Due diligence for development venture?

Question

I am contemplating an investment with a local developer. I would be able to contribute as much as I wish and am "guaranteed" up to a 40 percent annualized return, or the option to profit share. The current project is at the stage of land acquisition and currently in escrow. There have been permits pulled, and rezoning pre-approvals. I have the option of getting my money back plus interest upon a construction loan during phase two, which means I would have theoretically no ties to the sales price.

I met the developer at a local RE meet up and he seems knowledgeable, and trustworthy. The investment would get me a note and deed of trust. What further due diligence should I do prior to sending funds to a Gentleman I just met?

I appreciate your help and advice.

I met the developer at a local RE meet up and he seems knowledgeable, and trustworthy. The investment would get me a note and deed of trust. What further due diligence should I do prior to sending funds to a Gentleman I just met?

I appreciate your help and advice.

Wayne Brooks · Answer

Lots of variables, including this guy's track record and experience, but do realize that your trust deed/mtg would be subordinate to the construction loan.  And of course "up to", by definition, means "less than", and there are no guarantees.

Justin R. · Answer

When lending for a deal like this (only a small portion of a multi million dollar development) what would be considered a "normal" transaction? Would I write the check directly to the LLC?  When reading about lending situations common advice says to ensure my attorney writes the contract and to utilize the title company. Is this the same with real estate syndication?

Justin R. · Answer

The entity is his LLC. He has also included his past projects and a list of references. In addition he says that he is putting his own money into the deal. I will contact the references and go from there. Thanks again.

Justin R. · Answer

He is looking for a minimum of 25k, up to 250k. The rates range from 35 percent to 45 percent depending upon the amount invested. I am asking him about past projects, references, and the entity.    He has developed a high quality portfolio explaining the details of the investment, and pro forma numbers. Thank you very much @Khaled Helmi and @Wayne Brooks!

I will let you know when I get the information I asked.

Thank you!

Khaled Helmi · Answer

I agree with @WayneBrooks as there are a lot of variables here and anyone who (1) has experience and (2) guaranteeing up to 40% returns would probably already have his rolodex of contacts and wouldn't need your money.

I cant advise you on analyzing the development side, but I'd make sure I check the local state criminal records for him (great way to get some info on his past) and ask for past projects he's completed and then do your due diligence and make sure that the builder is actually his company.

In terms of specifics:

-How much minimum is he looking for?

-How is he structuring the entity that you will be putting the money into? (Please tell me he isn't asking you to write the check in his name)

-How much of his own money is he putting in?

That's what I'd ask to start.  Be VERY CAREFUL here as this smacks very fishy.

Khaled

PS - All con man SOUND like they know what they're doing so other than concrete examples of past work I'd completely disregard it