How John Dough got his dough
“John Dough" has a condo redevelopment project in Boston. You met him here on November 6th. Below, John tells us about how he got his capital in the current finance market:
Before I started this project, a colleague and I were able to obtain financing from a local bank for a different condo “shell” (gutted to the studs.) In that case, they agreed to financing the purchase price including our full construction budget, with us putting down 30% and paying a couple of points.
So, we figured that with this newly found property the same bank would be willing to give us the same deal. No such luck. The financial crisis of 2008 was in full swing and the same deal was off the table. In fact, we contacted several local banks and they either said “no way” or didn’t even bother to respond.
We are not the kind to give up. We knew this project had a lot of potential and we started to look for alternative financing options.
I talked with my financial advisor who suggested that I get in touch with a hard money lender he knew. A few days later I was able to discuss the deal with the hard money lender and he seemed enthusiastic about what I was proposing. (I think that my financial advisor talked us up a bit.) This hard money guy wanted to see us do well and cut us an amazing deal: he would front the money to buy the property with us paying him back his initial investment plus 10-20% interest on his initial sum at the conclusion of the project. We would have to finance the construction ourselves, but we had no monthly payments to deal with, no points at closing. I told him that we would do our best to get the unit in an appraisable state quickly so that we could potentially take a loan out against the property. Even at 60% loan to value, we could possibly be able to pay the investor back all of his investment, plus interest, with some cash left over for us to cover some of the construction expenditures. However, I stressed that we may not be able to find a bank that would refinance us since the other two units in the building are bank owned. We came to the agreement that after six months of market time, if we couldn’t sell it, we would reevaluate our situation. At this point our financing was secure and we were pleased (and lucky). There was still plenty to get accomplished before closing. Stay tuned.
Comment
Permalink
Email
A hard money lender? This just gets worse and worse.
There's really enough profit margin even at 30% price decrease to justify this? Even if you make a profit in the end, I'm guessing you guys are going to end up paying yourselves $5 an hour or some such.
Charles,
We feel comfortable with our margins. Even with paying back our lender principal and interest, paying back ourselves for construction, and paying for miscellaneous costs (attorney fees, commissions, etc.) we believe we have 80-100k of profit based on comps in the immediate area. These sales are recent (within the last 2 months) and are very similar. There are a few units UAG that are due to close within the next few weeks that reinforce these comps.
To repeat what I said in an earlier comment, I obviously don't have enough details to speak definitively - I'm just questioning.
But re-development is a line of work I used to be in, and would like to again, so I'm very curious.
Are you assuming the spring market (which I'm guessing is your target) will be flat, or assuming it will go down a neighborhood appropriate amount? (ie more for Jamaica Plain or Dorchester than the South End/Back Bay) I think a reasonable assumption is current comps minus 20% at least.
I certainly believe in the concept of pricing inefficiencies, but wow that's a lot to be paid back - it implies a property that was not just a little under fair market, something I haven't seen yet myself in any of the neighborhoods I watch.
Charles,
A 20% decline in the next 4 months or so is quite a big drop. I don't foresee that kind of decline by the spring market unless something ridiculous happens with the credit industry. I see condo prices flat or slightly declined up and through the spring market. There are a couple of reasons I believe that. For one, the government is doing all they can to ensure banks give mortgages out to qualified buyers. So, I think that it will be the same or slightly easier than right now to get a mortgage in 4 months. Additionally, the government is trying to help current homeowners avoid foreclosure. This will help stabilize prices, to a certain extent, since there will theoretically be lower amounts of distressed properties on the market. What gives you the sense that the market will decline in certain areas of Boston by 20%?
Maybe this unit was priced inefficiently. Maybe not. It wasn’t habitable, so how do you comp that?
For clarification, we’re pricing our unit LESS than our comps when you compare them on a square footage, amenity, and location basis.
I've posted further up the blog a lot on why I think the market will drop - basically, to avoid searching, its got to go back to fundamentals, and price around 3 to 3.5x salaries. Probably will overshoot, since thats what always happens in a recession.
How would I value the unit? Pretty easy actually. Take a similar "real" comp. Subtract build out price. (should be pretty simple if you've got a gut, no surprises). Subtract profit and fees and overrun margin. Now you have a fair price for the unit, everything below is gravy.
Note, my "real" comp above would be discounted at least 20% so I'm not trying to hit a historical target. Though the actual number would depend on neighborhood, its tough to find a reasonable observer who doesn't think Boston real estate will continue dropping - the only question is the amount.
My bona fides - I've been predicting prices on this blog for a long time, and (with Marcus) have been consistently accurate, I note. I saw this coming in 2005 and got out of development back then.
First, I have been predicting for a long time to anyone who would listen that we would never see $2/gallon of gas ever again, so......
But when economists estimate a loss of 135,000 jobs in Massachusetts during this recession and a slow recovery, I can't help but think that real estate prices in Boston are going to soften.
Great discussion.
This blogger might want to review your comment before posting it.
Recent Posts
browse this blog
by categoryINside Boston.com