So we’ve dealt a mighty blow to the appreciation side of the equation in Part 1. Let’s talk about the costs of doing the deal
Secret # 2 – Say Hello To Your New Best Friend
I’ve already covered this in depth. The point is that an appraisal fee up-front costs a heck of a lot less than a hefty loan application fee, a Phase 1 fee, a survey and other loan costs on a property that won’t appraise.
Do you remember those real estate gurus on television or the radio that say they can show you how to purchase all these pieces of real estate and make you rich? They then go on to have all these people tell their story about how they used this real estate system to buy “x” number of properties and they have an equity of, like, a million dollars… all in the span of 12 months? Maybe there’s someone out there who’s lucky enough to do that, but there are three things they aren’t telling you.
- If they made that much money so quickly, why in the heck are they telling you about it? Are they so magnanimous? No one in their right mind gives their secrets away to create a bunch of competitors in their back yard. This truth is as plain as the nose on their face.
- What about all the other properties they’re holding that are costing them money every month? Oh, let’s just leave that out. Like every deal was home run.
- In who’s inflated opinion are those properties worth a million dollars after considering the mortgages? You’ll never see one who said they got appraisals on them and they’re worth a million dollars. No sir. It’s just phantom equity they can’t get out of their properties.
The point is don’t be one of those people. Real estate professionals… and especially
appraisers… are the cheapest advisers you can get so you don’t buy wrong and get stuck with a turkey that Mr. Obama won’t pardon.
Secret # 3 – Banking on the Bank is Like Gambling at the Craps Table
I talk to a lot of people who are excited about a buy, yet don’t have their acquisition priorities straight. What I find is one of two situations: either they haven’t arranged pre-acquisition financing or they’re overly confident they can. In today’s credit restricted environment, that’s just a crap shoot. Whether I tell them here or they find out during the due diligence process, the end result is disappointment.
Go see your local banker and put it all on the table. Look up your credit score. Be honest. What will he/she say? Would you qualify for a loan or is purchasing just a wild goose chase? Why do you think most deals in the MLS don’t close – it’s the inability of the borrower to obtain financing. Pure, simple and to the point.
Secret # 4 – Rules of Thumb Are Just Plain Dumb
If there is one thing you can say about distressed real estate in a recession is that the old rules don’t apply. I get this a lot on marinas where prospective purchases think they’re getting a bargain if they buy it for 50 cents on the dollar based on an old, inflated appraisal.
Let’s take another example. The 10 percent cap rate rule of thumb still lives and many times it’s too low. How about the 5 percent vacancy rule? Even apartments are struggling to maintain 95 percent occupancy in areas thought to be recession-proof. As for price per square foot, what’s your basis for comparison? If you haven’t looked up sale prices per square foot recently, forget about applying this now-antiquated rule of thumb.
Secret # 5 – Don’t Play Unless You Can Walk Away
This is arguably the one rule that I just don’t see market participants applying. They’ve heard about it many times but don’t apply it. Get emotionally attached to a dog, cat or mate. Don’t get attached to commercial real estate. Think and act like an investor. If the deal doesn’t give you a good first year return on investment, move on. Did you notice I said first year? We appraisers call this the “going-in” capitalization rate. If there isn’t a substantial premium over what you can get in another investment, walk away. Remember… you’re giving up liquidity, so you need a return on investment premium and if it’s not there the first year, that “golden parachute” you expect when you sell it many years later won’t be there either. Don’t be the greater fool in the greater fool theory.
If you know you won’t be able walk away from a deal before you even get involved, play the stock market instead. At least there you can get out of your transaction quickly and easily.
In Part 3, I’ve got more secrets for you.
John Simpson, MAI
