5 Red Flags Real Estate Investors Should Avoid At All Costs

By on December 14, 2018

With many markets growing in competition you may need to shift your focus and look elsewhere. In 2018, investing outside of your primary market is as easy and abundant as ever. Technology has made researching properties and studying new markets something any investor can easily accomplish. In your due diligence search you need to know which markets are on the upswing and which are on the decline. In many ways, the market the property is in is just as important, if not more, than the actual property. Getting involved in a declining market will make it difficult, if not impossible, to make a profit. On the flip side investing in a growing market will make you look like a genius and help maximize your returns. Here are five major red flags for any potential market.

  • Declining sales figures. The starting point for any property due diligence should be sales numbers. There are a handful of key sales figures that often tell the story of a market. Look at the last 90 day’s worth of comparable sales and see where average sales prices have been trending. Real estate is very cyclical and something that shaped a market six months ago may not be applicable today. If sales are currently on the decline, there is almost always a tangible reason why. There could be a problem with employment, taxes, schools or foreclosures that are driving home values lower. It very well could be a short-term problem that is easily fixed, but you need to know where the trend is heading. With sales prices lower, comparable sales are impacted which push future sales lower as well. Declining sales prices can simply be a blip on the radar, but they could be an indicator of much bigger problems down the road.
  • Rental vacancies. It is no secret that rental demand has been on the rise for the better part of the last decade. Ever since the mortgage collapse, home buying numbers are down and rental numbers are up. One indicator of a market is the strength of rentals. Even if you don’t view your property as a buy and hold candidate, rental numbers have an impact on demand. In your research, if you discover that rental properties are having trouble finding tenants it can be a sign that people are moving away from the area. Homebuying figures can depend on several factors, but renters have much less scrutiny in getting approved for housing. In most cases, the monthly payments are lower, and demand is always there. Markets with declining rental prices and increased vacancies should be a giant red flag for investors. Fewer renters mean landlords will have fewer property options. If demand continues to sag they will either be forced to sell for whatever they can, or become late on the mortgage and eventually short sale or foreclose.
  • Poor job market. The strength of a market is often tied into the economy. A local economy is based on the performance of the job market. If jobs are abundant buyers will flock to the market and look to purchase real estate for the long term. If jobs are elsewhere, homeowners will sell for whatever they can and go to where the jobs are. A major indicator in job performance is the local unemployment rate. Unemployment has leveled off in recent years but is still a factor in a handful of markets. All it takes is one major employer to leave town to create a major vacancy in the town. Conversely, if a few large companies move into a town you could hit the jackpot and time the market right. In addition to the data you review at town hall it is important to read the local town newspapers. These will tell you any job rumblings or rumors that can impact the job market.
  • Population change. Simply put, are people moving in or moving out of the area? Like most other demographic data, you can find this at the town hall or possibly on the website. The information may be a little dated, but it will still give you an indicator of population trends. With a declining population it is a sign that buyers and homeowners are going elsewhere. Eventually, this will have a trickle-down effect on sales prices, often sooner rather than later. Fewer houses on the market means buyers are in control and can dictate terms. Sellers need to react, often by lowering their price or offering a concession that appeals to buyers. With fewer buyers in the mix, prices will drop, and home values will quickly decline.
  • Limited buyer pool. With any property in any market you want to appeal to the broadest possible buyer pool. You may great a great deal on a property 50 miles outside of town, but what are you going to do with it? If you can’t sell it, the value is not be nearly as much as you think. In evaluating a market, you should look at the resale potential of the properties in it. A market may be great to use in certain months, but what happens in off-peak times? Will you be stuck with a property you have a tough time renting? Will your buyer pool be only a handful of niche buyers? If you can’t turn the property over, the market may not make sense to buy in.

Don’t get stuck with a property in a declining market. Use these five red flags to help stay clear of the wrong market.