In our continuing series, we are exploring a concept called, “The Garrison Cycle”, which was created in 1985 by Marc Garrison who started the National Association of Real Estate Investors, NAREI.

The Decline Phase is characterized by what Garrison calls a “psychological hysteria” where the down market feeds on itself.  Sellers now are unable to sell their properties, because they are unable or unwilling to take losses to get out.  Most buyers have retreated to the sidelines waiting until the market recovers, while some buyers prey on desperate sellers.

Occupancy levels and rents decline while foreclosures and defaults rise.  In response, the mortgage market tightens and the government tries to step in; both will ultimately make the situation worse.      

Looking back, we experienced the Decline Phase starting in 1985, accelerating in 1986 with the Tax Reform Act, and falling into full decline with the stock market crash in 1987.  We did not end the Decline phase until around 1991. 

In my last article, I stated that the Equilibrium Phase occurred recently in 2005-2006.  With the increasing foreclosure rates, the shake out in the mortgage industry, and the government trying to step in, I believe that we are fully now, in 2007, in the Decline Phase.  I hope that history does not repeat itself and we need to wait 4 years (until 2011) to see the end of this phase. 

In a continuing series from last week, I am discussing a concept called, “The Garrison Cycle”, which was created by Marc Garrison who started the National Association of Real Estate Investors, NAREI, in 1985.

In the Equilibrium Phase, the market has topped out and is beginning to cool off.  Job Growth and residential income property appreciation in that specific market have slowed to the national averages.  As the phase continues, the hangover and wild ride of appreciate of the Expansion phase are beginning to catch up with investment property owners. 

Sellers are too late to command the premium prices of just a short time ago.  Buyers begin to look for deep discounts on investment property to offset the lower appreciation the market is currently experiencing (which is low by saving account standards).  Investors leave the market (or refuse to get in) as the appreciation on property flattens out and they instead invest their money in the stock market and other investment vehicles.

I believe we saw this phase in 1980 when we saw interest rates in the double digits.  I also believe that we saw this phase more recently in 2005-2006 as we saw the market cool after the frenzied 2000-2004 run of multiple full-priced offers per house.  Although short, this phase precedes the Decline phase which we will discuss next.

I am going to take a departure from discussions about investment property and landlord issues into a more brainy discussion about Real Estate Market Cycles and It’s Implication for Market Timing.  This post is adapted from a concept called, “The Garrison Cycle”, which was created by Marc Garrison who started the National Association of Real Estate Investors, NAREI, in 1985.

After studying ten real estate markets, for a year, from around the country with different job growth and job losses, Garrison found that every market can be classified into one of four market phases:

This simple, but powerful concept allows us to explain not only the bust market of the 1980s, but the current market that we are experiencing today.  The other paradigm shift that Garrison’s research explained is that even though national (and international) forces affect the economy as a whole, every market around the country is actually on a different point of the above perpetual circular economic cycle.

Understanding the cycles and what to watch for (or what we have seen in the past) can change the way that you invest in real estate.  This tool will identify the best time to buy in a market and when to sell before the market begins to decline.

Starting next week, I will examine each of the 4 phases in depth and give you my predictions of where we are in the market and what you should be doing right now.

Most investors are planning to sell their investment properties eventually.  Those same investors will either sell their property without doing any work and accepting the fact the property will not show very well.  Others will spend considerable time and money just prior to selling to get the property back up to speed. 

Read the below list and attempt to tackle at least one item per year. 

• Repaint the outside of the house.
• Repaint the front door and common hallway.
• Plant shrubs (trim existing ones) and plant flowers.
• Immediately before you sell, fertilize the grass and water constantly.
• Repair/replace any decks or outside stairs.
• Repair/remove/replace any fences.
• Paint the basement floor and laundry area.
• Add additional lighting in the basement area and/or laundry area.

These items will give your investment property more curb appeal and should allow you to sell your property faster and for more money.

Are you memorized by those shows in which people are buying run-down houses, fixing them up and reselling them for huge profits before the first mortgage payment is due? Wow!

What’s more, these people claim they made as much money on this one house as you did all of last year. They don’t look or sound any smarter than you, and they’re raking in the cash! You start crunching numbers and before you know it, you’re thinking about a career change.

Flipping houses can be exciting, lucrative, demanding, risky, and rewarding all at the same time.  The best line I ever heard applied to flipping houses (and also applies to investment property in general) is:  “You make your money when you buy, you get paid when you sell”.

If you do your homework, watch your time and money, and following a few overarching guidelines, you can be successful:

• You must be 100% confident you understand what the house will sell for QUICKLY after you fix it up.  Be realistic.  Don’t shoot for the top price in the market; in fact I recommend to price it 5-10% below what it should sell for to move it quickly (especially in this market).
• Itemize what your costs are going to be to not only fix it up, but to hold and market the property.  Make sure to include some contingency for unseen problems or items you decide to repair/replace once the work begins.  Then don’t stray from that budget.
• Just as important as the budget is a schedule.  Every day that you own the property means less money (profit) in your pocket when you sell.  Make sure you are not slowing down the project.  Keep the house busy with activity.
• If you are a armchair do-it yourselfer, pick your battles.  Make sure that the quality of your materials and workmanship meet the price point you are working in.  I have seen many do-it-yourselfers, do a poor job on an area they were trying to save money on, only to have the house not sell because everyone through the house saw the problem.  Hire talent and quality.
• The potential profit margin ultimately drives the amount of work you can do on a flip, but I recommend to newer flippers that they should buy a house that needs a few (potentially major) items to repair, such as needing a new kitchen and bathroom, instead of 100s of small ones, such as new doors here and outside facia work there and a reworked kitchen here and tons of TLC everywhere.
• Have an exit strategy.  What if the house doesn’t sell quickly?  What are you prepared to do?  I believe there are two easy answers:  move yourself in and sell your house or turn it into an investment property and rent it.  While moving in may be difficult or impossible, turning it into a rental should be one of your considerations.

Although this is not a comprehensive list, these are the guidelines that I give everyone that I meet that is interested in flipping.  They will make you more successful, more money, and less stress.

Good luck!

The Minneapolis & St. Paul real estate market continues to be in a slump.  Here are the new numbers released for July 2007:

• Closed sales are down 2.7% over July 2006.
• For the year to date, closed sales are actually down 14.4%.
• Percent of original list price received at sale is down 1.9% over July 2006 and is down 2.1% year to date.

A few bright spots to be conservatively excited about are.

• The average sale price was up 2.4% from July 2006 versus July 2007.
• Year to date the average sale price is down 0.1%.  Although negative, it is considerable stronger than other areas of the country, which are seeing considerable deflation.
• The average days on market until sale is a staggering 127 days, but is actually down from 137 days year to date.
• New listings are down 2.5% year to date.

These numbers confirm what we have been saying:  the market continues to be a very strong buyers market.  A few positive notes for sellers are that average sale prices were up in July (hopefully they will continue that trend).  Lower listings year to date means that inventories of unsold properties are actually declining which will help sellers with both time on market and price.

This information was gleened from a report published by The Minneapolis Area Association of Realtors.  S