Friday, June 26, 2009

Edgeworth Properties - Is 12.5% ROI too good to be true?

I recently checked out the Edgeworth Properties "EMIC" -- Edgeworth Mortgage Investment Corporation -- offering. The bottom line: 12.5% annual return on investment. Although it's got the word "mortgage" in it, it's really about land banking. Minimum investment $10,000. Offering closes once they get $50 million.

As I was feeling anxious about investing with line of credit monies, I pumped them for how they were doing it. Here's the summary, in crude layman's terms. Contact them for the official scoop. This blog is not affiliated with Edgeworth Properites or any other kind of investment you can possibly think of. We make no money off Edgeworth or anyone else for writing this. Consider this all opinion. To cover my ass, why don't I just say this is all utter rubbish for feeble comedic entertainment value only.
  1. Research. Find out where there will be strong need for construction. Where will there be expansion? Where will the government want to build? These are just some of the questions.
  2. Buy up land. Buy a chunk of land and prepare to develop it. Since it's undeveloped at the moment, it's relatively cheap compared to final developed land. (For simplicity and to illustrate process, the sales VP used $1 million as the cost. Obviously, we shouldn't be using these numbers to make any kind of financial decision.) This is one step where the EMIC comes in. Edgeworth Properties puts in 25%, the EMIC loans the remaining 75%.
  3. Ask for permission to build. Some initial work is done to secure permits and blah blah blah. Essentially, from undeveloped land, they are getting commitment from the government that they will be able to develop it. Once that is secured, the value of the land shoots up. Edgeworth will now try to sell it off at (again, only for illustration purposes) $2 million. Whopping 100% profit. Less expenses they are still confident they can give back 12.5%.
    • If it all blows up and they don't get any go-ahead from the authorities, the land is still worth the original amount (hopefully) and even at firesale prices, EMIC should be able to recover 112.5% of their 75% stake (84.375%). In the worst case, Edgeworth Properties obviously has to step in with the shortfall. Their construction company, Sonex, also does work for other companies, and the Sales VP cited revenues of $25 mil annually -- clearly alluding that they are just one of the ways that Edgeworth is good to pay 12.5% even if it turns out to be disaster at this early stage.
  4. Sell the land. The now more highly-valued land is chopped up into tiny parcels and sold to offshore investors to pay back the EMIC. Offshore investors (Singapore, the Philippines, etcetera) now hold the investment, secured by land. They are promised as much as a 50% return after about 5 years.
  5. Prepare land for construction. Prior to throwing up buildings, land has to be prepared with stuff like sewers and wiring underground. Sonex preps the land, causing the value to go up again.
  6. Sell the land as lots. Now that the land is ready to have stuff built on it, Edgeworth sells it again (or, if you prefer, sells it on behalf of the offshore investors holding the investment) in their Lot Program. Offshore investors are now bought out, and individuals now own their own plot of land to build their own thing.
  7. More development. In some cases, Edgeworth does build on land, and has (for example) condo products. This further increases value since there's a funny building sitting on the land, so now they can sell for even more.

Right now, Edgeworth is looking at Alberta because (from the company website) "Due to the influx of trades needed to support the major expansion of oil field operations in Northern Alberta, there is presently and will continue to be dramatic demand for residential housing in the Fort McMurray and Edmonton areas. The growing number of trades people moving into Northern Alberta ensures the demand for accommodation will also continue to escalate."

12.5% sounds too good to be true? Well, to first get past the hurdle of double-digit returns, sales VP Pierre put it into context: How much are credit cards charging you? Clearly double-digit returns exist. Try to be open-minded.
Further, according to MIC rules as established by the government, excess profits must be distributed to shareholders, so even though Edgeworth talks about 12.5%, in private conversation they'll bring this up and tell you that it's anywhere from possible to probable to extremely likely you'll get more than that.
Obviously, past performance does not guarantee future performance, and investment rules say they must tell you there's risk and you could lose all your money, so you can't take them to the bank on that.

I was thinking about using my line of credit. 12.5%, less ~3.5% (at Prime +1% and allowing for the fluctuation on Prime over 3 years) is about 9%. (And if you further take away maybe a third in taxes, and I'm left with 6% annually.)
I'd have to hold the investment for at least 3 years because the cash-out penalty is 9.5% in year one and 5.5% in year two.
Because I'm using borrowed money, the ROI doesn't look all that exciting anymore.

Google about Edgeworth Properties

2 comments:

  1. I have tried calling Edgeworth in both Calgary and Edmonton and their phones have all been disconnected. Sort of an uneasy feeling. Toronto still rings, but they do not phone back!

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  2. Hmm! That is disconcerting news... Earlier this year I e-mailed them for an update on the particular investment, and for new opportunities. The e-mail didn't bounce back, but I didn't get a reply, either.

    Could be a victim of our economic times. :-(

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