Never underestimate the power of the capitalist system. While developers are looking to get out from a rapidly growing pile of failed condominium conversions, savvy bulk condo buyers are swooping in. REO funds, hedge funds and private equity are positioning to cherry pick from the current wreckage and create profitable positive cash flow opportunities. Understanding the reasons for the market evolution are key to profitable investing.

Here is some data that will give you a sense of the magnitude of the condo conversion over supply.

Let’s look at the financing that was used by these condo conversions, a type of financing referred to as mezzanine financing. Mezzanine lenders typically made high rate loans ranging from 18% to 24% interest to the converter to help cover the project’s mortgage costs while the units were in flux. In many cases, the mezzanine loans were for short durations, most commonly 3 years.

Savvy investors are now betting that a lot of converters will realize their stake can’t be salvaged and will walk away, leaving the property in the hands of the mortgage lender. And lenders don’t want to be in the business of selling condos. In addition, the credit squeeze has eliminated refinancing as an option for many converters.

Going back to the 823 projects converted in 2005, a number of these converters are approaching the end of their mezzanine financing in the coming months. Some lenders have agreed to pour additional good money after bad, hoping that the condo market will turn around.

Our experience confirms the data. Over the past few weeks, the number of inquiries from developers interested in marketing their inventory has gone off the charts. We receive on average 4 to 5 inquiries a week from large and small developers interested in liquidating inventory.

Happily, we are also starting to receive inquiries from bulk unit purchasers. Most of our bulk buyer groups have been from California until the past few weeks, but now international interest is starting to pick up, our most recent inquiry being a cash buyer from Latin America looking for cash purchases at deep discounts.

We’ve also evidenced that there are serious buyers out there for the right opportunity. Our most recent success story is a 90 unit sale of a duplex project that offered deep discounts, tax incentives and positive cash flow, sold in 10 days.

Real estate investing has proven to be quite beneficial historically and very attractive opportunities are starting to present themselves. It is clear that savvy buyers are circling and value players have increased their appetite for attractive real estate investment opportunities.

Specialized companies have built their business around an online presence. Such a company is REIN Alliance, and we’re experienced advisors when it comes to managing bulk condo deals at attractive prices for our clients. In addition, developers wanting to establish an effective presence make their inventory known to us. REIN Alliance represents the bridge that connects developers and potential buyers through the Internet.

Many buyers today also approach us with the question of whether it is best to invest in condo conversions, foreclosures, or preconstruction blocks. The foreclosure market in our opinion carries the greatest risk currently. In addition, it is difficult to leverage economies of scale as your properties are likely to be spread out geographically and management becomes very problematic. Expect to put in a significant amount of money upgrading the foreclosed property and ongoing maintenance expenses maintaining the property.

In contrast, condo conversions and apartment buildings do not require the same level of maintenance expense and offer an easier more hassle free management opportunity. As far as preconstruction, the cost of construction and the pricing currently available makes it difficult for preconstruction purchases to cash flow, so the challenge is finding a property where the valuation makes sense. Condo conversions tend to be at much lower price points, thereby affording the investor good appreciation potential and positive cash flow.

We are entering the best market for real estate investment in the past 25 years. A simple rule of investment success is to be greedy when others are afraid, and afraid when others are greedy. Others are certainly afraid.

REIN Alliance is one of a few companies that specializes in investment condos and especially bulk condo investments. Real estate investment takes a lot of time and effort but the rewards can be enormous. Do not expect the road towards success to be easy. Work with a knowledgeable investment company and enlist a team of qualified and experienced partners. Do not be afraid to ask questions.

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There are countless tips on real estate investing available and this is by no means intended as a comprehensive list. While every investment has its own intricacies and problems that need to be worked out, there are some very basic aspects that are common to most investment properties. Understanding those aspects and asking questions about them can help you determine whether a particular real estate investment opportunity is for you.

Anything Can Change

Building in the capacity for change in your investment is not only good real estate advice, but good life advice. Aspects of an investment can change at any given time and building in a little cushion in your profit projections for that change will most likely give you a better outlook on the possible outcome of your investment.

This is especially true for something like the tax climate of your investment as changes in tax laws happen regularly. If the tax situation surrounding your investment is the only thing you like about it, it is probably not a sound investment. Solid investments can withstand changes in the tax code, so never rely solely on the stability of tax codes, you will be sorely disappointed.

Do What You Know

It is tempting to get involved in real estate investment opportunities outside of your comfort zone. Maybe the terms look good or the area is nice, but your lack of expertise in the field will ultimately hurt you over the course of the investment. If you are well versed in multi-family homes, do your best to uncover the best investment opportunities in that field. If your bag is fixer-uppers, stick with that. Success is difficult to replicate so if you have a knack for something, exploit that knack.

Compare, Compare, Compare

As any real estate agent will tell you, valuations for a new home put on the market are a direct reflection of other sale prices of similar properties in that area. Your potential investment is the same way. If you are going to rely on rents to make back the money spent on the investment, compare the rents your prospective investment property takes in against similar properties in the area. Are they too high? If so, that may indicate future trouble filling the building at those prices, which then cuts into your profit forecast.

If you are getting involved in a fixer-upper, compare what you think the home will be like in the future to homes that have sold that look similar to that now. Doing so will help you estimate your eventual sale price and the amount of money you should invest to net a decent return.

Hammer Down True Expenses

Just as you want to examine what your incoming cash flow will be on any real estate investment opportunity, you want to investigate your outgoing cash flow as well. What are the key costs involved in running the property? What are the taxes on the property? How much does it cost you when part of your multi-family property is vacant? Sometimes properties can look great when you examine the rent payments coming in but then lose their luster when you look at the cost of running the facility. You need to investigate both sides of the story to get an accurate view of the financial future of your investment.

Know The Building

In real estate investing, surprises are usually costly. Not only should you do a full walk through of the prospective investment yourself, you should also look in to hiring an independent, professional inspector as well. Uncovering problems with the foundation, roof or furnace early can either save you from making a poor investment or give you ammunition to negotiate a lower price.

Not all real estate investments are the same and you will likely run in to a unique problem on every property you pursue. However, by sticking to the tips here, you can give yourself a great foundation from which to operate. Above all, pursue information on the property as vigorously as possible to eliminate the possibility of regretting your investment later.

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