I was asked this very simple but powerful question by a prospective investor:
“Michael, what makes you guys so different?”
I admit I had to ponder the question for a moment but 40 minutes later, poor Matty, had got it straight from my heart...what it is that separates us from the crowd and why people entrust us with their funds.
You see, I try to educate my email subscribers about property market research using Boomtown and how to accelerate their wealth creation using property development.
Matty said to me that the points I raised about why I think we're different could also make a good list of factors to consider when thinking about WHO to put your money with.
We all know results are really what matter.
But past results are not necessarily an indication of future results.
So, the question is how do you take a forward looking view on someone you're about to invest ... $20k...$50k...$500k?
So here's what I said, and what I believe are good criteria to consider when you next invest in property development.
We focus of small residential developments
As a boutique family business, we focus mostly on investing in less risky small residential property developments with time frames of 24 months or less. Nobody knows what the future holds and what the property market will do in the longer term.
We're 100% independent of any developer or project we sponsor
We’re not developers.
Instead, I’ve personally sponsored more developments than most developers will ever undertake themselves and this experience feeds back into our project selection algorithm.
Apart from being involved in a wide range of projects, what really matters is the collective financial power you and I bring to the table. Most developers wouldn’t talk to us individually and certainly not give the kind of terms on a deal I can secure on our behalf.
Our latest capital raising is a good example of this - provide some details here and I'll send you more information.
Some developers raise capital for their own projects without the additional layer of scrutiny we provide ... in my view that's a bit like giving my 3 year old daughter Georgia access to the cookie jar. Not a good idea.
Bank debt is GOOD.
Some developers promote a ’no bank debt’ model preferring to have the investors fund the entire project without facing the additional scrutiny of a bank's underwriting team.
They reason that if things go wrong, there is no bank ready to liquidate the project.
Whilst there is some merit in in leaving the banks out, they do bring a high level of scrutiny to the process and throw huge resources, and intellectual capital, into the due diligence process.
They also know the players in their local market and will have an opinion about the reputation of the developer and development team before putting in their money - often as much as 70% of the total project costs.
In some cases, developers cannot get bank debt due to an impaired credit history so they go to the less experienced investors for their capital with a promise of excess returns.
So while I get the no bank debt idea, I also value the additional insight the bank brings as part of my own research.
Similarly, the banks keep a very close eye on the project and make sure their/our money is being spent as expected and if things go off track, they are also pretty adept at ‘rescuing’ a project to secure a better outcome... particularly when there are ‘mum and dad’ investors involved. Their reputation is everything.
'Hurt Money’ Hurts.
Some developers take all their ‘profit’ as a 'development management fee’ throughout the project. I prefer to see some ‘hurt' money in the project rather than just a trade of their time and expertise for our hard cash.
Also - bank debt means they've put personal guarantees on the bank debt which is a great motivator.
When there is no 'hurt money' of their own in the deal... nor any bank debt, what’s motivating them to stick around if things get difficult?
No Salesperson B.S.
My clients tell me they like the fact that there is one voice throughout the process - MINE.
You get to talk to me directly before investing, during the project and after it completes.
AND ...as the founder and head of research at Hotspotcentral, I know what I’m talking about unlike some pushy commission driven sales person.
Some of my clients say they value this continuity and accessibility enormously.
Independent regulatory oversight
I’m often asked, “what happens to my money once it’s invested?” or “who keeps an eye on my money”.
Guess what? It’s not me.
Hotspotcentral operates under a completely independent AFSL with Directors that have plenty of ‘grey hair’ in the business. They monitor everything from how we talk about the offer to where the money goes and when.
PLUS...they make sure there is separation between your money and the developer …. under very strict rules set by the regulators.
These guys have seen it all in the small property development space which contrasts this with other developers who ‘buy’ an AFSL so they can enforce their own compliance standards. Hmmmnn!
I can’t stress how important it is to have as many independent eyes providing due diligence as possible. It can be burdensome fro me in some respects but it's nevertheless important for your peace-of-mind.
I prefer it that way too as I also invest my own money in these projects.
We put up our family money with yours
I often wonder why the vast majority of our competitors DON'T invest in their own projects. Surely if it’s good for their clients, it’s also good for them?
It’s human nature when you put your own family money in, as we do, to go that extra mile in your research and ensure everyone involved is a seasoned expert that also value their integrity.
I can attest to the integrity of my developer partners as evidenced in the numerous post-project testimonials I have on file (and my website).
You learn more from failure
Hotspotcentral has sponsored small residential developments for about 8 years now. We’ve mostly seen success but have also experienced failure (in the early days).
It’s not pleasant....but you do learn much more from your failures than you do your successes.
For example, we’ve been there when a builder goes bust half way through a project…and worse.
Cutting-edge AI Research
This is where we are totally different.
It’s also mostly why our results have been exceptional of late.
Risk mitigation is all about due diligence and objectivity in the project selection process and as far as I am aware, we’re the only company in Australia with its own proprietary research technology that uses time-tested data algorithms to compare over 15,000 suburbs for their development potential …
AND….combine these insights with over 100 project specific success factors that together give us an objective YES or NO on whether to sponsor (support) a project or not.
I’ve been involved in the business side of Artificial Intelligence (AI) for over 15 years having previously advised major banks in over 30 countries about using it to combat fraud and money laundering.
If banks can automate their lending decisions too, then it made perfect sense to bring this incredible power into the property investing and development development space now that the internet has made is cost effective to do so.
AI brings a high level of objectivity and processing power into the research process.
On the flip side, few projects pass the test which is why we rarely support more than one project each YEAR.
Note: Hotspotcentral is also the only company that makes some of this technology available to the general public ...without charge.
Talking about the benefits of investing in property (armchair) development is fine but most importantly Hotspotcentral have the results to back up our claims.
Don’t always expect 40%-50%+ returns like these people but if you want solid double digit returns on preferential terms then:
My investors have also elected to keep a property when the project is over... at a 22% discount to bank valuation... in top flight capital city locations … with their project costs guaranteed by the developer…and in many cases we’ve had their stamp duty paid too.
Again…it's actual results that matter.
And now for....
The really big difference?
I told Matty that I love the difference we’ve made to the lives of many of our investors.
That's what gets me going every day.
Yes, I live a wonderful life with my family in our own rainforest only 15 minutes from some of Australia’s most iconic beaches...I’m hugely grateful for that …but the rewards are in the people we serve and the trust they place in us.
After listing what I believe are some of the things that make us different, I then said to Matty…
I tell you what, I’ll provide you with a list of questions to ask before investing elsewhere should that be the best path for you (I've since sent them).
I then suggested he:
Listen to the answers carefully and ask for evidence that backs up what they tell you.
Ask for old offer documents and proof of the subsequent results.
Call their customers and ask them how they were treated before, during and after they invested…how progress (or lack thereof) was communicated and how regularly.
Make sure the developer explains in great detail how they select a project and what risk mitigation they use to reduce the risks.
Don’t just listen to regurgitated soundbites like “risk mitigated, data driven research”…or…”projects handpicked by a select industry veterans”…it’s all marketing that I too am guilty of…but... the meat behind the marketing is what really matters.
Ask them if their friends and professional advisors invest alongside them. Mine do and that’s a big responsibility.