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Michael Masterson’s Real Estate Investing Secrets for the Bear Market

Today's Financial News - Posted September 26, 2008

Opportunities in the making… Michael Masterson expects the mortgage portfolios of Lehman Brothers and other failed investors will be pooled into big blocks of properties, which will be chopped up into smaller chunks and sold off for 20-30 cents on the dollar. Buyers will try to resell these developed chunks for 30 and 40 cents on the dollar.

by J. Christoph Amberger

Baltimore — (TFN): As if this past week was not sufficient to give “government interference” a bad name, the Bailout Battle on Capitol Hill really illuminates just where one should be looking for the real culprits in the high-risk mortgage mess. Those responsible are among those clucking loudest about Wall Street greed and failed policies.

Thank goodness for the internet, which not only has a long memory but also perky, handy ways to summarize just what has happened in a 9-minute video clip.

I wonder if we have the one or other pointed question directed at the debating candidates tonight. “Senator, how come you actually helped sue a bank because it didn’t make enough subprime loans” may be a good one. I bet Jim Lehrer will not think of it. But we can dream, can’t we?

And what about the bailout plan? Jeremy Siegel writes today: “I think that a scaled-down measure of the plan will pass. And the Treasury will end up buying assets above the current ‘market’ but well below face value. This would still leave the Treasury with a profit, since current prices are deeply discounted to ‘hold-to-maturity’ value even assuming high defaults. Nevertheless, the 30-day IOS-libor spread has ballooned out to a record 197 bps, and this is a source of concern. But I think that the ‘cash panic’ that hit the street last week has eased, and as of this writing the 90-day bill rates are up to 87 bps and the market off only 1.2%

So what does the whole mess mean to investors?

I met with my long-term associate Michael Masterson in Delray yesterday. Michael is not just th king of small-business success strategist, he’s been a successful real estate investor for years.

(In fact, long-time TFN members were treated to an exclusive interview with him back in March.)

Wedged in between a jiu-jitsu lesson, to which he graciously invited me in the little dojo he’s built right next to his offices, lunch and a three-hour strategy meeting, we got to talk about the real estate crisis.

As an old aikido-man and competitive fencer, I prefer to do my fighting in the vertical. But strategy and opportunity-seeking pretty much apply all around: You make your move when you hear or see your opponent immobilize himself py putting his body weight on the wrong foot (or wrist).

Michael and his team are now watching like hawks what’s happening with all the assets that are underlying the demise of the savings & loans and investment banks — like Washington Mutual and Shearson Lehman.

Here’s what he expects to happen: Their portfolios, and those of other failed investors, will be pooled into big blocks of properties, which will be chopped up into smaller chunks and sold off for 20-30 cents on the dollar. Buyers will try to resell these developed chunks for 30 and 40 cents on the dollar.

It’s Michael’s version of TFN’s “Omaha Principle”: Only when nobody’s buying, it becomes interesting to start shopping around.

“I’m looking at those prices, and I wonder how can anyone go wrong? These are 15-year old prices! It may take a few years, but how can you not make money on those properties.”

Is he buying yet? “There are two bottoms in every bear market… when selling activity and the number of units slow. Then it picks up again. The bottom of the prices comes after that…. most people start buying too early.” In his opinion, the Miami-area price bottom still a year away.

TFN’s Andy Snyder is using the same principle to locate bond and stock investing opportunities for you in the weekend’s Smart Trading. I hope you can spare a few minutes this weekend to watch it.


Next Article: Dollar Bear: No rebuilding without a clear slate

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Posted by J. Christoph Amberger · Filed Under Real Estate 

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