Investors fund the development costs and share profits after selling to a potential buyer when completed. The equity share holding legal arrangement was 51% for the principal deal finder (finds the deal and raise the money), and 49% remaining for joint investors.
Returns were promised as high as 15% p.a.
I rejected the deal outright.
Why?
1. Only 49% equity shareholdings on contract limited to joint investors mean investors have absolutely no say, no voting rights whatsoever in the operations, profit and loss statement and other major decisions involved in the investment. “Management reserves the right for every say and decisions made without having to consult with co-investors.”
2. The deal finder appears more interested in my money than answering the many questions and doubts I have.
3. Deal finder avoids any personal and conference calls with investors. (There’s only one scheduled investor meet) Email questions were not answered or answered vaguely. It seems to suggest “If you want to invest and make money, put your money in and don’t ask too many bothersome questions. You’re not the only investor I can raise money from as there are many other keen investors who don’t ask as many questions as you.”
4. 49% equity shareholdings are split among too many investors. There’s a saying, “Too many cooks spoil the broth”. Getting into an investment deal with many Tom, Dicks and Harry’s is like getting into bed with BOTH the devil and angel at the same time.
5. The deal is structured to benefit the deal finder overly more than it’s reasonable.
6. The deal feels and smells wrong.
7. Too many unsophisticated investors with low entry investment equity in the deal (As little as $10,000 to participate)
It’s NEVER about if a deal can make money or how much can be made.
One must look beyond promised investment returns. Examples are complexity of managing project/property, available key experiences to manage project, strong support network, in-depth knowledge of industry trends, markets & economy and much more.
The crucial question you need to ask BEFORE entering into investment deals with anyone,
“Will the deal or investment remain sustainable even if projections DON’T go well as expected?”
If the joint-investment hotel deal goes well, investors will happily walk away with profits by a stroke of good luck. But if the deal goes awry by unforeseen events, unsophisticated investors will be filing legal law-suits with one another This is not the kind of investment you want to be involved in no matter what exciting returns promised to you initially.
It’s fine if you like to remain a passive investor in a deal, but do understand the differencebetween “taking advantage of” and “being taken advantage of”
10 Questions You Need to Ask Your Deal Finders
Over the last 5 years, my USA partners and I’ve structured and joint-invested in large-scale USA Commercial Real Estate (RE) deals with our investors. These properties are priced between US$2 Million to US$5 Million a piece. A typical American Single Family Home costs US$150,000. Comparatively speaking, we joint-invested in property deals the equivalent of S$30 Million to S$50 Million worth in Singapore.
In your interview with your deal finders, ask them these 10 questions. These are great questions I always encourage my investors to ask or I’ll personally ask them when considering any co-investment deals myself.
1. Who exactly are they?
- What’s their investment experience?
- What previous deals have they done in the market of deal origin?
- How successful were they?
- Who were their investors?
- Any proven track records?
- What’s their real estate investment background?
- Any expertise in the market of deal origin?
2. Do they have any equity stake in the same deal with you?
- If not, dare question why.
3. Any Finder’s fee or Management fee?
- One-time or yearly?
- How much if yearly?
- Fair compensation value?
4. What legal documents are required to sign?
- Minimum 2 legal documents for signing by all investors/shareholders/managers – Management & Partnership Agreement.
- What are their terms and underwriting criteria?
5. What is the structure of deal?
- Roles and responsibilities of management, and voting rights by co-investors.
- Who decides on major decisions?
- How are decisions settled among all shareholders?
- Who is management and who is passive?
- Share holder’s profit sharing arrangement?
6. Who decides on investment exit?
- Time-frame and penalties if any.
7. What is the minimum investment equity and number of investors?
- Smaller investment quantum deals will attract more unsophisticated and immature investors.
- Higher investment quantum deals will attract more mature and sophisticated investors.
- Investment success or failure will depend greatly on who your investment partners are, their attitude and thinking, investment sophistication and maturity.
- The more small quantum-size investors, the more risky and problematic the deal will become.“Too many amateur cooks spoil the broth”
- Only consider investment deals that has a higher entry barrier with no more than 10 investors per deal including yourself. Know who your co-investors are.
8. What is the holding structure for property?
- Under a Corporate entity or individual liability?
- Is the loan non-recourse, or does it have to be personally guaranteed and by whom?
- What extra profit sharing % is allowed for the investor who shoulders more risk with a personal guarantee?
9. What kinds of returns are promised to you?
- If guaranteed or high returns are promised, the more you should question the risky side of the deal.
- Never invest in promises.
- Instead, always think sustainability and stability of the investment’s tomorrow.
- Remember – The credibility and expertise of the people managing the property is MORE important than the property itself.
10. Any strong support network readily available/accessible for maintaining operations and management for the project?
- Relationships with known local vendors, property managers, lawyers and others to ensure smooth operations.
Conclusion
Never invest in deals that purports to benefit the other guy (deal finder/seller/developer) overly more than it’s reasonable for you.
The big boys snuggle comfortably in a big bed together, while you the small-time investor gets the hard floor by the bed. The only comfort for you is you avoid seeing the “lewd” stuffs they do among themselves on the bed. And this is the real cut-throat money-world.
Before you put your money into any deal under contract, you should clearly understand your investment terms and underwriting criteria and investment objectives.
Imagine this: You put money into a deal under contract. You’ll later find that the guaranteed return promised by the seller has not been fulfilled. Or that the deal finder had inflated the price and you end up with a lemon. Or that the deal finder/platform makes plenty of money from you from the start leaving you with scraps at the end. Or worse, your overseas property gets into trouble with a neighbouring property and there’s no one to assist you with the legal.
While sometimes ignorance is bliss, in this case these kinds of surprises could cost you plenty of your hard-earned money. And when you’re doing a deal, you don’t want surprises like these.
The lesson learned is this: clearly understand the terms of the deal and how the deal finder/seller will “underwrite” the deal.
You want to benefit fairly, and not be taken easily for a sucker.
Source: http://www.crei-academy.com/the-top-10-questions-you-need-to-ask-about-your-property-deal/
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