“This is the biggest fool thing we have ever done. The [atomic] bomb will never
go off, and I speak as an expert in explosives.” – Admiral William D. Leahy in 1945
Want to find a good investment? Don’t call a real estate agent. Your chances are one in 20 you’ll get someone who even has a clue. The same goes for stock brokers. Ninety-five percent of them are salesmen. They’re not investors. They wouldn’t know a good deal if it bit them on the seat of their pinstriped pants.
Here’s the number one job of real estate agents: to help someone buy a property at the highest possible price. The higher the price, the more money they make.
Here’s your job as a real estate investor: to buy a good property at the lowest possible price.
See the disconnect here?
Now, the fact is many real estate agents do indeed provide a valuable service. But they provide it on a retail level for people who are buying homes for themselves. It’s only the rare agent – perhaps five percent at most – who understands what an investor needs in a deal.
What do you need?
To buy below market value when a market is fully valued and to buy deeply under market value when a market is overvalued. In most cases, you should also buy at a price where the property cash flows with a margin of safety built in. (That’s even if you only intend to flip the property and never intend to rent it out.) You should also fix your interest rate for longer than you intend to own the property.
Follow these simple rules just for starters, and your chances of losing money are slim while your chances of making money are much greater than for the chase-the-market, buy-and-hope speculator crowd.
Unfortunately, many beginning real estate investors don’t get it. I met two last weekend who are both holding negative-cash-flowing, brand-new condos no one wants to buy. These women don’t know each other and they’re in different cities. Yet they’re both in bad shape thanks to pre-construction deals sold to them by brokers at the height of the boom. “Pre-destruction” would be a better name for them.
To make matters worse, their real estate brokers put them in touch with mortgage brokers who helped them get loans that would make the properties more “affordable.”
Both women are now holding their cash-flow-negative properties with neg-am loans. That’s where you make your minimum payment on time and the amount you owe goes up month after month. What’s more, they’re usually adjustable-rate mortgages. So they start with an introductory rate (a.k.a. “sucker’s rate”) and then climb like a monkey.
Here’s some more broker baloney some investors fall for: They take the “economic forecasts” of broker trade groups seriously. The National Association of Realtors, for instance, probably has over 100,000 members. They also have a powerful PR machine, and they have a guy they call their “chief economist.”
His name is David Lereah, and he’s quoted all the time in The Wall Street Journal, business mags, the business sections of all the major newspapers, you name it. But don’t be fooled. He’s about as independent as Fidel Castro’s economic advisers. He’s expected to spout a party line and that’s just what he does.
That’s also what a lot of other real estate organizations do. They’re always saying “buy”… but almost never talk about buying right. Yet that’s the most important thing.
For instance, here’s something from a March 13th press release from the Florida Association of Realtors:
“It’s official: Now is the time to buy a house, according to a UF study, noting that the market has probably bottomed out, and ‘there’s not much to be gained by holding out at this point.'”
I think UF stands for the University of Florida, but it might as well stand for Uncle Fester. Good investors don’t rely on market forecasts, official or otherwise. You have to make your own call there. And if you buy cash-flow properties under market value, even if you’re off on your market call, you can still make good money – because you bought a property that can pay for itself and you bought right in the first place.
Here’s the bottom line: Some realtors are excellent for investors. I work with a few, and so do quite a few investors I know. But they’re few and far between. Most realtors are not experts on value. That’s your job. You have to know what a good value is. Then you can tell brokers what your criteria are. If – and only if – they’re interested in looking for deals for you that meet those criteria, then you’ve found a valuable ally.