Private Lenders - Making the most of Market Negativity
Sherril wrote a comment on my previous article of “private lending - the best times are the worst times”, saying that us investors will just have to wait until the market becomes more positive. Well,
I don’t like the idea of waiting til the market does something. Rather let’s respond creatively to the current market negativity to make some money.
First, let’s recognize that the truth is that home values a falling in many areas of the country. This is definitely not good for people who want to sell their home. Despite the fact that this particular downturn has been triggered by the adjustable mortgage debacle, it is really just part of the cycle of real estate values that occurs with a period of 8-15 years. We’ve been in a up cycle so long, most investors haven’t a experienced a down period. And values will eventually come up again.
But what is the investor supposed to do now? First, let’s go back to the first principle I believe every investor should live by: “You make your money when you buy” This means that your profit is built into the price and terms of the offer your willing to accept.
For example, if you are flipping houses, start with the calculation of what your investor buyers are willing to pay for these properties. It may still be 70% of after repair value (ARV) - repairs, but what is the percieved ARV?
In a falling market comps are deceptive. They are a backward looking measure of value, of people were paying for similar properties 6 mos to 1 year ago. The trick is to be able to project with some safety margin how low the price will be 6 mos to a year from now! In some places the depreciation rate is 5%. The percieved depreciation rate of your potential buyers may be higher. And that’s the real value of the ARV.
Start with that value, factor in your costs and profit, and you’ll get the maximum about you can offer to pay your seller.
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Richard Odessey has been investing in Real Estate since 1999 and have bought, managed and sold over $5MM in assets over that time period. He has created a national network of RE investors that are a source of continual on-the-ground intelligence. Richard has also developed unique and proprietary tools to zero in on only high profit-low risk transactions.
