S.E.C. Real Estate Observer

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One of my favorite movies “What About Bob,” starred Bill Murray as a mentally challenged patient of a Dr. Marvin, Psychiatrist, played by Richard Dreyfus. The movie spun a hilarious tale around Bob’s dependence and need to follow his psychiatrist on his vacation. At this time, Dr. Marvin was getting national exposure from his book called “Baby Steps.” He encouraged his patients to try to solve their problems in small steps, not all at once, i.e. take several steps to get there.

Sometimes real estate exchanging can be the same. Most of our clients want to get to their goal in one giant step, not 3 to 4 baby steps. As we counsel with our clients, it would be wise to lay out, in advance, the possibility that they may need to go through 2 or 3 properties to eventually get the benefits they desire. The key to this working is to first make sure your client is thinking benefits, and can clearly identify the benefits he currently owns, and the new benefits he seeks. Assume your client currently owns a “C” apartment in Denver, 60% encumbered, but cash flowing well. He is seeking retirement to Phoenix. First identify the current benefits; cash flow – ability to borrow – upside with more management – taxes not a problem – can add some cash. Then what benefits do they seek? Geographic move – less management – more time for golf – less cash flow is okay if less management.

If a taker of the Denver apartments can satisfy part of the benefits needed, the client should seriously consider it. As a first step, i.e.: Apartments in AZ, net leased building anywhere, f/c quality development land in AZ. Although none of these properties may give all the benefits needed, they get the client closer to the final goal.

A few years ago, I sold a piece of land which would have resulted in a large gain. My goal was to grow my estate and eventually own a quality piece of improved real estate with debt, not to exceed 50%. I’ve since taken the cash through real estate in Kansas, Lake City, Co and Montana to get to the final goal. My goal has not changed. Obviously none of the assets provided all the benefits I sought, but each moved me closer. I’m probably one, maybe two more exchange away from getting that leased, 50% encumbered, quality commercial property. Stay tuned.

When taking these various steps, to get a client to the final goal, I’d suggest the following:

1. Make sure the client, not the Counselor is leading the dance.

2. Never take a “step” you are not willing to stay with for a reasonable period of time.

3. Watch tax consequences. Always go into a deal for investment purposes and document the transaction. Be aware of holding periods.

4. Be respectful of client’s desire to avoid fees on every deal. Fees eat away at the eventual gain.

The next time you are counseling with your client and have clearly identified all the benefits they are seeking, ask them if they are willing to take a few “baby steps” to get there.

Dan Harrison, a broker friend from California puts it another way. “Real estate is like a roller skate, it’s a vehicle to get you from one place to another.” Your first pair of skates is probably not the pair you retire with. As you see a vehicle which has differing and better benefits for you or your client, it may make sense to exchange skates. After 2 or 3 exchanges, you will probably be in a set of benefits you may enjoy riding for a while.