Offer Accepted:  Almost $2 million under appraisal, but can we fund it?

I fund most of my deals through some type of pooled investment, whether I raise money on a deal-by-deal basis or through a blind pool fund. It can be a stressful business…agreeing to purchase a property but still having to raise the funds to pay for it. The question always looms: “Can we fund it?”

I’m not alone, I read forum threads all the time from BPers trying to fund deals by raising money. And then there are always the “how do I do it” questions. The other day I got a PM with a question…”Do I find the deal first or do I find the investors first?” So I thought I’d start this thread, to give other BPers a peek behind the curtain…how do we do it, and can we do it every time? And what comes first, the deal or the investors?

Here’s the deal

The property is a fully entitled condominium development within commute distance of metro Phoenix. My good friend, @Serge S., a Phoenix local, leveraged his relationships to find this property and we are partnering on it. You might remember that Serge and I were on Podcast #152 alongside @Ben Leybovich. I’m sure that Ben can give us 152 reasons why we shouldn’t do this deal!

Back in the real estate heyday, a developer spent over $9 million acquiring the 15 acre infill property, entitling it for condos, building close to 30 class A units and constructing the complete infrastructure of utilities, streets, sidewalks, sound walls and common area amenities before the market suddenly came crashing down in the great financial collapse.

The property has since been operated by an equity fund that acquired the foreclosed property back at the bottom of the market. The units have been rented, but the land, shovel-ready for over 150 more units, has sat idle, like an old west ghost town. This fund subsequently liquidated all of their assets but had one remaining—this one, and they were just looking to give it away when Serge came into the picture.

So we are scooping it up, all of the fully-rented class A units and all of the land together with the improvements, all $9 million worth, for just $3 million! The property appraised two years ago, when the market was lower than it is now, for nearly $6 million. Who says you can’t find good deals in this market?

Funding it

So for a deal as “good” as this, why worry about funding? Don’t the gurus say that if you find a good deal the money will find you? I say “not true.” It’s not about the deal, it’s about the sponsor. It’s about track record. It’s about achieving success on previous deals. Oh yeah, it’s also about the deal.

But a deal like this isn’t one of those “straight down the fairway” deals. It has hair on it. First, it’s a development deal of sorts. As far as development deals go, it’s about as good as it gets because the entitlement risk, carrying costs, and high land development costs are mostly taken out of the equation. If we decide to build, we can build cheaper than anyone because all we have left is the vertical construction. But it’s not the typical, run-of-the-mill multifamily value-add deal that our investors are used to funding. This one is different. And the exit strategy is murky.

To complicate things further, we’ve closed $36 million of deals in the last 30 days, raising $10 million, so does that mean that our investor base is taxed to capacity? Will they have an appetite for this type of deal? The question remains to be answered, and I’ll answer it as it happens.

Who’s on first?

So to answer the question of whether the deal or the investor comes first…it’s the investors. It’s important to have plenty of investors on your list before you find the deal, so that you have more certainty of closing and mitigate your risk. If you don’t get your deal funded you have the ability to back out without losing your deposit (if you structure it right), but you’ll personally be out thousands of dollars in legal and due diligence costs. This is one of the costs of playing this game, it comes with the territory. If you find the deal first and then look for investors, you won’t have enough time to raise the money you need before you pass the point of no return.

So how will we do it? For the first step, we reached out to our investor waiting list. We told the story, and asked, “are you interested?” The responses started coming back almost immediately…there is interest! But will there be enough? That remains to be seen. Stay tuned.