Commercial Real Estate – Four Crucial Steps to Ensure a Profitable Investment

The game of commercial real estate could be won in many ways, and has provided many individuals a way to make some serious money. As a matter of fact, a large percentage of the worlds millionaires earned their wealth via real estate investment. While nothing is a sure thing, real estate offers numerous opportunities for the savvy investor. Whether you want to create wealth or simply sustain it, there are several methods that you are able to implement to get where you wish to be.

Where should you start?

Let us look at the investment factors involved in commercial real estate.

Commercial Real Estate Step 1: Research.

The first thing you need to understand before you can invest in real estate is an understanding of the characteristics of a real estate transaction. All of the subtleties can be taken care of by an attorney and accountant, who are well-equipped to protect you from fraud and risk. So, step one is finding a real estate attorney, and accountant who can service your requirements. Do not be concerned too much about the price, as this expense will be computed into your return from the investment. You can discover the right property, and engage a mortgage broker before hiring an attorney.

Commercial Real Estate Step 2: Figure out your budget.

How much cash are you able to invest or raise, and what return do you have to produce from that investment to make the investment worthwhile? This issue needs to be determined up front. This amount is purely subjective, and will vary from instance to instance. Some investors will apply a work-backwards strategy that looks for properties with the greatest returns. This is an unfortunate technique in that many deals that offer a good return are passed by in favor of the potential ‘home run.’

Commercial Real Estate Step 3: Determine your specific technique.

Here are the most popular strategies:

Rehab

A rehab is where you purchase a run-down building that requires lots of attention. You will then provide the necessary elbow grease. When finished, the property is returned to the market, and you produce a tidy profit, mostly from your ‘sweat equity’.

The key to this technique, of course, is to find real estate that are undervalued. Should you overpay, no matter what you do to the property, you’ll lose on the deal. Also, you ought to stay away from real estate that only need superficial enhancements. You will not make a profit if all it needs is a new layer of paint and the yard mowed. Stay with the properties that need the most TLC and you will come out on top.

Buy and Hold:

Probably one of the most common method of commercial property investment is the buy and hold strategy. You buy real estate that is valued at a fair price which will stay in your portfolio for years to come. It could be in your neighborhood, across town, or even in a foreign country. While you hold on to the real estate, the value will continuously rise. At least that’s the principle, because hopefully developments and enhancements are going on all around you. After a few years (or decades) you, the master entrepreneur, sell the asset for millions more than you pay for it. It doesn’t get a whole lot of better than this.

While there’s a whole lot of money to be produced in this type of venture, it can take a long time to mature. This really is great for someone who has a big chunk of money that they wish to sit on for a few years. There is no set time limit as to how long it will take you to win. You basically need to go with your instinct on this one. This strategy can produce an excellent return and it’s a pretty passive source. You don’t truly have to do anything except buy the real estate and wait.

Quick Flip

The quick flip usually requires a property struggling with foreclosure or bankruptcy. In this circumstance, a home owner is under duress, and might take a significant cut in the price in order to get out quickly. You then acquire the distressed property and quickly return it to the marketplace. Since you don’t need to sell quickly, the property will get fair market value and you can make thousands of dollars in profit. As with rehabbing property, the key is finding cheap properties that you know are undervalued. If you know the market, you are able to do very well with this type of transaction.

Whichever investment technique you decide on, make certain it’s the correct one for you. Think about all the elements carefully before making your decision. Just remember that you too can be successful in commercial real estate investment.

Commercial Real Estate Step 4: Start the search.

OK. You’re now ready to begin the property search. Though you should look for the greatest returns, if you find a property that meets your return specifications, you ought to send it to a mortgage broker to shop it around, and get you a few quotes for the cost. Don’t worry about wasting their time, as they understand that only 1 out of every six opportunities will close, so they are content to shop your deal around to investors.

Conclusion:

As mentioned earlier, the world of commercial real estate can supply a serious income stream to a savvy investor. But as with any investment strategy, it’s not without risk. So that you can maximize gains while minimizing risks, it is suggested that you seek advice from an investment specialist.

Real Estate is Not a Good Investment

With falling property values, the stock market on a roller coaster ride and the economy worsening many people will wonder if it is time to start investing in real estate again. The answer to this question is a very simple and very obvious one: not any time soon.

Pending home sales fell by nearly 30 percent in June according to the National Association of Realtors. Many people will see this as an opportunity to pick up but bargain properties as investments but it is not.

Real Estate is Overvalued
The reason why people should avoid real estate investment at this time is that real estate is still way over valued in most of the United States. In many areas homes that are worth less than $100,000 are still being sold for $200,000-$300,000 and condominiums that are worth less than $100,000 are still being sold for a half million dollars.

If you don’t believe me take a look around your area, drive or walk around and look at the houses for sale. Chances are you’ll see broken down old dumps with smashed windows and shingles falling off the roof for sale. Do a quick Google search on those properties and you’ll discover that they’re probably selling for $100,000 or more.

The market for commercial property is even worse, I know of one depressed Colorado town with high unemployment where questionable retail space is renting for $900 a square foot. This space is being leased in a building in a very cold area where natural gas the cheapest fuel for central heating in the US is not available. This means heating costs will be double or triple those in an area where natural gas was available. Not surprisingly that retail space has been sitting empty for years.

Sooner or later the market will catch up with all that over priced real estate and property values will fall to realistic levels. My guess is that real estate prices in most areas of the United States will still have to fall by 25 to 50 percent to reach a realistic level of value. This means that persons who invest in property now could loose 25 to 50 percent of their investment.

Properties are Over-Mortgaged
The main reason properties are overvalued is that many of them are over-mortgaged. Over the past few years it was so easy to get a mortgage that many people put two, three, or even mortgages on their properties.

Many pieces of property are mortgaged for more than they are worth, they are “underwater” in real estate parlance. Media reports indicate that as many as 25 percent of American homes could be “underwater.”

One terrible situation out there is that many property owners who want to sell can’t because they know they couldn’t make enough from the sale to pay off their mortgage. Naturally, nobody will want to take over the mortgages on those properties because they would loose money. This means that a lot of real estate can’t be practically or legally sold at this time.

If this wasn’t bad enough, a lot of those underwater properties are encumbered by all sorts of liens, especially tax liens. This means that anybody who takes over such properties will be faced with a big legal bill.

There Will Be a Glut of Foreclosed Properties on the Market
Anybody who has followed the news over the past couple of years knows that are hundreds of thousands of homes in foreclosure. This means that people haven’t been able to pay their mortgages and have been evicted. To this figure we can probably thousands more homes where the owner has simply walked away and the mortgage holder hasn’t bothered to take the property back yet.

Many of these foreclosed properties are sitting empty and off the market right now. Quite a few realtors won’t touch foreclosures because of all the problems with them so they’re hard to sell.

Sooner or later all of those foreclosed properties are going to come on the market and drive real estate prices down further. In cities like Detroit and Cleveland where a large percentage of the homes are in foreclosure full sized homes in some neighborhoods are selling for less than $20,000. We’re going to see similar situations across the country in the next few years. When this occurs, the value of real estate in many cities such as Denver, Las Vegas and Los Angeles will fall to levels rivaling those of Cleveland and Detroit.

Property Taxes are Too High
To make matters worse we’ll soon see a situation where property taxes will exceed the value of the property in quite a few areas.

This will occur because in many areas of the country property taxes are based on “property value.” Unfortunately this property value has little or nothing to do with market value. The values used to determine property taxes are based on a figure determined by a government official usually the County Assessor in most areas this individual is elected and needs no training or expertise. In many areas it is based on what “comparable properties” sold for in the recent past. Not surprisingly the local government sets the property values as high as possible so it can collect as many taxes as possible.

In other areas the property taxes are based on what the property last sold for. This means if you bought your house for $500,000 in 2005 but its now worth $100,000 you would still be taxed as if the property was worth $500,000.

The property tax situation will make the foreclosure mess worse because many owners won’t be able to afford to pay their property taxes. Many owners will simply walk off and leave the property to be seized by the local government and sold at a tax auction for pennies on the dollar. Many of the foreclosed properties will also end up at the tax auction because nobody is paying the taxes on them which will greatly increase the real estate glut.

When to Invest in Real Estate Again
Naturally people will ask: when should I start investing in real estate again? The best answer to this question is when the real estate market hits bottom which should be in about two years.

At that time we’ll see a real estate investors’ paradise with great properties selling for $50,000-$100,000 or less. Many people will be able to pick up tremendous bargains at foreclosure and tax auctions.

Until then your best strategy is to avoid real estate investment and keep your money in money markets, stocks, foreign currencies, CDs or precious metals. If you have a lot of cash I would recommend that you put it in precious metals like gold because a collapse of the dollar could be just around the corner. If the Euro collapses because of the European debt crisis it will bring down the dollar. Some foreign currencies such as the Canadian and Australian dollars and the Swiss Franc will be good investments too.

It would also be a good idea to sell off any property other than your home that you own right now. That way you will be able to avoid taking a huge loss on it in the future. For seniors who have no mortgages on their home, I would recommend taking out a reverse mortgage and investing the cash from it in stocks or precious metals. This way they can still live in their home and cash in.

Real estate is simply not going to be a good investment in the United States for the next five to ten years. Smart people should start seeking alternatives to real estate investing now.

San Diego California Real Estate Home Values About to Drop

The good news is that San Diego home prices have increased for the past eleven months in a row. A positive outlook would suggest that the real estate decline bottomed in April 2009 and that housing prices will continue with, at least, modest appreciation.

Recently a local news headline noted San Diego home price appreciation outpaced the rest of the nation. Another headline stated that San Diego County house prices rose 11.7% in April 2010, as compared to April 2009. This was said to be the fastest rate of annual appreciation increase in the nation. Plus, San Diego County home prices have been rebounding for the past year after their 40% decline from the top of the market in 2005.

In light of the above news, one would be hard-pressed not to agree with the consensus opinion that the bottom has been reached in the San Diego real estate market; the current recovery seems to be outpacing the national averages.

In 2005, I wrote an article entitled “A trend to go national” where I predicted that the trends I saw occurring in our local housing market, which defined classic irrational exuberance, were not only about to take down the local market, but I believed, would affect the entire nation. I was not alone in raising the caution flags about the real estate market, and those who were caught up in the exuberance of the market as well as many media outlets, coined the term bubblehead to myself and others, to imply a certain foolishness to those who would speak out against such a powerful and (certain to be) continued annual double-digit home appreciation.

It was difficult to raise the caution flags in 2005. The San Diego real estate market from 2000 to 2005 appreciated on average approximately 20% per year. Until the summer of 2005, when the sales volume started to fall but the prices were still appreciating, there weren’t obvious signs of pending trouble, especially to the layperson. Most did not foresee a market collapse. Even in the latter part of 2005, while the slowing market became quite evident, the conventional consensus of opinion was that it was just a normal pullback. Most optimistic outlooks touted a strong market and a great opportunity for many to purchase real estate in San Diego before the upswing resumed.

Now it is July of 2010. Similar though different, market conditions make it again difficult to go against the conventional trend which is stating that a bottom has been put in place and we are on an upward rebound. I recently attended a seminar by a prominent real estate economist who forecast a slow but steady rise in local home values. His charts and facts presented at the seminar were quite impressive. Not being a real estate agent or broker “in the trenches,” I believe his data was not reflecting the most current conditions, especially after the expiration of the federal tax credits.

It’s hard to say exactly what effect the $8000 federal tax credit for home buyers had on the real estate market. Personally I believe it to be very similar to the government’s cash for clunkers program, whereby, it pulled buyers from future months into the current program. The result was an increase in the actual housing demand and values for people trying to get in before the credit expired. When the cash for clunkers program ended, auto sales took a nose dive for a number of months before finally stabilizing.

The federal $8000 credit ended on April 30, 2010. If you had a property in escrow on or before April 30, and closed it before the end of June (now extended through September) you would be eligible for the credit if you qualified. The housing figures now being reported reflect this activity created by the $8000 credit. As long as the property went into escrow by April 30, sales could close in May and June which still affects housing numbers. Housing sales reports are usually closed sales and unlike the stock market, it takes some time for a property to go through escrow.

The first housing numbers to be reported, that don’t reflect as much of the effect of the government’s $8000 tax credit will be sales for July, reported during August. California instituted its own tax credit which went into effect on May 1, 2010. Only 100 million was allocated for this and the California franchise tax Board reported that as of June 15, 80% of this amount had been allocated.

One could speculate that the current slowdown I’ve seen in San Diego neighborhoods would not be reflected in reports for closed sales until August. On July 1, the national Association of Realtors reported that sales of existing homes dropped 30% in May from April. For the Western states this drop was reported as 20.9%. Though the West obviously was doing better than the rest of the country, the huge double-digit declines are a major red flag that cannot be ignored.

Don’t be fooled by the media talking heads’ effervescent housing recovery rhetoric. Keep in mind that many of their sponsors and advertisers are from real estate related industries. Plus, many of the same media talking heads were the same folks who stated there was no real estate bubble and any slowdown was an opportunity to jump into the market in the summer of 2005.

As an active San Diego California real estate broker I could see a marked decline in real estate activity, in many local areas, right after the April 30 federal tax credit expiration. Homes listed for sale that just a few weeks earlier would’ve gotten multiple showings in one week, are now lucky to be shown once a week. Indications from local escrow companies and from a major San Diego mortgage company indicate that this slowing trend is significant and widespread throughout San Diego County.

What’s really troubling, is that the government tax credit was not enough to jumpstart our local housing market. Plus, the fact that this new downturn has started in the seasonally adjusted hottest marketing timeframe, coupled with historically low home mortgage interest rates, would indicate that as we approach Fall and Winter, this trend could easily accelerate and in a real real estate market bottom in late 2011 or 2012.

San Diego is the third most real estate dependent area in the country (with Orlando and Miami being the first and second respectively) the general San Diego economy should also experience a double-dip until the real housing market bottom is in place.

Real Estate Agents – What Sellers and Buyers Should Know About Them

For most buyers and sellers the prospect of dealing with a real estate agent brings forth unknown fears. While some agents are genuine and reputable and consider their clients best interest as their top priority, there is no dearth of unscrupulous individuals either who are just trying to make a quick buck at someone else’s expense. As a buyer or sellers of a property, it is your responsibility to choose a estate agent prudently. So, here is a look at what you should know about real estate agents before you approach one.

What does a real estate agent do?

Depending on which side he is working for (the buyers or the sellers), the realtor acts as an intermediary between the buyer and the seller and helps to complete the sale of a property. For his services, he is offered a commission from his client (seller, buyer or both). When working on behalf of the seller, the agent is responsible for putting the details of a property in the multiple listing services of the area and undertaking other efforts such as home staging to market the property.

In case of a residential property, a real estate agent may start off by putting up the details of the property on his personal or company website depending on whether he is a part of a realtor firm or works on his own. The next step would be to market the property through postcards and advertisements in real estate magazines offline as well as online.

Besides marketing the property, the agent who lists your home is also responsible for following up with other agents who might have clients that may have expressed interest in the property. An agent is also supposed to help you negotiate the best deal possible. He/She is with you every step of the way till the home is sold; advising you on all matters including procuring the services of a lawyer.

The agent does not charge the client/home seller for his marketing efforts; however, you will have to incur any legal cost involved in the selling process

When working from the seller’s side, a realtor is responsible for rummaging through the property listings of an area that his client is interested in. He coordinates with the real estate agent handling the property on behalf of the seller and arranges to show the premises to his clients. A real estate agent from the buyer’s side also helps to negotiate the best deal for his client and is with the buyer through out the purchasing process. He is also responsible for approaching a professional to get a property evaluation done. Some real estate agents may also offer other services such as advice and help for procuring home loans.

Real estate agents not only earn commission from the sale and purchase of homes but also when a property is leased. Usually the commission is paid to the real estate agent at the final settlement of the deal.

Who should you choose to be your estate agent?

Real estate agent can don three mantles that of an intermediary on behalf of the seller, the buyer or a dual agent. When buying a house, it would be best to hire the services of an agent who can work on your side, the same holds true when selling a home as well; you would be better of approaching a real estate agent who works for sellers.

Although real estate agents who work from the sellers or the buyer’s side do not have different credentials, some agents choose to play on a single turf while double agents may work for both the seller and the buyer simultaneously earning commissions from both.

The Sellers Real Estate Agent: An agent working on behalf of the seller will have his loyalties towards his client an he/she will try his hardest to convince the seller to give his client the lowest deal. So, as a buyer if you were to ask the seller’s agent if his client would accept a higher deal, he will be obligated to not divulge this information to you.

The Buyers Real Estate Agent: Similarly agents who work on behalf of the seller owe their responsibility to their clients and will try to get their clients the highest deal possible. So, they will not be willing to offer information on how low their client will go in terms of the price.

A dual agent: A dual agent is obligated to keep the honest picture in front of both parties; since he is entitled to a commission from both parties, he owes his loyalties to both the buyer and the seller.

Most real estate agents have a list of buyers as well as sellers so it is not unusual for an agent to work on behalf of both parties or at least get another agent from his real estate firm to negotiate on behalf of the seller or the buyer.

The problem with real estate agents

While real estate agents are in the business of marketing properties, it is not uncommon for them to play up their credentials; after all, it is a dog eat dog world and there is certainly no dearth of realtors in the market. While this is acceptable, some individuals resort to lying blatantly about their accomplishments and often their customers end up paying for their tall claims.

So, make sure that you check all the claims that are being made by a potential estate agent. Do not hesitate to ask for references. If he has not mentioned his experience in the brochure, make it a point to ask him about it. Also, inquire about other properties that he may have sold which were similar to the one that you want to sell/buy; this would include properties in the sane area, of the same size and price range.

Finding a good and reliable agent can save you a lot of trouble while hanging out with the wrong guy can quickly turn into a nightmare so take your time when picking an agent to buy/sell your home.