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Investing in Hot Markets
| | Monday, June 06, 2005 @ 09:49 AM EDT
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Contributed by: Steve Cook
Steve Cook Properties
Read more archived articles about Squeezing More Profit
Frequently, I am approached by investors throughout the
country who think they cannot invest where they live because it’s a hot market. Currently, I live in an area ranked as the third hottest market in the country and am still finding great deals. And not only do great deals exist, but they keep getting better!
So what am I doing differently? I’m focusing on doing fewer deals and selecting projects that will result in higher profit margins. Opportunities that will net in excess of $100,000 for rehabbing and at least $20,000 for wholesaling are most desirable. In the past, the average retail value of homes I purchased was about $75,000. Now I purchase homes in the $250,000 range or higher in order to achieve my desired margins.
Frequently, I am approached by investors throughout the
country who think they cannot invest where they live because it’s a hot market.
Currently, I live in an area ranked as the third hottest market in the country
and am still finding great deals. And not only do great deals exist, but they
keep getting better!
So what am I doing differently? I’m focusing on doing
fewer deals and selecting projects that will result in higher profit margins.
Opportunities that will net in excess of $100,000 for rehabbing and at least
$20,000 for wholesaling are most desirable. In the past, the average retail
value of homes I purchased was about $75,000. Now I purchase homes in the
$250,000 range or higher in order to achieve my desired margins.
To achieve these types of margins, I’ve begun pursuing the
following types of deals:
-
Commercial Deals: Although buying, rehabbing and reselling commercial is
not my top interest, high margins can be made by buying, improving and holding,
or just wholesaling commercial deals. In hot markets there are always people
looking for profitable commercial deals. If you don’t have the money to buy the
commercial property yourself, consider wholesaling it to someone who has the
money.
-
Land Deals: In hot markets, land is always a wise investment and is
usually easier to sell than a home. This is primarily because there are many
cash buyers waiting for land to build their dream home. In purchasing land, I
look for properties that either have the potential for subdivision or have large
parcels of land where a lot or two for new homes can be built or sold to a
builder.
-
Obsolete Homes: In the 50’s, there were many homes built and a
significant number were small, one bathroom ranchers. It was the American
dream! Unfortunately, many people now believe ranchers are insufficient and
worthless. This is a good thing for investors. In areas that are hot and have
a number of these homes, investors are usually able to buy these ranchers for
less than the value of the lot itself. In purchasing this type of home, I will
either tear down the rancher and build a new one or build modern additions to
make it more attractive to buyers. The key thing most buyers want is a minimum
of two bathrooms. When I buy one of these homes slightly under or at market
value, I can usually get about $2 back for every $1 in renovation and
additions. If I buy a home for $200,000 and put $70,000 into it, getting
$350,000 or more for the home isn’t uncommon. Another obsolete and hot item is
a house on the water. Recently, I’ve been seeking small cottages on Baltimore’s
waterfront (a.k.a. Chesapeake Bay) with the intent of tearing them down and
putting up new homes. I’m able to occasionally buy an outdated cottage for
$250,000, put a new home up for $200,000 and retail it for $600,000 or more.
-
Condos: Builders and buyers can’t build enough of them. Taking old
apartment buildings and doing condo conversions is hotter than ever. Do a nice
job and make them luxury condos, buyers will be lining up for them. Of course,
give consideration to location because condos are more desirable in some areas
than others. For example, the Manhattan market demands condos. Everyone wants
one. However, many are outdated with old kitchens, antiquated bathrooms and
horrendous decorations, especially the wallpaper. Although condos in this area
frequently sell for over $1 million, they are small and renovations are only
needed to the inside of the units. That’s the bonus for investors – no exterior
renovations. An AWESOME renovation will cost about $30,000-$40,000 and sell for
$150,000 more in many cases.
-
Pay Full Price and Still Make Quick Cash: There are always hot spots
within hot markets. These are areas where people are lining up and waiting for
homes to come available. There are more buyers than available inventory.
People will make full price or higher offers the day listings come out,
regardless of what the home looks like inside. They just want to get into the
neighborhood. In pursuing these deals, I would do mailings in these hot
neighborhoods and let people know that I’m looking to buy a home, am willing to
pay them full price and can save them the realtor’s commission. I would sit back
and patiently wait for the sellers to call. Because it’s a private sale, I
would tie the homes up with very small deposits and then look to assign my
contract to a retail buyer who is willing to pay more than I am to get into the
neighborhood. Since no realtor is involved, I would negotiate a fair price with
the sellers and get the benefit of the savings plus whatever the buyers are
willing to bid over list price. When dealing in markets where homes sell for
$400,000 or more, a $20,000 markup or more isn’t that big of a deal. When
getting upwards of a million dollar home, $50,000-$100,000 is almost irrelevant
to a motivated buyer.
The good news is this - there are opportunities everywhere,
everyday. Think outside of the box and approach deals a little differently.
With my focus on higher profit margins and the type of deals listed above, four
deals now can net me $1 million or more. Before, I had to do about 100 deals to
make that amount of money. For those of you who are ready, there is a ton of
money to be made in high-end and hot markets. Don’t let a hot market stop you
from doing deals – they’re actually easier to make money in than anywhere else.
Note: Stephen Cook is an author and active investor in Baltimore, MD. He has bought and sold over 180 properties. Steve pursues many avenues of investing and specializes in the wholesaling and rehabbing of properties for profit. For more information on rehabbing properties for profit, including how to find and qualify a good contractor, please see his new course:
Rehabbing Properties for Big Cash: A Real Life Guide to Retailing Homes
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