With the credit crunch and subprime crisis making lenders more cautious, loans are harder to come by than they used to be. But by pre-selling a number of units, real estate developers can more easily obtain construction loans from banks.
Real estate developers will often pre-sell blocks of units at a significant discount. Interested investors can, through a company that brings investors together to purchase a block of units, buy a unit at a discount and sell their unit for retail value upon its completion. This is called wholesale preconstruction and is also known as bulk preconstruction or preconstruction syndication.
One such wholesale preconstruction company is Axiom Realty Capital.
An Internet search for “Axiom Realty Capital” turns up a plethora of investors who are dissatisfied with the conduct of the wholesale preconstruction investment company.
One such investor is Evan.* Evan was drawn to investing in wholesale preconstruction because of the potential for high returns from small investments.
“The story goes that the condo developer needs to pre-sell many of the units before the banks will loan any money. So, these real estate companies gather a group of investors together and buy a large number of the condos at a discount of about 15 percent with 10 percent down,” Evan said in an e-mail interview. “If you bought a $500,000 condo, it would be discounted to $425,000 with $42,5000k down….It would then be re-sold for $500,000 and you would have a profit of $75,000, which would be split with the company that arranged the deal. That is an 88 percent return.”
Such potential returns should bring another axiom to mind: If it sounds too good to be true, it probably is.
“I invested with [Axiom] only because they were the first [wholesale preconstruction] company I found….I didn’t see any red flags beforehand. But right after I made the two investments—that is when the silence started. They claimed that their business had mushroomed so much that they just couldn’t keep up,” Evan said. “After the investments were made, I couldn’t get any information from them.”
Evan said he made two investments with Axiom.
“The first was a project in Panama City, Fla., called Lake Town Wharf. It turned out to be a disaster. Part of the deal, with the developer, is that they will sell your unit at the full retail price, and if they sell any other comparable unit at a discounted price, then the price of your unit drops ‘dollar per dollar.’ This protects you from the developer selling similar units (which he owns) at a lower price than yours,” Evan said.
“In this case, the developer started selling his units much cheaper than those controlled by the group investors. Also, the developer is supposed to put your units back into the resale pool and give them priority their sales. In this case, he did not do that either, so none of our units were re-sold and still are not being marketed….The group of investors are now filing suit to get out of the contracts and get our investment back. We think we have reached an agreement and we will get our deposit refunded (less certain fees and legal expenses)….Axiom should have been monitoring this project throughout the development, and I feel they did not,” Evan said.
“Shortly after making that investment, I made a second–before the first deal fell apart,” Evan said. “It was a condo in Pittsburgh. At first, it [seemed] to be working out. However, I could not get anyone from Axiom to either return my phone calls or respond to my e-mail. As Lake Town Wharf started to fall apart, I wanted to know what was happening with the second project but couldn’t get any answers. I wrote the president of the company and told him that if I didn’t get my requested information, I would contact the Utah State Attorney General and file charges. That got their attention,” Evan said.
After his negative experiences with Axiom, Evan said he would give the following advice to investors: “Do your homework, and find out everything you can about the company before investing any funds. I would talk to others who are already investing with the company and see if they are satisfied.” Evan said he is still investing in wholesale preconstruction and that he has been fully satisfied with the three other companies with which he has worked.
Two other investors, Kevin and Randy, are business partners who also invested twice with Axiom.
Kevin and Randy’s story
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Kevin’s experience with Axiom began when he “was fishing around for…investment information. I liked their website, I liked the products that they had,” he said. “So that’s where I started. I called them and got a little bit of information. As a new client, they were all on board to get my call.”
Before investing with Axiom, Kevin was unable to get a hold of any other investors who had worked with Axiom. “I hadn’t been able to really find any,” he said.
But he and his business partner, Randy, chose to go ahead with Axiom regardless. “We originally started with a development called Icon on Bond in Grand Rapids, Mich. We would reiterate to them time and time again that we had no intention of closing. The guy who used to work there was completely on board with that idea, and he…said to us, ‘We’ve never actually ever had anyone have to close on their properties.’ So that was a record that they had, and…I don’t know if that record was actually validated or correct, but we took their word for it,” Kevin said.
“They said they do extensive research on the area, and on the developer and on the development, so they essentially have a professional team doing their due diligence,” Randy said. “Presumably, people who know more than we know had done the research.”
“When it came down to the building actually getting completed…it never happened. And we basically had to press them to get information from them,” Kevin said. “We called the building and there’s no one selling our units, not even in a pool. And they were like, ‘Oh, well we’re having problems with the developer. The developer wouldn’t let the rep in that Axiom hired to sell [the units].'”
At that point, Axiom hired an attorney and cancelled all of the contracts on behalf of their investors, Kevin said. “At this point, we have no clue where they are at with that, and it’s been about four or five months.” Next, Axiom filed “some type of suit against the title company to say, ‘Don’t even think of giving this money back to the clients,’ because they knew we were calling the title company and saying ‘I want the money back,'” he said.
Investors in the project were given demand letters by Moch International, Icon on Bond’s developer, which offered the options of either closing on their deals or accepting $6,000—leaving the remaining $24,000 of their investments on the table, Kevin said.
“I have been trying to get a hold of Axiom to basically say, ‘What do we do now [when] we are being confronted with this?’ and they have not gotten back to me, so it looks like they are pretty much leaving us hanging to dry at this point,” Kevin said.
“E-mail after e-mail, call after call, would typically get no response whatsoever for a period of six to eight weeks,” Randy said. “That’s been one of our big issues with Axiom the entire time. They’ve not been good with communication after they get your money.”
Randy said that he asked the in-house counsel Axiom had hired what type of due diligence had been done into Icon on Bond and “he said ‘not really a whole lot.’ It hadn’t gone through a standardized due diligence process.”
Randy and Kevin hired an attorney to deal with the situation with the Icon on Bond condos in Michigan. Their attorney found that Joseph Moch, owner of Moch International, is an attorney who had “some sanctions against him and his license was suspended for some period of time,” Randy said. “Axiom didn’t know that.”
“We did a quick Google search of the guy’s name, and all the actions and information popped up right then. My issue with Axiom is [that] if they’d done a simple Google search, as far as due diligence, on the owner of the development…obviously, this would have popped up,” he said.
Randy said he acknowledged that he could have done the Google search himself, but he assumed “that Axiom, [because] that’s their business, that’s the service they offer for investors” had already taken care of the due diligence.
Park 1000 was another project that Kevin and Randy invested in through Axiom. Kevin said they were drawn in by the appeal of putting 5 percent down and providing an additional 5 percent through a letter of credit. When they went to make their investment, they were told that such contracts were no longer being accepted and that another 10 percent down was required. Kevin and Randy said they decided to put the additional money down to invest.
As time went by after they put their money down, “We realized that the developer wasn’t signing the contracts, wasn’t validating them,” Kevin said. “After a month or two, it was like, ‘Are you signing them, or are you not?’ We were tired of…our money being in limbo, basically, not even in escrow.”
When Kevin and Randy finally got word that the contracts were no longer being signed and accepted, they sent a letter to Park 1000 to cancel their contract. Park 1000 said that they would not cash the checks Kevin and Randy had sent to cover the origination fees. “Axiom wasn’t too responsive through this,” Randy said; their phone calls and e-mails to Axiom went unreturned, he said. “So we got a hold of the developer and started working with the developer directly to get our information.”
Kevin said that the developer sent their cancelled contracts and notice that their checks would not be cashed. “Meanwhile, boy, Axiom cashed that check the first day they got it….But the contract was never consummated, so they can’t take our money, because it never went into anything. We sent a letter off to Axiom and harassed them for another month, saying ‘You need to give us our money back.'” They have attempted to follow up with repeated certified letters, but have gotten no response from Axiom.
When they began working with Axiom, “it seemed all straightforward. ‘This is the product, this is the spread…we promise to sell your unit.’…Then it all just fell apart from there,” Kevin said. “They said the unit would sell in four months, but in reality, it’s been a year and a half.”
Randy said that, as a result of his experiences with Axiom, in the future, he would do financial, credit and criminal background checks of all individuals and entities involved in a project.
He said investors should be wary of companies that required significant up-front fees. “Do fairly extensive due diligence. Really understand what your risk is,” Randy said. “You need to be prepared for the worst-case scenario that could happen.”
Michael Connolly, CEO of Axiom, is the target of a lot of venom from dissatisfied investors. He emphasized that Axiom tries to encourage communication between investors and developers rather than frequently communicating with investors themselves.
“Communication is key. The issue is more between the developer and the client. We structure the investments, we do our due diligence….But that doesn’t guarantee returns. Any sort of investment has risk and reward—that’s why it’s called an investment. We try to also encourage our investors to be aware that there are risks associated with this. We really encourage communication between the developer and the client so they understand the goods, the bads and the indifferents happening on a particular project.”
If an investor tries to contact Axiom directly, they will likely talk with the client service department, which “is really trying to engage the investor and the developer in a dialogue,” he said.
Some investors, having found getting a hold of anyone at Axiom to range between difficult and impossible, have turned to the Internet.
A search on the Internet for “Axiom Realty Capital” turns up numerous investors who feel wronged by the company—and who are voicing their dissatisfaction online. Connolly dismissed the statements made online by investors.
“Chat boards provide an opportunity for people to vent and oftentimes they’re not fact-based and [are] more emotion-based,” he said.
Many of the comments posted online about Axiom refer to e-mails being bounced back to their senders. “My e-mail works,” Connolly said with a laugh. “In the day-to-day discourse of e-mail, sometimes things bounce back, but I do not have a systemic issue with my e-mail, nor do any of my associates at Axiom.”
As to why some investors might be dissatisfied, Connolly said, “Where issues come into play is where developers are over-optimistic about what their results may be and if they are not being clear about the challenges they are facing. And I think it’s only fair to point out that there are projects that have outperformed expectations.”
Axiom, which has been in business for around two and a half years, recently had as many as 25 to 30 projects in the works, Connolly said he estimated.
Last month, however, NuWire obtained an e-mail that Axiom sent to its investors, which said that “At this time, Axiom has decided to limit its operations to the following: 1) working through current projects with current buyers, 2) collecting overdue fees and 3) seeking out new projects that may be suitable for buyers with an existing origination fee credit. We are not currently offering new projects to new buyers.”
To read the entire e-mail, click here.
The lesson to be learned from all of this can be summed up with another axiom: Buyer beware.
*Only the first names of investors were used in order to protect their identities.