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All Forum Posts by: Chris Adams

Chris Adams has started 41 posts and replied 594 times.

Post: My 22 duplex lot deal - $1MM in debt - purchased with no money down.

Chris AdamsPosted
  • Contractor
  • Valparaiso , IN
  • Posts 604
  • Votes 327

And Now Its October

Ok let the fun part begin. A lot has happened since we purchased the property in June. I got the first building permit July 1. Construction of the first, and second building began, and we are about to start breaking ground on the 3rd building soon. 

We already had 1/2 of the first building sold when we started. On September 6th I sold the other half of this building, with over $10k in upgrades. The clients added a fireplace, granite countertops, and quite a few other things.  I had to tear out an existing wall in the sunroom and build the fireplace wall. it was a lot of work considering the unit was ready for insulation. But we need sales, and it was much harder on my subs then it was on me lol.

Anyhow the first half of the first building is set to close Monday. Landscaping started yesterday. 

I'll post some finished interior/exterior pictures soon. I will also try to post some construction pics of the other units going up. I can't believe winter is drawing near! 

Post: My 22 duplex lot deal - $1MM in debt - purchased with no money down.

Chris AdamsPosted
  • Contractor
  • Valparaiso , IN
  • Posts 604
  • Votes 327

Progress Update

So now that I have explained how this deal came to be I will fast forward and start posting updates on the project. 

I closed the deal with the bank on June 1 and began pulling permits for the 1st building immediately. The first permit took forever, or so it seemed. Remember the no money down part? Thats over, start up cost take over and it seems like money is spewing like a broken dam.

To get construction of the 1st building started I had to start up my all of my insurance that had been on hold since I hadn't been doing construction for a while. Here are the out of pocket cost.

General Liability Ins   $2,900

Workman's Comp      $2,400

County License     $150

City License          $150

Civil Engineering    $250

Builders Risk          $2,500

Building permit     $12,000

Ugh, I don't even have a hole in the ground and I've spent $20K !!!

But I knew this was coming, and this is the reason we needed to keep our cash reserves on hand instead of coughing up a big down payment for the land deal.

I had already signed a contract for a pre sold on 1 side of this building. In new construction the earnest money on a pre sold contract typically goes to the builder. In this case the earnest money was $10k down at the contract signing and another $10k when the foundation is poured. This healthy earnest money was very helpful with start up cost.

I had also taken on an investor in this deal, here are those details. 

The investor put up $25k and in return he will get back $1,250.00 every time a property closes as return on his investment, then at the end of this project he will get back his original $25k. At the end of the project he will receive $55k back in interest on his $25k investment.

Yes its a very sweet deal for him. And I can already hear many of you gasping. Yes I could have gotten a hard money loan for much less than this cost. So let me explain.

Originally I was hired by one of the partners to save him, his investment and his subdivision from eminent doom. This person had something close to $225k or so invested in the project. In all reality it was his life savings, and he was now 73 years old and nearly broke. It became clear there was zero chance he would ever recoup his losses, and bankruptcy/foreclosure was inevitable.

I felt that offering him an investment opportunity that would give him a chance to recoup some of his losses was the right thing to do. If things go as planned he will recoup around 20% of his losses, and I get much needed startup capital.

My cost for his investment are tied to final closings of sales, this is when I get the bulk of the profits, so I don't have added pressure of a monthly interest expense. If we don't sell properties for a period of time, like winter months, I don't have to pay interest. In the end I will feel very good knowing I helped him recoup something, and his investment has helped me start this project off with a health amount of cash reserves.

Between the pre sold deposit, investment funds, and my own cash investment (mostly from my rental company) This project is starting off in a  very good financial position .

Post: My 22 duplex lot deal - $1MM in debt - purchased with no money down.

Chris AdamsPosted
  • Contractor
  • Valparaiso , IN
  • Posts 604
  • Votes 327
Originally posted by @Matt Huneycutt:

Bravo Chris 

Bringing in another banker was a killer move. Is the tactic of financing one or two builds at a time commonplace for double digit subdivisions or was that completely abstract thinking?

Just so I understand, you build one house and sell it, you now have the funds to own the lots out right?  Then you take further loans as you build the remaining 20 (your friend has you covered on loan #2. Is that right?

 In order for me to meet my goals I need to have 2 buildings constructing at different stages all of the time. If one building is finished I want the other to be framed so that if I sell the first I can have new product up and ready as fast as possible. 

The profit from the sale of 1 address will cover my cost for 1 year. By cost I mean it will pay my interest expenses, property taxes and insurance. 

 It does not pay off all of the lots. The loan for the lots will be paid off as I get construction loans for either pre sold or spec buildings.

Post: My 22 duplex lot deal - $1MM in debt - purchased with no money down.

Chris AdamsPosted
  • Contractor
  • Valparaiso , IN
  • Posts 604
  • Votes 327
Originally posted by @Mike H.:

I love the deal just because its no money down with the potential to make 440k (20k per door x 22 buildings x 2 units per duplex). But it definitely seems like a huge risk fraught with the possibility of losing your entire portfolio and credit - which would
make it very difficult to start everything back up again.

Is the 20k per unit your worst case scenario for profit? Can you make 30k a unit?

What are you projecting your absolute longest holding period to be for the entire thing? And if that gets pushed back, how significant a hit do you take? i.e. Instead of completing and selling 4 duplexes a year, you only do 2????

Lastly, what size/style units are these exactly? 3/2, 1,500 sq ft, 2 story? Ranch, etc?
And where in chicago suburbs are you exactly? Just curious as to whether or not your cost per square foot ($87) could be done cheaper a little further south of the city (i.e down by me)

I only ask because your story sounds a little similar to mine - although I wasn't in construction. My company went thru a bunch of layoffs during the bust though and I got very lucky to keep my job. That was the impetus though for me to really jump into real estate investing. Had very little money (a 40k HELOC) but was able to parlay that into 30 rental properties that, for the most part, are in decent areas with good schools and your typical 3/2, 1,500 sq ft homes worth about 130 to 140k that I'm all in at 65% LTV or so.

Strangely enough, though I also bought 2 duplex lots in a suburb far southwest of chicago (braidwood) at a pretty good price. Right now I'm just sitting on them since I talked the bank into escrowing 2 years of taxes and I got the taxes cut in half recently (I contested the taxes with the county and won) so they're actually paying taxes for 4 years.

Its a fascinating deal though to think that you are now the owner/developer of a 22 lot complex and that you got that project with NO MONEY DOWN!

I thought I was a good negotiator when I got the bank to take 15% down on the two lots. But no money down to buy the lots PLUS no money down for the new construction is just silly. :-)

And, believe me, when I say that I'm a bit of a risk taker too. But I don't think that I could take that leap on that deal.  I do hope you make out like a bandit on it though. It would easily be one of the best success stories that I've ever seen on BP or any other site. 

Good luck. Keep this thread and the posts going as best you can. And it would really be great to see the plans of the units and some construction pics just for kicks.

thanks

 Mike, 

I put together 2 scenarios, best case i sell out in 3 years, worst case 6 years. At 6 years I still do very well as long as interest rates don't go crazy. My goal right now is 12 addresses a year.

We have 3  ranch plans right now, a 1500 sf 2/2, 1620sf 2/2 w sunrooms and 1700 3/2.

As for my cost/sf I am constantly trying to get my numbers down. Ozinga is going to have a $10/yard increase real soon tho. This equates to $1,500 per address on me. Managing cost is a constant struggle.

As to being a risk taker, yes I am taking a risk. But after we fixed your math I think we both see the rewards more than offset the risk. To be honest the risk doesn't bother me, or influence my decisions. $1MM in debt doesn't even cross my mind, its just a number on a spreadsheet. 

But there are also a lot of other numbers on that spreadsheet. I look at the monthly cost to own, vs the minimum amount of sales I have to have to break even. As long as that number is a manageable one I am not intimidated.

The great wall of China is 5,500 miles long, and it was built 1 brick at a time. Im just laying bricks.

Post: My 22 duplex lot deal - $1MM in debt - purchased with no money down.

Chris AdamsPosted
  • Contractor
  • Valparaiso , IN
  • Posts 604
  • Votes 327

A few things I forgot to mention when negotiating with the bank. My wife and I have credit scores near 800. We had started accumulating rentals, which have good cash flow and good equity. I have 15 years experience as a new home builder. I was in good standing with all of my subcontractors and suppliers.

All of these items worked in our favor during when the bank looked at us under the microscope.

Post: My 22 duplex lot deal - $1MM in debt - purchased with no money down.

Chris AdamsPosted
  • Contractor
  • Valparaiso , IN
  • Posts 604
  • Votes 327
Originally posted by @Jon Klaus:

What are your "Don't let us go broke" contingency plans?

 In the next post I mention how I already have 1 pre sold, from which I will make enough profit to cover 1 years cost of ownership. Yes 1 sale will cover my cost for 1 year. 

So worst case I only sell that 1. My rental properties cover 40% of my cost of living. So if need be I could keep doing the delivery job to make ends meet. 

In reality, I am now a subcontractor for myself. I do my own trim, and siding. This covers my personal cost of living. 

Post: My 22 duplex lot deal - $1MM in debt - purchased with no money down.

Chris AdamsPosted
  • Contractor
  • Valparaiso , IN
  • Posts 604
  • Votes 327

Bank Negotiations

Of my many hobbies in life, studying the game poker is the one I have invested the most time in. If you play poker a few times a year for fun with your friends, you may not grasp my meaning. But for those that have dedicated hundreds of hours studying the game like I have, you understand how much the fundamentals of poker transfer into negotiating and REI. Well it was time to sit down with the bank and play poker.

My very first meeting with the bank to negotiate this purchase had to be done from a position of strength. I could not walk into that meeting and let him dictate the terms of this deal. Lets face it, I was a homebuilder that had been killed by the economy. My last 4 years of tax returns look like swiss cheese. And I simply do not have the ability to purchase this deal if I have to put and money down. Given all of that, if I start letting him call the shots I'm screwed!!

So how do we negotiate from a position of strength with a bank, when we do not have the ability to show him tax returns with any taxable incomes, or the ability to plunk down a huge equity investment? Well, we first have to understand what Mr. Banker has and what he needs vs what he wants. 

In the case of this subdivision, what Mr. Banker has is a subdivision that has gone in to default by two different owners, both of which he financed. And right now he has a $700k note that the current owners have not paid on in 18 months. He has a board of directors that are asking him why he has not foreclosed on the asset, yet continued to give them a construction loan even after they where in default.

If you want to know what effect this has on the bank, here is a good article that will save me a few thousand words of typing.

http://www.allbankingsolutions.com/Articles/NPA-im...

Now that we understand the bankers position we can begin to formulate our plan. Our plan is simple. Create a win win for both parties. Ok I will get specific.

Bank Meeting - Shock and Awe

What is the best way to negotiate from a position of strength that shows your opponent your serious, and at the same time catches them completely off guard putting them completely on defense all at the same time? Well I brought a commercial banker friend of mine to the first meeting completely unannounced. Im 100% certain by the look on Mr bankers face that his entire game plan for negotiating this deal just went out the window.

Mr Banker now has one of his peers in the room that is working for the buyer. This meeting has gone to a new level once my banker friend starts asking a lot of well directed bank/FDIC questions. I understood about 4% of the bankerese language that was going on. But the meeting definitely worked in my best interest.

I finally pull out my spreadsheets, handing them to Mr Banker and said " The numbers in these documents are what it will take to make this project profitable. I am not going to be the 3rd person to fail in this subdivision. Based on my budgets and sales forecast, the property you have is worth $468,700.00 to me. The only variable left is your ability to structure the financing in a way that will allow this project to finally succeed." 

Notice we don't ask for any terms, right now is time to keep quiet and listen.

Mr Banker looks up and says "I need this project out of my NPA and back in my performing assets class. You are the first person to sit in front of me who gives me the feeling we can finally see this project get completed. What kind of capital reduction can you do up front (down payment), and what do you need from the bank to succeed in this project"

The way I answer this question, right here right now is for all of the marbles.

If i say, I can't put up a down payment, I look weak. Even tough its the truth.

So my answer was

"As you can see by the cash flow statement, I have based this deal on financing the entire purchase price. I am allocating all of my cash reserves towards covering startup and carrying cost during the 1st 6 months of the project until cash flow from the sales starting coming in." (At this time I already have 1 contract for a pre sold on a property I don't own =) )

"On top of that, I need a commitment from your bank for a construction loan on 1 spec building based on 80% LTV for the life of this project."

Mr Banker didn't think all that long, looked at my banker friend and said " There is no point in financing the land without a construction loan so there is no problem with that. I'm thinking I can do prime for 2 years I/O with draw downs against the principle when we do Construction Loans. Construction loans will be at prime +1. Let me run this past my bosses and see how they feel.

BOOM ! I just put together a deal. The bank feels like they can finally move this dog of an asset, and Im going to be getting my life back.

My banker friend and I walk out to the car and he tells me " Dude I can't believe the deal he just offered you, he must be taking some serious heat from the bank to move this property."

So I also put a deal together with my friend where he will supply me another construction loan for a spec building. 

And thats how I managed to purchase 22 lots, and 2 construction loans with no money down.

Post: My 22 duplex lot deal - $1MM in debt - purchased with no money down.

Chris AdamsPosted
  • Contractor
  • Valparaiso , IN
  • Posts 604
  • Votes 327

Wife Negotiations

My wife and I met when we where 16 years old, and we have been together ever since. She has always been very supportive of me and my entrepreneurial spirit. But I have to admit gaining her support on this deal was a bit tougher than normal. She has always been involved in the day to day of all of our companies to some point, so she understands the numbers and the risk involved. 

The most important factor for me in any decision, is having my wife's support on a deal. Especially this deal. I'm a firm believe that if you can't convince your investor how good a deal is, then its probably not a good deal. 

At this point I showed her the sworn statements, then I showed her the cash flow analysis.( I may post this cash flow analysis ) This gave us an detailed outline for the next 18 months on company and personal cash flow based on worst case scenario sales. 

My wife has all of the confidence in the world in me, but her confidence in the economy is a different story. And at this exact moment in time, Russia was pointing their tanks directly at Ukraine. To be honest none knew what the results of that skirmish was going to cause.

After all of the conversations with my wife, I finally said this

" We have struggled ever since we liquidated our new construction inventory during the crash. Our plan when we did this was to keep all of our credit and sub contractor relationships in tact, so that when times got better we could re-enter the new construction market. Times are not great but they are much better. Neither of us are enjoy the life we are currently living, and its time to change that. I need to get back to doing what I love, life is just to short."

Her answer was simple. "Don't let us go broke"

Next up Bank Negotiations

Post: Now THIS is a great landlord!

Chris AdamsPosted
  • Contractor
  • Valparaiso , IN
  • Posts 604
  • Votes 327

Am I the only one wondering how he can implement a 10pm curfue on residents? I thought that was called marshall law. In all seriousness please explain

Post: My 22 duplex lot deal - $1MM in debt - purchased with no money down.

Chris AdamsPosted
  • Contractor
  • Valparaiso , IN
  • Posts 604
  • Votes 327

@Mike H. I will answer you in detail when I get time, I'm out of town till friday night. But Im near 24k per address. I like my math better than yours 22 building * 2 Addresses = 44 * 23k = $1,012.000