Investing in real estate can be challenging even in the best of times. Investing in today’s climate is a real test!

Needless to say the biggest hurdle today is the availability, cost and terms of financing. As a result of the subprime crisis, lenders today are nervous about all forms of real estate even though the default rates on commercial properties are far below levels in the residential world. As a banker-friend once told me, bankers are there when you don’t need them and never there when you do. In other words, bankers tend to overreact to both good and bad times and, as a result of the hits they are currently experiencing with residential loans, they are cutting back on commercial lending.

But the bankers are not totally at fault. Investors all over the world are now skittish about mortgage securities (investments in packages of mortgages). Investors have been hurt by U.S. residential problems and so are not interested in mortgage securities backed by commercial properties. OK, so we have a liquidity crisis. What to do?

Well those of us who lived through the seventies and eighties remember when interest rates were much higher than they are today. As a result of high rates, we learned to utilize techniques for acquiring property without accessing traditional lending channels. These techniques include purchase money debt, wrap-around mortgages, land installment contracts and long-term leases – all of which are mechanisms for conveying property without the need for traditional debt sources.

There is another approach that real estate investors need to explore: purchasing the stock or membership units in the entity that controls the real estate. In this way, existing debt can sometimes be left in place for not all mortgages have “change of control” provisions. And, even when there is this language, the creative buyer should have it reviewed by an attorney for the specific language may not apply to the contemplated transaction.

The goal is to consider another means for purchasing without resource to traditional lenders. There are other advantages of buying an entity: e.g. most states have significant conveyance taxes which are payable on the transfer of real estate but not when the entity owner of the real estate changes hands. There are also risks: buying an entity raises concerns about undisclosed liabilities.

The key is to understand all opportunities for buying without the need for traditional debt. If one investor can consummate a transaction that others cannot, he or she has an important edge and one that can at times translate into an excellent deal. To be successful in this liquidity-challenged environment, the creative buyer must consider all means for purchasing property without traditional financing. return to front