Creation of Wealth - Convert Land Into Cash

You are a Real Estate Agent and you have a client, Mr. Able, who owns 320 acres of land which he leases out to a rancher who raised cattle and uses the land for grazing. 40 acres of the land is used to raise alfalfa. Mr. Able could sell the land; however, he feels confident the land will greatly increase in value within the next 5 years because of it's proximity to a major Freeway Interchange. Mr. Able would like to obtain improved property with which he could obtain some tax shelter and the opportunity for additional income. Mr. Able has told you that he would be willing to take property that required some "fixing-up".

After some research you locate a 32 Unit Apartment Complex which does need some "fixing up". It currently is only about 50% occupied. The property is in an upper blue collar area near an elementary school. The problem is that the owner who is a widow, Mrs. Calhoon, has little knowledge or desire to solve her problem. She has hired different managers; none of whom have been able to turn things around.

After inspecting the property Mr. Able is confident that he can do the fixing-up and turn the property around. However, he is going to need the cash he has available to buy the materials and labor to do the fixing.

In counseling with Mrs. Calhoon we discover that she needs Long Term income more than she needs a lot of cash. She has some cash from her husband's Life Insurance. He has managed the Apartments prior to his demise. So let's analyze the situation:

1. Mr. Able's Land
Owner's Value - $480,000
Loans - $0
Equity - $480,000

2. Mrs. Calhoon's Land
Owner's Value - $384,000
Loans - $0
Equity - $384,000

Note: Market Comparisons indicate that the value of the Apartments, after rehab and leased up, should be approximately $586,000.

After some negotiating the following transaction was agreed upon -

Mr. Able will purchase the Apartments by creating a First Mortgage to Mrs. Calhoon for $200,000 secured by his land. He will also give her a First Mortgage on the Apartments for $184,000. This will provide a substantial monthly income to Mrs. Calhoon and will get her out of the problem with the Apartments. Mr. Able now has the tax shelter he is looking for and once the Apartments are upgraded and leased out they will provide more than enough income to pay Mrs. Calhoon's notes.

You as the Real Estate Agent should receive a nice fee from Mr. Able, your client.

These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.

Real Estate Consultant and Coach. 40 years in Real Estate, and 15 years member of the "Society of Exchange Counselors". Land Developer, Home Builder & Rehabber, Mobile Home Dealer & Rehabber. Owned Apartments, Office Buildings, Strip Center, Ranches, and Land. Also owned many Seller-Financed homes, as well as bought and sold $200 million + of Seller-Financed paper. Visit my website http://RealEstateJack.net/