By James Furlo on
The Offer: Selling 1.5 Acres of Land
Listen to the Podcast
- 00:00 Introduction
- 01:07 Our Favorite Investment: A Transformation Story
- 03:23 The Decision to Sell and Reinvest: A 1031 Exchange
- 07:11 Understanding Return on Investment and Return on Equity
- 13:44 Discussing the Potential of a Land Investment
- 14:03 Initial Plan and Challenges Faced
- 14:34 Considering Leasing or Selling the Land
- 15:58 Potential Buyer Shows Interest
- 16:57 Receiving an Offer for the Land
- 24:20 Final Thoughts and Future Plans
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Read the Transcript
James: Hello, my name is James Furlo and this is my lovely wife, Jessi Furlo. And we are going to be talking about real estate and our mission is relatively straightforward. We want to help other people make wise investments so that they can just better communities. They can do better in their investments.
They can do better with other residents and so that all of us can build wealth. Again, well helping out communities and this is our very first podcast and over time I will get much better at that intro But that's okay. It's new. It's fresh. Yeah, exactly It's fun and it's exciting and it has taken me a while to convince you to get on with me but you and I have been investing together since 2009 because at that point we had been married a couple of years And we had some, we both had jobs, we both had savings, and we just kind of went off.
And so, it's a weird way to say we've been investing together, but that's the only way we've been investing, I guess. But yeah, so it's been kind of a crazy ride, right? I'm thinking about it, it's 14 years? Yeah, 14
James: Yeah, yeah. Alright We've been married 15. People may not have any context whatsoever, I'm just kind of curious, what is, are your favorite investment that we own?
Put you on the spot. What's
Jessi: our favorite investment that
James: we own? It's your favorite investment, yeah, right now. Oh, not ours. Well, whatever.
Jessi: Hmm. That's a weird question.
James: Yeah? I don't know, it's just a weird question. So mine is simply based on the overall return of a property? Right, I mean, I would say Lion.
Okay, yeah, me
Jessi: too. Only because, like, Not for the same reason. I do like that it is income producing and it's the most, like, the most profitable of all the ones we've done. Income
James: producing and producing type? Yeah, yeah.
Jessi: I like that one because it has, it had the biggest transformation. You know, it's like it started
James: in So just real brief, like Whenever someone asks you about it, I actually don't know this, when someone says Like, tell me about that purchase.
What do you say? Tell
Jessi: people. I've heard your story, so I've picked and chosen. Oh, I've got my shtick down pretty well. Oh yeah, you have a shtick for sure. I say that we bought a kind of a rundown mismanaged apartment building that was half full and the people that were in it were registered sex offenders, so it was like it was half full of not great tenants and just in a state that nobody wanted to touch.
And I, I mean, I remember the first time that we walked through it. And this is what I kind of walk people through too is like, and this is the type of property that you like and you have, we have walked through several that I'm just like, what is happening right now? And you're like, yes, it's like, there was like one totally smoke stain, one totally like cat peed on super stinky.
There was another, it was like moldy, another unit that was moldy. And it just, like, just escalated, like, one after the other, after the other, after the other. Like, one was being used as, like, a halfway house. And there were 11 units in this case. Yeah, 11 different units. So it was, it was just like It was bad.
It was nasty and gross and
James: But it was also a fantastic deal.
Jessi: Also a fantastic deal and it had so much potential And I think yeah, that was
James: I I think that's why you like it Cuz I went from a place that honestly no one ever wanted to look at. Oh yeah, it
Jessi: was terrible to It's a home for people that like people love living there.
James: Desirable to a bunch of young professionals now. Yeah,
Jessi: community. It's a great location. All right.
James: All right. That's good to know. Yeah. I do like that one as well. Yeah. I mean, I got a special spot for our first one, which was a duplex as well, just cause that got us into the game and took us like 18 months.
That's true. Eventually we'll share that story
Jessi: of the process. I feel like we learned a ton from the duplex and how to manage tenants and kind of what we were doing. Yeah. But the apartment building. I, we, we had gotten our stride a little bit and we leveled up and
James: it was like, Oh, okay. We had two duplexes and we were living in a single family home and then this one came along.
And it was like, it was big. I remember, yeah, I remember it was overwhelming at first. I was like, Oh, geez, 11 units. Now it's kind of a weird like. Oh yeah. 11 units. No problem. Let's go. Which is cool. Smallish. But yeah, cool. That is actually not what I wanted to talk about in our very first episode. I wanted to talk about something that is actually currently happening right now in our business.
Yes. And the goal again of this podcast is to equip people to make wise decisions. And I think There are multiple ways to do that. Part of it's through education and we will definitely do that part of it. But then another piece of it is through modeling and telling stories. And so I just thought it'd be fun to hear your stories.
Yes. I thought it'd be fun to talk about something that is like, that is happening right now in our business. Yeah, you gave me a teaser
Jessi: earlier. I did. I've been like waiting. I know. You told me I had to wait for your answer. So
James: I'm, okay, I'm ready. Yeah, so I want to talk about that. Yeah. Just cause I think it's interesting.
And honestly, like, I don't know where this is going to go because we're in process. So a little bit of backstory and is, so we talked about, we own those two duplexes and we lived in a single family home. Well, eventually we live in the place that we live in right now. And we're actually in it, not so secretly in it.
We're in the studio. Yeah. And in 2021, we did a 1031. And so we sold those three properties and rolled those into a larger set of warehouses and a 1031. is a IRS code essentially saying a real estate exchange. So, over time, when you, when you buy a property, you you get equity in it, either through appreciation or through depreciation.
And you're supposed to pay capital gains on whatever that equity piece is, which is essentially, again, it's what you bought it for, minus depreciation, and then, or, let me think about the math here. It's what you sell it for, ultimately, minus It's what you bought it for minus depreciation, kind of a double thing there.
And so normally you'd have to pay a significant amount of money on it. Like in Oregon you pay, so you pay about 20 percent ish, depends on your tax bracket at a national level federal. And then in Oregon you get to pay another 9. 9. Yay! Yay! For tax. So it could be a lot. So, 1031 Exchange essentially says, I'm going to take the equity that was in that property and I'm going to roll it over into this new property.
So you're not getting rid of the capital gains, you're deferring a tax deferred exchange. So that was what we did. And we bought 26, 000 square feet worth of warehousing space. And, that's a ton of cents. Yeah. Which,
Jessi: just so I remember correctly, it was kind of like we had built up equity in the, in those properties and we could have sold them and just taken the cash out and reinvested, but the capital gains was a piece of it.
But we also knew that holding onto them wasn't the most profitable thing because they had depreciated a little bit. We had done all the fixes that we could on them. And so their value was for the state that we have had them was maxed out essentially. Yeah.
James: There's. There's two ways to
Jessi: I don't really remember what our motivation for doing the 1031 was other than, Okay, yeah, seems better to get something
Yeah, there are, there's two ways to think about, There's two ways to think about when is the right time to sell, I suppose. And I I did it one way, but ultimately both ways work. So the first way, so normally when you are trying to figure out what's the return on your property, the typical equation for the A return on investment is money invested or your cash flow divided by money invested.
And from that standpoint, these properties looked off the rails awesome because we had pretty low down payments and rents had just continued to go up over the years. And so on an annual basis, they looked amazing, but there's only one way to look at it. Another way to think about it is a return on equity, which when you first buy a building, those, the equity and investment, those are the exact same numbers.
And so when you do that math, what happened to us was the market started to appreciate over time and because things were just crazy in 21 and 20. And so even though our rent had gone up, the values had grown significantly. And so we were watching that. return on equity number slowly dip down. We're like, man, like the absolute dollars are good, but we're just not maximizing the return that we could have on our equity.
And then again, turn that into an investment in another property. Another way to think about it that is probably the way I think about it more than not now is about velocity of money and potential future upside. So like. So you have a property, you buy it, you do a bunch of repairs and you increase the revenue on it.
And, and that is a really big gain that you get out of it. And then what you do is you look at it and you say, Okay, how much more can I increase the value in the future? And oftentimes once you've done all the repairs, the answer is like, not much. It's all up to the market. Right. And so at that point in time, the trigger is to say, Well, if I sold the property or whatever, exchanged it, whatever.
I moved on to another investment that gives me another opportunity to do another value add, to do an improvement, to essentially go find an investment that has a higher future potential. Gaining value and so it's actually not looking at the return is the return is there But you're looking at the value of the property and how much can I increase the value of this property
Delta of like where's the property at and where can I get it to correct and you want you want that to be
James: bigger? Yeah, yeah in the next I don't know year three years Something like that, whatever time horizon makes
Jessi: sense for you. And once you've already done the fixes on the current property, it's pretty
And I think part of that is just, it's been a change in our philosophy and how we've invested. Cause when we first got started, it was all about cashflow. Like it was, I want to replace my job's income. Yeah, that was it. So return on investment ROI, like that's fundamentally a cashflow type of number is like, that was the senior metric that we cared about.
Yeah. We're now at a point where it's like, well, I want to. I want to grow the value of the investment because I know that cash flow is going to follow behind it. And so the way we think about it and measure it is slightly different. They can ultimately lead to the exact same. Outcome. Sure. Though I would argue with the, with the way of thinking in terms of, well, how much future value can I add to this investment, you'll tend to flip investments faster is my guess because it doesn't really matter about the appreciation anymore.
It's just like, okay, time to move on. So we ended up doing this 1031 and we bought these warehouses and it was kind of an interesting deal because there were, what was it? It was a big warehouse and then like two smaller ones kind of, and then there was a little office space. And then part of what we also got with the negotiation was a one and a half acres of land.
And it was like this triangle piece of land and it is all on. And we're talking about 70 to 90, 000 cars a day past this place. I mean, it is right on it. It's, I was doing math. It's, Oh, it's a half mile, maybe a little bit more, maybe 0. 6 miles from the closest exit to get on. So it's super convenient. So awesome.
It's, it's not, but it's also not in between any, it's like. It's in between two large ish cities. It's kind of in the middle. So that's kind of a little bit of a knock against it because it's in more county territory. Although
Jessi: people are traveling the highway to get to either of
James: those cities regularly.
Totally, yeah. Yeah, exactly. But it means if you're going to the office, like, you have to commute to the office. You can't just like, oh, it's a five minute drive. No, it's close to like 15 20 minutes. So anyways so we bought this place and Like I said, it came with this piece of land and I didn't really know what to do with it.
The, the property itself was, it was a decent return on investment and it's from a percentage standpoint. Sure. From a cashflow standpoint, we like, because we ended up putting 600, 000 into this thing as a, as that 10 31, the cashflow is significantly bigger than what we were getting with the other places.
Yeah. But from a. Future potential value standpoint, honestly, it's not that much. It was really, it was this cashflow play is what we're going for. But now I'm looking at it saying, okay, what's my future potential value. And my back of the envelope math is saying, man, I should honestly sell these things and move on and go get a value add type of deal.
But first I'm looking at is the land. And that's because of the way we structured this thing. was there's technically two different purchases that happen. We bought the warehouses, and that is 100 percent in the 1031 exchange. And then there was the land, which was a wholly separate purchase and not part of the 1031 exchange at all.
I didn't know that. Yeah, and part of it's because land and a building are not Right, they're not the same. exactly like for like, it's a thing. And so yeah, so it was a way for us to keep things separate. And so that means I can sell the land and It's all good. Separate. Yeah, it's not part of it. It's not, it doesn't get messy with the 1031.
There's no built in cap, not cap built in equity and that I got to worry about with it. Technically these other two warehouses are two other plots. So in theory I could sell those individually, further complicating those, again, part of it is this 1031 exchange, like how much was apportioned to each, but there's also a single loan on it.
And so if I only sold one of the properties, I would have to get a whole new loan as well for the remaining one. It'd be a thing. And then there's all sorts of questions. But not with the land, that's Correct, yeah. The land is like It's separate. As far as, yeah, on paper, legally Just maybe not mentally. It is a wholly separate investment and property.
Okay. And we had a plan for it. 'cause that, and, and, and I should say too, like that land was where we said, oh, here's an opportunity to Sure. To massively increase the value of this investment. Yeah. 'cause right
Jessi: now it's just, it's empty. Yeah. Yeah. Empty land,
James: there's nothing. Exactly. And the warehouses were like, they're good.
They're producing cash flow. There's not a lot of upside in it. But this land has a potential to be a massive growth to turn the overall investment of this thing like. Double digits. Awesome. So the initial plan was to do RV storage on it. And for a whole host of reasons, that ended up not working out. And it was quite frustrating of a process.
Spent some money on it to figure out I can't do it. Super lame. But, as a result of it, I then, honestly, I sat on it for a while. I was just bummed. I was like, oh my gosh, I can't do what I want to do. Let me think about what I want to do for my next steps. And then I just kind of moved on with my life. And this thing just kind of sat here.
Oh, I remember. Yeah. So. I was there. And so I've reached a point where I've said like, okay, I need to do something with it. And honestly, it's probably not me who's going to do something with it. I need to either lease it or sell it to someone else who will do something with it. And thankfully the way that we structured the deal was because we've got this 1031 thing going.
We put. Like 50, 000, this land should have been sold for 300, 000. And we ended up buying it for 250, 000 because everything was kind of amorphous, right? The seller didn't care because they were like, I don't know, whatever.
Jessi: He was selling it as one big thing. Yeah,
James: exactly. In his opinion. Yeah, yeah, exactly.
And so I was able to shift 50, 000 of that land value into the warehouses, which kind of meant I had a 50, 000 equity. Right into this piece of land. Oh, I should also say the seller gave me a note of 250, 000 for the land. So I bought it for two 50, I have a note for two 50. So right now I have essentially like zero equity sitting in this thing, which I was totally cool with because again, I was going to do a value.
I think it's not working out. And so now I'm like, all right, I got to lease it or, or sell it. And so put on the market and at. I forget what the rate was. It's like a dollar 10 per foot per year for leasing. Yeah. And it's about 70, 000 ish square feet. And so anyways, so we put it out there. And there's a contractor company who has expressed interest in it.
And this is the teaser that I gave you. And so I went over this morning. Contractor, like, like builder? Construction, yeah. Okay. Yeah, exactly. And so I went over there this morning. We met at 7am. It was actually pretty funny. They were like, we want to meet at sunrise. And I looked it up and I was like that's like, not sunrise, but that's okay.
And so we got out there. We looked at the land. And it was dark and like half an hour later, it was light enough to look at it and it was like, Oh, well it happened, but it turned out well for us because then we got to go off and do fun stuff with friends, but that's all right. And so anyway, so we met there, we looked at it, answered some questions for him and kind of told him, all right, here's what the deal is, here's what it looks like.
And so the, the potential buyer, prospect buyer, potential buyer and his agent went back. And so they called back earlier today saying, Hey. We're interested. Let's, you know, be interested. Yeah. And so they made an offer of 400, 000 for this property. For the land. For, yes, for the land. Now the way they want to structure it is they want to pay 300, 000 cash.
And then they want me to give them a loan for 100, 000 for that remaining balance for some unknown interest rate for the next three years. And so that was kind of, you know, real like, and it was just verbal. Here's what we're thinking. And my agent, he was like, it's kind of a flinch test, you know, to see how, to see how it all shakes out.
Sure. And so. So yeah, so that's kind of where we're at. Now, one of the things we did yesterday, because we kind of, we knew that this tour was coming and we had a hunch that they were going to be more interested in buying rather than leasing. And so I was like, alright, we actually should look up and figure out how much potentially this land is worth.
And so, we looked all around the valley, looked at all the different land comps that are out there. I don't actually remember what we looked
James: Did I look at that? No, no, no, no, no. They just, they went off and, they just did their own research. They did, they looked at it. Yeah,
Jessi: yeah, yeah. Okay, I was like. I thought you said that we did and I was like, Oh, no, no, no, no.
James: remember doing that at all. As in those agents and myself. Yeah, the brokers and myself. You
Jessi: guys looked at it and got a price range that you thought was
James: reasonable. Now, it's interesting because there are Depending on how you decide to look at this and how valuable are 70 to 90, 000 cars going a day?
How much of a detractor is it that there's no water on it, that it is just dirt and there's not rock, that a fence will need to be made and there's some other, like, tenant improvements that will need to happen. But also it's like It's close to Salem, but it's not in Salem. And there's all sorts of questions.
Yeah, all sorts
Jessi: of benefits or
James: negatives, depending on who you are. Depending on how you want to value this thing, you could say that it's worth 400, 000, or it could potentially be worth up to 700, 000, depending on How you want to look at your comps. Another way to look at it would be to say, okay, if you were to have this thing fully leased out, and, and then you take that and you say, and there's, say there's a going cap rate in the area of 7%, what would that value of the property be?
And, and that honestly puts it at like a 1. 2 million dollar range. But then what you have to do is you have to kind of back out and say, well, there's no land. Or, I'm sorry, there's no building. So, if there was a building like what would that be worth? And you got to subtract that out for it. And again, it kind of puts you in that like six to 700, 000 range ish.
Unless it's a super nice building and it's not rented at a good rate, in which case then it could put you down like the 300, 000 range. And so it's just kind of, it's, it's messy, honestly, cause there's just very few comps for this place. And that's also one of the exciting things about land is it really comes down to how well can you tell the story of the value behind this thing?
How. Badly does this person need it? What are other options? And during our tour, they made sure to let us know that they were looking at something else. She's like, yeah, yeah, absolutely. You know, they were, they're doing insane, all the right things, everything that I would say and do if I was looking to buy.
Sure. And so, so I don't know where we're going to go with this. We are super early stages. I'm trying to think about when. We'll actually publish this podcast, . I may, yes. I, this may not be the first one that we actually publish. Actually just had that
Jessi: thought and was like, are you sure you wanna publish this while you're still negotiating?
James: Yeah. The chances of them not finding this brand new podcast. Yeah. Maybe
Jessi: super low, but I don't, yeah,
James: I'll, I'll play it out. So there may be
Jessi: two or three other rep episode cards a little closer to your
James: chest. Yeah, this may not be number one. This may be number three or ten. Depending on how things go. And I will definitely give an update on it.
But anyways, it's just super interesting, in my opinion, that just kind of this process of commercial properties is just very different than residential. Right? Residential's like, okay, what are the beds, baths, square foot, location, we can find all the comps, dial it in. Yeah, and you just kind of go like, this is what it is.
But this one's a little bit more free flowing. There's, it's a lot less free of a market or how do I say it? There's just less buyers than sellers. So it's,
Jessi: it's just less buyers than sellers. And the use for the property is super dynamic. Like a contractor would use it for something totally different than an RV salesman or.
Yeah, or the warehouses that we have. Yeah, people
James: in totally. Yeah. So there's just a lot there, which is interesting. So anyways, so I got an offer so Which is cool.
Jessi: What? I was curious. Yeah, what would be your counter to that? I mean, yeah, that's a good question because I don't like We also are not experts in land sales, you know this particular type of land But it's kind of like based on your research you have a much wider Potential value for it.
Yeah, it's like it doesn't make sense or does it make sense maybe to just jump and be like great That sounds great. Let's go.
James: Yeah, what's also interesting about this one is if We sold it for 400, 000 and got the 300, 000 cash up front. The, the way the taxes work would be kind of interesting, right? So, not only would I have realtor fees of 5 6%, and then I would have, potentially, like, I'd have to pay taxes on that 50, 000 gain.
And so, at the end of the day we would prime. There's a chance we'd actually have to bring money to taxes at the end of the year. Yeah. Which is kind of a bummer. And that's something I haven't sat down and looked at the spreadsheet yet. And just to really like, alright, how much, should we break even?
Do I gotta bring five grand? Do I gotta bring 15? Like, what is it? Or do I get like a nice little 5, 000? Woo! And then three years from now, you get this 100, 000 bonus. Essentially, where you just go, oh yeah, that was there. And maybe they're paying interest all along the way of some amount. I don't know. And so like that's something to consider and so I'm, so for me, I don't get like super excited about 400, 000.
I honestly would be like, I'd rather just lease it because I think I can get just the numbers just look better at that particular rate from a, what's the value of the property going forward into the future. The very first step is telling them verbal is awesome. Give us something in writing because there's some details that they didn't include like well, what's the interest rate?
You're gonna pay on this thing just for for starters. Well, and
Jessi: do they have any other criteria like We'll pay you this if you put a fence up. Yeah. Whatever.
James: Yeah, exactly. So, I think that's like, that's the number one step is like, Hey, yeah, if you're actually serious, like, let's start throwing some paper around.
Like, let's see an actual offer. At least a letter of intent so that we have something concrete that we can talk to on it. Makes sense. Depending on how they want to structure it. Like, I would love, personally, I'd love to see it more 500, 000 range. Just based on the comps that I saw and knowing what this land looks like, I actually think it's a really fair price.
I could potentially make an argument for 600, but I think it will sit on the market for nine months at 600. And then finally someone will come along and get it at 500. I think I could have a buyer in the next few months type thing. If it's not these folks, it'd be someone else. Or I get it leased and I'd be totally happy with that as well.
Interesting. So, yeah. So,
Jessi: but for a first offer. Yeah. Someone's interested.
James: Yeah, yeah. Good sign. It's also we're in that weird, like, holiday shadow, I guess is
Jessi: what I would call it. People haven't quite gone back to work. Yeah. Such a whap. Some people
James: have, but not everybody. Yeah. And a lot of us are like, oh, I gotta do a new year books.
So I figured it out. So yeah, there you go. That is, that's where we're at. Cool. Again, I just think it's interesting. I think it's helpful to understand kind of how we're thinking about it, how we're seeing things. Yeah. No, this conversation
Jessi: was helpful to me.
James: I feel like, okay. That's a hundred percent. What I was going for.
All right. Well, that is, if it's not our official number one, it is yours and I number one. And I'm looking forward to do this more often. Yeah, I think it will be awesome. And if you found this helpful and like this conversation, we would love a rating and or review in whatever podcast app you use, have a great day.
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