Private Lender Perspectives: Private Equity Fund

by Paul Bernard - Residential Equity Partners, LLC.
November 3, 2013

Most real estate transactions have a complicated side and a simple side. From a high-level perspective, most things appear to be simple and straight-forward. The basic idea in a real estate transaction is two parties are exchanging the title to a property for something of value, usually money or another property. Look just below the surface and most of the moving parts become visible. Please take a moment to review the first article in this series where the short-term buy-renovate-sell project is explained and the private lender interaction is further clarified. The swim-lane diagram below was borrowed from that article to set the stage for this one.

We are again going to consider the role of the Private Lender in this process.

This time, however, we replace the idea of the private lender as an individual person with a group of like-minded investors. The key here is to have a well-written document outlining the rules and business relationship for multiple people or companies to work together and achieve a common goal. This is typically referred to as an Operating Agreement and can be summarized below.

Operating Agreement
There should be many sections and details in a robust private equity fund operating agreement. Here are the major parts with a brief overview of what they represent:

• The member qualification section explains the criteria for participating in the fund, including entry into and exit from the fund. 
• Investment objectives should be clearly defined so each fund participant knows how their money will be used and cared for while under the management of the fund. 
• All cost, fees and earning potential could be listed in a table and should avoid the use of complicated formulas. Here, simple is best. 
• All investing strategies have risk. The risks and potential losses associated with the specific investment strategies must be clearly stated along with the systems used to manage and minimize those risk.
• Investing criteria related to each market sector should be clearly defined. Allocations to each sector could be illustrated in a table. Again, simple is best. 
• Periodic reporting requirements should be detailed in the operating agreement so each member can monitor the activity of the fund and the performance of their investment capital over time. 

Business as Usual

The actual fund is represented by the operating agreement and exists as a binding contractual agreement. The fund manager is charged with the care and oversight of the fund and has an active role in every aspect of the fund. Once the fund operating agreement is created, the usage and process is identical to the Individual Private Lender model explained above and in the Basic article.

Instead of presenting an investment opportunity to an individual private lender, the deal is presented to the fund manager. The fund manager then reviews the deal and applies the approval structure and rules defined by the operating agreement. This is typically a multistage review and consideration process and could be performed by the fund manager or ideally by a committee of select fund participants. From there, the remainder of the process parallels the Individual Private Lender model.

Review the other articles in our Private Lender Perspectives series right here in this blog for more details.

Please visit our website to learn more about our firm and how we operate in the dynamic world of residential real estate. http://www.ResidentialEquityPartnersLLC.com

Private Lender Perspectives: Basics

by Paul Bernard - Residential Equity Partners, LLC.
October 19, 2013

The complexities of real estate transactions are often too overwhelming to consider all at once. I hope to clarify the main points here using a few words and an accompanying diagram. This is written within the context of a short-term residential renovation project where the entire process takes only 3 or 4 months.

To get started, the subject property must be located, contact made with the owner and a suitable purchase price and terms agreed upon. The importance of this very critical step cannot be understated. Buying at the right price sets the stage for the entire project and can assure profits or lock in losses. I used our company initials "REP" in the role of the developer in the diagrams below. Please see our other post regarding "Players" in the real estate investment arena.

The next major step is securing funding from either your own internal cash and credit lines or from a lender. The diagram below illustrates the critical role of the title company as the central repository of the purchase agreement, earnest money, funding documents and the money from the lender. The title company will follow the instructions in the original purchase agreement and pay off the existing loans, pay off and effect release of liens and prepare the deed for the new owner. The title company also receives or creates the trust deed and prepares all of these documents to be recorded. On closing day, the money changes hands, the deed is recorded and the obligations of the new buyer to the new lender become enforceable. 

Closing day marks the end of the purchase but signals the very beginning of the physical work on the property. Now with the title to the property in the name of the developer, the rehab work can begin. This is the time when the builder gets to work. Most residential renovation jobs start with permits, plans and staging at the job site. The first major effort that can be seen at the property is the demolition. Here, all the parts of the building and grounds that need to be removed are removed and either recycled or discarded. Residential property demolition is usually completed in a few days. The next 4 to 6 weeks encompass a very intense, but carefully managed renovation which often includes new floors, paint, appliances, lighting, cabinets, counters and upgrades to major systems.

Marketing efforts start in earnest during the final week or so of the renovation and end with a new buyer and the property going under contract for sale. The diagram below is almost the reverse of the purchase process above. Notice the promissory note pay-off and cancellation of the mortgage. This is where the private lender is re-paid the principal and any accumulated but unpaid interest. The title company again plays a critical role in this transaction as can be seen below.

Now, let's look at the entire process in a single diagram. Most residential renovation projects can be completed in about 3 to 4 months. The main steps are as follows:

1. Buy at the right price in a hot market
2. Do a fantastic job on the refresh
3. Professionally market the refreshed property
4. Sell at a fair price

. . . . . then repeat

Please visit our website to learn more about our firm and how we operate in the dynamic world of residential real estate. http://www.ResidentialEquityPartnersLLC.com

Meet the Players

by Paul Bernard - Residential Equity Partners, LLC.
October 19, 2013

Modern media, real estate gurus, home study courses and professionally produced workshops seem to mix and interchange some fairly common roles within the real estate investing arena. It is important to speak the same language so the parties involved can communicate effectively, especially if you work in this exciting field. I chose to write this article to clarify these titles and their meaning.

• Developer – company responsible for the overall operation of a real estate deal. This includes the acquisition, funding, renovation project management and eventual occupancy if it is to be a rental or the sale of the property if it is to be sold. 
• Investor or Lender – the person or group putting up the majority of the money to fund a project. This could be a bank, mortgage company, private individual or even a group of private individuals.
• Builder – any construction company or person performing the activities on the ground, this would be the general contractor if one is used and all of the construction trades. 
• Realtor – trained, credentialed professional, adept at representing buyers, sellers and facilitating the purchase transaction itself. This official title carries a certain amount of respect. 
• Title and Escrow Company – this is a very specialized service company with the legal authority to develop deeds, titles, mortgages, promissory notes and oversee the purchase transactions related to the buying and selling of real estate. In some states, this role is performed by an attorney specializing in real estate transactions. 
• Trustee – as it relates to real estate foreclosures; the Trustee has the legal authority to oversee and administer auctions, forcibly transfer real property deeds under the state foreclosure and debt collections rules, regulations and laws.  
• Seller – the deed owner of a property wishing to sell or forced to sell in a foreclosure. 
• Retail Buyer – a buyer of real estate intending on occupying or directly using the property.
• Wholesale Buyer - a buyer of real estate NOT intending on occupying or directly using the property. A good example here would be the developer intending to buy, renovate and sell a property. 

Please visit our website to learn more about our firm and how we operate in the dynamic world of residential real estate. http://www.ResidentialEquityPartnersLLC.com

Wholesale real estate demystified

by Paul Bernard - Residential Equity Partners, LLC.
October 9, 2013

Most of us know that "wholesale" in the world of products, stores and shopping means "from the manufacturer and at a very low price and usually in large quantity". When compared to how the word "retail" is used in this same context, most people understand this means the final sale to the end user and at full price. These two words have been used more and more in the real estate business lately to describe similar classes of transactions. In the real estate arena, the word "retail" simply refers to the transaction where the property is sold to the party intending to use it or live in it. Retail sales are most often handled by a licensed Realtor and typically include major marketing efforts, listings on the Multiple Listing Service and an Open House. Whereas the true meaning of the word "wholesale" in this context is not so clear and a bit muddled. Is it possible to wholesale a property if you did not build it?

In its simplest form, wholesale real estate transactions are between parties not intending to use or occupy the property. This could be two landlords trading properties with each other, a bank selling a bank-owned property to a developer or between any two other parties where neither one intends on living there. Imagine for a moment, a person working from home scouring the Internet for distressed properties. This person is not an investor or developer with intent to buy a house, they are not a Realtor looking for a property to list and sell, instead they are looking for a property some other developer would want to buy. If you had the time, technology and a basic understanding of how real estate investors, developers and landlords worked; you too could become a real estate wholesaler.

The three basic wholesale models can be defined fairly easily. 

1. Bird Dog - this is where the wholesaler finds the property a developer wants to buy, performs some preliminary research then simply refers the property to the developer and collects a small fee. In the mid-west where property values are modest and reasonable, this fee typically ranges from $100 to $300. However, in the big coastal cities east and west, the property values are much higher and so are the bird dog fees. Sometimes $500 to $1,000 would be more reasonable fees to expect in Los Angeles, San Francisco, New York and Chicago. The more valuable the property, the more you get paid. The Bird Dog model is by far the easiest but also has the least amount of control for the wholesaler and still requires a concerted effort in marketing and research. 
2. Assignment - the basic concept is the same as Bird Dog, but this time with more control over the property and requiring a bit more effort and knowledge too. Here, the wholesaler will need to locate the owner of the property, make an offer to buy and get the property under contract. The purchase offer has some language that allows the contract to be assigned to another party before the purchase is completed. The wholesaler in this model must have a good working knowledge of real estate, construction costs and be able to perform assessments on properties and negotiate a favorable purchase price. The signed contract is what is sold to the developer and not the house itself.  The wholesaler is done when they assign the contract and get paid. The developer would then fund the purchase, complete the renovation and eventually sell the property through a retail transaction or keep it in their rental portfolio. This wholesale-by-assignment model requires a bit of sophistication, working knowledge of contracts, construction and capable investors ready to buy the contracts on short notice. Assignment fees are based upon the value of the underlying property and the contract terms. Typical assignment fees range from $2,500 to $10,000 and sometimes more, depending on the value of the underlying property and the terms of the contract being assigned. 
3. Double Close - is identical to the Assignment model above except that a double escrow or double close is set up and performed at the title company. In this case, the wholesaler would actually buy the property, legally taking title to it and funding the purchase themselves. Then, on the same business day, sell the property to a developer in a completely separate transaction. Here the wholesaler can mark-up the property to align themselves with even higher returns. It is not uncommon for really great deals with deep discounts to be marked up $10,000 to $25,000 or more and still be favorably priced for the developer. That mark-up would be the wholesalers profit from the sale of a property they owned for an hour or two. Again, a certain level of sophistication, knowledge of construction estimating and real estate transactions is a requirement for success using this model. 

The successful wholesale operation must have a marketing campaign to locate discounted properties and distressed sellers. This could include Internet-based research, flyers, direct mail and other similar systems. Beyond marketing, locating the properties and structuring deals, having developers ready to buy the properties found is a critical step that cannot be overlooked. Some wholesale deals come from working investors and developers where they find more properties than they can handle. Instead of turning the opportunity away, the contracts are assigned or sold to another developer for a fee. 

Get started with finding a developer or investor willing to take on another Bird Dog and ask them to mentor you. They teach and you get paid to learn with each deal. As your knowledge grows, move into the Assignment model and on to Doubles. Are you already wholesaling property and need to expand or grow your operation? Maybe another investor/buyer is the missing piece of your strategy?

Please visit our website to learn more about our firm and how we operate in the dynamic world of residential real estate. http://www.ResidentialEquityPartnersLLC.com