We are certainly in a buyer’s market right now and real estate investors have quite a bit of bargaining power these days.

But is this the time to buy or will real estate prices head even lower?

We are seeing millions of foreclosures coming on the market, which is currently driving prices even lower, but this could come to a head in the near term. Many experts think we could see the bottom in real estate prices sometime this year.

My suggestion: Keep your powder dry and get ready to jump into some real estate investments in the next year as long as the right opportunity presents itself.

My wife and I have had a great deal of success investing in real estate over the years. We were fortunate enough to see the writing on the wall and dumped most of our investment properties in 2006 at a net profit.

I attribute our success to a wise man that once told me “You make all your money in real estate the day you buy the property”, basically this means you have to buy the property for much less than it is currently worth.

Now, we are getting ready to jump back in and are looking to add real estate to our investment mix again. Recently we have been spending our weekends driving around looking at distressed properties. We are looking at properties that are bank owned or are being short sold by a homeowner that is upside-down on their mortgage.

The trick is to find nice properties that you can rent out and make a positive income stream. Essentially, you need to be able to receive more rent money than your mortgage payment.

And the most important part: Low Ball… Low Ball… Low Ball…

You need to make an offer 40% to 50% below the current market value. Now, 19 out of 20 people will tell you to go somewhere else. But if one out of 20 accepts your low-ball offer, you will get the deal of the century.

Source: Is it Time to Buy Real Estate Yet?

You see, most investors gobble the answers up, thinking, “If the Big Money is doing it, maybe I should, too.”

But I read the Big Money poll in exactly the opposite way… I know when the Big Money guys all believe the same thing, chances are great the trade is “full” already.

So if you read the Big Money poll right, it can actually be quite profitable. Let me explain…

In mid-March, Barron’s e-mailed the poll to money managers. About 120 replied, and the results came out over the weekend.

The most hated asset class (not surprisingly) was real estate investments. Only 8.1% of money managers considered themselves bullish on real estate. And the most loved class was Latin American stocks… Only 13.8% of money managers were bearish on Latin American stocks.

The “untrained” reader might take this to mean the right trade is to buy Latin stocks and sell real estate stocks.

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Funny, then, that real estate stocks are now the best-performing sector this year… Simon Property Group – the benchmark real estate stock – is up more than 20% year-to-date.

Meanwhile, the Latin American Discovery Fund, a collection of South American blue chips, is down for the year.

How can this be? The answer is simple…

When all the money managers are bearish, there’s no one left to sell that stock… With only 8.1% of money managers bullish on real estate stocks when the poll was taken in mid-March, there was nobody left to sell real estate stocks. With no one left to sell, they couldn’t go down any farther.

So here’s what happened: On March 14, Simon Property Group traded for around $86. Now – just six weeks later – it’s at $105.

On the other hand, the Latin American Discovery Fund peaked two days before March started, and it hasn’t done much since. It was everyone’s favorite in March… Why hasn’t it gone up? In short, there’s nobody left to buy – only 13.8% of money managers were bearish on Latin stocks when the Big Money poll was taken. Everyone who wanted to buy was already in.

Here’s the key: You have to wait for the extremes in sentiment. The old saying is, “The crowd is wrong at the extremes, and right in between.”

So let’s look at another example from the Big Money poll… One result was as lopsided as I’ve ever seen: Only 3.6% of investors are bullish on 10-year Treasury bonds. That means nearly all money managers believe long-term interest rates are headed higher.

With long-term interest rates currently below 4%, investors think rates can’t go any lower. After all, they haven’t seen them lower than that in their lifetimes.

But they’re ignoring history… Japan’s property bust started in 1990. Interest rates were “normal” then – around 6% to 7%. But as the property bust went on and on, long-term interest rates fell to 3% by 1995… and actually fell below 1% in 2003. Even today, they’re around 1.5%. Incredible!

All the talk is of inflation… and everyone expects interest rates to head higher. But don’t go betting the farm just yet. This trade is already full, and long-term interest rates could surprise you and head much lower. Already, interest rates on 10-year Treasuries have fallen from more than 5% in the summer of 2006 to below 4% now.

If you want to follow the crowd and do the “ordinary” thing, bet against real estate stocks and bet that interest rates will head higher. But by doing the ordinary thing, you’re destined for ordinary returns. If you want “extraordinary” returns, you must be willing to do something extraordinary.

One of my favorite hunting grounds for doing something extraordinary is Barron’s Big Money poll…

Good investing,

Steve

P.S. Talk about doing something extraordinary… In the latest issue of my letter, Sjuggerud Confidential, which came out earlier this month, I recommended a safe bank, with no exposure to U.S. real estate. We’re already up more than 20% – in less than four weeks! And I still think it’s a great buy. To learn more about this idea, click here.