Over Promising Under Delivering

One of the major problem of our industry is the over promising and under delivering or what some people would call bait and switch. How many times do I hear from real estate professional that they were offered this great financing deal, but that it did not happen for one reason or another. I was going to call this post the disease of our industry, because, I believe that bait and switch is really a problem that we all have to deal with. Over promising under delivering provides people with not very realistic expectations this affect investors, borrowers and all of the different parties involved.

From an investor stand point we know that when something is too good to be true it will come back and be hurting us one way or another. After speaking with a friend of mine this week and after reviewing his investment and valuation, we came to the conclusion that on one of his investment he was going to lose couple of hundred of thousands of dollars. Originally the deal looked great, well only if you look at it from a stand point that everything will ever be perfect. Since I regard every deal from a number stand point, I was even wondering how he could have made the investment he did. If there is something to remember here, is that if we rely on verifiable numbers, as investors we would have fewer chances to get burned.

Real estate professionals have also a duty to their clients to be realistic and be able to do their due diligence. Numerous professionals try to get financing done at the lowest cost imaginable, even if it does not appear reasonable. Today we have two types of lending in commercial real estate, Federal Government backed financing or private lending. Anything in between does not really work. Some private banks are making limited deals but that's it. A Government backed financing will get your borrower financing between 5% and 7%, a private financing deal will be between 9.75% and 12.5%. Getting a private money loan at 9% does not exist even if it is promised. A 9% private money loan will turn out to be between 10% and 11%. A conventional commercial loan that does not meet government backing criteria will most likely be impossible to approve. The lesson for me here is for everybody to be realistic.

Once or twice a week, I get a call from a real estate professional who asked me about a client that need financing on a great deal. The property is being sold under value and borrower wants 100% of purchase price since it is either a property owned by a bank or litigated by a court. When I receive these calls, it always makes feel uncomfortable because clearly the person calling me does not understand the reality of real estate today. I would encourage all the professional to make sure they have an understanding of the market and do some homework.

Last word, when it is too good to be true it is too good to be true.

 

Facts Or Fiction

In today's real estate market there are a lot of rumors, miss understanding and half truth. In my last post I mentioned that there were great opportunities to be realized, understanding these opportunities is more complicated than it first appears. I spend my days looking at demand for financing, at trying to understand where our capital is going to be invested and what are good investments and what are not. Because of my work, I come across a number of half truths, miss information but also about opportunities, for example buying notes and assets from banks etc…

One of the most challenging aspects of looking at investments today is to differentiate reality and fiction. One of the biggest fictions that go around is the belief both by real estate professionals and others that their market is special. How many times I have heard, " the industry is not doing well but our specific market is not affected" or act differently from every other markets. From San Francisco to New York, from Seattle to Miami contrary to facts a lot people believe that their market will act or is acting differently. This idea of exceptionality is fuelled by anecdotes and rumors difficult to debunk.

Other fictions are related to properties real values, availability of capital, the number of people that can afford to buy certain property types, valuation methodology etc... The facts are more rational for example properties values will be base on either and/or the income it generate. Capital availability is limited it does not matter the type of property people have, its location, the financials etc… Higher end of the market is not affected by downturn, as we are seeing the downturn affect every market segments and property types (residential and commercial).

As a private investor, working for a private investment fund it is important to be careful in the way we look at opportunities. Today we have one truth when looking at a funding, an investment or a transaction we are negotiating, it's all about the income of the property. This income approach applies primarily to commercial real estate, however, residential deals are also evaluated in part this way.