It appears as though the decades-long bull run for the housing market has met its end. As interest rates rise and fears of a recession grow, we are beginning to see some cracks in the housing market.
If you’ve been sitting on the sidelines waiting for a buying opportunity, this might be good news for you. For current investors, it’s time to exercise caution and consider some proactive moves.
According to Redfin, One-third fewer homes went under contract in October than last year, the largest decline since 2015. But while 30-year mortgage rates fell to 6.95% in the first week of November 2022, some key measures of homebuying demand such as Redfin’s Redfin Homebuyer Demand Index, mortgage purchase applications, and pending sales stabilized after several weeks of declines.
Do I know exactly what is going to happen to the real estate market? Absolutely not, but I do think recent events should make you think hard about your investing approach over the next several months.
Here are 5 considerations to think about:
Underwrite conservatively and maintain a margin of safety
Communicate early with partners and lenders
Act decisively
Exercise patience
Stay on top of local market trends
5 strategies for investing and surviving in an uncertain real estate market
1. Underwrite conservatively and maintain a margin of safety
It’s possible to find deals in any market. And certainly, if there is distress in the market, there will be future buying opportunities.
Think about these questions as you review new deals:
Margin of safety: what if you need to hold this property longer than expected? Will you have enough cash reserves to fund extra interest payments and taxes?
Exit strategy: am I being realistic? Do I have multiple exit strategies (sell, refi, etc) with outcomes that justify the risk I am taking in this market?
Leverage: is now the time to maximize the amount of debt you can put on a deal? More debt can mean higher returns, but it also comes with more risk.
Stress test your assumptions: what’s an acceptable future market value to assume if prices are currently falling? Is that a result I can live with? Can I still qualify for a refinance if rates continue to rise?
2. Communicate early with partners and lenders
If you have bad news, it’s best to communicate this early with your key partners. Don’t wait until it’s too late. Overcommunicate! Even if things are going just fine.
What are these type of situations? Here’s a few that often come up:
A property is taking longer to sell
You are approaching a loan maturity date
It’s possible you might face some type of liquidity challenge where you could miss interest payments or do not have enough funds for the rehab
Having trouble with a property’s refinance
There’s a conflict with a primary contractor
Speaking early with your partners and lenders allows you time to take proactive steps to mitigate any issues. With your lender, for example, you might be able to work out an extension that gives them assurance you can continue to perform, while allowing yourself time to execute the strategy.
Your partners can also offer useful advice and can provide honest feedback about a particular approach in this market. Take advantage of them as a knowledgeable sounding board.
3. Act decisively
“Live to fight another day” might be a good approach to take for the current real estate market.
If you are actively invested, you should consider acting decisively if there are early warning signs of distress. Here are some steps you can take:
Listing not getting any interest? Have a plan to lower prices to generate additional traffic. Waiting too long risks the market continuing to move against you. Additional holding costs such as interest, taxes, and insurance will continue to accrue.
Not certain you will long-term refi lender will be able to get the deal done? Reach out to 5 other lenders. Ask for referrals. Yes, it might be painful to begin that many loan applications, but more shots on goal can dramatically help.
Current strategy not working? Change it.
If you are trying to sell and you aren’t getting the outcome you want, think about refinancing it and leasing it. Sell it in the future if prices recover to your threshold.
Uncertain if you can get the refi done? List the property and run a concurrent process to sell.
4. Exercise patience
Sometimes it’s hard to sit on your hands. But if you see this market as a potential buying opportunity, patience might be key right now as we wait for the dust to settle.
So what steps can you take to be ready when buying opportunities present themselves?
Get your team in place. This includes capital partners such as investors and lenders. Build those relationships so that they are prepared when you bring them a deal. Find out if their deal criteria or underwriting guidelines have changed with recent changes to the market.
Build your own source of deal flow.
5. Stay on top of local market trends
The market is evolving weekly. How do you keep up with the latest trends? There’s more to it than reading news articles. Many of these focus on macro, or nation-wide trends. Your local market might be completely different!
Get out and speak with real estate market participants. Lenders, other investors, real estate agents, contractors, etc. This is the best source of information for what is happening in your market, in real time.
As a Texas-based private lender, we speak to investors everyday. Anecdotally, here is what we are seeing in the market:
Houses are sitting on the market longer, requiring price cuts and more patience to sell. This is more true as you might imagine, for higher-priced properties
As the market shifts in favor of the buyers, they are becoming pickier – high-quality flips are doing much better than lower quality rehabs
Some short-term hard money lenders have stopped or severely restricted making new loans. Others, like Longleaf lending, are still lending for the right property and borrower.
Investors are having more difficulty qualifying for refinances on rental properties: debt-service coverage ratio (DSCR) hurdles are becoming tougher to clear
Better long-term borrowing opportunities are with regional banks and local credit unions
Some investors are not actively buying as they take a wait and see approach
Demand is holding steady for buyers of investment properties
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