Bob Nelson, real estate investment broker, Pacwest Real Estate Investments, and Marcia Edwards, residential broker with Windermere Real Estate, look at regret when it comes to real estate investment decisions.
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Regret is something no investor wants to experience, but it happens. For instance, sometimes investors will pay too much for a property assuming that rents will continue to rise and the overall market will to, allowing them to recover that purchase price. To avoid regret, it’s important to educate yourself and approach decisions with forward-looking hindsight.
Suppose in a negotiation there are three people who want to buy a property. Each of them makes an offer. The broker who has the listing on the property may say, “Hey guys, I don’t know which one to choose, you’re all qualified, let’s do a best and final.” I’ve done that before. They literally make one more offer. The winner is the winner, period. Now that’s assuming that all three buyers were financially qualified at equal capacity, and so forth. But, it’s interesting that even though the winner probably offered more than the other two, does that mean he overpaid for the property? Not necessarily, because in the past, rents have escalated at a very rapid rate. We even have rent control, because it was an emergency situation. He is the winner in a situation where rents will increase, and continue to increase, to justify what he paid for the property. Of course, at some point, the market may begin to soften a bit.
Then there are value-added properties—that is, the property that could have an upside if you did a lot of deferred maintenance after you take ownership. Look at it as kind of an as-is purchase of investment property.
Bob Nelson, Eugene Commercial Real Estate Investment Broker:
If you buy a property that is in genuine need of repair and there are tenants paying rent, you have to ask yourself the question: “How far do I go in upgrading this property? Do I put the improvements on the inside, where the tenants get to benefit from the improved lifestyle. Or, do I put it on the outside?” (For instance, to take care of dry rot.) It will always be justified on the inside, rather than the outside. That’s just the way it is.
Deferred maintenance is often more expensive than you anticipate, so I’d make sure you understand the extent of the deferred maintenance before you purchase that property.
Using Forward-Looking Hindsight in Real Estate Investment is from Bob Nelson and Marcia Edwards on the “Real Estate Today” Eugene, Oregon, radio show, which airs at 5:30pm daily on KPNW.