The Best Laid Plans Etc. Etc.Etc.
May 6, 2008 – 3:00 pmOnce upon a time the shrewd real estate investor had a very nice and neat investment strategy all mapped out. He would buy a run-down property at a distressed price, put a little sweat and money into it and turn around and sell for a profit 12 to 18 months later.
This was a great plan and could pay off tremendous dividends. Leverage allowed percentage returns into the 3 digit number ranges. Life was good.
Unfortunately things tend to change. Somewhere in the early 2000s prices started to escalate so much that our perfect investor with the perfect plan had trouble finding a property to buy that was priced in a distressed range whether it was distressed or not. So the investor started moving farther and farther from home base.
Suddenly Orange County investors started to find themselves in the middle of San Bernardino. Maybe even the High Desert or worse. Not only that but soon even these returns were in full retreat. Pretty soon the investment with all of it’s risks started paying off like a certificate of deposit. In other words, lousy.
Now the business plan needed to change. Now the cowboy investor had to start figuring that he would need to live with this investment for awhile. Maybe even 5 years. If that was the case, property management became more and more important. Operations were where the money was going to be made.
Admittedly this was pretty tame stuff. Returns could be better than certificate of deposits but they were not going to be like hitting the slot machine bonanaza either.
Today the investor may need to plan on a 6 or 7 year hold and he probably needs to pay attention to tenant retention and deferred maintenance. He needs to become a property manager or hire a good one to keep the cash flow coming and eventually to make that big pop on sale that came so frequently in the good old days.
In today’s world blind luck has been replaced, once again with good management. True, blind luck is much more fun to talk about at cocktail parties, but usually management triumphs. This marketplace has driven us back to the mundane.
Tags: investing, investment planning, investment strategy, Orange County investors, property management, real estate investor
Looking For Tenants in All The Wrong Places
April 11, 2008 – 5:01 pmImagine that your company is based in a European country and you need to open a small branch office in Orange County. You call a Broker that has come highly recommended at Swartz Commercial Real Estate and ask for that Broker to have an assortment of spaces emailed to you so you can choose a few to look at upon your arrival in Orange County. You want to be around the Orange County Airport for ease of shuttling employees back and forth. You also want a nice building that will present itself well for clients stopping by.
Now imagine your surprise to receive an email with 50 choices on it. How can that be? You only want to be in top notch buildings and only within a mile of the airport. 50 Choices???? That’s absurd.
Absurd? Maybe. True? Definitely.
What happened to all the office tenants? That my friend is the big question these days. Office building owners are giving bonuses to brokers to do a lease, they are giving bonuses to tenants to do a lease and they are giving bonuses to existing tenants to not opt out of their lease.
I know that officials in the Federal Government are loath to use the word recession but an awful lot of ordinary people think we’re in one now. Office tenants seem very fearful of making a move in case business gets worse than it is.
Interestingly this makes for a very good time for a tenant to cut a great deal for the next few years. However, it is precisely at times like these that most people opt to do nothing out of fear. In many cases it’s an irrational fear but in many other cases the fear is justified.
Us, commercial brokers and office building owners may be looking for tenants in all the wrong places but so far no one has told us where the right places are. Any one who knows of these places please feel free to share.
For more information about Orange County Office market see this article in National Real Estate Investor online edition
Tags: leasing, looking for tenants, office space, office tenants, Orange County, recession, tenants
When Is A “Low Ball” Offer Not A “Low Ball” Offer
April 7, 2008 – 5:27 pmOne day I got a call from a Real Estate Broker saying that he represented a person who would like to sell his R&D building which happened to be in my Business Park. For those unfamiliar with a R&D building it is a hybrid comprised of approximately 50% office and 50% warehouse. These percentages may vary somewhat but that is the idea.
I hadn’t been thinking about buying this building as I didn’t even know the owner wanted to sell. It wasn’t on the market but the other Broker told me he heard that I had purchased 3 other larger properties in the park and the owner was anxious to sell.
The property was 5,000 s.f.. I ordinarily don’t like to insult people with offers but as I really didn’t plan on buying another building and as I would need to find a tenant I made what may have been construed as a low ball offer. I didn’t really care if he took it or not so I said will I would pay $180,000 with 1% downpayment and the owner would need to carry a note for the balance for 10 years.
I should state that the property is on a ground lease so the price would always be lower than a property on fee land, or land that comes with the property. On the other hand the property is in Irvine which is ordinarily pretty pricey. This definitely could have been considered a low ball offer.
Interestingly enough the owner accepted my offer. $1,800 down payment and the balance would be carried in a note.
The year was 1998 and although the press and government said that the great real estate depression of the 1990’s was over, it really wasn’t to be over for another 2 years. Things may have been getting better but it was slow and we all had memories of not being able to sell properties at any price much less lease them. We sort of thought the worst was behind us but there was no exact way of knowing.
The question is: Was my offer low ball or was it reasonable?
One might remark that it was reasonable because the owner, who was not under duress and was very successful actually took the offer and never even countered. He was actually happy not to have to carry an empty building and not to have to worry about finding tenants in a slow marketplace. He was also happy to have an income stream on the property rather than a negative. In addition he didn’t have a tax consequence so he was happy.
I don’t advocate low ball offers. Buyers who spend their time doing that often wind up wasting everybodys time. However, usually the market dictates what a low ball offer really is. If the market is booming it serves no purpose to offer prices that are very much off market rates. Some markets demand going higher than market prices in order to win the property.
Down markets obscure the definition of a low ball offer. If prices continue to decline who knows what low means. If an offer has some reasoning behind it then I encourage clients to submit it. If it is just low with no particular reasoning or thought then it is probably a waste of time. That is, some buyers insist on taking 20% or 30% off of any price no matter if it is well priced or not. That tactic seldom works.
Of course in a down market one tends not to hear the words “low ball” uttered by the seller or the broker. Unlike booming times, they may even say thank you for the offer no matter the price offered. In good times there is a good chance your heritage will be questioned in no uncertain terms.
Did you ever make or get a potentially low ball offer? Did it work? Was it really as low ball as originally thought? Leave your answer in the comments below.
Is Negative Leverage Negative?
March 28, 2008 – 4:02 pmEarning interest at the rate of 3% on your savings and carrying credit card debt at 19% seems to indicate a financial disconnect. If this were to happen for a month or 2 it may have some rationale, but certainly not long term.
The same reasoning can be applied to buying a property using what is known as negative leverage. That is, buying a property at a 5 cap rate and financing it at 7% interest. It’s going to be real tough to make a return on investment until the net operating income grows substantially.
Buyers are suddenly reacquainting themselves with the concept of cash flow. It’s been a few years since that has dawned on them. Frankly, I’m not sure why that concept seemed to vaporize around 2002 or 2003 but it did.
I know, I know property values shot up faster than a rocket and one only had to buy and sell a property in the space of a few months to realize their gain. But still, why did we collectively lose our basic principles when dealing with hard assets such as real estate.
Why did losing money become fashionable? Why did it take the tanking of the entire mortgage market and eventually the credit market to wake us up?
Won’t it be nice when Sellers all wake up too?
Tags: buying property, cash flow
Price Perceptions in Commercial Real Estate
February 29, 2008 – 3:02 pmThe Agent on the telephone had just given me a verbal proposal to purchase a property on behalf of her client. The price offered was more than 20% lower than my client, the property owner, was asking.
When an offer is going to come in substantially less than the asking price I find it preferable for the Agent to tell me what it is. In that way we can get right to the heart of the matter without all sorts of other terms and conditons to wade through. It saves everybody a great deal of time and effort, especially if the potential buyer is going to be stuck on the low ball offer.
Therefore I was pleased that I received this offer so I could just tell the Agent that we already had much higher offers that were turned down by the owner and there was no way that he would take time to counter-offer on this one. I did just that and waited for her to tell me that she would speak to her client and ask him to reconsider.That wasn’t the case however. What she did was spend the next 10 minutes trying to convince me that prices are coming down and her client’s offer was perfectly reasonable.When she took a breath I told her that she was arguing with me over a no win situation.
The fact is that the asking price is much higher than offered and we had a slew of offers that were much closer to asking that were all turned down. It didn’t matter that the buyer felt prices ought to be much lower, because the owner didn’t agree.
This scenario is being played out over and over again in todays real estate market. We are in that point of the business cycle where buyers feel that they have to buy very low and sellers, who are typically doing well with their properties, are holding out for higher prices.Something has to give in this scenario.
Most likely both sides will eventually move towards each other and real estate business will move at a faster clip once more.The golden goose days are over for owners. If they want to sell they have to sell at a price that allows a buyer to get a return on investment other than utilizing the greater fool theory.
Buyers have to understand that because the housing market has hit a wall it does not mean that every seller is going to dump their property. In fact, the housing market has very little to do with the commercial market anyway.The biggest difference is that even with prices lowered, homes still may not sell.
There are still a great many buyers for commercial properties and they will step forward if the price is reasonable. One does not have to have a distress sale to move a commercial property.
When a marketplace goes out of whack one way, it will inevitably adjust towards the middle. Both buyers and sellers must make money on a deal and they both need to understand that.
A market with very little movement will convince both sides to give just a little towards the other side. This kind of understanding on both sides is a requirement to do business in this economic environment. Incessant arguing to defend a low ball offer is not.
How do you go about negotiating? Do you start with a really low offer or do you start at a reasonably low offer?
As a Seller, would you respond to a very low offer? How do you determine what a low ball offer is?
Tags: buying, negotiating, pricing, selling
ARE THINGS GETTING WORSE
February 14, 2008 – 5:55 pmAs of this posting, February 14, 2008, we have been getting a steady stream of unsettling financial news from all sides. The D word is being used more and more.
The stock market dropped then has regained slightly but is still significantly down. GM announced a $39 billion loss for last year, Fed Chairman Bernanke has said that he is prepared to keep reducing the bank lending rate to keep the economy moving and the President and Congress are trying to decide how big a stimulus program to institute.
Things sure seem bad. Strangely enough though, the commercial real estate market is still chugging along like the little engine that could. True things are not like the recent past but they aren’t like the dark ages of the early and mid 1990s either.
Rents are still going up, occupancy levels have decreased in office properties due to the mortgage companies that have bailed but retail and industrial occupancies are still hanging in there. Apartments are still doing well in general. However, that market is skewed with all of the high end units that have come on stream in the past couple of years together with the condos that couldn’t be sold being converted to apartments.
Right now it seems like the Orange County commercial real estate market is going to squeak through the current economic mess in fairly decent shape. There are no mass foreclosures going on, in fact there are almost no foreclosures of any kind going on in the Orange County commercial real estate market. You can prove the point by calling any major bank and asking for a list of their commercial foreclosures. There aren’t any.
So if you are an investor in real estate, don’t get depressed. Maybe you shouldn’t read the newspapers either.
Tidying Up the Subprime Mortgage Mess!
January 23, 2008 – 5:51 pmWe are currently in the middle of a huge mortgage mess in the United States. Credit has tightened immeasurably on Wall Street and on Main Street in our hometown banks. Even foreign markets have been negatively affected.
Just yesterday the Federal Reserve lowered the discount rate with a 3/4 percentage cut in rate. But will this do any good?
Many say no and some say yes. It did some good on the stock market but not necessarily for the economy. The psychology of investing became a smidgeon more optomistic and that is always good.
However, we dealing in commercial real estate are kind of caught up in the middle of things. For the past several years the underwriting on commercial purchases has been quite stringent. In many cases buyers hoping to leverage a purchase with 15% to 20% downpayments have been forced to put 40% or more down in order to get financing.
These loans really have not been in jeopardy at all. However, the commercial investors have been tainted by the craziness of the subprime lenders and borrowers. Suddenly commercial loans have become even tougher to get and even though there have been very few defaults on these loans, the public is staring at them as though they are about to fall off the high wire.
The net result of this is a perceptible slow down in commercial property sales and in many cases leasing. Buyers are tending to hold off buying while waiting for the commercial market to come crashing down, which it most likely won’t do.
I think those buyers willing to step into the market now will be able to buy at a much better price than they have been able to for the past 2 or 3 years. This will ultimately create a much healthier commercial market for everyone as Sellers can also buy at a cheaper price and be able to move up in size much easier than they have been able to.
In the meantime the Federal Government is stumbling around trying to find some cure for several years of wild and irresponsible lending. The future will tell us how successful some of these schemes are.
Tags: commercial loans, mortgage crisis
Condo This!
December 7, 2007 – 3:17 pmI wasn’t very long ago that a condominium was place in which to live. At one time they become very popular, then they fell out of favor then they became popular again and not they are falling out of favor again.
In the meantime developers came up with an idea to conodminimize an office park. When they started up in the very late 1970’s they became popular, then they fell out of favor for many years and then became wildly successful in the new century. Soon industrial condos came into being and also sold like wildfire.
Hotels have joined the condo bandwagon and now, the latest trend, retail condos. Take a look at this article regarding the new concept.
Is This The Right Time To Buy Commercial Real Estate?
December 6, 2007 – 4:37 pmWhether the economy is up or down, people are always questioning whether it’s the right time to to buy commercial real estate. I have spoken to people who have been shopping for just the right deal for 5 or 6 years. They were so worried that the market would go down that they didn’t buy anything in perhaps the hottest real estate market ever.
Can you imagine how well you could have done if you bought just a small fraction of the commercial real estate that you looked at since the year 2000? You might be too busy enjoying your yacht in the south of France right now to read this article if you had.
Just what is a bargain when you are dealing with commercial real estate? Is it 10%, 20% or 100% below the average price for a similar property? Probably any one of those numbers would constitute a true bargain. However, how probable is it that one can actually buy the property significantly below market price?
I submit that it is not very probable. In fact most people that have doubled, tripled, quadrupled or increased their net worth even more than that may well have paid market price for their property. The money is made on buying smart and projecting income prudently. It does not need to be made on “stealing” property.
Buying or selling prudently in a down or up market is key for investing into commercial real estate. Otherwise, if you are waiting to take action for just the optimum conditions you may grow old waiting to do it. You will also miss a great many opportunities along the way.
More about opportunities another day.
Let me know what you think about buying commercial real estate.
Is This the Right or Wrong Time to Sell Commercial Real Estate
December 5, 2007 – 4:41 pmAs is the case in Buying, there are always many people questioning whether this is the right time to sell their commercial real estate. It doesn’t matter that prices have hit historic peaks, they want to be sure that they “don’t leave money on the table”.
Timing is always important in selling but it is not the end all that people think it is. One’s own circumstances are the most important determining factor in deciding when to sell.
Some people simply must simplify their lives and cannot cope with the complexities of their properties. Some people are retiring and they don’t have any heirs that can adequately watch over the properties, or if they do they are too far away. Some people want to do a 1031 tax deferred exchange into another type of property for a myriad of reasons.
These people often need to sell now, and probably should not be trying to time the market so they can sell at the exact right time. For one thing, I don’t know anybody who can predict when the exact right time is. I wish that I did.
I have spoken with a great many people who have tremendous equity in their properties but still are afraid to sell. With the federal capital gains taxes low and the ability to exchange into another property or into a tenant in common property it may be accurate to categorize their fear as somewhat irrational.
Selling at a loss is always a tougher decision. However, selling with a good gain and return on the invested dollar is usually not a foolish thing to do. Waiting until the market peaks may be foolish if you have other reasons for selling. Chasing a down market while holding on to one’s property probably is foolish.
Let me know what you think about selling commercial real estate.
Tags: commercial, real estate, sell