S.E.C. Real Estate Observer

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Editor’s Note: This article first appeared in the May 1974 issue of the R.E. News Observer.

“I am not the kind of person who can save money to build an estate.” The author is unknown, but often quoted. It is a fact that it takes money or assets to get started in Estate Build­ing. Many Brokers and Salesmen will admit they are unable to create and maintain a savings account. Money is always needed for short gap emergencies like office rent, family expenses or to close a transaction. Thus, many potential estate builders cannot even get started.

It is not easy to start a nest egg for real estate investments. If you are able to be current in paying bills, you are a step closer to starting your nest egg account. You are admitting that you are weak at making cash purchases but good at installment purchases. You are the kind of person who can afford insurance in monthly payments but not able to buy a policy in full.

A suggestion is to borrow $10,000 and put it temporarily in a time plan deposit until an investment comes along that would be attractive in your portfolio. This gives you the opportunity to capitalize on your ability to pay the bank in install­ments.

The nest egg money is for invest­ment purposes only — nothing else. Treat it as if it belonged to someone else (hands off for personal use). The funds must be invested with all proceeds compounded in the invest­ment nest egg.

Not long ago we made an offer to buy a $40,000 commercial build­ing in Eastern Oregon. The building was leased and would provide de­sirable benefits. We offered a $10,000 personal note as a down pay­ment, and payable at $2,000 per year in­cluding interest. The buyer consid­ered the note no more than a forced savings obligation. The buyer knew he would not accumulate $10,000 cash in a nest egg, so he financed the down payment with the seller rather than borrowing from a bank. The seller was asked to finance the down payment on better terms than terms offered by a bank. Why would a seller take this kind of transaction?

The balance of the price was in cash (from a new loan by a savings and loan). Would a bank make a $30,000 loan to finance this 100% financing sale?

Yes, when they were informed that the buyer was putting up $16,000 in a real estate contract as additional security in the transaction. The bank asked why the buyer didn’t use the contract as a down payment as it would look better in terms of regular transactions.

The answer is that the contract offered for property would be a taxable transaction (personal property for real property is not a Section 1031 exchange) and the buyer’s basis in the contract was approxi­mately $6,000. The exchange of a $16,000 contract with a basis of $6,000 for a down payment into real estate might cause an additional burden (tax wise) for the buyer.

Thus, a real estate equity, contracts or any item of value can be used as additional security in real estate transactions.

The buyer put up his $16,000 contract as additional security for his personal note. He retained the pay­ments on the $16,000 contract (and applied them against the payments on the $10,000 note). The cash flow on the commercial building helped retire the $10,000 note prior to its scheduled amortization.

The buyer wanted to retire his outstanding personal note as fast as possible. Thus, the contract pay­ments and gross spendable income (cash flow) retired the loan rapidly.  Within a few short years, by com­pounding the cash flow and the contract payments, the $10,000 obliga­tion would be retired.

The installment method of build­ing a nest egg for later years was kept well in mind by the estate building buyer.

Clifford P. Weaver, San Jose, Califor­nia, was a capable real estate administra­tor. He  managed the interests of more than thirty partnerships, corporations and joint ventures. In 1968, he was named “Counselor of the Year” by the Society of Exchange Coun­selors, and was presented “Best Ex­change Award” by the California Real Estate Association. Cliff taught “Broker Estate Building Techniques” for the Richard R. Reno Educational Founda­tion. Mr. Weaver was Secretary-Treasurer of the Society of Exchange Counselors. He was a Certified Commercial Investment Member and member of The Task Force, composed of leading “problem-solving” real es­tate practitioners who counsel corpor­ations with real estate holdings.