Commercial Real Estate Investment Specialists - The Wellspring Investment Network

Bottom's Up

noreply@blogger.com (Dike Drummond MD CPC) — Thu, 26 Jun 2008 23:26:00 +0000

Head's up ... I am going on record here and calling the Nationwide Residential Market Bottom in April, 2008...

Here's why...

If I look at a sampling of places that have suffered a real "smack down" in prices .... places like...

2007 Median SFR Prices compared to 2006

Detroit - Down 56%
Sacramento - Down 34%
Las Vegas - Down 23%
Ft. Myers, FL - Down 29%

These select markets can serve as the "Canary In The Coal Mine" for the rest of the nation.

When these markets collectively start to turn around ... you know the rest of the nation cannot be far behind.

According to an article in yesterday's Wall Street Journal, all four of these markets turned in April. As did Contra Costa and Riverside Counties in California, Prince William County in Virginia and other hard-hit markets. Last month each of these markets showed a significant increase in home sales compared to the previous year. And these are Big Numbers.

Sacramento sales up 41% over 2006

Ft. Myers, FL up 41%

and first quarter in Detroit showed a 48% increase in home sales from a year earlier.

Why such an uptick...

Its all about price. We have reached the plateau where sellers - individuals all the way up to Bank REO Departments - are caving in and capitulating and lowering prices to a point where investors cannot resist.

Example:

If you search Detroit on Realtor.com for properties $20,000 or less ... you'll find over 5000 houses actually listed on the MLS. That's what I call a Bottom.

Now can you imagine a 34% median home price drop? Well it happened even in Sacramento and it's producing the increase in sales that you would eventually expect once the prices drop low enough.

For the SFR investor the equation is quite simple. When prices drop to the point where a property bought off the MLS will cash flow as a rental ... buy as many as you can. I believe we are at this point now.

What's new here is the complete sample of "Canary" markets above are following the same pattern. Now we would both admit there's a huge difference between Detroit and Sacramento, however the market dynamics are identical. The prices just have a different set point.

So I'll step out of a limb here... I'm calling the market bottom right right here in April, 2008.

I believe in the predictive power of the combination of Detroit and Sacramento and Las Vegas and Ft. Myers all exhibiting the same market bottom pattern ... this sure as heck looks like a trend to me.

Here's the Rub

What no one's crystal ball can tell you, however, is whether the market bottom will be

- A Sharp Bottom with a quick upturn and rebound of prices and sales

- Or a Long Flat Low Point with depressed prices and slow sales for as long as several years.

I am personally betting on the latter... if for no other reason than four dollar a gallon gas and the return to conservative lending practices.

And don't forget the leverage a professionally managed Apartment Complex has over a portfolio of Single Family Houses ... any day of the week ... IMHO.

Here's a link to the article in the Wall Street Journal. Read more here...

noreply@blogger.com (Dike Drummond MD CPC) — Thu, 26 Jun 2008 23:18:00 +0000

The Residential Markets are doing the equivalent of the Limbo Dance these days. The only remaining question is How Low Will They Go?

Here are three recent data points from the Press and our Wellspring Network Members showing just how bad the Single Family Residential market is in many areas of the country. I think you will see clearly why I remain suspicious that single family homes still have far to fall to hit the actual bottom in a large number of markets.

A) The Deepening SubPrime Mess

An article in last week's Wall Street Journal showed a graph of the default rates of residential mortgages based on the year in which they were originated. Talk about some scary numbers.

For Mortgages written in years 2000, 2001 and 2005

At twelve months after loan origination the default rates averaged 8%. This is considered a high default rate by the way.

For mortgages written in 2006 and 2007

At twelve months after loan origination an average of 15% were delinquent and the delinquency rate is still climbing steeply. 24 months after origination of 2006 mortgages ... a full 30% were in delinquent and the delinquency rate is still climbing steeply.

What will the ultimate Default rate be on these 2006 and 2007 loans... 40% ... 50% ... higher ?

The answer has huge implications for Real Estate and the whole economy at this point. And we are no where near the peak default rates ... yet.

B) The Investor's Credit Crunch

Many Residential Real Estate Guru's are saying this is a GREAT time to buy Pre-Foreclosures, REO properties and cheap rehabs. But even that is difficult given our simultaneous Credit Crunch.

Especially hard hit is the Residential Mortgage for the Non-Owner Occupant ... the type of loan an Investor would use to buy a house. Multiple Residential Investors in the Wellspring Network are telling me that these loans are VERY difficult to come by with one exception. If you are doing all your business banking with a local bank, they may be able to get you an investor's mortgage more easily than any regional or national lender.

HOT TIP:

If you will be needing an Investor Loan in the next 12- 24 months,

you might consider moving all of your accounts to a

strong local bank now to start building that relationship.

C) Last but not least - Foreclosures and REO

One of our network members tells me that in Houston last month a full 60% of the foreclosed houses offered for sale on the courthouse steps didn't get a bid. And Houston is not a market that is in deep trouble.

There appear to be two reasons for this.

1) No availability of Non-Owner Occupant loans as mentioned above

2) Investors know these same houses will become Bank REO properties and show up in a couple of months even cheaper on the MLS.

The Investors know that even a courthouse steps auction is asking WAY to much right now. Banks and other lenders are becoming desperate to move their inventory of REO property. Loads of extremely cheap houses are beginning to show up on the MLS in many markets.

For an extreme example...

If you search www.Realtor.com for homes in Detroit at a price of $20,000 or less you will find 5,451 listings. This does not take into account the thousands of abandoned properties that are not listed on the MLS.

So where and when is the bottom?

I still believe the worst is yet to come as the defaults on mortgages written in 2006 and 2007 move to Foreclosure. The problem is that these additional foreclosures pile on to an already terrible market where it is simultaneously difficult for investors to get a loan.

Now ... On One Hand

This could be a bonanza for SFR investors and now MIGHT be a good time to buy IF you have the cash.

AND on The Other Hand

The actual, real, honest to gosh bottom of the market may be many months in the Future. My crystal ball is as cloudy as yours. The longer it takes to hit the true market bottom ... the cheaper homes will become and the more opportunity the Credit Markets will have to recover and start lending on Investment Properties again.

Keep your eyes peeled in your local market, don't forget Multifamily and stay tuned...

Recession Ping Pong

noreply@blogger.com (Dike Drummond MD CPC) — Thu, 26 Jun 2008 23:10:00 +0000

"This time it's different". How many times have we heard that before? Usually spouted by investors sitting right at the peak of what we later identify as a Bubble of epic proportions.

Here in the Recession of 2008, the statement may actually hold true.

We are certainly seeing world economic conditions never seen before ... and it really may be different this time. Sort of feels like a game of Recession Ping Pong. Here's what I mean...

In past Recessions...
it was the Economy that went in the crapper first. General economic conditions ... oversupply and manufacturing downturns, rising unemployment and such ... were what threw threw us into a Recession. AND the Economic Recession would THEN affect the Financial Sector with rising default rates and such.

This time ...
the Financial Sector is taking the lead. The over-leveraged, easy credit blowup of lending on all levels has thrown the Economy off the cliff and into the pit of doom. And now that we are in a general Economic Recession ... the economic downturn is reverberating back in a feedback loop to drive the Financial Sector down even further.

Imagine if this were a game of Table Tennis ... Ping Pong

In the old days it went something like this

Economy Down - Ping

Financial Sector down with it - Pong

Both recover together

This time it may be different

Financial Sector down - Ping

Economy down - Pong

Driving Financial Sector down further - Ping

Driving Economy down further - Pong

All I can say is ... if this really was a Ping Pong game I am hoping for a mercifully short rally.

Then you add in several flavors of "Special Sauce" and it really, honestly may be "Different this Time".

- Oil over $120/barrel
- Worldwide Commodity prices at record levels
- Worldwide food inflation and shortages due to diversion of crops for bio fuels
- The underlying demographic of the emergence of a middle class in India and China
- The Weakness of the US Dollar
- An historically significant drop in US Home values and its negative "Wealth Effect"
- US Consumer and US Government debt at record highs

Now I am not predicting the "Economic Sky is Falling", but I think anyone who is saying the US and world economy will snap out of this recession in just a quarter or two has their head buried in the sand. And I just start laughing when I think about Bush and the $600 checks that are supposed to make a difference. BTW, someone talk to me about Republicans and Fiscal Conservatism... please.

It would seem to me that the most appropriate attitude at the moment is one of watchful anticipation. As the various markets begin to understand and adapt to the changes taking place on a daily basis ... it may turn out that we do snap out out of this recession quickly. AND it could also be that "this time it is different" and we are in for a ride the likes of which we haven't seen before.

My advice ...
Save money, work on finding new customers and newer ways to make them happy in your business, invest in stable cash flow (like apartments in selected markets) and read the WSJ and John Mauldin's Blog to keep in the information flow.

Securitization Slow Down

noreply@blogger.com (Dike Drummond MD CPC) — Thu, 26 Jun 2008 23:05:00 +0000

It's as if the Market has been "holding its breath" for the last several weeks... basically since the Bear Stearns collapse. (You may have noticed this in your neck of the woods)

The nationwide market for Multifamily Properties is still strong in the face of the residential real estate collapse. Occupancies are stable in most markets and rents are keeping pace with inflation. But not very many properties are being bought and sold this quarter. Here's the reason...

I call it the "Securitization Slow-Down"

Used to be that a lender would write a loan and then quickly get that loan off their books through Securitization. The Securitization process bundled a bunch of loans into a larger "security" and sold those to other entities as a safe way to make good income. Things just didn't quite work out that way when the underlying loans went sour.

Securitization allowed lenders to make more money by writing more loans and shift the risk to other entities. As the loans started to go bad it was the owners of the securitized loans that were left holding the empty sack ... not the ones who originated the loans. So now nobody trusts a Securitized Investment. No one wants to take on problem loans that another institution originated.

According to the Wall Street Journal ... In just the last year total assets in US Banks have risen by $1.2 Trillion ... mostly because of the Securitization Slow-Down. Lenders are not able to securitize ... so the loans stay on the books.

Why is this Important?
Well ... when a lender writes a loan they intend to keep, they go about the process differently than if they intend to Securitize it. They are more careful at every stage of the loan process. This new caution has a negative affect on your Return on Investment.
The Lenders are doing two basic things differently now

1) Lower LTV'sAverage LTV's have fallen from the 80% of the last several years to the current 75% or less. So, buyers have to put more cash into the deal.

2) More Conservative Underwriting The Lenders are moving expense estimates up and income estimates down across the board. This "new math" lowers the Net Operating Income (NOI) projections from your property ... Which lowers the Debt Coverage Ratio ...Which lowers the amount they will lend to the buyer. So, buyers have to put more cash into the deal.

More Cash Please ...
The Double Whammy of lower LTV and lower NOI from more conservative underwriting ... means it will take a significantly larger pile of cash to buy the same building now than it did just a few short months ago. Less Leverage = Lower Returns With more cash into the deal ... any Buyer's Return on Investment is lowered.This naturally lowers the price any Buyer is willing to pay.

Sellers who have been used to top dollar for their properties are holding off on their sale because top dollar is significantly lower in this market than before the Credit Crunch. Everyone ... hold your breath just like George there.

The New Old
This new, more conservative environment isn't "New" at all. It's actually a return to what is historically normal. Just like the way Price/Earnings Ratios returned to more normal following the DotCom bust. What has been distinctly abnormal is the superleveraged environment of the last several years. Lenders writing loans willy nilly knowing that they would have them Securitized and sold to someone else in a matter of weeks.

So this is not a new phase. It is more like the fashion world ... what was old is now new again. The bell bottom jeans of my high school days are back in style. Look for properties to begin coming back on the market and seller flexibility to return in the next several months as we all get used to this New-Old state of affairs.

Sooner or later everyone - even the Sellers - will realize the days of easy credit and fat underwriting are over and prices will find a new level that makes sense in today's environment.

Won't be long before the market starts to breathe again.

That was TOO close !

noreply@blogger.com (Dike Drummond MD CPC) — Thu, 26 Jun 2008 23:02:00 +0000

That was waaaay to close for me.

Looks like we were all standing on the edge of a cliff for a moment and fortunately we have taken a step back. I am talking about the collapse of Bear Stearns that ended in the buyout by J.P. Morgan over the weekend. The actions of the Federal Government showed they are clearly treating this as in impending collapse of the US credit markets. They obviously felt a Bear Stearns collapse would have taken the whole economy down with it. Just look at the numbers....

- Bear Stearns was worth $20 Billion in January.
- Their New York headquarters building alone is worth $8 per share.
- They were bailed out by J.P. Morgan for an incredible $2/share
- Total value of the deal was only $236 Million
- Remember they were worth $20 Billion two months ago ... that's just under 12 cents on the dollar ... a "fire sale" in anyone's book.
- AND the Feds threw in an additional $30 Billion in guarantees to lower the risk of the deal.
- Both President Bush and Secretary Paulson signed off on this deal. [Historical Note: The 1998 bailout of Long Term Capital Management cost $3.6 Billion]

To get the inside information on just what happened ... you have to read John Mauldin's newsletter - and consider subscribing for the best commentary on world credit and investing markets I have found. Click here to read "Let's get real about Bear" and learn why this was most definitely NOT a bailout. This is a MUST READ!

Here's the good news.Goldman Sachs and Lehman Brothers both reported earnings today that beat the street's expectations ... so the bleeding may be stopped for now. At least the fears of Bear Stearns being the first of a set of falling dominos is on the back burner now.

Expect a huge and temporary stock market surge on this news.

Bottom line: - Hoard your cash ... the buying opportunities will come.- Don't expect any loan origination to be easy in the next several months minimum.

Don't Try to Catch a Falling Knife

noreply@blogger.com (Dike Drummond MD CPC) — Wed, 26 Mar 2008 02:01:00 +0000

This is stock broker's phrase telling investors not to try to buy "bargains" when the market is in a free fall. In order to lower your risks, you let the market bottom out, even bounce once or twice before buying.

Just don't think you can catch that falling knife without getting hurt in the process.

The Residential Property KnifeResidential Real Estate Markets are in a free fall in many areas and I am going to go out on a limb here and say ... don't buy into this first wave of bargain hunters.

The thing that triggered this thought is an article in the WSJ about the "Foreclosure Bus" in Las Vegas. Seems a local Real Estate Agent couple have purchased a bus and dolled it up to tour prospective buyers around to the foreclosed properties in town.

They even have a little song they and the passengers sing as they tootle around Sin City,

"All aboard the Foreclosure Express, Climb aboard and get your houses for less"

Less than what? Less negative cash flow than caused the last owner to crap out?

The example quoted in the article looks like this
3 bed2 bath"granite counters and a small bricked yard"
$235K in 2003
$395K in 2006
for sale now by the bank at $285K
What a bargain ....

Head's up...
There's no Bounce in sight...

The problem here is you are looking at a falling knife with no bounce in sight.

This residential splat is not due to bottom out until mid 2009! This is not even the midpoint of the projected meltdown in single family houses. If you do buy a "bargain" now, here are some questions that you might want to answer before you sign the contract...

- What lender are you going to use?
Don't believe what they are telling you about loan terms. We are in a major credit crunch. Until you get to the closing table their rates and LTV's are very fluid and they may drop you altogether at any point in the process.

- What rent will you expect to collect?
Your's is not the only new rental on the market so watch for falling rents and lower quality renters.

- Will that "bargain" continue to drop in value along with the rest of the market?

There is another way
I would suggest that if you are a determined single family investor you hold all the cash you can scrape up for the REAL bargains that will start showing up as more time passes and we drop deeper into the slump.

Your "Green Light"Another analogy from the world of stock brokers is that you are not at a market bottom until you see signs of "Capitulation".

The Foreclosure bus is not one of those signs. When the owners of the foreclosure bus have completely given up ...
certain that the market is so bad no one will ever buy another house again ...
when you see the Foreclosure Bus sold for scrap and mashed into a little cube by the car crusher ...

THAT is Capitulation. That is your buy signal ... your green light.

That's when you take that pile of cash and start snapping up the real bargains. In the meantime...There's always Texas multifamily...

Here's a link to the Foreclosure Bus article

The Premium for a Quality Property Manager

noreply@blogger.com (Dike Drummond MD CPC) — Wed, 26 Mar 2008 01:56:00 +0000

How much is Good Property Management Worth?

As an experienced Commercial Property Investor, you know that good property management is important, but the question remains....

Exactly how much difference can a quality Property Manager really make to your bottom line.

What is the dollar amount you can expect in return for taking really good care of your renters?

I think I have an answer for you...

Recent research offers a fascinating glimpse into exactly what premium you can expect when tenants believe you are a quality property manager. The results are surprisingly lucrative.

Real Facts is a statistics company that focuses on Multifamily in several larger US markets. They published an opinion survey December of '07 from renters in four different U.S. cities.

The purpose of the study was to determine exactly what influenced the renters level of satisfaction with their landlord.

Turns out renter satisfaction comes from the presence of "a sense of community" within the apartment complex.

And a "sense of community" comes from a number of quality Property Management factors... good renter screening, good policies, fixing the apartment units when then need it in a timely manner, etc.

Good data ... no surprises and....

Then they did a fascinating thing...

They compared the Average Rent in each market with rents charged by the owner who ranked highest in renter satisfaction in that market. So we are comparing average rents to the rents of the winner of the renter satisfaction survey in four separate markets.

Here is what they found...

You can expect a monthly Rent Premium of between $40 and $100 a month in markets such as Las Vegas and Denver from excellent property management.

In San Jose there was a staggering $450 per month difference.

--------------------------------------------------------------------------------
Let's look at the Bottom Line impact of that kind of a profit premium.

Let's say on the conservative side you get a $40 a month premium for your quality property management ...

In a 100 unit apartment building that is
- $4K per month
- $48K per year
- and at an 8 cap it equals $600K in additional property value when compared to the average quality manager. (assuming this income all rolls to the bottom line)
--------------------------------------------------------------------------------

Now you know exactly what quality property management is worth to you.

You may want to survey your own renters in your own complexes about their opinion of property management quality and work to improve that.

Or you can go online to services like
- apartmentratings.com
- apartmentreviews.com
and see what your renters are saying about you right now.

BOTTOM LINE:
Happy renters happily pay higher rent - a LOT higher rent - for a well managed apartment.

There you go, mystery solved. Now you know exactly what quality property management can be worth to you and your portfolio.

=========
Here is a link to the RealFacts press release about the study
http://www.realfacts.com/12102007.html
=========

Reason #2 for the Commercial Real Estate Lending Pullback

noreply@blogger.com (Dike Drummond MD CPC) — Wed, 26 Mar 2008 01:44:00 +0000

Well, it's been about ten days since the Bear Stearns collapse and the details on the final deal are emerging with the price offered by JP Morgan rising into the $10 range.

Last time I checked that is still less than the market value of the Bear Stearns New York office building all by itself.

AND JP Morgan gets all of the company's assetts, clients and personnel. That is quite a deal.

In my last post I talked about the general pulling out of Commercial Real Estate Financing activities seen on the street last week. I initially thought it might be because of uncertainty about continued lending given the Bear Stearns collapse.

My colleague Dennis Ryan and Morgan Capital Management in Minnesota points out another reason why the institutional money raced for the sidelines.

They saw the STEAL JP Morgan got Bear Stearns at and are wondering if their capital might be better used to snap up a similar bargain if another institution falters.

Blood in the water and the sharks are circling.

It is still a great time to be holding a lot of cash and we aren't anywhere near the bottom yet.

The Great Commercial Financing Pullback

noreply@blogger.com (Dike Drummond MD CPC) — Thu, 20 Mar 2008 23:54:00 +0000

Heard on the Street...

In wake of the Bear Stearns Collapse over the weekend there are amazing tales of a serious pullback by commercial lenders ... even pulling out of projects in the final phases of committment.

I have personal knowledge of a $35M debt package dropped by Citigroup

AND

A $6M institutional equity package dropped at the term sheet stage by GE Capital just this Monday.

The underlying project is sound as a pound and NOTHING has changed about the financials fo the apartment complex these entities were looking to finance.

What has changed is the psyche of the lenders. TOP DOWN they are scared. They don't know if what they hold on their balance books is worth even 50 cents on the dollar. So....

The order comes down from on high... "Stop all lending activity ...."

And that is what happened in hundreds of deals across the nation this week.

It better unfreeze soon or we will all be in a BIG HURT.

My two cents and I would love to hear if you have seen a similar pullback in your market.

D

Strike Three ... the Retail Bubble is Coming

noreply@blogger.com (Dike Drummond MD CPC) — Wed, 16 Jan 2008 23:24:00 +0000

We are all living through the Residential Real Estate Meltdown ...

that's Strike One.

Speculation and criminally easy credit built the Bubble and now we watch its sloooow motion bursting in the real estate sales and price numbers daily.

As if that wasn't bad enough, the Lenders and Wall Street firms created a Smoke and Mirrors Ponzi Scheme out of what used to pass as responsible Lending Practices and you get...

Strike Two - the nastiest Credit Crunch in a very long time.

Here are a couple symptoms:

Tuesday CitiGroup announced a loss of $9.8 Billion and a bail out by money from Kuwait and Singapore. They reported revenue of $7.2 billion for the quarter, down 70 percent from $23.8 billion a year earlier. That is a $16 BILLION dollar drop for the quarter alone ... and no one expects this to be the end.

No wonder no one wants to lend anyone new money ... they aren't sure how much they really have!

Ready or not here comes Strike Three...

The Bursting of the Retail Bubble

Strikes One and Two are tipping us into a Recession AND there has been significant overbuilding of Retail Space in many markets as developers chased the Residential Bubble.

We are set up for a real crash in Retail Properties.

This week bought signs of the impending collapse:

======================
1) Massive Retail Overbuilding:

In the average market Retail Space Under Construction accounts for just 3.3% of the existing stock of Retail Property.

Here are the percentages of Retail under construction in several cities as reported in the WSJ this week.

San Antonio - 11.6%

Inland Empire, CA - 8.7%

Phoenix - 7.2%

Cleveland - 6.5%

Las Vegas - 6.3%

2) Big Boys go Belly Up

Centro Properties is an Australian company and owns 674 Shopping Centers in the US. This week they announced that the entire company is for sale.

They financed a recent acquisition spree with $3.4 Billion in short term debt and are now unable to refinance as a result of the Credit Crunch.

3) Recession's Effect on Retail

Retail Profitability is uniquely tied to the health of the overall economy and Consumer Spending. It also tracks the Residential Markets most closely of all Commercial Property Types.

With the triple play of

- Overbuilding

- Residential Collapse

- Recession

A Collapse of Profitability in Retail is just over the horizon.
=======================

I would say "Watch Out" if you are in any stages of purchase or development of Retail Property.

Strike three is coming at you ... Don't swing at that pitch.

Now we all know that "All Real Estate is Local" ... and you may be in a local market where you will do just fine ... AND I advise you to carefully check the state of the larger market where you reside for signs of future weakness.

These same Market Forces do not bode well for Office Properties....

Which brings us to Multifamily...

All of these same factors play to the advantage of Multifamily Investments.

- A pool of new renters as foreclosures skyrocket

- A need for affordable housing as the economy sinks

- A shrunken pool of apartments available due to condo conversions over the last few years

- Many areas experiencing very low Apartment Construction starts

- strong rental growth projections

These forces are moving so strongly in favor of Multifamily that I am almost exclusively focused on this Asset Type for the foreseeable future.

Stay tuned for more quality Multifamily and other investments in the near future.

Heads Up:

A quick Credit Crunch "Man on the Streets" report.

You will want to adjust your acquisition proformas to get no more than 75% LTV in debt financing on your purchased properties in 2008. You might be able to get up to 80% ... just don't "bank" on it going in.

AND build financing contingencies in to your contracts to give you at least 30 days longer to close than you are used to taking in the past.

The Commercial Lender's Roller Coaster

noreply@blogger.com (Dike Drummond MD CPC) — Thu, 20 Dec 2007 23:24:00 +0000

The Commercial Lenders are like a Roller Coaster Ride these days.

You know ... slow clackety clack up to the top and then a gut wrenching drop into the loopty loop. Makes you want to Screaaaammmmm.

As Lenders choose to speed up or slow down ... you are directly affected as a Commercial Property Investor.

One month they seem to want to lend you money, the next it seems like a game to figure out the most bizarre way to deny your loan.

Lender as Problem #1

The biggest problem in any Commercial Real Estate Purchase right now is obtaining financing. It doesn't really matter if you have the Cash Cow of the Century under contract ... the Lenders are going to put you through the ringer.

Here's How I Know...

I am participating in the close of three purchases at the moment, totaling nearly 1500 units of Texas Apartments. We have been in negotiations with lenders and private equity groups for nearly three months straight on this group of acquisitions and the swings in their attitudes have been impressive.

One month they are moving forward and the next they are making impressively weird requests.

It's all because of just one thing... F-E-A-R

The lending markets are running scared because BILLIONS have been lost in the repackaging of SubPrime Loans.

The Banks and Wall Street Firms don't trust each other because good loans have been bundled with bad ones and no one can really get a bead on whether the debt they are holding is quality or crap.

They don't trust the borrowers, they don't trust anyone...

let's face it, they are having trouble sleeping at night.

Many firms have simply stopped lending completely in certain niches or markets. They don't trust ANY loan to perform. And its not limited to the USA.

Even overseas firms are losing billions.

I have said before that I wish I could quit writing about this stuff ...

unfortunately this "Credit Crunch" - as the press likes to call it - looks like it will be here for a while.

Buyer Be Prepared

If you are under contract on a property or will be soon, please make sure your financing is as lined up as you can make it.

- Write multiple extensions of the financing period into your contracts so that when you need them ... and you will .... they are there for you.

- Make sure your investors or other equity sources are lined up and rock solid

- Be ready for all sorts of strange last minute demands from the lender I have even seen a recent deal held up until the equity partner bought a new $2M life insurance policy with the lender as beneficiary.... go figure.

Remember "Plan B" here as well ...

Bottom Fisher's BonanzaAnother thing that has started just in the last 4-6 weeks is signs of bottom fishing.

- Larger firms are buying the assets of publicly traded builders at 40-60 cents on the dollar.

- Nearly finished subdivisions are being sold to private investors 5 - 10 houses at a time for $150K less than the asking price twelve months ago.

- Everyone and their uncle is learning how to do short sales and forclosure buys on the residential side

You may just want to hold on to your cash here as well as the real estate market sorts itself out and you begin to be able to spot the true bargains.

Bolster Your Credit Crunch Knowledge Base.

No matter what, you can't know too much about what is going on in these credit markets. Here are some very valuable resources for your further education.

***

John Mauldin has a million subscribers to his newsletter for good reason - it's the best information on markets you will find.

Here is another post on "Minsky" and why you need to know his theories on these turbulent times

- A "MUST READ".The US Credit Crunch of 2007

***

Here is a post about a swiss bank that is taking a $10B hit from this lending snafu.

UBS writes down another $10B

***

And here is how the Press is Spinning the Crunch

Credit crisis: Long road to recovery

Last but not least..

You will want to take a minute to check out all the quality FR_EE information at our at our Commercial Property Education site Investortours.com .

Get your Commercial Property Training Going ... here's how...

noreply@blogger.com (Dike Drummond MD CPC) — Thu, 20 Dec 2007 23:16:00 +0000

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You will find a boatload of FR_EE Bonus Reports you can download just for visiting

- "35 Reasons You Should Invest in Commercial Real Estate"
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Residential Real Estate Divine Intervention

noreply@blogger.com (Dike Drummond MD CPC) — Thu, 20 Dec 2007 23:12:00 +0000

Remember the last time you saw a priest in an old black and white movie? Sooner or later he was going to say, "Saints preserve us" in an Irish brogue.

Now we have home sellers in markets across the nation calling on the same divine intervention...

With housing sales falling 8% in September of this year to a seasonally adjusted annual rate of 5.04M units -- the lowest level in 10 years -- residential sellers are looking for miracles to sell their house.

The latest craze reported in last week's Wall Street Journal is actually calling on Saints Joseph and Jude to help get an offer on your house.

Here's how this supposedly works...

St. Joseph is the patron saint of carpenters and has long been associated with household matters. Now the urban myth has it that St. Joseph will obtain a quick and generous offer for your listing if you bury him upside down in the yard !

St. Jude is the patron saint of "hopeless causes" and some doubly faithful sellers are tossing one of him in the hole as well.

Websites are sprouting up offering St. Joseph "Kits" ... proving yet again that no one ever lost money underestimating the taste of the American People.

They basically consist of a plastic figurine and a set of instructions on how to bury him.

Just in case you have a house languishing unsold and would like to put a saint or two on your side ... here are a couple of those websites.

1) Statues are 25% off here or you can by them 24 at a time:http://rs6.net/tn.jsp?t=takajgcab.0.0.zfvxytbab.0&ts=S0295&p=http%3A%2F%2Fwww.goodfortuneonline.net%2F

2) This one even calls St. Joseph the "Underground Real Estate Agent":http://rs6.net/tn.jsp?t=takajgcab.0.0.zfvxytbab.0&ts=S0295&p=http%3A%2F%2Fstjosephstatue.com%2F

3) This site gives the history of the practice of burying St. Joseph to sell your house:http ://www.luckymojo.com/saintjoseph.html

4) Lastly, this site gives detailed instructions including several prayers - in both English and Latin - as you cover him uphttp: //www.fisheaters.com/stjoestatue.html

This is just another sign of how far the residential market has sunk recently. Unfortunately we are nowhere near the bottom and the Fed is just as scared now of a Recession as it was the last time it cut rates.

How long will the residential swoon last ...

everyone's crystal ball is too cloudy for a prediction. Until it does make the turn, let's pray for all the residential folks who have property for sale and keep looking for those select Multifamily markets that will turn out to be the biggest winners.

A Spicy Apartment Profit Recipe

noreply@blogger.com (Dike Drummond MD CPC) — Thu, 20 Dec 2007 23:08:00 +0000

Remember the last time you tried a new dish at a good restaurant and it opened your eyes to a whole new set of tastes.... like the first time you ate Thai food or your first piece of coconut cream pie. Mmmmmm.

That's how I feel about finding a new business plan.

Weird hunh? I'll admit it ... I am a business plan junkie. I am also a pretty good cook. I love to learn new ways people are making money in real estate just as much as a really good new recipe.

I learned a real spicy new "Profit Recipe" this week.

I have a friend who has made over $1M in the last several years working the following business plan in his spare time.

1) He finds apartment complexes with upside in the form of vacancies, renovations that are needed, high loss to lease

2) Buys them at the right price using his own cash as the down-payment

3) He purposely takes no cash flow from the operations of the property and instead pumps every dime of profit back into capital improvements to upgrade the building. He constantly looks to upgrade the quality of every aspect of the property

4) My friend even says that he raises rents with the hope that a certain number of tenants will move out so that their units are available for rehab. They aggressively upgrade the vacant units and raise the newly remodeled unit's rent even more

5) His goal is to force just $1500/month in increased income from the property over a 12 - 18 month holding period. Do your calculation and $1500/month in increased calculation at his market's 6% CAP Rate is a $300,000 profit

6) Once he has achieved that goal, he sells - usually at the same CAP Rate as he bought the property

7) He does a 1031 exchange of his profits into the next property and does it all over again

Here is the special sauce...

He is a Real Estate Broker and gets commissions on both ends of the deal. While he purposely does not make money off of the property's cash flow, he does make a commission on both the buy and the sell of each property in this daisy chain.

Please Note:

This plan works for him because he has additional income sources and businesses that pay for his monthly living expenses. He doesn't need cash flow; he needs the large amount of depreciation the property spins off to write off his existing income.

This is a fantastic example of the flexibility of investing in Commercial Real Estate.

This "Recipe" is specifically tailored to my buddy's financial situation.

Commercial Property is just like Thai Food ....

so many flavors, so many recipes.

One more thing...

He tells me the only change he would make is to get a cost segregator consult and accelerate his depreciation deductions even more.

This is a tasty business model for you if you have substantial income from other sources and are looking to simultaneously build your Commercial Real Estate Portfolio and shelter some of your income from taxes.

Even tastier if you are a real estate agent or broker and can pump up your returns with sales commissions.

Take another look at this unique "Recipe" for real estate profits and ask yourself these questions,

"What aspects of this business plan could I use to build my portfolio?"

"How can I tailor my portfolio to better match my financial needs?"

Lender's Little Shell Games

noreply@blogger.com (Dike Drummond MD CPC) — Thu, 20 Dec 2007 23:01:00 +0000

You know the old "Shell Game" ... where they put the pea under one of three shells and you have to keep your eye on the right one.

Let's talk a little about the Lender's shell games we are seeing a lot more of in the current cool financing climate.

These are tricks lenders will pull on you that can radically lower the amount of money they'll lend you on your next commercial purchase. Tricks you need to see coming from a long way off and be prepared to defend against.

The Loan To Value (LTV) Bait and Switch

Right now, the LTV Ratio may be the main number you use to estimate the amount of money you can get on a loan. You may say to yourself something like this, "I have a $2M purchase, and its a real bargain. The Lender says 80% LTV is no problem. I should be able to get a $1.6M loan."

Don't count on it and here's why ...

Once you are under contract and have presented your Lender Package to the Bank, the Loan to Value Ratio is absolutely and totally meaningless.

The LTV gets trumped by another ratio that is much more important to the bank.

That's your Debt Coverage Ratio (DCR).

Here's the basic formula:

Debt Coverage Ratio = Net Operating Income / Annual Loan Payment

Debt Coverage Ratio for most lenders needs to be 1.2 or higher.

This means your Net Operating Income is equal to 120% of your loan payment.

Here's where they get you...

1) The Lender will disagree on the amount of Income you can project ... and cut it.

2) They will disagree on the amount of Expenses that you will project ... and raise them.

These two changes will take a great big bite out of your Net Operating Income.

By lowering the Net Operating Income, they may drop you below the Debt Coverage Ratio that's required for that "80% LTV loan" you were counting on. They can then legitimately come back and lower the loan amount.

If you don't do something to change their thinking you only have one choice available ... bring more money to the closing table.

The Lender's thinking has nothing to do with LTV.

The negotiations will always center on your Net Operating Income. So rather than quietly give in to their little shell game of moving targets, you have to be willing to defend your projections of Income and Expenses in order to get the loan that you want.

Be ready to build your case like a lawyer.

- You may need to link arms with your Loan Broker and go back to the Lender several different times with market data to support your Income figures.

- You may have to have link arms with your Property Manager and supply information to support your Expense data.

AND remember, all this negotiation will come down in the last 10 days of the purchase process.

Be prepared to go down to the wire to get the numbers you need. And make sure your contract has a built in extension of the financing period. (take a peek at your standard purchase contract right now and check for a financing extension clause)

So when you're looking to buy your next property, start thinking like a banker.

Don't count on Loan to Value Ratios.

Be ready to defend your estimates of Income and Expense so that your Net Operating Income will support a Debt Coverage Ratio that gives you the money you need.

The Fed's Scared and You Win

noreply@blogger.com (Dike Drummond MD CPC) — Thu, 20 Dec 2007 22:56:00 +0000

Last week the Federal Reserve cut both the fed funds rate and the discount rate by 50 basis points. The Markets loved it and everyone had smiley faces on. There is just one problem...

The Fed only makes cuts of that size when they are very scared of something.

Curious that the cut was enacted at the same time that the Fed chair Bernanke was also saying publicly, ""It is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions."

Bernanke clearly wants the losers in the Sub-Prime meltdown to take their lumps.

Instead he justified this large rate cut by saying it was in order, "to try to get out ahead of the situation and try to forestall potential effects of tighter credit conditions on the broader economy."

What "situation" is the Fed scared of? In one word ... Recession

What he is essentially saying is, "Look ... this rate cut is not for you folks losing money on bad mortgages and their derivatives, it is because something supremely nasty is on the horizon and we want to soften the blow."

I can imagine the Chairman cringing as he checked the 1/2 point box, hoping the wall street traders didn't interpret it as a bail out.

Here's why they are scared...

Several Fed Governors, including Fred Mishkin, are predicting a whopping 10-50% fall in single family housing prices depending on the market.

This lays a double whammy on the economy.

1) Consumer spending will be dramatically slowed because consumers will no longer be able to tap their homes for equity. The "Wealth Effect" caused by the run up in home values in the last 5 years is officially dead.

2) The fallout of the Sub-Prime collapse is only just beginning.

If you examine the amount of "at risk" loans on the books, only 10-20% of the foreclosures expected have actually occurred. This is just the beginning of the ripples.

Our job as investors is to find the Commercial Real Estate "Silver Lining" in the coming Recession.

Wait... look in the footnotes of the Fed's discussion and it is right there...

With so many former home owners now flooding into the rental market and rental availability tight in many cities, the Fed governors expect rental rates will climb steeply... approaching 4% annualized in the last quarter of this year. AND vacancy rates will fall.

Bernanke himself is indirectly telling us to buy Multifamily.

Compare the positive expectations for Apartments to the effect a nationwide Recession would have on the Retail and Office markets.....

With the Fed's crystal ball telling us macroeconomic forces point to an explosion in rental demand ... its time to go into Multifamily buy mode.

Now its not all milk and honey... you will have to put up with a little more hassle to get the loan - for the moment - AND it will be well worth it in the long run.

Bozo the Banker

noreply@blogger.com (Dike Drummond MD CPC) — Thu, 20 Dec 2007 21:54:00 +0000

The relentless drumbeat of downer Real Estate News continues going on and on and on....

Hey, I'm as tired of it as you are AND we are most likely at only the start of a sustained down market in Residential Real Estate.

Notice I said, RESIDENTIAL REAL ESTATE.

Don't let the Press convince you that ALL Real Estate is poison these days.

That's the main problem with the news media. Just like politicians they always push to make everything Simple and Sensational. "Real Estate used to be GREAT and now it is part of the Evil Empire"

Well, you and I know there is no such thing as a single, monolithic Real Estate Market.

Every niche in every area is different... especially in Commercial Properties. Apartments in Texas are very different than Office in Portland or Retail in Boise.

The problem is Bankers who used to lend on everything, now have trouble spending a quarter on a gumball.

Bozo the Banker

This week it got personal for me.

If you wondered how the banking/lending crisis might affect your investing ... read on and I only hope this does not happen to you.

We are building a four station home office in a big barn on our property. I applied for a $50K unsecured business loan at my local bank to allow me a couple years to pay off the construction costs.

I have $210K in deposits in various accounts at this bank, a fat net worth and a credit rating well north of 700.

They flat out turned me down.

When I asked why, my local bank officer said that the bank's underwriting office - which is several states away - "Does not lend on your Business Category any more"

Here was my mistake.

When the loan application asked what kind of business I am in, I wrote, "Real Estate" Bozo the Banker nixes my loan this week, thinking,"Real Estate Bad".

Now let's remember...

That Same Banker would have lent me $250K on my first house - NO money down, with NO documentation of income and a credit rating of 550 just two short years ago. What a Bozo.

No matter what the press (or Bozo)says... remember this.....

The next 18 months will continue to deliver tremendous opportunities in Commercial Real Estate in certain markets and in certain niches. The niche most likely to benefit widely is Multifamily.

Millions of people will unfortunately lose their homes. New lending practices mean very few will be able to buy again any time soon. Population growth continues and everyone needs a place to live. This should produce a rapid increase in the size and quality of the renter pool nationwide.

Now you will probably have to keep Bozo (the banker that is) happy with a little more money down and show a little more financial strength than you are used to.

Just factor a 25% down payment into your proforma and shout to your Broker friends and other lead generators, "Damn the Bozo's, Full Speed Ahead"

P.S.

1) If anyone asks you what your "business category" is, tell them you have an "Investment Company".

2) I got the loan from another bank ... the new offices look fantastic!

3) The picture of Bozo is an actual cover of Business Week last week.

Cut My Rate .... Please !!

noreply@blogger.com (Dike Drummond MD CPC) — Thu, 30 Aug 2007 20:02:00 +0000

"It's only when the tide goes out that you learn who's been swimming naked". Warren Buffett

I really, really wish I could stop writing about the sub-prime cesspool and its ripples into the world economy, but the stuff just keeps hitting the fan.

As an example, the world financial markets - as measured by the Dow Jones World Index - are down a full 10% from their July 16th high and the vast majority of this is because of our mortgage blowup.

AND if you have tried to originate a commercial loan in the last 30 days, you know this is a big issue.

The screaming meemies at the banks are acting as if the sky is falling - all of a sudden - and their new rates and terms are potential deal killers for you and your project.

I think it is important to understand the bigger issues, because we really are feeling the effects of forces beyond our control ... and that is not just my usual background paranoia. I mean when the Federal Reserve does a lightning rate drop like it did last week ... the big boys are on the move.

What we have seen so far is some bad news from the sub-prime portion of the lending sector and lots of PANIC from everyone else. And I would suggest that it is 3 parts Panic and 2 parts bad news.

This may be the end of the beginning...
I think the Fed cut will take care of some of the Panic out there by letting everyone know that big brother is watching and ready to help. Once the markets realize the sky is not actually falling, things might return to more normal operations.

And then again ... maybe the beginning of the end ...
The statistic that gives me the willies is that the majority of the sub-prime mortgages in existence currently do not adjust their rates until the first quarter of next year. Reminds me of the Chinese curse, "May you live in interesting times."

Hold on to your hats and in the meantime, here is another perspective...

A must read article for the back ground information on why the recent rate cut by the Federal Reserve could have been expected AND why more are likely to follow.

The authors are not real estate investors AND their perspective can teach us a lot about the bigger forces at work in the financial markets.

It's all based on history and sooo predictable. Whenever the Fed sees banks tighten lending standards to the point where corporate lending becomes restrictive ... they loosen the floodgates of cash to prevent recession.
"Why The Fed's Rate Cut Did Not Come As A Surprise"
by John Mauldin and Dr. Prieur du Plessis

Crack the Volatility Whip

noreply@blogger.com (Dike Drummond MD CPC) — Thu, 30 Aug 2007 19:50:00 +0000

Now is the best time to be an old-fashioned, boring Real Estate Investor and the last couple of weeks have been daily lessons in why.

The current Sub-Prime Mortgage morass that is roiling financial markets has brought into focus the dark underbelly of newer, sexier investments.

You see, every quarter investment firms battle it out to produce new flavors of investments. They create and market new forms of Exchange Traded Funds, Options, Futures, Hedge Funds and the like to both individual investors and big institutional money sources.

They are new, high return, sexy ... "don't worry about volatility ... everyone is buying them"

More, More, More ...
It is a natural instinct to grow. Investment firms profit by having more money under management.

With the current Real Estate Market downturn and China's huge trade surplus, the investment world is overflowing with money looking for a home - so these new forms of investment are easy to sell. And there are Billions of dollars at stake.

Creating the Whip ...
In most cases these investment flavors are farther and farther removed from the actual asset or company that is the true source of value in the investment.

And the farther the investment is away from the actual value, the more volatile it becomes.

It is like creating a bullwhip.
The farther down the whip you are from the handle the more wild your ride. Close enough to the tip and you get snapped off.

With these investments, Wall Street is only whipping itself
... it's a masochist's dream.

Sub-Prime Blowup Deconstructed
In the case of the Sub-Prime collapse, the actual asset is the house the mortgage is guaranteed by. And if mortgages were the only investment at stake, the only news we would be reading is a couple of mortgage companies are in trouble.

Build the Whip
But that is not what happened. Wall Street built a whip out of the SubPrime Mortgages.

The bad mortgages were bundled into Mortgage Backed Securities and then Collateralized Debt-Obligations (CDO's) and then Junk Bonds.

Each of these new creations is higher return than the last ... in a good market. And each is higher risk when things go wrong. And every one is a couple feet farther down the whip.

When the Whip Cracks
So now when the mortgages on the handle of the whip go bad, the crisis cracks the whip to cause a much larger problem in the financial markets.

The mortgage originators go down and take Banks, Hedge Funds, Bond Funds with them ... craaack ... hopefully you weren't in there too.

Grab the Handle
One of the keys to avoiding this kind of volatility in your portfolio is to grab the handle of the whip by staying close to the source of the investment.

That is why I am such a fan of Direct Investment - where you invest by actually owning the asset, not the stock or other derivative.

The easiest example of Direct Investment is in Real Estate - old fashioned, not very darn sexy Real Estate. Buy the building and you own the asset. You can do this by yourself or as a group of investors. Either way you own the asset outright.

Buy it right and manage it well and it will pay you month in and month out regardless of anything going on anywhere in the world of Wall Street.

The bottom line is my tenants still pay me rent
no matter how many Hedge Funds went belly up last month.

With your Direct Investments giving you a firm grip on the handle, you can sit back and watch the whip of market volatility snapping around the ears of the Wall Street traders ... while you sip tea on the veranda and sleep well at night.

The Sub-Prime Sh_t hits the Fan

noreply@blogger.com (Dike Drummond MD CPC) — Thu, 30 Aug 2007 19:43:00 +0000

It seems like every single day the papers are reporting evidence of more and more Mortgage Sh_t hitting the fan.

The challenge for us is this debacle is already putting the hurt to Commercial Real Estate Loans and this could be just the start.

I sincerely hope you are not in the middle of a purchase right now and trying to get a mortgage commitment.

The Story So Far ...

We are seeing the far side of an extended period of shockingly easy credit. Too much money given to people who should have never gotten it at rates they couldn't afford. THEN Wall Street piled in and securitized the high return loans with no thought about their viability.

The size of the shell game has meant the Subprime Collapse is effecting everyone.

Ripples...
- The Subprime Default wave has lead to
- A Mortgage Backed Securities crisis leading to
- A Collateralized Debt-Obligation crisis
- A Junk -Bond Collapse and
- A Credit Freeze

The homeowner wasn't the only one getting easy credit.

Earlier this year when the Blackstone Group bought Equity Office Properties for $23Billion they were able to flip billions of dollars of property the next week at Cap Rates of 4.0%.

The buyers acknowledged in the Wall Street Journal that they expected these properties to be negative cash flow for as much as two years.

You can only do that with incredibly easy lenders.

Just you try taking a loan application to the bank with negative cash flow on your proforma. I wouldn't do it, but the big boys did earlier this year and got funded.

Sounds like No-Doc Commercial Junk Lending to me.

Now the other shoe has dropped...

This week American Home Mortgage went tits up ... they were the nation's 10th largest home mortgage originator.

How does this affect you...

If you tried to get a commercial mortgage this week you already know. Loan rates jumped half a point overnight on the American Home news AND lenders are squeezing LTV's and Debt Coverage Ratios and all sorts of other things you won't see coming until the close.

If you are in due diligence now make sure you keep in touch with your lender weekly ... their terms and conditions are a moving target right now.

The Silver Lining

1) Now is a great time to be sitting on cash and looking for bargains

2) If you are a seller with assumable financing at less than 6.5% you can get a premium for your property

3) The FED is much less likely to raise rates in this environment

Watch out for more Sh_t

No one thinks this credit crunch is over and a lot of the Pundits are now rationalizing that this return to more conservative lending practices is "good for the economy".

Keep your eye on the news on these topics and give your lender a call to see what changes have come down from corporate in the last week.

Adjust your spreadsheets to take in these new expenses and think about making assumable debt a selection criteria in your lead generation program.

The SubPrime Dog Bites Us All

noreply@blogger.com (Dike Drummond MD CPC) — Wed, 08 Aug 2007 02:34:00 +0000

I am writing today with a real warning to Commercial Real Estate Investors everywhere.

The problems with Sub-Prime mortgages are biting us too - and unfortunately I think this may only be the start.

I am not just talking about the recent run up in interest rates - for some reason I actually feel better in the absence of an inverted yield curve. No ... I am talking about big changes in underwriting on commercial loans.

In response to their bungling of the Sub-Prime residential mortgage boom, bankers are changing ALL of their underwriting to a much more conservative stance. You will definitely notice it when you take out your next loan on a piece of Commercial Property.

Members of the Wellspring Network have seen increasing rates, bankers demanding drastically increased reserves at closing and even Wall Street firms suddenly dropping whole niches - such as unentitled land - like so many hot potatoes.

You can expect the tightening to continue ...

get ready to amend your proformas as you analyse new purchases.

The Sub-Prime Loans were real Dogs and now

Everyone is feeling the bite.

The bankers and loan brokers knew these loans were absolute crap - many no documentation loans were nicknamed "liar's loans" - and now we are all going to feel the pain.

Here is a MUST READ to understand just how deep and wide this problem really is.

What Wall Street did with the loans AFTER THEY WERE ORIGINATED is the Key.

The real problems with these mortgages go waaay deeper than just the current wave of foreclosures. They are having a major effect on many of the biggest brokerages, banks and pension funds in the land AND it can get quite confusing with terms like Collateralized Debt Obligation (CDO's) and Residential Mortgage Backed Securities (RMBS) thrown about with gay abandon.

The best discussion of this topic I have EVER seen is in this week's edition of John Mauldin's "Thoughts from the Frontline Weekly Newsletter".

I strongly encourage you to invest the 10 minutes it takes to read this article

and get a real understanding of this issue and why what we are seeing now is only just the beginning of the fallout

Click Here to read the article "Where is the Real Risk in the Subprime Debacle?"

Have a great summer in the sun and watch for our Texas Cash Flow Apartments as they come available

Arlington Farms Project Page is here

Password is texas4

Move the Broker Over

noreply@blogger.com (Dike Drummond MD CPC) — Mon, 09 Jul 2007 01:21:00 +0000

So you have identified a great commercial property and it's time to make an offer. Your LOI is accepted and now the serious contract negotiations begin.

How can you get the Broker out of the way so its just You and the Seller, toe to toe?

Now in my mind, the Broker's job is complete when the buyer and seller are hooked up. They bring us together and rightfully should stand aside at that point and let buyer and seller settle the finer points.

AND yet how often does the Broker become a Sumo-sized obstruction to timely negotiations when you are trying to get a contract nailed down.

How can you move the Broker to the side (where they belong at this stage of the game) and not piss anyone off?

The answer is so simple it might surprise you.

Here's how you do it...

Use a Custom Contract and an experienced Commercial Real Estate Attorney to make your offer.

Just Say No to the "Standard Forms"

There is only one way the Broker can stay in the deal after the LOI and that is if you make the simple tactical error of using the MLS/Realtor Standard Contract.

With a custom contract and your Attorney at your side, the only person you will be dealing with is the Seller's Attorney.

Now an Attorney is a different beast than a Broker

The two lawyers will negotiate amongst themselves the finer points of the contract and when they need your input, they will ask you for it. No Broker will be in the middle, running interference.

Your attorney and their attorney will be in daily contact with each other ... and the deal will get done.

When to call the Broker back in...

The Broker can still be a valuable asset under certain circumstances.

If the deal gets bogged down on a point or two in negotiations ... call the Broker back in to talk with the seller.

Remember, the Broker has a powerful vested interest in the deal going through - Money ... Cold Hard Cash. So bring them when they can apply some extra pressure on the seller to get the deal done.

The Big Question ...

Do you have a solid working relationship with an experienced Commercial Real Estate Lawyer?

If not, its time to get on the phone and find one.

- Check references

- Test them out by sending them a contract to review

- See the quality of their work and how quickly they get back to you.

AND, most of all, remember this ... they need to be a local attorney.

Make sure if you invest in Timbuktu, you use a Timbuktu attorney or you are asking to be bitten in the butt by an oversight no local Timbuktu attorney would make.

Negotiation Secrets of a Real Estate Pro

noreply@blogger.com (Dike Drummond MD CPC) — Wed, 27 Jun 2007 17:53:00 +0000

Here is a very profitable lesson in Negotiating I learned this week from my partner in Texas. It is so simple and so cool, I just have to pass it on.

Fasten your seat belt ... I call it

"Move the Middle"

There is a tendency hard-wired into humans to split-the-difference when negotiating.

When I say 10 and you say 20, our brains naturally want to meet at 15.

Some people actually use split-the-difference as a negotiating tool. They will name an outrageous number and hope that you will come half way.

There is another way...

With this Move the Middle technique you can hypnotize your negotiating partner to split the difference in your favor and move them relentlessly toward the number you need.

Here's how it works...

You just watch THEIR increments and make YOURS smaller.

This is a true example from this week...

We were Retrading a Commercial Property at the end of our Due Diligence period and absolutely needed to get a $100K credit for repairs from the seller to make the numbers work.

We made our case and asked up front for $200K.

The seller countered with $100K

- notice they came up from zero to $100K in one step - they split-the-difference ... nice start and we were only just beginning.

Our brain might have tempted us to split-the-difference again and say $150K. Instead we Moved the Middle by naming a smaller increment than this $50K drop.

We floated a request for $190K - we dropped by only $10K.

Let's see what happened...

The Seller countered with $130K

- Notice again, they moved toward us by countering our $10K increment with $30K of their own.We had successfully Moved the Middle.

We requested $180K and could feel the Middle moving our way again...

We and the Seller eventually settled on $145K and our project now works on paper ... we are proceeding to the close.

Not to shabby for a retrade and the deal is $145K sweeter in our favor.

That is how you Move the Middle

Look at the negotiation interval the other side is using and come back with a smaller one. The other side will come your direction as their natural tendency to split-the-difference takes hold.

POWER TIP:

Try this out in your next negotiation ... especially if it seems to simple to be real. You will like the results.

I Want HAIR on My Deals

noreply@blogger.com (Dike Drummond MD CPC) — Sat, 09 Jun 2007 17:25:00 +0000

I sure hope this property has some "Hair On It"
my partner says as he rubs his hands together with glee.

The "Hair" he is looking for is another way of saying Problems with the Property.

And he is actually hoping to find Problems with his investments, because in his world

Problems = Profits

I have recently partnered with a very experienced investor in "underperforming" apartment complexes in Texas and the way he looks at property flies in the face of the way most investors do their research.

He is looking to maximize his returns and that means hoping we actually find Problems ... "Hair" on the deal

The more problems - within reason - the more opportunities we have to force the appreciation of the property. The more things we can fix, the more rent we can charge.

I certainly never learned that growing up
When I was growing up, my Dad taught me to look over any major purchase with a fine toothed comb. A car, a house, a boat ... if it was a big ticket item, you kicked the tires and looked under the hood. You wanted to make sure it wasn't a "Lemon".

And if I found a problem, it was a reason NOT to buy it. I did my research to find problems so that I could avoid them.

When it comes to generating the biggest returns on commercial real estate my partner is actually hoping there are problems ... blemishes ... little hidden secrets and "issues" with the property.

The more "Hair on the Deal"
the more ways we can leverage the returns on the property.
These are what the brokers will call "A Property with Upside Potential".

- If I find out the sewer backs up every 3 months ... the price just went down AND we can negotiate a two week extension on the close to get the pipes examined and a credit for the repairs. With a new sewer lines, I can raise the rents.

- If the vacancy rate is 20% because of a couple bad tenants ... the price just went down AND when I get those two bad actors out of the building vacancies will drop and ALL the rents can go up.

- If the property has a bad reputation ... the price just went down AND we can rename it, resign it, repaint it and start a PR campaign to reposition it in the eyes of the city. With the repositioning, we will increase occupancy and rent rates.

The Multiplier Effect
Just little raises in the rent cause a huge difference in the value of the property because of the Multiplier Effect of a larger commercial building.

An Example:
- Let's say I own an 80 unit apartment building
- Using any of the three techniques above to solve a problem, let's say I am able to increase the rents by just $20 per unit
[BTW, this is called a "nuisance raise" because no one moves out over a $20 rent raise]
- 80 X $20 = $1600/month in additional income or $19,200 per year
- $19,200 in additional net operating income, sold at a cap rate of 8.5%
- is an additional $225,882 added to the value of the property

Say, "Cha Ching" one time for me

Using combinations of these techniques my new investment partner regularly produces Internal Rates of Return over 40% on these underperforming apartment complexes.

So a "Hairy Deal" is a Good Thing Because

Problems = Profits

Join the Network if you would like to invest in these kinds of commercial properties with upside

www.wellspring-network.com

To your success,

Dike

OPM - $100K in a Paper Sack

noreply@blogger.com (Dike Drummond MD CPC) — Wed, 30 May 2007 21:40:00 +0000

I hope you are having a great week and I just have to tell you a great OPM story that happened to my partner and I this month.

I swear right now this story is completely true.

I do love OPM (Other People's Money) and I bet you do too.
One of the things I teach my coaching clients is money is everywhere, you just have to ask.

Here is a great example.

My local investing partner was in visiting his Colon Hydrotherapist. (That's a fancy word for a 40 minute enema - not my cup of tea I'll tell you) Turns out that while he was "relaxing" during the procedure his therapist asked him the OPM conversation opener,

"What do you do for a living?"

[A side note: any time anyone asks you that question it is an opportunity to raise $50K or more of OPM right then and there]

He told her about our Real Estate Investing and then asked her the OPM payoff question, "What kind of returns are you getting on your investments?"

And here is what he learned ...

Turns out her dad (she is in her 40's) doesn't trust her with money and is sitting on her inheritance in the form of several sacks of $100 bills at his house. The total is several hundred thousand dollars.... just sitting there gathering dust.

Now just imagine hearing this story while you have a hose running up your backside. My partner could hardly contain himself.

Within a matter of days she agreed to a $100K loan at 10% with quarterly interest only payments on an unsecured note.

Last week her dad agreed to meet us at the bank with the cash - 1000 one hundred dollars bills in a vinyl deposit envelope. You know, the ones with the zipper across the top. It was about the size of a brick.

It gets even better

He got a flat tire on the way to the bank. Now imagine. You have $100K in a sack on the front seat and you are jacking up your rig to replace a tire on the side of the road with traffic whizzing by.

Well, he made it to the bank and it took the bank tellers a half hour just to count the notes - three times through in teams of two. Turns out there was 1001 of them ... she got $100 "cash back".

Bottom line is we got $100K of OPM we can leverage into $500K of Commercial Real Estate and it all started with a simple conversation - even though it was under less than normal circumstances (I hope).

And now she will get a 10% return on money that was just filling couch cushions last month.

POWER QUESTION:

Who could you ask about OPM that would give it to you if they only knew what you do?

Get out your Network Chart, make a list and go ask them.

To build Your Network Chart, check out my article on Power Networkingby visiting the Blog HERE.

That's all for now. Have a great week...