S.E.C. Real Estate Observer

• Tweet

• Tweet

(Originally published in the New York Real Estate Journal, November 30, 1999. Republished with the permission of the author.)

Selling is Not Always the Best Solution

Sometimes selling the real estate is not the best solution. The broker must find out the underlying problem and recommend the best solution based on what the client is really trying to achieve. This process is called “counseling.” Here is an example of what I mean:

Bob and MaryAnn ran a small bakery. They owned the space it was in as well as the adjoining space, which they hoped to expand into someday. Each had a separate tax number. As the years went by and they got older, the hard work and long hours started to take its toll. They made the decision to sell the business and start taking life easy. They hired me as their agent to sell the business and instructed me that they would prefer to take back the financing. It was by free and clear, so that they would have a small retirement annuity. I sold the business and real estate to an enthusiastic buyer and Bob and MaryAnn took back paper for a 20-year term. Both they and the buyer were delighted with the arrangement. In the meantime, Bob and MaryAnn also leased the adjoining space to a business associate and they seemed pleased with both transactions. I was not involved with the leasing deal.

“Sell the bricks and mortar or solve the problem?
Selling is not always the best solution”

A couple of years later, MaryAnn called and asked me to sell the rental unit. The tenant was there on a month-to-month basis and there would be no problem in asking her to relocate. The tenant did not want to buy the real estate. I put the property on the market. We were in a down market then and I counseled them that it would take time. After six months, there were no offers. We lowered the price and tried it again, but after another six months there were still no offers, not even a phone call. Bob and MaryAnn were reluctant to lower the price again. It was already lower than what they had paid for it, so it was time for us to sit down and review the situation. We met in my office and I asked a few questions, then sat back to listen. It all began rolling out:

• They had a falling out with the bakery buyer. He was making the monthly payments on time, but always waited until the last day of the grace period. They were not even on speaking terms. The situation was very uncomfortable.
• When they financed their rental unit, they did not have a strong enough statement to go to a bank for a conventional loan, so they had to borrow from a private investor at a rate higher than market.
• The rent they were receiving did not cover expenses and they were losing $300 a month after debt service. This had been going on for at least two years! They didn’t want to sell the rental unit, but decided they had to so as to retire the debt and stop the bleeding.

So, what was the problem? We all can see it! The negative cash flow was eating them! The mortgagor was causing them discomfort and worry. What did they want? Positive cash flow and piece of mind!

Here is how I solved the problem. I arranged for them to sell the mortgage they were holding. They then used the proceeds to pay off the rental property mortgage. I didn’t even have to sell the entire mortgage, just the next 120 payments.

When it was all said and done, they eliminated a problem from their life and turned a negative $300 a month cash drain into a positive $500 a month cash flow, an $800 a month swing and they still owned the real estate. They ended up with what they really wanted – the rental property, positive cash flow and piece of mind.

Did I sell the real estate? No! Did I solve the problem? Yes! This formula can be used in any similar circumstance, regardless of the value range we find ourselves in. There are many other formulas available! I, and those whom I regularly train and associate with, believe that counseling and creative problem solving are what the practice of commercial real estate is really about. Sometimes it involves selling the real estate; often there are other solutions to consider!