Michael is coming back onto the show (previous episode below) to share a situation he recently had in his business that taught him a lot. He had a lender back out of his deal THE DAY OF CLOSING! This was a 62 unit deal, and Michael was left scrambling to get this deal done. Hear how he overcame the situation and what he learned in the process. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“If you’re starting out, mortgage brokers can be an asset for you” – Michael Beeman
Michael Beeman Real Estate Background:
- Began his REI career in May of 2017 with $52k to invest
- His company’s holdings now include ownership and management of over 120 multifamily units
- Listen to his previous episode:
- Based in Casey, Illinois
- Say hi to him at bestevercommunity.com or 217.508.8185
If you’re a passive investor wanting to learn more about questions to ask sponsors in order to qualify the opportunities, sponsors, and the markets opportunities are in, visit BestEverPassiveInvestor.com.
We created this site just for passive investors to have a free resource providing the questions to ask and things to think through. BestEverPassiveInvestor.com
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, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.
Because today is Saturday, we’ve got a special segment for you; this is gonna be a fun one… Situation Saturday, here’s the situation – you are about to close on a multifamily property, and uh-oh… Lender backed out. What the heck, what’s going on? Well, if you come across this situation – hopefully you don’t, but if you do, then fortunately we’re gonna hear about a situation just like that, that actually happened, with our Best Ever guest, how he overcame it, so that should you come across this situation, you’ve got a roadmap. How are you doing, Michael Beeman?
Michael Beeman: Hey, I’m doing great. How are you?
Joe Fairless: I am doing well, and looking forward to our conversation. A little bit about Michael, really quickly – he began his real estate investing career in May 2017 with 52k to invest. His company holdings now include ownership and management of over 120 multifamily units. He was a guest on this show in episode 1345, titled “Another real estate success story. 31 units with $60,000.” Now we’re gonna talk about a situation that he was recently in; it’s a 62-unit that the lender backed out. I’m not going to give any more information about that. I think now we’d love for you Michael to just tell us the story about the 62-unit.
Michael Beeman: Okay, so how we came across it was that I had searched around online and I had inquired about a property that a broker had, and we went back and forth (the broker and I did) on voicemails that were left about every 3 or 4 days… Because he didn’t know who I was, and when you get into that realm of things, generally brokers want to feel you out and have an understanding that you’re not just a big waste of their time.
So I wasn’t early enough on the first property, but he came down, visited me, [unintelligible [00:02:50].16] our operation, really believed in what we were doing, and I had a couple of investors – one that actually had heard me on your first podcast and wanted to partner with me.
Joe Fairless: Oh, cool.
Michael Beeman: Yeah, that was wonderful. He’s actually invested with us twice now, and we’re looking at doing another investment together on some smaller stuff… Because we do a wide range – we have stuff all the way down to duplexes, and then we have this 62-unit. But going back to the 62-unit, I had the investment money lined up; I had about 18 months track record with my own stuff, and this was last November and it was supposed to close… We had gotten the thing under contract, done our due diligence, gone through everything, figured out that we’re buying this at a 9% cap, where our value add was… We were going to separately meter the water, plus the rents – we were averaging about $55/door low, and the water metering was gonna save us $37,000. That, with increasing about $11,000/year, and lowering some of the other expenses, like maintenance and such. We had a nice half a million dollar value-add on something we raised about half a million dollars for.
It wasn’t a big purchase. This was in Springfield, Illinois… And I get to the day of closing; I’m driving there, and I’m like “Huh, it’s weird that nobody has called me this morning”, because it was a two o’clock closing in Springfield, Illinois, which is about two hours from me… And I said “It’s weird that nobody has called me this morning”, because I was told I was gonna get a confirmation phone call of exactly where the meeting place was. But I knew the name of the title company, so I just put it in Google and started driving.
Joe Fairless: “Everything must be going perfectly”, you thought. No issues.
Michael Beeman: Yeah, everything must be going perfectly.
Joe Fairless: No one’s calling you for any issues.
Michael Beeman: Yeah. I didn’t see any issues… And then I got a call from the mortgage broker, which is the lender that had worked out with this financial institution… The mortgage broker on these large properties; if some of your listeners don’t know, there’ll be mortgage brokers that shop around for the right bank for you and get you a deal, and then they throw on half a point or a point on your note… But sometimes if you are starting out, they can be an asset to you.
So he calls me up and I’m about 30 minutes from the site and about an hour from close, and he calls me up to say the bank has called him this morning and they backed out; he has no idea, they wouldn’t give a reason… He suspects it was because it was right towards the end of the year and they had an overrun or an overload on multifamily loans, and they decided they weren’t doing anymore until the new year, and… Good luck with it. That was it. I was like “Whaaat?!”
Joe Fairless: That’s disgusting.
Michael Beeman: I lost my mind. I was like “What in the world?!” I’ve got investor money, I’ve spent at least $50,000 on my syndication attorney and my inspections and everthing else, which is gonna have to come out of my pocket, because I’m gonna have to return the investor money, because the investor money is sitting in an account, but I’ve got $50,000 in my dollars that’s gonna go down the tube, at least – maybe closer to 70k; if I look back, I could probably get the exact number, but regardless of that… I’m talking to him, like “What the heck do I do?” So I call my syndication attorney to tell her, and she says “Call this guy.” So I called this other mortgage broker that was really good, and then I called my local bank.
My local bank was actually somewhat interested in it… But it was their monthly meeting for purchases over a million dollars where their board gets together, so they wanted to go to that meeting… And then when they went to the meeting, they decided that this wasn’t the right time for them to do this right now, that they didn’t really trust us yet, and they didn’t feel we had enough time. They were afraid of the distance from us, and everything else, even though we had an on-site manager there that came with the property.
Basically our system is set up where everything is online. Tenants pay bills online, they apply online, we advertise online, especially on Facebook Marketplace, Craigslist, our software puts it out to Apartmens.com, so… It’s not like the old days where you really have to be on-site. You could do a lot of stuff from a distance, especially if you have somebody on-site that does nothing but show apartments and give out five-day notices, and you have local maintenance.
So we actually felt like we had a very good organization, much better than the previous owner, who was just a mom-and-pop owner, and he basically was doing everything, with the metal box, and people dropped their cash in on the side of the door… It was a very mom-and-pop in that thing; just a sign hanging out front with his cell phone number on it… So we thought we were much better than that, so they backed out. Now we’re getting up into late January…
Joe Fairless: Well, time out before that, because you went through the moment you got the phone call…
Michael Beeman: You’re wondering how did I get the seller to go this far?
Joe Fairless: Well, there’s a whole lot of things I’m wondering, so time, real quick… Let me just ask a couple questions before we get into months down the road. We just heard you got a phone call; you were on the way to closing, and your mortgage broker says “Bank backed out, and I don’t know why. Good luck!” Did you ask that mortgage broker “Well, what are some other options for other lenders?”
I had talked to him, and in fact he was trying to find other lenders… So he was working behind the scenes, but by the time he said “Good luck!”, he realized that my contract was expiring within two weeks. So my $20,000 I had down, plus all my expenses, was going to just vanish…. So he realized all of that situation, and he said there’s no way I can get somebody within two weeks to do this.
Joe Fairless: And how much money did you need for the financing?
Michael Beeman: There was about a 1,5 million dollar finance.
Joe Fairless: Okay, so 1,5 million dollar financing, which is kind of touch, because it’s a little too large for most people, if they were to pool a couple people’s funds together, for them to take down… But not large enough for a lot of interest with–
Michael Beeman: Yeah, because one was a 36, and one was a 10, and one was a 16 – it was a portfolio – and they weren’t close enough to combine them and call them agency debt. So I could get agency debt either.
Now, they had a lot of cashflow opportunity because of that, and I was buying at a 9% cap and there was a ton of value-add… So I had a lot of things going for me with the property that I really liked, but I had that going against me. So I’m discussing with the broker, because I got this through the Marcus & Millichap broker, and he has convinced the seller to not just take it off the market or go to anybody else, he has convinced the seller we are still a solid buyer… And he’s the one that really helps salvage the deal with me; we talk to the seller and he said “Okay, well I’m just gonna keep running it as is. It’s making more money for me now than it ever has”, because he had finished up a bunch of repairs and remodels… So new tenants were coming in at almost $100 higher than his current tenants.
So he was not upset at that point; he just realized that he was in his ’60s and he didn’t wanna be doing this forever.
Joe Fairless: And what if anything did you have to give him in order for him to agree to–
Michael Beeman: I did… I had to increase the price about $20,000 to get the large extension that needed.
Joe Fairless: And how did you all come up with that $20,000 figure?
Michael Beeman: Well, he basically came back to me saying “Look, I’ll do it for X amount of dollars”, and he was at like 50k. I said “You’re out of your mind. That’s $50,000. I’m not doing that.” So I bluffed and said I’d walk away, which I probably would have done at 50k.
So I bluffed and said I was gonna walk away and deal with the broker; I said “This isn’t gonna kill the deal.” I said “Let’s bluff him and see how low I can get this number down, because he seems like a really reasonable guy, and I don’t want to spend an extra 50k. That throws off my projections on my returns by almost a full percentage point.” So I talked to the Marcus & Millichap broker and he communicated with the seller; he got me to agree to 20k, because I had been all the way down around 10k, but we agreed somewhere around $20,000, and I got an extension. Now, I closed on the very last day of that extension, and that’s a whole other story…
So I’m trying to salvage this deal, so from there I’m talking to this mortgage broker; now that I’ve got this extension, I’m talking to a mortgage broker…
Joe Fairless: The new one.
Michael Beeman: A new mortgage broker. His name is Eric Stewart, he’s great. He’s a great mortgage broker for large multifamily… Anyways, I’m talking to him and he thinks he’s got a lender that would specialize in this type of situation… Because he realizes my value-adds, so he says “You probably don’t want long-term debt that’s gonna cost you a lot of money, and you don’t want debt that’s going to cost you a lot of money to refinance out of, because I can see what your goal is here. You want to get all this water meter, get your rents up, and you want another 18-24 months to be able to refinance your investors to cash out…”, and I said “Exactly.”
So we’re talking, he thinks he’s found someone, but they’re dragging their feet at the moment, and he said “Go ahead to your local bank, and if you think they’ll do it, then try.” I mentioned before that they just didn’t like the management setup, plus they were a smaller bank and that was a lot of money to them.
Anyways, going forward – he’s found this bank, we got through the whole process again, we go through everything, give all of our information, which is reasonably close at this point, because we had all the information for the other bank, we were already at a closing… So we basically found a lender that would take on the property with 24 months of interest-only; so I get a little bit higher interest rate doing that, but then I still have time to refinance out at the end of 24 months, and on the one property that’s 36 units we believe we will have a valuation over a million dollars, which will allows us to put agency debt on it. The other two properties we’ll have to switch to more traditional financing whenever we refinance out.
So he gets that put together and we are on the last day at closing. My mom is one of the signers with me, she’s one of the largest investors; of our $500,000, she had brought 190k, because like I said in my previous, I started this company and my mom put in 20k of that original 52k I had, and she now owned one quarter… So whenever I came to want to do something big, she had belief in me, because she had seen what I was already capable of… So whenever I had this opportunity, she wanted in, so she was one of the signers on the deal, and then I was on there… And she’s on vacation, which is just perfect. She’s in Florida, we’re trying to do–
Joe Fairless: [unintelligible [00:13:13].22]
Michael Beeman: [unintelligible [00:13:15].09] my mom’s in Miami, Florida on vacation, and she’s supposed to sign this paperwork… And she’s driving all over Florida in an Uber to different places because she doesn’t know how to use some of the simple things that most of us know how, like CamScanner, to where you can just take pictures and scan the doc and it runs a scanning app, and you can send these documents back…. So she’s running to different banks to see if somebody will help her out with scanning these documents back to us, signing and scanning them back, and making sure she fills them out correctly on her end… So then there’s confusion on where she’s supposed to overnight them, so they got overnighted to the lender instead of closing, because that’s where she swore that lady [unintelligible [00:13:55].17] where to send them…
Joe Fairless: [laughs]
Michael Beeman: So I’m pulling my hair out on the day of closing… And finally they say — because this was the day before the closing; the day of closing I find out all this and I’m pulling my hair out because FedEx said they couldn’t reroute it, because it was overnight delivery… And even though the day before, whenever I figured this out, I had called them and they said they can reroute it, but that lady didn’t realize it was overnight delivery…
So the lender gets it, they call title, they say “Okay, we have everything. Do you need this?” and they said “No. If you’re saying you have everything and you’re gonna send us money”, she said “I have everything I need for title closing. I don’t understand why you guys wanted to send the documents here first anyways.” So they said “Okay.” So that problem was taken care of, and we finally got to closing there at the end, but it was just one of those things where you got to the end and you were just like “Nothing can go right…!”
It was a learning experience; there’s a lot of tips I could give to people going forward…
Joe Fairless: What are they?
Michael Beeman: One of them is I should have been in much better communication with the lender to find out what the issue was from the very beginning to try and overcome their objection. The second time around it wasn’t as difficult for me to overcome objections because the mortgage broker I was working with, Eric Stewart, was in great contact with the lender, and he was like “Okay, here are their objections. Here’s how we can handle them.” So he kind of took me under his wing in a way to show me exactly what to say when I got on the call, tell me exactly how I was gonna do things, to say what they wanted to hear… And I never had that with my first mortgage broker.
So I will say that if you have the right team, that is 100% your most important thing. Then finding out what your objections are and how to overcome them. That worked out in my favor, having him on my team, in that same situation. That deal would have never got closed without him, and I would have been out 50k for trying a syndication.
Joe Fairless: And also having a broker from Marcus & Millichap be able to navigate that conversation with the seller….
Michael Beeman: Yes!
Joe Fairless: Because he was representing the seller, right?
Michael Beeman: Yup.
Joe Fairless: Okay, so he was representing the seller, but he was just trying to make sure the deal…
Michael Beeman: Got done.
Joe Fairless: Yeah. And how many months delayed was it for closing?
Michael Beeman: It closed in early April. That was essentially 3,5 months late.
Joe Fairless: So it was delayed 3,5 months.
Michael Beeman: Yes.
Joe Fairless: And the only thing you had to do to get that additional time was increase the purchase price by $20,000.
Michael Beeman: Yeah, that was the only thing I ended up having to give up in the deal, which was amazing.
Joe Fairless: Yeah. If you had not closed within that 3,5 month time period and it expired again, would you have lost out on — the original 50k obviously, but then the additional 20k? Or was it just 20k tacked on to the purchase price?
Michael Beeman: No, that was my thing – I didn’t tack it on to the purchase price, because this was not a sophisticated seller. This was his only 62 units, he was selling them, he’d owned them for 14 years, and he had bought them in a partnership with some partners, and within 2-3 years realized he didn’t like the partners and bought them all out… So he had this property, he was self-managing. He was asking originally for 50k in increased price.
Joe Fairless: Right, right.
Michael Beeman: So he still had some belief by saying that to me, in my opinion, he had strong belief and belief in his broker that said “This guy will get the job done.” So he still had strong belief in his broker at that time in my opinion to just say “50k increased price”, instead of “Bring me 20k or 50k cash, so that if you don’t close, I have an even bigger pile of cash in my pocket to put the thing back on the market.”
And that put me in a safer situation going forward as well, because I didn’t have to put out any more cash, except for the $12,000 that the lender wanted me to plump forward for their appraisal/due diligence stuff, which the new lender cost me that 12k and it cost me 20k on the price, which ended up being about $32,000. So all in all I can’t complain too much. The mortgage broker and the broker from Marcus & Millichap really helped me, and then a little bit of me just basically not willing to quit, and just tried to figure out how to overcome every objection with the lender, overcome objections with the seller, and try to get something to the finish line, and we did.
Our team is up there right now, starting on their rehabs on some of the things and the metering of the water.
Joe Fairless: Well, I thoroughly enjoyed this story, and I’m glad that all is well that ends well… Thank you for sharing, and thanks for coming back on and updating us with a situation that took place that was very challenging. Best Ever listeners, if you liked this episode, then I did an interview with Mark Mascia, episode 599 – so that was like 1,000 days ago; longer than 1,000 days ago – and it’s titled “Big money raised, investor partners set, and on closing day the lender says…” Well, spoiler alert, same thing happened; in that case it was a large medical office building in Nebraska, and it was as storybook ending as yours is with his deal… [laughs] So if you’re curious about how it could have gone, then you can listen to episode 599.
Thank you for being on the show… How can the Best Ever listeners get in touch with you?
Michael Beeman: My e-mail is firstname.lastname@example.org. I talk to a lot of people all the time; some people that have heard me on your podcast, and others, and I try and help them out. We partnered on deals… My number is 217-508-8185. That’s a good way to reach me, and if you just shoot me a text message, I give you a call most of the time. I’m like everybody else, I’m a bit busy, but you should me a text message, ask for a time to have 15 minutes of my time; I love helping people out. I also love hearing about real estate stories all over the country, and I get to hear those whenever I get to talk to people, so I have a good time with that as well.
Joe Fairless: Thanks for being on the show again. I enjoyed learning more about this story. I hope you have a best ever day, and we’ll talk to you soon.
Michael Beeman: Alright, thank you Joe.