For the past 6 months or so, it has really begun to appear that real estate values and demand are flattening out. Now, in late 2005, the financial programs and some new media “talking heads” are saying that the hot real estate market seems to be cooling off.
These are changing times for the real estate investing business, and the challenge is to recognize new trends and develop a strategy that makes sense.
There has been noticeable slowing in the market. One of my contacts reports that after years of strong sales of log homes in the North Georgia mountains this summers market slowed to a virtual crawl.
It appears that rising rates are taking a toll on the number of buyers who can qualify for a mortgage. Higher energy prices mean higher home maintenance costs. And, the seasonal drop in buyer demand, common in winter months, will add to the slowing pace of real estate sales.
In the investment community, appraisers are being pressured to be more conservative as lenders, stung by fraudulent deals and high foreclosure rates, are fighting back.
Many loans are requiring more than one appraisal in order to verify the value. Some appraisers, in an attempt to keep lenders happy, are dropping appraised values by as much as 15%. This is going to have a snowball effect in 2006, as todays flattening purchase appraisals become tomorrows comparable sales.
Overall the economy is still strong, and with interest rates still at historical lows, there is no reason why investors cannot continue to profit from real estate, as long as we use common sense when evaluating deals.
In a crunch, the only real protection you have against such market conditions is your equity. I know all the arguments about how you can't spend equity and how people with equity don't have any cash. BUT I can also assure you that the people who cash out their equity and use it for spending money find that this habit will eventually lead to trouble in a flattening market.
The refinancing craze of the late 1990's and early 2000's was based on the assumption that prices are always rising. We are now entering a cycle where this is not a reliable assumption in all areas. For the average investor in the current market, refinancing should only be done to eliminate other debt payments, and not for spendable income.
Conservative investors have learned from experience that markets go in cycles, and that hard times will come sooner or later. We are seeing the end of the investment cycle that began in the early 1990's. It is important that our attitude toward handling real estate investments change along with it.
Highly leveraged properties can work in a rising market that is seeing strong demand and growth, but when the market begins to flatten or drop, as is now the case, it is critical to avoid being over leveraged. Equity is your only real protection in a flattening market.
This means that many of the popular strategies of the past 10 years, that led to high leverage should only be used carefully, if at all. A seller may offer you 100% financing to avoid a foreclosure, by letting you take over their house subject-to their existing loan. But you have to be sure you can generate enough income to cover those payments.
Creative strategies that lead to high leverage are not a good idea in a falling market. They work well during strong job markets, when housing demand is at it's highest. When the demand slows down, high leverage deals are the first to suffer loss of cash flow.
The safest and best way to invest in real estate is not the sexiest or the most glamorous. The safest way to invest is to have adequate equity when you buy. Whether you want to hold for years or sell quickly, your profit is in your equity.
I can't sell as many seminars, tapes and courses by telling you the facts.
To sell stuff, we are supposed to get you all worked up into a lather over how wonderful it's going to feel when you start making $10K per month tax free by pulling out all your equity. But don't forget about the other end of that strategy...that tax free income is a loan that someone has to pay back.
This brings me back again to the fact that you make your money when you buy. Why is that? Because you are supposed to insure that you pay a lower price that will guarantee equity. The presence of equity is what gives a deal it's value. The more equity that is there, the better the deal is likely to be. It's just that simple. And equity is like a life jacket when real estate markets begin to sink.
Donna Robinson is a real estate investor, author, and consultant located in Atlanta Georgia. You may read more of her articles on her website at http://www.realestateinvestorhelp.com/ or you may contact her by email at drobinson@reihelp.com or call 404 542-9903.
Tags: mortgage loan, mortgages, mortgage lenders, mortgage financing, real estate financing
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