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 Highest And Best UseOne of America's greatest real estate men was William Zeckendorf. He made tens of millions of dollars during the forties, fifties and sixties, when millions really were millions. He lived and worked in New York City, where he was a notoriously flamboyant character. His trademark was to be driven in the biggest limousine and to smoke the biggest cigars of anyone in the city. For a few decades, he succeeded. Though our goals are more modest, Zeckendorf has a lot to teach us. He was a real estate genius. Zeckendorf was a visionary and an opportunist. Here was his genius: but as it SHOULD be.
Think of yourself as a Zeckendorf in your investment area. You be the modern day Rip van Winkle. You be Donald Trump. Think about the possible development opportunities around you. Should the Dairy Queen be knocked down to make way for a McDonalds? Would Burger King move near the McDonalds? Should the old service station be turned into a small shopping center? Can the old factory be converted into a nursing home? Is the Kmart ready to go out of business? Can we build forty houses on that farmland? Would Holiday Inn be interested in the old Shady Pines Motel? Does the Dunkin Donuts want to expand? Does the bank need a drive through? Would the old movie theater make a nice weekend flea market?
Every great enterprise begins with one person's idea. 
Almost every business transaction involves real
estate. Smart real estate investors anticipate change and put themselves
in the middle. What franchises are missing from your area? What
businesses have passed their prime? In the opening and the closing of
businesses, there are potential real estate profits.What information can you learn from the articles and ads in your local newspaper? What are people talking about? What is the condition of local buildings telling you? Where is the path of development in your area? Are there any vacant buildings? What's being done with them? What is the state of the local economy? People moving in or out? Where is infrastructure (highways, roads, bridges) being added? Get in the middle of the action. "My warehouse space is being snapped up for artists' lofts at twice the rent!" "I'm going to sell, and lease back the land under my apartment building." There are always enough new ideas around to make the real estate investment business exciting - and to make a change of use tempting and potentially profitable. When is a change in the use or operation of a property warranted? When it will bring the property closer to the ideal of value: highest and best use. We define the concept of highest and best use as that use of the property that will yield the greatest economic return over a given period of time. Determination of highest and best use requires a continuing reevaluation of your needs, the property's potential, and other outside influences. You must ask the following questions before making any major changes: What are my financial objectives regarding this property? What are my realistic options for the property? What outside influences may affect the use of the property? Let's examine these questions and list specific actions that may help us to reach the proper conclusion. What are my financial objectives regarding this property? You should consider only those changes that fit their financial plans. For instance, a small addition to net income may not justify a change requiring greater risk or a longer time commitment. Highest and best use is an opinion of value. The advice of friends and experts may differ. But it's your investment, therefore, yours is the only opinion that matters. From your personal financial viewpoint, you say either, I'm satisfied with the property as is, or I want the property to do more for me. Here's how to determine which changes are in your best interest: Conduct an annual review of your investment goals and objectives. Conduct an annual review of your net worth and cash flow. Arrange for Nardo or your Mastermind Alliance or your mentors to review your entire investment portfolio each year. Arrange for a tax consultant to review your entire investment portfolio each year. What are my realistic options for this property? You should keep abreast of new ideas and trends in the business. Here are some of the options you might consider: Converting to condominiums. Converting to cooperatives. Leasing the land under your buildings to low-risk investors. Developing a time-share program. Installing energy-saving devices, or separating utilities. Rehabilitating or upgrading to improve gross income. Refinancing to gain tax-free capital for further investment. Improving your maintenance scheduling to reduce expenses and add to net income. You can evaluate these options on a specific property by researching new ideas and strategies in newsletters, trade publications, books and on the Internet; and by discussing the specific options with your Mastermind Alliance. This lesson should be called The Grandmaster Real Estate Course. It is all the opportunities that are going to separate you from any competition. You see a two-family and everyone else sees a two-family house. But, you envision expanding or developing that two-family house into a four-family or six-family house. Now, you could be talking real, real, real, real money.
Let's say you buy a two-family house on a large lot for $200,000. You get approvals to knock it down and you have a modular sixplex erected on the site. You spend lots of money on amenities and landscaping and you condo the sixplex. Let's work the deal through in our minds. You buy a two-family for $200k. You put $100k into plans, approvals, demolition and site work. It costs $400k to build the sixplex. You sell the units for $200k each. You pay the real estate agent and how much "K" is left for you?
This is not a Disney fantasy. This is a story that plays out day after day, but for whom? You've got to believe. You've got to know the market. You've got to be a person of action who sees what others don't see. This is simply you putting all of your research work into play. How do rich people get rich? Well, this is one way. Remember these old sayings: How much more is a three-family house worth than a two-family? What would your conversion costs be? What would your profit be?  Of course, zoning laws can be appealed to the Board of Appeals. Is there an affordable housing shortage in your investment area? Maybe the Board of Appeals would approve a four-unit or a six-unit building on the site. Maybe, they would approve eight units or ten units if you agreed to make two or three units affordable. Do you know any board members? Can you hire a local attorney who specializes in zoning matters? If the property is a small two-family house, does the land area and location justify your knocking the building down and putting up a new pre-fab duplex? Could you then condo the two duplex units?
What if the zoning is for 4,000 square feet and you have 10,000 square feet? You have an extra 2,000 square feet. The Board of Appeals turns you down for more units. Can you put garages up for added income? Can you sell the extra 2,000 square feet to an abutter? You may not want to do any of these things, but you want to consider all your options. Remember when you convert units and build and rehab, you are adding to the housing stock and to the tax rolls of your local government. You are providing a valuable community service. And, if you are borrowing rehab funds and hiring local contractors, you are supporting your community. Every city and town needs people like you willing to make improvement investments in the future. Many large houses are on large lots. Maybe the lot is worth more than the house. Maybe you'd make a lot of money by knocking down the large house and building two or three houses in its place. What would the town officials say? Pose the question. Learn. Then, when and if an opportunity presents itself, you'll be ready to act.  A single-family house in a commercial district may be an opportunity to convert for retail or office use. Maybe the house can be used for commercial and residential purposes. This type of property can be very desirable for work-at-home people. A single-family house in an industrial district may have significantly less appeal and value. Unless, of course, you can knock the house down and use the land as an approved toxic waste disposal site, then it would be worth a lot. I am kidding, but it's true. Every multi-family you buy, you think, "Does this property have condo conversion potential? Are the parts worth more than the whole?"
Comparing current local market conditions for condominium sales, condominium rentals and apartment rentals. Determining the total legal, engineering, financing, reconstruction, marketing and potential profits of the conversion. Assessing the suitability of your building's floor plan for conversion. Setting the time factor of the conversion and possible loss of rental income during the interval. Retaining and coordinating qualified support personnel needed for the conversion: attorney, accountant, architect, engineer, contractor, etc. Locating optimum financing for the project: rehab and bridge loans for you and end-loans for your unit buyers. Ensuring that the conversion conforms to all applicable state and/or local laws, rules or regulations concerning condominium conversion. Designing and implementing a marketing package for the property to appeal to existing tenants, new buyers/occupants and most particularly to investors. Expand some more. Think about retail store condos, office space condos, professional space condos, airport hangar condos, motel room condos, hotel room condos, mini-warehouse condos, stadium box condos, safety deposit box condos, campground condos, trailer park condos....  
Real estate investing is a thinking person's art. If you advertise a property as a handyman's special, you will probably have a long line of bargain hunters at your door looking for a good deal and bidding the property way beyond the range of profitability. For each deal, you have to know your numbers. It costs the same amount to update a kitchen in a wealthy area as in a poor area, yet the return in the wealthy area may be significantly higher. If you are converting apartments to condos or adding additional units and you estimate the potential profit to be one hundred thousand dollars, this is a good construction project. If you are buying a house to resell at a profit and you don't personally like the kitchen, who cares? Every investment doesn't have to be your dream home. You aren't going to live in the house with the bad kitchen. Let the owner who will live in the house design the new kitchen. Resell the house with the potential for improvement.Before you consider any renovation expense, take a look at what renters are looking for. Most people would say - more space for less rent. Wrong. On a list of most important factors, the amount of space ranks 16th among a list of tenant priorities. What's number one? Location.  On the list of priorities you'll find the following, in ranking order:
These are costs that you won't recover in a hurry, but in the long run, will save you headaches and maintenance and repair costs, and, in the end, add to the appreciation and profitability of the building. Other costly items: adding a second bathroom, redesigning kitchen layouts, new cabinets, sinks, etc. These costly improvements must be compared to other less costly ones that may increase rents as much or even more. For example, adding a balcony can increase rents 10%, a fireplace, another 10%, a built-in desk and sofa bed in a small apartment (a studio) can increase rents by 5%.
With bad tenants, there are two scenarios. They become good tenants or you evict them. Unfortunately, in many states, the eviction process can take up to six months. If the rent is $900 per month, you will probably lose that $5,400, plus legal fees. A bad tenant who is being evicted usually doesn't pay rent. You may obtain a court judgment against the bad tenant, but good luck collecting. A better approach is to try and buy them out. Offer them a thousand dollars if they will move within two weeks. If a thousand doesn't work, offer two or three thousand. Even if you had to give them the whole five thousand, the non-aggravation would probably be worth the cost. If you are buying a property and suspect these kinds of problems, you should factor these buyout costs into your offer. Or even better, you can request that the property be delivered to you free of tenants. Then, the seller has to deal with bad tenants before the closing.
Regardless of the rules, regulations, and provisions agreed to and signed, some individuals will act with independent indifference. Letters requesting compliance are left unopened; verbal requests fall on deaf ears. The root cause of the problem can be determined at a later date or never. Once you've identified a problem situation, act promptly and prudently.  Legal eviction can be time-consuming and expensive. However, the tenant may voluntarily relocate if you locate comparable space at a comparable price, or if you offer to pay moving expenses or a moving allowance. The offering of such cash rewards to tenants who voluntarily agree to relocate (whether to make the space available to a higher paying tenant or for new construction or conversion) has been a standard practice in commercial and industrial real estate for many years. While rewarding a problem tenant with a cash settlement to relocate is not a first option, it may be a cost-effective one. Remember, once you're rid of the problem, you can concentrate on more profitable concerns.
Remember from the Action Principles® that you can't change people. You can't make them neat or quiet or non-smokers or good parents. The owner has tried and failed several refinancing attempts with this bank and others. The owner has tried and failed to sell the property to the general public. Many of the owner's friends, family and co-workers know about his financial troubles and have decided not to buy the house. Many people at the bank know about the foreclosure and have decided not to approach the owner and buy the house. All of the attorneys and their staff and family at the law office handling the foreclosure know about the owner's financial troubles and decide not to approach the owner. In most cases, when you are buying a property at foreclosure, you cannot get inside the property prior to the auction and even if you can, you don't have an opportunity to do a full property inspection. Even with all of the cautions above, you still might get lucky and get a good deal on a foreclosed property and buy it for 10% - 20% below market value, but you can do that anyway by making offers. And you can make those offers with a lot less risk. Continuing Education: http://www.homestore.com Supplier of online media and technology solutions to the home and real estate industries. At the heart of the company's operations is Homestore.com(tm), the largest and most comprehensive family of Web sites devoted exclusively to home and real estate-related content and commerce. Go to Lesson 8
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