A new Chilean company, BrickOp, has a “novel” plan to help investors buy their first piece of real estate with absolutely no money out of their pocket. Sounds like a great deal! Should you do an investment like this? Buy real estate with no experience and no risk, what could go wrong? Unfortunately, there is a huge catch.
The company advertises: Investors can earn a much higher return than parking money in a bank account or even a mutual fund, without the hassle of being a hands-on landlord. “This is for the average person,” he said. Based on recent rates of appreciation, an investor could double their initial investment in about eight years, Silva said.
What is the “new model”?
- Brick op buys “affordable” multifamily properties
- BrickOp focuses on purchasing buildings in “affordable areas”. Buildings in these areas are typically much older and in need of work. I assume that these older apartments are bought for around 100k a door
- Convert to condos
- These apartments are then converted into condos and sold to various investors for between 201-240k
- Setup a “lay-away” plan for investors
- Investors put down 5% now and make 30 monthly payments of 1200 to reach the 20% down
- The investor then can go out and get a conventional mortgage to finance the rest of the property
- Bargain basement HOA
- Along with providing a layaway plan to save for a downpayment, the HOA in their first project costs only $30/month per unit
- Low management fees
- The company is also offering bargain basement management at 4% as opposed to a typical 8-10%
The catch:
- “Affordable” is expensive to maintain: The units the company is focusing on and selling are older units that are in need of major expenses, roof, windows, electrical, appliances, etc.. All of these items will cost significant amounts of money to upgrade over time.
- HOA severely underfunded: With an HOA fee of $30/month/unit, if there are 10 units in the complex that means the HOA is saving zero in reserves each month. The 30/month likely doesn’t even cover proper insurance on the property. For example if 10 units sell for 240k each, this puts the value of the complex theoretically at over 2.4m. The total HOA fees from the complex are 3600 per year (30/unit 10 units), insurance alone should be 7-10k to have adequate coverage
- Nobody will finance today: There is not a conventional lender that will finance these transactions with zero in reserves for the HOA. Before financing a unit, banks require an HOA questionnaire and look at the balance sheet of the HOA. Under the current setup, the reserves are zero and the potential liabilities for each unit are exorbitant. For example, what happens when the property needs a new roof, the roof is 30k, which means each unit is on the hook for another 3k expense. This is just the beginning of expenses….
What do the numbers actually look like?
| Proposed | Actual | |||||
| Rent/month | 1400 | 1400 | ||||
| Purchase Price | $ 240,000.00 | $ 240,000.00 | ||||
| 20% down | $ 48,000.00 | $ 48,000.00 | ||||
| Loan Amount | $ 192,000.00 | $ 192,000.00 | ||||
| Mortgage Payment | $ 1,030.00 | $ 1,030.00 | * assume 5% over 30 years | |||
| HOA | $ 30.00 | $ 250.00 | * should be 250/month | |||
| Management | 56 | 140 | * should be 10% | |||
| property insurance | 50 | 50 | ||||
| Reserves | 100 | * tenant move out, repair, etc.. | ||||
| Total Expenses | $ 1,166.00 | $ 1,570.00 | ||||
| Net profit | $ 234.00 | $ (170.00) | ||||
| HOA special Assesments | 200 | |||||
| Actual | $ (370.00) | |||||
The so called “new way to buy with little down” is a train wreck waiting to happen for any investor who jumps on board. The owners will at some point have to pay for the severe HOA funding. Not only will the investor be on the hook for a monthly loss each month, the unit is likely worth substantially less than what they paid as appreciation is leveling off in Denver and these properties are older buildings with little updates that will need substantial money to maintain/update. Before you jump on the train, ensure you fully understand that this train is heading straight for a derailment.
Resources/Additional reading:
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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