January 1985
Vol 7 No 4

TO SELL OR NOT TO SELL, THAT IS THE QUESTION . . .

At about this time every year I try to make an educated guess about the coming year with regard to my income, investments and tax liabilities. And I look beyond to the following year to make certain that I'm on course – meeting my financial goals. I learned that from the Boy Scouts. When traveling across uncertain terrain, if you want to proceed in a straight line, you find two trees and line them up like the front and rear sights on a rifle aiming at your ultimate destination. Then all you have to do is to keep them in line to avoid wandering around and missing your objective. Investing works the same way, except I use tax years to keep my sights on my goals. I do two at a time rather than one.

 

1985 and 1986 promise to be interesting years indeed! The administration has the opportunity of making fundamental changes which will affect investment values of stocks, bonds, mortgages, real and personal property and all dollar denominated wealth throughout the world. Here^'s what could happen in the relatively near future: Volker replaced at the FED; massive currency change aimed at flushing cash holdings INTO the banks/government hands; new tax concepts which eliminate many sheltered investments; Government Bonds and Treasury obligations becoming the only lawful investment for private and corporate pension plans; wholesale debt repudiation not only by banana republics but BY AMERICAN CITIZENS WHO CAN NO LONGER MEET THEIR RISING COSTS OF OWNERSHIP OF HOUSES; consolidation of power into a handful of major banks who are able to establish networks across the USA via new laws which will free interstate banking; resumption of inflation at double digit rates in an effort to eliminate growing deficits; subsidized mortgages for select groups of buyers and cash subsidies for low income TENANTS who will be able to pick and choose their new housing in the open market; banks and insurance companies moving into the housing markets as developers with equity interests rather than as mere lenders; competition for credit between the private and public sectors which drives interest rates through the roof.

 

Maybe two years isn^'t far enough into the future! Long term goals are the basic foundation for your investment strategy. They^'ll give you the perspective to look beyond the next two years and into the waning years of the 20th century. Don't be stampeded into sudden changes in your investment plan. Just as a pilot must navigate around thunder storms, so must you also steer a course around foreseeable problems and continue on your course to your objectives. Let^'s look at some evasive tactics to help you do that.

THERE^'S NO SUBSTITUTE FOR CASH . . .

Why? Because cash is a universally accepted currency – especially when it comes in the form of the American DOLLAR. It's portable. It's private for short periods until they change the currency. It^'s versatile – useable in a wide range of situations. It can be a short term holding position, convertible to virtually every other form of investment at will. Its the reserve currency of the entire civilized world. Preferred! It^'s what you should be seeking when you sell your property rather than mortgage paper. It's the ultimate survival hedge in today^'s world – even more important than GOLD!

 

But, there^'s a fly in the ointment. Cash is hard to find. It's hard to store safely. It earns PROFIT rather than INTEREST, so it's value fluctuates in the hands of different people. Here^'s what I mean: Suppose you could buy property or paper at 50 cents on the dollar in the distress markets. You^'d be able to effectively double the value of your cash because of your unique ability to find and negotiate price on those items you were able to buy. Compared to someone else who didn't know where to find distress bargains or to negotiate deep discounts for cash, your cash would be worth more than his.

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Quotation not permitted.  Material may not be reproduced in whole or part in any form whatsoever.

SELLING FOR CASH REQUIRES IMAGINATION, PERSISTENCE AND CREATIVITY.

There^'s one ingredient which is crucial for every sale: A BUYER! You've got to be as creative in finding buyers as you were in finding sellers. Start now to analyze Buyer needs. First, the property must be appealing from both a physical and financial point of view. In Hands-Off Management seminars we spend a lot of time describing ideal income houses you should be buying. That same criteria of neighborhood and house appeal applies to those who might buy from you as well as rent from you. So your first buyer's market will be among your current tenants.

Select from among those with the best payment records (you're going to furnish credit references for them) and incomes that can qualify for loans. Locate an aggressive mortgage broker who gets paid on commission. Map out with him what you intend to do. Pre-qualify your tenants to see how large a loan they'll be able to obtain. Then see what you can work out with them. Here are some ideas for overcoming low loan-to-value problems:

a.   EQUITY SHARE with them. They qualify for the loan, you hold your equity in the form of an ownership interest in the property and continue to take tax benefits on it. BEWARE: Don^'t help them qualify for a larger loan. Better to get them to qualify for the largest loan they can, and let them pay all the payments. You take a passive role and be prepared to step in to regain the property in the event they can't make payments. You can structure a buy-back agreement with them to divide profits between you at a later time.

b.   Guarantee to re-purchase the property whenever they want by paying them 10% profit ON THEIR EQUITY, not on the entire purchase price, in CASH. This will remove any risk they may have as well as any potential profit. You'll get that for assuming the risk. Always work with fully assumable loans. Avoid non-assumable and variable interest rate financing even if it means a lower loan. It will be worth it to you in the future.

c.   Do the above, but retain an OPTION to buy them out based upon some division of profits at a point in the future. Take title subject to the new loan terms. You can either sell your Option for cash, exercise it and sell your interest for cash or co-op with the occupant and both sell to a third party for cash sometime in the future.

d.   Once the loan is in place, have the occupant deed you the land beneath the property. You give him a land leasehold for as long as he's the occupant, but make it negotiable at any time he chooses to sell the improvements. Your equity will vest in the land and his lease payments to you can be structured to be mutually advantageous in the future, your income can be indexed via the land lease to all other occupants.

 

Once you've exhausted YOUR tenants, you can start on everyone else^'s ! Use hand bills. Distribute them to apartments, condos, all other rental houses. Depict the benefits of home ownership as well as the impact ownership has on personal income taxes. In this era of dual incomes and rising taxes, this isn't inconsiderable. If the Bradley-Gephart Bill is passed, home owners will be about the only people able to deduct interest payments! All the above techniques will work with them too. One entrepreneur used to advertise to Veterans: ^“Buy from me on your VA loan with NOTHING DOWN. I pay all closing costs AND I GUARANTEE TO PREPURCHASE YOUR HOME AND TO GIVE YOU A 10% PROFIT ON YOUR EQUITY.^“ What a clever way to pull 100% of the cash out of your property and still be able to re-claim it with miniscule costs of money while hedging future inflation.

Don't overlook trade-ins! I've made many a deal using cars. You can either accept a worn out old heap for the down payment and adjust the price to offset it – or you can provide a shiny new (looking) car as an incentive to get them to buy. Maybe the dealer would take a 2nd T.D. in payment. And if they don^'t like cars, what about appliances, drapes, carpets, furniture, yard care, pool services, a privacy fence, etc. that they^'d accept as an inducement to get a new loan and to cash you out. Builders do it. Why not you?

House trade-ins are better yet. In a distress purchase, you can offer in small for big, old for new. In a subsequent sale, you can accept old for new, small for big. The key is to always trade theirs at wholesale, yours at retail no matter what you're doing. Now, the plot thickens. Your profits on your cash transaction can be enhanced both before and after your cash sale, thus increasing the yield overall. When you buy, knowing that you intend to sell, if you buy with something worth less than cash and sell for cash, you make a profit from your exchange of currencies just as any money changer does. What do you use? We^'ve covered this in other letters, but you might EXCHANGE other property in which you have a low cost basis. You might buy with low yield paper that the seller will accept at face value in return for your taking over some of his problems of ownership or marketing. Low yield paper also includes DISCOUNTED BONDS which you might buy for mere fractions of value. You might combine paper with cash and property in making your purchase. The lowest cost of all is obtained through an OPTION which you might buy with management or the PROMISE of future payments which won't fall due until AFTER you've sold for cash.

 

Here's how one person did this. He offered the distressed seller a free and clear Time Share Unit (you could use a lot, car, Mobile Home, collectables, etc.) plus a ^“Payment Agreement^“ secured by two existing NOTES which had been carried back on previous property sales with low interest yields. The ^“Payment Agreement” carried no interest at all. In addition, $3,000 in cash was paid to induce the seller to sell. The house was worth $65,000 with an assumable FHA loan of $19,300 @ 8%. The out-of-State owner was experiencing ^“management distress^“ rather than ^“financial distress^“. He wanted OUT! His payments were only a little over $250 per month including everything, but he was having to make them on an empty house. The offer of property + secure income + cash solved his problems.

The buyer offered the property for sale at $65,000 with a cash DECORATING REBATE of $3000 to anyone who could refinance or pay cash down to the mortgage balance. Further, he offered to substitute a 30 year BOND in lieu of the cash rebate which would pay back the full purchase price of $65,000 in cash at the end of 30 years. His buyer elected to take the bond offer instead of the cash. He sold the house and netted over $40,000 in CASH after all selling expenses were deducted, including the approximately $2000 cost of the ZERO COUPON BOND which he^'d been able to purchase at 3% of value in the Bond market.

 

Let's take a look at the buyer/seller's true profit. First, his basis in the Time Share Unit was only $1000. It was accepted at listed value of $6400. Profit: $5400. The ^“Payment Agreement^“ carried zero interest. It was funded by two Notes which averaged 10% interest. With a face value of $36,300, over $300 per month of net INTEREST INCOME was being used to pay PRINCIPAL to the seller. His note was amortizing over 10 years. At the same time, the buyer's notes that were being used as security were ^“interest only”. There was NO AMORTIZATION. His profit margin would add up to $36,300 over the 10 years on the ^“paper” alone. This was a self liquidating investment which contained a built in profit of $41,700 at a cost of about $4000 in cash and Time Share Equity. But there^'s more.

What about selling profits? Buying via terms and exchanging and selling for cash is the reverse of what some of the current crop of get-rich-quick promoters advocate. They advise carrying back ^“paper” and income rather than cash profits. Let's add up the results of the above transaction in terms of the sale: The old loan was paid off via refinancing by the final buyer. This left $45,700 out of which $1950 was paid for the Zero Coupon Bond, leaving $43,750. $3,000 was used to pay back the cash used to buy the property, leaving $40,750 to the ^“middleman^“. Since he had purchased the property with no loans against it other than the existing mortgage, this cash was his to keep.

In the event that his financial goals required continuing investment in houses, $40,000 in cash should buy $70,000 in equity in the distress markets – maybe more in Houston. If you look at the potential for profit, you can see that cash earns far more when it's put to work than you can expect to receive from passive investments such as ^“paper^“ and interest bearing instruments or deposit accounts. Entrepreneurial skills + cash = PROFIT. Now is an excellent time to cull your investment houses and to sell for cash while we have the current short-lived drop in mortgage rates and you can still find buyers who can get loans. When interest rates pop up in 1985, you'll be able to re-enter the market and buy at discount. In the interim you'll be able to earn reasonable interest in T-Bills safely.

Maybe another illustration would help here. A couple owned a nice lakefront home with a pool, dock, etc. They^'d just placed a 2nd mortgage on the property to pay for the pool and couldn't afford the payments. Their property was worth about $78,000 and the payments were about $450 on the first mortgage with an additional $16,000 ^“add on interest^“ loan for the pool payable at $225 per month on a second mortgage. The house had a rental range of about $550 – $650 depending upon the season and the enthusiasm of the owner for water sports. The buyer had a small house of the Hansel and Gretel variety – SMALL! It had a retail value of about $40,000 and was encumbered by an assumable 6% loan of $7000.

Here^'s the way this was handled: They accepted the small house subject to a wrap around 12% loan with payments of $450 per month PITI for 3 years and balance due in full on a $38,000 loan. Their house was accepted, subject to the loans which consisted of the $46,000 first at 8% and the $16,000 2nd. $16,000 in retail equity was exchanged for an ostensible $2000 equity in the smaller house. That netted $14,000 on the transaction for their buyer. But it gave them an affordable house with comfortable payments which far outweighed the comfort of the larger house and impossible payments on a mistake they had made in installing the swimming pool. After 3 years, they^'ll refinance and give the buyer another $30,000 or so in cash from his equity remaining in the wrap around loan. And he^'ll still own the larger house. Of course he can sell it to capture his cash from someone else. In the meantime, he^'ll be using the cash flow on the wrap to augment his loan payments.

 

Builder's have another way to do this. Suppose you could build a $75,000 home with a cost of $48,000 including the lot. This is a high profit margin, but as interest rates go up, labor costs go down together with building lot costs. The trick is to be able to continue to sell in that market. Offer your house (New Lamps For Old) at retail and solicit older houses as trade-ins. Get the buyer to pay off the lot and construction loan out of the mortgage financing proceeds. Carry back your profit in the equity on the house being traded in. Suppose you could harvest the full profit of $27,000 above in the form of an equity in a $50,000 house with a $23,000 loan at 8%. You'd then be able to either rent the property taken in for a positive cash flow from the start, or sell it as described earlier and take out the cash.

 

THERE'S NO BAD NEWS OR GOOD NEWS! NEWS IS WHAT YOU MAKE OF IT . . .

Re-read this letter. I've premised some interesting events over the next 2 years. Have they reduced opportunity? No! They^'ve just changed it. If the tax laws take away some of your benefits as investors, sell to people who want your houses for their own USE regardless of tax benefits. Make new profits from those who can't or won^'t THINK – and who sell into a panic market on YOUR TERMS. Earn cash with which to offset uncertainty by selling imaginatively to buyers who would otherwise be locked out of the markets by interest rates. Exchange and structure transactions to limit tax liability on your operations by forming dealer corporations, avoiding short term capital gains via the use of Options and spreading out taxes through installment sales and alternate security instruments other than mortgage financing on your purchases.

The combination of economic and political uncertainty, ^“simplified tax laws^“, ^“credit crunch^“, hazardous banking shake-outs and catapulting A.R.M. payments will create multitudes of buying opportunities from speculators, home owners, distressed lenders and Bankruptcy Trustees at drastically reduced prices and terms over the next 2 years. Getting into a cash position while you can – and reducing your own exposure to these events makes a lot of sense. Cull your marginal properties now. Save your best ones. Get prepared for one of the best buying seasons ever in the next 24 months while you seek the high ground with cash and cash flow.

Copyright © Sunjon Trust All Rights Reserved, www.CashFlowDepot.com. (888) 282-1882
Quotation not permitted.  Material may not be reproduced in whole or part in any form whatsoever.