Over the last several months, we have watched the real estate marketplace turn from a red hot market where anything and everything was selling within weeks of being placed on the market, to a lukewarm and in some areas, downright cold market, where a property’s days on the market can be approaching a year. We at QuadReal Investment Group, Inc. have experienced a huge shift in our mindset and investment techniques, based on the conditions of the current market. We have taken a good look at the properties in our portfolio and have re-evaluated what role each plays in our investment strategy, and how we should be looking at holding or re-marketing them.

This month’s newsletter will discuss the most important guidelines for making money in real estate in the current market. Our strongest suggestion is to pause and ponder whether doing business like we did 12-18 months ago is still a good idea. Perhaps not! Perhaps it’s time to do a little re-evaluating. You should review the following points before every purchase and sale that you make.

EVERYTHING IS NEGOTIABLE
Professionals in the field routinely talk about real estate purchase/sale contract as a “meeting of the minds.” Because real estate transactions are comprised of so many elements, they are one of the last remaining investment vehicles where minds can indeed meet after considerable give-and-take over each aspect of the deal. In other words, in the real estate marketplace, there are many more bargaining chips than just money.  This is especially true now that the market has gone from a seller’s wonderland to one where the buyer has much more power in influencing price, terms and conditions.

Virtually everything in a real estate deal is negotiable to some degree. It is essential that you become a little wary whenever you hear the word “standard” in the real estate marketplace. For example, real estate agents and brokers in a particular area may charge a “usual & customary” commission, but that is not a standard to which you must adhere. There is no standard rule for who will pay the closing costs. When a deal seems to be falling apart, you can often negotiate with elements of the transaction that have been overlooked.

KNOW THE MARKTPLACE
Most experts agree that the best investments are usually local investments – that is properties that are in or near an area where you live or have lived for a period of time. This advice holds true because real estate is affected on two levels – environmentally and economically – by what’s happening around it.

To succeed in investment real estate, you must maintain awareness on both levels. Awareness of new trends or other gradual changes usually requires your physical presence for at least part of each year. At one time we were buying foreclosure properties throughout 23 counties here in Florida. This was a no-brainer when the market was so hot. Many of the properties we purchased and resold, we never even saw. That same investment strategy would be a recipe for disaster in today’s market as once again, with the down turn in the frequency of sales and the prices that the properties are bringing, the market has again “localized”. What is happening in West Palm Beach is markedly different than what is happening in Crystal River. This is not to say that if you live in Crystal River, buying an investment property in West Palm Beach is a bad idea…. but you would be well advised to really  be aware of the pulse of the market wherever you are buying and selling.

Environmental awareness requires paying attention to all the physical elements that surround your property: land, weather, pests and critters, other buildings, neighborhood, and the character of the municipality. Economic awareness includes not only statistics such as the unemployment rate and the local per capita income but also the pace of the real estate marketplace. You must know whether you are working in a seller’s or a buyer’s market. You must be aware of local property values, buyer’s demands and preferences, as well as local supply-and-demand trends.

SET GUIDELINES AND GOALS
Guidelines and goals are always the road signs and destinations for your real estate investment vehicle. Without them, you can lose direction at many critical points: negotiating price, holding time, cash flow and tax advantages, improvements and selling, for example. By taking the time to think through a situation before it becomes an issue and then setting out a goal and some working guidelines, you can keep yourself from missing out on optimum profits.

KEEP YOUR BRAIN IN CONTROL
Emotion has no place in the marketplace of real estate investment. Each investment property is a business deal and you are the entrepreneur. Base your decisions on facts and rational evaluations, not on feelings. Emotions such as anger, aggression, fear, prejudice, greed and pride almost always sour the investment pie.

LOCATION IS THE MOST IMPORTANT FACTOR IN DETERMINING VALUE
IT’S THE OLDEST CLICHÉ IN REAL ESTATE: What are the three most important factors in a deal? Location! Location! Location! The reason the cliché has persisted through generation after generation of real estate investors is that it reflects reality. Nothing affects value as much as location.

Three elements comprise location: town, neighborhood and lot. Before you purchase, evaluate the property by considering each of these elements. Will the economics and characteristics of the town support the type of real estate you are considering? Is the neighborhood desirable? Does your property fit in? Is the land conducive to its current use or your intended use?

An ongoing, periodic re-evaluation of location is just as important as your evaluation prior to purchase. Because the character of the local real estate marketplace generally changes gradually and over relatively long periods of time, some investors continue to hold property, unaware of the incremental creep of change. Don’t be lulled into a false security regarding property value and potential appreciation. Once a year, re-evaluate the location exactly as you did before you purchased it.

We recently experienced the importance of this point with the properties we hold in a small community in Brevard County. The community was at one time, and certainly at the peak of the selling frenzy of 2004-2005, a great place to buy and flip single family homes. But things have changed and nothing is really selling. Building contractors are dumping their inventory of new homes at drastically reduced prices, making the sale of used homes much, much more difficult. So, as conditions within the neighborhood have changed, so have we changed our marketing strategy for buying and selling. The location is still the same great family-oriented neighborhood, but the market conditions within the neighborhood have changed. We have become much more select as to the properties we consider purchasing, and have become much more flexible as to how we consider re-marketing what we are looking to sell.

CONDITION COUNTS
Condition can affect profit almost as much as location can affect value. Repair costs that you can incur after you take title are out-of-pocket expenditures, and they can wipe out the benefits of leveraging. Never purchase a building without securing from professionals a careful inspection and accurate estimates for necessary repairs. If you are qualified personally to make those determinations, then do so, but honestly and objectively. Then factor the costs of repairs into your negotiating. Whenever feasible, cover the costs of repairs in the mortgage financing. You can do this by: agreeing to pay a slightly higher price if the seller does the repairs – to your approval or, hunting down the best possible mortgage deal (high loan-to-value ratio and low interest rate).

GET IT IN WRITING
Paper can be the real estate investor’s best friend. Purchase and sale contracts, promises, contingencies, agreements, test results, approvals by municipal officials, work orders, price estimates, leases, rules of occupancy, warranties, expenditures, rent receipts and tax returns are but a sample of instances where good written records are essential.

Beyond documenting your investment from purchase to sale, however, it is also important to document your periodic re-evaluations of the local marketplace, your investment goals and guidelines, and the location and condition of the property. If you do them and forget them, you will not benefit. Write down your findings so that you can compare each evaluation with those of previous years.  Chronological files will help you to see trends developing in the local marketplace or changes in your needs, goals, preferences, abilities and interests.

SHOP FOR FINANCING
The cost of borrowing money is a factor in almost every real estate investment. Many sources of financing are now available nationwide. Do not rely on one source for mortgage information. Use local and national newspapers, reporting services, the Internet and a good mortgage broker to seek out the best possible deal.

Pursue financing opportunities outside the traditional mortgage hunt. Be creative. (Financing the purchase of a home and investment properties can be markedly different. Buyers of homes usually take out one mortgage loan, whereas buyers of investment property may create a pastiche of lending agreements). Explore the possibilities of short term financing from the seller for part (or all) of the purchase price. For the cost of fix-up or rehab, look into private deals for second or third mortgages, which can come from friends, relatives or associates, not necessarily traditional lenders. Consider balloon or interest-only instruments.

However creative your approach to financing your investment property, always keep in mind your goals and the essential numbers in the deal. They must act as an overriding control mechanism.

Because money is ready available, danger lies in borrowing too much. Always remember that you must repay every loan, and you will be paying interest for every day that you hold and use the borrowed money. Too much financing can create a negative cash flow that can sometimes be painful enough to force a sale before the investment has reached its maximum potential return, or even a good return.

KNOW YOURSELF
The element that makes QuadReal Investment Group, Inc. different from other investment educators is our central premise:

YOU are the most important factor in the success of every deal.

Most investment educators ignore the human element and stress the technical. This can undermine your effectiveness, because it is you, a person (or a group of persons), who choose an investment property, negotiate the contract, manage the buildings and decide to sell. The more educated you are, the more experience you can gain, the better the chance of your success in this business.

Look at yourself just as carefully as you look at the property you are considering purchasing. Use the information that we teach at our seminars to compare the demands of different investment vehicles with the skills, interest, goals and personality traits that you bring to the marketplace. And just as you periodically re-evaluate the marketplace and the condition and location of your property, re-evaluate yourself as a real estate investor. Ask yourself, “Am I still suited to the investments that I am holding?”