February 2016

26 Feb

Posted at 09:06h in Background & Preparation to Invest, Jonathan Twombly, My First Deal Series
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Closing your first deal is critical. Before you've done it, most brokers, investors, and lenders won't work with you. Once you've closed a deal, everything becomes easier. But if no one will work with you until you've closed a deal, how can you ever close a deal? It's a Catch-22 situation. New investors, struggling to get over that first-deal hurdle, spend thousands of hours every day on sites like Bigger Pockets, hoping to learn the "secret" to getting the first deal. They seek out investors like me for advice or mentoring. Some even invest thousands of dollars on courses promising to teach them "shortcuts" to real estate riches. There are no "shortcuts." The only "secret" is to hustle. To focus your hustling and reduce wasted time and effort, you should learn from experienced investors. Model what they did. To help you, starting today, The Mortar will post a periodic series entitled "My First Deal." Here, experienced investors will tell you the story behind their breakthrough. We'll start with mine. My First Deal:  A Three-Year Ordeal I've written about how I went from miserable lawyer to full-time real estate investor. Getting my first deal was a three-year ordeal. Here's what happened. My first partner and I focused on apartments in Louisiana and Texas. We spent 2011 sorting through the leftovers that brokers show new, unproven investors. In 2012, we finally bid successfully on a property in Houma, Louisiana. We'd seen the deal before, but the owner had cut the price enough for the deal to work. Soon we had a second property under contract with the same seller. We lined up our equity investors, a co-signatory for the debt, and a lender. Then the lender inexplicably dropped out of the deal. We got skittish and canceled the second deal. We were out of pocket thousands of dollars, not to mention the months of effort wasted. Ultimately, we dissolved the partnership. But while we were still riding high, we were looking at other markets to enter in the future. Being a data dork, I was poring over the numbers from the recently-released 2010 United States Census, trying to find the most attractive markets. I decided to look only at markets growing faster than the U.S. as a whole. That eliminated the Northeast and most of the midwest. I cut off everything west of the Mississippi River because it was too far to manage. Florida's big booms and busts scared me, so it was out, too. The Carolinas, Virginia, and Georgia were left. Charleston jumped out as a fast-growing area. I loved the city, and I had good friends in it. So I decided to start there. I knew reaching out cold to brokers wouldn't work. I decided to use my network, knowing Charleston was small enough that everyone knew everyone else. I asked my friends -- a doctor and a lawyer -- if they could introduce me to any commercial brokers in town. Both came through. But my friend Abby really hit a homer. She introduced me to her best friend's husband, Chris, a successful broker and developer in the area. Chris's partner, Tyler, had led acquisitions for a multifamily investment fund for 15 years. He knew everything about the industry and all the players in the region. After my first partner and I dissolved our business, at the end of 2012, I formed Two Bridges Asset Management LLC. Now on my own, I wanted to focus on the Southeast. Just about the first call I made was to Tyler. He became our exclusive representative in the Carolinas. Adding Tyler to my team changed the game for me. But not right away. It still took time to land that first deal. Tyler called his old broker contacts, looking for our first property to buy. We saw many markets and looked at dozens of deals, criss-crossing South Carolina in Tyler's truck.  But, as a new, unknown group from out of town, we were still not seeing the good deals -- the "pocket" listings that brokers only show to their best clients. Finally, Tyler asked a favor of one of his partners in development deals. The daughter of one of his close friends, Kay, was a successful commercial real estate broker in Greenville. Greenville was far from Charleston, but it a fast-growing area, and on my short list. With the benefit of a personal introduction, Kay met us at her office. We first discussed our investment strategy. Then Kay mentioned a new listing that might fit, in nearby Spartanburg. We'd be the first to see it. We immediately left the office, drove to Spartanburg, and viewed the property. It was located at the intersection of two Interstate highways, within minutes of thousands of jobs. Few cars were in the lot at midday -- tenants were working -- and the ones that were there were newer, nicer ones. The complex had a good feel. A few days later, after running the numbers, we made an offer. Kay convinced the seller to accept it without taking the property to market. Soon we were in contract. Someday I will write about the struggles we went through to close the deal. I've already written about how the deal nearly tanked after we closed it. But the point here is that we closed it. We got our first deal. We were in business. Three Takeaways for New Investors So what should you take away from my story? First:  be persistent. Nearly three years elapsed between starting in real estate and closing my first deal. I did not give up, and I ultimately found success. Don't quit too soon. Your goal may be just ahead! Second:  if there's a "secret" weapon in this business, it's your friends and family. I asked Abby for introductions to brokers, and she introduced me to her best friend's husband, Chris. Chris introduced me to Tyler, a multifamily pro. Tyler used personal connections to get us introduced to Kay. We've now done several deals with Kay and her team. Your friends and family do not need to be in real estate. Abby wasn't. I didn't know if she knew anyone in the field. But I asked, and she did. You will never find out who your friends know unless you ask them. It's actually better that Abby was not in real estate. Her contacts were more likely to meet me because they were personal friends, not professional contacts. And they were more likely to take me seriously because of the personal connection with Abby. Third:  persistence and relationships together will lead to a break. Keep pushing forward and keep using your network to meet new people. The next new person you meet may be able to help you. Over time, if you persist and build solid relationships, opportunities will come your way. But relationships and reputations take time to build. You must be patient and build them right....

19 Feb

Posted at 11:30h in Background & Preparation to Invest, Jonathan Twombly, Managing Rental Properties, Real Estate Psychology, Transitioning to a Career In Real Estate, Uncategorized
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You’ve finally closed your first deal. What do you do now? Yeah, I didn’t know either. And it nearly caused me to blow my first deal. Then I got serious.   I went pro. On Top of the World During due diligence on my first deal, I decided not to hire the seller’s onsite property manager (PM) after closing. The property started operations with our management company’s transition team. The regional manager (RM) was to hire a new PM. Hiring a PM took months. Numerous candidates turned down the position before one finally accepted. Her background was in affordable housing, not market-rate property like ours. It didn’t sound quite right to me, but the RM believed she could learn the PM role quickly. Anyway, who was I to say? I was a newbie. I still felt like an amateur. The RM was the professional. I deferred to her judgment. Operations started off very well. By the end of the Second Quarter, the property was fully occupied and outperforming our financial projections. I sent a nice fat dividend check to the investor. He had just invested in our second deal, too. I felt on top of the world. Whoops!  Not So Fast . . . Almost immediately, though, things started going wrong. Occupancy started trending down in the weekly reports. We were experiencing very high rent delinquency rates and had to evict several tenants. I brought it up with the RM on our weekly property calls. Each week, she assured me that everything was under control.  I kept my mouth shut. But by early fall occupancy dropped to about 90 percent, and operating profits fell. Eviction expenses and apartment turn costs were rising. We would miss the Third Quarter distribution. And, then, black mold was found in a vacant unit. Then another. Then a third. All three units had to be gutted to the studs. The RM kept assuring me everything was under control, we’d start seeing improvement soon. I deferred to her. I said nothing. The property was in free-fall. The PM and RM were not doing their jobs. The professionals were failing, and I did not know what to do. I felt paralyzed. Turning Pro When occupancy fell below 90 percent, something in me snapped. I realized, for the first time, that the hard work started when we closed the deal. I was an asset manager now. Someone had invested more than $1,000,000 of his family’s money in this deal. I owed him a duty to fix things. I had to take action fast, even though I was not really sure what to do. I made a decision. I would stop assuming the RM and PM knew more than me. I would stop deferring to their judgment.   I would take charge. I would captain the ship. That moment, I turned pro. I emailed the management company’s top executives. The company was managing our second property, too, and was in the middle of due diligence on our third and fourth deals. We had been discussing a long-term relationship as we built our portfolio. I told them that they would straighten out the first property right away, or I would terminate all their management contracts. That email got action, fast. The CEO and other executives flew in to meet with me. The PM returned to her old job in affordable housing before she could be fired, and the RM took direct control over the property. The company assigned one of its best asset managers to oversee the RM, and he drafted a recovery plan for the property. After a few months, a new executive manager took over our entire portfolio, replacing the RM. Taking Stock and Facing Facts We also made sure to get to the bottom of what happened, to avoid making the same mistakes ever again. We dug in and discovered that: The PM was used to filling vacancies from a waiting list. She could not adjust to a market-rate property that required constant marketing to maintain occupancy. She did not check vacant units for problems. She was unaware until it was too late that moisture issues had caused mold in three vacant units. She set qualifications too low in the tenant evaluation software, causing her to rent to unqualified tenants who fell behind on rent and had to be evicted. She entered invoices into the accounting software improperly. The property looked more profitable than it was, because expenses were not being booked. The PM said the property lacked operating cash to turn vacant units to be re-rented. But she never told her superiors. We could have advanced money from corporate to help, but were never informed of the problem. The RM was not paying attention to any of these matters. Nor were her superiors. And I faced up to the fact that, as the sponsor and asset manager, I was ultimately responsible for the situation. And I made some rookie mistakes too: Ignoring my gut and deferring to the RM’s assurances that everything was fine. I should have spoken to the management company’s executives the moment I felt that what the RM was telling me was inconsistent with the numbers I was seeing. Distributing too much cash too soon, depriving the property of operating funds, because I wanted to look good to the investor. I should have distributed only what was needed to meet the preferred return and waited for the property to stabilize. After we brought in the new management team and implemented the recovery plan, the property’s position improved dramatically. And our other three properties, which were already performing well, benefitted too. But significant damage had been done at the first property: The property fell behind on payables to vendors. Vendors did not want to work at the property. We had to fund accounts payable from corporate, and it took months to catch up and restore the property’s credit with vendors. The property fell below the lender’s required debt-service coverage ratio, and the bank took control of the property’s bank accounts for two calendar quarters. Most important, the investor did not receive distributions for more than a year. There were negative consequences for our company, too: We, as the sponsor, could not participate in any profits until the investor’s preferred return deficit was made up. We waived our asset management fee until distributions resumed. Our contract did not require it, and the investor did not ask us to do it, but it was the right thing to do. As a result, we received no compensation from the property that required more time and effort and caused more stress and sleepless nights than any other we own. Lessons Learned So, what can a new investor take away from this experience? Once you close, you are in charge of the deal. If things are not going right, it’s your responsibility to fix it. Strong property-level staff is vital to the success of your business. If you see any signs of incompetence, you must address it immediately. Require your management company to hire property-level staff with direct experience with your property type. Different property types require different skills. Hiring a manager without the right skill set could destroy your business. The situation at a property can unravel very quickly. It can take years to restore the property to its full potential. You must take swift action at the first sign of trouble. Don’t be afraid to speak up. If your gut tells you something is wrong, it’s your responsibility to demand that the management company fix the problem. The problems with this property caused me to lose many a night’s sleep. But, taking a long view, I’m grateful this situation arose early in my career. It taught me how to be an asset manager. This property forced me to become a pro at what I do....

09 Feb

Posted at 08:42h in Background & Preparation to Invest, Real Estate Psychology, Transitioning to a Career In Real Estate
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Guest Blogger:  Joe Stampone of A Student of the Real Estate Game I spend a lot of time talking with real estate entrepreneurs who have successfully closed a few deals and built their company infrastructure. While they knew it would be difficult, they’re always surprised by what it takes to build a company. The ability to source, underwrite, and execute real estate transactions is a small piece of running a real estate investment firm. Based on the countless conversations I’ve had and from my own experience with Atlas, here are 10 things you need to do before doing your first deal. This list was also inspired by the advice from my latest eBook, what 20 real estate operators wish they knew when starting their firm. Cultivate a support network: Going off on your own is going to be an emotional roller coaster for the first few years. You give up your steady salary and come out of pocket for start-up business expenses, and you’re going to have to skip those after-work happy hours and weekend dinners. You won’t be able to go on that west coast ski trip this year or do a summer share in the Hamptons. Make sure to have a network in place of people who understand what you’re going through and can offer advice/support. It’s going to be a grind for a long time, but it will be worth it in the long-run. Create a board of advisors: One of the most challenging aspects of doing your first deal is winning the deal with no track record. Why should an owner/broker award you the deal instead of the group with a big balance sheet and a history of executing deals? Yes, you can show the track record of deals you’ve been involved with at your previous shop, but I recommend you form a board of advisors who can provide advice and who have a track record you can piggyback off of. Understand the holes in your skill set: Before going after that first deal, spend some time with your partner(s) analyzing what “holes” there are in your combined skill-sets and personality traits, the biggest potential risks to your business model, and what a downside scenario might look like. Once these issues/risks are identified, it’s a good idea to take it one step further and think through potential ways to mitigate these issues upfront, or how to best address them if they do arise in the future. Devise and business plan and understand your competitive advantage: As a new firm, you have to differentiate yourself and give a client or investor a reason to work with you as opposed to with an established player. That requires you to form a strategy or viewpoint that might be contrarian or showcases your expertise executing a specific strategy. Early investors will be betting on you as well as your specific strategy. Work with an established attorney and accountant: When working with service providers you typically get what you pay for. If you can afford it, find a quality attorney and accountant who can help you get your business set up, put proper systems in place, and ensure you’re doing things the right way. It’s a lot easier to do it now rather than later on down the road. You can use a service such as LegalZoom to save on costs. Cultivate a network of investors: One of the fallacies I hear most often in real estate is “you can always find the money if you have the right deal”, a phrase that may hold true for established investment firms, but couldn’t be further from reality for rookie investors. Call everyone in your professional and personal networks and tell them about your new idea and how you will create value while mitigating risk for your investors – key points which we forget to emphasize while we’re stuck digging through the weeds of the acquisition. You can start to build your investor database by contacting your CPA’s, lawyers, existing clients, RIA’S and wealth managers, lenders, and friends and family of means, all of whom are seeking to allocate capital or have clients seeking to allocate capital in real estate. Understand your company culture: Even with just two or three people at the company, you should be talking about culture. You should be very deliberate on creating culture every day. You cannot go back in time once you are a successful business and “make up a new culture or establish one for the first time.” Culture is born and grows and lives, just like your business, and you need to put it in place at the beginning.” Partner with a good 3rd party marketing firm: When starting out you need a company name, logo, business cards, and a website. You can save on costs by using sites like 99Designs or finding freelancers, but I recommend working with a high-quality 3rd party marketing firm that has done work with other real estate investment firms. I have worked with several groups that are affordable and understand the real estate space – feel free to reach out if you’d like an introduction. Find a partner with capital if you don’t have any: It’s going to be impossible to cover start-up costs, fund deposits, and sign on debt without a net worth. If you don’t have capital, find a partner who does. This is probably this biggest barrier to successfully execute your first deal and the reason many investors start with bite-sized deals. Get your first deal done: Ignore everything I just said and execute! Get your first deal done and use it to learn, put processes in place, and build your track record. This list is in no way exhaustive, but provides a good sense of things you should be thinking about as you prepare to go off on your own and do your own deals. What else would you add to this list?  Enter your thoughts in the comments section below....