Opportunity to invest in RE development at 12% interest - TGTBT?

[isaakthepirate]

Hi Folks,

A friend/colleaugue who's been investing for 10+ years with a RE developer who's offering 12% return on loans. He connected me with th RE agent who's developing a large lakefront development, with over 4000 lots (2K acres) in East Houston. She financed it privately and offers a 12% return on private loans, with a minimum of 35K.

I spoke with her at length (1.5 hours) about her business model, ethics, plans, etc. I've seen the property, read the reviews on Yelp (mixed, but mostly because of marketing). She has legitimate papers, loans, etc. The loan is for 1 year, with interest and principal return in 1 yr. I'm considering investing 35K (about half of my liquid savings).

That said, this sounds too good to be true, and I'm a little wary. I asked her why she was going so high, and she said that she needed to do that rate to be competitive at the time she was raising funds (05-06) and has maintained that.

My dad lost 250K in 2009 investing in a private business providing 9% return leasing medical equipment, run by a pillar of a large CA city who had built the entire in a pyramid scheme, so I'm skeptical. That business was entirely legit on paper and in person - he did due diligence meeting, talking, etc. with this company.

Thoughts/feedback? Anyone else had this type of opportunity and found it legit?

Thanks for your help, friends.

Best,

Isaak

[GGNoob]

Why not just do something like Lending Club? With $35k, you could buy 1,400 notes for $25 a piece. You could get very similar or better returns for a lot less risk and you'd be setting up yourself with a steady stream of income to reinvest or withdraw.

[Another Reader]

She is maintaining the rate from 05-06???  What competent business person overpays by that much when they borrow money??

The answer is that this is a highly speculative land development in an area that has been hard hit by oil prices.  Banks won't touch this and for a very good reason.  The numbers don't pencil - the lots would likely be developed and then sit with no buyers.  The bank really does not want a bunch of unsalable lots on their balance sheet.  And unless you, along with the other individual lenders, decide to foreclose, your money will be tied up with no way of recovering anything.

In your shoes, I would decline to invest.

[eyePod]

I wouldn't because it's such a huge chunk of your NW. You're chasing the dragon man.

[isaakthepirate]

Thanks for the comments.

Yes, I had similar conclusions about the empty lots. However, she's selling pretty well - this isn't just speculation. They sold 6m in '13 and 8m in 14' (they also own the construction company that builds out an the management company - they're a one-stop shop and get tons of income because of it.)

Great point about Lending Club. I've been looking for comparables that could offer me close to this rate with less risk and hadn't made it around to LC, so I'll check that out.

[ohana]

You might also put some of that into an REIT.  But you won't get that large of a return.  (I am also assuming  your won't be subject to as much risk.)

[myhotrs]

Pretty standard rate for a hard money loan. Here in SoCal, these guys are well known and legit:

http://www.thenorrisgroup.com/hard_money_loans/

Slightly different though as you get the property if there is a default, so unless this lady is putting up a specific property as security, her deal is more risky. With the Norris Group, you may actually benefit in a default as loan-to-value is generally below 70%.

[Another Reader]

A 4,000 lot development is not financed by hard money.  It's financed by a bank or group of banks or a similar conduit.

There really is not enough information given to get a full picture of the project.  It's just very odd the owner (probably not the agent) of a 2,000 acre development with a lake and probably common amenities is out beating the bushes for individual investors with $35k to lend them money.   If you are selling $8MM in lots and houses a year, you don't do the substantial equivalent of crowd funding.

Given that the oil troubles cropped up at the end of 2014, historical sales aren't relevant.  The climate has changed.  They most likely won't close $8MM of sales in 2015.

[isaakthepirate]

Yes, sorry I haven't given all the information with the intention not to flood people with details that may not be relevant.

I'm trying to get a sense of if this is something that occurs regularly - thanks, myhotrs, for the example of the Norris group.

She offers the sold lots as collateral, and I approached her bc my friend had rec'd the loan - she wasn't out looking for me. She has 50K minimums for investing, primarily to add amenities to the property. It's sort of like a timeshare development, about 1.5 hours outside of Houston. When I asked her about her reasons for providing such a high return, she wrote:

"It is high interest because, at the time we were raising cash for the property, that was the rate at which I was able to do "better" than several of my folks were then getting, and this was much more a risk in a way off place called "Cleveland, Texas".  At this time this is a very high rate, yes, but I didn't want to change it on folks.  That is the purpose of the refinancing, to lower our rate to around 6%.  You get the benefit of the face interest rate of the existing Note. If I was in California working on it, yes, it is likely my door would be being beaten down!  I'm not there, not focused on raising funds.  I'm here building this business. "

[PEIslander]

I wouldn't because it's such a huge chunk of your NW.

I agree with the eyePod. It might be a great investment or it might not - time will tell. The risk might even be weighted towards it being a great investment, yet as 'AnotherReader' wisely noted above, there are aspects that are beyond anyone's control. The deal can be totally legit but that doesn't mean it is a good opportunity for you. You'd be putting too many eggs in one basket and taking on unnecessary risk. Realize that the people involved are not objective --- they like most people in their situation are real estate horney. They see this investment with dollar signs in their eyes that blind them to much of the risk. They no longer see it as speculation -- although it is!

If you walk away, sure you might regret the opportunity not taken. That should be tempered by the realization that sometimes the bets can really be just too big. If you had a million dollars in liquid savings the risk wouldn't be of concern. Your responsibility now to your future self is to manage risk. Accept that responsibility.

[projekt]

I am not a lawyer or an accountant, but this may not be legitimate. The SEC has created rules about who is permitted to invest in securities that are not listed through SEC-approved markets in order to protect people from being taken for a ride. If these loans are covered by those regulations, they may be illegal. Do we have a securities lawyer or accountant on here who can clear that up?

[Psychstache]

Hi Folks,

A friend/colleaugue who's been investing for 10+ years with a RE developer who's offering 12% return on loans. He connected me with th RE agent who's developing a large lakefront development, with over 4000 lots (2K acres) in East Houston. She financed it privately and offers a 12% return on private loans, with a minimum of 35K.

I spoke with her at length (1.5 hours) about her business model, ethics, plans, etc. I've seen the property, read the reviews on Yelp (mixed, but mostly because of marketing). She has legitimate papers, loans, etc. The loan is for 1 year, with interest and principal return in 1 yr. I'm considering investing 35K (about half of my liquid savings).

That said, this sounds too good to be true, and I'm a little wary. I asked her why she was going so high, and she said that she needed to do that rate to be competitive at the time she was raising funds (05-06) and has maintained that.

My dad lost 250K in 2009 investing in a private business providing 9% return leasing medical equipment, run by a pillar of a large CA city who had built the entire in a pyramid scheme, so I'm skeptical. That business was entirely legit on paper and in person - he did due diligence meeting, talking, etc. with this company.

Thoughts/feedback? Anyone else had this type of opportunity and found it legit?

Thanks for your help, friends.

Best,

Isaak

As in Houston, Texas? Where TF is there a lake near East Houston that people would actually consider a privilege to live on?

[forummm]

I just wouldn't bother with it. You could get a reasonable return in some definitely legit bond fund. For only $35k, the amount of extra interest you could get above a legit bond fund is a couple grand. For the time it's going to take you to research this and the amount of anxiety you're going to feel, it's not worth it. You could get a 2nd job instead and come out ahead--and know you were keeping your cash safe.

[slugsworth]

I would vote no.

There is not enough information to go on, but for perspective. . .24 month commercial construction loans are going for between 2.3-3.75% interest right now. The higher end of that being a fixed rate. There must be a very large risk not being disclosed.

[bacchi]

"It is high interest because, at the time we were raising cash for the property, that was the rate at which I was able to do "better" than several of my folks were then getting, and this was much more a risk in a way off place called "Cleveland, Texas". 

Because any bank would consider it too risky.

At this time this is a very high rate, yes, but I didn't want to change it on folks.

A real estate developer with a heart of gold!

That is the purpose of the refinancing, to lower our rate to around 6%.  You get the benefit of the face interest rate of the existing Note. If I was in California working on it, yes, it is likely my door would be being beaten down!  I'm not there, not focused on raising funds.  I'm here building this business. "

Good god, this is the biggest piece of horse shit I've seen in a while. Too busy to raise funds but not too busy to send emails to an investor with $35k?!?

Look, if you want a good lesson, go for it. You and your dad can commiserate about your equally bad investment decisions.

[arebelspy]

Her flimsy "I set a rate and haven't changed it for a decade and am too busy to cut my financing cost in half" doesn't cut it. She's bullshitting you. The rate is so high because the risk is high - speculative land deals with half your net worth?  No. Run.

[OurFirstFire]

All other details aside, I think you hit it correctly in the title - 12% with low risk is TGTBT.  Some in my family have participated in 1 year bridge loans for property development backed by the property with a LTV of ~50%, but the going rate seems to be 6%-8%, and there are plenty of brokers to connect a legitimate developer with this kind of financing at those rates. Definitely sounds fishy.

[KBecks2]

I wouldn't because it's such a huge chunk of your NW. You're chasing the dragon man.

I agree with this, you don't want half your money invested in one of anything.  It's too much.
The max I would go is 20% for my biggest investment, but in practice, my largest investment is only 8% of my port at this time.

Best wishes, there are many ways to grow your money and minimize risk.  Take your time to learn about your options.  Don't get sold!!!!