work and thought project for newbies. Please join in.

[Rich Weese]

It is always important to be able to analyze properties and potential acquisitions/sales. My belief is most of the profit is made on the buy. I have an opportunity in real life and want to throw it out there. There will be 2 choices on this "assignment" and it'll be a good opportunity for you to do some thinking and "paper trading". I already know what my decision will be, and I'll eventually tell you why. I want you to think for yourself first. Take this as fun.
Scenario- I bought a 64 lot subdivision in So. TX a little over a year ago and have posted the terms on BP.. I made a good deal because I had an exit strategy. I built some 4br rental homes to keep it flowing, AND convinced the City to allow me to gate the 2 entrances and make it a gated community. Values and prices of lots were more than doubled by going gated community with very little cost. I've sold a few lots and built a few presold homes. I just ramped up and have started 4 new Model homes, because the market is really strengthening.
I figured I could completely build it out in 3-5 years. Currently, I can make about 30K per home and that would hopefully increase as the time goes on.(1.5 million at present values GROSS)
Option 2- I just had a very heavy hitter in So. Tx make me a cash offer on all remaining lots. At his offer, I can double my money (600-700K profit) and 1031 to something else. He has a bank in his pocket and likes all the characteristics of this project- City, Schools, proximity to Mexico, price point etc.
Now, those are the choices . What do YOU choose and why. Don't be afraid to respond. Many things could be considered.
1. time value of $$
2. other money making vehicles
3. Etc.
Just jump in with your choice and why. Use all the points you can to back up your selection, kinda like a debate. Rich.

p.s. I'm sitting at a hotel on Ft. Lauderdale Beach and bored for the afternoon, hence the posts!! Tomorrow, back home.

[Account Closed]

Originally posted by Vikram C.:
Charles, a couple of comments regarding your analysis:

1. The discount rate that an investor should use should be the opportunity cost of his capital with a similar level of risk. Since Rich can probably invest the proceeds of a sale at a much higher rate of return than 8%, he should use that higher return in calculating the PV.

2. The leverage assumptions should also be similar across both the options. One would assume that if Rich wanted to extract cash out of this project, he could do so by using leverage now. Therefore we should assume equal leverage for both scenarios. (Perhaps Rich can let us know if, for some reason, he is able to use leverage for future projects but not on this one.)

Vikram, I agree. I was trying to extrapolate the rate based on the present value used in the example. A simple present value doesn't help in understanding the rate of return needed or expected.

On your second point, the sale provides immediate cash that can be leverage into a new investment assuming that 650K is close to market value then with a 25% down payment you potentially can leverage into a property that can produce a far greater return. Not sure what property is available in the area, but 600-700K provides good leverage to perhaps by a 200 lot subdivision that allows for similar 30K profits.

[Sherri Abrams]

Rich, I'm a newbie and I agree "cash is king". I would take the money and run. Run and start on some more investments. It's a sure thing and it allows me to move on to other investments.

[Bill Gulley]

Rich seems to have interests in many areas, limiting his reinvestment to this subdivision seems to be a rather restrictive assumption. I believe he said he has done some transactional funding, if so, using such investments as an opportunity costs might be more valid, obviously it's an acceptable risk and experience level for him.

Walk away Rich, no, don't walk, run! LOL

[Emilio Ramirez]

From a newbie point of view, this is a no brainer. Double my money in one year! Take the money and run. I don't have to calculate IRR or opportunity cost of money to tell you that.

One thing that hasn't really been addressed here is the market. Rich said the market is "strengthening", but all I really know is that it is in S Texas and close to the border. If this were my deal, I'd need to know who was buying these properties and what are the chances of them being able to continue to buy these properties with the current economic situation in the US. Much more risk in holding the land and relying on the market to continue strengthening. I would take the sure dollar today and live on to try again.

Rich in his situation can do whatever he wants because he has multiple exit strategies on the property. I'm going to bet that he sells.

[Vikram C.]

Originally posted by Emilio R:
From a newbie point of view, this is a no brainer. Double my money in one year! Take the money and run. I don't have to calculate IRR or opportunity cost of money to tell you that.

Emilio, I actually believe that it is a mistake to think that way. To me, the decision is completely unrelated to how much Rich paid for the property. It makes no difference whether he had doubled his money or halved it because what he paid for the property is in the past. It's done and over with. Good investors need to have selective amnesia - forget what you paid for it but remember the lesson learned.

The decision really is all about opportunity cost of his money. Whenever you optimize your portfolio, the thing that you want to ask yourself is whether your money is being put to its best use. If you can invest your money in something that is going to give you a higher return than your current investments, then it makes sense to move your money into the new investment.

Obviously, this has to be done with good judgment and you should not constantly be rejigging your portfolio. But the main thing to remember is that portfolio decisions have to be based on future opportunities and not on past costs.

[Emilio Ramirez]

Vikram. I understand your point about not looking back. As an investor I have learned to analyze different stratgies through various methods and make an informed decision. Newbies, however, can easily get caught up in the numbers. I am still licking my wounds from my first deal and have a hard time getting past, past costs. As far as lessons learned, only time will tell.

Regarding this specific situation, however, my response is geared toward the current economic climate in the US and its impact on the national RE markets. I would not be confident in the next 3-5 years for new home construction in the US.There are way to many intangibles.

For example, rich said that he was building on the border. What if his current market is illegal aliens? There is such an uproar right now that they may get run out of town. Then what? He has no one to buy his homes. Plus the cost to build them goes up because all the workers are now legal as well. That's just one thing that could go wrong and impact his anticipated return.

Give me the 1.2 million and take it offshore to Panama or Brazil.

[Vikram C.]

I understand, Emilio. I just wanted to put that post in there for the benefit of future readers because it is important not to look back.

BTW, I will be a bit surprised if Rich is marketing his gated community properties to illegals! :mrgreen:

[Rich Weese]

More good replies today, so let me fill in some blanks and give actual #'s on this deal.
There were 64 lots. 3 homes had been built when I bought the first 5 lots for 16K each and built 5 homes. I kept each one, didn't attempt to sell and have them rented. I bought 5 more lots and did the same thing. Several of the renters wanted options to purchase. 2 other lots were sold to 3rd parties. I then bought the remaining 49 lots for 12K ea (600K approx).
I installed the gates, electrical, phones , fencing etc for under 20K. The lots are now priced at 23.9 to 32.9 depending on size. I have 620K invested. I've sold a couple lots, and built and sold 3 homes. Net so far in profit is about 150K.
I think I have 43 lots remaining and I have offer of 23.9 across the board per lot. I can walk with just over 1 mil of which the profit is 550K plus what i've netted so far, a total of approx 1.1.
I have 4 models ready to build and have moved dirt to get ready. Homes will be selling for 129K to 169K with total costs (including lot) of approx 95-110K. This provides a nice profit per lot of approx 40K per . I could walk away when all built with total of approx. 1.9 mill including previous profit.
So, sell now and net 700K and total of 1.2 to take elsewhere.
Or, build out and net 1.6 mill and total of 2 plus to take elsewhere, less devaluation of funds.
Now for questions or replies.

Sammy- no consideration has been given to up/down prices. I expect it to go up in this area for many reasons.

Gus- As I've stated in other posts, I use gold/silver as a hedge and own adaquate amounts, imo. In runaway inflation, I prefer highly leveraged RE.

Charles- I have the actual # of lots and profits calculated for a better comparison. Don't know if it'll make any differences in your decision.

Vikram- you're correct. I could leverage project, although adverse to loans. All lots, and models are F&C. Would PROBABLY prefer to go cash and risk less at my age and status. I also have the updated amounts of net, gross etc. There would PROBABLY be some tax consequence if it was built-out. Thank you for the comment on my abilities.

Sherri- thanks for the input. I understand your thoughts completely.

Finance- I'm sure I could make more in some other ventures- and spend a lot more time. I tried the transactional lending and am STILL resolving problems. I should've been more involved or not at all. I enjoy my free time.

Emilio-I have doubled money in different ventures and could do it in this. I'd then be looking for new venture and expend time neccessary to accomplish that. The city is Weslaco and lies between Mcallen and Brownsville, 7 miles from border. There is a city of 1 million in Reynosa, and most of our U.S. Companies, 1 million in the Mcallen valley, and the sleeper of Monterrey with several million a couple hours away.
All of these areas are strong with parties wanting to move money to the U.S. by buying RE. There are many reasons I like this area and am willing to invest again there with no reservations.
The buyers have been legals. There are many legal immigrants or part timers buying in U.S. I'm not concerned about the buyers. They will continue to prefer U.S. over Mexico as investment arena. I have RE in both and I hear the concerns from Mexican friends and business owners.

Keep the thoughts coming and I hope my responses have enabled better calculations and replies on your part. Thanks to all and I love the newbies joining in. Rich

[Rich Weese]

Vikram- just saw your post that was being posted while I was doing my slow typing. You're correct on the illegals.

Emilio- lived in Brazil for 2 years and wouldn't start investing in Panama or Brazil at my stage in life. Rich

[Vikram C.]

Rich, that changes things a little bit. Your choices are $1.2 million right now vs maybe around $2.1 million in 3 years or so. (I realize some of it will come earlier and some later.)

That's about a 20% annualized return if you stick around with the current investment. That's not a bad return but I suspect you know how to make a higher return. So from a purely financial standpoint, it makes sense to sell and redeploy your funds.

But weighed against that is the situation you are in your life. You like to travel a lot. The current plan is just one of execution and I am sure you can outsource most of the work. In addition, if it were me, I would get some satisfaction from completing the gated community and feel that I have created something that is going to stand there for decades.

In short, from a financial standpoint, selling is the logical thing to do. From a personal standpoint, you will have to make the call based on the things that give you satisfaction. You are in the happy position of being able to decide without regard to financial optimization!

[Mark Robinson]

Rich,
I wanted to thank you for doing this example and giving us homework. I find it very useful and practical. I can read all the books I want and see all the webinars out there, but a real world example with information on the why's and wherefore's can be so much clearer. Thanks for taking the time.
Mark

[Rich Weese]

Vikram- right on! You pretty much separated the determining points. I've actually only done one little subdivision before, a 16 unit in St. George, UT. It went well, but was a pain in the arse. I had to do all roads, utilities etc., where this one already had them in and just needed the City approval. One idea made a lot of difference on this deal. The work is outsourced.

Mark-Thanks for the props. You might enjoy some blogs I posted on acquistion of a larger apt complex and also on creating wealth. There is also a cool section on BP called Meet the Investor. Check out the 13 profiles on there for more info on myself and others.
Enjoy BP and learn from actual doers. Texas is a great place to be, imo. Rich.

[Mark Updegraff]

Thanks Rich, I'm headed to "meet the investor now"

Looking forward to your next installment of
Deal Analysis for Newbies, I especially like the fact that this was undeveloped.

Thanks for all your time on this site, your wisdom is priceless ;-)

[Tomas Janik]

WOW, this suppose to be for newbies??
Isnt newbie as newbie, most of these guys have some investing background, dont think that count as newbie, to be honest.

Newbie - like me, who really have no investing background, wouldnt know what to suggest.

Naturally by instinct I would sell and move to higher profit margin property using the 700K as 20% down payment, as mostly people suggested.

It also depends on personality and level of comfort, if you are fine waiting for the profit while selling lots and building on it in 5 years terms, why not.

However, it is great for excercise!!

Any more assignments?

[Rich Weese]

Tomas- this assignment has received many replies and now has slowed down. Maybe I'll come up with another assignment. It seems to be a popular method to get conversation going. Rich.

[Jason Edson]

I hope I'm not too late to reply! My full time job the last couple weeks has been taking care of my 7-week old son, and I just saw this thread.

As I've read through other replies, I keep bouncing back between two forces that drive my answer: cash-out vs. automation.

Cash-out: The numbers have been run (I still ran them myself - my high school math teachers always made me show my work), and I agree that selling now and moving on to a new project will generate enough additional funds over the same timeframe to be the right financial decision.

Automation: The hard work is done. If you sell now, you have to either start over again on the same type of project or find something new. Although you sacrifice money, I would guess that you gain significant free time.

I'm going to be counter to the other newbies and say that you kept it. I would say that even being a 29-year old newbie, I would have to seriously consider keeping it and spending more time with my son, my wife, and my golf clubs.

My entire theory here is based on the idea that the remaining work on this project requires significantly less hours on your part than doing other projects for the next several years in order to make the higher return. That would be where my "newbie-ness" shows and crushes my idea.

[Jason Edson]

Maybe I'll come up with another assignment. It seems to be a popular method to get conversation going. Rich.

I love case studies! I've always felt they're a great way to learn. It's nice to be able to work with real numbers and real results and is a fun change-up from looking at prospective deals with no "actual" answers.

Maybe some of the other vets on the site would be interested in adding some of their work as well? It could get everyone involved.

[Rich Weese]

Jason- I like your suggestion. I'd love to see other examples of real action on here to debate. Good point. Rich

[Rich Weese]

I stated I'd list my decision on this sale after the posts slowed down. This has occurred. I want to thank all who took part and did some thinking of their own on the choices presented.
There were great reasons for selecting either choice, and that is what made it interesting. The needs of the seller also entered in and might be different than another seller would have.
With that said, I chose to accept the offer, subject to finding a suitable 1031 exchange property. I also had a 5 day rejection period to change my decision.
During the 5 days, I had several conversations with the Builder that would be the partner in developing the models and the homes to be sold. The Builder had made some decisions that were difficult for them and had been counting on my project. They have one other project to work on, but at a much higher price point. This project would go hand in hand.
They had been counting on my project. Their advertising had been ramped up, additional crews had been lined up, sales staff had been hired, etc. This same company has already built 14 homes in my project.
In going back to the buyer and attempting to get a committment for him to use my builder, I failed. It then became a more difficult decision because there wasn't much difference in the 2 choices before me, imo.
I guess it came down to the relationship I had developed with the Builder. I just felt it wasn't right to leave him in the lurch. I notified the buyer that I wouldn't be following through with the sale.
Thanks to all the respondents. I hope you had fun with the process and will understand the final decision. (both of them!) We'll come up with something else in the future. As mentioned earlier, others on BP should post other actual projects that will solicit the same type of activity and responses from the members. It is good to have this decision over with. Remember, I never solicited this offer. It came out of the blue.
Thanks for joining in. Rich

[Mark Updegraff]

Wow Rich!
Incredible story!!

I'm glad you're looking out for the little guy. These are the same virtues I was taught by my family growing up and it is not something you see every day! It is no wonder you are successful in your endeavors. Thanks for sharing, once again ;c}
mc

[Vikram C.]

Rich, thanks for sharing this with us. In addition to discussing it with your builder, was there anything else that you wanted to do during the five-day rejection period?

[Scott R.]

Must say I agree, in this economy, think about not only the homes you are providing for familys but all the jobs you not only kept, but created to develope this community. I honestly think in your situation, I'd rather see the completion of a sub division I created. Awesome story.. ! Scott-

[Scott R.]

double post! internet froze.. sorry

[Scott R.]

triple. wow. sorry.

[Rich Weese]

Mark- don't give me too much credit. The Builder wasn't a REAL little guy. He would've been ok, but it would've hurt him for sure.

Vikram- There were no other items I was concerned about during the 5 days. I do like to mull things over somewhat and this was also the "mulling over" period. Rich