A Stick, a String, and a Carrot

Editor’s Note: This article was first published in the July 1973 issue of the Real Estate News Observer.

Many Realtors use cash to buy or control real estate for their own account. This program is OK if you have plenty of the green stuff around. However, once you use cash, it’s gone for a period of time, or what Jim Misko of Eugene, Oregon, calls “final spending.” The money is gone and gone probably when you need it.

Why not consider the following technique if the right opportunity comes along? We wanted to acquire a two-acre commercial parcel of land valued at $60,000. The land was worth the price and was about two years premature.

If we paid cash for the parcel, we would lose the power of all that wonderful cash. If we purchased on terms (the standard 29% down game), we would have to make interest payments, principle payments and pack the taxes.

If we used any cash, it would be “final spend” cash that we had worked very hard for and eliminate most of our funds except for our contingent reserve. Wouldn’t it make sense to develop another formula technique to handle this situation and acquire the property?

We took $15,000 and acquired $15,000 in time plan certificates from our bank. Stop by your banker’s office and ask him to explain the time plan certificate deposit program in depth (he’ll love you!).

We offered the owner of the lot $10 for a three-year option to buy his property. We put up the $15,000 in time plan deposits as additional security in the transaction. In other words, if we did not exercise the option, we would forfeit the deposits. This additional security, the deposits, put a little more teeth or backbone in the transaction. How could an owner turn down this offer? If we do not exercise our option in the three-year period of time, he gets the $15,000 in time plan deposits. This $15,000 represents 25 of his selling price.

This is a people business and the psychology behind the $15,000 to be forfeited is quite a consideration for an owner.

However, what does this do for the buyer? You control real estate for three years for $10. Your $15,000 in time plan deposits is under the gun for three years (usually held in trust at the bank or in a holding agreement at the title or escrow company). However, you still earn interest on the time plan certificates.

The buyers felt, as we mentioned earlier, that the property was two years premature. That is why they secured a three-year option to give them an extra year cushion in case of a change in economy. Always plan your holding period a little longer than you require.

For $10 and putting up $15,000, as additional security, the buyers purchased the parcel of land at today’s price and don’t have to deliver until three years down the road (with three years of inflation working for them), plus no real property taxes, no interest or principle payments to make during the holding period.

Clifford P. Weaver taught “Broker Estate Building Techniques” for the Richard R. Reno Educational Foundation. Mr. Weaver was Secretary-Treasurer of the Society of Exchange Counselors. He taught “Broker Estate Building and Administration Techniques” for the Richard R. Reno Educational Foundation. Specializing in real estate problem solving, he conducted his practice in the San Jose, California, area.

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  1. […] issue were originally published in July, 1973. Cliff Weaver presents a technique for you to “hold on to more of your cash;” and Yvonne Nasch provides a “double in lieu of” formula that resulted in four […]