Pay For What You See
“‘Buy what you see,’ you tell us all the time, Lief,” wrote a reader recently. “Yet, at the same time, you promote pre-construction investments. How does that make any sense?”
Perhaps I should adjust the mantra from “Buy what you see” to “Pay for what you see.”
Taken literally, Buy What You See leads you to conclude that you should invest only in real estate that is 100% complete. Totally built-out. All infrastructure and amenities in place. If you’re an ultra-conservative investor or a retiree not interested in taking any chances, this safe-bet strategy can make sense.
However, the point of the advice is to help the would-be real estate investor get back to basics. To remind you of the fundamentals of real estate markets, cycles, and pricing.
If what you see at the time of your purchase is a plot of land with no improvements or infrastructure, then that’s what you’re buying…and that’s what you should pay for.
That’s the crux of the thing. Make sure that, whatever you’re buying, you’re paying a price that reflects the reality of the product at the time of your purchase.
Am I Contradicting Myself?
“Buy what you see” does not translate to mean never buy pre-construction or raw land. It means to understand what you’re buying…so you can assess and accommodate the risks…and so that you pay the price you should pay given what you’re paying for.
The trouble starts when investors forget this fundamental and are tempted into paying “something-there” prices…when there’s nothing there. In Panama, for example, during the heyday of the pre-construction boom, people began paying prices that reflected potential values, not current, pre-built values. That’s not buying and paying for what you see. That’s buying and paying for what some developer is promising you might eventually, someday exist.
When you buy early, you should pay a price that reflects a discount compared with comparable completed projects. Unfortunately, in Panama, as elsewhere during the boom cycle of last decade, developers got greedy…and the buyers, greedy, too, were led astray by promises of profit supported by claims from earlier buyers who had, in fact, bought at discounts to completed construction prices.
If your risk tolerance is low, then maybe, yes, you want to follow the advice literally. Buy only what you see…understanding that this means, sometimes, you’ll miss out on profit opportunities.
But maybe you don’t care. Maybe you’re looking for a nice place to live in retirement, and you don’t want any surprises. However, if your agenda is more profit-driven, then you don’t want to limit yourself literally to buy what you see. You want to pay for what you’re buying. Which means the earlier you buy, the bigger the discount you should enjoy.