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A Real Estate Game Plan For Uncertain Times

First, let’s not panic…..Yet

This time last week we knew we were in for a ride on Wall Street. Today it’s getting down right scary. I admit, I’m confused. It would seem I’m in good company given the plurality of conflicting opinions and anecdotal advice everywhere. Questions abound without common answers. Who can we trust to interpret an unpredictable market. Will America unravel?  Most important, what should my game plan be if I depend on Austin Real Estate for my livelihood?

In the history of civilization, there has never been a society continually prosper with unchecked deficit spending forever. At some point payment is made or we become subject to our debtors.  America has piled up almost $10 trillion dollars of debt during the last 3 decades with no end in site. In fact, in the last two weeks alone, economist’s estimate another trillion dollars will be required to smooth out the devastating effects of Wall Street and now Main Street. Politicians are quick to point out that this does not necessarily equate into actual taxpayer debt. As long as things work out as planned (ie: AIG repays, Fannie/Freddie spring forth with new life, etc, etc..) the real number may be closer to $300 billion.  If you are a pessimist (as I am) 3xing any Government estimate gets close to reality, so if it works out as planned it could be $300Billion, and if it does not work out as planned it could be $3 trillion! No matter what the real number is, tomorrow morning you must arise and go to work in the Austin Real Estate market and make a living. What is your game plan?

I believe I’m qualified to write this blog based on the failures I have endured in the last 30 years in Real Estate investing, not the limited successes. When you loose money, you learn your lessons or you move on to another business. Anyone can make money in Real Estate as long as the market cooperates. Not so if it goes down.

So, what to do today?

Make the market preform. By nature, Investors are not well rehearsed at patience. We feel a sense of worth and productivity if we buy deals. Deals make money and money affords a lifestyle we desire. It all makes sense……until the market changes. An iron clad warning system would be nice, but unfortunately the market is indifferent to you and me. It doesn’t really care.  Since we cannot predict with certainty where the market is going 100% of the time, a sensible balance of real estate holdings is imperative.

Ex: You have 3 deals. 2 are on the market, one you are working on, soon to be on the market. The deal of the year then falls in your lap. Problem is, virtually all your capital is tied up in the other 3 deals. None are under contract but you are sure they all will sell by December. (It’s Oct 6th) To buy #4 you will have to borrow the purchase and remodel money and scrimp to make the monthly payments until something sells.

Should You Buy The 4th Deal?

No, you should not. Not because the market may turn down, because the market may turn up. Not because it’s the deal of the year and another may not come your way for a long long time. You should not buy the deal because you can not afford the deal and you can not predict the future. Who could have predicted in July-August ‘08 what we would be dealing with on Wall Street in October ‘08? How is the July ‘08 deal of the year looking in October ‘08?  If you learn to stay within your affordable means at all times, you will not only be better prepared to weather a storm, you will NOT be vulnerable to the unannounced market downturns, as we are in now.

What is your Plan B?
So, you now only have 3 deals and all are on the market. You are relieved you didn’t take on another project, in what is now a challenging market to sell in. Unfortunately you are still vulnerable. Buyers are gone, what to do now?  If this is the first time to address this predicament, the default is usually leasing the property. Not a good idea. It stops the bleeding, or at least some of the bleeding, but it presents another stressful round of events, that of Landlord (More of this in another article). Take it from a bruised, battered old timer…..Drop your price, sell the property, man/woman up, take the loss. A sale pays off the indebtedness. You stand out as a performer to your lender. Your competitors do not. You required the market to preform, and it did. You can learn a lifetime of lessons at this moment! So simply learn your lesson(s) and make up the loss on the next deal. Do not let arrogance and pride stop you from selling at this moment. It is unrealistic to assume you will always buy and sell for a profit. Many of your competitors will rent out, endure the inevitable tenant issues, balloon payments, maintenance issues, and never return to investing. You will be in the position to buy again, and you will be seasoned!

Do Not Set Egotistical Goals

Real Estate is not a business to set rigid goals. Ex - “I will buy 30 deals this year and grow at 20 % per year until I become King”. This is an efficient way to go broke. You simply do not know when a fundamental change will occur in the marketplace. With that in mind, you must be ready for it at all times. Staying within your affordable means at all times is a necessary discipline that is difficult for most. The first time you pass on a deal to a competitor who scores big, you will feel a bit puny.  Don’t cower to it. You are in business for the long term and this is a discipline you must have for longevity. I talked to Robert, a new acquittance, who put it best the other day. ” I study daily, set my parameters, and let the market come to me.” I appreciate his studious homework and admirable sense of discipline. It is working for him and he has only been in the business for 4 years.

Be wise, employ patience, and pay close attention. We are in some of the most interesting times of our lives!

Jay

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