I’ll say up front that this subject is one maybe better written by Captain Obvious. Yet, if it’s so obvious why are so many investors consistently caught with their pants down? As a real estate investment advisor I’m asked all the time about when to buy or sell. I do not claim to have either a lucky and talkative bird or a working crystal ball. I can say however, (obvious comment coming) that paying attention to the market pays off.
I thought I was a year late getting into both Phoenix and Boise – 20/20 hindsight. I wasn’t late as in miss the boat late. I just didn’t have that little birdie whispering to me exactly when and where to invest. I had to rely on my own experience, research, and judgment. It’s easy to say, “Yeah, I just decided it was time to move my clients to this or that region.” It’s a lot harder decision to actually execute when your clients are looking to you for guidance. Correct guidance.
How often have we all heard timing is everything? In real estate how much would our overall investment performance have been improved had we known in advance exactly when a down or normal market was about to skyrocket? What if you were in East Toilet Seat Rhode Island in 1999 wondering just what you should do with that $50K burning a hole in your pocket? Suddenly a little birdie landed on your shoulder and whispered, “Hey big guy, buy all you can with as low a down payment as possible — in San Diego. The only thing you knew about SD was its predictably great weather.
Your timing would have made you look like a genius. Of course if you were that bright you would’ve traded up a couple times before doing a third trade into Phoenix around the middle of 2003. By that time your $50K would have grown to more than $400K. (drawn from client file) We all know what happened in Phoenix from that point on. You knew it before hand because of your talkative birdie. He whispered again, telling you in the spring of ’05 to trade out of Phoenix and move your two-comma equity to Boise. “Boise?” you ask. “Trust me” he whispered.
So how is pitching a lot like real estate?
Pitching is only about timing — the batter’s timing. Successfully mess with a hitter’s timing and you’ll consistently succeed. He’s expecting a curve and you throw a fastball right by him. He knows you’re about to try that again. Now he’s walking back to the dugout because he swung a day early on your changup. It’s all about timing. Sandy Koufax (the best pitcher ever to wear a uniform – don’t argue, I’m not rational about this) had two pitches – a fastball and a curve. Both were the best in baseball. You are the hitter. Which pitch is he going to throw? One is 95-100 mph, the other is under 80. Don’t be wrong. Koufax screwed up a hitter’s timing so badly one time, the guy’s swing caused him to literally crack a couple ribs. I saw it happen live.
This is the scenic route to answering a question often posed by prospects who’ve been referred to us by clients with whom they are acquainted. They’ve been told holding periods are dictated by the market and not set in concrete by our crystal ball. Somehow this is disappointing to some of them. So they ask us – “How long are we going to own our first investment properties?”
We’d have a better chance of predicting who’s going to win the National League West division title this year. (Sadly, probably not the Padres, though they will compete for it.) The astute investor is always aware of his up to date equity growth rate. It matters not whether it’s been 12 months or six years. You’ve either grown enough that it makes ‘growth sense’ to exchange up, or it doesn’t.
Here’s a recent example.
In the first quarter of 2001 clients of mine purchased a couple small unit income properties in San Diego. 11 months later I advised them to make use of a 1031 tax deferred exchange to more units. Why? Because their initial investment capital of about $70K had grown to well over $200K already. Their equity to value had quickly risen from about 10% to almost 40% due to appreciation in the tsunami range. They agreed. We closed the sale escrows 13 months after they closed the original purchases with combined net proceeds of just over $220K. They’d taken another $50K from their home which they added to this bounty. By the end of this exchange they’d traded into five properties worth about $2.2Mil.
Remember, they’d started just a year before by acquiring less than $600K in small units.
They were once again in an equity to value position of about 10% and ready to benefit from the quickly rising market. I’d told them when they closed on the original purchases we’d probably be trading them in the next 3-5 years. Fortuneately I didn’t listen to myself talking, but rather what the market was screaming.
Timing is everything. You’re not going to know exactly when to buy or sell. But if you allow the market to tell you, you’ll be a lot closer than most. Pay attention — those birds are extinct.
Steve Berg says:
Jeff: Great post. Love the baseball/timing analogy. But the key concept in the whole thing was your advice to your clients to expect to hold the property for 3-5 years. PATIENCE is a key (maybe THE key) aspect of investing in real estate. Kris and I were dealing with a few small time/first time investors in 2004 in San Diego. They had witnessed the meteoric rise in values and thought, “This is easy!. We’ll buy and spin it in a year and make $50k-$100k”. Our attempts to caution them that the market may well have run its’ course and that they should either: 1.) not buy now, or 2.)plan on a “3-5 year hold period” were completely ignored. Of course now they are feeling the pain. Thanks for reminding everyone that in real estate a mid-to-long term hold alomst always provides an excellent return.
Regarding Koufax, I take exception. You had to see Bob Gibson pitch. The games rarely lasted more than an hour and a half. Talk about throwing smoke…
Steve
February 6, 2007 — 7:13 pm
Norma Newgent says:
Thanks for the great post. It really makes me appreciate my samll role in moving dirt. As a Realtor, I don’t feel that huge pressure to help my clients based on what the market may or may not do, I just help them find a some great diggs. I don’t think I want that added pressure. I liked the baseball too even though I’m just a girl.
February 6, 2007 — 8:01 pm
NVmike says:
I don’t think 3 to 5 years is going to be long enough for anyone who buys today.
It looks like at least another 12-18 mos of solid depreciation ahead. And then, if history is any lesson, that’ll be followed by at least a few years of no appreciable growth.
February 6, 2007 — 10:21 pm
Brian Brady says:
I also loved the analogy but I might suggest that batting is better. Good hitters face all kinds of different pitchers (like investors face various challenges). The successful batter knows when to take a pitch and also engages in the outguessing game.
Alas, I’m being pedantic. The important message is that investors listen to what the market is screaming.
By the way…Wells, Maddux, Hoffman? If old age doesn’t take its toll the Padres could DOMINATE
February 6, 2007 — 11:43 pm
Steve Berg says:
NVmike: I suspect Jeff will also weigh in on this, but until he does let me clarify – The 3-5 year timeframe is a macro average estimate based upon long term, historical trends. It may or may not apply to any one specific market at any one specific time. There are exceptions to every rule. For example, in the early ’90’s in San Diego it was a brutal 6-year downturn. If you had purchased a home (like I did) in 1989, you had a 6-7 year timeframe before it was worth what was paid for it again. But if you had purchased that same home in 1993, you were on the plus side in 3-4 years. Beyond that timeframe the return on investment was not just good, but exceptional. And this was one of the worst residential market recessions (I called it the Depression) in San Diego history, rivaling the days of 18% interest rates back in 1979-1980.
February 7, 2007 — 8:08 am
Jeff Turner says:
Jeff… reading your posts makes me wish, with all my might, that I had known you when I sold my last company.
February 7, 2007 — 8:42 am
Jeff Brown says:
Steve – I get those kind of clients from time to time, and they’re almost always under 40. I learned (again yesterday) that you can tell cllients something in plain English several different ways and times, and they will still do it differently. Then they come up with the same reasons why as when you first explained it to them over a year before. I’ve ceased being amazed. 🙂
I saw Gibson pitch, in person, three times at Dodger Stadium. Twice was against Drysdale, once against Koufax. I’ll grant you he was in RANGE of Sandy, but not as good. He was the meanest SOB in baseball though. Drysdale was mean, but Gibson was the spawn of Satan. 🙂
I remember once when Frank Howard went deep on him. The next time up Frank just stood in the box as if he had no intention to swing the bat. Turns out he knew something my little 14 year old mind didn’t. He KNEW he was going to get plunked. And he was, at about 95 mph – right in the kidney. He actually seem appreciative that Gibson had decided not to kill him. He just put his head down, and jogged to first. Note: If he’d have looked at Bullet Bob while heading to first he would’ve been hit again.
February 7, 2007 — 9:24 am
Jeff Brown says:
Norma – Just a girl? Part of what got me all googly eyed about my wife was her love of baseball.
We’re opposite sides of the same coin. I listed/sold homes for the first seven years of my career. I finally concluded that if one more wife told me they weren’t going to buy a house because of the color of the paint in the living room, I was going to be on the 11 o’clock news.
BTW, like your blog.
February 7, 2007 — 9:31 am
Jeff Brown says:
NVmike – Thanks to Steve, who saved me a paragraph here.
That said, your comment about history saying there’s at least another few years of no appreciable growth, goes against my experience.
When it all came tumbling down in October of ’79 it took awhile for the atrocious interest rates (17.5% FHA for instance) to come back to earth. Once that happened, which was around ’85 or so, it was flat for a year and then it literally exploded – no flat time whatsoever.
The S & L crisis period Steve refers to was indeed much worse than today, lasting about six years. There was again a period of transition, say ’96-97 when it ‘drifted’ up. Then it exploded – again there was no ‘few years of no appreciable growth’.
Of course it’s only fair to also include the fact we’re talking about San Diego only here. I’m not sure what happened elsewhere.
February 7, 2007 — 9:40 am
Jeff Brown says:
Brian – I take your point on hitting. I was a hitting coach but was better known as a developer of pitchers. I found most hitters no matter how hard they ‘thought’ just never seemed to get on a learning curve.
I know listening to the market can seem impossible at times, but generally speaking it does communicate to us.
The Padres pitching? You and Josh are blood brothers. You’re right about them dominating – IF they Maddox and Wells are both able to start at least 30 games each, AND they win at least 15 games apiece. Since they both throw a lot of ground balls, that may be a problem. Both our new infielders aren’t known for their gold gloves.
February 7, 2007 — 9:47 am
Jeff Brown says:
Steve – The most salient point about the S & L crisis is how much worse it was than our current correction, as you pointed out. That’s why I can only scratch my head at those who insist this market is the ‘worst ever, and we’re all gonna die’.
Six years of falling prices AND rents, while vacancy rates went up, up, and away. I never want to go through that again.
February 7, 2007 — 9:54 am
Jeff Brown says:
Jeff – Thanks – I really appreciate the sentiment. I suspect though, you’ve done better than pretty well on your own.
February 7, 2007 — 9:57 am
David Saks says:
Great article,Jeff.
I remember the day Koufax refused to pitch in the World Series because it was Rosh Hashana. I was a little boy then. It didn’t slow the team down. His teams determination was strengthened by the dynamism of this great athlete to not be deterred by intense national pressure to relinquish his affinity for his people, nor his relationship with his creator, and pitch on this holy day. I had his rookie baseball card once upon a time. He was, and still is, one of my heroes. Perhaps, the antithesis for some, is that their timing is a bit ahead of the game and the clock has to catch up with them, although my example may prove to be without much regard for literal significance. I wish I could always adjust my decisions so that a marketable principle is applied and an action occurs at the desired time, no crystal ball required.
February 7, 2007 — 6:52 pm