Typically it is the small investor that goes merrily investing long after the astute investor has dumped all his shares for the novice to gobble up at unprecedented prices.  The same scenario can also be applied to real estate.  This time around big and small investor went off the precipice thinking they were real estate’s answer to Einstein.

So there they are, big and small, bloodied and dazed and hoping that the free fall is over.  After all, here we are in the summer of 2009 and there are just the barest signs of life starting to show in the economy.  A proverbial blade of green grass pushing up through the dry and partched earth giving hope that better days are ahead.

Here is where seperation once again begins between astute and non astute investors.  In real estate we find a whole lot of people once again trying to show their investing prowess by buying up small homes to rent and then to sell.  In some cases these homes are REOs, sometimes they are short sales and sometimes they are just regular sales from somewhat motivated sellers.

With tens of billions of dollars worth of residential foreclosures still on the horizon I have to question this investment philosophy.  How can one buy if the prognosis is for prices to be pushed downwards? How can one expect to cover their costs by renting if there are so many single home investors competing for the same renters?  Thats not to mention all of the existing apartment stock on the market that is also competing in the same marketplace.

Moreover, there seems to bidding wars going on for many homes as multiple buyers clamor to get in on the party.  Doesn’t this just bid prices up and defeat the entire purpose of buying cheap to begin with?  Doesn’t this just gladden the hearts of bankers everywhere with large stocks of REO homes in their portfolio?

Time will tell of course but right now it doesn’t seem to bode well for those joining the crowds.  Of course it may make sense for a buyer who just wants a home for their family and will be staying in it for the next 5 to 10 years.  That involves a different decision than the investor who has solely a profit motive in mind.

Personally I think there might be something to that tortoise and hare race.  It may just make sense to sit back and enjoy the tumolt for awhile before joining in.

Maybe the signal to move in some direction is not readily apparent.  Maybe it’s in the way the lint falls from his navel or how crumpled the cookies are coming out of the box or its in the tea leaves (time to dump the bags).  Chances are the real signal comes from other pundits, consultants, advisors or gurus.  They all start reading each others thoughts and before you know it they have complete consensus.

I submit that there are some very simple signals and rules to adhere to. Three to be exact, much like a traffic signal.  When the market starts going up and everyone is starting to get euphoric it is a clear green light go signal.  Start buying until you see the happiness turn to unbridled giddiness then it is time to turn the burners down.  During the green phase one is buying for growth and sellers being sellers they give the buyers no choice but to buy short term, and turn the property to take a profit.

When the economy goes into free fall and the real estate market starts nose diving it may be prudent to wait until things make a change. Stop for the red light. This is now occuring in the residential market and anyone buying at this time needs to plan on a long term hold.  If this is a home for them to live in then they will most likely be okay in the future but they can forget any short term gains.

The commercial real estate market however is most likely in an orange light phase especially in Orange County.  Prices are not plunging because owners are doing okay with their property, in general.  But the prices are definitely softening.  Sales are down but they are occuring.  Buyers are still out there waiting for a sensible deal.

During the slow down orange light phase one must buy for yield.  The values of the properties can’t be determined for the coming years but if the tenancy is good and the cash on cash return is good there are reasons to take the jump into the market.  The primary reason is that inflation is rearing it’s ugly head and the best way to offset the effects of inflation are by putting your rapidly depreciating cash into hard assets.

The all time winner of hard asset investing is real estate.  At this time in the market it is commercial real estate that has been bought well.  It is still difficult to buy Orange County commercial property with a good cash flow.  However, as sellers become more motivated to sell they will see the light.  Hopefully it will be the orange light demanding the deal be structured to yield a nice cash return.

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.

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.