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.
Solving Real Estate Problems Creatively and Positively
- Cash. Lease Option. Benefits.
Online auction accelerates sales by significantly cutting down negotiations time consumed in traditional buying and selling.
Breaking it down to a few of the many time intensive components of a traditional transaction that selling or buying through online auction alleviates or eliminates:
- Playing telephone tag
- Recording and accessing voice mails
- Drafting and chasing all the email correspondence
- Traveling back and forth to personal meetings with a seller’s or buyer’s agent and their customers
- The direct involvement of actual buyers or sellers in the negotiations process
Instead, use new online auction technology to negotiate multiple initial tender offers at the same time. Click to present offers, click to counter, reject or accept offers. It’s that easy and takes just seconds.
As to what real estate auction sites are best, always go for the entirely free venues. Ensure that these also do not charge any buyer’s premium, which traditional online or on location auctioneers still charge to this day. This fee can reach up to ten percent over and above the value of the property.
Did you know that just like on eBay, you can list a property on ListedBy as a ‘Best Offer’ option instead of the traditional ‘Reserve’ or ‘No Reserve’ auctions?
For those who want to learn how to start to receive and negotiate actual offers as a result of advertising listings on a real estate site, for free, instead of just getting views and traffic reports, chasing email and playing phone tag with prospects, here are the different listing options on ListedBy.com and what they mean: ow.ly/gaA4g
Did you know that selling real estate at auction with a lower, attractive but acceptable minimum starting price for the homeowner is a powerful strategy to maximize the asset value and final sale price? This strategy, applied for a residential real estate auction, can be highly effective.
As long as a minimum starting bid price is set for the auction, there is only upside. The seller is not obliged to release the property for any bid below the set level. The main advantage of this strategy is pulling potential buyers away from competing properties towards at least having a look. Once buyers have had the chance to see the property, interest is created, and one or more bids are entered, buyers can go on to outbid each other knowing that the property is priced below other listings they had originally been considering.
Benefit 1: Bring in buyers looking at competing properties in the area
Benefit 2: Attract more than one potential buyer
Benefit 3: Create a bidding competition
Benefit 4: Differentiate yourself as a REALTOR with potential future customers by demonstrating you offer a unique value proposition
Most traditional real estate auction companies and real estate auction sites still charge bidders a registration fee, on top of the Buyer’s Premium* that alone can reach a whopping 10 percent of the property value.
The key to maximizing the value of a home selling at auction is to attract more bidders. Applying such fees can have the opposite effect, compromising the asset value and the home seller in the process.
By eliminating all auction registration fees, more bidders are enticed to participate. By removing the Buyer’s Premium as well, more money is left in buyer pockets to go towards the purchase instead of the organization that is running the auction.
* Buyer’s Premium – A traditional practice that new free online real estate auction 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.
Download your copy of the ListedBy – Real Estate Auction Primer for Consumers printable booklet, for more information about auction terminology.
If anyone in the industry knows how to reach top producer status and hold it consistently, it’s RE/MAX REALTOR® and success coach Christy Crouch. We caught up with Christy to discover her top secret.
LB: Christy, many real estate professionals can and do benefit greatly from your experience. If you were to share your number one secret to success, what would that be?
R: Treating it like a business, as if you own the company and you are the CEO of your company. You have to make choices and behave like the CEO of a major corporation would. Consistency is key. The consistency of what you do day after day in this business determines the consistency of your income month after month.
LB: What is/are the main challenge(s) that you face in pushing through with this advice in your own business. How do you overcome them?
R: Schedule and time management. I have two kids under the age of 13 and juggling it all can be challenging at times. To overcome it I follow a daily schedule. I plan each month out ahead of time with what days I’m working, what activities are going on and work my personal and business life together. I ask myself daily… is what I’m doing today going to benefit me, my family, my business, or contribute to someone else? If the answer is no, I generally shift to a more productive action. On some level it’s simply a choice and you have to Just Do It every single day like the Nike ad says.
LB: What is the main downside for not applying this principle?
R: You’ll never become a top producing agent without treating it like a business. You may sell a lot of houses one year and not the next. You’ll experience inconsistency, overwhelm, burnout and breakdown much more often.
LB: How can listing or buying property using free online real estate auctions or ‘Best Offer’ technology on ListedBy or other platforms impact your business?
R: I believe the more exposure you can have for yourself, your business, and especially your listings, the better off you’ll be. The Internet puts the world at our fingertips and I think we should take full advantage of that.
LB: Anything else you would like to share?
R: I am just like anyone else. If I can do it, they can do it. It’s all about the choices we make every single day. Choose to win and you will!
LB: Once again, thank you very much for your contribution.
About Christy Crouch: Christy Crouch is the co-founder of You’re The Difference Sales & Life Coaching (www.yourethedifference.com), coauthor of the highly acclaimed real estate objection handler book, Now What Do I Say? Christy is an active agent in Virginia, has participated in closing thousands of transactions in her career, and was inducted in the RE/MAX Hall of Fame for her production. Christy is in the top 2.3% of her marketplace. Her goal is to share what she’s learned with other agents to support them in having a highly successful real estate sales business while having a happy and balanced life.
Did You Know….that ‘old’ auction organizations and website models still charge buyers a premium of up to 10 percent on top of the property value?
Free, advertising and services based models are the new world. The result will be mass participation at real estate auctions and optimized property market values.
Did You Know….that auction is the main method for buying and selling real estate in many countries including the United Kingdom, Australia and Sweden?
And for those who’d like to know more about Big Ben, featured here on the left, here it is, from the Wiki: ‘Big Ben is the nickname for the great bell of the clock at the north end of the Palace of Westminster in London, and often extended to refer to the clock and the clock tower, officially named Elizabeth Tower, as well.’
Did you know that bidding in auction legally binds the highest bidder if their bid meets or exceeds the Reserve price or is the highest bid in a No Reserve auction?
For those entering the real estate auction world, a ‘No Reserve’ auction legally binds the seller to release the property at the highest bid above the minimum starting bid price set by the seller.
In a nutshell, the strategy sets a minimum price the bidding should start at, and sells the asset to the highest bidder at auction expiry. Unlike a Reserve Auction where a hidden reserve price has to be reached by a bidder before the seller is obligated to sell the property.
A No Reserve auction strategy has a number of associated benefits including knowing in advance that the property will actually sell by auction expiry, once an initial bid above the starting minimum bid has been recorded. This benefits both the seller and prospective buyers.