Market Cycles: What Happens When The Market Changes?

Doug Fath and Jeff Greco discuss market cycles and what happens when the market changes in their latest video. Click the video below to watch now.

Market Cycles: What Happens When The Market Changes?


Jeff Greco: Jeff Greco with Legacy Capital.


Doug Fath: Doug Fath, also with Legacy Capital. Today we’re gonna be talking about market cycles and really where this came from was from client interviews that we did at the end of last year. Just one, trying to understand ways that we can add more value to our clients. Also understand what are some of their concerns and a common consensus that came up in those interviews is just where are we at in the market cycle and specifically concerns about a correction coming and what can that look like? I think certainly in the aftermath of 2008, that’s kind of where people go when they think about market corrections. Certainly we’re not experts or … no one knows the future, right? We don’t know where we are but there are certain things that you can look at and identify. Sort of what came about is essentially that we’re probably somewhere between here and here in the market cycle.


That next cycle is gonna be a correction or downward cycle. That was the common consensus with the clients that we spoke with and something as we look at our data that we feel as well. The question is how long does that take? Is that a month, a year, three years? Who knows, right? It begged the question, what are some of the things that you can start doing in your business where if you feel this is where we’re at and a market correction is coming next, what are some of the things that you can do to prepare for your business? So one, not only are you able to navigate that next market cycle, but to be able to thrive and be able to use that as a buying opportunity in your business.


Jeff Greco: Yeah, and so if we look at this beautifully drawn curve, again, by me. It represents prices. So if we looked back roughly about every 10 years or so there’s some sort of major or not so minor correction that happens. As Doug was saying right, 2007, 2008 was really the last major correction that happened. Just mapping on some years, right before the market fell out we were really at the top of the cycle. If we would map that onto now as Doug was saying, prices are getting higher right now in the market. In 2018, are they at the very top of the market? Do they still have some room to appreciate? We’re not magicians.


We don’t know exactly when, but we really wanted to create this video because in our annual interviews with our clients many of them were trying to understand, “Hey, what should I be thinking about? I may not know exactly when some sort of correction is happening but what are some things I could do now to plan for when the market corrects?” Just to give you a little context. My entrée into the real estate investing business was really out of the 2007 market collapse. I was buying delinquent mortgages from banks and hedge funds. Just to map this onto a strategy I used is that prices were at the top, people were getting mortgages hundred plus percent financing.


Probably shouldn’t have been qualified for those mortgages because the economy changed, market prices dropped, a lot of people weren’t able to continue to make their mortgage payment and so I was buying debt backed by real estate. I didn’t know if I was buying at the very bottom, but I felt confident that I certainly wasn’t buying it at the top. What we wanted to talk about were just a couple of different strategies because it’s our belief that there’s no good or bad time in the market. Really, it’s a question of how do you use a strategy that’s appropriate for where the market cycle is. A couple things to keep in mind.


Obviously when market prices are low or real estate’s on sale you want to buy, buy, buy. We’re not in that time right now but maybe when the next correction happens if it’s big enough or certainly in 2008 really until now there’s been a significant amount of buying opportunities. Price appreciation has happened considerably. The question is as we get to kind of this cap or top of the dome here before prices start to go down again, what are some things not knowing specifically when they’re gonna change or when they’re gonna stabilize. One of the things that we’re believers in is that cash almost always is king and so in one of the previous videos we talked about having reserves or having a strong business.


What will happen at the top of the market or as things start to correct? If you’re a fix and flipper what may end up happening is that mortgage rates may rise and/or your people that you’re looking to sell your newly rehabbed house to may not be qualified or those same refinance programs may not be available before. Your rehab time to rehab a house may stay consistent at 90 days for instance but rather than you exiting in one month, two months, or three months you may have to hold on to that property to find a buyer who is in today’s standards what would be super qualified to be able to sell your house. Go ahead.


Doug Fath: Or you also may have to sell at a lower price. If you catch it here and it starts to go down maybe you thought you were gonna get $300,000 for it and maybe now you gotta be at $290 or $280. Again, something to keep in mind and this was one of the things that came through with the clients that we spoke about is just that mindset of being conservative. Things right now, the market’s good, properties are selling, you have the right product, it sells like that. Inventory is at an all time low but you want to think a step further. When that changes, what are some of the things that you can do now with your buying decisions that will put you in a position where if you do get caught sort of in this first phase here that you can exit even if you need to lower your price and you’re still walking away with profitable deals.


Jeff Greco: Right, so as Doug was mentioning, having the financial stability whether you need to sell it at a lower price and not being into a deal whether it be for a purchase price or your rehab amount so that if you don’t sell it for that 300 number you’re still making money or are able to exit a deal really having money to buy new assets or to potentially withhold or stay in assets longer that you may need to keep financing or holding costs going. Certainly having liquidity for not only your business expenses but also your holding and your debt expenses of real estate as well as potentially building up your war chest like Mr. Buffett for when things do go on sale again, being able to ready to buy things at a significant discount.


Doug Fath: One other thing to keep in mind as well, even if your business is solely focused on flipping you do also want to consider what is the rentability of that property and would that produce cashflow for you? In the example of if you get caught where prices are going down and instead of getting 300 you really need to sell it at 280, maybe you don’t want to sell it at 280. Okay, well what if you were to put a tenant in there and refinance into permanent financing? Will that tenant pay your mortgage? Does it still leave you with cashflow? It just gives you another exit option so that maybe you’re able to ride this out and you’re making money every month or at minimum breaking even until the price goes where you want it to go and then you can sell.


Jeff Greco: Yeah, so having multiple options, thinking about where we are in the cycle, building up the reserves, having a strong foundation, being able to manage if prices are higher and you don’t want to and we tell clients all the time it’s okay to let a deal go if it’s not at the price that you want. Being diligent, there’ll be another time. We don’t wish this upon other people but maybe people who are in the market driving the prices up are overpaying. If they’re not in a strong position maybe you will have an opportunity to buy their houses that they paid too much for or they may have to sell at a fire sale price. You can be an active buyer at that point. Just making sure that you’re in a strong place no matter what the market cycle is will help you be successful.



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