Here is one place where subjective considerations may be more important than economic. In other words: Are you old and rich enough to pay a premium for no hassle convenience– or would you rather work a little and make some serious money?
Let me explain the choice with reference to a situation I have been through many times. When I was in my mid-thirties, I went to a “free” dinner presentation for property in a deluxe gated community.
Lets use today’s money and today’s prices in this example. Obviously, the prices were much lower 35 years ago. But this kind of deal was available then, and the equivalent is being offered today. Where? California, Southern Spain, South America, Asia, Africa, Australia – i.e. everywhere.
The Project? Very nice, brand-new, never occupied , fully furnished and completely (or almost) finished “spec” homes in a golf-centered development. The price each house was not offered at $750,000. It could be “equestrian centered” or “senior centered.” It doesn’t matter, the principle is the same. You can buy retail or you can be the developer! Just like a whole cow on the hoof does not sell for as much as when divided into steaks, hamburgers, leather shoes, and sold at retail prices. In fact, the difference or mark-up from a wholesale cow to retail T-Bone chops may be a factor of 20. It doesn’t matter if the new development you look at involves is detached free standing houses, a connected town houses, or a condo in a high rise. The point is do you want to buy retail, or do you want to put in a lot of effort to buy a bigger property, subdivide, sell and emerge a multi-millionaire? If you buy into a development where someone else has done all the work you’ll get a clean, new residence, almost always with with a good, long term financing package. However, you will be paying a relatively high price for the convenience of a deal on a silver platter. Should you buy? If you are making or have made your money in some enterprise other than real estate, why not? It is like buying a car or yacht.
You can get exactly what you want, custom finished to your personal specifications! If you can afford to buy something that is ready to move into, and finished exactly the way you want, why not go for it. You have made your pile of money in another field and especially if you are retired, you don’t want or need another project.
But you won’t make any money on a quick resale of anything you buy at retail. In fact if you change your plans and have to sell quickly, a substantial loss is almost guaranteed.
At my present age (over seventy), if I wanted a dream house to spend the rest of my life in, I might go for such a deal. But at age 35, NO WAY!
HOW TO BUY WHOLESALE
A good Woody Allen joke was, when asked about his religion, he said, “The only sin in our house was buying retail.”
If I really liked the development way back then, to get a better price, I would look for a distress deal in the same project. In any new development you can be sure that if you sniffed around and asked questions, you could take over somebody’s else’s position at a huge discount from the original “retail” asking prices . You ask the neighbours, employees, look on Craig’s List and at the Internet ads for “urgent sales” in the same development. What kind of deals might these be:
1) The developer himself, if offered this deal, might be willing to sell you the fully furnished model apartment or house at a big discount. A smaller, cash strapped developer can generate some cash this way. To have a show flat or show home leases it back from you or otherwise be able to use it as his display home. How long for? Until his project is sold out, usually within a year or two. This kind of arrangement is not always available, but no harm in asking — especially if you don’t need the place for yourself right away. This is a good place to note that in good times, with rapidly rising values (some might call it a bubble) developers make out like bandits. But when the general property market turns sour as it does for a while every seven to ten years, developers can get stuck with unsold inventory. But in this example, lets assume times are good, and getting better. You have plenty of money but you want a good deal.
2) Look for a buyer who has made a substantial deposit but is unable or unwilling to complete his purchase. A common reason for a quick sale at a discount is that the buyer’s physical or mental health has deteriorated –or he may have died unexpectedly.. In this case, his guardian/ administrator will want to liquidate quickly for the best offer he can get. What was paid and the need to recoup the investment is not a consideration in such cases. Another reason for a distress sale can be that the buyer has had financial reverses, a divorce, or has been convicted of something and is going to jail. In my own case, by sniffing around for such deals I found one where the buyer had made a €250,000 deposit on a €750,000 unit, but now wanted “out.” My offer of €50,000 cash was accepted and thus it came to pass that I closed the deal on his unit paying only €550,000 when less astute buyers were paying €750,000 for similar homes. That brings me to my “hundred house rule.” Simply stated, that rule is, don’t get carried away by any salesman’s great pitch, or those wonderful brochures and videos. Have a will of steel to avoid signing anything — or simply skip the “free” dinner presentation entirely. High pressure salesmanship all too often gets you to sign a contract and write a down-payment check without any understanding whatsoever of the market. You have to know what similar properties are selling for. Sniff around. Be a tire kicker. Broker’s won’t love you for not being an easy sale, but you will ALWAYS find much better deals if you investigate before you invest. Look at other, competing subdivisions and you’ll find special situations like distress sales.
HOW YOU CAN MAKE THE DEVELOPER’S PROFIT BY BUYING WHOLESALE & SELLING RETAIL
3) Once I looked at a €750,000 (asking price) 4 bedroom 3 car garage home with pool on a quarter acre lot. It was in a very well thought out of new vacation homes. One of the many advantages of a classy gated subdivision is that you can lock the door, & go away for six months or a year. The property is guarded . Your garden and exteriors are maintained. When you come back the place is just as you left it.
In many cases, your vacation home or condo can be managed and rented out to cover all running expenses. Typically management takes 50% of rent and you are credited with the rest. But generally, it will never be a profit generating operation. In the above case, I sniffed around and knocked on the doors of many farm properties in the general vicinity of the development. I asked owners if they wanted to sell and if so, what price they wanted. This looking around process took me six months. For your information, you will seldom, if ever, be quoted a price on any real estate deal that you regard as a bargain. Getting a good deal involves finding a motivated seller, and then making a very low offer.
For more details on exactly how to do this, read the book I edited: Think Like A Tycoon.
To make a long story short, for the same price (€750,000) as the one new house, I was able to buy a 200 acre fruit orchard across the street from the same development. It had a quaint, old small stone farmhouse on it. I had this vision of carving it up into 400 half acre lots that I would eventually sell off at retail for at least €50,000 each. Do the math: 400 X €50,000 = € 20,000,000. It took around 10 years to get the zoning, put in roads, electricity, sewers, but that is exactly what I did. Do you think I turned €750,000 into €20 million without effort or setbacks? Think again. Dealing with bureaucrats to get the permits and environmental clearances is never easy. Getting loans to put in the improvements and prepare the lots for sale, and to build model homes doesn’t happen by itself. Being a successful developer is a full time, long term job and you’d better get your experience working for somebody else in the business. Why? Because without the expertise and stick-to-itivness to put a deal together and peddle it, you will have a major fiasco on your hands. The €20 million isn’t gross-in-your-pocket either. My expenses (borrowed money) were around €5 million. But my net was indeed close to €15 million on that one deal.
4) Another category will be “REO.” This stands for “Real Estate Owned After Foreclosure.”
The owner is the mortgage lender, usually a bank or savings and loan association. In Panama, last time I visited, there were thousands of such properties, and in Spain, literally MILLIONS of them. When economic times are tough, these deals pile up from failed developers. Someone who will take more than one, say a dozen or more properties off their hands can make deals to buy the homes or condos at a fraction of their construction costs. Maybe even less than the land value alone. When properties are not entirely finished or are being vandalized, the discounts can be utterly amazing. Because bankers are typically very lousy at marketing and asset management, they often sit on the properties and do nothing until a buyer (like you!) actually sniffs out the property, knocks on their door and makes an offer. You might be able to pick up what would have been a €750,000 home for €100,000 and if you put up the say €50,000 cash needed to finish it and put it up for sale or rent, the bank might even give you a 100% loan.
True REO Story: I once had a very rich, very good friend who owned the most impressive and expensive house in Ticino – the South of Switzerland. He was a high-roller with a beautiful much younger trophy wife. They gave parties like those of the Great Gatsby. During this period, he had offers on the property from pop-stars and other celebrities of as much as €15 Million cash. Then, unexpectedly he lost all his money plus money he had borrowed — on a deal in Kazakhstan. To survive he took out a short term bank loan of €1 million on his Swiss property. Maintenance & landscaping on the property was neglected. A year later he defaulted on the bank loan. The high roller offers had evaporated. The bank unceremoniously evicted him. The stress of his losing his money and status brought his life to an end. His widow not as beautiful and glamorous as se was, went back to her home country to run a sports clinic.
The property itself was empty and overgrown with weeds. It had been broken into and slightly vandalized. This is where I came back into the picture. I knew that run-down property simply will not sell to very wealthy people . The rich almost always want a red ribbon deal – ready to move in – A gorgeous, turn-key, finished and furnished product. I felt the property if restored and repainted (cost €25,000?) could be sold well below market value o €5 million, at €2 to €3 million . So I went to the bank and asked the chap in charge of ROE properties if they would accept an offer of €1 million. This was the amount of their loan. “Will you deliver title to me for this amount in cash?” I asked. Banks are typically no brain, slow moving bureaucratic behemoths and in this instance, they took over a year to get back to me.
During that period, I had second thoughts about the property. In the trade they call it premature buyer’s remorse. For one thing, by buying this well known and substantial property, I would give up my low profile and come to the attention of “the authorities.” That would never happen if I stuck to my usual much smaller deals. Next, this was a high maintenance property, and like a high maintenance yacht or mistress, involved heavy monthly charges for a watchman, utilities, taxes, repairs, gardening, insurance, pools, fountains, etc. I certainly could not afford to live there. If I had to hold it for several years instead of several months, I myself might go bankrupt supporting the staff needed to keep the place in top shape. I estimated running costs at maybe €500,000 a year.
You might want to point out that people tend to underestimate the cost of maintenance and taxes for their personal residence.
Once you start adding up those items to the cost of the residence, most personal homes without renting them out are not that great of deal. Moreover, most of the companies that promise to rent out a residence while you are away never live up to expectations.
There are some risks that people do not realize that are associated with condominiums and associations. If you live in a community with 100 homes and only 45 are sold, who picks up the cost associated with the 55 unsold units? Most of the time the burden shifts to the 45 or the community declines. The community decline, of course, undermines existing property values. Laws vary by country, but there is a risk of foreclosure of common areas in some countries.
Another item to worry about are title issues associated with condominium and cooperative structures. That is a whole convoluted area of civil law.
The annuity section in your essay is quite good. You can sum up the argument that an annuity is only as good as the guarantor. Look at how many insurance companies will be unable to meet their obligations (such as a 3% minimum rate of return) in a 0% environment. Most insurance companies need 1-3% to cover their overhead. I doubt that many of them are making 6% without taking an inordinate amount of risk.the Swiss insurance companies are probably mostly OK with their annuities as they have been operating in a near zero interest rate environment for decades.
I believe, but am not entirely sure, that they are heavily invested in rental real estate that even in Swiss gives a 5%+ return.
Also, they seem adept at trading bonds and such. I dunno how they can do it, but we have been watching a sample model account and they have been bringing in an average 7-9% per year trading distress bonds.
I would think that is not dependable but they have been doing that well since even before 2005.
For more details on exactly how to do this, read the book I edited: Think Like A Tycoon.
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