What is a speculator?
Updated March 10, 2022
A real estate speculator is a buyer who purchases property or land with plans to sell it and make a profit. These buyers anticipate that they will sell for a higher price in the near future, often based on market forecasts or their ability to purchase at a discount. Because their purchases are based on conjecture, speculators face more risk than those who invest in real estate for the long-term. On the other hand, because their turnaround time is so much shorter, successful speculators can cash out more quickly.
Types of Real Estate Speculation
There are several approaches that a speculator might take, with varying timelines for turning a profit. Some speculators seek out homes in preforeclosure—that is, after a mortgage lender has alerted the homeowner that they have defaulted on their loan, but before the home goes to auction—or homes that are going into short sales, when the lender will sell to a new buyer for less than what is owed on the mortgage. It’s also possible to purchase a home that has been foreclosed upon at an auction.
The advantage of buying such a property is that they are generally cheaper than comparable homes for sale. Such homes do come with risks—they may be in poor condition and in need of major upgrades or could come with surprise expenses to repair defects. There could also be liens on the home that would need to be resolved before the sale is finalized. However, if a foreclosed home is in good condition, there may be a number of speculators looking to purchase, which could lead to a bidding war.
A real estate speculator is a buyer who purchases property or land with plans to sell it and make a profit. Credit: Maurice Williams/Unsplash
Some speculators purchase with the intention to flip a home; that is, renovate a property that’s in subpar shape and then earn a profit upon resale. This can be more reliable than simply waiting for market conditions to improve, because the speculator is actively taking steps to increase the value of the home, but there’s also the risk of going over the timeline and budget for upgrades.
These are short-term methods, but some speculators take a longer-term approach, basing their investments on forecasts that predict a particular market is increasing in appeal and will see price gains in the future. On a large scale, real estate developers do this when they purchase a plot of land with the intention to build multidwelling buildings in an appreciating market. Individuals may purchase a home in an up-and-coming area based on their research about promising market trends. Still, there is always the risk these predictions won’t come to pass and they will not earn a profit on their investments.
When Is the right time to speculate?
Speculating is a risky endeavor, but speculators can mitigate some of the risk with thorough research. Ideally, speculators should invest in times of good economic health and optimistic outlooks for the real estate market they’re purchasing in. Of course, the unexpected can arise even in the hottest areas—consider how the Covid-19 pandemic affected price growth in major cities—so speculators may want to consider whether they have the cash on hand to pay a mortgage on an investment property for longer than they would like to hold onto it.
Over a long enough timeline, real estate is considered a safer investment than other assets, as well as a good way to diversify one’s portfolio. Investing for the long-term rather than the short-term, as speculators do, comes with less risk, but also, potentially, less reward.