Academic journal article Journal of the International Academy for Case Studies

DHR Patio Homes, LLC: "For the Sake of a Nail, the Kingdom Was Lost!" (1)

Academic journal article Journal of the International Academy for Case Studies

DHR Patio Homes, LLC: "For the Sake of a Nail, the Kingdom Was Lost!" (1)

Article excerpt

CASE DESCRIPTION

This is a field-based disguised case which describes the attempts of a small residential construction company to close on a large land deal, a deal that would net them over four million dollars in 12-16 months. The problem for the characters in question is how to raise the $2.5 million dollars needed to purchase the property. Every time the protagonists believed they have resolved the situation, another problem with the loan is introduced. Several factors complicate the transaction: the lending institution changed the loan down payment from 10% to 20%, the protagonists had transactional difficulties in terms of physically acquiring their down payment, and one of the lenders at the last minute insisted on a $50,000 set aside to be placed in an escrow account. The case has a difficulty level appropriate for a sophomore or junior level course. The case is designed to be taught in one to two class periods (may vary from fifty to one hundred minutes depending upon instructional approach employed, see instructor's note) and is expected to require between four to eight hours of outside preparation by students (again, depending upon instructor's choice of class preparation method).

CASE SYNOPSIS

Derived from observation and field interviews, the case describes how two college professors operating a home construction LLC are trying to close on a major land deal ($2.5 million dollars) that would net them over $4 million dollars in estimated profits in a 12-16 month time period. These professors have no experience in raising funds but luckily have the assistance of Justin Martin, the President of the Snowy Mountains, the firm that they will be purchasing their subdivision from (Mountain Trails). Through Justin Martin's connections Stephen Hodgetts and Richard Davis meet with Benefit Bank and arrange for the loan. Davis was under the impression that the bank required a 10% down payment ($250,000) which Davis and Hodgetts finally raise by borrowing on their retirement accounts and liquidating Hodgetts' stock holdings. However, the bank actually required a 20% down payment since Davis and Hodgetts were new customers. Justin Martin promised to lend Davis and Hodgetts this amount ($250,000) as a same day loan to be paid back by them from the proceedings of their closing on Justin Martin's mother-in-law's house. At the last minute, however, Justin Martin insisted that Davis and Hodgetts deposit $50,000 in an escrow account; $50,000 that Davis and Hodgetts did not have access to for at least a few days after the closing date. The case ends with Davis wondering how he is going to raise $50,000 in one day.

INSTRUCTORS' NOTES

Overview

The case subtitle, "for the sake of a nail the kingdom was lost" perhaps best summarizes Davis and Hodgetts' situation in that they are on the cusp of a deal that would propel this small, startup home builder into a full-fledged operation. The estimated profits from this project would be quite substantial and could be used in funding future ventures with the same developer. Furthermore, the timing of this project could not have been better for Davis and Hodgetts since their current development was having legal problems (there were large third party liens on their properties because the land developer did not pay his landscapers). They could not close on their currently constructed homes and it therefore made no sense to build new homes on these properties.

However this "deal of the century" is not an easy one to make given the purchase price of the subdivision ($ 2.5 million) and Davis and Hodgetts' inexperience in raising venture capital. An interesting twist in the case is that Davis and Hodgetts seemed to have found themselves a benefactor and a possible mentor in Justin Martin, the President of Snowy Mountains. Justin first connects them with a lender and then offers Davis and Hodgetts a one day loan using his own money. Ironically, each deal that Justin brokers (the Benefit Bank loan and his own personal loan) seems to have a hidden catch or caveat (including his own) creating last minute problems for Davis and Hodgetts. …

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