For the past 6 months or so, it has really begun to appear that real estate values and demand are flattening out. Now, in late 2005, the financial programs and some new media "talking heads" are saying that the hot real estate market seems to be cooling off.
These are changing times for the real estate investing
business, and the challenge is to recognize new trends and
develop a strategy that makes sense.
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There has been noticeable slowing in the market. One
of my contacts reports that after years of strong
sales of log homes in the North Georgia mountains
this summers market slowed to a virtual crawl.
It appears that rising rates are taking a toll on the
number of buyers who can qualify for a mortgage.
Higher energy prices meanhigher home maintenance
costs. And, the seasonal drop in buyer demand,
common in winter months, will add to the slowing
peace of real estate sales.
In the investment community, appraisers are being
pressured to be more conservative as lenders, stung
by fraudulent deals and high foreclosure rates, are
fighting back.
Many loans are requiring more than one appraisal in order to
verify the value.
Some appraisers, in an attempt to keep lenders happy, are
dropping appraised values by as much as 15%. This is going
to have a snowball effect in 2006, as today's flattening
purchase appraisals become tomorrows comparable sales.
Overall the economy is still strong, and with interest rates
still at historical lows, there is noreason why investors
cannot continue to profit from real estate, as long as we
use common sense when evaluating deals.
In a crunch, the only real protection you have against such
market conditions is your equity. I know all the arguments
about how you can't spend equity and how people with equity
don't have any cash. BUT I can also assure you that
the people who cash out their equity and use it for spending
money find that this habit will eventually lead to trouble
in a flattening market.
The refinancing craze of the late 1990 's and early 2000 's
was based on the assumption that prices are always rising.
We are now entering a cycle where this is not a reliable
assumption in all areas. For the average investor in the
currentmarket, refinancing should only be done to eliminate
other debt payments, and not for spendable income.
Conservative investors have learned from experience that
markets go in cycles, and that hard times will come sooner
or later. We are seeing the end of the investment cycle
that began in the early 1990 's. It is important that our
attitude toward handling real estate investments change
along with it.
Highly leveraged properties can work in a rising market
that is seeing strong demand and growth, but when the
market begins to flatten or drop, as is now the case, it
is critical to avoid being over leveraged. Equity is your
only real protection in a flattening market.
This means that many of the popular strategies of the
past10 years, that led to high leverage should only be used
carefully, if at all. A seller may offer you 100% financing
to avoid a foreclosure, by letting you take over their
house subject to their existing loan. But you have to be
sure you can generate enough income to cover those payments.
Creative strategies that lead to high leverage are not a
good idea in a falling market. They work well during strong
job markets, when housing demand is at it's highest. When
the demand slows down, high leverage deals are the first to
suffer loss of cash flow.
The safest and best way to invest in real estate is not
the sexiest or the most glamorous. The safest way to
invest is to have adequate equity when you buy. Whether
you want to hold foryears or sell quickly, your profit
is in your equity.
I can't sell as many seminars, tapes and courses by
telling you the facts.
To sell stuff, we are supposed to get you all worked up
into a lather over how wonderful it's going to feel when
you start making $ 10 k per month tax free by pulling out
all your equity. But don't forget about the other end of
that strategy ... that tax free income is a loan that someone
has to pay back.
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