In the next several columns, I am going to explain a Real Estate Acquisition Matrix I have developed over the years. It is the criteria and requirements my years of study, research and experience have shown me should exist in every transaction.
I treat this matrix like a checklist, and I will not buy a piece of property unless every item on this list is checked off. I feel about my checklist like a pilot should feel about the pre-flight checklist provided by the aircraft manufacturer for his plane. Every time he gets to the beginning of the runway, he is supposed to carefully run through this checklist.
Obviously, if not everything in this checklist is working properly; he should abort his takeoff and return his plane to the hanger for repair. If he ignores the problem and takes off anyway, he is courting disaster. This does not necessarily mean he will crash if he takes off; it just means his odds of having a problem have been substantially increased. I treat my real estate acquisition checklist with the same respect. If 90 percent of it is there and some items better than normal, but I cannot get that last 10 percent negotiated; I pass on the investment.
My averages of acquisitions to attempted negotiations are approximately 1 out of 50. Granted, I spend a lot of time to produce nothing, but since it is my economic life with which I am gambling, it has to be 100 percent to pass.
One of the biggest mistakes I have seen people make when trying to buy land is becoming emotionally involved with the tract. Maybe they want it because they used to pass it as a child, or their rival competition is bidding against them. Whatever the reason, it is a kiss of death to become emotionally involved with a piece of land. I can truly say that as an investor, I have never seen a piece of land I simply had to have.
If you stay completely objective, you will never have to worry about the trap of rationalization. When a tract does not fit your checklist, simply drop it and move on.
When negotiating to buy or sell a property I have a little practice that operates on the “It’s my Football Theory.” Remember the child when you were a kid who, if he did not get his way, took his football and went home. I am very much this way when it comes to negotiations. When I am buying, if I do not get my price, terms, etc., it is my money, and I can go look elsewhere until I find somebody else who wants to play by my rules. Likewise, if I am a seller, if I do not get what I want, nobody can twist my arm and make me sell.
In other words, once you truly understand this theory, you realize “Nobody has anything you have to have.” If it is not absolutely right, move on until you find something that is.
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If you arm yourself with this philosophy, you will have already significantly increased your odds of success and reduced you chance for failure. Therefore, when negotiating an acquisition determine your bottom line before you make your first offer.
The next step in the matrix is to determine you land-acquisition philosophy. I like to look at this in terms of “What do I want to be when I grow up?”
I break land buyers into three distinct camps. All are quite different and have their own points of merit, and each investor needs to decide which is best for him or her.
First comes the land speculators. They are the risk takers, but also make the most money in the real estate game when they are successful.
A land speculator plays hunches. He or she tries to determine the next area where the big real estate developers are moving before they themselves know. If the speculators call it correctly, they get very rich; sometimes seeing land values jump from $5,000 to $40,000, or even $60,000 an acre in just a few years. However, if they miss, no bigger headache exists in the investment world, because it takes years and lots of holding expenses to figure out you were wrong. I have always had a lot of trouble with being in this camp personally.
I feel that one would have to be very egotistical to try and out guess the likes of a Ross Perot, Trammel Crow or Jerry Jones. They are truly experts and have incredible research staffs that spend tremendous amounts of time determining where they are going next. In addition, as you probably have guessed, they do not broadcast that fact prior to their acquisitions, which are usually done in the most secretive manner to prevent rapid price increases during their accumulations phases.
No, unfortunately, I do not feel qualified to compete with these experts, their money and research. Therefore, I disqualified land speculation for my own account, even though the profit potential is quite attractive.
In my next column, we will discuss the other two types of land investing philosophies with the hopes of giving you enough information to choose which type of philosophy is best for you.