Bill Roberts - "Baby Boomer" Retirement Planning

Making Money In This Market by Bill Roberts

Making money in this market by increasing the "use" or utility of a given property is a good strategy in today's market. There are many under-utilized properties out there from vacant lots to houses with functional obsolescence.

This is different from "rehabbing" because rehabbers generally just want to make the property look better, but they don't actually increase the use or utility.

Use Change

The principle that we are talking about here is HIGHEST AND BEST USE. To determine highest and best use takes a little bit of common sense combined with vision and imagination.

In a neighborhood of three bedroom, two bath homes a two bedroom one bath home is NOT at its highest and best use.

Add Value

A rehabber might want to paint and install new carpet, but that isn't going to improve this home's utility. But if you ADD a bedroom and a bathroom in addition to whatever cosmetic makeovers you do, you will be adding actual value to the property.

Value per square foot is fairly consistent within an area. A 1000 square foot house might be worth $250,000 while a 1500 square foot house is worth $375,000. In this instance the houses are worth $250 per square foot.

Now the opportunity lies in bringing the smaller house into conformity with the neighborhood. Adding 500 square feet to the house at a cost of $80 to $100 per square foot can yield a benefit of an increase in value of $250 per square foot. In the simplest terms, you have just "created" $75,000 to $85,000 additional value if everything else remains the same (in economics we call this "assuming ceteris paribus"). Naturally, everything doesn't remain the same, but the concept still works. You may also have to "rehab" the rest of the house. Your return on investment will not be the same for the additional square footage as for the rehab, but you might not be able to sell the house if you don't do the rehab also.

Buy Right

You need to make sure you buy the house right. You don't need to "steal" it, but you sure don't want to over pay as well. You can make a good return on your time, effort, and investment by picking a good candidate for use change while at the same time paying full market value for the property in its current use.

More Infill Opportunities

Another example of a candidate for use change is a house on a large lot where the lot could be split to yield another house lot. Generally, the large lot will sell at a premium over smaller lots, but not for the full value of a vacant buildable lot.

As a general rule a vacant buildable lot is worth about 20% of the value of a house in the same area, so a lot in an area of $500,000 houses is worth approximately $100,000. If the house with the large lot is priced $25,000 more than houses on normal sized lots, this might be a candidate for a lot split.

As an example, our candidate for a lot split is a two thousand square foot house in a neighborhood of other two thousand square foot houses. They have an apparent value of $500,000 or $250 per square foot. The seller wants $525,000 for his house on the big lot.

We buy the house for the asking price (subject to local zoning and land use approval of the lot split).

So we make $150,000 for our efforts on this particular use change. However, we could opt to make a little less by selling the new lot to a builder for $100,000, but we might end up just trading dollars when we "dispose" of the original house. Sometimes, it is a matter of doing it all or doing nothing.

Still more opportunities exist for use change. Maybe the house is in an area where some apartments exist. Building a couple units on the back or side of our house might be a suitable use change for the neighborhood.

MLS Searches

These opportunities can be located with simple MLS searches utilizing "keywords" such as:

• Small house
• Large lot
• Two APNs
• Splittable
• Large yard
• Fruit trees
• Room for horses
• Estate

In addition to the normal searches for 1 or 2 bedroom houses in an area of mostly 3 and 4 bedroom houses.

There are lots of unimaginative rehabbers looking for fixers, but if you want to actually do use changes you will find a lot less competition. Good luck.

Getting Started

If you are interested in participating in use change but you are a little hesitant to jump right in you may want to find an investment group which specializes in this process.

Contact Bill Roberts (619) 244.4610 for more information about the opportunities in use change.

How To Sell A Business by Bill Roberts

As a Business Opportunity Broker, I found it useful to write a book on “How To Buy A Business.” This article is a distillation of some of the main points of that process as affects a broker selling businesses.

The first thing a Business Broker needs to do is interview the seller. Keep in mind that 90% of businesses put on the market DO NOT SELL.

The seller needs to be motivated and reasonable. Find out his motivation. Keep digging until you are sure you know why he wants to sell. Most businesses put on the market are losing money, or are about to.

What is the prognosis for the neighborhood? What about competition? Find out about key personnel. If somebody is leaving or has left and took a big chunk of the business with them you know why he is selling.

Don't accept as a reason that the owner is tired and needs a break. Of course he's tired. Nothing wears you down faster than a failing business.

After you are satisfied that you know why he is selling, you can move on to discussing the business. All sellers lie about how much business they are doing. I suggest taking an oblique angle on them.

Ask how much business they generally do on Wednesday. Repeat this for the other days of the week. Determine which day is their busiest day. Find out their slowest day.

The Pro-Forma

You are going to construct a pro-forma financial statement.

You are going to make up the numbers. You have to be a detective. Start by constructing a typical week, then a typical month. Because ALL sellers lie, these numbers will be better than you could get from the seller.

Whatever you do, don’t accept the seller’s P&L. If you don’t know the actual numbers, you can honestly say you don’t know. You absolutely don’t want to be put in a position of representing the business to be in a certain condition, because if the buyer finds it to be otherwise it is you he is going to come after for misrepresentation.

Tell the buyer you don’t know, but this is what you think it might be. Make him make his decision based on his own DUE DILIGENCE.

Price The Business

Now you have to price the business. That's a subject too big to adequately discuss here. However I will give you some basic guidelines. Small businesses doing less than $2,000,000 in annual sales are generally worth about two times the NET PROFIT plus the value of fixtures, equipment, and inventory.

Maybe the business has NO net profit but it has a good location, or it has an exclusive product, or the current management has run it down, or some other reason that it deserves special consideration when it comes to pricing. Don't just accept a price that the owner says he wants.

Over priced businesses don't sell (at any price). You are not serving your client by taking an over-priced listing.

The Listing

Write your listing for at least six months, but try to get a year. It takes time to sell a business.

You should only accept an EXCLUSIVE RIGHT TO SELL listing. Open listings and exclusive agency agreements lead to NO COMMISSION. Protect yourself.

When you get a “nibble” on this business, it will be your job to “qualify” the prospective buyer before you let him know anything about the business including its name or address. A lot of people who have no intention or ability to buy a business want to know everything about your listing. You owe it to your client (the seller) to tell them nothing.

If you are serious about selling businesses, you need to know that it is a lot more work and takes more “skill” than selling general real estate, and generally pays less. You do it because you love it and you are good at it. No other reason!

For help in buying or selling a business, contact Bill Roberts (619) 244-4610.