If you go to any real estate conference today there is an emphasis on scouring the market to find the next hot area. As I watched others get into the space from the sideline. I adopted the same mindset. Just find the best numbers and buy there. Then find the next deal in the next new locale and go there. Rinse and repeat to make millions.
Over time I have learned that this mindset is completely wrong.
I'm based in Houston, TX. Let’s say I get sent a deal in College Station. I went to Texas A&M and lived there for 6 years. I go up multiple times a year for football games. I know the area pretty well. Well enough in fact to know that I don’t know that investment market well. I can look up city data and come up with a quick analysis, but I don’t have a strong feel for deal flow there.
When I get a deal sent to me in College Station I think one thing:
“Why did the investors who already invest in this market pass up this deal?” Every broker wants to sell a property for the highest and best price with the least amount of work involved. All brokers, including mine, will reach out to a pool of investors they have sold to and gauge what price we will pay before they go through the hassle of making the listing. Many properties are traded this way.
After it goes past those investors it goes to investors already looking in the market heavily. People who have alerts set up to find deals in a specific market or investors in other markets who have indicated they are looking for a deal here. The internet has made the world much smaller.
Before the internet, there were thousands of untapped markets. Data was not readily available. You had to do more than push a button. Now computers are literally scouring available real estate all around the country looking for great cap deals.
No matter what market you are looking at there is someone there looking for their next deal. As information becomes more easily accessible the market starts solving for any large variances in price. It's Finance 101.
And very smart well connected people make this mistake all the time. Brandon Turner of Bigger Pockets fame, the host of the largest real estate podcast in the world, bought an apartment in Cincinnati. Brandon lived in Washington and previously had invested only in areas he grew up in. He did his due diligence and additionally tapped into his vast network talking to local investors and brokers there, etc. Everything pointed to the deal being a home run. He has one of the largest networks in the country so it had to work.
And it was his worst deal ever because paraphrased “I just don’t understand that market.” He should have known that the Cincinnati investors had passed over it for some reason. What are the chance you think that brokers took the deal to local syndicators already in that market? 100%. How many people looked at it when it hit the market? A lot. Cincinnati has been hot for awhile.
As I invested in Houston in California I became very aware of my local market knowledge. I would see two houses priced similarly, but because I knew the neighborhoods was able to identify the better product.