Summary: Over the past 5 years, retail housing values have risen 80% while investors are paying 300% more for investment properties. This is leading to more foreclosures among investors who are buying without carefully considering how purchase decisions affect exit strategy.

Recently I spent some time researching selling prices of investment real estate in Atlanta, GA between the year 2000 and the present time, February of 2006.

What I found was very interesting. I pulled old files representing deals that took place more than 5 years ago. At that time investment properties were selling for an average of around $20,000 for a 2 bedroom 1 bath property in decent, (almost liveable), condition.

In 2000 a 3 bedroom 1 bath SFR in liveable condition sold for around $30,000 in an average neighborhood. We paid as little as $5,000 for a house with some fire damage and as much as $53,000 for a 1000 sq ft brick house in an excellent neighborhood, with a true ARV of $250,000!

5 years ago, an average gross profit spread on a deal was around $100,000. It was relatively easy as a seller, to make $10K to $15K cash profit on a quick cash sale to another investor, and still leave that investor as much as $100,000 in gross profit spread. In short, there was plenty of profit to go around. Mind you, we were using legitimate, conservative appraised values from independent appraisers.

But today, in early 2006, these kinds of real margins are much tougher to achieve. The present market is filled with buyers who lack a good understanding of the issues that affect profitability. As a result, many are buying properties at prices that are just too high to make the deal work.

In fact, my research indicates that retail housing prices - houses sold to owner occupants - have gone up nationwide an average of 60% to 80% over the past five years.

At the same time, in Atlanta, selling prices to investors have gone up some THREE HUNDRED PERCENT! The phenomenon of so many investors selling to so many other investor buyers has created an artificial market in areas heavy with investor activity. The data I had close at hand was for the Atlanta market, but my readers from around the country tell me that this is also true in many other markets.

What this means is investors buying today are paying the highest prices ever recorded for Real Estate Investment Property with no guarantee that these properties will go up in value, or cash flow enough to justify their purchase prices.

After reviewing 25 years of real estate market data, I personally believe that we are at the very peak of the current real estate market cycle and will soon see more evidence of a downward trend in property prices and the resulting effect that this will have on appraised values.

It calls to mind a mental picture of a kid swinging on a swing set. As you swing forward you reach a moment when you become virtually still as the swing reaches its peak, pauses just momentarily, and then begins its descent to the backward part of the swinging motion.

I believe we may be at that momentary pause in the cycle before the market starts to swing the other way. In the first quarter of 2006, we seem to be enjoying the pinnacle of a long and exciting swing upward.

But just as the forces of gravity act upon that swing, cause it to pause, and then return where it came from, there are forces at work in the real estate markets that could act like gravity to pull real estate values downward from their present peak highs.

Some of these "forces of gravity" could be rising interest rates, rising foreclosure rates, slowing investor activity, and unforeseen events like another devastating hurricane or a major terror attack.

I would caution investors at this point to be extremely mindful of the fundamentals when buying any investment property.

I am very concerned about the number of investors who have gotten into the market over the past two years and are finding themselves in foreclosure on one or more properties.

While the general media outlets are reporting that houses are still selling well, the fact of the matter is that more investors than ever are finding their cash flows squeezed or their properties are not selling.

This is leading to a very high foreclosure rate in the investment property community.

While the National Association of Realtors may downplay slowing sales as a small percentage of their overall market, the fact remains that there are no specific reporting mechanisms for investor sales. Mass media reports can be misleading for investors.

It is very difficult for the average investor to get any kind of accurate information that shows what's actually happening in the investment property market both for sales to buyers or property cash flow data.

While there are always good deals available in any market, you have to pick and choose carefully.

I caution you to be especially careful about analyzing your deals and doing your due diligence before you commit yourself to anything. At the present time it is very important to be conservative when evaluating investment property deals.

With investor buy prices, property taxes and insurance at all time highs, there is much more risk in the present real estate market.

But, dark real estate clouds always have a silver lining for those who understand where their cash flow and profitability are in a given deal. The market forces at work now will eventually force prices to more reasonable levels.

I would expect that eventually we will see prices drop as much as 40% in the most over-invested areas. As activity slows, or interest rates rise, more creative seller financing will begin to develop. Investors who are patient and wait for the best opportunities may have to wait a while longer, but in this case patience will definitely be a virtue. ***