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”?

  1. Brick op buys “affordable” multifamily properties
    1. 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
  2. Convert to condos
    1. These apartments are then converted into condos and sold to various investors for between 201-240k
  3. Setup a “lay-away” plan for investors
    1. Investors put down 5% now and make 30 monthly payments of 1200 to reach the 20% down
    2. The investor then can go out and get a conventional mortgage to finance the rest of the property
  4. Bargain basement HOA
    1. Along with providing a layaway plan to save for a downpayment, the HOA in their first project costs only $30/month per unit
  5. Low management fees
    1. The company is also offering bargain basement management at 4% as opposed to a typical 8-10%

The catch:

  1. “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.
  2. 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
  3. 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:

 

 

I need your help!

Don’t worry, I’m not asking you to wire money to your long-lost cousin that is going to give you a million dollars if you just send them your bank account!  I do need your help though, please like and share our articles on linked in, twitter, facebook, and other social media.  I would greatly appreciate it.

 

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.

Fairview is the recognized leader in Colorado Hard Money and Colorado private lending focusing on residential investment properties and commercial properties  both in Denver and throughout the state. We are the Colorado experts having closed thousands of loans throughout the state.

When you call you will speak directly to the decision makers and get an honest answer quickly.  They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide.  To get started on a loan all they need is their simple one page application (no upfront fees or other games)

This Post Has One Comment

  1. Kurt

    Indeed, would certainly rather be the sponsor….

    If volume takes off, imagine many PE firms will dive in on the sponsorship side. Just look at the leveraged loan market.

    Great points as always.

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