Jack McCabe sees change in the air.
The CEO of Deerfield Beach, Florida-based McCabe Research and Consulting watched as the good times in the real estate world went sour – and now that that pain is being felt worldwide, says that there has been a return to a more traditional bulk of investors.
“Flipping as we knew it a few years ago is like the dinosaurs – dead and gone,” he says. “These investors coming back into the market tend to be more savvy, more experienced. A lot of them have made their living in real estate. They sat out while all the artificial craziness was going on, knowing it would result in a tremendous downturn.”
Of course, it did.
“In the first half of this decade, flipping was done by all types of individuals, from taxi drivers to housewives, waitresses, to top-level earners,” McCabe says. “We had investment clubs, we had pools of money where people would put their money together to buy condos and flip them.”
This along with what McCabe calls “toxic loans and easy credit” artificially inflated real estate values across the country, particularly in markets in Florida, Nevada, Arizona, and California that saw historic increases – as well as overseas markets in England, France, and Spain, where people were priced out by speculative flippers.
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“These markets have all come crashing down once the market understood it had doubled in size, not due to population increases, or job development, but due to speculative flipping by people who had no intentions of ever occupying these units,” he says. “When these things got out of hand, it was musical chairs, and who was going to get caught without a chair.”
Today prices in many areas have dropped by 45 to 50 percent – or more. In Fort Meyers, Florida, for example, prices are down 71 percent. That’s a far cry from the time period between 2001 and 2005, when masses of investors would show up at the grand openings of condominiums, putting down deposits on multiple units.
“Now the prices have dropped so much that the real long-term investors that have been sitting on the sidelines watching this debacle unfold are re-entering the marketplace, many of them with cash,” McCabe says. “(They’ve) been building war chests.”
Those war chests filled with cash provide an advantage. These days, acquiring financing is not an easy task, and often sellers want only to deal with cash buyers, refusing to consider any offers that require financing because of the risk involved.
“Cash is king,” McCabe says, “and cash is driving the marketplace as well as foreclosures, short sales, and distressed sales.”
With the U.S. unemployment rate hitting a 26-year high of 9.8 percent in September, experts are questioning how long it will take for the credit markets to thaw and for sales activity to fully recover. That combined with anemic job growth makes flipping as it was once done a non-issue, according to McCabe.
“These are not positive indicators for any type of short-term profit-making on real estate,” he says. “Even though people know they can buy at low prices, they still have unrealistic ideas of how much values are going to increase in the next few years. If they’re looking at three to five years, forget it. … But if you have a longer-term investment mentality and if real estate’s in your blood and you love it (then that’s positive), but you also have to be really savvy, experienced, and knowledgeable.”
So who will succeed in this new market? According to McCabe, it’s the investors who want to buy low, sell high, and not do a quick flip on properties, but rather hold them for seven to 10 years – or longer.
“These are long-term investors that realize if they build up a portfolio at today’s bottoming prices and they hold and manage for periods of five, seven, 10 years or more, they’ll realize substantial gains and increases in wealth over that time period,” he says. “These are not yesterday’s cocktail-party experts that talked about ‘Oh, I put money down on this condo two years ago and I just flipped it, and I put down 20 percent but was able to flip it for $200,000 profit, and I’m so smart, I’m such a bright guy.’”
He also emphasizes that today’s investors have to do due diligence before buying properties to ensure they’re getting the most for their money. “You can’t sit at home and pick something out on the internet,” he says. “There are so many different (factors) to know before buying.”
