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Wednesday, December 19, 2007

Louisiana Deal Is Over!

Well, not 100% yet, but it is close enough now that I feel comfortable writing about it.

The last time I wrote about this, the mortgage holders had a conference call to determine how we should proceed at the foreclosure auction and what would happen if no one bought the properties and we ended up with control of the buildings. The auction was supposed to happen on December 5, however I fully expected "Joe" to file for bankruptcy and thus delay the auction.

It turns out, he did not do that (at least, not to my knowledge). Instead, we postponed the auction. Why? We found a buyer for the mortgage! Now, normally, when a defaulted mortgage is sold, it is sold at a deep discount. However, we were able to sell the mortgage for 100% of our cost. This was mainly because the properties secured by the note are worth much more than what we were owed. Some other factors specific to the note buyer came into play as well. Namely, the note buyers had a legal judgment against Joe in another matter, so this helps satisfy that judgment somehow (I'm not entirely clear on this though), the purchase was part of a 1031 exchange the buyer was performing, and, to put it bluntly, the buyer has a little bit of a personal grudge against Joe and enjoys taking property away from him.

So, when you combine the fact that this was part of not only a judgment settlement, but also a 1031 exchange, you can imagine the paperwork involved, which was the cause for most of the delays. (Some were due to the 1031 exchange agent not being able to follow directions.) And since we are talking about a total just north of $1.7 million, you can imagine everyone wanted to be sure all the i's were dotted and the t's were crossed.

We will get back all of our original investment, plus interest due and late fees. The only hold-up now is that the amount that the buyer wired to us was based on a December 3 close date, not December 18. With the amount of money involved, the additional 15 days interest is not insignificant. The new owners also want a new assignment of interest form from us, so we are getting that to them. Right now, with the exception of the additional interest, the buyer's funds are in our attorney's bank account, waiting to be distributed to us.

This was a great learning experience for me. It was the fist time I have ever invested in any sort of commercial project. Although I wasn't involved in the day-to-day dealings, I did get to listen in on conference calls and see how more experienced players deal with problems. We went through several possible outcomes, including one where we thought we might buy a bunch more property and end up doubling our money. At times, it was a roller coaster ride and the end game changed fairly frequently. I felt lucky to see some serious deal-making at work and also to see how different deals failed and the reasons for their failure.

The ROI I was getting paid on this was 12%. With the late fees, I probably did a little better than that. But the money I invested came from a HELOC, which was charging me about 7%, meaning my net gain was 5%. (Although during the 1.5+ years I was invested, my HELOC rate fluctuated, so my net gain varied a bit as well.) In fact though, my net ROI is infinite. Because the money I invested was not mine, any return I got from it represents an infinite return - money from nothing. Note that I would not recommend this method for just anyone! Before I made the decision to invest this way, I needed be sure that if the investment went south, I could still make my monthly HELOC payments. It turned out to be a good thought exercise, as that is exactly what happened. I think, all told, I had about 8 months of no payments. I got all the unpaid interest back eventually, but until then, I had to make the HELOC payments myself. All in all though, an infinite ROI is pretty hard to beat!


At this point, I need to thank Les. He was the one who brought this investment to my attention. In fact, I actually bought out part of his investment in the buildings over a year ago. He eventually sold all of his interest to other investors (although he still kept a small percentage of each monthly payment as a servicing fee, so he was still making some money on it). However, even though he no longer had any of his own money invested in the deal, he spent countless hours working first with Joe and then with the note buyers to make sure his investors got all of their money back. I never once felt like he was not fighting for my best interests or didn't care about helping us. I cannot even begin to image the countless hours he spent dealing first with Joe (and from what I have heard, that was a nightmare), and then with the new note buyers. He will still get some money out of this deal, but compared to the amount of work he put in, I think it won't be much. If anyone has a chance to work with him, he's got my highest recommendation. He's honest, honorable, and a good communicator (although not so good of a typist). Personally, I plan to invest with him again.

6 comments:

Clifford said...

I certainly am glad this had a quasi-happy ending for you!

Doug said...

Shaun, you're talking about lesgee from the richdad forums, right?

I'm glad that this worked out positively for you - it could have been much worse...
This is one of the reasons why I only invest in projects where I can maintain a degree of control (if I can't afford to do it on my own and need partners)... I feel that is the only way to stave off potential disasters like this...
Pretty soon we'll have to get you involved in the larger multi-family deals (the 100-200-300 unit places)- those are exciting to work with once you have good management in place..

Shaun said...

Yup, lesgee. I'm ready for the larger multis.. Send me an invite :-)

Doug said...

haha, as soon as I find the next good target, I'll let you know... I'm very particular about these things though...

Kenric said...

Hey Shaun, send me an email. I've got another multiunit in the works with you know who. Let me know if you're interested.

mark said...

Great article on the real estate happenings, I really enjoy reading your posts. Just for your information, Donald Trump is in big trouble right now with his real estate empire. I hope everyone can pull through this slump!!

Elmo

Real Estate Professional

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