Thursday, August 19, 2010

How foreclosure properties affect our real estate market, and why right now is a great time to buy a foreclosure property.

Buying an investment property is a great way to make money and help secure your financial future. Like any kind of investment though, such as with stocks or bonds, buying an investment property at the right time is very important. If you want proof of this, talk to someone (including myself) who bought a property between late 2004 and early 2007. If someone bought a home in that time period, it is safe to say that their property now is not worth nearly as much as it was when they bought it. Buying real estate in that time period is an example of bad timing. However, if you talk to someone who bought a property in the early 1980's during the recession back than, their property is probably worth a lot more today compared to when they purchased the property back when old Ronald Reagan had recently taken office.

Ideally you want to buy an investment when it is priced low and sell when it is priced high. You are probably asking yourself "Well how do I know when those times are?" Good question. Going through the finance program at Florida State's College of Business, I managed to learn a thing or two about investing in stocks. I know that in the crazy ever changing stock market, this task can be somewhat tough....well actually pretty much impossible. Stocks prices pretty much react to news which changes everyday, thus it is pretty much impossible to predict what a stock will do. However, real estate is a much slower changing market and generally operates based on basic economic fundamentals. So in real estate, how do you know when a good time to buy is? Let me provide you with a somewhat round about answer to this question.

First off, in real estate, prices are very dependant on supply and demand. The higher the demand is for homes, the higer the prices will be and visa versa. The higher the supply of homes the lower the prices of homes will be and visa versa. Many variables can drive demand and supply in real estate including interest rates, tax laws, unemployment rates, number of homes for sale, ect... When assessing supply and demand for homes in real estate, it is important to know what affects supply and demand in real estate, because if you do, this will help you be able to predict whether the value of your home is going to increase or decrease.

So let's look at today's real estate market here in Tallahassee. In today's real estate market in Tallahassee, the fundamental economics of our real estate market are stronger than most people probably think. I did some market research earlier this year, and what I found indicated that our market is on the upswing ( if you want to view my full market report that I did on Tallahassee's real estate market, view my blog from back on May 20th titled "Tallahassee's 2010 Housing Report") First of all, overall sales in the first part of 2010 were up 27% compared to the first half of 2009. Also, our inventory of homes for sale shrunk significantly as well. So sales up, housing inventory my world that is a strong sign that the housing market is on the up and up. Sales went up because prices went down from 2009 to 2010. As you know though, when sales start increasing due to increased demand and the supply of homes begins to shrink, it is only a matter of time before home values begin to increase in value again. However, in today's real estate market we have something a little unusual going on which throws a wrench into the equation of determining how soon home values in Tallahassee (and everywhere else in the country for that matter) will start to rise again. This wrench is the foreclosure crisis we are going through.

When I finished my study on the market conditions in Tallahassee and I got done looking at and analyzing Tallahassee's real estate market statistics, my first thought was "there is something wrong with this picture." The market statistics showed that sales were way up, inventory had shrunk down quite a bit, yet the value of our homes here in Tallahassee are still decreasing. According to the laws of supply and demand, this should not be happening. Well what is causing our home prices to drop is the increasing number of foreclosed homes that are coming onto the market for sale.

You see, once a bank forecloses on a home, they are very motivated to get that home sold. Banks refer to these foreclosed homes as "non performing assets." This is because they are assets that are tying up the bank's money, but they are not making the banks any money in return. In fact, they are causing the banks to lose money. Every month, the bank has to pay the normal expenses of owning the home including taxes, insurance and homeowners associaion fees if there are any. Because of this, banks want to get these properties off their books as soon as possible. Often times banks will sell these properties for less than market value, and in some cases for dirt cheap. Well when that happens, guess what else happens? It brings the value of the sorrounding properties down. When a lot of these foreclosed properties pop up for sale and are sold for dirt cheap, the resulting devaluation of homes in that community can be quite severe. This is why prices have been dropping in our community and other communities across the state and country despite the increasing number of sales and the shrinking housing inventories. So what does all this mean?

Basically what all this means is that home values won't start increasing until all of these foreclosed properties get sold off. This could be a while. If I were to guess, I would say it will be another 2 years before we start to see home values increase in Tallahassee. There is some bad as well as some good news though. The bad news is that it is going to get worse before it gets better. Last month our country saw a record number of homes that were foreclosed on by banks...the most ever recorded. This means that over the next few months we are going to see lots of foreclosed homes hit the market for sale. The good news though is that the number of people who are delinquent on there mortgage payments is decreasing. This means that the pace of homes being foreclosed on is going to start slowing down.

If you are in the market to buy an investment property though, right now is the time to do so. We know that the basic economic fundamentals of our real estate market are strong. We also know that over the next few months more forclosed homes will hit the market for sale, but in the next year or so the number of foreclosed homes will start decreasing. When this happens, home prices in Talahassee will start rising. This means that anytime in the next year is a great time to buy an investment property...especially if you are paying in cash. Banks will sell you a home for less money if you pay in cash because they know the closing is fast and certain.

I have helped several investors this year purchase properties for great prices. For example, I sold one investor a 2 story condo with 2 bedrooms and 2 bathrooms, granite countertops, new appliances, tile floors and tiled showers for only $45,000. I also helped a client of mine purchase a 3bedroom/3bathroom condo in Savannah Crossing as an investment property for only $84,000. He paid cash for his, and he is earning about an 8% annual return on his investment (not counting appreciation) which is a much better return than he could get at the bank these days. There are other great deals out there right now like these, and there will be more to come in the near future. As I mentioned earlier, buying an investment is all about the right timing, and now is the right time to buy investment property in Tallahassee if you are thinking of doing so. If you wait around too long after all of these foreclosed and distressed properties have been bought up, you will miss the boat and a great chance to make money through buying an investment property at the right time.

If you have any questions about purchasing an investment property or if you have any real estate related questions, please don't hesitate to contact me at (850) 567-0037 or via email at