Tight Money Strategies

Editor’s Note: This article first appeared in the November 1973 issue of the Real Estate News Observer.

Since 1966, the real estate industry seems to be facing trends in supply, demand, and availability of loans that change more rapidly and more drastically than before. Changing our approach to brokerage to compensate for or benefit from each new set of circumstances tends to boggle most brokers.

Assuming that everything we know today will change within 3 years, and following the advice (oft given but seldom used) to “buy when everyone is selling and sell when everyone is buying,” formulas worth considering are:

1. Buy the tough-to-finance real estate vehicles when motivated sellers will negotiate the price and carry terms or accept options at much less than cost of institutional money.
Sample list:
A. Small (local tenant) commercial and industrial buildings. (Because they’re hard to finance).
B. Mature (ready to go) lots for apartments, houses, offices, and commercial where users are available, but no construction loans are.
C. Mature subdivision land where builders cannot now get financing.

2. Finance the purchase or option of these vehicles by “private offering” group ownerships of your investor clients. Profuse use of low interest, low down, low payments, and long escrows together with tough bargaining on price and use of soft dollars should gain the projectable desired benefits of:
A. Appreciation – caused by future demand.
B. Hedge against skyrocketing inflation.
C. Appreciation caused by buying in stagnant market and selling in active market.
D. Appreciation caused by proper selection performed by broker.
E. Leverage at 1/2 – 2/3 the cost of institutional financing.
F. Conversion of some ordinary losses to capital gain.
Broker receives commission plus part (subordinated) of ownership and a virtual lock on resale fee.

3. Between now and some time in 1975, when construction loans will begin to again be generally available causing vacancy factors to rise, would seem the logical time to sell income properties at full occupancy to the hungry public syndicators with shelter on their mind. Cash generated from these sales can find high returns in all forms of deposits, bonds, government notes, and existing real estate notes available at discount. Higher returns might be available to the speculator in the form of 1 and 2 above.
4. “Hard money” brokers have a field day now because of the cost of institutional loans. Seconds are probably preferable to refinancing paid-down firsts. Refinancing, likely to be available at the end of the money market cycle, guarantees short term (3-5years) loan liquidity.

5. To get cash out of income property equities where refinance is now unfeasible, try selling 75% of ownership to investors with option to repurchase at 5 years. Retained ownership subordinates to return 9% to investors for enticement, but existing loans are not accelerated because of retention. Investors get semi-guaranteed sheltered income but option price is calculated to leave equity buildup with optionee. Obviously, inflation and appreciation benefits go to optionee. Care must be taken here that usury cannot be alleged against investors by virtue of the possibility of the transaction being labeled a “disguised loan.”

6. Areas of high vacancy from recent overbuilding should be a buyer’s paradise for the forward looking broker providing feasibility exists even knowing new construction will cease for awhile.

7. Development seems to be off the list for all but the well-heeled pros. Now, more than ever, is the time to avoid institutional lenders and approving municipal bodies.

None of these approaches are new, but the application of them to current conditions on a “program” basis separate from the confusion of the 1,000 other formulas we know about might make you more decisive as to where to apply your efforts and a little bit more bullish in the market. I know one broker who will benefit from the organization of these thoughts.

Comments are closed.