this market.
[Eric Dorer is a licensed real estate broker in NC and SC and a Realtor with Wilkinson & Associates in Charlotte, NC. He is also a licensed Florida attorney and practiced law in Florida for more than 20 years. You can visit his website at: http://edorer.wilkinsonandassociates.com ]