| property investment - selling off the plan |
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jules21
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| property investment - selling off the plan |
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hi, i just arrived here. am looking for reasonable and informed advice on a real investment i've just dived into.
i've just invested in a property scheme that goes like this:
1. manager of joint venture negotiates purchase of 4 lots of land.
2. i (as 1 of 4 investors) guarantee purchase of 1 of 4 lots.
3. manager of JV has 3 years to get planning approval and pre-sell, off the plan, 75% of (planned total of 16, possibly 12 apartments depending on council approval) apartments to be built on land.
4. investors (4 of us) buy 1 apartment each, so sales of 4 of those 16 (or 12) are 'guaranteed'.
5. if pre sales conditions are not met, investors may elect to wind up JV. in that case i 'own' my lot of land (see step 2), or more accurately have to pay it off.
6. if development gets up, i own 1 of 4 apartments on a block as a tenant-in-common with other 3 owners, part paid for with my share of JV profits. the scheme was sold to me as having a potential rental yield of 4-5%.
profits are distributed 50% JV manager, 50% amongst 4 investors.
manager covers architectural costs, other "in kind" contributions, but is not liable for any final resulting financial losses.
i know the manager of the scheme, and have confidence he is honest and sharp. he is successful and experienced in this type of project.
essentially i'm a silent partner, the manager makes the decisions and does the work. but are there any tips people here can offer for my involvement - what i can do to secure my position? what are the hidden pitfalls?
has anyone ever involved themselves in such a scheme?
the obvious risks are that the development conditions are not met (i.e. presales) and i end up owning a block of land. the other is that the development costs balloon, for which i'd be part (but severably) liable.
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Mon Jun 25, 2007 1:07 pm |
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oldguy
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quote:
on a block as a tenant-in-common with other 3 owners
The tenants in common ownership gets messy in a hurry, someone gets married/divorced, the ownership goes to the 'other'divorced party, a sale/liquidation clause is exercised. So you and one of the others could well be 50/50 partners in 5 years, you'll have to buy out the others to save it.
quote:
know the manager of the scheme, and have confidence he is honest and sharp. he is successful and experienced in this type of project.
Yes, sharp - that's why he gets 50% of the profit (if there is some) and 0% of the loss (if there is some) - a no risk position. Sorry that you know him, these deals work a lot better if you maintain an arm's length business relationship - any friendship that you now have will be gone in a while (although that doesn't mean that you will fail).
But why are you doing all of this? Why not just buy a unit yourself, enjoy 100% ownership, free to make 100% of the decisions, and claim 100% of the profit? Is there a hidden benefit to this JV that I am missing?
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Mon Jun 25, 2007 5:36 pm |
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jules21
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thanks for your reply oldguy. some good points for me to consider.
i discussed the deal with a few others i know who were also interested (one of them has gone in with me), and we accepted because:
1. he's bought 4 lots, and as best we can determine, he's got a really good price on them as a result.
2. the apartments will be built in 'bulk', and there should in theory be cost savings from economies of scale not possible if we were to go it alone.
3. he's done it before and knows what he's doing
4. i am confident he's basically trustworthy, at a minimum he's not going to flee to switzerland with the money.
if it works as he hopes it will, i'll half-own an apartment with the profits. clearly that would be better than buying a unit at full price. obviously the trade off is the financial risk i am carrying.
and he does wear some risk. he's not charging fees for project management or architectural work - those are tied up in his 50% of the (potential) profit. if there's no profit, the architect (who is part of the development team) doesn't get paid.
essentially, i've assessed that his experience and expertise, in combination with his direct contributions of project management and architectural services is worth forgoeing 50% of the profit.
a key point is that he's not drawing revenue from the project, prior to distribution of final revenue/costs. so he has a clear incentive for the JV to make a profit.
i'm happy to hear views and opinions on whether i've got this right or not!
on the point you made about tenants-in-common - if it gets to the point where i own an apartment, i am probably in good financial shape by this stage (i.e. the development only goes ahead if pre-sales are made, the only way we can really lose here is if building costs blow out). being forced to sell wouldn't be a disaster.
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Tue Jun 26, 2007 4:01 am |
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oldguy
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quote:
if it works as he hopes it will, i'll half-own an apartment with the profits. clearly that would be better than buying a unit at full price. obviously the trade off is the financial risk i am carrying.
When I buy rentals, I use enough leverage to get an expected ROE of 30% to 40% for the first couple years, then I let the ROE settle back toward 15% as my equity grows. So I start with a 30% to 40% Risk Level. And, w/o partners, I am free to change tactics, take evasive action, apply my managemant skills freely, if markets change.
You are taking way more than a 40% risk - and, as a silent partner, you do not have a way to adjust to changing markets, no risk mitigations available. (Maybe that's why I wouldn't be a good silent partner?) But, on the positive side, you probably made a small investment that you can afford to lose?
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Tue Jun 26, 2007 3:54 pm |
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jules21
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you're correct that the deal is not controllable in the way you describe investments you've made.
essentially i'm acting as a financial guarantor - agreeing to pick up the slack where borrowings of the JV won't cover necessary working capital for the development.
i could earn up to around $150,000 for as little as $7,000 equity input. (that is best case scenario). or equity input could be significantly greater if the JV can't borrow.
so there is no easy way to assess risk/return. it's a highly speculative investment.
a degree of security on my part comes from the fact capital investment is mostly secured with assets, it isn't all being sucked away by exhorbitant fees and salaries.
i believe the greatest risk is that the developer can't make pre-sales on the apartments, in that case i end up with a vacant block of land. although i shouldn't automatically lose money on that, it may be awkward to extricate myself.
if he makes presales at a good price, we're on our way to a nice profit (as long as he doesn't screw up the development phase).
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Wed Jun 27, 2007 1:36 am |
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austin
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| People backing out |
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I'm a little confused. Probably because I am reading this at 4am. What happens if he presales 75% of the units. Then starts building. During this time the real estate market in your area slows and people start backing out of their contracts. And then you cant sell the units. In that case who get stuck with the loan payments for the building? Putting money in for the land seems ok. If the deal goes south I would not want to be stuck paying a mortgage payment on a half completed apartment complex. Also usually those loans have high interest rates and have a balloon payment after a few years. So basically after 3 or 4 years the bank will want the note paid in full.
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Fri Jun 29, 2007 9:07 am |
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jules21
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the development is planned for sales of 16 (or possibly 12, depending on planning approval) apartments. presales must reach 75% of total apartments.
each of the investors (i.e. 4 of us) will purchase 1 apartment (the 75% target is inclusive of these purchases).
if buyers back out of their contracts, obviously this would be a big problem. however there is some risk 'insurance' through the fact the sales are spread over a range of buyers. it's unlikely everyone would back out.
now i'm no lawyer, but if they backed out, i would presume there'd be some recourse to gain compensation from them (retain the deposit?)
i guess the answer is twofold:
1. you're correct this is a risk, but
2. as long as only some of the buyers back out, there should still be sufficient capital to keep us afloat. it would be inconvenient though (to put it mildly).
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Sat Jun 30, 2007 7:13 am |
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austin
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| backing out |
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You are correct if only some of the people backed out you should be ok. I always worry about the doomsday scenerio which in alot of cases is not very likely.
If the market tanks alot of people could pull out but I dont know know on average what that number might be? 50% maybe. Do you think their is any chance the other investors might pull out? Do they all seem financially sound currently.
You might also research the builder. See if their are any horror stories on the internet. Or if the past developments have been successful.
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Tue Jul 17, 2007 4:52 am |
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