The School Of Sam Zell

In real estate investing, real money is made at the top of the market by those who bought at the bottom. There’s probably no better example of that than Sam Zell.

Known as the ‘Grave Dancer’ one gets the impression that’s something others feel he should be embarrassed about. From an investing point of view, it’s just smart. When property is on sale at artificially depressed prices, that’s the time to buy all you can in markets that will appreciate well when they recover.

In February 2007 Zell sold his flagship business, Equity Office Products (EOP), and its portfolio of 540 prime office buildings to the Blackstone Group for $39 billion, as reported in a Forbes article at the time.

This is the portfolio of property that Zell has meticulously built up over the last 20 years and now sold at premium price to a private equity group at the very peak of the market.

“According to Zell, private equity firms awash with capital benefitted from “preposterous” leverage and offered premium prices to publicly held real estate firms. Zell said he considered that type of deal a “Godfather offer”–because no publicly held company could responsibly refuse it.”

The point to pay particular attention to is, when everybody else in the market was losing their heads buying, afraid they may “miss out”, Zell sold his entire commercial property portfolio (about 125 office buildings in 15 metropolitan areas he had identified as target markets).

And likewise, when everbody is desperately trying to sell, unable to continue with ownership of their property, Zell is buying.

“Following a market crash in 1973, Zell spent three years acquiring $3 billion in real estate assets, much of it for $1 down. He built his portfolio by approaching 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.”

It’s not rocket science, in fact it is just common sense. Recognise that real estate prices do fluctuate, they don’t always go up. When the prices are down and depressed, buy all the quality properties you can. When prices are sky-high and people are paying more for property tha you think it could possibly be worth … sell everything you have.

Easy to say, hard to do.

1) You need to have control over your emotions. A good deal of which is having access to good information to make decisions with.

2) You need to have clarity of purpose. If you know you endgame going in to your enterprise, you’re unaffected by the emotional rollercoaster the rest of the market is riding. To you it’s a sideshow while you wait for your optimum time to sell.

If you listen to Sam Zell talk about it he sees it all as a function of supply and demand.

He told the Wharton audience he has never recovered from his first course in economics, where he learned about supply and demand. “I would tell you whatever business I’ve been in–real estate, barges, rail cars–it’s all about supply and demand.”

What clearer set of principles could you have to guide you in your real estate investing.

A biography of Sam Zell titled, Money Talks, Bullsh*t Walks has just been published and is a great read. If you are buying apartments it’s a must read! He’s a real investor, the real deal, and there are gems of wisdom on almost every page.

Right now is a great time to buy apartments. Learn from a master operator.