JF1761: What To Do When Your Lender Backs Out At The Last Minute #SituationSaturday with Michael Beeman


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:

 


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


TRANSCRIPTION

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 michaelbeeman@beemanandsons.com. 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.

JF1729: Investor Starts With Only $10k, Now Cash Flows $700 Per Month with DJ Cummins

DJ and his wife are a real estate investing team, and they’re just getting started. They have purchased and sold a four unit multifamily building, as well as bought a couple of other deals and are currently holding those. Hear how they got started with little cash to invest, and how they plan on continuing their real estate investing careers. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Don’t do it yourself, know what you’re good at, and find yourself a team” – DJ Cummins

 

DJ Cummins Real Estate Backgrounds:

 


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


TRANSCRIPTION

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.

With us today, DJ Cummins. How are you doing, DJ?

DJ Cummins: I’m great, thanks for having me.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about DJ – he started investing in 2015, and has purchased three properties, a total of six units, and has now approximately $85,000 in equity in those properties, with a current monthly cashflow or roughly $700/month, and all with an initial investment of $10,000. Based in Bethalto, Illinois. With that being said, DJ, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

DJ Cummins: Sure. In 1998 I was in high school and I’ve heard a lot of people on your show talk about the Carlton Sheets program.

Joe Fairless: Yup.

DJ Cummins: As a junior in high school I got the cassette tapes and I listened to them, I thought he was crazy, and that was the end of that. And then I guess about six years ago my cousin and I were on a fishing trip, and he was talking about real estate, and him and his wife had a few apartment buildings. They’re about my age, and they were talking about possibly retiring early. It all seemed crazy, and it got my interest sparked again… So what was less than a year from then, even my wife and I started investing.

Joe Fairless: What was the first step you took?

DJ Cummins: Well, we did a lot of research, because at the time we didn’t have a lot of extra money. The $10,000 we started with was about every penny we could scrounge up. We started a partnership with my wife’s cousin and his wife, and the four of us bought a fourplex in 2015. Then we bought two more single-family houses after that.

Our market just isn’t great for multifamily. There’s not a lot of choices in the good areas, and we’ve found a lot more success with the single-families since then.

Joe Fairless: Do you have a full-time job?

DJ Cummins: I do. I’ve been in the mortgage industry for 10-12 years now. I’ve been a loan officer, an underwriter, an appraisal analyst… Now I’m kind of an operations support, in the background of a mortgage company, and then Erin does the purchasing for a steel [unintelligible [00:02:51].17] So she’s good at finding deals and buying stuff.

Joe Fairless: Erin, your wife?

DJ Cummins: Yeah, Erin is my wife, yeah.

Joe Fairless: Okay, cool. Well, that’s good, your background especially… And Erin’s too, but you’ve been in real estate as a W-2 employee or as a professional for a while before you started investing.

Your initial investment was $10,000, and that was with your wife’s cousin and his wife. That was the fourplex that you still have?

DJ Cummins: We actually sold that about a month ago. It’s the first time we’ve sold anything.

Joe Fairless: Should I say congratulations?

DJ Cummins: Sure. We’re kind of adjusting what we have going on, and we did good on it, and we’re looking forward to the next purchase coming down the pipe.

Joe Fairless: Great. What did you buy it for initially?

DJ Cummins: We bought it for 95k. Two units were vacant at the time, but the rents would have been $1,700. Then we sold it for 118.5k four years later. It was bringing in roughly $2,000/month. We raised the rents and we made some money out of it, and decided the partnership – we were gonna kind of go different ways. Erin and I have some money now to invest on our own in something.

Joe Fairless: Okay. So it was more the partnership structure was driving the sale, and less the property profitability. It was profitable, clearly, but it was more you wanted to go your separate ways.

DJ Cummins: Yeah. The property was cash-flowing $400-$500/month, so it was doing well, especially for a $95,000 investment… But we were just gonna go different ways with the partnership. A partnership is great when you get started, because there’s someone there to cut your back on stuff… But it can also turn a great deal into an okay deal when you’re just cutting that equity in half and you’re cutting the cashflow in half, so… It was time to go our own way.

Joe Fairless: How much did you net from that transaction that you’re able to now put into something else?

DJ Cummins: I think ours was a little over 19k-20k.

Joe Fairless: Okay. So you put in 10k initially, so you doubled your money in four years?

DJ Cummins: Yeah, we doubled our money in four years. Plus, we had the cashflow in between that.

Joe Fairless: Sure. Well, that’s a pretty darn good return.

DJ Cummins: I would do it again, yeah.

Joe Fairless: Yeah. Not including the cashflow, that’s 25% return, just on the profits from the sale. Okay, and your two single-family homes – what were the purchase prices for each of those?

DJ Cummins: One had been on the market too, and we’re gonna try and take some money from that one once we sell it… But that one we purchased for $43,000, and… These were all in a good area where we’re from here; so it was purchased at 43k, it was renting at $850/month, and we only had about 8k to 10k into it as far as fixing up the property.

Right now we owe about 29k on it, and we actually had an offer last week for 64k that we were gonna take, and then the offer fell through, so… Roughly, we should walk away with another 30k or so from that one.

Joe Fairless: And thanks for mentioning how much you’ve put into it; I should have asked on the fourplex how much you’ve put into it… Did you put much into it, since two units were vacant?

DJ Cummins: We pretty much redid all the flooring, all the paint, several new refrigerators, a couple of air conditioners… So we’ve put in quite a bit of things. Two of the apartments were completely redone, were gutted and started over on. So we’ve put in a lot, and then the cashflow did some of that work for us.

Joe Fairless: Okay. And how much all-in would you say you put into it? You bought it for 95k, and then how much on top?

DJ Cummins: We’ve probably put 15k-20k in it. We had one tenant that tore up a little bit on us, and that cost us 9k just on a 500 sqft. apartment rehab.

Joe Fairless: Dang! After you did the renovation?

DJ Cummins: Yeah, we had done some renovations, and then we pretty much had to start all over. We were getting ready to do an eviction, so he didn’t want us to go on the property, and he had a water leak in his bathroom and he had a pair of [unintelligible [00:06:40].20] and I guess it busted, and he never told us… So there were some mold issues in two of the three rooms… It was pretty bad.

Joe Fairless: That’s gut-wrenching. That makes me sick for you. When you came across that, what was the process to resolve the issue?

DJ Cummins: Well, we had some [unintelligible [00:06:59].24] and luckily the mold hadn’t sat there for a long time, so we had to cut out some pieces of wall, but we got it fixed pretty quick. We found some great contractors along the way, that have been with us [unintelligible [00:07:08].13] They got it turned around, and it still took longer than a month… But still, when it rents out for $500 and then you have to spend 9k to fix it up, it’s kind of gut-wrenching, like you said…

Joe Fairless: Yeah. The money from the rent go to these fixes that you did, or did you have to come out of pocket for anything?

DJ Cummins: That one we came out of pocket some on, just so we didn’t drain our business bank account, and then we kind of paid ourselves back over time. And after the sale of the property we got some back, but… Technically, the company paid for part of it, our LLC, and then we’ve put in a little bit out of our pockets too, just so we didn’t drain the bank account [unintelligible [00:07:44].22]

Joe Fairless: Of your two single-family homes, you said you bought one for $43,000, and you’re all in for around 54k… What about the other one?

DJ Cummins: The other one is a little bit larger, and that’s probably my favorite one that we have. We bought it for 55k, but we got a $3,500 closing cost assistance. We had to put some work into the place. I think we’ve put 12k into it, and that was more than we had planned on, because the inspector missed something on the foundation, and we had to have the addition jacked up in the air about six inches. They just put the foundation on cinder blocks, on the dirt. The kitchen was just slowly settling down into the ground, and we had to pour some footers in…

That wasn’t gonna be a huge rehab. It was gonna be a paint job and flooring and it was good to go, but then we had to jack the floor up, so that was kind of  a scary thing. Now we’re into that for about 62k-63k, and it’s worth around 80k.

Joe Fairless: Okay. What’s it rent for?

DJ Cummins: It rents for $950.

Joe Fairless: $950. How come you’re selling the other single-family home?

DJ Cummins: That one was also in a partnership.

Joe Fairless: Okay. And the 63k one was not?

DJ Cummins: That one was just my wife and I.

Joe Fairless: Hallelujah! You’ve gotta keep one.

DJ Cummins: Yeah, we don’t have to start all the way over. We’ve paid our dues and we’ve learned what we’re doing; we’ve got a team, we’ve got some ideas about what we wanna do in the future, and we’re looking at some — I call those chameleons, because we’re up for anything. We’ve looked at car washes, storage facilities, laundromats – which terrified me, looking at the laundromats – apartment buildings… We’re chameleons, we’re up to change to do whatever we have to do to make the money. That’s why we’re selling off the two in the partnership, just so we’ve got a little bit more freedom to do what we want, and not have to run it by anybody else, or anything like that.

Joe Fairless: Did you do the renovations yourself when you had to get the units ready?

DJ Cummins: Well, that was one of our big mistakes. At first we were trying to do it ourselves, and… Anybody can paint. When I say anybody, I mean anybody but me… [laughs]

Joe Fairless: And me.

DJ Cummins: So we did okay, but it takes so long to do it yourself… I’m working 40-50 hours/week and I’ve got a 10 to 15-hour commute, and then trying to put in a floor at nighttime, or fix a toilet here and there… We did a lot of it ourselves at first, and we had an eye-opening experience. The apartment we turned over a couple years ago – we did it ourselves, and it took us 4 months to do; we saved on labor costs with the contractor, but the contractor could have finished that job in probably 1,5 to 2 weeks.

Joe Fairless: Oh, my gosh.

DJ Cummins: Yeah, so we saved $1,000 and lost $2,000 at the same time, pretty much… So we learned our best asset is not doing things ourselves. We’ve figured that out pretty quick.

Joe Fairless: What took so long? And by the way, if I was doing it, it would have taken six months. You got it done four months faster than I personally would have been able to do. But looking at it, now that you’re reviewing the process, what was taking you all longer than a contractor?

DJ Cummins: Well, a few years ago I had to google the difference between a flat-head and a Phillips screwdriver.

Joe Fairless: [laughs] Okay, I’m past that, at least…

DJ Cummins: [unintelligible [00:10:51].00] but it’s just a learning process if you’re working on cabinets. Or the painting was a pain, and the guy was a smoker, and it was like a four paint job type of place. And we got the cheap paint to be cost-effective, and that stuff didn’t work at all. It was like putting white out on the walls. We took 4-5 different colors to get it on there, so we’ve learned not to use the cheap paint.

It’s a learning process, so… I guess we weren’t in that big of a hurry to get it turned over, though we should have been. At that point we were treating it more as a hobby than as a business, and then we realized we were hurting ourselves in the long run financially, and it was hurting my back. I was down there doing all kinds of stuff.

Joe Fairless: And you wrote a book about landlord life. In fact, it’s called “Landlord Life: a Diary of a New Real Estate Investor.” What’s in the book?

DJ Cummins: Well, we did a lot of research before we got started, and I’ve read a whole lot of books, and tons of blog posts, and different websites and podcasts…. And podcasts are awesome these days. But I just thought I wasn’t getting [unintelligible [00:11:51].07] for what being a landlord was gonna be like. Some books are great, some books are not so great, and I thought what I was most curious about was what the day-to-day was gonna be like, and what actually it was like to be a landlord. You find a lot of books on how to sign deals and do deals, but what do you do once you got that deal?

[unintelligible [00:12:09].00] writing the book… It was six months before we bought our first property, so I kind of jumped the gun on the book a little bit. But anytime we did something with the business, it’s in the book. It’s literally like a diary. There’s no chapters, it’s literally — anytime we did something with the business, there’s a diary post, and we laid it into a book.

Joe Fairless: Huh. It’s not only helpful for others to see the play-by-play, but it’s helpful for you as you’re going about the process… I keep a daily journal, and I’ve been doing it for 3-4 years, and it’s just eye-opening to read what I was working on a year ago today, two years ago, three years ago, and thoughts…

Have you kept up a journal or a diary since publishing the book?

DJ Cummins: I still catch myself writing stuff down, even though I’m not writing a book anymore, yeah. It did help. I had several times, like around tax time, that we forgot this and that, and what was this money for, and which LLC was this receipt for… And we were able to just pull up that Word document, and there it was; I wrote about it in the book, so we could figure out where it was coming from. Even if someone’s not writing a book, it’s not a  bad idea to keep a journal with what’s going on on a day-to-day basis.

Joe Fairless: For real estate investors who are starting out, what’s your best real estate investing advice ever?

DJ Cummins: Well, like I said, don’t do it yourself. Know what you’re good at and find yourself a team. You don’t have to start off with 1,000 units; get yourself one house if you have to, and find the people that are gonna be good at what they do. We’ve got an HVAC guy, we’ve got a painter, we’ve got carpenters… We’ve got a little bit of everything to help us now. Now we can keep on keeping on, and not have to worry about anything else. Knowing what you’re good at is the biggest thing to me, and avoiding what you’re not.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

DJ Cummins: Yeah, sure.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:13:59].18] to [00:14:42].01]

Joe Fairless: Best ever book you’ve recently read?

DJ Cummins: Well, the copout answer would be my book, or one of your books, so I don’t wanna give the copout answer…

Joe Fairless: I want the real answer.

DJ Cummins: [laughs] Well, it wouldn’t be fair to come on here when no one knows who I am and say my book’s the best one in the world… Two that I really like – I have to mix in two… The Book on Investing In Real Estate with No (and Low) Money Down, from Brandon Turner. In my opinion, that book was kind of like Rich Dad, Poor Dad was. A lot of people talk about how Rich Dad, Poor Dad changed their mindset… Well, Brandon’s book kind of took it a step further and did specific examples on “Hey, this is how you can do this without having a ton of money”, and I thought that was a fantastic book.

Then Mark Ferguson, “Build a rental property empire.” I’m not sure that I wanna have my own empire, I don’t wanna have 40 or 50 houses; we’ve had three properties the last few years and I’ve had a few extra grey hairs pop up… But just seeing how he’s done it — it’s just kind of an eye-opening book. It’s possible to put your mind to it. It’s a great book.

Joe Fairless: Best ever deal you’ve done out of the three?

DJ Cummins: All three deals we’ve done – they all pretty much have similar cash-on-cash returns, and all that kind of stuff. I really have decided that I like the single-families more, so the most recent one that we just bought a couple years ago (2017 is when we bought it), it cash-flows $300/month, we’ve got about 20k of our own cash into it, give or take a few dollars, and we’ve got 20k to 30k extra equity built into the property already.

Joe Fairless: What’s a mistake you’ve made on a transaction that we have not talked about already?

DJ Cummins: The biggest mistake — one for us is not having a property manager. Someone that has a full day to dedicate to [unintelligible [00:16:19].09] and someone that’s okay to be the bad guy; I am not very good at being the bad guy. We found that out. So that was a big mistake for us, not having a property manager.

We’ve got good tenants where we’re at now, and I think we’re okay with who we’ve got, but anything going forward is gonna be under property management for us.

Joe Fairless: Best ever way you like to give back?

DJ Cummins: We’re both volunteering at our church, we’re both on a couple of boards at the church; I’m on the financial board, for example, and… A passion of ours is helping out with the church.

Joe Fairless: And how can the Best Ever listeners learn more about what you’ve been doing?

DJ Cummins: Well, anyone’s free to reach out to me on Facebook or LinkedIn under DJ Cummins. And I actually started a blog a couple of weeks ago, www.ragstonicerrags.com.

Joe Fairless: [laughs]

DJ Cummins: I’m not a rags to riches kind of guy; I just wanna have nicer rags… So that’s kind of where I’m at [unintelligible [00:17:10].10] But I feel like I’ve learned a lot in the last few years, and I wrote a 400-page book, so I feel like I know a thing or two about a thing or two now… And I wanted to share it. I’m not on there to sell anything to anybody. It’s kind of a way to get the word out from what we’ve learned.

Joe Fairless: Well, DJ, thank you for sharing what you’ve learned, and the experiences from your first three deals. The lessons from the renovation process, taking it over versus bringing in a property management company or contractor, to partnerships, and the challenges that you can come across with tenants who just go berserk, and qualifications for screening tenants – all that stuff. And also, as you’re building your portfolio, where your focus is going.

Thank you very much for being on the show. I enjoyed our conversation, and I’m sure a lot of the Best Ever listeners who are looking to get into real estate or just get going got a lot of value from this conversation, so I really appreciate it. I hope you have a best ever day, and congrats on the book, and we’ll talk to you soon.

DJ Cummins: Okay, thanks so much, and thanks for all that you do for everyone out here.

JF1649: Scaling A Business With A Successful Exit #SituationSaturday with Terry Lammers

Growing a business takes a lot of time and effort. Sometimes, your efforts can have a negative impact if you’re not making the right moves. Today, Terry will help us understand how businesses are valued, so that we can focus on the activities that have the highest returns. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

 

Terry Lammers Real Estate Background:

  • Co-founder and managing member of Innovative Business Advisors, advising business owners on the sale of their company
  • Had 11 different companies he grew to $40 million in annual sales before selling in 2010
  • Based in Fallon, IL
  • Say hi to him at http://www.innovativeba.com/bestever

 


Sponsored by Stessa – Maximize tax deductions on your rental properties. Get your free tax guide from Stessa, the essential tool for rental property owners.


TRANSCRIPTION

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.

First off, I hope you’re having a best ever weekend. Because today is Saturday we’ve got a special segment for you called Situation Saturday, and here’s the situation – you’ve got a real estate business, and you want to scale that business, but here’s what you are thinking… You’d like to scale that business and the exit out of the business with a successful sale of the business. Today we’re talking to Terry Lammers about how to scale our real estate business and prepare it for a successful exit.

First off, how are you doing, Terry?

Terry Lammers: I am fantastic. How are you, Joe?

Joe Fairless: I am fantastic as well, and nice to have you on the show. A little bit about Terry – he’s a co-founder and managing member of Innovative Business Advisors, advising business owners on the sale of their company. He’s had 11 different companies he’s grown to 40 million dollars in annual sales before selling in 2010. Did I say that right? Help me with that fact.

Terry Lammers: I grew up in a family oil business; we were dealing with gasoline, diesel fuel, lubricants, stuff like that, so I came back to the company in 1991, took it over, and over the next 19-20 years purchased, acquired 11 other companies. Then I exited the business in 2010.

Joe Fairless: Oh, cool. Alright, thank you for that. Based it Fallon, Illinois.

Terry Lammers: Innovative is based in Fallon, Illinois, and the oil company was in Pierron, Illinois. We’re about 30 miles East of St. Louis, Missouri.

Joe Fairless: Cool. With that being said, will you give the Best Ever listeners a little bit more about your background and what your focus is now?

Terry Lammers: Sure. So a family oil business, growing that, I grew up in it; purchased 11 companies, grew it to over 42 million dollars a year in sales, sold it to Growmark, which is about a six billion dollar agronomy company in 2010. I had to work for them for six months, and then I was done. I had not planned for what I was gonna do after I sold the company, so I sat around the house for about three months, and my wife informed me that I was gonna get a job.

Joe Fairless: [laughs]

Terry Lammers: I did commercial banking for 3,5 years and kind of got my entrepreneurial spirit back, and in July of 2014 my partner and I started Innovative Business Advisors. I got my CVA designation, which stands for Certified Valuation Analyst. CVAs values businesses, and that’s a national  designation.

Innovative basically does three things – we help people buy and sell businesses; since I’m a CVA, we do a lot of business valuations, valuing businesses for a variety of reasons. A lot of the reasons we value businesses is for the business owner to know is the company worth enough for them to exit? And then we also do some coaching and consulting.

Joe Fairless: How much does it cost to have you put a price tag on a business?

Terry Lammers: We do two different types of valuations. One is per NACVA standards. NACVA is the National Association of Certified Valuation Analysts. And then we do a summary valuation. The NACVA valuation – for their standards it has a lot of write-up in it. There’s a write-up on the company, the management team, the industry, all the adjusting entries – there’s documentation why we did that, and that’s gonna cost you between $5,000 and $10,000. We charge $10,000 for it. There’s just a lot of work to it.

For the same number, you’re gonna get the same value – we’ll do the summary valuation, and that’s what most people are doing, because if you’re the business owner you don’t need to know about your management team, you don’t need to know about the industry and you don’t need to know about your company. You’re living it, right? So we kind of cut straight to the numbers, and we do that for about $2,500.

Joe Fairless: Will you say the industry again – is it NACVA? What was it?

Terry Lammers: NACVA, it’s an acronym for National Association of Certified Valuation Analysts.

Joe Fairless: Got it, cool. Just wanted to make sure I had the acronym correctly. When you’re doing the summary evaluation to put a price tag on what that business is worth, what goes into that?

Terry Lammers: It’s mainly getting to the true cashflow of the company. One of the main things that I preach when I’m doing public speaking and stuff like that – in school, everybody focuses on sales and net income, and it’s really not about sales and net income, it’s about gross profit and cashflow. Because of the depreciation and amortization, those are non-cash expenses that are on your income statement, and you need to add those back into the net income to get you the true cashflow of the company. So you’re really valuing the cashflow of the company, that’s what it boils down to.

Joe Fairless: If a company has been around a while and is not making money, but has a product and just hasn’t been able to be profitable, but has a product and maybe we’ll say they have a patent on the product, how do you put a value on that company?

Terry Lammers: That is very tough. I will tell you there are two types of valuations. We do financial valuations, so we’re valuing the cashflow of that business and determining what financial sense would it make for, say, you to buy my company. The other type of valuation would be a strategic valuation. So if I create an app that Google thinks they can buy, and spread it across the world, what is that really worth? Now, if you are a potential buyer of a company and you come to me and you say “Terry, I’m thinking about buying this company, and strategically I wanna know what is it worth”, we can sit down and talk about that – what your potential market is… But there’s no way to financially justify those types of valuations. That’s really tough. So I tell people that all the time – when I’m doing a valuation for your company, I’m doing it from the perspective of “Does it make financial sense for somebody else to buy it?”

Joe Fairless: So excuse the ignorance with this question, but it seems like it would be pretty easy to do a financial valuation of a company if you have the profit and loss statement, because it’s already done for you if all you’re looking at is the gross profit… So you just look at the financials they give you and then you put some sort of multiple on that?

Terry Lammers: Yeah, so the tricky part can be to get into the true cashflow of the company, because unfortunately people get very complacent with their financial statements… And I get them, and I’m a fresh set of eyes on those things, and I’ll find a lot of things that’s like “Why is your accountant doing it like that?” and most often, the answer is not that it’s a bad accountant, it’s just nobody has brought it up to them, and “This is the way we’ve been doing it for the last ten years, so that’s the way it’s always gone forward.”

Joe Fairless: For example? What would that example be with an accountant, why they’re doing something like the way they’re doing?

Terry Lammers: The cost of good sold is always a section where — the proper things aren’t in the cost of good sold section. Or there’s a lot of personal expenses on the financial statement… It’s fine, their own personal expenses; I hope auditors aren’t listening to this, but if you [unintelligible [00:09:00].12] through your company, that’s your prerogative, but when it comes time to sell it, you wanna be able to clearly identify those things so you can add that back into the cashflow. So you’re gonna want to add back into the cashflow any expenses that a prospective buyer would not have when they take over the company. But I’ve seen mislabeled items on the income statement. Income statements that are eight pages long – that’s ridiculously long; nobody can analyze that. They need to be condensed.

So those are the kinds of things that you start to look for. On the top side, the revenue side, there’s one revenue item, and they’re selling multiple products and they don’t have that split out. So really going through and – that process is called normalizing the financial statements – getting to the true cashflow of the company. But then one of the things – especially if the company has less than a million dollars in cashflow, so it is a bankable deal, I hang my hat a lot on the fact if I put a number on the company, can you realistically go to the bank for a reasonable down payment and have enough cashflow to service that loan?

Joe Fairless: And then once you’ve normalized the financial statements and you have the true cashflow, how do you determine what multiple to put on it?

Terry Lammers: Really I don’t say that you’re putting a multiple on it. Once you’ve come up with the value, you can determine what the multiple came out to by dividing it by the value, by the seller’s discretionary earnings, or two times revenue, or something like that, but you really don’t come to it with the approach of “I’m gonna value this business at 3x revenue.”

A common way to value a company is called the discounted cashflow. What you do with that is you’re thinking about what type of return should I get on this company. When I was buying companies, my trigger to buy a company was if I could pay for it in 3-5 years. So if I’m gonna pay for that company in three years, that means I’m getting a 33% return on my income. If I’m gonna pay for the company in five years, that’s a 20% return on my income. So if you divide 20% by the cashflow of the company, that will give you a value. Same if you divide 33% by the cashflow of the company – that will give you a value. Then from there you can determine if that value is a bankable number.

A small business – you should get a better rate of return than, say, what you could invest in the stock market or something like that. So you’re determining what rate of return will trigger me to want to buy this business. The bigger the business is, the lower the rate of return somebody will accept to buy that business, which increases the multiple of that business. So 16% would be a multiple of 6. Does that make sense?

Joe Fairless: Yeah, that does.

Terry Lammers: I’m [unintelligible [00:11:44].25] through my book – the name of the book is “You don’t know what you don’t know”, the byline is “Everything you need to know to buy or sell a business”, and I think it’s in the second or third chapter that I lay out that formula on how to do that.

Joe Fairless: And for a real estate investor who has a company, and — when I say “has a company”, they have some people who work for them, and they’re thinking “Hey, I like what I’m doing, but I want a little bit more freedom with my time, so I’d like to scale this wholesaling business, or this fix and flip business (or whatever business they’re in) and sell it to someone in a year or three years”, what are some questions they should ask themselves in order to make sure they’re prepared for an exit to make their business as desirable as possible for a buyer?

Terry Lammers: Are you specifically talking about a real estate business, or any business?

Joe Fairless: Yes, we’ll talk specific to real estate.

Terry Lammers: Okay. Specifically to real estate, one is you wanna have decent financial statements. When I sold my oil company, we had a fleet of trucks. I had a three-ring binder for every truck. So for every property you have in a real estate portfolio, where is it financed? This may sound silly, but the address, the rent rolls…

Joe Fairless: Well, I’m not talking about property, I’m not referring to someone selling their portfolio of their properties. What I’m referring to is if someone has a company where they’re wholesaling deals, or their company is to fix and flip deals; so they’re not buy and hold investors, but rather they’re investors who purchase properties and they have a business model to fix and flip deals – what questions do they ask themselves? These questions are probably the same that any business owner asks themselves for how do they prepare to get their company ready for a sale in a year or two years down the road.

Terry Lammers: Really everything comes back to cashflow, but there’s some things that I can tell you that are non-financial and financial. On the financial side, really have your house in order; do you have very accurate financial statements? If you’re flipping houses, you’re probably gonna have some work in progress, and stuff like that, so making sure that that is all cleaned up… But the profitability, having good cashflow is what ultimately is gonna value that business. So non-financial things that can really kill a business like that – if you’re the one buying and flipping houses, are you doing that personally, or do you have work crews that can do it? We coach using a value-builder system, and they call that the hub and spoke. Are you the owner of the hub of the company, meaning that all the customers are coming to you, you’re doing most of the work, you’re doing all the selling, so the company is all about you? If I’m from out of town and I’m gonna buy that company and you disappear, who’s left to run the company? So if you have a crew of people out doing that work, that’s gonna be a much more sellable company.

Joe Fairless: And with your business that you sold – it was a family business; how long did your family have it prior to you joining?

Terry Lammers: My dad bought the company (I believe) in 1975, so I pretty much grew up with it. I say it’s a family business, but by the time I sold it, there really wasn’t any other family in the business besides my wife. I was able to have three operations managers and an office manager, and I could walk away from the business for two weeks and everything would be just fine. That really helps from a non-financial standpoint of making a company sellable, that the owner isn’t intricately involved in with the company.

Joe Fairless: When you got involved back with the company in more of an adult capacity, where was it at in sales? We know where it ended up being, at over 40 million, but where was it?

Terry Lammers: Yeah. So the first year I came back it was just  my mom, my dad and myself, so it was the three of us, and I’d say — we had two trucks and it was a good day if they both started. So I think the first year back our sales were about $750,000.

Joe Fairless: Wow. How did you grow it?

Terry Lammers: My starting salary was zero. The company was in rough shape, and we had the opportunity to buy another company, and I knew if we bought that company, we would put it back in the black. I was working in St. Louis at the time for a bank, in credit card finance, wearing a suit every day, and that didn’t really fit my fancy… So I came back to help mom and dad out, and in April of 1992 I purchased my first oil company, and recreated — my dad’s company was Highland Pierron Oil Company and I created Tri-County Petroleum, and we eventually merged my dad’s company into mine, and we took off with Tri-County. That was for a banking reason that we did that.

Joe Fairless: So the growth in the sales was primarily through strategic acquisitions?

Terry Lammers: Absolutely. It really was. That’s a great way to scale a company.

Joe Fairless: And with the 11 acquisitions that you did, were all of them projected to pay all of your money back within 3-5 years?

Terry Lammers: I would say all but one, and it probably still did. The acquisitions that we did were strategic in nature; a lot of times we were expanding geographically, as much as anything… But I did have a situation with one company that was — in the later years we had grown quite large and I had two offices 30 miles apart, and there was another oil company right smack dab in the middle that wanted to sell… It was a small operation, but it had a bulk plant. A bulk plant is a storage facility for gasoline and diesel fuel, and if I’d bought the company, I was gonna tear down that bulk plant; nobody else would build a new one there, it just wasn’t economically feasible. But what I was worrying about is if the competitor bought that, now he could have a bulk plant right in the middle of an area where I had very high customer concentration. So in my opinion, the guy wanted about $100,000 too much for that company, but it was very strategic to me. So did I pay him for it? Heck yeah I paid him for it, because I didn’t want anybody else to come into the area.

Joe Fairless: You’re playing defense by doing some offense.

Terry Lammers: Correct. So what I would tell your listeners is think about that – sometimes you have to look at a deal from a strategic standpoint, and it may not make the most sense, but that is where when you hear about some of these companies selling for ridiculously high numbers, it’s because it was a very strategic operation for somebody.

When I sold my company to Growmark, one of the reasons that they were very interested in buying  it was 1) I was the largest competitor in Southern Illinois, and 2) which I didn’t know about until after I sold the company, and where I probably could have demanded a higher number, they had just bought a lubricants blending facility in Council Bluffs, Iowa, and they wanted to get into the bulk oil business in Southern Illinois. Well, they could either start from scratch, or if they purchased my company, we were selling about half a million gallons of lubricants, and had a lubricants selling facility… So by buying me, they were in the lubricants business and were able to add to what they had to offer.

Joe Fairless: Yeah, I find that stuff really interesting. Thanks for giving those details. Anything else that we haven’t talked about, that we should talk about as it relates to preparing our business for an eventual exit?

Terry Lammers: Let me add one more thing to when you’re buying a company, because I think this would apply to real estate also. Say somebody is gonna buy out another management company, or something like that – one of the things you need to think about when you’re buying another company is all the operating expenses that you’re gonna wipe out. Typically, when I’m valuing a company, I’m valuing the cashflow that that company is generating. If you’re looking at buying another company and you’re in that same industry, really look hard at those bottom line operating systems, because you’ve already met your liability limits for insurance… That’s a big one that I was always able to strike out. Obviously, you probably already have a computer system in place, so all their support expenses for their computer software system is probably gonna go out the window. So you may be able to drop 30% or even 40% of the operating expenses of that company that you’re looking to buy, which if you added that to cashflow would make the company worth a lot more money. That’s where you’re really able to scale.

So when it comes to selling a business, it’s really about getting your ducks in a row. Financially, the company’s biggest driver of value is gonna be the cashflow. But when people start looking at it and the financial statements are a mess, they’re not being done timely, that’s something that just kills me. People wanna sell their business next October, and they don’t have tax returns done from the year before. You’ve gotta get them done in a timely manner. You need to have your financial statements done in a timely manner.

All those loose ends (who owns the property?), you get into a larger company and all of a sudden there’s several LLCs, and it becomes fuzzy who owns what. It really is about getting your ducks in a row.

Joe Fairless: How can the Best Ever listeners learn more about what you’ve got going on?

Terry Lammers: Read my book. The name of the book, like I said, “You don’t know what you don’t know: Everything you need to know to buy or sell a business.” It’s on Amazon for the print version, or you can download it free on Kindle. The book basically walks you through the process. I start out talking about buying businesses, then a simple way to value a business – what we talked about, with the discount cashflow; the process of buying a business, and then I talk about building your team… So there’s chapters on bankers, attorneys, financial advisors, CPAs, I talk about bankability and what makes you bankable… There’s really two sides to each loan, in its simplest for: collateral and cashflow. Then we get into building value in the company through those non-financial things that I said – really start to add value to the company. Then I get into “What am I gonna do with this thing? I’ve built it, now what do I do?” and the exit process, and the steps you need to take; I talk a lot about confidentiality. The last chapter I called “Don’t be like a dog that caught the car.” Basically, how to plan for your life after you sell your business.

Throughout the book I try and keep it humorous and tell stories about things that I did right and things that I should have done better. It’s a process, and you need to build the team.

Joe Fairless: Terry, thank you so much for being on the show, talking about how to value businesses, the two approaches – the NACVA, the summary evaluation; those are deliverables, but the two types are financial and strategic. And all roads lead back to the true cashflow of the company, so if we are looking to sell a real estate company in the future years, we’ve gotta have the good financial statements, we’ve gotta be timely, we need to have systems in place so someone can take it over when we’re not there.

Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Terry Lammers: Thanks, Joe, and thanks to your listeners for listening. Have a great day!

 

JF1397: Turning Down A Deal You Love When Considering All Factors with Mandy McAllister

Mandy had a deal lined up that she was in love with, and ended up passing on it. When a town banded together to keep a factory out of their town, the potential lack of working force jobs made her no longer want the deal. Being able to pass on a deal that does not perfectly align with your strategy is an important skill to have. Mandy also runs us through some of her deals that she did purchase. A lot of great content added by Mandy in this episode! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

 

Mandy McAllister Real Estate Background:

  • Expert in repositioning underperforming small multifamily assets
  • Found success with her own deals in student housing as well as urban centers while also investing passively in syndications
  • Her passion is to help others define their path to financial freedom
  • Say hi to her at http://goodfortunecapital.com/
  • Based in LaGrange, IL
  • Best Ever Book: One Thing by Gary Keller

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TRANSCRIPTION

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.

With us today, Mandy Mcallister. How are you doing, Mandy?

Mandy Mcallister: I’m just living the dream, Joe. Thanks for having me.

Joe Fairless: Alright, living the dream – I love that. Let’s see, a little bit about Mandy… She is focused on under-performing small multifamily assets. She founds success with her own deals in student housing, as well as urban centers, while also investing passively in syndications. Her passion is helping others define their path to financial freedom. You can learn more about her company at goodfortunecapital.com. Based in La Grange, Illinois, which is a suburb of Chicago. With that being said, Mandy, will you give the Best Ever listeners a little bit more about your background and your current focus?

Mandy Mcallister: Yeah, absolutely. I dJoe Fairless: id both undergrad and my masters in business, and through the whole dot-com bust I was working on the floor of the Chicago Board of Trade. At that time I saw the commodities and the farm ground really hold their values and really thrive during that time, so that really kind of informed my focus on hard assets.

From there, I kind of grew my career into medical sales and made my first property purchase in 2008 in an up-and-coming neighborhood in Chicago, with the end game of renting it out as soon as I moved, which I did a couple years later.

I didn’t really make another purchase until 2015, which is when I got into that small multifamily near Illinois State University, and really chose 2017 to make it kind of a focus of mine, to give it the attention that it’s due, and joined a mentoring group and really doubled down. I invested passively, and really I’m looking for deals right now in the Kansas City area that we can syndicate on our own.

Joe Fairless: I asked you right before – which I usually don’t, but we met in Chicago at — what was that conference…? Midwest…?

Mandy Mcallister: The Networking Summit?

Joe Fairless: There you go, it’s a mouthful [unintelligible [00:03:07].20] conference that they put on in Chicago. We met there, and I thought you mentioned the deal that you were working on, so I briefly just asked you the latest deal, and you said “Well, we actually just walked away from a deal”, so tell us about that.

Mandy Mcallister: Yeah, through this mentoring group that I’m a part of I met my business partner, Jen, who’s down in Kansas City, and for the last 8-10 months [unintelligible [00:03:33].24] every deal that crosses our desk. We’ve found something in a tertiary market that we really like – a 53-unit; our LOI was in at 2.3 million. It was an opportunity to kind of position a  C asset into a B, and really make it a place that people would really wanna live. But being that it was in this tertiary market, doing kind of our due diligence and underwriting, talking to a property manager who we intended to bring in, and kind of the local commerce group, we learned that Tyson Chicken was planning to bring in a processing plant, but that the people who lived in this little town kind of banded together and said not to Tyson, which meant that it was gonna be significantly harder to bring in these working force jobs moving forward… So we took that as kind of a sign that we needed to pass on this deal and focus on something that has more long-term jobs associated with it.

Joe Fairless: Huh… It’s interesting, because I think a chicken processing plant is a unique thing that I imagine a decent amount of communities would have an issue with… So in my mind, that doesn’t necessarily mean the town is against jobs, it’s just against smelling death every day.

Mandy Mcallister: [laughs] I grew up on a farm; chicken are really smelly animals, I’ll tell you that… But the perception of the commerce group and that property manager was it was much, much harder — there were a lot of industry passing on this small town because of that, that they were banded against… So we chose to pass. Was it wrong – I don’t know, but it is what it is right now.

Joe Fairless: Got it. All other fundamentals with the deal made sense?

Mandy Mcallister: You know, there was maybe about $100 under market rents. It was a little bit off the beaten path, but it was directly between Kansas City and Lawrence, Kansas, where the University of Kansas is. The only reason — actually, me and my business partner went out and had some conversations with residents that were there, and people in local businesses, and the sense that we got from that was people really only lived in this small town because it was super cheap to live in a small town, and that kind of didn’t really give us the warm and fuzzy.

Joe Fairless: How much (if any) money did you lose as a result of backing out of the deal?

Mandy Mcallister: We didn’t lose money. We were at the best and final stage, and walked away at that point.

Joe Fairless: Oh, okay. Alright. So you had submitted an LOI and you hadn’t been awarded the deal, but you were in the process of being either selected or not selected, based on who they picked…

Mandy Mcallister: Yeah, so best and final was down to us and one other buyer.

Joe Fairless: Okay. Would there be a price that you would purchase it if the other buyer fell through and the broker came back to you all and said “Hey, the other one didn’t work out. Are you interested at a certain price?”

Mandy Mcallister: That’s something we would absolutely reconsider, and we’ve submitted so many LOIs at this point at prices that make sense… So we’re kind of just staying close to the rim, hoping something does rebound. So we’d absolutely consider it, but at the end of the day I am a buyer of real estate, I’m not a seller, so I wanna make sure that I’ve mitigated risk in terms of long-term stuff as best I possibly can.

Joe Fairless: When you’re submitting the LOIs, do you submit at the purchase price that is your best purchase price initially, or do you have a different approach?

Mandy Mcallister: Yes, we  stress test in such a way — we look at about a 15% vacancy, because that’s just about as bad as they got in the 2008 downturn, and we really try to go in with something where we have some room to negotiate… Which has probably resulted in why we haven’t taken anything down yet… But we have structured things such that there is that room for negotiation.

Joe Fairless: Okay. So you haven’t recently purchased something… What was the last one you purchased? Was it the Illinois State University small multifamily one?

Mandy Mcallister: Yup, on my own. I did go in on a syndication in the past year, as a passive investor, but on my own, the ISU property was the last one I bought.

Joe Fairless: Okay. We’ll talk about each of those. The ISU property – you said it was a small multifamily… How many units is that?

Mandy Mcallister: It’s four.

Joe Fairless: And what was the purchase price?

Mandy Mcallister: Get this… Buckle up, Joe… 120k. [laughter]

Joe Fairless: Okay… That sounds pretty good. For the Best Ever listeners who are in like Brownsville, TX or something like that, they’re like “That’s about market rate right there…”

Mandy Mcallister: Right. [laughs] Well, I’m in Chicago, so that’s kind of why — I looked in my backyard a and a couple hours out, so…

Joe Fairless: Okay, so 120k… What’s the rent?

Mandy Mcallister: I noticed a pretty significant difference in terms of rents for furnished student rentals, versus non-furnished rentals. We bought  from a guy who was self-managing and renting it out unfurnished at about $400-$450/month, depending on the unit. Then we repositioned that and aligned ourselves with one of the two go-to property managers that were student-focused, and in that first year we were able to lock down tenants at $725 to $775, because we were furnished student rentals.

Joe Fairless: How much does it cost to furnish each units?

Mandy Mcallister: Furniture lasts a little while; we’re not replacing that every single year… But the initial revamps that we did – it was new flooring, the furniture and paying some attention to the parking lot… It ended up being about $5,000/door, so I think all-in, the furniture was maybe just shy of $1,000 of it.

Joe Fairless: And each unit is commending $775 in rent, approximately? $725, $775 – I’m just using one of those numbers… So $775?

Mandy Mcallister: Actually, that $775 was if they were a shorter-term tenant; so if they stayed 10 months instead of the 12, they paid more. If they were the full 12, that’s when they paid the $725. We’re actually right now up to $835, being just a couple years here.

Joe Fairless: Wow. That shatters the 2% rule, and the 2% – it shouldn’t be a rule, should it? It should be the ideal scenario, right? I’ve never purchased a house that has 2%, but you did, you purchased a — it’s 2.4%, the $725, because it’s $30,000/unit… How did  you find that deal again?

Mandy Mcallister: That was straight off the MLS, it was just looking for these unfurnished rentals in the middle of a pocket of furnished unit rentals.

Joe Fairless: Wow, that is quite the find. And when you are now looking at syndicating, in between you passively invested in a deal… What did you look for, prior to passively investing in the deal?

Mandy Mcallister: I actually got involved in that as a result of being a part of this mentoring group. I knew that I wanted to move towards syndicating my own deals, so for kind of a learning process, I found one that I wanted to be a part of… And actually, a teammate through the mentoring group is the one who was offering this up for passive investment.

Basically, the reason I thought it was a home run was because it was beginning at 104 units, with 26 that would soon be coming online. So the 104 would go to 130, and actually ended up appraising for about 2.8 million more than the purchase price, after those additional units went online… So that was something that I absolutely wanted to be involved in, and I also chose to self-direct some funds, so that I knew the process of going through a self-directed IRA, so that I could potentially help future investors on deals of my own.

Joe Fairless: The 26 units – were they built from the ground up, or were they distressed and then renovated?

Mandy Mcallister: It was kind of a hysterical story here… The previous owner had taken adjacent units and put kind of a spiral staircase through the ceiling and floor of two units, and made them one kind of much larger unit, but it didn’t commend as much rent as the two did separately. So [unintelligible [00:12:11].19] for a significantly higher NOI.

Joe Fairless: What have you learned by investing passively?

Mandy Mcallister: The process in particular, investing with my self-directed IRA funds is for sure not nearly as easy as click buying a stock… So kind of knowing the timeframes of wiring funds and things like that was super-informative, and also seeing the sorts of communications that come out, and kind of knowing the sort of hand-holding that I was allowed along the way has been really helpful.

Joe Fairless: What aspects of the communication would you apply to a deal that you do when you syndicate one?

Mandy Mcallister: U think that every step of the way, roughly every month right now as we’re ramping up and changes are happening to these units that are coming online, we’re made aware. So without having to recreate the wheel, this team has done  a really great job of syndicating this — it’s providing me and every other passive investor with a little bit of knowledge just through an automated mailer that they put out monthly right now, and then I think that they’re planning to move towards quarterly once all the changes are made complete.

Joe Fairless: What would you do differently? I’m sure there’s something that you’d do differently whenever you do your own deal that you’ve noticed…

Mandy Mcallister: I do think that they’ve done a really great job. I know a lot of other syndicators that do some video stuff… I would really love an opportunity to put together a video for potential investors, because people take in information very differently. I would love maybe a webinar of some sorts to walk through those significant PPM documents… But other than that, these guys did a really great job.

Joe Fairless: Based on your experience as a real estate investor, what is your best real estate investing advice ever?

Mandy Mcallister: Figure out what you like to do, what you’re really good at, what you can get really passionate about, and just keep doubling down on that.

Joe Fairless: What is that for you?

Mandy Mcallister: I really love the people part of this, kind of the networking, how I met you… The spreading the word, preaching the gospel of multifamily real estate is really my thing.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Mandy Mcallister: More than ready.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:14:41].04] to [00:15:17].04]

Joe Fairless: Okay, what’s the best ever book you’ve read?

Mandy Mcallister: Gary Keller, The One Thing… Especially because this is my side hustle. If I didn’t have the ability to really hone in and focus on what the next great thing is, I wouldn’t be accomplishing anything impactful.

Joe Fairless: What’s your full-time job?

Mandy Mcallister: I sell medical devices.

Joe Fairless: Best ever deal you’ve done?

Mandy Mcallister: I’d have to say it was a fourplex that really taught me a lot of things… It taught me about scale, it taught me that the repositioning the best use for an asset is the one that matters, not how it’s being used right now.

Joe Fairless: What’s a mistake you’ve made on a transaction that you did? That 4-unit.

Mandy Mcallister: We didn’t walk each of the units before signing papers, and two of the four had become vacant, and I wasn’t aware. But it ended up a blessing in disguise, because we were able to reposition, but it was a real gulp moment.

Joe Fairless: What would you do differently if presented a similar situation?

Mandy Mcallister: First of all, I’m gonna be systematic and walking every single unit before close, not just at the inspection.

Joe Fairless: How far in advance of closing should you walk those units?

Mandy Mcallister: In very close proximity. I’d wanna walk them the day of or the day before.

Joe Fairless: Best ever way you like to give back?

Mandy Mcallister: To the investment community, I started a meetup in Chicagoland that we call the Life and Cashflow Apartment Investors, which has kind of a [unintelligible [00:16:44].18] And in general, I work with a group called the Foundation for Community Betterment, where we identify someone in need who has continually given back to the community, and raise money for very specific needs.

Last we’ve raised money for a wheelchair for the daughter of a police officer, so it was very impactful to see exactly where those dollars were going to be used.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Mandy Mcallister: Check me out on my website, GoodFortuneCapital.com, or shoot me an e-mail at Many@GoodFortuneCapital.com.

Joe Fairless: One other thing I wanted to ask you about – we talked about Chicago… You got pre-qualified for agency debt without ever having got that debt before, so how did you do that?

Mandy Mcallister: I really thought that you had to have had that debt to qualify for agency debt, which is a real catch-22, but it turns out because of my passive investment history, because I’d done small multifamily, because my partner had done a bunch of fix and flips and had single-family rentals, they were willing to work with us, with the Freddie Mac Small Balance Loan program, which was pretty cool.

Joe Fairless: So it pays to invest passively in deals for being set up in the long run if you’re looking to do it more actively, as well as having the right business partners partner up with you.

Mandy Mcallister: For sure.

Joe Fairless: Sweet. Well, thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Mandy Mcallister: You too, Joe. Thanks.

Best Ever Show Real Estate Advice from experts

JF743: How a Funding Source Automates and Markets AMAZING Deals

Today’s guest is a pro at analyzing, underwriting, and pushing deals that need to be funded. He manages a large group of individuals amped to get your project funded and off the ground, hear how he is able to automate his marketing and provide a service most cannot.

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Vincent Pace Real Estate Background:

-Manager at Barnett Capital; A private money lender for home flippers and real estate investors
-Over $30MM funded
-Based in Northbrook, Illinois
-Say hi at www.barnettcapital.com
-Best Ever Book: Catcher in the Rye by J. D. Salinger

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JF714: Your BIGGEST Stress Reliever as a Landlord

Our guess today is committed to being your next point of contact for your tenants. She has a system in place to remove your stress and headache and set up payment plans, communication, and carry out custom orders that you as a landlord would approve of. Hear how she does it and give her a ring in case you’re interested!

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Linda Liberatore Real Estate Background:

–   Founder of Secure Pay One
–   Conducted 1,000+ Seminars
–   Based in Schaumburg, Illinois
–   Say hi at https://www.securepayone.com
–   Best Ever Book The 10X Rule

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