All Forum Posts by: Don Konipol

Quote from @Matt Ridenour:

Hello everyone!  
i have a very motivated seller with a lot of deferred maintenance. 
He isn’t savvy in real estate and I want to make sure I treat him very fairly. 
He owes 130k. My rehab estimate is 200k with an ARV of 575-600k (probably more but being safe)

He would like 300k. I know I can’t give him that. He is open to sub to, and he even would let me pay rent for him somewhere else in town.  
I’m trying to secure the property for as little as possible without screwing him over. 
my current best thought is a sub to, a year’s rent and a profit share once it’s sold. Maybe some walking cash. 
Any big ideas?

I’d love to hop on a call with a big thinker if you’ve got time!  Can’t give my cell I don’t think, but message and I’ll get right to you. 
I owe him an offer tomorrow morning. 😱

I can’t address your Ethical concerns since each person lives by different standards 

I can tell you that a straight purchase - sale has the least chance of future complications, lawsuits, disagreements, disputes, etc.  Transactions where seller carries financing or sub to has a greater percentage chance of disputes, lawsuits……. And, transactions which are partial sale, partial joint venture, seller getting a “percentage “ of “profit” upon resale, etc, have a very high probability of dispute and future legal action.  Just for starters, here are SOME of the charges a plaintiff attorney will charge in lawsuit in the scenario where you agree to pay the seller a “share” of your profits 
1. You sold his client an unregistered security
2. You violated Dodd Frank act 
3. You failed to comply with CFBP regulations
4. Your profit report is fraudulent
5. You coerced the plaintiff into selling under fraudulent terms
6. You misrepresented your abilities to successfully manage the process
7. You violated the mortgage due on sale clause
8. You denied the plaintiff due process
9. The agreement was fraudulent on its basis 
10. You do not hold a general contractors license 
11. You failed to maintain proper insurance coverage 

Since you have no statutory protections, it’s likely the seller will be able to secure the services of an attorney on a contingency basis, while you will have to pay an attorney to defend you at an hourly rate covered by retainer(s).  Some of these charges may or not have any basis in fact; however, you will be required to defend every one of the charges brought by the attorney representing the seller, each adding to you attorney bill at $300 -400 per hour.  Competent counsel in most parts of the US will cost $15 - 20k to get to the point of being prepared for trial, so likely after your attorney extracts the most he can reasonably expect out of you he will recommend settling - that means you giving up any profit you made, or throwing g in more money accentuating any loss.  

I expect this post will be followed by a number of post from people who entered into these agreements - and it all worked beautifully.  About half of these will be complete fabrications.  The other half will be true - but it’s the luck of the draw.  Do it enough times and anyone will get burned. 

Now, some people’s business model may seem to lend itself to these potential lawsuits.  But they set up their business so that the chances of being sued are minimal; investor expectations are realistic; investors (and be sure, in your scenario the seller is an INVESTOR in your deal, if you don’t think so look up the SEC definition of investor) are informed of ALL the risks they may be incurring, and the business model includes disclosure documents that disclose EVERYTHING that may be relevant about the sponsor, deal, etc. 

So be warned, entering into a partnership in any form where you are making the decisions and the other party (s) are passive has a high probability of not ending well . 

Quote from @Robert Ellis:

Hey everyone,

I’ve been exploring the idea of raising capital through an equity fund structure instead of doing individual syndications deal by deal. The goal would be to have more flexibility and be able to move faster on acquisitions without needing to line up investors every time.

Curious if anyone here has gone that route — either as a sponsor or investor?

A few things I’m wondering:

• What kind of structure did you use? (LLC vs LP, open-ended vs closed fund, etc.)

• How did you handle the capital raise — friends and family, accredited investors, crowdfunding?

• Any challenges with compliance, reporting, or investor communications once the fund was live?

• Did you find that investors preferred the fund model over one-off deals? Or vice versa?

• Any software or tools you’d recommend for managing a fund and reporting to investors?

If you’ve done this or are considering it, I’d love to hear how you approached it and what you’d do differently. Appreciate any insights you’re willing to share!

Limited Partnership model is somewhat dates - the 25 + years of case law on LLCs has given attorneys the confidence to recommend LLC over LP, mainly because the LP model requires a general partner without limited liability, although that GP could be another entity. The LLC model has a manager who can also have limited liability.  Further, the LLC model is significantly more flexible and adaptable than the LP model. 

I ran an “open ended” fund from 2002 - 2009.  The major problems are that with assets that are not valued by a market on a daily basis the valuation is a guess at best, so new investors never really know if the value quoted for their investment is accurate, and any investment below net asset value dilutes previous investor equity.  Closed fund model is a lot “cleaner”.

Smaller investors seem to accept, if not prefer the fund model, diversification, one decision , not a whole lot of ongoing analysis, UNTIL they don’t receive their anticipated distribution; they seem to believe projections are a promise, equity participation has the same priority as debt participation, anything in the PPM they neglected to read was a fraud perpetrated against them, LOL.  Of course most investors aren’t like this, but MANY smaller investors are and will require significant “hand holding” if there’s any “glitch” in the investment. 

Larger, more sophisticated investors prefer having assets identified BEFORE they invest; we went to this model in 2013 and still are using it today, through using Series LLC to syndicate our deals. 

The main choices for exemption from SEC securities registration are as follows

1. Intrastate - offering marketed to investors from one state only.  Compliance with that states securities laws
2. General exemption for private placement - offered to investors who are sophisticated and with whom the sponsor has a preexisting relation.  No specific filings, no guarantee SEC won’t in the future claim offering violated securities laws, no statutory defense for investor lawsuit for sponsor. 
3. Reg D 506 B - safe harbor as compliance guarantees SEC acceptance of securities registration exemption and meets requirements for sponsors statutory defense of investor claims meaning attorneys won’t undertake investor lawsuits on a contingency basis absence fraud, no general solicitation and advertising, investors self accredit.
4. Same as 3 above but does allow general solicitation and advertising, no pre established relationship between investor and sponsor necessary, requires verification of investor accredited status. 
5. Reg A and A+ - “mini public offering” much more costly than Reg D but much less costly than a registered offering.  Can lead to “trading” platform where investors can enter into an aftermarket to buy and sell security interests. 
6. Regulation CF (crowdfunding) - requires participation of crowdfunding portal registered with SEC or broker dealer participation.  Many regs to contend with. Aren’t many examples of utilization successfully in real estate. 

Investors expect to be able to access information concerning their investments on line.  Therefore a portal for investors with up to date information concerning their holdings, new offerings, status updates , etc. is necessary.  Additionally, periodic updates should be emailed to each investor. 

Quote from @Ian Ippolito:

Quote from @Don Konipol:

I just did a very INFORMAL survey of real estate crowdfunding sites.  I eliminated those platforms that are just a way for a single real estate syndicator to market their own deals - so I eliminated MY OWN site and those like it.  I tried to keep the “universe” I looked at restricted to those sites set up for providing investors an opportunity to invest in a variety of different offerings.

Here’s the result: I identified 96 sites (platforms) that specialized in real estate crowd investing - though Reg D or Reg CF.

78 are no longer active/out of business

18 appear to be active 

Of the 18, 5 appear to offer only investment in a fund they run, no individual properties to invest in. 

Most industries consolidate over time. And many of those platforms focused on areas of real-estate that were hit hardest by the recent real-estate downturn: Office and multifamily. 

Makes sense.  However, reading through your website, it appears that there are only one or two platforms that pass even an initial screening you set up.  The way I read this is that while there are syndicators who meet stringent investment requirements, there have been few if any third parties who have been successful bringing private real estate investment opportunities “public” with anything resembling consistency.  I find this VERY disappointing. 

I’ve believe that while there are numerous reasons for this, most can be classified as either (1) the crowdfunding platform operates in such a way that doesn’t protect, benefit or optimize investor interests (platform fees excessive and added to sponsor fees, limited bankruptcy protection, non alignment of incentives, limited disclosure, etc.) and/or (2) the platform/site is heavy emphasis on “tech” and light emphasis on “finance”. The following is an actual example of the latter.

In 2018 I was contacted by an officer of PeerStreet wanting to enlist my services in helping them enter the commercial mortgage loan space ( they had done all residential and a few multi family loans at that point).  The deal they offered was that I would originate a commercial mortgage loan, keep ALL the points (my three and their usual two) and keep the one percent (of principal) annual “asset management’ fee. I agreed. 

The loan we mutually decided on was a $3 million loan secured by an office building in Ohio.  We had originated the loan 12 months prior, it was maturing, and we would originate a new loan under new terms which PeerStreet would purchase from us immediately.  I spent more than a few hours educating PeerStreet management as to why the loan amount should be no greater than $3 million. 

A couple of days before closing PeerStreet informed me that they would close the loan in their own name.  Since I was to still receive all the points and asset management fee I had no problem with this.  My shock was after the loan closed and I received my fee (points). Instead of the $150,000 I was expecting PeerStreet wired $230,000 into my account.  Turns out they decided to up the loan amount from $3 million to $4.6 million.  It became obvious to me that they hadn’t understand even the basics of risk/reward as it related to commercial property investment/financing. 

After the 12 months note was due the borrower was unable to refinance the larger $4.6 million amount, and eventually defaulted.  Reading PeerStreet website at the time I was able to ascertain that their finance people were people with bachelor degrees in business, 0 - 2 years experience, and were being paid $65,000 - $70,000 per year.  This is just not the experience or caliber of person needed to analyze and judge, and make investment decisions for hard money lending.  

Ian, it appears you have just about “given up” on these third party platforms and emphasize direct engagement with the sponsor? 

Quote from @Account Closed:

I know this is an old post, but hopefully I can get some clarity.

Okay, so this is what I want to see. Investor feedback. I’m new to wholesaling and see a lot of bad reputation around wholesalers. I want to come in the game above that negative stigma. I’ve seen multiple times people make reference to a transaction should make sense to all parties involved, but I’ve never seen that broken down into a theoretical numbers scenario. I would assume seller wants to make the most profit (naturally), buyer wants the best deal (naturally) and wholesaler wants to make the biggest assignment fee (naturally). On the outside looking in, it seems a bit idealistic and not so realistic in terms of what’s fair dollar-wise between seller, wholesaler and buyer. I’ve sold some sort of product to an end-buyer for the last 18+ years of my life and what I learned in the first year is the customer is just as greedy as they accuse the salesperson of being; meaning if a customer walks into a BestBuy if they could they would all walk out spending $0 for a 100” flat screen — which would be unfair to a commissioned employee. Since real estate is just another form of a transaction I guess I’m trying to understand this notion that in real estate all parties involved are concerned about each other’s fairness & more importantly are people actually abiding by that philosophy? Everything I’m seeing in my research is that it’s only wholesalers who are allegedly acting below ethical standards but sellers, buyers or agents are being completely genuine and above board. At least that’s how it appears to me and I don’t have any skin the game yet. There seems to be this tension between licensed agents and unlicensed wholesalers which I don’t get (again I’m new) b/c whether you’re licensed or unlicensed in real estate isn’t the objective always with anything is to know what you’re doing? I’m sure there’s some wholesalers who’ve botched a deal, but I’m sure the same could be said about the “professionals” as well. Anyway, that’s not the intent of my post. I’m trying to learn. Being a salesperson for so long I understand the value of time — particularly of not wasting it. That’s why I would like to know the investors POV on it all so I can get picture of what’s worth an investors time and what would be a waste of an investors time. I think I already have a good grasp on the seller’s mindset — they want to sell (which I’m sure is a lot of unrealistic listing prices).

So @James NA using your example of $200k, in a market where avg ARV is let's say $315k, the subject property is not a gut job but just it's a straightforward all around dated interior with about 15-2000 sqft. What buy price would you consider a good deal or enough meat on the bones or a bum deal?

Not sure everything you’re asking, but I can provide some clarity on the wholesaler vs broker/agent divide
1.wholesaling, as it’s most popularly done today, is in all essence brokering real estate without a license.
2. Licensed agents/brokers go thru a lot of study and need to pass (in most states) a pretty stringent test meaning that in order to represent a principal as their agent or place themselves in the middle of a potential transaction, the broker/agent must have pretty good foundational knowledge of real estate principles, real estate law, and real estate finance.  The vast majority of new “wholesalers” know little or nothing about these areas.  As a result they can, and do screw up peoples lives.This is most evident when the newbie wholesaler produces a purchase contract leading a desperate seller facing foreclosure to believe he has a firm sale.  The reality is that the wholesale will not, in fact usually can not complete the purchase.  The only way the property sells is if the wholesaler has miraculously guessed correctly about the value of the property, the cost of repairs and market demand for fixer up properties, and a fix n flipper is willing to pay him a fee for the right to complete the purchase. If the transaction does not close, the homeowner has wasted valuable time he could have had the property listed for sale, while his credit sinks and his chances of getting out clean evaporate. 

3. New licensed agents are supervised by brokers who are ultimately responsible and legally liable for the actions of those agents.  Further, almost all states require brokers to pay into a fund that reimburses consumers for loses occurring from illegal or unethical actions of brokers/agents.  New wholesalers are either flying solo or under the influence of gurus with whom they “invested” $5- 50k and whose advice can be summarized as “make the deal at any cost”.  

No, not all wholesalers fit this description.  I know some wholesalers who have been doing it for, in one case, 50 years. Their knowledge is extensive, and they never make an offer they don’t intend to close whether or not they’re able to flip the contract. They have substantial working capital in their business, and spend $10k monthly on marketing.  

The success rate for new wholesalers is probably less than 1%, which is about 20 times worse then other business startups.  The reason for this is threefold;

1. New wanna be wholesalers are led to believe that in some universe wholesaling = investing.  Wholesaling is a SALES job, or at best a marketing/sales business.  After finding out what wholesaling is really about, many/most just don’t want to do it.

2. To make any real money at wholesaling, the wholesaler needs a lot of capital to get started and carry them thru the 4-6 months before a deal can be completed.  Many go into it believing that they can “drive for dollars”, put out “bandit” signs, or free ads in the Greensheet.  Some thing a home made freebie web site will be the ticket.  That ship sailed last century; when the new wholesaler finally acknowledges such they usually need to find gainful employment in a hurry.

3.  wholesalers in many states have been receiving letters from state authorities advising them  either or both of the following: they need to have a real estate BROKER license to engage in wholesaling (if they have a salespersons license they need to operate under a broker; finding a broker willing to sponsor a wholesaler might not be easy)and or they need to comply with certain disclosures when dealing with homeowners (such as a statement that the transaction will close only is the wholesaler can find a buyer at a higher price). 

I just did a very INFORMAL survey of real estate crowdfunding sites.  I eliminated those platforms that are just a way for a single real estate syndicator to market their own deals - so I eliminated MY OWN site and those like it.  I tried to keep the “universe” I looked at restricted to those sites set up for providing investors an opportunity to invest in a variety of different offerings.

Here’s the result: I identified 96 sites (platforms) that specialized in real estate crowd investing - though Reg D or Reg CF.

78 are no longer active/out of business

18 appear to be active 

Of the 18, 5 appear to offer only investment in a fund they run, no individual properties to invest in. 

Quote from @Lydia Tilahun:

Hi everyone, I’m a beginner investor based in Colorado. I’ve saved $60K and I’m looking to invest in a rental property — possibly out of state. I’m still learning and would love to connect with others who’ve started with similar budgets. Open to advice, tips, or just hearing what’s worked for you! Thanks in advance.

I wouldn’t make it TOO complicated - while learning as much as you can is always good, trying to organize all this random information into an investment strategy at the early stage of investing is impossible.  Here’s what I would do based on my 45+ years of real estate investing experience

Purchase a small but well located and good condition SFR or duplex in an area within a 2 hour drive (preferably 1 hour) of your main residence. Collect rent, pay bills, keep a reserve for repairs and capital items.  You’ll learn more in a year then all the theories, strategies, and tactic study will teach. 

Quote from @Chris Seveney:

Quote from @Don Konipol:

WEALTH BUILDING thru real estate investment was a specific strategy originally popularized in the early 1960s.  It was an outgrowth of Richard Reno’s transforming his commercial real estate brokerage from the traditional model to one concentrating exclusively on real estate exchanges.  Reno completed exchanges involving as many as 23 participants!

The premise of “wealth building” in real estate is that the investor consider any transaction, deal, etc that INCREASES their net worth (wealth), given an acceptable level of risk.  An example would be when offering a property you own for sale.  Most of us would put the property on the market as a cash (to us) transaction.  But, someone committed to wealth building would analyze whether their wealth could be increased further by offering the property for sale with seller financing.  In many instances a significantly higher sale price can be obtained this way, often paired with an above market interest rate of the note.  This is because the seller is opening the sale to a much larger number of potential buyers; possibly “users” rather than just investors, and eliminating cost and red tape in buyer’s obtaining third party financing.  If the seller can “wrap” the new note around  a lower interest rate existing note, the wealth created can be even greater. 

Of course nothing is “absolute”; the astute investor will need to also compare the wealth increased by simply holding on to the property; holding and improving the property; and selling the property for cash and reinvesting the proceeds.  The major point is that the investor is continually evaluating their options as to each property they own, property they can buy, cash position, etc., with maximum wealth creation as the goal for every decision. 

I’ve used a less “intense” version of this throughout my real estate career.  I’m interested in learning from other investors who used “wealth building” and investors who haven’t - let us know what you think about it and your experiences. 

 Early in my career I was a buy / maximize value / sell investor / rinse and repeat. Today I am a buy and hold investor because its more passive.

For my strategy I want to hold real estate AS LONG as possible and have someone pay the principal and interest on it and expenses.  For selling real estate, we only sell if we see there is  a far better oppportunity in the immediate future and basically swap asset for asset.

We recently sold a vacant piece of land that we had which we did offer seller financing vs. traditional sale - we ended up selling it traditional all cash even though seller financing could have gotten us more $ but the buyers wanted a very low interest rate and we looked at it as cash in hand and invest it and the cashflow was not far off so we evaluated risk of just take the money now.

@Chris Seveney, 

@JD Martin

@Jay Hinrichs
 My gut feel is that, a lot like myself, successful, experienced real estate investors utilize some MODIFIED version of strict wealth building decision making.  Sometimes, it’s not even a formal analysis, just gut feel.  However, I’ve come to believe while this kind of “wealth building LIGHT” approach will result in capturing the majority of potential wealth increase available in any given situation, there’s still a lot of potential wealth that “got away”.  And I’m in no way suggesting that the investor strictly take the “greater” wealth option in every decision; just that the investor become fully cognizant of the options, risks, and returns available. 

As an example - It seems that there are a number of investors (on BP) who hold a belief that seller financing can’t possibly be beneficial for both the buyer and seller.  An even greater number believe subject to transactions are somehow “bad”.  Heck, there’s one poster who believes the technique is inherently evil!   While I acknowledge all the potential pitfalls in utilizing some of these strategies, I have had great success with both seller financing, wrap around financing and subject to.  I’m not talking about seeking out properties on a continual basis where an investor can utilize these techniques; I’m suggesting understanding these type transactions and analysis to see if their utilization can enhance the investors wealth vis to a much greater extent that either holding the property, repositioning the property, or a cash sale. 

Quote from @Jay Hinrichs:

Morning Don,

Exchanges in the 60s  was this starker exchanges or pre 1031  I know Starker exchanges started with the Starker Timber family in Oregon when they were exchanging Timberlands to basically try to block up their holdings with other Timber concerns or private land owners..

I am unfamiliar when the 1031 IRS rule actually came about.. ( I guess I can google it LOL)

Selling on terms and wrapping was something my Father deployed in the late 70s and big time during the Carter interest rate debacle.. So I do find it amusing that all those Morby followers think sub to and wraps are something he invented .. But hey have to hand it to him his timing was perfect to try to teach rookies those strategies. 

1921 - was the beginning of 1031 exchanges, Striker in 1978 introduced DELAYED exchanges 

However, imo, too many people commit to exchange rather than sell simply because they want to avoid paying taxes - at any cost.  When you add the fees charged by intermediaries and the “cost” of possibly exchanging for an investment that may not meet your needs, and the ultimate tax to be paid at the time of cash out, the cost could be far more than paying the fairly low capital gains tax, especially if the sale could be times to a year in which other income is not “recognized” or offset by losses. 

WEALTH BUILDING thru real estate investment was a specific strategy originally popularized in the early 1960s.  It was an outgrowth of Richard Reno’s transforming his commercial real estate brokerage from the traditional model to one concentrating exclusively on real estate exchanges.  Reno completed exchanges involving as many as 23 participants!

The premise of “wealth building” in real estate is that the investor consider any transaction, deal, etc that INCREASES their net worth (wealth), given an acceptable level of risk.  An example would be when offering a property you own for sale.  Most of us would put the property on the market as a cash (to us) transaction.  But, someone committed to wealth building would analyze whether their wealth could be increased further by offering the property for sale with seller financing.  In many instances a significantly higher sale price can be obtained this way, often paired with an above market interest rate of the note.  This is because the seller is opening the sale to a much larger number of potential buyers; possibly “users” rather than just investors, and eliminating cost and red tape in buyer’s obtaining third party financing.  If the seller can “wrap” the new note around  a lower interest rate existing note, the wealth created can be even greater. 

Of course nothing is “absolute”; the astute investor will need to also compare the wealth increased by simply holding on to the property; holding and improving the property; and selling the property for cash and reinvesting the proceeds.  The major point is that the investor is continually evaluating their options as to each property they own, property they can buy, cash position, etc., with maximum wealth creation as the goal for every decision. 

I’ve used a less “intense” version of this throughout my real estate career.  I’m interested in learning from other investors who used “wealth building” and investors who haven’t - let us know what you think about it and your experiences. 

Quote from @John McKee:

I'm familiar with PPR and 7E Investments.  What others are out there I should be looking at.  LMK and thanks!

First determine if you qualify as an accredited investor.  If not, your options are more limited.