Real Estate Questions
A Long List of Real Estate Questions
With real estate it has become essential to ask the right questions. This critical process is incomplete without finding practical and candid answers to those questions. This article is designed to help in the search for timely and realistic solutions involving both residential property and commercial real estate.
The problem-solving process should start with a detailed examination of all appropriate questions, and there are several worthy candidates described below. Despite any neat and tidy short list, it is important to realize that one question is likely to lead to another.
Sometimes questions are more important than answers.— Nancy Willard
The First Real Estate Question
Does residential real estate or commercial property provide the better value in today's real estate market?
This question is vital for a buyer trying to determine where to find the best investment value. But for someone buying property specifically to live in (residential) or to create a business (commercial), the question can effectively be ignored.
For those who are indeed looking at opportunities for investing, this area must be examined very closely. As noted in some of my other articles, there are perhaps as many as two dozen critical differences between residential real estate financing and commercial mortgage loans.
One of the most interesting and often overlooked differences to acknowledge when comparing residential properties and commercial real estate is that there is an element of "portability" associated with business ownership. One of the main components that determine value for businesses and commercial property is the income stream created by business activities. When buying a business, the appraisal process will analyze income produced during the past several years as a primary basis for determining value for a specific piece of commercial property. In many (but not all) cases, the business operations can later be relocated to a new location.
An important similarity between business property and residential real estate is the need to assume a long-term time horizon. Real estate should never be evaluated as a short-term investment. Some of the biggest real estate problems in recent years have originated with a mistaken belief that such a prudent investing principle could be totally ignored.
My view is that using less debt is always preferable to using more debt.— Stephen Bush
The Second Question
Cash or debt to buy real property?
The answer is not as obvious as it seems.
Given the prevailing wisdom from many financial "experts" to use as much leverage (debt) as possible when buying real estate, this question will unfortunately be ignored and not even asked by many real estate buyers. My advice is to ask yourself this question at a very early stage of the real estate buying process:
Do I have enough financial resources to either make a larger-than-normal down payment or pay all cash for the property?
Be prepared to be viewed as a virtual outcast by your banker if you decide to avoid using any debt or very little debt when buying real property. The "less debt is better" strategy is also likely to be ridiculed by any advocates of "use other people's money" philosophies and investing seminars. My practical and prudent view is that using less debt is always preferable to using more debt.
Long-term or Short-term Time Horizon for Real Estate?
Real estate should never be evaluated as a short-term investment. This perspective is counter to "flipping" and other quick and easy recipes for real estate investing.
Don't Forget About the Real Estate Questions That Are Usually Overlooked
Just a few examples of more key question areas for real estate:
- If financing is needed, is it really available with acceptable long-term conditions?
- What is an appropriate time horizon to realize a suitable rate of return?
- What are the biggest current problems to anticipate for someone preparing to sell a business with commercial real estate included?
- Be prepared for one question to lead to another...........
This might be the best possible outcome! Once you are in the "questions groove," it will suddenly make sense to ask "just one more question" before making important real estate decisions.
Reverse mortgages are another festering problem in Washington. It's enabled by the U.S. government. They're a "problematic" product for everybody -- the consumer and the mortgage servicer.— Chris Whalen (The Daily Ticker: Reverse Mortgages a "Festering Problem" Enabled by Government)
Reverse Mortgage Questions
Unfortunately, with reverse mortgages there are more questions than answers in almost all cases. Most objective experts advise avoiding this questionable form of financing. If you decide to consider a reverse mortgage anyway, prepare a lengthy list of questions. Ask your attorney and accountant for their candid advice.
More Important Questions: Can Business Writing Impact Real Estate Solutions?
The easiest real estate questions to overlook usually involve issues that will not be relevant until it is time to sell or refinance the property.
Overlooked Real Estate Questions
Selling or Refinancing Real Property?
Even if an individual is asking the right questions prior to their real estate purchase, the easiest questions to overlook typically involve issues that will not be relevant until it is time to sell or refinance the property. Most of us probably know someone (perhaps ourselves) who is having financial difficulties because of their current inability to sell or refinance real estate. As noted both here and in separate reports, the biggest problems can frequently be solved, eliminated or avoided altogether by anticipating them in advance. The best time to anticipate these factors is ideally before buying commercial or residential property. But in the end, positive results can often be achieved so long as the problem areas are not totally ignored until it is too late.
Judge a man by his questions rather than his answers.— Voltaire
A Goldilocks Poll
Please answer the poll below to give your candid assessment as to whether Goldilocks would say "too little" or "too much" or "just right"!
For purposes of the question below, the private sector includes both banks and individual investors.
Looking at real estate throughout the United States, have the private and government sectors done enough to solve real estate problems?
Asking the Right Questions About a Real Estate Career
The most serious mistakes are not being made as a result of wrong answers. The true dangerous thing is asking the wrong question.— Peter Drucker
Stress Tests for Banks and Real Estate
Two specific news developments during 2012 reinforced a questioning attitude toward banks and bankers (particularly when it comes to commercial real estate financing). I am referring to (1) the Federal Reserve "stress test" of the biggest banks and (2) a former Goldman Sachs executive describing how client interests regularly take a back seat at this particular banking firm to corporate money-making. Events like this strongly support the ongoing need to ask (the right) questions before making any financial decisions involving any bank.
More of the same in 2014, 2015 and 2016: As you might have heard, the news regarding bank stress tests did not improve much with time. The result in 2014 was very similar to the outcome in 2012. It wasn't until 2017 that all major banks passed the financial stress tests.
When investing in real estate, buyers need to impose their own version of "stress tests" that reflect the financial health of a property and business. "What Every Real Estate Investor Needs to Know About Cash Flow" is an excellent analysis and description of real estate cash flow and numerous other financial measures that should be understood when evaluating real property. The author, Frank Gallinelli, talks about the real estate due diligence process in the video shown below.
Frank Gallinelli: Due Diligence for Real Estate Investments
What About the Right Answers?
Of course the right answers are important. But as Peter Drucker has pointed out, critical damage can be inflicted by asking the wrong questions. In other words, you might obtain the right answers to the wrong questions and then make decisions according to this information. Even though the information was accurate, you could still be heading in the wrong direction.
As an example of how turned around perspectives can be, some "experts" think that banks are the solution to one or more financial problems and therefore justify the bailout resources thrown at them. In contrast, others (including me) consider banks themselves to be the underlying problem. In my view, banks are not the solution because they are the problem. Even the head of the Federal Deposit Insurance Corporation — Sheila Bair — had this observation: "The banks should have been let go."
As another example, real estate is viewed by some as a problem that requires a bank solution. Along with others, I consider real estate to be a solution and banks to be a problem.
Asking the right questions (and then ending up with the right answers) depends as much as anything on having the right perspective.
A prudent question is one-half of wisdom.— Sir Francis Bacon
© 2012 Stephen Bush