This just in from the “who am I going to blame file”....

There is an interesting article in today’s New York Times about a California woman who is suing her real estate agent because she feels she paid too much for her $1.2 million home.

The woman claims that her agent “ordered an appraisal of the house” for her and her husband but “...did not respond to the couple’s request to see it.” Shortly after moving in they got a flier from another realty agent showing a house just up the street sold for $105k less than theirs.

This reminds me of a hair-brained CNN story which was published recently about a woman who was debating the merits of suing her doctor for complications she suffered after a surgery.

Hmm...homebuyer purchases a home without ever laying eyes on an appraisal, then sues ‘cause she overpays. Patient suffers a complication during a major invasive surgery then sues her doctor for pain and suffering.

The who’s the blame phenomenon in American culture is one that I’ve written about before, but unfortunately I think we can look forward to reading a rash of stories in the real estate field in the coming months. Real estate is, in the best of cases, an inexact science. With prices falling these may be treacherous times for real estate agents in our litigious society.  So Realtors: when the guy down the street cuts a better deal than your client just inked, be ready to call your attorney. 

A reader who goes by the handle “Max” made a comment the other day that got me thinking. There’s a concept in pop business theory called the Peter Principle which states that managers tend to get promoted to their point of incompetence – taking on bigger and bigger responsibilities until they eventually get to the point where they’re over their head. And this, ironically, is the point where they tend to stick.

In discussing the concept of leverage, where an investor builds a profitable portfolio of investment properties over the year by occasionally executing a 1031 exchange, the Peter Principle might be relevant. As Max points out, you don’t want to get in over your head.

There’s something to this. There’s an implicit assumption that over the course of your investment career your ability to manage the complexities of larger properties and a greater number of tenants will increase. Additionally, you will also put yourself in a position to make judicious use of property management services. But at some point an investor needs to know how to say “enough”. Smart investors need to recognize when they’ve gotten to that point.

But often they don’t. And if you can find one who has gotten beyond his comfort level then you may be in a position to negotiate a great purchase. There’s a phenomenon I’ve noted which I call the “two-fer” sale – keep your eyes open for these. From time to time I’ll notice two similar properties which hit the market simultaneously. Sometimes they’re FSBO’s, and you’ll notice them if there are two identical FSBO signs on the same block. In my experience, this is a sure sign of an investor who paid for some expensive Rich Dad type motivational seminar, and in a wave of enthusiasm and empowerment hit the streets and bought the first two houses he could get a mortgage for. Essentially, this investor hit the Peter Principle very early in the game. He wants out.

Two-fer’s can be a great opportunity. If you can find a reluctant landlord who’s struggling with the negative cashflow drain of two vacant properties, you negotiate a great bargain by saying you’ll take both of the properties off his hands: I’ll take ‘em both for $XXX,XXX. And that should be a really low combined price. But the reason that this tactic works is that you’re making the seller’s problem disappear in its entirety. This can make the seller shift into “cut my losses” mode in one fell swoop.

This is a tactic that works. This is how I bought the two properties (FSBOs) a few years ago that I’ve recently vowed to sell as my New Year’s resolution. And on the buy side I’m looking at a couple of similar opportunities as we speak.

So the Peter Principle is a sword that cuts both ways – so make sure you’re on the right side of this trade.

Lots of ink has been spilled on how our jittery market is impacting homeowners. But it’s hard to find anyone writing on the question that looms largest in the minds of most investors: what do I do now?

There, of course, is no single right answer to this questions – it will depend you’re your risk appetite, your local market, your time horizon, and your view of what the market is going to do next. But from where I sit I see five basic paths forward for investors in 2008:

• 1: Rebalance in the same market. This is what I’ll be doing this year. Investors who have been in the market for a while are sitting on a pile of equity that probably won’t perform too well in 2008. That means it’s time to sell, re-leverage, and put it back into properties that will give you the right cap rate. I wrote about my specific example a couple of days ago. Although it’s no fun selling in a soft market, when you’re buying and selling at the same time it’s a wash. Price your property right and it’ll sell – and at the same time look to buy a property at the same sort of discount.
• 2: Lift and shift. If you’re in a market like San Francisco, Los Angeles, Florida or Las Vegas then you might be concluding that your market has done its thing and the future looks a bit less rosy. Some investors might be tempted to try to hold on until the market turns around and hits the peaks that it enjoyed during the acme of the roller coaster ride, but a better idea might be to sell now, grab that equity, and re-invest in a market that is less overvalued. Consultants like Jeff Brown in San Diego are advising this type of strategy, moving investors from California to Texas.
• 3: Bargain hunt (speculative version). Fifteen years from now they’ll be asking “what did you do during the market correction?” Well unless you have your crystal ball you don’t know now what the best answer to this question will be, but investors with a speculative bent are looking for the bounce. Again, this is a speculative view. Not that there’s anything wrong with that – as long as you're aware of the risks you're shouldering. There’s nothing so dangerous as someone who thinks they’re an investor but in reality they’re acting like a speculator.
• 4: Bargain hunt (value version). Regardless of your view of what’s going to happen next, in many markets the current correction is creating some great value deals – properties that you can pluck straight form MLS that will generate a positive month-to-month cashlfow with only a 10% down payment. You won’t be seeing many of these in, say, Las Vegas. But you will in Fort Worth, Tulsa, and Kansas City. You’re not looking for the dip with this strategy – you’re just poking around in a relatively favorable market for positive cashflow investments. If the market bounces then great. If it doesn’t then you’re in good shape to weather the storm.
• 5: Ride it out (do nothing). Good traders will acknowledge that sometimes their best trade of a given week was one that they didn’t do. Strategies 1 and 2 require you to have some underperforming equity to re-deploy. Strategy 3 is strictly for speculative high-rollers, and Strategy 4 only works if you’re living in the right kind of market. So what if you’re in the “none of the above” camp? Well patience can be a virtue in investing, and I’m not in the “now is always the best time to buy” camp of real estate investors.

I’ve often mentioned that real estate investing is all about people. Here are three ways in which this general principle manifests itself.

Information wants to be free: Real estate investing certainly has an element of secrecy, as does any business endeavor that involves negotiations. For example, when you’re on the buy leg of a 1031 exchange you don’t want the seller and you’re running short on time you don’t want the seller to know that you’re under pressure to make a deal work. And when you’re selling a property that you just bought FSBO you don’t want the buyer to know that you purchased it for a song.

But that said, there is a great amount of general information that you can be generous with. This isn’t altruism; information truly wants to be free, and professionals who are open with sharing their expertise will in the end benefit in many ways.

This is a principle that I try to demonstrate myself – in this blog, for example. Everything here is free. And I frequently receive emails from readers who compare the things they read here (and on other free resources) with the stuff that they pay thousands of dollars for. The internet is a sleazy place when it comes to real estate. Want to find out “…closely guarded secrets for real estate investing” or ways to get “a whole new level of jaw-dropping wealth and financial independence” then all you have to do is whip out our credit card. (note: these are actual quotes from various websites). If you’re paying for a secret you’re getting scammed; there are no secrets out there.

But this “free information” principle applies directly to all of us as investors. I deal with a relatively small number of real estate professionals: contractors, real estate agents, lenders. And I share with them what I’m doing – how I make deals work, what’s been successful and what’s failed, and what my strategies are. And they reciprocate – which means I learn a lot more about, say, peer-and-beam foundation leveling and realtor commissions than I otherwise would. Information wants to be free, but it’s also very valuable. Give a little and you’ll get a lot.

I want the people around me to make money: I’m not a big fan of paying a 6% commission to sell a property. But that doesn’t mean that I mind when the people around me profit when I do a deal. Most successful corporations don’t get that way be paying their employees the bare minimum; this rarely is a sustainable strategy. Likewise, most successful investors don’t get that way by squeezing every cent out of every deal at the expense of the people who support them. When I call my contractor or my real estate agent I want them to be happy to see my name on their caller ID. I want to be known as a repeat customer who closes deals. I expect to be charged a repeat-customer rate, but they know they won’t have to twist my arm to get paid fairly.

Relationships aren’t just about dollars and cents: This is an area that I have to be vigilant about reminding myself. I generally show appreciation through repeat business – and since I’m generally a dollars-and-cents type I might tend to think this is enough. But it isn’t. Independent professionals get a great deal of satisfaction from the appreciation that their clients show them. Good businesspeople aren’t in it just for the money, and they won’t know you appreciate their expertise and hard work unless you tell them. Write a note. Post a recommendation on Angie’s List. Remember them at Christmas.

It’s resolution time for me, something I always undertake around this time of year – a couple of weeks after welcoming the New Year. I find that promises made while the confetti is still falling tend to be long on champagne fueled optimism and short on realism. So I usually wait a couple of weeks to commit.

My fun resolution is tied to my interest in photography – create a history of 2008 in 52 photos by selecting a photograph each week that I think is good enough to show, and spend a few minutes writing about why I picked the picture and what the moment meant. If you look around you’ll see a lot of photo-a-week galleries on the internet, but this will be a private project for my family. So no downloads for me…

And my professional resolution this year is…drumroll…exactly the same as my resolution last year: to sell some properties that have accumulated some equity and flip them into a fourplex using a 1031 exchange.

The two properties I need to sell are a couple of nice townhomes in the West Memorial section of Houston. I bought both of them from an investor a couple of years ago and the market has treated the area pretty well.

The market in Houston is a bit soft in this price range, but since I’m buying and selling at the same time I’m not that concerned; my main goal is to ensure that my portfolio has the right amount of leverage and that I’m generating a good cap rate on my investment. These properties have appreciated, but rent rates in the neighborhood haven’t kept up.

Last year, publically declaring my resolution seemed to have some psychological effect in making sure I got it done. Worked last year….we’ll see if it does this year too.