Case Study: From Worst Deal of 2023 to Best Deal of 2024??

 

Here is a case study on how we turned our worse deal into potentially our best deal!  We funded a large fix and flip loan on a property in Siesta Key, FL. We provided a $1.9 million initial advance and construction holdback of $150,000.  The purchase price was $2.5M and the After Repaired Value was just about $3M.  The borrower was a group out of Miami.  They were supposedly experienced borrowers, but they were new borrowers to us.  They weren’t the best borrowers to say the least.  About 3 months into the loan, they stopped making payments.  Most borrowers that go into default find a way to get the project back on track.  We just knew that this group wasn’t going to fix the situation.  We didn’t wait to file a foreclosure.  We went after them hard and tried to pursue our pledge of equity.  In the event of a default, the pledge of equity allows us to go after the shares of the entity that owns the property.  It gives you more leverage than a typical foreclosure because you can take control of their company faster.   This could be a nightmare situation for the borrower, especially if they own other assets in that entity, which this group did- about $10m of assets in this case.  We gave then an ultimatum; give us a deed in lieu or we’re going after your other properties.  I know we sound like bullies here; this was a special situation.   These were BAD borrowers.  They took out a whole bunch of loans that they had zero intention of paying back.  We needed to take a hard stance to protect OUR investors.

We got the deed back in March of 2023.  The house was a bit of a wreck when we took it over.  They demo-ed the property before defaulting on it so everything was ripped out- the bathrooms, kitchen, some walls, etc.   Because of the current condition, we would have to sell it at a discount and take a loss on our loan.  We obviously didn’t want to take a loss.  And after checking comps in the area, we saw that the property had some upside.  At a minimum, renovating the property would allow us to get all of our money back.  Our main goal here was to preserve our investor’s principal.  ALWAYS PROETECT YOUR INVESTORS!  So that’s what we did.

We had a hard time finding a contractor in the Sarasota area, we had to get someone we knew from Miami to do the work.  He and his crew lived on the property during the renovation. We’re very grateful for that.  The property needed a full renovation.  We estimated that it would take about 6 months to complete.  It ended up taking around 8 months, which isn’t too bad.  The cost for the renovation was around $400,000.  Definitely not a small job, but it’s a fairly large property at six bedrooms and five bathrooms.  Everything had to be updated.

Here are some after photos.

We were able to get the property on the market for the busy selling season in Siesta Key, FL, which is December through April. We initially listed the property at just under $3.8M.  We felt this was fair since other properties in the area have sold for north of $1,000/sqft.  However, after a few weeks of no offers, we lowered the property to just under $3.5M.  Our total cost basis is just over $2.4M, so even if it sells in the low $3ms it’s still a significant profit.  Since our business is lending and not speculating, our main goal is to protect our investor’s cash.

As of today, the property has been listed for just under 30 days.  We have a lot of interest, but it’s not under contract yet. I’ll update the blog once it sells with a full analysis. 

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John Femenia

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