Posted by: docktohome | January 9, 2011

The Phoenix-Reno Exchange

In October of last year I attended an exchange conference in Las Vegas that was a combination of education and marketing.  The conference was put on by a group called the National Council of Exchangors.  My mentor had attended one of their conferences in early 2010 and was so stoked about it that when the October event was scheduled he highly encouraged I attend.

The conference offered a two-day education session which covered some of the basics of exchanges.  For those not familiar with real estate exchanges it is basically the trading of properties or other valuables between two or more parties.  Although this isn’t currently a common investment strategy it is definitely a profitable and innovative strategy to help people achieve desirable results in real estate.  Following the two days education were three days of marketing. 

The marketing session was for NCE members only and to be a NCE member you are required to be licensed.  I am not yet licensed but my mentor is so he was able to attend.  At the marketing session agents and brokers bring packages of property which included all types of real estate; residential, commercial, retail, mobile home parks, and land.  Each individual is allowed to bring a certain number of packages to speak about to the group.  When presenting the packages the individual states what they have, what they want, the owners level of motivation, must takes (things that must be taken with the package), and can-adds.  You are allotted five minutes to present this information to the group and in the five minutes anyone who is interested in the package being presented will state their interest.  This is usually done by calling out your designated identification number. 

Jim, my mentor, had brought a Phoenix condo which he was to present at the marketing session.  This condo was a 1bd/2ba with a Net Operating Income of approximately $2,600.  Our goal was to use this condo to move into a multi-family opportunity and take on additional debt to cover the difference in values.  This condo was acquired for $18k and after repairs the total investment was $22k.  When presenting this property at the marketing session we put it at the value of $50k and received almost a dozen offers from interested parties.

While at the marketing session there were also properties of interest to us for which Jim put in mini offers.  There were two properties in particular that were appealing and that was a 12-plex in Galveston, Texas and a 10 unit building in Reno, Nevada.  After quite a bit of communication between ourselves and the broker  representing the 10 units in Reno as well as an additional meeting at another conference, we were starting to work out a deal.  To make the deal more appealing for the owner of the 10 units we were able to offer a second Phoenix condo also valued at $50k, making our total offer two Phoenix condo’s at the value of $100k.  The owner of the 10 units in Reno had placed a value of $499k on the property of which was offering a NOI of $32,733.  Now the typical response to this scenario is, why would a person with an asset valued of $499k with a NOI of $33k want to trade properties for two small Phoenix condo’s with a total NOI of $5,500???

Here’s why:

Benefits offered to Seller of Reno 10-units

  • Reduced tenant and property mgmt 10units down to 2units
  • Rental income of $5,500 per year
  • Passive income from a note taken by the buyer
  • Less work for equal money

Benefits to Us

  • More cash flow
  • Move into a larger property
  • Greater opportunity to grow GSI (Gross Scheduled Income)

We should be closing on this deal within the next month and are looking forward to acquiring the Reno property.  The way we were able to make all parties happy was by working with the term of the note and adjusting down the values of our properties.  For us cash flow was the most important however the owner of the Reno property wasn’t willing to take a cut in income just for reduced time and management.  The way this problem was solved was by reducing the total value of the condos from $100k down to $80k (still up significantly from total purchase price) and having the interest on the note increase on an annual basis. By starting with a low interest rate on the note we are able to get our desired cash flow initially and as it increases the note holder will be able to get his desired passive income as well. And that my friend is what I call a WIN-WIN.

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Responses

  1. Awesome posti Diana! This is an awesome example of how exchange is more beneficial than regular transactions! Are you going to be at the exchange meeting in Phoenix in February?

    • Yea thanks for reading! I don’t know if I will be there for the February meeting I am still in the process of getting my license.

  2. Diana, I’ve never heard of this, but I’m certainly impressed. You’ve almost doubled the value of your properties in this transaction, and leveraged them to gain financing on the property you really wanted. EXCELLENT WORK!

    Can I ask about how you structured the financing on the note. You mentioned the interest rate goes up, is this an interest only note, or are you paying down principal as well?

  3. Exchanges are certaintly fascinating, I am currently trying to put together a three-way exchange and it is so exciting watching the pieces come together (as with any deal..as you know!).

    As for the note terms they were constructed by the owner of the apartments broker. Like I mentioned in the post it was important that the owner not feel as though he was taking a large cut in cashflow. To make up for the downsizing in property the note terms are in his favor, especially as the years go by. The Note is amortized over 40yrs, due in 10. For the first year the interest will be 4% payments of interest only– 2-3yr interest of 5% payments of interest only– 4-10 yrs interest of 5.5% payments of principle and interest

    **One last add- This note is ‘walkable’ upon payee approval meaning we could move this note(debt) to another property if that was to be a benefit to us down the road!


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