Investing strategy of highest and best use

Seasoned investors love the thrill and lucrative returns of buying property and converting that property to its highest and best use. This is perhaps some of the best most creative ways to make wealth in real estate.

Seriously, Landfill is a lucrative investment?

Think of a useless piece of land. Land that often floods in the outskirts of a city, no one wants the land and the value therefore is almost worthless. Someone buys the property by convincing the county to allow for zoning of a landfill. The landfill will create a win for the city by filling in the swamp style land and will also provide a place for the city to bring its garbage, additionally it will create jobs. Sold the County is on board and the county now has a landfill.

The owners now create income from multiple sources. Each sanitation truck that dumps there pays a fee to do so. Often landfills have rock quarries \ that can create a revenue stream by processing the gravel and milling it into stones and sand and selling the commodities. This creates a larger hole in the ground which allows for more sanitation dumps which generates more revenue. Over a course of time it collects much revenue and as the land is filled and capped off the land has more value and can eventually be sold off for much higher prices. Did you know that many real estate developments are built on old landfills? When I grew up as a kid I lived in such new housing development that was years early a landfill

How I made $286 k in 7 months from a Highest and best use investment

Perhaps one of my most passionate investment projects was an investment which included 4 seasoned investment strategies.

1.      To buy a property that was Not for Sale

2.      To convince the seller who was not interested in selling to sell to me with partial owner financing

3.      To convince this un interested seller to take a moratorium on my payments to him for one year

4.      To convert this current 4 unit apartment building into 4 individual condo units

I must admit even typing this out makes me think back on this and wandering why I ever thought I could pull this off. Actually it was fairly simple. It was not easy but it was a simple concept.  Start with (SIBCUS) See it Big, Keep it simple. Buy a property, convert it to its highest and best use, be create in the acquisition process was seeing it big. Created a (WIIFM) What is in it for me) to the seller which will entice him to want to sell a property to me with seller financing and delay the payments for 1 year was keeping it simple.

When you create a (wiifm) for the other party it is amazing what you can accomplish. As an investor you want to sell your offer to the other party using the wiifm principle. When they see a big win for them they will often be on board.

Here is how sold the seller on the deal

The property was owned by a client of mine. I was selling off all his duplexes one by one and he was purchasing larger 20 and 30 unit buildings to replace each of these sales. I was eagerly waiting to get to the day he said “O.K. Larry lets sell the 4 unit”. That day never seem to come so I asked him if he was going to be selling it as well. His words surprised me. He said. “Oh no I will never sell that one, I will die with that property. It was my first investment, it is paid for and making me good money.”

Well that is not what I wanted to hear. I had plans to buy that property and convert it to a 4 unit. This condo conversion is something I wanted to try as I have been reading about them but up to this point have not seen it done in our area. I was however convinced it would be very lucrative for this particular property. This property was a 4 unit building surrounded by newer condos and the area was a upper middle class condo area.

After about 4 months of prodding him he finally asked why I was so interested in that particular property. So I shared with him my objectives. He chuckled and was doubtful it could be done or would be lucrative. I persisted and he finally said make me an offer.

Yay, my foot was in the door. The only problem is I had recently made another investment and was cash poor so how could I afford to buy it now that he finally showed interest in selling it

Knowing I was cash poor but wanted the property and having done my diligence and believed I could do very well with the purchase I had to make him a (WIIFM offer)

The Wiffm offer

1.      I gave him $364,000 - $14,000 over appraised value his benefit

2.      I put only $16,000 cash into the deal which was just over 5% my benefit

3.      I had him do seller financing on 15% so I could get a simple 80% LTV loan on the property My win

4.      He gave me a one year moratorium (delay in payment to him) on his 15% seller financing portion. My win.

5.      While I did not make payments to him for one year the interest accrued during this time. His win.

6.      This delay in payment allowed him to delay his capital gains tax consequence. His win

You can easily see that creating a win win situation and showing a seller their Wiifm allows you to make some great real estate deals.

The Deal

The purchase was a four unit apartment building in the suburbs of Minneapolis Minnesota. I paid $364,000 for the 4 unit. To put it to its highest and best use, the next month I hired an architect to give me an architect’s opinion on the property. I hired a surveyor to survey the property and I hired an attorney to draft the paper work. This was all done to convert it from an apartment building to 4 individual condo units, complete with declarations, bylaws and Condo docs.

So the purchase price was $364k (including all acquisition costs). I spent roughly $7,500 to hire my surveyor, attorney and architect. By separating these 4 units into individual condo units I was able to increase the value considerably. This was the highest and best use of the property. The process took about 4 months. During this time I had the property rented out and was enjoying a 9 percent return on my money. I did not purchase it however for the 9 percent return. Not a bad return for the interm.

After a 7 month time frame, I sold these units off for $175,000 apiece. $175,000 times the 4 units equals $700,000.

The increase in property value was $336,000 less the $7,500 in professional fees to convert to condos and less another 6% or ($42,000) in liquidation cost, meaning that I manufactured $286,000 in 7 months’ time. This $286,000 was much more important to me than the 9% return I was getting on my annual returns. This money represents manufactured growth and it allowed me to further leverage more investments.

As I sold this property the seller received his 15% seller financing money plus interest after only 7 months. As we were in a new tax year his tax need was accomplished. He also received a $14,000 premium on the sale and did not have to pay any realtor fees to sell the property. All Wins for the seller.

Win-Win

Creating win win situations is what real estate investing as all about. Focus on doing this everyday and you will be known as the go to guy in real estate. You will find that deals will come find you as you exercise this creativity. 

These stories are not intended to impress you but rather to get you thinking of possibilities on how you too can manufacture growth. I have hundreds of stories like these and love to work them. If you have opportunities run with these kinds of advanced real estate investing techniques, do your diligence and be prepared to capitalize big.

Happy Investing