Now that the holiday madness is dying down, I've got some time to look back over what I did in real estate last year and see if I achieved the goals I set out last year.
Goal 1: Rehab two properties. I did not achieve this goal, although I can't really say it was through any fault of my own. The investors I was working on behalf of got scared with the current real estate downturn and decided they no longer wanted to flip properties. Even though I never lost them any money, I can understand their feelings on this, especially given all the media attention the real estate market has received.
Goal 2: Buy another rental property or invest in more real estate-backed paper investments like the Louisiana deal. I achieved this goal when I bought a rental property in Oklahoma (Rental #1).
It feels like those goals weren't all that difficult, but that is only because Goal #1 didn't get done. If I was rehabbing properties, my year would have been much busier.
For 2008, I think my goals will be:
Goal #1: Invest in a multi-unit property. I may already be close to achieving this goal. Ideally, I'd like to own a multi-unit property all on my own, but right now, while I'm still in the learning stage, I'll be happy to go in with some other investors and learn the ropes by being a passive investor and watching how things work.
Goal #2: Invest in more real estate-backed paper assets. This should be fairly easy, now that I have some contacts. Unlike my Louisiana deal though, I plan on splitting up my funds into at least two different investments so that if one stops paying, I should still get some income from the other. Different partners and different geographic areas would maximize my diversification.
Goal #3: Buy another rental property. If the first two goals work out, I should have enough cashflow to make obtaining this goal fairly easy. If they don't, well, it could be tough...
Showing posts with label Louisiana. Show all posts
Showing posts with label Louisiana. Show all posts
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.
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.
Louisiana Conference Call
Phew.. I just got off a 1.5 hour conference call with the other mortgage holders on the Louisiana mortgage that is going to foreclosure a week from today. We basically went over the various options we have open to us and how we want to instruct our attorney to bid at the auction. The opening bid at the auction starts at an amount equal to the foreclosure auction costs, which is less than $2,000. We will instruct our attorney to bid the price up to our costs, including the back interest, late fees, etc., if anyone else is bidding. If no one bids, the place is ours for the cost of the foreclosure fees.
We had a couple alternatives. Assuming there are other bidders, we could opt not to bid up to the amount we are owed. In effect, this would be a short sale, since we would be accepting a price of less than what we are owed. No one on the call was too excited about doing this. We could also opt to bid more than what we are owed. We would do this if we felt the properties were worth more and could be worked on and improved to increase their value. Although we do feel the buildings are worth more, this raises other issues - which people will own it, who will handle the renovations, who will provide the additional capital necessary to make the improvements, etc. Rather than get into all that, everyone pretty much feels it would be better to just take our money and get out. So that is how we arrived at the decision to bid the price up to what we are owed and no higher.
Of course, all those questions will need to be addressed anyway if no one bids or no one outbids us and we end up owning the property anyway.
Lastly, there is always the possibility that Joe will file for bankruptcy the day before the auction. (Personally, I feel he will.) He is also facing 2 foreclosures on properties in Texas on that day, plus 2 more foreclosures in January, so he doesn't have a lot of other options. However, we have a couple of investors with lots of bankruptcy experience on board and they have a plan in case this does happen. All a bankruptcy would accomplish is delay the foreclosure by a couple of weeks.
Stay tuned...
We had a couple alternatives. Assuming there are other bidders, we could opt not to bid up to the amount we are owed. In effect, this would be a short sale, since we would be accepting a price of less than what we are owed. No one on the call was too excited about doing this. We could also opt to bid more than what we are owed. We would do this if we felt the properties were worth more and could be worked on and improved to increase their value. Although we do feel the buildings are worth more, this raises other issues - which people will own it, who will handle the renovations, who will provide the additional capital necessary to make the improvements, etc. Rather than get into all that, everyone pretty much feels it would be better to just take our money and get out. So that is how we arrived at the decision to bid the price up to what we are owed and no higher.
Of course, all those questions will need to be addressed anyway if no one bids or no one outbids us and we end up owning the property anyway.
Lastly, there is always the possibility that Joe will file for bankruptcy the day before the auction. (Personally, I feel he will.) He is also facing 2 foreclosures on properties in Texas on that day, plus 2 more foreclosures in January, so he doesn't have a lot of other options. However, we have a couple of investors with lots of bankruptcy experience on board and they have a plan in case this does happen. All a bankruptcy would accomplish is delay the foreclosure by a couple of weeks.
Stay tuned...
Another Louisisana Update
The foreclosure process on the Louisiana properties continues to move forward. The property will go to the Sheriff's sale on December 5. I fully expect Joe to file for bankruptcy on December 4, thus stopping the sale. Joe wants to speak with the minority holders of the mortgage note, but no one wants to talk to him and, to my knowledge, no one has. He's turned over some financials, but just his records - nothing official like a K1 or anything that has been filed with the IRS.
The "keeper", the person who has been select to manage the property while it is in the foreclosure process, has been collecting rents directly from the tenants and is in the process of paying off the bills that have been racked up by Joe's months of non-payment. The power was about to be shut off for non-payment and that has been taken care of. There were some other bills and it required some of the other mortgage investors to contribute some more money to pay them off. Of course, they will be repaid when this is all over.
So it looks like our people are finally turning the building around and getting bills paid and maintenance taken care of. Joe may file for bankruptcy and delay this further, but at least the property is being stablized and he is no longer in control of it.
And what is the exit strategy for these properties? It really depends on how the foreclosure process plays out. We have the following choices:
The "keeper", the person who has been select to manage the property while it is in the foreclosure process, has been collecting rents directly from the tenants and is in the process of paying off the bills that have been racked up by Joe's months of non-payment. The power was about to be shut off for non-payment and that has been taken care of. There were some other bills and it required some of the other mortgage investors to contribute some more money to pay them off. Of course, they will be repaid when this is all over.
So it looks like our people are finally turning the building around and getting bills paid and maintenance taken care of. Joe may file for bankruptcy and delay this further, but at least the property is being stablized and he is no longer in control of it.
And what is the exit strategy for these properties? It really depends on how the foreclosure process plays out. We have the following choices:
- Sell our interest now at a discount. No one seems to be willing to do this. Of course, no one wants to take a loss, but I really feel we will be able to get our money back on this, so I don't see a need to sell out at a loss right now.
- Joe can come up with money from other investors and pay off our mortgage. This is pretty unlikely.
- Wait for foreclosure to happen. Someone other than us buys the properties at auction and we get paid off. We are then completely out of the properties.
- Wait for foreclosure to happen. No one else buys, or we bid higher than anyone else and we will become the new owners, then we can sell our interest to other investors.
- Wait for foreclosure to happen, become the new owners, and then keep the property ourselves. We'd need to discuss who will manage it, the costs involved, any monthly income we might receive, etc.
- Wait for foreclosure, become the new owners, and one or more of the owners will get a new loan to pay off any investors who don't want to remain owners.
General Update
My tenants in Rental #1 have opted to not renew their lease. On Monday, my property was not yet listed on my property manager's website, so I emailed her to ask if they put it up as soon as the tenants give notice, or if they wait until they have moved out and they have cleaned the place. I never got a response, but my property is now listed on their website. And the PM must have felt rents could be increased, because it is listed for $775 a month, a $25 per month increase. There are no pictures on the website, and the link to a map of where the property is located doesn't work, so there is still some work to be done.
The Louisiana project I am a mortgage investor in has gone to foreclosure. According to those dealing with him, "Joe" is pissed and is threatening lawsuits left and right. Why is he pissed? Because the rent checks ($15,000 a month on one building alone) are no longer going to him! As per the terms of our mortgage, we can step in and collect the rents directly sholud Joe default. The existing property manager has been named the "keeper" of the property, which means he is responsible for the upkeep, holding all the foreclosure documents, collecting rent, etc. Since Joe never paid this guy and we did, I think he's happy to perform this duty :-)
It's still possible that Joe will file bankruptcy and delay this further. We shall see how it goes..
The Louisiana project I am a mortgage investor in has gone to foreclosure. According to those dealing with him, "Joe" is pissed and is threatening lawsuits left and right. Why is he pissed? Because the rent checks ($15,000 a month on one building alone) are no longer going to him! As per the terms of our mortgage, we can step in and collect the rents directly sholud Joe default. The existing property manager has been named the "keeper" of the property, which means he is responsible for the upkeep, holding all the foreclosure documents, collecting rent, etc. Since Joe never paid this guy and we did, I think he's happy to perform this duty :-)
It's still possible that Joe will file bankruptcy and delay this further. We shall see how it goes..
Foreclosure Papers Filed For Louisiana Property
When I last wrote about the Louisiana commercial property I'm invested in, the buyout of "Joe's" interest in the property had fallen through and he was once again late on his payments. We (the other mortgage investors and myself) had decided to start the foreclosure process as soon as possible.
I received word yesterday that the process has begun. On September 15, Joe was officially late for the September payment and late fees started accruing. A 10 day courtesy letter was sent to Joe in September via certified mail telling him he was late and had 10 days to become current.
Later in September, a 10 day demand letter was sent, letting him know we will foreclose unless he makes his payments. That ten day period just ran out and yesterday our attorney filed the foreclosure paperwork. We can now legally pay the building management company, whom Joe has also not paid, and include that in the amount Joe owes us. Same thing goes for the utility companies, who have also not been paid and are threatening to shut off the power.
Our mortgage specifies a 45 day foreclosure period, so if all goes smoothly, we will own the property in a month and a half. It will not go smoothly. Joe will try to fight this with more delaying tactics, possibly including filing for bankruptcy. Whatever he does, financial control of the property is no longer his, so we can take steps to get everyone paid up and happy again.
I received word yesterday that the process has begun. On September 15, Joe was officially late for the September payment and late fees started accruing. A 10 day courtesy letter was sent to Joe in September via certified mail telling him he was late and had 10 days to become current.
Later in September, a 10 day demand letter was sent, letting him know we will foreclose unless he makes his payments. That ten day period just ran out and yesterday our attorney filed the foreclosure paperwork. We can now legally pay the building management company, whom Joe has also not paid, and include that in the amount Joe owes us. Same thing goes for the utility companies, who have also not been paid and are threatening to shut off the power.
Our mortgage specifies a 45 day foreclosure period, so if all goes smoothly, we will own the property in a month and a half. It will not go smoothly. Joe will try to fight this with more delaying tactics, possibly including filing for bankruptcy. Whatever he does, financial control of the property is no longer his, so we can take steps to get everyone paid up and happy again.
Louisiana Update
This investment is a textbook case of why you should always know who you invest with and make sure your objectives and styles are compatible. (Although in our defense, I will say that when we went into this deal, the problem person was not the majority partner. He only became that after buying out someone else.)
The last time I wrote about this, it appeared things were looking up - our investment was brought current, a new team had bought out the slumlord majority holder "Joe", and we were looking at a possible 100% upside potential. Not any more.
I just got off a conference call and have the latest info. Apparently, the purchase never went through. During the due diligence phase, the team went to check out some of the properties that were in Houston that were part of the sale and found out they were in bad shape. Like, ready-to-be-demolished shape. So three of the nine properties in the deal were rejected. The deal was moving forward, but Joe then contested the sale, saying we were getting the Louisiana properties too cheap. Legal counsel for the new team advised them to cancel the purchase, so the deal fell thorough and Joe is still the owner.
The good news is the investors have been brought current, at least through August. The September payment is due by the 15th, but it's looking like that won't be made. Also, the property tax still has not been paid since the beginning of the year and there are several other outstanding payments owed, including one to the property manager (someone you definitely want to keep happy).
At this point, we are moving forward as fast as possible with foreclosure. If you recall, we have both a first and second on the properties. The second has the stronger language, so that is the one that will be foreclosing. We have a couple of options here. If we don't get the September payment, we can foreclose for that. Because the tax bill is a senior lien to any mortgage, we can pay the delinquent tax bill to protect our interests in the property and foreclose for that reason. (The second actually still has a couple hundred thousand available, so we wouldn't have to come up with any more money to pay the taxes.) Speed is of the essence here because, as mentioned earlier, Joe is a slumlord and we want to take control of the property before he runs it into the ground and destroys the property's value.
In the past, Joe has threatened to file bankruptcy if we start foreclosure. At this point, we're ok with that. If he files bankruptcy, the buildings go into a trust and the court assigns a third party to administer the trust. This accomplishes our goal of getting control out of Joe's hands. Additionally, our second mortgage contains an assignment of rent clause, which means we can collect rent directly from the tenants, again, keeping the money, and therefore control, out of Joe's hands.
Once foreclosure has been filed, even if Joe brings the payments current, it still won't be enough to stop the foreclosure. Joe will need to show he has a plan and the resources to continue to make payments and effectively manage the property.
Joe has asked some investors what they want for their interests. In other words, he wants to know if he can buy them out. We've told him we will sell our interest at cost, cash only. He doesn't have the money to do that, but he may be able to talk some other investor or investors into partnering with him.
So if anyone reading this gets an offer to go in on some office buildings in Louisiana, contact me before you say yes :-)
The last time I wrote about this, it appeared things were looking up - our investment was brought current, a new team had bought out the slumlord majority holder "Joe", and we were looking at a possible 100% upside potential. Not any more.
I just got off a conference call and have the latest info. Apparently, the purchase never went through. During the due diligence phase, the team went to check out some of the properties that were in Houston that were part of the sale and found out they were in bad shape. Like, ready-to-be-demolished shape. So three of the nine properties in the deal were rejected. The deal was moving forward, but Joe then contested the sale, saying we were getting the Louisiana properties too cheap. Legal counsel for the new team advised them to cancel the purchase, so the deal fell thorough and Joe is still the owner.
The good news is the investors have been brought current, at least through August. The September payment is due by the 15th, but it's looking like that won't be made. Also, the property tax still has not been paid since the beginning of the year and there are several other outstanding payments owed, including one to the property manager (someone you definitely want to keep happy).
At this point, we are moving forward as fast as possible with foreclosure. If you recall, we have both a first and second on the properties. The second has the stronger language, so that is the one that will be foreclosing. We have a couple of options here. If we don't get the September payment, we can foreclose for that. Because the tax bill is a senior lien to any mortgage, we can pay the delinquent tax bill to protect our interests in the property and foreclose for that reason. (The second actually still has a couple hundred thousand available, so we wouldn't have to come up with any more money to pay the taxes.) Speed is of the essence here because, as mentioned earlier, Joe is a slumlord and we want to take control of the property before he runs it into the ground and destroys the property's value.
In the past, Joe has threatened to file bankruptcy if we start foreclosure. At this point, we're ok with that. If he files bankruptcy, the buildings go into a trust and the court assigns a third party to administer the trust. This accomplishes our goal of getting control out of Joe's hands. Additionally, our second mortgage contains an assignment of rent clause, which means we can collect rent directly from the tenants, again, keeping the money, and therefore control, out of Joe's hands.
Once foreclosure has been filed, even if Joe brings the payments current, it still won't be enough to stop the foreclosure. Joe will need to show he has a plan and the resources to continue to make payments and effectively manage the property.
Joe has asked some investors what they want for their interests. In other words, he wants to know if he can buy them out. We've told him we will sell our interest at cost, cash only. He doesn't have the money to do that, but he may be able to talk some other investor or investors into partnering with him.
So if anyone reading this gets an offer to go in on some office buildings in Louisiana, contact me before you say yes :-)
Louisiana Update
Another conference call for the Louisiana investment just concluded and it looks like TMG, the investment group that is taking control of this project, is giving us investors a pretty good deal. As usual, there are lots of details, but I'll try to keep it simple here.
Those of us that are currently on the first mortgage for the commercial properties in Louisiana have the following options:
To me, this is a no-brainer. The slumlord who took over control of the investment will be gone. The new first mortgage holder will be TMG, the group that already has about $400,000 invested in the current second. The president of TMG also will be personally responsible for $1 million of the new mortgage and he is putting his personal residence up as collateral.
This investment is turning out to be pretty profitable for me. I had some months where there were no payments, but we are now current and have been paid late fees. So my return including the late fees is around 12.6%. Now I'll be getting another four points, which jacks the ROI for this year up to 16.6%. Then there is the prospect of getting 9% for another year plus a 100% or more return on our principle when the buildings are sold.
But technically, my ROI is infinite now, since my investment cash came from my HELOC, so it's not even my money I'm using. But it's just not the same to say my new ROI will be infinite-er :-)
Those of us that are currently on the first mortgage for the commercial properties in Louisiana have the following options:
- Get cashed out. Your investment will be paid off and you'll get your money back.
- Roll your investment into a new second mortgage. The second will be collateralized not only by the two buildings in Louisiana, but also a couple of other commercial properties in Houston (a strip mall and some apartment complexes). The second mortgage will be for about a year, although it is likely it will be refinanced and paid off early. (We will be guaranteed at least 6 months interest though.) The second will be at the same interest rate we are getting now (12%). In addition, we will be getting 4 points cash up front.
- If we decide to stay in the investment, we will also get the option to convert our investment into an equity position in about a year (a "right of partnership of ownership"). The terms for this will be worked out later, but it is likely equity position holders will get monthly payments at 9% APR plus a preferred position on the investment, which means they will get their money back before anyone else when the places are sold. So even if everything goes south and the properties need to be sold at a loss, the preferred positions will have an excellent chance of getting all their money back. This is optional, so if we don't want to become equity holders, we don't have to. They expect to sell all the properties after an additional year for a profit of around $10 million dollars and investors could be looking at doubling their investment.
To me, this is a no-brainer. The slumlord who took over control of the investment will be gone. The new first mortgage holder will be TMG, the group that already has about $400,000 invested in the current second. The president of TMG also will be personally responsible for $1 million of the new mortgage and he is putting his personal residence up as collateral.
This investment is turning out to be pretty profitable for me. I had some months where there were no payments, but we are now current and have been paid late fees. So my return including the late fees is around 12.6%. Now I'll be getting another four points, which jacks the ROI for this year up to 16.6%. Then there is the prospect of getting 9% for another year plus a 100% or more return on our principle when the buildings are sold.
But technically, my ROI is infinite now, since my investment cash came from my HELOC, so it's not even my money I'm using. But it's just not the same to say my new ROI will be infinite-er :-)
Summertime Slowness
Nothing much seems to happen in the summer. Here in Arizona, it's just too hot to go outside and do anything and with vacations and family visits, it seems like real estate has taken a back burner for a moment.
My Louisiana investment has finally been brought current. Actually, more than current since I've already received the payment for August. That brings the mortgages up to date. The other aspect of this investment - buying out the old majority owner and possibly getting an equity share of this and several other properties - is still in process. I think escrow is supposed to close by the end of the month, but with a deal this big, I wouldn't be surprised if it took longer. No more details yet either, so I am not entirely sure how good of an investment this may be and if I'll want to stay in it or cash my money out and move to something else.
My tenants in Rental #1 still have yet to pay their $200 from May that they were mistakely undercharged by my management company. The tenants told the management company last Tuesday that they wouldn't have that money until August. If they have not paid everything by August 10, I've instructed the management company to evict them. Their lease is up on November 1 and I am 95% sure I will not be renewing their lease. It might cost more to evict them now than to simply keep dealing with their issues until their lease expires, but I would rather be trying to rent the place in August and September than in November and December.
The investors I was rehabbing and flipping properties for are evaluating their options right now. I think all the media coverage about the housing meltdown has got them a bit worried about flipping and they aren't sure if they want to keep doing that. They are looking into getting a rental property, perhaps something in the Payson area that they can rent out part time and possibly use for themselves other times, or perhaps just a straight rental somewhere in the metro Phoenix area.
Personally, I'm saving up my funds for my next REI purchase, which will definitely be a multi-unit property. I'm not saving as much as I'd like, mainly because I've been hit with a rash of big expenses lately (well, that plus a losing vacation to Las Vegas!), so I'm not sure when I'll be ready to pull that trigger. Just a few months, hopefully.
My Louisiana investment has finally been brought current. Actually, more than current since I've already received the payment for August. That brings the mortgages up to date. The other aspect of this investment - buying out the old majority owner and possibly getting an equity share of this and several other properties - is still in process. I think escrow is supposed to close by the end of the month, but with a deal this big, I wouldn't be surprised if it took longer. No more details yet either, so I am not entirely sure how good of an investment this may be and if I'll want to stay in it or cash my money out and move to something else.
My tenants in Rental #1 still have yet to pay their $200 from May that they were mistakely undercharged by my management company. The tenants told the management company last Tuesday that they wouldn't have that money until August. If they have not paid everything by August 10, I've instructed the management company to evict them. Their lease is up on November 1 and I am 95% sure I will not be renewing their lease. It might cost more to evict them now than to simply keep dealing with their issues until their lease expires, but I would rather be trying to rent the place in August and September than in November and December.
The investors I was rehabbing and flipping properties for are evaluating their options right now. I think all the media coverage about the housing meltdown has got them a bit worried about flipping and they aren't sure if they want to keep doing that. They are looking into getting a rental property, perhaps something in the Payson area that they can rent out part time and possibly use for themselves other times, or perhaps just a straight rental somewhere in the metro Phoenix area.
Personally, I'm saving up my funds for my next REI purchase, which will definitely be a multi-unit property. I'm not saving as much as I'd like, mainly because I've been hit with a rash of big expenses lately (well, that plus a losing vacation to Las Vegas!), so I'm not sure when I'll be ready to pull that trigger. Just a few months, hopefully.
Louisiana Update
I took part in an hour long conference call this morning with the other mortgage holders on the commercial property project we've got going on in Louisiana. There is really too much to cover in a blog entry, but I will attempt to give the highlights. You shouldn't assume these are the complete details.
The majority holder, I'll call him "Joe," that has been causing everyone else so much trouble, has come to us asking to be bought out. Joe is in over his head on many properties, not just this one. In Louisiana alone, he already has a $1 million judgment against him and he has properties in Texas that are also facing foreclosure. Joe's style is that of the slumlord. He works hard, but he is still a slumlord and tries to do everything the cheapest way possible. For instance, one of the Louisiana buildings has three elevators and only one is working. Rather than call an elevator repair company, he took out an elevator motor and took it to a machine shop to have them fix it. That didn't work, so he tried to cannibalize other properties he owns to get the elevators working again. Needless to say, that didn't work. The other investors have also gotten calls and emails from the construction manager saying Joe is not paying all the vendors. Apparently he feels they are padding their bills and charging him for work done on other jobs, so he refuses to pay. There are more examples, but you get the idea.
However, as I said, Joe is also a hard worker. He just tends to piss people off. Despite this, he has still managed to increase the number of tenants in the property since he took over. This is probably due to local economic conditions more than his skill - the area is doing well thanks to an energy boom. Property values have risen, the town has a new mayor, title companies are reporting increases in business (meaning more people are moving in). The other minority investors feel more optimistic about the area now than they did a year ago when they first got into the investment.
Joe is out of money. He is a distressed seller and has come to us for help. He needs to save some of his other properties from foreclosure, as well as this one, so he has agreed to sell a package of properties. The minority holders, including myself, are represented by a company I will call "TMG." (Other people as well, but they are closely related to TMG.) In fact, TMG is one of the entities foreclosing on another one of Joe's properties, so we have a nice amount of leverage here. (Because the deal is still ongoing, I don't want to give names here, but when it is all done, I will if anyone is interested. I am thoroughly impressed with TMG's integrity, skill, and straightforwardness.)
The package deal is we will buy the four commercial buildings in Louisiana plus roughly 475 apartment units in Houston and about 400,000 square feet of commercial property in Houston for just over $12 million dollars. TMG figures to spend another $8 million or so in acquisition and redevelopment costs, and then the properties will be worth about $30 million, at which point they can keep them or sell them for a nice $10 million profit. The nice part about this deal is that there will be little out of pocket costs for the purchase. Remember how I said Joe was a slumlord? Turns out, the city of Houston will loan us $6 million at 0% interest just to get Joe out of there and redevelop his properties. There are all kinds of other financing terms involved in this deal, but it all looks good. Oh, and did I mention this deal should be completed by the end of the month? Just about as fast as a purchase for a single family house!
So where does all this leave me, as a mortgage lender on the Louisiana properties? First, the existing loans will all be brought current. Second, TMG will be offering us three choices:
So things look very interesting. I'll have to wait for some hard numbers of course, but I am very interested in option 3. Since my investment in this project comes from a HELOC, I'll likely take out some of my money to pay that down, but will keep some invested for the longer term and bigger ROI. For those of you that play Cashflow 101, this is turning into a real Big Deal opportunity!
The majority holder, I'll call him "Joe," that has been causing everyone else so much trouble, has come to us asking to be bought out. Joe is in over his head on many properties, not just this one. In Louisiana alone, he already has a $1 million judgment against him and he has properties in Texas that are also facing foreclosure. Joe's style is that of the slumlord. He works hard, but he is still a slumlord and tries to do everything the cheapest way possible. For instance, one of the Louisiana buildings has three elevators and only one is working. Rather than call an elevator repair company, he took out an elevator motor and took it to a machine shop to have them fix it. That didn't work, so he tried to cannibalize other properties he owns to get the elevators working again. Needless to say, that didn't work. The other investors have also gotten calls and emails from the construction manager saying Joe is not paying all the vendors. Apparently he feels they are padding their bills and charging him for work done on other jobs, so he refuses to pay. There are more examples, but you get the idea.
However, as I said, Joe is also a hard worker. He just tends to piss people off. Despite this, he has still managed to increase the number of tenants in the property since he took over. This is probably due to local economic conditions more than his skill - the area is doing well thanks to an energy boom. Property values have risen, the town has a new mayor, title companies are reporting increases in business (meaning more people are moving in). The other minority investors feel more optimistic about the area now than they did a year ago when they first got into the investment.
Joe is out of money. He is a distressed seller and has come to us for help. He needs to save some of his other properties from foreclosure, as well as this one, so he has agreed to sell a package of properties. The minority holders, including myself, are represented by a company I will call "TMG." (Other people as well, but they are closely related to TMG.) In fact, TMG is one of the entities foreclosing on another one of Joe's properties, so we have a nice amount of leverage here. (Because the deal is still ongoing, I don't want to give names here, but when it is all done, I will if anyone is interested. I am thoroughly impressed with TMG's integrity, skill, and straightforwardness.)
The package deal is we will buy the four commercial buildings in Louisiana plus roughly 475 apartment units in Houston and about 400,000 square feet of commercial property in Houston for just over $12 million dollars. TMG figures to spend another $8 million or so in acquisition and redevelopment costs, and then the properties will be worth about $30 million, at which point they can keep them or sell them for a nice $10 million profit. The nice part about this deal is that there will be little out of pocket costs for the purchase. Remember how I said Joe was a slumlord? Turns out, the city of Houston will loan us $6 million at 0% interest just to get Joe out of there and redevelop his properties. There are all kinds of other financing terms involved in this deal, but it all looks good. Oh, and did I mention this deal should be completed by the end of the month? Just about as fast as a purchase for a single family house!
So where does all this leave me, as a mortgage lender on the Louisiana properties? First, the existing loans will all be brought current. Second, TMG will be offering us three choices:
- We can get paid off in full, plus accrued interest and late fees.
- We can trade our mortgage position for an equity position in the whole package.
- A combination of 1. and 2.
So things look very interesting. I'll have to wait for some hard numbers of course, but I am very interested in option 3. Since my investment in this project comes from a HELOC, I'll likely take out some of my money to pay that down, but will keep some invested for the longer term and bigger ROI. For those of you that play Cashflow 101, this is turning into a real Big Deal opportunity!
Update On All My Projects
I'm back from Vegas, poorer, but relaxed...
Looks like my feeling that things might be improving at my property management company was correct. I've found out that the company is being bought by an employee and that they have ramped up the staffing and efficiency of the office. That makes me feel better.
I also finally received the Release of Mortgage for my refi of Rental #1. I got that notarized and will send that back today, so my private money mortgage I used to purchase the property will officially be released.
I've got a conference call tomorrow morning about the commercial investment I am part of in Louisiana. Don't have all the details yet, but the good news is that the majority owner that took control of the project midway through and stopped payments and basically screwed everything up has agreed to be bought out at a discount. More details to come!
I think that's about all the info I have on all the projects I've got going now. For the future, I think my thoughts have turned from looking for Section 8 / non-Section 8 single family homes to fourplexes... More investigation is necessary.
Looks like my feeling that things might be improving at my property management company was correct. I've found out that the company is being bought by an employee and that they have ramped up the staffing and efficiency of the office. That makes me feel better.
I also finally received the Release of Mortgage for my refi of Rental #1. I got that notarized and will send that back today, so my private money mortgage I used to purchase the property will officially be released.
I've got a conference call tomorrow morning about the commercial investment I am part of in Louisiana. Don't have all the details yet, but the good news is that the majority owner that took control of the project midway through and stopped payments and basically screwed everything up has agreed to be bought out at a discount. More details to come!
I think that's about all the info I have on all the projects I've got going now. For the future, I think my thoughts have turned from looking for Section 8 / non-Section 8 single family homes to fourplexes... More investigation is necessary.
Another Louisiana Update
A month ago, I reported that payments on my investment in commercial property in Louisiana were close to resuming. I got word today that the lawyer who was drafting the second mortgage has been swamped for the past 2 weeks, but he promised to get a draft of the mortgage out today. The second mortgage holders have the funds ready to pay the first mortgage holders (including me) and we're just waiting for the paperwork to be finalized. The loan is about 4 months past due now and when payments resume, they will include past interest and late fees.
I also got the word that part of my investment will be repaid. My total investment was split over a couple buildings: $120,00 on two main office buildings and $30,000 on a parking garage. My portion of the parking garage note has been bought out, so I'll get that part of my investment back plus interest and late fees. I just sent over my bank wiring information, so I expect to receive the funds by the end of the week.
I also got the word that part of my investment will be repaid. My total investment was split over a couple buildings: $120,00 on two main office buildings and $30,000 on a parking garage. My portion of the parking garage note has been bought out, so I'll get that part of my investment back plus interest and late fees. I just sent over my bank wiring information, so I expect to receive the funds by the end of the week.
Louisiana Update
I got another update on the Louisiana project. As of my last report, it was decided that a second mortgage would be placed on the property and the money from that would be used to make payments to the first mortgage holders, while the payments on the second would be delayed. I'm pleased to say that now all the players have agreed to the terms and the deal is now in escrow. We expect to have our payments be resumed before the end of the month.
Update On Louisiana Project
Sometime last month, I got word that the mortgage payment on the commercial properties in Louisiana was going to be missed. That payment is now 35 days past due. In that time, the mortgage investors (of which I am one) and minority property owners have had several conference calls discussing in what direction to proceed. The situation has been pretty fluid and I didn't want to post anything about it because it was changing so rapidly.
It looks like now we have a course of action that everyone agrees on - mortgage holders, minority owners, and the majority owner. The main issue is that the new majority owner is in a cash crunch. He is still actively rehabbing the property, but most of his money is tied up in other buildings and until he sells one of those, he's short on cash. In looking at our options, we discovered our mortgage note wasn't as strong as we would have liked - it specified only that we could collect the maximum amount we loaned, not any additional foreclosure costs, which could be in the tens of thousands for the amounts we are dealing with. (The note was provided by a title company, not a lawyer, and although it does have some nice points, we've learned from that mistake.) The value of the property has never been an issue and there would definitely be enough equity in the property to cover the mortgage loan, but foreclosure is a long process and the majority holder suggested the process would be even longer if bankruptcy was involved - a not-so-veiled threat.
So to get payments started again, the minority investors have proposed underwriting a second mortgage on the property. This mortgage will have stronger language, should a foreclosure still be required down the road, and it will be large enough so that the missed payment(s) and penalties on the first will be covered. There is still plenty of equity in the properties, as verified by a recent appraisal. The parking lot is in the process of being refinanced at a 50% lower interest rate. Since it already has a positive cash flow at hard money rates, the refi will not only get back some of the investors' money, but also increase the free cash available for meeting the mortgages on the other three buildings. It could take another month for the second to get hammered out and funded, so I may end up with two missed payments, but they will be made up shortly.
All in all, it's been a great learning experience for me. I get to listen in to how much more knowledgeable real estate investors handle problems and work out solutions that benefit everybody. I get experience with commercial lending and multi-million dollar deals. I am also impressed with how the minority owners are looking out for the mortgage holders. All of the minority owners have sold part or all of their interest to other investors, as Les did to me, so there are roughly 30 investors in this deal, although there are only about 5 owners. Even those owners that no longer have an interest in the mortgage note (i.e., they are in it for the capital gains, not the cash flow) are concerned that the mortgage holders start getting payments again and are brought current. They have been on top of this since the moment they found out a payment would be missed.
There are a lot of details I've left out, including the many other options that were investigated, but I feel confident the solution that has been reached will benefit everyone. Of course, being the detail-oriented person I am, I won't feel 100% comfortable until the second mortgage is signed, but I'm feeling much better about the situation than I was a month ago.
It looks like now we have a course of action that everyone agrees on - mortgage holders, minority owners, and the majority owner. The main issue is that the new majority owner is in a cash crunch. He is still actively rehabbing the property, but most of his money is tied up in other buildings and until he sells one of those, he's short on cash. In looking at our options, we discovered our mortgage note wasn't as strong as we would have liked - it specified only that we could collect the maximum amount we loaned, not any additional foreclosure costs, which could be in the tens of thousands for the amounts we are dealing with. (The note was provided by a title company, not a lawyer, and although it does have some nice points, we've learned from that mistake.) The value of the property has never been an issue and there would definitely be enough equity in the property to cover the mortgage loan, but foreclosure is a long process and the majority holder suggested the process would be even longer if bankruptcy was involved - a not-so-veiled threat.
So to get payments started again, the minority investors have proposed underwriting a second mortgage on the property. This mortgage will have stronger language, should a foreclosure still be required down the road, and it will be large enough so that the missed payment(s) and penalties on the first will be covered. There is still plenty of equity in the properties, as verified by a recent appraisal. The parking lot is in the process of being refinanced at a 50% lower interest rate. Since it already has a positive cash flow at hard money rates, the refi will not only get back some of the investors' money, but also increase the free cash available for meeting the mortgages on the other three buildings. It could take another month for the second to get hammered out and funded, so I may end up with two missed payments, but they will be made up shortly.
All in all, it's been a great learning experience for me. I get to listen in to how much more knowledgeable real estate investors handle problems and work out solutions that benefit everybody. I get experience with commercial lending and multi-million dollar deals. I am also impressed with how the minority owners are looking out for the mortgage holders. All of the minority owners have sold part or all of their interest to other investors, as Les did to me, so there are roughly 30 investors in this deal, although there are only about 5 owners. Even those owners that no longer have an interest in the mortgage note (i.e., they are in it for the capital gains, not the cash flow) are concerned that the mortgage holders start getting payments again and are brought current. They have been on top of this since the moment they found out a payment would be missed.
There are a lot of details I've left out, including the many other options that were investigated, but I feel confident the solution that has been reached will benefit everyone. Of course, being the detail-oriented person I am, I won't feel 100% comfortable until the second mortgage is signed, but I'm feeling much better about the situation than I was a month ago.
