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All Encompassing Mortgage and Real Estate Thread

UTPhil2006

By UTPhil2006
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troph

troph 25227

Posted
Posted (edited)
On 5/24/2021 at 4:48 PM, Chewbacca said:

I'd be very careful with this.  Will the builder pay for all improvements in cash, or will he expect to be able to use the house as collateral for a construction loan?  What happens if he fucks up and quits halfway through?  What if he runs out of money or can't get a loan to finish?  Most smaller builders aren't going to have that kind of cash lying around.  He's going to want to use the house to get a loan.  If you still have a mortgage, this might be an issue.

Not saying it can't work, but there's a lot of risk here for you. How well do you know the builder and how much do you trust him?

We do this model on occasion. Yes we refi the mortgage out and use the land as collateral. Considering most builders who do their own deals get 70% of the profits dropping down to 50% requires a trade and using the equity is that trade.  The bigger concern is papering the deal to get 1031 status. Building a home and selling it isn’t an investment play. You have to do some maneuvering before development to capture the 1031 gains. Most builders don’t do that well because well they are in the business of building homes which by definition is ineligible for 1031 treatment.  You actually can’t convert any gains from the build to long term in a 1031 or otherwise only the value of the lot.  You have to sell the land to a SPE for a note and then the SPE  develops. We typically keep the homeowner as the owner of the SPE and do a development deal with the SPE. Need a bank that’s ok with it as well. It’s not hard you just need some level of sophistication from your builder. The question though is whether you keep riding up or cash out? 

I’d also say I’d be looking at $3m for a sales price for an oversized zilker lot. But only a few builders can reach for that and do it.  I’d want a long term builder in that neighborhood and I would not want to skimp on design, the best designs fetch top dollar and there are a handful of architects that just rake it in zilker. You’ve also got to have a builder that can grab designer attention right now because everyone is so busy. Crews too, man you gotta have A+ crews - after all they do the real work. But for builder solvency the biggest issue is making sure a small builder is in fact small. With supply chain disruptions and covid delays it’s pretty stressful right now. Small builders taking on more more more are the ones to worry about.  We’ve actually slowed down some because of the raw material and supply chain concerns.  We have lots we are sitting on and we are not in a huge rush to develop right now either.  Lot of stupid money right now trying to do this. It’s definitely a way to make a lot of money for sure but it’s not guaranteed.

Edited by troph
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Armybrat

Armybrat 41409

Posted
Posted
16 hours ago, jimmyjazz said:

Well, the homestead exemption in Texas tends to guard against that type of cost increase.  Of course, it also means you're stuck, and the taxing authorities tend to have creative ways to screw you, regardless.

Wilco just yesterday increased the homestead exemption for 65 & over seniors from $30,000 to $90,000, and also for the disabled from $25,000 to $75,000.

Travis County should have been doing that years ago.

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Pasken

Pasken 1312

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Posted (edited)
1 hour ago, Armybrat said:

Wilco just yesterday increased the homestead exemption for 65 & over seniors from $30,000 to $90,000, and also for the disabled from $25,000 to $75,000.

Travis County should have been doing that years ago.

Fuck that. If you want tax relief then vote for people that will replace the bulk of our property taxes with income tax. That way instead of shifting the burden of supporting you to the working class, you shift it to the wealthy.  What happens when they raise these exceptions is they have to raise the whole tax rate for everyone to compensate. It's such a fucking stupid way to fund a government. 

 

I already have to support the rural schools through recapture and the people that live outside the city limits through county taxes that don't ever get invested in Austin. 

Edited by Pasken
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Pasken

Pasken 1312

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Posted
1 minute ago, Armybrat said:

Fuck any income tax.

Oh my god. Then don't cry about a 65+ homestead exemption so I can further support your unincorporated ass. I do enough through my county taxes that build your roads. Why would you want to push your burden from working middle class people instead of people who are making a lot of money whose quality of life won't  be as affected? Are you that brainwashed by the GOP that you advocate that much against people you know? Your own family? 

 

 

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Armybrat

Armybrat 41409

Posted
Posted
2 minutes ago, Pasken said:

Oh my god. Then don't cry about a 65+ homestead exemption so I can further support your unincorporated ass. I do enough through my county taxes that build your roads. Why would you want to push your burden from working middle class people instead of people who are making a lot of money whose quality of life won't  be as affected? Are you that brainwashed by the GOP that you advocate that much against people you know? Your own family? 

 

 

Horseapples.

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ZB'Tejas

ZB'Tejas 597

Posted
Posted
2 minutes ago, jimmyjazz said:

Don't confuse them with facts.

tbf the majority of this board are probably not "lower middle class." Plus I thought we are talking about real estate in Austin which I would say priced out lower middle class several years ago. 

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Armybrat

Armybrat 41409

Posted
Posted
1 minute ago, ZB'Tejas said:

tbf the majority of this board are probably not "lower middle class." Plus I thought we are talking about real estate in Austin which I would say priced out lower middle class several years ago. 

Yeah, because the out of staters flocking here from places like overtaxed California are driving up values.

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Chewbacca

Chewbacca 7830

Posted
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10 hours ago, troph said:

We do this model on occasion. Yes we refi the mortgage out and use the land as collateral. Considering most builders who do their own deals get 70% of the profits dropping down to 50% requires a trade and using the equity is that trade.  The bigger concern is papering the deal to get 1031 status. Building a home and selling it isn’t an investment play. You have to do some maneuvering before development to capture the 1031 gains. Most builders don’t do that well because well they are in the business of building homes which by definition is ineligible for 1031 treatment.  You actually can’t convert any gains from the build to long term in a 1031 or otherwise only the value of the lot.  You have to sell the land to a SPE for a note and then the SPE  develops. We typically keep the homeowner as the owner of the SPE and do a development deal with the SPE. Need a bank that’s ok with it as well. It’s not hard you just need some level of sophistication from your builder. The question though is whether you keep riding up or cash out? 

I’d also say I’d be looking at $3m for a sales price for an oversized zilker lot. But only a few builders can reach for that and do it.  I’d want a long term builder in that neighborhood and I would not want to skimp on design, the best designs fetch top dollar and there are a handful of architects that just rake it in zilker. You’ve also got to have a builder that can grab designer attention right now because everyone is so busy. Crews too, man you gotta have A+ crews - after all they do the real work. But for builder solvency the biggest issue is making sure a small builder is in fact small. With supply chain disruptions and covid delays it’s pretty stressful right now. Small builders taking on more more more are the ones to worry about.  We’ve actually slowed down some because of the raw material and supply chain concerns.  We have lots we are sitting on and we are not in a huge rush to develop right now either.  Lot of stupid money right now trying to do this. It’s definitely a way to make a lot of money for sure but it’s not guaranteed.

A deal like this can make a lot of sense from the builders side.  I don't think I'd do it as the owner unless I knew the builder well and really trusted them.  It's 100% out of your hands as the owner as soon as you contribute the property into the new entity.  And I didn't even touch on 1031, but you're right that's a whole other issue altogether.

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troph

troph 25227

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Posted (edited)
1 hour ago, Chewbacca said:

A deal like this can make a lot of sense from the builders side.  I don't think I'd do it as the owner unless I knew the builder well and really trusted them.  It's 100% out of your hands as the owner as soon as you contribute the property into the new entity.  And I didn't even touch on 1031, but you're right that's a whole other issue altogether.

We take a lot of risk on these kinds of deals offering significant profit for a participating owner, we don’t own the land we only have a contract. Obviously our strong preference is to buy and then keep the profit for ourselves and our investors. We make more money that way. Bringing in a new person who has no experience as an investor can be a nightmare too.  Working with professional or at least seasoned investors has a lot less risk.  And this model with our rinse and repeat investor partners has none of the risk you reference. Btw we usually don’t do 50/50 deals like this anyway. Usually it’s a high pref off the top and then a split less than 50/50 in favor of the builder. We do it that way because new investors want less risk so more off the top. And we also cover budget overages so any additional capital needed comes from us (to be paid back for sure). We guarantee the loan so no recourse to the owner except the land.  But the bottom line for an owner is putting insane profit on the table as an option does come with risk, a lot of it. But you de-risk by working with smart, capable, responsible, experienced people and you can rake it. We have, our investors have. So I may be biased - who are we kidding I am - but it’s totally worth it imo.

Edited by troph
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jimmyjazz

jimmyjazz 47212

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Posted
1 hour ago, troph said:

We take a lot of risk on these kinds of deals offering significant profit for a participating owner, we don’t own the land we only have a contract. Obviously our strong preference is to buy and then keep the profit for ourselves and our investors. We make more money that way. Bringing in a new person who has no experience as an investor can be a nightmare too.  Working with professional or at least seasoned investors has a lot less risk.  And this model with our rinse and repeat investor partners has none of the risk you reference. Btw we usually don’t do 50/50 deals like this anyway. Usually it’s a high pref off the top and then a split less than 50/50 in favor of the builder. We do it that way because new investors want less risk so more off the top. And we also cover budget overages so any additional capital needed comes from us (to be paid back for sure). We guarantee the loan so no recourse to the owner except the land.  But the bottom line for an owner is putting insane profit on the table as an option does come with risk, a lot of it. But you de-risk by working with smart, capable, responsible, experienced people and you can rake it. We have, our investors have. So I may be biased - who are we kidding I am - but it’s totally worth it imo.

What happens if the shit hits the fan?  How many good deals does one bad deal wipe out?

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troph

troph 25227

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Posted (edited)
3 hours ago, jimmyjazz said:

What happens if the shit hits the fan?  How many good deals does one bad deal wipe out?

you might not believe my answer but you have to avoid bad deals.  and it's not hard to do so.  Our approach includes walking on deals that present mediocre on paper - this is probably the single most important factor (second being capitalization).  Those are the deals that go backward in a hurry.  Our philosophy is to have plenty of downside room.  we look for homeruns on paper or we don't do it.  we want more profit from less houses, not more houses with less profit.   this is not a good business to treat as a volume business. generally we look for $1M in profit before carrying costs, closing costs, etc.  as prices rise to $3M that probably moves up to $1.2M or so. Those deals are hard to find but we've had them.  They have plenty of room to sour.  We also look for more scarce opportunities than even the broader market presents.  right now we are bouldin, zilker, travis heights, some just south of there but selective and lake travis water front or substantial water views.  That's it.  we don't look at anything else.  we work with only really solid designers and we have fantastic crews where it matters - foundation, framing, and roofing.  on finish work we only use high end folks who do great work.  plumbers and electricians come and go, that's just their nature.  Then we take these scarce/home run projects and we make them safer by utilizing significant equity positions to make the leverage work but not be a risk.  we don't look for the least amount down, we target 35-40% on a project.  that makes the homeruns safer as well, and the amount of meat on the bones gives more room for more equity.  then we only look for 2-3 per year.  so that allows us to have the capital to cover overages, taxes, delays, you name it.  even if we had to hold the project for a year, they are highly desirable homes that will be the first to rent if we price them at market.  so then you need really only to cover a small portion of a note and the taxes to tread water.  Since after the S&L crisis, holding real estate in Austin has always been a good thing, so that hold for a little while is not a scary proposition.  In Austin real estate, it's very difficult to lose money if you are prudent.  That will eventually change, and it hasn't been this way for our entire history but we do think the next 5-10 years will see continued increases in real estate values with the only caveat being another financial crisis or interest rate hikes of a substantial nature.  Our reasoning is that supply and demand here was already so out of whack (for a lot of reasons) that the simple economic equation drives price up. 

if you want some specifics, our worst peformer was 18% return for investors in 2017 (probably 12% annualized).  Next lowest was about 22% (about 15% annualized).  To be fair to us, our highest so far was 50% (35% or so annualized) and we have a three year hold that will return 60% (20% annualized) and we have some right now that look to be 120% over a three year period so 40% annualized.  on average across a dozen or so builds we've done 22-24% on average on an annualized basis, with no losses at all.

*not an offer or solicitation, historical performance is not indicative of future results, forward-looking statements contain a high degree of assumption and risk and cannot be relied upon.

(I couldn't help myself with the disclaimer)

 

Edited by troph
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Pato del Muerto

Pato del Muerto 53509

Posted
Posted
14 minutes ago, gmr548 said:

Yes. The exodus from California isn't full of rich liberals with several degrees that has become a caricature. Those people can afford it.

But its people with enough money to throw at real estate to cause this price surge. 
 

Armybrat, your state leaders have been pandering to California businesses to move to Texas for years. It’s not the fish cannery that’s moving and can hire local cheap unskilled labor. It’s tech companies, who want to be near Austin for the relevant talent pool, but who also move their Californian employees with them.  I bet many of those moving here would just as soon stay in California. 

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gmr548

gmr548 16701

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34 minutes ago, Pato del Muerto said:

But its people with enough money to throw at real estate to cause this price surge. 
 

Armybrat, your state leaders have been pandering to California businesses to move to Texas for years. It’s not the fish cannery that’s moving and can hire local cheap unskilled labor. It’s tech companies, who want to be near Austin for the relevant talent pool, but who also move their Californian employees with them.  I bet many of those moving here would just as soon stay in California. 

I mean, the current price surge is a national trend that goes well beyond people moving from CA. Even for Austin in particular, the number of people moving from CA has been proportional to its share of the national population (excluding TX as the majority of moves come from within TX). The California thing is a bit of a boogeyman in Texas.

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bluto

bluto 4997

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Posted
I mean, the current price surge is a national trend that goes well beyond people moving from CA. Even for Austin in particular, the number of people moving from CA has been proportional to its share of the national population (excluding TX as the majority of moves come from within TX). The California thing is a bit of a boogeyman in Texas.

Ohhhh but it plays almost as well as the opening chords of whiskey River to the masses.
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Armybrat

Armybrat 41409

Posted
Posted (edited)
8 hours ago, gmr548 said:

I mean, the current price surge is a national trend that goes well beyond people moving from CA. Even for Austin in particular, the number of people moving from CA has been proportional to its share of the national population (excluding TX as the majority of moves come from within TX). The California thing is a bit of a boogeyman in Texas.

I’d venture to guess that the majority moving to Austin from within the state are not native Texans, particularly those from the other metro areas.

But most of us like to rag on the west coasters and also do the “get a rope” thing for the east coast crowd mainly for the entertainment. Nobody really wants to claim the goobers from north of the Red, Collie Station, Jasper or Sulfur Springs.

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jimmyjazz

jimmyjazz 47212

Posted
Posted
16 hours ago, troph said:

you might not believe my answer but you have to avoid bad deals. <snip>

I get that, and I applaud you for being picky.  My oldest friend collects rental properties, and he is similar in his investments.  He says he probably turns away 25 properties for every one he buys, and he probably doesn't buy even one a year.  His cash flow demands are really hard to hit.

That said, I was really just referring to a deal you're working on if/when real estate prices take a 20% hit.  I don't think anyone knows when that will happen, but I've seen it a few times.  (Maybe not 20%, I don't remember the exact specifics of Austin price declines, but substantial enough.)

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troph

troph 25227

Posted
Posted
49 minutes ago, jimmyjazz said:

I get that, and I applaud you for being picky.  My oldest friend collects rental properties, and he is similar in his investments.  He says he probably turns away 25 properties for every one he buys, and he probably doesn't buy even one a year.  His cash flow demands are really hard to hit.

That said, I was really just referring to a deal you're working on if/when real estate prices take a 20% hit.  I don't think anyone knows when that will happen, but I've seen it a few times.  (Maybe not 20%, I don't remember the exact specifics of Austin price declines, but substantial enough.)

financial crisis the hit was about 4% if I'm not mistaken.  Austin hasn't seen a 20% decline in almost 40 years.  Yes it can happen, but the dynamics today aren't going to allow that.  after another 5+ years, maybe, but Austin is still a value as it moves into big city status and scarcity protects against any broader decline (location, location, location).  Even still, if you take what we do with land and add the value of the improvements and then discount from comps by 20% we will likely break even or better on any investment, or we decide to hold.  anyone who doesn't think like that is someone to avoid.

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troph

troph 25227

Posted
Posted (edited)
53 minutes ago, tokamak said:

So y'all are saying the secret to success is to only make good deals? By God, you just might be onto something there.

it took 20 years to stop doing bad deals and learn to say no, and that even resulted in talking to bankruptcy attorneys in 2010 where I lost everything.  even still we have deals that sour, but if you think that's what I said, ok.

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DalTxHornFan

DalTxHornFan 3130

Posted
Posted
21 minutes ago, jimmyjazz said:

I think the mid-80's bust was big.  Maybe not 20%, but I know it wiped out a bunch of people's equity.

I had a new build SW Austin duplex that I bought in 1983 for $116,500.  When I tried to refinance my ridiculous 14.9% mortgage (remember inflation?) -- the appraisals came in at $65,000.  The Tax Reform Act of 1986 totally changed the dynamics of rental real estate basically overnight. 

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Gladeite

Gladeite 376

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Posted

I was a real estate appraiser in the 1980s.  Residential property values in Texas dropped around 40% from 1984ish to 1989ish.  Commercial valuations dropped even more, probably 50+%.  

It was a brutal time.  In Houston, several large subdivisions had every single home foreclosed on.  People paid $100-120,000 for them new with all sorts of points, closing costs, etc..  included and minimal down payments.  Values went down to $60000+/- if in great shape, $40,000 if trashed.  Entire neighborhoods just walked away.  Our office did numerous condominium projects where every unit had been foreclosed on.  We did most of the Galveston condominiums that were financed by Gibraltar.  Every vacation unit owner walked away.

In Austin, we did 1000s of NPC, Milburn, etc... tract home builders that had minimal down payments and lots of financing costs built in.

In San Antonio, we did 1000s of Ray Ellison foreclosures.  Probably the largest declines overall.  His incredibly cheap quality builds deteriorated quickly and he built the most financing, furniture, pools, etc... into the price.  Very sad for a lot of families.  To pay $125,000 new and 4 years later be worth $50-60,000.

The change of the tax code destroyed the commercial market.  Overnight, apartment projects were worth less than 1/2 of what they were.  Cap rates?  20-30% after the change in tax code and lack of financing.   Units traded less than $10,000/door.   It became impossible to sell a strip center.  No tenants and no financing.  Lenders were giving them away.  Fourplexes in Austin were renting for $500/unit and lenders could not sell them for $40,000.  Class A buildings were owned by the lenders and they became landlords since they could not sell them.  Vacancy rates were over 50% and rents were $0.50 to $1.50/ft.

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DalTxHornFan

DalTxHornFan 3130

Posted
Posted
33 minutes ago, Gladeite said:

I was a real estate appraiser in the 1980s.  Residential property values in Texas dropped around 40% from 1984ish to 1989ish.  Commercial valuations dropped even more, probably 50+%.  

It was a brutal time.  In Houston, several large subdivisions had every single home foreclosed on.  People paid $100-120,000 for them new with all sorts of points, closing costs, etc..  included and minimal down payments.  Values went down to $60000+/- if in great shape, $40,000 if trashed.  Entire neighborhoods just walked away.  Our office did numerous condominium projects where every unit had been foreclosed on.  We did most of the Galveston condominiums that were financed by Gibraltar.  Every vacation unit owner walked away.

In Austin, we did 1000s of NPC, Milburn, etc... tract home builders that had minimal down payments and lots of financing costs built in.

In San Antonio, we did 1000s of Ray Ellison foreclosures.  Probably the largest declines overall.  His incredibly cheap quality builds deteriorated quickly and he built the most financing, furniture, pools, etc... into the price.  Very sad for a lot of families.  To pay $125,000 new and 4 years later be worth $50-60,000.

The change of the tax code destroyed the commercial market.  Overnight, apartment projects were worth less than 1/2 of what they were.  Cap rates?  20-30% after the change in tax code and lack of financing.   Units traded less than $10,000/door.   It became impossible to sell a strip center.  No tenants and no financing.  Lenders were giving them away.  Fourplexes in Austin were renting for $500/unit and lenders could not sell them for $40,000.  Class A buildings were owned by the lenders and they became landlords since they could not sell them.  Vacancy rates were over 50% and rents were $0.50 to $1.50/ft.

I remember it well.  On the other hand, I made coin and started a career in bankruptcy and financial investigation work dealing with all of the fallout.  Good times.

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troph

troph 25227

Posted
Posted

in some ways that tax code rewrite was a black swan event.  you can't control for those.  that's where luck comes in.  we've all had our share of back luck, frankly the financial crisis and covid count for those too.  nothing you can do about that.  we had to walk on three deals last fall that right now are so fat and rich with profit.  our investors puckered, banks started puckering, we were too a bit, but didn't matter couldn't get them financed.

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Okie State

Okie State 3889

Posted
Posted
Drove by and saw this in our neighborhood.  It’s like $100/sqft more than the highest selling house in this area.  The lot is a little bigger than most but they are clearly trying to hide the square footage in all the promotional materials.
https://www.redfin.com/TX/Austin/10224-Spicewood-Mesa-78759/home/31323779
Surely nobody is that dumb.
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Wulaw Horn

Wulaw Horn 19596

Posted
Posted
3 minutes ago, CooterBrown said:


She doesn’t realize the kids can hear you banging her in the ass through hollow doors?

That’s the main reason to have solid wood doors.

Disagree. You want the kids to hear daddy railing mommy through the doors. It keeps them from trying to get in and saves mid coital inturuptist. 

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