Mike from NJ asks:
With the rapid increase in prices, I’m finding the environment so much more competitive and it is getting harder to find deals. Do you have any advice for someone who is looking to find deals in today’s environment?
Mike, this is a great question.
First of all, while the market has become more competitive, I’m finding that deals are still out there. But before we can find a deal we need to define what is a deal. It’s a little bit like asking if the image on a magazine cover is beautiful. Whether the image is beautiful is in the eye of the beholder.
Recognizing a deal means really knowing your numbers. You need to be on top of market values in your local area. When I say market values, I’m talking about the hyper local values that apply in almost every market. It turns out that in situations of very tight supply such as we have right now, the radius you can consider is usually expanded.
But above all, if you are looking to establish new values in an area, the key is to gain control over enough of the area that you can convince the market of the prices you are setting in the market. There has to be sufficient scale to create a meaningful and convincing data set.
I’ll give you a simple example. Last year, I bought a property that is on the border of a fast flowing River about 30 minutes outside the city. The purchase was a bank sale, and yes we got a good deal.
The second property was an off market deal for the property next door. The negotiations started when the neighbor died. The family clearly wanted to sell the property and the proceeds from the sale would be divided among 7 next of kin.
At about the same time, I started a dialog with the owner of a property across the street. This house is in physical distress. The owner does not want to do any further maintenance on the property. He is in his 70’s and actually has a farm house that he wants to restore. He wants to use the proceeds from the sale to restore the farm house.
So how does this small example help you?
I could give you another half dozen examples that are similar. In each case there is a special story surrounding the property.
In each case the finished product will not resemble the current property in its current condition. The vast majority of buyers in the market are still looking for properties that are move in ready. It’s a small percentage of buyers who are willing to redevelop a property.
Let’s go back to the definition of a deal. I have a clear idea of what the finished product will be and what it would sell for in today’s market. Our team is hands on involved in quoting construction projects on a daily basis. We can back up from the final sale price to determine the residual land value that we can afford to pay and still have a project that meets our margin criteria.
I’m describing three different properties that next to each other in the same neighborhood. If I was just doing a single property, I would be less confident in the prospect for the area. But I know that the value is often set by the neighbouring properties. By controlling the neighborhood, I’m controlling the value.
Once you go through the effort to understand the local approval process, the incremental effort to do three is small compared with doing one.
If you have been listening to this show for a while, you have no doubt heard me talk about the buy on the line, move the line strategy. The core of the strategy is to transform enough of the neighborhood that you raise the value not just for a single property, but for the entire area. We pioneered this strategy in Philadelphia during the depths of the Great Recession. Here too, we found many deals off-market. Some were auctions. But the process was exactly the same.