If this is your third visit looking for the next lesson, congratulations! It shows that you are eager to learn; an essential ingredient of all successful real estate investors. If you are new here, go back and read the previous lessons. We’ll wait. You don’t want to miss any lesson since each builds on the last. This lesson will focus on conditions and types of different real estate markets. You need to understand each because different conditions will dictate different strategies. A market condition can last for months or years. They can also change very quickly. In hot markets, delaying a decision by as little as an hour can be the difference between making or losing thousands of dollars. How do you keep tabs on the current “temparature” of the market? The best way is by carefully choosing your Realtor. If you’ve done your homework and have chosen a Realtor that’s an expert in both his/her market and real estate investing, you will get the most up to date information and conditions. No one has a better pulse on the market than an experienced Realtor.

Types of Real Estate Markets

While there are many variations, real estate markets basically fall into three categories; Buyer’s Markets, Seller’s Markets and Neutral Markets.

This lesson will cover Buyer’s Markets; what is considered a Buyer’s market, the advantages and strategies for buyers.

Buyer’s Markets -A Buyer’s market exists when the inventory of homes for sale exceeds the number of buyers looking to buy homes. Experts agree that “months of remaining inventory” is the best indicator to determine what type of market exists. A Buyer’s market is one in which there are 6 or more months of remaining inventory. The higher the number, the stronger the Buyer’s market. The formula to compute Months of Remaining Inventory is: Total number of active listings divided by the total number of closed or sold transactions for last month. That number will be your Months of Remaining Inventory or MRI.

When the number of homes for sale is up, buyers make the rules. Buyers have more choices, less or no competition; and Sellers know that. In a cold real estate market, serious sellers are more willing to negotiate. Buyers can offer less money and ask for more, including closing costs, contingencies, even inventory. When I bought my last home, it was a Buyer’s market. As I was touring the home I eventually bought, I noticed a beautiful brand new big screen TV in the living room. Joking, I said “how about throwing in the TV?”. Not expecting anything but a chuckle from the owner, he responded without even a pause by saying “Put it in the offer.” Long story short, I now have a $4000 TV in my living room.

If you are a buyer, the best time to buy is in this market. Ironically, during Buyer’s markets, I often hear “I’m going to wait for prices come down even more.” As you learned in lesson 1, no one can precisely time a market. I’ve seen countless people try, only to miss out on another great opportunity. These people sit on the fence looking for the market’s bottom and find it after it’s too late. It’s easy to spot these people. They’re the ones saying “I remember when…, If only I had bought then.” You also learned in lesson 1 that it’s okay to buy “high”. Remember that “high” is relative. If you bought a home considered high at the time for $250,000 and 5 years later it was worth $500,000, does it matter that you bought that home for a “high” price? Not only does it not matter that you bought high, it would have been a mistake not to have bought that home. Everyone wants a deal, but you will never know when the market has hit bottom until it’s on the way back up.

What to Look For

Signs of a Buyer’s Market include: inventory increases each month, there are more than 6 months of remaining inventory, comparable sale prices (sales of recent comparable homes) are higher than active listing prices, the number of closed sales in current month is lower than previous months, median sale prices are declining, properties remain on market longer (DOM).

Buyer Benefits & Strategies in Buyer’s Markets
Lower Sales Price - in a Buyer’s market you will generally see both lower list and sale prices. Buyers many times can get properties at prices below market value. Be careful though. A Buyer’s market doesn’t mean that buyers can offer less for all properties. Buyers must consider other factors including days on market, desireability, scarcity and the list price. If a property was just listed yesterday at a price already below market value and is in excellent condition, that property will more than likely sell at list price.

Concessions and Repairs -in Buyer’s markets, buyers can ask for a lot more. Regardless of the market, all terms of the sale are negotiable; buyers are just more likely to get sellers to agree to give more. Common consessions include having Seller pay Buyer’s closing costs and inspection costs. Buyers can also ask for repairs or credits. Once again, other factors need to be considered. It’s not uncommon to have multiple offers in Buyer’s markets. In that case, a serious buyer would forego asking for much.

Renegotiate the purchase price after the inspection -depending on what is found during the inspection, major repair items can be the basis for negotiating either credits or lowering the purchase price.

Other Strategies - Ask for contingencies. Shorten the period a seller has to respond to your offer. Ask for extras (remember my $4000 TV?). Ask for things you don’t want. If a Seller doesn’t want to give it up, use that to negotiate. “Well, since you won’t give in on that item, let’s lower the purchase price.” Sometimes that works. If it doesn’t, who cares, you didn’t want it in the first place.

Get in the game!

These are just some of the strategies buyers can use in a Buyer’s market. An experienced Realtor that’s an expert at negotiating will know how and when to use different strategies. The bottom line is, if you’re a serious Buyer, get in the game. This is your time. Don’t be the one years later saying “If only…”

Up next – Seller’s Markets

Until then, happy house hunting!

Elliot Lau

“Like any real estate advice, this seems very positive. I agree with everything that was said, however, I think you have missed an important component. Location!
Depending on location you could purchase a piece of property that may never increase in value during your lifetime. Look at areas where severe economic hardship has set in (Detroit & Chester). I would like to see data that supports these timing statements. Graphs are always nice too.”

The response argued that location should have been mentioned as another important component. While I’d agree that location plays a factor in real estate, time is much more important. There are lots of components to consider when analyzing a real estate investment. If I included every one of those components here, it would be, at least confusing, at worst discouraging. Location has been widely accepted as the most important factor to consider. With that being said, let me dispell another myth:

Myth: There are only 3 things that affect the value of real estate: Location, Location, Location.

The response continued on to say “Depending on location you could purchase a piece of property that may never increase in value during your lifetime.” citing Detroit, MI as an example. While widely believed, that remark is incorrect. The fact is time, not location, would be the determining factor. Of more than 275 major metropolitan cities in the U.S., every one of them, including Detroit, has gained in value since 1980. Sorry, I’m still learning how to insert graphs here. Instead, go to OFHEO,the federal office that keeps these stats. Did you realize that since 1980, Michigan real estate prices have increased by almost 215%. Detroit over the last 5 years has increased 4.4%. Modest but at least an increase in value. Last year, the real estate values in Detroit decreased by 3.3%. These stats support the principle of time being the determining factor.

Time vs. Location

I was born and raised in Hawaii. I formed a belief from an early age that the Leeward coast on Oahu was a depressed and impoverished area that investors should stay away from. That belief is shared by most locals. In the mid 1990′s, I met a young investor who came to Hawaii with less than $100,000 in his pocket to buy real estate. He didn’t have any preconceived notions about the Leeward coast. Instead, he did his homework. He instilled real estate investment principles and, despite location, invested heavily into that area. Ten years later, he has amassed a real estate portfolio worth over $15 million. Time, not location, determined that. The area’s severe economic hardships have shown little or no improvement since the mid 90′s. Despite those economic conditions there, anyone who invested in that area 10 years ago has expereinced some of the best appreciation on the entire island. Imagine if he had not invested in the area for reasons of location and economic hardship. Real estate will always appreciate in value over time.

Real Estate Deals in Detroit

And just to show you that Detroit isn’t as bad as you think, check out this link: Detroit Deals. Professional real estate investors don’t follow the crowds or buy into prejudices. They use sound investment fundamentals to make their decisions.

I thank Turtle for his response and encourage more to do the same.

Happy house hunting!

Elliot Lau

In the first lesson of this series, you learned that it really isn’t possible for anyone to accurately time any real estate market, including the most experienced professional real estate investor. If you missed the first lesson, you will want to go back to it to get up to speed. As with every lesson, part 1 laid out important fundamentals you need. Each subsequent lesson will build on the prior one. By the end of the series, you will have a complete understanding of what it takes to be a real estate investor.

Dispelling Real Estate Myths

So if one can’t time real estate markets, how is it that some build fortunes, while others don’t make, or worse, lose money in real estate? What are the secrets of the real estate pros? The main difference between these two groups of people is this. Professional real estate investors do their homework. They research, learn, and listen. Researching different markets and trends, learn investment fundamentals and strategies, secure the best financing and carefully choose a Realtor that is an expert in both the market and in real estate investing. Finding that expert Realtor is probably the most important research you can do. Why? Because that Realtor has the best information and pulse on that particular market you are in. A critical mistake amatuer and first time investors make is overlooking the role and importance of the Realtor. This same group puts more thought into deciding on what’s for dinner than how to choose a Realtor.

Myth #1 - All Realtors are created equal.

I’m constantly amazed at how many people believe that. Unfortunately, I’m not surprised. Think about it, what other “profession” has practitioners that do it part time while spending full time at their “real” job? There are few barriers to get into the business. You can complete required classroom instruction in as little as a week, take a state exam the next day and be given a real estate license in the same month that you started the whole process. Heck, my cousin is a waiter at night and sells real estate part time during the day. All of those facts are 100% true. That brings me to the next myth.

Myth #2 – There is little difference between one Realtor and another.

The biggest mistake you can make when buying real estate is to believe that. I have been a Realtor for 20 years and recognized each year as a multi-million dollar top producer. I’ve done it full time and have never had any other job to distract me. During the course of my career, I’ve spent over one thousand hours in non-mandatory education, seminars, workshops, etc. to become an expert in my profession. On top of those thousand hours of formal education, I spend any where from 20 to 30 hours every week studying, researching and networking to make sure I’m always at the cutting edge of my profession. I’m not saying all of this to brag or attempt to get your business. Chances are I will never have an opportunity to meet you let alone work with you. I’m saying this to dispel the myth that there is little difference between two Realtors. Yes, there are people who have a real estate license and practice it “in their spare time.” That’s what makes choosing a Realtor the most important research you will do as you start out. Who would you rather have representing you in probably the single largest purchase you will ever make in your life? A person that sells real estate as a hobby or someone who has spent countless hours to become an expert and practices real estate like a professional?

Myth #3 – All Realtors have access to the same information.

That myth isn’t totally false. While it is true that all Realtors have access to the same MLS information, knowing how to search and find the good deals is what sets them apart. Unlike the yellow pages, the MLS doesn’t have a category named “Good Deals”. If your Realtor doesn’t know how or what to look for, they may not find it. And having access to the same information is not the same as knowing what do to with that infomation. Most Realtors don’t even have the same understanding and knowledge that you will have just from reading this series.

So what can be learned from this lesson? Adopt the fundamentals of the real estate pros. Do your homework. Don’t take shortcuts and never underestimate the importance of carefully choosing your Realtor.

Next up – Seller’s Markets, Buyer’s Markets, Neutral Markets…and The Pros and Cons of Each.

Until then, happy house hunting.

Elliot Lau

There are 33 American billionaires that made their fortune from real estate. All of them collectively agree that nobody can precisely time any real estate market, not even them. So if these 33 people (whose combined net worth made from real estate totals over $80 billion dollars) admit that they can’t time the market, how can you? But before you give up on your dreams of becoming a real estate tycoon, there are valuable principles and practices used by each of these 33 real estate billionaires and most professional investors. Their secrets, mostly unknown to amateur investors, can be learned. They will all be revealed in this first and following educaltional series. This series will teach you the secrets, and mistakes, of the real estate billionaires to help increase your chances of not having to rely on social security for your retirement.

The Secret of Timing Real Estate Markets

Adopt the same techniques of those that have built fortunes in real estate. For starters, they follow this creed: First, Buy low and sell high and second, There’s never a bad time to buy, there’s only bad times to sell. If you incorporate this creed, you’ll begin to understand what all successful real estate investors have learned. It’s okay to buy high, as long as you sell higher. In fact, looking back at any time in history, the price of real estate at that given point in time was “high” at that time. I remember when my parents bought their first home in 1960. It was $50,000. It was, at that time, an obscene amount of money to spend on a house. That home today is worth over $1.5 million dollars. My point is that at the time my parents bought that home, the price of real estate was high. Did it matter that they paid a “high” price for that home? In hind sight, the answer is easy. In fact, it would have been a mistake to not have bought that home. Of course hind sight is always 20/20, but one fact remains. Real estate will ALWAYS appreciate in value over time. Yes, there will be peaks and valleys, but over time, it will always appreciate in value.

All successful real estate investors know that real estate is a long term investment. Sure, you can make money quickly in real estate. But the quick path is also filled with high risk, sleepless nights and will need a little luck. These types of investors are called flippers. They know that the higher the risk, the higher the reward. Investors looking to make the quick dollar better have deep pockets and an iron clad stomach. Flipping real estate is not for the faint of heart. One wrong decision can cost you everything.

So what’s the secret?

So what is “The Secret” to timing real estate markets? The secret is you don’t have to time markets to build wealth in real estate. All you really need is time. If you can adopt the discipline of patience and combine it with time, you have moved a huge step closer to financial independence. It is that simple. Mind you, I didn’t say easy. There’s a distinct difference between simple and easy. The next in this series will get into the nitty gritty and teach you to how to become a professional real estate investor.

Until then, happy home hunting!

Elliot Lau