Four Magic Questions : Part 3

Real Estate Riches: How to Become Rich Using Your Banker's Money
by Dolf de Roos, Ph.D.

(Page 3 of 5)

It happens every day of the week. In fact, it is much easier to buy a bargain than a lemon for the simple reason that even if you sign a contract (subject to finance) to buy a lemon, the bank will not lend you money on it, as the appraisal will reflect its true value and not the contract price. Bingo! An instant and invisible lemon-avoidance algorithm.

Now I know from experience that when I say "It happens all the time!" many people need more convincing. After all, they say, if it happens all the time, why has it never happened to me?

Well, the problem is that too many people think that if something sounds too good to be true, then it must be. If that is your belief, if that is what you have been brought up to think, then every time you come across something that sounds too good to be true (like a building worth $1.5 million that is on the market for $1 million), you will dismiss it as a hoax, as a con, or as a fiction of someone's imagination, and you will move on to more "believable" deals.

Therefore, you will limit yourself to deals of mediocrity, to the plain vanilla, ordinary, so-so deals with little upside potential that most of the rest of the world languishes with.

Does this mean that all deals that sound phenomenal are in fact phenomenal? Of course not! But dismissing them out of hand merely because they sound good definitely means limiting yourself to those horrid deals of mediocrity.

Even if you accept that phenomenal deals may exist, you may still be wondering why anyone in their right mind would sell a building worth $1.5 million for a mere $1 million. There are too many reasons to list here, but let me give you some examples...

The most common reason why properties are sold at way below their true value is, unfortunately, divorce. When people are blissfully married they can reason lovingly and at length, but when things go awry, the battlers want instant results. So if it is agreed to sell a jointly owned home, the owners generally want each other out of their hair as soon as possible, and they therefore want their money out fast. There is no time to prepare the property for a good sale, and sometimes even no time to get an updated appraisal. Let's just sell the property NOW, split the proceeds, and never talk to each other again.

Not getting an appraisal is a surprisingly frequent reason why properties are sold at way below the market value. One example is when people are in a hurry, such as in a divorce situation as we have just seen. Other times, the owner may think he knows it all anyway, and since the house up the street sold for $360,000, and the house down the street sold for $345,000, he feels he is getting a good deal by selling his at $370,000, when in fact any of a dozen appraisers would have put a value of $480,000 on his property since his is the only one with a triple garage, a swimming pool, and a view to die for.

Sometimes the owners are simply too stingy to engage the services of an appraiser. They think that by saving the appraisal fee (typically around $500 for a single residence), they are putting that money in their pocket, when in actual fact they may be depriving themselves of many tens of thousands of dollars of potential sale price.

Perhaps the owners have lived in the house since 1957, when they bought the property for $3,200, and they now think they are ripping you off by accepting $285,000 for it, when in actual fact the property is genuinely worth $390,000.

Or a property may have been bequeathed to four children. One of them wants to live in it, the second wants to rent it out, the third wants to turn it into a commune, and the fourth is hiking in Nepal and cannot be contacted. General disharmony ensues, and in the end the lawyers (including the one with the power of attorney for the hiker) arrange to sell the property quickly and split the proceeds four ways.

Very commonly a property may be sold by people who have no vested interest in getting the true market value for it. This is often the case with foreclosure situations, where the bank is mainly interested in getting its mortgage back, but also occurs when people are asked to look after someone else's affairs. For instance, young Tommy may be asked to go back East to sell dearly departed Grandpa's house and small shopping mall, because no one else in the family can take the time off work. However, the reason Tommy doesn't have a job is because he likes partying, so back East he does not bother to do his homework to get the best price-he assigns the task to a randomly chosen real estate agent (a rookie with two weeks' experience), and both Tommy and the agent are ecstatic to get a sale price of $1 million, when the true value was, you guessed it, $1.5 million.

Each reason why people sell a property at well below its market value is unique, but they are there nonetheless. Believe it, and you will find them. Do not believe it, and you can join the masses who can say with complete honesty and accuracy that "that sort of thing never happens to me!"

So far, we have asked two of our four magic questions. We have seen that when you invest $100,000 in the stock market, you get exactly $100,000 worth of stocks that are worth exactly $100,000 the moment you buy them. Conversely, when you invest $100,000 in property, you can buy $1.5 million worth of property for a contracted price of $1 million using a $900,000 mortgage. Let's move on to the third question.

Question Three

When you buy your $100,000 worth of stock for a purchase price of $100,000 (and the moment you buy it, it is in fact worth exactly $100,000), what can you personally do to increase the value of your stock portfolio?

"Pray!" I hear you say. How about writing a letter to the directors of the company wishing them well? Or how about going out and buying as much and as many of the products or services that the company provides as you can afford?

I think you will agree that your options are limited.

Copyright © 2001 by Dolf de Roos, Ph.D.

About the Author

Dr. Dolf de Roos began investing in real estate as an undergraduate student. Despite going on to earn a Ph.D. in electrical and electronic engineering from the University of Canterbury. Dolf increasingly focused on his flair for investing, which has enabled him to have never had a job. He has, however, invested in many classes of real estate (residential, commercial, industrial, hospitality, and specialist) all over the world.