The Real Estate Broker's Corner

I have a habit of watching CNBC in my office whenever I am in it. If you are going to make you living in business, it pays to be aware of what goes on in the business world.

Anyway, just about noon, they ran a soundbit that the National Association of Realtors now sees existing home sales being off by 5.8% this year. It's nice to see the NAR arrive at the party, even if they are a bit late. For the last couple of years, I always thought they were "cheerleaders", trying to "talk up" the housing market. And I think most of the people who were listening (at least those who are in the real estate business) to the cheerleaders were wondering how these people got on TV. I don't know about their customers, but the folks I deal with around here expect honest talk from honest brokers about the climate of the market, not cheerleading.

The market is tough, and that is being kind. But as Warren Buffett once said, the trick to making money in stocks is easy, when everyone is selling, be a buyer, and when everyone is buying, be a seller. Easy, right?

The operative term is "everybody". When you have market capitulation, when everybody is calling it quits and selling, that's when you want to be a buyer. And the fact that the NAR has stopped whistling dixie, tells me we might be in that market right now.

When I was in the army, I asked a senior NCO how he became successful, and he gave me the absolute best advise that I ever got. He said not to get to tied up in what he had done, that the opportunities and challenges he had faced were probably different than the ones I would come across. He said to focus on being able to recognize opportunities, and then move decisively to take advantage of them. That is probably good advise for real estate investors today.

When I first got into this business, I was asked to give my opinion of a bundle of rental property that my broker had listed at 2 million dollars. Not being (at that time) a seasoned real estate professional, I did an analysis the only way I knew, the right way.

An asset has a value equal to the cash flows it produces divided by the required rate of return. Lets say that rental property produced 100,000 net income annually. If my required rate of return was 5%, then the asset is worth 2,000,000. My broker was very happy with this. Then I pointed out to her that a CD would yield 4%, so why would someone buy this property and assume all the risk involved with being a landlord, for little or nothing?

Most people would not. So when I told her I thought a minimum return that would reflect some risk would be 11-12%, and that implied a value of 850-900k, well, she wasn't as happy. There were comps to support her value, she said. The bundle never sold, and is in fact still for sale today.

What makes me happy today is that there are income property opportunities in New Bedford and Fall River that actually reflect the risk, and have returns that make sense with a 12-15% rate of return. I saw a 3 family in New Bedford for sale at 125k, and the rent roll is likely 1700 a month, had separate utilities. A three family at this price makes a lot of sense as an investor. Still, there are three families for sale for north of 300k in Fall River and New Bedford which make no sense at all to me, but that is about to change.

Once the dam starts to crack, its hard to hold off the flood. The subprime mortgage market's disintegration has removed a large section of the market for the urban multifamily. Combine that with banks moving aggressively in the market to sell foreclosed properties, and suddenly, we have the perfect storm for sellers, sunny days for the investor on the sideline.

It's not a bad thing. Investment properties should make sense as investments, and now they are starting to!