Let’s test your deal meter now that we are a couple of years into the real estate slow down.  There is all kinds of “deals” being offered on real estate out there but now the question becomes is it really right for you?  Suppose I showed you a deal where you could buy an upscale town home for $540,000 even though it will easily appraise for $720,000; i.e., with an easy to verify equity of $180,000.  That is more than most people in the United States make in two years!!

So tell me more you might say.  We’ll, this particular location, which happens to be located adjacent to one of the most prestigious, high wealth locations in the US with current and previous visitors including the Rockefeller’s, the Bushes (Sr & Jr) as well as tons of others on the who’s who list.  In addition, this location is absolutely world renowned for it’s unbelievable tarpon fishing drawing anglers from long distances to fish in the local waters of Boca Grande.

So what’s the problem, why is this discounted?  Like many locations in the State of Florida, the location has experienced an absolute slow down in sales.  In one site that we visited down the street from this development, there were only 6 sales in all of 2006!  That is unbelievably slow.  However, on the flip side, I don’t know of a single, knowledgeable real estate professional that believes that Boca Grande is anything other than golden over the long run. 

To really make this complicated, these town homes are really ideally constructed.  First, they are well done units with upper end amenities, granite, tile, etc…. No big deal since those features are becoming standard.  However, these 3 story units have a couple REALLY unique features.  First, each unit comes with its own ELEVATOR.  In this part of the world, that his huge because of the older generation that is likely to occupy these units.  With 3 stories, even the younger generations are not too thrilled in carrying groceries up all those steps.

The next feature is what absolutely makes this property unique.  However, I have to digress a bit into understanding fisherman (remember, this is a big time, high end fishing area with almost every article in the local paper discussing fishing ).  One of the biggest challenges in today’s modern age of gated communities and crowed and high priced marinas is where to keep a boat.  Normally, don’t even think about keeping a boat in your garage…. the garages are just too small, especially for salt water boats.   However, these town homes have absolutely solved that with the entire bottom story being a HUGE, deep garage.  There is absolutely no problem keeping a boat and trailer in your garage and in fact, the garage is deep enough to keep the boat attached to a truck and ready to go.  When myself and Bobby, our property acquisition manager saw this our eyes lit up since we are both avid fisherman.

Now, maybe a couple thoughts go through your mind…….

1)      You know that historically, investors have gotten rich by buying when the market is TERRIBLE;  and

2)      This market is an absolute slam dunk long term, and

3)      Maybe there is enough real equity here to make this work. 

Believe me, this is the same thoughts going through our mind.  We have been offered an interesting proposition on 9 units for our clients.  Since these units were pre-sold in 2005, it turns out there is 9 people that are not going to close and they will walk away from their 10% deposit.  We know these developers really well and so their offer to us was the following:

• Get original Phase I price ($600,000 even though others Phase II being sold at $720,000); AND

• Will also reduce price by the amount of the original purchaser’s 10% deposit.

So the purchase price would be $600,000 - $60,000 = $540,000 thus leaving about $180,000 of verifiable equity.    Why would they do this?  Real simple, they don’t want to pay the interest costs on these units while they wait the 12-24 months expected for a solid market turn in Florida. 

Is This A Good Deal?

ABSOLUTELY!!!! 

Is this a deal that we should do?   WE NEED TO ANALYZE IT.

The attractiveness of this deal very much depends upon how structured.  Suppose we purchase this unit for $540,000 with 10% down.  Let’s now look at the annual cash flow picture.

If we don’t rent out the unit and just leave vacant, then we have to sink a lot of cash into the property.  In my mind, that is not very attractive.  In this area, our best estimates of GROSS rents are about $15,000/Year.  After management fees, etc., then realistically we are looking at a net of about $10,000/Yr. 

This means that we have a negative cash flow of $41,000 and if takes two years to sell, then we will have expended $82,000 of our hard earned cash in addition to the money that was expended when the unit was purchased.  Let’s look at the cash flow picture if we sell in 2 years. 

Initially, when we purchase, then we have to put in 10% down.  Then, we have negative cash flow of -$41,000 for two years, however in year 2, we also have the sale of the property.   We are assuming that we sell it for its current value of $720,000 with a 6% commission. 

Looking at the numbers above, would you do this deal?   For me, I definitely would NOT

do this deal as structured.   In addition to requiring $136K out of my pocket, the dollar return is just not high enough, not to mention no contingency plans, etc. 

When I see the above, the questions that go through my mind are:

1)      Does the dollar return justify the dollars in?

2)      What happens if it takes longer to sell?

3)      Is there another way to structure this deal to make much more attractive?

What if we could take the same deal and structure as a NO BRAINER for you and for the developer?   In next week’s article, we will go through a couple of example on how to accomplish this.  Right now, we are exploring some of those same options with lenders to insure that they are comfortable…… If so, it looks like we have a very interesting opportunity for at least 8 people (I will probably buy one if structured right). 

Until next week….. 

Chris