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IWP!, flagship product is Chicago's premiere real estate Investment
magazine. Entitled Invest With Passion!, it is the tool for investors and professionals in the
Mid-West. The publication seeks to grow it's market share by providing
powerful information designed to build the reader both as an investor and a
person.
Since it's release in January of 2006, the magazine has been well received and
continues to gain momentum and support. The education, information, and
networking opportunities for the real estate investor has been long neglected.
No More!
The time is now and the momentum is building.
It's Happening!
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WORKING
WITH DEVELOPERS
By Geoff Thompson
I am absolutely addicted to real estate and real
estate deals. I don't believe there's anything more exciting than putting
together a deal that looked impossible or improbable, especially when it
comes to working with developers and new construction. I have had the
pleasure of working with some of the top developers in the country from
marketing and deal design to co-developments. They all have a few common
denominators - money, money and more money. They want it sold out
yesterday and closings today!
However, the first thing I'd like to point out from a
standard real estate investor’s side is that the developer has one
interest and one interest only - to move on to the next development, pay
off the existing financing and make a substantial profit. I like that
model because that is the American way. However, that model also carries
its pitfalls for the standard investor who is buying units from that
developer. Developers love to have their own attorneys write their
contracts. Those contracts are not usually written to protect the buyer.
This simply means that if you don't close, your money is gone. If you
don't comply with the financing terms, your deposit is gone. And if you
breathe in the wrong way, your money is gone. I don't mean this in a harsh
way. A developer borrows millions upon millions of dollars to break ground
and go vertical so everything needs to be airtight when it comes to
contracts.
We've seen this happen time and time again to
investors who are trying to do preconstruction deals with developers. A
good case in point is Southwest Florida and the current over saturation in
the market. Thousands of investors flocked to the Southwest Florida
market in the last five years. It was a real estate boom. No matter how
smart or not so smart,
investors were making money just by making small down
payments and flipping those properties prior to closing. It was not
unusual to see an investor make a $5,000 or $10,000 down payment on a half
million dollar property and sell the property prior to completion and make
$50,000 or $100,000. This was the time of free-flowing money. For those
who invested in the market at the right time, it was a gold mine that
seemed to be there for the taking for anyone who wanted to participate and
get rich.
However, some investors lost everything in an
extremely short period of time with the rise and almost instant fall of
that market, . Imagine living here in Chicago in a $250,000 house and
taking out a home-equity line of credit to make a $50,000 down payment to
a builder or developer with an expectation of flipping the property for
$100,000 more than you paid. Thousands of investors were called to
closing in that market and had a choice between losing their down payment
or carrying a property with a $4,000 or $5,000 per month mortgage payment.
People walked and left their hard earned dollars behind.
This created a massive surge of excess builder
inventory, investors who lost down payments, starving Realtors and the
general collapse of real estate values. It hit the real estate investor
community like a shock wave from an earthquake. For three or four years,
everything we touched was gold and in a matter of a few months the entire
market crumbled, leaving real estate speculators bankrupt and desolate.
As it seems to me, I'm always starting out with some
sort of a horror story regarding real estate investment and then turning
it into a positive light. This article is no different and the reason I
say that is that even though new or beginning investors had made serious
mistakes in the Southwest Florida market, it also opened up a door to some
incredible investment opportunities. Many of the builders who have a
saturation of inventory in their warehouse lines were able to discount
their product by the 10% down payments that they kept from the original
buyers. They were also able to take their profit margins of typically
15-20% of the original purchase price and discount those units even
further, creating some substantial value for current investors who are
willing to take a risk.
If you look at the Florida market historically,
you'll see that it has gone through corrections on multiple different
occasions. This correction period is no different from any other. The
time to buy real estate investments is during a buyers market, which
Southwest Florida is currently in. More importantly, Florida is still
seeing a thousand people per day moving to the state. We have also come
into the generation of retirement for baby boomers, which inevitably will
continue the surge of retiring to Florida.
There is no question that learning how developers and
builders work is an incredible tool for a savvy real estate investor.
With a little bit of knowledge, perseverance and strong desire to succeed,
the average investor can make significant profits in any market.
For those of you reading this article out there who
love creative deals, you will love this! My wife and I had determined
that we were going to move on from doing standard real estate deals to
doing our own construction and development projects. So we set off to
create our first masterpiece, and here's how it worked:
We made a deal with the gentleman to buy a commercial
lot on a land contract, or contract for deed. The deal on the land was
made for $250,000 and $1,000 down. The gentleman that we bought it from
is what I would consider to be a land guy. He makes his money by making
land deals and selling them for more than what he paid. My wife and I
were able to negotiate the terms with the seller to accrue the interest
and have no payments. The contract was written “and/or assigns” which is a
gold mine if you work it right.
Once we had the land under contract, we went to a
commercial construction company and asked the owner to design an office
building that fit the footprint of the land. I also asked him to wait for
payment until I was able to secure commercial financing and he agreed.
As we got the construction estimate, the building was
based at 6800 sq. ft. and was going to cost $1,100,000 for all the
construction, berms, landscape and lighting. With the land cost and the
cost of the building and construction, the project was going to cost
$1,350,000. My wife and I then got an appraisal estimate from a local
commercial appraiser, who estimated the buildings value would be
$1,700,000 when completed.
At this point, we had maybe as much as $2,000 in
costs into the building and our plan was to turn it into office condos.
This is where the deal became extremely cool for us to have organized it.
We had a gentleman with a growing business in the area that showed an
extreme amount of interest in the building. He originally offered to
lease the building in which case I would've carried forward on creating
the commercial financing. However, instead of us carrying the financing we
contacted an SBA lender and organized a 90% loan to value commercial loan
and sold the building for $1,650,000.
The SBA lender organized the loan as a
construction-to- permanent financing component on behalf of my new buyer.
This allowed us to assign our contract, our construction agreement and all
other responsibilities over to the new buyer. When we got to the bank for
the closing and I reviewed the settlement statement, I was pleasantly
surprised to see that the sworn construction statement by the builder
showed a cost of $1,050,000. I was ecstatic to see that the settlement
statement showed my wife and I leaving the closing with certified funds of
a little more than $250,000!
For my wife and I, this was an extremely cool deal
and it took about five to six months from beginning to end. Over the
course of that time, we put 50-60 hours worth of work in to bringing the
deal to a closing. This included working with the architects, the city
planning commission, neighbors who were residential but did not want to
see an office building in their backyard (which we fixed by increasing the
size of the berms), the SBA lender, and a very disorganized borrower.
Other than the fact that my wife and I made a quarter
of a million dollars on one transaction in six months or less, the
experience we gained from this first commercial development will be worth
tens of millions to us over the course of our future.
As I said earlier, I am addicted to real estate and
making deals. The deal that I just described happened in our fourth year
of investing in real estate. We started out investing in single families
and duplexes for our first two years and moved to purchasing a commercial
strip mall in our third year. We got our first development in our fourth
year and now we are in our seventh year as investors building a $100
million project in Ruskin, Florida which is a marina. The reason I share
this with you is that every deal, and every piece of knowledge you gain,
is another step toward the top. I didn't have the benefit of rich parents
or a college degree. We made these accomplishments by studying and
learning real estate investment techniques, making mistakes, and then
building upon the skills we acquired as we moved from deal to deal. We
stuck with it no matter what the issues were!
I believe that if you are driven and determined in
America, then your possibilities are endless. And considering that I was
voted “Least Likely” to succeed by my high school class, this is a pretty
powerful realization for me. We can all get to where we're going if we
believe and stay focused.
Geoff Thompson is an inspiring speaker, renowned
author of Real Estate Revolution, has hosted radio talk shows and the
founder of Global Wealth Solutions (GWS) - a real estate investment
brokerage. For more information, Geoff can be reached at 815-469-6677 or
geoff@gwealthsolutions.com.
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