In an extended interview on Real Estate 360 Radio, ListedBy’s founder and CEO Stephan Piscano shares key information about the online auction movement and discusses specifics related to ListedBy.com.
With transparency and low cost environments being key drivers for buyers and sellers to explore auctioning residential or commercial real estate assets online, Stephan, an accomplished property investor in his own right explains how the free business model can benefit both buyer and seller, and how it can create a new opportunity for the representing real estate agent on both sides to capitalize on the auction trend.
In the interview Stephan offers to listeners an extremely compelling and complimentary downloadable eBook on real estate investing that is helping new and established investors generate double digit returns.
Listen to the interview at http://bit.ly/1eckLl7.
When you meet Philip Chan, a pharmacist by profession, you quickly realize his passion for real estate. We recently caught up with him to get his views on the investment market specifically in the commercial real estate space, and to get a glimpse into his investment strategies.
Q: Philip, thank you for taking time to meet with us today. Would you please share a brief background with our readers on your career and involvement in real estate investing?
R: Thank you. I have been investing in real estate for ten years in both conventional and creative deals. My first commercial real estate deal was in 2006, involving a commercial lot in downtown Sacramento where I leased the space to a developer of one of the largest redevelopment projects in California. Three years ago I got involved in a mixed residential and commercial deal that cash flowed very well. But in 2012 was when I hit commercial real estate investing in a big way. 2012 was the bottom of the market and everyone was very fearful of commercial real estate. However, I analyzed the numbers and charts, and jumped in the deep end. That was one of my better moves I’ve made and it has now opened a lot more opportunities for me in both commercial and residential real estate.
One of my inspirations was Cherif Medawar. Cherif is a commercial real estate investment guru. I caught up with Cherif in Puerto Rico last year. Cherif spent some time showing me his commercial properties and what he did with them to build and accelerate value and potential. That was extremely inspirational. When I got back to California, one of the commercial deals near downtown San Jose I had been working on came through. The bank I was trying to get the property from gave me a deal at a significant discount at around $67 per square foot. Today that investment is worth about double that, just one year later, following a combination of both forced and market appreciation. At that time, other than Cherif, experienced real estate agents and investors said I was crazy to do the deal.
Anyone looking seriously at investing in the commercial space ought to take some time to listen to Michael Bull’s commercial real estate radio show at http://commercialrealestateshow.com. The link and additional resources, like real estate charts, are also on my website at www.mpcvilla.com. I relied on the show heavily as I was learning about commercial real estate – the radio show definitely helped propel me from a novice to an astute commercial real estate investor.
Shortly after the bank owned deal, I completed another 10,000 Sqft commercial property deal mostly retail and some office space, and took it over at the beginning of 2013 in a lease option agreement. I put 3% of the purchase price as option money and got the deal signed. The property was half empty and I was able to bring in a tenant quickly. I negotiated a few rent-free months with the owner which helped me recoup my option money. The investment has worked out great. I get a strong cash flow that generates more than 200% cash-on-cash return. When I exercise the option in three years, the down payment would have been accrued from the cash flow. I’ll be able to acquire the whole building without any of my money, and that’s excluding the benefits of any price appreciation on the asset. Basically, astute investors who apply the right strategies that take advantage of the downturn in the commercial real estate market can do amazingly well.
Q: Philip, what is your sentiment on the commercial space now that we have seen a major rebound in the market overall? Has the opportunity for investors passed or are there still good deals to be had?
R: I think there are still a lot of opportunities. My main geographic focus is the San Francisco Bay Area in California. But you can find many great deals elsewhere as well, since opportunities in the Bay area are harder to find. Seller financing and lease option deals and wrap around deals are out there. In this market, the owners in commercial are generally a lot more flexible than residential property owners, although the commercial market has already heated up quickly. I say take advantage of the opportunities now because they won’t last forever.
Today most investors look at residential. There is such a shortage of places to rent that rentals have gone significantly higher and vacancies have dropped to near historic levels. So residential is very hot and various market forces, including low inventory, increasing material and labor cost should continue to drive this uptrend.
At the same time, not as many investors are looking at commercial real estate, which I think is based on fear and lack of experience with commercial real estate. Within commercial there is office, retail, industrial and multi-family, and all operate a little differently. At some point the commercial space was very attractive and in high demand. That has now reversed but at some point it will re-establish its norm, which is already starting. In the mean time, investors have a wonderful opportunity to structure great terms.
Q: Of all the commercial opportunities you have been involved in, what do you think are the most lucrative and worth pursuing for new investors?
R: Each person’s comfort level and geographic location play a difference. The ability to align themselves with resources and expertise is important. It also depends on the deal. Retail for example is under performing. So if a person came across a retail property and it’s something where they can get an owner financed deal put together, or a lease option with some free rent and a low base rent, then lease it out and make money, I’d say it’s a good deal even though the retail sector is considered underperforming.
Most commercial real estate loans, other than the SBA loans for owner users, will require a fair amount more down payment, such as 30%, than residential deals. So more out of pocket and the loan terms are shorter, like 5, 7 or 10 years with 5 years fixed being more typical. So someone new to commercial real estate in my opinion has a generally lower risk opportunity and flexibility through lease options on a commercial property. In part because they are putting a smaller investment up front. The option allows the investor to gain control of the property for a small amount with the legal right to own it/purchase it later on. You can lease it out or sell your contract, if structured accordingly.
Another thing investors should keep in mind is that residential real estate as a vacant asset commands a higher value while commercial is the opposite. Get a vacant commercial deal structured well and fill it with tenants and see the value skyrocket.
Q: What parts of the country do you see more opportunity for commercial deals over the rest of the year and into 2014?
R: It will depend on the risk tolerance and what investors want. Hard hit areas like California and Florida will continue to grow and appreciate. I have never invested outside California but I think if I were to go out of state, it will likely be a commercial deal. I would go for larger corporate and well recognized brands as tenants, which tend to stay in one spot for a long time. They pay all taxes, insurance and maintenance. That I would categorize as an opportunity for a very secure income stream with low maintenance and it would be a great option, although competition for such deals is strong.
In terms of specific areas, based on what I’ve learned, you want to go to areas in high demand. Properties in lower demand areas will take a lot longer to find tenants. Commercial business districts are higher demand areas, as people and businesses tend to want to be close to those areas. Market trends also play a factor. With industrial properties, trends have been changing. Corporate tenants like Amazon and others want very new high end properties so they can run their businesses more efficiently. In the end it comes down to getting a property at either a discount and/or with great terms. An active investor should be able to make such deals work.
Q: Do you see more opportunities in residential or commercial over the coming year?
R: I’d say an investor ought to consider both residential and commercial. I’d look at both but in the end it will depend on the deal. As long as you are active in the market, you’ll always find deals no matter what the market situation is like. Interestingly, in this down and now improving market, some opportunities today are even more profitable than deals I transacted during the market rise to 2006.
Q: You have been applying the lease option strategy to many of your investments in residential and commercial real estate. How does the strategy work?
R: A lease option is a great way for an investor to get involved without too much money. It’s a lease or tenancy like renting, and the option is an additional agreement that gives the tenant buyer the option to buy the property without being obligated to do so. Within the option you have tremendous flexibilities, if structured right. Alignment of incentives among both parties makes lease options a great strategy.
Think about a car. If a car is rented out, the user won’t typically care for the vehicle very much. But if it is a lease to own, the driver will more likely take care of the car and be more responsible. Expand this concept to an even larger asset: real estate. The tenant may even improve on the property along the way, knowing that one day they may decide to buy it. In the end if the tenant doesn’t exercise the option, the owner keeps the option money, plus any tenant buyer improvements to the property. As a seller, you can even get a rent premium if you give out a lease option. 10-20 percent rent premium, plus a lump sum upfront would not be out of the ordinary. If the tenant buyer completes the transaction, everyone is happy. However, given that a majority of the tenant buyers do not exercise the option to buy, the owner is at a huge advantage. Imagine repeating the lease option cycle over and over. The same thinking applies to both commercial and residential assets. In summary, the strategy is all about relatively low out of pocket money with low risk and lots of flexibility.
Q: What should a new investor in real estate know about lease options? Give us some of the watch outs, do’s and don’ts.
In concept a lease option is pretty simple but the structuring and execution of it can get a little more complex. Each deal is a bit different because each landlord is different and their situation is different. One thing to keep in mind is protecting your interest as a tenant buyer by ensuring the deal is financially sound. Don’t acquire a property that eats you up financially. So you’d want to request a proof of payment such as on the mortgage and taxes for example, maybe quarterly. At least such due diligence with on going tracking gives you early notice on key things that may be going off track. When you exercise the option to buy, that’s when it becomes a traditional sale. When in escrow you make sure the property is transferred free and clear (marketable title).
I am still learning, applying and building. One of the biggest dangers about commercial real estate to watch for is long term vacancies. If the investor cannot withstand an empty commercial asset for at least one year, they should likely not get involved. That’s because some properties may stay vacant for quite a qhile, even as long as 4-5 years. However, you just don’t want to be in a deal like that. If you structure the deal right, you should be able to lease the asset at an attractive rent, in worst case scenarios and still make money or not be out of pocket until the asset appreciates and demand increases in the area. If you have that ability, then the deal would likely make sense. The key is getting the deal terms right. Commercial real estate involves a business to business arrangement, unlike a consumer residential deal. The mentality is completely different and the landscape is totally different. Businesses are usually more financially sound and publicly traded companies and big name brands make for great long term tenants. Deals around such tenants can get pretty exciting.
Philip Chan, pharmacist and active real estate investor, started his real estate investment business in 2003 (10 years ago). Philip conducts both creative and conventional real estate transactions with residential and commercial properties. Philip entered his first commercial real estate deal in 2006 and has been extremely active with commercial properties since 2012. One low cost way for investors to get involved in real estate is to use lease options, a strategy Philip has successfully used for both residential and commercial real estate in the San Francisco Bay Area.
To obtain Philip’s 10 Step Lease Option Protocol, visit www.mpcvilla.com, send him a request by e-mail or contact him by phone. Let Philip know if you are also interested in working with him on deals. You can also check current deals Philip is marketing on ListedBy, at http://listedby.com/Listing/Browse?Seller=mpcvilla.com or other commercial real estate auctions and over two million foreclosures at http://www.listedby.com/listing/browse.
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We’re pleased to announce the release of a new consumer handbook on real estate auctions, ListedBy – Real Estate Auction Primer for Consumers.
One of the terminologies explained in the booklet, which will be available for download right here within this blog post next week, is Transparency.
Transparency is one of the key advantages of real estate auctions, specifically online real estate auctions. That’s when bidders can see each others’ bids at any time, and can look up each others’ information, such as account profiles. Much like on LinkedIn and other social networks.
This kind of transparency gives everyone a greater sense of trust and confidence in the process, equal chance, and optimizes a property’s market value. New platforms such as ListedBy.com allow everyone to view other’s bids and member profiles including any ratings, recommendations or comments.
The guide also emphasizes the importance for consumers to engage an experienced REALTOR® when considering selling or buying a home through auction.
Click to DOWNLOAD ListedBy – Real Estate Auction Primer for Consumers.
Meanwhile here is the full News Release capturing the content of the booklet:
ListedBy Releases Real Estate Auction Guide for Consumers
Downloadable handbook outlines and explains basic auction terminology, strategies and ‘must-know’ guidelines for home buyers and sellers
NAPA, Calif. – November 30, 2012 – ListedBy (www.ListedBy.com), the first free online real estate marketplace and social network with live bidding auction and ‘Best Offer’ functionality has released ListedBy – Real Estate Auction Primer for Consumers, a ‘must-know’ guide for anyone looking to buy or sell real estate through auction.
“As the auction market gains traction, important terminologies and factors are a must for both buyers and sellers,” said Stephan Piscano, CEO and Co-Founder, ListedBy. “ListedBy’s model changes the auction practice almost entirely and adds new dimensions even experienced real estate professionals can greatly benefit from.”
ListedBy – Real Estate Auction Primer for Consumers will be available for download, free of charge, in the Knowledge Centre on ListedBy Blog, starting December 4, 2012. Consumers considering auctioning their home or purchasing a property at auction can also tap expert advice on the ListedBy Member Forum.
ListedBy – Real Estate Auction Primer for Consumers
Basic Terminology and Strategies
1. Auction – The term auction is derived from the Latin ‘augeō’, which means ‘I increase’ or ‘I augment’. It is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder at a pre-set set auction expiry date and time.
2. English Auction – Is an auction where the price is driven up by buyers and where the highest bidder wins, at auction expiry.
3. Dutch Auction – A process where the starting price of an asset begins higher and scales down until the offer meets a bid.
4. Reserve Auction – A ‘Reserve Auction’ sets a minimum price below which the seller is not obliged to sell the property at the expiry of the auction. As a home seller, use this strategy to secure an absolute price below which you are not ready to sell, and to advise bidders that bids must go higher for an acceptable agreement to be reached.
5. No Reserve Auction – A ‘No Reserve’ auction, also known as an Absolute Auction, legally binds the seller to release the property to the highest bidder above the set starting bid price. This strategy is usually used to create early excitement around an attractive, lower but acceptable price. The approach can drive a bidding competition that can result in a final sale price higher than originally expected by the seller.
6. Buy It Now – By placing a bid under a Buy It Now price option set by the seller, the bidder instantly wins the auction and both seller and buyer are obligated to transact at the set price. Leverage Buy It Now to avoid entering into a competitive bidding scenario and to secure and close on the property quickly.
7. Buyer’s Premium – A traditional practice that new business models such as ListedBy.com are eliminating. Also referred to as a Buyer’s Penalty, or the fee that a winning bidder must pay over and above the price of the subject property. The premium is typically between two and ten percent of the asset value.
8. Open Outcry – Unlike sealed bid auctions, ‘open outcry’ auctions are ‘open’ or ‘fully transparent.’ The identity of all bidders is disclosed to each other during an open outcry.
9. Auction Expiry – An auction has a start date and time, and a close ‘expiry’ date and time after which new bids are no longer accepted. In cases where a last minute bid comes in just prior to the expiry, certain auctioneer rules may include a short extension, to give former bidders a chance to counter the late coming bid.
1. Fees and charges – New, advertising and service driven business models are doing away with all fees associated with buying or selling property at auction. As a seller, look for auctioning your property through a provider or platform that does not charge any fees or commissions. As a buyer, look for auction venues that do not charge any Buyer Premium or penalty.
2. Transparency – Sealed bids may have some advantages in certain cases. However, in buying or selling your home, it is important to first consider a fully transparent environment where everyone gets to see who is bidding and how much. Transparency gives everyone a greater sense of trust and confidence in the process, equal chance, and optimizes a property’s market value. New platforms such as ListedBy.com allow everyone to view each other’s bids and member profiles including any ratings, recommendations or comments.
3. Online Auctions – New, entirely Web-based auction platforms and service providers offer a simpler, quicker and more efficient avenue for buyers and sellers to engage in auction. An online avenue also does away with the added effort, inconvenience, resources and expenses needed to organize and run a physical, on-location auction.
4. Engage a REALTOR® – While buying and selling at auction online is relatively easy, look to engage an experienced representative who understands real estate marketing, knows the area, the auction process and various strategies that can be used to maximize your property value or clinch you a better deal, if you are a buyer. A local REALTOR® who also has experience in online auctions can bring significant advantage to the process. The Member Directory on ListedBy lists agents from across the U.S. and can be a great place to begin your research.
Benefits of Online Auction for Buyers
· Knowledge that the property will sell at auction expiry.
· Knowledge of who you are bidding against and where the bids are at any point in time. A fair play environment.
· Ability to participate free of charge and from anywhere, anytime.
· Ability to conveniently view and bid on multiple properties.
· No Buyer Premiums means additional funds to put towards a desired property.
· Significantly cuts down price negotiations time typically consumed in traditional buying and selling.
Benefits of Online Auction for Sellers
· Expose your property to cash-ready, pre-qualified buyers.
· Let the market reflect the right value of your property.
· Create excitement around the sale of your property.
· Certainty that the property will sell and by when.
· A way to potentially sell your property more quickly.
· Create competition among buyers.
· Less back and forth negotiations lends for an overall faster, easier process.
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