Anyone with an eye on the real estate market is aware that 2007 is turning into a buyer’s market, also known as a soft market. A drop in existing home sales at the end of 2006 marked a decline not seen for over two decades. For sellers, this is not good news and means there is more supply than demand. However, the sun is starting to shine on savvy buyers who’ve waited patiently for the right time to invest.

If you are considering buying real estate, don't let prices be your only guiding principle. There is money to be made but an understanding of market dynamics and conditions is crucial to investing in a soft market.

Foreclosures

The changing market is bringing an increase of foreclosure properties. Adjustable rates are increasing and property values are falling creating more costs for less valuable properties. It is not a reality that can be easily ignored and for onlookers watching the pains of families losing there homes empathy is widespread.

While buyers can revel in more reasonable asking prices, they should also be wary of deals that sound too good to be true. This simple wisdom applies in good times and bad. Foreclosure investing can be worthwhile but just like any real estate purchase they do involve some risk.

If a property is headed towards foreclosure, it’s likely not been well maintained. Strapped owners struggling to make mortgage payments will not have had the resources needed for upkeep and repairs. If a buyer is looking to profit off of foreclosure properties, they’ve got to calculate the costs of restoring the property to a marketable or livable condition.

The variables can be tricky. Some foreclosures have sat abandoned. Frozen pipes, water damage and mold are just a few of the possible problems. Some other issues could involve unpaid contractors who have a stake in the property through a mechanics lien.

When analyzing the value of a foreclosure, buyers need to consider how much repairs and upgrades will cost, how much to clear any liens, how long renovations will take and how long before a buyer or renter can be expected. If you plan to live in the home first decide if and how long you carry two mortgages while repairs are under way.

There are some other factors to consider when buying foreclosures. The laws and regulations of foreclosures vary from state to state and can be complex. It’s important to seek guidance from an experienced professional.

There are different stages of foreclosure. Properties can be purchased prior to foreclosure or at a foreclosure auction as a real-estate owned property (REO). Both scenarios have their issues but a preforeclosure sale involves dealing with distressed homeowners and can be uncomfortable.

Many investors find themselves in an adversarial position even though a preforeclosure sale can help homeowners. To a seller with few options, foreclosure investors seem to be capitalizing on the misfortune of others.

The truth is that a preforeclosure sale can save homeowners from negative credit marks and help salvage some equity out of their home. Still, it’s all in perception and foreclosure investing takes a bit of mettle. The best scenario is to insist that the seller is fairly represented.

Foreclosures.com is one of the best places to start investigating this real estate investment option. In addition to regional foreclosure listings, the site has tools for estimating value, tax, legal and title issues and offers a CD course on mastering foreclosures. The system is highly regarded and teaches practical formulas for how to make a profit with foreclosure investment. There is also a helpful user-generated list of foreclosure sites and “gurus” to avoid.

Don’t Rely on Appreciation

Whether investing in foreclosures or reduced price property, never rely on appreciation to make a profit. Thinking independent of the market shifts is the best way to develop a good return on your investment.

If you are buying with the intent to “flip” a property, it’s critical to take a look at the current, local market rather than trying to forecast the next upswing. Even if prices are dropping and properties are sitting, there’s still room for profit. The trick is buying with a current market evaluation.

How much are houses selling for? How long is the average listing time? Find out the prices that comparable properties are getting. As you search for investments calculate all of these factors to determine what kind of return you can expect. Don’t buy with the expectation that you’re going to make your money with appreciation. Real property, real costs and today’s value are the most reliable factors.

Don’t buy too high if it’s been too long

One of the phenomenons that happen towards the end of a good market is that inexperienced buyers and builders want to get in on the fun not realizing that it’s too late. The endeavors are based on observing the success of others and not an awareness of current trends.

In fact, when it seems that other builders and buyers have been riding a wave of increasing property values for a good amount of time it’s time to consider that the end is nearing. Across the nation, new homes have gotten bigger and more expensive because of buyer expectations. These monster homes come with monster price tags and high-end homes suffer more depreciation when the market turns south.

When the market is fluctuating, smaller priced properties experience less of the swing. In fact, when buyers are priced out of most homes, smaller homes have more economic appeal and they have become harder to find.

A low-end property is a safer bet during economic downturns. It may not have a master suite or cathedral ceilings but it also doesn’t come with the stress of a big mortgage. The more manageable and affordable a home is when homebuyers are struggling with downsized jobs and other economic turmoil, the more value it will keep.

Location, location, location

This key principle to real estate investing applies double during a soft market. A good location can turn an average property into a money maker. The reason is that demand drives property value. Where there are jobs, schools and amenities that draw people to an area, there is a demand for housing.

Properties in high demand areas can be more expensive but usually ride out economic downturns better. These areas also tend to have a more limited supply of housing which means investments are more valuable. It is basic economics: high demand + low supply = good investment.

College towns are a prime example of a high demand location. Likely some unappealing visions of keg parties and sticky floors popped into your head at the thought of investing in a college town but don’t bail yet.

College enrollments are growing exponentially but housing supply doesn’t always keep in many municipalities. That means demand is constantly increasing. Plus, not all college students are there for the party.

Graduate and professional students comprise a large percentage of today’s university students. They are often married and looking for a home, not a room in a fraternity house. There’s also demand for housing from faculty, staff and all the surrounding business owners that cluster around the vibrant environment of college towns.

Build Sweat Equity

One of the sexiest terms in real estate is “the flip.” When property values are low, a fixer-upper seems like an easy way to turn a profit. This has plenty of appeal, especially for those who have the skills needed to build sweat equity. However, in a slow market properties sit longer and you can’t rely on appreciation to give a return on your investment.

Still, it’s possible to use sweat equity to your advantage in a slow market. The most important consideration is location. The worst house on the block is the best pick because once the property is on par with the neighborhood its value will rise. Just be sure not to over improve. Keep improvements limited to the styles, sizes and standards of the surrounding homes.

If you’re new to remodeling it’s a good idea to enlist the help of a professional or two. Hire a home improvement contractor to give you an overview of repairs and an estimate of costs. Be straightforward that you intend to do the work yourself, it may cost you a fee but it will return in good remodeling karma. Plus, if you run into problems during your renovation you’ll be able to turn to them for help or hire them to do part of the work.

When you know what the home needs and how much it will cost, hire an appraiser to see if the project will yield a profit. Appraisers are valuable resources as they know the market, have seen local properties and know what adds value. A professional appraisal costs a few hundred dollars but can help you save or even make money. If the appraisal reveals that the purchase, repairs and renovations will be more than the home’s value, move on.

You can finance remodeling projects with construction loans. These are different from typical mortgages in that the loan includes the purchase price and cost of improvements. The downside is they cost more up front and usually require that the project is run by a licensed general contractor. However you finance your “flip” just be sure to account for existing value, cost of repairs and cost of carry.

Have realistic expectations. The market is slowing and nationwide, flippers are making less profit and some losing money. Investors bought one in every four homes sold last year but the numbers are dropping. That means flippers aren’t buying or flips aren’t selling. If you are buying a flip during a soft market, don’t expect it to sell when you’re done. You might own it for a few years before it sells so be sure you can carry the costs.

*Note: The information in this article is general advice and not meant as a substitute for personal guidance from a financial advisor, real estate professional, general contractor or legal counsel. Although the author is a licensed realtor, the advice given in this article does not constitute any client contract or agreement between the author and the user. The author is not responsible for any losses, damages or claims that may result from your decisions.