The Flight to Quality

I received a couple of questions after my last post on Capital Deployment.

To address one of them – no – I won’t tell you Bluetooth convertible guy’s name. I haven’t heard from him since I wrote it though. I was wondering why my email spam traffic was down 30%.

The relevant questions were on this whole issue of capital deployment, so I thought that it made sense to discuss it further, especially in light of some new developments that I’m seeing in the areas that I’m tracking.

In a tight market where deals are hard to come by, an investor will scratch and claw to ferret out the deals, and many of the investors that I know, therefore,  will take on just about any deal that comes their way, because they don’t know where the next one is coming from. In a tight market that’s probably a smart strategy.

But, as we discussed previously, that’s not a problem now. In fact just the opposite has occurred – there are TOO many deals available. And that’s actually a BIGGER problem than not enough deals.

Why? Because no one can buy every good deal that’s out there because no one that I know has an unlimited supply of cash.

And that forces us to choose. And most people hate making decisions and as a result they’re really bad at it.

For example, in my last post I referred to two properties on the same street that had vastly different ROIs. But the cost was the same for the two. So on one hand you could spend your $65k and when you’re done with the rehab have a crappy property in a rent-heavy neighborhood that will give you renter headaches, a miniscule cash flow, zero appreciation, and a very low, although positive, ROI.

Or on the other hand, you could spend your $65k on a property that when you’re done attracts high-quality renters, premium rents, good cash flow, and a very strong ROI. And you might even get some price appreciation when the market turns around because you’re in a prime first-time-homebuyer neighborhood.

This really isn’t a hard decision, is it. But the scary thing is, with all of the decent properties out there, the crappy property in the above example went pending since my last post.

Which brings me to the point of my post – the flight to quality.

Quality has to be the driving force behind your decision-making when you have a limited supply of funds. You need to buy the best properties that you can, and adjust your criteria as the market changes.

For example, in the areas that I track, brick properties had been resisting the downward price pressure pretty successfully since the start of this downturn. Driving through the neighborhoods you’d see few houses for sale, and those that did come up for sale sold quickly for good prices in relatively short time-frames.

But just this week I saw the prices of three prime properties  – listed and occupied non-foreclosures – crash through the unofficial brick-price-floor that I had been observing. This now puts brick homes in play, and it forced me to change my criteria for everything, including the properties already in my pipeline.

Because I want the best quality properties available. Because I have a limited amount of money to invest.

When you don’t have “best quality available” as your #1 criteria, you end up with what’s left over. That’s so unnecessary in a market like this.