Real Estate Cycle Investing: When to Wholesale, Buy, Flip, Rent, or Sell

August 20, 2010 | By | 6 Replies More

Real_Estate_Market_CyclesIn today’s post, Marc Tonzillo shares buying and selling strategies  for real estate investors based on the market cycle…

I’ve been involved with real estate investing for over 15 years and have done my share of deals. These have included wholesaling, lease options, land contracts, straight rentals, land-lording and a foreclosure or two. This has given me large chunks of cash when I sold my rental properties, long term rental income and short term sums of cash when I flipped a contract.

Now I won’t say all of my real estate ventures have been a success. In fact much of what I’ve done, or tried to accomplish, has failed. I have realized though, through trial and error, what I’ve done right and what I’ve done wrong. And hopefully this article will help you avoid the same mistakes I’ve made. Who knows, maybe we learn more from our mistakes than from our successes.

The number one lesson I’ve learned is that an investor must invest along with the market cycle they’re in and they need to tailor their strategy to the current opportunities in their local marketplace. Now I know real estate investors make money every day in every market situation. I’m not saying you can’t accomplish any type of deal at any time. I’m sure you can. What I am saying, however, is that it can be MUCH better to look at the market condition your currently in, review local real estate conditions and then employ a strategy that lends itself to the HIGHEST probability of success in that marketplace.

Most of my career has been spent, wrongly, trying to use strategies that don’t work very well in the market I was in. Here’s an example…

When I first started out in the mid 90′s I learned about buying houses for no money down and then renting them out for positive cash flow. So I set forth trying to find no money down deals. Now I was living in Boston at the time in a pretty robust real estate market. Buying with no money down typically calls for finding sellers who will finance the sale for you. Once you locate a seller willing to finance, you turn around and attempt to lease the property for positive cash flow.

I had two things going against me before I even began. First, the market was good and the sellers were not willing to finance at all, let alone 100% of the purchase price. Secondly if I ever were able to find a seller to do this, it would be next to impossible to rent the house for a positive cash flow since the payments would far exceed the rental value. I was able to buy one low priced coop foreclosure for 10% down during this time and rent it for a profit, but doing this on a steady basis was difficult.

Another example… in the early 2000′s when the market was HOT I put all my focus into doing lease option deals with sellers. This was in South Florida. I was trying to have the seller lease their property to me with a long term option to buy at a predetermined price. It wasn’t working well at all. This was the WRONG strategy for a hot market. The owners didn’t need to sell on lease option when they could just stick signs in front of their homes and have them rented or sold in a few days. They didn’t want to tie up a price either. Meanwhile, other investors were making bundles by offering sellers all cash, putting the homes under contract and then flipping their deal to a ready list of hungry cash investors.

So what I’ve done, based on experience, is separate real estate market cycles into 4 segments: These are, declining market, bottom market, even (modestly ascending) market, hot market. Then I’ve determined what I would consider the most highly successful strategy to use in each particular market. Here goes:

Declining Real Estate Market

This would be after the peak when the market is definitely on a downward trend. The overall real estate market peaked around 2006. So I would liken this to the years between mid 2006 until late 2009 or the beginning of 2010.

In this, declining market, sellers tend to owe more than their homes are worth. This makes it difficult to purchase houses with equity. The market is going down so you certainly wouldn’t want to buy a house to hold as a long term investment. Better to wait for the market to hit the bottom.

You can try wholesaling short sales at this point but it grows more and more difficult to find an investor to flip your deal to. In my opinion the best strategy to use in this market is to focus on rentals. By rentals I mean either offering to lease a house directly from an owner with the right to sublet and making a cash flow that way or becoming a real estate agent and leasing homes for landlords. When the market is going down this is a great strategy since sales are slow and more and more people are willing to rent.

Bottom Real Estate Market

The market has stopped going down and prices have hit bottom. Sort of similar to the way the market is now. There are tons of foreclosures and short sales around.

In this market you want to focus on making money on these great deals. This includes buying foreclosures for all cash from the money you made when the market was hot and keeping the property as a long term rental, buying with private money or with partners, wholesaling foreclosures and short sales to cash buyers or becoming a real estate agent and specializing in selling foreclosures and short sales.

If you’re going to wholesale you’re probably better off becoming an agent since most of your cash buyers are going to look first to real estate agents anyway. Great deals are already direct to the public so you might as well sell them the way most investors want to buy them, thru a real estate agent.

Even (Modestly Ascending) Real Estate Market

An even market is where things have leveled off. Appreciation is slow, something like 3% per year.

In my opinion the best technique to use here would be to buy properties on terms. Terms meaning lease option, seller financing or perhaps subject to. The theory being is that in this market there isn’t any reason why sellers would not want to sell you their properties this way, especially if they are at all motivated. Think about it, when the market was going downward they couldn’t sell with terms because they had negative equity and when the market gets hot they won’t be motivated to tie up a long term price for little or no money down.

In an even market many sellers are motivated by debt relief and therefore are willing to allow an investor to just step in and pick up their payments. I’ve done this several times in even markets with some pretty good success. A great thing is that you have choices with what you want to do with the property after you have it under contract with your seller. You can rent the property and ride the appreciation wave to the top of the market, sell on terms and generate a cash flow from the spread between what your paying the owner every month and what you’re collecting from your buyer or you can flip the contract you have with your seller for a quick payday.

Hot Real Estate Market

Finally, there’s a hot market. This is a market where homes are selling like hotcakes. I’m talking in weeks to days rather than months. This market is NOT the time to attempt to buy rentals, buy foreclosures or buy on terms. This market does not lend itself to these opportunities and you will be beaten out by the tons of buyers out there who are ready, willing and able to pay the seller all cash.

I’ve found that in this market, above the other markets, it’s vastly more important to have a strong marketing system in place to find good deals. It’s imperative here to locate the deals before anyone else does. Not to mention have an agreement signed, notarized and recorded as quickly as possible. There’s too much competition in this market to take any chances.

In this market you want to offer to buy the house as is, with “all cash” and a fast closing. You want to make this strong cash offer. Then place the property under contract at the best discount you can get. Once under contract you will want to assign your deal to an all cash buyer who can close quickly. If the seller will allow it you could put the deal under contract with the right to get a mortgage and then sell to a mortgage buyer.

The point is that in this market you want to focus on deals where the owner gets all cash and then quickly assign your position. You won’t have any trouble locating buyers to pay all cash or obtain a mortgage because in a hot market, cash is extremely liquid and credit flows freely. Rather than assigning the agreements you have with sellers to end buyers you could be a real estate agent and sell homes as regular listings.

Much of what I’ve written here is theory combined with practice combined with many deals. I realize this is somewhat controversial in that many gurus teach that a real estate investor can accomplish any strategy at any time. I personally believe it can be done. All I can say, however, is that when I’ve gone against market cycles I’ve struggled but when I’ve followed the trend I’ve had some good successes.

Keep in mind that this is a model for using buying and selling strategies in different markets and doesn’t focus on marketing or how to find the deals before your competitors (which is also crucial). That’s another article…

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Marc Tonzillo has invested in real estate since the mid 90′s using creative financing techniques such as lease options, seller financing and contract assignments. He now specializes in advertising rental properties for landlords.

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Category: Real Estate Investment Buying Strategies, Real Estate Investment Selling Strategies

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Comments (6)

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  1. Great article and given today’s news about a 27% drop in existing home sales the buy and rent model will be the best stratergy for another couple of years
    .-= Mike Lautensack´s last blog .. =-.

  2. I’m a real estate investor hoping for that hot market to hit again. But appreciate the thoughtful analysis.
    .-= real estate investor´s last blog ..Understanding The Real Benefit Of Government Foreclosed Homes =-.

  3. Alizsa says:

    I am a “newbie”what exactly is the 1st steps in the term up under contract , do you just come out and ask the seller if you could put their property under a contract, or do you make a offer, then if they say yes , draw up a contract. I need to understand this term, correctly.

    Thank Alizsa

  4. Dave says:

    This is an amazingly useful article that brings alot of understanding to the effectiveness (or lack thereof) of different REI strategies. Not something you hear many investors talk about. A must read for all new investors!!!! Great job Marc!

  5. Marc says:

    Thanks for the kind words. It’s taken me years to understand some of the things I wrote about in the article (and am still continuing to learn). I hope it will help in your real estate investing business.
    Marc

  6. Marc says:

    Alizsa,

    With flipping contracts there are two schools of thought. One says you should tell the owner your intention to flip the deal after you have it under contract with the owner and the other is not to tell them. It depends on the “type” of deal you are trying to flip. If for example it’s a lease option on an even market then you would most likely tell the owner that you’re going to flip it. If on the otherhand you’re in a hot market you would offer to pay the owner all cash and NOT tell them I’m looking to wholesale the deal. If you tell them you want to flip the agreement in a hot market the owner will probably just sell to someone else.

    Marc