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Grave Dancing, Cheering, Puke, Our Market, and the Bandwagon

This article from Delaware Online is a perfect example of how some people can see the other side and capitalize on it. We’re not denying the market has changed, but we’re certainly not going to change our tune that real estate is a bad investment, and at the very least a great place to call home. Also, by putting these types of things out there, we’re not “cheering” (if we hear that word one more time, we’re going to puke), more like showing there are always two sides to every story, and that you can build a fortune in real estate, even in a down market.

Without further adieu…some quotes:

Sam Zell, the master real estate investor, has built a fortune on the cycles that shape his industry. These days, he believes the current turmoil in financial markets is more an emotional reaction to yet another period of excess rather than a true credit collapse.

In a wide-ranging lecture at Wharton moderated by real estate professor Peter Linneman, the Chicago-based investor said markets currently are spooked by problems with U.S. subprime lending. However, they still have capital to deploy, unlike during other real estate busts when financing could not be arranged at any price.

Zell said the slump should come as no surprise: “Over the last three years people were flippant. They bought anything they wanted and were proud that they didn’t do due diligence. I think they have all been chagrined and are scared out of their minds.”

Zell sold his flagship business, Equity Office Products (EOP), and its portfolio of 540 prime office buildings to the Blackstone Group for $39 billion. At the time, it was the largest private equity deal ever completed.

After a market crash in 1973, Zell spent the next three years acquiring $3 billion in real estate assets, much of it for $1 down. He built the portfolio by going to lenders and offering to take future operating losses off their hands in return for equity. Zell was able to carry the properties long enough for them to return to, and exceed, prior valuations. “As it turns out, we made a fortune,” he said. In the 1980s, the real estate industry was again marked by aggressive lending that sparked a development boom. “The idea was build it and somebody will buy it, and that somebody was the Japanese,” Zell recalled.

Zell acknowledged he does not always get it right. He told the story of how he acquired the Carter Hawley Hale stores in California in 1992. His firm did an analysis and determined that the 79-store chain would be worth at least 80 percent of the purchase price if it had to be sold in a fire sale. Soon after, Zell was faced with a sharp recession and a major earthquake in Southern California. In 1995, he decided to bail out and sell the chain to its competitor, Federated Department Stores. The price? Even though he lost money on the deal, Zell finds comfort that his firm calculated the downside correctly. Federated paid 80 percent of what Zell did. “The investment was a failure, but the process was a success.”

Zell is known by the nickname “the grave dancer.” According to Zell, the term grew out of the headline of an article he wrote describing his strategy of profiting off distressed real estate following the inevitable bubbles of investment enthusiasm. Zell said the article shows how “I was dancing on the skeletons of other people’s mistakes.”

Zell, however, also pointed out that the last sentence of the article reads: “He who dances closest to the graves, always has to be careful he doesn’t fall in.”

[begin rant] Come to think of it, this “credit crunch” is good. It’s going to weed out all the rookies and bandwagoners who are all saying the sky is falling. You go ahead and ride that bandwagon to the store that sells remedies for pit bull attacks, West Nile Virus, and Bird Flu masks. You might as well pick up a few flotation devices too, because you know, San Francisco is susceptible to tsunamis. While you’re doing that, the true real estate investors, and most likely a few of our readers, are going to scour this country for all the poor sods that weren’t smart enough to do their own homework when signing their loan documents and now blame the government for their own ignorance, buy a few of their homes for dirt cheap, rent them back to them, and wait this downturn out. Then, when the market turns, and your media mob tells you real estate is again a good investment, they’ll be happy to sell your home back to you for quadruple what they paid…that is, if you can find them on their yachts they purchased to ride out the inevitable tsunami that is headed their way. [/end rant]

‘What credit crunch?’ says noted contrarian [Delaware Online]

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