Clay Sparkman
Any good private money investor should be attempting to assess whether property values are rising, falling, or holding in the area of his/her latest potential investment. After all, the core issue when assessing investment risk is LTV, and if the “V” part of “LTV” falls during the time of your investment, your investment is becoming increasingly risky. Given so, if you sense that values are likely to fall in a certain investment region, you had better take that into account when deciding whether or not to invest. And if you decide to invest, given this information (whatever it may lead you to believe), you will be able to better assess your investment criteria and determine what you consider to be a safe LTV.
The direction of property values is not an easy thing to predict, but if one really wants to inform themselves with regard to what property values might be doing in the near future, than there are three pretty good things to look at.
But first, what not to count on: If you are looking at whether or not property values are rising, falling or holding today, just remember that this is a trailing indicator. At best it will tell you what is happening now, and even worse, it may be a better indicator of what happened several months ago. Look at this info, but don’t take it very seriously as an indicator of what is going to happen next.
And so, here are three leading indicators that I would recommend you consider:
(1) The rural test: Ask yourself what property values are doing in rural (or more remote) areas. Those values tend to lead the values of properties in more concentrated areas. So, if you are suddenly witnessing a notable fall in values in rural areas, chances are that other values in the region will follow.
(2) The time-on-market test: Determine what the average time on market is as you assess potential opportunities . For residential properties 3-6 months is fairly normal, and would tend to indicate that values will be holding for awhile. Last time I checked in Portland, the average time on market for residential properties was 1.7. This is a very low number and a very good indicator that values are on the rise.
(3) Look at the ratio of replacement cost to purchase price. If the ratio of replacement cost to purchase price is high, then property values are likely to rise, at least for the near-term future.
Let me know if you have any other indicators that you use. We would like to hear about them.
– Clay (clay@privatemoneysource.com, 503-476-2909)
Clay is Vice President of Fairfield Financial, a primary source for private money loans since 1964. Fairfield works with a broad range of private money investors, in a broker capacity, finding, underwriting, presenting, closing, servicing, and when necessary, assisting in the workout of difficult loans.
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