Whatever Happened to CREATIVITY In Real Estate Transactions?

[Don Konipol]

Back in the 1970s when I first entered the real estate profession (my fellow bankers were shocked that I left international banking to work as a COMMISSIONED commercial real estate salesperson!), creativity in deal making was a LOT more commonplace than it is now.  A large part of this was necessity; interest rates of 12% - 18% IF available doesn’t leave much room for profit UNLESS property can be transacted with leverage at a lower rate. I think I remember correctly that for a period of time 80% of real estate transactions involved some sort of seller financing or existing loan assumption. But beyond that we used many techniques that nowadays are either seldom used or totally misused by the undercapitalized, poorly educated and totally naive disciples of irresponsible “gurus”. 
Beside the “subject to” that’s recently become the subject of much debate we utilized  ”no interest short term owner financing”, the “2nd mortgage crank”, substitution of collateral, mortgage subordination, wrap loans, real estate “exchange” (not for tax reasons), sale - lease back, guaranteed rent payments, sale - buy back, land offered in lieu of down payment, zero coupon bonds as substitution of collateral, and a few others that escape my memory.  

I'd be interested in finding out what creative deals you've done either in the past or are currently involved in. I'll start with one that was only doable under the special circumstances of the late 1970s early 80s. I purchased a somewhat run down vacant auto repair facility with all equipment in tack for about $115,000 in 1981. After spending less than $5000 for repairs (this was 44 years ago) I leased it out to an auto repair shop owner for $3,000 per month. The purchase I made was $115k with $15k down and $100k owner financed note at 8.5% interest for 20 years. Now here's where it get CREATIVE and INTERESTING. I had negotiated a substitution of collateral clause in the purchase agreement, that stated I could substitute a note that (1) yielded the same or more and (2) carried the same or less risk. With interest rates in high double digits, I was easily able to locate corporate bonds of BBB rating with 20 years of payments left and 8-9% coupons. I purchase $100,000 face value of these bonds and because the current yield on these bonds was about 23%, I paid somewhere around $42,000. Then retired the $100k note by giving $100k in Corp bonds to the seller. So, I'm in the deal for $15k down payment, $5k repairs, and $42,000 for the bonds, or $62,000 all in. If the property is worth the $115k I paid , I have earned $53k in added equity. Better yet, I'm getting $3,000 monthly double net, so about $30k annual net income, about 50% annual ROI. Unfortunately, after holding this very profitable investment 9 years, I lost it in a divorce.

[Joe Villeneuve]

There's a reason why you don't as much (I see it more than others because that's the only deals I make...creative financing ones). It's because most people don't understand how money works.  They don't understand the math behind any type of financial formula, so they have no idea how to make adjustments to it that allow the deal to work in their favor.

I think a big part of this is the generation we live in/with, that is looking for instant gratification.  They look exclusively at the end result, with no regard of how that result was attained.  So, if there is a problem, or if there might be a better way to solve that problem, they don't see it, don't understand it when it's presented to them, and won't do that "creative" solution because of it. 

[Theresa Harris]

Quote from @Joe Villeneuve:

I think a big part of this is the generation we live in/with, that is looking for instant gratification.  They look exclusively at the end result, with no regard of how that result was attained.  So, if there is a problem, or if there might be a better way to solve that problem, they don't see it, don't understand it when it's presented to them, and won't do that "creative" solution because of it. 

I agree. For most the only answer is A or B and those answers would have been told to them before on social media.  Heaven forbid something unexpected happens.

[Joe Villeneuve]

Quote from @Theresa Harris:

Quote from @Joe Villeneuve:

I think a big part of this is the generation we live in/with, that is looking for instant gratification.  They look exclusively at the end result, with no regard of how that result was attained.  So, if there is a problem, or if there might be a better way to solve that problem, they don't see it, don't understand it when it's presented to them, and won't do that "creative" solution because of it. 

I agree. For most the only answer is A or B and those answers would have been told to them before on social media.  Heaven forbid something unexpected happens.

...and there is what I've been saying for years.  The Internet, social media, will repeat information.  There is very little actual knowledge that comes from the Internet.  Those that get their version of knowledge from the internet, do it because it is both quick and free.  They are not willing to spend any time learning, or any money to pay, for true knowledge. 
The information you get from the internet are pieces here and there, with no continuity between each piece.  It's great for filling in the blanks between different sources of knowledge, but terrible as a full source of knowledge.  When used exclusively for knowledge, all it does is generate more blanks.

[Vince Mayer]

@Don Konipol  "

"Unfortunately, after holding this very profitable investment 9 years, I lost it in a divorce."

Hmmmm. What was her ROI?

[V.G Jason]

People don't like to complicate things.  If you show someone how  seller financing works, the extra verbiage, etc., is too much sometimes for them. Likewise, the opposing force is agents these days are super, super pushy to where if you have them in the process they'll break anything down that isn't a linear or traditional, not necessarily easy, process.

People like everything seamless and transitional, almost a turnkey process. It's where that saying goes the money is in the work you don't want to do. I don't do much "creative" financing cause time is wasted dealing through gatekeepers/agents, I do my creativity usually by buying deep or making a market for someone needy.

[Jay Hinrichs]

walk down memory lane..  I brokered a townhouse development in the early 80s and we gave zero coupon bonds to the buyers as an incentive to buy.. and If I recall the bond held 30 years would mature and have enough that equaled the entire price of the home.  Cant remember how many we did as folks have a hard time thinking 30 years down the track..  sub 2 wraps were big.

Also participation mortgages were popular.  

[Chris Williams]

Quote from @Vince Mayer:

@Don Konipol  "

"Unfortunately, after holding this very profitable investment 9 years, I lost it in a divorce."

Hmmmm. What was her ROI?

 hahaha