Buying Mismanaged Real Estate Assets Low

The following is a scenario that is
cropping up more and more often with my investors and with those who have
recently reached out to me asking for input on potential real estate or
business deals. I thought it might be helpful to others to put my
thoughts on the subject

into writing…

As a value investor when it comes to buying
real estate, I find I need to constantly remind my investors and myself to stay
disciplined and keep emotions in check. Easier said than done. 

As a value investor for nearly 16 years, it is difficult
to “run the numbers,” remove emotion from the equation and come up with what
I feel is a fair and genuine offer only to see a frustrated seller huff and
puff and say, “Well I need to sell it for X dollars because: a) that’s what I paid
for it plus a fair return or b) I need the money to pay off my debt or c) that’s
what I require for another investment.”

A
property is worth what it’s worth, based on what it is, its income, location and market conditions. It
is not based on whatever the seller happens to feel it’s worth.

Equally frustrating are situations where
the asset was doing well before the current owner purchased it and, whether
through misfortune or incompetence, the current owner has driven the
property/business into the ground and yet, fails to see this. And of course, they’ll still insist on making a profit from a sale even
though there is no logical argument to base that on.  

How do you combine professionalism,
persuasion and frankness in order to make a seller see that you’re not trying
to shaft them? In reality, it is the owner through mismanagement or bad luck who created the situation.

I must admit I’ve struggled with some
recent “value” purchases in bridging that gap—between what I feel is fair
market value and an owner’s desire to sell high. It’s understandable an
owner might hold out as long and as strongly as possible; I think it only human
nature to do that when facing a loss; no one wants to see it crystallized.

In each of the last three deals I tried to
put together, we were looking at properties that had a lot of potential upside; projects that would get noticed by more than a few people inside and outside the industry, and more importantly, all three had great
profit potential. That being said, the risks and effort to make these
properties work was/is substantial. In all three cases, we’re talking about
multi-year projects with substantial soft and hard costs. And in all three examples, current ownership had
contributed in various ways to a decline of the property.

It can be disheartening for an eager
investor with a cool and profitable project to be told by a real estate adviser
to hold firm, and be prepared for a failed deal. Surely, it’s better to
deal with that disappointment than to overpay for an investment, which might add
a decade to the time it takes before it’s above water, which is too long.

I continue to work on my
negotiation and communication skills with the hope of being able to bridge
those gaps in the future. I continue to hold out hope that each of these three
deals might yet be resurrected. 

I also continue to find new and creative ways
to bridge financial gaps by creating different structures and agreements that
allow current owners a second chance at turning their investment around
by, for example, participating in a new, restructured company that holds the
asset, refinances it, adds value and has better management.

In the end, I believe a disciplined
to buying real estate is really important; as Prof Bruce says, “You make money in real estate when you buy not when you sell so buy smart.”

Anyway, there’s always another property or business to buy. A
disciplined purchase based on numbers and analysis is almost always better than
one you bought because you became emotionally attached or because you got involved
in a competitive situation and got a bad case of auction fever or because you
let your ego run wild.

Brian Dagenais 613-614-1098 Briandagenaisproperties.com