Our country is experiencing one of the longest economic expansions of all time – June 2009 and counting. And yet, everyone is asking the question: “How much longer do we have?” Investors, lenders, and borrowers are all looking for the correction. No one is at the point of sitting on their hands, but everyone seems to be wringing their hands while they place their bets on the table.
In June 1972, Jack Nicklaus had some hand wringing going on as he walked to the 17th tee, two strokes ahead of Arnold Palmer. The 17th at Pebble Beach is known for its difficulty. With the tee box safely 219 yards inland, the green is perched above the beach of Carmel Bay. Nicklaus faced the green, wind in his face, and visualized his shot. Clubbing up from a 2-iron to a 1-iron, he studied the flag buried behind the bunker on the left side of the green. A shot too far left was in the bunker or the ocean. A shot too far right was a certain bogey. Aiming for the front of the green, Nicklaus flushed his 1-iron and sent his ball on a straight path to the front of the green. The ball bounced once before it hit the pin and gave Nicklaus a tap in for birdie. With a 3-shot lead, Nicklaus was free to play the 18th hole however he saw fit as he secured his 3rd U.S. Open victory.
The moral of the story? You can be successful playing into the wind! What is required? A safe assessment of the situation and a conservative game plan. When the market heats up, a savvy investor will embrace a more conservative business plan. The plan might require a lower offer, a prudent repair budget or a safer exit price, but these disciplines keep the investor in the game. A savvy lender may require the all-in budget to be within the 70 percent ARV range while only approving budgets in the ‘low-to-moderate repair’ range. No one gets hurt when there is margin, certainty of execution and efficiency of time.
As the expansion continues, history tells us there will be those who chase the deal flow into the highlands of low margins and high leverage. There will be players who grip it and rip it straight into the wind with success. And, there will be players staring at the green from the beach wishing they had listened to that voice within that tried to remind them: “The wind’s in your face. Club up. Play it safe.” A heated market doesn’t mean we have to stop play. We can play with the wind in our face with the right combination of risk assessment, conservative planning, and efficient execution.
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