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November 9th, 2009 by Dawn Rickabaugh
According to a poll released recently by LoopNet, an online commercial real estate marketplace, 46% of commercial real estate professionals say the commercial RE market will not rebound until 2011.
Fifty-three percent (53%) expect further price declines of 11% or more. “Lack of access to debt financing” was the No. 1 cited barrier to recovery. No one can get loans these days.
And that’s why my whole conversation is about putting buyers and sellers together without the need for new bank financing. Intelligent, legal, ethical non-traditional ways of putting real estate transactions together is all I talk about.
We just need to choose the right strategy and engineer the transaction in such a way that it addresses the short and long term interests of both buyers and sellers.
Sometimes price is the most important thing to a seller, sometimes monthly income, sometimes capital gains. But one way or another, it’s about quality of life and creating desired outcomes.
What does the seller want to be doing with their time and energy? Do they have health problems? Are they tired of managing property? Are they moving out of town? Would they like the freedom to relax and travel and enjoy their retirement? Would a little more cash each month make all the difference?
A few days ago, I was talking to an agent that was trying to put a commercial real estate transaction together. His client owned a desirable 9,000 sqft property free and clear on historic El Camino Real in Northern CA.
A couple years ago, the property would have fetched close to $3 mil. Now it was listed at $1.6 mil, and there was one lone buyer who wanted it, only he couldn’t get traditional financing.
He would pay the $1.6 mil if the seller would take $400,000 down and carry the rest at 6.5% over 30 years.
Well, because the seller didn’t want to pay ANY capital gains, his agent was exploring the possibility of selling the note so all the proceeds could go towards a 1031 exchange.
Good idea, except for this…
The discount on a green 75% LTV (loan-to-value) commercial note, even with good down payment and credit, would be so high that it just wouldn’t make sense, especially with that low interest rate!
Here’s what I might say to the seller:
1. Just carry the dang note and be happy that you get to defer MOST of your capital gains through the installment sale . . . you’re getting your price, for heaven’s sake! And after some seasoning, you can sell the note for a smaller discount!
2. Drop the price 20% and hope for a cash buyer (or one that can actually get a loan) so you can do a 1031 Exchange or set up a Deferred Sales Trust.
3. Lease the property out and be prepared to wait AT LEAST 10-15 years before you find someone willing to offer $1.6 mil again.
I think this particular seller ended up leasing the property to the prospective buyer instead of selling it to him . . . which is fine, if he’s truly happy owning the property.
Just because the financial markets are in a mess doesn’t mean we can’t put savvy, potent real estate transactions together. And the economy needs us to do just that.
Always consult with your CPA, tax attorney and/or financial advisor before selling property or paper.
Dawn Rickabaugh is a RE broker with expertise in seller financing and RE notes (trust deeds). firstname.lastname@example.org