The Top 3 Reasons The Market Doesn’t Care
And what you can do about it.
The real estate investment market can be brutal for the small investor. The cumulative players making up the market sellers, buyers, brokers, and agents they’re in the game to fulfill a selfish interest. This subjects the small real estate investor to more risk. More risk means more losses. Even though the market doesn’t care the risk buyers confront can be mitigated when they have a plan.
The players in the market are generally honest in saying they care, but it comes with a caveat; they’ll do for you if you do for them. It’s a truism and one you should embrace if for no other reason than your own financial protection.
The cruel fact is the players in the game we call real estate investment really don’t care. At least not in a way that can offer you any protection from potential losses. This is a truism. One, to be brutally honest, the small real estate investor should accept to ensure they’re equipped to act accordingly to minimize any possibility of being taken advantage of thereby minimizing potential losses. The exception, when you’re amongst family or true personal friends. They’re likely the few exceptions.
The market will drop you like a hand grenade whose pin has been pulled and is ready to detonate. Just stop making money for any of the market’s players and my point will prove itself out. Investors shouldn’t take it personally though, because they are likely just like the other players and concerned about their own self interest.
In any marketplace buyers, sellers, and the intermediaries that traverse the markets have one fundamental concern, and its Moi (Me). They care about themselves, and rightly. Any of us who enter a market do so with a purpose. The principals are there to receive value, and in many instances that value translates to money, and the intermediaries, well, their in it to earn fees.
The side of the table you sit on whether buyer or seller or broker/agent isn’t material. The sole purpose of market participation is to receive value or make money. Liking what you do, enjoying the process, hell even making or losing money isn’t what matters most when sizing up where you stand as it relates to facing off with the other players in the game.
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Here are the top 3 reasons the market doesn’t care, and what you can do to secure your position when participating in the market as a small real estate investor.
1. We see opportunity and will take advantage of you. Stop it.
Given the opportunity a seller will try to gain the upper hand in a transaction with a buyer. Likewise, the buyer is often looking for opportunities to take advantage of a sellers vulnerabilities. Regardless of your place at the negotiation table the one way to avoid being taken advantage of is to have access to good information, augmented by knowledgable guidance from a real estate professional, attorney or accountant.
2. Data is our manipulation play. Trust but verify
As a Commercial Real Estate professional the data and information I present to clients is vetted, honest, and trustworthy. My interpretation of market data is analytical and pure. The strategies I suggest are based on extensive transactional experience, local market knowledge, and any other singular information pieces obtained about the other players. In all candor, it would be very easy to slant the data, or present the information in such a way as to support a position or suggest an understanding or action that might be more beneficial to my individual interests. I don’t and won’t ever take advantage because of the importance I place on ethical values, but I could easily attempt to manipulate a conclusion. And I’ve know players in the markets that have whether principals or agents/brokers. With this in mind, I wouldn’t be opposed to a client asking for further clarification on data or strategy. I would encourage them to trust me, but would not think twice if they verified the information. Always make sure the data or information you are relying on is coming from a reliable and trustworthy source.
3. Numbers sometimes lie. Use real time numbers to assess income and value.
The Proforma is a tool the real estate industry uses to show a value at some point in the future. Its a “IF THIS THEN THAT” statement that shows what income might look like “IF”a buyers does this and then what a value might look like once they’ve done “THAT”. The problem with proforma’s is that not every buyer has the tools and resources, can borrow at the prescribed interest rates, or will want to undertake the type of capital improvements required to achieve the value purported by the proforma. The proforma for a small real estate investor should be viewed as a fairytale. Its make believe until something else happens so in essence if you as a small real estate investor buy a property based on proforma numbers you’re over paying for the property. You would need to invest more capital or put in work to earn the proforma return or value. The proforma is a useful tool, and it certainly has many benefits, but to many properties are placed on the market and are being sold off the proforma income which may never materialize. My suggestion for small real estate investors is to underwrite contemplated acquisitions using real time income and expense numbers and then negotiate using those real time returns as your target for buying. Remember, not every property you like needs to be bought, particularly if it means over paying for the investment. Another similar property will come along soon enough.
Being self aware of your purpose for participating in the market will provide you with the insight those with ulterior motives do not care of your experience in the market. They want to gain the upper hand, and in many instances will attempt to do so unless you’ve put in place protections to prevent them from gaining an advantage. If you verify the data and information you use to make decisions, and use real time numbers to analyze and negotiate a purchase you will limit buying risks.
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Christopher Telles (@tellesio) is a 5x entrepreneur in CRE. Currently looking to connect and collaborate with CRETech and RETech entrepreneurs, and Venture Capital investors investing into the space. Chris is the CEO of Space Standard a boutique #CRE brokerage in #DTLA. Alway’s looking for new gigs, you can follow him on twitter @tellesio or send an email by clicking on the email envelope icon in the About area below.
