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Real Estate Crowdfunding Experiment #1: Property Details and Numbers Breakdown

real_estate_1Woohoo, I just received my first interest payment on my real estate crowdfunding experiment #1. I put in $5,000 at 11% APR, which should work out about $46 a month but the first partial payment was an underwhelming $16.81. I e-mailed Patch of Landand they said I could share the details of my loan, so here they are. If you are a SEC accredited investor and a (free) registered member, you can view it on their site.

Financial details. Here is the summary and breakdown from the Patch of Land listing:

The developer is requesting a loan of $179,000 in order to purchase and renovate the underlying property. The property was purchased for a total of $155,000 in April of 2015. There is minor renovation needed for the underlying property, totaling $55,000. The borrower will receive 2 draw(s) totaling $175,420 over the course of the loan. The initial draw in the amount of $120,420 occurs when the loan closes. The second draw of $55,000 will be disbursed when renovation is completed. The borrower plans to sell in 1 year or under.

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Loan is secured by the property, in the first position. Also have personal guarantee from borrower (not worth much). 6-month term (roughly April 15th to October 15th). 11% APR interest, paid monthly.

So the developer is contributing roughly $40,000 and the loan is roughly $180,000. So a total of $220,000 is being put into this house. Considering that the loan will charge roughly $10,000 in interest over 6 months, plus a potential 6% brokers commission upon sale, this house would have to sell for around $245,000 for the developer to break even. The developer thinks the house can sell for $275,000 but it all depends on how well they spend that $55,000 in renovation costs and how the local market holds in the next 6 months. A 3rd-party appraisal gave a estimated after-repair value of roughly $240,000, which is probably a conservative number but suggests a potentially tight profit opportunity for the developer.

In the end, I do believe it likely that the loan amount of $179,000 can be recovered from this property in a liquidation scenario (see below). It is important to note that the developer doesn’t actually get the final $55k until the renovations are completed and thus the home will be worth more.

Property details. Single-family home in West Sacramento, California. The address is 508 Laurel Lane. You can look up details from public records using sites like Zillow orTrulia. Built in 1954, 3 bedrooms, 1 bath, 1,675 sf living area, 7,000 sf lot. The pictures provided suggest a house that is definitely in need of a kitchen remodel and light repairs, but it wasn’t destroyed inside. The house is about the same size and appearance of other houses in the neighborhood.

I am not familiar with the Sacramento area. The zip code of 95691 appears to have slightly above-average selling prices compared to West Sacramento overall. According to Google Maps, the neighborhood is relatively close to freeway access and downtown Sacramento. I also looked at Google Street View and I liked that the neighboring houses all appeared to have well-maintained houses and manicured lawns. That suggests pride of ownership and/or a certain level of peer pressure to keep your house looking nice. Based on a quick Craiglist search of comparable rentals, this house should support roughly $1,400 to $1,500 in monthly rent, which is not bad compared to the ~$245,000 that I’d like this house to sell for once fixed up.

In the end, there are a number of risks in this deal, but otherwise it wouldn’t pay an 11% annualized interest rate. From my vague understanding of hard money loans, I was hoping for much lower LTVs in the 50% range instead of the 80% range. Perhaps the lessening of loan standards from new money flooding this new asset class is already happening. It would be educational to see how they handle a liquidation… but I should just sit back and quietly cash my interest checks.

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