S.E.C. Real Estate Observer

• Tweet

• Tweet

Our clients, whether they are brokerage clients or investors, are reading the same thing in the newspapers and hearing the same TV reports that we are. The world is falling apart. The sky is falling. It is the worst real estate market in two decades. There is no money available to finance our purchase of a home or the construction or acquisition of an investment property. The end of real estate as we know it is near.

What is the real situation? Where are you today as compared to before last summer when this market change became evident? There is no doubt about it that some changes have taken place over the last 15 to 18 months. If we were paying attention, we knew it was coming. There was too much money chasing too few deals. Lending was loose and CAP rates had exceeded historic lows.

First, let’s look at the residential market. Equity had become a farce. If you had a pulse you could own a home. And I am not talking about a fixer-upper that someone wanted to get rid of. You could own a brand new home in a nice subdivision. In fact, it became easier to own a home than to move into an apartment. In many places across the US, it took no money down to join the ranks of homeownership and the credit check was much less than what you would have to go through to move into an apartment owned and managed by professional management. So who would not do that? In many cases, those buying the new homes did not think of the inherent costs of home ownership. And in a lot of instances, investors were swooping in to buy several new homes at a time in our area, often with no real prospects of renting them. They had unrealistic expectations of rapid price escalation bailing them out. Now the property is worth less than the purchase price and the investors and residents are walking away. This situation is readily apparent in certain areas of California, Nevada, Arizona and Florida. But once out of those graphic areas, the concentration is not nearly as bad.

On the commercial side of the business, the situation is not nearly so pronounced as in the residential market. Sure there are pockets of stress but up till now those investors in commercial properties have not seen the extremes experienced in some of our residential markets. This is mainly because of tighter lending restrictions, especially the amount of equity required to close the deal. But with the economy slowing, many product types are suffering — retail in particular.

So what do we do? What do we tell our clients? First, SECs know how to function in this environment. We have been preaching counseling for almost 50 years. In fact, this was why Dick Reno, Chuck Chatham and Cliff Weaver started the Society. The situation is not a real estate problem, it is an ownership issue. Now it is time to get back to the basics.

Take a quick look at the courses sponsored by the SEC EDF: Counseling, Formulas, Problem Solving, Broker Estate Building and more. How many times have we all said, “Oh, just give me one more bust and I promise I will not mess it up this time.” Do you think that time might be here? Be careful what you pray for. You just might get it.

I submit that there is no shortage of money to do good deals. Quit trying to force the national banks to lend to you. I get at least one call per week from regional bankers wanting to take me to lunch and explain their new loan programs. And my investors still have money that they want to place. Yes, they are more cautious but they are ready to continue the game. But they want me to know where I am going and how we are going to get there.

What was the product type in your market that enjoyed the biggest lift in the last bust in your market? In the Texas market in the 1980s, we saw residential land, with the entire infrastructure in place, trading at less than the cost of the infrastructure. We had “see-through” buildings selling for 50 percent of construction costs. And investors came in and bought notes at steep discounts.

Change and turbulence is a part of the real estate market. Embrace and take advantage of this market. Go back to Counseling 101 with your clients and investors. Quit talking and LISTEN to them. Then expect them to give you the same respect — they must listen to you. If they are not doing this, it might be best to make a change.

Ask yourself if your client or investor is really listening to you. Take a few minutes out of a busy week to review that old Counseling or Formulas outline sitting in your cabinet. Sit and think. Be quiet. Can you hear me now?