\n<\/p>\n
There\u2019s a dark side of real estate<\/strong> no one talks about. Crime<\/strong>, destruction<\/strong>, theft<\/strong>, violence<\/strong>\u2014you name it, we\u2019ve dealt with it. With the spookiest day of the year coming close, we\u2019re going to tell you all our terrible real estate tales. Everyone on podcasts and YouTube wants to show you how easy it is to invest, how it\u2019s an assured path to wealth, and rarely what type of mistakes you can make<\/strong>. But we\u2019re flipping the script, bringing in some of the best and brightest in real estate to show that the grass is usually greener where the septic tank is.<\/p>\n Today\u2019s guests, who have all collectively succeeded at failing, are Andrew Cushman<\/strong>, Jamil Damji<\/strong>, and Matt Faircloth<\/strong>. If you\u2019ve been a BiggerPockets listener, these names may sound familiar to you, but if you\u2019re brand new, let us introduce you to these industry giants. Andrew is a multifamily expert<\/strong> and one of the smartest names in the game on screening and underwriting (analyzing) properties. Jamil built the nation\u2019s largest wholesaling operation <\/strong>and is an expert guest on On the Market<\/em><\/a>. And Matt, CEO of the DeRosa Group, literally wrote the book on <\/strong>Raising Private Capital<\/em><\/strong><\/a>.<\/p>\n But these titans of industry only made mistakes at the beginning of their careers, right? Not quite. They share today a selection of stories that will make you realize that the only successful investors<\/strong> are the ones who can both literally and figuratively weather a strong storm<\/strong>. And if you think it\u2019s all cash flow<\/a> and cruises for these investors, you couldn\u2019t be more wrong.<\/p>\n David: Jamil: David: Jamil: David: Jamil: David: Jamil: Andrew: David: Jamil: Andrew: Jamil: Andrew: Jamil: Andrew: Jamil: Andrew: Jamil: Matt: Jamil: Matt: Andrew: Matt: David: Matt: Andrew: Matt: Jamil: David: Matt: Jamil: David: Jamil: David: Jamil: Andrew: Matt: David: Jamil: David: Matt: David: Matt: Andrew: David: Andrew: David: Andrew: David: Andrew: Matt: David: Jamil: David: Jamil: David: Matt: David: Jamil: Andrew: Jamil: David: Andrew: David: Andrew: David: Andrew: David: Matt: Jamil: Andrew: Jamil: David: Jamil: Matt: Jamil: Andrew: Jamil: David: Jamil: Matt: Jamil: David: Jamil: David: Andrew: David: Andrew: Jamil: Andrew: Matt: Andrew: David: Jamil: David: Andrew: David: Matt: David: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Check out our\u00a0<\/em>sponsor page<\/em><\/a>!<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
This is the Bigger Pockets podcast, show 681.
And this was a big one. Because we put the insurance carrier on notice the day before we got in line before everybody else. If you have a fire at your property, okay, you\u2019re probably the only one making a claim. But if you\u2019re in a situation where a hurricane devastates a hundred miles of coastline, can you just imagine the volume of claims the insurance carriers are processing? We saw properties that sat untouched, unrepaired for two to three years because they didn\u2019t get their claim in fast enough.
What\u2019s going on everyone? I am David Green, your host of the Bigger Pockets Real Estate podcast here today with a special Halloween episode, brought to you by me and some of my good friends, including today\u2019s co-host Jamil Damji. Jamil, Happy Halloween.<\/p>\n
Happy Halloween, man. I\u2019m super happy to be here. And it\u2019s a scary, scary, scary show.<\/p>\n
Yeah, it\u2019s a scary and fun show. In today\u2019s show, we are telling real estate horror stories in the spirit of Halloween. We are going to be joined by my friends Andrew Cushman and Matt Faircloth as we all share things, basically deals gone wrong and what we did to try to survive them. Jamil, what were some of your favorite parts of the show?<\/p>\n
Oh, man. Just how prepared Andrew is, first and foremost. Secondly, Matt\u2019s hat? Get out of here. And third, you are the best Sergeant Slaughter I have ever, ever seen.<\/p>\n
Flattery will get you nowhere, Jamil.<\/p>\n
Yeah.<\/p>\n
But that\u2019s probably not true. This is my first time ever dressing up for Halloween and it\u2019s here with you guys today. Before we bring in the show content, let\u2019s get to today\u2019s quick tip. And it is, it\u2019s very tempting to want to skimp on insurance and when nothing goes wrong, that can feel like a good idea. But reconsider that after listening to today\u2019s show, you may never want to skip on insurance again. Make sure that you are underwriting thoroughly and preparing for what could go wrong, not assuming everything goes right. All right. Without any further ado, let\u2019s get to the show.<\/p>\n
And today we are going to be sharing our multi-family horror stories. Andrew, I hear you\u2019ve got something to share with us.<\/p>\n
Yes. I\u2019m Andrew Cushman. I\u2019m addicted to multi-family and I have some horror stories.<\/p>\n
Hi, Andrew.<\/p>\n
Hi, Andrew.<\/p>\n
Hi, guys.<\/p>\n
You\u2019re in a safe place, Andrew.<\/p>\n
Thank you.<\/p>\n
Tell us about it. What happened, Andrew?<\/p>\n
Well, this was back in the early part of my career, 2013, so we were two years in. This was Dallas, Fort Worth, Texas, and this was our maybe third or fourth deals. And it was one of those situations where the broker tells you it\u2019s a C property, but that\u2019s because no broker or seller will ever actually tell you that it\u2019s a D. It\u2019s always just a C. It\u2019s like a Dove bar. If you bite into a Dove chocolate bar, it\u2019s pretty sweet. But if you bite into a Dove soap bar, it\u2019s kind of bitter. And we were sold chocolate and we got soap.
And so on the day of closing, I\u2019m sitting there in the office and it\u2019s getting in the afternoon like, \u201cMan, what is that smell?\u201d And it just kept getting worse. And a couple hours before the end of the day, we found out that the sewer pipes underneath the building\u2026 It had crawl spaces and this was built in the \u201960s, that means plywood floor and then there\u2019s two to three feet of space under there. The sewer line had broke and spilled the entire crawl space with about two feet of sewage water and all the stuff that floats in that. And not only affected the office, it affected every other unit in the building.
That was Friday afternoon of closing. That was a great start. Saturday, the first weekend that we owned it, one little red flag that we missed at the time was that there is a convenience store right next to our property where let\u2019s just say unsavory transactions would occur. And on that Saturday evening a transaction went bad, started a little scuffle, which somehow ended up over our fence and onto our property. And we ended up that night with a quadruple homicide plus four stabbings. I was like, \u201cAll right, probably can\u2019t get a whole lot worse from here.\u201d
And then at the other property that we bought, basically at the same time, five o\u2019clock in the afternoon, somebody climbed up on top of the leasing office, busted out the skylight and threw Molotov cocktails down through the skylights into the office in an attempt to burn it down. That was my intro to Dallas, Fort Worth. It was very exciting. Needless to say I figured, \u201cwell, it can\u2019t get a whole lot worse from here.\u201d We did eventually sell those properties and get out of them and everything turned out. But what came out of it and what changed is way back in episode 279, we talked about the screening process for properties. Those two nightmares are a big part of where that came from.
The mistake we made is we did go to the market in person to check them out, but one of the things we do now is we do Google Street View, we take the little yellow man and make him walk around the neighborhood and see if he gets robbed. What we missed is that convenience store, because it\u2019s in a low income neighborhood, is going to be a real problem. The median income there was too low to support the rents, and then crime was high. When you take low income, high crime and then unsavory neighbors and put those together, you\u2019ve got a very rough property that has been extremely difficult to turn around because you can turn around a property but you can\u2019t turn around the neighborhood.
Now what we do is we screen. We won\u2019t buy a property that doesn\u2019t sit in a median income area that\u2019s high, and that\u2019s going to vary by market, but for us it\u2019s 40 to 50,000 at least. We only buy in low crime areas. We do a thorough street view and then we send somebody in person if it looks good. And for us, we don\u2019t buy 1960s properties anymore because the physical decay, it can be overwhelming, especially if you haven\u2019t budgeted for it. Yeah, that was some of our early horror stories and it framed what we did for every deal after that. And fortunately we haven\u2019t had anything like that after that. But yeah, it was quite the fun introduction to multi-family.<\/p>\n
Wow. I mean, that\u2019s obviously a nightmare, but it gave you a lot of tools that will keep you out of a nightmarish situation in the future. And I think that that\u2019s the whole purpose of waking up in a nightmare, is to not have them over and over and over and over again.<\/p>\n
Exactly. I mean, we don\u2019t regret it because it made us that much better for the\u2026 I don\u2019t know, whatever, seven or eight years afterwards. And we also did things like hire Mr. Slaughter here to come live at the property and patrol it for every night and every day. I think we had two or three officers on there. We let the police practice with their canine units on the property, try to help tamp things down. Yeah, we learned a lot and it heavily affected our process going forward. And again, fortunately we have not had to deal with that any further since then.<\/p>\n
Incredible. I\u2019ve been accused of being an unsavory character myself as Hugh Hefner, and I would have to say that I take pause and a little bit offense to you wanting to stay away from unsavory characters. I think everybody deserves a place to rest their head and wear a bath robe. But thank you so much for sharing that horror story with us, Andrew. It was enlightening to say the least. Matt.<\/p>\n
Howdie partner.<\/p>\n
Howdie to you. I also hear you\u2019ve got quite an interesting horror story that you\u2019d like to share with us. Hopefully, you\u2019ll be able to tie in how this horror story and that hat came to be.<\/p>\n
The hat, brother, is just sometimes you got to be the sheriff on a property as a property owner and you got to knock heads, whether that\u2019s on a C class property, B class property, whatever it is. There\u2019s going to be things that an owner needs to police and remove, whether that\u2019s improper management, bad books, theft, which is what my story is about my friend, or whatever that may be. Or tenants that are bad actors and making bad choices or having bad deals go down at the convenience store across the street. Almost called it a drug store. No, convenience store. Probably was a drug store as well. But yeah, we are kind of cops and bringing multi-family to the next level.
This story is that. This involves probably my first triple digit multi-family property; it was 198 units. This is the first time that we had bought something anywhere near that large. And it was in Fayetteville, North Carolina and Fayetteville\u2019s all one syllable, Fayetteville. And we had bought it and the property manager that we had hired was new to North Carolina and they had a regional manager, which is property managers are structured with a regional manager that\u2019s over typically a bunch of properties that have site managers that work and that sit at the property and have maintenance teams and that.
But the regional sits over the whole thing and it\u2019s really their job to grow and manage the existing portfolio. Regional was really solid and she put a great site team in place and a week after we closed, she quits. And so the property management company had a change of heart and decided, \u201cWell she quit. We don\u2019t really want to hire a new person right now, so we\u2019re going to try and manage this property in Fayetteville, North Carolina from Atlanta.\u201d And so they tried to manage it way remote. And so what that equated to was the site team was really left to run the property by themselves. And so you got somebody that\u2019s hours and hours away that\u2019s responsible for keeping their eyes on the property.
And when the cat\u2019s away, the mice will play, my friend. And that\u2019s just how it goes. Nobody with this hat was watching the property aside from us. What happened, very quickly, two things. We had identified to the property manager, to the site team that \u201cHey, we want to renovate all these apartments because they\u2019re all very circa 1970 with lovely wood paneling on the walls and 1970s stock kitchens and whatnot. And we knew that the tenants were paying $500, $600 a month in rent for ones and two bedrooms, whereas the market was 800 $900 a month. And we were going to make major investments in the property to bring those units up to new condition.
The site manager took it upon themself to write a letter to all 198 tenants, telling them, \u201cHey, new manager is going to make some major investments in this site. And just so you know, when your lease renews, you\u2019re going to go from 500 to $800, just be on notice.\u201d They put that on every tenant\u2019s door. We went from 80%, we went from 80% occupancy to 30% occupancy in two months after that notice was posted. Again, without a little bit of tact and that kind of thing, and then when the cats away, the mice will play. That was obvious nightmare number one is just occupancy falls way off and that. Fast forward, we ended up having to remove that property manager, not just because of that, because a lot of egregious issues that we had had.
And the second issue, horror story that came up had to do with yet again, not having a regional sitting over this property. The maintenance technician was there and I still remember his name, still remember his face. Every time I came on site, man, he\u2019d be outside picking up trash with this little long stick with the claw on the end of it that they use and with a little bucket. And he\u2019d plant new flowers. I was told by other site team members that a couple days before I would come down, he would plant some new plants just to show off a little bit, the property and all. He [inaudible 00:12:12] call me sir. Yes sir, no sir, the whole time. And very respectful, got my cell phone number, would call me every here and again to tell me how things were going. And yes sir, no sir, the whole time.
And he had a bunch of vendors lined up to do work on the property and people that he knew from the neighborhood were renovating apartments and stuff like that. And he was the best and he was my best friend and I thought that he was the one that was going to bring that property around. And I defended him when other people started to tell me, \u201cHey, that guy\u2019s not doing his job sometimes and this and that.\u201d \u201cNo, you know what? He\u2019s great. And not just because he calls me sir, he\u2019s amazing and I love the way he shows up.\u201d
We terminated the PM company and my business partner, Justin, goes to the site a week later and a guy in a beat up pickup truck\u2026 Any real estate investor knows what the truck of a local scrapper looks like. The guy who\u2019s there, whose job is to collect scrap metal and take it to the scrap yard and they get dollars per pound for it. Local scrapper truck pulls up with a truck full of metal that he\u2019s found around the neighborhood and he says, \u201cHey man, you got any appliances to sell me today?\u201d And I\u2019m like, \u201cWhat are you talking about appliances?\u201d And my partner Justin was like, \u201cWell no, we don\u2019t sell you guys appliances.\u201d And he says, \u201cWell no, the guy that works here, the maintenance tech, he\u2019s been selling me appliances that you guys pull out of these turned apartments. He\u2019s been selling them to me for $300 for a full set of appliances.\u201d And I\u2019m like, \u201cWhat?\u201d \u201cOh yeah, yeah.\u201d
And so in a business, when you\u2019re in multi-family when you\u2019re turning apartments, the appliances that you pull out of one apartment when you renovate and upgrade, those appliances could be used for parts and spares and maybe a tenant loses their refrigerator where you can give him the refrigerator you just pulled out of the apartment after it\u2019s been cleaned and use it until it\u2019s soon enough to buy a new one. This guy was selling all of our appliances to the guy in the beat up pickup truck.
Then it turns out, did a little bit of digging, that there was a homeless guy living on site. And we approached him and we said, \u201cYou\u2019re living in one of these apartments?\u201d And it was furnished. He had taken furniture he had found in the neighborhood and had a furnished apartment that he was living in, with a key. Guy had a key. And we were like, \u201cHow did this happen? How are you living here?\u201d \u201cOh, the maintenance guy has been renting me an apartment. I just pay him in cash, $400 a month in cash, then he\u2019s been letting me live here.\u201d And I was like, \u201cWhere are you getting the money from?\u201d \u201cOh, well, I do work orders for him and some of the other guys and I do some odd jobs around the site and they pay me and I just pretty much give the money back to him in rent.\u201d This maintenance tech was selling used appliances to a local scrapper guy and had a homeless guy live in one of our apartments who was also doing his work orders.
And the third, again, it keeps going. The third time, the thing that came up, on that same site visit, the guys that were turning the apartment\u2026 When you\u2019ve got a multi-family property like this, you tend to find a local contractor, a couple guys in a truck or a bigger outfit or whatever to go and replace cabinets and clean out the apartments and put in new flooring and you end up spending somewhere between four to 7,000 a unit to turn these apartments around.
Well they said to us, \u201cWell, okay, who are we paying our commission to?\u201d And we said, \u201cWhat do you mean, your commission?\u201d And they said, \u201cWell, every time we turn an apartment we had to give a $500 commission to the maintenance technician as his fee for him referring us to this job. Do we have to give that to you guys now?\u201d And we\u2019re like, \u201cNo, no, no, no.\u201d There was more, but it was just one of these lessons, Jamil, that you\u2019ve got to have oversight and you can\u2019t just trust a yes sir, no sir kind of person who\u2019s going to tell you what you want to hear. And by the way, the fact that he was planting flowers two days before I came should have been a sign. You should be planting flowers period, not just when the owner\u2019s going to come to town to put your best foot forward when the owner\u2019s in town to make yourself look good.
Just bottom line is oversight, oversight, oversight. People watching, watching staff. Because again, can\u2019t say it enough, you need people wearing this hat here and when the cats away, the mice certainly do play.<\/p>\n
Sounds like you had yourself quite the entrepreneur there.<\/p>\n
He did well.<\/p>\n
I would think so, yeah.<\/p>\n
Yeah. You can\u2019t slight him for trying and that, but he certainly did try very hard. But unfortunately he was an entrepreneur with our money in that. I\u2019m glad to have gotten him on down the road to whatever his next venture was.<\/p>\n
You moved him into the business development role, right?<\/p>\n
We hired him. Yeah. Let me use your superpowers for good.<\/p>\n
Ever had a moment like that, David, where the cat was away and a mouse came out to play.<\/p>\n
First off, let\u2019s get something clear right now. This is my podcast and I still run it and you\u2019re welcome in my ring. But Matt Faircloth, the next time you show up for a Halloween episode dressed in your three year old\u2019s cowboy hat, think that that kind of effort is going to fly here. You got another think coming? Okay, brother? Now I\u2019m going to let it slide because that was a really good story. You bring me some good content, but I expect more and I\u2019m going to see more in the future.<\/p>\n
I promised to get a full sized cowboy hat next time. Well said.<\/p>\n
Speaking of the future? Why don\u2019t you tell us about your multi-family horror story, David, because I\u2019m sure with all the experience you have in the business, there\u2019s got to be some spooky things that have happened.<\/p>\n
You asked me a question before I went onto that ridiculous tirade right there. What was it about?<\/p>\n
I asked you if you had ever had an opportunity to see the mice come out to play when the cat went away?<\/p>\n
That happens more I\u2019d say with employees in my businesses than it has with any actual investment property. I haven\u2019t had a situation like that yet, but oh my goodness, have I had some horror stories. By the way, I think Andrew might have one that we\u2019re invested together on one of those properties, the hurricane one, so he\u2019ll probably get into that. But I just had a big 1031 that I didn\u2019t really want to do. Long story short, somebody had stolen title to my properties. We\u2019re a bit of a target, we\u2019re in a platform like this, so I had to sell them very quickly, which forced me into a 1031 that I didn\u2019t want to be in. And then I learned in the middle of the 1031, there\u2019s a rule that no one had told me the entire time.
And that is when you sell your property, you have 45 days to identify your next properties and 180 days to close. We all know that. No one told me that you can only identify twice as much real estate as you sold. If you sold $5 million of real estate, you are only allowed to identify 10 million, which is the ones that you can pick from. Now, normally that is not an issue because most people don\u2019t have that much capital to deploy. In my case, my portfolio was almost free and clear. I sold about $4 million worth of real estate and I could only identify $8 million worth of real estate. However, I had to reinvest almost $4 million, which is very difficult to do if you can only identify 8 million. What makes it worse? I did not know that this was a problem until day 44 of my 45 day identification period, which created a very interesting 24 hour period where I had to identify properties and basically if I identified anything that I didn\u2019t have in contract, it wasn\u2019t going to close.
It was too risky to put a house on there that I didn\u2019t know I could put in contract. I had to go out and put properties in contract in one day that then I had to close. There\u2019s no way, I couldn\u2019t not close on these properties. A lot of your inspection strategies, they\u2019re not going to work in that scenario. First story, that set me up for some of these horror stories that are going to come, as if that wasn\u2019t a horror story enough.
During this period of time, one of these properties, we had a survey conducted and it turned out that there was a 30 foot encroachment of the neighbor\u2019s lot onto my property. Basically, 30 feet of the property I\u2019m trying to buy, the survey reported was hanging over the neighbor\u2019s lot, meaning if they wanted they could just come take a chainsaw and cut 30 feet off of my house. Now, it\u2019s not that uncommon to have some form of an encroachment. Boundary lines don\u2019t always get drawn super clear. It\u2019s very odd that you have 30 feet of a house. It\u2019s usually like a gutter hanging over or something like the fence didn\u2019t get put in the right place.
This was very significant. And this was a house, it was more than a million dollar house, it was like 1.2 million and it appraised at 1.35 million, so I was excited about buying it. It was coming with a lot. This is what\u2019s funny is I bought this property and I got the lot next to it. And even though they had all that space, they still chose to build their house as close to this other lot as they possibly could get. I\u2019m in this position now where if I don\u2019t close on this thing, my whole 1031\u2019s going to blow up. We had to tell them that we were in a 1031 to get them to go into contract in one day. So the seller was actually a pilot. He\u2019s flying his plane and we\u2019re desperately trying to find houses that we could put into contract.
What we did was we had his agent look\u2026 The seller\u2019s wife looked up who the flight attendants were on the flight, sent them a text message via the plane\u2019s wifi. They go knock on the cockpit door and they\u2019re like, \u201cHey, I got to read you the terms of this deal to know if you want to put in a contract.\u201d And he\u2019s like, \u201cI\u2019m flying a plane, I don\u2019t want to deal with this, I\u2019ll deal with it later.\u201d And they\u2019re like, \u201cNo, no, no. We\u2019ve got four hours and you\u2019re not going to land for three and a half. You have to make the decision right now.\u201d
He already wasn\u2019t super happy with how this whole thing went down and I don\u2019t think he got the price he wanted. He got the price he was willing to get. He didn\u2019t know about the foreclosure, but basically the seller\u2019s like, \u201cI\u2019m not fixing it. You can just go to HE double hockey sticks here.\u201d And I\u2019m like, \u201cI don\u2019t want him to know that I have to close, but I also don\u2019t want to buy a property that\u2019s 30 feet hanging over the neighbor\u2019s lot.\u201d I\u2019m in a bit of a horror story here. We went back and forth for probably three weeks on this. I tried to buy the portion of the lot that my house was hanging over into from the other guy. He didn\u2019t want to do it. I tried to make the seller buy it. He didn\u2019t want to pay any extra money.
Long story short, it turned out that it was just the surveyor was an idiot. Didn\u2019t know how to do their job, it wasn\u2019t a problem. We had a second survey order that showed there was nothing here, so there was this three weeks of sphincter tightening that did not have to happen. I suppose that muscle doesn\u2019t get worked out very much. It definitely got worked out during that period of time. That horror story ended up being just a haunted house that didn\u2019t have real ghosts.
But during that same 1031, I did run into a cabin that I bought in the Smoky Mountains that came with a pool. Now, pools out there tend to be inside of a structure. They\u2019re not just built out in the open because they would freeze during the wintertime. The pool was awesome and it would almost double how much I could rent this cabin out for. It\u2019s very hard to find those. They rent for a lot more. It\u2019s a really big pool in a huge structure. The problem is the pool is leaking. The pool is being redone. When I put it in contract, I wrote into the contract I, the pool has to be evaluated by a licensed professional to the buyer\u2019s satisfaction. And if I don\u2019t like it, I can back out, get my earnest money back.
However, this 1031 disaster could stop me from being able to back out of the deal. Now I\u2019m locked into it and I don\u2019t want the seller to know that I\u2019m locked into it. I want them to fix the pool. And the work that was done, basically, they plastered it. It was still leaking afterwards, so you don\u2019t know how bad the problem is. I don\u2019t know a ton about pools and no one out there could really give me the answer of, \u201cIs this an issue where we\u2019re just going to fix some leaks and plaster, or is this the plumbing itself is leaking and it\u2019s not going to hold water?\u201d
I\u2019d already negotiated about $25,000 in closing cost credits when I put it under contract. The seller wanted an early close. I wanted a delayed closing. He was threatening to just basically not close at all if I went past the close of escrow. That forced me, like I can\u2019t bluff anymore if he threatens to not do it. I was able to negotiate an additional $30,000 credit in order to fix that pool from the seller, not knowing how bad it was going to be. It was kind of like, well I don\u2019t know if that\u2019s enough, but it\u2019s better than losing the entire 1031 here, so I went forward with it and we get done, we go fill up the pool, it\u2019s leaking again. We send out another pool specialist, they say, I think you need to redo the whole pool.
It\u2019s probably going to be like 55 to $65,000 I would guess, just because it\u2019s hard to get people out there. I\u2019m kind of working with traveling contractors now to go out there and rebuild an entire pool, which technically I got most of the closing costs put towards the pool. It just made the deal not quite as good because I was intending on using those for furnishing the property. It was a new construction cabin even though the pool had been built by some terrible builder. That was a bit of a horror story that we\u2019re still trying to work out.
There\u2019s another cabin that I have under contract right now. Funny story, Did you guys know there was a Nashville, Indiana?<\/p>\n
No.<\/p>\n
No.<\/p>\n
No.<\/p>\n
Freaking south man. They\u2019ve got the same names for cities in all kinds of different states. I didn\u2019t know that either. What I thought I was doing was going under contract on a cabin with an appraisal of 1.365 in Nashville, Tennessee, and I\u2019m getting it for 1,000,050, so I feel really good about this. And then [inaudible 00:25:36]<\/p>\n
There\u2019s a book you should read, Long Distance Real Estate Investing.<\/p>\n
Yeah, that\u2019s exactly right.<\/p>\n
I want David Green money where I can just buy houses wherever they are and whenever they are, just because I don\u2019t want to pay taxes.<\/p>\n
I hadn\u2019t closed on it yet, but I\u2019d realize about two weeks in, \u201cOh, this is not Nashville, TN. This is Nashville, IN.\u201d That T and the I is a very big difference in [inaudible 00:25:57]<\/p>\n
One more dash across that I.<\/p>\n
Talk about cross your T\u2019s and dot your I\u2019s.<\/p>\n
Very nice there, thank you. The good news is the fundamentals of the deal don\u2019t change. It\u2019s underwritten with the same information the seller has. Previous guests that are booking. We have a very good understanding. Right now it\u2019s bringing in about $160,000 a year in revenue. There\u2019s ways that we can bring that up higher. But I just was shocked like, \u201cOh, this is not even in the same state that I thought I was buying this property, but it was still almost $300,000 of equity. I\u2019m going to move forward with it.\u201d Well it turns out it\u2019s in a very rural area.
Now, we\u2019re having a hard time finding a lender that wants to lend on it because they haven\u2019t heard of Nashville, Indiana either. It\u2019s in a very remote location. It is making good revenue, but that still makes a lender nervous. And it\u2019s also on six acres of property, which is another thing that lenders don\u2019t like. They like the actual improvements to have more value than the land. Luckily the seller has extended escrow like three times on this because we have to go find different lenders and then we have to order a new appraisal. That hasn\u2019t turned into a horror story yet, but it was very, very close to one when I realized I was buying a house in a completely different state than when I had looked at the contract and looked at the numbers and said, \u201cSounds good. Sign me up.\u201d Didn\u2019t notice that it was in Indiana and not Tennessee.
I barely averted a horror story in Jacksonville. I had a property that was leaking sewage similar to what Andrew was saying from underneath the house. And the property manager came and said, \u201cHey, it\u2019s going to be about $26,000 to fix this.\u201d And I\u2019m like, \u201cThe whole house is only worth like 110,\u201d it might be worth it to just let the house go. \u201cWhat on earth are you talking about? $26,000.\u201d \u201cWe\u2019ve sent three plumbers. This was the cheapest bid we could find.\u201d And I was like, \u201cWell, what\u2019s going to cost that much money?\u201d Of course, crickets, they can\u2019t ever tell you what the person\u2019s doing, they\u2019re just relaying this information.
The plumbers were saying, we basically got to rip apart the entire foundation of your home to try to figure out where the leak is coming. I sent a couple other plumbers out that I made a phone call and I found one that said, \u201cOh no, I can tell you it\u2019s coming from either this bathtub or that one. If it\u2019s that one, I don\u2019t even need to dig into the foundation. If it\u2019s the other one, I\u2019m just going to cut right down through the bathroom, figure out where it is, I can fix it.\u201d And then long story short, that was a $4,500 problem, not a $26,000 problem.
One of the things you got to learn is when you get the first piece of information, don\u2019t freak out. It\u2019s usually coming from someone who\u2019s not very interested in saving you money. They\u2019re interested in saving themselves time, which is frequently the case with property managers. And then the last example I have came from a house that I closed on in the Smoky Mountains. This is before the market shifted. It was listed at 1.6, I think that we ended up getting it for 1.64. But with a $65,000 closing cost credit. Very, very big number, which we were basically going to have set up where the seller, rather than running the money through escrow, was going to put it towards a contractor that was going to go and make the repairs that needed to be made on the house. And I gave it up to them. You could make the repairs before we close or you could do it this way and you could make it after. I believe that was the details.
Well, they ended up, once they realized the deal\u2019s going to close and we had waved our financing contingency, they just turned off the air conditioning to the entire cabin. And this was a cabin with a pool inside of it where there\u2019s a lot of mildew, so you can imagine in a couple days, it\u2019s amazing how fast that mold spreads. It\u2019s like a peach redition there. Super humid, middle of summer. The entire pool room is mold everywhere. Basically, the agent was like, \u201cWell there\u2019s nothing you can do, you got to close.\u201d I was like, \u201cNo, no, no, no, no.\u201d \u201cThere\u2019s nothing you could do. You\u2019ve got to close on this.\u201d They still have to deliver the property in the condition that it was in when we put it into contract, even without a contingency, that\u2019s part of the contract.
The sellers didn\u2019t want to budge. They were like, \u201cNope, you have to buy.\u201d We ended up at a standoff and I was like, \u201cWell, good luck trying to keep our earnest money with this and you\u2019re going to be taking back a cabin with a ton of mold in it. You\u2019re not going to be able to sell it for a couple months as you try to get that fixed.\u201d We negotiated an extra maybe 10 or $15,000 of credits to get the mold closed. We closed and then we had to go in there as soon as it was closed and fix all the mold, which actually worked out well because we also needed time to get furniture ordered and get some tweaks made so the property could be ready to be rented out to other tenants and get pictures taken.
We didn\u2019t actually lose any time of having that house on the market because we just fixed the mold at the same time we were doing other things. But those are all situations that could have easily blown up a deal and cost a ton of money and just made someone not want to invest in real estate at all.<\/p>\n
Sergeant sir, may I make two comments?<\/p>\n
I\u2019ll allow it.<\/p>\n
All right, two things. Number one, I love all these stories because we all get on this podcast and we talk about these deals and these successes and it sounds so easy. And the reality is, that even someone like you who\u2019s been doing this for a long time, tons of deals, tons of knowledge, still has challenges and real world problems. And so everyone listening, you go out and do this, expect problems. And if you get problems, it doesn\u2019t mean you\u2019re necessarily doing it wrong or you\u2019re not going to succeed. We\u2019re all still having problems even today.
The second thing is, I love the story of you hunting down the flight attendants and getting them to message the pilot. One of the things you ask at the end of most podcasts is what is the one thing that separates successful investors from those? That right there, the relentless persistence and creativity. Who would\u2019ve thought to, \u201cWell, let\u2019s see, I can figure out who the flight attendants are, get through the plane\u2019s wifi, message them and have them interrupt the pilot.\u201d One out of a hundred people would do that. But that\u2019s what separates us. I love those stories you told.<\/p>\n
I appreciate that. Everyone in your world will typically tell you it can\u2019t be done. It\u2019s not hard to get a lawyer, a CPA, an agent, and anyone like, \u201cOh we can\u2019t do it. He\u2019s flying right now.\u201d Rather than asking the question, \u201cWell how could we do it? How could this work?\u201d And so I appreciate what you\u2019re saying there, Andrew, but I think if we just ask different questions, how could this happen? A lot of the time the answer isn\u2019t that wild.<\/p>\n
That\u2019s true.<\/p>\n
Before you get there, I wanted to compliment you on something because I\u2019ve seen a lot of newer real estate investors think that no matter what happens, the seller\u2019s in control and they\u2019re going to tell me, \u201cOh you got to close and oh, too bad with the mold. Yours.\u201d There\u2019s like this three pages deep in the contract that says that the buyer agrees to take the property as is. But I think that it took some strength to come forward and say, \u201cNo realtor, I\u2019m not going to close. They have to give me a credit,\u201d because you underscored something that most contracts say and that the seller has to deliver the property pretty much in the condition that it was when I saw it.
If the conditions changed, if I\u2019m buying a house and a storm comes through and a tree splits that house down the middle, guess what? That\u2019s not the same house that I looked at. And that mold story should get underscored to anybody listening that you are in control. You don\u2019t have to close. You do have the right to raise a flag and say, this is not the condition that I was aware of and I want some consideration or something because conditions have changed.<\/p>\n
Well thank you, Cowboy.<\/p>\n
I experienced something very similar to that David, when I was trying to sell the Playboy mansion and they did an inspection of the grotto. A lot of things happened at the grotto.<\/p>\n
You could imagine what would show up in that inspection. How did the conditions change?<\/p>\n
That was wild David. Incredible, incredible story. But it absolutely shows just how seasoned of an investor you are and the fact like we\u2019ve heard from Andrew and Matt that you can remain in control and with the right mind and the right knowledge, you can absolutely take control of the deal and put yourself in a better situation. Thank you for sharing that with us. I think we all became a little bit smarter and wiser for it.<\/p>\n
Well, before I throw it to you, Jamil, I think Andrew also made a point that\u2019s worth mentioning. When you listen to a podcast, there\u2019s this concept called survivor bias, which means you typically only hear the stories of the people that survived and did well. We hear about Elon Musk, we hear about Bill Gates, we hear about their empires. We don\u2019t hear about the hundred of thousands of entrepreneurs that failed because no one wants to interview them on a podcast. And if they did, nobody would listen to it. We\u2019re like, \u201cWhat did you do that made you suck? I want to be like you.\u201d It\u2019s always the opposite.
What happens is you only hear the people sharing their best stories because not only are they the ones on the podcast, but they don\u2019t want to come and show you their warts. They want to put the filter on their portfolio that makes it look as good as possible. And we were kind of joking around earlier that you ask an investor how many properties they have and they tell you how many doors they have. They\u2019re like, \u201cWell technically it\u2019s got a garage door, a side door, a screen door, a bathroom door, a front door. Yeah, I got 12 doors.\u201d Maybe they have one house. That is just how investors, especially when they\u2019re at meetups and they feel the pressure to look cool, they want to talk.
And it creates this air that mistakes never happen. Nothing goes wrong. People don\u2019t lose money. And that the baseline expectation is that and if you get anything less than the baseline, you\u2019re not good at this and you should feel bad and you shouldn\u2019t invest. But if you actually sat and watched some of your heroes at work, you would find that it\u2019s complete chaos. In fact, I\u2019ll even tell you this, in the military, it\u2019s not much different.
I had this impression of the military my whole life that it was like this disciplined, orderly place because you always hear about discipline, discipline, discipline. And then I met friends that were in the military and they said, \u201cNo, it\u2019s complete chaos. It\u2019s madness, it\u2019s logistical nightmares. It\u2019s frantically trying to figure out why this thing got delivered to the wrong place and how we\u2019re going to get these people this thing. And there isn\u2019t enough shoes of this size for this area,\u2019 and the reason that they value discipline so much is it\u2019s so necessary in the chaos.
And then I started to notice as it became more successful and I started to meet other successful people, man, the pretty buttoned up version that you see on Instagram of any of these guys walking through their flip is never what their business looks like. They have employees doing dumb things. They have maintenance people running side hustles off of their own properties and selling their appliances. They don\u2019t even know what\u2019s happening in their CRM. They probably don\u2019t know what\u2019s happening on their tax bill. It\u2019s absolute madness for every single successful person that you see, they just don\u2019t share that. Nobody wants to get up there and say, I don\u2019t know what my numbers are, I just know that I\u2019m making money because I still have capital in the bank.
That\u2019s a much more realistic picture of what this is than this super tight, perfect edited video that you get where someone says, \u201cHere\u2019s how you analyze a deal.\u201d As everyone knows, you cannot control for everything that goes wrong in a deal. I\u2019m going to wrap this up by just saying, if you\u2019re making success, if you\u2019re staying somewhat profitable, if you\u2019re acquiring properties, you\u2019re probably doing better than 90% of the people that are out there. It\u2019s not perfection that you\u2019re striving for, and don\u2019t let that become your baseline.<\/p>\n
David, can I add to that? Because I just want to, first of all, high five you and I think it\u2019s brilliant and I think that what really creates success is trying again after failure. Like the property I talked about in Fayetteville that got down to 30% occupancy. We brought in a new manager, we refinanced the property, we renovated it, we got it up to 95% occupancy. Had you accepted, \u201cOh, moldy pool room, guess I got to just take it. No, I\u2019m going to put my boxing gloves on and fight and stay in the ring. I\u2019m not going to lay down.\u201d And I think that that\u2019s really what failure is. Quitting at a setback.
The real success is trying again at a setback, because it\u2019s funny, I just listened to Ray Kroc\u2019s personal story called Grinding It Out. Two of my gut buddies in GoBundance referred it to me, so I just listened to it. Ray failed a ton of times, but he tried again. He grinded it out and he tried again after failure. And I think that that\u2019s what really underscores success as a real estate investor as well. As you said, you\u2019re going to have stuff stolen, you\u2019re going to have a broker try and push it to close on a deal where you\u2019re getting duped on or something like that. It\u2019s really being willing to fight again and try again and then that\u2019s really what defines success. Not no failures, certainly not.<\/p>\n
That\u2019s a great point. Yeah. Jamil, I want to ask you, you\u2019re sitting there in a bathrobe, you\u2019re obviously in a posh hotel, you\u2019re looking fantastic. It would appear that everything in your world is working out about as perfect as it could be. I mean, your beard is symmetrically perfection. I can\u2019t imagine that you could have any horror stories. Am I wrong?<\/p>\n
You are absolutely wrong. In fact, you spoke of warts and I\u2019ve got a wart juicier than the end of any witches nose that we would see on Halloween.<\/p>\n
I hoped I would never hear the words wart and juicy used in the same sentence again.<\/p>\n
Well, let\u2019s get into it. Let\u2019s get into it. As you all know, I\u2019m on a Bigger Pockets podcast called On the Market and had an opportunity to dive into a deal that I was in escrow in Phoenix, Arizona. And this is where I\u2019m going to actually blame my co-hosts for helping me push me along and getting into this deal. Because for those of you that don\u2019t know, I\u2019m a wholesaler. I primarily wholesale property. Very rarely do I hold. And here was an opportunity. And the reason why I even got into the opportunity is I had a massive tax bill last year and I keep being told from my fellow real estate investors and every single one of my co-hosts on the On The Market podcast to buy houses, buy property, so I can depreciate it and lower my tax bill. And here I find this opportunity in Phoenix, Arizona.
It\u2019s a 53 unit off market property in a class neighborhood. It\u2019s a B class building, but it\u2019s an A class neighborhood. In fact, it\u2019s around the corner from my house, so walking distance. I can go there, I could hang out, if I ever got in trouble at home, I could stay in one of the units. That would be my doghouse. I\u2019m looking at this opportunity because a) it would provide me a great depreciation situation. I would write off a lot of income. I was able to get into the deal at 12 and a half million dollars. Now that deal, although it seems like,\u201d Hey Jamal, that sounds a little bit pricey at 12 and a half million dollars for 53 units,\u201d right two days after we had gotten under contract, I had a potential wholesale buyer. I had a multi-family buyer who wanted me to sell my contract to them at $15 million.
That would\u2019ve been an immediate two and a half million dollar wholesale fee. Now, as a wholesaler, to me that would\u2019ve just been an incredible situation. I would\u2019ve been able to get their earnest deposit to replace my earnest deposit. I could have assigned the contract over and possibly have made two and a half million dollars. I bring this situation to my brothers and sister on the On The Market podcast and I say, \u201cWhat should I do? Should I buy this property or should I wholesale the property and make a quick fee?\u201d
Now I was convinced, thoroughly convinced that Jamil, it\u2019s really important that you hold, it\u2019s really important that you invest for cash flow and it\u2019s really important that you keep more of your money instead of just generating cash or your wholesale business and giving it all to the IRS. And so I make the decision that we are going to move forward with purchasing the property. Now, to kind of set the stage for you guys where this is in my career, this is just recent. This is two months ago. We get into contract on the property. Well, a few months ago we get into contract on the property in April, and market is really hot right now. We\u2019re not seeing really anything coming around.
There\u2019s talk of potential rate hikes, but we\u2019re still not there yet. And my business partner, who was very, very experienced in the world of multi-family, a multi-family broker herself, had assured me that we would have lenders just throwing us money for this deal. And we had a financing contingency. Our earnest deposit on the property was $475,000. Immediately, guys, I just want to explain to you, I\u2019m getting nervous because I don\u2019t\u2026 Even though I do a lot of transactions, typically in my wholesale business, I can do anywhere between 50 to 80 transactions a month, so I\u2019m really not afraid of buying and selling property. But I\u2019m nervous to put out all of this money in earnest deposits.
And as we\u2019re checking the boxes through our escrow time, the financing contingency date is coming around. And I\u2019m nervous because we don\u2019t have a loan quote. We don\u2019t have any commitments from lenders yet. And I asked Sophia, my business partner in the deal, if she is confident that we are going to line up lending. And she was so confident that the lenders who had all given her commitments were going to come through. In fact, her answer was \u201cJamil, it\u2019s not how much, it\u2019s how little we\u2019re going to have to put down. We have lenders right now who want this building, they want to be the lenders on this loan. I can almost guarantee that we\u2019ll be able to get this thing done at 90% leverage.\u201d
And I imagine that, a building 53 units and 90% leverage\u2026 As somebody that\u2019s not primarily investing in multi-family real estate, this just seems like an amazing opportunity. And I\u2019m with someone who I trust, who I will absolutely\u2026 Who I believed would have the contacts and the relationships in the industry that would actually come through. And so there we go. We blow through our financing contingency and we deposit another couple of hundred thousand dollars into the file. And now we are in $475,000 hard in earnest money.
And the rate hikes start and they happen fast. And it was so dramatic how quiet the lenders became because as I\u2019m reading the headlines and as I\u2019m watching the retail housing market just come to a grinding halt, I get very nervous about whether or not we\u2019re actually going to have a lender that\u2019s going to come and make this deal happen for us. And I\u2019m calling Sophia daily. I\u2019m asking, \u201cDo we have anything? Has anybody given us a firm quote? And as the days progress, her responses become less and less assured. In fact, we get to a point where she made a phone call to me and she was in tears.
She said, \u201cI\u2019ve been in the business for near a decade and I\u2019ve done hundreds of deals and I\u2019ve never had my lending partners ghost me before.\u201d And we are talking about a multi-family horror story here and it\u2019s a Halloween episode, guys, but this isn\u2019t the kind of ghost that you want. This is the kind of ghosting that when you got near a half a million dollars up for grabs it\u2019s the scary kind of ghost. And I feel terrible. I feel terrible about the situation as a whole. Because for me, the first thing I had said to myself before I got into this deal was, \u201cJamil, you are so talented at what you do,\u201d and this is me talking to myself in the third person so I apologize if I\u2019m offending anybody with that.
\u201cBut you know what? I\u2019m really talented at finding deals. I\u2019m really talented at wholesaling and I always tell myself, don\u2019t get out of your lane. Stay in your lane, fool. You\u2019re good at what you\u2019re good at. You understand what you understand. And now you\u2019re playing in this world that I had not ventured into before and I truly am worried. What am I going to do?\u201d As the days get closer and closer to our close of escrow, it\u2019s obvious that we are not going to find a lender. In fact, all of the loan quotes that we were getting back had the building valued at $8 million. Now imagine that. You get into escrow on a property and it\u2019s 12 and a half million. You\u2019re able to find a buyer immediately for a two and a half million dollar lift.
So I would go so far as to say that the value of the building was 15 million. If I could find a buyer two days after going under contract for an additional two and a half million dollars, I\u2019d say the value of the building was maybe even more than 15 million, considering how fast that buyer would come to the table. But the fact that I allowed myself to get bullied into moving forward with this deal and purchasing this deal instead of just wholesaling it like I should\u2019ve, because I would\u2019ve at least gotten that earnest deposit from the buyer. At the end of the day what ended up happening was we had to walk. We had to walk away from the deal. We did not close. There was no way that we could finance the property at the purchase price. The lenders did not like the deal.
We tried to go back to the sellers and renegotiate. We explained to them that everything had changed, that the world had been flipped upside down. And this building was no longer worth the 12 and a half million that we were in contract at, not even close. And they were not willing to negotiate with us. They had us pinned up against the wall and they walked with our $475,000. And that was a really tough lesson for me at this level. Now, I\u2019ve been in real estate since 2002. I\u2019ve been doing this for 20 years. And the first time that I ever went broke was when I got out of my lane in 2007 and I started investing in condo conversions.
And so this whole game of wanting to get involved in something that\u2019s outside of your expertise, and again, that was the first time I was in multi-family was back. This is the second time I tried to get involved in a deal and I got burned. And it was really tough. It was a really tough pill to swallow, especially because I consider myself an expert. I consider myself somebody who should have known better and I didn\u2019t.<\/p>\n
Well, that is a situation where the market shifted so drastically and so quickly. I guess Andrew and Matt could probably support this if I\u2019m right or not, but I imagine you had cap rate expansion at the same time as interest rates rising, at the same time that lenders are pulling back and saying, \u201cOh, we don\u2019t know what\u2019s going on in the market so now we don\u2019t want to lend out all of our capital.\u201d And it went from all systems go full steam ahead to slamming on the brakes at the same time. And when you had all three of those things happen, you get put in a situation where it looks like you made a mistake, but at the time you put the deal under the contract, there was no way of knowing that was coming.
And I think we get used to real estate just, well this is the way it works. This is just what we do. Do you know what\u2019s in the contract as an agent? No, but I don\u2019t need to, because it always just goes fine. I don\u2019t have to understand the mold situation like Matt brought up. We had a similar situation at the one brokerage where we had probably 50 clients that had rate locks and rates went up so fast so quickly from what the Fed did that the lenders literally said, \u201cWe are not going to honor the rate locks. We will not lend at that. We\u2019re just not giving the money.\u201d And we had to go call over 50 people and say, \u201cYes, your rate was locked. We didn\u2019t realize that this could happen but lenders are just saying whether they have a legal right to or not, we\u2019re just not doing it. We\u2019re not funding. If you want the money, it has to be at this.\u201d
\u201cYeah, we told you 15% down and we changed our mind. We don\u2019t want to lend our money at 15% down. Now it\u2019s 25% down.\u201d And we\u2019re talking about people that were in the high fours to mid fives that were bumped up to mid sevens. And this is at the last couple days for some of them before they closed. You look like a total butt head having to tell somebody that. But it just happens. The market shifted so radically fast. And we\u2019ve been talking about how hot the market gets, but it could cool off just as fast. And we\u2019re used to seeing this type of thing with cryptos and securities and equities and now it\u2019s happening in the real estate space and it\u2019s absolutely wild.
That\u2019s a horrible story. Jamil. I remember when you reached out to me, I was like, \u201cOh, I bet he just needs a little bit of capital. We\u2019ll bridge the gap,\u201d and then you explain it more. And I was like, \u201cOh God, that\u2019s true. It went from 15 million to 8 million.\u201d There isn\u2019t a thing that you could do on this one.<\/p>\n
That\u2019s one thing that I think a lot of people miss or underestimate is how quickly the capital markets can shift.<\/p>\n
Yes.<\/p>\n
You go back to 2007, you could hear the collective sphincters of lenders just tighten and it just shut off. There was no nothing-<\/p>\n
In synchronicity throughout the entire country.<\/p>\n
And then the domino effect goes from there. That\u2019s probably one of the most important things to watch.<\/p>\n
We saw that in COVID. Remember that when there was [inaudible 00:51:00] in place and they were like, \u201cNope, no loans going out at all. Fannie\u2019s not lending. Freddy\u2019s not lending. Doesn\u2019t matter where you are in your escrow.\u201d Nothing you can do.<\/p>\n
Hey Jamil, I appreciate your vulnerability because, and David talked about this before about how people\u2026 There\u2019s a real estate investor persona on social media that we\u2019re all superheroes and we\u2019re either closing deals, going on vacation or going to a Mastermind, one of those three. And because that\u2019s all real estate investors do according to social media. That\u2019s it. We don\u2019t ever deal with anything else, any problems or whatever, we\u2019re just hanging out with people or closing deals. That\u2019s it. And I appreciate your vulnerability because it is those things that are listed are maybe 3% of real estate investing. The 97% is grinding it out and dealing with deals and dealing with curve balls and that, and it takes courage to put out the other 97% of real estate investing that sometimes you lose, sometimes you end up having the wins that you can\u2019t control change. Kudos to you on getting real man.
If you had that deal over again, aside from not doing the deal, what would you do different? If you don\u2019t mind just throwing that out there.<\/p>\n
Well, first things first, I should have put together the wholesale situation because truth be told, if I had put together the wholesale deal, which is what I am good at doing anyways, I would\u2019ve had the buyers earnest money locked in. The buyer that was going to take the property from me in the first place. They were all cash, so they wouldn\u2019t have even been subject to this situation with the lending. It would have been the perfect scenario.
Now, on the other side of that, I wouldn\u2019t feel good about this person buying this property from me at an inflated price anyway, so there\u2019s that other side of the coin. I\u2019m not interested in finding a bigger fool. I don\u2019t believe in that. I believe that everything that we do finds a way back to us. And again, my intentions weren\u2019t bad in originally wholesaling the deal. My intentions are always good when I wholesale. I want to provide value to my buyer, I want to provide value to my seller, and I love being in the middle, and I love being able to create value for myself by connecting the dots.
First things first, Matt, what I would\u2019ve done is I would have followed my instinct to always take the bird in the hand. That\u2019s the man that I was built to be, and I should always eat my birds when they\u2019re in my hands.<\/p>\n
Yes, I guess that is the next step. That\u2019s why you have the bird in your hand.<\/p>\n
Right.<\/p>\n
Yeah. Why not eat it. Even if it\u2019s crow.<\/p>\n
Even if it\u2019s crow.<\/p>\n
I love it.<\/p>\n
I should have-<\/p>\n
Oh man, good job, David.<\/p>\n
I should have just done the thing that I know how to do.<\/p>\n
You need to make a YouTube video about it. Have a bird in your hand as the thumbnail for the video and tell this story. Yeah. However, we\u2019re also resulting. You guys know the poker term where we look back and we say it didn\u2019t work out. We\u2019re like, I should done something different. If you\u2019d to close on that deal and saved all of your money and paid no income taxes for the year, this would be an example of you telling everybody else, \u201cHey, this is the way you got to do it. I wholesale. Instead, I went into this thing. I like Matt\u2019s question because maybe on the next deal you do the same thing, but you figure out a way to protect the earnest money deposit.<\/p>\n
No, you\u2019re absolutely right, David, and Matt, the thing that we actually made an error on with the contract is in that we put this thing under contract when everything had gone bananas. Sellers were dictating terms and it was a very oppressive contract. But when I spoke to Sophia, my business partner in the deal, and I asked, \u201cIs this normal? Is this level of aggressiveness part of the way that people are transacting in multi-family right now?\u201d Because for me, even though the market had gone crazy, when I\u2019m buying distress property, I still have an out. I still have an inspection period. I still have a way to negotiate a change in condition and accordingly, that just wasn\u2019t available in the multi-family space at that time.
I think it\u2019s really important to understand this and for the greater Bigger Pockets audience that\u2019s listening in, guys take notes to this. When things start to get super heated, when the market just gets so crazy that people are throwing away due diligence, that people are putting caution to the wind. When you are starting to see these conditions present themselves, understand that they can\u2019t last long, and that just might be the time when you sit something out. Matt, I would\u2019ve written a different contract. I wouldn\u2019t have gone into that deal where the earnest deposits were so aggressive, I wouldn\u2019t have gone into the deal where the timelines were as tight as they were. I felt nervous about it right out the gate.
I took another individual\u2019s word. This is another thing, the reason I\u2019m a real estate entrepreneur is because I don\u2019t like putting my destiny into the hands of other people. But when I\u2019m ready to write a check for $450,000 and somebody else is telling me that, \u201cDon\u2019t worry about it. We got the lending covered.\u201d I mean, what\u2019s wrong with me? Really though? Where was my discernment at that time? And so there\u2019s a lot of lessons here and it\u2019s a lot about me. I really think that I allowed the heat of the market. I allowed greed, because I thought I had an incredible deal and the greedy goblin inside of me let me make decisions that were outside of the benefit of my family. And I made a huge error. And you know what? You\u2019re right. I had to be vulnerable and I\u2019m sharing this so that people can understand what it looks like when you\u2019re making a wrong turn.<\/p>\n
Oh, thanks again for your vulnerability, man. I feel that. What I got is that I think it\u2019s only time to get great in business at one or two things. And dabbling at $12 million is one of those things where it\u2019s like, man, this could go great. It might not. If I want to buy a fixer upper or a wholesale or an Airbnb in a market that your wholesale business is playing in, I\u2019m calling you. Somebody that\u2019s closing 80 wholesales a month, dude? What? That\u2019s insane. The fact that you built that level of a business is off the charts. If I want to either learn how to wholesale or to buy a wholesale deal in one of your sandboxes, you\u2019re the guy. And if you\u2019re looking for a negative K-1 or something like that for passive losses, maybe a lesson is there\u2019s others that can help with that kind of thing that could have helped you structure a better contract or whatever, man.
I love your attitude around it. I think you obviously shook it off. I appreciate you going there and I think that it\u2019s one of those lessons just this business can deliver really, really bad right hooks. And as I said before, it\u2019s one of those things where the successful real estate investor is the one that doesn\u2019t let the right hook knock them down, they just stay in the ring. You\u2019re going to make that money back with your wholesale business. I mean, you\u2019ll just double down on wholesales and this\u2019ll be just a really expensive but lesson you\u2019ll easily recover from because of what you built already because of your core genius and your core greatness in the business.<\/p>\n
Thank you Matt.<\/p>\n
And your amazing sense of fashion.<\/p>\n
Yeah, I think I\u2019m going to start adopting the look. Yeah, I\u2019m going to adopt the look as an everyday thing.<\/p>\n
It\u2019s very natural for you. Andrew, did you want to share your last horror story about the flood?<\/p>\n
Yeah, this is a horror story that unfortunately is very timely.<\/p>\n
I was almost going to say, not to cut you off, but we may be hearing horror stories when this comes out from the actual situation going on in Florida right now where there\u2019s a hurricane coming and you can\u2019t control that. You don\u2019t know what\u2019s going to happen. This is a great example of the fact that trying to blame yourself for things you couldn\u2019t have seen coming never works.<\/p>\n
Right. The previous example I got, I talked about we sold those properties, basically investors broke even. We just got out of it and moved on. This one has a much happier ending. We purchased 150 units down in Lynnhaven, Florida, which is Panama City beach area, Florida panhandle. This was fall of 2016, I believe we closed in November. It was a C plus property in an A minus area for real, and so a ton of opportunity. We renovated it, took us about 18 months. We bumped the rent. We had just gotten to stabilization.
Our manager, we said, did a great job, and she moved up in the management company, went offsite. New manager came in. Three days later, 1:30 PM on October 10th, 2018, Hurricane Michael came through with 161 mile an hour winds, the strongest hurricane in recorded history to hit the Florida panhandle. And I have a screenshot that I keep of the eye wall of the hurricane directly over our property. And in three hours time we went from a hundred percent occupied to 9% occupied. The property used to be covered in beautiful tall pine trees. They all came down and sliced up the buildings like bread. And we actually had a guy who the next day we had to chainsaw him out of his unit because he was trapped in the unit.
What did we do to make that potential tragedy, potential horror story not be any worse than what it could have been? For one, I am a wannabe athlete trapped in a nerd\u2019s body, and one of the benefits of being a nerd is I\u2019ve always loved meteorology. I was watching this storm since it formed. It was a wee baby storm in the Northwest Caribbean, and I had a gut feeling that this wasn\u2019t going to be good. One of the things we did is our team\u2026 And if you have a property in any area that is subject to disaster, whether it\u2019s hurricanes or fires or whatever, sit down and think through what can you do to prepare for the event that you might not be able to control. There\u2019s still ways to mitigate it.
Number one, we got tons of supplies in advance. We had cases and cases of bottled water. We had mounds and mounds of sandbags. We have tons of plywood. We basically forced everybody except for a few stubborn folks to just get the heck out of town, get out of your units. That\u2019s a big reason why we had no injuries despite 18 inch trunks coming through the buildings. The next thing we did\u2026 These two things made a huge, huge difference.
We actually had one of our big contractors from Atlanta come down to the Florida panhandle and stay at a hotel the night before about 50 miles inland. He was still safe, but he was very close to that. He\u2019d be able to come help us out that very next day. Again, I mean, we knew this was coming. Also, the day before the storm, we filed a claim with our insurance carrier, even though the storm hadn\u2019t hit yet, we knew this is not going to be good. And the thing is, you can actually go back and cancel that claim and just say, \u201cOh nope, nevermind. Zero claim.\u201d We put the carrier on notice the day before that we were expecting a claim.
And then we also knew we were in hurricane country. So we had $350,000 sitting in the properties reserve account just in case something happened and we needed it. So what happened? Three hours later, knee deep water in the parking lots, buildings either flattened, destroyed, ripped apart. Again, I think I mentioned this, we had no injuries. The next day we were able to start remediation because we had our contractors already lined up. They came straight to us. We were able to bring water to the residents. We were able to have a generator and have one unit with power. Power was out for something like three months. We had one unit that had power so people could come in, cool down, charge phones, all that kind of stuff.
We were able to pay contractors immediately with our 350,000 to get in there and start cleaning up, get water out of units, get the trees off of the unit so that the building doesn\u2019t suffer more damage from additional rain. It\u2019s Florida, it\u2019s humid. Those things will turn black with mold in 72 hours if you don\u2019t deal with it. And this was a big one because we put the insurance carrier on notice the day before, we got in line before everybody else. If you have a fire at your property, okay, you\u2019re probably the only one making a claim. But if you\u2019re in a situation where a hurricane devastates a hundred miles of coastline, can you just imagine the volume of claims the insurance carriers are processing?
We saw properties that sat untouched, un repaired for two to three years because they didn\u2019t get their claim in fast enough and it took that long for them to get through the process. We had our first quarter million dollar check from the insurance carrier two weeks in. Also, we had what\u2019s called loss of rent insurance, meaning with 14 units left, we didn\u2019t obviously have the income to pay the mortgage or those expenses or salaries anymore. Well, the loss of rent insurance, the insurance company cuts a check to cover all of that, and so we were able to keep our staff and still pay the bills and still pay the mortgage. We never defaulted. We were never late.
And then this is a beautiful thing from our side and from our investor\u2019s side, we bought that property for $4,125,000. When it was all said and done, 18 months later after we\u2019d renovated it, the insurance carrier invested a little over $6 million on our behalf renovating and repairing that property. So now we basically have a 2019 construction property and it\u2019s like, \u201cWell, wait a second, Andrew, how do you buy a property for 4 million and get insurance proceeds of 6 million? It\u2019s called making sure that you get full replacement value policies that are rated for whatever disasters could hit your area. If you\u2019re in Texas, you need to be covered for hurricanes, wind, and hail, all that kind of stuff. You\u2019re in California, maybe earthquake.
On the Gulf Coast it\u2019s called category rated insurance for named hurricanes. And the lender will say, \u201cOh, you only need $70 a square foot.\u201d We said, \u201cNo, no, no, no. It actually would probably cost us a hundred. We\u2019re going to pay more on our insurance premiums to make certain we\u2019re covered.\u201d And a lot of times if you gamble and just get a lower premium by lower coverage, it\u2019s going to work out just fine until you have a building burned down or a hurricane takes out the whole property and you max out the limits just trying to get the place rebuilt.
Today, that property, like I said, it\u2019s effectively 2019 construction, the net operating income is 50% higher than it was before the hurricane. And the building that we bought for 4 million, even in today\u2019s environment is worth 18 to 20 million. People will ask, \u201cOh man, what do you think about buying in areas where you can get hurricanes or fires or all this kind of stuff?\u201d And you can do it, as long as you properly evaluate and mitigate the risks. Honestly, that was probably some of the 18 most stressful months I\u2019ve ever had in multi-family. And that first 24 hours of just sitting here on my computer watching the hurricane pass directly over us knowing what was happening, the amount of rain and 160 mile winds, and I had staff and people who lived there, was again probably one of the worst experiences I\u2019ve had multi-family. But with proper mitigation strategies, even horror stories can end up working out well.<\/p>\n
I think this is not a horror story, brother. I think this was a hero story. The amount of planning, the things that you had in place there, there\u2019s maybe this many people on the planet who care, who care to have stockpiled water, to have had resources, to have done the things that you had done as a property owner, as a business owner, as somebody who has been given the position in life where you\u2019re truly in charge of people\u2019s safety and of people\u2019s livelihoods. I\u2019ve never heard of somebody being that well prepared for a disaster before because look, it\u2019s not human nature to do so.
But I have to say, Andrew, you impress the hell out of me, man. That was an incredible, incredible foresight. And I think that anybody who had the opportunity or has the opportunity to live in one of your properties or to be anywhere near you with respect to how you do business is a lucky person.<\/p>\n
Well, and I got to give credit to our onsite team and staff. They are the ones who enacted everything and made it happen and delivered the water and cut the pine tree and got the contractors, all that stuff. I mean it really\u2026 I\u2019m sitting out here in California, safe and warm and dry and they were the ones walking through knee deep water and knocking on doors and making sure everyone was safe. It really came down to having an awesome team in place. And then like you said, having some things set up in advance so that they could do that.<\/p>\n
I commend you too, Andrew. And I think that on the analytical side with regards to insurance, it is tempting when you look at a deal to say, \u201cOkay, well maybe I\u2019ll do some co-insurance here,\u201d which is where the insurance company kicks in some money and you\u2019re pretty much self-insured, where if you need a hundred thousand worth of damage, if that happens to one of your properties, the insurance company kicks in maybe 80% and you have to kick in 20%. In exchange for that co-insurance your premium\u2019s going to be much, much less. That is penny wise, pound foolish when you have an issue like you did because you would end up losing 20% of that money that the bank kicked in to renovate your property.
I commend you for being more analytical about it. And I\u2019ve seen many, many real estate investors make insurance errors. And as you said, maybe you never need it, maybe you just keep that cash flow and you drop your premium by 10%, 15%, and that just goes right to your bottom line. Or maybe a real catastrophic issue happens that you need insurance on. And the more real estate you buy, the more likelihood of having an insurance claim is going to come up in the future. I commend you for not being penny wise and pound foolish on your insurance, which enabled you to pretty much build a brand new apartment complex with the insurance company\u2019s aid.<\/p>\n
And there\u2019s one other thing that\u2019s really important that I forgot to mention. If you have a little kitchen fire that\u2019s going to cost five grand, don\u2019t worry about it. But if you have a building burn down or something significant, go get a really experienced public adjuster. Because the insurance company\u2019s going to send out their own adjuster and their goal, they run a business, it\u2019s not nefarious, but their goal is to collect premiums and not make payouts. And so they will send an adjuster out and try to give you as little as they can for the damages. A public adjuster will basically argue on your behalf of, \u201cNo, this shouldn\u2019t be a hundred thousand, this should be 150.
On any kind of catastrophe like that, it is a full-time job. The contractor scope for repairs was 1,100 pages. There is no way I had the skill or ability to negotiate with the insurance company over that kind of thing. The public adjuster, again, who we talked to a couple days before the storm, we made sure we were front of his line. He really is a huge piece of why that worked out well is because we had somebody advocating who knew how to advocate in that kind of scenario on our behalf.<\/p>\n
Jamil, before we get out of here, where can people find out more about you?<\/p>\n
You can find me on my Instagram @jdamjil. I also have a YouTube page where I share all kinds of tricks and tips on how to get a great wholesale deal. And that\u2019s just youtube.com\/jamildamji.<\/p>\n
Andrew, same question.<\/p>\n
Yeah, I shouldn\u2019t be but I\u2019m a social media ghost, so best way to find me is just Google Vantage Point Acquisitions. It should bring up our website, which is vpacq.com. There\u2019s a couple different ways to contact us on the website or you can also connect on Bigger Pockets and on LinkedIn.<\/p>\n
And Matt?<\/p>\n
Sure, it\u2019s Sheriff Faircloth here. You can get a hold of us at derosagroup.com, wearing my son\u2019s sons cowboy hat. D-E-R-O-S-A group.com, D-E-R-O-S-A group.com. You can pick up a copy of my book, Raising Private Capital, Bigger Pockets best seller over there. You can join our investor mailing list and you can check out our social handles on our website, derosagroup.com.<\/p>\n
Guys, this has been one of the better shows I think that we\u2019ve ever done. We showed the warts, we showed the cream that we use to fix those juicy warts. We got to see Jamil in a robe and we got to see me actually for the first time in my life dressing up for Halloween. We also got to share some amazing horror stories that I hope everybody benefits from.
Each and every one of you, I want to thank you guys for being here, for sharing the ugly as well as the good. I hope to see you again. We\u2019re going a little long, so I\u2019m going to get us out of here. Listeners, if you like this, let us know in YouTube, log in, go to the comments, tell us what you liked, what you didn\u2019t like, and if you want to see more of this content in the future, and then be sure to share and subscribe. Thank you very much.
This is David, Sergeant Slaughter Green for Jamil Hugh Hefner Damji, Andrew Hang Loose Cushman, and Matt didn\u2019t know we were doing this today, Faircloth, signing off.<\/p>\n