The Fundamentals

All investment is made of just a few fundamentals; asset, capital, profit and time. In real estate these terms can be described as follows:

• Asset - What am I investing in?
• Capital - How much money am I investing?
• Profit - How much do I anticipate making?
• Time - In how long?

In keeping with our "small investor" line, I will discuss small asset classes, residential living dwellings of up to four units (the definition for "residential" rather than "income producing commercial" which is any residential over 5 units), small retail centers, etc. Of course not all single family homes, condos, duplexes and small retail centers are made equal. There's a huge difference, for example, between a condo in a garden apartment building out on the suburbs and a condo in a high rise in the city center. The differences, besides the obvious cost, are very important. 

Capital is what you are investing. Many new investors make the mistake of looking at just the price of the property without regards to the closing costs of purchase and sale, the potential rehab, the carrying costs and the commission paid at sale. While some costs, like the commission at sale, are paid from proceeds, the rest have to be invested upfront by the investor. 

The Asset is what you bought, a condo, a single family home, a little retail center. Your Asset generates income from rents or your Asset can be improved and sold for more money. Your Asset can have both an extrinsic and intrinsic value. The "intrinsic" value is what your Asset is worth. In real estate fundamentals, the value of your Asset is a direct function of the net income your Asset generates and what you as the investor is willing to make in profit as a return on investment. This is called the Capitalization Approach and I'll go over it in detail in the future. The "extrinsic" value of your Asset is a value outside of the fundamentals, it is a value that an investor places on an Asset due to speculation, a feeling that the Asset will be worth more in the future for some unspecified reason.

Profit is what is left after all costs are deducted from the sales price. Profit can be stated as an amount or as a percentage of total capital invested. Consequently a percentage return can be stated as a "cash on cash" return or an internal rate of return (IRR). 

Time is how long it took you from "cash in" to "cash out".  If you are analyzing a rental property then the "time" can be a year of net income. It is normal for rental properties to be analyzed based on a future sell off date at some future value, the "return" is then calculated not only on the rental income but on the potential future profit.

These four items create the fundamental pillars of real estate investment but we will see how the real money (and peril) in real estate is made by ignoring these fundamentals.

The Death of the MLS (Multiple Listing Service)?

Back before the internet, even before the efficient distribution of printed materials, members of "Real Estate Exchanges" would gather in a room and share information about properties available for sale. Most deals would be made on the spot, both Listing and Selling agents gathered to  make a deal.

By the early 20th century a "multiple listing service" was commonly being used, information gathered locally by various Boards and printed to be distributed to members. This method survived until the internet revolutionized the system.

The purpose of the MLS is to disseminate information to the members. Ideally the information will serve to put Buyers and Sellers together and allow the Members or Realtors to make a commission on the deal. For the system to work effectively the information must be of the highest integrity. Imagine if a 3 bedroom house was 1 bedroom, for example, or if it professed to have a pool when it didn't.

Over the last several years proposed threats to the MLS have materialized in the form of various web sites that offer the same basic information as the MLS. Web sites such as Zillow and Realtor have democratized the system, property information is no longer solely available to Realtors, anyone with a computer can search an area of interest and find out specific information about a certain property or neighborhood.

For a couple of years these "public" sites provided technological advancement and ease of use that the MLS simply could not match. The MLS software was clunky and slow, not user friendly, only worked with the IE browser. Members like me, however, continued to use the MLS (and pay for it) for the simple reason that the MLS provided the most accurate information. The MLS' content is driven by its Members.  When a property is listed an agent writes up remarks, posts pictures, etc which become a narrative of the property. When the property is sold the information is updated and this information becomes vital to other Members since it provides the "comparable" sales in the area. In contrast Zillow had a "Zestimate" which often had nothing to do with reality.

Lately, however, the integrity of the information found on the MLS, the very raison d'etre of its existence is being compromised. The MLS is being used not to provide accurate information but as an advertising tool for Sellers, particularly Banks, to direct traffic to online auction platforms. A Member will often receive an alert that a property has become available in their area, often at a very attractive price. When one checks it explains that the property will be available for auction at some point at a given auction site (Hubzu, Auction.com, Homesearch, etc).  In other words, the property is not available for immediate sale and the price is a fantasy.

This sort of "marketing" might be suitable for the general public and Banks and auction sites should be able to drive traffic to their sites, but not at the expense of Members who are paying dues to make sure their platform has integrity. If the information on the MLS is no more honorable than that found in better funded, better interfaced and easier to use sites (they work on Chrome!) it is my "zestimate" that the MLS as a platform will die.

Let's Try This Again

When I was a kid there was an Asian dude on TV who had this informational video on how to invest in real estate. This guy was not subtle, he would drive all these fancy sport cars, show off a huge house and hang out on a yacht with a bunch of bikini clad girls. I was a very impressionable young man with a bad entrepreneurial streak, I also had zero money. But wait! this man was telling me that the path to mansions, Ferraris and bikini clad girls required NO MONEY DOWN!! Fortunately I had NO money, not even enough to buy into the guy's spiel.

After more than 25 years in the real estate industry I can tell you that building a real estate empire with "no money down" is extremely difficult, if not impossible. However, I think it is possible to build a nice portfolio beginning with little if you have the right tools.  

This blog will be educational in nature. If you have a question regarding real estate I can probably answer it. If I can't, I'll try to direct you to someone who can. Real Estate is a thriving industry in South Florida, probably the best industry around.  We don't have technology, we don't have entertainment, we don't have investment banking, we have tourists and real estate.  While the industry encompasses management, leasing, sales, title, etc, I will focus on small investments.

By the way, I fell into the real estate industry by chance, got a job in a title company when I was 18, owned by two real estate attorneys. Since then I've worked for two management companies, as an accountant and financial analyst, got a mortgage broker's license, a real estate sales license, have done residential condo conversions, industrial condo conversions, bought land, dealt with various government agencies for all sorts of things from eminent domain to environmental issues to public-private joint ventures. Since 2008 I've bought over 100 properties in the Clerk of Court foreclosure auction and I manage my own rental portfolio. I also got a Bachelors degree in Real Estate and Master's Degree in Real Estate, from FIU.

Tony Vu selling....real estate?