July 16, 2013
Initial email from Will:
Embowners,
We are to the point where we can make good money with very little risk in
Real Estate.
There is a great lot at the tip of Eagle point up here that we can buy for
around $150K cash:
Link to the lot.
We would get a construction loan for $300K and I have a builder who can build us a killer 2,000 SF full log home with a 2 car garage that would be worth
$600K right now and likely $650K or more by the time it is finished.
My builder can design, and build everything turn-key start to finish
including all plans and permits for about $150 per SF.
You can see some of the other homes he has built here (link)
I propose we buy the lot and start building the home.
I will oversee all aspects of the construction and for that I will get the
experience, and the real estate commissions, from the purchase and sale.
Skip would handle the financial aspects of the paperwork including dealing
with the payments to the builder and the draws from the construction loan.
What do you guys think?
Will
August 2, 2013
From Lance, a recap of the Skype meeting the night before:
Emslackers,
We had a quorum at the Skype meeting last night — at least we think we did. Those in attendance were Skip, Will, Doug, Kev (mostly), and me.
We decided EMBOW would move forward with the house-building proposition. Skip’s likely going to spend the night at Will’s on the 13th, so that they can play golf, drink, and talk to some bank folks about getting a $315,000 construction loan (in that order) on the 14th. We’ll be having another Skype meeting on the 15th at 20:15 + 00:15, so the rest of us can hear the details of their fact-finding mission.
Unless they unearth some particularly gruesome details about the loan, we will move forward with the project. Looking further down the road, and assuming that this project goes well, we decided we’d be willing to consider building a house a year. (After we build four, we’re going to trade them in for a hotel.)
Notice the use of the pronoun “we.” This means that “we” are all in agreement. Not showing up the meeting, in this case, was the equivalent of an aye vote.
Oh, did I mention that part of the plan calls for Skip to take $150,000 out of EMBOW to buy the land? It will be solely in his name. (Yes, Mark, we thought you’d approve.)
To keep the process flowing smoothly, it might be best if the dissenters (if there are any) continue their silence and skip all upcoming meetings. That will leave the rest of us to figure out, as Will put it, “the most fun and creative way to invest/spend the money of those not attending.”
Fond(ling)ly,
-Lance
August 20, 2013
From Doug, recap of another Skype meeting
Minutes for tonight’s meeting:
Attendees: Lance, Skip, Doug, Kevin, Will
Initial discussion revolved around Lance teaching rich kids. We agreed private education was not necessarily better than we received in public schools (spoken like folks that can’t afford private school). But we wished Lance well starting his new job none the less.
Skip presented a [Google] spreadsheet (link to Google Doc) that specified the fees and expected returns for the Big Bear investment. Highlights from the spreadsheet:
It shows timetable – roughly a two year investment from purchase of the land next month, begin construction in April, 7 months of construction, 7 months to sell the house in June of 2015.
The cost per square foot is a stable number based on discussions with the builder. (When would we sign a contract for that?)
The original plan was for Skip to purchase all and sell the property in his name to ease the loan process. He said he was not comfortable with that due to his paying all taxes for the profits.
We decided a new plan that made sense and was agreed to by all attending members:
1) sell $200K of Apple just prior to the early September announcement (sell all shares of Apple purchase #4 and #7 from the portfolio summary in your statement, so expect a large long term gain). This pays for $40K margin existing, land, closing costs, and plans for the house.
2) Skip pays for construction costs as they arise directly out of the Embow E*trade account paid for on margin. Assuming no other transactions, the max margin amount would be ~$350K-(contributions and dividends). Contributions are $3k a month, and dividends would be ~$8K per quarter (is that correct Skip?).
3) Margin to be paid off after sale of the house. Margin rates are on the spreadsheet on a tab labled margin rates.
TO DOs:
1) Will to determine how Embow can hold property for purchase and sale. (partnership?, LLC?) He may contact Mark for some help in this regard.
2) Kevin will send LLC documents he uses for real estate transactions to the group in case the LLC is the way to go at a cost of $800 per year.
3) We need to update our partnership agreement with proper members and percentages. Mark? The current document is in the dropbox under archives.
4) Skip is looking into tax consequences (long term vs. short term gains) for all the real estate transactions.
December 10, 2013
Matles decides to chime in (apparently just seeing the email written in July):
Here are my concerns with regard to the Big Bear real estate project:
1) The profit margin is way too tight. To pay around $480 and hope to sell around $600 at best, then pay broker commission/escrow/title fees and then pay short term capital gains doesn’t appear wise. If the stars align perfectly we’d be lucky to make $50k in the end. There’s always something that comes up, builders, economy, permitting, etc and my gut feeling is that we’re going to run into problems that have a convincing story down the road.
2) I understand the whole idea behind the learning experience, but I am concerned about barely breaking even on this, or losing money especially since we’re shooting for a 15% return and have done better than that historically.
3) I love real estate, but we’re emotionally involved on this one. I have a friend who is in Copperopolis right now doing the same thing on Tulloch Lake. 5001 Lakeshore Drive, Copperopolis 95228. He figures he will spend 900k and buy the land, dock, architect, builder, etc and they’re building a 4200 square foot house, 3 car garage etc and they will list it for 2m. They will probably sell for 1.8 but the low is 1.5. He’s open to talking to us about his experience if anyone wants to talk about it, he is a great resource.
So, someone convince me this piece of real estate is the best place for Embow.
Then Skip gets annoyed:
Dave,
I understand your concern but I’m not sure you’re up on the facts. Were you at the meeting where we poured over the numbers on this? First off, if we make $50k that’s easily 15% on our investment when you take into account the leverage. Check the Google spreadsheet:
https://docs.google.com/spreadsheet/ccc?key=0As-BXCZjFJtvdEVvTFhkTV9TZ1llQUlQSTdVNFgtbGc&usp=drive_web#gid=0
As I mentioned to you on the phone, if you ever want to see EMBOW invest in real estate, this or something else in Big Bear, is our only realistic opportunity. Half of our members can’t get off the sofa to sit in front of a computer during a Skype meeting once every 4 months. Do you think we’ll get them to travel to Copperopolis (wherever that is) to look at property? It’s just not going to happen. We can’t even buy Qualcomm when we all like it.
It’s frustrating to spend all of this time and energy on an idea and have you and Mark write the numbers 480 and 600 on the back of an envelope and decide it’s a bad investment. If you really think it’s a bad idea, please stay involved so we don’t waste hours or in my and Will’s case, days of work only to have you spend 2 minutes on an email and shoot it down.
The time of the Skype meetings are determined by those who chime in and let us know when they can make it. Speak up and we will plan them around your schedule.
With all of that said, I’m totally open to your ideas and I encourage you to keep them coming. That’s what this club is supposed to be all about.
With hugs and kisses,
Skip
Mark chimes in:
That’s not fair, Skip. I was on a couple of the late night calls [BS alert: even with a generous definition of “a couple” meaning “one”, Mark’s pants are clearly on fire here] to go over the numbers and said pretty much the same thing — seems like a lot of risk for the return. I was waiting for Will or you to tell me where I’d gone wrong with the numbers. I’m not just writing down numbers on an envelope.
I don’t think either Matles or I are opposed to real estate investments. We question whether this is the right one. Building a spec house from the dirt up is definitely not the place to start on investing in real estate. Maybe a renovate-and-flip? Straight residential rental (i.e., not vacation rental)?
Maybe with the slow down in real estate that I keep reading about we can improve some of these numbers. But it seems to me that a lot of the risk is in the hands of the builder. An unanticipated cost here, another there, and poof! all of the profit is gone and we’re lucky to break even. Contractors aren’t the most reliable of people when making estimates and I absolutely do not want to end up in litigation to go after some guy’s bond to make whole on money advanced for work that wasn’t performed.