I put $35,000 with a land flipper and got it back 26 months later

Writing this as the passive side of the trade, because I do not think I have seen this failure described plainly anywhere.

Two years ago I put $35,000 into a joint venture with an operator who buys rural parcels from absentee owners. His pitch was simple and true: he buys at a steep discount, he sells for more, and I get half the profit on the parcels my money bought. His track record was real. He had done maybe 40 deals.

What I did not ask was how the parcels sell. He sells most of them on terms, meaning the buyer puts down a few thousand dollars and pays monthly for years, with the operator acting as the bank. That is a good strategy for him. It means my $35,000 did not come back when the parcel sold. It came back as monthly payments from a stranger in another state, spread over the length of the contracts.

I had built my own plan around a 12 month cycle. I thought money in, parcel bought, parcel flipped, money out, do it again. Instead the capital sat in three installment contracts. I got my $35,000 back over 26 months as payments arrived, plus $2,900 of profit share. Nobody lied to me and nobody defaulted. The deals worked. My assumption about timing was wrong by more than a year.

What I would do differently: ask, before any money moves, what percentage of the operator's last twenty exits were cash and what percentage were terms, and get the answer in the written agreement rather than on a call. Then decide whether I want to be in the note business, because that is what I was in.

Answer

4chriswalton8CC1CPRO8

This is the clearest version of the thing I have been trying to understand about land, so let me say it back in plain words for anyone newer than me.

A flip means you buy something and sell it for cash, and your money comes back at the closing. Owner financing means you sell it and the buyer pays you monthly for years, so you are the lender and your money comes back on the buyer's schedule instead of yours. The operator earns more that way, because he gets a markup and interest on top, and banks mostly will not lend on raw land so buyers will pay a premium for the terms. All of that is real. It just means the capital is committed for the life of the contract.

There is one thing that can change the timing, which is that installment contracts can sometimes be sold to note buyers at a discount, and some operators do that to recycle cash. If yours had, you would have gotten money back sooner and less of it.

So the questions to ask are what share of exits are cash, whether he sells notes to free up capital, who receives the interest, and what happens if a buyer stops paying. canton, you got $2,900 on $35,000 over 26 months with no default, which is a slow outcome from deals that mostly went right. Being early on the wrong assumption cost you the time, not the money.

2 replies

3gregpowell66AG4BPRO8

I did the same shape of thing on the construction side, put money in with a builder and assumed I was on a build and sell schedule when he was actually on a build and rent one. Different asset, identical mistake. The written agreement said everything I needed to know and I read the return numbers and skipped the timing.