Property Development Companies

I just went to a property networking event and was approached by many property development company directors, trying to convince me to invest hundreds of thousands of dollars into their next development projects, all offering 10-12% return on investment.

What are your experiences with this?

 

I have seen people lose the lot.

 

Generally they are a high risk, so-so reward type deal. All legal contracts will generally be in their favour. In most cases you are a form of Mezz finance and aren't actually a a joint owner.

 

Don't walk, RUN away.

 

They don't have their own money to get the project off the ground. For a lot of developers it's their strategy to use other peoples money or land because they wouldn't be able to afford the project otherwise or they just don't want to take on all the risk.

Look at every article about Tim Gurner now and you'll see its usually a JV with a land owner or investment house.

 

When approached with a good deal;
Consider that the Australian market is currently flooded with high net worth individuals who have millions to lend at much lower rates through lawyers funds, private funds etc.
So why is there the need to attract many small investors to prop up a deal at a ridiculous interest rate to attracting one benefactor to prop up all deals if the developments were to be financially viable?
The answer is that either the profit is in taking the money from the many small investors as sophisticated investors have more nouse and would want their lawyer to read the contract or that the development is destined to fall.
Watch the movie or live show The Producers for full details of how the deals work and sing along to “Springtime for Hitler and Germany”

 

Lender of last resort finance. Generally they will seek private finance as they have the following attributes:

1. No proven record of personal & direct experience in increasingly larger profitable devs
2. No comprehensive budget / detailed financial plan for scale and profitable outcome with contingency.
3. No capacity to borrow . They are credit exhausted. (Or a declined approval for other reasons)
4. Lack of own capital (40%+)
5. No project scheduling experience eg they will rely on a builder
6. They may have a builder proposed for the project largely chosen for cost. Sometimes the builder is unsuitable for the scale and type of project also.
7. Have no presales or commitment to sales. Sales are a future expectation.

Typically they offer high rates of interest for unsecured "mezzanie finance" and use high rates as bait.. They have often purchased the land with leverage and then seek 100% or more of build costs. Ironically they often approach other budding developers. If other budding developers satisfied the above check they wouldnt need to be involved as a lender of last resort.

Small "investors" are often just unsecured lenders who rank last and lack leverage to seek payments. Others may be involved in a unit trust and also will lack capacity to sue or demand anything. Smart professional investors will want equity and a large stake they can control. eg They may want to be the whole and exclsuive lender and seek a share of the profit that they will also manage. A true JV "partner".

For $800 anyone can be a company Director or "Managing Director".