Why cash is Emperor — and it has no clothes
We’ve all heard the maxims: “Cash Is King,” “Cash Plays,” “Money Talks.” And there is nothing wrong with those terms. It is absolutely true that for most sellers out there having cash is the ultimate for a quick and easy sale. Having cash means that there are no other parties involved in deciding whether you can close. So, as far as it goes, this advice makes sense. When you are dealing with unsophisticated investors or sellers who only know one way to do a deal, cash is not only king, it is the emperor. It is the absolute ruler and the top of the chain when it comes to assets you would accept for your property.
I claim however, that in reality, no one wants cash. Cash in and of itself is a depreciating asset, able to purchase less every year that you have it. Cash is nothing but government debt. And governments, since the crash in 2008, have shown an unquenchable thirst to print more of it at unheard of and unsustainable levels. The more money they create out of thin air as new debt, the less your money is worth.
In addition, when cash is used as a medium for exchange, you often have to pay taxes or fees both when you get the cash (sell your property) and when you buy what it is you really wanted (the next property or whatever other asset you purchase). So, cash as a medium, doubles your transaction fees.
While cash may be the emperor, it has no clothes. Those who see clearly the risks of holding cash will want other assets instead. They see that cash is not something to hoard but something to move through as quickly as possible to something they really want.
No one actually wants cash. They want what cash can buy them. Of course, since dollars are fungible (they are all the same) and liquid (they can be traded for anything) cash is the next best thing to what they really want.
What does this tell you about how to creatively structure deals? Instead of offering your seller the next best thing (cash) offer them the best thing — what they really want. This type of thinking opens all kinds of possibilities that can be used to structure deals that a seller will find more attractive than cash. And for someone thinking of selling your property, you should be considering what your next investment is and what characteristics it should have. Get that directly rather than in two or more steps through cash, and you will speed your investing and reduce your transaction costs.
Let’s look at some examples. A property owner selling their apartment complex that she has managed herself for 30 years wants to simplify her estate: she has three kids who don’t get along and won’t be able to agree on how to manage or even sell the property if she leaves it to them. What does this seller really want? An income stream that can easily be divided three ways with no need for cooperation from her children. How could you structure a deal with this seller other than cash?
Here are a few options:
- Create a seller note that divides the payments into three separate payments that can be individually directed as the seller desires. If the seller trusts you, this approach would work just fine.
- Give the seller an annuity as part of the sale where a third party will provide an income stream to the seller and later to her heirs after the seller’s death.
- Use a viatical settlement. In this alternative, you create a life insurance policy against the seller for part of the sale. The remaining purchase price is paid from the insurance upon the seller’s death. This benefit can, of course, be divided into three parts easily by the executor of the seller’s will or could be placed into trust for the children.
That’s just one example of a situation where the seller might prefer an alternative to a cash sale. In every seller situation there is probably some approach that would be more beneficial to the seller than cash. It’s up to you to find it. It will require getting to know, and frankly care about, the seller and her objectives. But it’s worth it to make a deal that you both can prefer to the standard, cookie-cutter, cash or cash-plus-bank-loan sale.
To find out more about exchanging or exchangors, you can visit the NCE website, read Wayne Palmer’s chapters in Robert Kiyosaki’s “The Real Book of Real Estate,” or contact Steve. Readers who are real estate licensees in the mid-Atlantic area who might be interested in joining a local exchange group should contact Steve via email or LinkedIn.