Pushing Dirt

With the days of 80% interest only financing long behind us, look to seller-held financing to get deals done in 2009. I’ve already concluded several transactions successfully in the last six months involving a seller held second trust. The financing in some cases is secured by a second position in the property, but lenders in the first position don’t always allow for this. In these cases a second mortgage might be guaranteed personally by the borrower or else other collateral might be offered

I’m regularly telling my clients that without some seller held financing, their buildings just won’t get sold. And sellers are opting to take the bulk of their money now, and some of it later, and facing the risk of default, rather than facing the risk of riding the market down further.

The biggest risk is of course the risk of default. On the plus side, you’ll be earning a return on your loan, and you’ll be deferring capital gains on the paper you held, paying it as the principal is paid down.

You can of course sell the note to a third party though expect to take a healthy haircut - in this climate cash is king.

Did you enjoy this post? Subscribe at the right to receive others like it by email.

1. Find a tenant that needs space. Find a building to buy. Contract to buy the building, write the lease. Finance based on the credit of the tenant and the cash flow.

2. Buy Veterans Administration homes which can be bought by investors with 5% to 10% down.

3. Get a real estate license. Find a niche with little competition (car washes? Mobile home parks? small multi-family buildings? little strip centers) and excel.

4. Think big. Find a bigger opportunity. Joint venture partners will contribute 95% of the equity required if the deal is a good one and give you much of the upside. It takes as much work to do a big deal as a small one. You do have to bring some expertise to the table to pull this off.

5. Be contrarian. Now that everyone is down on real estate, start thinking about buying it.

6. Look for sale leasebacks: an owner and occupant of a building who wants out but will continue to occupy the building and rent from you.

One way to create value in an industrial building is to consider a roof raise. A dated 14′ clear might sit empty for years while 30′ clear and up buildings all around it fill up.

You don’t even have to do the roof lift speculatively. Space Technology Inc. will gladly take your building specs and formulate a quote to raise the roof. In fact, they will do this with every building in your portfolio in the hopes that one of these quotes will turn into a job someday. You can take the bid and market that 14′ clear building as a state of the art high cube building.

Not all warehouses are good candidates for the process, and expect the price to come in at $10 per square foot or more.