S.E.C. Real Estate Observer

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Part II

Note: This is part 2 of a series. Part 1 is here.

With the recent dislocations in the financial marketplace of our country, it seems appropriate to consider how to market real estate during this period of economic uncertainty. One of the important goals for either an owner wishing to sell or exchange, or for a broker seeking to perform brokerage services for a client is to clearly establish what a client’s true needs are versus what they say they want. Often the wants are quite different from the needs. For example, a client who will only accept all cash for his property is going to be at a severe disadvantage in trying to sell his real property.

Due to the present lending crunch, first mortgage money is difficult to obtain even if all things are perfectly aligned. That is rarely the real-life situation, and we are entering a market where lenders are looking for reasons to refuse credit. In such situations, cash is king and those who must have all cash for their equity will be forced to accept lower prices and higher capitalization rates in order to make transactions happen.

The goal of marketing real estate in troubled times is to expand the number of takers (people who are interested in your property). The emphasis is on the buyer and what assets he or she has to work with to purchase property. For some, owner-carry financing is an opportunity to realize a sale in a cash-strapped market. Notes and mortgages secured by other properties, real estate equities in other properties, and lease-to-purchase formulas all represent proven techniques to acquire or sell real estate. The broker or seller who is knowledgeable about the true needs versus wants situation is far better able to structure win-win transactions than those who only understand a cash marketplace.

Another way of looking at a potential transaction is to establish the benefits a property or seller brings to the market. It is important to know the benefits that are being offered. Cash flow, capitalization rate, and positive leverage are all common benefits. Credit of the tenant, length of lease, and type of lease (gross or NNN) are other benefits that are widely discussed. Ease of management is an important variable as is availability of professional management. A seller or his broker must underwrite each potential listing to understand the position of the property and the flexibility of the seller in order to evaluate the potential for a property to sell. Sadly, many properties are not going to make an acceptable grade and much time will be wasted trying to sell properties for which the price, terms and conditions, circumstances of ownership, and flexibility of the owner make the property unappealable to the marketplace.

Another potential benefit in the marketing of a piece of property is the owner’s capability, or the additional benefits an owner can bring to the table. Will he add cash to his equity to acquire another property? Will he use his talent, expertise or credit to help make a transaction work for both sides? Is the owner geographically limited or would he consider property in an adjoining city, state, or region? Will he take other property or paper (notes) as a part of the down payment? Will he consider a joint venture? Will he sell one-half of his property? The list is almost endless.

In the final analysis, successful sellers and brokers are going to be those with the following: (1) the best understanding of their property’s benefits; (2) the ability to determine the differences between a seller’s wants versus his needs; and (3) the mental flexibility to consider options other than the traditional cash to the first mortgage. This means asking a lot more questions of oneself or the owner before putting a property on the market. Even in a slow or “down” market, some properties will change hands, and those who are the most knowledgeable and flexible will greatly increase their chances of being successful.