Falling markets

While most markets have risen over the last five years, some are flattening out, and some may have already dropped. This type of market offers great opportunity to the savvy investor. When property values are falling, inventory often rises, and many sellers become highly motivated when their properties fail to sell quickly.

Motivated sellers will do whatever it takes to sell their property. Whether sellers need to move from the area, are struggling financially, or have other pressing reasons to sell, they may well accept a below-market offer.

Investors know that a weak market can offer extraordinary deals, though flippers need to proceed with caution. In a falling market, even a few months delay can turn a sound deal into a headache. It always pays to know the market and purchase the property at a price low enough to net an eventual profit, even if the market continues to fall.

The common myth is that you cannot make money in a bad real estate market. In a bad real estate market, you can often buy junker properties for 50 cents on the dollar and sell them for 60 cents. It’s all in how you do the math.

It’s worth noting that markets will always change. If the market rebounds after a purchase, then all is well for the investor. However, if the market takes a downturn after a purchase, there can be trouble ahead. Markets commonly show signs of slowing or turning over several months.

Sometimes the early signs come from national economic trends, like rapidly rising interest rates or sweeping changes in tax policies that affect home ownership or investment (e.g., the rapid change in depreciation rules for real estate investors in the late 1980s).

More likely, clues come from local market conditions, such as unemployment, oversupply, or a change in demand because of living conditions.

Exit strategies

More important than guessing the future of a local market, you need to have a clear plan in mind when purchasing property. A smart investor knows exactly how he will “exit” the property before he buys. An even smarter investor will have a backup plan or two, in case the first course of action doesn’t work.

Know your market and your plan before you begin to invest.