Archive for December, 2010

Buy from pessimists and sell to optimists

December 3, 2010

Ron’s sayings and things # 2,857 to make you a better real estate investor.

This is one of the fundamental real estate investment concepts that most people seem to misunderstand or to miss apply to themselves.   Buy low and sell high plays a part in this concept.    It sounds easy enough but the application of this wisdom contained in the instructions is a complex concept.    To do this you must understand market fundamentals and take your time to study who the pessimists are and who the optimists are.    When the market is ugly and no one wants to be a real estate investor, foreclosures are everywhere, and everyone who has something to sell and there are no buyers or very few who want to buy real estate because of the general state of the economy.    In this market the pessimists are ruling.   The trick is to buy something that you can fix or that is in need of the specific skills that you can easily provide.  

 When the market is great and everyone is making money and going to become the next Donald Trump, the economy is booming and money is easy to get.   TV producers create shows profiling regular people making tons of money being real estate investors.   This is a market dominated by optimists.    In 2007 I owned several older houses in a changing neighborhood.    There were investors tearing down houses and building newer bigger houses on these lots.  I was beginning to get excited about the possibility of either rehabbing these houses for big dollars or tearing them down and building something new and big and beautiful.   Then I began to do my research on the costs, risks, and benefits.   After much analysis I determined that it was not in my best interests to pursue these opportunities.   So I decided to sell the houses to some optimists!

 One of the houses had 2 houses on 1 lot.   I sold it for $125,000.    My analysis looked like this: To turn these houses into something beautiful I would need to probably spend something like 100K each and in turn I could probably sell the houses as a package for between 325-350K.   Those are big sells numbers and appeared to be very enticing.   The problems were that I am not a builder!   I am an investor who specializes in buying problems and solving those problems for a profit.    To me it appeared to be wisdom to not do thing that I am not trained or experienced in doing.   Additionally taking on 200K in debt to work this transformation was also a problem for my cash flow.   The 200K would need to be serviced and I don’t like paying on debts without a tenant’s money to do so.   My cost for these houses was about 25K total and I have pulled out another 50K in cash in the form of a mortgage on the properties.   So here is what the math looked like

200K rehab costs + 25K original costs   = 225K

(Not including cost overruns and mortgage interest expense while holding the property for sale)

Profit from the sale:

325K sales price – 25K commissions and closing costs = 300K

Leaving a 75K profit from this little adventure (300-225K= 75K), this excludes any existing loans on the property.

If I just sold the properties for 125K minus commissions and closing costs 10K leaving me of 115K minus the 25K original cost or 90K profit.   This 90K profit was made be not doing anything except thinking and using discipline to not do things that I do not know how to do.   There was not additional leverage applied to get the 90K profit, no risks associated with building, no headaches with contractors, no nothing just sell the property!   So that is what I opted to do.   I listed the property and an optimist came and found me!

The optimist tore down the houses and began the process of building on the lots.   Unfortunately things did not work out as they had planned and they could not find a lender to loan funds to build and now they have torn down the houses that produced income, have a note on the land then needs to be serviced and are searching for an investor who can borrow enough funds to build or who has the cash to do so.   Finally after many months of paying on the vacant lots the optimist lost the property to foreclosure.   It turns out that the market turned before they could build and now a new investor owns the lots and is waiting for another optimist to come along so that they can do the process again.

Do you need an analysis done on your property or portfolio?   Not sure whether you are an optimist or a pessimist?   Do you need guidance on what path to take in the real estate business?   If you think any of these questions apply to you then you should call me at 512-689-6742 or email me.

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