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.


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