There's a part of the American psyche dictates that for any event or phenomenon a specific cause has to be identified – and all the better if that cause can be pinned on particular actor. Accountability is a good thing, but unfortunately it often segues into a “who’s to blame?” attitude.

Case in point: as the sub-prime market melts down, housing prices drop and inventory levels creep towards historic highs much of the mainstream media coverage has been devoted to figuring out who is behind all of this. The banks? Builders? The Fed?

Real estate investors (and in some cases, speculators) get an unflattering light shone upon them in this environment; witness today’s Money.com article with the musically alliterative title Flippers Fuel Foreclosures  which claims that investors are “...driving defaults in four of the states with the fastest rising default rates in the nation...” The article sites statistics from Nevada, Arizona, California and Florida.

If you look for it, though, there is a more interesting fact buried in the article: nationwide non-owner occupied properties accounted for just 13 percent of prime loan defaults and 11 percent of subprime defaults.

Consider this: according to recent census figures around the homeownership rate in the United States hovers around 68%. Meaning that over thirty percent of homeowners live in properties that are owned by someone else. Some of this housing is owned by corporations, but according to census figures the vast majority is owned by individual investors.

It would appear from the numbers that investors, as a whole, haven’t been doing a bad job at making prudent decisions. Investment properties are perceived as a higher risk than owner-occupied properties, but in many regions they default as a lower rate.

As investors we’re not trying to win any popularity contests, but it’s good to remember that prudent, responsible investing and property management is just good business. An investor who maintains a property that a tenant is proud to call home is probably an investor who also realizes low vacancy rates, inexpensive turnover, timely payment and low incidental expenses. This, along with prudent buy/sell decisions adds up to a profitable investment. And low default rates.

I’m not an electronic gadget guy (I didn’t run out and get an iPhone) but I am a fan of well made mechanical things. I’ll probably be the last guy shooting film while the world around me goes digital; I love my Leica rangefinder - the feel of those hand-assembled German gears pulling the film though the camera’s perfectly engineered sprockets.

But things like this are expensive, so they’re an occasional indulgence. When I glance down at my wrist I see my daily watch: the venerable Casio W-201. Date, time, alarm, stopwatch, water resistant to 50 meters. Accurate to fifteen seconds per month, and the battery lasts ten years without changing.

And the best part is that it costs about fourteen bucks at Wal-Mart.

So if I make a big windfall profit on my next sale how is it going to change my life? Well, not much, actually. I’m happy with the watch I have right now and buying a newer, more expensive one isn’t going to make me happier. This is a good proxy for my life in general - or at least the philosophy that I aspire to live by. Being happy with the here-and-now helps me greatly in trying to be good at what I do.  As a real estate investor it gives me the patience to do good long-term deals that build wealth, and the courage the take prudent risks when the right opportunity arises.

So for now I’m sticking with my plastic watch. And as an added bonus: whether I’m pushing a broom or swinging a golf club it’s so light I don’t notice it’s there!

I’d written here before about how there has never been a national correction in the history of the U.S. real estate market. Well what we’re facing now is not exactly a national correction, but it is a notable occurrence nonetheless: we’re about to mark the first year-on-year decline in national median home prices since federal housing agencies started collecting statistics on pricing.

The reason that this doesn’t represent a national correction is the fact that even though the national median is down, there are still some regional markets that are flat or rising. Investors know this and we’re watching our local markets.

The New York Times writes about the housing number, and two things jump out at me from this article. The Times refers to the median drop as a national decline, stating that the statistic contradicts “widely held notion that there is no such thing as a nationwide housing slump.” This is a statement written by a journalist, not an investor. It’s not true for the reason that I’ve stated above.

A second annoyance is that the article is full of predictions, from the likes of Global Insights and Moody’s. Predictions made by economists are notoriously un-useful.

But a decline in the national median may be significant if it adds fear and confusion to an increasingly volatile lending market.  Liquidity is already starting to dry up in some areas which pulls competition out of the market.  Bad for sellers, but good for buyers.  Bargain hunters looking for a quick flip better have better confidence in thier crystal ball than I have in mine, but buy-and-hold investors in undervalued markets should have their eyes peeled for solid positive cashflow investments that will be able to weather the current storm and which will have some upside once the market turns - whenever that may be. 

I put a premium on making things happen and getting things done. If I compare a bunch of B+ deal that I can actually get done vs. an A+ deal that doesn’t close guess which one I prefer?

This is a philosophy that I’ve learned over time, and one that doesn’t really jive too well with my background as an Army officer and my academic training as an engineer – two disciplines where finding the right solution is pretty darn important. So this is something that I have to work at.

This extends to the way that I deal with people. Real estate is a people business. Yeah there’s financing, and strategies and technical know-how, but at the end of the day it’s all about you and the person sitting across the table from you – whether she’s a contractor, a Realtor, or a buyer.

So I’m rarely thinking about cutting the best deal I can. I focus on cutting a good deal; one that I’m satisfied with, which gives me a good return and one which builds the relationship. A good relationship today will yield more good deals tomorrow.

Loyalty is important to me, and that is a value I try to communicate through my actions. Case in point - when I have a maintenance issue that I have to deal with here’s what I like to do: I call the contractor and tell him to head over to 123 Elm Street and take care of it, then send me the bill. No bid. Just fix it.

Now I certainly can’t always do this because many contractors are evil and dishonest (sorry if I offend anyone, but this is a statement of fact.) But I can do this with one particular contractor that I work with on a regular basis. I trust him, he trusts me, and we have a symbiotic relationship – this is a relationship that I value like gold. I know he’s not going to rip me off because he knows I’ll be coming back – he values the repeat business. And he knows I will treat him fairly, because he knows that our arrangement helps me manage my life – I value the ease and convenience. We both value the relationship and we both take care of it. Honesty. Trust. Case closed.

Reciprocal, symbiotic relationships don’t grow on trees and they don’t happen overnight. I always think of those hippos on the Discover Channel with the little birds perched in their wide open mouths. A real win-win deal: the hippo gets clean gums and the little bird gets an easy, risk-free meal of leeches and whatever else hippos end up getting stuck between their teeth. Kind of a disgusting analogy, when you really think about it.  Anyway, what you don’t want is to realize that you’re more like one of those whale sharks that has a bunch of blood sucking remoras attached to his underside; the remoras get a free meal and free transportation to boot, but the whale shark gets jack.

So relationships are something you have to keep reevaluating; make sure you're getting what you think you're getting. 

I spend a fair amount of time thinking about money and my ideas about the subject have changed over time. Money, in my view, is not the key to happiness – but being overwhelmed by money (or by the lack of it) can definately be a key to unhappiness.

In terms of importance money is like oxygen: having loads of it won’t necessarily make you happier, but if you don’t have enough it’s awful hard to think about anything else.

The idea of hedonism, in the colloquial sense, is often associated with visions of vice and amoral excess. Even the term Epicurean carries this connotation, even though Epicurus, the philosopher for whom the term is named viewed pleasure primarily as the absence of suffering. So in the classical sense the idea of hedonism actually had an air of responsiblity to it.  Meaning: fun times today leads to less fun stuff tomorrow – be it loads of credit card debt, a root canal, an unexpected pregnancy, acid indigestion, or that extra twenty pounds that’s magically appeared around your hips.

A couple of things brought these thoughts to mind today. First, I’m reading Milan Kundera’s excellent short novel Slowness, which talks about the topic. And second: I just ran across this excellent photo essay about money at SavingAdvice.com. I found it insightful and occasionally funny.

Related Link:

• Photo Essay - 25 Money Confessions

Real estate investors have a problem in that the general market is geared squarely toward the needs of the standard homebuyer; us investors often feel like square pegs trying to fit into round holes.

The relationship between investors and real estate agents is a weird one. I have a long-term relationship with an agent that’s based primarily on loyalty and trust; I know she’ll take care of me and get the details taken care of, and she knows I’ll be back. I don’t get a lot of useful advice and she never brings me a deal, but she helps make sure I get the work done. So, generally speaking, when I’m buying a property or looking for a tenant I’ll often work with her.

But...that’s kind pricey when it comes to buying. The notion that the buyer doesn’t pay a commission is a fallacy – the buyer does indeed bear this cost via an increased sales price – so I’m actually paying an awful lot for convenience and comfort.

So, time to try something new. Hungry Agents allows buyers and sellers to solicit bids from real estate agents for reduced commissions / commission rebates. So I gave it a try. I’m looking to make an offer on a multi-family property and placed my solicitation on Hungry Agents. Within 24 hours I had ten bids back offering rebates of 10% to 60%. Each bid is accompanied w/ some basic information about the agent: office location, rebate percentage, years of experience, franchise, and in come cases a biography page.

The buyer/seller who placed the bid can request a contact online. If the agent is interested in speaking with you then he can then give you a call.

Clearly this solution won’t work for everyone. But I generally find my own deals and make my own decisions with regards to pricing and terms, so basically I need someone to make sure the paperwork happens efficiently.   I’m not looking for advice, leads, negotiation assistance, or to be chauffeured around Houston.  Hungry Agents makes the a la carte approach a bit easier.

Too bad about that logo, though. Strange marketing move for a company that needs to build a positive relationship with the real estate agent community...

So, what do we do now…?

I’ve discussed in the past the folly of forecasting. A good case in point is the diverse smorgasbord of forecasts for the housing market, each offering served up by an immensely qualified expert running a sophisticated model.  Go with Peter Schiff of Euro Pacific Capital who predicts a fifty percent collapse in some high priced markets. A little more optimistic? Go with David Wyss from Standard and Poor’s who is looking for a more modest 8% drop.  Or if you’re ready to buy then the guy you want to listen to is Lawrence Yun, the senior economist from the always-optimistic National Association of Realtors, who happily tells you that “…further declines, if any, are likely to be modest given the accumulating pent-up demand.” The only thing missing is a smiley face emoticon.

So if the experts aren’t useful in giving us a heads up on the market’s direction then what’s an investor to do? Well it might be the right time to sit on your hands and wait it out, but it might be the time for action.

In these situations I look out the window at my own local market and ask myself a question: am I waiting for the bottom or am I waiting for affordability?

If you’re waiting for the bottom them now might be the right time to start looking. If you’re waiting for affordability then you might want to cool your heels for a while.

I’ll explain:

Bottom fishing: I got to watch Pete Sampras play at Wimbledon back in 1997. Of all the amazing things that I remember about that match one thing stands out: Pete knew when a ball coming his way was out of reach and he didn’t go for a shot that he couldn’t get to. There’s an analogy here for investors. When you’re shooting for the bottom the only thing that you know is that you won’t hit it; you’ll buy too early or too late but either way you’ll never buy at the bottom of the price trough. So why try?

If you’re bottom fishing then you’ve already come to the conclusion that a recovery is ahead. So don’t try to time it. If market conditions are such that you can negotiate hard, get a good price, and secure an investment that yields positive cashflow then it might be the right time to go for it.

Waiting for affordability: You might find yourself thinking gosh, prices have run so hard in the past few years it’s just natural that they’ve finally taken a breather. If they dip a little more then it will be a great time to get in.

If this is your view you’re probably banking on the good old days coming back again, a highly speculative move. Investors with this viewpoint are often living in markets where it is impossible to get into a real estate investment that produces positive cashflow – and in this situation a property must experience booming appreciation rates in order to yield a decent return. These investments, in my book, get the yellow light.

Don’t fit into either of the camps above? Then what signposts do you look for…?

Related Posts:

• The Black Swan :: The Highly Improbable and Real Estate Investors
• In Defense of Real Estate Speculators