There are a handful of criteria to remember when assessing whether or not it makes sense to go into a market. And at the very least, these criteria will establish a foundation for your preliminary market research. You may come into a community for example, where there are sixty developments in a given location in a twenty-five-mile radius, and based upon a grid analysis, you’re able to determine that only a fraction of those developments, let’s say 20 percent or twelve developments make sense in which to buy because they are priced at the entry level or mid-market level. In this particular example, it may be that only nine out of the twelve remaining developments you’ve looked at in our particular hypothetical have a build-out trajectory of ten to fourteen months, which is ample amount of time for the flip candidate to “marinate” in appreciation and make a profit on the accumulated float.
Furthermore, additional analysis indicates-after you’ve spoken with the onsite sales agents and received price setups on the subdivisions-that six of the remaining nine developers offer homes that have deposits in the $3,000 to $5,000 range, as opposed to other developments, that are nicely priced and fit your investment parameters, but may require a 10 percent or $20,000+ deposit requirement, both of which are deal killers. This is what I mean by market grid analysis and preliminary market research. After this type of analysis, you should be able to make a well reasoned decision as to where your target properties will be geographically located and why.
Also, never go into a market that appears it will soon be overpriced. Case in point and as an example, in October 2004 in Las Vegas, Pulte Homes slashed its home prices in nearly every development-including those that were in escrow-by $25,000 to $150,000 a home. Pulte literally and figuratively woke up one morning and unilaterally slashed and reduced prices across the board. At first blush, this may seem awfully generous, but what about the poor guy that just closed his Pulte home last Friday, before the Monday price slash! Suddenly he has a paper loss of at least $25,000 to $75,000, or quite possibly even more. Not only does he have a zero profit, he likely has an equity loss in the tens of thousands of dollars.
What about design upgrade when considering weather or not to enter a market? On the acquisition side of your investment, never build or design a TajMahal. Building a Taj Mahal reduces the return substantially and may not add to the overall enhancement of your home. Ultimately, adding too many upgrades will create a diminishing point of return. When it comes time to sell your investment, this will be an appraiser’s nightmare and a homeowner/investor’s loss, given that the actual cost of the upgrades will plateau to a certain level, and cease to add additional market value to the home.
As the latter Las Vegas example illustrates, and I can’t emphasize this enough, market selection and diversification is crucially important and may be a significant factor in walking away with a check at the close of escrow, as opposed to writing a check at escrow.
As a member of the National Association of Realtors and the National Association of Home Builders, D. Sidney Potter began his real estate career in 1992 as a mortgage operations consultant for Synergy Consultancy Group, and proceeded to work for Marcus & Millichap and Sperry Van Ness as a commercial real estate broker selling shopping centers and storefront retail. In addition to being a former member of the International Council of Shopping Centers, he holds a BA, 2 MBA’s and part of a Doctorate from Pepperdine University. Most recently he served on the Board of Directors for two major HOA’s in Las Vegas.
