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.

There are, of course, many uses for land, and of land, and all competent exchange counselors know that there are several formulas to be applied in handling land unencumbered or “free and clear.”

It has been found, during the past few years, that when someone has an equity in a small income property and wishes to exchange up into a large income property, it has not been very easy to do directly.

In other words, a simple two-way exchange has become increasingly hard to do when that situation exists.

One of the answers to that has been to put the equity of the smaller income property into inex­pensive land, perhaps along with some paper, and then use the inexpensive land, adding paper if nec­essary, to go into the larger income property desired.

Another popular technique to use when a piece of land has been held for 25 years and thus has a very low base, rather than have to pay heavy capital gains tax, is to sell it off; we recommend people keep land with low bases and offer to create some paper against it.

Using this paper to get what is wanted is an application of the for­mula known as the “Creation of Wealth.”

This has to be done very carefully and properly, mechanically, in order to have it be a tax-free maneuver, and so, the formula has to be well understood in order to use it.

This is a formula, however, that the writer has been using for 20-some years and has found it very beneficial, easy to use, and easily understood by clients when they know that its appli­cation can often save them lots of income tax payments.

Of course, one of the easiest things to do with land that people have held for appreciation is to tax-free exchange it into an income property where one can secure lev­erage, depreciation, etc.

Since no one is making any land anymore, land can go nowhere but up in price, and it’s the writer’s opinion that, even with today’s prices, the securing of cheap acreage and holding it is one of the best ways to offset the constant inflation that seems to plague our country.

And then, subsequently, in order to realize the gain through the inflation from year to year, make a tax-deferred, which we call a tax-free, exchange and enjoy the gain without paying any tax.

In the 1950’s, Realtor Richard R. Reno of San Diego, California, observed that many of the real estate problems existing in San Diego’s overbuilt market could be solved by people exchanging real estate.  He saw exchanging as an alternative to the unavailable cash buyer. He believed that people who owned real estate did not necessarily want to totally divest themselves of real estate ownership, but were uncomfortable in the circumstances surrounding their current ownership.  In effect, the problem was not with the property, but with the people who owned it.  He went on to hypothesize that there was no bad real estate, only inappropriate or untimely ownership.  With the appropriate owner in title to the real estate, there was no problem.

 This hypothesis of Mr. Reno led to the idea that the most effective way to deal with real estate was to abandon the traditional approach of focusing entirely on the property, the “bricks and mortar”, and incorporate into the process the circumstances surrounding the ownership of the property.  He recognized that the reason(s) an owner wanted to sell, and what the owner would do with the cash, if it was obtainable, was the key to successful transactions.

 Two basic axioms evolved:

1. Working with people is more important than working with property. Properties do not have problems, people do.

2. Client management, the ability to deliver, stems from the relationship between the client and the broker. The underlying premise is that the client’s best interests are paramount.

Mr. Reno also observed that there was a need for education in counseling and in exchanging.  He advocated a professional approach that must incorporate the understanding that cash itself is not the answer to all real estate conveyances and, that unless tax matters are considered prior to a real estate transaction, a client’s best interest may not served.

It also occurred to Mr. Reno that a national group, meeting regularly, could effectively address issues and solve a client’s uncomfortable real estate situation.  Brokers representing diversified owners and various markets could provide a forum that would generate solutions to troubled owners.

In November, 1961, nineteen Realtors met with the common goal of forming a national organization composed of individuals who were committed to practicing creative real estate and counseling.  This was the first meeting of the Society of Exchange Counselors and has since become a prototype for most marketing groups internationally.