Wednesday, October 15, 2008

Raising Cash from real estate in a tough economy

One of the best strategies for increasing options in a downturn is to take some of the downside off the table. In general, this is done by reducing debt, reducing operating cost, reducing management complexity. The end result is better financial ratios including leverage, and a business that is more focused on survival now, with less risk and less management concentration and investment directed towards the unpredictable future. Not exactly what you dream about doing, but rule #1 in strategy is to live and fight another day.

Real estate in most areas is almost totally locked up because the expectations of buyers and sellers don't yet match. Sellers may not be realistic about the true state of asset values and buyers are holding out for a screaming deal. Many buyers are finding it hard to raise cash to close and are asking for extensions, seller financing or contingent sales that take commercial properties off the market without offering sure cash in the end.

The auction format may be the best way to reconcile the issue.

An experienced real estate broker who specializes in the auction platform works to provide all the necessary due diligence information upfront and pre-qualify buyers so that an auction can take place in 6-8 weeks. The transaction should be non-contingent, include a large escrow deposit and close within 30 days. The platform works because the normal dynamic between buyer and seller in a down market is reversed. With a conventional real estate listing, buyers know tha thtey can out-wait the seller and prices will continue to fall. In an auction sale, a competent broker will have a set of interested buyers who know that the property will be off the market on a date certain. The pressure is now on the buyers. With a good property and a good broker, the outcome is likely to be a relatively quick sale with cash at the end. Banks and creditors love this result. It injects predictability, that rare commodity, into the process at the most critical time.

When I was CFO at Wilcox Farms (www.wilcoxfarms.com) we sold several major plant sites using a modified auction format and were successful beyond our hopes. Bill Vipond (bvipond@crossdockdev.com) did a great job. He is enjoying his 15 minutes of fame currently as the guy who sold Rosario resort the day after the market crash at a time when most were predicting a failed auction. (Disclosure: I work with Bill and he is a good friend)

Another good, Northwest real estate auction firm is NW Auctions (www.nwauctions.com)

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