Jonathan Twombly

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....

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....

Going from lawyer to full-time real estate entrepreneur was tough.  Here's how I did it. Trading My Life for Money I practiced law for 12 years. I worked 14-hour days, ate every meal at my desk, and worked most weekends. Sometimes I went a month without a day off. I ate terribly, got fat, and felt miserable. I hardly dated or saw friends. My life consisted of eating, working, and sleeping (very little). The money was good. But my “Sunday night blues” started on Friday night. I wasn’t just trading time for money, I was trading away my life. Why was I working so hard? So my faceless billion-dollar corporate could fight over millions of dollars with another faceless billion-dollar corporation. And, right before trial, they'd always exchange some money and settle.  The client would go right back to doing business with the enemy.  I'd have just wasted three years of my life. And, for what? To make partner? Yeah, right. Law firm partners don’t like to dilute their profits. And even if you make partner, then what? You work just as hard as the associates, except now you have to bring in business too. The pressure never stops.  You have to feed the machine clients or it stops dead. I tried to escape several times. I walked off the job with no plan. I just needed out. But, with no plan, I would drift back into law. I even went back to school for two years. Then I met my wife and returned to law for the money. But law firm life nearly destroyed my marriage. In 2008, the Great Recession hit. I was grateful to have a job. But the work dried up, and as it did, my stress level rose. I surfed the Internet all day, dreading a knock on the door that meant someone was firing me or bringing me work. I could not decide which was worse. Breaking In Nearly Broke Me In early 2011, my firm got tired of paying me to surf the Internet and let me go. I was more relieved than upset. But the idea of interviewing for another law job made my stomach turn. I had to make a change. I’d always been interested in real estate. A friend and I had looked at properties together but had not made any offers. I started looking into real estate as a career. But, because of the recession, I was competing with guys out on the street with years of experience. I stood no chance. One day, a very experienced real estate hand sat me down over coffee. “Look,” he said. “I’ll tell it to you straight. At your age [42], and with your background, no one in this city is going to hire you. The only way you’re going to break into this field is if someone just takes a liking to you and offers to make you their partner.” Unbelievably, a few weeks later, that happened. I had been networking with everyone I could in real estate. I met a woman who owned property with her husband and wanted make real estate a business. She asked me to join her. “This isn’t rocket science. You’re smart. You can learn it,” she told me. “And, you have integrity. I can trust you. That’s most important.” She also thought I could raise money. She must have had some kind of second-sight. I was not sure whether to accept her offer, so I asked some close friends for advice. Two of them told me that, if I accepted the offer, they would invest money with us. And the amounts they mentioned were substantial. So, having a partnership offer and two investors in hand, I decided to go for it. It was not easy. It took us more than a year to find our first deal. Then we found another from the same seller. But after we had spent money on due diligence costs, travel, legal fees, lender fees, etc., the lender backed out of one deal and we terminated the other. We lost months of work and tens of thousands of dollars each. And I was supporting my family out of savings at the time. We decided to break up the partnership. We’d had some disagreements over strategy and decided at this point it was best to go our separate ways. After Three Tough Years, Success at Last Now what? I wondered. A few weeks later, I was having dinner with one of my investors. I said I might have to go back into law. He said not to be hasty and then suggested that we form our own venture. In early 2013, we founded Two Bridges Asset Management LLC. It took a year to get any traction. But by 2015, we had four properties in our portfolio, comprising 404 apartments, worth nearly $20 million.  Now we're planning to raise our first investment fund. What enabled me to leap from miserable lawyer to full-time real estate entrepreneur? I exercised a high degree of professionalism, which I learned as a lawyer I established a reputation for intelligence, integrity and trustworthiness I networked actively with people in the industry and followed their advice I absorbed the losses personally when our deals went bad, rather than look to our investors, demonstrating integrity and commitment to the business I kept moving forward in the face of setbacks I said yes to opportunity when it came my way If you are committed to a career in real estate, and you develop these traits, too, you can free yourself from the corporate grind. I did it. So can you....

Jonathan Twombly and The Mortar were recently featured on the popular blog, A Student of the Real Estate Game, run by investor Joe Stampone. Want to know how I made the transformation from miserable Wall Street lawyer to a happy and fulfilled real estate investor and blogger? Want to see how losing my job was integral to fulfilling my dreams and freeing myself from the corporate grind? Want to know a bit more about my investment philosophy? Then check it out!  Just click the link!  A Student of the Real Estate Game...