Friday, September 16, 2011

Fear is the Darkroom in which all of your negatives are developed.

     When I was younger, I considered myself someone who would take risks and many times that risk resulted in some type of profit from a real estate investment.  Finding a property with a sufficient amount of "hair on it" became the object of the hunt.  Oftentimes the property needed more of a haircut instead of a genetic reworking, but in all instances required some work to make it usable again.  Real Estate investing of this type is not for the feint at heart, there can be some real perils associated with it and along with perils go dollars to remedy the peril(s). 
     Today the market is flooded with foreclosed properties, most of them with some degree of "hair" on them.  It seems that when a property owner forfeits a property, they feel compelled to scavenge the improvements they put into the property.  Few and far between are the bank owned properties that are "broom clean" and ready to resell.  The majority of foreclosed properties require some level of involvement to make them market (or move-in) ready.  All to often the previous property owner stopped making payments due to an overwhelming situation that may be the result of latent defects and/or deferred maintenance.  Not all foreclosures occur from the borrower's financial hardship.
     In walks the "Real Estate Investor" who is ready to make a killing in the new found arena of "quick money".  Too often I have had the request for someone who has some money to invest and they want a nice clean property in a fantastic neighborhood in good repair, and oh yes, for 40% of the neighboring properties.  Unrealistic?  Perhaps.  So then why is it that we hear about all of the "fantastic deals" that someone has made?  The home run on the foreclosed property that someone who knows someone found and profited from.  The answer is simple:  Compromise.
     The investor who wanted the perfect property in the perfect neighborhood for the low price had a few developments with their investment criteria during the shopping process.  Through the course of his search, a few things may have been revealed.  The market rate for bank owned properties is not 40% but 65% of what the bank has into the property, not the perceived market value and his price point is adjusted.  All of the properties viewed may have repairs, and his tolerance of a property with some degree of repairs is now acceptable.  The properties in the best neighborhoods are either not being foreclosed or out of his price point and now the geographic areas are expanded and additional neighborhoods are being considered.
     Offers are made on properties and at long last one is accepted by both the seller and the purchaser.  This is much more simplistic that reality, but for the scope of this blog, I will keep it simple.  The amazing part about this process is that the property is NOTHING like the original perception of what the purchaser was looking for.  It is however a manifestation of the education obtained during the shopping process and the adjustment of the purchaser's expectations.  A result of COMPROMISE in the mind of the purchaser. 
     So now what happens?  The property is purchased and the revitalization is underway.  The cleanup and construction begins.  The remarketing of the property is launched.  Eventually the property will sell or lease and the investor is a happy camper...or is he?  Most people will not admit to their mistakes publicly and no one every brags about how much money the lost.  It is human nature to exaggerate, justify and rationalize how and why we did things, even if they did not turn out the way we planned them.  "I had a dream" of flipping a property and making a huge profit!  Now that the dust has settled, the dream has become a nightmare and the "flip" is nothing but a dream today.  The more prudent investor is still looking at properties for long term income or appreciation.  The timeline on our investor has now become extended, and time equals money.  The profit projected has dwindled and the amount projected for investment is now a fading light in the past.  Does this stop our boy from bragging about his latest deal at the coffee shop?  Of course not!  He revels in the high points and totally avoids the bottom line accountability.  Perhaps he does not know, but in the back of his mind he does.  These are the things that separates the professional investor from the amateur.  The professional has a pre-determined game plan, well thought out investment criteria, and a feasible exit strategy.  Most importantly is the contingency.  The amount that the investor will allow for unforeseen and unexpected items which may affect his bottom line.
     The final thought on the big picture of foreclosure investing is that I treat it as any other real estate investment.  Just because a property is being offered by a bank at a deep discount does not necessarily mean it is a great deal.   People make bad investments and walk away leaving the bank holding the bag.  All properties need to be fully evaluated before making any investment decision and purchasing someone else's mistake.  Then again, at the right price, anything is do-able.
     For contact information see my website at

Sunday, September 4, 2011

Its all a function of market time. By Michael Sims

People often ask me how long it will take to sell a property.  While each property is unique and will have idiosyncratic features, the overall determining factors are pricing and market time.  If the pricing is done well and calculated correctly, positioning the property against competition will be significant.  Bottom line pricing is not always the key to a sale, and definitely not in representing the Seller’s best interest.  Every situation is different but real estate is not a liquid asset, despite the desire of the Seller for it to be so.  With commercial properties, liquidity is often the exception and never the rule.  To achieve a “quick sale” often requires discounting the property value below 50% of it’s fair market value and even then savvy Buyers will want a further concession(s).
So, granted the Seller has reasonable expectations regarding the value of the property and the pricing is set correctly, the other deciding factor in selling a property is the market time function.  Most commercial properties take an average of 30 months market time to fully realize a fair market price.  Certainly some property classes perform better than others, but the question arises in my mind, did they accurately reflect all of the factors involved.
Perhaps a property sells quickly and everyone boasts about it.  Is the bragging accurate or just egotistical puffing the performance of the property, the seller, the broker or all the parties involved?  Most likely the property still took 2 to 3 years to fully market.
It begins with a desire to sell.  The seller makes the mental (and often emotional) decision to part with the property and begins a conversation with an appraiser, a broker, a competitor, or whomever the seller feels is a credible source of market knowledge.  At this point the seller may take a reasonable time period to “quietly” market the property on their own, suggesting to potential prospects that they are “considering” selling the asset.  Many sales incurred like this are not achieving the full value of the property.  The Seller, on the other hand may have a false sense of accomplishment feeling that he “beat the system” by not having to engage the professional services of experienced brokers, appraisers, attorneys, etc. and endure market time.  The more common result from this type of sale is a discounted value.  A scenario like this generally eats up 6 to 12 months of the selling cycle.  “No sale” efforts more often than not, frustrate the Seller and only delay the inevitable period of necessary market time.
If a sale does not occur, the Seller may begin talking with a broker about the listing and sale of the property.  After having mentally mulled the upcoming sale for up to a year or more, the Seller now “wants results” and commits to pay a commission to a qualified broker.  A sophisticated Seller will engage a broker who has steadfast local market knowledge and similar active and sold listings.  At this point, the broker can help facilitate the sale of the property, but it will still require adequate market exposure.  Adequate exposure for most properties take a minimum of 3 months to get the synergy flowing.  Listing agreements for 90 days are only aligning the broker for failure.  Many Sellers believe that their property has better dynamics than their competition, however nothing could be farther from the truth.  Some properties do, but the majority do not.
So by listing the property for a minimum of 12 to 36 months, the broker ensures that 1) the property will receive adequate exposure; 2) he will receive the fruits of the sale; and 3) that the “true market value” of the property has a better potential to be realized.  In a recessionary period this time frame can dwell for an additional 12 to 24 months from the time the property is professionally marketed. 
Two common mistakes that can affect value are the engagement of an ineffective broker and the premature changing of listing broker.  Engagement of an ineffective broker is oftentimes the result of a non-qualified referral to a broker not intimately involved with the local market in which the property is located.  Other situations may also constitute this type of ineffective engagement like broker inexperience, broker’s lack of sufficient database, or Seller’s desire to chintz on brokerage fees effectively causing lack of motivation.  Premature changing of the listing broker is often the result or unrealistic performance expectations by the Seller of the broker.  The Seller, frustrated by the lack of market demand for his property, will change the broker seeking a “greener grass” scenario offered by the original listing broker’s competition.  The successive broker may be the one who ultimately closes the transaction with little or no effort.  The transaction does not necessarily close due to the changing of the brokers, but merely because of the length of time passing between the original inception of a sale (by the Seller), to the actual closing date.  If no change is made, the property would sell regardless, provided it was priced accordingly.
All too often tactics like price dropping and excessive concessions while seemingly fundamental are only withering away at the true market value of the asset.  Research, price positioning, strategic marketing and public relations efforts conducted by a professional broker will sell any property, for its fair market value, given realistic expectations of the Seller but most of all, adequate market time will realize the maximum sale price.
For contact information see my website