The Storm Ahead in 2018

There is a storm brewing and if you have been close attention to it you have seen it coming for a while now. It is what will allow me to make the following prediction- 2018 will be a down year for overall real estate transactions because it will be the year of the remodel and not the sale. However, this is not all bad news and in fact there is opportunity abound you just have to know when and how to play it.

First, this should not come has a surprise to many. Inventories across the board have been down. It is has been a tough market for sellers who it is becoming harder and harder to sell for the reason that while they are getting over ask offers the question of where are they moving to does not have an direct answer leaving them with the most dangerous question of- okay now what?

For those who know me real well in the real estate industry will be the first ones to say I am not the biggest proponent of the real estate agent and the real estate industry model as a collective hole. In these markets that lack of advocacy stands out even more. I cannot begin to count the number of agents nationwide I have spoken with in the last several months from large teams down to the individual celebrity agents who have confided in me that while they have had a ton of meetings and listings they have not had a great quarter actually selling. The answer to this problem seems to be created by the fallacy that exists in these kind of markets where any good property will sell. Well what happens when that is only a half fallacy?

Here is what I mean by that. Property that is priced right and in quality condition will sell it just becomes a question of how long will it sit and how long before an equilibrium between price and demand is actually set. I was talking with an agent in Los Angeles earlier this week and he was describing the fact that he has three properties right now on his listing sheets that have a range of a three to five price discount built into them already as an incentive for someone to make an offer. Weeks in nobody is biting.

The problem is rather basic and fundamental. Less inventory makes the end purchaser very discerning when it comes to making a purchase especially when prices are at a premium. This puts a high level on move in ready. Anything less is going to be dismissed as unacceptable. Let’s circle back to that Los Angeles listing from a minute ago- I asked why he thought the properties were not getting any interest. His answer told me everything I needed to know, one has an outdated kitchen with awful layout, the second has bad wallpaper and carpeting, and the third has outdated bathrooms that have not been redone since the 1970’s. There in lie three great reasons for price reductions at list.

Economics is based in trend so which direction is the trend moving towards. Purchases are a premium but rates have stayed relativity flat on a year over year basis. Yes, there have been swings higher and lower but on the year to year charts the line move is minimal at best marginal at worst. Foreclosure rates have stayed within the levels of expectation which leads to the principle of returning capital back into the home.

For most Americans their biggest asset and biggest debt is actually the same thing their home and many people who have considered selling within the last several months are having to have weight the opportunity of what they are left to do, do they sell and hope they can find something in the market for themselves or do they play the waiting game for another six to eight months in the hope the kicking the can down the road will open the door wider in the future.

In kicking the can down the road they are making the decision to probably do something to make their homes more comfortable, or perhaps more appealing on down the road when the time does come to sell. Here in lies the first opportunity, look at homes that are doing significant work to them this can as simple as do you see work being done on the house? Are their contractors at the house? It is far easier to fish if you know where the fish are going to be and where you need to apply the pressure, it just becomes a question of the amount of bait needed and the amount of pressure you need to provide.

The next opportunity is listings that have been stagnant on the open market for a long while. I have a listed of ten properties I am actively looking at in several different markets and at each lengthy interval I have an email go out to the listing agent asking if we can have a conversation about moving the property to an off market deal. Where is the incentive there? Simple, they sell the property and get to have me as the buyer’s agent. An off market deal or even deal on the open market allows me to be more creative in how I structure the deal or with what tool in the toolbox I am going to use.

I love these kinds of deals because I am trying to pigeon them into one type of real estate deal. A lot of them are great candidates for buy, hold, and fix later; while some are fix/flip right away. This time of year it is a little harder to find the deal and a level of creativity is needed in how to structure and use the deal. At the end of the day what matters to me is the makeup of my overall portfolio, and I want to make sure that my pipeline of deals continues to flow uninterrupted.