During the past month it was my privilege to speak several times at seminars for the Apartment Owners Association of California, Inc. (AOA). I opened each talk asking the audience, “What is the most important word in real estate?”
From a very experienced crowd, there were numerous responses. Of course, one of the responses was “location, location, location.” Other terms included cash flow, leverage, equity and seller financing.
While all of these were good answers, in my opinion, they weren’t the “best” answers.
Let me share with you my personal experience and why I think another word is more important.
In the late 70s and early 80s, oil shale began to provide stimulus to Grand Junction, Colorado. The area was inundated with the migration of men and women heading to the high-paying jobs of the oil industry. This migration spurred a building boom.
One of the buildings most often constructed was a four-plex. Units were in high demand so rents were strong and vacancies virtually nonexistent. The value of a four-plex reached about $180,000 in 1982. Then, this happened:
“The economic bust, known as ‘Black Sunday’ (May 2, 1982) to the locals, started with a phone call from the President of Exxon to the then Governor of Colorado, Richard Douglas Lamm, stating that Exxon would cut its losses while retaining mining rights to the (then and currently) uneconomic oil. The economic bust was felt statewide, as Exxon had invested more than $5 billion in the state. Colorado historian Tom Noel observed ‘I think that was a definite turning point, and it was a reminder that we were a boom-and-bust state … there were parallels to the silver crash of 1893.’”
The units were gradually vacated as people lost their jobs and moved out of the area. Eventually, FHA foreclosed on many of the newly built four-plexes. I began poking around the area for bargains about two years later. Trust me, there was no rush or competition! Everyone had left the area and everyone thought I had lost my mind! I began to negotiate to buy all of the four-plexes HUD owned in one shot. We negotiated for seven months! During that time I stuck to my original offer of $40,000 per four-plex. They originally laughed and countered at $80,000. A few months later, they countered their own offer at $60,000. About four months after that, we agreed at my original $40,000 per four-plex offer.
In the late 1980s, a developer created approximately 120 lots in an area called Rosamond. It must have taken a lot of skill and foresight to do what they did. They took a hill and carved it into building lots. I have no idea how to do that. The cost of creating those lots was certainly over $3 million dollars. Most of those lots sat there for about 15 years; vacant and unbuildable. I bought them for less than 10% of the cost to create them ($270,000). In 2004 and 2005, my company, The Norris Group, and some trusted investors built out the remaining 93 lots and made several million dollars.
In each of these two examples, fortunes were both made and lost. The original builder in Grand Junction and the original developer in Rosamond probably had many years’ experience and an expertise that I lacked. Yes, they lost a fortune and I made one in exactly the same location.
So, what’s the most important word in real estate investing? I suggest that word is “timing.” Understanding when to do something is much more profitable than how to.
In the mid-90s, I brought what I had learned from Grand Junction, Colorado and studied the California cycles. In January 1997, I wrote a report entitled, The California Comeback: Why Real Estate Prices Will Double in the Next Eight Years.
In 2006, I wrote the California Crash: Why Prices Could Drop by Half and Foreclosures Go up by Thousands of Percent.
Both of those reports were pretty accurate, allowing me to both take advantage of a down market and exit at the approximate peak. I sold approximately 100 houses I had an interest in between 2004-2005. The Rosamond houses, at the peak, sold for $280,000. Less than three months after the peak, they sold for $210,000. Three years after the peak they sold for less than $80,000! There was a small window of opportunity in Rosamond. Since the 1980s, someone had tried to cash in on that tract. I’m sure they knew much more about construction and about land development than I did; but what they didn’t have was a road map to tell them when!
I just finished writing 2015: Proceed with Caution! The California real estate market is filled with opportunity in 2015; but you better know where! In some areas you will be a pure speculator, and in others, you’ll be an investor!
Bruce Norris is an active investor, hard-money lender and real estate educator. A talk show host in his hometown of Riverside, Calif., Norris is frequently quoted in financial publications and a speaker at investor club meetings throughout California. His latest study, The California Comeback 2, was released in July 2013 and provides the statistics that substantiate his predictions. More information about Bruce Norris, his research and his investment seminars are available at www.thenorrisgroup.com