All Forum Posts by: Scott L.

Would someone have experience/advice on investing in the ground-up development of townhouses for sale as condos?

I've been asked to invest (equity) in the tear-down of an old house, and development of six, 3-floor condo units on the property. Demand seems strong for condos in this neighborhood. But I'm unfamiliar with the dynamics of this type of investment:

- Are the first units harder to sell and buyer-finance, because buyers and banks look at occupancy to cover HOA costs?

- Does the investor have to keep up homeowner's association fees for any unsold properties?

- I assume builders+investors can rent out a unit if it's not selling. Is positive cash flow an increased problem since the investor or rentor are contributing to common HOA costs but not getting the benefits.

- It seems like these are more risky as a project, because built-in equity disappears when the old house is demolished, and new equity depends on the builder delivering on time and budget. What special contingencies would I put on the builder/deal?

If you like building townhouses-condoss an property class, I'd welcome the chance to ask a few more questions. Thanks a million (or a thousand)...

Great points, Ann & Adam, thank you. I'm gettin' on-board the "straight talk train." Best wishes.

Hi, I'm a relatively recent home flip investor. There's a property going for $200K where I've been offered an equity participation and optionally the debt side. Is there a good case for doing both equity and debt?

The house can be acquired and fixed for low $200K range, with good potential. It would be financed 70% short-term hard money, 30% equity. I would contribute 90% of the equity for 10% preferred and 40% of profits. I optionally could take on the hard money loan at 12%.

I'm not clear what the impact is t if I take both equity and debt. For example, if the developer (10% equity holder) becomes unavailable, what does it really mean that I am responsible to myself for the loan and for the rehab?

On the plus side, I think the property is low risk with 30%+ equity returns, and I could enhance those return on a single project with debt.

Thanks for thoughts,

SL

This is a great/deep discussion thread. I'd appreciate anyone else (thanks already to @Jason Miller) chiming in about the viability of serious efficiency improvements on rentals. I'm hoping to both do a community service and make a bit of income by facilitating more insulation and other energy enhancements during home flips. However, most developers are so focused on turnaround speed and $ returns that taking time to apply for rebates is unattractive, and they doubt most renters will agree upfront to a premium for lower-cost energy at the time they're negotiating for the apartment. Thoughts here?

Here are 3 papers I've found about the challenges and successfull programs:

Overcoming Barriers to Energy Efficiency by Beth Williams at MIT - http://dspace.mit.edu/handle/1721.1/44348

Enabling Energy Efficient in Rental Housing, from the University of Minnesota: http://conservancy.umn.edu/bitstream/107532/1/Mitchell_Enabling%20Energy%20Efficiency%20in%20Rental%20Housing.pdf

On-bill financing of energy efficiency: http://www.puc.state.pa.us/Electric/pdf/Act129/OBF-ACEEE_OBF_EE_Improvements.pdf

I'd especially interested if someone is having success with rebate programs in Connecticut. Thanks!

Hello, I've gotten my feet 'reasonably wet' on home flips and now have gotten my first request to serve as investor on a commercial property. The opportunity happens to be a building of local bank that closed - small brick building on a busy commercial st.. My question is more general, however:

With any commercial project, it seems that knowledge of the type of business that will lease, the lease rate and other terms, the neighborhood and estimated customer density, stablity of the renter, all make a difference. The developer approaching me has ideas about this but I need independent validation. So, who do you ask?

Would a broker or undewriter involved in this type of property talk to me, out of the blue?

Would I need a specialist lawyer to negotiate the investment and lease?

Does the extra pre-deal advise get to be very pricey?

Are the online courses in commercial RE licenses worth much?

I plan to proceed cautiously with any commercial deals, but would greatly appreciate advice on how people switched to commercial.

Thank you,

Scott

Hello, I'm negotiating to be the primary investor on a 4-family home that needs refurbing then likely could rent out. The refurbishment needed first is extensive. I'm familiar with straightforward quick flips, but this seems more complex.

Could someone suggest key protective terms to put in place, or a source for boilerplate LLC operating agreement language to compare against? For example:

- Do people require receipts from the developer to confirm refurb costs?

- What happens during overruns - additional capital contributions? If I put in 90% of the cash and get back 70% of the profits (30% refers to the other person who is also the developer) - shall I ask fo a great % if more capital is needed?

- How to motivate the developer to continuing improving NOI after the house rents?

Thanks for any pointers to important terms to put in the agreement!

Scott

Thanks Eric, great perspective.

Very good points, Paul. In particular, the "insurance" benefit of hedging does seem expensive especially when using ITB, because this ETF tracker of the home-building stocks is very volatile in price, which makes the options expensive. I'm told by someone who's done the analysis that it may be less expensive with either options on an ETF of REITs, or futures on the Case-Shiller home index sold on the Chicago Mercantile Exchange. I'm looking into those next.

Hi Brandon, thanks for writing. There are good comps to indicate $6,600/mo rent potential, after repair work. Total monthly operating costs should be $2250.

In terms of the deal split, my partner would be the person who sourced the property opportunity and who will serve as general contractor. I'm solely an investor.

Q:So how might our roles affect the equity % returns? I've gleaned from BP forums deals ranging from 50/50 no preferred, to 8% preferred with 70/30 going to the investor. I've also read that general contracts might merit 20-40% markup over materials if bid out competitively.

Q2: Do you know of boilerplate/sample contracts between an investor and developer on rental properties? I'd like to compare those terms to the ones I see and potentially incorporate some of the safety features.

You've noted the key element of the deal. It's a good location and solid structure in a city with high demand, but the interiors were treated poorly pre-foreclosure so will need a major overhaul. At minimum, preferred equity returns may help buffer some downside.

Thanks so much,

Scott

Hi, I'd greatly appreciate any input on this deal. I'm fairly familiar with the terms I'd seek for a local (NYC suburb) single-family flip, but this 4-family has possibilities to flip or rent. The CAP and ROI seem attractive, but am I giving up too much in terms of the returns given my equity position??

• 4-family home.
• Purchasable for $310K, significant refurb needed (say $135K).
• Finance acquisition 70% through hard money loan, 30% through equity. **90% of the equity would be my contribution here.
• End-game possibilities to (a) put on the market to sell after 4 months refurb – could be worth $575K ARV and if sold quickly yield me a 30%+ cash on cash return, or (b) if soft buyer's market then put out to rent, with projected 9% cap rate.

My main questions:

• If I put in 90% of equity, what % of profits would be competitive? Maybe 50, 60 , 70%??
• Have folks out there arranged an LLC structure where the small equity holder (the developer) makes a higher % if it's sold quickly but the large investor (me) makes more if it's rented out for years? Or does this complicate incentives

Thanks for any thoughts, Team-BP.

Scott