“I know someone who did all the work involved in preparing the prospectus himself without having a lawyer involved.”

This is not a good idea unless the person raising the funds has vast experience in these matters, and has worked with a lawyer in the past to prepare a prospectus.

Even in this case a lawyer should still be used to review the document prior to distribution.

In terms of cost, this can vary considerably, but a straight forward prospectus could range between $20,000-$50,000 – if prepared in the correct manner.

Marketing costs are also an unknown variable – given the information. If a broker is contracted the cost could range between 5-10 percent of the funding target.

— Michael

I have been following this post and thought it worth commenting.

“assigning contracts and options and foreclosure (repo) deals.. just wondering what the general opinion on this board is of this kind of dealing”

Assigning contracts/options/foreclosures is a mainstay in the United States and has become common in Australia and New Zealand.

However, assigning contracts/options/foreclosures is simply another method of turning an investment [time or money] into a profitable return.

As with any transaction the parties involved should conduct due diligence and feel comfortable that a mutually acceptable agreement has been reached – or decline to proceed.

In terms of the emotional and ethical considerations, I for one do not believe emotion should play a part in any business transaction – the end result should be a culmination of the facts, the risks and the benefits.

In saying this, I personally abide by strong ethics and encourage those I am associated with to do the same.

Caveat Emptor [“buyer beware”] is the foundation of investment – whether the transaction is deemed ethical or not.

It is not the platform [i.e. assigning contracts, selling OTP, foreclosures, lease options, etc] that determines if the transaction is ethical or not, it is the standards you as an investor abide by.

— Michael

“Elysium, it’s not ‘uncertain’, that’s why contracts and lawyers are involved!!”

.. correct.

An offer becomes a “binding contract” when accepted by both/all parties i.e. signed.

The contract is “conditional” until all conditions [incl. subject to] are met, or the contract terminates.

When the contract becomes “unconditional” the buyer is obligated to meet the vendors terms.

A contract can include any conditions that are mutually acceptable to both the buyer and seller [within reason].

The key is to stipulate conditions that protect your interests, and avoid unnecessary requirements that may compromise the deal.

There are a variety of conditions to consider – which will differ for each investment. This is why qualified people should be employed during the due diligence and contractural phases i.e. building inspector, registered valuer, lawyer.

— Michael

Bill

I am not usually one to bother with debates of this nature, however..

Having read your comments I would consider you nothing more than a pessimist [possibly burned in the past, or not quite as knowledgeable as you suggest].

There is nothing substantial, or substantiated, in your response to this post – specifically your so-called “predictions”, which are common views in the media/analytical world. And quite frankly, on the basis of your ongoing input, I question your knowledge and understanding of investment in general.

Your apparent emphasis on historic trends is an opinion/strategy you can abide by, but should not dictate to others in this forum without justifying the rationale in today’s market.

As for your personal attack on “Mini” and “Westan”, I consider this unnecessary, and a direct reflection of your professonal integrity and level of professionalism when confronted with other opinions.

I certainly hope the parties you are soliciting conduct their due diligence before entering a financial or other business relationship.

— Michael

P.S. I am far from a “novice”.

“I didn’t think a company needed to start with any equity?”

When a company or joint venture is setup as an entity i.e. Trust, LLC, LP etc, shares or membership units are assigned to the entity i.e. company XYZ has 1,000,000 shares; joint venture ABC has 1000 units.

Simplified definitions [Equity]:

1. A term describing shares/units, or any security, representing an ownership interest.

2. On the balance sheet, equity refers to the value of the funds contributed by the owners [the shareholders/partners] plus the retained earnings [or losses].

“And couldn’t you do it like, Shareholder A is the boss and gets to decide who Shareholders B and C are. Shareholders B are those who share the profits.”

A company is generally assigned a Managing Director or CEO who in this capacity can make these decisions – at times in conjunction with a “board”, which is not necessarily made up of shareholders.

Smaller operations which do not have “officers”, but have shareholders, generally stipulate in the operating agreement that shareholders with a combined interest of x percent must agree to the sale of shares and how the profits are distributed.

Although I could comment on the remainder of your post, without knowing the type of business and a number of other considerations, I cannot provide an informative response.

Either way, I would advise speaking with a qualified attorney who will clarify any questions you have.

— Michael

“Firstly, getting a quorum people to either turn up or have their input phoned in, wasn’t easy! Secondly, nobody was ‘the boss’ – it was a democracy… you’d always get whingeing about it from the one or two members who didn’t vote for it.”

– This is an example of the importance of preparing an operating agreement prior to the formation of a joint venture – disclosing to each member their rights and responsibilities, liabilities etc, and the role of the “Managing Partner” [aka “the boss”].

If a partner does not agree with the terms, it is at the discretion of the partner retaining a majority interest to amend the agreement or exclude the partner from participating.

“You could always start a company with you as sole director, and invite members of the joint venture to come in as shareholders, sharing profits.”

– This is certainly an option to consider, however, unless you have the resources to move forward as a sole proprietor and establish equity in the company, forming a sole proprietorship in the first instance may counteract the benefits of a joint venture.

The benefit of a joint venture is access to finances/resources which in theory make a business more efficient and productive. If the company is formed prior to the members inclusion, there is the potential for members/investors to undervalue your participation [equity] because of a weakness they may identify in the operation i.e. caused by insufficient resources.

If a joint venture is considered vital to success, then the concept should be presented to potential partners prior to formation, followed by mutually acceptable investment and operating paramters outlined as the basis of a joint venture agreement.

“..invite members of the joint venture to come in as shareholders, sharing profits”

It is important to understand the difference between a “joint venture” – which generally assigns “units” to “members”, and a “corporate entity” – which assigns “shares” to “shareholders” – before deciding on the appropriate structure.

A joint venture is usually formed as a short-term vehicle, with a specific operating objective and “sunset clause” [expiration date] i.e. 1 to 10 years.

For example, a joint venture may be formed by several investors for the purpose of acquiring x number of SFH’s, renovating then on-selling. The joint venture expires after x years and profits are distributed accordingly.

Shareholders in a corporate entity have less control/participation in business activities. The business is often not restricted to a specific activity; less than 100 percent of the company’s equity/shares are sold – allowing for future fund raising and expansion [which equates to less compensation for shareholders versus members who retain 100 percent equity in a joint venture]; and, a corporate entity does not generally have a “sunset clause” – unless shareholders receive periodic dividends, they may not realize a return on investment until the company is sold, if at all.

Furthermore, unlike “shares” in a corporate entity, it is not common for “membership units” in a joint venture to be sold/traded. Although restrictions can be placed on selling shares if the corporate entity is privately held.

“It was not the cheapest option, but it was the most professional one. It also allows for another class of investor to be added in as C-shareholders.”

Because joint ventures are unlike corporate entities – in terms of members investing money for a specific period in exchange for x percent equity – share classes are a moot point.

Share classes specify the priority of profit distributions and are commonly used in corporate entities when several stages of capital have been raised i.e. the original investors/directors are allocated class “A” shares – with priority over other shareholders, the second group of investors receive “B” shares, and so on.

Joint ventures generally have a more straight forward structure, with equity assigned in proportion to the members/investors investment – it is not common for new members to be added after a joint ventures formation, but if so, each members units are diluted accordingly.

— Michael

“and they have margin calls so you need to have cash for emergencies, as they will sell your stock on you in the event for the market going down”

The broker will require “immediate payment” from cash reserves if the sale of stock does not cover the margin call.

Margin loans should be left to very experienced traders.

— Michael

“Scenario 1.”

A loan is not recommended because it will often restrict the investors rate of return – meaning it may be more difficult to reach an agreement.

Furthermore, there is limited security in a loan arrangement for a foreign investor, versus an equity-based arrangement i.e. Unit Trust.

—

“Scenario 2.”

“for the capital invested, grant each other bank lending rates for the time your money was tied up in the project, before you work out the profit.”

This [bank lending rates] is not common or necessary.

Generally funds invested into a real estate partnership are used for project expenditure – not remunerating partners, unless there is an agreed periodic management fee.

Remuneration is based on profits generated upon implementing a divestment or exit strategy. Otherwise, if each partner was receiving an interest rate – whether called on during or after the project, the partners would have to service this cost.

“If you are not going to sell for a while, then the guy who does the work also needs to grant himself bank interest rates on the labour component from when he would normally be paid until the profit is realized.”

See above. Alternatively, if the cost incurred is for “labor”, then this would be budgeted accordingly – i.e. as a salary/wage for services.

“If you have ongoing unseen costs, these are added into the equation and taken out of the final profit figure. Be very conservative when calculating your costs.”

The budget should include contingencies for unexpected costs from day one – generally a percentage i.e. 5-10 percent of the total projected expenditure. It is never advisable to commence a development [which your post indicates] without having all funds in place, or accessible under contract.

All costs should be accounted for “before” a final profit is realized.

— Michael

“I have read allot of books about real estate investment but all these books fail to give good advice on risk management.”

The reason risk management and exit strategies are not extensively covered is they can vary considerably subject to the type of investment, stage of investment, financial resources, location and many other variables.

The exit strategies we formulate are less focused on risk management, and more on maximizing profitability.

The reason being, we conduct extensive due diligence before making an investment, which highlights the potential risks throughout the holding period.

We can then closely monitor identified and potential risks, but apply resources to managing the best strategy in terms of profitability – and implementing this [exit] strategy at the appropriate time.

The reason I mention this is an “exit strategy” does not have to signify “risk management”, it can also signify “profitability”.

No matter whether the investment is a single family home, or a 1000 unit apartment complex, the same basic principles apply;

1. conduct sufficient due diligence to identify risk prior to investment.

2. manage risk throughout the investment lifecycle, but maintain a focus on maximizing profitability.

In terms of the risk variables that should be considered prior to investment, the common considerations include;

1. ability to service a mortgage/loan for a pre-defined holding period

2. potential interest rate increases during a pre-defined holding period

3. comparable valuations i.e. recent sales of comparable properties in the same vicinity including asking price v. sell price, time on market

4. what I consider the most important [but difficult to estimate] variable – “supply v. demand”

The importance of a “pre-defined holding period” is it becomes a benchmark for evaluating the risks prior to investment i.e. plan to hold for 1 year, 5 years or 10 years.

When you reach the pre-defined date, you then reassess the risks/rewards of holding for an extended period, or implement your exit strategy and move on to another investment – you may find the most profitable exit is prior to the pre-defined date.

A phrase I try to abide by.. “a wealthy man is not one who knows when to buy, a wealthy man is one who knows when to sell”.

My reference to this phrase is simply, if on the “pre-defined date” you have made a clear profit, however you are “not certain” of where the market is heading, then you sell. If the buyer realizes a short-term gain, then so be it.

The key with an exit strategy is setting milestones and implementing them in an effort to maximize profitability. If the exit strategy is overlooked because “greed” becomes a factor, then the investment is likely to become a burden or opportunity cost.

— Michael

“How can house prices keep rising without incomes in the area rising as well?.. The only answer I can come up with is that prices can’t possibly go up so far ahead of rents sustainably.”

In my experience – which is an investment/development role in primarily waterfront/coastal locations, the answer comes down to “supply and demand” and the buyer’s ability to service the cost of the property without the need for residual income.

I am not familiar with the location highlighted in this discussion, however, if it is attracting a predominantly retired population, then it is possible their ability to acquire freehold, or service minimal mortgages, is playing a part in sustaining market valuations.

Otherwise demand for waterfront/coastal property will always exist, and often appreciate at a faster rate than other locations – without the typical influences such as rental and interest rates.

As westan correctly pointed out.. “the prices might seem high to you but there are some very wealthy people out there all after the same thing.”

— Michael