When to Hold ‘em – When to Fold ‘em
By
Grant Jones
There are three things in cards and loan collateral/property management that must
never be ignored if you are to avoid the pitfalls of holding on to, or getting rid
of, cards or properties at the wrong time: market value [what are my [or their]
cards, or assets, worth – now and later?], break even projection [what will it cost
me [or them]to play the hand profitably?], and burn rate [can one afford to stay in
the game?]. Keeping track of these essentials, will make your decisions about when
to hold [or accept as loan collateral], or sell off, assets, more predictable, and,
therefore, less fraught with anxiety. In other words, you’ll keep all your “play”
within the envelope of profitability, even when you lose a few hands.
MARKET VALUE: Market value fluctuates, depending on lots of things, including time,
and what the other guy has. It’s true that many properties can be made profitable
with enough injections of time, energy, and other resources. It’s also true that
properties can become “black holes”, sucking up everything you throw at them. The key
is to know, really know, what you’ve got, and what it’s worth – when to hold your
ground, and when to cut your losses.
The time to evaluate whether the property is worth more resources, is before you
become the owner. In the equity lending business, it’s before you let your clients
get further in over their heads with your money. Remember, your “hard money” client
drained THEIR resources on the project before they came to you. Unless you impose
it, nothing will change but time. Unless more than money is brought into the
equation, your client is not going to be any smarter after the cash infusion than
before. Unless you love the agony of defeat more than the thrill of victory, look
before you lend. So, the first rule in playing cards and buying an interest in
property is: know what your “stuff” is worth to the savvy cash buyer BEFORE you up
the ante.
BREAK EVEN PROJECTION: Now, how do you “break even” with a bad property, or a good
one in a bad location. Some things can be changed, like management and advertising.
Some things can’t, like location or timing. Let’s say you’re stuck with a bad hand,
but the raises [loans and overhead] have been modest, you’ve had a winning streak,
and you’re tempted to “stay in” just to see the next turn of the cards. When it comes
to property, that kind of curiosity can be costly, and occasionally deadly. Treat
every deal seriously, evaluate your hand carefully, and, over time, the odds will
reward you. Don’t be impulsive, and don’t acquire an ego investment.
Even after all that, there are the problematic costs: training, maintenance, theft,
more government fees and assessments, and stuff that just happens. Break even is
when you become marginally better off for being in business, than you were before;
therefore, making an accurate assessment of how much, and how long it’s going to
take, is crucial. The best measure of whether the numbers being used to determine
“break-even” are accurate, is to apply them to the property in question. If you
can’t use a linear extension of the track record to reach profitability on time, be
very conservative with your assumptions. The second rule to adhere to is: before
you send good money after bad, make a realistic budget for likely completion,
maintenance, and marketing costs to bring the property to profitability if your
client [or your cards] do not live up to expectations.
BURN RATE: Burn rate is the rate at which you [or they] spend more than is taken in.
When you’ve spent your last dime, and can’t borrow more, you’re finished – no matter
how good the property is otherwise. On a practical level, then, one must consider
whether one can “stay in business” long enough to “turn the corner”, and whether it’s
worth it.
People who didn’t think about that eventuality either sell at a loss, or become
equity funding clients. Equity funding brokers who don’t think far enough ahead
either, take a “write off” or plow more resources into the project to “turn it
around”. Well and good if the project just needed a little more time, or a push;
but, what if it was just a good looking “black hole” to begin with, or the time-line
to break-even is so long that we need an actuarial table? The time to evaluate these
things is before, not after [and yes, that means some impatient souls will go
elsewhere, but console yourself, they won’t go with your money, and there will always
be another deal].
To avoid the specter of having to sell off prior to reaching maximum profitability
[because you’ve run out of ideas, or money, or both], do a “worst case” projection of
your balance sheet BEFORE you commit your funds, and see if it still makes sense.
No matter how hard you squeeze your cards, they don’t change value. The third
essential is to keep one eye on the rate of closure to meet the budgetary
expectations of “break-even”, and the other on the rate of “burn”. If the burn rate
exceeds the acceptable closure rate after a trial of, say 6 months, seriously
consider cutting your losses.
One of the reasons professionals usually win at whatever they do, is because they
come to the table prepared, they pay attention to the details, including the players,
and they’ve learned what works, and what doesn’t. Too often, as equity funding
brokers, we take the tack that all we have to look at is the appraisal and balance
sheet. In some environments, almost anything works, but times are getting tighter;
bankruptcies, repossessions, and foreclosures are on the rise, and the value of a
failed business in a depressed market is a lot less than when everything and
everybody was in an expansive mood. Unless you have “a card or two up your sleeve”,
don’t buck the odds by discounting the basics.
Other factors: Don’t get emotional, do the math, consider tax benees, sell off
gradually, consider fundamental shifts, and forget what you paid [be objective from
point to point].
* * *
Grant Jones is Director of Property Management with Equity Funding, a Division of
Centrum Financial Services, Inc., in Seattle. He is an attorney, in addition to
holding professional credentials in a broad range of fields, and has authored many
articles on property management issues. He can be reached for comment at
[206]269-0628, or gjones@centrumfinancial.com. The
author retains his copyrights,
but license is granted for limited personal use copying.
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