All Forum Posts by: Scott Krone

@Nik Moushon The template is a great tool we utilize throughout the process.  We have made offers through brokers.  They may have a relationship with the owner, but not always.  Most recently, they did have a previous relationship.  
That being said, we get cold calls all the time.  It's real estate, anything is for sale for the right terms.  Zoning, financing, environmental Phase I and Phase II, you may want to include geo for raw land.

@Colton Reid howard I am confused if your loan request was for a SFR or a MFR. MFR is typically considered commercial by most Chicago lenders. We are based out of Chicago, and have used Chicago area lenders for all our SFR as well as commercial properties all under LLC's. I would suggest a smaller local bank that you can build a relationship with. It may be a matter of how much equity you have in the deal, or your personal guarantee. If you need a stronger guarantee, then perhaps consider partnering with someone who can assist in that or experience. Another suggestion would be to have your team, broker, architect, builder all lined up and promote the team to your potential lender. It is all about risk management.

@Nik Moushon  I will try to answer your four questions with 2 responses.  

First, being prepared by knowing the market and keeping an eye out for potential deals.  Many times we make offers on properties that are NOT on the market because we know the market and what we can afford.  Part of the preparation is knowing the zoning, and what processes will be necessary to move the project forward.  Another part is building relationships with investors and lenders so when you do have a property they are not surprised!

Second, as @Jason Hsiao mentioned, we won't have all the numbers finalized, perhaps the zoning.  That is what the due diligence of the contract is for - to determine if we can confidentially move the project forward.  On large projects like the one you are considering (a big one for "new" investor (your words not mine), we would have zoning, financing and environmental contingencies to mitigate the risk of closing and our earnest money.  

@Dave Foster

@Dave Kansagor  It was the former SaraLee factory, which was demolished.  The new development was 316 condos, 64 townhomes, 16 single family, underground parking, club house, water retention, and all of the streets, landscaping etc.  My role was two parts.  I worked on the overall plan for the community, and the unit layouts.  Once that was done, I also worked on the financial modeling of the development.  

The first steps for any development is understanding the market - what demands there are for the proposed product, current supply/inventory, what the community will accept with respect to zoning.  We initially proposed 1,000 condos, and the city boards approved 400 total units of condos/townhomes and homes.  Lots of risk on a 6 - 8 year plan.   Markets conditions can change during that time.  What I learned was how to negotiate and know your out position.  When I worked on it, I did not have an appreciation for the market conditions.  From my perspective, it was more of a Field of Dreams mentality, "If you build it they will come."  I am not saying that was the developers position, that was my limited understanding at that time.  That being said, I do see a lot of "newer" investors have the Field of Dreams mentality.  Today, we don't buy without having a full knowledge of the market.  We hire third party consultants to advise us of the markets.  We spend a good amount of money annually on those studies.

@Dave Kansagor What role have you been asked to add to the company.  There are many different roles within a development company.  100 acres is a very large development.  The first one I worked on was 50 acres and 400 units - 6 years of work.

@Kirt Sangha  4.5% cap in MF right now is very aggressive with little margin for error, especially for a new investor who has not done a develop before.  With respect to cost, what type of development are you considering.  SF, MF, number of stories, parking etc.

@Travis Hewlett.  Hard to top @Brian Burke and @Ben Leybovich!  I have not had the pleasure of meeting Ben,  but have with Brian, and his thoughts are always beneficial.

I have been in real estate for 25 years in MF condo, MF rental, SF, Townhomes, Notes, Retail and Self Storage.  What I have learned is no market stays hot forever.  I see many who approach it like their market will never have a down turn, and for me that is the most dangerous position.  I will try to answer a few of your questions.  Please keep in mind there were many factors which caused the Crash in 08-09.  The biggest factor was the underlying assumption on the market combined with the lending structures propping it up.  It was not sustainable at any level.  That being said, I don't see the same extremes in the market place today, but there are some commonalities in specific market places.

What I learned from the crash - When everyone is investing in one market, sell don't buy.  In 2008, I saw doctors, lawyers, even carpenters I used to hire buying property for tear downs far above market price.  They were all buying on speculation and growth.  They did not respect the fundamentals of the market.  I stopped buying and sold.  I was even criticized for selling "low" as I was wanting out of the market. I am thankful that I was able to see the signs.  One was many "experts" were forecasting the downturn.  

The other thing I learned was, entities were desperate to place money.  The majority went to one market - apartments.  It was the only commercial real estate any lender would loan.  As a result, the apartment market took off.  The other strong growth was senior care (similar to MF with a higher entry barrier).  Personally, I see many of the same conditions in the market place - properties being bought at historically low cap rates, growth based upon speculation, and now inventory.  The markets are beginning to outpace the demographics.

The last point I learned was those with cash - crushed it post crash.  They could buy at the right prices points.  Real estate can with stand a market correction, if it is positioned correctly with respect to debt.  The reason the SF market crashed was it was over leveraged.  The leverage was so high because of speculation and trying to create ridiculous rate of returns to compete against the stock market.

How long for the market to bottom out - I agree 3 years to get to the very bottom.  Market timing is very hard.  Most of the losses however were realized in the first 18 months.

Indicators in markets that helped investors know they would recover - each product type has its own indicators.  SF very different from Self Storage, etc.  That being said, jobs and education typically drive the market.  People tend to go where there are jobs, and want their kids to go to good schools.  The better the jobs and schools typically the better markets - not just for SF, but the other markets as well.  That beings said, real estate taxes, state taxes, climate have all impacted the market places.  We have had friends leave our market for similar jobs in lower tax states and communities.  That is partially the reason TX and NC are growing.

How to prepare for the crash - Buy right and don't over leverage the properties.  Make sure the purchase reasons are based upon the fundamentals not speculation.  We study demographics and market conditions before we consider purchasing a property.  If those factors are not solid existing conditions, we don't move forward.  

@Nick Gray @Nicole Marshall @Dustin Beam - With your back grounds it seems you are more analytical than sales.  I have a Masters in Architecture.  During my masters, I connected with a professor who was a real estate developer, architect and GC.  It was there I learned, I enjoyed putting the deals together and structuring them.  Like architecture, the art is in the structure of the deal.  

While others have been advising for you to stay for income verses wealth (only you can identify what you believe is wealth), I would encourage you to look wide verses the traditional roles - flipper, RE Broker.  There are many fields to pursue within real estate.  That being said, I have never worked 9-5!  I have been in RE for 25 years with a focus on development, design and build.  I have enjoyed it greatly, as it combines both the creativity as well as the "engineering".

@Kelly Hering  - good problems to have.  We have found it is better to establish systems during the good times, and they will carry you through the tougher times.  That being said, we have one over all company, and each of our investment properties are in their own company.  We also have clients.  It is important for us to keep all the bills accounted for each property.  The equipment could/should go under your overall company, and can be depreciated as asset.  It can also be "billed" to each project, similar to the materials.   Labor should be easier due to each worker recording on a daily basis were they worked.  If you are doing tear downs, they will tend to be on one job for a longer period of time.    Personally, each day I record which of the 8 or so projects my time went towards including the overall company.  Hope this helps.

@Jonnathan Thompson  There are primarily two means to accomplish what you are asking - they either are Private Money Lenders (PML) or an investor can share an equity position.

While I don't agree with @Ned Carey position, that a PML is in a safer position, there are benefits to being a PML.  They are only in a safer position if they are in first lien position (first loan on the property).  A second lien is unsecured, and is not safe (the RE crash of 2009 was not too long ago).  A private money loan offers your investor a rate of return - typically a lower rate of return because the assumption is they get paid first or second.  That is the benefit, they get a "rate of return" over a defined period of time.

An equity position (owner, partner, member in LLC - these are all the same terms), shares in the risk as well as the reward with you. Typically, there is a bank loan, and then the equity position fills the balance of the cash requirements. Typically, the investor gets a % of the profits or a guaranteed minimum follow by a % split. You can structure it any way you feel is best to appeal to your investor.

I believe your larger question is how does one fill the Sources stack.  Uses are how you spend the money.  Sources are where you get the money to spend.  Most use debt for a large portion of the Sources stack because it costs less, and they can increase the rate of return on the equity or cash position.  Most real estate transactions with bank debt require equity/cash from an investor.  One can use  friends, family, investors to fill this portion of the capital stack.  Either way, the deal is typically attractive to an investor based upon level of confidence, experience, length of time, level of risk, amount of money at risk, and rate of return.  Most presenters of deals focus too much on the last item and not enough on the others.  Generally speaking, a 30 year old investor (higher level of risk for growth) has dramatically different goals and level of risk compared to a 70 year old investor (lower level of risk for asset protection and cash flow).  You need to get to know and most importantly understand what your potential investors are seeking in order to know what they want.  Propose a structure that makes sense to both of you.

Either way, I would suggest you contact an attorney to properly guide you as to how to structure your project - either with PML or equity.  There are rules and guidelines one needs to follow.