​Offer Accepted: Almost $2 million under appraisal, but can we fu

[Brian Burke]

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.

[Brian Burke]

Things are moving along...we are about 1/3 of the way into our Due diligence period. 

To start off, I flew down to Phoenix and @Serge S. and I conducted the first phase of our on-site DD. We inspected the interior of every unit, and I must say, I was impressed. It was in better condition than I had expected.  When I was looking at the architectural drawings I didn't think I would be a fan of the floor plans, but once we got inside the units I really liked them. The 9-1/2 foot ceilings give them a nice feel and the floor plans are open and spacious with island kitchens, walk-in closets, and huge bedrooms and bathrooms. 

One thing that was interesting was that you could see the progression of the Builder's distress as things were going downhill. The first building that was built has granite counters in the kitchens and baths, some hardwood floors and some 18X18 travertine, upgraded carpets, upgraded cabinets with soft-close, etc. the second building had some granite and some high-end Formica. The third had builder-grade carpet and cabinets, standard Formica counters, builder-grade carpet and 12X12 ceramic tile in the kitchen.  The fourth building was the one that was partially completed when the property was foreclosed.  It was finished by the hedge fund that bought the property and has standard builder-grade finishes.

Here is a picture of one of the nicer kitchens:

I was also impressed with the condition of the land infrastructure. Despite sitting idle for 8 years, the pavement is in excellent condition. The utilities are all in place along with all road signs, fire hydrants, etc. it's literally ready to go vertical.

Then we met with the city's planning director. He told us that this project is the best attached product in that city by far.  He highly encouraged us to acquire the property and build out the original plan, but also acknowledged that there is an approved alternative to build out 271 apartment units. What is even better is that there are no other attached units in the planning pipeline and there are no other finished sites suitable for Multifamily in the city.

So the question remains...can we fund it?  I'm thinking that the answer is yes...we have 34 people on the interest list so far, which is a very solid start. We are doing a webinar soon so after that we'll know how close we are to getting it funded. 

More updates to follow!