The adage about the importance of location still rings true in the world of real estate investing. The strength of any deal is largely based on the strength of the market it is located in. You can be offered a deep discount on a property in the middle of nowhere, but it doesn’t necessarily mean you are getting a good deal. If the market lacks sufficient demand you will be stuck with a difficult asset to get rid of.
Prior to making an offer you should spend some time narrowing down a few markets you are comfortable with. This way instead of analyzing the market all you need to do is evaluate the property and make a decision. Breaking down a market means more than just looking at the most recent sales trends or reading the headlines in the real estate section. By digging a little deeper you can choose markets on an upswing instead of ones heading in the wrong direction. Here are five key due diligence areas to help evaluate any market.
- Sales data. Any evaluation of a market must be done through a real-time lens. Sales that occurred even six months ago have very little impact on the current standing. Start your evaluation by getting as much current sales information as you can. Your real estate agent should be able to provide you with this data or you can find it on realtor.com or through the local town website. Look at the total number of transactions in relation to the same time last year. Next, look at the average sales price and average days on the market. If properties are taking longer to sell it should be viewed as a sign of reduced demand, which will ultimately pull prices down. You should also look at the number of new housing permits as an indicator of market growth. Don’t fall in love with any one trend over another but look at the direction the market is headed in.
- Demographics. Demographics and sales data often work hand in hand. A change in demographics will often dictate where sales figures are headed. Look at the makeup of buyer and homeowners in the market. Are the trending towards an older demographic or are they leaning towards younger, first time homebuyers? Look at the strength of the school systems in addition to any changes in the mill rate. Schools and taxes are two of the biggest considerations for potential buyers. If all things are equal buyers will opt for locations with better schools and lower taxes. It is also important to look at the amount of crime and unemployment. Unemployment has stabilized nationally over the past decade but there can be pockets where it is still a concern. High unemployment means lower sales and more demand which will sink property values. As obvious as it seems buyers want to live in safe areas with low crime. If crime numbers are high they will quickly look for other markets.
- Expansion. Many towns are prime for significant growth over the next decade. In the right situation this will bring more revenue to the town, which in turn will lower the tax base and improve the overall quality. Additionally, people like to live in places where they can get everything without going too far. Something as minor as a new Walmart or a hot new restaurant may not seem like much it can be the spark that prompts future growth. Towns that have recently expanded or have items on the docket may be set to take off. As an investor, they may still be priced at or below fair market value and there may still be some upward potential. Expanding too wide or even too quickly can be a bad thing in the wrong market but if done right an expanding town can be a positive sign of things to come.
- Employment. The unemployment rate is not the only employment consideration that should be taken into account. The total amount of jobs created or sustained is also a major factor. Very few people actually enjoy a long commute to work. Your employer doesn’t need to be across the street, but it probably can’t be 45 minutes away either. Markets with hospitals, large corporations, factories or multiple professional buildings can employ hundreds, if not thousands of people in a small area. In a perfect world the market will have plenty of residential living within 15 miles of the main parts of town. That way as a homeowner you can have your cake and eat it to. You can work where you like without having to travel an hour to and from work daily.
- Buzz. If you are a rehab investor you may not be necessarily looking to see where the market is headed a year from now. You are more focused on the next 60-90 days. Keep your eyes and ears open for any buzz you hear around town. Read every local publication you can find and join as many social media groups as you can get on. Markets tend to run hot and cold based on nothing more than buzz and speculation. If there is a major factory rumored to come to the market it may be enough to generate interest and ultimately find a buyer.
The more time you spend researching a market the more comfortable you will be. Every few weeks you should review your information so there is nothing you miss. Any due diligence should start with these five key areas.
