Patience and focalization are crucial elements of successful real estate investing and market selection. However, don't feel as if you've missed the market because of the negative naysayers out there, who started talking about the housing bubble in late 2005. Forbes Magazine predicted a housing bubble every year from 2002 through 2005, and it still hadn't happened as of late 2005. (Although by 2007, certainly things had changed in the real estate market.) Not that a housing bubble hasn't eventually happened to some degree or another in selected markets; the point is that if you took the advice of naysayers, think of the lost upside you'd have missed.
Most importantly, remember that all real estate is local. Just because some markets are hurting, does not mean that other markets are not substantially out-performing the curve. This is a huge country we live in, with hundreds of builders, thousands of cities and millions of people. The socioeconomic and demographic landscape is so varied and complex, with job growth, population migration, and redevelopment initiatives abound, that it is insanely ignorant to suggest hyper-appreciation is nonexistent in a number of communities. People will always need a place to live, and builders will always be motivated to meet that need. With that in mind, what drives part of the success of the preconstruction investing model is not always the unabated and natural appreciation that occurs in a hot market, but the fact that some builders will artificially price their homes at a discount to spur sales activity.
Keep in mind that these builders, whether they be local, national or international, are answerable to their lenders. Their lenders want executed sales contracts and closed homes. Based upon how a lenders' multimillion-dollar construction loan is structured, a developers' progress on a subdivision is segregated into different loan amounts within one umbrella loan. As an example, a $10,000,000 umbrella loan is made from XYZ lender, with a construction loan drawdown schedule that results in 10 equal payments of $1,000,000 to the developer over the construction period of the development. The future loan drawdowns are contingent upon several factors; the pace of executed sales contract, buyer deposit reserves, the completion of zoning permits, etc. The latter components are a part of a very complex formula that essentially puts the onus on the developer to produce closed units, in exchange for access to the lenders' capital.
Understanding a builders' motivation and the market forces that affect a developments' appreciation are critical to your success. Don't be afraid of getting in the mid-to-late innings after you've conducted research on a market, and also keep in mind that along the way-and despite the meticulous research you've done-not every deal is going to be a home run. Expect a few duds here and there, and also know that there is no substitute for good research. The research should be your primary guidance in real estate investing. Just don't go on a hunch. Make sure your hunch has backup-backup that can take you to the bank.
As a member of the National Association of Realtors and the National Association of Home Builders, D. Sidney Potter began his real estate career in 1992 as a mortgage operations consultant for Synergy Consultancy Group, and proceeded to work for Marcus & Millichap and Sperry Van Ness as a commercial real estate broker selling shopping centers and storefront retail. In addition to being a former member of the International Council of Shopping Centers, he holds a BA, 2 MBA's and part of a Doctorate from Pepperdine University. Most recently he served on the Board of Directors for two major HOA's in Las Vegas.
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