Residential Rehab Loans: Understanding the Local Factors of the Real Estate Market

If you are the kind of person who wants to fix-and-flip a house, chances are that there are things you already know how to do. You don’t need to be told how to handle your tools. You can look at a house and understand what is wrong with it, and what needs to be fixed to make it more attractive to buyers. If the foundation needs shoring up, you’re the person to shore it up. Those things you know. What you may not be as familiar with is understanding the short-and-long term trends, both regional and national, that can impact your potential sale. Getting a hard-money loan to fix-and-flip a house means understanding how the market works and what you can do to get in- and out- at the right time.

Understanding the residential real estate market means figuring out which trends are going to be short-lived and which ones will impact you. To start with, we have to differentiate between a few factors.

All Real Estate Is Local

It is helpful to think of real estate as being a little like the job market. For most of the last decade, the job market has been lousy. It was very easy, and accurate, to say that it was near impossible to find a job in this market. National numbers would back you up. However, in some places, like North Dakota, which was seeing a boom in fracking, the job market was great. So for North Dakota residents, relying on national numbers would be misleading about their prospects.

Real estate can be a lot like that. Some areas, like California and Nevada, were hit harder by the foreclosure eruption than other places, but because of that, they led the way in the housing revival. They far outstripped national numbers during the recovery. National numbers are important -but they never tell the whole story.

When looking at trends that actually impact you, it’s important to bore down into the data and get as local as possible. Maybe the best way to really get a handle on the local market is to check out the Local Homes Inventory. This is a listing of how many houses are on the market and that are being sold. This is your best look at local and immediate trends, a snapshot of the market at any given moment. Normally, the more homes on the list, the lower the prices, because of the increase in supply.

It can also be used to see if people are moving out and if people are moving in. If there is normal flux, then you might be OK. However, if there is a disproportionate number of people selling and houses that are lingering on the market, especially in a buyer’s economy, that could be a sign the neighborhood is on the decline, and that investing in it would be a bad idea. In short, if national numbers are soaring, but that block is lousy, stay away from the block. A rising tide lifts all boats, but not if the boat isn’t in the water.

Consider the Distressed Situation Market

We’ve talked about how to recognize a distressed property, but sometimes that isn’t enough. If a market is saturated with distressed properties, it often means that the area is not stabilizing. The West Coast has seen a remarkable decline in the number is distressed properties. This might not immediately seem good for the fix-and-flipper, but when a market is too saturated, prices go lower. As it straightens out, the property you are fixing is worth more. The West Coast is actually below the national average, with about 13% of houses that are distressed. Indeed, Southern California has some of the highest-performing metro areas in the nation. That’s a good sign for the market.

Knowing Short From Long

This is one of the harder aspects to understand, even for economists, and it is why we have bubbles. Everyone likes to project short-term trends into infinity, but that isn’t how it works. If the housing market is rising, it is tempting to think it always will, but you need to examine the fundamentals or real estate. These include:

  • Local income levels
  • Debt ratios in a neighborhood
  • Capital investment from outside (foreign money in a given market)

Understanding the real estate market is way trickier than understanding how to fix up a house, but it is just as important. Your leading hard-money lender wants you to succeed – and a big part of your success is knowing when is the right time and place to start a fix-and-flip.

 

Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help.

 

 

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