Sunday, March 28, 2010

Busman's Holiday Questions Unearth News, Insight

On the road, I can't help but nosing into local real estate wherever I go.

Right now I am in SW Florida on some family business, but while here I have been in touch with a number of people, getting caught up on the latest sats regarding regional and local real estate trends.

Garren Grup, a good friend I made last year and colleague in the business, had some good news regarding values in the Lee and Collier County areas. Specifically that the two counties are the fastest growing counties in all of Florida regarding business (and real estate) recovery. But my guess is it is coming back fast because these two counties likely fell harder and sharper than any other counties in the Sunshine State.

There are still many, many MANY vacant, brand new strip retail centers in many areas I have driven. Also it isn't hard to find commercial buildings where work suddenly stopped last year (or before. On the housing front, there is hope that values here have reached bottom and may be on the way up, albeit slowly. Interestingly, word is that most of the foreclosures in these two counties occurred in Lehigh (in Lee County) and in Golden Gate Estates (in Collier County). So there are significant values there for investors who want to jump into the single family housing rental market.

Along Vanderbilt Beach where I am staying there are many condo units for sale. I was amazed, frankly, at how many were listed in one particular building where my family used to own. The number is staggering and the word is "make an offer." West of U.S. 41 values have been hurt, but families are not as likely to have been forced into foreclosure. East of U.S. 41, it is another matter, according to Garren and others.

And therein lies the potential. When you are in a market that has been hit hard, the question becomes when to jump back in. And how long will the recovery last...or even how strong will it be?

A half dozen years ago the play was one of leverage. Buy smart with cheap money. No money down if you can get it. True, there were those who jumped into no money down deals, or interest only transactions, but they often paid full price because they didn't know what they were doing. Those folks got burned as their notes were converted or as values fell. But those folks who bought right (at a smart price) AND leveraged are in a stronger position today.

Today, the leverage opportunity is harder to come by. Today it is all about buying distressed properties, stabilizing them, and holding them to appreciate. Its what we call "a strong upside." Many opportunities here. I'm heading out to some multifamily open houses this afternoon. It should be interesting.

More to come....

Tuesday, March 23, 2010

Headed To Regional Blue Rock Commercial RE Meeting

Its time for our twice annual regional network meeting of Prudential Commercial Real Estate agents who are part of the Blue Rock Midwest network. Agents from three states converging in western Ohio to share best practices, network and do some out-of-the-box thinking and problem solving.

It will be a change for me this week. I am not speaking at this meeting and it will be nice . . . oh so nice . . . to not have to worry about times, or tech setups, etc. I just get to sit back and soak it all in.

I'll likely have some things to write about, so stay tuned!

Monday, March 8, 2010

Cross-Cultural Mutual Benefits

When we talk about use of self directed IRAs to fund real estate transactions, as I have mentioned in a couple of earlier posts you don't have to be purchasing the real estate yourself. You can be a hard money lender to someone looking at alternative financing programs to get a project jump started.

But even an outright purchase of a property by an investor using their SDIRA funds can be turned into a "mailbox money" situation. That is, where the owner is truly a passive investor and receives checks monthly from another party. This is increasingly a way for people from different cultures to mutually benefit, depending on how the deal is structured.

Let me give you a very real example.

All over the United States, refugees from Somalia have immigrated, adding a rich new culture to our existing melting pot. Some somali immigrants have money to invest in projects, others do not. Some came for a better life. Some escaped war and famine and are hoping for something better in the United States. A place where hard work and dreams can be turned into something very special.

Somalis, because of their moslem faith, do not and cannot pay bank interest on loans. It would be a violation of their religion to do so. Therefore, they don't qualify for traditional bank lending programs.

A way around this that benefits both the somali entrepreneur/investor, and someone with SDIRA monies -- or someone using traditional financial means to purchase a commercial/investment building operates as follows:

- The traditional investor uses private funds, or a bank loan, or SDIRA monies to purchase a building.
- A somali entrepreneur/investor buys it on a land contract from the new owner. The new owner is, in effect, the bank. The entrepreneur/investor makes monthly payments for the building and is responsible for all costs -- insurance, property taxes, all utilities, interior and exterior maintenance, maintenance of drive/parking lot, etc. Factored into the monthly payment is the monthly principal AND the interest on the loan as granted by the traditional investor (from Point 1) who bought the building. Only "interest" is never mentioned in the document. That money is incorporated into the monthly payment.

All sides win. The person who bought the building is acting as the bank, and the "New American" entrepreneur can fill the building with tenants, manage it, and ultimately own it when the land contract is paid off. In Ohio, land contracts usually are paid off in just under five years. The risk to the traditional investor is mitigated by being able to take the building back if the entrepreneur/investor misses any payments.

There are many opportunities like this out there these days. It takes thinking creatively, and cash on cash returns can easily approach or exceed 20 percent, depending on the project. Here in this office, one of my colleagues is doing quite a bit of work in the somali community, and pairing individual investors with immigrant entrepreneur/investors who can benefit from each other's knowledge, enthusiasm, access to capital, and access to a community of potential lessees.

It just takes a little big of out of the box thinking.

Sunday, March 7, 2010

Government Trying To Help Commercial Sector, But . . .

An incredible dynamic is now occurring within real estate. As many writers and market watchers have observed, and we practitioners are living, credit markets and politics are impacting commercial real estate far more than market forces these days.

The Term Asset-Backed Securities Loan Facility -- better known as TALF -- was designed to help the residential market by helping market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities collateralized by student loans, auto loans, credit card loans, and SBA guaranteed loans. As a result, the various Federal Reserve banks lent more money to banks, so that they could lend more money for real estate transactions.

Today, while it did bring some credit spreads in to help commercial transactions a bit, it did not do much. In this writer's humble opinion, another government program that got in the way. What Washington really needs to do is get out of the way, in my opinion.

What will make keep commercial/investment real estate healthy is less intervention by federal officials. Already we are seeing monkeying around taking place with loan loss reserves at other wise healthy financial institutions. This pressure, in turn, puts pressure on borrowers. Not just future borrowers, but those who already have loans outstanding.

Residential real estate appears to be bottoming out. But what is to happen with the commercial/investment sector remains to be seen. Everyone says the big turnaround for commercial real estate will be in 2011. I am thinking 2012 but who knows. Still, it is a good time to buy. Money is cheap (for now) and manyh distressed properties are out there waiting for a good owner and good management.

Just some thoughts on a Sunday.

Monday, March 1, 2010

When You Don't Know What You Don't Know

I like to think I am a pretty smart guy. Well schooled in a number of disciplines, self taught in many others. I am routinely looking to try new things, go on new adventures.

But I also know what I am not. I am not an attorney, though I know many things an attorney might recommend. I am not an accountant, but do know many things (though not all) that a CPA might recommend.

With that said, however, I am the first one to tell you I don't know what I don't know.

I was reading a story in a local commercial newspaper this afternoon, and learned that law firms are facing issues with clients coming in who have tried the "do-it-yourself" legal route and created bigger problems than that with which they started. With the advent of the net, and big box stores, people can do almost anything themselves. But can they do it well? There is a classic line from the first Jurassic Park movie, where actor Jeff Goldblum's character asks rhetorically (and I am paraphrasing here...), "While all your scientists were running around asking themselves whether they could grow dinosaurs, did anyone ever ask ' should we?' "

The same can be said of all the do-it-yourselfers running around selling self-help books and DVDs telling people to go out and jump into real estate. Sure, you can file your own legal forms with something you find on the internet, and you can try to write your own sales contract, but should you? Now, I am one saying the same thing, but with a caveat. GET SOME PROFESSIONAL COUNSEL when you are doing so. Did you feel like I was shouting with that last sentence? I was. For too many people are getting themselves into trouble buying investment properties -- usually single family houses -- because they don't know what they don't know.

As noted above, the legal profession is facing the same challenge. Many people come in to an attorney asking for help to "fix" a problem that the individual thought they could handle on their own, either with advice from the uncle who is a retired lawyer, or with some downloadable forms. I know plumbers who are making a fortune from the calls they take, often from a wife, asking the plumber how soon they can come out to the house to "fix" the do-it-yourself project that the husband started after a trip to a big box (either orange or blue) hardware store.

But the advice to get a seasoned commercial/investment real estate agent working on your behalf -- usually at no cost to the buyer/investor -- goes for commercial buildings and other investment properties, as well.

Obviously, some will say I have a bias as I am a commercial/investment Realtor. True that. But I know companies that outsource their payroll, outsource their marketing, outsource other HR tasks, and outsource their transportation for their hundreds of employees who travel tens of thousands of miles. I know one particular company that conducts inventory audits of retail chains. This company's philosophy is generally as follows: "We aren't a transportation firm, so we shouldn't own a fleet of cars. We are not an HR company, so we should not have such a department. We are not payroll experts, so we outsource that program. We are not marketers, we outsource our PR and marketing programs," . . . and so on. They do what they do extremely well, because it is the one thing they focus on.

There are individuals who understand real estate well enough that they write their own purchase or sales contracts. They know what they're doing. Another very large segment will always rely on experienced agents to do the legwork, negotiation and paperwork for them. But a vocal minority will go back and forth between using an agent, or doing it themselves, all the while touting how easy it is, and enticing others to jump in the water not having a clue what they are doing.

I think I have written in these pages before that I don't pretend to be an attorney, why should an attorney pretend to be a real estate agent. The same goes for accountants, or general contractors, and so on. It is understandable that people feel more empowered to "do it on their own." But then is it a good use of their time if much of what they are doing is spending time on the learning curve, when the better use of time would be to effectively review potential properties their agent has found for them.

Even more, how many budding real estate investors out there cal tell me right off (without looking it up) the meaning of :

- Leverage
- Cash on cash return
- Hard money
- Littoral
- Seasoned note
- Gross rent multiplier
- Brownfield economic development grant
- Non-recourse loan
- Deferred gain
- Capitalization rate
- Rescission
- Boot
- Joint tenancy
- Property syndication

These are just a few that came to mind as I was typing along here this evening. I have written in the past in this blog about the shows on cable television that hype flipping -- one of the ways people have lost a lot of money. You may as well blow it in Las Vegas, for it is in every sense of the word "gambling." Never mind the fact that the buyer is gaining none of the tax advantages of holding a property for investment. Nevertheless, I am encouraged by a new show I caught on one of the cable networks recently where an investor counsels people who have purchased a property on how to best get it ready for rent.

Recently on one show, the show host made recommendations that made a property owner's eyes bug out (figuratively, of course). The buyer/owner travels much of the time for work, and has little furniture in the large, two-story house he recently purchased. The owner wanted ideas on how to removate the partially finished basement into living quarters that he could rent to a tenant to help pay on his mortgage. I sat watching the TV and said out loud, "the guy is never there, he should live in the basement and rent out the first and second floors of his home." I sipped on my red wine while I waited for the results of the design the investor/host would unveil. Lo and behold, he said the same thing I did. Rent out the top two loors and renovate the basement into a beautiful apartment.

As I am chuckling about my clairvoyance (nah, just common sense), the owner was trying to figure out what to do, starting with picking his jaw up off the floor. The guy bought the house for purposes of an investment....he plans to move later but keep the place as a rental. So why not start now? It was so very far from his radar he was having a tough time processing the thought. Think about it...he could realize a far higher income from renters than he could by simply renting the basement.

Anyway, the reason for telling you this is because many people want to go the do-it-yourself route. Saving a buck? In this economy I get that. But for most buyers, there is no cost for using a real estate agent. For sellers, office, retail and industrial sales are off. You want someone who knows the ropes. I have a client that owns numerous retail strip centers around the Columbus area. He has tried to rent them himself, and he knows his stuff. But he doesn't have the "time" to deal with it. He asked me to list two of his retail lease spaces on the west side of the city last fall. They are both leased now. They had been empty since LAST winter. His family trust has income, and he is doing the things he wants to do.

Wrapping up, none of us knows what we don't know. You will find that the good commercial/investment agents have the hearts of teachers, not sales people. I want to help my clients succeed. Because it keeps them coming back. I have a couple of investor clients who are one what can best be described as a "one-a-year plan." That is, they are buying one commercial property every year. Every five to seven years, they are exchanging/selling these properties for something a bit larger, building equity and taking advantage of indefinite tax-deferral opportunities that have been in the U.S. tax code since the 1920s.

And they contract for my services because: A) It is not their specialty, B) It is not the highest and best use of their time, and C) They know that they don't know what they don't know.