His track record sheet only shows winners, and he wants $250k

Been going back and forth with an operator for six weeks. Small shop, three people, buys rural and recreational parcels in four counties across two states, sells most of them on installment terms, some for cash. He wants $250,000 from me as a single member in a joint venture, 8% preferred to me then 60/40 split of profits above that, three year expected life with the caveat that seller-financed notes may extend it.

What he's given me: a one page summary of 14 exits over four years. Average purchase $14,800, average sale price $31,200, average days from purchase to sale 96. Two of the 14 were cash sales, the rest terms at coupons between 9% and 12%. He says one buyer defaulted and he resold the parcel for more than the original price.

What I've asked for and not yet received: the buy-side HUDs, the note payment histories, and a list of parcels currently owned and how long they've been owned.

My problem is the 96 days. Rural land is supposed to take longer to sell than that, and 96 days across 14 exits either means he's very good at pricing or means the summary only counts parcels that already sold. I also don't know what happens to my capital if half the portfolio is sitting in 84 month notes when year three arrives. The doc language says the manager may distribute notes in kind, which I do not want.

I've spent a lot of time on due diligence in other asset classes and I feel like I'm missing something specific here. What would you ask him that I haven't?

5 replies

2raj_mehta14CapitalPRO6

@rigging that's the cleanest way I've seen anyone put the survivorship thing, and it makes me feel better about being confused by these track record sheets generally.

The part I still don't follow, @canton, is what you'd even own if he distributed notes in kind. You'd be handed a stack of installment contracts on parcels you've never seen, in states where you'd have to figure out the default process yourself? That sounds worse than a delayed exit.

2bmoreno23AB1B

I don't own any of this yet, so tell me if this is dumb. If most parcels sell on 84 to 120 month terms, how does a three year fund life ever work without either selling the notes at a discount or handing them to investors? It seems like the strategy and the timeline are fighting each other by design, and the in-kind clause is how he plans to win that fight.

1stephen_ok9CO2CPRO6

The 8% pref then 60/40 is generous enough that I'd read the waterfall three times to find where it isn't. Ask whether the pref accrues and compounds or just accrues, whether interest collected on notes counts as profit or return of capital in the split, and whether he takes an acquisition fee on each parcel that never appears in the profit calculation. On a $14,800 average purchase a 3% acquisition fee is small in dollars and enormous as a percentage of your economics if he's buying 40 parcels.

Whether an arrangement like this is a security depends on how it's structured and who's investing, and that's a question for a securities attorney rather than this room. I'd want to know the answer before wiring, though.

3derekj19SB1B

Different angle. Who does the actual selling in a three person shop? If he's the one taking the calls, walking buyers over parcels, and chasing late payments, then the whole thing is one person's calendar. I'd ask how many hours a week he spends on collections now versus two years ago, because that's the line that tells you when the model stops scaling.

His track record sheet only shows winners, and he wants $250k

5 replies