*** Investing Tactics to Navigate Wisely in All Types of Real Estate Markets

Last week Levitt & Sons, the homebuilder whose Levittown developments were the emblems of America's postwar economic boom, filed Chapter 11 bankruptcy for reorganization - and its fate as a continuing business remains in limbo. Here's how David Streifeld in the International Herald Tribune summarized the collapse: "The first big home builder to fail in the current slump, Levitt's collapse illustrates how the turmoil in real estate is spreading far beyond subprime borrowers who cannot pay their mortgages. Levitt had a fabled brand, decades of experience and enthusiastic customers with good credit, but that was not enough to save it." To see Levitt's historical brand vanish is alarming, to say the least. But the worst part is the damage done to the homebuyers who had made down payments on new Levitt homes that were under construction. The lives of those customers will now descend into rounds of lawsuits, frustration and possibly substantial financial losses. If you cannot trust a brand as well respected as Levitt & Sons, whom can you trust in today's turbulent real estate world? While you need to apply caveat emptor ("let the buyer beware") to all real estate dealings (with lenders, construction firms, homebuilders, private sellers, real estate agents, and others), due diligence only gets you so far. After all, how many of us are sophisticated enough to read a corporate financial statement analysis and spot all the signs of trouble? And remember, even top financial professionals missed colossal levels of fraud at Enron, WorldCom and other giant corporations that failed. How can you and I, investors without bottomless pockets, find protection from frauds, failures, and other money-losing hazards? Let me recommend a few tactics.nnDon't write big checks on trust alone when you are buying property. Place all your deposit money in escrow when you are dealing with any seller, agent, builder, or developer. If no delivery, your funds are not (generally) at risk.nnAnalyze the cyclical nature of markets - including (or perhaps, especially) new construction. Correspondingly you must, as an investor, beware of overleveraging and taking on too much debt as a boom continues to roll along. But, in fact, many pros and amateurs alike behave foolishly in this regard. Instead of becoming more cautious and stashing away cash reserves as a boom steams along, they expand their holdings aggressively, using higher amounts of debt.nnLearn to spot imbalances. This is a sophisticated concept that I cover in depth in my Real Estate Investor Training Program at Trump University. But to summarize here, take it as a warning sign when rapidly increasing market values substantially outpace construction costs. It is a situation that creates larger and larger profit margins for builders - TEMPORARILY - until the rush of builders who are all seeking to pocket those juicy returns floods the supply-side of the market just as speculative demand reaches a peak. nnAnd watch for this red flag too . . . It is another danger sign when house prices are accelerating far faster than rents. In Las Vegas, for example and in South Florida too, house prices more than doubled during the past five or six years of the boom - - whereas rent levels barely matched gains in the Consumer Price Index. This trend causes two negative effects. First, potential homebuyers find renting cheaper than buying, thus diminishing end-user demand for houses and condos; and second, low rents (relative to selling prices) create "alligators" who eat up a potential investor's cash flows. As prices climb higher and higher, these alligators become bigger and hungrier. In the recent boom, as oversupply shattered hopes for enough appreciation to defeat the alligators, investors (i.e., speculators) simply withdrew. Instead of lining up to bid on the next big flipping opportunity, they withdrew to watch football on Sunday afternoons. So when you hear of a failure like that of Levitt & Sons, is staying out of real estate your only sane response? If the big guys are failing, shouldn't you stick your head in the sand and wait it out? Not so. As many successful people know, the Chinese ideogram for danger is the same as the one that stands for opportunity. That’s a sign that fortune favors the brave - but only brave people who know how to read the danger signals and invest wisely.nnn

---

nGary W. Eldred, PhD, has been involved in hundreds of real estate transactions as buyer, seller and consultant. He is author of many best-selling books on real estate. Dr. Eldred created The Real Estate Investor Training Program for Trump University.