All Forum Posts by: Andrey Y.

So, this is difficult to qualify. I'd like to think that everyone takes fiduciary seriously and that everyone does the best they can to be conservative. Un our case, just looking at Sun Crest that closed 2 days ago, we used 15.5% economic loss in Y1, and that's before the LTL to renovated market, which was another 18.85%.

Is that enough? Who the **** knows. I really hope so. There's a lot of LTL to current market which we will begin to burn right away, and we will be renovating units. So I am pretty sure we'll be fine on the LTL. And I think 15% economic loss for everything else should do as well.

But, just in case it's not we brought on over $500,000 in reserves of all sorts. I hope I don't need it and will just return it to partners. But, I've been doing this for 15 years, and this is how I define conservative - reserves!

You're right about that, and @Brian Burke gave us a great list of things to look at. The statement "our underwriting is conservative" is incomplete. It needs to read "Our underwriting is conservative because we've assumed X, Y, and Z." 

I've seen folks claiming conservative underwriting because they're supposedly using conservative comps for rent assumptions, whereas in reality the comps were totally unrealistic, and were located in significantly nicer neighborhoods. 

I'll also look for very modest stabilized rent growth assumptions. Deals look a lot better if you assume 4% annual inflation in years 4 & 5, compared to if you assume 1-2%.

I also like to look at cost per door compared to other recent transactions to see if they're really getting as good a deal on the property today as they say.

@Andrey Y.

I get your points, but do you really expected people say, "My underwriting is the most aggressive one you've ever seen!"? As someone who's been around the block for a few years and invested in 14 deals, you should rely on your expertise and look at the raw data the facts presented to you, rather than concentrate on the adjectives operators use to describe their business model. 

Now as far as the fees go, they cannot be evaluated in silo. Maybe the fees are as low as @Brian Burke mentioned, 2, 1, 1, but don't forget to review the PPM for the splits and maybe the waterfalls, and potentially other clauses! You have to look at the picture overall. 

Here's an article with additional guidance on PPM: 

https://www.biggerpockets.com/member-blogs/10850/87614-interpreting-the-private-placement-memorandum-ppm

@Andrey Y. one of the dead giveaways is to compare the sponsor’s year 1 proforma and compare it to the property’s trailing 12 month historical performance.  If there is a big jump in the effective gross income, call BS.  If there is no jump in the property tax expense, and the state where the property is located reassesses on transfer, call BS. If the projected economic vacancy is less than 9% to 11% at a minimum, call BS. Ask for rent comps and see if the comps support the post-renovation rents. If they don’t, call BS. Look at the cap rate the sponsor is using to calculate the sale price on exit (if they even tell you)—if it is the same as market cap rates today, call BS. Those are quick checks that I do and it only takes a couple of minutes. Way too often I find more than one violation of the above.

Market fees are 2-ish percent acquisition fee (maybe higher on small deals like under 5 million and lower on larger deals, say over $30 million).  Asset management 1% of effective gross income.  Loan fees of 1% or less. Disposition fees of 1% or less. 

Your Comment: "These dudes are ruthless. Some of them are friends and relatives of mine"

Sounds like you should hang around a different crowd. 

Reason this strategy is so slimy is it removes all recourse from the seller in the event the buyer doesn't fulfill their end of the contract. No reasonably educated seller would do that. The strategy requires investors to target unsophisticated property owners to pull it off. In other transactions there is recourse if one party doesn't fulfill their end of the contract.

• In an owner financed deal the seller can foreclose if the buyer stops paying.
• In a landlord tenant situation the landlord can evict if the tenant stops paying.

In a "Subject To" situation the investor has removed all recourse from the seller. They took their only asset "house" and stuck them with a huge liability "mortgage". Honestly I don't see how this isn't illegal. Hell it may be. I'd imagine it toes a fine line near mortgage fraud.

I'm an independent voter, this discussion is focused on student loan debt and its impact on buying real estate. My questions are related to the data provided and are focused on that topic. 

These personal attacks and misdirection to a topic you feel you posses a moral high ground lead me to believe this isn't a topic you are comfortable talking about in a constructive manner. 
 

@Peter T.

Yeah that’s completely different. Going on vacations isn’t the same as an entire generation enslaved to the government because they preached you wouldn’t be successful unless you went to college at the same time that raised tuition costs 400%.

It’s not a tired line. Have a little bit of empathy. Children (14-18 are children) are very impressionable. When you tell them they have to do something, they will believe you. Not everyone is so cynical that they learned to distrust adults at 13.