Phase two of the seller’s market is the riskiest phase of the real estate investment cycle. During the beginning of this phase, properties will remain unsold on the market for even longer periods. Gone are the days when a property would have multiple offers as soon as it comes on the market. Gone are the bidding wars. During this cycle, you have to search far and wide to find a buyer. Some properties may even be on the market for a year or longer.
Because properties are not being snapped up as fast as they were during the previous market cycle, the number of properties on the market is beginning to increase. Sellers have to wait longer to get their properties sold, but in the beginning stages of this phase, they are still getting an inflated value. Raw land is still being purchased for speculation and the amount of construction in the pipeline is starting to become excessive. At this point, overbuilding is becoming a valid concern.
For the first time since the second phase of the buyer’s market, business and job growth are also beginning to slow down.
The smart investors have already pulled their money out of this market and have moved to other emerging markets. They did this as soon as the indicators hinted that the market was starting to transition.
There are two main market forces that will signal the dangerous transition into the second phase of the seller’s market.
The first is job growth. When job growth becomes stagnant, this means that the area won’t enjoy any population growth and may even suffer from population loss. With fewer people, there is less of a demand for properties. If an area can’t create more jobs, the chances are better that it will enter the second phase of seller’s market.
The second market force that you want to pay attention to is the available supply of property. A key element in a market that is losing momentum is overbuilding. Overbuilding directly leads to oversupply. When developers create more property than the market demands, they must begin to lower their prices in order to reduce inventory. This has a ripple effect on other properties in the surrounding area.
At some point, these even lower prices will fail to attract enough buyers. For example, when an area loses population and jobs, and if the birth rate declines, there simply may not be enough people to fill all of the available properties. Under these circumstances, we start seeing large numbers of foreclosures.
This kind of activity led to the bankruptcy of several banks during the mid-1990’s and the mid-2000’s. Although this is an extreme example, this is what happens during the second phase of a seller’s market.
When too many apartment units are built, rents for existing buildings must be lowered just to keep up their occupancy.
You should always be monitoring the local building department for the number of permits that have been issued. This will give you the clearest indication of where supply will be in the next year or two. If a city is completely built out, this can be less of a problem. However, in small towns where there is lots of inexpensive land nearby, overbuilding can become a serious problem that is hard to quickly correct. You should also monitor the statistics for how long properties have remained on the market. Any real estate agent should be able to provide this information for you. When you notice the time on market begin to increase, you should be preparing your properties for sale. You don’t want to be the last one out of the market.
If there is a strong demand for property in your area, it usually takes between 60 and 90 days to sell a property. However, during the second phase of a seller’s market, it can take 90 to 180 day or longer to sell a property.
When you have been waiting this long for a buyer, they already know you are desperate and they will absolutely use it to their advantage when negotiating a price.
How Do I Invest in this Market Phase?
If you are currently in this market phase, sell your properties and move on to a better market as soon as you see the signs of the second phase of the seller’s market. You want to get out as early as possible during this market phase.
If you are interested in purchasing property during this phase, just wait until the final stages and you may able to find some great bargains. In some cases, property may be trading for 50% of what it used to bring. If this is in your local market, you could pull up a dump truck and buy as many properties as you can afford.
Huge profits can be made by those who have vision and can wait until the market turns around. One of the best strategies you can use is to take all of your profits early from a second phase seller’s market and move it into an emerging market.Huge profits can be made by those who have vision and wait till a market turns around. Click To Tweet
If you are currently holding a property during this phase of the market and you don’t want to sell, I’ll offer you some suggestions to help you protect your equity.
- Make sure you have plenty of equity. People who have only 20% equity will quickly get wiped out. If you have more than 50% equity and a 50% loan-to-value ratio on your mortgage, you should be safe.
- Make sure you can easily cover your expenses with your current cash flow during these tough times. You may have to put up with a high amount of vacancies during this period and want to make sure you are safe.
- Be patient. Some markets take a few years to turn around. Others can take a decade or more to get back into shape.
The good news is that most areas except the rust belt and former manufacturing hubs like Detroit will eventually come back, you just have to be willing to wait it out.
If you want to learn more about building a stream of passive income through real estate, join my Wealth Builder’s University community to get step-by-step guidance on building your own portfolio.