S.E.C. Real Estate Observer

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*By its cover!

However, have you ever looked at the type of real estate owned by your fellow-real estate practitioners? Sometimes it gives you a “cover insight” as to why many “insiders” are having problems making a successful living from real estate.

In the past few months, the Real Estate News Observer has been conducting a small, informal, private review of properties owned by seemingly intelligent real estate brokers. The results of the investigation are alarming. They are reported here to help those who might get trapped in the future by acquiring unnatural equities in their own portfolios.

In general, brokers seem to acquire three categories of properties; (1) properties that will produce long term benefits and truly benefit anyone’s portfolio; (2) properties that serve as catalyst for estate building. These are inventory items that could be loosely defined as dealership oriented, and (3) properties that do not lend themselves toward any of the broker’s goals or plans. Many of these are acquired from faulty commission taking, or acquired by facilitating other sales or exchange transactions.

Certainly a sound practitioner should attempt to acquire more properties under category one – long-term benefits from real estate ownership. Benefits are defined as cash flow, amortization, appreciation, capital growth, liquidity, etc.

Of course, an estate-building broker needs a limited amount of property in category two. These are items that will be universally accepted as down payments for other properties, etc. However, the concept that you can’t judge a book by its cover is certainly disputed in category three – properties that don’t produce any recognized benefits to a real estate practitioner. You can tell a book by its cover when you review some of the properties owned by practitioners overstocked with properties outlined in category three.

Let’s review some of these properties.

What is your immediate impression of a broker who asks you to cooperate in handling a six-unit apartment house 90% encumbered, capitalized at 4%, has a substantial deferred maintenance (the normal reserve for proper maintenance was used to make payments on the second or third loan on the property) and does not have property management? The broker claims to have a property that will produce a lot of tax shelter for the “next” owner. Of course, it’s known that the tax shelter is a benefit, but after its rapid use, the property offers nothing for the investor except the bone pile behind the slaughterhouse.

We have seen brokers “acquire” vacant hunting lodges, carnivals, and properties beyond repair, obsolete single purpose medical buildings. The list is endless and so is the work to get rid of these kinds of equities.

Many brokers will take in “lame duck” properties (category three) because they are making a very profitable exchange on their end of the transaction. They will overlook the “duck” in order to profit on the property they exchange. A nice profit is hard to turn down.

Editor’s Note: This article was written by Cliff Weaver and first published in 1973. We think Cliff’s points were well taken then and still hold true today in so many ways….