International Real Estate Investing Fundamentals: Buy What You See And Pay For What You’re Buying
Buy What You See?
June 2, 2009
Panama City, Panama
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Dear Overseas Opportunity Letter Reader,
"'Buy what you see,' your real estate investing advisor Lief Simon tells readers all the time. Yet, at the same time, he promotes pre-construction investments. How does that make any sense?" wonders a reader this morning.
Lief replies:
"Perhaps we should adjust the mantra from 'Buy what you see' to 'Pay for what you see.'
"Taken literally, Buy what you see leads you to conclude that you should invest only in real estate that is 100% complete. Totally built-out. All infrastructures and amenities in place.
"If you're an ultra-conservative investor or a retiree not interested in taking any chances, this safe-bet strategy can make sense.
"However, the point of the advice is to help the would-be real estate investor get back to basics. To remind you of the fundamentals of real estate markets, cycles, and pricing.
"If what you see at the time of your purchase is a plot of land with no improvements or infrastructure, then that's what you're buying...and that's what you should pay for.
"That's the crux of the thing. Make sure that, whatever you're buying, you're paying a price that reflects the reality of the product at the time of your purchase.
"'Buy what you see' does not translate to mean never buy pre-construction or raw land. It means to understand what you're buying...so you can assess and accommodate for the risks...and so that you pay the price you should pay given what you're paying for.
"The trouble starts when investors forget this fundamental and are tempted into paying 'something-there' prices...when there's nothing there.
"In Panama, for example, during the heyday of the pre-construction boom, people began paying prices that reflected potential values, not current, pre-built values. That's not buying and paying for what you see. That's buying and paying for what some developer is promising you.
"When you buy early, you should pay a price that reflects a discount compared with comparable completed projects.
"Unfortunately, in Panama, as elsewhere through various boom and bust cycles, the developers got greedy...and the buyers, greedy, too, were led astray by promises of profit supported by claims from earlier buyers who had, in fact, bought at discounts to completed construction prices.
"If your risk tolerance is low, then maybe, yes, you want to follow the advice literally. Buy only what you see. Understanding that this means, sometimes, you'll miss out on profit opportunities.
"But maybe you don't care. Maybe you're looking for a nice place to live in retirement, and you don't want any surprises.
"However, if your agenda is more profit-driven, then you don't want to limit yourself literally to buy what you see. You want to pay for what you're buying. Which means the earlier you buy, the bigger the discount you should enjoy."
Kathleen Peddicord
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