Thursday, March 03, 2005

House 11 Exit Strategy

This is in response to a question in the comments on the previous entry - what is my exit strategy and how did I pick this property, given that I have investors in this.

The deal with my LLC is that I get 15% of the profits and the investors get the remaining amount. This is actually less than the 25% the manager of other LLCs that do similar things charge.

When I started looking for properties, I started with the standard rule of buying at <= 75% of fair market value. None of my offers were being accepted and I quickly realized that the Phoenix market is too hot right now for there to be many of those deals. I changed my strategy and started looking for properties that I could get for $20,000 or more under FMV. Those were more plentiful, but I still wasn't getting many. I had decided to lower my limit to about $10,000 plus repair and resale costs under FMV. In other words, I wanted properties where I could get at least $10,000 profit when all was said and done. House 11 I actually originally had at $25,000 under FMV, but then that damn second offer came in at the last minute and I had to raise my price by $8,000. Still, I'm getting the house at $17,000 under FMV. I think I can sell it a bit over FMV once I have it repaired (due to the hot market here), and, as I mentioned in a previous comment, I think I can make about $12,000 on this.

Note that I said "I can make..." In actuality, it's my investors and I making this amount. The fact that I have other investors doesn't really change how I approach deals.

I have just recently started thinking about another possibility to make some extra money on this deal: a seller carry-back. The house will be completely paid for, so when I sell, I might be able to offer seller financing for all or part of the purchase price. Of course, I don't want to carry a 30 mortgage note, even though it would provide good cash flow. The purpose of my LLC is to flip houses, not create monthly cashflows. But, if I simultaneously sell the house with seller financing and then sell that note at closing to another investor, I might be able to get some extra money out of this.

This is due to the time value of money. If I carry a 30 year mortgage for $150,000 at 7% interest, that note is worth more than $150,000 today because the buyer would get interest payments for 30 years. I need to do a lot more research into this, but it's something worth checking out.


Shaun said...

Well, forget the note selling idea. It looks like I had it backwards - notes sell for less than their current balance, not more.

Anonymous said...


I just started reading your blog recently, how many hours do you spend on REI every week? is this all you do? or is this PT?



Shaun said...

Heh.. Believe it or not, I'm just doing this part time right now with the goal of doing it full time in the future. I was spending about 1-2 hours a day on it, but 1 hour of that was looking for a property and doing title research on available properties. Now that I've bought one, I'm not doing that and am just spending time reading up on various subjects - maybe 0.5 - 1 hours a day. Once my property is sold, I'll be looking again, so the time will go back up. I'm trying to recruit birddogs so they can do some of the legwork for me, but that has been surprisingly difficult.

Steve said...

I know exactly what you mean about the amount of time it takes finding properties, as evidenced by my recent blog entry. I wish my wife could handle the chore, but she's busy with other things herself (mainly my 2yr old daughter). I am seriously thinking of advertising in my neighborhood for teens who want to earn money and learn a valuable career to do the legwork. Maybe charge $1-$5 a property they find me that meets my criteria, and a bonus if I close on a property. It's just getting too time consuming.

Anonymous said...

Great blog, Shaun. Good information. I am a novice investor in the Maricopa County area as well. Would be interested in meeting and getting your thoughts on the market in Arizona.


Bginvestor said...


Sounds good! Are you going to use a realtor to help you sell the property? I've heard setting up a auction is a great way to get full price while selling it FSBO.

FYI - I like your site. I put your link on my site. Check it out some time!

Shaun said...

At this point, I haven't decided if I will use a Realtor to sell or not. My agent only charges me 1%, so really my biggest expense will be the buyer's agent, so even if I went with one of those place that puts your house on the MLS for $500, I'd still have the buyer's agent to pay. I have read about the FSBO auction routine - from the "Sell Your House In 5 Days" book or something similar. I also know some FSBO websites and am on a couple mailing lists that provide buyer leads. I think what will really drive my decision is what the final numbers come down to. If, for some reason, repairs costs are way over what I figure, I may try the FSBO route initially. If the holding time gets too long, I can always call my agent later. I'll keep everyone posted :-)

Steve said...

Interesting. FWIW, I always figure 7% selling costs on the backend in addition to a min. of 6 months holding costs. I admit this usually drives down my offer prices a bit ($5k-$10k). I've thought about FSBO, too, but I honestly don't think I would have the time these days to put forth the marketing, showing, etc.

hespy said...

hey shaun, how did you set up your llc to account for investor's funds? Is it set up as a joint venture or do you have them as limited partners or something else. Also, do you have enough investors to pay for the entire house or are you also kicking in some of your own cash.

Shaun said...

The LLC is set up with the investors as the members and myself as the manager. As such, they own the LLC and I merely run it. Stock was issued to them in the same ratio as their contributions to the total amount raised. On the advice of my CPA, we issued stock for a small dollar amount and treated the rest of the contributions as a loan to the LLC from the members. She said this is better for liability reasons since the LLC then isn't flush with cash and a lawsuit target.

For this LLC, I did not invest any of my own funds. However, if I did, everything would have been handled the same way.

hespy said...

That's interesting. I'm in the process of structuring the company to allow for investors. I read somewhere that having a pool of investors cash that is used for multiple properties could be considered a security and therefore subject to additional regulations.

Is there a min/max duration for investors to keep their cash in the llc? And do you send out an (semi)annual fixed dividend or is it based on profits for individual properties?

Thanks for the info.

Shaun said...

Hmm.. I've not heard about that. I do know that you cannot solicit for investors to the general public without registering with the SEC. However, getting investors from family members, friends, acquaintances, and word-of-mouth is allowed without SEC registration.

For this LLC, there is no defined min / max investment lengths, but that is probably a good idea. My plans are to end the LLC after a couple years, simply as a protection against liability. I happen to know the investors pretty well and know they won't be asking for their money back next week, but if (when) I do this again, I will need to include that verbiage. The other LLCs I have invested in and talked about here before have a fixed duration of 3 years and you are prohibited from withdrawing your contributions during that time.

I plan on distributing profits every 6 months. I'm modelling that on the other LLCs I am in, which do the same thing. And I'm distributing all the profits each time, not a fixed amount. Since an LLC is a pass-through entity from the IRS' viewpoint, the members get taxed on the profit whether they recieve them as a payment or the LLC keeps them and reinvests them, so I figure I might as well send out the money.

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