Stages of the Market

About 3.5 years ago we decided to buy a rental house for a longer term investment, in an area a couple of hours away that had an active market. By looking on line at listings we selected a Realtor and paid them a visit. We looked at 5-6 houses and picked one that seemed to have the best potential. It was a typical 1948 house, 2 BR 1 Ba, and a double garage, on a modest sized lot. The asking was $49,000, and it was a FNMA repo that had been vacant several months. We inspected the interior, and it needed new carpeting, some wall repair, and patching the floor in the utility room, along with minor electrical work.

We offered $43,000 cash and gave the requested $1,000 earnest money. We got a counter offer, but they merely wanted another $3,300 toward the earnest money. We took title in an entity's name, which meant that we couldn't get any institutional financing. So we got it with cash provided by a refinancing of another property.

Over the next several weeks, we redid the interior and painted the exterior, spending about $5,000. We advertised it for rent at $550 plus utilities and got a good tenant. All went well for over a year, when the side sewer line gave out, which cost $4,000.

When the tenant said she had physical problems and would have to move, we decided it was time to sell, as the market value had risen to about $86,000. But a new medicine helped the tenant and she didn't have to move, so we delayed selling.

Shortly after, the sub-prime lending problem hit the market, but it was slow to react. In a few months, the tenant had to move, so we put the house on the market, with good comps to support a price of $90,000. After the market decline took hold, we reduced the price, but still no valid offers.

Several months later, since we didn't have a need to sell at a price around $70,000, we decided to rent it again until the market recovers. It was promptly rented for $625 and is producing a good return again.

This situation illustrates Dean's book's Stages of the Market, and the different strategies that are recommended for each stage. We now appear to be at the bottom now, according to the Realtor's report of prices inching up and the volume of sales increasing. So we are landlords there again and will bide our time until the market returns toward a top. Of course, we could have sold at $70,000 and made a nice profit, but our economic situation didn't require it, and hope springs eternal. That's why we like investing in real estate.