It a Deal or a Trap
A developer friend of mine has what he call the third owner syndrome. He is very experienced and has turned projects around that his team purchase after the original developer went belly up. He says that many developers get carried away by the project and try to build a monument. Or that they get caught in a changing market. They may have allowed a bit of wishful thinking to flavor their due diligence. Several years ago before the market tanked, some “lenders” were more interested in the fees generated by a project than in its viability. The project was going to be sold to Wall Street anyway. I remember back during the Saving and Loan Debacle looking at a project, We called it Camp Swampie. The project was a Second Home Golf Course Resort Community located in rural Louisiana. It was probably a hundred miles from anything. You had to travel miles on marginal secondary roads to get there. They had a golf course, a nice clubhouse with all the upscale amenities, state of the art kitchen, golf carts in the garage (NEVER USED) and condos as well as developed Golf Course lots. Unfortunately, they had not sold one unit. The RTC wound up with this puppy.
My friend says that after the project has been foreclosed several times many projects can be turned around because the numbers are finally realistic. I do not think Camp Swampie fell in that category. On a smaller scale there are a number of builder houses , small subdivisions and condos that are lying fallow . Many of these were started by reputable builders who got caught in a changing economy. They were unable to sell other units leaving them without the funds to finish other projects. They were caught short when the lender who was funding their project was taken over. There have been many bank failures, leaving builders/developers stranded. Other projects were caught in changing demands. Mac Mansions are much less desirable now. How about non conforming properties? A contempory house in a traditional subdivision is certainly hard to sell.
Other properties were built either by inexperienced or fraudulent builder/developers. There are several subdivisions in my market that were built specifically to sell to unwary investors and have code violations, shot tie workmanship and other issues.
There are opportunities in taking on an unfinished project but it is critical that you do your due diligence. Review the documentation, check for code and zoning restrictions. Check the construction. Some things may be covered up. A good inspector is money well spent on these types of projects. Be certain to get an owners title policy and read the title exceptions. Do your due diligence very thoroughly. Be sure that your experience level matches the project or that you have access to the experience level necessary for this type of project. Is this the best use of your resources? There are lots of houses out there.
|The author Gordon Catts is a long time member of real estate groups. He was evolved in the formation of several Local Associations. Gordon was a founding member of what ultimately became National Real Investors Association.
If you have a house for sale or want to buy a new home, please visit his Real Estate Website or read his Real Estate Blog!
Gordon’s website GordonCatts.com has several articles relevant to Real Estate Investors and he writes and teaches in this arena.
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