Advancing portfolios minus cash

January 18, 2009
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Getting credit these days seems to be a lot like winning the lotto — it happens, but only to a select few. With financing and real estate values down, investors are looking for more creative means to salvage their real estate investments.

One way is through property exchange: trading one property for another rather than a traditional cash transaction.

Enter Gary Vandenberg, an associate broker at Real Estate Solutions 1031 Inc.

Vandenberg has been a real estate broker since 1975 and was introduced to a group called the Realtors Land Institute in 1981, which is when he developed his interest in property exchange.

“It’s not something that just comes naturally; it’s something you learn over time,” said Vandenberg. “We had a very active exchange group and I started learning exchanges in that group. I have since gone on to other national organizations and now I’m a member of the Society of Exchange Counselors.”

The Society of Exchange Counselors is an invitation-only national group that meets six times a year.

There are several reasons a property exchange might be preferable over a typical sale. Today’s down economy has created a growing interest in exchanges that Vandenberg believes will continue.

“I’ve been doing this since the early 1980s, and in the mid-`80s I saw a lot of exchanges take place. While this market is very different, it’s at least as rough. We fully expect a lot of activity,” he said.

“There’s a new need for exchanging because you work without lots of cash,” said Vandenberg. “Exchanges take place for a lot of different reasons; one reason is it just isn’t the right owner for that property.”

He gave an example: Suppose someone has a lot of debt on a strip mall that has lost a lot of tenants. The owner can’t afford to make the payments until he or she finds new tenants. Another investor might specialize in finding tenants. The owner of the strip center will exchange the property at a slightly lower value than a cash sale, but, in exchange, gets a property that will put him or her in a better position for the future. The owner saves their credit and gets some equity, and each party walks away happy — a main ingredient for an exchange.

“This is all about motivation. In exchanging, everyone has to benefit or transactions won’t happen. Fortunately, every person has different needs and that allows the exchange to take place,” he said. “People have to realize they’re not going to get a cash sale, which is what everyone wants but not everyone is getting. While they may not get exactly what they want, they’ll get something that betters their position.”

In his personal portfolio, Vandenberg conducted an exchange that resulted in approximately $5.5 million worth of property changing hands. The reason for the exchange was simple: He had some property that was a little out of his expertise and the other party was in the same predicament. The two parties saw that by switching properties, each would gain an investment in an area they knew well and, in this particular case, the properties allowed them to diversify in different markets and therefore spread risk.

Vandenberg suggested that when doing a property exchange, it is important to work with someone who is experienced, as there are more variables to consider than in a traditional cash transaction. For one thing, people become a complicated variable, he said.

“The property is what it is, but the people — that’s where the variables come in,” he said, stressing the need to understand an investor’s abilities. “If someone can sign on a $3 million mortgage, that’s good; if they can’t, you need to know that. There’s a lot more variables involved than just straight out selling real estate. I enjoy that. It’s like putting puzzles together for me.”

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