Anyone invested with developers?
You see there ads a far bit, some even offer up to 70%p/a. But the average is about 30%It’s just some of these returns they offer are pretty good. I have reasearched the companies and the projects I’m interested in investing in but what is the legalities of a JV or promisary note.
Promisary note. Is this piece of paper worth what it says or just the paper it’s written on?
JV’s appear to be more secure, does anyone know the in’s and out’s? What to look out for, what you must have in it?
Miracle Home Loans
Negotiate your interest rate!“some even offer up to 70%p/a. But the average is about 30%”
Be very wary of any developer offering an annual return of 70 percent. Even 30 percent is not common and can be indicative of significant risk on the investors part, an inexperienced developer, or a scam.
There are a number of channels available for sourcing capital for the “preliminary phase” of a property development – SFH or larger, for far less than 30 percent.
If the developer is offering ~30 percent to finance the “construction phase”, then I would bet my last dollar that the project is not deemed viable or the developer does not have enough credibility with institutional lenders to secure finance.
“what is the legalities of a JV or promisary note.”
The legality issues should be directed to a qualified lawyer – every agreement and/or note is structured differently.
“Promisary note. Is this piece of paper worth what it says or just the paper it’s written on?”
A promissory note [also referred to as a “note”] is a legally binding document and the basis of many large and small loan transactions. But a note is not a guarantee that you will see a return on your investment.
“JV’s appear to be more secure, does anyone know the in’s and out’s? What to look out for, what you must have in it?”
In general participating as a “joint venture partner” requires a significant investment in proportion to the required funds.
Although at times joint ventures are structured as syndicates whereby smaller investors can participate – retaining “units” i.e. shares, in the joint venture.
But this method often reflects the developer/JV’s inability to secure sophisticated investors and should be approached with caution.
From an experienced developer/fund raiser’s perspective the objective is always to limit the number of investors to as few as possible.
Furthermore, any entity raising funds must typically comply with securities requirements – which your lawyer will advise on.
— Michael
Hi Miracle
Typically the larger experienced development companies who can provide a capital guarentee will offer around 12% with a small bonus on completion.
Any company offering 30% or 70% as you mentioned, it will more than likely be a JV scenario where you would profit-share but at the same time, the risk would be shared too.
Generally most experienced developers can borrow funds for around 12-13% from lending organisations, so the obvious question is, why would you offer more if you don’t have to?
Brendon
Acute Mortgage Reductions
http://www.acutemr.com.au
[email protected]Originally posted by Geronimo:
Generally most experienced developers can borrow funds for around 12-13% from lending organisations, so the obvious question is, why would you offer more if you don’t have to?Brendon, I’ve spoken to a few ‘experienced’ developers, and the reason they would offer 30% is because if they borrow the money from you and don’t have to use as much of their own, then their profit is less on that deal, but they could be doing more than one development at once, thus making more profit.
I believe that using their own equity is the most expensive money they can use….
Miracle, a really good solicitor to talk to in regards to lending to developers is Bernard Tan, who works for Maddocks Lawyers in Sydney. If you have the money, he can also bring deals of his clients to you – we were just pipped on one super deal cos some of my syndicate couldn’t decide quicky enough[thumbsdownanim
Cheers
MelThanks for the feedback!
Mel,What is Bernad’s returns?
Mel, funny you mention they can do more than one deal.
A developer in particular has increased his projects to $120m in a relative short time.
The link is below, if you would like to check out, one particular developer, I was considering to invest with.
http://www.codevelopaustralia.com.au/investor.htm
What do you think?
Michael R – what is SFH?
Originally posted by melbear:
Thanks Mel, I understand how Mez deals work.
What I’m saying is, they can get 70% from a senior lender ie bank and 30% from Mez paying 13% interest without using any of their own funds. There is no reason to offer more.
Michael
Have investigated the group mentioned a few months back when they started, and all I can say is be very careful!
The security is not what it seems and they are heavily exposed in the market. Also new to the game.
And borrow more funds from investors than they need, using some of it to pay back your interest! Alarm bells should be ringing now!That’s all I will say before I get in trouble.Do your due diligence and get a good lawyer.
Brendon
Acute Mortgage Reductions
http://www.acutemr.com.au
[email protected]Brendon
Typically the larger experienced development companies who can provide a capital guarentee will offer around 12% with a small bonus on completion.There are a lot of ‘smaller’ developers out there who cannot provide this level of guarantee. Therefore the ‘risk’ to the investor is higher, and so must the return be. This does not mean that they are not as good as Mirvac or Multiplex, merely that their capital base is not as large… Of course, if they can provide such a guarantee, they will surely offer far less of an interest rate…
Cheers
MelTrue Mel
What we’re talking about then is a JV scenario as apposed to Mez finance.
The difference lies in the security provided for the funds invested.
The problem I have is that they are advertising as Mez funds with great returns etc. And my concern there is that a novice investor may easily get burned by not being able to ascertain the security provided.
The company in question here in Brisbane offers these great returns and as security provides director’s personal guarentees. On looking more into it we discovered that they had offered the same guarentees on about 5 other projects.
And do you think the director’s will have much in their names?
I think there are going to be a few people burned in the coming months.
Brendon
Acute Mortgage Reductions
http://www.acutemr.com.au
[email protected]Hey Brendon
That’s true. That’s why we were happy to pay whatever it took to our solicitors to ascertain the value etc. of any security/guarantees offered to us.
In one deal for some members of our group, I think the solicitor sent them all nuts with the absolute level of due diligence he did, and all the extra work that created for everybody involved – but you would certainly be happy with that when you’re investing a big chunk of money.
Cheers
MelHi guys – the company that I worked for in my last position offered JV opportunities that are returning between 32% and 65%. There was nothing dodgy about it and your security was guaranteed as you owned a proportion of the freehold property.The borrowing for the project was secured by using that unencumbered property. It’s not a bad return for not having to do any work. If you do a developemnt in your own right you may get 100% return on your funds invested but you need to find the project that works and have the confidence in yourself that what you are about to undertake will be successful (and find a financier with the same confidence!) and have all the headaches and so on. JV’s can put you into a much larger deal taht you just couldnt undertake yourself.
Extensive list of ‘Off The Plan’ property available for sale in Perth.John – 0419 198 856
The problem with this type of financing is not the return on investment, but the return of the investment.
I’ve seen many deals where the only security was a raw piece of land, and the bank had a first mortgage on it. As a creditor you can only expect cents on the dollar if the deal goes bust (and with the slowing property market it could be sooner rather than latter).
Yes there are excellent deals ot there, but there are also extremly risky deals out there. So do your due diligence.
Also you may have to lump up large amounts of money which has it’s own downside (as you can’t spend it on better investments if they crop up).Rgds.
Lucifer_au“the company that I worked for in my last position offered JV opportunities that are returning between 32% and 65%.”
Which company and what were the terms?
“your security was guaranteed as you owned a proportion of the freehold property.”
Investment 101 – “guarantees” are nothing more than a marketing ploy. Developers who use this ploy will generally have contingencies to protect their interest if the project fails – if not, they should have.
“The borrowing for the project was secured by using that unencumbered property.”
If the LOC is “secured” with freehold property, and the project is viable, then a primary and/or secondary lender will generally finance the deal at a cost of up to ~12-15 percent p.a. – counteracting the need for private funds or a joint venture.
— Michael
SFH = Single Family Home
I guess I’m not able to give legal or accounting advice, but from the point of view of the developer, he’s trying to maximise his profit and he is looking to use other people’s money to do it!
If you are putting your hard-earned money into his project, make sure that you see the viability of the project via a feasibility. Make sure that your money is secured by adequate means… whatever they are. A second mortgage, for example, may not be sufficient.
Make sure you have a good solicitor (as Mel rightly advised). Find out if you can become a JV partner rather than an investor… because that way you can go on title, as you have alluded to in your post, miracle.
Peter.
—
Peter Comben
http://www.smartpropertydevelopment.com.auPeople might have seen this article, but I’ll post it anyway.
http://www.jenman.com.au/NewsArticles1.php?id=100
There’s some other articles on Jenman.com.au on mezzanine finance. Just type “mezzanine” into his search website and they come up. Does anyone have any comments on the article? I am sure developers would be more interested in commenting on the article rather than on Jenman…
Of particular interest to me from that article is this comment:
“It sounds enticing but the risks are high. If a project goes belly-up the mezzanine investors get paid only if there’s anything left over after the banks get paid.”
Thoughts on this, miracle? Peter? Props? Mel? Brendon? Michael? Anyone?
kay henry
Hi Kay
Just skimmed over the article, but the point you highlighted is significant.
A senior lender (usually a bank) wouldn’t give a rat’s ass about selling the site for maximum dollar to leave something in for the 2nd mortgage investors.
Their concern is to recover the outstanding debt, so as a 2nd mortgage lender/investor you are entirely at the mercy of what another developer is willing to pay for the site, which may not be enough to recover your investment.
As with most investments, the risk lies in your level of experience/knowledge in analysing deals.
Being able to verify the figures in the feasibility study is paramount, which is why I believe these types of investments are too risky for inexperienced investors unless you have a very good lawyer to help you through.
Brendon
Acute Mortgage Reductions
http://www.acutemr.com.au
[email protected]Can someone please fill me in on the following hypothetical situation.
Lets say I lend someone 200k on a 1M prop, and are given a second mortgage on it. I would also assume I would have a caveat taken out over the property?
Lets say the developer goes belly up and the banks want to sell. My understanding (which may be entirely wrong, so feel free to correct me), is that the bank will have trouble selling the property to anyone other than myself, as I have a 2nd mortgage and a caveat over it.
Or, am I mistaken in that the bank could sell it to an unrelated party for say 700grand at a mortgagee auction?
“the bank will have trouble selling the property to anyone other than myself”
— This is very unlikely. The bank [primary lender] will sell the property at a discounted value [at times 30-50 cents on the dollar] if necessary in order to recoup outstanding principle.
This generally attracts multiple buyers/bidders and ensures a prompt sale – often above the discounted value established prior to commencement of auction.
“Or, am I mistaken in that the bank could sell it to an unrelated party for say 700grand at a mortgagee auction?”
— see above.
“Lets say I lend someone 200k on a 1M prop, and are given a second mortgage on it.”
— I would consider this scenario a major “red flag”.
This typically results if the borrower is unable to secure a loan via an institutional lender – which is generally at a lower carrying cost than private funds.
There are very rare circumstances when private funds are used to leverage a real estate investment ahead of institutional funds, i.e. bank. Most occasions the borrower has been declared bankrupt, has failed due diligence for another reason
or the deal simply did not stack up.— Michael
Hiya wrappack,
Michael is pretty much right, but I thought I’d give you the sellup process in a nutshell, if that’s OK?
If the mortgagee defaults, the mortgagor may (after some legal paper shuffling) offer the proeprty for sale. The property has to be put up for public auction, and there will be a reserve which will usually be set by a valuer.
Once the reserve (which is always reasonable…) is reached, the property will be sold.
The moneys are disbursed thus:
Firstly, to the First Mortgage, in the amount of the mortgage, plus due interest, plus legal (and other) fees.
Secondly, Any other mortgages, in order, in the amount of those mortgages, plus their due interest, plus fees.
Thirdly, any other parties who may legally claim under the property.
Fourthly, the mortgagor. (IF there is any money left!)
So, for example, if the property has a first mortgage of 800k and a second mortgage of 200k, and sells at auction for 1.3m (lets suppose some 50k of work has been done by Mr Backhoe) then the money would be distributed thus:
First Mortgage, 800k + interest + costs (say 820k)
Second Mortgage, 200 + int + costs (say 210k)
Mr Backhoe, amound due + costs (say 55k)
TOTAL: 1.038k
So the Mortgagor will get: 262k to walk away with.BUT
Say the auction only brings 950k…
First mortgagee gets 820k.
Second morgagee gets the balance (130k)
Mr Backhoe goes under. (no pun intended)
Mortgagor gets nothing.I hope this is sorta clear. [blink]
Devgal
Many thanks for your replies Michael and devgar.
By the way , what is a caveat? I was under the impression (?mistakenly) that a caveat meant that you had a financial interest in the prop, and it is very difficult to sell without the caveat removed. What is the difference between a caveat and a 2nd or third mortgage?
OOps, almost forgot to ask.
If I buy a house for say 1M, and the vendor will lend me 100k, would he get a 2nd mortgage/caveat/joint venture/etc?
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