Wednesday, February 06, 2008

Flipping LLCs Having Hard Times

Time for another update on the four LLCs I am invested in that flip foreclosures in the San Fransisco area.

Times are indeed hard in the California real estate market. I received a letter from the LLC manager stating what everyone already knows - the market sucks. Prices are depressed due to a flood of inventory, especially REOs and short sales. The LLCs have not been able to sell any properties. Since the companies are paid by taking 25% of the sales profits, no sales means no profits which means no income for the companies.

They have now exhausted their working capital. They are laying off about 60% of their workforce and those that remain will be taking a pay cut. They will also be moving to smaller, less expensive offices. They are asking the members to vote to change the operating agreement of the LLCs to allow the collection of a 4% annual maintenance fee to fund their ongoing operations. In return, they will forego their 25% stake in the profits. This will allow them to continue servicing the properties and give them additional time to seek alternative sources of income.

Personally, I'd like to refuse this request. One of the LLCs I am invested in was supposed to have closed a year ago and the investor's principle have been returned. That LLC is still operating because the properties left in inventory have not yet sold. I know they market is bad, but I have a hard time believing it can take a year to liquidate their inventory. I suspect they are still holding out for top dollar or close to top dollar. These properties were all bought at big discounts, so they should have some room to drop the prices for a quick sale. Of course, that's easy for me to say when I am not in the area and don't know all the details...

So despite my feelings, the reality is I have to approve this request. They currently have about 70 properties in their inventory, spread over 5 counties. It is in my best interests to allow them to continue to use their knowledge of the properties to get them sold.


Anonymous said...

The real estate market here in the greater SF Bay Area is divided into several submarkets. If these entities bought foreclosures out in Modesto or Stockton over a year ago, prices have now dropped below whatever they paid for the foreclosures. If they used leverage to make the purchases, there is probably no equity left to recover. These folks will be going bankrupt soon anyway. They are just looking for some income to keep themselves going with the 4percent fee.

If they bought in the immediate Bay Area in desirable areas (like San Francisco proper, the Peninsula or Southern Marin), values are just now beginning to decline. I doubt they bought in those areas, because there were very few foreclosures a year ago and they would have sold for full value.

The last big round of limited partnerships and syndications was back in the 1980's. Big or small, those ended badly too. You were probably in high school when the RTC finished cleaning up the mess.

In your shoes, I would vote against the fees and insist that these folks sell or send the keys to the bank and wrap this up. Take the loss, and move on.

Shaun Stuart said...

They did not use leverage. Properties were paid in full with cash. I've got a list of their properties. None are in Modesto and a couple are in Stockton, although I don't have the details of when they bought those with me. Their stuff is in the Alameda, Contra Costa, Solano, San Francisco / San Mateo, and San Joaquin / Stanislaus counties. Some of the properties are leased, so there is some income coming in, but not enough, apparently.

Anonymous said...

Anything in Stanislaus or San Joaquin County has dropped dramatically. Tracy, Modesto, Manteca and Stockton are out there. The City and County of San Francisco are one and the same. Values have held up well. San Mateo County is most of what is known as the Peninsula. Most of that area has held its value as well. Alameda and Contra Costa have gone down, but the percentages vary in these demographically and geographically mixed areas. I don't follow Solano County closely, but I'm sure the declines are significant.

It sounds like they bought too early in the cycle and the majority of the properties are under water. The last cycle peaked in 1989 and values took about 5 or 6 years to recover. If you don't want to wait that long, try to force liquidation. Good luck either way.

Anonymous said...

how safe is your principle?

If you vote to give them the 4% fee and take away the 25% commission, then what is their incentive to actually sell the properties.

Shaun Stuart said...

The manager is also a Realtor and the listing agent, so he earns his 3% commission on the sale.

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