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Wednesday
Jan052011

Foreclosure Limited Partnerships

Taking advantage of the housing market with forclosure limited partnerships.

In my recent posts, I commented on how buying and selling foreclosures is probably the best way to take advantage of the depressed real estate market, due to the deeply discounted properties that you can purchase at foreclosure auctions. However, I also warned that such auctions are potentially hazardous to the financial and gastric health of the inexperienced investor.  

I believe that for most of us, it makes a lot more sense to become a passive investor in a limited partnership that specializes in these types of properties. The first set of reasons for this is a reflection on us as busy physicians. Between your practice and family obligations, you most likely will not have the time, and possibly energy to do all the research necessary to successfully purchase at a foreclosure auction. Also, many of our investment histories are littered with less than optimal outcomes, especially when we have become involved with investment vehicles that we are not totally familiar and comfortable with.

The second set of reasons focuses on the foreclosure auction process itself. Before even attending such an auction, you have to research public records to find the target properties and check title. Then at least a cursory inspection of the properties you might be interested is a must, which would include an estimation of the cost of any required rehab and fix-up. Also, you must analyze the local market and neighborhood to assess the current market value of the target properties.  Now you're actually at the auction, where you will be bidding against professionals that have a vested interest in you, as a newcomer, not succeeding. Assuming you are able to purchase a property at approximately the price you had in mind, and that you have access to cash funds or accessible lines of credit, you are now a property owner.

If your plan is to flip this property for a relatively quick profit, you must have the necessary rehab work done, which frequently concentrates on cosmetic items.  When completed, you place the property on the market, either as a "for sale by owner", or through a realtor.  Hopefully, you purchased the property at a marked discount to current market value so you can re-list it at a price that is still sufficiently below comparable properties, to allow a quick re-sale.

If this seems like a lot of time and work, it is. There are also a lot of potential mine fields in this scenario, such as: buying a property that has too many hidden rehab costs, paying too much for the property, not having access to lines of credit so you have to spend all your available cash on one property. I'm convinced that this is not a field that I personally feel comfortable playing in. I would rather try to accomplish the same investment goal by investing with groups that literally do this for a living.

After researching this issue, I felt most comfortable with a group out of Northern California - Praxis Capital. I was impressed enough that I become an equity participant in their syndication. They focus on single family residences in Northern California that are primarily bank owned (REO's). They also get involved in short sales, trustee auctions and bankruptcy liquidations. Their average purchase price is $ 219,000 and the average re-sale price is $ 293,000. The average sale price is 34% above the purchase price, which can be as low as 20% of the market peak values. The average time from purchase to sale is 91 days, and they average 12 property purchases per month.

The Praxis principals have successfully managed 26 partnerships, and have purchased over 150 properties since March 2009. They have over 21 years experience in foreclosure auctions. The partnerships have access to several lines of credit, which allows them to leverage multiple properties, which in turn increases the profit margin return to the investors. One of their recently closed funds boasted an average annual return of 34.53% to the investors. 

The limited partnership focuses on foreclosures (which I believe is the property type with the greatest profit potential), concentrates on a buy and sell strategy (which I feel best suits today's real estate market) and works in Northern California (one of the prime markets that will continue to do well in today and tomorrow's market). The Praxis group has extensive experience in foreclosure auctions, property valuations and property re-sales. After a holding period, the investor has the ability to withdraw some or all of their investment. But what I like most about this particular partnership is their transparency. You can speak to the partnership principals - really! In addition to their periodic P & L reports, they hold quarterly conference calls with the entire limited partnership.  

If you would like more information on this partnership, you can contact me, contact their Investor Relations Director - Sherri Haskell (415-722-4849 - sherri@praxcap.com) and check out their website.

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