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Is It Time to Sell ??

August 22, 2018

Some say that with housing prices where they are it might be time to sell. I dont know if its time to sell, but I think it is time to be cautious when buying. If you are thinking about selling, maybe do so with owner financing. You can get some cash, and lower your basis in the property.

As you know, prices have gone up substantially in the last 10 years. In Texas, it seems like we are about where we were in 2006 right as things were getting a little too frothy. We have more people coming into Texas but there is also lots more construction and development coming on line also. The Real Estate Center at Texas A&M has lots of information on the state of the economy here in Texas right now.

I am still buying properties to wholesale and rehab myself. At this time I think the market is not going to move up too much more too quick. For that reason, I am not looking to hold anything that is not a value add type of project. Larger properties still seem to make sense with the value add component.

People are still very bullish in this market. It is because people are so bullish that I have to pull back a little and be cautious. People tend to move in the herd mentality. When EVERYONE is buying, most people think they should buy too. WRONG. Maybe buy something, rehab it and get rid of it. That seems to make sense these days for me.

There was a song by the Kinks called “Give the People What They Want.” At times like these I hear people saying that real estate can only go up. Prices will not be like this ever again. I have to just say, “Here is a property that I just rehabbed in great shape, pay me market price.” You gotta give the people what they want.

When the herd mentality takes over, you know things are getting out of hand. I wrote on the subject over a year ago that we might be at the top of the market. Things may be a little too hot right now. I can not predict when things will change or even if they will. What I can say is that prices are well over where they were 10 years ago. I will keep giving the people what they want until they dont want it anymore.

The Unemployment rate is even lower than it was last year. We are at 3.9% for the US as a whole. Gas prices have gone up a bit, but nothing major. They are still historically low. I think that it will take wage rates to start going up to trigger some inflation. When the Fed sees inflation, they will start to raise interest rates. Higher interest rates will cause housing to become less affordable and will lower prices.

Higher interest rates always scares businesses. They will tend to pull back and hire less people. I believe that these items of higher interest rates and higher wage rates that are causing unemployment to go up will in turn cause the housing market to cool off.

When people start to see the housing market cool off, they will again force themselves into the herd mentality and they will run with the herd. They will remember 2008 and run for the hills. Well, maybe not run, but real estate will be slightly out of favor.

Prices should plateau for several years or maybe decline somewhat. I dont believe there will be a recession or any 2008 type of price correction though. When prices are not climbing 5-10% per year on their rental properties, people may think it is time to get out. Especially people that are out of town landlords.

I would think that those might be the people to market to when returns decline. The investors will be the ones who put 20+% down and will be able to take losses on their properties. If they bought a property at 200k, they will probably have a 160k mortgage on it. If that 200k property declines in value to 180k or 170k they may sell and still get a little cash out of the deal.

You may be able to purchase that formerly 200k property for 30k less than 2015 or 2016 price. Going back to the first paragraph about owner financing. I think that is a great thing to do right about now if you think it is time to sell. My wife and I have sold a few properties with owner financing in the last few years.

The reason we have done that is that we like to get a little cash up front and payments for long term(25 years). If things turn and the buyers can not make payments we can take the properties back and sell them again. We might be at a lower price in a couple of years, but we got some cash for down payments so our basis is lower on the property.

Lets say we sold a property for 100k with owner financing. The buyer puts 10k down. So now our basis and loan balance is 90k. If they pay for a few years, we get interest and a small principal pay down. We will be getting payments all this time.

Lets also say that they stop making payments after 5 years. The loan balance will be about 82k on a 25 year mortgage at 7%. If prices have come down from 100k, we should still be good to sell at 82k or maybe even 90k since we are doing owner financing. We will get another 10k down in our pocket and start the process all over again with a 80k loan owed to us.

I guess what I am trying to say is that if you think it is time to sell, sell with owner financing. If prices do decline over the next couple of years. I will be buying like a crazy man. Do what everyone else is not doing. When the teachers, plumbers and hairdressers are telling you to buy real estate, it is no longer time to buy.

When everyone says that real estate is the worst investment out there, I want to start buying again. I want to get into lots and lots of debt to buy as much as I can. My wife gets so scared when I tell her that. I always want to buy low and sell high. If nobody is liking real estate, I am. Right now, too many people like real estate.

Good luck on your real estate deals and happy investing.