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Jim Scherrer


Nov 1, 2009, 4:53 AM

Post #1 of 9 (11976 views)

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Herd Mentality As it Applies to Real Estate in Puerto Vallarta, Mexico

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By: Jim Scherrer

With the incredibly fine winter climate, proximity to the US and Canada, and the amenities offered, Puerto Vallarta, Mexico has long been recognized as a great resort destination as well as retirement haven for North Americans.

Beginning early in the 21st century, Vallarta, as with many other resort destinations, began an explosive period of growth. Developers from around the world flocked to Vallarta in order to cash in on the baby boomer retirement plans. Within a short period of time, most of the finest beach front and hillside properties were snatched up and planning began in earnest. Tower cranes were erected, dotting the skyline throughout the city, and construction workers from neighboring states rushed to the area for employment.

As soon as the above projects were announced, the developers threw up beautiful sales offices and prepared for the land rush. These nice, spacious, air conditioned offices typically had comfortable lounge areas with new furnishings, pretty magazines, sometimes piped in music and perhaps a few free margaritas. They were typically staffed with English speaking, well dressed, experienced, professional sales personnel. Most of these new offices had multiple sales cubicles with the capability of negotiating two or three contracts at a time; some even had counters where the buyers could get in line to wait their turn for such a unique opportunity to own a piece of Paradise. Granted, it never quite reached the point that it did in Florida, where they were holding lotteries and drawing lucky buyer numbers out of a hat!

During the first few years of the decade, the North Americans were grabbing up the new condos at such a torrid pace that many of the construction projects were 30%, or more, sold out before they even broke ground. Pre-construction pricing of 10-20% off their suggested list price was frequently offered to owners of condos previously built by the developer. After all, these privileged speculators had earned the right to have the first chance to scoop up the most desirable condos at what seemed to be reasonable prices; few could afford to pass up such a no-brainer investment opportunity!

Meanwhile, as the tower cranes started whirling around and the thousands of construction workers, looking like a huge colony of ants, began their construction, the beautiful buildings started coming to reality. Money was flying in every direction and it seemed as though everyone that came to town had an extra half a million dollars to spare for their retirement dream residence. Of course, during those years, re-financing and second mortgages on North American real estate with highly inflated values was commonplace; the herd had a feeling of easy money and never ending wealth!

With the herd of somewhat naive buyers in town, the question was never whether or not they should buy a condo; it was which condo they should buy. They were virtually knocking down every real estate office door in town (approximately 80 in the area at its peak!); it was definitely a seller's market. The developers would usually negotiate 5-10% off list price in order to give the buyer a sense of satisfaction that they had received a good deal, still leaving the developer with a substantial profit margin; everyone was happy as the good times rolled on!

By the middle of the decade, the local real estate market was humming on all cylinders and new projects were being announced almost daily. The Mexican Tourism Board announced plans for developing a new 20 mile stretch of beaches north of Vallarta and planning was underway for another 20,000 new condos. Obviously, as long as the stampede continued, they would continue building and prices would continue to escalate, resulting in a tripling of real estate values during a short 7 year period of time, i.e. the old rule of supply and demand was in full force; keep coming and we'll keep building!

Well, as always happens, a global recession hit in 2008. However, this time it was much deeper than most had ever experienced, severely impacting the PV real estate market as the demand virtually disappeared overnight. Developers and speculators were left holding thousands of new unsold condos creating the greatest buyer's market ever experienced in this part of the world, i.e. the supply (glut) of new condos far outnumbers the demand. Consequently, the developers and speculators are on their knees just trying to recover their costs, often discounting by 30% or more while many of those fancy real estate offices in PV were forced to close and those remaining open are doing so on shoestring budgets and reduced staffs.

The herd mentality has been clearly demonstrated on a daily basis for a number of years all over the Vallarta area and is still in play, except now the buyers are all following each other in the opposite direction; postponing purchases until someday in the future when the economy is more certain, i.e. until the coast is clear. The masses seem to feel a sense of urgency to purchase when their peers are doing so and feel no sense of urgency to purchase when prices are at the lowest levels possible. During the past year, it has been absolutely amazing to see the herd of what appear to be intelligent, educated buyers walking away from once in a life time opportunities because there's no line up of buyers. It's as though everyone's afraid to be a contrarian; consequently, they'll end up buying later at a higher price.

Buying into a given real estate market is essentially the same as buying into the stock market. Why does the herd always insist on buying high and selling low? The developers are never going to sell below their cost and current prices are as low as they'll ever be; bargain opportunities are everywhere but once they are recognized and scooped up by the savvy buyers, the prices will surely start escalating again.

We thank our lucky stars for having bought a villa in PV twelve years ago (before it was the in-thing to do) and have seen it more than triple in value. Of course, anyone buying today at these severely depressed prices could realize a short term gain of 50% (or more) on their investment, if and when the economy ever recovers. However, knowing the way the herd mentality reacts, the majority of buyers probably won't return to the table until it's too late to take advantage of the current situation with its tremendous real estate values.

Are there any contrarians out there? Are there any retirees or about-to-be retirees that have any money (or credit) left? If so, you'll never find a better time to take advantage of a seriously depressed and overbuilt real estate market. Pack your bags and come on down for a week of fun in the sun this winter and check out the phenomenal opportunities that await you in Puerto Vallarta. With the current availability of mortgages in Mexico, this is a rare opportunity to buy low and perhaps someday in the future, sell high; it's a great concept! Disregard what the herd is doing and remember just one thing; they're usually wrong!

Jim Scherrer has owned property in Puerto Vallarta, Mexico for 26 years and resided there for the past twelve years. The mission of his series of 70 articles pertaining to retirement in Puerto Vallarta is to reveal the recent changes that have occurred in Vallarta while dispelling the misconceptions about living conditions in Mexico. For the full series of articles regarding travel to and retirement in Vallarta as well as pertinent Puerto Vallarta links, please visit us at PVREBA.



jl1

Nov 6, 2009, 2:58 PM

Post #2 of 9 (11746 views)

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Re: [Jim Scherrer] Herd Mentality As it Applies to Real Estate in Puerto Vallarta, Mexico

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This is an interesting essay and for the most part, accurate. The one statement I disagree with is "buying into the real estate market is the same as buying into the stock market." That may have been true during the recent bubble, but was not true before. In fact, the real estate bubble was due to the failure of the stock market to deliver the unrealistic returns people had been accustomed to expecting. Bill Clinton once referred to money as a giant river flowing around the world which needs someplace to go. The primary difference between the recent real estate bubble and normal real estate markets, is that people began looking at real estate primarily as an investment. In the past, real estate was considered a home--whether primary or vacation--not something to hold for a few years, then flip. The fallacy of the essay is that the writer is provoking people to jump back into the market and make their investment score by taking advantage of the bursting condo boom. Investment is never a good reason to buy real estate. I've just finished building a home in Sayulita. I've already been offered twice--in cash--what it cost me to build it, by several people. I just smile and say no. My wife and I hope that our grandchildren, and even their children, will enjoy this labor of love, and that our contribution to future generations of our family will be enjoyed by many, long after we are gone.


mazbook1


Nov 7, 2009, 3:22 PM

Post #3 of 9 (11713 views)

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Re: [jl1] Herd Mentality As it Applies to Real Estate in Puerto Vallarta, Mexico

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AMEN!!!! You will eventually be a darn good Mexican, jl1.


cindym

Nov 10, 2009, 6:52 PM

Post #4 of 9 (11666 views)

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Re: [jl1] Herd Mentality As it Applies to Real Estate in Puerto Vallarta, Mexico

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I believe the OP is comparing the "buy high sell low" strategy to the stock market, not any other aspect.

I do disagree with the ascertation that "Investment is never a good reason to buy real estate." Why not, many people successfully buy RE as an investment year in and year out.

Other people only buy RE for their long term personal residence.
Neither purchase is right or wrong, just different actions for different reasons.

I see the OP as just a RE marketing piece not much else. Is it a good time to buy in Puerta Vallarta, probably.
I don't read much else into the post, just encouragement not to be afraid of the market.


jl1

Nov 10, 2009, 7:08 PM

Post #5 of 9 (11662 views)

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Re: [cindym] Herd Mentality As it Applies to Real Estate in Puerto Vallarta, Mexico

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What I was reacting to was the recent phenomenon of people trying to "guess" the real estate market, whether it is on the way up or down. I agree that well meaning people who find themselves in the position to buy, now that prices are down, should probably do so. The problem that I see is, who is to say that these vertical concrete boxes are worth anywhere near the prices that are being asked, even now? Anyone knowledgeable about construction should know that these units cost next to nothing to build. The OP is advising people to capitalize on a market that was way inflated to begin with. I think it is best to do due diligence, research the market, and make a decision that will be the best one in the long run. It was speculation that created this fantasy market and who can say more speculation will rescue it?


bournemouth

Nov 10, 2009, 7:19 PM

Post #6 of 9 (11657 views)

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Re: [jl1] Herd Mentality As it Applies to Real Estate in Puerto Vallarta, Mexico

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The OP has an interest in encouraging people to buy real estate in PV so there is an inbuilt bias to his piece. It's basically advertising and should be treated as such.


jl1

Nov 10, 2009, 8:46 PM

Post #7 of 9 (11648 views)

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Re: [bournemouth] Herd Mentality As it Applies to Real Estate in Puerto Vallarta, Mexico

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I'm not naive. It was obviously a fluff piece. I just object to the couching of an obvious pitch in prose that would suggest an earnest interest in the welfare of others. As a former sales manager and trainer, I believe that being coy about one's motives when selling is dishonest and not fair to prospective buyers.


bournemouth

Nov 11, 2009, 6:09 AM

Post #8 of 9 (11641 views)

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Re: [jl1] Herd Mentality As it Applies to Real Estate in Puerto Vallarta, Mexico

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I couldn't agree with you more.


Jim Scherrer


Nov 27, 2009, 8:41 AM

Post #9 of 9 (11025 views)

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Re: [bournemouth] Herd Mentality As it Applies to Real Estate in Puerto Vallarta, Mexico

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FYI—I just noticed the above comments and thought I'd give you readers a little background information for your consideration.

I am a degreed engineer with graduate business school and 40+ years of experience in the construction field; of which 20 years were in corporate management, sales management, and marketing. I started my own engineering & construction company in 1979 and sold out in 1994; the company now employs 3,500 people and is a major division of a Fortune 200 company. After "retiring" in 1994, I invested as a day trader until the end of Sept, 2008 when I liquidated everything. I have owned property in Puerto Vallarta for 26 years and retired here 13 years ago, making PV my primary residence ever since. Needless to say, I know a bit about construction, investing, and real estate values in Puerto Vallarta, i.e. I don't consider myself to be just another bozo real estate agent writing a "fluff" piece to promote sales in Mexico!

I do know what it costs to build in PV and I know how many beautiful places there are available in town, at prices barely above the developer's cost; prices below pre-construction levels and prices that will not go any lower! Because this market has historically been a cash only market, real estate foreclosures are never seen. Owners/developers are simply not forced to sell; consequently, prices will not drop below their costs!

Yes, I'm biased and yes, this essay can be considered a marketing tool; fluff, I don't believe so. To insinuate that this article is dishonest and unfair to prospective buyers is so far off base that it's really not worth my response! The information is factual and intended to give those considering various retirement destinations some food for thought. The time for buying a second home in Mexico or a retirement home where the winters are incredibly beautiful will not get any better, whether you consider it as an investment or not. In writing this piece, I'm encouraging the folks to "think out of the box" instead of following the herd; the typical pattern of behavior.

This entire area has been economically devastated not only by the global recession but also by the inaccurate (and unfair) media hype concerning the swine flu (virtually nonexistent in Vallarta) and the border town drug cartel war (800 miles away) that has essentially nothing to do with life in Vallarta. Hopefully, the folks reading this essay (as well as the 70+ others that I've written) should come away with a little more knowledge about the unusual opportunities that exist in PV today; unlike any that I've ever seen in the 26 years of owning property here.
 
 
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