We often have investors who want to jump into investing because of all the media attention on the foreclosure market, and we're happy to help them craft a successful strategy. But - it's not as straightforward as you might think.
Here's what you need to know about investing in this market: It's NOT easy.
Many investors think there are properties ripe for the picking. That's certainly not the case. And I'm not just trying to give you Realtor-speak. Let me start by telling you what you're probably expecting to hear: There are some areas and price ranges where sellers can't give houses away. Homes in the outlying areas such as Gainesville, VA and Frederick, MD have high days on market across the higher ($800k+) price ranges. If you want to buy one of those homes, we can get it for a song. For example, here are the Gainesville and Frederick graphs showing days on market by price range (click to enlarge):
In both cases, the days on market starts off at about 150 days and grows as the prices increase, topping out at over 300 days on market in some price ranges. Interestingly, you can see that although the days on market is high in both cases, it's lowest in the lower price ranges. Our belief is that this is driven mainly by investor demand for REO, bank owned properties. Properties in these price ranges have the best chance of neutral to positive cash flow.
As you get closer to the city, the average days on market decreases and gets flatter over all the price ranges. For example, here are the graphs for Arlington, VA, and Georgetown, DC:
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In the Georgetown case, the days on market actually dips to its lowest in the $900k $1MM range, showing tremendous demand in these price ranges. In both cases the average days on market is below 100, showing generally higher demand than the outlying areas. In these parts of the DC metro area it is exceedingly difficult for an investor to find investment property because of the still high demand. Since prices have come down across the region, people who before could only afford to buy in outlying areas like Gainesville or Frederick can now afford to buy closer in, driving demand. This is why we say the market is slow AND it's hot - this localized demand creates micro markets across the region. Anything inside the Beltway and walking distance to Metro tends to be hot.
So one would think, what about the middle ground areas, like Rockville, Fairfax and Woodbridge? (some would count Woodbridge as an outlying area, but because of the major I-95 corridor and the high number of REOs in that area we've seen demand be quite strong - surprisingly - and so we'll count it as a middle ground for the purposes of this discussion.)
Demand in Woodbridge has been steady from the $100k to 700k price ranges, right at about 150 days on the market. Here's the chart:
(Note that for Woodbridge, the data gets a bit squirrley in the higher price ranges because of low volume, so individual properties tend to skew the results above 800k.)
Rockville tells a similar story, with a flat days on market demand result of between 80 to 140 days on the market up to about $1MM:
REO sales in VA are most prevalent in Woodbridge, followed by Loudoun county (Sterling & further out west). There are fewer (not none, but fewer) REOs near or inside the Beltway. In MD, the situation plays out similarly - Prince George's county has many more REOs than Montgomery county does. Generally, as you get further away from Washington, DC proper, you see more REOs on the market.
So what are the lessons here for both buyers and investors? In lower price ranges (below $400k) you'll generally have much more demand. If you want to buy a higher priced house (above $800k-ish) in the outlying areas, we'll be able to negotiate you a great deal quickly. However if you're shopping in that price range in Arlington, Northwest DC, Chevy Chase, etc., things are still moving briskly, and getting a good deal requires a more defined strategy (see our "lowball offer" blurb at bottom).
Since investors tend to concentrate in the sub $400k market, there are many investors vying for good rental properties in these price ranges. A "good" investment property is generally defined as being cash flow positive with an added bonus of being near Metro. If that's what you're looking for, you're going to have a fight on your hands. We recently had a client that had to put in 7+ offers on a sub $250k purchase, and ended up having to bid $3,000 above asking price to finally get something (unbelievably, she had bid $20k over asking on another REO but lost out on that one to an even higher bid). This is not an unusual story, and I present the data here to open an investor's eyes (or a primary home buyer's for that matter) because the media generally paints a picture of a soft market, which is only half the story. The full story is it's a very soft market in certain price ranges and areas, and not at all a soft market in others.
One final anecdote: Our firm sells REO properties on behalf of two of the biggest banks in the US. In 98% of our sales, we've had multiple offers. No kidding! Almost no REO properties end up selling with just 1 offer. What typically happens is when we first put the property on the market, if it's not priced well, it just sits with no offers. Since the banks are in the business of selling property quickly, they'll mark the price down every 30 to 45 days, just like the "as-is" section of a furniture store. Then at some price point (presumably the "cash flow neutral" price), we get a flood of contracts. This points to the tremendous number of investors vying with primary buyers for real estate.
As always, whether you're an investor or a primary home buyer, you should buy logically, not emotionally. I highly recommend you watch our "successful lowball strategy" video, and feel free to contact us to sit down over coffee to discuss your specific goals.