“They understand that market position is paramount to having great investments. When too many investment dollars are chasing the same product, it often indicates that the market positioning is coming to an end. Instead of adjusting their investing criteria and settling for less, these investors simply adjust where they invest. They know that real estate is all about location. To an investor, that means the location that is most economically viable to buy right today and which will provide the longest duration of sustainable cash flow and equity growth.SIBKIS—to the seasoned investor, this means seeing the big picture and not deviating from the intended outcome. Keeping it simple means establishing your criteria and sticking to it. It means making only minor adjustments to the strategy, but never adjusting the investing criteria.”
Larry Arth for Personal Real Estate Investor Magazine
via Brandon Turner, BiggerPockets.com[April 24,2014] “On today’s episode of the BiggerPockets Podcast, we sit down and chat with a real estate investor who wasn’t seeing a lot of action in his business – until a friend challenged him to take his investing seriously and start treating it like a business….Our guest today, Tim Gordon, accepted the challenge…”
When demand heats up, so do asking prices:
Many sellers these days are waiting to trade their properties at–or above–the asking price. When demand is up, the asking price is typically influenced by an over-enthusiastic market environment. This is especially true in multifamily right now, because it’s in demand. When demand increases, so does the willingness to pay a higher price; it’s the law of supply and demand at play. In support of the highest possible sales price, a broker–with input from the seller–will put together a proforma income and expense statement to justify the asking price. A proforma is only as good as the assumptions used to create it.
The problem with most broker proformas:
The biggest problem with most broker proformas is that they typically do not take into consideration the total cost of acquiring, operating, maintaining, and selling the asset when the holding period ends; without this information, a true assessment of investment value will be difficult to achieve. The success of a real estate investment depends on 4 major things (1) it’s basis, (2) it’s financing, (3) it’s management, and (4) it’s cost at disposition. Because of these facts, the risk profile of real estate—as an asset class—is higher than a treasury bill, for example.
With a higher risk profile, a higher rate of return is justified for taking on the increased risk. Therefore, an internal rate of return of 14 or 15% before taxes is a reasonable expectation for properties like multifamily; unless you are reducing your returns in order to accommodate an equity partners’ required rate of return. An investment that offers a low return for higher risk is an investment not worth undertaking because of its inadequate compensation.
Games people play
Brokers will give you proformas without taking into account the true cost of ownership including acquisition and disposition costs. It is a half-ass approach, and half-baked idea, and yet brokers–along with some sellers–do this all of the time. In my own deals, I make it a point to explain why my offers are not where they want it to be. Typically, when I do this, they can see the logic. The reactions I get will vary depending on the character and personality of the person I am dealing with; for example, one broker’s voice suddenly went up an octave as he started talking really fast to get off the phone with me, and then never returned my phone calls or emails.
In another instance, a broker blatantly lied to me arguing that she had already received an LOI from an interested buyer at the “minimum price” the seller was supposedly willing to accept. When I withdrew my company’s interest, the truth came out. For this reason, we have had to incorporate a policy to only deal with decision-makers directly in order to avoid the greedy and costly games that some people will play in the middle of a deal to milk the most fees and commissions they can from it.