Saturday, August 25, 2012

Professionals Exist to Help Us - Use Them and Pay Them

We constantly need to make decisions about many things, every day during the course of business.  One major factor that influences decisions is cost, and although that isn't anything new to anyone, managing those costs relative to reward is an important point.  

When finding a potential deal, we must be very comfortable with the property and the upside as this is the reason we're considering the purchase, but when we're not quite sure, or need confirmation, or have a potential problem, hiring a professional estimator, appraiser, legal professional, engineer etc., is not really a cost, but is a necessary aspect of doing business.  Some people try to avoid these professional costs and end up paying substantially in the price of experience.  As many of us already know all too well, experience is sometimes a costly teacher.

My point is that if you're not sure about something, hire a professional to make things sure.  If you're presented with a property that you have reviewed comps and things don't seem right, why take a gamble in buying the property when for a couple hundred dollars, an appraiser can help you determine value.  You may be out two or three hundred dollars, but that could save you from getting into a bad deal and losing tens of thousands!

If you have a potential structural issue or you're dealing with load bearing walls etc., make sure you have a very experienced contractor or structural engineer to help you along the way.

If a probate related or other legal issue arise, don't play around and waste time and money.  Bite the bullet and pay an experienced attorney.  These folks can be expensive, but their knowledge is what they get paid for and they can save you substantial money and grief and get the job done right the first time.

I have an engineering degree, but this doesn't make me an expert in many things.  I am humble and I know my limitations, so when I have a problem that I don't have the answer for, I hire a professional who does know the answer.  If you don't have this same philosophy and try to cut corners in areas that you're not experienced in, sooner or later, it will bite you.  This can be substantially more costly to you than simply paying a professional to make sure you are steering your business in the right direction, rather than the painful and costly approach that happens when we don't consult with pros.

Don't worry about that money you're paying your hired professionals.  The correct view is that paying them is like an insurance policy for big mistakes.  These folks are there to help us, so when we need help, it's best to ask for it.

Until next time.....

Wednesday, August 15, 2012

Taking Emotion Out of the Deal

Throughout history, and indeed in today's markets, emotion drives the ebb and flow of the markets.  Whether we like it or not, this is a fact that has been much studied and has been discussed in countless books, newspapers, articles and speeches.

Depending on your preferred medium of investment, this emotional component can either help you or work against you.  Let me explain:

If one is Trading stocks, emotion is a massive factor in the movement of stocks.  As a stock investor, we can remove our emotional component as much as possible, however, we cannot completely eliminate it and we certainly can't control what the "crowd" does.  Determining the valuation of a stock at a particular moment in time is both an art and a science, so because it is typically difficult to determine future value, our emotions do come into play whether we like it or not.  There are a number of things we can do to limit or eliminate that and that is to have a system / game-plan and follow it without exception.  Even the brightest trading professionals are right only about two-thirds of the time, so losses are a part of the game regardless of how good we think we are.  There is no such thing as getting it right all the time.  These are the realities.

Now, moving onto real estate, when it comes to investing, we must limit or eliminate the emotional component also.  Because we know by doing our due diligence ahead of time, how much a property is worth (within a reasonable estimate) at the present time, we can ensure that by purchasing at substantially below that value that we are good, taking emotion completely out of the picture.  As in our stock example, we follow our game plan to to letter and ensure that based on the value today, that we are not paying more than that value.  In fact, as I mentioned before, our aim is to buy very much below today's fair market value and if we don't have that present, then we do not have a deal!  We then move onto the next potential deal.....

While we're on the topic of emotions, we came across a seller this morning who themselves presented a valuation in today's market for their own property that was based on an appraisal in current condition.  This appraisal reflected what we were going to offer him, so he knew what it was worth in the market.  However, he refused to accept market realities and wanted double the amount we offered. When he was asked what he felt the property was worth, he simply said that he knew it wasn't worth what he was asking, but that's "what he wanted" and that is that.  He proceeded to tell us how nice the property was, how nice the neighborhood was....We are not emotionally driven home purchasers.  We are numbers and facts only investors and you should be too.  If the numbers don't work, then regardless of how nice the property is and whatever other flora and fauna the seller and/or their agent is spewing, move onto the next potential deal and leave the non-deal behind.  Do not waste time on sellers that refuse to accept market realities.  They are betting that "it'll come back".  Let them gamble.  We don't do that.

Yes, this is an emotional seller who overpaid for his property at some point in the past, and now cannot live with a loss even though the economic reality is that his asset isn't worth what he wants for it.  So, it will sit and he will lose money maintaining insurance and paying property taxes and seeing his asset degrade further due to weathering / wear and tear with no other hope than potential appreciation down the road which most likely would not cover his mounting losses.

Do not become one of those statistics where you are only betting in market appreciation to salvage your investment.  Sometimes, looking at a short term game plan makes much more sense than waiting to see what the distant future holds.  As I've said before, nobody has a crystal ball, so why bet the farm on future appreciation when this is not a prudent approach to investment in real estate.  Certainly, many other options are available to us.

If we're talking stocks, we need to have a bias whether the stock will go down or go up.  This bias determines our  potential profit or loss.  In real estate, we lose money if the value goes below our purchase price, so price appreciation is only one of many exit strategies that we can use, and it is the most uncertain and volatile strategy available.  There is no need to rely on price appreciation when buying real estate assets, so focus on other exit strategies that are available to you with some we have discussed in previous articles of this blog.  This limits risk and increases potential profitability by buying well below current fair market value and knowing what your exit plan is before you sign the Purchase & Sale Agreement.

Remember, emotion has no place in real estate investing.  If you buy low enough, and use the right exit strategies, you will be just fine almost all of the time.

Until next time....

Sunday, August 5, 2012

Ready to Place an Offer? : Do's & Don'ts

In the course of our daily business, we run into many people who are "want-to-be" investors.  There is absolutely everything right with wanting to be.  However, for those of you new investors, there are certain rules of conduct that those more seasoned already know but you may not know if you are new to the business.  It is critical if you intend to do deals consistently to present yourself in an honest light.  What exactly does this mean?

1) When presenting an offer, be real.  That means, do not under any circumstances, lead the seller on by telling them that you have the money to close when in fact you do not.  Do not waste people's time!  This means, get your financing approval and/or cash together beforehand and demonstrate to the seller that you have the money at the time of your offer through a real proof of funds.  This means send the offer with your proof of funds.  Don't send the offer without proof of funds because if you do, you will be perceived as an amateur and may be in a poor negotiating position immediately because of this perception, whether this is right or wrong.  There is no need to show proof of funds before this time, but at the time of offer, you should have everything in order to prove that you have the financial capability to close.  Wanting to close and having the capability to close are key, not just the want.

2) It doesn't matter if you low-ball but can justify your offer.  You want a great price?  Of course, who doesn't?  But don't just lowball without being able to explain why.  Lowball offers are completely ok if you  can justify them.  Lowball offers without justification are amateur moves when what you're trying to do is show yourself as a professional.

3) In this real estate market, cash is truly king.  Get all your cash together to buy the property you want and you'll be at the front of the line in acceptance.  Sellers want cash (your cash), and you want their property, so why not make it easier for yourself and forget about getting financing if you want to close quick on that great deal that just came across your desk.  This means, get a partner or partners to put up the cash if you don't have enough or even if you don't have any cash.  You need cash, but there is no rule or law to state that it must be YOUR cash.  Make deals with private investors whom could simply be friends and family, and get it all cleared before you make your offer.  Don't make an offer and think in your head that Uncle Ben has $20 million sitting in his checking account doing nothing and you've got the greatest deal in history waiting for his $20 million to be used.  Oh, but you just sent your offer in but haven't even spoken to Uncle Ben about what you're doing, right?...Don't do that!  I think you get my point that the money has to be resolved BEFORE THE OFFER.  Again, do not waste a seller's time.  You want to be seen as a performer, not a non-performer, and the quickest way to become a performer is to do what you say you're going to do in a timely manner and back it up.

4) If you find after an inspection that some minimal issue exists, don't go back to the seller and ask him to knock off $500 or $1,000 because you have a toilet or some light fixtures that need replacing.  If it's a major problem like serious electrical wiring faults, a defective septic system, cracked boiler, well then that's a different issue altogether, so perhaps in those types of cases, you can walk away from the deal altogether or ask for a credit at closing from the seller to pay for these repairs.  Unless you have an all cash deal happening, ask for a credit at closing for major repairs that came up after inspection, because the repair has to be paid for by someone, either you or the seller.  If you just ask for a reduction in purchase price, this won't help you if you are getting a lender to put up some of the money. The credit as closing works much better because you then have the cash to do the repairs right at the time of closing.

These are some simple points for investors who wish to build their reputation with sellers as performers and not as time wasting non-performers.  Be a performer starting today and get your deal house in order.  Real Estate is all about relationships and don't let anyone tell you otherwise.  Being real and honest with your deals will build your credibility, gain you many more great contacts and referral business and put more cash in your pocket.  If you wrong people, word spreads quickly so start right from today to build yourself up rather than tear yourself down.  Being a performer pays much better.

Until next time........