What is wrong with this deal?

$10,000.00 for earnest money deposit. $25-$30,000.00 for 3rd party fees that include: Title Company, attorney fees, appraisal, Phase 1 environmental and closing costs.

Property Information

96 units apartment complex Illinois purchase price $2.45 million subject to appraisal. Class "C" type buildings. Gross $530k+ NOI $280k+.

What I'm offering

$5,000+ every month for 6 months with a balloon payment of $100k investment plus 25%-70% in equity at the end of 3-5 years.

How you get paid

Investor being put on 2nd on the property for a collateralized lien In case I'm not able to pay you back in any way you would be legally able to take over the property. Casualty Insurance in case the property catches on fire or floods etc. Business Loss Insurance for up to 12 months this would pay for any income loss to Casualty's that might befall the property. Key Man Life Insurance put into my company operating agreement if I'm die my operating agreement would pay my private money investors off with the proceeds.

Edited: 06/26/2010 at 11:25AM

Brian Levredge

SFR Investor · Long Beach, California

Pro Basic

788 posts
11 awards
65 influence

Jan 29 '10, 01:24 PM

What's the down payment and where is that coming from? What about the financing? How do you propose to repay an investor triple their money in six months and give them an equity position in the property? Lots of red flags on this proposal.

Edited: 06/26/2010 at 11:25AM

Paul Turner

Real Estate Investor · Kenosha , Wisconsin

91 posts
50 influence

Jan 29 '10, 01:31 PM

I don't need a down payment with this lender. Yeah I thought it was crazy also but he does 100% financing the catch is you have to show you have access to 20% of the purchase price. I would pay the investor back with the properties income. An after 6 months I would have set enough aside to do so.

Ah the equity position is another way of securing the investment. An with all the precaution's: Casualty Insurance,Business Loss Insurance,Key Man Life Insurance and being put on a second on the property.

Edited: 06/26/2010 at 11:25AM

Brian Levredge

SFR Investor · Long Beach, California

Pro Basic

788 posts
11 awards
65 influence

Jan 29 '10, 01:58 PM

There's still plenty of concern. I get an NOI of 265k using the 50% rule. If it's a C class property there's a pretty good chance there are going to be some decent capital expenses and we don't even know the vacancy rate yet. Illinois is also a high tax state and that's going to skew things north. Even assuming none of these things, your NOI works out to just over 22k per month.

Your debt service fully financing this would be right around 17.5k per month using a 6% rate and 20 year term on 2.45M. That leaves you roughly $4500 per month left over. Unless you are getting a much better rate and term, you won't be able to even pay back 5k per month and that seems to be a best case scenario.

My other issue is being in a junior position to the first. If you default, I get wiped out most likely. I just don't see how you can generate the return to the investor that you are promising without the money coming from an outside source.

Edited: 06/26/2010 at 11:25AM

Paul Turner

Real Estate Investor · Kenosha , Wisconsin

91 posts
50 influence

Jan 29 '10, 02:24 PM

How about you take a look at the property details. I have the current rent rolls also
http://www.loopnet.com/xNet/MainSite/Listing/Profile/Profile.aspx?LID=16227667&SRID=741550381&StepID=101

Also I am planning on making some improvements. After 3 months after I close an looking into another company that does property income enhancement assessment To increase the NOI. This property is just to get my foot in the door. My goal this year is to have over 100 100+ unit apartment complex's nationwide. Some I'm going to flip and some I am going to hold onto.

Updated: 06:53PM, 01/29/2010

That's a great question to what if I default? An had to sell how would 7%-9% of the profits (selling price)?

Updated: 07:05PM, 01/29/2010

Furthermore "collateralized lien" If the investor is on a second on the property "asset" so IF I DON'T Preform said investor could take control. By exercising there remedies in the lien. As I stated in the first post "Investor being put on 2nd on the

Edited: 06/26/2010 at 11:25AM by Paul Turner

Bill Gulley

Real Estate Investor · Springfield, Missouri

5,640 posts
13 awards
100 influence

Jan 29 '10, 06:44 PM

Hi, maybe a better idea, allow your investor to partner. The laon is made in the company. If you defult, you lose your interest in the company. That way he does not have to payoff a first to protect a measly $40,000. He can be in a passive position with no other benfits unless he earns something. Pretty simple to do. Good Luck, Bill

Edited: 06/26/2010 at 11:25AM

Paul Turner

Real Estate Investor · Kenosha , Wisconsin

91 posts
50 influence

Jan 30 '10, 01:02 AM

How would I go about that?

Edited: 06/26/2010 at 11:25AM