Some People are Running in While others Run Out
Last time I was in Chicago Gail and I were walking down Michigan Avenue and there seemed to be hundreds more walking up the avenue than down.
"Where are we going?" Gail asks.
"II don't know honey, but where ever it is, we are late. All these people are already coming back.!"
In August of 2005 Gail sold all of our real estate except our personal home. If that was all I told you, you might think we were brilliant market timers because August 2005 happened to be the last month that inventory and sales were in any sort of equilibrium. We should have "turned around and started coming back", but instead of sitting on the cash or wisely investing in indexed funds and heading for the mountains, I proceeded to embark on my next great adventure and develop a large commercial building.
That building (Cyperlin), never came out of the ground. Before we could get the letters of intent turned into firm sales, the market had begun to turn and all of the buyers backed out. I was correct that the residential part of the market was saturated, but was incorrect in predicting how quickly this would affect the commercial segment.
I am proud to say we did a few things "right". Firstly, I had optioned the land instead of buying it outright, and secondly, while I was planning on using investor money to complete the project, no investor money was used or sacrificed. If I had purchased the land outright, I would have been in the situation that many land owners find themselves today - upside down. The investor issue is one of personal pride to me, perhaps I would not have lost as much of Gail's and my money if I used investor money early on, but I know that these investors and friends still have faith and trust in me.
The bad news is; that pile of cash we had from selling everything in August was gobbled up by engineering and architect fees, hard deposits, and other soft costs like marketing and planning.
I now have a much better appreciation for my father. This was a guy that went through the depression and since then was way too conservative with his money: NOT!
I know it's too late now Dad, but you were right!
Let's go back to the concept of the guy going up Michigan Avenue when everyone is going down - is he a contrarian or a late comer? Many of the buyers in late 2005 and 2006 were not contrarians, they were simply late comers.
Contrarians are buying when others are selling, or vice versa. But what exactly is a contrarian investor in real estate, and are there other alternatives (middle ground) within the real estate industry?
If everyone is buying and you are doing nothing, you are not a contrarian. You are just doing nothing. Doing nothing is not middle ground, it's just inaction - most times an easy option for many people.
No one would disagree that more people want to sell real estate now than want to buy real estate. If you are a buyer are you are a contrarian?
In general, yes.
You can invest contrary to a market trend, but you should not invest contrary to logic.
Tatiana and I went to look at 15 more homes this Friday - all on the water - all in Cape Coral. While we were visiting one house we ran into a shopper that wanted to tour with us. He was down from Indiana and was looking for a retirement home. We were in one home that I thought was a very good deal - in fact it was under contract already at above the asking price.
Our buyer asked me, "How do I know that it will not go down another $50,000 in value after I buy it? I am worried about that."
"I do not know, and I can not guarantee it", was my simple answer, "but logic and experience tell me that this will not be the case".
The price was appreciably below replacement cost, the home can not be easily duplicated because it is on a deep water canal only a few hundred feet from the river.
I would not have made this statement nor had this feeling for a three bedroom home in an area with may vacant homes all alike.
My point is simple, it is not enough to be contrarian - you still have to be smart and do everything right.
The reason I look at so may homes is so that I will recognize a good deal when I see it.. The good deal stay on the market only a few days.
The Leasebacks makes a Come Back
I talked earlier about middle ground. Assume for me if you will, the roll of the developer seller. Further assume that you have a large inventory of developer condos that are vacant and need to be sold. Heck, you BUILT them to sell them. Your options are few - you certainly can't act contrary to the market and start buying - you HAVE to sell. Or do you? What are your options?
You need to get creative with your financing, your method of transfer, and your offerings.
I participated in a focus group last week to discuss just this topic. A condo buyer these days is certainly a contrarian. There are many more condos to sell than there are buyers.
The top concerns of condo buyers are:
- The financial stability of the developer
- The stability of pricing
Let me address each issue and then talk about lease options as a solution.
The financial stability of the developer is a concern to buyers in a project that is still controlled by the developer. Buyers are concerned what would happen to their condo fees if the developer goes bust and they certainly do not want to live in a community that is in ill repair and mostly empty. This can be addressed by the developer is a few ways -the best way is for him to post a letter of credit for the condo association. Developers may also be willing to pre-fund expenses for a period of time.
The stability of pricing is on every buyer's mind, like the buyer Tatiana and I met last week: "What if the price should further decrease after I buy?" This is not as easy for a developer to address, but I have seen some price stability guarantees -however they are difficult to administer since each condo is unique. The only thing a developer can do is guarantee hat that HE will not lower prices - he can do nothing about re-sales.
Financing is a MAJOR issue with new condo projects that are less than fifty percent sold out. Some banks simply will not finance them or have restrictions and fees that make financing intolerable. The good news is that most condo buyers are buying as a second home and have loan to value ratios that are well within these banks new limits. . Some banks will loan only as much as 50% on a new condo purchase in a project that is not more than 50% sold out. The answer is internal financing from the developer, guarantees on the loan by the developer ( he actually signs a guarantee with the lender), or a special relationship with a lender that may involve a combination of guarantees, buy downs, or oher considerations to the lender.
If you are a condo buyer and you can address your concerns about the above three issues - you have identified "fixable" problems that put you in a great bargaining position. Property negotiated, condos purchases today can be a very good deal.
One other solution that I have proposed for a few developer clients is the lease back. The lease back can be done in combination with some of the above suggestions
In a typical lease back, the developer sells the condo and then leases it back as a model. The lease back normally is negotiated at say, 8% of the purchase price, said 8% paid either at closing to the buyer or over a one to two year period, paid monthly. All lease backs and the terms must be fully disclosed to all parties, especially the lender if there is one. After two years the buyer gets full use of the condo.
Many of you know that in the past we handled the marketing for Parkside at Rivers IV. BBL built this waterfront resort and Parkside is still one of my favorites. I am still close to the project manager and we sat down to come up with some creative solutions to the three major objections that buyers have in condo projects. The developer here is financially strong and is going to put up the letter of credit to answer the first objection, they will alsoaddress the price guarantee issue and are willing look at doing the financing directly for buyers that need it.
Perhaps of great interest to today's buyers is that they have made available to us the lease option - even on units that are not models. This means buyers can buy and be guaranteed a lessee; enabling them to capitalize on the low pricing of today's market by buying now.
A new version of the lease back is that the buyer can get use of the condo in the months that he wants to use it - say high season - and still gets the lease payments for the full two years.
Folks, most good Realtors have been very busy with buyers. I am sure January was another record setting month is sales locally. Buyers more than ever need the services of a good Realtor. Let me know if I or one of our team can help you in any way.