LMSM 27 | Anatomy Of A Deal

 

In this two-part episode, Frank Cava and Ian Mathews break down every detail from a $10M real estate project involving 75 single-family homes in Richmond. This is our first podcast episode where we film together in the same room, using Frank’s paparazzi film crew and editors. We share every granular detail of how we identified, negotiated, funded, executed, and celebrated a deal that was incredibly profitable to us and the investors who helped us fund the deal.

In this episode:

  • The power of persistence and follow-up to find great deals
  • How a great partnership drives an equation of 1 + 1 = 3
  • How the deals you close are closely linked to your ability to execute
  • Profits are made when you buy, not when you sell
  • How to raise private capital from wealthy investors
  • What happens when a profitable deal gets hit with a pandemic
  • How to communicate to investors when a deal starts to go sideways

Watch the episode here:

Listen to the podcast here:

Anatomy Of A $10M Deal (Part 1)

This is the story of a $10 million deal that Frank and I put together. We get into everything from soup to nuts, and how Frank found the deal, how I got involved, how we raised the money, how we got through the pandemic with this, how we closed, and celebrate it. This is a two-part episode. This is part one that we recommend you read to first to before part two. If you are new to our channel, please subscribe. We hope you enjoy this.

This is our 25th episode. A momentous day for our fledgling startup. What would bring us together for such an amazing event would have to be something big. On a number of occasions, we have alluded to a deal that we did several years ago. It was a portfolio, a large deal. The title of this episode is Anatomy of a $10 Million Deal. I aspire to one day saying anatomy of $100 million deal, but for now $10 million is pretty exciting. We are talking about a deal that we did together. We had different roles in how we did the deal. We thought it would be interesting to document how it came to be, how we pulled it off, and how it ended.

Why don’t we start with my real estate business and how these things started?

In general, both of us play around in the real estate business and we’ve been in and out of it. We worked together at a big publicly-traded company that built homes for years. That’s how we met each other. Since then, you started your own business. You’re in the residential space, I’m in the commercial space. This was different for me. Talk about your business and how it’s linked to residential real estate.

We started off with home builders. What I did is I had a non-compete and I morphed. When I opened the business in 2009, I had non-compete plus the market sucked. What I tried to figure out is where can I make sure that I could get into deals and not lose money. What I did is instead of buying undeveloped land or things that were speculative. I bought things that I knew that I could turn quickly. I also was confident of what the asset value was. The reason I lead with that is it sets me up perfectly to do a deal like this because these are homes that came across my desk that were already occupied in existing areas and existing neighborhoods, in many instances on streets where you are dealing and other homes, so I could analyze it. That’s how the genesis of the business started. We mostly do direct to seller marketing and advertising. Someone calls on one of our ads and they’ll ask us like, “What do you do?” We buy houses, cash and fast, those kinds of things are what we do for the majority of our business.

What kind of marketing do you do, Frank? How do you get the leads now?

It started off with postcards and just postcards, and then it morphed the letters. Mostly US Mail, cutting edge technology. As we’ve got more sophisticated, we’ve gone to outbound call and outbound text. We also now do television. We use radio and the internet. We use both the SEO, PPC, and SEO, Search Engine Optimization where your name comes up so people find you. That’s the slow way. The faster way is through PPC where you pay for an ad and it follows you around the internet. We do some retargeting. If you’ve gone to our website, we’ll follow you around Facebook, for example, to try and buy your house that way. It’s mostly trying to get one person at a time to sell his house.

I’m glad you said internet, PPC, and Facebook where people would think they were reading from several years ago because you led with postcards, letters, television, and radio. That’s how we do it here in 1957 Cava companies, which are still some of your best leads. People have quit on some of that, but that’s fascinating.

It’s like when I started at NVR, I’ve had this conversation. In college, they made me have a laptop and I go through nine interviews with Kenny. The last one I finally asked, Kenny, I go, “You’re my ninth interview. I hadn’t even seen a computer.”

Your business in general, if I could summarize it, you find leads, you try to help people that are looking to sell quickly because you’re capitalized well, and you look to acquire single-family homes that are at a discount that you could sell, that you could then put some money into either flip it or sell it right away wholesale.

We’ll get a house under contract and we think we’re going to talk about leverage. The complicated way to say it is like buying an option on a stock. Instead of buying the option on stocks and having $150 or $200 for that one share, you might buy an option for $5. What we do in a lot of instances is instead of buying a $100,000 house for $100,000, we’ll put a $500 deposit down. It goes to the attorney. We control the asset for 30 to 60 days with $500. What we’ll do is one of many exits. Once it’s under contract, we can assign it or sell the contract to somebody else who then buy it. We could then buy it ourselves, do the work, and do what they do on television, flip it and sell it, which we do that a lot.

The other thing we do in a lot of instances is we buy it and we fix it, and then we keep it as part of our rental portfolio. We’ve got several hundred of those. The things you’re going to start to understand through this show that’s important about real estate than I do, you need multiple exits. Even if you’ve done, everything right on the front end and studied, the market could change, the Coronavirus pop up, the foundation might be bad. Who knows? Neighborhood could go up or down. You need to have multiple exits. That’s what we look at with every deal.

That’s a great point that we’re going to end up getting into. Later on, all of those capabilities came to play in this deal. If you were a savvy investor who was good at buying, flipping, and selling for a higher price, the middleman, this still wouldn’t have gone so well for us. In fact, we’d have lost a lot of money if we’d had done it that way. The fact that you had a property management business, someone who was good at working with the city, working with Section 8, collecting rents, getting rents raised, and a department that works with the financing. All of that came to play for us throughout this. We need to lean on all of it.

If we don’t have the business that we have in 2019, I never think about doing this deal number one because I don’t have the skill. It’s not only too big. I know I need to be multifaceted. We’re going to talk about Coronavirus came in three months into this deal that we get popped in the face with something that nobody had anticipated. Had I not had Cindy who works in property management who is good at understanding, not only property management, long evictions, and all those things. She has an attorney who she works with who helped guide us through the PPP Act and the CARES Act. We ended up going back and collecting almost $100,000 in rent through government subsidy that we might not have been able to get. That’s a huge part of our profit. We had a full suite business with good people, that’s the reason I think about doing this deal. It’s one of the things that I must have before I ever pick up the phone and call, let alone you, any investor but then ultimately, I pick one of my best friends to do this deal with. I need to know that I am properly tooled to do this well.

The $10 million deal that we’re talking about was 75 properties all packaged into one deal. Before this, how many large package deals had you done? What first had you ever done 75 all at once?

Since I’ve been on my own now, 75 was a big deal.

LMSM 27 | Anatomy Of A Deal

Anatomy Of A Deal: You need more exits because even if you’ve done everything right on the front end and studied, the market could change.

 

Prior to that, what was about the largest you would do?

We did a refinance 83 units six months before this deal. We already owned it, packaging it, and jumping through a bunch of those hoops and made me think that 75 we can handle. We did do one deal and it was 30 units. We’d done that about 18 to 24 months before we close on this deal.

Aside from that, 90%-some of the deals that you do are one-off. It’s someone gets some marketing, either saw it on the internet, an ad, and on you on television. They call inbound to your sales department who then talks through it, consults with them, and negotiates a good price. You go through it in your weekly sales meeting, decide how much would we have to put into it, what could we sell it out and is it worth buying. You acquire it and you close it 30 to 60 days later. That’s your business model in a nutshell.

What we’re good at is the one-off stuff. When we did the 30-unit portfolio, that almost killed us.

Let’s get into it. When did you do the 30-unit deal?

We close on the 30-unit deal at the end of 2017. It got written up in the local paper in the beginning of 2018. The 75-unit deal didn’t close until December 31st of 2019. The 30-unit deal came across my desk from a realtor. It’s someone who I’ve worked with before. I’d never bought that many but sometimes I’ll buy 3, 4, 5 at a time. I might buy several from one seller in iterations like someone’s got five houses, you buy one. They say that went pretty well. You buy two and then you buy the other three. This realtor that we had worked with, we’d sold him some stuff and we bought some stuff from him. He’s like, “I’m pitching this to the market. I know you could do this deal.” It started off in the 40, 50-unit range but the numbers went right on all of it and it took time. It took 3 to 6 months to whittle it down. It’s 29 doors, $3 million, and we bought all of those. We closed on that in the beginning of 2018.

You closed on it and that’s the first time you ever took that many in. How did it go? Did you kill it?

No, it almost killed us. It’s a true story. We thought we were ready for it and we weren’t. We didn’t have the manpower, the staffing, and the people behind it. Our property management division wasn’t in-house in time. It was outsourced. There was a bunch of things that went wrong. The reason I ultimately called you is we only had debt on that deal. We almost ran out of cash on that deal. It was the reason I structure this deal in a different way.

You’ve got 30 units. For someone sitting there thinking about it, you own it. You’ve got the title on all of these. I assume there are 29 tenants in those properties. Some are paying on time, some are not. You are outsourcing the property management, so someone has to be collecting bills because you have to pay debt every month. You have a principal on interest payment you have to make every month. If your tenants aren’t making payments, it puts a big cash squeeze on your company. Did you acquire those at the right price or was there some more risk in those properties that you didn’t anticipate?

We bought it at the right price.

The pro forma was okay and the price was right. The execution was difficult with that many tenants to manage.

What I learned in that deal is the estimate was wrong. I thought the estimate for the work would be right but it was higher than I had anticipated. I mentioned that we had to go back through the CARES Act and PPP. On the RVA 7519 deal in this deal, we ended up collecting 99% of the rent that we should have collected. I don’t even have this statistic for the 30-unit deal, I would guess it was close to 60%, if not lower. When you start looking at a deal, it’s like a development story. A developer develops 100-lot subdivision, they make their money on the last twelve lots. The money in deals like this, you’re not as rich as everybody thinks. It’s high-level execution, not only high-level execution, but it’s also little details that start to add up. If you don’t hit all the checkboxes, you can lose money easily. On this particular deal, it was a 29-unit package, a $3 million portfolio, the thing that got in our way was this. It costs us more than we thought to do the work.

We anticipated it was going to cost us $20,000 a door. It costs more than that. We thought we could turn the units and get people to cooperate, it took way longer than we had anticipated. Our interest carries and all that stuff went up. We weren’t collecting the rents. We had other problems. We’re spending $100,000 where I had budgeted $25,000 on a renovation. This is a real part of it. I started having cash issues because I was spending way more than I had borrowed. You go over budget by $30,000, $40,000 X 30, it’s $1 million out the door, that adds up. We were way smaller company back then.

That smokes the profitability of the whole project.

It smokes it and it puts strain on not only you personally but your business.

This deal doesn’t go well. If I’m sitting there thinking, “Frank got this business. He’s had it for ten years. It’s profitable one unit at a time.” The average person would think, “Why wouldn’t you go back to that business model of one at a time. If this went so poorly where you bought a big package and put all that pressure on you and stress, something had to have changed in your business that gave you confidence, you could go do something twice as large.”

My staff got better. I understood what we did.

The faster way for people to find you is through PPC, where you pay for an ad and it follows you around the internet. Click To Tweet

Talk about that. Your estimates were way off. You were not executing well. You were only collecting 70% of rents and you had runoffs that were crazy versus what you estimated. What changed in your organization in that two-year period to get you to come talk to me about the next deal?

There are three fundamental things that were different. First, I overhauled my construction department. I had more estimating help. We studied the deal differently. We said, “This looks on the surface $15,000 worth of work. It’s probably closer to $25,000 to $30,000 worth of work.” We were conservative with our estimate numbers because the last time we did this, we weren’t conservative and we got killed. This time around, we were the opposite. We were conservative of what we thought the construction numbers needed to be. We went into this deal thinking that we had a couple of projects where we were going to spend $50,000 to $200,000. When COVID happened, we pivoted, but we had the budget with some of those.

We had some money that we can move from over here to over here in the deal because we built flexibility in. Understanding the estimate and building some financial flexibility was a big change. That’s number one. Number two, staff. Our construction department was more robust. We had more project managers. I had changed construction managers who was running my construction department. I got a magician in there now. Eddie is incredible. He figures out how to get things done. When we couldn’t pull permits, we had to pivot. We couldn’t pull a permit anymore because the city was closed for three and a half months. I can’t say, “We can’t pay the rent or the mortgage because the city is closed.” What we did instead is we decided we’re going to lessen the amount of work we do.

We’re going to get through this quick. We started to put a real premium on speed versus a real premium on we are going to do what we said we were going to do before. The path needs to change, but we know we need to get this thing operating, functioning, and we need to pay the investors. That was the focal point. In the end, we need pretty pictures, which is what our problem was before. The third thing that was the most critical is that 30-unit portfolio had an average purchase price of $100,000 a door nearly two years before we bought this deal. I bought this deal with an average purchase price of $73,000 a door. I bought it lower. I was not willing to rush into this deal at $100,000 or $110,000 a door because I’d already seen that story. These are assets on the same street.

Even with a better team, you recognize that at the same purchase price, I’m putting myself in jeopardy of running through the same stress and I’m not interested in that. We’re going to get into that on the price points of this. That’s pretty fascinating that you already knew with roughly the same type of assets, same houses, same neighborhoods, same zip codes. I know the pain. I felt this. It’s just twice as much. I’m losing money on every house. I’m going to make up for it in volume. That doesn’t work.

You can’t make it up on volume. The thing you asked that is relevant is why don’t you go back and do one at a time? In two years, I did.

You did for a while until you figured out a better model and got a better team.

When this deal, the price, and the people were right, and everything lined up then I knew it was time to do the deal. We negotiate this deal for eighteen months to get the price right.

You’ve got through this 30-unit deal. When did this 75-unit deal first come across your desk and how did you find out about it?

I’m not a marketer per se. I’m a salesman. Contrary to all the crap you see me posting on Facebook nowadays, I’m not someone who’s comfortable doing that. We’ve talked about the discomfort for both of us to put things out there on a show. What I did is we had a local marketing company, they do internet ads and big campaigns. They’re not an agency but they do all the digital stuff. I had a relationship with them. I was on retainer and I said, “I bought this portfolio. I would like to get some press around it.” I don’t want to pay for an advertorial. There’s a paper in Richmond called BizSense. I read The Wall Street Journal, The New York Times, and BizSense every day at 7:00 every morning. It’s somewhere between 1 and 5 articles that show up in your inbox. You can see what’s happening in the business community. For people in Richmond, the business community reads BizSense, everyone I know.

I wanted to be in it. There are four people who are writers. I didn’t know how to get in touch with that person. I cold called but I don’t want to cold call. I want to get written up. I thought this was a cool thing. I hired the ad agency. The ad agency coached me on what to say and they’re like, “You’re going to speak to so-and-so. So-and-so is nice, but make no mistake, he’s a reporter.” They made sure that I didn’t screw up, start blabbing, and say dumb things as I ran it up in the paper. They’re like, “Have some strategy, talk to them about it.” He’s going to ask questions. That’s what he does. I thought that would be an entryway into a bigger market, other deals, and letting the business community know who we are because we hung out under the radar until this point. What happened was that article got published. Within a week, we got an email. It didn’t come to me personally. I dug it up for this show. It didn’t come to me personally. It came to our spam account.

Angelo dug it up so I could find it. It’s not even in my inbox. I didn’t save it. It didn’t even come to me. It got forwarded to me from somebody else because it went to the website to an info spot and said, “I saw your article. You might be interested.” When they brought us that deal, it was a $9 million or $10 million offering at first. It was for more houses, but it was overpriced and it was bigger. There was a bunch of stuff in there that we ultimately whittled down. That’s how this started. It was with purpose. I went to someone who could help guide me towards getting some publicity. Once the publicity came in, phone calls came in.

Did you get the idea for the newspaper article? I know you and I’m similar to you. You like to let your work speak for itself and grow organically. You’re not P.T. Barnum. You’re not out trying to over promote yourself. You had to have got that idea from somebody. Something had to scratch a niche where you thought, “I need to go get some press.”

I know exactly where it came from. It came from two things. Internally I was like, “This is a big deal.” It was the first time I thought I did a big deal since I left NVR. Everything had been one-offs. Each row hit in a single to the right, over and over. This time I hit three grand slams. I was like, “This feels different.” I had gone to a conference in 2009. It was by Tony Robbins. It was all these different people, Gary Vaynerchuk was there when he was a no-name. There was a woman who spoke about PR. She talked about how to get in front of things if it made sense. Eight years earlier, I spent $5,000 to be at an event. There was a throwaway comment that somehow hung out in the back of my head and I thought of it then. I asked these people who I knew were in this space, I’m like, “I’ve never done PR. Is this warrant PR?” They’re like, “Yes.” We did the whole on a mini-podcast about things that build upon themselves and you don’t know where it’s coming from. That’s where it was. It was planted in my head eight years earlier.

You never know where an idea is going to pop up in your mind, where it’s going to be used, and what it’s going to lead to. They reach out to you cold. They’re asking an obnoxious amount of money. It was something like $9 million for all of the 75 properties, which at that number, that was close to $100,000-some that average price. You looked at it and thought, “I’ve been down this route. I’m not touching that. That’s $110,000 or $115,000 of property. I may lose my ass.” You say no thanks in a polite way? Did you even meet with their people or was this all email at a time?

The first thing I did was blew it off.

LMSM 27 | Anatomy Of A Deal

Anatomy Of A Deal: If your property management division isn’t in-house but outsourced, a bunch of things can go wrong.

 

You didn’t take it seriously. Someone randomly come into the info of Cava Companies is not serious.

It got deleted. It made it to me, and I remember I hit delete. I remember where I was sitting when I deleted it because I have thought about that. I reached out again. I still thought it was overpriced, but he reached out and then this time he was smarter. We share a common friend, Jeremy. He’s like, “I went there for grad school with Jeremy. Jeremy so happened to be a friend of my brothers. I know you through him. This could be good for you.” He went personal and because he did that, I felt compelled to call him back.

You call him back. You have the first set of meetings. That’s where the numbers start to get flashed. You say, “Thanks, but no thanks.” It doesn’t make sense for us.

We have a couple of conversations. It’s somehow or another, I don’t remember the exact details, but we ended up sitting in a room with them. When you’re doing a deal of this magnitude, most of the people we’ve talked about this, most people in my industry are full of shit. Jerome can tell you they’re full of shit.

That’s what happens in an industry that is so dependent on debt. Things look much better than they are and things are fueled by debt.

We started to have some conversations that were somewhat substantive. Two things happened. They showed us that there’s a little bit of flexibility in the price and they didn’t want to get serious with us on price until they met with us. I’m the owner of a company but I don’t think of myself that way. I think of myself as a real estate guy and as a normal dude. This was the first time that I have told you this story that I walked in and I thought that the person who reached out to me would be the person I connected with. He’s a member of the team, but he’s not the decision-maker.

This guy, an older version of Frank who saw himself in you was selling 75 properties in the first place for estate planning. He was getting older. It was simpler for him to pass it down to his heirs as if he had cash or rolled it into a big commercial deal but didn’t want them to have to deal with selling 75 individual properties.

He owned it for 30+ years most of these. He’s fully depreciated them. Their value to him was now over.

We will come back to that because that’s an important piece of what helped us out in the deal is the fact of who the owner was and why it was undervalued in your opinion. You make a little bit of a personal connection in this but the numbers still don’t get real for a while. From the time they reached out to you to the time where you got serious about closing the deal, how long was this negotiation?

It was somewhere between 16 and 24 months.

On one side, you say, “They offered $9 million.” You ultimately bought this package for $5.5 million. Great negotiation, Frank. The average person doesn’t have anywhere near that patience to sit for 16, 18 months until the price comes to them. You were willing to lose it. You probably thought you lost it multiple times. You’d given up on it.

If you’ve ever spoken to a police officer, you’ve ever noticed the only people who are police officers that run is on television. I’ve asked the police officer at some point, I said, “Why don’t you run?” They’re like, “I’m never willing to run into a bullet.” That’s what this was. I wasn’t running into a bullet. I was going to slowly and methodically do this deal if it made sense, but I was going to walk methodically into the crime scene, not sprint. I’d already sprinted into a deal and damn near got shot. This was not going to be that.

In multiple occasions, you had to have thought, “That’s done. I’ve already walked over. You guys aren’t even close. I’m going to go out of my business. I’m still making money. I’ve got a good company. I don’t need this 75-unit deal. I only needed if it’s priced in my wheelhouse.”

They sent us an email. I remember exactly where it was. Max was nine months old. I was in California. I was on vacation. It was August. Angelo got the email. I wasn’t checking in. He calls me up 2 or 3 times. When you get a call that many times, you answer and he goes, “Did you see the numbers?” I’m like, “No.” They dropped almost $1.5 million. We ultimately closed $200,000 less than that number. He’s like, “We got the deal.”

When you bought it to them, you didn’t think they were coming near that. You were skeptical.

I bet you, they shopped at the other people. Who the hell will buy 75 houses in our market? There are not many people. The market was hot, but it wasn’t euphoric like it is now where there was a ton of cash and people need the pour it in the places. People were a bit more prudent in purchasing. This is a heavy lift. I knew we were competing against ourselves. I knew if I was patient, I need to get the deal where I want it, but I wasn’t going to kill myself to get this deal.

When you start looking at a deal, it’s like a development story where the little details start to add up. Click To Tweet

It’s interesting when you say that the reason why you were able to negotiate it is because of scale. You are large enough where you could handle and swallow 75 units. The average investor who is good with debt is good at buying right and selling wouldn’t be able to manage all 75 of these. I see that in commercial real estate. If something goes on the market that’s in between $1 million and $2.5 million, they don’t even hit the market. They’re gone because anyone can get debt on that fast. I’m selling my collision center right now in Orlando for $4.3 million. My realtor said, “Be patient. These take a little longer because someone’s not calling their loan broker and getting a loan for $4 million. We’ve got to find you somebody that can go pay it.”

It’s most likely a parcel deal. It’s most likely a deal like this where there’s some debt and there’s some equity. It’s more complicated.

It’s a team of people that buy together always.

We talk about this all the time internally. Turnkey rentals, if it’s over $100,000, most people have $100,000 in an IRA sitting around. It’s not an insignificant amount of money, I don’t want to say that, but it’s not a ton in nowadays terms. People have that. Once you get the $125,000, $150,000, that’s usually where debt needs to come into play. With a deal like this and you asked some of the things that were different between this deal and the last deal, the 30-unit deal, I wasn’t as sophisticated as a business and the market wasn’t as sophisticated. The SFR space has grown up in the last several years. Instead of using a private lender who can lend me $3 million at high terms, this time, we structured the deal at rates that were in the sevens, which is reasonable. You can make money when money is at seven. The way that we structured this deal was a lot different. I knew there was a debt component that I could get at a reasonable number. All of that stuff started to line up, but because of it like you talked about, the complexity was big. We were one of the few dogs in the fight. The market had come back to us, it was more affordable.

You arrive at a price for 75 units of $5.5 million. You sign a contract. You agree to terms. You know I have to figure out how to finance it. In the past, you have 10 or 12 lenders that you go to regularly, all different tranches depending on how quick you need the money, how fast you’re going to pay them back, and what kind of terms they’re getting. That could be anywhere from 6% to 10% with a hard money lender. On this particular deal, $5.5 million, this is not the only deal you have out there at this point.

We were talking about this at the time, you add multiple layers of debt on other properties that you own. You own over 300 properties right now. You’ve got debt out there that’s strategically placed. You’re looking at this deal and you’re saying, “I got to figure out how to do it.” Financing all of it based on where your assets were at the time was a non-starter. You had to figure out a different approach. How did you decide to syndicate with private capital? Syndicate means collect money from people that are not banks in a simple way.

If you’re you and me or if you’re someone who listens to a lot of finance stuff, you understand what we’re talking about. It makes sense to clarify this. Ian said that I had other debt out there. It’s true. I’m going to make the math easy. If I buy a house for $50,000 and it requires $50,000 worth of work, I’m out of pocket somewhere between $10,000 and $25,000 to do that house. The purchase there is debt. I’m going to do that with debt but I also have to come to the table with equity. Somewhere between $10,000 and $25,000 worth of my own money. I have all these projects going on at a time and this is what I did wrong in a 30-unit deal. I didn’t raise equity. I use my own equity. My life got tight because I had all of this stuff going on. I didn’t have the cash. I needed my own internal cash.

There’s debt then there’s capital, your capital is your down payment, or it’s your equity. Usually, it’s referred to as equity if someone else brings it to the table. If you do a $100,000 deal and I come in with $80,000 and Ian gives me $20,000, what Ian wants for that equity is a return and some points on the back end. I didn’t speak this language when I got into business for myself working at NVR. I knew how to structure deals, but not this. We’ve talked about this on the show before. I had to understand how do you structure the deal. I was at a different seminar. I love to learn. You and I love to read. We talk to people. We’re always out finding information.

I just so happened to be at my friend, Tim Bratz’s event. It was in Florida. I have this deal under contract. I’ve already written the check for the deposit, which we’re going to get into. I didn’t know how to do it. I was trying a bunch of things and I was gyrating. It didn’t make sense. Tim was going over a commercial deal. He buys multifamily housing, so he buys apartment complexes. There are 400 people in the room and he’s telling how you do this deal. It was like a bolt of lightning. I was like, “That’s it. That’s how I’m going to structure this deal.”

I got up, I ran out, I sat on my phone, and I texted myself like, “This is how I’m going to structure this deal.” On the second day of the conference, I’m like, “I got it.” I had a business coach at the time. That afternoon, we had a call, and I’m like, “I’m so fired up.” He asks me a bunch of questions. I was like, “This is how I’m going to do the deal. I didn’t know you were in the deal. I didn’t know all the pieces, but I knew the structure.” The structure hit me. Within probably three days of that meeting, I was on the phone with my attorney, and I said, “Can we do this?” He goes, “I got it all the time.” I don’t know why I didn’t call him first. This is how these things work. I called him, I said, “This is what I’m thinking.” We ultimately, on a cocktail napkin, laid out the deal that I brought to you. Between concept and reality, it changed some of the details.

Talk about the deal on the cocktail napkin as simple as you can.

I have a debt component on this deal. I’m going to raise equity on this deal. The way that Tim does it, he raises equity past the point of what the purchase price is, so he doesn’t run out of money which almost happened on the 30-unit deal. I was going to sell it to somebody else. We were going to manage it and then we were going to charge a bunch of fees. Its simplest form. What I ended up learning is we were going to buy the deal for a price.

It’s $5.5 million sales price. You needed $2 million of equity from outside investors and you were taking a loan out of what?

It was a $5.5 million purchase and I charged a $2.5 million fee, so it became $8 million.

$8 million purchase price at that point. $2 million of it is equity, $6 million debt, roughly. That was what you were thinking was going to be. To do that, you had to form an LLC that was going to acquire the property. It was not going to be Cava Companies. We would have a service contract with you should you pull that off.

I didn’t know you were the guy yet. This is 30 days before I called you where I’m conceptualizing this deal. That’s how it all starts to come together. What I thought of is this is similar to my buddy’s apartment buildings, 75 singles. By taking a huge chunk off the top, I made a profit in the year that I wanted to. I gave myself enough cash to do the deal where I knew I wouldn’t run out of money. It gave me the ability to grow my staff. There was a bunch of things that we ultimately talk through, but that is how it started to come together. The lesson that we’re going to talk about is we’re going to talk about how much I paid in deposit, which is pretty low. I didn’t know how I was going to get this thing closed when I put it under contract. I knew I was going to close but I didn’t completely know what it looked like how am I going to assign all of it or part of it. There was a lot of uncertainty. I knew that I was going to do the deal and I knew I’d figured out I made my way to make it work but I didn’t know exactly what that looked like when I started.

You have it sketched out. You’ve had your eureka moment, and you’ve talked to your attorney to see is this legal, which is important. You’ve got a clock that’s ticking. You’ve got 60 days in the contract on when you’re supposed to close.

LMSM 27 | Anatomy Of A Deal

Anatomy Of A Deal: If your tenants aren’t making payments, it puts a big cash squeeze on your company.

 

I gave myself 60 to 120. I had months, not years, to close.

You’ve already burned through some trying to figure out how to finance it. That’s about when I come into this deal. How did you decide to call me who has never done anything like this before?

This analogy is here all time. You’ve never seen the movie, The Social Network. In The Social Network, Justin Timberlake convinces Mark Zuckerberg to move to the Bay Area. They moved to the Bay Area because he needs to be there. Being there, there’s engineers and people you bump into. Being immersed in it changes things. I’m fully immersed in this. The reason you came to mind to me is I was out walking a property, remember where I was going to get out of the car, and I was sitting there talking to you. You were telling me about your second collision center and how you’re raising equity. You told me some of the people you were talking to. You’re talking to me about the rates. I remember you talking to me about how much money the people had, and they were excited to deploy it at rates that I thought were reasonable. You and I had talked about this deal eighteen months earlier.

You’ve been asking me about what I thought about it a bunch of times.

I never knew you were going to be involved in this. You and I had talked about it a fair amount. I thought of it this way. I thought this could be a future deal. Hitting a bunch of singles is great. It’s made me a great life. This is a much bigger lift. If I was to partner with you, I thought you had the wherewithal to understand it. I knew we trusted each other when we think our friendship was important and we’re going to figure out how to get through this, so I knew it wouldn’t be me managing someone or someone being a tyrant over me. I also knew that you had a gift for writing.

This was something that was important to me. I thought you would communicate it well. I thought you would be able to tell the marketplace what we are doing. I thought I could share that story again because I saw this as being replicatable. If I had the right group of people, you, to write up a story, this could be something we could share. I’ve sent those emails to other people. Those were some of the components. I’ll switch. I’ll start asking the questions now. Do you remember the first time we ever talked about this deal before I brought it to you as an investor?

It was from your 30 contracts deal. I remember a picture you sent me of you smiling. You might’ve been at this conference table. You had 30 packages in front of you that you had to sign. I remember we had a long conversation about how exciting that was for you to be doing a deal that big. I remembered multiple conversations along the way. You were frustrated with some people on your team at that time because that deal that you had such high hopes for was going south in multiple ways. You were frustrated. We talked through that a lot. I had an intimate look on the inside of what you were doing to reimagine your entire company and your team because of that 30 deal and the lessons you learned. I do remember when you started saying, “I’m about to go do something again.” At first, you were joking about it like, “Here we go again. I’m going to go do all that.” I remember the stress you went to then it was all of right around when you get me getting married, all of that. I remember it all.

That 30-unit deal I used to think about every night when I get Max a bath.

I remember multiple conversations about the 75-unit deal and thinking, “He’s not going to do that. He’s a new dad. He doesn’t want to do it.” I would listen, but that’s pretty awesome that you have that opportunity. I remember the first conversation when I thought it was serious because you mentioned your attorney and you mentioned a fee. We talked about it a few times where you’re like, “Here’s where I would structure.” You vaguely brought me up, but it wasn’t a hard sell. You were trying to drop the bait into the water and see if I would nip at it.

When you brought up like, “Here’s a fee that we could do.” I was like, “He’s presenting this. He wants me to go do this.” Like everything in life, it wasn’t one call to close me. It was multiple, slow, “What do you think of this? What do you think of this structure?” The first time you brought up the structure to me was not when you said, “I want you to be the manager.” It was, “What do you think of this structure?” That’s what I remember. You were trying to see what my thoughts on the idea in general were.

Before I brought this deal to pitch it to you, we have talked to at points about we’re going to get into it who we rely on for information. I rely on you for information. I talk to people candidly about you’re one of my secret weapons. I go ask you questions about things I’m dealing with personnel, management, and investing because you see that. When I had brought that to you as an idea, you didn’t immediately kill it. When I started thinking about who I want to do this with, you were high on the list because of the way that you’d reacted, but I didn’t bring it to you as a pitch when I was serious about the deal. I’m broader to you to run it by you.

That’s how I remembered it.

How did you know that I was either serious about the deal or I was bringing it to you to be the manager?

One, you brought up a fee schedule of how it would work for me. What would be in it for me? I remember getting up one of the calls thinking, “I’m going to invest with Frank in this deal.” I still was thinking you wanted me to be part of the $2 million. I was thinking, “I’ll put a piece in there. I have some capital I can use.” That next call when you said, “You would be the manager on the LLC.” That’s when it all got serious for me. To invest passively is one thing, your passive investor, you don’t have any liability. To be a manager on an LLC, you are now liable. You are now the guy that gets sued if investors are not happy with the way something goes. It is a different connotation to be on an LLC and to be the manager of an LLC. I knew that. That’s when that conversation got serious. That conversation is what I started asking you a lot more detailed questions.

I remember this well. Eddie, Angelo, and I had gone to a conference. We were sitting in my car and we put you on speaker. I don’t know if I told you they were in a car or not, but this was the part in the dialogue where you and I were getting into the nuts and bolts. I remember saying this, I said, “Ian, you seem interested.” You said, “I’m interested.” I was like, “You also seem to have a lot of questions.” Did I give you an email first with an overview or did you ask me the questions? I sold the key verbally then you asked the questions, and I came back and did a bunch of words.

You sold it verbally. I had a lot of questions and some of them, you didn’t have answers to yet because you were still trying to figure the deal out. I got 4 or 5 into my 25 questions. You were like, “Pause, you have more than that. I know it. I can already tell.” You knew at that point if I’m asking them those kinds of questions, I was serious about it, but I needed more detail. We talked about this later. You didn’t know this about me at the time. People either learn by listening or they learn by reading. I’m a reader. I didn’t tell you this at the time, but this is what became serious for me. I said, “I’m going to give you a big list of questions. I can do that. I need to see it all laid out in front of me.” If people call me and start launching into something new for me, I start to hear the peanuts teacher. I don’t hear the details. A lot of times, I’ll pause and say, “Can you send me an email with everything you said, because I’m sorry, you lost me after eleven seconds.”

Get some publicity. Once the publicity comes in, the phone calls come in. Click To Tweet

This is double-sided and this is twelve pages. These are the questions that Ian had started with. The first email was twelve questions in length and it was, “How do you feel that you can separate Cava from this other entity?” It was some real mathematical kinds of questions. Some of it was philosophical type of stuff. I remember I got your questions and then I replied to your questions almost a week later. I called you up.

My guess is you want to talk to Zach about some of them because some of them you hadn’t thought through.

I didn’t want to be wrong. I saw that you gave me your question. It took you about a day to give me the questions.

I put a lot of thought into it.

I called you and I said, “I can answer this in a haphazard way but I can answer this thoroughly in about a week.” What I did is I went through. Angelo and I did a pass together. He types it 900 words a minute. I don’t know if that’s an exaggeration or accurate, but he’s fast, a lot faster than I can do these things. He would type, we put together our answers, we took it to our attorney. Our attorney isn’t just an attorney and say, “You’re getting into trouble.” Our attorney is a business guy. He’s someone who does mergers and acquisitions, so he knows how to do deals. I brought it to him, “Does this make sense? Am I answering this right? Is this in the spirit of what we’re doing?”

We can get granular, but instead of getting granular, what makes sense is this. When you’re trying to do a big deal with someone, you need to be brutally honest. You need to talk at a level that is blunt and honest. It’s stuff that you can stand behind. In addition to that, you don’t want to run into gunfire. You want to slowly and methodically answer things because you need to do it properly and right. You don’t want to make a mistake. You don’t want you to turn a person off. I saw your list of questions. I knew what will go into the answers. I remember calling you and saying, “I would like to reconvene in a week. When we reconvene in a week, I will be thoroughly prepared.”

Angelo and I spent a full day and a half answering all this. We set up a conference call with our team of attorneys. They went through it with us. We iterated it again. By the time I spoke to you a week later, this is the only thing I had worked on. This was it because I wanted to be prepared. I wanted to have an answer to everything you asked. If you asked a pivot question based upon something, I want to know why I type what I typed. This is a $10 million deal. There are bigger deals out there, but it’s a huge freaking deal. You’ve got to be versed and ready when you bring this to someone because there’s a lot of risks. Things could go wrong.

The risk side worth talking about here because it’s a $10 million deal. From your perspective is reputational risk, execution list risk, you can lose money on it, and you could upset a lot of people. On my side, what my value of the deal was my reputation. That’s all I was bringing to it at the beginning. I knew if I was going to say yes to you, my next job was to get on the phone, start calling people, and asking them for a minimum of $250,000 of their own money to put into a real estate deal with you. Those questions I had to have every single answer to. Part of my list of questions that I got, you started with twelve. That twelve led to another twelve. There was a lot of detail into it.

Some of it was from my own money. I’m protecting myself. I worked hard for $250,000. I don’t want to lose $250,000, but much bigger for me because I know you. You probably wouldn’t have taken that many questions. If I’m going to then go promote your deal, I need to know it’s ethical, it’s legal, it’s effective, and it’s fair for the investors. There’s a good chance of them getting their money back because the people I was going to call, they’re wealthy, but think about the folks I called. I built relationships with these folks over decades. One bad deal ruins a relationship. My anxiety around this deal was my reputation. You’d mentioned it, I had done multiple syndications in commercial real estate, and I was doing a great job.

I knew that side. I knew triple net commercial real estate and industrial equipment rentals. We had this conversation at one point where we were going back and forth. I said, “Frank, I’m going to be honest with you. I can get $2 million out of this group of people and I could buy another collision center. I need to understand why I’m doing this and not getting that $2 million from them and doing a deal that I know I’m going to take care of them on.” I had to tell you that there’s competition for this 75 portfolio that I understand better, so you have to get me to a place where I understand 75 single-family homes because I don’t get it enough yet. We talked about that in detail. That’s an experience. Now, I understand it a hell of a lot better now after going through with you. At that time, it was like, “Frankie, I could do a fourth deal with the same group of people. I know exactly how it’s going to turn out. I have a team that could kill it with that.”

There were two things that I said to you in that. Do you remember what my response was to that?

A few terms changed in the deal. On a piece of it, there was a profit split change for me where I was telling you. It’s not that juicy for me. I need some payment. Why don’t I invest in this is what I said? I’m putting my reputation on the line. I’m a manager. Why don’t I tell people to call you and we all invest in it? If I’m not doing much better than an average investor, then why am I doing it?

There were two that I remember saying to you. One of them was on this deal and clearly, I need to get you more answers. That’s why I talk so much at length about getting you incredible answers when I did. The second thing I remember bringing up is you and I have talked many times about starting a show, which we finally have. We also talked about potentially starting a fund. If we were to start a fund, we need a multitude of investments in it. You’re good on the commercial side. You’re good with the collision centers. I’m good at this side. If we have a blended basket of assets, it gives us more to talk to investors about. We had both sides of it.

That was a good selling point too. When we talked about it, at some point, we both came to the conclusion that if we’re going to build a real estate fund one day, a serious one. We need to do a deal or two. We need to tell people we’ve done some deals, not just Frank and me integrate you should buy our fund. We talked about this. We’re like, “We need some deals. We need some wins.” That led to, “Frankie, is this the one?” It was like, “We’re never going to do a real estate deal. We’re never going to do a fund if this isn’t the deal. Is this the one we start with.” Take all this stuff aside. You were getting this big fee upfront and you needed that fee to bolster you. You hired some people with that money. The $2.5 million go right to the bottom line.

You hired better people. You spent a lot of that money, but one of my sticking points was you’re taking all your profits upfront and then you’re layering in like you had property management fees and you had some other things I didn’t like. I said, “If you’re going to take that huge fee upfront, you can’t be making fees on every deal.” You were like, “They’re out. I can make money without that.” The other thing I said is you need some skin in the game. You need to be one of my investors. You took it a step further and you brought your brother into it. Those are terms of the deal. Those are some of the sticking points from the legal and the LLC, but you get lawyers. You get off the phone with a lawyer and you don’t know whether you have more risk or less risk. What it comes down to at the end of the day for me and in doing business, more than all of the little details in the questions I asked you, I needed that to sell other people.

What it came down to was I trusted you. I had a serious conversation with you. After all of that detail, I said, “Frankie, you know who I’m going to call.” You do know who I was going to call him. You know these are important people to me. I would rather lose a freaking arm than go lose $250,000. Is this the deal? Do not make me an asshole in front of some of my best friends. You were like, “I get everything you’re saying to me. I’m putting my brother in it. I’m putting my own money in it. I don’t need to be losing my brother’s money. This is the deal.” A term that I used all the time, which always made you laugh every time is what this deal goes tits up. Tell me what’s going on. I kept saying that over and over to you. You looked me in the eyes, and you said, “Ian, this is the deal we start with. I’m not going to put you in that position with your friends.”

LMSM 27 | Anatomy Of A Deal

Anatomy Of A Deal: If you don’t hit all the checkboxes, you can lose money very easily.

 

We have done a show, several of them, and we’ve talked about decision-making. We’ve talked about it’s not the deal, who’s the jockey. We’ve talked about the Colin Powell, 70-40 deal. This was a deal where I fought over it for a long time before I ever thought about doing a deal. I knew there was risk but I also felt comfortable with the risk. I’d already made mistakes in something similar, so I knew how to structure this differently. The thing that I felt comfortable with is I had done that 30-unit deal. We made mistakes. I had assets on the same streets. My team is better. We had multiple exits. We could turn these into rentals. We could flip these. We had all kinds of different options.

That was part of it. That fulcrum of, “Should we do the deal? Should we not do the deal? Are we going to lose money?” I know most of the people who invested, with the exception of two people out of eight, I know them all. I consider them friends. I don’t want to lose this for them. One of the things that I pride myself on is I’ve been at this for several years. I have paid everyone back, always, every penny. I remember thinking to you, Ian, if this deal goes sideways, I will either lose my investment. At the beginning of the nitty-gritty, I was a B shareholder. We came to that conclusion universally. I get paid last. That’s how we set it up. If anyone loses money or anyone doesn’t get a return, it’s me. On a deal of this size, that’s $600,000, $700,000 with return factored in. That’s a huge insurance policy. Those were little things. We kept that money in a separate account. There was some security built around this.

Let’s fast forward to the end. What was cool about doing this deal is you know my business outside of people who are in my industry who worked for this company. Every other human being, you’re 1 of the 5 to 10 people in my life who understand that the best. You didn’t even understand getting into this. Now you’ve seen me in action. You’ve seen our team in action. You know what we can do. If I bring you another deal based upon this one and some of the hurdles and the curve balls that were thrown at us, you can understand that. How many times prior to this deal had I ever asked you for a penny?

Never.

I waited and I played that card patiently because you have the ability to invest. You have plenty of money to invest. I didn’t want to do that. I wanted to pick the right deal and set it up the right way. I waited. It’s one of those morsels that pops in your head and you wait years and you’re like, “I need to utilize that skill.” This was the time I thought to take a shot because it made enough sense. In the 40-70 Rule, I was close to 70. I’m asking you questions even though we got sidetracked there for a bit. There was a moment for me where I went from selling you to we were on the same side.

To me, that was when we built the PowerPoint deck out. You remember that we were on the phone together and I sent you a bunch of stuff and you’re like, “Cut this, do this.” We start working on it together. This is a big deal. This is my business. My name is on the door. I understand it. You had to raise the money. That was part of our deal. My voice meant so much less. Your voice mattered. We had to build this around you. Some of the things that I thought were important, you didn’t and it turns out some of the slides that we put in there, you’re like, “I don’t know if I should keep this in there.” You’ll do it because you believe me, and people asked about it. Do you remember that conversation and then taking out to the market and pitching it?

The deck that we built was largely based around who I thought I was going to call. When you’re in real estate long enough and people know, you talk to people that have money that could invest. When you talk to them and they ask you what you are up to, you tell them what you’re up to. “I’m doing some deals. Here’s what I did.” I hear that Matt is in with you on that or Ron is doing it. He’s in on that deal. Here’s the way that was structured. He said it’s going pretty well. The next one is the way it works. Once you’ve done a deal, you talk to people and they say, “Next one, let me know.” I don’t call anyone if they’re not said that to me. Keep me in mind. I have money and I would like to invest it somewhere other than the stock market. That’s loosely translated.

I keep it in my OneNote. If anyone’s ever said, “Keep me in mind.” I have a list. There are over 30 names in there of people. It’s a little tab that says Potential RE Investors. From a sales perspective, I know I have a list of people that I could call and say, “You asked me to keep you in mind.” That’s how I lead with that phone conversation. The deck, it’s important. I need to be able to show them details. I need to be able to give them details but the phone call is what matters. It’s, “You asked me to keep you in mind and the next deal. I have one, are you interested?” With most of them, it started with a text message. One of the first people that I called, I’ve coached his son in soccer for years. He’s a great guy and he’s a young, retired guy. His son is a great kid and his wife is great. I’ve known him for a while. I’ve coached them. That’s about it. We’ve hung out a little bit socially, but not a lot. Maybe at the pool every once in a while. He sold a technology company several years ago.

I’m so tech-forward, I used to tech.

You are tech-savvy. When you say you, you mean Cava Companies. A lot of the Millennials do it. I texted him saying, “You told me to keep you in mind the next deal I had this. This one’s a little different than the ones I normally do.” I gave him a little bit more detailed than a typical text would. “It was 75 units. It’s $2 million we’re raising. The minimum investment is $250,000.” See what he says. He’s the first guy I sent it to. We kept the text message. He didn’t respond. It took a day and a half later then he responds. I told you, he’s the first guy I’m texting. He’s got plenty of dry powder. Nothing for a day, I’m like, “That didn’t work.” I thought that normally works better than that. A day and a half later, I get a text back from him saying, “Ian, sorry, it took me a while to respond. I’m on a cruise with my family. This sounds good. I’m in for $400,00.” I texted that to you and I’m like, “Here’s the way it gets done, Frankie. I haven’t even talked to him. $400,000 already lined up.”

It was one of those texts that’s coming in. I couldn’t tell who it was. I just texted you the guy’s last name with a bunch of question marks.

“We’ll talk later. I texted my way to $400,000.” I ended up not giving $400,000 because we made it a minimum of $250,000. It’s luxury that we have. Most people can’t do that. The reason we did that is we didn’t want 40 people in this deal. The reason we did it is because we could have done it. There are a few people I could have called that would have given us the whole $2 million, but I didn’t want to talk about the structure. I knew that they would have an issue with you getting the money upfront. I knew there were some people that would have issues that could have given us a lot more money, but their attorneys would have got involved. Choosing the investors was important. He was a tech investor. Another friend of mine owns a successful chain of restaurants he has done well. I knew that he would respond well. A friend of mine is a senior partner at a big consulting firm. I know some other executives that were at my level at NVR. NVR stock has done well. I had a number of people I could have called there. My boy who’s a big-time realtor in Indiana, which we will talk about in more detail.

What’s funny to me about this deal is you are responsible for raising the capital. This deal had a $100,000 minimum, not $250,000. We keep this in $250,000, but that’s the difference in this deal for us. I had a notecard printed that I carried with me for every day of this deal that I looked at. Every day I thought about who’s in the deal and how much money they were in the deal for. I knew that detail because ultimately, the performance of this was on me. It was up to you to raise it, but I knew every granular detail. I could tell you there were two investors in for $200,000, there was somebody else in for $100,000. I was in for a half a stick, as they say on billions, which is interesting.

What is fascinating about what you said is the concerns in the upfront fees. Who did we not want to go after? We didn’t want to have 40 people in the deal. We said that because it’s a lot of management. Who else didn’t we want to go after? We pick people who we know would say yes, more or less, who would understand the deal and we wanted to work with. People who would either talk to you about it and were like, “Let’s try this out.” People who we know would be like, “I’m investing and I’m going to set it and forget it.”

It’s an out of the box deal the way we were structuring the entity, the way I was involved and the way you were involved. People knew you as a guy that had come out with us for drinks before but didn’t know your business for a hole in the wall. We needed to understand some of that. I tried to choose people that knew you. I tried to choose people that weren’t too close to the residential real estate space that you’re in that would say, “Why are you structuring the deal this way?” That’s not how I would do it. I didn’t want anyone like that. I didn’t want anyone who would be questioning the execution. That’s not to say that’s bad in all deals. For this deal, I wasn’t interested in calling people that, which I could. In a future deal, I might call if it’s structured a little more conventionally.

Let me state it this way too. This was your first time doing this deal. You believed in me. You believe in the asset class. You thought we were going to perform or you wouldn’t have done it, but at the same time, if someone asks you a question in September of 2019 about this deal and they asked you that same question now, what is your level of certainty in getting it right now versus then, understanding, or being able to speak educated about it.

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It’s much different because I know the names of the people who are executing better. I knew of Eddie, I know Angelo, I’ve got to know Cindy and Carla much better now. I’ve been in the office enough where people know me as your gregarious buddy that comes around and makes fun of you. Now I know them more from a context of I’ve watched them go to work and I’m confident. If I were to go promote again for a deal we did jointly, I would be promoting them almost as my team. Before, I was like, “Frank’s team.” I didn’t know them well enough but now I’d be like, “My guys are good in Cava.” I would promote it more personally than I did the first time. I didn’t promote it personally because I didn’t know them personally. I’ve vetted it. I’ve looked into a deep. I trust Frank well.

It’s worth bringing up huge part of my stress in the first 60 days. Closing a deal for me for this deal was not terribly difficult. It didn’t take a lot of my sales skills. Sales skills are calling someone who’s never talked to me before and closing them on the phone. That’s cold calling. That’s tough. That takes skill, repetition, and practice. This was leveraging twenty years of trust in me of a success I’ve had. What was scary for me is there’s only one person who dove into that PowerPoint deck. We put all that work into that PowerPoint deck.

I’m pretty sure Tim never read it. I know Peck’s never read it. Ori probably looked into it a little bit. Maybe we got to beat out some names. Joe may be looked at it. My boy, the partner, he was all over that deck. Lots of questions. I wanted to be like, “If it’s too much, don’t do it.” He needed to get comfortable and that’s fair, but the rest of them were like, “You like the deal.” That’s stressful for me. I didn’t read the deck. Tim, “I read the deck, but you like it. You make good decisions with your money.” That’s the way that deals closed.

“You trust Frank. He’s got a good team. This isn’t going too bad. I lost a ton of money on this.” He told me about some deal he made that was bad and he goes, “It’s you, I trust you.” I remember being like, “Tim, read the deck. I need to know you looked at it. If this doesn’t go right, I need to know that you didn’t blindly toss $250,000 at me in a wire. I need to know that you read the deck.” After that, I understand you’re pretty much in this because I’m in it. It’s funny. I was in it because you were in it and you were saying, “Trust me, I feel good about it.” Part of the reason why I had to drill you is I knew the guys I was going to call will going to say, “Do you like it? Why do you like it? Is your money in it?” All those answers are yes. They were going to say yes if I called them because I went 6 for 6 on who I called. We had to bring some of them down because I wanted you in it and your brother, but we could have got the $2 million because of that.

There was some strategy. We also knew that if we did a good job for eight people, those eight people would go sell 3 or 4 people each. Next time, we wouldn’t have eight, we have 24. This comes all the way back to high school football. What my high school football coach told us constantly is, “Practice is going to be harder than the game.” What you did is you put me through practice. You asked me tons of hard questions. We spent hours and hours. Before you started pitching, you came and visited. You drove stuff and you understood it. When you went to pitch it, you knew it. You were prepped. You put me through your paces.

More than that, you went through the entire proforma line-by-line with me. Every line, every house, we went through. Do you remember the wee hours with Angelo? You went through every house. Where’s the path? Where are you pathing it? Where’s the work on this go wrong?

Usually, we do this show alone. We have a room of people and I’ve talked to almost everybody who’s in this room individually about what happens with deals in real estate. Most people are full shit. Most people don’t know how they’re talking about. Most people don’t vet a deal like this. Ultimately, what happens when people invest, especially people that are in your circle, they do it because you’re doing it. What we learned about each other in this deal is we both had a high level of respect for the other person but we learned the details, how we analyze, and the integrity. You’re like, “I can’t lose these people money.”

You’re emotional. “I don’t have the relationship you have, but there’s no way in hell I’m losing those guys’ money.” I’m like, “It’s not going to happen that way.” The first person to get a haircut is me. Those are the little things that we worked through. It’s important to understand how the sausage is made before you go out and sell the sausage. That’s one of the things we want to iterate here is I’m good at this business and understanding the asset class. I know the market. Ian felt that way. Most people who are reading this who might be structuring a deal, you’re going to work with friends and family. That’s how it starts before you get syndicated and go out. That’s how it works. Let’s get into this.

All of that negotiating with you, one thing I’ll add on this on closing, is I anticipated what the sticking point was going to be. You’re taking all your profit upfront. That’s highly unusual in a deal. You’re getting paid. By the way, we’re going to do a deal. I knew that was coming. No investor said, “Frank’s brother needs to get in. These are our capital.” No investors said you couldn’t have those fees in there. I did all of that and I went and said, “I know what you’re going to be concerned about. This is what I’d be concerned about with you. Frank is taking a lot of his money. Let me tell you exactly where his skin in the game is. He gets his money out last. He had to put an extra $500,000 in. His brother is now in the deal. He has no fees after this happens.” I laid all that out. This is what I’ve negotiated already because I was concerned that the risk wasn’t as high on Frank as it would be on us as investors. That’s why I put my money in it. There was no conversation about the fee anymore upfront.

It’s Eminem in 8 Mile. You already answered it. Did anyone say no? Everybody said yes because you picked the right people to call and you got ahead of it. How did you think about dollar amounts per investor? We talked about somebody who was in for $100,000, a couple of people were in for $200,000, somebody said they were going to go in for $400,000. It’s worth belaboring slightly why we did it this way and why we essentially put a cap.

We did leave with $250,000 with everyone when I went out with some of it. One of the investors wasn’t as comfortable when we talked about it. We thought this is a person who, in the future, is going to have more money but has a strong network of other people in their position. He’s since done this. He invested in the tech company that we’re in. He’s already started telling his boss and other people about how good this real estate deal was. That was smart. Paxton’s a deal that came in last. We’ll get into his story at some point.

My brother ended up coming for $200,000. We made the deal work, but we also capped on the upper end at that period of time. Your buddy that owns the restaurants may have come in heavier, but we asked them, “We don’t need you to.” The guy that sold the tech company, he was willing to go $400,000 out of the gate. We’re like, “Let’s mitigate a little bit of the risk.”

You dropped him. I was going to do $400,000 when he was going to do $400,000. I brought my back down because we thought, “Let’s have a few extra people in this deal and do well with them.” It was building momentum and I was getting more excited and confident by the day. I thought, “Why not have a few more in because they could be our best salespeople in the future with referrals?”

What expectations did you set with the investors with months and percentages?

When you and I talked behind closed doors, you thought in eighteen months you could get to a 30%. We had some pro forma numbers before the pandemic that were significantly higher. We were enthused about like, “I got this much padding. We’ll get into the pandemic.” I tried to keep expectations lower with that group. I told them, “It would be great if we could get a 15% to 25% return within 24 months.” I was consistent with everyone at 15% to 25% in 24 months. Here’s the downside. Most people were pretty comfortable with that return with their money.

These kinds of deals, you don’t write them on a cocktail napkin. Ultimately, the operating agreement is pages long. There was a waterfall structure.

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In essence, the first 25% all went to the investors. The first return is the preferred return. In tranches of 5%, they started giving more of the profit’s way to me and you. They still got a lot of the 25% to 30%, but over 30%, you and I were starting to get the line and share of the profit.

We talked about this a little bit. There’s risk, debt, and other things. The way that we structured this in the entity, I was responsible for the debt. You were the manager but I ultimately had to give the personal guarantee, which I volunteered to you. How you took things out of the deal and cross them off for the investor, I made sure when I brought it to you like, “I’m taking the debt. I’m taking the guarantee. I’ll deal with those things.” We talked about some of the returns. I felt so comfortable because the market was high in January and February 2020.

We closed this deal, Christmas time of 2019. I thought in February or March 2020, I thought we were going to be done. I thought we could sell this whole thing at a 40% margin before Corona hit. When Corona hit, the market dried up. We had to go crazy to get this done but I knew there was enough skin in the game where we could ride it out if we needed to, and we could land there. We had said, “We can do this deal up to two years and 25% preferred return. Let’s tell everybody where we landed. We landed at what percentage and how long.”

We finished at a total entity of 30%, which meant that the investor’s actual payout was 28% in thirteen months. We smoked what we told everyone they were going to get to the point where they were all elated. They were so enthused with what we were able to do, especially when they went through that summer thinking, “My money went up in smoke.”

We were going to get into it. This is worth going into this. Ian is a great writer. He writes for Forbes and you see him on LinkedIn. This is hysterical to me. This quarterly update went out on April 3, 2020. It’s the Hello investors with an exclamation point, “I forgive you if you need a few days to get the courage to open this email. I considered sending this on the first of the month but fell in an investor letter on April Fool. This day was in poor form considering the circumstances. I imagine the timeline of your March 2020 when something like this called in. March 11, 2020 Tom Hanks gets Coronavirus. March 12, 2020, NBA cancel seasoned. Dow Jones industrial falls 1,800 points. March 13, 2020, you remember that you invested in a real estate portfolio bringing on flu-like symptoms.”

Leading up, when did I write that?

April 3, 2020.

The deal is going pretty well and Corona hits. There wasn’t a day in March 2020 that Frank and I weren’t talking for an hour or two all day about multiple things. In essence, what happened is the entire real estate market dried up. No one did anything for two months. It panicked. Not even people weren’t buying but you couldn’t get an appraiser to a house, you couldn’t get construction folks into houses. The permit offices weren’t open. The government offices weren’t open. You couldn’t get the Section 8 vouchers. Everything that could go wrong was going wrong in March 2020. We were trying to stay calm. I’m getting text messages from the investors, “This pandemic is crushing us.” I’m trying to use some humor to deflect it because I know if we can survive a while and keep collecting rent, we’ll be okay. That first investor update was a couple of pages long. I gave them incredible amounts of detail of what we were doing to mitigate the circumstances and the situation that we were in.

One of the things that we’ve talked a lot about is the power of relationship. Something we haven’t talked about that’s critical is the power of communication. We’re both fairly blunt. I’ve been told that you’re blunt. I’d rather be blunt and get it out there. We started talking about it in the middle of March 2020 and we all have to show up with masks is, “Where are we at with this?” I’ll start with humor. I have a toddler and Ian is a big baseball coach. He loves baseball. He loves spending time with his son. His son is IJ. My son is Max. I’m having a conversation with Ian and Max is starting to throw a ball. Ian is like, “Frankie, when he’s nine, I’m coming down there. IJ and I are going to buy a house and we’re going to coach Max on baseball.” I go, “Ian, why would you buy a house? You’re still going to own 75.”

If I wasn’t laughing, I’d be crying. What we started to talk about was the things we can control. Ian told a funny story. Immediately, we told the investors, “Here’s the ugly, here’s the bad.” We went through and looked at this. We said, “We built this portfolio that if we have to, we can rent it. We can rent every door. We’ll collect rents. You might not get as much as we want, but this is why you don’t invest in the stock market, which has dropped 40%, by the way. This is why you invest in real estate. We’ve got pros on the ground who are collecting rent. We might get bloody, but so be it. This is why we’re in this deal.”

In a four-page email, it starts with humor. I’m trying to deflect a little bit but the truth is out of all of those pages, the first three pages are the ugly and the bad. If you’re an investor, you know things are rough. If someone starts with good and roses, my time is up but if you lead with, “Here’s all the havoc going on right now that we’re dealing with, and by the way, there’s still some good and we’re going to keep being honest with you and transparent, but let’s not panic.” I told the story about a baseball card that I bought when I was a kid. I thought the world ended because the value dropped on it. By being patient, it ended up being worth more. I tried to give a little bit of an analogy. When you have investors, when you have customers, you make commitments to them, and things are not going right, they know it. You might as well lead with it and be as direct and blunt as you can about it.

This is in March 2020. It’s four pages front and back. You wrote it. I’d still be writing this if I was the one responsible for writing it a year later, but you wrote it. It was a lot of detail. We spent almost two days on the phone getting prepped to write this.

That was another one as much as before the deal where I’m like, “you need to give me details because they’re going to ask me. Let’s get it all out there.”

We were fortunate. When we started this deal, and this is something we learned, we started strong. We started strong before the pandemic. By the time the pandemic hit, we’d already flipped 25% of the units to higher rents. We already sold three. Those were things that we had momentum, and because we already flipped 25% of the doors to a higher rent or got rid of it, our debt came down a smidge, but we were already collecting enough rent and we had good tenants in place. We’re like, “We can weather this sucker.” The other thing you referenced in here and why I raised equity was $750,000 in cash in the account when you write this letter. That would have paid the mortgage for fifteen months. We had tons of cushion and that’s how we built the deal. That was what was brought up quite a bit in our prep.

It’s worth going back to even a little bit. One, we diffuse the situation with some humor. We had a little bit of fun with it, but the truth is you can only tell so many jokes before people start to say. “No, am I getting my money back?” You have to execute. You have to communicate well with investors if you’re going to do this. If you’re going to syndicate, you have to. You have to make them feel they’re insiders, they’re in the middle of it, and they know everything so they don’t panic, but you also have to execute. You were doing that well.

That wraps up part one of Anatomy of a $10 Million Deal. Tune in to part two to see how we did on the execution of this project, how we managed all the way through the pandemic, all the way to closing, and how Frank and I celebrate it. We’ll also get into the metrics of the deal and what kind of profit margins we made.

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