Even the most bearish economist is predicting that commercial real estate prices will fall up to 40 percent from peak to trough. However, the data released yesterday from Moody’s Investor Service shows that in April commercial property prices plummeted a record 8.6 percent. According to Moody’s data, commercial property prices fell a total of 29.5 percent from their highs in 2007. This leaves another 10 percent drop in prices if the most bearish economists are correct. In my opinion, much of this drop was due to a speculative credit bubble that caused commercial property buyers to purchase properties that would never produce a positive cash flow, even assuming a strong economy and strong demand for commercial real estate.

I believe that most of the declines in commercial property prices that can be attributed to the credit bubble have mostly taken their toll on prices. But, I surmise that we could experience an even greater decline in commercial property prices due the fact that the economy is fundamentally unsound. If one closely examines the fundamentals of supply and demand for the commercial property sector, the prospects for continued price declines becomes readily apparent, especially in the retail and office building sectors of commercial real estate.

Background to a Crisis

During the speculative credit bubble, developers built many more office buildings and retail stores than could possibly be sustained. Now that unemployment is in the double digits and major economic sectors like the automotive industries are going bankrupt there is less demand for commercial property. There have been many large, well known, retail brands either going bankrupt or severely cutting back growth projections. In a small city, near where I live, there are at least fifteen Starbucks. How many Starbucks stores can one small city support? Circuit city is out of business, Brandsmart may be next. Car dealerships are closing their doors around the country. These are all commercial real estate tenants whose absence can’t easily be filled. The list goes on and on. If so many large retailers are going out of business or curtailing operations then there will be even less demand for all of the vacant commercial retail space.

Commercial Real Estate Breakdown & Predictions

As local, state and federal governments go deeper into debt they will be increasing taxes even further on businesses and property owners. This means higher taxes for the owners of commercial real estate. If the costs to hold a property increase, then its intrinsic value must decrease.

I would challenge the 40 percent figure and would argue that prices could drop even more due to the dismal state of the economy at large. I would go the record to say that the commercial property sector could see real price declines of up to 70 percent from peak to trough. The worst might still be ahead of us.

Source: Reuters
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• ‘Wave of foreclosures’ to hit commercial sector, Insider Q&A; told (lansner.freedomblogging.com)

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Tags: Commercial, commercial property, commercial real estate buying, commercial real estate prices, commerical property investing, Retailing

Many apartment buildings are now facing foreclosure because of falling prices, stricter underwriting guidelines and 5 year mortgages becoming due. For the astute buyer of apartment buildings these apartment building foreclosures could represent an investment windfall.

As a glaring symbol of the burst bubble in national residential real estate prices, the National Association of Realtors announced recently that a full 63% of homeowners in Las Vegas are now “underwater” in their mortgages. This simply means that they owe more than their property is currently worth. For many of these people, it simply makes no economic sense to continue paying for their mortgages when the underlying asset is no longer worth what they owe. This situation will probably lead to further foreclosures and further declines in real estate prices. As all eyes are currently watching the steep decline in residential real estate prices and rising foreclosures, the commercial side of real estate has hardly begun to realize the problems that may be looming on the horizon for many apartment building owners.

Homeowners in Las Vegas, for example, who are able to continue paying their mortgages may decide to hold on to their property for a few years and hope that real estate prices recover. They are able to make this decision because, presumably, they have 30 year mortgages. In contrast to residential mortgage holders, many investors in commercial real estate are holding on to 5 year mortgages. This means that they will be forced to refinance their properties when the notes become due and it couldn’t be happening at a worse time. Many apartment buildings rose in value right along side residential real estate prices and too many of these owners paid too much for their properties because they figured that as long as they were seeing a net profit every year from their rent collection then they had nothing to worry about.

Market Conditions Lead to Great Opportunity in Apartment Market

During the real estate investing frenzy apartment building buyers didn’t take into account the possibility that real estate prices would drop so precipitously is such a short period of time. Now, many apartment building owners are facing a dire situation. For example, let’s assume an apartment building investor purchased an apartment building in 2005 for 1 million dollars. He came out of pocket for $200,000 and he financed the purchase with a 5 year balloon note that becomes due on January 1, 2010. He financed 80% of the purchase price. In the last years, however, the market price of his apartment building has dropped 20%. It is now appraised by the bank as being worth $800,000. Unfortunately, when he goes to the bank to get a loan, the loan officer tells him that the bank has changed their underwriting guidelines and they are now only willing to finance 70% of the appraised value of the property. Now, he is only able to finance $560,000. The problem is that he still owes just around $800,000 on the property. The difference between $800,000 and $560,000 is $240,000. Unless the apartment building owner can come out of pocket to pay this additional $240,000 to the bank then he will eventually be forced into foreclosure. It is safe to assume that many apartment building owners will make the same choice that thousands of home owners have, to walk away from the mortgage and the property, chalking it off as a lesson learned.

For the first time buyer of apartment buildings, this could be a windfall in the making. There could be thousands of properties, in good condition, appearing on the market at rock bottom prices.

Tags: apartment building foreclosues, apartment building investing, apartment foreclosures, buy apartment buiding foreclosues, how to buy apartment building foreclosures, how tobuy apartment building, invest in apartment foreclsoures

We put together the following video presentation in 3 parts to help you learn about the basics of Short Sales, how they work, etc. Other topics covered include Credit, Deed in Lieu of Foreclosure, dealing with the banks, and Taking a Short Sale Listing etc.

PART II

PART III

Tags: mortgage, real estate, real estate investing, short sale, upside down

How High Is Up?

The answer can be as simple as one flight of stairs. It also can be as grotesque as 300%. Since I’m talking about real estate, I’ll skip the flight of stairs type of answer and concentrate on the 300% side.

Unless you’ve been living in a cave in Zimbabwe, you know the real estate market has taken a directional turn - down. In some areas, if the articles I read are correct, like Detroit and Cleveland, you can literally buy foreclosed properties for less than 10¢ on the dollar. That looks like one heck of a deal to the naked eye.

However, if you do the numbers, it is actually one hell of a bad buy. In order to understand why I say what I say let’s look at the math of gains and losses. By the way, you can get exact numbers by doing an Internet search for that exact phrase. My numbers in this post are rounded down to the nearest whole number.

Math Is A Two Way Street
I will use $1000 as the example number. Making believe your property was worth $1000 two years ago and is now worth only $620 means you’ve sustained a 38% decrease in value. If you’ve seen 38% before that’s because someone wrote an article that says 38% is the average decrease in property value in the U.S.

I say who cares what the average value is because I don’t live in an average value area. I live in one of the highest foreclosure states in the Union. You too may live in an area where the foreclosures are still running rampant. Therefore, 38% means very little.

That’s why I say 38% is just another number. But that’s going down a side track. If you are looking for your property to rise back to the $1000 value to restore the loss, by what percent must it go up?

61%.

Wow, that’s almost twice what it went down. Yep, but that isn’t as bad as if it went to a value of $250 meaning it experienced a 75% decrease. To restore the value of $1000, it would have to rise in value by 300%. To me that is a bigger wow.

As the percent of decrease increases, so does the rise in value percentage. In other words, if you can buy a property that has decreased by 90% like in the cities I mentioned above, your rate of rise would be close to 450%. Remember, this is a rounded number so do your research.

Opportunity Is In The Eye Of The Beholder

So what do these numbers actually mean? Depending on what side of the numbers you are on, they could be disaster or opportunity. Let’s say you bought a property for $250 and it went to $1000 in an acceptable period of time. You just made a fantastic return provided you sold it with very little expense.

If you owned the $1000 property and it slipped to $250 but did nothing, you are simply sitting on an asset that has decreased in value. No big deal if you aren’t planning on selling and can afford to continue to pay the mortgage. No big deal also if you needed a big loss for tax purposes and decided to sell. That actually may be an opportunity. On the other hand, if you must sell, you just encountered disaster.

When I was a stock broker, I remember people using the sell at a loss strategy. They would sell stocks that had slipped in value so they could take the loss to offset gains and reduce their taxes. I fully realize this may have limited application. However, it is still an option.

The purpose of this post was to present the two sides of the math, in general terms, that comprise this market. The numbers are illustrative only and meant to jump start the thinking process and the manner in which you look at your investment(s). After all, it is your money at risk and you should have as many facts as possible in order to make an informed decision.

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Tags: home values, house values, property analysis, real estate, real estate value

Finding the right apartment building to buy for an investment can seem like an overwhelming and daunting task for the first time apartment building buyer. However, if you know a few things to look for when purchasing an apartment building everything becomes a lot easier. There are good things to watch out for and some very bad things as well. The good things allow you to locate apartment buildings that have a strong chance of making you money over the long run and the bad things mean that you will have problems making profits.

Here are some warning signs to watch out for when locating apartment buildings to buy. If you see that your potential apartment building investment has any of these attributes, run the other way.

1) Rent controls that limit the amount of rent you charge or limit the amount you can increase rent. It makes no sense to invest your hard work and energy into any enterprise that will not reward you for your labor. With apartment building investing, the reward comes in profits and positive net cash flow. If rent controls do not allow you to charge a fair market rent then you will always be struggling to pay your bills and make a profit. There are thousands of apartment buildings out there with no rent controls.

2) Structural flaws and deficiencies in load bearing walls or in the apartment building foundation. The key word here is “structural”. As an investor you don’t want to purchase a building that has serious structural flaws because the repairs on these problems cost a lot more money then you might think. Even if the building is apparently priced to reflect the cost of the repairs it is best not concern yourself with a building that is in extremely bad physical condition. There may be unseen issues that could eventually lead to the building becoming condemned. The building also may not qualify for bank financing if the problems are severe.

3) Environmental issues such as toxic mold or buried oil tanks that are leaking. Make sure you research your investment very well. Most states require sellers to disclose the presence of environmental hazards on a property; however, it is up to you to do your due diligence. Mold remediation and the removal of buried oil tanks can be very costly.

4) A large majority of the units are occupied by tenants who are receiving subsidized rents from the government. The presence of many subsidized renters can mean that the tenants are gainfully employed. This can lead to problems such as crime and drug abuse.

5) An area with a large surplus of vacant units. If an area has vacancies at 15% or above then you will have trouble renting your units. Watch out for areas that are offering huge incentives and free rent to prospective tenants.

6) A bad neighborhood. Do some research and determine if the neighborhood you are looking at is safe place to live. Ask yourself if you would feel safe living in that neighborhood with your family. Drive around the neighborhood at different times of the day and night. Are there people lingering on the street corners during the week day? Does there seem to be an unusually high level of police activity?

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Tags: apartment building buyers, apartment building investing, buy apartment building, how to buy apartment buildings, how to invest in apartment buildings, investing in apartment

1. Real Estate Principles for the New Economy by Miller/Geltner

2. Real Estate Finance and Investments by Brueggeman/Fisher

3. The Appraisal of Real Estate by the Appraisal Institute

4.Investment Analysis for Real Estate Decisions by Greer/Farrell

5. Property Management in Real Estate Investment Decision-making by Jaffe

6. Macroeconomics by N. Gregory Mankiw

Real Estate Principles gives a great overview of the Real Estate Industry.  Readers will understand what drives Real Estate markets in the short, intermediate, and long run, connections between the Capital Markets and the Physical Markets, and Residential and Commercial property analysis.  The effects of the legal and regulatory environment are explored, as well as financing, cash-flow analysis, and models.

Real Estate Finance provides a similarly broad perspective but with a more sophisticated discussion concerning factors affecting financial decisions.  A larger portion is devoted towards income-producing properties, tax treatments, equity financing, effects on portfolio management, the secondary mortgage market, and investment decisions.

The Appraisal of Real Estate goes into great depth in discussing what the role of an appraiser is and how to conduct an appraisal.  I often hear from other Realtors and investors about how unreliable appraisers are.  When asked if they understand how appraisers work, their methodology, how they gather data and process it, I’m usually met with blank stares.  There is much more to appraising then simply looking at comparable properties or doing a quick cash flow analysis.

Investment Analysis is the book EVERYONE should read.  You need to have a firm understanding of the underlying principals covered in the above books in order to grasp the concepts in this one.  Greer/Farrel cover Market Efficiency, land utilization, market research and forecasting, traditional and contemporary valuation and risk measures.  Learn how to conduct a feasibility report, interpret probability distributions, utilize a mean/standard deviation approach, and discover why the certainty-equivalent techniques have issues.

Property Management is a great short read where Jaffe examines the literature of Real Estate Investment Modeling, investigates data analysis, sensitivity analysis, and how management decisions affect overall value.  Whether you agree or not with his conclusions, taking the time to see how he systematically analyzes the effects of management will help you develop your own analytical methods.

Macroeconomics exerts such an influence over the national and global economy.  Especially in these uncertain times, it is important to have a grasp of how fiscal and monetary policies shape the short and long run rate of output.  The recent credit and economic crisis has shown how important an understanding of globalization and the interconnectivity of all the various markets are.  If you believe that your investment property is influenced only by local market factors, think again.

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Tags: Learn Real Estate, real estate, real estate book, real estate books, real estate investing

When people first decide to buy an apartment building it is common for them to make a few easily preventable mistakes. The most common error that I see new investors make is not having what I like to refer to as the “investor tool chest”.

For example, if you wanted to build a house you would need a few things to get started. You would need first to have a blue print for the home drawn up by an architect. Second, you would need to have the proper tools to actually complete the building, You would need the nails, hammers, saws and drills to work on the raw materials. Thankfully, investing in apartment buildings doesn’t require any physical tools or skills. However, investing in apartment building does require the same kind of mental planning and in this case your “tool chest” is actually a “tool chest” of knowledge.

To Be a Successful Apartment Investor, You Must Have a Plan!

The best way to acquire these essential educational tools is to read many books and magazines on the subject. The first and most important tool that an investor can have is the ability to determine the investment value of apartment building. There is no way that an investor can be sure that he or she will be buying a cash cow or a money pit without the necessary ability to analyze the value of a building. There is an endless array of information available about debt coverage ratios, cap rates and real estate evaluation. In my opinion the first time commercial real estate investor should operate with one simple mental “tool” or presumption and that is to determine what the building is worth to him or her and to ignore almost everything else. What this means is that investor should virtually ignore what prices other similar properties have recently sold for in the area. Instead, the investor should figure out the price that will allow him or her to buy the property and make the profit and cash flow that will make it a good investment.

In order the figure out what price you should pay for an apartment building, assuming for example that you want to realize a certain return, or Cap Rate on your investment annually, simply use the following formula:

Net Operating Income
__________________ = Price You Can Pay to Realize a Desired Cap Rate
Capitalization Rate

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Tags: apartment building course, apartment building education, apartment building investment, apartment building news, buy apartment building, buy apartments