Okay Pelican OTBrain Trust, Whaddya Make Of This Real Estate Investment Strategy?

Wrecked944 · 05:12 PM

I was talking to one of the regular drivers at autocross and we chatted a bit about our careers. And he said he works for a real estate investment company. I asked for more details and he said he works for these guys...

http://madisonivp.com/

Apparently, this company's business model is this: When a developer wants to get financing for a new project, they need to show the bank that they have some percentage of the units pre-sold. So the company pools a bunch of investors together to each put 10% down on a group of units - thus fulfilling the financing requirements. The money is then kept in an FDIC insured trust and the developer can't touch it. In exchange for this, the developer sells the units to the investors at a discount *and* agrees to a zillion onerous strings attached to put the lion's share of the risk on the developer's shoulders. Later on, the units can be sold back to the developer for a fixed profit, sold to other people before the project is complete, or kept by the investor if they happen to like the unit (having purchased it at a discount).

So there ya go. I read through the entire website and could find nothing heinously wrong with the scheme. But I am not quite ready to drink the coolaide. So I figured I'd sent it your way for a sanity check...

This BBS is my Brain Trust. So have at it!

red-beard · red-beard's Garage

This would violate Sarbanes-Oxley

turbo6bar · 08-26-2006, 06:27 PM

This sounds like a great investment "strategy" for the developer. If it's such a good investment, why doesn't the developer simply put the units up for sale? If the potential is there, the money will come.

08-26-2006, 08:15 PM

So there's a buyback agreement from the investor/buyer back to the developer that the financing instititution is not aware of? That's the definition of fraud. Good luck on your new venture.

pwd72s · 08-27-2006, 06:59 AM

"Later on, the units can be sold back to the developer for a fixed profit, sold to other people before the project is complete, or kept by the investor if they happen to like the unit (having purchased it at a discount)."

Sold back to the developer??? Uh,developers have never filed for bankruptcy? Also, all the negatives previously listed by others apply.

08-27-2006, 07:19 AM

Here's another way to work it. Have several of the subcontractors agree to overbill and kick back 75% of the overage to you. Allow them to do substandard work to further increase their margin and your kickback. Blame the cost overuns on increasing construction costs(easy in this economy). Run the project through about 50% completion and file bankrupcy. You've taken your profit up front and turned the asset back to the construction financier. It's a win/win!!!!!!!!!!