Developer and Atlanta real estate expert Harold Cunliffe of The Pacific Group kept a packed room engaged and laughing during “Get Back in the Game,” an informative meeting presented by the Greater Atlanta Home Builders Association. Joined by Bill Blanton, CEO of First Covenant Bank, the dynamic pair gave tips to home builders on what they need to do to get back into the building business.
Cunliffe set the stage for how his company shifted focus from developing lots to purchasing distressed lots. He states, ” I concluded that my career as a real estate developer was over at age 60. My business partner and I discovered that we could purchase lots for less than their replacement cost. And, we determined that we could not come back to develop lots within the next 10 years. At the time we started purchasing lots, there were 150,000 developed lots in Atlanta.” Cunliffe’s company, The Pacific Group currently owns 2,700 lots in the metro Atlanta area.
So, how should a small builder position their company today? Cunliffe offers three tips:
- Get a pension plan. Not only can you set aside a sizable amount of money over time, but you can defer paying income taxes on the money you save in a 401k. Additionally, with a self administered plan, real estate can be purchased and sold within the plan. Any gain on the sale of the real estate is also tax deferred.
- Get a wife. It is a good business strategy to have a marriage at all times. Be prepared to lose all assets in your name at all times, but put the assets you’d like to keep in your wife’s name. Don’t let your wife sign personal guarantees or become part of your business. A bad wife is twice as good as a good lender. A bad wife will take 50% of your assets while a lender will take 100%.
- Get a judgement. Protect yourself with a judgement. Get a $3 million dollar judgement, settle for $25,000 and sell the debt to your wife.
Cunliffe offers several tips for working with funds and property owners. He says to remember that these groups are all about 10 times bigger than any developer you have ever worked with as a builder. Most acquisitions are made on a cash basis, but it is possible to purchase lots outright with a take down. Funds can also exercise patience as most do not have cash flow requirements. Funds will even sell lots below the market rate with a true up or align with a builder to build on a fee basis.
Like many builders, Cunliffe has a positive outlook on life. He states that with any kind of uptick in job growth, 30,000 starts a year are possible again.
Blantin offers an overview of the banking eco system. A 40 year veteran of the banking industry, it is fair to say that he has seen a lot. He states most banks will do construction loans if they have to do them to get rid of the lots. However, for new construction, unless the bank has a relationship with the lots a loan is unlikely. Unfortunately the lesson learned by the banks during the housing crises was to avoid A&D loans. The irony of the situation is that without A&D loans, banks can not be profitable. Historically, 80 to 90% of bank earnings were generated from construction loans. The lesson learned should have been to look at the numbers, how many lots are in the area and other factors.
Bankers, builders and Realtors must go to Washington D.C. and start complaining that the regulators are not enforcing current rules. They will say that a bank can make a good loan. However, their definition of a good loand is one that has been paid off for 12 months.
A big problem is that Georgia is the poster child for failed community banks. With 57 failed community banks, Georgia has a black eye on a national basis. The problem is that it is not over yet. Experts estimate that another 30 community banks will fail.