Posted by Robb Terranova under Buying Real Estate | 
If you are buying real estate right now, there’s an argument to be made you are either rich, brave, or foolish.
Every time I evaluate a deal, there is a better chance I will do nothing at all than take action. Good deals are far fewer than bad ones, and I’ve made a lot of money in real estate NOT buying something.
With all of the low prices, distressed properties and desperate sellers out there right now, it is really tempting to start snapping up bargains.
But the wise move may still be to wait. If you are buying real estate right now, there’s an argument to be made you are either rich, brave, or foolish.
You’re rich: You’ve watched as real estate prices plummeted. Now signs of recovery mean it’s time to invest. If you have the spare capital, you stand to make a lot of money in this market of incredible opportunity. You can afford to gobble up the discounts and hold them for three years. It’s great to be you, and you are part of a fortunate and elite crowd.
You’re brave: You have both ends of the financing worked out, and you buy bargains to sell, for the most part, at small margins. Most likely you are forced to run a volume business. Do enough deals and you can still cash in on the current market conditions. But you are probably working yourself sick to make the same money that will take half the effort as the market improves.
You’re foolish: You know you can get bargains, so you buy them any way possible. But did you plan how you are going to get rid of them? If you’re trying to make a killing and price your resale high, your short-term financing may come due before you can resell. Quick sell it at a discount, and you may have so little margin by the time you unload you could wind up breaking even. If you get stuck holding, you still have to pay off your short-term lender. The unhappy possibilities are endless.
You could be wise. Even though there are juicy discounts out there, as the siren song of equity beckons, you could remind yourself about the resale profile of your deal in this market. It’s simple, really: don’t buy, and you don’t have to sell. You’ve waited all this time, maybe there’s wisdom in waiting just a little while longer.
Posted by Robb Terranova under Buying Real Estate, Real Estate Investing |
Deals in buyer’s and seller's markets merely have different profiles, which makes this is a good time for a pro’s and con’s refresher.
Are there real estate investment deals out there right now? Surprisingly, no matter how bad market conditions seem, the answer is always, “Yes!”
Deals in buyer’s and seller’s markets merely have different profiles, and in the midst of either, one looks wistfully over at the green grass of the other.
Which makes this a good time for a pro’s and con’s refresher.
BUYER’S MARKETS:
In a buyer’s market it’s easy to remember the con’s. Buyer’s markets seem like winter days, painful and what investor can’t wait for them to end? But, buyer’s markets have an up side, which once again bears repeating.
BUYER’S MARKET CON’S:
- Property prices are falling:
- Wow. Nothing highlights paper wealth like depreciating property. It will make you feel like the holder of a mattress full of Confederate currency when you go to sell your assets in a buyer’s market. The best thing to do is hang in there until the seller’s market returns, but what does “hanging in there” actually entail? Translated, it means finding the money required for holding power. This grim waiting game can be a real test of nerves and can exercise your ingenuity. Will the bottom ever arrive? It doesn’t seem like it!
- Money is tight for both fix-up and refi:
- What lender wants to back a loan with collateral that’s losing value? No such entity exists. Its harder to borrow money in a normal down cycle, to say nothing of the impact of sub-prime complications in today’s market. In a buyer’s market it’s also harder to divest assets to raise your own capital. Unless you have a rainy day fund (or a partner with one) to continue doing business, you have to hold tight. Pinochle anyone?
- Days on market are long, slow turnaround, higher carrying costs:
- One of our properties was on the market for a year, but nobody balked at our DOM because it was becoming the norm. OK, hooray, my property’s not stigmatized, but it’s also not selling! In this case the property was free and clear (except for property taxes and insurance), but it was still lost income from the capital I could be using for other deals. In most cases, properties have financing that needs to be serviced, which makes you feel like you’re sitting in a traffic jam in the world’s most expensive taxi cab with the meter running.
- FSBO becomes less viable, which means real estate commissions:
- A good real estate agent can pay for their commission if they are highly skilled. A real professional agent can provide advertising far and wide, word of mouth promotion, open houses and other sales techniques that you may not be as practiced in as an investor. Nevertheless, if you can cut out the middleman and sell your property direct to the consumer, that’s another critical profit factor in your favor. Real estate agents almost become a necessity in a buyer’s market because competition is so stiff you need all the traffic you can get.
- Properties must be fixed to the max, higher renovation costs and longer renovation times:
- Nothing can be wrong with the property. Nothing. We had a house for sale, immaculate on the inside, but the yard was average and not professionally landscaped. We discovered that this curb appeal issue had become a major stumbling block in the buyer’s market, and buyers wouldn’t even go inside to see our granite countertops, all new stainless steel appliances, master bath with vaulted ceilings, etc. You know what? It’s really expensive to fix everything to perfection.
- Supply outstrips demand, more concessions to get a sales contract and close:
- There are lots of horror stories out there about seller concessions in a buyer’s market. At the worst point in the market, we had a buyer ask us to come down 5% on our already reduced asking price, pay not only his closing costs but his down payment, and then allow for inspection and repairs on the property. We decided to rent the property instead.
BUYER’S MARKET PRO’S:
- Acquisition costs are lower for fixer-uppers, just like everything else:
- Desperate sellers mean lower prices. This is obviously good for acquiring bargains, discounts, and steals.
- Hard to flip, but easy to justify holding for much higher prices later on:
- Even if property is hard to sell, if you can buy it low enough and hold onto it, this is exactly where real estate wealth really comes from. Flipping fast is fine, but holding longer usually means greater profits from appreciation. You just have to remember to sell in order to get those profits, which turns it into a really long, slow flip. You can even save on taxes with long term capital gains.
- Competition is low among investors, deals are plentiful:
- The harder it is to do business, the more the investor field is winnowed out. This means, if you’re still doing business you’re in elite company, and you can take advantage of the open field. Buyers are few and property availability is high, which means you can get your hands on some nice stuff for cheap.
CONCLUSION:
The market is in constant flux, and there are better and worse phases in the market cycle to make money. The end of a buyer’s market and the beginning of a seller’s market are probably the best for investors, so keep your eye on the horizon.
Read the companion to this article, a refresher on seller’s market pro’s and cons: “Here Comes the Real Estate Recovery…and a Seller’s Market”
Posted by Robb Terranova under Buying Real Estate, Real Estate Investing, Selling Real Estate |
Taking a minute to understand the people side of real estate investing may help you to quickly become more profitable.
Ask yourself a question: why am I in real estate investing? Answer, to make money. But how is money really made? Can you force your way into deals just because you want to do them?
Taking a minute to understand the people side of real estate investing may help you to quickly become more profitable.
Start by taking a look at yourself. It is possible you have a tendency to think real estate investing is a business, that everyone involved should act logically, and you should be able diagram your profits like a scientist calculating the geologic age of a rock.
The house is worth X, so I should be able to buy it at Y because the seller should agree that a cash sale is worth the discount.
Then I hire several contractors who all, like synchronized swimmers, coordinate the completion of their tasks and finish my house in 3 weeks with no holding costs.
Everyone wants to live in my neighborhood, so I’ll discount the house 1% under market for a quick sale, voila! I’ve made Z dollars, and I’m off to the next deal.
Go ahead and try it this way, everybody does at some point. When nobody listens to you, then you might realize, oops, you forgot to calculate in the people factor.
Every step of the way, the people involved have their own motives, some emotional and NOT financial, and you will make more money figuring out what those are than trying to insist everyone understand yours.
The key to the people side of real estate investing means standing in the other person’s shoes while maintaining a grip on your ultimate objective. Remember, you’re not going to fool anyone, you actually have to understand their perspective, not just pretend like you care.
First, what’s your house worth? It depends not totally on comps, but who is willing to buy it. Who is willing to buy it depends on what people LOVE about the house. They may love the neighborhood, or they may love the schools, or they may love the patio in the back yard.
So it becomes financially important to you what the buyer LOVES about your house. You can research and emphasize these emotional triggers in your advertising, then customize them to the particular buyer in your face to face pitches to sell the house more quickly for a better price.
Second, what’s a seller willing to take? They may think the house is worth twice what they paid for it because they always wanted to sell it for that, or their neighbor’s house for sale is worth that so they should be able to get that too. What the seller will take depends on what they FEEL it is worth.
So it becomes financially important to you how the seller FEELS about the house’s worth. Interviewing a seller with careful listening skills, you can gather a literal wealth of information. You can skillfully address these points in your negotiations to get closer to what you want to pay for the house.
Third, contractors are very independent, not only from each other but from you. They usually have several irons in
the fire at once and cycle in your job based on their priorities, not yours. Coordinating contractors depends on diplomatic handling of their NEEDS interacting with yours.
So it becomes financially important to you what your contractor’s NEEDS are. Sizing up a contractor’s profile in early meetings can help you find those you can work well with and avoid hiring those that you will have trouble with later, which will save during renovation and ultimately make you more money when you sell.
You can find tremendous insight into the people side of real estate investing in my book “The People Side of Real Estate Investing”.
I use deals from my own investing career to demonstrate how to integrate the people side into real world deal making, and provide line-by-line dialogues for successfully handling common real estate investing scenarios.
Even if you think your people skills are terrible, by the time you finish reading this book you will have a significantly better understanding of people’s motives and how to capitalize on them for bigger real estate profits.
Posted by Robb Terranova under Buying Real Estate, Real Estate Investing |
The real estate recovery is inevitable. It's not too soon to start getting prepared.
Remember how easy it was for the fabled townsfolk to dance around the prone and hulking corpse of the giant who once terrorized them? Before the giant was killed by the courageous Jack, however, dancing did not come easy (maybe it was the wobbly knees?).
This pre-kill point is where we are in the real estate cycle, the industry so saturated with hopelessness that dancing days are all but inconceivable. But the giant will fall, and when he does, you need to be ready.
OK, the US economic framework has been shaken to its core. OK, the real estate industry still feels like the lower 9th ward in New Orleans post-Katrina. But will you be ready when, after dragging the bottom for a longer than tolerable period of time, the real estate market actually ticks up?
Real estate is cyclical, real estate is cyclical, real estate is cyclical… Keep repeating this mantra because there is life after the slump, meltdown, crash, insert your grim noun here. This crazy idea has been gaining momentum in the real estate industry lately. More and more it is displacing the suffocating gloom that once occupied the same space.
In its previous incarnation, “extrapolation bias” which is the tendency to think things will continue as they have been, caused the bubble to catch so many investors out on a limb. The newly entrenched version caused by the slump, that real estate will continue to decline, has actually begun to reverse.
Recently, we have started to see brief glimpses that real estate will soon be moving out of survival mode into recovery, and it gets you thinking, or more accurately “feeling.” If this cataclysm is actually going to end, it’s time to start planning. What a delicious task to finally undertake as visions of appreciation and equity once again push themselves into our consciousness.
Five things to do immediately:
- Finalize the optimization of poor performing assets. This means renting houses that won’t sell at any price in this market worth taking, so they can at least cover their financing until the market improves.
- Begin researching the new conventional financing guidelines and the alternative financing climate:
- While sub-prime loans from conventional lenders will be virtually non-existent, sellers may be disposed to consider owner financing, something you can use yourself in a tight sub-prime market to move your resale inventory early in the recovery.
- Hard money lenders have been hurt severely by defaults on properties where equity dried up with falling prices, and are now saddled with houses they can’t resell. But in order to stay in business they still need to lend money. As home prices rise and they see a steady gain in value, they may soften their terms.
- Accordingly, if you have assets you’re trying to sell to capitalize other projects, you will start to see more favorable conditions – you won’t have to spend quite so much fixing to perfection, you might actually be able to FSBO, and days on market won’t drag into the next millennium.
- Continue to watch for buzz about the bottom, because that’s what consumers are listening to:
- As we know, the media are always at least one tick behind real estate current conditions and tend to play it safe. Remember, we saw this on the down slope when most denied the crash was impending.
- More and more articles are emerging about the recovery, which likely indicates the dawn. We have started seeing headlines about the bottom from credentialed pundits, and statistics that support the “beginning of the end,” so the starting gun is getting ready to go off.
- Be on the lookout for the first markets to firm up. Believe it or not, these are probably extreme collapse areas like Florida, California and Nevada because the markets have overcorrected there. If you aren’t in a position to take advantage of opportunities in these areas, remember that soon other markets will follow and the best profits will be for those who take action at the beginning when prices are still at their lowest.
- Pre-visualize the recovery and develop a concrete investment plan using normal (not abnormally unfavorable) market conditions. What types of property will you be looking for? Map out in detail what purchase price, what condition, what location, and what end result (sell, hold) you will execute.
It’s not that crazy to start thinking aftermath. In fact, it’s critical if you want to be on top of things when the time comes, and it inevitably will.
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