An Emerging Market is a market in which demand for real estate far exceeds the supply. This type of market can be a wise investor’s dream. Appreciation can be as much as 10% per month! An emerging market can be caused by any number of factors such as a “baby boom”, senior citizens retiring to a warm climate, an increase in jobs in a given area, an increase in wages, a catastrophe wiping out large scale areas causing a rebirth of new construction, a “hot economy”, liberal bank lending guidelines or a sharp fall in interest rates. This is the market that creates millionaires many times faster than in other markets because banks are freely lending money to investors and home buyers. Any exit strategy will work in a hot market. It’s hard to not make money in this type of market because demand for homes is much greater than available supply. Be cautious, however, if your exit strategy is to buy and hold. The market may correct, leaving you overleveraged.
The Las Vegas and Florida real estate booms from 2000-2005 exemplify a hot market. Many investors bought into pre-construction deals in these areas with ambitions to sell their investments to owner occupant buyers when their projects were completed. A pre-construction deal involves finding a builder during an ongoing project or before a project begins, agreeing to purchase the pre-construction unit (home or condo) and then holding the unit or selling it while construction is concluding. Most builders required hefty down payments to break ground on these projects, but that didn’t matter to many investors who were routinely making $50K, $75K, even more than $100K per deal during the “boom”. Though this was a good strategy for many investors in two very good markets, time had begun to run out on some in 2006.
Emerging markets don’t usually make it past five years. Many investors had massive nonrefundable down payments outstanding on their preconstruction homes when the market changed in early 2007 and had no choice but to walk away from their projects because home values had dropped so much during construction that it no longer made sense for the purchasing investor to close the deal with a required bank loan to finalize the acquisition. It’s one thing to lose a $50,000 nonrefundable down payment/deposit by wisely walking away, but it’s another thing to have to close a finished construction project by acquiring a large purchase loan on a unit that’s worth tens of thousands of dollars less than what was anticipated – on top of putting that $50,000 deposit up.
Remember to be careful in hot markets as competition between investors is high which can cause “overbuying” or spending too much on a property. This causes home values to artificially inflate which is a precursor to a crash. Getting caught up in the frenzy of a hot market can lead to many ill-advised decisions. Also remember that hot markets are flashes in the pan and can end as quickly as they start.