The most valuable of an investor’s resources is their time. While any real estate investor risks spending too much time for naught, time is never wasted on a comprehensive market analysis.
As a hard money lender serving the Greater Los Angeles region, I find investors spending too much time identifying available properties without the appropriate time allotted to study the market. All profitable investments are based on a thorough analysis of the following:
- price and value,
- risk, and
- financing options
The success of any real estate investment can lead back to the scope of the market study and the time an investor spent investigating values and risk.
Price and Value
While sellers focus on value, investors focus on price. There are distinctive nuances between value and price.
Value is the property’s worth in the market. Price is the amount a buyer is willing to pay.
The most challenging task for sales agents is advising their principals on a list price the market will bear. The dance becomes interesting for an agent not to underprice as investors work not to overpay.
Both sides must analyze the market without emotion. An agent must speak truthfully to a seller about what the market will support, and an investor must understand the market well enough to ensure their offer is commensurate with the at-market price.
An investor must determine the price range for each property in each market before an offer is made. The price range is “backed into” after studying and applying the financing options, the renovation budget, and the value created.
The price range is the last step.
Every investor has their measurement and tolerance for risk. However, a property that seems like “a steal” may not be so when compared to the market. A property with low demand in an area with diminishing values will never result in a profitable investment.
The scrutiny of population growth, labor base, price-to-rent ratio, and the effects of supply and demand will determine whether an opportunity will prove viable.
An investor’s exposure will be further limited if the current market conditions are projected forward. This means speaking to those active in the market who would know of future changes in the employment base, grant programs, and incentives to bring about changes in trends and local perception.
Raw data cannot provide these factors, but they may identify opportunities before values significantly increase. Investors must be able to read and predict market trends rather than create or hope for them.
Investigating loan options is more than evaluating programs and term sheets. An essential part of a lender’s underwriting is the input of market trends and conditions from Realtors and appraisers. An investor needs these professionals on their team, as the lender will have access to expert advice.
Lenders will know how much time an investor has contributed to a market analysis by the contents of the loan package and the proforma. A thorough and accurate market analysis will lead to the best loan terms.
The Items in an Analysis
Due diligence will be the same for the fix-and-flip and the buy-and-hold strategy. Every opportunity will need a specific analysis, and each must contain the items below.
1. Identify the Market
The geographic area, region, community, or neighborhood can determine a market. The market will identify the product type, like single-family homes, duplexes, or condominiums.
2. Relevant Data
The collection of market data must be relevant. Time must be given to go deeper into the raw information, like sale prices of comparable properties. The market conditions can be derived from the proactive measures of local governments creating opportunity zones or re-classifying zoning regulations. Investors must know and study the rental and vacancy rates over time and any changes in the demographics, new-construction permits, and the employment base.
3. Historical Data
The historical data will help to place the market’s activity into the proper perspective. This information will not predict future conditions but will help recognize patterns and cycles.
Data should be gathered to show changes in the following:
- rental rates, and
- supply and demand.
The time invested in a comprehensive market analysis will equate to the best return for an investor. The study of the market conditions is as necessary after the closing as it is when finding an opportunity. The proper timing of a sale will directly affect profitability.
The worst thing an investor can do is to depend on time to correct the mistake of overpaying or on buyers’ emotions to create a bidding war.
An investor’s decisions must be from sound market data and quantified to the lender underwriting the opportunity.
If you are a real estate investor with a short- or long-term hold period, it is in your best interest to work with a reputable and experienced hard money lender in Los Angeles. PB Financial Group is a premier, direct hard-money and bridge lender that has provided quick funding since 2007 and closed over 2,700 loans. We aim to satisfy your financing needs efficiently.