Images from the Rear View: Lessons on Real Estate Investments

I received an interesting phone call this week from a woman in California. She runs a company that directs money from overseas into US-based Real Estate investments. I’m still pondering the implications of that conversation.

When I first got involved in wholesaling, I was approached by another west coast company looking for investment deals. This was back in the pre-bust days when everyone wanted to get their hands on a piece of Real Estate. The group of investors contacted me from a Craigslist ad I posted for one of my deals.

During our initial conversation I spoke with John. He explained that his company pooled the money of multiple investors to purchase investment properties all over the country. He mentioned that he was working with a wholesaler in my market, Valerie, who I knew. So following the conversation, I called Valerie to get some more information.

What I learned was pretty typical of the time. John’s company found deals and marked them up to his investors. Valerie told me that the company had closed on several of her deals. Every deal was in the city. Every deal was close to a developing area where a few blocks can mean the difference of $100,000 in value. The company’s markups were huge, sometimes greater than the value of the property. Their buying criteria seemed to be solely based on how a deal appeared on paper.

The individuals and companies that survived the bust did so by knowing their markets and by making smart investments. John’s company profited because the investors with skin in the game were thousands of miles away.

I never ended up doing any business with John. In retrospect the story has become a good lesson for me. Real Estate investments are local. Know your neighborhoods. Know your markets.

So why does the conversation from earlier this week continue to roll around in my mind?

During the top of the Real Estate boom, people threw money at any piece of property they could get their hands on. It’s no wonder. Investors were making hundreds of thousands of dollars flipping houses in a few months.

People got greedy and lost sight of basic the fundamentals. They started making business decisions that were not smart. And for a few years they were rewarded for those bad decisions. It all worked wonderfully until the music stopped.

I am sure there are some excellent Real Estate investments in California. Why does an investor have to search the other side of the country to find a good deal? And why are so many overseas investors willing to risk their capital with a company buying property they’ve never even seen?

The question I continue to return to is, what have we (as investors) learned from our past mistakes?

We cannot know what tomorrow holds. But sometimes the best way to view the future is by taking a good look in the rear view mirror.