Step three in our 11-part series is “Establishing a Timeline of Events,” so let’s take a look at how to make the correct call at the right time.
Time Keeps On Slippin’ Into The Future
Picture yourself on a white sandy beach with a warm breeze, sun, palm trees, and beautiful turquoise water. Your mind begins to wander … you think, Wouldn’t it be great to own a beachfront condo? Hmmm, when is the right time to buy or sell? How do intelligent real estate investors make the right moves?
Successful commercial real estate decision making follows a process based on a series of analysis involving detail beyond the seasonality decision of purchasing a beach property. On a superficial level the process may focus on urgency/motivation, immediate needs and market conditions. But skilled real estate consumer analysis will include forecasting, competition, and feasibility studies.
Real estate is developed and acquired for long-term benefits. So, if a city or community is prospering and growing there will be a future demand for additional real estate creating opportunities for both buyers and sellers. The first step in being able to see these opportunities becomes clear through the process of forecasting.
Forecasting – The objective is to develop the ability to recognize patterns of growth in the market; so it is trends in population, employment, and income that are important. A forecast attempts to predict what will happen. This requires a prediction for each of the complex events that influence demand. Simply doing a projection using recent history and extending it into the future ignores the negative effects that may have occurred with national trends, inflation, etc., and also does not recognize what new product may becoming available from competitors.
Competitors – careful study of the supply of competitive properties is a very important part of a market study. Even in a market with great growth prospects, high and growing demand, profitable opportunities can virtually be eliminated by strong competitors who discovered the opportunity first. Competitive analysis consists of three parts:
1) an inventory of existing property of the same type, new product under construction or being proposed for development;
2) an analysis of vacancy trends and absorption rates; and,
3) a study of comparable properties analyzing the strengths and weaknesses of the subject property to the comparable property. The question then becomes:
Does it make financial sense and provide the return on investment desired? This answer is discovered in the feasibility study.
Feasibility – refers to the ability of a project to achieve its objectives. For real estate, feasibility usually refers to achieving financial objectives. A feasibility study involves more than financial returns. It will answer other questions, such as: Is it possible to use the property as planned? Will zoning allow the use? and others. But the bottom line is that after knowing all the costs, forecasting the income if a rental property, legal cost, property management expenses and the like, does the end result provide the real estate investor with the desired financial results anticipated from completing the project?
Your real estate consultant should be able to assist in these areas of expertise and provide timelines for completion prior to committing to either buy or sell. The end result of a decision, although still a risk, should be stacked in your favor … not just slippin’, slippin’, slippin’ into the future.