Investing in today’s market has been easier in some ways, particularly in the D.C. Metro area because of healthy appreciation in real estate. But as we saw in D.C.’s Petworth in late summer of 2014, a market saturated with investors can be devastating. Inventory builds (properties that sit on the market), and ill-prepared investors are forced to cut sales prices drastically. In Petworth’s case, sales prices were cut as much as six figures—wiping out profits and equity.
The Power of Data
So how can you avoid a situation in which the market is appreciating at a high rate and yet unwise investors are losing money in the wrong, saturated areas? If repair value, repair cost, and profit margin are the only numbers you’re crunching, be prepared for a tough awakening followed by a loss. Understanding the metrics of the market will help you identify the best opportunities, while saving you time and money. Below are some important guidelines to follow to step up your game and add to your due diligence.
Know the Investor Ratio
Tracking the number of as-is/cash buy transactions is a great tool for evaluating an investment opportunity and understanding your competition, in effect knowing your investor ratio. To calculate your investor ratio, look back at the last 6 months of transactions in the target neighborhood. If the number of investor transactions averages 30 each month, for example, then jumps to 60. At that point, you know you will be dealing with double the competition when selling your property. If the market can’t support double the amount of sales, you are going to see sellers slashing prices left and right until a new balance is found.
Know When to Come to Market
Understanding how active a market is will allow you to know how bold to be with pricing. Keep a close eye on price increases when you notice them. Days on market (DOM) is the best gauge of market temperature. If you notice that DOM are decreasing, you know that it is a hot market. If DOM are on the rise, the wise thing to do is to be aggressively conservative. Price the property more prudently than your competition before your competition adjusts the price, creating a new lower, more attractive edge before you do.
Utilize Expert Advice
Few things excite investors more than getting more money as a result of the market stars aligning in your favor. We know it is not your job to forecast the market, as it is, you already have enough on your plate. Here at Washington Capital Partners, helping customers in our area allows us to understand where people invest and at what prices. Run your deal by us, we are happy to help you be more successful and share our insights with you!