There’s no better way to learn about real estate liquidity than by observing a down market. Frustrated sellers all across the nation have had to exercise extreme patience in converting their homes back into dollars. Because real estate is less liquid than other investment types, it pays to understand how you can best protect yourself. The last thing you want to do is rely on a raging hot market to make your home liquid. Ideally, you want it to be liquid no matter the market condition.
What we’ve seen take place during the downturn is stratification of San Francisco homes into three different layers. The first are homes that continue to sell at or near their asking prices no matter what the market is doing. The second layer is comprised of homes that tend to fare well during good times but take hits during bad times. These homes are highly affected by market conditions both in the prices they command and the time it takes to sell them. Most homes fall into this category. The last layer are the homes that do not sell at all during a down market, unless the owner is willing to take a massive loss.
Here are some things to keep in mind to ensure your real estate investment leans toward the liquid side of the spectrum, and some bullets on what NOT to do:
- The best way to have an illiquid real estate investment is to buy something there are hundreds of (or will be hundreds of). There is little to no differentiation in these types of properties and they are an extremely tough sell during down times. The only time these properties sell and do well is when the market is roaring… and counting on that to take place is quite the gamble, particularly if developers are building similar homes nearby (which they will in a roaring market). The smarter approach is to invest in a property that is unique, even one of a kind, but is not too eccentric. There is a big difference between uniqueness (think charm & character) versus eccentric. We’re not referring to decor here, we’re referring to the actual structure. Decor is easily changed if you need to sell. What can’t be changed, however, is the fact that you bought a home that looks like a pirate ship and will appeal to a tiny market segment of equally eccentric people.
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