WS1211: Closing A Multifamily Deal | #Highlights

EPISODE 1211

[INTRODUCTION]

0:00:00.0

Whitney Sewell (WS): This is your Daily Real Estate Syndication Show and I’m your host, Whitney Sewell. Today is a Highlights show that’s packed with value from different guests around a specific topic.

Don’t forget to like and subscribe but also go to LifeBridgeCapital.com where you can sign up to start investing in real estate today. I hope you enjoy the show!

[INTERVIEW 1]

0:00:23

WS: Our guest is Juan Vargas. Thanks for being on the show, Juan.

0:00:27

Juan Vargas (JV): Hey, Whitney. It’s a pleasure to be on your show, man.

0:00:29

WS: Help us to think through that process of when we’re first looking at properties, getting to the closing table. Then let’s go specifically after closing as well. When that’s your role, what should we be doing?

0:00:40

JV: Yeah. I would say before my first couple deals, I actually got into the GP side by assisting with equity. I do want to clarify that up front. So, there are multiple ways to get into the GP side. I do want to say, so just figure out what your skill really is. Sometimes, you don’t know what that is, but you’ll learn it. You’ll learn what you are good at, what you’re not good at. My entry into the GP side was through raising capital, and that’s one of the ways. 

My focus now is on asset management. You’ll ask, “What’s the role? What do you do?” As far as finding the opportunity, you’ve got to find the opportunity. You find the opportunity. You get them into a contract. What we’ve been wanting to do on some of our deals is actually build in an early access agreement, or early-access period into the contract. So, what that has been able to help us do is we’re actually able to go in there in under seven days. So, we’re able to go under and do a lot of the due diligence within those first seven days. If you have hard money before your hard money goes hard.

So, we’ve been able to structure our agreements. During those seven days, you want to have access to the property. You want to be able to go into the property and got into the units, take a team with you. So have roofers, electricians, plumbers, all those kinds of guys. Also, your property management team can also help you out with doing their lease audits, doing their own survey, and also getting some of the budget and the pro forma put together and a button-down.

So that’s kind of what we do just to help us eliminate some of the risk upfronts. If it’s something that we find out that it’s not worth going or moving forward with, then it’s easy. We just walk away, and hey, it didn’t work out in the end. If it does, then we’re able to move forward, and our money goes. So that’s kind of the way we started.

0:02:20

WS: I think that’s some great advice right there, and I haven’t really heard anybody elaborate on that or talk about building in the early access. I’ve heard people in the industry may be mentioned or talk about it but not on the show. That’s great advice. Do you have that in

your LOI or is that something that’s in the contract?

0:02:37

JV: Yes. So, you want to make sure that you put in the LOI so that whenever you go to finalize the PSA, the seller knows what you are expecting. We know every time we’re submitting an LOI, we always make sure that we have that early access in there. It can vary. We do it for seven days because a lot of times the seller doesn’t want to give you that. They’re like, “Why would I allow this guy to be on my property and go into my units to do all this, their own homework?” Then they’re not really100% committed at that point.

So, what we do is we put that in there, but we go ahead and wire the money as if we’re going to ahead and pursue it as if we’re going to for sure take down this deal. So, wire the money. It doesn’t go hard though until day eight, but we make sure that we have our attorney and put in there, “Hey, if we don’t feel comfortable with it, we can walk away, and the hard money that’s [inaudible] company can be returned to us.” So, we’ve got to make sure that we do that, because a lot of these deals these days, the reality is that you have to go hard money. If you’re not going hard, then you’re not winning anything. So, a lot of people, they don’t want to go hard, so you’re not winning deals. That’s part of the terms.

The price I think is the most important, but the terms are right there with it. Then there’s your track record, who you are, and all that good stuff. So we always try to make sure that every time we submit an offer, we got to make sure that we have that in there.

0:03:50

WS: I know you just saved somebody $200,000 right there.

0:03:53

JV: Hopefully, yeah.

0:03:55

WS: Thanks for talking about that, because it is very important. I love that tip that you put out there and getting that time agreed upon that you can do an inspection, and hopefully, the sellers cooperate and let you in and provide access and those things. You’re not one to waste your time either. It’s costing a lot of time and money for you to come to do that early due diligence like that. But tell me about that team though that you have readily come in with you. You want them there. I mean, you want them coming in those units and giving you some really solid advice on what needs to be done. What do we have to do going forward, and what’s the cost going to be? Who’s that team, and what are their roles?

0:04:32

JV: Yeah. So, before you’re able to do that, hopefully, you were able to get an operating budget to do your pro forma and see if the numbers work out on a deal, first of all. Usually, that’s a property manager. Reach out to their property manager, somebody that’s well-known, somebody that manages properties that are similar to the property that you want to acquire. So, if you’re looking at a C deal, then don’t look for a manager. They’re going to be useless for you. Vice versa, if you’re looking at a B+ deal, don’t look at a manager that does C deals. Find somebody that fits exactly the kind of product that you’re looking for. I think it’s very, very important.

A lot of people, they see managers as somebody that can manage a property regardless of what kind of property you have. I don’t think so. I think there’s C managers, and there’s managers that’s their focus, and that’s their strength. That’s their bread and butter. Then there’s B managers, and that’s their bread and butter. Yes, some of those may interchange and might do B and C, but they’re going to focus on one master class versus the other more. That’s what we do. We try to find that manager that fits, and we look at their portfolio. We interview them. We do all that good stuff. Then we tell them, “Hey, we’re about to get this property in the contract. We have LOI that’s about to be accepted or whatever.” Those kinds of things, just to prepare them and have them ready.

Apart from that, because they’re usually going to handle your lease audits, they’re going to be onsite, they’re going to be doing a lot of that. But you still need somebody to go in there and check out your roof and then check out your plumbing, your electrical, your units. Your units, it’s usually going to be your manager, but it’s still one team to go under and do all that. All that’s going to cost you, so you’re still going to have to put some money in, and it’s going to cost you.

If you walk away from the deal, you’re still going to have to have spent some of that money. If you don’t move forward with the property, then you still have to pay your property manager for their due diligence costs. Usually, they’ll take care of it and do it for free if you move forward with the property, if you are to use them. If not, then you have to write a check for their services. It is not for free either.

So those are the people that you want to have really on the property ready to go. As soon as you signed that, then bring them on and have them ready.

0:06:28

WS: I want us to jump to closing, after closing. Maybe some things that as you’re managing these properties after closing, things that that we should be thinking about that we are doing even on a monthly or weekly basis. Those meetings we should be having and things we should be discussing.

0:06:43

JV: Yeah. So, we always have weekly calls with our managers. We don’t self-manage our properties. We have third party property management, companies that manage our properties for us. We want to make sure that we have calls every single week. You’ve got to look over all the numbers. You got to look over the KPI numbers. What’s going on with the property? What are we doing? What are we renovating? Why are we not doing this? What’s working? What’s not working?

Every Tuesdays is kind of when we do our calls, and that works out best for us. During those calls, you want to, as I said, talk about the reports. Talk about the number of units that you renovated. How much were you able to get? What did it cost us? A lot of it is testing. Whenever you put your performer out there, you’re assuming that if you do these repairs or renovations that you’re going to get this kind of rent. But whenever you actually do the renovations, that’s not always the case. It can be worse, or it can be better.

For us, fortunately, it’s been better and maybe the economy, maybe the opportunity that we found. But it’s been better with less capital that we actually put into these units. Those are the kind of things you want to do. As far as leads, that’s very important, because a lot of it is lead retention, your tenant retention. You got to try to make sure that you keep your tenants, because that costs you a lot of money whenever you do turnover. The turnover, that’s a lot of money wasted, because then you got to market to new people, you’ve got the unit standing vacant, and those kinds of things. It’s very important that you keep track of what’s going on with your existing tenants and then your new tenants. Where are they coming from? What’s the traffic look like? Did we close on this lead or not?

So those are the kind of calls, and those are the kind of things that you have to discuss on these calls, apart from being on the property. So, you’ve got to be at the property as much as you can. If you’re local, then that’s good. You could be there once every couple of weeks or something like that. You don’t have to be there every single week either. But if you’re not local, you want to be there, at least, once or twice a month. If you have a team, maybe you could take turns, and everybody can be there once a month or something like that. 

You always got to stay on top of that, because the truth is they’re not going to be watching over your property unless they know that you are serious about it and they know that you are on top of them. Otherwise, they’re going to take it easy.

0:08:45

WS: Some great things that we need to be talking to our property management company about. You said you all are doing it on a weekly basis, which is great. Anything else that might come up during that call that you need to address at that time? Anything else they might bring to you that maybe somebody that’s not doing this yet may not realize that they’re going to have to talk about or be prepared for?

0:09:04

JV: Yes. So, one of the things – I’m going to give this credit to Neal Bawa. For a lot of your listeners, I’m sure they know who he is. So, I listened to a podcast that he was on, and he spoke about hiring some VA’s to help with lead generation. So, your property manager is going to do their best job. This is his words, and it does not quote for quote, but a property manager is going to do their best job to give people into your property, but the reality is that it’s only going to be a handful of people. So, it’s only going to be one or two people or maybe three at most, depending on the size of the property, that is going to be doing that.

So, he hired VA’s from the Philippines to do calls, to create leads, to bring him to the property. Now, he’s not replacing the manager at all, but he’s assisting. So, it pretty much is doubling down. So, he’s bringing leads from the manager, bringing leads from his Vas, and he’s working together. Those are kinds of things that these days you have to find every single opportunity you can find because a lot of the reality is that a lot of these properties are overpriced. So, if you’re going to pay a little bit more, then maybe you think it’s worth it. You want to get a property – I’m not saying to overpay, but the reality is a lot of people are overpaying. You got to find out every single opportunity that you can do to the property to create those revenue streams, because that goes to the bottom line.

I’m going to give him all the credit in the world, because you heard that from him. I thought that was just genius. That guy he’s really intelligent and smart in the way he manages his properties. So, I took that page 100% from his book. I thought it was very clever.

[INTERVIEW 2]

0:10:30

WS: Our guest is Mike Vann. Thanks for being on the show, Mike.

0:10:33

Mike Vann (MV): Thanks for having me. I appreciate it. I’m glad to be here.

0:10:37

WS: Tell me a little about your syndication journey. What was the deal you all did? We’ve had your partner on the show. We discussed the deal. I’d like for us to talk about that deal and maybe give us an update as well. In case the readers don’t know, give them a little more background on that property.

0:10:55

MV: My partner Rodney Miller had been on the show prior. We were getting ready to close or maybe had just closed on the deal at that time. This is a 100-unit C-class property in a market east of Tulsa, Oklahoma. I would never have imagined myself buying an apartment complex in Pryor, Oklahoma. It’s a small town but the key factor, one of the decision-makers in us pursuing the deal was this is home to one of Google’s server farms. They had come in in 2011 and since invested over $2 billion in this community and have continued to expand their facilities. They have purchased and built on to their existing facilities, purchased other facilities, built more, and keep adding jobs. There aren’t enough places to live.

Everything there within twenty miles is full. There are not enough places to live. Google came in and announced a several hundred million-dollar expansion on this facility, specifically. Before they can even start this, there’s further expansion. There are going to be jobs coming into this community for years to come. Google is not stand-alone. Even though we know Google is not going to go anywhere, there are Fortune 500 companies in the mid-American industrial park there. It’s a diverse economy with a lot of jobs and a plan to be coming in the near future over the next several years. That combined with the fact that the demand for housing there led us to go ahead and pull the trigger on the deal.

0:12:38

WS: I appreciate you mentioning having a diversified job selection. We feel like Google is going to be around for a while. Still, I wouldn’t feel comfortable if that was pretty much the only main employer and that there weren’t any other large employers as well but them building on is a great sign. Why did the sellers sell the property?

0:13:00

MV: We bought the property from Mitt Romney’s son. They are focusing more out in the Utah area and in disposing of their assets outside of that area, in the general vicinity. They had sold some other properties in Wichita and some other areas in the Midwest. We’re focusing closer to home.

0:13:21

WS: Rodney’s show was WS199 if you want to go back and hear more about the property when they were in that process of closing. I can’t remember the exact process if you all had closed yet or not but you’re closed. Let’s talk about what has happened since the close and some things that have happened that were unexpected and what has happened since then. Since the close, what game plan did you all put in place?

0:13:48

MV: The property was fairly full when we took it over. It’s 97% or something like that. One of the things that we didn’t uncover was how many short-term renters were there. We did a lease audit and all that. We knew that there were a certain amount of short-term renters. There ended up being a lot more than we’re shown clearly on some of the leases. Upon the day of the takeover when we had our unit walk, there were some people that had moved out that were there on paper but not there physically. We had a little bit lower physical occupancy when we came onto the property, which is not a big deal. We put our team in place and went to work.

Over time, we came to find out that the local manager that they had there in place didn’t have a lot of rules. People decided they were done with their lease with no notice and moved out. The thing I would learn from that is you can look at the lease files on paper and do your due diligence on that but maybe ask more and better questions to get a clearer picture of what the true tenant profile is like. Be able to anticipate a little bit more. It hasn’t hurt us financially. We were able to turn right around and get those units we rented. Because of the demand, we had already rented several units that are pro forma rents, which were quite a bit higher than the previous owner had in there. We got them up to the market.

0:15:28

WS: If there was that much demand, it might have been a blessing that those people moved out. What questions should we be asking so that doesn’t happen to us?

0:15:38

MV: It may be tenant concentrations. With a lot of the construction that was going on there because of Google, a lot of Google’s 1099 workers or the Google folks that were coming were on short-term contracts, maybe tenant concentration and their specific policies on the move out notices. Typically, we have a 30-day notice. There wasn’t a 30-day notice or it wasn’t being enforced. It was in the lease but wasn’t being enforced. You want to know your tenant profile concentration of employers within your tenant profile and be able to anticipate those types of problems. It’s not that you can do anything about it because they’re already there, but at least it lets you get a game plan around that when they do move out.

0:16:23

WS: Was the seller self-managing or was it third-party management?

0:16:27

MV: It was a third-party manager. They found some guy in the local community and had him come in and run it. He was a very stern guy. He was a fair housing nightmare. We didn’t keep him on. It was a third-party management company. I don’t think there was a lot of oversight. These folks were on the other side of the country. This is a small asset for them. They admittedly said it was ignored somewhat. They prettied it up a little bit before they disposed of it. It’s going to turn out to be a great asset for us.

0:17:03

WS: Tell me what has happened since the close? You’ve got rid of the old manager and got a new manager. What was the game plan with this property? Is it a value add? Is it remodeling units or getting better tenants? What did you do to increase the value?

0:17:20

MV: It was more of going in. There were a few rehab units. Probably 90% of them already had full the partial rehab so there wasn’t a lot of CapEx to be done. Some have a little deferred maintenance on the exterior, stripe, and silver parking lot. That’s being done now. Also, new landscaping and rebranding the property. We’re going to add or extend the laundry facilities and make them a lot larger. We’re going to put more grilling stations around the community. We held our first resident event, a barbecue. We’re doing more of those to create more community among the residents so we can get better tenants and keep them longer.

[END OF INTERVIEW]

[OUTRO]

0:18:01

Whitney Sewell: Thank you for being a loyal listener of The Real Estate Syndication Show. Please subscribe and like the show. Share with your friends so we can help them as well. Don’t forget to go to LifeBridgeCapital.com where you can sign up and start investing to real estate today. Have a blessed day!

[END]