S.E.C. Real Estate Observer

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Editor’s Note: This article first appeared in the August 1972 issue of the Real Estate News Observer.

Everybody’s “gotta be somewhere” — right? Every property’s “gotta have an owner” — right? From the Empire State Building to the four-unit motel that was just condemned, all real estate is owned by a legal entity. That entity must make the decisions regarding the future of that property — even the older ones — the misfits — the alligators.

So, in an exchange market, many of these properties are going to appear “restrained” due to the distressing situation they present to their owners. Thus, they engender a high degree of motivation and the willingness of the owners to accept many things other than cash for their equity.

The opportunities in these “misfits” are fantastic. Given a reasonable amount of time, money and creative thinking, these properties can become your, or your client’s “Bag-Keepers” — the ones you hold for long-term investment. Using creative techniques to acquire and hold these properties is the key.

Let’s assume that your client is about to acquire a small motel that really is a “Mom and Pop” operation, but he isn’t going to run it. You will need three things for success:

1. Money to upgrade.
2. A good maintenance man and manager.
3. A plan for profit that has appeal. The need for upgrading, fixing deferred maintenance, and operating the motel until you can generate more income from it. For example, it will take about S1,200 a month – $200 to cover a manager and $1,000 to buy materials and put a maintenance man in the motel full time to fix and upgrade the units.

Try to defer any payments for six months, especially to the owner going out of title. If possible, get him to pay the total payments for six months. Or, have him give back some paper to offset the negative cash flow you expect to experience.

Now try to arrange financing to do the upgrading. Try Title I FHA improvement loan for five years up to $5,000. They “authorize fast” and cost about 12% true simple interest. If you can, refinance the property — it will be longer term and cheaper interest. Perhaps you can include some other property you own that is in good shape and give the lender a blanket mortgage over both of them if he is unwilling to lend on the misfit alone.

Other possibilities for getting the money you will need are to syndicate the loan with private lenders, or bring in some partners on a percentage basis. The real problem is getting and keeping a good maintenance man who can make small decisions, and do reasonably good work in the expensive areas like plumbing, electrical and concrete. Try fire departments in cities. They always have electricians, plumbers, carpenters and jacks-of-all-trades, and they have 48 hours on duty and then several days off. They like to make extra money. Generally around $3.00 to $4.00 an hour will do it.

Advertise for a maintenance man with tools of his own. You will get a lot of replies. Try to take a look at some work he has done before you hire him. You’ll be safer if you do. Look also for retired people who want to supplement their income.

A manager is the hardest to find. Getting someone who will willingly work different hours, and for generally low pay, is difficult. Finding a manager who will see it through from beginning to end and then probably lose his job to a new “Mom and Pop” purchaser is tough. I have found it good, when the end result of the plan will erase their job, to give them a small percentage of the profit — say 10% to 20%. It makes them help sell it when the time is ripe — instead of being resentful every time a prospective new owner comes to look.

And now the Plan. It must have appeal to the lender, to a new owner, and to you. If it doesn’t, you will fight an uphill battle all the way — make less profit and, worst of all, you won’t have that dream to sustain you in the moments of despair: when you have run out of money; the manager has quit in disgust; and the building has just been condemned due to termites, dry rot, furnace failure, and general collapse of the plumbing facilities.

Survey the neighborhood and determine the highest and best use for the improvements you have and then lay out your plan with projected income and expenses, artist’s conception, bids and specifications for work to be done.

Determine the outcome and then shoot for it with all your power. That is what is meant by “grab a root and growl.”

James A. Misko (Anchorage, Alaska) is a past member of the Society of Exchange Counselors and for many years taught an education program based on these strategies for the Reno Educational Foundation, the predecessor of the S.E.C. Education Foundation. Jim Misko left the teaching profession to become a Realtor in 1960, starting a career that has lasted forty-four years. He has spoken in fourteen states at conventions and seminars, at the Five State Convention and at National Conventions on this subject. He has written many articles for NAR, the Real Estate News Observer and the Institute of Property Management.