Fortress Investments??

Question

Found this company while looking around online for something else, a company called fortress investment out of AZ, say they give you rented out properties for 7500 bucks and then you just have to refi it to get it in your name and they alledgely come with instant equity as well. Anyone ever delt with them? http://www.fortressinvestor.com/about.html says they own like 12million worth of property. perhaps they are just trying to unload their stock. If you can get it all for 7500, it almost sounds too good to be true, and we all know if it sounds to good to be true, it probably isnt.   Thanks in advance.

Jonathan V. · Answer

Bank appraisal price does not equal the value of a home.
          
          The value of a home is determined by what market conditions are present.  (i.e. what someone will pay)
          
          "If we can not trust a bank appraiser than we might as well never invest in real estate."
          
          I suppose in some sense, your statement is correct.  However, home x in neighborhood y can be appraised at $150,000 all day long, but if there isn't a buyer at that price range, that appraisal is of as about much value as the piece of paper it's sitting on.
          
          Furthermore, appraisals can come in at all different ranges, in my area, it's based off of the last 3 comparable homes (sq ft., bed/bath) that were sold in the area.  Yes they try to take into consideration how nice the home is and such, but these can still be way off.  Just read Danâ€™s post regarding this variance.  
          
          I understand and appreciate that you are selling a product, but the idea that there is less risk involved in what youâ€™re offering, rather than finding positive cash flow-deals, even just using the 2% rule, is a bit of a stretch.

Edit:  I didn't realize this post was from 2008 until after replying.

Don Konipol · Answer

thanks for the analysis jon.  i have been investing in real estate, real estate notes and real estate securities since 1979.  your analysis is right on as usual.  there are no short cuts to being a successful investor.  appraisals are all over the board. in the last two years i have seen the widest discrepancy between appraised value and market price (going both ways) in all the 30 + years i have been investing. for example, we just listed a property we thought might sell for $240K (as per appraisal).  we had numerous buyers wanting it and have sold it for $310K.  yet, we acquired a property in foreclsoure for $255k, that i thought was worth $425 - $450K (appraisal at $515K).  after 18 months on the market i have lowered the price to $275K and still just accepted an offer that will result in a $35K loss for us!  in this market suffering a large negative cash flow while sitting on "phantom" equity is a perscription for bankruptcy

Sean Terry · Answer

This is the wrong Fortress Investments, LLC, you're referring to Fortress Investments Group the NY firm (FIGâ€Ž - Fortress Investment Group LLC (NYSE).)  
          
We're a small company out of Phoenix AZ.
          
          Just an FYI.
          
          Thanks Sean
          Fortress Investment, LLC (Arizona Limited Liability Company)

Marc Stinebaugh · Answer

Beware of Fortress, they are with Sidley Austin Law Firm, some of it's upper echelon have now been implicated in a financial scam involving the World Trade Center on 9/11 and we believe they may also have plans to collect large amounts of insurance money from an attack on the Olympics in Vancouver. 
          
          Sean, whether or not you are aware of that is irrelevant, but I suggest you look into it. I wouldn't want people like that in my company putting our name down like that. Just, be careful. And don't worry, they're already going to court, here is the Civil case. 
          
          http://abeldanger.blogspot.com/2010/01/draft-45-preamble-for-constitutional.html
          
          Fortress is also alleged to be a financial scamming company that sells fake debt, a little more info on that is available here. 
          
          http://www.reformbc.net/reconcile.htm
          
          Here's a exerpt:
          "Reform notes that the Sidley Austin law firm and the newly-bankrupt KPMG Consulting have been selling fake real-estate and Olympic debt through a Fortress Investment hedge fund to â€œsophisticated institutional investorsâ€ which face a growing risk of a pension fund default."

Marc Stinebaugh · Answer

Check the links above.

Sean Terry · Answer

Jon,
            I agree that every investor needs to do their own due diligence, and I welcome anyone who would like to fly to Phoenix and view the houses we have to offer. You are obviously a sophisticated investor who has the time, money and crew able to do thoses types of extensive renovations and you can handle the risk involved   The investors we cater to does not want take the risk or have the means to do what we do. 
            
            We believe we are doing a service to the neighborhoods by cleaning up these houses and to the investor by delivering turn-key properties at a fraction of the cash outlay.    
            
            With current market conditions anyone can pick a neighborhood and find comps with large price swings. That's just the way it is. But with our program, a certified bank appraiser will be performing the appraisal. If it comes in at $110 and the loan amount will be $82,500. If it's comes in higher 75 percent will be higher, lower it will be lower. If we can not trust a bank appraiser than we might as well never invest in real estate.  I can say some deals we broke even on, after all that work and some deals we do ok, but Fortress will take the risk, not our clients. 
            
            Again Jon, I appreciate your feed back and respect your opinion. 
            
            And to all the folks, higher a good realtor and have them represent you, have them look at how we renovate our properties.  we would love to meet them and don't worry about paying them, we will pay them a commission. 
            
            Happy Investing,
            
            Sean

Jon Holdman · Answer

You are correct. Buying this property for $160K with $30-50K out of pocket would be an AWFUL deal.  Buying it at $127.5K with an interest only loan for $120K is better than that.  That's a long way from being a good deal.

For my investments, I don't use 50% expense ratio.  I use 40%.  But, I manage them myself and am willing to do that for free.  Your deal says you get $1050 a month in rent.  You've got a $700 interest payment, $150 in taxes.  Are you managing them for free?  Or, are you charging 10% like most property managers?  That's another $105 a month.  Now your buyer is down to $95 a month.  There's never any maintenance?  Never any vacancy?  Never any tenant damage?  No charge to file taxes? Never an eviction?  Well, maybe if your buyer just has one or two or three properties, they will get lucky and never have any of these other expenses.  Maybe they get unlucky and the tenant has to be evicted after paying one months rent and wrecks the place in the process.

I fully accept the idea of hard money/refi to get into a house for minimal out of pocket.  I've done it, and I've funded others doing it.

Paying $39.5K for the property, putting $27K into a rehab, and lets say another $10K in holding costs and getting $1050 a month in rent is a decent deal.  Even plunking down another $3K to refi into a perm loan puts you at about $80K, of $532/month fully amortized (not IO like your loan) for 30 years.  I'd take that deal, if it was in my back yard.  Or, even across town.  Long distance and paying for a PM, its still not good enough.

Being able to get someone into this with a $120K loan and you taking the proceeds from that loan.  Now, that's a deal!

Don't worry M S.  Even at a reasonable value of $120K, 75% works out to $90K, leaving Fortress a nice return on their $65-75K investment.

Jon Holdman · Answer

Folks, do you due diligence before getting into any deal. Learn the area.  Before you send someone money, get on a plane and examine the deals for yourself.  Learn the area, and learn what values and rents really are.  Learn the business.  Buying a house is not like buying a stock.  If a stock falls 25% in value, you can still sell, and sell quickly, and walk away with some of your money.  If you buy a house, and it falls in value even a little you can be on the hook for tens of thousands to unwind a bad investment.  Transaction costs will eat 8-10% of the sales value.  If you need to sell quickly, and there are two other nearby, similar houses, you'll have to price yours lower to make it move.  Even if this does appraise for $160K, if you had to sell quickly you'd have to price this one for $110K to compete with those others.  You'd net barely over $100K.  It may have only cost you $7500 to get in, but it will cost you $20K to get out.

There are numerous houses within two miles of this one listed on the MLS priced around $60K.  In fact, for this zip code, realtor.com shows 56 listings for 3/2's or larger under $75K, 21 between $75K and $100K, 13 between $100K and $140K, 7 between $140K and $180K and 14 above that.  Many of the higher end ones are clustered just to the north of this deal, only a half a mile away.  Are these comps?  I don't know.  You can't either without some feet on the ground.  Or are the ones for $60K a mile or so to the SW comps?  Don't know that, either.  This may well be a great speculative play.  As a rental, its, at best, a very weak deal.  If you goal is to speculate on appreciation, this may work for you. If you're trying to build a rental portfolio, go buy those 3/2s a mile away for $60K.  There's 56 of them, ones not a beater.

M S · Answer

Thanks for the replies from both sides everyone.    So no matter what the appraisel comes thru as, fortress would only get 75 percent of that, even if that ment losing money on the deal?

Sean Terry · Answer

Thank you Jon for your response, the feed back is appreciated. 
            As for the property you chose 2011 w Cypress, we did buy it from the bank cash, this deal was unfinancible by a conventional lender, so far we have put over $27,000 renovating the property and will make it one of the best homes in the neighborhood. 
            
            We used a ITI loan (5-10 year fixed) @ 7 percent for 30 years giving a estimated payment amount of $850 ($700 payment and $150 T and I). We also recommend Home Lovers as a PM firm. They charge 7 percent for our customers with no junk fees. I own a lot of real estate and have never paid 50 percent in expenses unless we just acquired the property and are stabilizing it.  
            
            As for values, the comps you chose are probable bank owed properties that are distressed, an appraiser will not use these for comps. They use 3 sold comps that are arms length (no trustee sale or bank sale) that are like property with in 200 sqft of the subject. Remember, this is all irrelevant because when the refinance is started, the bank will randomly pick an appraiser and the true value will be determined. The investor will get a loan at 75 percent of that value. Fortress takes the risk if it comes in lower not the investor. 
            
            Now let's assume Jon all your assumptions are correct and a investor was to purchase the property with the traditional method putting 25 percent down and having to fund all the renovation costs and take all the risk. The total out of pocket would be $30K to $50K with no hope of recouping the cash until the property sells or is seasoned for one year to do a cash out refi. 
            
            Now which method would most investors pick:
            A. Buy a Fortress home for $7,500 total out of pocket with a tenant in place and minimal risk.
            Or
            B. Buy the same property with $30K to $50K out of pocket, no tenant and all the risk. 
            
            It's really a no brainier and defiantly not "weak".

Thanks,
            Sean