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What are wealthy real estate owners telling us?

February 19, 2019
wealthy real estate

It was the fall of 2011 when my wife and I presented an offer to the bank that was selling the home through a short sale. The person who owned the house at the time – but was selling in cooperation with the bank – was still living in the home. She lived there by herself and was a former professional athlete.

FYI: A short sale is a sale of real estate in which the net proceeds from selling the property will fall short of the debts secured by liens against the property. In this case, if all lien holders agree to accept less than the amount owed on the debt, a sale of the property can be accomplished.

Source: FSB

She had purchased the home in 2007 for nearly triple what we had offered to buy the house for in 2011. She had bought at the exact top of the market and we were buying at the exact bottom of the market.

In hindsight, it’s tempting to say that we made a great investment… but I know the truth is that we lucked out with market timing. For the seller, she obviously had the exact opposite experience, meaning that she had the absolute worst market timing.

However, simply explaining how investments work as ‘lucky’ or ‘unlucky’ is an extremely naive way to look at our economy and markets. For my specific example of purchasing a home, the details of how everything unfolded make the whole ordeal look anything but lucky.

For starters, the woman who had purchased the home in 2007 qualified for an enormous loan based upon the money she was making as a professional athlete. Then, one year after she bought the house, she retired with no plan on how she would continue to pay her mortgage.

Meanwhile, my wife and I were literally eating rice and beans, while living in a trailer in someone’s back yard so we could save up enough money to purchase a house. Also, we were both working multiple jobs and continuing to increase our salaries.

When the 2008 housing crash happened, my wife and I were set up very well to take advantage of the situation. Of course, at the time we had no idea that a crash was going to happen, but we were definitely positioned well.

I don’t share this story to brag, but simply to show you how a bit of discipline and hard work really paid off. Again, at the time, my wife and I just assumed that we were in the right place at the right time, which was generally true.

But being at the right place, at the right time, AND having the right resources involves a lot more than just luck.

So, if you can get just a general idea of where the right place is, when the right time is, and have the right resources… then you can make some VERY good decisions that will look brilliant as time goes on.

Let me share a story that I shared with Explorer Partnership members several weeks ago:

I spoke to a real estate investor a conference who said that he bought dozens of apartment units in Miami in 2010-2012. Those same exact units have TRIPLED in value since then. And, yes, he is selling almost all of them right now.

That’s an incredible return on capital for that investor. Not only did he buy at the bottom of the market, but he is likely getting out close to the top. And his returns on an annualized basis are probably somewhere over 30% just from capital appreciation… and that’s not including any yield he received from renting out those apartments while he ‘waited’ for the values to increase.
Clearly, this investor timed the market perfectly. Was it pure luck? Skill? Does he have a crystal ball?

Well, I asked him. He said that he attributes most of his success to discipline. He explained that when we started to buy real estate at the bottom of the market, all of his friends were telling him that he was crazy. And now that he is selling, his friends are saying the same thing – he’s crazy and he should hold on because prices are going to go even higher.

The discipline, he explained, was that he knew what was ‘reasonable’ for real estate prices. When he was buying back in 2010-2012, the prices were unreasonably low. Now that he is selling, he thinks that prices are unreasonably high.

The experience that I personally had when I bought that house and the story I just shared should make you start to wonder where we are at with our market.

Here are the facts:

  • Housing prices have been steadily increasing for nearly a decade.
  • Interest rates are increasing.
  • High end real estate is starting to go on sale.

That last fact is what you should be focusing on. Why is high end real estate going on sale?

Well, the smart money (wealthy people) are getting out of the game while they are still up. Think about luxury real estate throughout the world. Generally speaking, luxury real estate is often the second or third home for someone wealthy.

So, whenever the market starts to turn even the slightest, luxury real estate is often sold off.

And this isn’t a subjective observation. Major cities throughout the world are experiencing this right now. However, it isn’t making the front page news because the high end real estate market generally does not effect the average consumer.

Bloomberg just released an article showing that multiple worldwide cities are seeing their high end real estate prices decline by over 30%.

Will this sell off in high end real estate spread to the broader market? No one knows for sure.

However, as an investor, you can look at the facts and understand where we are when it comes to market timing. You can miss the ‘exact timing’ by a couple years and still do very well. (When we purchased our home it was nearly five years after the real estate melt down began!)