Over the last couple of years, Colorado has had one of the highest appreciating markets in the country. I live in Greeley Colorado, which is about 50 miles North of Denver and has about 100,000 people. The median price in Greeley was $120,000 in 2012 and now the median price is $260,000 in 2016. I talk to a lot of investors and journalists who cover the real estate industry and most of them assume a hot market makes it hard to get a great deal. There is more competition when the market is hot because that is what drives prices up. There are more people looking to buy houses than there are houses for sale. However, I have bought 13 flips in my market in 2016 and it is only September. I get awesome deals on my flips and most of those purchases have been straight from the MLS (multiple listing service). It is definitely possible to get a great deal, even in a hot market.
Why are housing prices increasing so much?
Colorado prices have increased faster than most parts of the country. However, most parts of the country have still seen rising prices. United States real estate prices have increased 6 percent over the last year. Some markets are seeing higher increases than others, and I have talked to many investors in these areas. Most real estate industry insiders don’t see enough housing inventory to meet buyer demand. During the housing crisis, there was very little building anywhere in the U.S., but the population kept increasing. Building has increased now that the housing market has recovered, but new builds are nowhere close to as high as they were before the crash. Builders are focused more on high-end projects and multifamily, than they are on affordable new home projects. Because there are not enough houses for all the buyers looking, prices continue to rise.
How can there be good deals available with so much buyer demand?
When prices are rising and there is low inventory, it can be tough for owner occupied buyers to purchase homes at market value. Why would investors be able to buy houses below market value?
- Most owner occupied buyers do not want houses that need work. When a house needs repairs, most buyers will cross it off their list, because they want something they can move right into.
- Owner occupied buyers may not be able to finance a home that needs work. Even if a buyer wants a home that needs work, they may not be able to finance it. Conventional, FHA, VA, and other lenders only want to lend on homes that are in livable condition. Even an investor may not be able to get a loan on some houses.
- Some properties are occupied by tenants. I have bought multiple properties this year that had tenants in them when I closed. I was responsible for getting the tenants out before I could fix up the home and sell it. An owner occupant buyer is not going to want to deal with the headache of a tenant. On one property I made a $35,000 profit simply by getting the tenant out and selling the house.
- With rising prices, some real estate agents under price homes. I have been lucky to get a few houses that were under priced by either the seller or their real estate agent. With prices rising so fast, you have to make sure you value houses correctly to get the most money for them. In a couple of cases, I bought homes that were rented for well below market rent, and the agent valued the home based off of that rent figure.
- Some sellers need to sell fast. There are some sellers who are concerned with getting money as fast as possible, and not getting the most money they can. They will price their homes low and accept the offer they think has the best chance of closing.
There will always be deals in any market. It does not matter if prices are going up, going down or they have stablized. The tough part is finding the deals and getting them under contract.
What are the keys to getting a deal in a hot market?
I am able to get great deals in my market for a number of reasons. I have the same buying criteria for profits on my flips that I had when the market was much slower. In a rising market, I do not want to take more risks and make less money. I would actually want to be more cautious, because I don’t want to go bankrupt if the market does change. I have stopped buying rental properties in my market, because the cash flow is not as good as it once was, but I still get great deals on houses to flip. Here are some keys to my buying strategies:
- Become a real estate agent. I get so many more deals because I am a real estate agent. I can act faster, I save money on commissions, I can value homes easier, and I have a large network of investors, contractors, lenders, and more. If you are not an agent, you need to have a very good agent working for you.
- Act fast. Because I know my market very well, and I am a real estate agent, I can submit offers on houses a few hours after they are listed. If you have to wait a couple of days for your agent to show you the home, contractors to look at it, and then run numbers to decide if it is a good deal, the deal will be gone.
- No contingencies. On 80 percent of the offers I make, I have no inspection or finance contingencies. This is not easy for everyone to do, you must have a lot of experience in real estate to waive an inspection. Not everyone has cash, but it is possible to waive financing contingencies and still get a loan.
- A good reputation. I close on just about every house I get under contract and I have not asked for any inspection items to be fixed in years. I know some investors love to use inspections to get a better deal, but I feel that strategy hurts buyers in the long run. I have agents send me deals all the time, because they know I will close and I do not play games. I could have paid a few thousand dollars less on some properties by asking for inspection items to be fixed or a price reduction, but if you do that enough people will start to notice. You may miss out on a deal that will make you $30,000, because you were trying to nickel and dime sellers on other deals.
- Be willing to do some work. The more work you are willing to take on, the better deal you can get on a house. If you are just starting out, you need to be careful of how much work you take on, but if you are only looking for houses that are ready to move into, it will be very hard to find a good deal.
You can learn much more about how I find deals and finance them in my book: Build a Rental Property Empire: the no-nonsense book on finding deals, financing the right way, and managing wisely. The book is available as an eBook and paperback on Amazon.
If you are hoping a great deal will fall into your lap, it will not happen. A random real estate agent is not going to have 3 awesome rentals and 5 awesome flips for you to choose from. You have to know what a good deal is to you, you have to know what price you want to pay, and you have to be able to help look for those deals. Once you find the deal, you have to be willing to take on some work, act fast, and be decisive. It is not impossible to find great deals in a hot market, but most people (owner occupants and investors) are not willing to do what it takes to find those deals.