Cashing In By Selling For Less — Being Dumb Like A Fox

This market, for the most part, is terrible. Plain and simple, it’s a long way from just being down a tad. Though not nearly the worst I’ve seen, it’s bad enough. Is it bad enough for you too?

What would motivate you to trigger a tax deferred (1031) exchange into another region in another state? I promise to give you more than one reason.

Let’s do that later.

There are a couple reasons, generically speaking, motivating folks to invest, or execute a tax deferred exchange. One is to end up with more money than they have now. The other is to create more cash flow (income) than they have now. Pretty complicated.

The people reasons are infinite, and for the most part absolutely appropriate. Obviously whether for growth or income, retirement is the #1 reason people invest in real estate. The end game is always the highest retirement income possible. They also want to easily pay for their kids’ education. Or be able to take care of their parents if necessary.

Let’s take a mini-detour here for a BawldGuy Axiom: More is better than less. Sooner is better than later. More, sooner, is much mo’ better.

Paradox: Sometimes selling for less, means ending up with more.

Focus on what’s happening now. Loan underwriting has been tightened. Selling real estate has become more difficult, or as we’ve discovered in some markets, more than difficult. Prices have gone down — more or less in different markets. The plain truth is, your property isn’t worth what it was a while back. Usually though, it’s not that big of a deal.

Let me show you.

Investors who wish to sell don’t take to this atmosphere well. They get cranky. Sometimes downright rude. That’s because maybe they haven’t thought this market all the way through.

Back to ‘let’s do that later’.

I’ve been through this kinda market a few times before. Been there, done that. It’s always the same, except for degree. This correction is worse than ’74-’75 — but not as ugly as the early ’90′s. It’s a down market, and that’s all that it is.

There are some real perks to a down market for those in the right position, with the correct focus.

Let’s talk about what the right position is.

The rightest position is having a bunch of cash burning a hole in your Levi’s. Next best? An investment property(s) with sufficient equity to do some serious damage. The next in line is your home with lots of accessible and affordable equity. Affordable meaning, of course, you can make the potentially increased monthly payments that could result in taking money out.

For now, we’ll bypass 1 & 3. Both involve showing up as the Buyer With Cash, which in this market, doesn’t exactly make you a pariah. Let’s talk, instead, about the investors owning income property with a good bit of equity.

Let’s not get caught in the trap in which amateurs sometimes find themselves. They’ll use a formula found in some real estate investment book, telling them to make their move once their equity reaches a particular percentage of the property’s value. For instance, 40%. That figure might work well in one region, while it’s seriously way late in another.

There are too many factors involved to handcuff yourself to silly one size fits all templates. Numbers may or may not work the same in different regions. Assuming that can result in faulty logic. Kingman Arizona ain’t Austin Texas. (Though they sure could be if Tuesday’s vote goes the right way.) Southern California isn’t Boise, and Kansas City is just not comparable to Phoenix.

This is where the pro comes in. I’m in San Diego. Let’s say you’re in, ah, Kansas City. A duplex in San Diego goes these days for $450-700,000 give or take. In Kansas City you could probably go to Duplexes R Us and get a Baker’s Dozen for that much. So if you have a SD duplex worth $600,000 with only $200,000 gross equity, the average owner would probably role their eyes at the thought of exchanging their equity elsewhere — especially in this market.

Looking more closely, we see the net equity of the SD duplex is a little over $150,000. If that were a KC duplex, with a value of $180,000 and the same percentage equity to value — the net would be barely less than $46,000.

Let’s also agree the prices for both properties are easily less than they’d have received a couple years ago. Hence, the anxiety. “Why should I exchange, losing money in the process?” Of course, that’s a false statement based upon a false premise. (Again, more on that one later.) Because your value has fallen from a its high, doesn’t mean you’ve lost money. It simply means your crystal ball failed you — again — not telling you the exact day the damn thing was worth the most.

What’s the most relevant question at this point?

Easy.

Will a tax deferred (1031) exchange result in your position being significantly improved? Yes? or No? If it’s not a no-brainer — don’t do it.

In many of today’s growth regions an exchanger can better their position — sometimes more than significantly. The SD investor? He could easily go from selling a single, 40 year old duplex to owning nearly $1.5 Million in new or nearly new properties. The KC guy? His net wasn’t nearly as much, but given the same opportunity, they could just as easily acquire triple (or almost) the value of what they left — really.

Still, I hear the whispering.

That is pretty cool, but don’t you understand, we’re taking a ‘loss’ here. Why do that?

I’ll let the ‘loss’ comment pass.

In today’s markets, we’re negotiating deals for our clients, some as buyers, some as exchangers, saving them literally thousands of dollars. In some cases, this is not only in property value discounts, but upfront money too. Money in various costs and immediately require capital expenditures.

Huh? What’d he just say?

Either no closing costs, or 60-80% reduced closing costs.

No loan points.

An appliance or two thrown in at no extra cost.

In the most recent transactions — most recent meaning they haven’t even closed escrow yet — the upfront savings turns out to be over $10,000 — apiece! Add to that the below market price, and what have you discovered?

Again — easy.

All that money you ‘lost’? You made it all back and more simply by closing escrow on your exchange.

We won’t even talk about the next 10 years, except to make one observation. The difference in capital growth and additional cash flow over that period of time, will be easily measured in hundreds of thousands, if not in excess of a million dollars. It’s my intention you take that statement literally. Your choices could be crying in your beer about ‘what could have been’, or breakin’ out the champagne to celebrate your great judgment.

In the case of the SD investor, who thought they’d lost over $50,000? They gained $60,000 by their ability to buy with almost no closing costs, loan points, or paying for refrigerators or window coverings. I’ll grant you it sounds pretty mundane, so I’ll make you a deal. If you don’t want the savings, I’ll take the cash instead.

Here’s another way to look at it. They secured two additional ‘bonus’ properties directly as a result the accumulated savings on closing costs, loan points, and initial required capital expenditures.

Seriously, most of the properties available today, can be acquired for a fairly decent discount — as were the properties mentioned above. In fact, each of those properties, very conservatively speaking, were put into escrow for our clients at least $25,000 under market — apiece. In this case, they’ve already made a cool $100,000 just by closing escrow.

Now, tell me again about how much you’ll lose by selling your properties?

If you come here regularly, you know I like to have fun while passing on my experience and expertise.

Today was no different, but there’s a serious lesson to learn here.

Even without gaining any of the advantages shown so far, you can still sell for far less than you think your property’s worth and come out way ahead.

Think about what happens when you triple the value of what your equity controls. In SD you’re going up what, 0% a year lately? It’s more likely decreased in value, and you’re acutely aware of that fact. Imagine our guy with the SD duplex, selling for $600,000 — ending up with nearly $1.5 Million in property. At only 3.5% appreciation the first year of ownership, he’ll have made more than $52,000 in increased value. Surveys show that beats 0% on $600,000 11 times outa 10.

Furthermore, they’re now in a much more flexible position, as instead of one property, they now have six. They’re all new. Their tax shelter has nearly quadrupled. Their capital growth rate has almost shot off the chart.

Oh, and by the way? Their yearly after tax cash flow has gone from about $5,000 to $15,000.

Not exchanging out of areas like California, Arizona, the northwest, and almost the entire midwest, makes no sense.

This is the kinda market where selling for a so called loss is actually the most profitable thing you could do. Really. Moving your equity, when it’s (And therefore, you too.) essentially mired in quicksand, puts your Purposeful Plan back into the game. Until you, as a real estate investor, realize this, your Plan will remain on hold. (stuck?) Meanwhile, your life isn’t on hold, and more importantly, well — tick tock. Another year, another birthday.

Time stops for nobody.

Don’t be captive to the whims of the market. Instead, turn the market into your profit center. Learn how to win by selling for what you think is a loss.

In this kind of a market, you can truly lose your way into a far superior position.

Try it, you’ll like it. Be dumb like a fox.

Related posts:

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2. “My 4% Will Beat Your 10% Any Day – Stocks vs Real Estate “
3. 10% Down For Small Income Properties – Dumb Like A Fox?
4. 10 Ways Real Estate Investors Can Ensure An Abundant Retirement
5. San Diego Real Estate Investors — Some Reasons to Invest Out of State — Try Texas