Can you pay too little for a piece of Real Estate?

Posted on 09/02/10 in General, No Comments

Forever on the hunt for great deals I yesterday found myself in a local commercial real estate agents office looking at a few very interesting property deals.

After speaking to the principal agent for a few minutes we disclosed that we are after a killer deal and would be interested in any property were the vendor has a large amount of motivation to sell or a property that they may be willing to let us Steal ahem… buy.

What we are looking for was a great deal that could have some add value and with any luck it also wouldn’t require much or any money to be put in from us.

Now if we had taken that shopping list to a large agency 12 months ago we might have been laughed out of the office, but not in this current market.

The agent whiped out a huge map of every commercial building in Wellington and started putting stickers on the buildings that were available at the moment from his agency for a huge discount.

By time he stopped the map had maybe 15 stickers on it, the conversation sort of went “And this ones available, it will sell for 12m and is worth about 20m, they need to refinance and pay out an IRD debt”.

It was just crazy, we went through some 300 million worth of property mostly selling for around 50 or 60% of it’s government valuation.

Looking at the history of values in Wellington it seems to me that these sort of prices haven’t been around since the crash of 1987.

So this made me think does the act of trying to find really killer deals in this sort of market make me predatory?

Can my looking to buy large amounts of real estate in a recessionary and very “Down” market actually be bad for the market as a whole?

Consider these two investors…

They bought themselves a really nice deal today, they purchased the Brooklyn Heights subdivision from the Liquidators of Lombard Finance.

Lombard was owed more than $40,000,000 yes that’s forty million dollars of loans made to the developer of the subdivision Lance James, James had the development taken off him and the company appointed to sell the asset has been in negotiation ever since.

These two investors were at the right place at the right time and most importantly with a few bucks in their pockets and took the development way for $2.25m!

The article goes on to say…

And the delighted buyers – developer John Mouroukis and his real estate agent partner Peter Barzukas – are set to recoup almost all their investment within a few months just by finishing off and selling six nearly complete houses.
The rest of the story is here

I bet they were delighted, but my question is do they have any duty to the failed investment of the people who put their hard earned money into Lombard?

I think not.

Look at it this way, some 35,000 kiwis who had invested in South Canterbury Finance will get their invested funds back in a few weeks which will pump $1.8 billion pure investment dollars into the economy.

These people in my view made a hands off speculative investment to earn higher than bank interest rates in an investment vehicle they thought to be very stable.

But isn’t that what any property investor does too?

So who’s going to bail out the mum and dad investor who can’t service their level of lending due to the recession making one of their incomes disappear?

Nobody, they simply should have known better right?

There is no government safety net, no guarantee scheme that will save us all.

This is because we all captain our own ships we control our own destiny, and that’s exactly why it’s OK to buy huge chunks of real estate for much less than what they’re worth.

Because you can, because you are in a position through the knowledge you have obtained to put the deal together and because of the decisions you have made your in a position to take advantage of the current market conditions.

I really don’t think any of the South Canterbury Finance customers are going to give their part of the $1.8 billion back because its not fair to the government.

Interesting to see the SCF website still live today…

“South Canterbury Finance is one of New Zealand’s largest & most successful finance companies, providing finance, loans & solid investment opportunities for over 80 years. With a strong regional presence throughout New Zealand, you can trust the team at South Canterbury Finance to provide outstanding customer service and sound advice.”

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