“The Great Real Estate Depression of 2009” - Part 2

[The Business Shrink]

Business Shrink Online Seminar - Part 2 “The Great Real Estate Depression of 2009”

The Business Shrink: Peter Morris
Real Estate Expert: Dr. Bruce Tizes
Seminar Host: Shane Hackett

This is the second installment of the online seminar “The Great Real Estate Depression of 2009.”

Shane: And Dr Tizes when you look at kind of the history of how we got here it seems like we started with the sub prime crisis and then it rolled and had a incredible ripple effect into the bank where and even real estate that was obviously that was not sub-prime is greatly affected in the failure of banks. How do you see and what role do you see the banks playing right now in this great real estate depression of 2009?

Dr. Tizes: Well, thanks for asking. I will divide the answer into two pieces. You asked how did we get here and I think that the answer to that is painful simple. When a lender distinguishes risk from reward, you get into trouble. And so when people were lending other people’s money, and earning a fee for that, but not taking risk themselves they lent money imprudently.

Of course, can you say that the borrower may not have told the truth in some those sub-prime loans and certainly they are responsible, but the next step up from there was the illusion that risk could be eliminated. Risk is not eliminatable, which isn’t a word, but risk cannot be hedge away by entering into a forward with an insurance company that insures against default, when the insurance company itself had written premiums and risk coverage many multiples of its net assets. That’s like going down to the candy store and asking them to insure that a bus doesn’t off the tracks and start swimming. Its fine, but it is a ridiculous contract. In other words, it can be written in reduce paper. The last piece of that is that I’m not the brightest guy in the room and I looked at some of those derivative contracts and I really couldn’t understand them. I couldn’t understand what the risk was; I couldn’t understand what the return was and so I didn’t do them.

Now I’m not patting myself on the head; I’m just confessing to you freely that I didn’t understand. So that’s how we got here I think.

In terms of what to do now, relative to the banks what our federal government is doing is doing is trying to encourage the banks through use of planning [inaudible] to lend money. To put money out there to you, me and other borrowers as we see fit. And of course it is not working to well right about now, but over the course of time they probably will and the best predictor for a booming real estate market is abundant cheap capital.

And so at sometime there will be liquidity in the marketplace and it won’t cost too much. And when that happens, which is generally by the banking function then it is followed invariably by ascending real estate prices.

Shane: Peter, as the Business Shrink, you talk about the actual investing part or the kind of a hard business strategies, but you also look at it from a psychology point of view, and so this question is directed to you which is based on where we are at right now, we’ve got multiple investors that on our presentation tonight, can an investor take advantage of the psychological aspect of this depression that we are currently experiencing?

Biz Shrink: Absolutely. In order to do that we must realize first that first of all about how people’s feelings and emotions enter twine with their business judgments. One of the things I’ve been saying for thirty years has gone through three cycles and then some is when things are great, they are always great; when they are bad, they are always bad. It is a now is forever and no matter how many cycles we go through people are always guilty of embracing the moments, freezing the time frame and projecting into the future that this is going to be constant. No matter how many times they ride up the hill in a gallop and then they fall off the horse and then the stay in the saddle and eventually they come back. They seem to be willing and we all seem to be willing to ride this rollercoaster and be faithful to the point at which we’re in. You’ve got quantitative people and pseudo analysts who say, “I’m going to wait until things hit bottom before I do something.” Now it is always a good idea to wait for the bubble to burst and for prices to really drop and try to really bottom fish, but on the other hand, it is also realistic to know that nobody really knows that where the top is and nobody really knows where the bottom is. And I like to say that the bottom of the market is the phrase used by fools because the only person that sees the bottom is the person who looks out of his rear view mirror and that means that person is already past the bottom. So the trick is to go into the bottom 10% of the curve, and know that when you see something that has fundamental value and that you are not looking for a quick hit, but you are willing to invest and be patient for awhile; then deal by deal there are opportunities to make money today. So, what does that mean? It means that if you going to go into a urban area where there are hundreds of hundreds and thousands of foreclosed homes that haven’t been resold and there doesn’t seem to be any immediate future of a drop in prices or a building for people to move back in or for the labor situation to get much better; the fact that it is a bargain does not mean it is an invitation to buy. On the other hand, there are areas that have more inherent scarcity value that the properties have dropped in value, but because its on the ocean or its on a lake or in area where there not a lot of replicable pieces of land or buildings and its taken a big hit in terms of value, one has to have courage of his or her convictions to make judgments and to make fundamental and good investments and give it time to heal and to profit from it. So in that regard, yes there are opportunities, but one needs to be cautious, not get into any type of mass thinking. It’s is a very individualistic process for people’s risk and reward tolerance. As Dr. Tizes has said, “you can’t [inaudible] on from the other.”

Shane: So Dr. Tizes, with Peter’s explanation, how do you specifically evaluate and identify properties? We will take this moment in time. How do you evaluate and identify properties that you are interested in and investing in?

Dr. Tizes: Well, thanks for asking. And Peter has such tremendous experience in real estate that I hesitate to try to put four important words on the union face of real estate investing, but I am going to try anyway.

The words are fear, hope, greed and desire. Because emotional implications of real estate investing control what price action is. So Peter introduced a concept of fundamental value. You might say that there is a fundamental value to the shoreline of North America that is not shared by the Great Plains for an example. And there is scarcity of the shoreline that is not shared by the Great Plains. So that might be an example of a fundamental value as distinguished from the excitatory enormously emotionally driven markets of the California coast line. So both the fundamental value and the enormous emotional range that people apply to things that they own are consequential established in price. So Peter I hope that was alright with you.

The Biz Shrink: Well, I think it is exactly alright. I think that you have more than brilliantly acquitted yourself with your track record of picking real estate. I’ve seen it first hand. You go for unique properties that are not easy to replicate; where the [inaudible] entry is high. Where the affect from the appraisal theory point of view; there are not a lot of comparables. In fact, if you are going to buy a piece of property say a vacant piece of land in the outer ring of the Dallas SMA [inaudible] area where there is future rings or Phoenix where there is future supply of land that appears to be endless. You are asking for trouble. And yes there are comparables. There is this one patch of 10 acres here and there is a patch 5 acres across the street and there is another 10 acres a mile north and go on and on. If you have a piece of land that is unique and that may have a 10 acre lake on it; it may be edge of a mountain; it may be on an intersection where the high car count, whatever it is, then you can’t just sum it up a comparable. A good example is I bought a piece of property for a million dollars that was 230 acres in the suburban New York area that has two miles of lakefront and then I got it appraised and I achieved a valuation of five times that initial appraisal back in 2000 before 9/11 actually. In order to establish value I had to arm wrestle with different appraisers and interview them on their philosophy and methodology. Those who set out say they would find comparables constantly feel short and didn’t understand the nature of the assignment, nor how to value a unique property because my answer to that was repeatedly, “well where’s the other 200 acres or even 50 acres that has a 50 acre or a 20 acre lake with a half a mile or a quarter mile of lakefront that is nearby?” And they would always come up short saying, “well we don’t have that, but we have 30 acres five miles away of flat land.” And I would say, “Well, how do you compare that?” Not unless you add the cost of building a lake, which you can’t even do with EPA mostly and the state and local versions of that. So you can’t replicate that experience of that piece of land then you do not have a comparable. So then what you have to do is then do adjustment factors. You may have to go 100 miles away and you may find something closer into an urban area that has more values or something further out that is less, but then you would have to put adjustment factors to say this is higher than that because it’s closer to New York. This is lower than that because it’s further away. This is higher than that even though it’s further from New York because it has more land with rolling hills and great terrain. So there are a lot of factors that go into it. So I like to say really good unique land has a [inaudible] entry that is a collectable in nature and has a long term fundamental value. There is land that has yet to be developed. Yet to be maximized. Yet to be articulated. Yet to be planned and horizontally developed meaning master planned and created [inaudible] consistent to the planning board. And the kind of land doesn’t have a comparable; it has what I call an analog.

Dr. Tizes: Peter, can I jump in?

Biz Shrink: Yeah.

Dr. Tizes: I want to bring it back around to the core question of the depression of year 2000, and what Peter outlined there is the kind of real estate that excites me and excites him. We like collectable, quality unusual real estate assets, but there are many ways to invest in real estate, particularly here during these troubled times. We might like deeply discounted properties that have cash flow for an example. Or another person might like buying something collectable or third person might like taking down a asset that is cash flowing that will [inaudible] reused in the near future for an example. Or something in the path of growth; another person might like asset that has a correctable defect. So for example, a polluted piece of land that you can clean up, but acquire it at low cost. There are a number of different strategies and they all apply themselves very well at the times when the market is down because as everybody knows and understands this is a buyers market.

Biz Shrink: And that is well put. I couldn’t agree more, but I would like add something Bruce to what you are saying. And that is that, I have found over the three cycles in the 35 years that I have been investing in land and other types of real estate that there is a certain approach that is almost juvenile that prevails in the down market like this one of mass depression, hysteria, and [inaudible] disillusion that which is people who have money say, “Aha, I’m going to steal this and I want to buy this for 50% or 80 % of what it was a year or two or three ago”. So when you get a numerical approach without of thinking about the qualitative aspects of the property, you are mixing the boat. Or no I want to buy mortgages and I want to buy them at a 50% discounts. Then and again, that’s not the right way to look at it; you are putting the cart before the horse.

What you want to look at is the fundamental asset and where it is in its value cycle and where it can go down the road when the market stabilizes two, three, four or five years from now. Most people don’t focus on that. They haven’t been through the cycles today, those who control the money most of them and then they are buying based on ratios. It’s not the way to buy the real estate. It’s not the way to meet a person to fall in love with or a business partner to get in the business with either. You’ve got to look at land in a very personal way. It has its own DNA.

Shane: Just kind of recap on what both of you were just talking about, in real estate its location, location, location and Peter you gave many examples about the different values of land based on where it may be located, the type of land and knowing your portfolio very well, you’ve made hundreds of millions of dollars finding very exquisite, very high value pieces of property located on the beachfront, water front type of areas, and Bruce where you were talking about different types of real estate what I would call asset classes and one of those could be a cash flowing property; Bruce regardless if it is raw land or single family home, an industrial apartment complex or an industrial/commercial building, one of the questions is how do locate them or how do you actually find them. I guess each one of those asset classes may have its own unique way that you locate them. How do you locate these types of properties that actually fit your criteria for purchase?

Dr. Tizes: Shane, I really want our listeners tonight to walk away with a couple of things of genuine value directly for them. It’s not easy in a short period of time to encapsulate all that Peter knows or I know or perhaps the little bit we know, but there are some core fundamental truths. One of them that Peter was making direct reference to is that real estate is not fungibable. A very fancy word to say that one piece is different from the other. They are not interchangeable. It is not sufficient to look at a spread sheet to determine that if you want a piece of real estate. Now there are a lot of ways to find good deals and of course we only want to buy the good ones, but the first and fundamental truth is that you have to kiss a lot of babies before you find the right one. Roughly, I touch 100 deals before I actually close on one roughly. And a number of the deals that I don’t close on are pretty darn good, but they aren’t just good enough. And so that means that I am really busy. And it tells you axiomatically that if we have slightly more talent than the next guy in this field if some how brown dirt runs through my veins and does not the next guys veins that still follows the 99% of the really hard work of getting out there, seeing the piece of property, touching it, feeling it, understanding it and trying to negotiate for it so that it meets your criteria which by the way implies a method. So you might say that somebody that who has the method to buy only when the clock is at twelve o’clock is right twice in a 24 hour cycle, right? So there are a lot of methods to be had; you could buy real estate on houses that are in a street that begins with the letter “T”, right? That’s a method. I’d suggest different methods; I don’t think that those are particularly good methods, but they are methods and they are replicable. So what we have is a method and I happen to look exquisite unique idiosyncratic properties that are in short supply, but that doesn’t mean that I couldn’t make a living creating track homes with a built in 21 % margin above my cause. Both of those are methods. Have a method. So one of the take way lessons for tonight, is treat real estate seriously because you lived in a piece of real estate your entire life and not in a cave does not make you a real estate expert, but it also doesn’t mean that you can’t be one. It is a serious field human endeavor and you need to think about what you are doing. So that is one answer. The second is the usual one for human work is cast your net widely. Don’t be afraid to go look at a lot of stuff and only touch the good ones. In other words, don’t do a bad deal because you are in such a hurry to do a deal. The third is although the real estate rules do say that location, location, location is the most important; it is not. The most important thing in real estate rules is when. When are you in the real estate cycle? So Peter touched on that a few moments ago to tell you that he doesn’t buy at the bottom. And guess what ladies and gentlemen, and neither do I except by accident. I’m not smart enough to know exactly when the bottom is except by looking in the rear view mirror of the car. What I can do is be extremely cautious and I don’t mind buying after the market is lifted off of its bottom. In fact, I’d very rarely go in until the market is demonstrably off its bottom. Different people play that in different ways, but develop a method that you are comfortable with.

Biz Shrink: I’m saying that’s very good advice and I can say sending your praises Bruce that recently we control interest in a substantial 400 acre property in the southwest without going into the name of it. We have an opportunity to develop 10 acres on a residential basis and finding that right 10 acres in the 400 acres of rolling hills. The effort that you put into elevation, water availability, water view, water access, water recreational, soil conditions, ease of building, site views and with extensive walking. There are so substitute for embracing a piece of land to make a judgment. There is no substitute for any deal for showing up personally and looking at those kinds of nuisances.

Dr. Tizes: Thanks very much. Shane, may I continue with a few more rules that might be helpful?

Shane: Absolutely, go ahead. Please.

Dr. Tizes: Another rule is what Peter & I call high early liquidity which means always be willing to sell when they get to the price you need to have. These are not [inaudible] objects. This is a business. Real estate is a business. Now should you love what you do, you bet we think that you should love what you do, but that doesn’t mean that you need to take that particular single piece of property in your hands and ride it for the next 37 years. You should be or I should respectfully say that I am and Peter is indifferent to the particular pieces of property that we have just that we like them but when we can liquidity from those properties we accept it. So if we have a piece of raw land we might sell it raw or we might subdivided into parcels. We might improve it with entitlements that those are government permissions to build. We might build a sing house, we may build multiple houses, we may build condominiums and we might sell it anywhere along that path. So that rule is called high early liquidity. And then finally, I ask you to pay a lot of attention to the systemic risk of your portfolio. That is the portfolio things that you invest in. You want to have just enough money in something, so that if you win, you win enough for it to count. If you lose, it doesn’t kill you. And that means a highly diversified portfolio and everybody love diversification, but if you diversify into “bad stuff” you haven’t helped yourself. So sometimes, frequently, Peter and I take the trade or take the investment that is called “cash.” That is we take the investment called “no investment” when we can’t find the right investments to allocate our dollars. We are not so eager to buy things that we will buy things that are not correct for portfolio.

Biz Shrink: Alright, sometimes the best deal you would do is the deal you don’t do. And that is a very important rule. And that is a very important rule. Saying no is good for the soul in business.

Shane: Peter I think that yours is very similar that you will actually look at 100 deals to get to one deal that you will actually seriously do the due diligence on to see if it can be a transaction.

Biz Shrink: Absolutely. Don’t forget the human equation because sometimes deals come with people and you have to assess whether that person honest, what your rights are and need to be set out up front like a prenuptial agreement just in case things don’t go well. What level of control you have, what the integrity of the person is because I’ve seen many of bad persons destroy a good deal. So sometimes I’ve passed on phenomenal deals because the people that are involved in it are looking for a venture are people that I don’t trust and don’t feel that I will be able to have functional experience deal to direct to the higher asset level of value. So do not forget the human equation. It’s not always the property that comes alone; sometimes it comes with people. With that being said, if you good with picking players with that are worthy to work with you, you will open up another sphere of opportunity and sometimes that it is quite good because people like to hold on to special properties and when they have a need to liquefy sometimes they will sell parts and keep parts. So there is another nuance for a higher level of expertise where you can buy business psychology and real estate.

Shane: Now both of you have done have hundreds of millions of dollars in real estate transactions and millions and millions of dollars in profits. With the hundreds of people that registered for out online seminar tonight, I’m sure we have a very diverse group of investors. Some people could be starting; some people could be looking to make investments in single family homes and other people in much more sophisticated real estate transactions. And Dr. Tizes what are the three biggest mistakes that amateur real estate investors make?

Dr. Tizes: Most people think that because that they have looked at one, two or three houses that they have canvas market. So the first mistake is that they don’t cast their net widely. It is essential to work exceptionally hard. The early bird gets the worm. I literally without exception work 14 to 16 hours everyday, seven days a week. The second most important and Peter will have his own view of this I think, but failure to create a strategy. The process of winning is replicable one. Even if the individual assets that you have purchased in your real portfolio are different; the process that you follow to find it, evaluate it, close upon it, manage it, optimize it and ultimately get to a disposition is a replicable process. Probably the last piece advice I would say is that constitutes the largest error that investors in real estate makes is that they believes that money comes easily. Money does not come easily. It does not come easily in any field of human endeavor; it does not come easily in real estate; it doesn’t come easily from the lottery. The lottery winners are impecunious after a short period of time and that is a very fancy word to say flat busted broke.

Biz Shrink: Well, there is another way that I like to say true luck is nine tenths of perspiration. If you work hard you place yourself in a position and take advantage of luck. Dumb luck is not something you bank on; that’s a critical thing to focus on. The other thing I would like to say which is that I have said it a different way before is don’t look to buy cheaper by the pound. Don’t look to buy cheapest price. Look for the best price possible for best deal possible for the best piece of real estate available that has a unique quality to it. My experience over the years of having bought and sold 10 billion dollars of real estate is the deals that I thought I was stealing numerically in ratios and mathematical terms never did nearly as well as deals that I’ve paid “prevailing value with a willing buyer and a willing seller looking to do without coercion in the marketplace or a special disadvantage or hardship where the buyer could be pushed around into giving things up for a song, but that the property itself was available because the opportunity [inaudible] risen and the market was ready for it transfer hands.” Those deals did much better. They were the [inaudible] as opposed to the ones where I thought I was buying cheaper by the dozen.

Dr. Tizes: Peter…

Biz Shrink: And I tell you…

Dr. Tizes: This is a secret! Don’t!

Biz Shrink: That is a very important thing to keep in mind.

Dr. Tizes: Peter, don’t tell them all the secrets!

Biz Shrink: Well, I’ll keep a few back, but I am going have to go early now as I have to go across the pacific, but I do want to say thank you to everyone for my point of view, for being here and I know this will continue. I would like to say Shane, if it is appropriate; if not, I apologize in advance in putting my foot in my mouth, but would be nice to hear from your folks by email ask to what you liked and what you didn’t like about the session and we will take that into consideration. It’s a learning process for us too, in terms in how you would like to be informed and what type of issues that you feel would be helpful to discuss. And I want to say thank you and good night.

Dr. Tizes: Good night Peter and thanks so much.

Biz Shrink: Bye.

Shane: It is always great to actually have the Business Shrink on the Business Shrink Seminar Series. [inaudible]. Dr. Tizes, in a couple of our previous seminars one thing that Peter actually talked about in terms of sourcing the right property is the psychology side and intuition, but also backing that up with research and facts, hard numbers and also hard work which is pretty much is what you were saying in terms of the effort that you put in into trying to actually work at trying to find that deal that’s going to have that expediential return.

Dr. Tizes: Well, that is certainly right and I don’t want to scare anybody away by talking about the hard work too much, but I did emphasize it to stand in opposition to the guys that stand up and pretend that you can lick a postage stamp and put something into an envelope and have an avalanche of coming in your front door because that is just not the truth. It is also true that when you have a method and a style of investing that yields profit. If you apply it with great hard work you would do reasonably well. That is true and that is the essential American dream right there. I happen to like doing that in real estate and although Peter is gone now; I’d underline the core idea that you buy really good property. Really good. Really good things tend over time to out perform weaker things. So the answer idea that you are buying a can of peas and that you ought to pay as little as you can for those jolly green giant peas has no application to real estate whatsoever to each piece.

Shane: Absolutely. I know just that in the small time that we are here together on our seminar that we are really doing is touching the very tip of the iceberg and without a doubt, I know that everyone that has participated tonight is very impressed with obviously with both yours and Peter’s track record and really appreciate all the different ideas that you have shared with us tonight. Dr. Tizes is there anything before we actually adjourn here that you would like to add?

Dr. Tizes: Well, no. Only that I really appreciate your inviting me tonight and I’ve had some fun. Anytime that I get to talk with some friends and colleagues about something that I like doing as much as I like real estate, I’ll always say yes. Thanks so much.

Shane: One of the interesting things is that Peter will talk about in terms of his long term 30 plus years of investing. There has been multiple market cycles and Peter used the term that people get in the mindset of now is forever and if you look back over the history of both of your investing you both have multiple go fors and there was the internet bubble that bursted. Then there was 9/11 and based off of the name of your book, you’ve got The Great Real Estate Depression of 2009, but this does is create a great buying opportunity and a investment opportunity for individuals that have the time, that will put in the effort and have investment capital or access to the investment capital to make substantial profits in the real estate market right now. So please feel free to contact Margie directly and she will set you up with a time to be interviewed at your convenience. Dr. Tizes thank you so much for your time tonight. Sharing with us your insights and what’s going on in the real estate market right now. We greatly appreciate you being a guest tonight. Thank you.

Dr. Tizes: Thanks for being so kind. I’m going to good night then and regard to everybody and good luck.

For more information on real estate consulting services with the Business Shrink Peter Morris or Dr. Bruce Tizes, contact Luke Collier via email at [e-mail] or by phone at 816.886.4006. www.thebusinessshrink.com

Important Disclaimer: This is neither an offer to sell nor solicitation to purchase securities and this is for educational purposes only.

Copyright 2009. All rights reserved. The Business Shrink. www.thebusinessshrink.com