For Real Estate Sales Professionals

April 18, 2005 E-zine

April 18, 2005
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Read by More Than 30,000 Agents

Always be determined to become the
best real estate agent in your territory!

In this Issue:

1. It's Time to be a Conservative Real Estate Investor

2. Be Careful When Discussing Politics with Your Clients

1. It's Time to be a Conservative Real Estate Investor

This is an article that in many ways I don't want to write and have you read. It would simply be easier for me to write another article instead on one additional approach you could utilize to build your real estate business, but I really feel it's important that I communicate my thoughts and feelings about my observations on the marketplace right now.

This has been a wonderful, spectacular ride for both real estate agents and investors these past years. Depending on where you're located, you've probably experienced a solid improvement in your real estate market for the past 5-10 years as compared with what it was like for the five or so years before this great run began. But at the same time you may find yourself asking, "How long will this continue for?" And when it comes to answering this question accurately, I can't say with certainty that I have all the answers for you. But I can tell you that I see some things happening in the marketplace that do have me a bit concerned.

Having been in our industry for over 25 years now I've been around the business for two cycles of great appreciation in property values, and two cycles of 25-40% losses in property values in Southern California also. I also experienced the tail end of the upsurge in property values in the late 1970s, too, when I first began working in the industry at that time.

But in these big market upswings, people get crazy. They sometimes think that they've become complete real estate geniuses because of how much their properties have been appreciating, and they oftentimes think that this upswing and appreciation of properties will never end. These are usually the same people who get burned the most when the market changes, too. But in times like these when feeling that one is a real estate investment genius can mean no more than identifying a property, buying it, and enjoying great appreciation within six to twelve months afterwards, I get really concerned about what times may be ahead for us.

And knowing that for the past 30 years or so that great real estate booms in our country have been followed by great declines in property values, do you think that a downward market shift like what we've experienced before could ever happen again? And if so, the real $64,000.00 question is...when?

When I was an agent selling and leasing commercial properties in 1988 in Los Angeles, there was an owner of a garment manufacturing building who I called to see if he'd be interested in selling his building. His building was located in a prime part of the city, and I knew I had people who would buy it immediately if he was interested in selling it. But when I called him his response to me was, "Jim, Jim why would I ever want to sell my building? Where else could I get 25-30% annual appreciation on my investment like this?"

Approximately four years later the same man called me and said, "Jim, Jim, you should have kicked me and forced me to sell my building at that time. I should have known it was time to sell everything I owned when the guy shining my shoes was giving me advice on how to handle my real estate portfolio!"

And this represents the truth many of us have experienced over the past 30 years. When times are unbelievably hot, people who have no business being investment experts begin talking confidently as if they are in fact true investment geniuses.

As an example, several years ago when the stock market was hot and everyone was still making easy money, I saw a segment on the TV news where they interviewed a group of neighbors who had formed their own investment advisory club. The group met weekly, and the members would tell each other which stocks to buy that they could easily make big money on.

When I saw this TV segment, the members of the club appeared to be average people with very minimal experience in the stock market who were caught in a great market upswing, and they now thought they were great investment geniuses also. And I thought to myself, "Wow! When people like these feel they're stock market geniuses, that's a major signal that a big correction in the market is about to happen."

And of course, there were a lot of people who lost a ton of money when the stock market collapsed.

So all of this has me looking at the underlying forces in our real estate market to see if there are any warning signs of what may be coming our way. And here's what I've been observing...

There are a lot of people out there who are in a state of panic feeling that they'd better get into the market now, or else they'll be shutout from getting into it forever. These people are not seasoned, knowledgeable real estate investors, but they've seen their friends ride the gravy train of ongoing appreciation for a while now, and they're determined that they're going to claim their own piece of it.

Despite the fact that home prices in the United States have achieved record levels, the percentage of people's equity in their homes has never been lower. While people have been experiencing record levels of appreciation in their homes, they've also been taking the equity out through lines of credit and second trust deeds for both living and other expenses, too.

While people have been stretching to afford the home they want at these record high prices, many of them have also been financing their loans with variable interest rates. If and when interest rates go up, these people will be caught making much higher mortgage payments than they are right now. And some of these homeowners got into their loans at artificially low "teaser" rates, too, meaning that their interest rate will be increasing in the months and years ahead even if market interest rates remain the same. But if interest rates go up, these people will get hit with both the increase they knew was coming, plus another increase in their variable rate because of the changing market conditions.

And in looking at the above two examples, do see the possibility that a great number of families could find themselves financially strapped in a major way if something happens and the economy slows down?

Now for some observations on what's happening with the real estate market here where I live in Southern California:

In Malibu, mobile homes are now selling for $1,250,000.00. These are MOBILE HOMES on RENTED SPACES in a MOBILE HOME PARK!

In the area where I live, investors are buying single family homes with negative cash flows of $500.00-$1,000.00 a month, figuring that they'll simply make out like bandits every year on the appreciation. And one investor who's been focused on buying new model homes and re-selling them immediately for a profit, recently got angry at the developer when they reduced their asking prices on the next new phase they were building. The investor then demanded that the developer reimburse him for the difference in price. But interestingly, the investor felt no need to offer to reimburse the developer for the profits he had made from immediately selling the previous model homes for higher prices.

When someone is investing in model homes, that's an investment where one is normally paying a very "retail" price for their investment property purchases. But when you add to this the ongoing demand and expectation of immediately being able to re-sell these homes for a handsome profit, you get a picture of just how really crazy this real estate market has become.

No one can say for sure where the real estate market is headed, but when the market is inundated with so many people thinking that all they have to do is purchase any property and they'll make easy money on the appreciation, this could definitely be a major warning sign for us. And when you add the following additional warning signals, too, it becomes even more important for investors to exercise caution...

Appraisers have been going public about the fact that they're under tremendous pressure to justify continued higher prices in their appraisals, and the government is now demanding answers. With this in mind, I can only imagine what a little pressure on appraisers to be more conservative could do to curb a good real estate market. Most of us remember what happened with the savings & loan scandal years ago, and I'm sure there are a lot of people who would like to take the necessary action right now to ensure that something like that doesn't happen again.

In addition, the government has now begun investigating brokerage companies, title companies, and lenders for the payment of illegal kickbacks in our industry, too.

And on a topic that could have ramifications for our overall economy, top investment experts on Wall Street are predicting that gasoline prices here in the USA will reach $4.00-$5.00 a gallon within the next several years. And one of the oil industry's most respected investment bankers says that he sees the price of gas ballooning to $7.00 a gallon in the years ahead. There's simply so much more demand for petroleum from expanding economies in Asia these days, and we now have a worldwide level of competition for petroleum that we've never experienced before. In addition, the oil companies are not having an easy time finding new sources of oil to meet this demand either.

While what these oil experts are saying may be speculation, and it may never fully materialize, do you still think it may be wise for some people to be a little more conservative with their real estate investing nowadays? I mean three years ago how many of us would have ever imagined that the price of gasoline would be what it is today? With this in mind, it doesn't take a genius to project where the price of gas could rise to over the next 2-5 years either. Especially when some experts are already telling us where they think it will go. And if these projections are accurate, what kind of an impact do you think this could have on both the economy, and on the real estate market as well?

As an example, in the area where I live many people commute 2-4 hours roundtrip to work each day to the major cities in Southern California, and I can only imagine what something like this could do to a family's cash flow. I'm sure this could then increase their desire to live closer to work, which could then create its own impact on the demand for housing in our local real estate market.

In going back to what I wrote at the beginning of this article, I'm clearly not writing about all of this to increase my popularity. There are a lot of people out there who don't want to even consider these possibilities, and it would be easy for me to appease them simply by not writing about them. And I'll probably be hearing from some of them when they read this article, too. I'm instead writing about this as a warrior who has been through the up and down cycles in our business, and I'm also writing as a wakeup call to help you position yourself in the best way possible should any changes begin to materialize in your market.

In looking back at the two dramatic down cycles I've experienced, they both began the same way. With a gradual slowing of demand by buyers to no longer purchase properties at the same crazy, frenetic pace. So as an agent immersed in the marketplace, you may have the advantage of being among the first to recognize any change in your market before the rest of the public even sees it. But most importantly, you may want to avoid buying any properties that rely on ongoing appreciation in order for the deal to still make sense to you. And make sure that any properties you buy are based on sound fundamentals that will weather potential readjustments in the economy, too.

We all hope that this real estate market will continue for years to come, and that we'll never, ever experience another downward trend. But as intelligent real estate professionals, we should still be prepared anyway.

As real estate agents, we have to continually think positive in hot markets, normal markets, and in markets where we have great difficulty finding anything to feel positive about. But it's positive thinking combined with sound decision making that will both have us produce the results we want to achieve, and have us lead the lives we've always imagined for ourselves also.

Click here for downloadable E-books and live audio interviews with top-producing real estate agents. These interviews are with industry experts who show you exactly what they do to continually make hundreds of thousands to millions of dollars a year.

2. Be Careful When Discussing Politics with Your Clients

Politics is an extremely sensitive subject these days. It seems a bit less sensitive now that the recent elections are behind us, but still a lot of people feel very strongly about their political views. And with this in mind we have to watch ourselves to make sure opening our mouths about our own political opinions doesn't cost us a lot of money.

As an example, think of a politician, a political opinion, or a cause that you feel strongly about. Now imagine that you're doing business with a salesperson who seems like a nice person, but all of a sudden they express a strong opinion that is the exact opposite of how you feel about this subject. Perhaps they say some negative things about a politician you admire, or they voice their opposition to the exact same cause that you feel so strongly about. Well, now how do you feel about doing business with that salesperson?

I'd like to give you a couple of examples of experiences I've had in this arena over the past year. One of them involves an article that I wrote, and the other one involves something a salesperson did while trying to sell me a Web video marketing service.

First of all, let me talk about the one that involves the article that I wrote.

In June of last year former President Ronald Reagan passed away, and I thought it would be a good idea to write an article about him in my E-newsletter. I always felt that the man had tremendous communication, speaking, and presentation skills, and I wrote about these in my article. And since when people pass away it's normally a time when we focus on their good qualities and positive accomplishments, I wrote my opinion on what I thought some of these were during his Presidency, too.

Well, the only E-mail I received about the article was from people who didn't like the fact that I found any positive qualities about Ronald Reagan at all. They were very adamant about this, and in some cases recited a long list of all the things he had done that they strongly disagreed with.

Now keep in mind that it was not my intention to make a political statement or opinion in the article. But that's what my article ended up communicating to some people. I was simply trying to pay my respects to a man who was President of our country, and who had recently passed away. I was also trying to make a connection between great presentation and communication skills, and how much of a difference they can make in a real estate agent's business. But I learned that through trying to do so in an article about a politician, the message could get lost and replaced instead by some people's anger towards the politician himself. And truth be told, I'm not normally a big fan of most politicians anyway.

The second incident was one that happened with someone trying to sell me an Internet Web video marketing service. First of all, the person had previously sent me examples of their service, and quite frankly I thought that the visual quality of their video was poor. But being a good salesperson, the other person person still E-mailed me once a month or so just to see if I might change my mind.

Then, about two months ago, the person E-mailed me a link to a Web site to look at another example of how their video service could be utilized. And when I clicked on the link, it took me to a site showing a video that blatantly trashed our country's government in a highly defamatory manner. Now regardless of what one thinks of our government, as I'm sure we all have those aspects we both like and dislike, I couldn't believe that the salesperson was marketing his service to people in the real estate community by intentionally sending people to this site. There simply had to be a better Web site he could have chosen that would probably be more in rapport with people in the real estate community. So after first of all not liking the visual quality of the service he was offering me, I now had an opinion of him as being completely clueless at marketing also. And I don't know about you, but I find it difficult to want to do business with people who I feel make very poor business decisions.

So in moving forward in your own real estate business, discussing your political opinions with your clients and prospects can be a touchy issue. If you choose to venture into this arena, you'd better make sure that your opinions are in agreement with the people you begin telling them to. Unless of course you feel it's more important for people to know where you stand politically than it is for you to successfully be doing business with them.

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Larry Crumbley, SIOR, CCIM
Fickling & Company

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