| 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.
|
