Walking the talk on our investment thesis (leaving behind $300,000 in earnest money)
Valorem Ventures is a real estate company that focuses on multifamily assets in Austin, Phoenix and adjoining markets. 2020 was a challenging year on so many fronts with the pandemic holding centre court for most of it. It was however, a seminal year in our company's history. We will look back on it in the future and see it as the year we walked the talk on our mission statement to "provide our investors diversification, capital preservation and above average returns.....".
Having created, scaled and exited technology companies with multi billion dollar stock market valuations, we are intimately aware of the stock asset class and it's volatile valuations. At Valorem, we offer an alternative investment option for investors that want the security of a hard asset in a stable market in the country. We like the capital preservation aspects of this investment class and take our responsibility to be good stewards of our investors' resources extremely seriously.
Our number one focus has, and always will be, our investors' best interests. We put their interests ahead of our own, knowing that over the long haul that will allow us to scale and sustain our business more effectively
It’s easy to say all this and it makes for a great marketing message. However, putting it all into practice can be a very different thing like we demonstrated in March of 2020, when we decided to walk away from more than $300K in earnest money and costs paid with our personal capital to preserve our investors' capital.
We were under contract to acquire a project near Houston for ~$20M with a $6M raise, had completed the bulk of the equity raise and were moving forward with a close on Mar, 13th, 2020.
During due diligence, the initial inspection found minimal issues. Given the asset class, we conducted a more rigorous inspection and found some structural issues. We were able to negotiate a price reduction and the seller agreed to remedy and warranty repairs.
COVID-19 was emerging as a threat but the true extent would be unknown till after our close date. We pay close attention to micro and macro trends and were starting to see a few trends emerge that could impact the deal:
Drop in treasuries had lowered debt rates. We had locked in a Freddie loan at a higher rate a month ago. Knowing we could buy another property at lower debt gave us the potential for better returns, with all other things being equal.
Oil futures were dropping rapidly. Drop in oil prices could impact the Houston economy and especially service jobs, which was the bulk of the tenant base for our project. It could impact our exit strategy and timeline.
There was a lot of froth starting to form in the market and we were seeing a strong deal pipeline emerge in Austin and Phoenix. These markets were safer bets for long term appreciation and to survive any short term volatility.
On top of that, we got some news from our Property Tax consultants who felt like our taxes would be higher in Year 1 than we initially thought. We hired two other firms to give us a second opinion. One thought it could go up a lot and the other thought it would be inline with our projections.
As we updated our underwriting to allow for higher taxes and a slower rent increase, we saw our investor returns drop a little. Not drastically and still inline with what we had promised but with more risk. We had a decision to make.
Did we want to get more aggressive on some of our assumptions to counteract the headwinds we were facing? No. That was an easy choice. We underwrite conservatively, i.e. assume taxes will go up more than we expect, rents will grow slower than we expect and expenses will be higher than we expect. That way we prepare for the worst and can take advantage of the upside.
Did we want to push forward and pretend things would get better, and worry about this 4 years from now? No. We will not chase a deal. We sleep a lot better at night even if we lose our own money rather than being restless trying to deliver investor returns on a project that is very risky.
Did we want to change our internal structure and reduce our fees to ensure we still delivered promised returns to our investors? Yes. That was easy to do and was the first thing we looked at. It still did not make up for the increased risk in investor returns.
We asked the seller for a price reduction, which we thought was warranted given the risks. The seller refused. That is when we decided to walk away even after spending more than three hundred thousand dollars of our own money on this deal. The increased risk was just not warranted.
When we talk about always putting our investors’ interests ahead of our own, this is what that looks like. It’s not fun to talk about–but it is a core belief we run our business with. We view success (and risk) through the lens of our investors. We take that responsibility seriously. And when push comes to shove, we’re not going to do a deal just to make a fee or avoid losing earnest money.
As you look for investment opportunities and evaluate project sponsors, make sure you’re confident where their allegiances lie and ask them for some of the deals they walked away from.