Investing in Hot Markets
by Steve Cook

Frequently, I am approached by investors throughout the country who think they cannot invest where they live because it’s a hot market. Currently, I live in an area ranked as the third hottest market in the country and am still finding great deals. And not only do great deals exist, but they keep getting better!

So what am I doing differently? I’m focusing on doing fewer deals and selecting projects that will result in higher profit margins. Opportunities that will net in excess of $100,000 for rehabbing and at least $20,000 for wholesaling are most desirable. In the past, the average retail value of homes I purchased was about $75,000. Now I purchase homes in the $250,000 range or higher in order to achieve my desired margins.

To achieve these types of margins, I’ve begun pursuing the following types of deals:

1) Commercial Deals: Although buying, rehabbing and reselling commercial is not my top interest, high margins can be made by buying, improving and holding, or just wholesaling commercial deals. In hot markets there are always people looking for profitable commercial deals. If you don’t have the money to buy the commercial property yourself, consider wholesaling it to someone who has the money.

2) Land Deals: In hot markets, land is always a wise investment and is usually easier to sell than a home. This is primarily because there are many cash buyers waiting for land to build their dream home. In purchasing land, I look for properties that either have the potential for subdivision or have large parcels of land where a lot or two for new homes can be built or sold to a builder.

3) Obsolete Homes: In the 50’s, there were many homes built and a significant number were small, one bathroom ranchers. It was the American dream! Unfortunately, many people now believe ranchers are insufficient and worthless. This is a good thing for investors. In areas that are hot and have a number of these homes, investors are usually able to buy these ranchers for less than the value of the lot itself. In purchasing this type of home, I will either tear down the rancher and build a new one or build modern additions to make it more attractive to buyers. The key thing most buyers want is a minimum of two bathrooms. When I buy one of these homes slightly under or at market value, I can usually get about $2 back for every $1 in renovation and additions. If I buy a home for $200,000 and put $70,000 into it, getting $350,000 or more for the home isn’t uncommon. Another obsolete and hot item is a house on the water. Recently, I’ve been seeking small cottages on Baltimore’s waterfront (a.k.a. Chesapeake Bay) with the intent of tearing them down and putting up new homes. I’m able to occasionally buy an outdated cottage for $250,000, put a new home up for $200,000 and retail it for $600,000 or more.

4) Condos: Builders and buyers can’t build enough of them. Taking old apartment buildings and doing condo conversions is hotter than ever. Do a nice job and make them luxury condos, buyers will be lining up for them. Of course, give consideration to location because condos are more desirable in some areas than others. For example, the Manhattan market demands condos. Everyone wants one. However, many are outdated with old kitchens, antiquated bathrooms and horrendous decorations, especially the wallpaper. Although condos in this area frequently sell for over $1 million, they are small and renovations are only needed to the inside of the units. That’s the bonus for investors – no exterior renovations. An AWESOME renovation will cost about $30,000-$40,000 and sell for $150,000 more in many cases.

5) Pay Full Price and Still Make Quick Cash: There are always hot spots within hot markets. These are areas where people are lining up and waiting for homes to come available. There are more buyers than available inventory. People will make full price or higher offers the day listings come out, regardless of what the home looks like inside. They just want to get into the neighborhood. In pursuing these deals, I would do mailings in these hot neighborhoods and let people know that I’m looking to buy a home, am willing to pay them full price and can save them the realtor’s commission. I would sit back and patiently wait for the sellers to call. Because it’s a private sale, I would tie the homes up with very small deposits and then look to assign my contract to a retail buyer who is willing to pay more than I am to get into the neighborhood. Since no realtor is involved, I would negotiate a fair price with the sellers and get the benefit of the savings plus whatever the buyers are willing to bid over list price. When dealing in markets where homes sell for $400,000 or more, a $20,000 markup or more isn’t that big of a deal. When getting upwards of a million dollar home, $50,000-$100,000 is almost irrelevant to a motivated buyer.

The good news is this - there are opportunities everywhere, everyday. Think outside of the box and approach deals a little differently. With my focus on higher profit margins and the type of deals listed above, four deals now can net me $1 million or more. Before, I had to do about 100 deals to make that amount of money. For those of you who are ready, there is a ton of money to be made in high-end and hot markets. Don’t let a hot market stop you from doing deals – they’re actually easier to make money in than anywhere else.

Copyright © 2005 Steve Cook, All rights reserved.

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