Best practices on new purchase

[William Woodring]

I may be investing in 4 plexes in New Braunfels, Texas through Grocapitus. 

This is new construction.

Issue one

Should I demand that an appraisal be done before accepting the property and base the final price on this appraisal? 

I will be full owner. 

Second issue, 

Grocapitus is demanding 30% down immediately and construction doesn’t begin for a year, thus I am loaning my money to them free for up to a year. Should I demand this money be put in an interest bearing escrow account with the title company?

Third issue, 

What is the breakout on who pays what regarding closing costs? 

Anyone have any other best practices to recommend? 

[Bruce Lynn]

I can't think of anything almost worse than buying in a development with separate owners of other multi family.  I don't know what their plan is, but lets say 20 different 4 plexes owned by 20 different investment owners.  That just sounds like a disaster to me.  

The seller will never agree to final price based on appraisal...and if they did, are you will to go both ways....if it appraises for more would you pay more....or does the risk only get to go one way.

The 30% down is likely how they fund construction or entitlement.  Most developers would never allow you to put that in escrow....and will not pay interest.  Likely they need that for operations.   On some syndications there is what they call pref or preferred return.  Sometimes you'll see this on new construction, but also on some value add deals and potentially other deals.   So you get paid 5-6-7-10% first, before waterfall....and not always in the current year, but until your % is caught up.  Some people like this some don't.  Some people just want the semi-guaranteed return and no upside...more like bond investing, but hopefully with better returns.

Closing cost estimates should be be in your PPM I would expect.  My guess is that it will be YOU.  Rarely does the developer want to pay closing costs.

You might want to look at normal apartment syndications as an alternative.

What is the exit strategy and is there a way to protect yourself on the exit?   Let's say you want to break up the 4plex and sell as individual units.  That can be tough as many lenders don't want one owner to own more than 20% of the units....so at minimum on a 4unit you would own 25%.  So you might be left with owner financing.   Since this is a group of 4plexes what restrictions do lenders have of just selling one out of the group of 20 (or however many there are.)   Let's say again if one buyer gets 15 4plexs and the other 5 sell to 5 different individuals, when you try to resale can your next buyer get financing in a place where another group owns more than 20% of the units?   

I can think of 3 developments like this in DFW area.  All are older, so not sure what the original pitch or strategy was, but all three are disaster areas in my opinion....probably 40 years later.  What if you are the type of investor that wants to keep your place in tip top shape, but all the others don't give a flip....probably hurts your returns.  What if you are the quality type guy that believes in upgrading and maintaining is the best way to force appreciation, but all the other investors are value guys that never want to spend a penny and just run them into the ground.

[Bruce Lynn]

I can't think of anything almost worse than buying in a development with separate owners of other multi family.  I don't know what their plan is, but lets say 20 different 4 plexes owned by 20 different investment owners.  That just sounds like a disaster to me.  

The seller will never agree to final price based on appraisal...and if they did, are you will to go both ways....if it appraises for more would you pay more....or does the risk only get to go one way.

The 30% down is likely how they fund construction or entitlement.  Most developers would never allow you to put that in escrow....and will not pay interest.  Likely they need that for operations.   On some syndications there is what they call pref or preferred return.  Sometimes you'll see this on new construction, but also on some value add deals and potentially other deals.   So you get paid 5-6-7-10% first, before waterfall....and not always in the current year, but until your % is caught up.  Some people like this some don't.  Some people just want the semi-guaranteed return and no upside...more like bond investing, but hopefully with better returns.

Closing cost estimates should be be in your PPM I would expect.  My guess is that it will be YOU.  Rarely does the developer want to pay closing costs.

You might want to look at normal apartment syndications as an alternative.

What is the exit strategy and is there a way to protect yourself on the exit?   Let's say you want to break up the 4plex and sell as individual units.  That can be tough as many lenders don't want one owner to own more than 20% of the units....so at minimum on a 4unit you would own 25%.  So you might be left with owner financing.   Since this is a group of 4plexes what restrictions do lenders have of just selling one out of the group of 20 (or however many there are.)   Let's say again if one buyer gets 15 4plexs and the other 5 sell to 5 different individuals, when you try to resale can your next buyer get financing in a place where another group owns more than 20% of the units?   

I can think of 3 developments like this in DFW area.  All are older, so not sure what the original pitch or strategy was, but all three are disaster areas in my opinion....probably 40 years later.  What if you are the type of investor that wants to keep your place in tip top shape, but all the others don't give a flip....probably hurts your returns.  What if you are the quality type guy that believes in upgrading and maintaining is the best way to force appreciation, but all the other investors are value guys that never want to spend a penny and just run them into the ground.

[Bruce Lynn]

The one caveat is it is in Austin.  Hopefully you and everyone else there is going to make a killing.  It's the new center of the universe.   Can they still keep it weird?

[Harish V.]

Grocapitus is just a broker/facilitator. They do not have any management responsibility. They are benefited by you buying.

@William Woodring What is your motivation for considering these?