How not to Buy and Sell Real Estate – Learning from Our Mistakes
One real estate cycle is ending. Another is about to begin. Are we smarter now?
Palm Coast, Florida – May 31, 2009 – Real estate markets are cyclical. The most recent downturn was the worst in my lifetime (I’m 65). Unfortunately we can’t do it all over again but if we could, what would we do differently? Certainly we don’t want to make the same mistakes again.
People ask me how I would describe the present real estate market. I tell them that we are at the OPPOSITE of whatever Irrational Exuberance was. Properties are selling at prices as far below their intrinsic value as they were selling above their intrinsic value 3 – 6 years ago. Buyers are reentering the market at very attractive price levels. Let’s try to get it right this time.
Lessons
Buying at a Sales Launch Event makes as much sense as selecting your spouse at a Viagra Party. Launches are designed to be events, often lavish ones where a sense of competition for a limited number of properties fosters a sense of urgency. Planned amenities are depicted. Lifestyle is promoted. Free food and drinks are plentiful. You may be told, but not in writing, that there are huge profits for those who get in at the pre-launch or pre-construction prices. You don’t worry about the association fees or club dues – they won’t be payable until the golf course is built or until the roads, etc. are done, perhaps two years. You plan to flip your property long before then. The greater your sense of urgency, the greater is your risk of making a big mistake.
The buyer doesn’t care how much you paid for your property. They also don’t care how special you think it is or how much money you need to get out of the sale or how much you have spent to carry the property. Nor do they care if any promises were made prior to your purchase and later broken. They don’t care. The only thing that matters to the potential buyer is what it is worth to them. Get over it and price accordingly.
If it’s important, get it in writing. Failure to do this is the biggest reason disgruntled buyers file lawsuits that they probably won’t win. If you cannot reach a written understanding with the developer or seller, you are open for trouble down the road. And while you are negotiating, take off you happy ears. You can’t expect the seller to be honest if you can’t be honest with yourself.
Don’t fall in love with your assets. Sellers are always the last one’s to know that the market has gone potty. If you are selling in a down market, don’t follow the market down. Get ahead of it. Even if your property is the lowest priced listing in the area, if it’s not selling, it’s still not low enough. Meanwhile, the market continues to drop in front of you. Price aggressively or suffer the consequences of continuing carrying costs and additional price reductions (all too late). It doesn’t matter what similar properties are listed for. The ONLY thing that matters is what similar properties are SELLING for. If a similar property closed today, remember that it sold (signed sales contract) a few months ago. If the market is dropping, true selling prices are already lower than that.
Because you paid $50 thousand more than the seller paid only a few months ago, you cannot assume the person behind you in line is going to do the same. Developers do not create speculators any more than casinos create gamblers. Casinos are built because gamblers already exist. When the music stops, what will you do if all the chairs are gone?
You can’t call your realtor and tell them to "sell my property at the market first thing Monday morning." It may take months or years. Real estate is not liquid like stocks. Are you prepared to carry the ongoing costs? And if your investment is in one of the gated or condominium communities, carrying costs include association fees and possibly club dues. (Understanding the Risks/Rewards of Investing in Gated Communities)
Just because someone is willing to lend you a lot of money is not sufficient reason to borrow it from them. If you learn only one lesson, let it be this one. Leverage can be good on the way up but unmerciful on the way down. When I sold my last piece of investment property, I (as the seller) had to show up with a check. Yes, there has been some fraud and deceit, and some people were harmed terribly by it. But for most of us who made mistakes or suffered losses, it wasn’t someone else’s fault. We got a little too greedy, a little too confident, and a little too reckless. We gambled and we lost.
Spend more time researching the details of your real estate purchase than you did researching your recent HDTV purchase. If you wait till you get to the closing table, it’s too late. You will be signing or initialing piles of forms within the scheduled hour. If you don’t sign, you don’t get the house. So do your homework before the closing.
Have I scared you? A little bit, I hope. We are at the beginning of the next cycle of wealth creation. I doubt the next run-up will be as dramatic (hence less risky) as the last one, but we should still be careful. Understanding the risks can help us avoid most of them. I hope we can all enjoy the next ride up together. At my age, I’ve probably got only one cycle left.
Painful to Hear
Great commentary, Toby. Painful for peole to hear, but true.
I love it!
People had been asking me what is the market like and I’ve replied "it’s a muck". I’m changing that to "it’s in the potty". 🙂
Does seem that we are at the leveling off point. Now if we can just get those doing bpo’s to be a wee bit more honest in their evaluations we might level off a little more quickly.
Very good, Toby
And a needed commentary I think. I am forwarding to my sister who is looking (not locally but your advice still applies!) Thank you.