Squish Happens

Most people believe bubbles “burst”.  When people talk about the decline of tech stock values at the turn of the century, they say “the tech bubble burst”.  Of course, lately it’s all about the “real estate bubble” bursting.  Over the last two years, The Real Estate Guys™ have taken some criticism over one of our TV shows where we said, “Real estate bubbles don’t burst”.

But we’ll stand by that.  Bubbles don’t burst – at least not as long as whatever is underneath them is real.  And there isn’t much that’s more real than real estate.

So we say bubbles are squishy.  In fact, the term “bubble” (in the context of referring to a rapid run up of prices) is really a misnomer.  Better to say “balloon”.

When you squeeze a balloon, it squishes.  It comes out the sides or goes between your fingers; it just finds someplace else to go.

So you’ve heard that real estate prices have dropped.  There’s deflation.  Equity is gone.  Everyone’s underwater.  Life as we know it is over.  It’s real estate Armageddon.

Then you see (like we did) today’s Wall Street Journal article, “Hong Kong Land Sale Raises Worry of a Bubble”.

A bubble?  Didn’t it burst?

Well, no.  Actually, it squished.

According to the Wall Street Journal:

“Government officials here (Hong Kong) grapple with how to cool off overheating property prices”.

When’s the last time you heard “overheating” and “property prices” in the same sentence?  It almost seems like an oxymoron, like “reliable copier”.

Here’s another excerpt:

“The big (land purchase) came after (the real estate developer) sold 900 apartment units in a major new residential complex over the weekend for a total of  US$541 million.”

If you do the math, that’s over $600K per unit!  In ONE weekend.  We haven’t seen THAT in the US for awhile.

More…

“In China…home prices have risen as much as 25% in the past year and land values have doubled.”

That’s this past year, as in 2009.  You know, when US prices were in their third year of decline.

Now, consider where much of the money that fueled the US real estate bubble came from.  Get it?

The bubble squished.  But if your perspective is too narrow, you might think it burst.  Especially because that’s what everyone says.  And if you think bubbles burst, then you will quit the game and hide in your FDIC insured bank account.  Meanwhile, as the dollar crashes, you’re savings become worth less and less.

We have two main points:

First, real estate is an asset class unlike any other.  It’s real (permanent).  Gold and other commodities can also make this claim so, in and of itself, being real doesn’t make real estate utterly unique as an investment.

But, unlike virtually every other investment, real estate’s value is not universal.  Real estate values vary by markets and sub-markets, and those markets are global as we can clearly see.

Compare that to gold, which is also real.  If an ounce of gold is selling for $1200, it’s the same price all over the world.  There’s no squish, except to another asset class.

To really look at it right, you can’t think of real estate as an asset class.  You almost have to think of each property, or at least each market or sub-market, as an asset class.  So when one is down, another is up.  Squish.  Like stocks and bonds, gold and the dollar, etc.

But the big thing (our FAVORITE) that makes real estate unique, is that it can be financed with bank or private funding and debt serviced by tenants.  This makes it VERY conservative when structured properly.  Why?  Because even if the property declines in value, as long as it produces enough net operating income to amortize the loan (meaning the tenants are paying down your loan) some day it will be paid off.  Then it just generates cash flow forever.  That’s a beautiful thing.  Form that perspective, squish doesn’t matter that much.

Our second main point is that right now many people are forming new financial paradigms as a result of what they’re seeing and experiencing.  The people who lived through the Great Depression came out of it with very powerful convictions about how they viewed and handled money.  There were many great attitudes such as frugality, saving; and loyalty and appreciation for the opportunity to work.  We would all be better off by adopting these attitudes.

However, many of those same people missed out on some of the greatest opportunities in modern history because they brought a lot of fear and rigidity out of the trauma of the Depression.  Many people were hyper-conservative.

To be clear, we aren’t suggesting anyone should take risks they aren’t comfortable with.  And we aren’t criticizing anyone’s personal investment philosophy – no matter how conservative it might be.  We’re certainly more cautious about the risks we take these days.

We are merely suggesting to be mindful of the temptation to be hyper-conservative in terms of your willingness to be an investor.  If you won’t invest in your education or take time to investigate opportunity, you’ve probably decided “investing is too risky” and have effectively quit.  You think the bubble burst, the game is over, and there is no opportunity.  Or it’s so far off or you’re so out of position that you’re on investing sabbatical.   This is probably not you, or you wouldn’t be reading a blog like this.  But, there are lots of people who have quit – or are in various stages of quitting.  Make sure you know who you are and that you’re honest about it.

Now is a great time to be getting started (or re-started).  Talk to the people you know about real estate investing and see what they say – and watch what they do.  How are their attitudes changing as a result of the last three years?  What’s their game plan going forward?  Ask yourself those same questions.

Remember, squish happens.  As an investor, you want to pay attention to the flow of capital and try to be on the right side of squish.  And since you know squish happens, be sure to structure your deals to survive if you’re on the wrong end of it.   We’ll be talking more about this in the future.

Most of all, make sure you take the right lessons out of this Great Recession.  The right lessons are those that make you a better investor, not those that push you back to being merely a saver or a non-participating observer.  Invest in your education.  Investigate and evaluate opportunities.  Keep your head in the game, even if you’re on the sideline temporarily.

We’d love to hear from you!  Use our feedback page to tell us how this recession has affected your investing philosophy and strategy.  What are the people around you saying and doing?  Where do you see opportunity and why?  What are you doing to broaden your horizon, increase your education and increase your network?

2/21/10: Commercial Property Update – Woes, Recovery & Opportunity

Many people think that the residential real estate crisis and its impact on banks and the secondary mortgage market have set the table for an even bigger implosion in commercial real estate.  But if you believe that opportunities often come dressed as problems wearing work clothes, maybe that isn’t so bad.

In studio today to take a look at the State of Union in commercial real estate are:

  • Your President and host, Robert Helms
  • Co-host and teleprompter operator, Russell Gray
  • Our Speaker of the House, the Godfather of Real Estate, Bob Helms

With so much focus on the residential real estate and mortgage markets, which is of much greater interest to the main street consumer and news outlets which cater to them, we thought it would be interesting to take a look at the commercial side of real estate.  Many observers think that there are dark days head for commercial properties, but what are the current trends?  More importantly, where are the best opportunities today and in the future?

We start out by taking a look at the sales and pricing trends in retail real estate.  What affect is the soft economy and subdued consumer spending having on retail occupancies, rents and cap rates?  Will money be available to purchase and refinance these properties?  Will there be buyers?  Inquiring minds want to know!

Sticking with the discussion of concerns about the availability of funding, we delve into a discussion of what’s happening in multi-family where government subsidized money has been plentiful.  With the pressure on Fannie Mae, will multi-family residential funding remain available?  What if it dries up?

Another side effect of a soft economy is financially weak or insolvent tenants.  Are commercial tenants starting to walk away from leases like homeowners are walking on upside down mortgages?  And how likely are they to accept rent increases?  It seems to be a tenant’s market right now.

Now there are lots of facets to commercial real estate and we can’t possibly cover them all in one show, so we decided to wrap up with some talk about office – and what’s happening to vacancy and rental rates in today’s “jobless” recovery.  If that isn’t an oxymoron, it should be.  It’s like saying “reliable copier”.

Of course, we can’t talk about all the challenges without remembering that problems often bring with opportunity – for those willing to think independently and outside the box.  As always, there are no magic formulas or one-size-fits-all solutions.  Challenging markets require courage, creativity and the kind of capital that comes as much from time, talent and relationships as it does from credit lines and cash deposits.  The good news is that when the going gets tough, most of the competition goes off and follows the herd to “greener” pastures.  If you believe the real estate “grass” will grow again, then it might be a good time to stake out some new territory.

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2/14/10: Hollywood Confidential – Selling to the Stars and Finding Your Niche

After a couple of weeks of avoiding foreclosure and working out bad loans, we decided to take a virtual vacation and head to Southern California.  We’re told it never rains there, plus we wanted to see how the movie stars are getting along in this weak economy.  So, like the Clampett’s, we loaded up the car to head to Beverly…Hills, that is…swimming pools, movie stars.

Riding in the jalopy for today’s show:

•    Your host, Robert “Jed” Helms
•    Co-host and Financial Strategist, Russell “Jethro” Gray
•    The Godfather of Real Estate, a very masculine “Granny”, Bob Helms
•    Special guest and more beautiful than Ellie Mae, real estate agent to the stars Sharona Alperin from Sotheby’s International

Well, the first thing we know, we’re not a millionaire…(sorry if you’re too young to remember the theme song from the Beverly Hillbillies!)…but we know they’re out there.  What we wanted to know is: what’s happening in high end real estate?  Are people with money still buying big homes?  And what lessons can we learn about dealing with high profile, high net worth people – because when you don’t have all the money there is, but there are great deals all around you, then you better find some financial partners fast!

To help unravel these mysteries we dialed up someone who is a bit of a star in her own right, real estate agent to the stars, Sharona Alperin.  Even if you think you’ve never heard of her, we’re betting that you probably have – and just don’t know it.  We got her to talk about her 30 plus year claim to fame…about half way through the show.  Yes, that’s a tease.  You’ll need to listen to find out!

Sharona talked about how she markets to and services celebrity clients.  And even though we don’t sell real estate anymore, we got lots of great insights that directly applies to real estate investing – including the important role of discretion when dealing with high profile people.

Probably the greatest lesson and inspiration is that anyone is just one relationship away from completely changing their future.  Sometimes the right people will come knock on your door, but most often you need to go out and find a way to meet them.  There are opportunities all around you if you’re paying attention.  When you see one, don’t miss it!

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2/7/10: Renegade Strategies for a Changing Economy – When Your Workout Options Fail

Super Bowl Sunday! While most people were guzzling beer (we are SO jealous), gorging themselves on chips and salsa, and cheering on their favorite team, The Real Estate Guys dedicated broadcast crew faithfully showed up for yet another edition of real estate broadcast excellence.

And with all the hype about offensive, defensive and special team strategies, we thought it would be fun to do a show on renegade strategies for property owners when lender workout options aren’t working.

Taped up and dressed out in shoulder pads, helmets and eye-black for today’s broadcast are:

  • Your Quarterback, Robert Helms
  • Your Not So Tight End, Russell Gray
  • The Head Coach and Godfather of Real Estate, Bob Helms
  • Trick Play Coordinator and Special Guest, Trustee Verification Specialist, Tyler Cohee

After the coin toss and handshakes, we kick off with a discussion about the ethics of loan agreements.  Of course, when you can’t make the payment, your options are limited.  But what about when you can afford to make the payment and choose not to?  Strategic defaults are growing in number and popularity.  What are they?  Do they make sense and if so, when?

When it’s late in the 4th quarter, you’re way behind and you can’t get your loan modified; the lender won’t forbear, your property is headed to auction; and you just need a little more (a lot more?) time – it’s time to call a trick play!  Our special guest Tyler Cohee dials up just the thing when he calls in to explain how trustee verification works. VERY interesting!

Now in the Red Zone, the Guys call several renegade plays for reducing your loan balances, holding onto your properties and gaining more control over precisely when turn a doomed property over to the lender.

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