Real estate inventories across the country are at record highs. For any seller this is definitely a bad thing. Higher inventory means more properties competing for less and less buyer dollars. Higher inventory means it will more than likely take longer to sell a property and it means that the selling price will ultimately be lower. Supply and demand works in real estate just like it works in every other product. But what does high inventory mean for the average real estate investor?
High Inventory and Low Real Estate Prices
To the novice real estate investor, high inventory is a sign of overbuilding and sinking prices. To be sure, this is a very good surface analysis of many areas with high inventory. The savvier investor should see this as an excellent opportunity to score a very good deal. It should be noted that this analysis does not apply to all areas. Areas experiencing real estate inventory of 2+ years should be avoided regardless of the quality of properties available.
Investors can find a sweet spot in these times of high inventory, however. Places where inventory traditionally ranged from 3-6 months may now be seeing inventory of 9-12 months. In these areas, buyers have tremendous negotiating power. Not only can they negotiate for lower prices, but they can hand pick the best properties. If an investor doesn’t success with the first offer, he/she can always move on to the next property. With inventory levels at record highs, sellers are entertaining all offers.
High Real Estate inventory Prices
While this strategy should be used with caution, in many areas that were not directly involved in the real estate run up and subsequent run down, it holds promise. Investors should start looking for properties that provide enough cash when rented to cover the mortgage and operating expenses. Additionally, in this market, these properties should have some potential for appreciation. Consider neighborhoods with fairly strong employment (Research Triangle in Raleigh, North Carolina for example) and a growing population. Real estate prices should be attractive because of the recent downturn. These properties possess fairly small downside given the cash flow criteria and should rebound fairly quickly when the economy turns around.
Don’t be intimidated by areas with slightly elevated inventory. Consider it an opportunity to choose the right property for the lowest price. Proper due diligence should keep investors from markets with too much inventory and provide them with the opportunity to lock in a great long-term return. This is a great environment for buy and hold investors.
Michael Cook - Michael Cook is currently a Real Estate Investment Banker for Wachovia. He and his partnerstarted their own real estate investment ...
