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Tuesday, March 25, 2008

Multi-Unit #1 Is Still Alive

Despite my earlier pessimistic outlook for this deal coming to fruition, it appears it now stands a good chance of happening. There is a group of investors that will be coming in to fill the funding gap that the loss of the mezzanine loan created. They still have to raise the money from their investors, but they have analyzed the deal and have a "high confidence" it can be done.

I know some readers don't feel this is a good deal. Everyone is entitled to their own opinion, of course, but it has been pointed out that the setup of this investment has some significant advantages over other similar investments by other groups. The principals of this project have structured it so that the bulk of the cash flow goes to us investors - the 9% preferred return. The principals have not marked up the purchase price of the property and do not earn a commission on the purchase price. They charge a 2% fee simply for their time and effort in putting this together. Further, after the 9% return to investors, the profits will be split 50 / 50 between the investors and principals. However, if the annualized total ROI drops below 20%, the profit split changes to 70 / 30 in favor of the investors. In short, the principals make much more money if the deal performs as they projected.

Of course, the biggest point of dispute is how accurate those projections are. If there is no profit, no one gets anything. While some people don't think the projections are realistic, I trust the principals and their knowledge and experience in this area.

Escrow is now set to close at the end of April. I look forward to that happening!

9 comments:

Jason Dragon said...

Wow, great blog, I would love to talk to you more about your ideas. I have been trying to find ways into the world of Real Estate. I keep finding good deals but don't know much about how to find investors. I have told people about my deals and made a ton of people a lot of money. Now I want to make some money on my ideas.

It would be great if we could talk or chat online.

Chris said...

HI Shaun,
I have been reading your blog and like that you think so logically. I am a new landlord and have a question that is not related your entry. Do you know if it is legal for a landlord to evict a tenant due to them continuously violating HOA's house rules and for landlord to collect the reminder of the lease's rent payments, even if the Landord can find a new renter down the road - prior to the lease expiration date? If you have time to answer this question, I would appreciate it. Thanks! My email address is: cdoan477@yahoo.com

Shaun said...

Since laws are different in each state, I can't really answer that question. However, you should be using a lease that is legal in your state, so I would suggest just reading the lease. Standard leases generally have a section on the responsibilities of the tenant and the consequences for not upholding them. Also, the lease should state how the remaining rent is handled in the case of an eviction. Truthfully, the lease may say you are entitled to all of the rent, but in reality you may find it difficult to collect. Even if you go to court and you win the case, most people don't have several months worth of rent sitting in their bank account, so you'd have to garnish wages and such. Most landlords would, I think, just be happy to get rid of the tenants and be done with them. However, the tenant doesn't need to know this. You can use the lease as a negotiating tool. If they do get evicted and are responsible for all the rents, tell them you will be willing to waive the rents if they move out in a timely manner and without damaging the property.

The Sakker said...

Shaun, thanks for keeping this blog. It is very informative. You don't have to do this, but you do--and it will come back to you.

I have a question. I have been hearing so much about land trusts. "It's a great way to stop foreclosure because the seller can place the deed in a trust, buyer can move in and take over payments, the DOS clause is not violated, and the seller's credit won't get ruined." I'm sure you know the drill. Why would a seller want to do that? What is his/her guarantee that the buyer/beneficiary will not also default on payments and the seller be left not only with ruined credit but without the house that could have been sold as a short sale?

Anonymous said...

Chris, check the landlord tenant act for your state - in Az you can only charge until you get a new tenant, and you must be actively trying to lease (if memory serves me correctly).

Sakker, check with an attorney regarding land trusts in your state, I know of attorneys in Az that say they are useless, and I believe you may have been mislead regarding the DOS clause for land trusts, I think it only applies if the owner does not transfer certian ownership rights, read the law (I think it's a federal law?)those bankers are smarter then we sometimes give them credit for...

Shaun, not trying to be rude or take over your site, just joining the conversation, good site from what I've seen. I'm also in Chandler and was pointed here from RDPD site. Are you still a member of that?

If you'd like to chat you can find me at rdpd user id jdgrego1 I'm always looking for local investors to bounce ideas with.

Later, John

Shaun said...

Sakker - Like John says, I've just looked into land trusts here in AZ and they are pretty much worthless for privacy protection. If I recall, in AZ, you have to list the members of the land trust, so there is no anonymity, which is the main reason most people want land trusts. So I never looked into them more than that.

John - I technically am still a member of RDPD, but I haven't been there in a long time... Maybe a year or more. I think my id there was ShaunStu. I read those boards religiously when I was just starting out, but haven't looked at them in a long time.

Terry said...

Found your blog from a link from BiggerPockets. Started reading and man you get into some interesting "deals". Curious as to why you aren't doing the investing/developing yourself. I would have a hard time relying on someone else to make the deal happen. Curious as to your thought process and rationale. Thanks and keep up the good work.

Shaun said...

Terry - It's all a matter of available time. I still have a day job, plus a wife and daughter, so the amount of time I have available to spend on real estate is smaller than I would like. But I've found people I trust and have no problem investing with them. I wouldn't invest with just anyone off the street who came to me with a deal. Also, by partnering with other people, I can get into bigger deals and take advantage of the experience of people with more real estate knowledge than me. I think partnering is very important. If you've got the game Cashflow 101, trying playing it with each person doing their own thing and then again with everyone partnering to help each other. See which way gets you richer faster...

Terry said...

Lack of cashflow and time. That applies to just about everything in life! Appreciate the honest answer just for the sake of satisfying my curiosity. In reading the posts I did, I couldn't tell if you were teamed up with a group you knew and trusted or not. Good luck.

I know you have been getting some grief over this multi-unit #1 deal. I won't comment on whether I think it is good or not. Don't know enough detail. However, I can say that if I had listened to the majority vote on the deals I have completed, they never would have gotten done and I would be a heck of a lot poorer now. Keep up the posting.

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