This is the continuation of the ‘Approaches to buying properties’ series we started towards the end of last year. You can read the earlier articles where we discussed the first approach here and here.
The second method is what you can call a supplier’s credit. Supplier’s credit like we know it is your supplier giving you goods to sell before you return money. It’s a credit, it’s just that it’s very good credit. How? There’s no interest rate attached to it so you will see most traders and most business people try to as much as possible get supplier’s credit.
What is required to get it is some form of record of credibility or transaction power size, share market size. Let’s say for example you are a dominant force in a particular industry, say you are a trader and you sell shoes. Let’s say the shoe market in your country, you control like 65%. You are a dominant force. if there is a shoe maker where you people used to import your shoes, they’ll want to get your business. They will want you to be one of their distributors and one of the ways they can do that is by offering you what they call supplier’s credit.
If you use your money to buy shoes, you are tieing down your money. They can say, “We will give you the shoes, sell and return the money.” What that simply tells is that you can actually take your money out of the business and go and do something else with your money and your business will still be going on and at no interest rate. They would have agreed the price and the periods you will pay and once you are able to keep to that time, you have good market, you sell well and then you have integrity, you have it done.
So also, you can use supplier’s credit to buy properties in real estate and I must tell you that you need to explore. If you don’t ask, let me say this again, for some of these things, they look impossible to you and that’s simply because you have not asked. If you don’t ask, you won’t get them and I will give you some examples. On the particular property that I talked about in the first approach, before we were even able to raise the money we were able to raise to be short of ten million naira, when we could not raise up to that, we had approached the seller to say, “Look, we are talking to the banks, they are taking forever. We have this much. Can we put that down as an indication of our interest, as commitment to show that we are really serious about this purchase and we will pay you the difference over this period of time.” We discussed that but the person said no in this case meaning the person was ready to wait till we had all the money.
He said, “No. When you have the complete money, bring it.” We asked and that didn’t stop us from asking. There have been other situations too where we asked and we got what we wanted. Like in one of these situations, we asked and that was how we were able to provide for the balance in this example, 190 million. We paid it in installments. In real estate, there is a document you can make when you have this kind of arrangement that helps your vendor, the seller to have a bit of comfort in whatever arrangement you’ve put together. That document is simply called contract of sale.
Contract of sale just expresses the agreement you’re having or you’ve had over how the property will be sold especially when you are not paying out-rightly for one reason or the other because it’s not even just about not having the money that you don’t pay out-rightly in real estate transactions. For example if a property has tenants and the seller says, “I will get them out! I will get them out!” but because you are interested in the property, and you don’t want another person to come, you want to lock down the property but you don’t also want to just tie down your money, you will do something like this. You will pay a commitment and you will say, “Give me vacant possession and I will pay the balance or, you pay a commitment, get this people out and I will pay the balance.” It’s not as if you don’t have the money. Also, if you don’t have the money, you can use this document as well to negotiate and say, “Look, this is what I have. I will pay you this and at such and such time, I will pay this other amount and within that period, this is what we will do. You have agreed to do this and I have agreed to do this.” And you put it down in that document called Contract of Sale. It will specify the tenure of payment, it will specify the amount you are going to pay and at each time you are going to pay it.
It can go as far as specifying even when you have a challenge, a period that you have specified that you are going to pay, what grace period do you now have thereafter? And if you now can’t pay, you can’t meet up with the promised timeline, what happens to what you’ve paid or the property? Sometimes, it could be that well, “I now cannot pay after all of this,” probably with your agreement, what will happen is that it is until we sell to another person before you get your money. In some instance, you get your whole money back when they sell. When and how you agree to that kind of arrangement depends on the property in question. In some other instances, they will say, “We are not even spending your money anyway.” In the contract, they will say the money should be put in an escrow account. An account they call escrow account is an account run by a third party to the transaction; somebody that both of you give power to hold money in that transaction and you would have given him an instruction of how to run that account ahead without your contract. If you now cannot meet up, we will refund your money. They may say that you will lose some amount. Of course it is understandable you have to lose some amount because you’ve taken them through a serious stress and there is opportunity cost because if some other people come within that period of contract, they can’t sell even if they are dangling the cash before them. If they dare sell, you can take them to court and you will win so it is as good as sold so if you now cannot meet up, you must also forfeit something.
Don’t let anybody deceive you. You can use this document to buy any property.
You know in real estate, a lot of people think it’s cash and carry but if you really go to where real estate plays, especially the big league, it’s not cash and carry. These are the kinds of instruments you use to buy properties. That’s another method that you use in buying properties.
I will be talking about the next approach in the follow up to this article which will be out on Friday 9th January, 2015.