A 1950 industrial age approach to business has gone by the wayside. Businesses that have stayed in the “Build it, Sell it, Repeat” business model are not going to make it. Blockbuster is a dying business model because they own it, rent it, repeat has led the way for a better more convenient model to surpass them via the internet. Blockbuster is trying to integrate the model with new technology but you have to ask yourself if Netflix’s cache, ease of use and internet dominance will drive the last nail in the Blockbuster coffin. Diversification with partners at every level of business creates a mosaic of business opportunities that rise and fall depending on the changing marketplace. Partnerships allow businesses to make the adjustments quicker by using the resources of a more specialized party to reduce the learning curve on a required innovation. Partnerships are the insurance for business in the 21st century.AH 

You have heard of the phrase other people’s money but what about other people’s equity. Money can be hard to obtain from sellers or lenders. Equity is money that has not been transferred into cash. Sellers are more likely to give up equity for cash because equity is an intangible for many distressed sellers. The key to obtaining OPE is speed. You need to be able to move quickly to fill the Seller’s need for liquidity. Here is a technique in a slowing or downtrending market that I have used in the past which might yield a powerful win/win for both parties in a transaction.You identify a house with substantial equity but very little prospects of selling at the current asking price. You approach the Seller to discuss the possibility of a joint venture. You take over the payments and move the seller out and become a co-owner on the deed. You tell the Seller that you will give the seller a portion of the equity now and take over the payments until the property sells. The Seller agrees to give up a percentage of the equity to you for taking over the payments and the remainder of the equity is divided 50/50. For example: House is worth 250,000 but the market selling time is 12 months. Equity is 100,000 and the house payment is 1400.00 PITI per month ($16,800 yearly). You agree to give the seller $10,000 and take over the house payments. You have them agree that you will control the selling of the house. Seller agrees to divide the equity as follows:Buyer receives the 10,000 plus all payments of $16,800 back at closing.Seller and Buyer divide remaining equity 50/50.  You make the decision to drop the price $30,000 to sell the property quickly thus eliminating $8,400 in payments which gets added to the overall equity for the Buyer and Seller to divide. After commissions (if you use an agent) and costs your net equity being divided is as follows:Sales Price 220,000 less $15000 (costs and commissions), less $18,400 ($10,000 to Seller and $8,400 payments) to Investor less payoff of 150,000 equals net equity of $36,600 divided 50/50.$18,400 cash back to you as Buyer plus $18,300 in equity equals total of $36,700. That is a 99% rate of return on your investment in 6 months (profit of $18,300 divided by $18,400 investment = .994).Seller receives $10,000 in cash from you and $18,300 in equity returned for a total of $28,300 in 6 months. The Seller made $28,300 and the Buyer made $18,400 from OPE.  Not a bad way for the Seller to hedge the risk of cash crunch and to manage illiquid equity. AH  

Over the next couple of weeks, I am going to start posting about real estate transactions. The first set of posts are going to be related to managing bank relationships. I know that most investors avoid banks because they have bought into the hype about the importance of being ananymous. As a lawyer, I believe it is more important to do what is right, accept the fact that you are going to get sued and prepare accordingly. Bank money is usually provided at decent rates, predictable terms and average loan to value ratios. Your personal guarantee should not be a problem if you are person of integrity. I am not saying that you should avoid other forms of financing but you should start with establishing a good relationship with a local community bank. I have 5 community banks that I do business with and all of them provide great customer service and better then average terms.Here are 10 things to do to establish a banking relationship:1. Spend the money and time to have your accountant prepare industry accepted financial statements and have them updated every 6 months.2. Prepare an asset sheet with liabilities to provide the bank a clearly defined net worth, cash on hand and debt load analysis.3. Have your tax returns for the last 3 years scanned into the computer so that you can email them to the bank quickly. They are going to move them around internally and paper gets lost.4. Always maintain a cash reserve in a mutual fund or other liquid vehicle to prove reserve funds but never use that money.5. Never take out second mortgages on investment property.6. Provide a written explanation of your tax return if one of the most recent years has something abnormal on the return.7. Ask for more than you are going to receive.8. Ask the personal banker the types of deals they are looking for before you ask them for something. 9. Try to establish less than 75% loan to value in your deals that you take to the bank.  (I will teach you how to limit the cash out of pocket later)10. One deal at a time. Do not try to take down multiple deals with a new bank. Do one, close it, make 3 payments and then inquire if they are willing to do another transaction.AH