Chris McAllister is the Founder of Real Estate Brands Ltd, the franchising entity for ROOST Real Estate Co. and Lucky Town Real Estate Co.
The real estate market has never been tighter. I have been licensed for 20 years now, and I have never seen the market more aligned with the interests of sellers and residential real estate investors. Sellers who are putting their homes or investment properties on the market are seeing multiple offers and immediate sales.
In the face of the Covid-19 pandemic, buyers never left the market, and sellers became extraordinarily cautious.
Why Sellers Are Scarce
Sellers are cautious because a quick look at Zillow will show you that in many places, exciting next home possibilities are few and far between. This creates a vicious cycle. If you don’t see anything to get excited about, why move?
As an aside, I predict home builders will have their best years ever coming up because of this phenomenon.
Buyers Are Taking On Risks They Shouldn’t
Buyers are making bad decisions. We have clients getting outbid in multiple-offer situations by competing buyers who are willing to waive inspection contingencies and committing to make up the difference between the contracted purchase price and lender-appraised value if the appraisal comes up short. This behavior is reminiscent of what happened in the run-up to the real estate crash of 2008.
Brokerage Performance Over The Last 90 Days
Here are the facts about our brokerage’s performance in the last three months, as an example:
• March was the best month we have ever had as a company. Both property management and sales set records.
• In April and May, contrary to my fears, the property management business remained strong and actually continued to grow. Our owners have done very well during this time. June is coming in on plan.
• Home sales in April and May were down by a full 50%, but they appear to be stabilizing now in June.
• Demand from buyers is as high as or higher than it has ever been.
• Residential real estate investors are the happiest investors on the planet.
I expect sales to recover from May lows by 20% or so between now and Labor Day. Presidential election years are always quirky, so I don’t expect a full sales recovery until spring 2021.
Real Estate Investor Activity
Several of our clients are listing and selling their single-family rental properties to owner-occupants right now. Given the fact that inventory is light and interest rates are freakishly low, the law of supply and demand dictates that this is a rational strategy. Party on!
Where To Invest The Harvest
The one potential downside for an investor in a sellers’ market is what to do with the proceeds from the sale. The circumstances that make it attractive to cash out are the same that make buying anything on the market right now a bad financial move.
In most cases, the asking prices for multifamily properties are too high to generate a suitable return. I may be wrong, but I refuse to count on being able to increase rents in the short- to medium-term to offset the purchase price.
I don’t think commercial real estate is a viable option either.
I expect retail and office space will take years to recover from the pandemic. Many people can, and prefer to, work from home and are far more productive outside of the office. I predict shared space concepts such as WeWork and Industrious will see less future demand from sole proprietors of all types, as well as from anyone who spends their days in Cloudlandia and on Zoom.
I think commercial retail and office space will be cheap, but I don’t see how it can be cheap enough if nobody needs it. Warehouse and distribution centers supporting e-commerce and server farms supporting Cloudlandia are definite possibilities, but in the spirit of full disclosure, they are beyond my expertise and the capacity of most of the clients we work with.
As an aside, there is a cool idea for the WeWorks and Industriouses of the world where they convert some of their office space into apartments. There is a huge cohort of people who would love to live, work, party and go to the gym with their friends and workmates, all in the same building.
All of this just brings us back to why residential real estate is going to continue to appreciate due to high demand.
What’s An Investor To Do?
Unless you have high-interest-rate debt you want to pay off with your harvest or you are lucky enough to identify a new, bigger, more exciting, residential real estate opportunity that you can’t pass up, I think this is the time to remain invested where you are and enjoy the ride.
On the other hand, if you are cashing out and moving to Costa Rica, again, party on!
Return On Portfolio
Your interest is in the total return on your portfolio over time. You want to get the biggest return possible and see all of your motivations for getting into real estate investing begin with come to life. To successfully expand your portfolio these days, you need every advantage you can find.