S.E.C. Real Estate Observer

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An Overlooked Formula That I Call Up and Out

What is the asset class that is always the largest in our Marketing Book?  Of course, we all know the answer ….land.

It’s the most challenging asset class to market for a number of reasons.  The most innovative/creative formula I’ve seen is what I call the “Up and Out” Formula for those owners who wish to sell their land and cash out but who cannot add cash to a transaction.  It’s best described in the following example:

Able owns a land parcel valued at $100,000.

Step One: Able seeks out an investor/owner, Bob, who is willing to exchange his single-family rental home (SFR) for $200,000 for Able’s land, valued at $100,000, plus $100,000 cash.

Step Two: Able seeks out a private lender who is willing to lend, on a short-term basis, $100,000 to Able, secured by the $200,000 home that Able is purchasing. This transaction will provide the cash Able needs to acquire the $200,000 home in addition to his land that he is contributing.

Step Three: Able sells the home for $200,000 and repays the $100,000 short-term loan, pocketing the remaining $100,000 cash proceeds.

Takeaways:

1. It’s a whole lot easier to sell an SFR than it is a land parcel.
2. If you’re a land owner who wishes to use this formula, seek out a private lender ahead of time who understands what you intend to do so the financing can be arranged quickly.
3. Let’s be honest—the biggest challenge for Abel, the above landowner, is finding the owner of the SFR who is willing to exchange 50% land and 50% cash for his SFR. What are the most likely characteristics of this SFR owner?
   1. He or she is an investor/owner, not an owner-occupant.
   2. He or she wishes to use a 1031 Exchange (thus being able to reduce his or her capital gains tax by taking the house instead of cash)
   3. The SFR should be located within a reasonable distance of the land so the owner is familiar with the value of the land. (It’s less likely that an SFR owner in Florida will exchange his or her SFR for land in Colorado than it is a Colorado-based SFR owner.)
   4. Ideally, an SFR owner who is agreeable to an extended escrow of 60 days or so will give the landowner time to pre-market the home and close quickly, minimizing his or her holding costs.

It’s my belief that a considerable amount of land at our meetings could be sold using this “Up and Out” formula. (Do we have members out there who have used it in the past?)