The Stairway of Benefits

By itself, cash has no value. A challenging assumption at first.

There is an argument that cash is only a medium of barter with no intrinsic value of its own. It is a stepping stone to ultimately get what we need or want. Nothing else.

As an example, we may trade in our old car, plus add cash, to drive away with the new model. The exchange comes from both cash equity and old-vehicle equity. Or we drop by the convenience store and give cash for a quart of milk. Cash is merely the exchange mechanism that gets us the milk we need.

In both cases, cash is of little value in itself, except that it helps get us to what we actually wish for. People and corporations want something of direct use or benefit, for which cash can be offered.

Therefore, if we know the ultimate goal and motivation of the party disposing of or acquiring a property, we can multiply the opportunities to complete the transaction well beyond seeking only a cash deal. Cash is almost always an intermediate step toward the benefits actually required or wanted.

A ladder of benefits

For discussion purposes, below is a proposed ladder of real estate and personal property equities, from most desirable to least desirable.

The order could be debated. Some would put good quality mortgages up at number one or two instead of down at five. Different preferences prevail.

Why this order

• Number one could quickly be sold, often for more than full price.
• Houses and condominiums can usually be financed for 70 to 90 percent of value and traditionally sell quickly.
• Income property can usually be financed for 60 to 70 percent of value and produces obvious cash flow.
• Mortgages can be hypothecated or sold at a discount, depending on quality.
• A buyer can usually be found for developable land.
• Personal property (boats, cars) can be fun.
• Free-and-clear non-productive land does nothing for the new owner except improve the financial statement, while negative-cash-flow property actively hurts.

In theory, it should be easy to convince yourself to move up or down the ladder.

Moving down can pay

Creative structuring makes it worthwhile for a higher rung to move down. A few ways:

• Find a user. A developer holding cash-flow income property might happily take negative-cash-flow land if he can develop it.
• Go passive. An owner tired of managing income property might take good paper instead.
• Change the use. Solving the problem that makes a property negative can move it several rungs up the ladder, making it desirable to everyone in between.
• Make the property more attractive. Take off the loans or offset them. Negative-cash-flow land and income property can become break-even or better.
• Sweeten. Cold-storage land is hard to swallow by itself. Adding sufficient cash or paper brings a completely different taste. Less desirable properties advance in acceptability when sweetened.
• Solve the other party's problem. Willingness to take on and solve problems attached to a more desirable property often makes the transaction work: finding users for vacant space, refinancing an over-encumbered property, working out title problems, developing out part of a site, or carrying the payments while a tenant is found.

Where there are challenges, there are solutions. To be effective, we must be both creative and practical.

Remember: there is no bad real estate, only inappropriate or untimely ownership.