JF1110: Doing Your Due Diligence on Your Lender #SituationSaturday with Abhi Golhar
It was his first new development deal and he used a new lender for the deal. With permits taking waaay longer than they should, the new lender started getting nervous and threatened to call the loan. Hear how Abhi dealt with this sticky situation. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet: Numbers are everything
Abhi Golhar Real Estate Background:
-Managing Partner of Summit & Crowne, a real estate investment firm in Atlanta.
-Host of Real Estate Deal Talk an independent source of original podcasts, videos, & articles
-Full-time investor in real estate & contribute to Forbes & Inc.
-Uses a “value-added” approach to identify single family flip, buy-hold, and multi-family opportunities.
-Based in Atlanta, Georgia
-Say hi to him athttp://realestatedealtalk.com or https://www.abhigolhar.com
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
I hope you’re having a best ever weekend. Because it is Saturday, we’re doing a special segment called Situation Saturday. You know what this is, right? You’re a loyal Best Ever listeners. But in case you forgot, this is about putting our guest in a challenging situation or having them relive a challenging situation and how they got out of it and the lessons learned along the way.
We have a phenomenal returning guest with us. In fact, episode 476, titled “For five years he failed, until he…” – you can go listen to that if you didn’t already… But don’t do that yet. Listen to this conversation first, with Abhi Golhar. How are you doing?
Abhi Golhar: Good, Joe. Thanks for having me back. My name should just be Abhi 476, I think that’s what we should do. [laughter]
Joe Fairless: You can get it. I can see the tattoo already. We can put it behind the Best Ever logo and everything. A little bit more… You are the managing director of Summit & Crowne, which is a real estate investing firm in Atlanta; also the host of The Real Estate Deal Talk, and a full-time real estate investor and contributor in Forbes and Inc. Magazine. Based in Atlanta, Georgia. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and then just roll right into the challenging situation?
Abhi Golhar: Yeah. A little bit about my background, Joe [unintelligible [00:02:31].02] engineering at the University of Michigan Go Blue, and I started investing right then. It’s been now about 15 years. In 2002-2003 I started investing in inner city Detroit. I didn’t start with a whole lot of capital, not a silver spooner… Quite frankly, my parents didn’t even know that I was investing in inner city Detroit. I initially started with wholesaling real estate, then worked my way up, built some cash up, got into a couple projects, failed in Detroit – and I think that’s where you should go listen to episode 476, but listen to this one first. And that’s how my education started. I could have just said “I’m not going to do real estate or invest in real estate anymore” because I was super scared, but I didn’t… I pulled myself back up and I just went at it, and I was absolutely fearless. It’s been a wonderful, wonderful journey ever since, making mistakes and successes along the way.
The challenging situation that I had was a couple years ago my partner and I purchased 646 East Avenue in Atlanta, Georgia. That’s a home that was an existing single-family home in a little neighborhood called Old Fourth Ward, before Old Fourth Ward got super hot (like Hotlanta). We purchased it for about 235k-240k, and our plans were to build on it. It was gonna be a beautiful 2,200 square foot home, about a 4-bedroom, three and a half bathroom modern home; I’ll send you all the plans, link to the PDF in the show notes for sure.
It was an interesting deal; we had a lot of back and forth with the city, and the biggest challenge that we had was the lender was just not up to par. It was so obnoxious working with this lender, it was so bad, and we just didn’t do our due diligence enough.
Joe Fairless: Real quick – you bought the land for 235k or was it a knockdown and you were gonna build, or you were gonna renovate…?
Abhi Golhar: Yeah, great question. It was an existing single-family we were going to knock down and build new.
Joe Fairless: Okay, existing single-family, you’re gonna knock down, build new… Did you buy with cash (the 235k) or did you use this lender to close the transaction initially?
Abhi Golhar: We purchased with the lender, so we raised our own equity – we put our own cash in the deal – and we took out a loan for the acquisition and the new build. Total cost of that was right around 520k-525.
Joe Fairless: Okay. You raised money to have the equity for the down payment and miscellaneous things on the loan, and then you got a loan with the lender for the purchase and the build.
Abhi Golhar: Yes, you got it.
Joe Fairless: Okay. Then what happened? Tell us.
Abhi Golhar: Well, this is where doing your due diligence not only on the deal helps – we had that down, I’ll walk through that in a second – but it’s also doing your due diligence and your homework on the lender. The biggest challenge that we had with this lender is this was this lender’s first time investing in a single-family, a new construction project out of state. The lender was actually in New York, in New Jersey, and they were looking at doing new construction deals or lending on them in the South-East. They had heard about us from a couple of other local lenders that we knew. We said, “You know what? Let’s give it a shot” We got on the phone with them, they sounded like great folks, and we said “Great, let’s go ahead and make it happen.”
What’s interesting though is, as you know, Joe, with new construction projects, it takes time. You have to get permits, you have to get variances sometimes, you have to go back and forth with the city on red lines, which are corrections to the original plans, in order to get your permits.
At the time, the [unintelligible [00:06:15].27] was just running a little bit behind. This was as the market was reheating up, and they started running a little bit behind. They were getting delayed on a couple of things, so it took our permits instead of generally a good run rate of about 4-6 weeks to get, it took five and a half to six months to get.
Joe Fairless: Oh… Any lender would have a hard time with that.
Abhi Golhar: Yes. And so what we did was we started communicating all the time. We got on conference calls, we shot out e-mails saying “Hey, this is what’s going on with the city.” The city of Atlanta has what’s called a BB number; that is essentially a tracking number associated with that particular project, kind of like a FedEx tracking number or a [unintelligible [00:06:59].08] tracking number for your mail delivery. So they were checking that out and I said “Hey, you know what? It’s taking a little bit longer, the city is backed up, we’re getting red lines back, we’re addressing them as soon as possible”, but they weren’t really happy about that. And considering that it was the lender’s first go-around, they got really jittery, and they said “Hey, you know what? We might just call the loan due if this activity continues, because you’re not making progress.” Oh my gosh…
Joe Fairless: How much was the loan for?
Abhi Golhar: We brought 20% down on 525k, so let’s say roughly 410k-415k probably.
Joe Fairless: Got it, okay.
Abhi Golhar: Yeah, and the terms were okay–
Joe Fairless: When they initially mentioned that to you as far as “we might call the loan due” – was that over the phone, in e-mail or in person? I imagine it wasn’t in person, since they’re not where you are.
Abhi Golhar: Yeah, it was over the phone.
Joe Fairless: I’m the lender, you’re you; I just told you we might call the loan due if you don’t start showing some progress… What did you say? Did you stammer like that? [laughter]
Abhi Golhar: Yeah, exactly! “Uh, I mean, come on! I get, believe me, I understand.” If I was a borrower, I would put myself in their shoes. I’m like “Listen, let me put myself in your shoes for a second. This thing is taking far too long, I understand. Is the borrower communicating with me?” That’s like the first two things that I’m looking at: 1) is your position secure? Yeah, you’re in the first position on the property, no big deal. But is it taking longer than it should? Yes. Is the borrower communicating with me as much as possible, letting me know what’s going on every step of the way? Yes. Okay, then that should give me some level of comfort, but it doesn’t take me all the way when I get that.
But we were also not being confrontational about it and saying “Oh, whatever… You’re a terrible lender; we’re not gonna pay the note anymore.” We weren’t doing that. We were like “Hey, we will continue paying this note, we believe in the project; let’s do an extension. We’ll pay the extra points…” – I think it was like half a point or a point to extend… No problem, we’ll take care of that too, but give us the opportunity to extend and see the project through to completion. They didn’t wanna do that, and I said “Okay. You want to call the loan due. How much time do we have?” and they said (over the phone) “You have about 45 days to off-load it”, and I said “Alright. We can fly up to you… What do I need to do?” [unintelligible [00:09:35].05] was on the phone with me too, he’s my business partner and he’s my right-hand man in Atlanta; we were both dumbfounded… We were like “Are you kidding me? Because this has never happened to us before. We’re usually on top of stuff”, and I will take that responsibility on my shoulders to 1) I didn’t do enough due diligence on the lender, and 2) We should have been probably more aggressive with the city, and I get that… There’s only so much we could have done, but it’s still my responsibility to make sure that this thing is expedited. We even had an expediter at the city as well, that was on these conference calls letting the lender know what was going on.
So the lender dropped that bomb and said “You know what? 45 days out.” Alright, that’s what we’ve gotta do. So we scrambled, we put the package together. At the time we would have made $200,000 on this deal, because even our all-in cost was roughly around 565k-575k on a worst-case. We had comps between 750k-770k, in that neighborhood, with day on market less than 15. So I knew that the deal was good, I knew it, because we’re not gonna buy stuff that’s crappy; that’s never, ever the case.
You invest in multifamilies, you understand numbers are everything, the team is everything, the lender is everything. So we packed the deal, we finally got permits, and we went back to the lender and we said “We have permits. Let us build! Let us do this!” and they’re like “Nope, sorry. We don’t want anything to do with you or the project.” Okay…
Joe Fairless: Wow… How did they say it? Obviously, that was basically what they said, but again, is this over phone calls, or e-mails? Just so we get an idea of what it’s like to be corresponding during this time.
Abhi Golhar: It was phone calls followed by e-mail. What we did was we took the notes from the phone call and said “This is what’s going on”, just so we had everything documented for our records. Then we said “Hey, is this what was agreed or what was discussed on the phone call?” and they responded and said “Yes, please advise how you’d like to move forward.” Because it was either we sell it, or they were gonna foreclose… Because they didn’t want to have anything to do with it even after we got the demolition permits and build permits, and at that point in time we were probably month seven and a half. So we would definitely have to get an extension, and they weren’t gonna have any of it.
I said, “Okay, no problem. We have two options.” First option is let’s find another lender to do it. Second option is “Let’s just wholesale it off. Whichever one hits first, that’s what we’ll do”, and we wholesaled it off.
What’s crazy is we followed back up with the deal. They bought it for payoff plus about 15k, so we made a little bit of money, not a whole lot. Then we had the cost of permits, and things like that, so we made maybe $100 or $200 on it. They ended up selling it for 910k. You have no idea how frustrating that is for me to tell. I’m about to fly to Cincinnati, grab a beer and just keep drinking with you, because that’s how frustrating — I still talk about that deal even today, and it’s just like, man… And like I said, I’m still willing to take the responsibility, but Jim Rohn said it best; he said “All you can do is all you can do”, and if you are doing exactly that, then you have nothing to worry about. But I felt like I had everything to worry about in the entire world, but you know what? Sometimes all you can do is all you can do, and you have so many external factors: the city of Atlanta, the permitting process that’s just taking forever… All you can do is all you can do. [unintelligible [00:13:01].01] to the best of your ability.
Joe Fairless: What was it like communicating with your investors during those 5-6 months that you were waiting to get permits?
Abhi Golhar: They understood because they had invested with us before and they had full confidence in our ability to perform, which we did on the permits, but then we didn’t on the build… And then once we wholesaled it off, we said “You know what? We don’t need any profit on it. We’d like to, but we’re gonna make sure our investors get paid off first”, and they did.
Joe Fairless: Knowing what you know now, if a similar situation presented itself, how would you approach finding or screening the lender.
Abhi Golhar: There are two things that I’d do. One, I would have a conversation about the neighborhoods and I would pay very close attention to what they know and what they don’t know about the city.
Joe Fairless: Like what?
Abhi Golhar: I would say “Hey, Joe. What do you think about Kirkwood, Atlanta right now? And you would give me a response. I’d ask you a couple of additional questions about the city of Atlanta, what your thoughts were, why Atlanta, how many deals have you done here before? Are you doing any deals currently? Are you looking at any opportunities currently? Can I drive by that? Can I meet some of the borrowers that you have in Atlanta, shake their hands? I would have done that a little bit more (more up front work), and quite frankly, I’d probably just go after a local lender… We had two local lenders lined up, but we wanted to try these folks… So that’s what I’d do a little differently next time.
Joe Fairless: Were their terms a little bit better than the local lender? There had to be something that pushed you over to them initially, compared to local people.
Abhi Golhar: The local lenders – they were really tied down with some of the deals that they had currently going, and they had pretty much all capital allocated for deals already, and we got better terms from these folks (I’ll just call them North-Eastern lenders; that’s not the name of the company, but just to identify them). So the North-Eastern lenders had better rates and more available cash; local lenders just didn’t at the time, because they were tied down, so I’m like “You know what, it makes sense. We’ve gotta move on this property because we know we can make money on it.”
I suppose in hindsight moving that fast isn’t also a good thing, because it didn’t give us the time to ask the questions of the lender that we needed to.
Joe Fairless: What condition was the property in when you wholesaled it?
Abhi Golhar: We had started demo on that property, and we finished demo and we sold it as a demo-ed lot, and that was it. There were no footings, there was nothing there. It was just a plain old lot.
Joe Fairless: What do you think it cost based on what you’ve seen the finished product looking like with the final thing – what do you think it cost them to build, all-in costs, just to get an idea of their profit?
Abhi Golhar: Oh, my gosh… We wholesaled it off to a really good builder, so I know that they cost was roughly around $92-$95 a square foot for 2,200 square feet… And ever worst case, if they spent $100-$105 dollars just to make it a little nice, are you kidding me?
Joe Fairless: Yes, that’s $220,000, if it’s a dollar a square foot, and then you’ve got the acquisition cost, which was — how much was that?
Abhi Golhar: The acquisition was roughly about 250k, new build at 220k… Yeah, they totally doubled up.
Joe Fairless: Anything else as it relates to this particular story that you think is relevant for the Best Ever listeners?
Abhi Golhar: I would say go in with your eyes wide open, trust but verify, and hold your team really close to your chest and make sure that everybody’s willing to dig through the trenches with you. That’s when you really know at the end of the day that you have a team… That one person, two people, three people that are willing to make it happen for you, even if it’s at 2 o’clock in the morning, because I cannot tell you how many times Walton and I talked and it was after hours, one-thirty, two, two-thirty, three o’clock in the morning… Just having that reassurance and being able to sleep at night knowing that everything’s going to be okay means the world to me.
Joe Fairless: I noticed that when you said types of questions you’d ask the lender one of the things you didn’t mention – and I don’t know if this was intentional or not – is asking them “Hey, if the project is supposed to take 4-6 weeks to get permit approvals, but it takes 5-6 months, how are you gonna react?”
Abhi Golhar: Yeah, that’s a really good question for next time, too. That’s without a shadow of a doubt something that we ask all lenders moving forward, especially from that experience. That was a great call; I just didn’t bring that up, I don’t know why.
Joe Fairless: Got it, it makes sense. Well, I loved our conversations. Thank you for being on the show. How can the Best Ever listeners get in touch with you?
Abhi Golhar: You’re very welcome, Joe. Thanks for having me. The best way to get in touch is go to realestatedealtalk.com.
Joe Fairless: Easy enough, super simple – go listen to Real Estate Deal Talk Podcast as well. Thank you for being on the show, thanks for talking about lessons learned from 646 East Avenue in Atlanta, Georgia, in the old — what is that submarket called?
Abhi Golhar: Old Fourth Ward.
Joe Fairless: Fourth Ward, there you go.
Abhi Golhar: You got it.
Joe Fairless: So the lessons are many – some of them I wrote down… Do the due diligence on the lender, have a conversation about the neighborhoods, make sure they’re comfortable with it; perhaps leans towards a local lender on these types of deals, and have a point blank question about “Hey, if I’m running behind for permitting reason, because the city is running behind, how are you gonna react to it?” As you said, trust but verify, and hold your team close to your chest and make sure that you’re all a tight-knit group.
Thanks for being on the show. I hope you have a Best Ever day, and we’ll talk to you soon.