How to Make Money on the Losers

Most folks lean towards thinking that hard money lenders are “sharks” and deserve whatever they don’t get. That attitude is left over from the bad ol’ loan sharking days of the Mafia, when people got their legs broken for late payment, and cement boots for non-payment. Those of us who happily work with straight-up lenders of last [or almost last] resort, and funders of “golden opportunities”, wince at that attitude, but understand it, and I’ve been around long enough to know the difference. Life is too short, and the consequences too long, to “short” anybody, but, like it or not, we loan money, and hold collateral. Sometimes we get “shorted” on the collateral. I don’t even know of a hard money lender who has never had someone default on a loan. We don’t like it, and we’re careful about type and amounts of collateral, but it happens. This article is a kind of “get well card” to those lenders who have done OK on the lending side, but find themselves awash in a sea of marginal foreclosed properties, and aren’t sure what to do, or when to do it. Foreclosed properties come in all varieties. I’ve managed marinas, apartments, gas stations, golf courses, and office buildings [just to hit the “highlites”], as well as vacant, developing, and developed land. Return readers will remember an earlier article dealing with when to work with a property, and when to get rid of it. This piece is dedicated to getting you into the black if possible, or minimizing the red-ink if not. We’ll see. [b]Know what you don’t know:[/b] If prior experience had been necessary to make foreclosed properties viable, many would have died. That’s not to say that I’ve survived every blood-bath with a secret formula, no indeed, but it helps that my management background includes being an attorney, a general contractor, an appraiser, a broker, a boat-builder, a mechanic, and that I see solution/problem patterns better than most. I didn’t acquire all that overnight. You bring skills and experience to the table too, but may not have enough to determine, with confidence, what to do with your latest “acquisition”. So, the first rule is: when the stakes warrant it, don’t save money by relying on your own instincts. Be candid about your ignorance and call for help. This article is not a panacea, but it will cover the basics. [b]Inventory assets:[/b] To start with, you need to know, with certainty, what you have. A legal description is only an address, and a Title Policy, an address guarantee. A visual, on the ground, survey is often “worth the trip”. I’m reminded of an out-of-state development that, according to offers, wasn’t worth much because it was next to a landfill, and “all that methane”. When reading “between the lines”, it helps to have not been born yesterday. Therefore, it came as no surprise to me to find that the landfill was just barely visible, had long been closed, and the methane was being routinely, and odorlessly, burned. Had we relied on “the locals” with an agenda, and other second-hand information, we’d have sold for a great deal less than we did. Either do your own research carefully, or get someone more qualified to do it for you. [b]Insure your interest:[/b] Guard your assets. Take pictures and send them to your insurance broker. Tell him, or her, what you have in mind. Be candid about liability issues, and take their advice. If you’ve previously done a good job selecting your broker, they will make sure you get the best coverage and price. If you haven’t, you’ll “get cooked” here too. When I joined Equity Funding, one of the first things I did was cut insurance costs by two-thirds, and Oh how the agents [all “nice guys”] screamed. Price shopping is not vulgar, and the cost savings are not “chump-change”. [b]Clean it up:[/b] Sure, cleaning costs money, but do you think a buyer will pay you more because its value is hidden under the trash? The most usual assumption of the buyer is that it would have been cleaned up, but you either thought it wasn’t worth it, or that the litter/dirt is hiding something worse. Either way, cleaning the property is a cheap investment, but repair and remodel only if the market will reward you [either by a quicker sale, or a mark-up on your additional costs]. Donald Trump recently said that anyone who ignores details [like how something looks] is a loser. Believe it. [b]Survey marketing options:[/b] Whether the property has been improved or not, do a complete market survey, including a Phase I Environmental survey, if indicated. I’ve lost track of the times I’ve been told one thing, and later found out I was told wrong. Check with the local governmental jurisdictions, starting with Planning and Development and the Assessor’s Offices. The county appraiser may also have something tucked in their file. Find out what IS [and IS NOT], and deal with it. Improved property has more than one use, depending on zoning and the market: find out what they are, and the value of each alternative. Bundle-break if you can. The value of the parts sold piece-meal is often more than the sum of the parts. Determine the market, and sell “turn-key”, or “bare to the walls”. [b]Use your imagination:[/b] Unimproved property is also multi-dimensional: trees, rocks, and gravel have value, whatever its development potential might be. Development itself has time-lines, and time is money. Don’t ignore your available assets in haste to unload your “unwelcome step-child”. In one case, we turned a $5,000/acre wetland desired by the state into an interdependent area of the main parcel [justifying an appraisal over three times higher] simply by filing a dozen different easements and assignments saying so. The property didn’t change, but how it was viewed certainly did. [b]Inventory assets:[/b] While none of us would lose sleep over a missing teacup in a foreclosed restaurant, keep in mind that every stampede begins with “1”. Would you be more interested if a $5000 ice machine disappeared? Inventories of some properties are often messy, but don’t forego them. Nor is it all about theft. A failed hospital I surveyed last year had over 500 electro/mechanical beds. The new owners were astounded to learn that the beds alone represented over $1Million on the used market. The rest of the equipment had been similarly undervalued, with the consequence that the personal property left behind now had the potential to pay for the real property. Don’t assume that the “stuff” that’s left behind is junk. It’s yours, and you have a right to extract it’s value. [b]Find a good local broker:[/b] Find 10 of them. Talk to, and meet with, as many as you can. You’ll never have a more interested gaggle of brokers vying to impress you, as before you give one of them an exclusive – and don’t be in a hurry to do it either. Chances are all of them will look under a lot of rocks looking for a client or an undiscovered opportunity to impress you with. All you have to do is let them know their big fat commission is safe. [b]Operate a business only as a last resort:[/b] The former owners may not know as much as you, but it’s likely they “tried everything” before letting you have it. Get a professional opinion from a successful entrepreneur in the field before you try your hand. If you DO do it, don’t do it just because you think the last guy was stupid. Sometimes it’s best to just clean up the property and sell it as a “dream project”; but, occasionally, with the infusion of more capitol, time, talent, and a little luck, the effort can be a gold-mine. One such experience was with a failed motel in a non-growth area. Two years later, a long awaited federal Super-fund project finally got underway and the value then tripled. That’s not all, but space is another limited resource with which we must contend. However, if you impress the foregoing on your property manager, and they actually use it [most will find a reason not to], you won’t have to write off their salary as an expense . . . it’ll be an investment. It’s a sad truth, but the money you saved hiring inexperienced property managers has cost you dearly. * * * Grant Jones is Director of the Property and Projects Division with Equity Funding, Centrum Financial Services, Inc., which is an old-line nationwide hard money lender doing business under the name of Equity Funding [equity-funding.com]. 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.