Timing the Real Estate Market

Timing the Real Estate Market

Authors: Craig Hall

Published: December 2003

eISBN: 9780071465205 0071465200 | ISBN: 9780071421959

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Contents

Acknowledgments

Part One: Why Timing the Market Is the Best way to Make Money in Real Estate

Chapter 1: Timing, Timing, Timing!

Timing the Critical Buying Decision

Timing the Critical Selling Decision

My First Lesson in Timing the Real Estate Market

Timing vs. Location

Timing vs. Improving Value

Why Most Investors Don't Pay Enough Attention to Timing

So, What Is a Real Estate Cycle?

Maximizing Your Returns Through Timing

Real Estate Cycles Are Market- and Property-Specific

Seven Major Trends Impacting Real Estate Cycles

Sources of Timing Cycles

Successful Timing Can Be Learned

Chapter 2: The Myth of Cash Flow: Why You Don't Make Money "Owning" Real Estate

My First Big Lesson About How Real Estate Is Not a Cash Flow Business

My First Lesson in the Importance of Selling

The Greatest Lie in Real Estate

The Second Greatest Lie in Real Estate

Revenues

Operating Expenses

Capital Expenses

Mortgage Payments

Don't Believe the Two Greatest Lies in Real Estate—Instead Concentrate on Timing

Chapter 3: Lessons I've Learned From Real Estate Cycles of the Last 35 Years

1974-1976: Big Opportunity in a Down Market

1981-1982: Opportunities in a Down Market in the Southwest

1986-1990: Success Made Us Forget About Timing the Market—and We Ended in Disaster

A Review of the "100-Year Flood" of 1986-1990

Supply and Demand Were Way out of Whack

Enter the U.S. Government

1991-1992: Another Down Cycle

2000-2003: How Trends Work Against One Another

Learning from Past Cycles

Chapter 4: The Fundamentals of Pricing: Capitalization Rate and Net Operating Income

Value vs. Price

Determining Prices Throughout Real Estate Cycles

Net Operating Income (NOI)

Capitalization Rates (Cap Rates)

Calculating Cap Rates

How Cap Rates Impact Property Pricing

Why Lower Cap Rates Are Good

Buy When Cap Rates Are High and Sell When They Are Low

Part Two: The Seven Trends That Drive Real Estate Timing Decisions

Chapter 5: The Seven Major Trends Behind Real Estate Cycles

The Three National Trends

National Trend #1: Inflation

Inflation Can Transfer Risk from Real Estate Investors to Lenders

Too Much Inflation Can Hurt You

The Perfect Inflationary Trend

National Trend #2: Interest Rates

The "Gotcha Clauses"

Low Interest Rates Aren't Always a Plus

National Trend #3: Flow of Funds

When Stocks Are Hot, Real Estate Is Not

The Impact of Tax Incentives

The Role of Foreign Money and Money Managers

Psychology Plays a Big Role

The Impact of Lower Interest Rates on Flow of Funds

The Four Local Trends

Local Trend #1: Job Growth

Local Trend #2: In- or Out-Migration

Local Trend #3: Path of Progress

Local Trend #4: New Construction

How to Use the Seven Major Trends

Chapter 6: What Each of the Seven Trends Tells You About when to Buy, Hold, or Sell

Timing Recommendations for Single-Family, Rental, and Second Homes

Timing Recommendations for Apartments

Timing Recommendations for Raw Land

Timing Recommendations for Office Property

Timing Recommendations for Retail

Timing Recommendations for Hospitality— Hotels and Motels

Trends in Action

The Wildcard—Exogenous Shocks

Chapter 7: Using the Seven Trends in the Real World

Understanding Trend Interaction

Looking for Anecdotal Evidence

Pulling It All Together

A Real-World Example: Radisson Hotel DFW South, Dallas 2002

Step #1. Look at the Seven Trends

Step #2. Consider Exogenous Events

Step #3. Assess Barriers to Entry

Step #4. Review Anecdotal Evidence

Step #5. Pull It All Together

Rely on Logic

And Then There''s Hindsight

Part Three: When to Buy

Chapter 8: Buying Basics

Think Through Where Your Property Is in the Timing Cycle

Determine Your Purchase Goals

Finding Your Property: How to Effectively Use a Real Estate Broker

Get to know Your Market: Getting the Word Out

Appraisers, Market Studies, and Local Economic Indicators

How to Find a Lender

The Dangers of Leverage

Assuming Existing Financing—The Good, the Bad, and the Ugly

New First Mortgages

Understanding Financing

Seller Financing

Mezzanine Financing

What Lenders Expect of Borrowers

Picking Your Lawyer

Reading the Sales Agreement

Title Companies, Escrows, and Closing

Due Diligence—A Critical Phase

Renegotiating Your Deal After Due Diligence

Structuring a Property Management Plan

Timing and NOI Projections

Take It to the Board of Directors

Chapter 9: Buy When There's Blood in the Streets: The Contrarian Timing Strategy

Why Would Anyone Sell a 20-Year-Old a $1.6 Million Apartment Complex with Zero Down Payment?

What Is Contrarian Timing?

Do Markets Always Rebound?

Five Principles to Live by When Making Contrarian Investments

Risks and Problems with the Contrarian Investment Approach

Bottom-Line Benefits

Chapter 10: Buy When Prices Are Going Up: The Momentum Timing Strategy

A "Path of Progress" Momentum Play

What Is Momentum Buying?

Five Important Indicators of Upward Momentum

Buy to Sell

How Momentum Buying Is Different from Contrarian Buying

Four Risks and Problems with Momentum Timing

How to Spot the End of Upward Momentum

Bottom-Line Benefits of Momentum Buying

Part Four: How to Hold

Chapter 11: Increase the Value of Your Property: Six Powerful Techniques

"Holding" a Property Often Means "Get to Work"

Turning a Big Lemon into Lemonade

Problems Were Not in Short Supply

Problems

Outcome

Building on Positives

Every Transaction Needs a Management Action Plan

Your MAP Needs an Alternative Bonus Plan

MAP Opportunity #1: Make Cosmetic Improvements and Catch Up on Deferred Maintenance

MAP Opportunity #2: Undertake Major Rehabilitation

MAP Opportunity #3: Improve the Economic Uses of the Property

MAP Opportunity #4: Improve Operational Efficiency

MAP Opportunity #5: Improve Marketing

MAP Opportunity #6: Financial Engineering

Timing Your Improvement Plans

Chapter 12: Hold Most Properties for One Cycle

Selling Your Fruit Tree at Peak Harvest Time

So, How Long Is a Cycle Again?

Why You Hold for One up Cycle

The Impact of Deferred Maintenance on Your Plan

Financing Affects Holding Time

One Cycle Allows Time for Property Improvements

Why You Sometimes Hold for Less than a Full Up Cycle

If You See a Real Downside Coming

If You've Achieved Your Major Goals

Judiciary Center: A Short Hold That Netted Maximum Value

When you Miss the Window, Waiting out another Cycle can Cost a Lot

Chapter 13: Hold Some Properties Longer Than One Cycle

Willowtree, the Cash Cow

Hall Office Park: A Long-Term Plan

Reasons to Hold for More Than One Cycle

Quality of Construction Is Important

Location Is Critical

How Financing Figures into Holding for More Than One Cycle

Part Five: When to Sell

Chapter 14: Selling Basics

Think Through Your Property's Position in the Timing Cycle

Determine Your Goals

The Value of Real Estate Brokers

Negotiate the Brokerage Fee

Determine a Marketing Plan

Look for 1031 Exchange Buyers, if Possible

Methods of Selling

The "Multiple Listing"Approach

The "Auction" Method

Pricing Properties vs. Open-Ended Bids

Consider the Buyer's Financing Needs

Before You Sell, Order Reports on Your Property

Marketing and Maximizing Exposure

Analyzing Letters of Intent

The Legal Process

Picking Your Lawyer

Entering into the Sales Agreement

Negotiating the Contract

Defending Your Goal

Surviving Due Diligence—A General Point

Retrading the Deal

Closing the Transaction

Income Taxes Relating to Property Sales

1031 Exchanges

Three Bottom-Line Reflections on Selling

It's Better to Be Too Early Than Too Late

Chapter 15: When the Pay Window Is Open, Sell: The "Sell When Everyone Wants It" Strategy

Gates of Arlington: The Pay Window Was Open …

A Little Publicity makes a Big Difference

Bumps in the Road

Sometimes You Win, Sometimes You Lose

Selling Doesn't Just Happen

It’s Hard to Sell When Everything's Right— But Just Do It!

Four Ways to know It's a Seller's Market

Create a Bidding War

Timing Is Critical: Don't Miss Your Window

Chapter 16: When Positive Momentum Is at Risk, Get Out: The "Sell Before Prices Go Down Again" Strategy

What Is Positive Momentum?

Catching the Wave

What Does It Mean When We Say Positive Momentum Is "at Risk"?

Four Ways to know Positive Momentum Is at Risk

Part Six: Putting Theory into Practice

Chapter 17: Is Real Estate the Next Bubble?

Applying the Seven Trends

The Three National Trends

National Trend #1: Inflation

National Trend #2: Interest Rates

National Trend #3: Flow of Funds

The Four Local Trends

Local Trend #1: Job Growth

Local Trends #2 and #3: In- or Out-Migration and Path of Progress

Local Trend #4: New Construction

Taking Stock of the Seven Trends

Anecdotal and Exogenous Events

Remember: Real Estate Lags Behind National Economic Cycles

Has There Been a Paradigm Shift?

Is the Real Estate Bubble About to Burst?

What Should Investors Do?

Chapter 18: Real Estate Timing: More Art Than Science

Science Can Help But It's No Panacea

Art Is Understanding the Changing Relationships Among the Seven Trends

Perspective and Humility

Index