April 2010
Short sales, foreclosures, distressed notes, liquidation auctions, bankruptcy sales…ahhh, so many deals, so little time. Real estate is on SALE!
Today’s environment for commercial real estate investing is an all-you-can-eat buffet of opportunity. The biggest question is which path to take. I see many investors get lost in the weeds of choices and rush into the first deal they come to–or be paralyzed for fear of making the wrong move.
A few simple guidelines have helped me to avoid the mistake of acting rashly, or not at all.
Define your target
In this type of market, you can’t possibly look at every deal that’s out there. You’ll waste too much time chasing deals that don’t fit your abilities, in places you don’t want to be, with terms that demand that you fit to the deal rather than structuring the deal to your strengths.
Answer three questions before you start:
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What market(s) do I want to be in?
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What property type(s) are positioned to do well in that market and fit my resources and talents?
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What is the price range I can handle?
The answers to those questions will narrow the field and your focus. The first is really the most critical. There are some markets that will not recover for years, or ever. There are others that are down but not out, and a few that are already on the upswing.
Research your markets to find those that have bottomed and have the attributes for recovery. Property type and size are functions of lifestyle choices and financial capacity. Match your strengths to the targets.
Have a full set of tools
Don’t make the mistake of having just one strategy and looking for deals that fit. There are at least a dozen ways to approach deals in this market, but no single technique is going to fit more than about 10% of the deals. That means you’re a non-player for 90% of the opportunities.
Develop multiple strategies and structures. You’re up against investors (like me) who have a depth of knowledge including short-sale procedures; bank REO policies; alternative equity arrangements; cash-flow mortgages; subject-to financing; seller financing; master leases; straight options; sale-leaseback; turnarounds; and splitting the bundle of rights.
If some of those are unfamiliar to you, now is the time to learn them. My library has at least a hundred books from well-known real estate authors, and I’ve found something in almost every one of them that I’ve used somewhere. Invest in specialized knowledge. It will pay off a hundred-fold.
Likewise, develop a wide network of contacts to feed you potential deals that fit your criteria. Brokers, bankers, lawyers, accountants are obvious information sources, and I spend a lot of time cultivating those relationships.
Don’t overlook less obvious sources. I’ve concentrated on leveraging memberships in organizations. I carry a few brochures in my pocket that describe our company’s services and acquisition criteria to hand to anyone I meet at chamber of commerce meetings, local civic groups and associations.
If you don’t belong to these groups, join. Consider the dues as a hunting license for deals, tenants, vendor contacts, financing contacts, etc.
Now that you’ve 1.) defined the target, 2.) have multiple techniques and numerous sources of information–you’re ready to act.
Always play to win
A good friend of mine is fond of saying he only plays by his rules and reserves the right to change the rules whenever he wants. That sums up a cornerstone of my investing philosophy. I play this game to win, on my terms, and I am always prepared to walk away.
It’s easy to get caught up in the madness of crowds. Few of us are immune to an overload of stimulus from the greed gland. Chasing the same deals everyone else is chasing or thinking the deal in front of you is the hottest thing you’ve ever seen is a mistake.
The truth is, there is always another deal. I’d much rather miss one than make it under pressure and become the next motivated seller.
Put simply, I am not going to shortcut my due diligence for any reason. Knowledge of local market fundamentals, property condition, and creating multiple exit strategies are critical to making an intelligent decision.
When the due diligence turns up something that can only be cured by events beyond your control, it’s a major red flag. That property priced at 50% of replacement cost may not pass the test of: “If I had the opportunity to replace it, would I?”
Make offers based on reality. Structure the deal for a worst-case break-even. If it doesn’t meet your standards, learn to say “Next!”
Go where they ain’t
I rarely deal in the hottest markets or crowded arenas. An old adage about beating the competition in business is to “go where the competition ain’t”. In commercial real estate that means finding niches that others overlook or ignore.
Recently, my local paper had a press release from the Realtor® association listing about fifty agents who completed an “accredited” Short Sale class. Now they’re all running ads touting expertise in “creative” real estate deals.
It’s become a crowded field, and the scam artists have figured out how to game the system.
“Flopping” (the practice of low-balling comparable market values to get a short sale approved, then turning the property at the real value) has replaced “Flipping” as the newest old trick. You know when a new term emerges, the party is about over.
You can’t steal standing in line.
I take a different approach for bank-owned and owner distressed properties. I look for deals that I can offer a bank par value on their loan, but at my terms, which are always structured for a worst-case break-even.
Imagine a banker who has been fielding calls with low-ball short-sale offers for weeks taking my call and hearing I want to pay the full loan amount. Think he’ll listen? Oh yeah. This strategy has brought us several deals that will produce excellent returns, and we’re looking at more now.
I even got a testimonial from one banker who thanked us for “saving his bacon” on a deal that was significantly underwater.
Go for it
To sum up, with a defined target, a wide network, and multiple strategies, you can position yourself to take advantage of almost any situation without having to compete. While others are striving to “think outside the box,” you’re turning the box inside out, making up your own rules, and playing to win. Happy hunting!
© 2010 H. Ray Alcorn Jr. All Rights Reserved
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