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commercialking

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Member Since: 03/26/2004
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Posted: 20:38 on 09-02-2004

Terry,

I have made a couple of minor edits to your post and am going to suggest you make another one. I'll try to reply further later but I really must run.

1) I have eliminated the word Guaranteed twice.Because what you are offering is an interest in a LLP. I think the SEC would conclude that you are offering a security and not real estate. The word "guaranteed" is specifically forbidden in securities offerings. By itself it constitutes securities fraud (three to five in the federal pen last I checked).

2) I think you'd like to change the word "offer" This is another word which has a specific meaning in Securities Law which is different than it has elsewhere in the world. You might be "discussing" (or some other similar word) the matter here but in the securities sense you do not want to be "offering" it. because if you do so you have made a public offering without a Reg D filing and that would also be a big problem and probably illegal.

But the TCI rules (for violation of which you can only be thrown into a virtual jail) you seem to have done pretty well with in this forum which has special rules. Anywhere else this post would get deleted. I'll get back to you on the other issues.

Mark
.

[ Edited by commercialking on Date 09/06/2004 ]

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commercialking

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Posted: 09:38 on 09-06-2004

Thanks Terry, for re-posting this. Sorry if I scared you with my prior comments. It really is a very good post and is exactly the sort of thing we are trying to do in this new Deals in Progress forum.

Now let me ask some "public" questions.

So as I understand the transaction the investor is going to put up 10% of $270K = $27,000 and get back 20% of $270K= $54,000. Are they also going to sign a mortgage?

You say the money will be escrowed until construction begins but you don't say under what circumstances the money comes out of escrow.

What is the investor buying here, exactly, shares in the LLC doing the project or one house? You say "secured by real estate" but its not clear to me in what way.

The referral fee for bird-dogs worries me. If what you are selling is the LLC then people have to be licensed to collect a commission for referring investors. Unlike real estate brokerage where people routinely ignore licenseing requirements the SEC takes a very dim view of paying commissions to people who do not have licenses of some sort or another. (Attorneys, accountants an financial planners and some others are exempt from this rule because they are licensed in other ways).

How many of these investors are you trying to get?

Anyway, good luck with the project.

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myfrogger

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Posted: 11:59 on 09-06-2004

The only thing I can comment on is local private companies have given me referal fees plus an interest in the company if I find them money.

The agreement we have currently is that I get a 7% cash refferal fee plus 7% stock referal fee. With $50,000 investment, I would receive $3,500 cash plus 2800 shares of stock currently selling at $1.25/share.

This is a small company but growing with the idea of going public. I'm not sure the accounting of the 7/7 fee but they do it and i'm confident they are not in violation of any law because I know the founders personally.

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commercialking

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Posted: 23:58 on 09-08-2004

I have moved the responses to myfrogger to the Legal Forum under the subject heading of "Fees for Raising Money" I felt like the ensuing conversation was very interesting but way off the topic of Concretes original post. You may go there and respond if you have an opinion or question as to the legality, methods, proceedures, etc. contained in myfroggers post.

If, however you would like to respond to Concrete and his Avalon Forest deal the place to do that would be right here.

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concrete

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Member Since: 09/16/2003
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Posted: 10:20 on 09-21-2004

Hello

,

Sorry to take so long to respond, business, computer and hurricane problems to blame.

Quote:

Thanks Terry, for re-posting this. Sorry if I scared you with my prior comments. It really is a very good post and is exactly the sort of thing we are trying to do in this new Deals in Progress forum.

Advice, even if it puts a little fear in me, is always welcome

Quote:

So as I understand the transaction the investor is going to put up 10% of $270K = $27,000 and get back 20% of $270K= $54,000. Are they also going to sign a mortgage?

Eventually a construction loan. Each investor is committing by contract to buying one lot and building one home on that lot. And at the same time each investor is given a Purchase Contract to purchase the home in one year if not sooner.

Quote:

You say the money will be escrowed until construction begins but you don't say under what circumstances the money comes out of escrow.

The money is escrowed until 20 partners (less if a partner takes more than one) are committed. This is to ensure the success of the project. During this time all partners are pre-qualified to be able to purchase the lot and obtain the construction loan. Each investors 10% remains his funds individually and should there not be 20 partners obtained, each investors funds are returned directly from escrow.

Quote:

What is the investor buying here, exactly, shares in the LLC doing the project or one house? You say "secured by real estate" but its not clear to me in what way.

The investor is entering into a Limited Liability Partnership as a limited partner and his contribution to the partnership is his ability to qualify for a construction loan to build one home independently. The LLP as a whole is agreeing to purchase 20 lots from the Developer (my company) and this is the sole purpose for the LLP. The General Partner in the LLP (me) is responsible for overseeing everything. Each member in the LLP will have an individual contract with a licensed builder (my company) to build his home. The investor/limited partner chooses an offered floor plan and lot. It is basically a Pre-Sale Buying Commitment except that there is also a Purchase Contract where the Developer buys out all the investor/limited partners of the LLP when it buys the home from the investor/limited partner if the home has not sold in one year. At the time the project begins, the investor individually actually purchases the lot via his 10% and qualification for the construction loan, lot titled to him, and construction begins on his home. Everything is taken care of for him, the complete construction of the home. The home is offered for sale at a market /appraised price. If the home has not sold within one year, the pre-written and dated Purchase Contract is executed, buying the home from the investor/llp partner and his 20% of the appraised price of the home is paid to him and the construction loan is paid off. I have used the 20% instead of a set figure because the houses will vary somewhat in price, and each investor/limited partner will choose one. The contract between the investor/limited partner and the Developer buying him out will have the price of the home for the amount of the construction loan plus 20% of the Appraised Price of the home, appraised value at the time of the sale. The Developer will be selling the home probably for the Appraised Value, but it is up to them to negotiate that contract. There is a simultaneous closing. All fees/cost are paid by the Developer.

Quote:

The referral fee for bird-dogs worries me. If what you are selling is the LLC then people have to be licensed to collect a commission for referring investors. Unlike real estate brokerage where people routinely ignore licenseing requirements the SEC takes a very dim view of paying commissions to people who do not have licenses of some sort or another. (Attorneys, accountants an financial planners and some others are exempt from this rule because they are licensed in other ways).

This is an advertisement for a lot/pre-construction house for sale in Avalon Forest,. From what I understand about bird-dogs, and please correct me if I am wrong, it is perfectly legal to give a lead to an investor about a property for sale (http://www.legalwiz.com/articles/flip.htm). Anyone wishing to purchase in Avalon Forest shows their intent by joining the LLP (not LLC) and so that the entire process is a somewhat passive experience in that their project is overseen for them, and they have a guaranteed exit plan. My lawyer says this is perfectly legal. I would appreciate any input to the contrary showing this illegal as I certainly do not wish to be in violation of any laws. Also, bird-dog fees will be paid at the time of the construction loan closing.

Quote:

How many of these investors are you trying to get?

Quote:

Anyway, good luck with the project.

Thank you very much. And thank you for your insights.

Also, everyone please be advised that my lawyer has not finished completing the entire structure of this deal, and some minor things may be subject to change upon final review.

Regards,
Terry McKee

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commercialking

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Posted: 11:34 on 09-21-2004

I'm not quite sure I see the purpose of the LLP? Why not just pre-sell the houses direct? Keeps you out of offering a security and any consequent security law violation problems.

So, you've got a bank willing to do 90% LTV investor loans for a pre-construction deal and you are promising to buy back in one year later for 110% of their initial purchase price? Thus the investors ROI would be 100%. While that sounds pretty good that way it sounds less good when figured as a return on capital at risk. Which is the way I think these deals have to be figured. Then the rate of return is only 10% annually. I would think you'd have to go to at 12-15% return on capital to be very attractive.

This is actually one of my problems with the RE guru's in general. They are always quoting ROI on heavily levered deals-- this ignores the added risk created by all that leverage and makes it pretty easy for people to get in over their head.

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Posted: 21:54 on 09-21-2004

concrete,

Some questions and comments.

1. Do I assume correctly that your company will be responsible for installing site improvements?

2. Is the basic goal here to generate funding to do the site improvements?

3. The investor is responsible for the construction loan?

4. If your company buys back the homesite for an amount equal to construction cost (builder's cost) + 20% of appraised value, then your company has to "resell" the homesite, presumably to an end user. Correct?

5. In PA, an individual who has no ownership interest in a property is prohibited by law from getting compensation for supplying property leads. There are some who say that "there's no such thing as a Bird Dog jail." They don't say (and can't credibly say) that it's legal. What they're saying is that the laws sometimes are not enforced so they think that the risk of getting punished is low. The article you cite doesn't say birddogging is legal. I would suggest you have your attorney check the laws of your state to see if "selling" property leads without being an equitable owner is legal.

I agree with commercialking's comment. Why not just sell the homesites to end users?

Nancy

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The-Investor

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Posted: 15:44 on 10-08-2006

Hi concrete,

Just found this post. How is your pre-construction Investor doing? Did you do anything more with this idea?

Here in Utah I found two developers doing somewhat the same thing with a differant twist. They are looking for Investors with a 700 or higher Credit Score and use their financing.

The Investor has no out of pocket cash to put down.

Then the profits are split 50/50 as per below example.

Profit Projections:

This from their Ad.

How Can Your Good Credit Be Turned Into Profits?
If you have a credit score of 700 or better, Appropriate income and lender approval, developer will build you a custom home using your good credit score to obtain the construction loan... with no cash out of pocket. Once the home is completed, an Interest only loan on the final appraised value, is used to pay off the consultation loan. Six percent is set aside to cover all sales and marketing costs leaving a net construction profit of approximately 15%. We split that profit with you. You get 51% of the net profit, we get 49%. You receive half your profit as soon as the home is completed even if the home has not yet been sold to the final buyer. The other half of your profit and half of the profit is placed in an interest bearing trust account. That fund is then used to make payments on the interest only loan until the home is sold.* That way, we are making half the payments and taking half the risk with you. NO OTHER BUILDER IN THE STATE OFFERS THIS SPECIFIC PROGRAM.

Construction Cost: $355,500 = 79%
Loan at completion: $445,500 = 99%
Reserve for marketing: $27,000 = 6%
The net profit is divided between us
51% to you = $32,130
$49% to us = $30,870
Your Total For Two Homes:
$64,260

Not too bad for the investor with no out of pocket cash.

[ Edited by The-Investor on Date 10/08/2006 ]

[ Edited by The-Investor on Date 10/08/2006 ]

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