Nine Ways to Profit During Decline

No one puts up a big sign on the highway that says, “Now entering decline.” As an investor, you have to attune yourself to that.

Fortunately, you have a few tools at your disposal. With just a little background research and education, you can learn to recognize the key indicators of decline—and more importantly, discover the best ways to profit.

Signs of Decline

You know you’re in decline when selling statistics favor the buyer. The Days on Market increase, and sellers have to bring cash to the table to close.

Another obvious sign: jobs decrease, right along with the population. Because of that, big national chains and franchises close. A true decline market hits everybody, after all, even the corporations.

The median home prices fall and foreclosures rise, too. In fact, the only comparable sales are foreclosures. That’s what people will start using to appraise houses. Homes that used to sell for $350,000 might drop to somewhere around $160,000.

As prices fall significantly, the demographics change. Upper and upper-middle class residents move in, which mean more neighbors move out.

There’s also a general decline in the quality of stores. You’ll see a demand for short-term loan stores and pawn shops instead of brand new retail shops. Bottom feeders and bargain marts will pop up. When strip malls struggle, temporary stores like Halloween costume shops open. Full size grocery stores turn into expo centers and flea markets.

Finally, you’ll see a lot of half-built properties and empty lots left in new neighborhoods. People are cutting their losses, which means newly gentrified areas that were making great comebacks can quickly reverse.

You’ll see all these signs when whole cities are in decline, but they’ll also happen in market expansion when submarkets change.

1. Know Why the Market Is in Decline

If it’s a national economic crisis, it’s fine to buy in decline; in fact, that’s exactly what you want to do. If it’s from economic obsolescence, however, you might want to hold off.

A great example is Milledgeville, Georgia. It’s currently in decline because two major employers shut down at the same time. Now residents are moving to find new jobs, which means all of the support jobs—dry cleaners, restaurants, landscaping companies, etc.—move as well. When jobs disappear, economic obsolescence is created.

2. Look for Strong Local Leadership

Examine the mayor, City Council, Economic Development Council (EDC), and Chamber of Commerce.

Interview the local EDC and ask the following questions:

  • What are the new jobs?
  • What companies have moved to the city in the last 10 years?
  • How many people have they employed?
  • How much are the jobs paying?

If you have a strong EDC that knows how to use tax incentives to bring in new industries, you’re more likely to bounce back.

Look for leadership that supports economic diversity. When steel declined, Pittsburgh moved its focus to high tech. That was a good choice. While the rest of the country was in decline, Pittsburgh was booming because they were able to adapt.

3. Start Buying When Prices Drop Significantly Below Replacement Costs

You can get deals on higher-class properties when you buy at the beginning of decline. Those homes usually need fewer renovations because they’re already updated.

Don’t worry, you can still buy at the end of decline, too. The prices will be cheaper, but the properties themselves will need more work. At this stage, you’ll often find foreclosed properties and cheaper homes up for grabs.

4. Get a Little Greedy

Throw balance out the window. Forget about diversifying for now. When things go into massive decline, you can often buy a three- or four-year-old home for half its normal price, knowing full well that it’ll bounce back in a few years. Buy as many of those as you can.

This is a great time to make progress on your portfolio. There’s no better time than late decline. You can really make some money.

5. Find Motived Sellers and Buy with Creative Financing Terms

Many sellers during decline are desperate to sell their homes. They didn’t get out soon enough and now they’re stuck with a property that costs them more than it’s worth.

Do your research and you can snag a home for $170,000, knowing that it’ll likely hit $250,000 in the future.

The trick is understanding as much as you can about the seller’s situation. Don’t be afraid to individualize the financing terms to better suit the seller’s needs. Offer, for example, to pay down the rest of the mortgage if they sell you the home a little cheaper.

6. Pay Attention to Interest Rates

Make sure you have assets prepared, so when late decline comes, you’ll be ready to act. If you think a big decline is coming, sell before the market hits equilibrium. You’ll get much better prices.

7. Avoid Wholesaling Too Many Assets in Late Decline

It’s easy to buy a property and renovate it, thinking you’ll make an easy $10,000. And that can be true, but if you hold onto that home for a few more years, profits will skyrocket even further.

8. Buy A Properties and B Properties

You can get deals on lower-class assets any time, but the best deals on high-class properties generally only happen deep in decline. That’s when you’ll find homes with good appreciation, schools, and demographics without emptying your wallet.

9. Ensure You Have the Right Property Management and Renovation Teams in Place

This is often overlooked because investors get so caught up in the property-buying side of real estate, but it can seriously affect your profits. Say you found a great deal but your property management team is subpar. Suddenly the profit you made on such a great home is swallowed up by property management fees. Bad property management can turn even a great investment into a lukewarm deal.

If you aren’t using a turnkey provider, make sure you negotiate with renovation crews to get the best outcome possible.

The Takeaway

The four stages of the market cycle might not be the easiest to recognize, and they’re even harder to tackle successfully. A strategy that works in expansion, for example, might be exactly the wrong choice for decline. But when you follow these nine tips, you’ll be much more prepared to face decline’s—and every other phase’s—distinct challenges.