Attracting investors to residential development, LLC and risks

[Kevin Z.]

Looking for some tips and general advisement, especially on risks and holes in my plan.

I am a realtor who wants to form an LLC with various investors whom I have not found yet. Purpose is to buy old property to demolish and build new to sell. I would serve a management role and be responsible for selling the house. Each property will require about 1.6 to 1.8 million dollars start to finish... 800k-900k purchase, 720k construction cost. Finished house normally sells for 2.4 to 2.6 million. (I know of one house this month that cost 1.6, and sold for 2.7 within 2 weeks! Obvious cheap materials usage, but still sold because buyers didn't know better ) The plan is pretty safe in my opinion, even if you couldn't make a $1 million gross profit.

Finding people with cash is easy. Persuading them to invest in development is going to be much harder.

How would you make a total stranger more likely to agree to invest in this strategy with other total strangers?

Brandon just wrote a blog about security in investment. LLC, builder's risk insurance, nearly guaranteed profit.... is that enough security?

The risk to reward ratio is low. I would be hiring a reputable general contractor. I would charge a small management fee, making most of my money off commission from sale of the home. Profits will be returned proportionally to the investors. As a realtor, obviously I don't have the cash nor can I borrow from banks, but I'd chip in $50k (drop in the bucket) just to have some skin in the game.

I am hoping to make some high-net-worth people into this kind of investor. I have seen some stupid purchases recently made by these people, e.g. buying a $2.7 million old ranch house to rent out for <$4500 per month. After property taxes, they're making almost nothing! I want to convince them that there are bigger profits to be made in development.

Currently, a handful of small developers are building one or two luxury homes at a time. From my mls and title research, these guys are buying old homes under an LLC, then somehow getting construction loans that cover the full cost of construction. They sell at a big profit, pay back the loan, and pocket the difference.