JF2216: Pre-Covid Deals With Charles Seaman #SituationSaturday

September 26, 2020 | Joe Fairless | 00:18:49

JF2216: Pre-Covid Deals With Charles Seaman #SituationSaturday

Charles Seaman is the Senior Acquisition & Asset Manager of Three Oaks Management, LLC. He is a returning guest from episode JF2081 so be sure to check out that episode to get his full background because today he is going to be sharing his experience with a deal he had before COVID and how he dealt with it after COVID.

 

Charles Seaman  Real Estate Background:

  • Senior Acquisition & Asset Manager of Three Oaks Management, LLC
  • 14 years of real estate experience
  • Portfolio consist of 92 unit apartment in Georgia, & a 48-unit in South Carolina 
  • Based in Charlotte, NC
  • Say hi to him at: https://www.3oaksmgmt.com/

 

 

 

Best Ever Tweet:

“During COVID I learned that If you persist, and you negotiate well, you can get yourself a nice deal ” – Charles Seaman


TRANSCRIPTION

Theo Hicks: Hello, best ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today, we’ll be speaking with Charles Seaman. Charles, how are you doing today?

Charles Seaman: Fantastic, Theo. How are you today?

Theo Hicks: I am doing well. Thanks for asking and thanks for joining us yet again. Charles’ first episode was Episode 2081. So make sure you check out the episode to learn more about his background and what he is focusing on today, because in this episode, being Saturday, we’re going to talk about a sticky situation that Charles was in, what the situation was and how he was able to get out of it, and the lessons that he learned.

Before that, as a reminder, Charles is the senior acquisition asset manager of Three Oaks Management. He has 14 years of real estate experience, he has a 92-unit apartment in Georgia, and then the deal we’re going to talk about today is a 48 unit in South Carolina that this sticky situation is about.

He is based in Charlotte, North Carolina, and you can say hi to him at https://www.3oaksmgmt.com/.

Charles, let’s just jump right in to the situation the Saturday. Tell us about this 48-unit deal.

Charles Seaman: Yes, absolutely. As everybody’s aware, the world’s changed quite a bit in the last couple of months. We had this deal under contract, we first looked at it in late January. We got it under contract in mid-February. At that point, the world was in a much different place. Initially, it was a deal that was mismanaged, that had, of the 48 units, 12 vacant units, and it was something that was an operational play that we were able to go in there and do better management; part of our play was going to be filling in the vacant units, and then also pushing market rents, because it’s under-rented compared to what it could be.

Being that it had so many vacant units, it was initially a deal that was going to be bridge financing. What happened is we had a bridge lender on board, we gave them an application fee, we were ready to proceed. And then on St. Patrick’s Day, that was a few days after the pandemic officially was declared, our mortgage broker gave me a call and said, “Hi, Charles. I got some big news here, the other lenders shutting down their entire bridge program, and it has nothing to do with us or with the deal. But just with the overall market conditions, there was too much uncertainty, and they didn’t want to lend to anybody at that point.”

That was the case with most bridge lenders, not just this particular lender, but many bridge lenders in the market.

At that point, we were faced with the situation because we were trying to figure out, “Okay, what do we do?” We were in the middle of our due diligence period, our money had not went hard yet, but we really had two options. Option one was either to terminate the contract, get our money back and get out of the deal, or option two was to work with the seller and see what we could do to potentially make it work for both sides.

The agreement that we came to is, we liked to deal and we wanted to move forward with this deal, but we extended the due diligence period by 60 days, and we also extended the amount of time that our money would not go hard for it. The thought was that with the extra 60 days for due diligence, even though all of our due diligence was really done, basically, it was just a waiting game to see if market conditions would change, and if we’d be able to get bridge financing during that time.

Lo and behold, we’re midway through the extension, and at this point, surprisingly, during the pandemic, the property actually got stabilized and filled up. Around early May, the property became stabilized and we no longer needed bridge financing, so we were now able to qualify the agency debt, which for anybody brand new is Fannie Mae or Freddie Mac. As that happened, it opened up opportunities, because to a point, Fannie and Freddie were more or less the only two major lenders that were actively funding multifamily transactions. So at that point, the property became stabilized.

Also in that period we were able to negotiate a price credit with the seller, because initially – while I’m not a fan of retrading, it was something that I thought we really had to do, because pretty much anybody that had a deal on the contract pre-COVID got some type of credit for it if they still decided to go through with it. I said we’d be foolish not to. We got a reduced purchase price, the property got stabilized and then all of a sudden, we go and we end up applying for agency debt with one lender. The lender gave us a term sheet for 75% LTV, which for the tertiary market was pretty good. We weren’t initially expecting it to be that high, but that worked out great, and they were projecting a 3.7 rate.

All of a sudden, the deal was looking better and better, because initially, we were looking at it as having to get bridge financing. Now we were qualifying for agency debt, we’ll have better leverage, we’ll have lower rate and just overall better terms, so it was starting to look better and better. Initially, we engaged with this first lender, and what happens is they go out there, they do their third-party inspections, the appraisal comes back much better than any of us anticipated it would… And overall, most of the boxes that the lender wanted checked, got checked.

Lo and behold, about a month and a half, two months later, they come back to us, and they tell us that their commitment’s only going to be for 65% LTV, which very much surprised us, because we were saying, “Well, how did we go from meeting most of the criteria that you have, starting off with 75% on a terms sheet, and now we’re at 65%?” We said, “Listen, we’re this far in, and the last thing we want to do is go out and start with somebody else,” because that means just negotiating an extension again with the seller, and just overall delaying the process and spending more money. But unfortunately, we couldn’t get them to budge. I don’t know if it was just overall nervousness from the market conditions the last few months due to the pandemic… But they wouldn’t budge, and 65% LTV wouldn’t work for us, because that would make our returns not as favorable as they were.

Lo and behold, we wound up nixing that deal, and we went ahead with a different agency debt lender. As of right now, we’re recording this, the deal isn’t actually closed, but we should be closing within the next two weeks, so it looks like everything is moving forward.

With this particular lender, they’re going to be right around the 75% LTV and pretty much the same great terms. So what happened is we have a deal that initially started with bridge financing, and that wound up not happening because of the pandemic, and it actually winds up getting better during it.

The real lesson I think I got out of this was that if you persist and you negotiate well, you can get yourself a nice deal.

Theo Hicks: That was a great lesson. Congratulations on still being able to hold on to that deal. Let’s go back a little bit. I just have got a few follow up questions. You said that you got that call, and then you had to brainstorm of what the next move was going to be. How much longer did you have until that money went hard?

Charles Seaman: We had about two weeks.

Theo Hicks: Two weeks?

Charles Seaman: I got the call from our broker on St. Patrick’s Day, March 17th, and our money would have went hard on April 3rd, so roughly two weeks left.

Theo Hicks: Perfect. So you went back to the seller, and you were able to renegotiate an extended due diligence and a hard money date. Did that require additional money down, or did they just accept it, because they wanted to start [unintelligible [00:11:14]?

Charles Seaman: They accepted it. They could see that we were serious buyers, they could see that we had already done over due diligence and everything we really needed to on our end, and they understood it was just a byproduct of the market, and unless they found the buyer who was going to come in there and buy with all cash, that they were probably going to experience the same thing with anybody else.

Theo Hicks: My main question is, talk about luck that the property was able to be stabilized – was that something that you knew they were working on? Did they do that because they knew they wouldn’t be able to sell it to you if it wasn’t stabilized, or was it just kind of a happy coincidence?

Charles Seaman: It was a happy coincidence. We definitely weren’t expecting that, but it gave us another option. Because even in early to mid-May, we were still debating, “Are we really going to be able to qualify for bridge financing?” As soon as we heard the deal was stabilized, we said, “That’s great.” Now we can go agency, and that’s a non-factor.

Theo Hicks: What would have happened if it wouldn’t have been stabilized? Do you think you would have been able to do the deal or would you have had to back out?

Charles Seaman: I think we would have backed out and terminated the contract, because the bridge terms weren’t great beforehand, just because it was a tertiary market. But with the amount of bridge lenders that temporarily suspended their programs, and post COVID-19, the charms would have been even worse, or rates would have been higher, or leverage would have been less, and it just wouldn’t have made sense for us to go through with it.

Theo Hicks: At what point in the process was that purchase price reduced?

Charles Seaman: That was actually reduced right before we decided to go through with it. Right before we told them, “Okay, we’re going to go through with it and not terminate.” I wanted to make sure we can get a reduction because I said it just seemed like we’d be leaving money on the table if we didn’t.

Theo Hicks: Did you do the price reduction because you needed to do that in order for the deal to make sense, or was it a, “I know I can do this because of where we’re at and this is more meat on the bone for us”?

Charles Seaman: It was more just that I knew we could deal because of where the market was at. We could have probably still made it work with the initial number, but it’s even better with the lower one.

Theo Hicks: How does that negotiation process work? Is it just you tell your broker, “Hey, we want to reduce price,” and then they negotiate with the broker and then it kind of comes back to you, the traditional negotiating back and forth on the purchase price? Is that how it works?

Charles Seaman: Exactly, yep. What I do is I initially sent the broker an email with the breakdown of the additional costs that we would have went with, because at that point the property still wasn’t stabilized when we had started that negotiation. We said if we went with bridge, this was the cost compared to what it would have cost us before, and we gave them a list of everything in particular, the lender required reserves.

Even after we went agency, with the lender required reserves it’s still going to be much more than what it would have been before. Now granted, as long as the loans and compliance and whatnot, we do get that money back after a certain point, but it’s still additional money that has to come out of pocket for it at the beginning. I said I understand that’s not the seller’s problem, but ultimately, it can’t be only our problem, because they said if we’re raising all that extra money and [unintelligible [00:14:03].00] the lender for a year or two years or however long it maybe, it’s still money that somebody is coming out of pocket for, so it lowers what we’re able to pay for that property.

Theo Hicks: And then last question, so you said that you had the bridge loan, you didn’t do that anymore. You found an agency loan that had great terms and they changed their mind for some reason, and you had to go with a different lender, which gave you kind of the original term that the first lender gave you.

How long did that process take? Traditionally, it takes two months to go through that entire process. Did you kind of go through that expedited phase?

Charles Seaman: With this particular one what happened is from start to finish we went seven months. So I joked around and told people, it was probably the longest closing we’ve ever had before the deal was closed. But from the time we first looked at it, it was January and we’re going to be closing it late August, so seven months from start to finish.

Thankfully, the second lender was willing to reuse the appraisal report the first lender had gotten, so that saved some time, and it also saved some money, so we didn’t have to pay for a new appraisal. They did require a new environmental, but at least the appraisal was done and they were able to reuse that, so it got the ball rolling and allowed them to get a jumpstart on it.

Theo Hicks: Perfect. Okay, Charles, anything else you would mention about this deal or about your company before we wrap up the episode?

Charles Seaman: Nothing else about the deal, but [unintelligible [00:15:17].24] shout out if they have any other questions? Otherwise, I’ll give people a quick way to reach me.

Theo Hicks: Oh, no other questions. Feel free to let people know where to find you and learn more about you.

Charles Seaman: Sure. Sounds good. One of the things I would say just to give a quick plug, every Saturday afternoon on Zoom I do an underwriting session. For anybody who wants the chance to go through and underwrite a multifamily deal and learn how we usually do it, feel free to reach out. You can either send me a text message at 347-306-3378 or an email, Charles@3oaksmgmt.com, and let me know that you heard me on the Best Ever show, and that you’re interested in joining the Saturday underwriting session.

Theo Hicks: That’s a really good idea. A lot of people want to learn how to underwrite multifamily deals, it’s really cool that you talk people through that, and actual live deals that you’re working on.

Charles, thanks for joining us, again, in this Situation Saturday and walking us through how you’re able to go from having a deal under contract pre-COVID to COVID hitting, and then having to figure out how to get new financing; originally had the bridge loan, that was not going to work out because the lender shut down its bridge loan division, and you only had two weeks until the money went hard. So you had the option to terminate the contract or work with the seller. You extended the due diligence and the hard money date, so you can kind of wait and hope that the market turned around. It didn’t, but there’s a happy coincidence that midway through the extension, the property was stabilized, and so you now qualified for agency debt, so you didn’t have to back out, and you were able to also, at the same time, negotiate a reduced purchase price.

Then you had another obstacle where the original agency lender reduced their LTV from 75 to 65, which obviously is a massive increase in the amount of money you needed to put down. which reduces the return percentage, and they wouldn’t budge, so you went with a different lender, who was able to get you not only better terms than the first one, but they were also able to expedite that loan application process.

The overall lesson was just to be persistent, and do what you can to continue working, grinding, don’t give up and just back out of the deal at the first sign of trouble. And if you are persistent, you’ll be able to do a really good deal, like you did, with better terms, better purchase price, and then you’re buying the property at a higher ROIs.

Charles, thanks for joining us today. Appreciate it. Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

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