Risk: Major US or World credit crisis, banks drastically reduce mortgage underwriting
Mitigation: Rent the houses
Risk: We over leverage the company and we get another down-turn in Atlanta real estate
Mitigation: This is a primary concern for note investors. All of the notes written have a 75% maximum LTV limit for the LLC. The managers of the LLC are obligated by this contract to not exceed $750,000 in debt per $1,000,000 in property held.
Risk: Interest rates radically increase to the point we cannot sell or finance the houses
Mitigation: Reduce sales price and / or rent
Risk: House prices fall significantly from today’s pricing
Mitigation: House prices would have to fall > 15% for most properties to break even. For investors to take losses the houses would need to fall in price 30-40%. The LLC operating agreement has an automatic price reduction strategy to liquidate properties once purchased. Prices are reduced, after 60 days on the market, 2.5% per month to force liquidation.
Risk: Natural disasters
Mitigation: Insurance coverage is bound to each property on the date purchased.
Risk: Major DOW Jones decline
Mitigation: Selling properties will be difficult when consumers lose confidence in the market. We can try to reduce the prices to liquidate or rent the house. Most risk would be in large houses above $250k.
Risk: Title Issues, Federal Tax Liens, 2nd Mortgages
Mitigation: All real estate transactions contain inherent risks. Our properties are greatly tied to these risks due to the foreclosure process. We use title searches to mitigate these risks as much as possible before purchase. By holding a portfolio of properties the risk to the entire LLC will be survivable if one property has significant title or lien defects.
Risk: Property Conditions Risk such as major non repairable issues
Mitigation: Portfolio of properties will protect investors from a devastating loss on any single property.
Risk: Buying a house with a tenant lease
Mitigation: On this specific property this would delay our ability to control the property for resale. This would tie up significant capital if we could not buy out the lease. By holding a portfolio of properties we can work around this situation and continue to generate profits on other houses while we process this house.
Risk: Home Owner files bankruptcy the day of the foreclosure auction.
Mitigation: Each case must be reviewed by the foreclosing attorney. If the sale is reversed we will receive our capital back quickly from the attorney. The interest expense during this month must be paid from LLC profits on other properties until the capitol can be redeployed.
Risk: All of your notes are Demand Notes. What if everyone makes a “run” on the LLC.
Mitigation: All of the notes issued by HSH are Demand Notes. If multiple investors request their capital back at the same time we will have to pay these notes off as houses sell and capital is available. Typically we are holding houses for 60-120 days. Time on market after rehab is about 21 days.
Risk: Worker falls off the roof of a house
Mitigation: We carry rehab insurance on each property and Workman’s comp policy to protect the llc from these losses.
Risk: An intern is shot in the arm by an angry homeowner while scouting foreclosing properties
Mitigation:
God forbid this does not happen, we do carry the following insurance:
-Property Insurance on Each House
-General Liability + UnOwned Vehicle Coverage
-Workman’s comp insurance
In this particular case the workman’s comp policy would cover the medical bills.