How to Win the Deal, Even in a Hot Market

Author's note: the ideas reflected in this blog post are very much market-specific. My primary market remains a strong seller's market, and the strategies listed below are reflective of that position in the market cycle.

The Three-Legged Stool

If you've had a sit-down with a financial planner in the last few decades, they may have mentioned the "three-legged stool" of traditional retirement: Social Security, employee pensions, and personal savings. With the idea rattling around in my brain, I took to Google to see if there were many other examples of the same analogy being used. I was not disappointed:

- The 3 Legged Stool of Small Business, according to the Small Business Doctors, consists of your company's product/service, its systems/processes and its leadership.

- The 3 Legged Stool of Emotion Regulation according to the Tuckahoe Child Psychology involves Diet, Sleep and Exercise.

- The 3 Legged Stool of Psychological Science (and of Effective Storytelling), per Association of Psychological Science: Meaningfulness, Coherence, Memorability.

It's a sticky idea: the three pillars which do a far better job than would two, and to my surprise, also typically works better than with four.

What's the point?

As the summer selling season continues to heat up buyers & investors alike are more eager now than ever to get into the market, or resign yourself to the idea that you're going to miss out on this wave: better luck next year! 

Those new to the act of looking for deals can initially find the process... deflating. According to the Tucson Association of Realtors, we are experiencing a pretty extreme market: median home prices & absorption rates are the highest we've ever seen, while the number of homes for sale & the length of time it takes to sell a home (avg. Days on Market) are at their lowest levels since the statistics were first tracked in the 90s.

It begs the question: How in the world do you win in a market with nothing to buy? It can be done, and is being done every day. It's just being done faster, more efficiently. It's about knowing the process, understanding your market and understanding the level of competition you're going up against. 

With that, let's look a bit more in-depth into my 3 best recommendations for finding your diamond in the rough of a peaking market:

3 Pillars of Investing in a Hot Market

1) Know your Buying Criteria inside & out

The most common mistake I see working with new buyers boils down to a lack of a specific buying criteria: what, specifically, are you looking for? What are your 5 "Must-Haves" you want in your next purchase, such that you value them to the exclusion of most or all other parameters?

Let me paint you a picture: you have a vague idea of what you're looking for. Maybe it's a 3/2 that needs some light rehab, anywhere in town is fine, so long as the numbers work. You don't want to paint yourself into a corner, after all.

After a bit of research you find one that looks good: A 3/2 opportunity in a C- neighborhood, which you pass on because you want a better school district.

A bit more research into a different market and you find something that could work. Amazing school district, but the rents barely cover the mortgage. Isn't it smarter to look for a triplex rather than a single family home, anyway?

A month later the triplex you ran across seems like it would produce decent cash flow, but you wouldn't want to live there because it's too far from work...

Stop! For just a moment, stop looking for deals and identify specifically which deals you're looking for.

"I'm looking for a duplex or triplex in or around the X & Y neighborhood with at least 2 bedrooms per unit, purchased for no more than $150,000, so long as the units would rent for at least $700/side" <- that, you actually might find!

2) Get Pre-Qualified by a local lender

Due to the realities of a seller's market, successful buyers are ones who are prepared and can react quickly. In a market where nearly 1/3 of homes are sold within the first week on the market (in a 2018 sampling of 10,000 sales in metro Tucson) the first, "cleanest" offer very often wins the deal.

Moreover, a seller would never seriously consider an offer without a pre-qualification letter or proof of funds because they don't have to; there are too many buyers and too few properties to buy, somebody is going to step up and match your price who is already pre-qualified. Realistically, it's the price of admission, and the standard Arizona Association of Realtors Purchase Contract in fact states on line 69 that a Pre-Qualification letter is attached to the offer.

Why stay local? I have 2 pieces of wisdom here:

1) We don't usually look at property between 9am-5pm, and when it comes time to make an offer I'll need to be able to get in touch with the lender quickly. I trust my local vendors to work when I work, and speed wins deals.

2) A lender should be consultation- and relationship-based. If your lender is not interested in an ongoing relationship with you, or isn't ready to invest their time into increasing your financial education, they are not keeping pace with today's market and have no business in your world.

3) Make a strong offer, the first time

Statically speaking, the average list price to sales price ratio has been hovering around 97.5%-98.0% for Tucson city-wide. Which is to say, on average, if a property is priced such that it ultimately sells to someone the buyer scarcely achieves more than a 2% discount off "sticker price."

I understand the desire to negotiate property to below-market values. It's one of the cornerstones of sound financial investing, and you ignore it at your peril. But please understand we're talking about discounts on market value, not necessarily on list price.

A lot of the time, the deal works at list price. When it does, you need to be prepared to pay list price: if you aren't, someone else will.

That's it! I know it sounds like a lot of prep work, but if you agree to take on the burden of all that preparation you will find yourself in the upper 5% of any market you want. After all, not every investor is looking for "a duplex or triplex in or around the X & Y neighborhood with at least 2 bedrooms per unit, purchased for no more than $150,000, so long as the units would rent for at least $700/side," and will scarcely even see the deal before you've scooped it up.

Do you have any other tips or tricks for making deals work in a hot market? Tell me about it in the comments?