3% Return per month

[Aikido]

Hi all,

I certainly appreciate the discussion around this. I will go back to get more information along the lines of the developer's situation. Please understand it is not my intention for anyone to make a decision based on my posting on this forum. If you want more information regarding this deal then it is up to you to do that.

For those interested I will post what I find out later.

I remember hearing Peter Spann once making the point about how he looks for 3 things in an investment. High return, high capital growth, low risk. I think he said that he has never been able to find one that can fully satisfy all three. The best he ever got was two of the three.

hopefull Peter doesn't come back and sue me for misquoting him or something

 

[alexlee]

I remember hearing Peter Spann once making the point about how he looks for 3 things in an investment. High return, high capital growth, low risk. I think he said that he has never been able to find one that can fully satisfy all three. The best he ever got was two of the three.

Agree. So in this case, with it's either high return and no capital growth (loan is repaid), so you'd want low risk. Or, you get no return (default), maybe capital growth (assuming the development is completed and it really is worth what the developer says it is), so you'd still want low risk.
Alex

 

[JoannaK]

this has been a very interesting discussion!

why on earth is he having delays getting the final pmt from the bank?

TFB...this happens because generally the lenders hold back a retention equivalent to 5% of the construction costs until all final certificates are lodged with the bank, at which time they'll release the final payment.

Most developers will have the funds to carry this, but sometimes things do happen, things run over budget or over time, and the developer can't always carry it.

without getting into the numbers side of the deal, this is just another tool in the tool box, from a developers point of view, and a deal structured like this can work. As the units are nearing completion the risk to the investor would be fairly minimal. Obviously the investor would need to speak to their solicitor about additional protection, such as caveats and the like.

I've used this technique whilst in the middle of building one project to secure another project, but we actually had the contracts stamped by the OSR.

 

[thefirstbruce]

Thanks Joanna,

Have you ever used a caveat? I understand they are pretty weak legally. A friend put a deposit on 2 new land release lots. The market moved up, and the developer realized he'd undersold, so he dragged out the DA (basically lied about not having it approved yet) beyond sunset date. He thus argued the contract was void. My mate's lawyer tried to slap a caveat on lots to prevent them being resold, on the basis the developer had lied and misled the buyer in relation to council approval and did not act in a timely manner in honouring the contract. It didn't work and my mate was up for another $2500 legals in addition to 15 months opportunity costs on the deposits.

 

[Aikido]

Hi Joanna,

Thanks for that. In terms of just passing on the opportunity that was presented to me, I didn't have the necessary knowledge to demonstrate the viability of the deal.

What I would like to suggest is if there is enough interest we can have it as a topic for our next meeting in Sydney with Joanna giving us a bit of a presentation (being a bit presumptious here). I'll pm peter to see what he thinks.

Cheers

 

[JoannaK]

in my situation above I did use a caveat, and the vendors (who purchased my unit for $1 as security) did also use a caveat...

My understanding is basically the land owners solicitor either has to approve the lodgement of the caveat or make a defence as to why the caveat shouldn't be lodged (through the courts I imagine).

As I understand it, a caveat is merely a warning to a purchaser that there are other interests in the property that need to be sorted out prior to a settlement taking place.

But, a signed, exchanged contract should constitute enough of an equitable interest in the property to allow a caveat to be placed...i don't know.

I don't know too much more than that about caveats, and of course I could be completely wrong.

 

[JoannaK]

Hi Joanna,

Thanks for that. In terms of just passing on the opportunity that was presented to me, I didn't have the necessary knowledge to demonstrate the viability of the deal.

What I would like to suggest is if there is enough interest we can have it as a topic for our next meeting in Sydney with Joanna giving us a bit of a presentation (being a bit presumptious here). I'll pm peter to see what he thinks.

Cheers

ohhh...that is cheeky!!

i don't know. I'm not a solicitor who knows all the ins and outs of these things....and the SIG has had other gigs already about development, which I'm sure have all been excellent, and they've gained alot from.

I doubt I could add much more to what has already been presented to them.

 

[Aikido]

I guess this is not strictly about development. Its more about creative financing solutions for developers and investors. You can demonstrate why developers pay the higher interest that they do to get the job done. I think its another investment opportunity to create some cashflow for people who might have money parked away.

 

[JoannaK]

i don't think so! I'm far from creative when it comes to financing solutions! A financier who specialises in this field would be in a far better position than I.

 

[grossreal]

Hi all
A quick note
what you are talking about in this post is either bridging loans or caveat lend they are very similar and yes caveat lending is relatively specialist.
I own the email address [email protected] and use it for investors who wish to get involved in caveat lending.
it is not something that isn't for sale hence never posted in this section.
running late for a meeting but so sorry about being so short.
it is very popular and the developer if be needs it there are alot more hoops then has been posted as yet.

 

[ker]

Hi all,

I frequent the forums often but rarely have time to post I'm a property developer and caveat lender msyelf.

As Joanak has mentioned these things can happen as a property developer due to many reasons, however, Aikido did mention that they still had two months worth of work to completion? Lenders always fund on a cost to complete basis only so he shouldnt be getting caught out at this stage of the game.

Regardless, I think the deal offered can potentially be good( we lend to developers all the time). You would need however to do thorough due diligence on where things really stand with the project. Deals like this we come across all the time and once you delve into things a little more it usually is pretty ugly. But this developer is only offering 3% per month which means he isn't comlpletely desperate yet! We once had a developer begging us to lend him some funds to complete a site and was offering 12% per month

In my opinion i would want to:

1. See copy of all and especially the most recent QS report confirming costs to complete, and confirmation of the remaining funds available in his contruction facility. The biggest risk to an investor coming in at this point in time is if the developer cant complete the project and obtain all necessary certficates,etc to obtain OC. The real risk is who the builder is unless the developer is the builder himslef in this instance? You will be amazed what trouble builders get themselves into from sneaking out extra funds through the drawdowns and using it to cahflow themselves on other projects,etc I've seen it happen many a time over the years and builders going insolvent as a result. There are also some "dodgy" Quantity surveyors out there who dont do a very thorough and complete job. I would also get my own project manager out there to cost up for himself what he estimates the costs to complete the site is.

2. As already has been mentioned, the risk to the investor or lender is if project is not completed. The developer will have every intention of repaying the funds if it is a genuine $250k discount off one of the apartments. In this market, he could not afford to give away that type of discount on a small 10 unit project, the margins would be too small. However, I would definately get the developer to agree to more like a $400k discount. This way, it covers not only your prinicpal but your interest/default interest and assuming he could not pay you back your $250k, why would you want a unit for $400k??? And what if the unit is in a poor location from an investor perspective? All that has really happend is that you paid a $250k deposit but got no real discount/benefit in the end. If he is confident of paying you back he should have no problem offering this. The $400k discount would also have to come off whatever the current valuation is of that particular unit he is offering as security (appoint reputable valuer to do a current market valuation) That way the discount is confirmed as being genuine, not what the developer believes it is worth. If teh valuation comes in at only $600k, then discount should be $600k - $400k.

3. But the above alone would not be enough in my opinion if you wanted to be really prudent. I would also along with the above structure it so that the developer signs a 2nd mortgage to be secured by way of caveat over the development site. That way, if he somehow manages to screw up the completion of the site and consequently(the purchase of your discounted unit) then you arent left in the lurch and have security over the site. My bet however is that he already has a registered 2nd mortgage on the site so equity would be limited. However, if that was the case you could still lodge a caveat secured by unregistered 3rd mortgage. The caveat is powerful so much so in that can prevents any dealings with that property and serves as a warning to everyone that you have an "equitable" interest in the property. The caveat cannot be removed without your consent and can really screw a developer up as it will prevent any settlements from happening,etc If the developer defaults you can then register your mortgage over the site. The develop has no choice but to pay you out or get prepared to be sold up.

4. And ideal would be to have some form of residential security say of one of the Directors personal properties. I would rather have one residential property alone whereby I had a registered mortgage or caveat secured by mortgage over a property with sufficent equity then any of teh above security. But if all checked out and the developer didnt have any residential property to offer up I would still do the deal with 2 and 3 above( as long as I was comfortable with his exit strategy and ability to complete the project)



rgds,

Darren

 

[simonjulie]

Hi ker
Thanks for explaining the structuring of the deal. Sounds like you have years of experience in the game.
Great post and I look forward to reading many more of your forum contributions.
Kind regard
Simon

 

[JoannaK]

Great post Ker!

 

[Aikido]

Ker

what is the process of recovering your money if the deal does go sour? So if things go south, being a second mortgage or third mortgage, you stand down the end of the line in terms of getting your money back.

And getting a discount on the uncompleted unit. Will you be in limbo until the project is completed and then get the unit at the contracted price? If the project is sold to another developer will the contract be honoured?

 

[grossreal]

hi Aikido
If a caveat is on the site and the developer goes south then you are ( unless you have a second mortgage) a unsecured creditor and the new owner won't honor your lend as I wouldn't.
I do caveat lending but I caveat a property of the applyee that is not part of the property they are buying, refinancing or lending on, caveat lending is good for sites that are near to complete and need money put they are high risk and this is high risk lending and to mitigate that risk you must eyeball each deal and work out which you are lending on, this is not nor should it be lend to invest in this type of lending.
if the person wanting the lend can't show me a exit plan or structure and the lend is over 3 months I'm not interested in it 3% is reasonable some do go to 8% per month but again its risk against return If you are willing to take the punt on it comming off the you may win I don't go on those deals but have seen them.
developers should have 21% profit in the project,should have 5% contingency and should have put 20% of there own money into the deal to get it kicking off and if you have run out of money then this is a high risk deal because some thing in the above hasn't happened.
one thing you must remember if you are embarking on bridging finance/caveat lending(and a host of other names but are the same)that you do and you will lose money yes the gains are higher then the losses but there are losses and if you haven't organised the way that you do it, then risk against return.
I am in a group of lenders across the country and is solicitor back, I spread my lends across 10 different lends so if one goes bad the solicitor chases it and I still have made a profit, be it alot smaller and the caveatee gets the cost per month until we are paid or the cost is over the value of the property and is sold up ours are backed by a second mortage and wont go over 80% lvr of the property we are caveating.
To give you an idea of the sizes of some of these loans huntley mine in wollongong was a 6.5mil caveat/bridge loan and this group I'm with didn't go with it, a single investor out of the group did.
I use this system beacuse yes the risk is still there but is mitigated by the solicitors and our fees to do a 200k lend is in the versinity of 40k which the person wanting the funding either pays up front or adds to the loan at the start, the interest is paid up front.
min and max is a 3 months loan.
If you want any info on this type of lending by all means post your questions and will see If I can't answer them, my little group of like minded investor will,

for a area that you can look at that no body has mention in this post,
is were this type of lending is done, not at the end of a project but at the start were the builder need the money to kick the project off and then the banks come in and refinance out the purchase and your costs are factored in to the set up costs.
if you go for a gross realisation lend after 3 months into the development the money starts flowing and you have 100% lend on the site but I'm not going into that.

 

[simonjulie]

Another great post
Thanks grossreal
How did you come to get involved in this type of syndicate lending?
Kind regards
Simon

 

[JoannaK]

Another excellent post - thanks guys; this is all fascinating stuff!

 

[thefirstbruce]

Thanks Kerr and GrossReal for the voice of experience.

I'd like to hear more from you guys.
My understanding is that a second or third mortgage to back a caveat, is flimsy, and costs a stack in legals to chase. If the developer tanks and is liquidated, and the properties are sold off in the typical administrator/liquidator fashion (with minimal advertising and <7 days settlement time), then rarely is full market value attained. When you throw a weaker market on top of this, such as has happened between 2003 and now, there's going to be even less equity to pay everyone.

The administrator and the first mortgagor might get their money back, but the second and third and unsecured creditors get little.

Can you give me your insights on this please.

 

[ker]

Hi First Bruce,

What you say is correct to a degree.

A caveat on its own can be a bit "flimsy" but if the borrower has agreed for a second or 3rd mortage to be secured by caveat then in the case of the borrower defaulting you can then register your mortgage. Caveat lending always commands higher risks then if you register the mortgage upfront. This can take a while however, because when you register your mortagage you need the consent of the first mortgagee and teh first mortgagee must produce title to allow you to register your second mortgage. They can drag this out for ages. As a second mortgage lenders it is always prudent to try and obtain a deed of priority. This caps the first mortgagees debt at a certina figure, so the equity is not chewed up by the first mortgagees legals costs, default interest,etc,etc. In this time of lending scenario however, you would not have time to obatin a deed of priority,etc and nor would the first mortgagee necessarily agree to it. But whether it is a caveat loan, second or third mortgage it is always more riskier than a first mortgage position naturally, but if there is sufficent equity and the exit strategy of the borrower is clear then the risk can be mitigated and the risk/reward can be quite good. We have often done second mortgage/caveat loans where the LVR has been only 60%(including our loan). So in worst case scenarios the borrower can be refinanced to repay our loan.

The costs for recovering your funds as a caveat lender is no more expensive then any other mortgagee position really, and even as a second mortgagee you can force the sale of the site if the borrower defaults. In terms of the first mortgagee just selling up the site within 7 days,etc they cant really do that. If the mortgagee takes posession of the site it must be demonstrated by them that they attempted as best as possibel to achieve fair market value price. This would involve a process of adverstising the property for sale through normal channels ie RE agents,etc and/or ultimately selling at auction. That way, it CANT be argued by the Borrower, or the second mortgagee that the first mortgagee didnt just fire sale it quickly to recover their debt. For instance, a property might be worth $1 million, and the first mortgaee's debt may only be $600k. If they just sold it the next day to thefirst buyer who came along for $650k, knowing that that was fine because it covered all their expenses and principal debt, then there is potential recourse on that lender because they didn't do what was in the best interest of "all parties".

Again, in terms of this deal being offered I would have to have certainty of the exit strategy and the builder's/developers ability to complete. I would take the contract with $40k discount as security along with a caveat secured by mortgage over the site. Would also matter to me who the first mortgagee was. Because I know most lenders would not want the site to be sold up "almost complete" as near impossible to achieve a good firesale price at that point in time. They would much rather do whatever it takes to complete the site whether they had to bring in another builder or just in the end advance the money to get the site finished. Though a much bigger project, with one of Westpoints developments in Melbourne, the second mortgagee in that instance was Bridgecorp and in order to protect their original loan amount, they are themselves injecting a further $17 million along with the first mortgagee just to complete the project, otherwise they both stood to lose millions if tehy didnt. Its much harder to sell the site unfinished, then if it was completed and they could auction of each indivdual unit. If the first mortgagee funded based on exitsing pre-sales also then by ensuring the site is complete, they will ensure these settlements occur and there exposure is reduced. But the fact that the developer has run out of funds this late in the game indicates to me there is something funny going on or it is probably more complex than what appears.

However, if you like the area and the end product looks like it going to be okay and teh valuation stacks up then you could stand to buy yourself a brand new "cheap" apartment (assuming he couldnt pay you back and the site eventually got completed by someone?)


rgds,

Darren

 

[thefirstbruce]

Outstanding contribution Darren. I really appreciate the quality of your reply. I hope you and Ker get comfortable on Somersoft. A lot of us here are looking for ways to make better profits, with controlled risk, in this flattish market. And there would seem to be more small developers under duress currently.

Regarding your answer, my concern wasn't so much the first mort. grabbing the property and flicking cheaply, but rather the administrator. I have seen them advertise a property in a manner that would draw minimal interest from serious local buyers. I have heard liquidators are very good at ensuring their mates get first pick of properties up for tender or auction. And I understand that time is of the essence when liquidation is underway.

Though agree if a project is almost finished, the first mort. often puts up more money to save a project. I have seen a construction company dip into their overdraft heavily to finish a project that the developer couldn't make progress pmts on. Though it all gets complicated when they start slapping caveats on things as well.