How to identify hot markets

Question

If you move to a new area, what data are do you gather to determine which market around you is hot? Where do you start?
Lets say for wholesale flipping..

Thx!

Peter Giardini · Answer

Eric,

I have found that for retail flips absorbtion rates are a great indicator or what is happening within specific zip codes.

Determining an absorption rate is pretty straight forward.

Using your local MLS, or tools like Realtor.com or Redfin determing the number of properties on the market in your specified area for a given period of time... and even price range.  Once you have that data determine the number of properties that have sold in that timeframe.

The last step is divide the number of properties sold by the number of properties on the market.  The result will be the absorption rate expressed as a precentage.  I have found that in today's maket an absorption rate of 30% or higher is a decent place to be investing.

That 30% absorption rate signifies that the inventory in this location is turning over every 3 - 4 months.  That is a healthy market.

Some MLS systems, like the one in the Minneapolis area capabilities that provide this data almost at the touch of a button.

Good luck... and I hope this helps?

Pete

Eric M. · Answer

I don't know anything about absorption rate or any fancy stuff but I have flipped a lot of properties.
My opinion is it is completely worthless to search for a "hot" market for flipping purposes.  All you want is a populous market.  Flipping is hard in rural areas.
Having a "hot" market means you sell properties faster but conversely you have a harder time acquiring.
Cold markets mean you sell slower but have an easier time buying.  So it basically all evens out.

IMO, since we all know you make money when you buy property, I prefer "cold" markets.  Just search the posts here.  All kinds of rehabbers are complaining of tightening profit margins in the past several months as the RE market warms up.  2 years ago, profit margins were FAT and markets were cold.

I'll take a cold market over a hot one for flipping any day of the week.  You buy much cheaper and if you rehab to a high standard and price right, your properties will sell well.

Justin S. · Answer

I agree with Eric that I also prefer a cold market as well.  But in a hot market you can do less rehab and sell for a premium.  You will need to adjust accordingly.  18 months ago I was replacing everything down to the light switches, houses had to be perfect.  Now I do a lot of paint and carpet cleans and relist.  It is just about knowing your market.

Kevin Dickson · Answer

You don't want to identify a hot market.  You want to find a cold market that will be hot soon.

That is easier than it sounds.   The rental market will start getting hot 1-3 years before sales prices accelerate.

Rental absorption rate is therefore an earlier leading indicator.

Geof Greeneisen · Answer

Eric Roseman What areas are you considering?

Eric Roseman · Answer

lol, again thank you for the replies. I am getting a clearer picture.

I guess the next logical question would be, once determining a good absorption rate and pinpointing new home buyer price point, what filter is most important in your search for profitable properties? Is it a percentage discount of arv? Are you looking for REO? Foreclosed?

Then once you have a printout of properties that meet your criteria, do you look at each property individually to determine your mao and start faxing out offers?

Peter Giardini · Answer

Eric,

This may take a while... these are some damn good questions.

As I mentioned in the first post, your research should be broken down by price points.  Every market has different entry points for certain buyers.

For instance in Baltimore a first time homebuyer home is usually anything priced less then $200K.  In DC however, that number is substaintially higher.

In today's market the primary buyers are first time homeowners.  We can determine this because most mortages today are FHA or VA.  So... your job is to determine from the comps what price ranges first time homebuyers are entering the market at.

Once you understand that price point, it is just a matter of deetermining the absorption rate for properties in your selected area and price point.

This all sounds complex... but it really isn't once you see these numbers on CMA.

I will try respond to some of your other questions as time allows.

Pete

Eric Roseman · Answer

Very insightful. Thank you Peter.

I guess if I could continue with this then, what would be the next thing you would look for in a market you identified that has a high absorption rate?

How do you identify what types of properties to look at in this area? Do you look for the average arv for whatever type home is selling in that market? What is your formula for determining an accurate arv?

After you determine what the average home is selling coming off the market for, how do you refine your search to find the homes you think you can buy fix and sell for profit?

How to identify hot markets

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