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.

That has not happened in commercial real estate.  Pundits are predicting that the last half of 2009 and the first part of 2010 will see a plethora of commercial REOs hitting the market.  There are many reasons for this to occur such as an inablility of current owners to refinance debt when it comes due as well as swollen office and growing retail vacancy rate.

However, does this mean that buying an REO is always the best way to go?  The answer is really no because commercial real estate is much different than residential real estate.  One has to be rather astute in real estate to tackle a commercial REO.

The reason is that when buying residential properties, even REO’s there are many protections for the future consumer or homeowner.  There are warranties, and expectations that the seller is going to make all necessary disclosures and is not selling the buyer the proverbial pig in a poke.

When buying a commercial REO, the buyer is really buying a totally “as is” property.  The lender does not have the same duty to find out what they do not know and disclose to the buyer.  The buyer is assumed to be knowledgable enough to have everything check out and make his own decision based upon his own findings.

Certainly the lender selling the REO must disclose what they know to be a problem.  But they usually do not go out of their way to find out the problems to disclose as they must do for residential property.

Therefore the unsuspecting and  inexperienced investor may find himself with significant problems such as structural deficiencies, thorny tenant problems and possibly governmetal citations that must be corrected quickly or else heavy fines could be put into place.  When any or all of these items come into place the large “as is” disclaimer in the contract is trotted out by the bank and they will say they simply never knew these problems existed.

If there are a plethora of commercial REOs coming to the market it may be that prices will be just as depressed for properties that are not going into foreclosure. Those may be the very best deals to go after.  In fact even now, when there are not that many commercial REOs on the market, one may get a great deal by simply putting in a very aggressive offer and that may just be accepted.

Having warranties and representations and full disclosures from the seller are nothing to be ignored.  Think things through before you react.