There is a saying: “If you do what everybody else does, you’ll get what everybody else gets”. This is true of any market including real estate, that’s why you gain an unfair advantage by the time you become creative. The biggest “geniuses” of this market are those who have become exceptionally creative and who will put together deals where none could exist, by shifting enough factors around until they win.
Breaking the mold is a necessity in real estate investing.
This is way real estate investing cannot be performed inside a box: a system that always works in the same way and that will produce always the same results. For one thing, if the system is really workable it will attract a lot of competition that will copy it and will use it to its maximum potential, and huge profits bring about ruinous competition.
So you need to be able to play by the rules, so that people can still understand you, but with the ability to create your own rules. In commercial real estate this becomes even more important. When you are in the same playground as everybody else, competition will bring prices up, by the sole application of the law of supply and demand. And if the price goes high or if you are forced into buying a property at its current value or slightly below it, you have already lost.
The focus, like in residential, is finding distressed or defaulted properties (where the owner has stopped making loan payments) and bringing new value to them. You cannot settle for the same rate of return like any other investor does. If you do, and the market goes down, you will be in a tight spot along with anybody else. If you have a better position you will still make a profit while others will be sinking.
There is a story I want to borrow from the world on Internet Marketing, adapting it to commercial real estate investing. It talks about two investors that go on a safari and suddenly come face to face with an hungry lion that starts to draw circles around them. One of the investors sits down on rock, takes away his boots and puts on a pair of sneakers.
The first investor looks at him and says: “That’s silly, you will never be able to outrun a lion!” And the second investor replies: “I don’t need to outrun a lion, I just need to outrun you!”
So you need to focus on properties that have problems, high vacancy rates, plummeting lease values, a drastic diminishing value as compared to the loan that was issued on them. Remember that the location and the structure of the building is only partially important in this case. There was an instance for example of two identical apartment buildings, sitting just across the street from one another. They had been built the same year, with the same materials and with the same shape. Yet one of them was solvent and doing very well and the second was failing.
Management is the real key factor and a tired owner or an incompetent one will make the best candidate for a foreclosure and the potential of profit for an outside investor. Sometimes you need to deal with problems associated with the seller, which are usually easy to fix, or with problems associated with the property. The seller often just wants to get rid of the property and you can help him, by providing multiple solutions from which he can chose and that will all bring you and him benefits.
When you have problems related to the property, they are also usually easy to fix and boil down to a seller’s inability to understand them and deal with them.
So commercial real estate investing, more than residential investing, requires a very keen ability to understand the real situation of the seller and what he really wants and a superb ability in structuring a deal.
Roberto Mazzoni
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