For the moment, it looks like buying the S&P 500 below 2,400 was a shrewd move. The S&P 500 got down to about 2,237 before aggressively rebounding higher. Every investor can easily sell the stock they bought between 2,237 – 2,400 today for a 17% – 30% gain. Whether you do so or not is up to you.
When the S&P 500 was at 2,400 and below, the Doomers came out of the woodwork to warn us all that the world would enter a zombie apocalypse. They, along with politicians and the media, said that millions of people would die from the coronavirus. As a result, many predicted the S&P 500 would fall to 1,000 and the Dow would fall to 10,000.
Thankfully, social distancing and lockdown measures have helped tremendously and the Federal Reserve and the government launched massive stimulus plans to save us all. Thankfully, the models were nowhere close to correct.
With tens of millions unemployed, the government announced an extra $600/week in unemployment benefits. Earning $4,000 – $5,000 a month per person should be enough for one person to survive, especially given all the backlash I got in my budget posts.
With stimulus checks and more PPP money being dispersed, the government is attempting to ensure a vast portion of the economy survives until the lockdowns end. So far, the government is doing an admirable job pumping out the cash.
As the stock market recovers, the time to find real estate deals is now. If you believe in a measurable recovery in 3Q, then we only have a small window before the most frightened real estate sellers realize the world is not coming to an end.
The Hunt For Real Estate Bargains During A Pandemic
Your goal as a financial freedom seeker is to buy real estate from the equivalent of the stock seller who sold stock or shorted stock after the Dow dropped below 19,000 and after the S&P 500 dropped below 2,300. They are out there. You just have to aggressively look.
You want to find the real estate seller who thinks the following:
- The Federal Reserve and the Federal Government are ineffective.
- Stimulus checks, unemployment benefits, and PPP loans won’t be paid and forgiven.
- The coronavirus numbers will be equal to or greater than all the government model predictions.
- There won’t be any efficiency or productivity gains after going through months of working from home.
- Confuses a slowdown in the real estate brokerage business with real estate prices.
- Lockdowns will last well beyond 3Q2020.
- People are actually going to start saving aggressively instead of reverting to their old ways of spending more than they make.
- The stock market will re-test the lows and go lower.
We know in general how real estate performs with every tick lower in stock prices. The S&P 500 down between 15% – 25% is the sweet spot for real estate outperformance in my opinion. At this level, money rotates out of stocks and into real estate and new money invests in real estate instead of stocks given real estate’s defensive characteristics. So long as the stock market doesn’t stay down for too long, real estate will likely do fine.
I’ve also highlighted some real-time examples of how well real estate prices have held up during a global pandemic bear market. You can knock the examples all you want, but these are real examples from real people I do not know. Below is another real estate outperformance example that closed 40.5% above asking on April 21, 2020, well into the pandemic and lockdown.
Given the strength of real estate on the way down, real estate will likely continue to hold its value or go up further as the economy and the stock market rebound. Just be careful with some commercial real estate investments in hotels, student housing, and office buildings, if there are no deal sweeteners. However, these are also sectors that may likely have the most upside as well.
The idea is to buy real estate at an enormous discount, despite the stock market already recovering by a huge amount. Then, if you choose, sell the property once the market realizes its true market value. Or, if you found that dream home, you can enjoy living in it happily ever after. Each day you wake up, you will be reminded by what a steal you got!
The beauty of investing in the stock market and real estate market is that you can use your knowledge in both markets to make a better investment.
We, unfortunately, can’t rewind time and invest all we can in the S&P 500 at 2,237. However, what we can do is try and convince real estate sellers to still think that the world is still like it was when we were at S&P 500 2,237 to get a great deal.
Ideally, we want to find those sellers who were not only panicking when the S&P 500 was below 2,400, but also thinks the S&P 500 will re-test the lows and go down a lot further.
Convincing A Seller To Sell At A Huge Discount
In real estate, there’s a nice saying that goes, “money is made on the purchase, not on the sale.” That’s not entirely true since you can do a lot of things to make buyers pay top dollar as well. But with a well-timed purchase, you get to pay less in property taxes over the life of ownership and generate a much higher compounded return due to a lower cost base.
Most people are trying their best to sell you something. I like to take the opposite approach and figure out how to convince someone to sell me something they may not want to sell that I think is valuable.
If you’ve found an ideal property, here are some strategies for trying to convince the seller to sell, especially when there are shelter-in-place rules and a lot of fear of the unknown.
1) Focus on making a connection.
Making a connection is extremely important during any transaction. Sellers would prefer to sell a property to someone they like. The more you can convince the seller that you will own the property forever and take care of it, the better.
You write a real estate love letter wherein you tell the seller how much their home would mean to you. Talk about the children you plan to play with in the backyard. Talk about how you plan to replace the roof, regularly mow the lawn, and invite your parents over to stay. Paint a lovely picture in the seller’s mind of how you plan to take good care of the property once it’s sold to you.
Selling a home is extremely emotional, especially if you’ve lived in it for many years. All the memories can’t help but flood back when you get into negotiations with a potential buyer.
2) Become the Doomer Bear.
It’s much more stressful being a seller than a buyer. Buyers can simply shop around with no commitments. However, the seller is putting himself out there by listing his property online, signing a contract with a real estate agent, and allowing strangers to go through his home.
The seller also knows that if they don’t sell within a certain period of time, the property goes “stale fish.” And when properties go stale, price cuts are an inevitability. It’s also embarrassing when you put yourself out there and get rejected.
As a result of so much worry and stress, using “the end of the world” strategy can motivate your seller. Luckily for you, it’s currently much easier to imagine the end of the world given the 24/7 news cycle is all about coronavirus deaths and economic destruction.
You could start with a big picture scenario such as discussing what would happen to the property market if the stock market has a 50%+ correction like it did in 2008-2009.
Then, you could go on to discuss what would happen if COVID-19 mutated, thereby putting billions more people at risk.
Then, you could discuss about how the second and third wave might be so much more deadly.
Then, you might highlight all the government models that predicted millions of people could die in America as proof you are not talking hyperbole.
Then, you can discuss how you believe strict lockdowns will last for at least another year or two, since a vaccine won’t be developed until then.
Then, you can bring up how states could go bankrupt and how the United States could turn into Venezuela with martial law. If they are a fan of TV shows like The Handmaid’s Tale, you could joke about what life would be like in Gilead.
Finally, you could talk about natural disasters like earthquakes, flooding, and fire completely destroying their property for good.
Your goal is to paint a picture of the house being a tremendous burden and you being the savior of that burden. Obviously, you don’t want to come across as crazy. Instead, you want to come across as a financially stable realist. Because after all, anyone of these things above does have a chance of happening.
Like inception, if you can implant just one of these items into their minds as they are thinking over your offer, there’s a good chance you could turn them into the panic stock seller when the Dow was at 18,500.
3) Focus on the benefits of a simpler life.
Desire is the cause of suffering. Owning property can be a big pain in the rear. Your goal is to focus on how much better their life would be if they did not own the property: no more maintenance work, no more de-weeding, no more replacing old systems and appliances, and no more stinking property taxes!
A simpler life is why I sold my rental property in 2017 and reinvested the proceeds into real estate crowdfunding, dividend-paying stocks, and municipal bonds. Not having to deal with rowdy tenants was a life-saver as I focused on taking care of my baby boy.
The older and wealthier the property seller, the more appealing a simpler life free from property maintenance will be.
4) Make them fear losing you.
Once you present yourself to the seller as someone with impeccable character and tremendous financial strength, it’s time to make them fear losing you with a real estate breakup letter.
Even if there are other interested parties, a real estate transaction is never done until the final escrow papers are signed and the money is finally deposited in the seller’s bank account. So many issues cause a deal to fall apart.
You must make it clear to them that once they lose you, you are gone forever.
The Right Offer Price In A Pandemic
Given the S&P 500 corrected by 32% from its high, you could offer 32% below comparable sales prices right before the coronavirus hit. Your real estate agent can easily pull up all the most recent comps. You can also do so yourself by searching online.
Unfortunately, offering 32% lower than the most recent comps will likely shut you out. Most rational sellers know the stock market has rebounded and many believe there will be an economic recovery in 2H2020 as shelter-in-place rules are lifted.
Therefore, it is my belief that a more reasonable starting offer price is ~20% below recent comps. You will likely still offend most sellers who won’t bother to respond to your offer. However, -20% is not unreasonable given all that’s going on.
If you can buy property between 10% – 20% lower than February 2020 comps, you will have hit a home run. Just know, the ball game is never over. We can only operate in confines of what we know at the moment and speculate about the future.
Be Prepared For Real Estate Opportunity
If my thesis is correct that real estate prices will continue to hold up during a pandemic, then finding great real estate deals will be hard. Unlike during previous downturns, real estate inventory is down as most sellers simply wait things out. However, you should never let something difficult stop you from trying.
There is always some real estate deal out there if you look hard enough. One should assume that anybody willing to list their property during a pandemic believes prices will be heading south. Otherwise, they would simply wait several months until people can actually physically visit their house. Therefore, it is up to you to prove them right by offering a much lower price!
There is also going to be that real estate agent who tries to convince the seller to sell at a bargain price to capture a commission. When business is way down, it is only natural to push harder for more business. Unless there is an extenuating circumstance, encouraging your seller to list during a pandemic is not the right move.
As a buyer, if you can’t raise enough money to buy a property with cash, then at least get pre-approved so you are ready to make an incredibly enticing offer at ~20% off last year’s price. You are more than welcome to offer an even lower price as every situation is different. The worst the seller can do is say no.
As someone looking to build as much wealth as possible to take care of your family, a little “no” shouldn’t stop you on your quest for great fortune. The market is open and fair game.
Finally, if for some unfortunate reason we do re-test the lows and go even lower in the stock market after you buy, at least you were able to buy the property at an appropriate discount.
Although I’m seeing examples of some really strong sales during the pandemic so far, real estate is local. I wouldn’t pay record high prices no matter how defensive real estate is an asset class.
If you are going to buy property today, please bargain more aggressively than normal. Let’s not ignore the fact that tens of millions are now unemployed and the world really could come to an end.
It is clear that lockdowns and COVID-19 will help accelerate the migration out of densely populated cities such as New York City, to less densely populated cities such as Charleston, South Carolina. The work from home trend is real.
Stay disciplined. Good luck everyone!
Alternative Real Estate Investment
Because it takes a lot of time to find a new property, get pre-approved for a mortgage, and negotiate with the seller, another strategy is to invest in real estate syndication deals that have already been pre-vetted and that offer sweeter terms during a pandemic.
Take a look at CrowdStreet, one of the best real estate syndication platforms that focuses on faster-growing 18-hour cities that have much lower valuations. Instead of leveraging up to buy one property, you can buying multiple properties without debt. It’s free to sign up and explore.
Readers, any of you going bargain hunting for real estate? Do you think you will be able to convince a seller to sell at a huge discount even though the S&P 500 has rebounded? Why would a seller want to list right now? What kind of deals are you seeing out there?