Dennis Norman
By:Dennis Norman
Right off the bat, as a result of the recent real estate market,I’ll bet a few people may disagree with the title to this post. Believe me,I may be one of those people but the title is a direct quote of a friend of mine with over 30 years experience as an investor and developer in real estate that I spent 2 1/2 hours with today discussing the market.
I spent part of the afternoon catching up with a seasoned real estate veteran that began his career as a real estate speculator,primarily buying and selling apartments and then expanded into developing new apartments,buying office buildings and developing airport parking garages. I do not have permission to use his name,so I will refer to my friend as “Joe”(original,huh?)
By Joe’s own accord,many of these deals did not work out well,but many did. I was also happy to learn that Joe’s company is surviving pretty well in this market. He has good debt service coverage on his apartments and is maintaining good relationships with his lenders;something that is not so easy to achieve today.
During our conversation Joe reminded me that although he expanded into new markets such as office buildings,parking garages,and building new apartments,that his beginning was speculating on existing apartment buildings. We then reminisced about the many speculators we have both known over the past 30 years then Joe made the comment that he had figured out what ”speculators never go broke”. I said huh? He went on to clarify himself in that he was referring to speculator’s that had stuck to their core businesses in markets they were familiar with and resisted the temptation to become developers.
Joe talked about one of the best speculators he knew,and I know as well,Sy Bailis,someone that speculated on primarily single-family homes. He said Sy,like the other successful speculators he knew,never claimed to “know the real estate market”or “where it was going”,that all he knew was on the day he bought a property he was buying it for less than it was worth at that time…By Sy’s calculations he had about 90 days max to resell the property and the sooner he did it the more it was worth.
Joe said Sy’s approach was that he would try to resell the property at his targeted price initially but as the 90 day mark drew near,lower the price to finally the point at which,at around the 90 day mark, the price was roughly equal to the price he paid for it. By using this model Sy was getting in and out of properties within a short enough time span that the market had not changed much. So,Sy’s whole business cycle was about 90 days…provided he wasn’t totally asleep at the wheel,and paying reasonable attention to what was going on in his market,it was a pretty safe model.
Suddenly this all seemed so familiar…Sy’s approach to speculating was one that I had as well a while back and one that took me through a recession as well as 17% interest rates profitably.
So why is the approach so fail safe? Simple,it is like the “pawn-shop”approach to real estate. Pawn Shops do not lend based upon what something may be worth a year or two in the future;instead they lend based upon what something may be worth in the next 30 or 60 days and make sure they turn their inventory quickly.
Unfortunately many investors (including yours truly) that may have been speculators at one point have ventured beyond into transactions that have a longer business cycle thereby increasing risk to fluctuations in the market. There are those of us that decided to move into development of new homes or apartments;projects that may take 2 or 3 years from start to finish and therefore allow the market to make dramatic changes thereby changing the outcomes of those ventures. Then,there are those investors that chose to invest in new condominiums that were yet to be built and in fact would not be complete until 1,2 or 3 years out…again,a lot of time for things to change. In the 4 years or so proceeding 2007 time was on your side…prices were increasing quickly so the longer it took for a new development to be completed,the more it was worth…however,somewhere around late 2007 that changed and the market headed south leaving many of the “long term speculators”holding the bag.
The moral to the story? If you choose to be a speculator in real estate,the safest approach,in any market,is the short term approach:buy based upon today’s values and sell,no matter what the price,within a short-enough time period (say 90 days) before the “market”can change too dramatically.
Oh yeah,don’t buy condos expecting to sell your contract for a profit….it’s a suckers bet.
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