All Forum Posts by: Cliff Mccue

This article just came out in Crain's

http://www.chicagobusiness.com/commercial-real-est...

@Yusuf Salloum 7% for your property is a steal.  Your property manager is the most important person on your team.  They can literally make or break your investment.  Would you go cheap on your money manager?  A bad property manager can cost you 10's of thousands by placing bad tenants or not maintaining the building or not collecting rents.  All this to try to save $36 a month?  If you are shopping for the cheapest manager you are going to experience it in your bottom line. 

@Kenneth Dai CHA does not pay for abated rent.  They will prorate the rent for the time that you were not abated.

@Jay Hinrichs

Things are going great here.  If you have time the next time through Chicago, I'd love to catch up with you.

I have seen this type of stuff frequently and I think it highlights poor business management.

We are now in a culture, because of financialization that few people want to actually grow a business.  Generate revenues, which turn into profit, then reinvest those profits to generate more revenue and on and on.  Everyone is looking to tap the debt market or the equity market and who cares about profit, they are "gaining market share."  There are so many companies that think they can out run their loses by continuing to tap the financial markets.  I think it is very common in real estate because of the high reliance on leverage.  If I make 20% on the 100k I borrowed, well then I can easily do the same thing with $10million.  When you skip over those growth stages, you don't realize the unaccounted for expenses that went into making that original 20%.  You don't realize that yea you made 20k but you put in 300 hours to do it.  When you get to $10 million, all of a sudden you need to actually pay someone to do that work and you business model no longer works.

That is why I think it is so important to do your due diligence on companies that you are going to lend to.  Hire a private investigator.  If you are willing to cut a check to someone for $100k, maybe you should do more than take their word for it or their "references" word for it.  But most people are too lazy to do that, so stuff like this continues to happen.

@Yin Choi

@Julia Tse

I think @Lindsay Hirsch's post says a lot so I am not going to comment on this particular company.  But I also have spent the majority of my career in finance.  You are accurate that they need to spin off returns in excess of their expenses (including there cost of debt), but to make the comparison of a small company to a company that has registered bonds is a stretch.  You have to look at things in terms of scale.  Returning 5% on $100 million is very different than returning 20% on $100k.  The reason why these yields are so high is because large investors don't have the time to do the due dilligence on all these small companies.  It takes just as much time to place $1m as it is to place $10k.  No large investor is place 100 bets when they can place 1.

I think it was Buffet that said it is much harder to return 10% on $1b than returning 100% on $1m.  

@David Greyshock

I started off in finance.   My job was to recognize mispricings in the market place.  Everyone had their own valuation models and they used them to calculate their own internal fair value.  If the market was under priced relative to this you bought if it was overvalued you sold.  There are dozens of pricing models for stocks no one model is right.

When you look at appraisals, what is the purpose of the appraisal?  I would argue the primary focus off an appraisal is to protect the lenders interests and a bi product of that is protecting the buyer's interest.  The bank doesn't look at single family and small multifamily homes from the buyer's(investor) point of view.  They look at it is what is the current market price in the area and am I paying over market value.  Which is fine, since they are putting down 80% of the money.  

Now when you start to look at commercial properties valuations tend to get cloudier because the lenders will look at it as an investment.  They will look at the cash flows of the properties and they will make adjustments to their inputs relative to a variety of factors regarding the property.  One example would be quality of cashflow.  If you have a retail strip full of national chains vs nail salons.  The valuation would be different depending on who your tenants are, with all other things the same.

With that all being said, currently single family homes and small multifamily are only viewed as owner occupant and their values are derived by comparable sales.  There are plenty of turnkey operators that sale at or below market value so as a buyer there is no reason to stretch to make something work.  

Lastly, one thing that is not addressed in the appraisal.  It is the quality of the property manager.  I would argue the quality of the property manager is more important to the value of the property from the investors point of view than what the house next door sold for.  A bad property manager will destroy your investment, just like management of a company you own stock in.  They can either create value for you or destroy it.  This will never be adjusted for in an appraisal.

@Darrell Odum

@darrell odem I can't speak their ability to repay an investor.  Here in Chicago they are defendants in a fair amount of housing court cases.  The amount of cases would make me worried about the product.

@Marcin Chojnacki

About what was the price of the laminate per sqft?  Just the material cost?

Thanks,

@Robert Obniski

First it depends on if it is fully permitted or not.

Plans and permits will be significantly more expensive.

No permits/under permitted will probably run you around 60k a unit

With permits could run 80-90k a unit.  Depending on what comes back on the plans.