Hedge Funds Take Interest In ‘Soft Deposits’

Nov 19 2014 | 12:56pm ET

Q&A with Winchester Equities’ Avi Benamu

New York-based Winchester Equities, headed by Avi Benamu and Jack Hazan, funds soft deposits for property developers short of ready cash. The service can buy developers time to arrange project financing and means they don't have to resort to hard-money loans. Winchester makes its money charging fees—2-2.5% of the soft deposit amount to draft an option agreement; 5% to exercise the option if the buyer decides to proceed.

To find out more about the firm, which has attracted backing from hedge funds and a family office, FINalternatives' Mary Campbell spoke recently with Benamu.

What is a 'soft deposit?'

A soft deposit, also called good faith deposit or earnest money, is a deposit made to a seller showing that a buyer is serious about purchasing a property. During the negotiated due diligence period, this deposit can be fully refundable should the buyer elect to terminate the contract. This earnest money allows the buyer additional time when assessing a property and seeking financing and is typically held by the seller’s attorney’s escrow account or a national escrow agent.

Winchester Equities provides buyers with soft money deposits for real estate deals—how does this work?

Winchester provides soft money deposits for real estate transactions... [giving] potential buyers the ability to lock up a deal even when experiencing a temporary lack of liquidity.  Buyers are able to purchase an option agreement on the property they are looking to purchase. We then put up 100% of the soft deposit required and go to contract under a newly formed LLC. This gives investors the necessary time and control to line up their equity and is typically held in escrow by the seller’s attorney or a national escrow agent. At any time during the option period, the investor may exercise the option and complete the purchase with the seller. 

We are actually not making loans. This makes our underwriting process fundamentally different and simpler than conventional financing.  We don’t require credit checks, collateral, appraisals, or equity.  Our money is only there for the soft period where the contract can be terminated and escrow refunded. 
What is the advantage to a developer of using this service?

We are talking to some very established groups with large acquisitions in the pipeline and they confirm that although they have some liquidity, many would rather keep a high balance in their account and not stretch themselves too thin by putting deposits on so many properties. They have equity partners they work with on a regular basis but they are required to be in contract before drawing down on their equity. Our program solves all these concerns.

Are there limits to the amount you will fund?

We are able to fund deposits starting at $500,000 and up to $20 million. We are able to fund smaller deposits as well but there would be a minimum nominal fee requirement.

Is there a crowdfunding aspect to this?

Our program does not have a crowdfunding aspect to it but we are in discussions with some of the crowdfunding platforms who have expressed interest in purchasing an option contract for some properties they are looking at.

Has this opportunity attracted much interest from hedge funds?

We are financed by a large family office and a couple of hedge funds as well as high-net-worth individuals. We have gotten some strong endorsements from sophisticated investors and fund managers.  I believe there is a big market out there for us and we have only just gotten started. Our current pipeline is over $50 million to fund in the next month.

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