Dear Real Estate Investor:
Times are tough. Did you think sooner or later they wouldn’t be? Is that why you’re spinning yer wheels searching for the perfect property in the A+ location, priced under the market?
Are ya leaving milk and cookies on the table for Santa next Monday too?
Take a minute and breathe deeply the gathering… Oops, sorry, had a 70’s flashback. Let’s start again.
We’ve all seen investors who’ve been fairly successful. Ever found one with a portfolio acquired only in boom times? Silly question isn’t it? When did they buy, making their biggest long term hits? Wait for it — here it comes — in the down times.
Next, ask them how many perfect properties they own in the best locations possible. The answer to that question, after they stop chuckling, is a big fat zero, zip, nada.
Besides, if you actually found that property, you couldn’t afford it anyway. 🙂
Invest in properties in solid growth areas, where jobs are plentiful and the other fundamentals are in place and for real. Buy them when the times are tough — hey! that’s now. Make sure you can use reasonable leverage with old fashioned loans. Demand they break even or better before tax, and cash flow easily after tax.
Don’t insist on staying local, as your market probably sucks more than a new Dyson. You already know that though, right? So what’s the problem? You think you’re better off being able to drive by your property? Do you wanna drive by mediocre or occasionally fly to excellent and stellar? Is the decision really that difficult?
If this doesn’t come across as written by Captain Obvious — read it again. The differences between highly successful real estate investors and the rest of the crowd makes for a long list. The two biggest differences providing the most profitable impact?
Successful investors don’t need perfect properties — and they buy in buyers’ markets whenever possible, as much as possible.
This isn’t from the third tablet Moses lost on the way down the mountain that day so long ago. Buying in a buyers’ market isn’t a genius move — just a smart one.
I’ll pause here in anticipation of those believing this market will only get worse. If you believe that — then don’t buy now. This market could indeed get worse. I have an idea. Let’s wait until the perfect time to invest — right at the bottom of this down market, the day before it begins to recover. Seriously, buying now isn’t for everyone. There are two requirements.
Stop wasting your time and therefore your money looking for the perfect property or situation. The stars don’t align that often. Meanwhile you’ve passed over who knows how many excellent investments because you couldn’t find the right rainbow with the pot of gold sporting your name engraved on it.
There’s a better chance of a million moneys in a room full of computers writing Romeo and Juliet than you finding the perfect property with all the perfect circumstances attached to it.
Decide what you’re Point B is, and what kind of property will best get you there. Buy the best properties you can locate in a reasonable time. They’ll close escrow. Then…
Live your life.
Repeat until wealthy.
Invite me to your retirement party.
Retire.
Portland Real Estate Guy says:
I noticed in my market the investor are going after short sales. Half the homes dont even hit the MLS. But most lenders will want to see if the home can sell for a higher price before letting it go for cheap. I noticed investors scoring homes for around 75% ltv.
December 19, 2007 — 8:23 pm
Robert Kerr says:
Jeff, successful investors don’t catch falling knives.
Yes, of course, buy in a down market, but not while the market’s dropping like a rock and with 2-3 more years of degeneration expected.
If you think we’re not looking at progressive degeneration over the next 24-36 mos, please share your reasons and data.
December 19, 2007 — 10:27 pm
Jeff Brown says:
Robert — with all due respect, I have a life.
December 19, 2007 — 10:47 pm
Michael Cook says:
Jeff,
I totally agree with you here. As long as the buyer has the upper hand, negotiate good deals and buy. The point of a buyers market is not to wait until everybody thinks its the time to buy. Even if you take a hit for a year or two, double down until the market agrees with you.
December 20, 2007 — 11:52 am
Jeff Brown says:
Michael and Jeff totally agree.
May we observe a moment of silence please? 🙂
Thanks Michael.
December 20, 2007 — 12:53 pm
Smithers says:
My wife long ago scrambled my huevos, so I will have to be content to go to other peoples’ retirement parties, instead.
December 20, 2007 — 5:13 pm
Jeff Brown says:
Smithers — 🙂
December 20, 2007 — 6:43 pm
Ralph Hial says:
Jeff, Robert Kerr’s statement is correct, and your response doesn’t address it. Successful investors don’t become successful by catching falling knives. In order to understand what a falling knife looks like, I cordially invite you to read the Housing Panic and Housing Bubble blogs for a week or two … with all due respect, of course.
A housing crash happens with sticky prices that stairstep downward, as people who observed the peak fail to understand the nature of the crash and buy in … only to hold, then take a loss when they sell out in disgust. Prices climb more steeply, and people take more of a price differential as profit in the same way. But the collapse happens by loading up losers with incremental losses. In effect, they “flip that loss”. The spectre of falling prices does spook people into unloading faster … certainly faster than rising prices compel people to sell to take the profit.
Of course, the outright stupidity of the recent credit environment alters that picture from the previous housing bubbles and busts. People are more likely to just walk away from a paper loss, since at high LTVs, they have little investment in the matter in the first place (i.e. “skin in the game”). So, we’re going to see more people hold for longer times, before just walking out and leaving the lenders with a larger loss per property. The stairsteps will be either longer or steeper, in comparison to historical norms.
December 21, 2007 — 2:55 am
Jeff Brown says:
Ralph — You may be right, which of course would make Robert correct also. Neither school of thought concerning the length of this current market has been sent down from the Lord etched on stone tablets.
If you guys believe we’re in this for another 2-3 years you should act accordingly. Nobody, meaning any of us, have a clue when a recovery will commence.
So pardon me if I don’t stand in the corner and cower with fear just because a couple guys demand I explain how they’re wrong. I don’t care. It doesn’t matter. People behave according to what they believe.
There are some incredibly bright folks on both sides of this question. It’s only when they begin talking as if their opinion is infallible that their credibility wanes.
You could be right — or not.
December 21, 2007 — 8:14 am
Charlie says:
Sorry Jeff but I must agree with Robert and Ralph but I need to go one step farther.
If one decides to invest in an asset it is prudent to know the value of that asset. Presently according to my calculations the US real estate market is still 3 trillion dollars overvalued. This is derived using the historical trend of household income compared with the total value of US real estate. I use the quarterly Federal Reserve Z.1 data. My trend analysis matches up just about perfectly with the Case-Schiller graphs I have seen for some of the major metro bubble areas.
If you compare the historical housing data, any data to any historical norm you will see a huge bubble. In most of the trend analysis I have seen this bubble appears to be about 3 times the size of the one in 1990.
There are other ways to derive the value of an investment in real estate. Vacancies are at an all time high. Inventories are at an all time high. Afford ability of real estate is at an all time low. Homes are over valued as an investment.
The only argument one can make to buy a home is that you are not at the mercy of a landlord. Well I am a renter. I rent a very nice home, with a view and a pool. I pay half as much rent as my landlord pays in a mortgage payment. I will bank $50,000 this year. She will pay the same amount to the bank as interest. I am renting a home. She is renting the money to purchase a home. In 5 years I will have $300,000 in the bank. She will have a bank owned property that if she is lucky will be worth what it is today. When I move I give a months notice. When she moves she has to wait until she can sell her home and then give a realtor $75,000. It’s a $1,250,000 house.
In order to argue that an asset is a good value you must have a reason.
One year ago my Dad told me he thought that the real estate market had bottomed. I asked him why he felt this way. He said because home prices had come down a great deal and they couldn’t go down much lower. I spent 15 minutes trying to explain an investment’s value to him. He got tired and went and took a nap. It is a very difficult concept to grasp.
December 22, 2007 — 12:10 am
Jeff Brown says:
Charlie — to each his own. There are currently some fairly astute investors and institutions who disagree with you. Just as there are Bulls and Bears, there are folks out there who believe real estate will continue falling into the black abyss. It’s a legitimate position to take.
We disagree. I have no idea when this will turn around, and I suspect you don’t either. We’ll both have to wait and see. Enjoy your holidays. 🙂
December 22, 2007 — 9:52 am
Charlie says:
Thank you Jeff. No one knows the direction of the market because of the animal spirits. Chalk me up as a prudent bear.
Hope you have a Happy Holiday.
December 22, 2007 — 11:27 am