And, to be honest, that was my primary goal for getting access to the MLS when my wife got her real estate license. But, in the three months since I’ve had access to the MLS, I’ve learned that finding property is probably the least important use I have for MLS data!

Instead, I’ve found that the MLS is an unbelievably great resource for helping me in other aspects of my investing — investing aspects that ultimately make the difference between failure and success in today’s world of property flipping.

Here are just a few of the things I use the MLS for that I believe will contribute to our long-term success:

• Determining what types of properties sell. In my area, there are far better deals on single family homes that have 1.5 bathrooms than on homes with 2+ bathrooms. Of course, the resale value of homes with at least 2 bathrooms is a good bit higher than homes with fewer bathrooms. While that’s to be expected (families want more than one tub/shower), it never occurred to me that homes with fewer than 2 bathrooms were essentially impossible to sell in this market. But, looking at historical MLS data, my wife and I have found that greater than 95% of homes that have sold in my area in the past 6 months have at least 2 bathrooms. Which essentially means, I should NEVER be buying smaller homes, regardless of how cheap I can get them, if my plan is to resell. This has been a huge eye-opener, and has steered us clear of some properties that seemed like amazing deals.
• Determining where to buy. When I first moved to this area, I quickly realized that there was a “good” part of town to buy real estate and a “bad” part of town to buy real estate. In the good part of town, houses were moving, foreclosures weren’t piling up too badly, and market values were holding up as best could be expected. In the bad part of town, there were more foreclosures than investors, there were very few first-time home-buyers, and market values were dropping pretty quickly. And for the most part, things haven’t changed much since then. Except, when I map out sold properties in first-time home-buyer price range for the “bad” part of town, I find that there are a couple subdivisions that are still seeing a lot of market activity, a good number of sales, and pretty good market values. Without analyzing the MLS data, I had decided to stay away from those areas completely; based on my analysis, I’ve found that I can safely expand my market to include these subdivisions, and because so many investors don’t realize that these “good” pockets exist, there isn’t much competition for houses in those areas.
• Tracking Sale Price:List Price ratios. Because I put in about 10x as many offers as I actually get accepted, it’s clear that my asking prices are often much lower than the seller’s are willing to accept. But, until an offer is accepted, I have no idea how far off my original offer was to what the seller would consider. Are my asking prices *much* lower than what sellers are willing to accept? Or are my asking prices just *a bit* lower than acceptable. Using MLS data, I can compare the List Prices (both original and final) to the eventual Sale Prices for the types of homes I’m interested in purchasing, and that gives me a very good idea of whether I can reasonably expect the banks to accept an offer 10% lower than list or 50% lower than list. This sames me the waste of time/energy in making ridiculously low offers, but also gives me enough information that I don’t offer more than I need to get my offers seriously considered.
• Finding active REO agents. A big part of being a successful investor in REO properties is getting to know the big players in the industry. For the most part, this consists of the REO listing agents and other REO buyers. The agents are the folks who control these deals, interface with the banks, and — if they like you — can help you get great deals. The other buyers are both our competition and our potential partners. While we make a point to treat everyone we work with like they are the most important person in the world (just our way of doing things), it’s nice to know which of these people really *are* the most important people in the world. Scouring through MLS data gives us a great idea of who the big players are, and allows us to tailor (and increase) our interactions with those people.

I could probably list another dozen ways we have successfully mined MLS data to benefit our business so far, but I think you get the idea. If/when you get access to the MLS, don’t forget that it’s value far surpasses just being able to find active properties.

With such a slow December, I was wondering if foreclosure activity in my area was waning, but it appears that it was just piling up instead. Nearly 1000 foreclosures in one month in my county (a suburb of Atlanta)!

While I’ve yet to attend a foreclosure auction on the county courthouse steps (the MLS has served us well in finding properties), I think I’ll make a trip up there on February 3 for this one. And while I don’t expect that I’ll place any bids (though who knows, maybe I’ll do some serious research before then), it will be nice to get an idea of the properties likely to come on the market in the weeks following the auction.

It may be a slow rest of January, but February and March are lining up to be plenty busy evaluating deals and (hopefully) acquiring plenty more properties…

LISH PROPERTIES BUSINESS PLAN

Criteria for Investment Location

As noted previously, the company will use well-defined financial and demographic criteria for making investment decisions. This section will lay out the demographic investment criteria to be used specifically for short-term “value play” investments (as longer-term “fundamental” investments will be less dependent on real estate cycles).

The following is a set of demographic and economic conditions that should be examined when considering a location for property purchase:

Population Trends

Population growth or contraction is likely the strongest indicator of near-term vacancy rates, and therefore should be considered a primary decision driver for the company when considering entering into local markets. Ideally, the company would like to see a contracting population due to a temporary and well-understood circumstance (loss of jobs, natural disaster, etc), with the likelihood of expanding population in the near future. Ideally, the population loss has affected property owners and has created a situation where high vacancy is causing price depression in the local area.

Employment Trends

Employment growth is a key driver of vacancy rates, and should be considered a key indicator and decision factor when evaluating local markets. In addition to employment growth trends, the company will take into account the type of jobs being created/lost, and whether new or lost jobs will directly influence the property vacancy. For example, new white-collar jobs will likely have a smaller impact on Class C/D buildings than they would on Class A/B buildings.

Building Cycles

Multi-family residences go through cyclical periods of expansion and contraction in both income and value, and it is important to not only understand what cycle the local markets are in, but to buy at the appropriate point in the cycle to ensure appreciation and income improvements. Specifically, the company will look for apartments in areas where there has been a recent price/value depression, and where a turn-around is either beginning or on the horizon. While the company should wait until after the “bottom” of the cycle, it should be willing to get in shortly after this point, and be willing to accept short-term losses during the recovery phase of the market.

Additionally, the company should be aware of the history of building in the local area, including number of issued building permits, number of new units, and number of conversions. Markets tend to peak around the time of maximum overbuilding, at which point values begin to depress and buying opportunities start to become available (though it may take months/years to reach market bottom from point of maximum overbuilding). The company should use building information to help determine the point in the market cycle, and use that information to help drive timing decisions for buying.

Socio-Economic Trends

Trends in number of households and household income play a key role in the vacancy and income rates experienced in the surrounding markets. By keying in on these socio-economic trends, the company should be able to better determine the direction and strength of the market. It should be noted that household income trends that are very strong may indicate a move from apartment rentals to individual property ownership, which will ultimately negatively affect vacancy rates.

I’m going to refer again to the market cycle diagram I showed you in an earlier post:

It worth noting that many real estate experts and “gurus” have discussed market cycles at length, and each of them has a different way of characterizing the various parts of the real estate cycle. Some refer to four stages of the cycle, some refer to five or six stages, and they all use different terminology that they’ve made up for the parts of the cycle. I guess it helps them sell books. I’m going to keep this simplistic — as you see in the graph above, there are essentially four parts of the real estate cycle. I’ll refer to them as the “Bottom of Cycle,” “Upswing,” “Top of Cycle,” and “Downswing.”

Let’s start this analysis on the upswing of the cycle. An upswing generally result from a local market seeing population growth and expansion in its economic status. Perhaps some big companies are building plants in the local area, bringing hundreds or thousands of jobs to the surrounding towns. All these new workers will need the support of a service industry (restaurants, car dealers, doctors, etc), so the population growth will trend upwards very quickly.

At this point, there is more housing demand than there is supply, so builders will start building new properties, and investors will flock to the area looking for investments. Vacancies drop to near-zero, rents increase, and as rents increase, property values will quickly rise. As prices rise, word gets out that the economy is booming, housing demand is soaring, and property investments are appreciating rapidly. Speculators (those investors who don’t know a whole lot about the business but chase after the hype) move in and start buying properties for far above market rates, hoping to score big in this hot market.

All the while, the builders continue to build as quickly as fast as they can get permits and the housing supply reaches and surpasses equilibrium. It is at this point that smart investors, who bought at the beginning of the upswing, are selling off their properties for huge profits, and speculators are paying top dollar for anything they can get their hands on. This is the end up the upswing phase of the cycle, leading right into the top of the market.

Suddenly, there is more housing available than there are tenants. Builders likely don’t yet recognize that there is an over-building situation, and building projects that were just started will continue for the next year or two, putting even more inventory on the market. As all this excess inventory floods the market, causing supply to heavily outweigh demand. Vacancies start to rise, and landlords lower rents and offer concessions in order to bring in tenants. As rents drop and vacancies rise, speculators panic and start trying to sell their investments. We are now smack in the middle of the downturn part of the market cycle.

As the downturn picks up steam, inexperienced investors will drop prices and take ever larger losses in order to just “get out of Dodge.” The result is a downward spiral of falling property prices. Builders have finally stopped building and are doing everything they can to sell their empty new homes. At some point, vacancy rates and property pricing will level off, and few transactions will be taking place; sellers refuse to drop prices any lower and buyers are still terrified to buy in this market. This is the bottom of the market, and this bottoming out can last anywhere from months to years.

Eventually, assuming the local economy is still strong and population is still increasing, the excess housing will be absorbed by the increasing population and the market will once again start its upswing. Smart investors will invest at the bottom of the market (assuming economic indicators are good, indicating an upcoming upswing) or will invest at the beginning of the upswing.

This is just one of many potential scenarios that might drive a market cycle in a specific location, but most market cycles are driven by the four key market factors we discussed above: population trends, employment trends, overbuilding, and socio-economic trends.

I’ll have plenty more to say on market cycles in future posts…

While there are literally thousands of factors that contribute to the ever-changing real estate market in any given local area, there are some factors that tend to appear more often than others and that tend to have a much larger influence than others. Specifically, there are four key factors that affect many/most real estate market cycles, and they work hand-in-hand to actually drive the cycle through the various phases:

Population Trends

Population growth or contraction is perhaps the strongest influencer of real estate cycles. When populations grow, the demand for housing can quickly out-pace the existing supply, creating a “seller’s market.” This increased demand for housing and apartment units causes vacancies to drop, as people are willing to rent any available space. The competition by buyers causes rents to rise, and increased income pushes the value of investment properties up.

On the other hand, when population rates are trending down, supply out-paces demand for housing, and consequently rents will drop and vacancies will start rise. As property income drops in this “buyer’s market,” the value of the properties themselves drop, and prices fall.

Employment Trends

Employment growth or contraction is important because it is a key indicator of what is likely going to happen with population growth. For example, when a big company moves into a city, it has a big impact on population. Not only does it bring employees with it and hires local talent, but it also provides a stable population of consumers who need services such as restaurants, auto repair, hair-dressers, etc. So, while a company may move into town with 1000 employees, the service industry to support those 1000 employees may bring another 1000 or 2000 people to the area. Employment growth can quickly drive population growth.

Of course, when companies leave town or lay off employees, it tends to have a negative effect on population trends, and also on the real estate market. Again, not only will the employees leave town, but there is now less demand for the accompanying service industry, and those service workers will likely leave town searching for greener pastures elsewhere.

Overbuilding

When populations are increasing, builders go crazy trying to keep up with the demand for housing. Generally, builders are so focused on getting as much housing inventory on the market as quickly as possible that they don’t notice when supply starts to overtake demand. This leads to overbuilding, where there are too many rental units on the market than are being demanded. With too much inventory, vacancies start to rise, which leads to falling rents, and ultimately falling property values. Eventually, builders will stop building, but by then it’s often too late, as the market is more than saturated.

If there is still a strong underlying economy in the local area, population should continue to grow, and eventually the over-supply of housing units will be absorbed. If the underlying economy is not strong, it may take many years for the excess housing units to get absorbed, and the local real estate market may stagnate for long periods of time.

Socio-Economic Trends

Trends in number of households and household income play a key role in the vacancy and income rates experienced in the surrounding markets. For example, in locations where there is a high divorce rate, families will tend to be smaller, and the demand for housing will tend to be higher. Changes in household income also play an interesting role in investment real estate; when household incomes surpass a certain threshold, people start to buy houses as opposed to renting, thereby hurting the investment market.

Let me explain…

It’s pretty well-known that almost all real estate markets increase in value over time. In fact, if you were to plunk down money for real estate at almost any time and place in the U.S. in the past 150 years, over the subsequent 25 years your money would very likely have increased in value. This is what makes real estate such a safe and profitable investment over the long term.

But, while real estate almost always trends upwards in value, it also almost always goes through cyclical periods (cycles) where values drop for some period of time before continuing their upwards trend. This is what a typical real estate cycle might look like:

In a typical real estate market, these cycles will continue to repeat. And, in general, the upswing part of most cycles will be higher than the subsequent downswings; this means that average prices over long periods of time will trend upwards.

So, while in some respects real estate is a no-brainer investment (again, prices almost always tend to increase), there are two major risks that these real estate cycles pose:

1. If an investor buys at one of the peaks in the cycle, his investment is likely to go down by some percentage before the next upswing occurs. During this period, rents may drop, vacancies may rise, and if the investor hasn’t planned for this temporary downswing, it could put so much financial pressure on the investor that he can’t afford to keep his investment;
2. Real estate cycles can last anywhere from a year or two up to a decade or two. So, while an investment made at a real estate peak will almost certainly go up in the long-term (assuming the investor can hold it long enough), that “long term” could end up being 10 to 20 years. Many investors don’t want to wait 10-20 years to see positive returns, and additionally, the longer the investor needs to wait for a positive return, the more likely that the total annualized return rate will be low.

On the flip side of those risks, let’s say an investor is able to acquire property during one of the low points in the market cycle. With the typical real estate cycle lasting at least a few years, this investor will likely see his investment continue to appreciate for the during of the upswing in the cycle. If he then sells his investment around the next cycle peak, he can easily see returns on the order of 5x or 10x his investment.

For example, let’s say an investor has found a place in the US where the real estate market is just getting ready to begin its upswing (keep in mind that cycles are localized events – the market in Houston, Texas may be in a completely different point in the cycle than the market in Austin, Texas). And let’s say this investor plunks down $100,000 as a down payment on a $1M property. Over the next five years, the property increases in value by 50% (not unrealistic in a hot market). So, this property has gone from $1M to $1.5M in price in that time. The investor’s equity is now $600,000 (the original $100,000 plus the $500,000 in appreciation), a six times return on his investment!

While those are large numbers, this is a completely realistic scenario. And in fact, many investors made many millions during the recent real estate boom (again, it may not have been a boom everywhere, but it was in certain parts of country). Unfortunately, the investors that bought at the top of this boom are going to experience the two risks I highlighted above – many will not be able to afford their properties when values drop, and the rest may need to wait 2, 5, or even 15 years to see positive returns.

If you got nothing else out of this post, hopefully I’ve conveyed a few basic things:

• Real estate will generally tend to appreciate in value over time
• This appreciation, while likely over long periods of time, are not guaranteed over shorter periods of time due to the cyclical nature of the real estate market
• Understanding these real estate cycles – and what causes/affects them – can prove the difference between marginal long-term returns and huge short-term returns

In my next post, I’ll talk about the various stages of the real estate cycle in more detail, and will also discuss the factors contributing to each stage. In future posts, I’ll discuss how to detect which stage of the cycle a particular market is in, and how to take advantage of that knowledge to make smart investments.