Arm yourself with options

The final aim of any investor is rather simple — buy low and sell high. However, in a sector as cyclical as real estate, investment decisions may become rather complex.

The final aim of any investor is rather simple — buy low and sell high. However, in a sector as cyclical as real estate, investment decisions may become rather complex. This, coupled with the fact that there’s too much information and too many advisers, calls for a well-thoughtout entry and exit strategy, being up-to-date with information on new deals and being thorough with simple techniques for evaluating deals.

Good investing means selecting the right investment mix, identifying your area of investment, setting return targets, never underestimating risk factors and accounting for all of them, and periodically reviewing and improvising the investment strategy. It is important to appreciate that ‘price is a reflection of the past’ and ‘value is the indication of the future’.

Rushing into an investment can be a foolish thing. And if you’re thinking that higher risks mean higher returns, you could well be on your way to making another mistake— because in this market the said paradigm does not rule. One way to make sure you don’t make these mistakes is to arm yourself with knowledge beforehand.

The real estate agent: One of the indications of an asset bubble building up is when your grocer turns into a part-time real estate agent, or your lift-operator starts getting you property deals. You must be cautious, since such ‘agents’ or ‘brokers’ can be a dime a dozen. What you need is the professional agent who is an asset for you because of his proximity to the market and indigenous information. He should know which properties are going for a steal, which ones to look away from or the ’secret’ deals that have not even hit the market. It would also be advisable to avail of the services of reputed property consulting agencies. These organisations provide a range of services like deal sourcing, financial structuring, due diligence and negotiation, to name a few.

A word of caution: Make sure that your agent is not the seller’s agent too. Also, outsourcing decisionmaking to your agent could spell disaster for you. Make sure the services availed of are only to the extent of gathering the best information, while retaining decision-making to yourself.

Leveraging through networking: A successful real estate investor cannot be invisible. He must be known and must know all those who matter and that’s why socialisation and networking play an important role in the investment process. Property exhibitions/shows are valuable sources of information about properties that are up for grabs. They also work very well as networking places to help you meet the right people— developers, investors, advisers, town planners, policy makers and people working in municipal corporations.

Real estate developers: He could give you nuggets of essential information about new properties and the best deals at discounted pre-launch prices, which you wouldn’t get otherwise. Along with knowledge about industry trends and where the development cycle is expected to lead, networking with developers also provides you with opportunities to sell your properties to them and/or co-development possibilities.

The media and the Internet: There are many property magazines, newspaper classifieds and real estate supplements in the media world today. It is essential to keep abreast of these publications since they may contain information that will change your perspective on the market. With the sector gaining prominence in capital markets, a lot of technical analysis is published on a regular basis by industry specialists and financial analysts.

As an alternative to conventional publicity, you’ll find the Internet a viable and newly preferred solution. Company Websites, micro-sites, pop-ups and more have become the new vehicles of modern consumer contact. Customer-to-customer Websites are known to get hundreds of hits in a single day and have wellestablished customer and property databases. These help to bring buyers and sellers closer. You’ll also find many sites that help in comparative analysis. A Webbased tool that deserves special mention in the context of our discussions is Google Earth. This tool actually enables you to see the aerial geography of the property you are planning to invest in, giving you a feel you’d never get, unless you owned a satellite of your own.

When properties are undervalued: They say that a business deal is best done when both parties are satisfied. The question is how does one achieve a winall situation? There are a number of variables in real estate and these are demand, supply, interest rate, environment, regional economic conditions, etc. An important variable that is often unnoticed is the economic condition/stagnation of the property. A careful examination of these will reveal there are opportunities to buy undervalued properties from willing sellers.

One way is to find mortgage lenders having a large number of non-performing assets. You are more likely to find attractive prices from such institutions. These include pre-foreclosure properties and foreclosure properties offered at huge discounts since financial institutions cannot manage the turnaround of such properties themselves. Sometimes, pre-foreclosure properties could come with a spread out cash flow requirement and, hence, could provide lucrative investment opportunity.

A distressed seller may be any individual who is probably in a state of any of the following:

  • Cash-strapped.
  • Family dispute/death of the owner.
  • Stagnant economic condition resulting in badly maintained assets.

You can locate such opportunities through your broker or people you know in lending organisations and their agents. You could also make it a point to keep an eye on foreclosure and sale announcements. But remember, it isn’t a good idea to rush into these deals. Weigh the pros and cons and don’t dive in because the deal is cheap. It is only advisable to invest when you see value in the proposition and if you foresee a possibility to turn around such a property .

Excerpts from a yet-to-be-released book, Real Investment, brought out by Knight Frank. This extract is from a chapter authored by Milind Korde, Managing Director, Godrej Properties.