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Can You Afford to Wait (Buying in a Competitive Market)

Can You Afford to Wait (Buying in a Competitive Market)

 Tim and Tracey have periodically heard from potential buyers that they don’t want to compete for a property (owner occupied or investment) during a seller’s market and for a buyer’s market.  At first glance, this strategy might look tempting because the adage of buy low and sell high has been ingrained in many investors.  However, history repeatedly shows that predicting market move is extremely difficult.  When will the market turn?  Waiting may be a great option if the market turns in six months, only rises another 5% and then proceeds to drop 10% or more over the next few years like it did in 2008.  However, those buyers refusing to compete in 2019 face daunting housing prices even when the supply of homes grow.  The median sales price on Oahu for single-family homes in March 2019 was $789,000.  Three years later, the median price on Oahu for single-family homes was $1,125,000, a 42.6% increase!

 A speaker at a business development seminar made an interesting comment a couple months ago.  He argued the current real estate market is a buyer’s market, not a seller’s market.  He pointed out that a buyer competing for a house in 2020 made a two-year return of 25% and a buyer competing for a home in 2021 made a return between 10 and 15%.  The new owners of these home made tremendous unrealized gains as home prices continue to soar from a lack of inventory and historically low interest rates.  The buyers enjoyed these outsized gains, not the sellers.  Will the real estate market continue to soar?  Who knows?

 What is a buyer supposed to do in a soaring market with no known end?  Returning to fundamental budgeting provides the key.  Tim and Tracey focus on cash flow to decide on pulling the trigger on another real estate purchase.  In 2004, supply was tight when they moved back to Oahu from Texas to join Stott Real Estate, Inc.  Even though the sales price was over five times the sales price of their Texas home, the monthly payment was manageable.  When the real estate market tanked in 2009 and 2010 as a result of the mortgage meltdown and the market price of their home dropped about $150,000, Tim and Tracey paid the market no heed because they could still afford the mortgage on their budget and the home still provided the same benefits and supported their goals.  Many of the people they helped during those years who were under financial stress, either pulled money out to support an unsustainable lifestyle or had too short of an ownership horizon.

 A more recent example involves a duplex purchase last year.  In 2020, Tim and Tracey purchased two duplexes at an average sales price of $210,000 each.  The Fort Worth real estate market was heating up and they had several offers rejected earlier in the year.  Their property manager knew they were looking for a duplex the following year and alerted them to a similar duplex that he was going to list for $280,000 and checked with them first to see if he could create a quick win-win.  They decided to sign the contract even though the sales price was 33% higher than the previous year because rents had also jumped roughly 20% and the cash flow still made sense.  Those three duplexes are currently worth about $330,000 each because the seller’s market has entered a third year.  The willingness to compete with buyers in a seller’s market became the catalyst for the recent unrealized capital gains.  Will the appreciation continue?  Who cares, provided the cash flow continues to justify the original purchase price.

 A tight seller’s market should not be avoided if buying a property supports your life goals and the financing either fits within your established budget or helps accelerate your passive cash flow.  All real estate purchases look like a stroke of genius if held long enough.  Simply put the odds in your favor by paying a price that offers a sustainable return on investment, personally or financially.

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