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Some of you who know me know that back in 2006 I had a partnership with 5 other Real Estate Investors. We were focused on Real Estate in the area of development. Primarily communities and planned neighborhoods in vacation areas. These would be second homes for most people and the market for this was booming! In those days people were buying up all the homes they could get. Lenders were happy to lend you money for multiple houses and debt to equity was not something they were worried about. From a REI and development perspective things were good!! No, GREAT!!
My partners and I had built relationships with developers and were getting offers on properties before they were developed. In fact, before the land was actually cleared for development. Developers needed money and access to credit for clearing and infrastructure. So they would partner with investors and sell preferred investors portions of their undeveloped land to raise money for infrastructure and the initial phases of development. When that was complete the investors, who bought in early, could sell the land back to the developer, at a profit, or offer it to the sales team for sale to the general public. It was common to buy tracts from the developer at $200,000 and then sell it, 12-18 months later, for $300,000. That's a $100k profit in a year and usually on as little as $20k out of pocket. The rest was in an interest only bank loan. Not too bad!! My partners and I were snatching these up as quick as they came in and things were good. For about 2 years....
Then, 2008 happened. And 2009. The market tanked...housing prices tanked...Developers went bankrupt. Lenders stopped lending. Real Estate values took huge hits. My partners and I were sitting on $1million in loans. For properties that were valued at $1.25million just months earlier. Now, the sum total of our holdings were worth less than $200k. For example, one property which had appraised for $218,000, just 4 months earlier would not sell at $18,000. Folks this was a water front property at the beach!! Lenders were calling loans due and our developer friends had all declared bankruptcy. We could not sell on the open market and lenders would not short sale for such a steep discount. My partners and I were stuck and severely over leveraged!!
We burned through our capital trying to wait it out. Everything we had invested, originally, plus all of our profits from the previous 2 years of good times. All gone.
So, enough with the sob story details. What's the point of telling you this? Exit Strategies! That's one lesson here and one that I have looked back upon and learned from. To be honest, there are a number of lessons I take from those years, and we'll get to the others sometime, but today, it's all about Exit Strategies.
In looking back it became obvious that one of our big failures, up front, was buying into deals that had only one way out. Not only one way out, but completely dependent on the developer to come through with their pre-construction plans. This was raw land being purchased at a premium because of the assumption that it would be a planned development, with infrastructure, in the next 12-18 months. One property was a 10 acre tract in the NC mountains. The developer sold to us for $500k. When the development was ready to go(ie- roads were in) that same 10 acres would then be divided into 1 acre plots sold at $70k each. Great deal right? Well now the developer was bankrupt and those same 10 acres had no roads and no access so it was essentially worthless. Our strategy required the developer to come through and now that they could not we had nothing but owed $450k. We lost and lost big. It took years to clean up the fall out.
The good news I learned from those deals and those days. Another piece of good news, my partners and I were the investors. We never took money from outside investors on those deals. Today, I am a better deal maker, syndicator, investor because of it. It was a costly lesson but at least it only cost me and now I make sure not to take chances like that and have built better evaluation criteria into my deals before I invest with other people's money.
Today Harvest Properties Group focuses on Value Add properties that cash flow from Day 1. While speculation is a factor in our deals it's not the only factor and we are VERY conservative with the speculation component. We focus on monthly cash flow and utilize our strategies which allow us to force the appreciation. We don't rely on the market conditions to build our equity or create our investor returns.
In terms of Exit Strategies our deals always have at least three. Usually more. We can sell as planned, usually 3-5 years later. We can refinance to cash out investors who want to do so while we remain invested in a long term cash flow property. We can utilize strategies such as Master Lease to another investor. Because we focus on deals that cash flow and where we can force appreciation we leave ourselves room to adjust based on market conditions.
At the end of the day we don't speculate. We perform solid due diligence and make sure we enter into deals that offer options and don't solely rely on one person or company to deliver the single critical component. To that I say thank you 2008 and 2009. You beat us up pretty good but we took our lessons and are applying them to make our investors happy!!