Should I provide private money to fund this project?

Question

Hello and thank you for reading this.

I am a newbie investor and currently at an education stage as well as building my local network stage.

At my local Albuquerque REIA meetup, there was a person advertising a deal that she needed private financing for and I have decided to inquire more in order to see if I should get involved. Here is what I know at the moment.

1. It is a short sale aproved by bank. It has to be closed in the next two weeks

2. Purchase price is $179,000 for 4 BR 2 BA 2GA,  2240 sf SFH.

3. CMA gives ARV of $259,667 for moderate remodel and $310,374 for total remodel and update.

4. Realtor.com gives buy estimate of 236k while Zillow gives 206k. Zillow also shows that most of the houses on the block are at 206k range with only a couple at 259k. The only active listing in 1/2 mi radius right now is for 247.5k that was originally at 259k.

5. The person claims 25 years in real estate and construction business and estimates repair cost at 30k-40k for moderate and 50k-60k for total.

6. There will be other partners involved with individual contributions at 50k-80k range each.

7. She promises to keep us involved so that we can learn how to do this in the future.

It appears to offer 18% return on cash after 6 months.

Can you please tell me if you think that it is a good idea for me to get involved in such a project? I won't be making lots of decisions but will be observing the process.

What kind of references should I request from this person?

What are the risks of this project?

What kind of documents should be prepared signed in order to guaranty my interests in a deal?

If I decide to go ahead and participate then how should I structure the partnership to protect my assets? This project is supposed to be funded through LLC with partners being rewarded based on their original investments.

I appreciate your input.

Robert Smith · Answer

Jumping into a venture is a great thing, however the first thing I would do is verify these numbers for myself. Realtor and zillow are the last 2 places I would pull my information unfortunately, these sites are very skewed as well as the information from the person "pitching" the deal. If there is only one house in the market at $259k and everything else has sold $200ish that is also a read flag. You want to be in and out with your money, not sit on property for a long time and let your money do nothing for you. In a position with many other investors is also a red flag for me. First position is preferred, it sounds like there is a lot of risk without a whole lot of assurances in the deal.

That was the bad, now the good. There is money to be made if the CMA is correct, and the return sounds like something that would be very good for the short period of time you are in the deal. Experience is something needed and 25 years is a good amount of time, claims may be the best choice for their experience.

Overall I would approach with caution and eyes wide open. For the partnership this is a good idea, the ownership and deeds of trust for the property should also be held in the partnership and not with this individual doing the deal. There is no guarantee when investing but you should protect yourself. Maybe a smaller deal where you are in first position would be a better first deal then something like this, give them time to prove their worth and if they hold true and return the money for everyone then maybe give them a shot next time. Ask around the group about them and do your research. Not every deal is a good deal, and as much as it is no fun to be left out, there is no reason to rush into anything either.

Marc C. · Answer

Why does she need you instead of just a commercial hard money lender? Looks like a very "thin" (skinny) deal to me, Petr. If you want to loan hard money, contact some of the hard-money lenders and let them make all the arrangements for your money. They offer proper vetting of the sponsors and deals and pay you roughly 12% annually on your money.

Jonathan Godes · Answer

I would verify that the investor that is offering this deal is registered with the SEC. If she is pooling funds (and it certainly sounds like she is), then you would need to be an accredited investor. So unless you are pulling down $200k a year or have a net worth of $1 million, this seems pretty fishy. And that is before I even look at the seriously thin numbers. Pass.

Chris Stone · Answer

OK. Just tested Zillow. This was my home, so I won't be breaking privacy laws. I sold for $329,00. Zillow has the home at $301,000. It is in the North Valley. We have trailer parks next to million dollar homes so zestimates are often skewed.  Still, they were off. My guess is non-disclosure laws are alive and well (except for the tax man) A realtor can share the comps. Zillow and Trulia are out of the loop.

Chris Stone · Answer

They might. I'm not an expert on these things but whenever I see data from Zillow in New Mexico, it's asking prices. I don't think anyone but a realtor can disclose sale prices in New Mexico. At least that's what my board tells me. We have pretty strict rules on how we can present sold prices. I have sat with clients that have relied on the Zillow prices and have shown what those homes have really sold for. Just sayin" Of course, things may have changed. I have no dog in this fight.

Marc C. · Answer

Well, actually, Zillow and Realtor get their data from the MLS in non-disclosure states. So the numbers ARE based on real cost-per-sq.-ft. data. And I find that it tends to be pretty accurate for Albuquerque. I mean, if you know that all of the houses in the area have sold for $100 and yours is brand new inside and you're asking $110K, you'll probably get some nibbles. (Obviously, gross generalizations here.)  But, you have to know the comps...as in, how do they compare with yours?

Petr: No, I haven't talked with any, but there are lots.

David Dachtera · Answer

@Petr Anisimov,

You'll want to vet the person, yes, but you'll also need to vet the deal.

You want to see the numbers and be shown how the deal protects your investment, makes a profit and repays your investment with the agreed upon interest.

If your borrower cannot do that, I'd pass in it.

Chris Stone · Answer

New mexico is a "non-disclosure" State. Sites like Zillow and Realtor.com can only estimate off the "for sale' price. I would want first or at least second position on any deal. I think Matthew Cole is right. I would pass.

Petr Anisimov · Answer

@Marc C. Hi Marc, I have not even thought about contacting hard money lenders to offer them to lend my money out. I was told that the going rate for Albuquerque is from 8 till 15%. Would they be interested in shelling out 12% to me? Do you have any names in mind that I can start talking to?

Thank you! and yes it sounds "thin" the more I think about it the less I want to get into it.

@Matthew Cole that is my concern exactly. Why does she need me on this deal? I will ask for her references however.

Should I provide private money to fund this project?

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