September 19th, 2009 19:56 EST
Owner Distress, Property Distress, Market Distress
Every real estate syndicator who I speak with recognizes that there`s a lot of money sitting on the sidelines that`s just terrified to move into the marketplace. But the irony is that the money on the sidelines knows that a lot of money is being made in real estate -- and the simple fact of the matter is that lots of investors just don`t know how to make it. They`re looking to the real estate professionals across the country to identify the right kind of deals to make the money.
So how do we move the money in from the sidelines?
In order to move the money in from the sidelines, you have to show the investors that you have a business plan that`s not dependent on market timing -- because the smart money knows that no one can predict the bottom of the market. The trick is to create a smart business plan for each and every property that you have an interest in acquiring. Investors will invest in smart business plans that resonate with them.
I have a specific strategy that I apply that helps me to know what kind of properties are the right ones, and the analysis is very simple.
I look for distressed assets -- properties that have problems that I can fix. There are three kinds of distress in the marketplace.
The first kind of distress is "owner distress." In a situation with owner distress, the owner of a property is on fire. That means that the person has some financial pressure, personal pressure, or other pressure that forces that person out of the market. Properties that are being sold by owners who are on fire are typically sold at fire sale prices, and if you can take a person out of their misery with cash or new financing, inevitably you`ll find yourself with a very handsome deal.
The second kind of distress is "property distress." In a situation with property distress, the building is a mess. It might have broken windows, broken walls, or a vacancy problem that`s out of control. And it requires some form of rehabilitation that a seasoned professional (with great expertise in rehabilitation) can put back together.
The third kind of distress is "market distress." Everybody knows that we`re in a situation right now where there`s a lot of market distress. Market distress is the one kind of distress that I want to stay away from. However, most people feel that market distress is exactly what they want to buy.
Since there is market distress everywhere, all of the properties are markedly lower price now than they were in the past, but when those properties will come back and be worth more is not a function of how smart or savvy one of us is. My ability to add value to these conditions is completely out of my control. I avoid situations that are dependent on the correction of markets, because I have no control personally on when the markets will come back and therefore I have no control over when a property will start to escalate in value.
My formula is very simple. I look for properties that are subject to owner distress or building distress, where I can use the experience that I have and the skills that I`ve acquired over many years in order to work a business plan that will correct the deficiencies that the owner had or that the building has.
By using a formula, the focus is on owner distress and building distress. The syndicator (a.k.a. the quarterback of the deal) can bring investors, capitalize a transaction, and then can use the skills of his team to put the project back on track, generally increasing the value of a property by 30% to 100% in a very short amount of time.
However, the trick to making money in a situation subject to owner or building distress is to turn the property over and take a profit -- not waiting for the market to rebound.
I`m a value added investor. The investors who are involved with me likewise are value added investors. They are opportunistic. In the venture capital business, those kinds of opportunities are called "vulture." Vulture investments or opportunistic investments are in trouble. We find properties that are at the bottom, not because of the market, but because of factors that we can correct.
So my advice is as follows. Look for the deals that have problems that can be fixed using the expertise of the team, and when you find those properties, profits are almost certainly going to be yours, as long as you can execute on the business plan that you put in place for that property.
This is the way that smart investors make a lot of money. Remember that more money is made at the bottom of a market than at the top. But you have to be sharp -- or work with people who are sharp. Bet on a sure thing. Find properties that have owner distress or building distress, and you`ll see more money come your way than under any other strategy that I`m aware of.
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About Joel G. Block, President of Growth-Logic, Inc.
Often dubbed a "Growth Architect" by his clients, Joel Block advises companies on explosive growth strategies by driving revenue and sales. Well known in the capital markets, Joel is a successful entrepreneur, speaker, advisor and faculty member of the iLearningGlobal community.
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