This Issue: Winning Real Estate Tactics for Troubled Times

When most people hear the word negotiation, they usually  picture stone-faced adversaries who glare at each other across a conference table and argue over every little point. That's not how I work. A better example is how I went about buying 40 Wall Street. 

I was interested in acquiring 40 Wall Street for years. I followed the building as the neighborhood changed, tenants moved out, and real estate values plunged. I watched as it changed hands and was finally purchased by the Hinneberg family, who ran it from Germany. I learned as much as I could about the family, including how they conducted business and the problems they were having with the property.

When I decided to make my move, I knew that the family's agent handled all the business for the building. Although everyone dealt with the agent, I wanted to meet with the Hinnebergs face-to-face to find out what they wanted and to explain my vision. If you want to learn the truth, try to bypass the agents and handlers and go to the owner.

So I flew to Germany and met the Hinnebergs. They were impressed that I devoted so much time and effort to meet them. It showed the depth of my commitment. The Hinnebergs reacted favorably when I assured them that I would turn the property into a first-class office building, which I have. We didn't sit down at a table and fight. Instead, we put our cards on the table and talked. We soon came to terms. All my preparation paid off, and we struck a deal in which we all won.

I've been called a master negotiator because I usually get what I want. I negotiate to win, and then I win. My process, however, isn't necessarily what you would expect. I spend lots of time preparing for negotiations, which usually gives me the edge.     

I believe that the key to striking a deal is persuasion, not power. Persuasion is diplomacy at its best - the ability to convince people to accept your ideas.

Last week Levitt & Sons, the homebuilder whose Levittown developments were the emblems of America's postwar economic boom, filed Chapter 11 bankruptcy for reorganization - and its fate as a continuing business remains in limbo. Here's how David Streifeld in the International Herald Tribune summarized the collapse:

"The first big home builder to fail in the current slump, Levitt's collapse illustrates how the turmoil in real estate is spreading far beyond subprime borrowers who cannot pay their mortgages. Levitt had a fabled brand, decades of experience and enthusiastic customers with good credit, but that was not enough to save it."

To see Levitt's historical brand vanish is alarming, to say the least. But the worst part is the damage done to the homebuyers who had made down payments on new Levitt homes that were under construction. The lives of those customers will now descend into rounds of lawsuits, frustration and possibly substantial financial losses.

If you cannot trust a brand as well respected as Levitt & Sons, whom can you trust in today's turbulent real estate world?

While you need to apply caveat emptor ("let the buyer beware") to all  real estate dealings (with lenders, construction firms, homebuilders, private sellers, real estate agents, and others), due diligence only gets you so far. After all, how many of us are sophisticated enough to read a corporate financial statement analysis and spot all the signs of trouble? And remember, even top financial professionals missed colossal levels of fraud at Enron, WorldCom and other giant corporations that failed.

How can you and I, investors without bottomless pockets, find protection from frauds, failures, and other money-losing hazards? Let me recommend a few tactics.

Don't write big checks on trust alone when you are buying property. Place all your deposit money in escrow when you are dealing with any seller, agent, builder, or developer. If no delivery, your funds are not (generally) at risk.

Analyze the cyclical nature of markets - including (or perhaps, especially) new construction. Correspondingly you must, as an investor, beware of overleveraging and taking on too much debt as a boom continues to roll along. But, in fact, many pros and amateurs alike behave foolishly in this regard. Instead of becoming more cautious and stashing away cash reserves as a boom steams along, they expand their holdings aggressively, using higher amounts of debt.

Learn to spot imbalances. When real estate investing, take it as a warning sign when rapidly increasing market values substantially outpace construction costs. It is a situation that creates larger and larger profit margins for builders - TEMPORARILY - until the rush of builders who are all seeking to pocket those juicy returns floods the supply-side of the market just as speculative demand reaches a peak. 

And watch for this red flag too . . .

It is another danger sign when house prices are accelerating far faster than rents. In Las Vegas, for example and in South Florida too, house prices more than doubled during the past five or six years of the boom - - whereas rent levels barely matched gains in the Consumer Price Index.

This trend causes two negative effects. First, potential homebuyers find renting cheaper than buying, thus diminishing end-user demand for houses and condos; and second, low rents (relative to selling prices) create "alligators" who eat up a potential investor's cash flows. As prices climb higher and higher, these alligators become bigger and hungrier.

In the recent boom, as oversupply shattered hopes for enough appreciation to defeat the alligators, investors (i.e., speculators) simply withdrew. Instead of lining up to bid on the next big flipping opportunity, they withdrew to watch football on Sunday afternoons.

So when you hear of a failure like that of Levitt & Sons, is staying out of real estate your only sane response? If the big guys are failing, shouldn't you stick your head in the sand and wait it out?

Not so. As many successful people know, the Chinese ideogram for danger is the same as the one that stands for opportunity. That’s a sign that fortune favors the brave - but only brave people who know how to read the danger signals and invest wisely.

When I was researching my book Good Stress, Bad Stress, a man named Bill told me an interesting story. Only a few months earlier, he had been virtually paralyzed by fear. He had piled up tons of debt. He couldn’t pay the credit-card bills that rolled in every month. And to make it all worse, Bill’s daughter was about to start college and he had no idea how he was going to pay her tuition bills.

Bill felt stuck, but then one day he threw some unpaid bills and old tax returns into a grocery bag and went to a bank. He was convinced that his debt was going to sink any chance of getting a loan to pay for his daughter’s education.

But guess what? Bill’s house, which he had owned for 15 years, was worth a lot more than he realized. The loan officer at the bank told Bill that if he refinanced his house, he could level his credit card debt and have enough left over to pay more than one year of his daughter’s tuition. Then the banker told Bill about some very attractive low-cost educational loan programs designed for people in Bill’s income bracket. The banker even helped Bill lay out a plan to make small monthly payments that would allow him to retire with a well-funded IRA fifteen years down the line. Bill went into that meeting scared, but he came out empowered.

The moral of the story is, you have to act on your fears, not let them immobilize you. That’s only one of the lessons I learned when I was writing my book. Here are some more:

• You never know whether a situation represents a threat or an opportunity until you confront your fear and take action. Sitting on your duff will never give you the answer to that question. Unless you move ahead despite your fear, you will never know what you are up against.

• If you can see a positive goal behind what is scaring you, you are probably in a good situation, not a bad one. Sure you are stressed, but if confronting your fear will let you start a business, retire richer, or buy a property, then you had better move ahead and give it a try. If you can sense a worthwhile goal calling out to you, that is reason enough to move ahead.

• Taking action will open up even more possibilities for you. Perhaps you’ll get a loan for one investment house - and the income from that property will allow you to buy still more properties. Or the plan you make to eliminate your debt will free you to start making aggressive investments in only a few years. Moving ahead opens up new ways to succeed, while hiding from your fear only causes your life to collapse in on itself.

So remember to think like a baseball player. Can you hit a home run from the bench? Of course not! If you want to swing for the fences, you have to step up to the plate.