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The Falling Knife Of Residential Property

Mar 27, 2008
Don't Try to Catch a Falling Knife

This is stock broker's phrase telling investors not to try to buy "bargains" when the market is in a free fall.

In order to lower your risks, you let the market bottom out, even bounce once or twice before buying. Just don't think you can catch that falling knife without getting hurt in the process.

The Residential Property Knife

Residential Real Estate Markets are in a free fall in many areas and I am going to go out on a limb here and say ... don't buy into this first wave of bargain hunters.

The thing that triggered this thought is an article in the WSJ about the "Foreclosure Bus" in Las Vegas.

Seems a local Real Estate Agent couple have purchased a bus and dolled it up to tour prospective buyers around to the foreclosed properties in town.

They even have a little song they and the passengers sing as they tootle around Sin City, "All aboard the Foreclosure Express, Climb aboard and get your houses for less"

Less than what?

Less negative cash flow than caused the last owner to crap out?

The example quoted in the article looks like this

3 bed
2 bath
"granite counters and a small bricked yard"
$235K in 2003
$395K in 2006
for sale now by the bank at $285K

What a bargain ....

Head's up... There's no Bounce in sight...

The problem here is you are looking at a falling knife with no bounce in sight. This residential splat is not due to bottom out until mid 2009! This is not even the midpoint of the projected meltdown in single family houses.

If you do buy a "bargain" now, here are some questions that you might want to answer before you sign the contract...

- What lender are you going to use?

Don't believe what they are telling you about loan terms. We are in a major credit crunch. Until you get to the closing table their rates and LTV's are very fluid and they may drop you altogether at any point in the process.

- What rent will you expect to collect?

Your's is not the only new rental on the market so watch for falling rents and lower quality renters.

- Will that "bargain" continue to drop in value along with the rest of the market?

There is another way

I would suggest that if you are a determined single family investor you hold all the cash you can scrape up for the REAL bargains that will start showing up as more time passes and we drop deeper into the slump.

Your "Green Light"

Another analogy from the world of stock brokers is that you are not at a market bottom until you see signs of "Capitulation". The Foreclosure bus is not one of those signs.

When the owners of the foreclosure bus have completely given up ... certain that the market is so bad no one will ever buy another house again ... when you see the Foreclosure Bus sold for scrap and mashed into a little cube by the car crusher ... THAT is Capitulation. That is your buy signal ... your green light.

That's when you take that pile of cash and start snapping up the real bargains.

In the meantime...

There's always Texas multifamily...
About the Author
Learn the Insider Secrets of Commercial Property Investment from Monte Lee-Wen who has personally purchased over $150M in Commercial Real Estate. CLICK THIS LINK NOW to start your Commercial Real Estate Investing Education with his 14 page FREE Report "35 Reasons You Should Invest in Commercial Real Estate". http://www.investortours.com
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