P1: OTA/XYZ P2: ABC FM JWBK256/Peebles June 30, 2008 7:48 Printer Name: Malloy, Ann Arbor, Michigan The Peebles Path to Real Estate Wealth How to Make Money in Any Market R. Donahue Peebles with J.P. Faber John Wiley & Sons, Inc. i P1: OTA/XYZ P2: ABC FM JWBK256/Peebles June 30, 2008 7:48 Printer Name: Malloy, Ann Arbor, Michigan xii P1: OTA/XYZ P2: ABC FM JWBK256/Peebles June 30, 2008 7:48 Printer Name: Malloy, Ann Arbor, Michigan The Peebles Path to Real Estate Wealth How to Make Money in Any Market R. Donahue Peebles with J.P. Faber John Wiley & Sons, Inc. i P1: OTA/XYZ P2: ABC FM JWBK256/Peebles June 30, 2008 7:48 Printer Name: Malloy, Ann Arbor, Michigan Copyright C 2008 by R. Donahue Peebles. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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HD255.P44 2008 332.63 240973–dc22 2008012234 Printed in the United States of America. 10987654321 ii P1: OTA/XYZ P2: ABC FM JWBK256/Peebles June 30, 2008 7:48 Printer Name: Malloy, Ann Arbor, Michigan Contents Introduction: The Opportunity of Setbacks (Why I Wrote This Book) ix PART ONE A RECENT HISTORY OF THE REAL ESTATE ROLLER COASTER 1 CHAPTER 1 The Big Bang: The Post-2000 Real Estate Explosion 3 Between 2000 and 2006, mortgage interest rates in the United States fell in half. That started a feeding frenzy, which sent housing prices to dizzying heights. CHAPTER 2 The Great Flood: The Oversupply of Housing 17 Combined with the growing thirst for inventory, spiraling prices encouraged developers to build more projects. And guess what? Blind to the downturn, they built way too much. CHAPTER 3 Down Time: The New Buyer’s Market 33 Because of the credit crunch and the oversupply, we are now on the down slope of the housing bubble, with prices dropping across the country. That means opportunities are everywhere. iii P1: OTA/XYZ P2: ABC FM JWBK256/Peebles June 30, 2008 7:48 Printer Name: Malloy, Ann Arbor, Michigan iv Contents PART TWO FUNDAMENTAL TOOLS FOR REAL ESTATE INVESTING 45 CHAPTER 4 Information Please: Where to Find The Data 47 The good news about real estate investing is that anyone can do it. Having said that, you need to do your homework to make a superior investment. CHAPTER 5 Adding It Up: A Crash Course in Valuation 57 Figuring out the value of a piece of property—what it’s really worth—is both an analytic and creative process. It is also fundamental to making a good investment. CHAPTER 6 The Big Guns: Finding Help from the Government 71 If you want to buy property, or protect property that is now threatened by skyrocketing mortgage payments, don’t discount the power of government programs. CHAPTER 7 Money Talks: Negotiating with the Lender 81 The average person who goes to a bank for a mortgage figures it’s not negotiable. Wrong. Here are a few helpful insights to help you negotiate with the man behind the curtain. PART THREE CREATING WEALTH IN THE NEW LANDSCAPE 89 CHAPTER 8 Boom to Bust: Making Money in Down Times 91 To understand the current situation you have to look back at historic real estate cycles, in particular to the real estate crisis of the early 1990s. CHAPTER 9 Fundamental Values: Buying in the Right Regions, Cities, and Neighborhoods 107 A big aspect of the current real estate crisis is that it’s indiscriminant. It’s hurting every market in the country, even places with solid fundamentals. And that’s where to buy. P1: OTA/XYZ P2: ABC FM JWBK256/Peebles June 30, 2008 7:48 Printer Name: Malloy, Ann Arbor, Michigan Contents v CHAPTER 10 Specific Observations: Making the Deals 119 Once you understand current values—where to buy and when to buy—you still have to make that perfect deal. So size up your seller. CHAPTER 11 Techniques, Tactics, and Tricks: Useful Tools to Make Money 133 Understanding real estate principles is vital, but it also helps to know a few things about auctions, foreclosures, bank-owned properties, and contracts for preconstruction sales. In other words, how can you best leverage cash and credit, or just one of the two? CHAPTER 12 Outside the Residential Box: Investing in Commercial Real Estate 157 The opportunities in real estate go beyond the residential marketplace; should you consider investing in commercial properties? PART FOUR SAVING YOUR BACON 173 (How to Avoid Getting Swept Under by the Subprime Tide) CHAPTER 13 Be Like the Rich: Change Your Way of Thinking 175 In America we have been conditioned to follow the rules. But what happens when the rules change and the system does not protect you? CHAPTER 14 Showtime: Dealing with Your Lender 185 The first lesson in learning how to think (and act) differently is how to renegotiate. Even if you have a bad mortgage on a property you own, you have more leverage than you think, even in foreclosure. P1: OTA/XYZ P2: ABC FM JWBK256/Peebles June 30, 2008 7:48 Printer Name: Malloy, Ann Arbor, Michigan vi Contents CHAPTER 15 Know When to Fold: The Time to Walk Away, and How to Do It 197 Sometimes it no longer makes sense to fight for a property. Then you need to know how to get out with the least possible damage. Index 202 P1: OTA/XYZ P2: ABC FM JWBK256/Peebles June 30, 2008 7:48 Printer Name: Malloy, Ann Arbor, Michigan Introduction The Opportunity of Setbacks (Why I Wrote This Book) I started my real estate career in my twenties, working as an appraiser of low- and middle-income housing for HUD in Washington, D.C. That was in the late 1970s, during one of the worst real estate crises to rock this country. Despite those troubled times, by the mid 1980s I was developing my first office building and on my way to becoming a multimillionaire. Later, when the real estate market again crashed in the early 1990s, I invested heavily. Today I have a net worth approaching $400 million. I am writing this book at a time when the real estate mar- ket is once again down. Most people would call this a bad real estate market, with prices dropping. For me, it is a market full of opportunities. vii P1: OTA/XYZ P2: ABC FM JWBK256/Peebles June 30, 2008 7:48 Printer Name: Malloy, Ann Arbor, Michigan viii Introduction When I started working in real estate during that down market of the late 1970s, interest rates were at 20 percent. Times were tough, but it meant lots of work for me as an appraiser. I spent the ensuing years developing my real estate valuation skills and developing local business and political relationships. By the mid 1980s I had evolved those skills and contacts sufficiently to lay the foundation of my wealth, developing my first high-rise. It was not until the early 1990s, however, that I began to build a true real estate fortune. This was in the midst of the last great real estate crisis in America. During this time the real estate industry faced a severe credit crunch, right when values were declining due to oversupply; the credit crunch expedited and exaggerated that decline.