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 patience when working in real estate
• Pigs get fat, hogs get slaughtered
• Caring about your investor’s money more than you care about your own
• The best way to get a second deal is to perform well on the first
• Why you should stop to celebrate a big win appropriately

—

Watch the episode here

Listen to the podcast here

Anatomy Of A $10M Deal (Part 2)

This is part two of the anatomy of a $10 million deal. If you have not read part one, you’ll be very lost starting on this. We recommend you stop, go back and read part one. If you’re just that crazy and you want to dive right into the middle of this deal, that’s cool too. You’re going to enjoy this episode. We get into execution, profit margins and how we ultimately closed the deal during a pandemic that made our investors and Frank and me plenty of moolah.

—

How many times prior to this deal had I ever asked you for a penny?

No, never, ever.

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. It’s like 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%. There was a moment for me where I went from selling you to, we were on the same side. That was when we built the PowerPoint deck out. We were on the phone together and I sent you a bunch of stuff and you’re like, “Cut this, do this.” We cannot start working on it together.

We cleaned it up and made it a little simpler.

This is a big deal and my business. My name’s on the door. I understand it completely. 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 like some of the slides that we put in there, you’re like, “I don’t know if I should keep this in there, but 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 on who I was going to call. When you are in real estate long enough and people know you and you talk to people that have money that could invest. When you talk to them, they ask you, “What are you up to?” You tell them what you’re up to. “I’m doing some deals. Here’s what I do. I hear that Matson was with you on there. Ron’s doing it.” “He’s in on that deal. Here is the way that it 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, “The next one, let me know. I don’t call anyone if they didn’t send 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.” It’s a little tab that has 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 that phone conversation. The deck is important. I need to be able to show or give them details, but the phone call is what matters. It’s, “You asked me to keep you in mind on 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 I know he’s a young retired guy. His son is a great kid and also his wife’s. I’ve known him for a while and 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 but he sold a technology company a few years ago for millions.

I texted him, saying, “You told me to keep you in mind the next deal I had.” This one’s a little different than the ones I normally do. I gave him a little bit more detail than a typical text would. I was like, “It’s 75 units with $2 million we’re raising. The minimum investment is $250,000.” I was a general, “See what he says.” He’s the first guy I sent it to and we kept the text message. It’s hilarious. He writes back and he says, “Ian, sorry.” He didn’t respond. It took 1.5 days that he didn’t respond. I want to see what will happen. He’s got plenty of dry powder. There was 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 up to $400,000.” I texted that to you. I’m like, “Here’s the way it gets done, Frank.” I haven’t even talked to him and I’ve got $400,000 already lined up.

It was one of those texts that are coming in. I couldn’t tell who it was. I texted you the guy’s last name with a bunch of question marks and you’re like, “Yep.”

“We’ll talk later. I just texted my way to $400,000.” I ended up not giving him $400,000 because we made it a minimum of $250,000. As a 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 and 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 there would have an issue with you getting the money upfront. I knew that 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 one. Another friend of mine owns a very successful chain of restaurants and 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 NBR. NBR 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.

We will get into him. What’s funny to me about this deal is you are responsible for raising the capital and this deal had a $100,000 minimum, not a $250,000. We keep this at $250,000 but that’s the difference in this deal for us. I had a notecard printed that I carried with me 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 $400,000. I was in for half a stick, as they say on Billions.

What I think 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 did we not want to go after? We pick people who we knew would say yes, more or less, who would understand the deal and we want to work with. Like people who would either talk to you about it and were like, “Let’s try this out.” Its people who we know would be like, “I’m investing and I’m going to let it set and forget it.”

I think because it’s an out-of-the-box deal, the way we were structuring the entity and the way I was involved or 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 and choose people that weren’t too close to the residential real estate space the year 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 or who would be questioning the execution.” That’s not to say that that’s bad and all deals for this deal. I wasn’t interested in calling people like 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 and the asset class, you thought we were going to perform, or you wouldn’t have done it. If someone asks you a question in September of 2019 about this deal, and they asked you that same question now like, “What is your level of certainty and getting it versus understanding, or being able to speak educatedly about it?”

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

I didn’t promote them personally because I didn’t know them. I’ve vetted it. I’ve looked into it deep. I trust Frank very well and that’s it. It’s worth me bringing up a huge part of my stress in the first 60 days. When you’re raising money, closing a deal for this deal was not difficult. It didn’t take a lot of my sales skills. Sale 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 skills and repetition practice. All of that. 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 it.

I’m pretty sure Tim never read it. I know Pax never read it. I already looked at it a little bit. Joe maybe looked at it. My boy, the partner, was all over that deck and he has lots of questions. That was the point where I wanted to be like, “If it’s too much, don’t do it.” He needed to get comfortable and that’s fair. The rest of them were like, “You like the deal.” That’s stressful for me where it’s like, “Tim, I read the deck, but you like it. You make good decisions with your money.” That’s the way that the deal closed. You trust Frank, he’s got a good team. This isn’t going to go bad. “I lost a ton of money on this.” He told me about some deal he made that was bad and he goes, “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.”

Practice will always be harder than the game. Click To Tweet

After that, I understand you’re in this. I was in it because you were in and you were saying, “Trust me, I feel good about it.” Part of the reason why I had to drill you because the guys I was going to call, we’re going to say, “Do you like it? Why do you like it? Is your money in it?” All those answers are, yes if I call 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. 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 8 people, they would sell 3 or 4 people each. Next time we wouldn’t have eight. We would have 24. This comes back to high school football. When my high school football coach told us constantly, “Practice is going to be harder than the game.” What you did is put me through practice. You asked me tons of hard questions. We spent hours and hours. Before you started pitching, you came down and visited. We 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 pro forma line-by-line with me, every line, every house we went through. Three hours with Angelo, you went through every house. “Where’s the fat? Where are you padding it? Where can this go wrong?”

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

I don’t have that relationship that you got. “There’s no way in hell I’m losing those guys’ money. 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 understand the asset class. I know the market.” Ian felt that way because when you’re structuring a deal, 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. Frank, 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 and we’re going to do a deal. I knew that was coming. No investor said, “Frank’s brother needs to get in and frame as their capital.” No investor said, “You couldn’t have those fees in there.” I did all of that. I then went and said, “I know what you’re going to be concerned about. This is what I’d be concerned about with you. Frank’s taking a lot of his money. Let me tell you exactly where his skin in a game is. He gets his money out last. He had to put an extra $500,000 in and 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 the risk wasn’t as high on Frank as it would be on us as investors and that’s why I put my money in it. There was no conversation about the fee anymore upfront.

It’s Eminem in 8 Mile, “Tell people something they don’t know about me.” You already answered to did anyone said no? Everybody said yes. 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 and a couple of people were in for $200,000. Somebody said they were going to go in for $400,000. I think it’s worth belaboring slightly. “Why we did it this way and why we essentially put a cap?”

We did lead with $250,000 with everyone when I went out with. 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 A) have more money, but B) has a very strong network of other people in their position. He since has 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. Paxson’s deal, the one that came in $50,000 less and we’ll get into his story at some point.

My brother ended up coming in 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 told him, “No, we don’t need you to.” The guy that sold the tech company was willing to go $400,000 out of the gate.

I was going to do $400,000 and 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.” 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’ 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 that we were enthused about like, “I’ve got this much padding. I got this and 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 that. Here’s the downside.” Most people were pretty comfortable with that return with their money.

These kinds of deals you don’t write on a cocktail napkin. The operating agreements are pages long. There was a waterfall structure. I don’t think we even need to get into it.

In essence, the first 25% all went to the investors, the first return, it’s like a pref. That’s the pref return. In tranches of 5%, they started giving more of the profits away 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 lion’s share of the profit.

We talked about this a little bit. There’s risk, debt and there are 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 and 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. We closed this deal in Christmas time of 2019. 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. Corona hit and the market dried up completely. 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. We could land there. We had said, “We can do this deal up to two years at 25% pref. Let’s tell everybody where 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 and we did it. This is worth going into because this is funny. Ian is a great writer. He writes for Forbes and you see him on LinkedIn and all these other things. This is hysterical to me. This quarterly update went out on April 3rd, 2020. It’s, “Hello investors. I forgive you if you need a few days to get the courage to open this email. I considered sending this on the 1st of the month but felt an investor letter on April Fool’s Day was in poor form considering the circumstances. I imagine the timeline of your March with something like this: March 11th, Tom Hanks gets Coronavirus. March 12th, NBA cancels season. Dow Jones Industrial falls 1,800 points. March 13th, you remember that you invested in the real estate portfolio bringing on flu-like symptoms.

When did I write that?

 

On April 3rd, 2020.

Deals were going pretty well and Corona hits. There wasn’t a day in March 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 and not even people weren’t buying but you couldn’t get an appraiser to a house and construction folks into houses. The permit offices and 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 like, “Is this pandemic 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. It was four. 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 about a lot is the power of a 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. I’m like, “I’d rather be blunt, get it out there and get it over with.”

That’s better than passive-aggressive.

What we did and we started talking about it in the middle of March. We all have to show up with masks like, “Where are we at with this?” I’ll start with humor. Anyone who reads this knows this. Ian is a big baseball coach and loves baseball. He loves spending time with his son and his son is IJ. My son is Max. I’m having a conversation with Ian when starting to throw a ball and he 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.” It’s going to be incredible. I go, “Ian, why would you buy a house? You’re still going to own 75.”

I’m still going to own 75 at eight years. I’m like, “Too soon.”

What we started to talk about were the things we can control. Ian told a funny story. Immediately we told the investors, “Here’s the ugly and 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.” We might not get as much as we want, but this is why you don’t invest in the stock market, which has dropped 40%. This is why I 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.

You look at that in a four-page email and it starts with humor. It tries to deflect a little bit. The truth is that out of all of those pages, the first three pages are ugly and bad because if you’re an investor, you’ve known things are rough. If someone starts with good and roses, my intent was up. If you lead with, “Here’s all the havoc going on right now that we’re dealing with, and there’s still some good. 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 and customers and you make commitments to them and things are not going right, they know it. You might lead with it and be as direct and blunt as you can about it.

This is in March 2020, for those who are reading, it’s four pages, front and back. We were on the phone and 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.

There’s 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 like when we started this deal and this is something we learned. 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. Because we already flipped 25% of the doors to a higher rent or gotten 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 here and why did I raise equity was $750,000 in cash in the account when we wrote this letter. I would have paid the mortgage for probably 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 pref.

It’s worth going back to a lesson. 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 like they’re insiders. They’re in the middle of it and that they know everything so they don’t panic, but you also have to execute. You were doing that well. We close. We have all our money. We have $750,000 in the account.

We’re both feeling all this anxiety. You’ve never done a deal this big, I’ve never done anything like this. I have all my friends in this deal. I’m feeling way out there. We’re all over each other in the first week. I’m asking Frank for more information and I’m getting frustrated. I’m wanting to have a weekly call. “What are we doing with these units? What’s going on?” When you do debt, no one calls you from the bank. No one’s asking you questions. I’m not calm. Frank’s not calm now. We’re both getting frustrated with each other because I don’t feel like I know what’s going on. I feel like I’m flying blind. Frank is frustrated with me because he’s not used to having someone asking him questions like, “Frank Cava, what are you asking me questions for?”

We got into it a little bit. At one point, we had a great conversation where I’m like, “I’ve got to be honest with you. If this doesn’t work for you, just say and trust me. I need better than that. You can do better than that.” You said, “I need you to chill out and trust that I’m doing my job.” I said, “Can we come up with something where you send me a little weekly summary?” and you already had something close to what I wanted that Carla was doing. When you put that together, I relaxed. I said, “I want to see the bank statements every month and a weekly update of sold.” We would have a quick call.

It’s important in a partnership, you have to expect a period of storming. Even if your boys, close friends, and doing something new together and you’re not used to seeing that side of the person, it’s easy to start getting frustrated with each other. Something we did well we could have let that frustration build until we got into a fight where one day you were like, “Go to hell out of my office. I got mad at you.” Instead, we both were like, “We’re both irritating each other. Why don’t we talk this through because here’s why you’re irritating me.” You’d be like, “Here’s why you’re irritating me.” It was like, “Why don’t we both change?”

This is worth talking about at length. The thing that Ian lightened most about doing these deals, he gets to walk around my office. He’ll be like, “I’m Frank’s boss.” He’s at a shitty ACDC T-shirt and flip-flops.

The company staff enjoyed those first few days of me walking around.

“Carla, have you met Frank’s boss? I’m Frank’s boss.”

“Has anyone seen Frank got in this morning? Has he been coming in late?”

That was a bit obnoxious and that also ended, FYI. One of the things that we both like is sports. I like to listen to Colin Cowherd a lot. One of the things he always talked about was, “This NFL off-season was so different than every other off-season because you didn’t have the normal off-season, the OTAs,” and Tom Brady. Everybody loves Tom Brady, especially Cowherd. He always talked about like, “It’s going to probably take Brady some time. It’s a new team, a new culture, a new coach and a new system. They were pretty crappy for the first 9 to 10 weeks. They had a buy, which is a big deal in the NFL. They rallied and they won a super bowl. What we did is we had to get through that bumpy turbulent point.

It’s like when LeBron James goes to a new team, the easiest bet is to bet LeBron James, not to win the championship year one because you don’t win in year one. It’s hard to transition. Year two is usually how you build. That’s what we did is we had this bumpy on-ramp. We liked each other a lot. We trust each other. We believe in this. We knew there was a lot of deal left to do and we were honest. We were like, “I’m not comfortable here.” You’re like, “I’m not comfortable here.” We were emotional. We talked about it.” We said, “How do we do it?” I remember you asked something. I was like, “I already do a weekly report internally. What if I was to add a little bit of metric to it and I sent it out to you every Friday? The first Friday I sent it to you, I called you.”

Even if you are working with close friends, still expect to go through a period of storming. Click To Tweet

As I sent it, we read it together. We did it the second week. The third week it went to voicemail, you texted me. You’re like, “I’ll call you later. I got it.” That’s the stuff that you have to do. This is again, a $10 million deal. This isn’t very insignificant. You’ve got to take it seriously and you have to make sure I’m no longer the most important person in this. I have people around me and I have to respect that or it’s going to be bumpy as hell and I’m not going to do another deal. You have to come to terms with that pretty quickly. We both boss each other’s chops, but what we did is we got there fast. Within 30 days, we were there, and I’m glad we all solved it before Corona because then we both crap our pants like, “What do we do now?”

We send out an email update to all the investors. I had a one-hour conversation with every single one of them. After that, they appreciated all the detail. We hit everything they wanted because there weren’t a lot of questions. We’re just more talking about the economy. March was scary. April was definitely scary. We didn’t do anything. May we started selling a few units and as we kept talking, we changed our mind on a number of units. We both had to talk through like, “We pro forma and put in $50,000 into this house. Do we want to do that? That could take us three months. I don’t think the upsides there anymore. Do we just flip this thing? What do you think? Get a coat of paint and flip it.” We would laugh about that.

When you were talking about war room strategy versus battlefield strategy it’s static strategy versus emergent. Our pro forma, I bet half those properties we did something different than we performed that we thought we were going to do. We had tranches of flip right away, put in $10,000, $50,000, $60,000, and sell it. We moved a ton of those $50,000, $60,000 out. We didn’t do any of that because we knew speed is different. You and I had to agree house by house, which strategy we were going with. We started to feel a little more confident because we were talking to enough people to see the stock market’s awful, but I’m not hearing from anyone unless they’re in hotels and restaurants, that the economy is collapsing. The people I was talking to were hiring, they were busy. That led to some conversations between the two of us because I still have a lot of friends that are in the construction, real estate, home building business and they couldn’t be busier in May and June.

Before we get into May and June, I mentioned to you that my son turned sixteen months old. When I’m stressed out, I get fat. I balloon up like I got stung by something. During COVID, I gained a shitload weight because I was not doing anything but working. I remember I would wake up and get Max out of bed. I go to my home office. Ellie would bring me food three times a day. She would give me a kiss on the head and she’d take it back to the kitchen and she put it away. I thought I was going to go broke, go bankrupt and I was petrified. We came to terms on this and we had a conversation.

I said, “I need to make sure we don’t go bankrupt. I need you to raise our kid. Can we do that? I hope this doesn’t last forever but I’m scared.” I put in as much time as I possibly could to make sure that we were thinking through things properly. If you remember, this is when we couldn’t leave the house. This was scary as hell. We had to get through that. What started to happen is you turn on CNBC and it was fucking depressing. All there are red all over CNBC. This is where network matters. I’m focusing on this deal, but I talk to you and you talk to people. I will come back to your side of this. I talked to Nico, who’s all on Wall Street. He audits a big firm and I’m hearing things from him.

I have a buddy who’s in San Diego and he’s like, “The market is so hot.” I’m like, “That’s not what I’m dealing with here.” Collective genius, we started doing all hands on deck calls. It’s like starting March 20th, a call every Friday. We had such high attendance. Every single member showed off. Everybody was locked into their business. We went from this period to starting the season green shoots. Let’s go a little bit deeper into talking to people and making sure you have perspective.

Ian, we’re going to talk a little bit more about when the market got hot and when you knew the market got hot and who we networked with. That’s going to be very important. What we hate about the podcast is you listen to them and they don’t tell you the freaking story. They’ll tell you, “I did this and this,” and out came a deal. What I want to talk about is some of the nitty-gritty stuff. In March, we read the thing about Tom Hanks has the Coronavirus. Let’s go backwards. Let’s talk a little bit about the riskiest mortgages. The riskiest mortgages are typically FHA mortgages. Me talking about mortgages with you in a room is stupid. For readers, what is an FHA mortgage?

An FHA mortgage is one that is backed and insured by the US government. FHA is Federal Housing and it requires a 3% down payment and 97% loan to value. Even crazier is that 3% can be gifted from a family member and a lot of people opt for that. Hardly any skin in the game in a government loan is a very risky loan. No one would do that loan if the government wouldn’t back you up when you got into it.

The worst mortgage market we ever saw together was when?

It had to have been 2007, 2008, that was the scariest period.

I’m not a mortgage guy. Ian understands mortgage better than me. He understands bonds. The bonds and mortgage market work in unison and in concert. I don’t want to get mired in detail, but I do want to say it this way. I’d like to have you correct me or add color to it. There was something crazy going on in March. I started getting phone calls. One of the agents who I trust the most is like, “I’m hearing if an FHA loan isn’t closed by March 31st, the financing is going to get pulled. It means that they’re no longer going to be able to underwrite that deal and that deals going to fall apart.” I had lots of deals fall apart in March. I thought I was going to have a plus $400,000 or $500,000 in March, not in the RVA deal, just in my business and we lost money in March. It was a blood bath.

Ninety percent of the deals you do are FHA.

They weren’t even FHA. These were people who said, “Screw it. Take my deposit back. I’m canceling. I had some big deals in there.” This was all factoring into like, “I’m going to run out of money. I thought everything was going to go to hell.” You and I had a conversation about forbearance. It was the word that started to come out. Can you explain what forbearance is?

Forbearance is, “Can you pass off on making your payments until a later date or write it off completely?” The government started coming out with all these different programs. Mortgage Protection Program, MPP, all these different things where they were saying, “People don’t have to pay.” The government was coming out and putting in new laws saying, “If people were impacted by the pandemic, they don’t need to make their payments ever.” What that does is the servicer who has to collect those payments, they were saying, “You were eating it.” All of those servicers there were servicing and eating it on those bad loans, all of them said, “We’re not buying it.” That’s where you start feeling it. Your credit scores have to go way higher or they have to put more down. They did it in the middle of the backlog. People who thought they were closing that month or the next month, were no longer closing.

We can get super granular here. This is the period of my life, where I had CNBC on every day, Diana Olick is standing in front of a realtor sign, somewhere in DC with a mask on talking about, and they’re showing all of this red when it came to mortgages, but this is the most important thing and it summarizes it. The worst market you ever saw was 7 and 8 at par as a dollar. An FHA loan in 2007 and 2008, if it was par as a dollar, where did an FHA loan trade in 7 and 8. Do you remember the number at that time?

The FHA was a little better, but that even at the bad points, it was maybe 4 or 5 points off at par. Maybe 95, 96.

Where was FHA loans trading compared to par in March?

There was no trade, but it was close to $0.80 on the dollar. That’s a junk bond. You would call that a scratch and dent, where to sell that loan at that point, you’re losing. You make three points at a deal. You could be losing 15 to 20 to sell it. That was for a short window, but pretty much what happened is the whole market said, “We don’t want them.”

What happened was a big segment of the buying public was going to get frozen out. Everybody who’s going to buy an RVA deal, every single house in the RVA portfolio would have sold the FHA and every single one. We freaked out. I don’t remember when we talked about this in real-time. I even thought you said $0.70 on the dollar compared to par. It was bad.

 

Understand that at $0.90, no one’s doing the deal. Whether it’s $0.80, $0.70, the bids, you couldn’t sell the loan. No one has the money. Even a company as well-capitalized as the one we worked at was not about to sell any of those loans. They were sitting on them and servicing them themselves because that wipes out the profit of the home.

Do you want to tell that story or talk about that a little bit about servicing themselves?

Multiple people that worked at builders were running into the same thing. They could not sell their loans. They were using cash reserves and holding the loans longer because those loans had credit scores that didn’t make sense or debt-to-income ratios that were too high. All their standards change, new originations and even closings that were in front of them. They were also having to service loans, which homebuilders aren’t good at that. Mortgage companies, retail mortgage folks that I knew weren’t able to sell loans. They were having a disservice. You don’t have the cash to do that. You run out of cash. I was 100% panicked when I was talking to you in March and April of 2020 because I hadn’t seen the market seize up like that in 12, 13 years. That was an ugly time.

Let me do a timeline of events. March 11th, 2020, Trump speaks from the White House. It was the first time I’ve ever seen him read off a teleprompter. That’s we’re closing borders. The NBA cancels. The 6th is that Friday before and then a stock market was starting to go down, but on March 6th, 2020 how liquid was the economy?

On March 6th, 2020, everything was on fire.

Between March 6th and March 11th, 2020 which is five days. The clamp was in five days total. It’s like, “The world is ending.”

Runs on banks all of a sudden again.

It’s important to talk about what the world looked like around us. We don’t need to nerd out on this. We’re talking about a $10 million deal, but this is critical. The Fed stepped in. Powell was a hero. He understood what went wrong in 2006, 2007, and 2008. Unless you track this stuff, you’re going to have a hard time finding it but the Fed bought $25 billion per day of treasuries. They did it for 40 straight days, which is $2 trillion. It’s a ton. What did that do to the mortgage market?

The mortgage market was still a mess. That didn’t help as much at that point because the forbearance stuff was still in place. People were still saying, “If you’re going to tell borrowers, they don’t have to make payments. We’re not going to do new loans.” They needed to chill on some of that language for that to chill out the mortgage market a little bit and relax. What happened was interest rates got much lower. By the rates dropping, the debt-to-income ratios came in line. Rates would have gone up while that happened and people were buying. It would’ve been a disaster.

The Fed put a bunch of money into the market. Some of the verbiage slowed down and that’s when PPP passed and that’s when CARES Act was passed. That was like, “If you must be given forbearance, we’re going to cover this against the mortgage companies.” One of the things that happened in this deal for us is these acts did come through. We ended up collecting 99% of our rents, but we ended up having to go to government entities and doing it for our residents because they didn’t have the sophistication to apply. We physically applied for them. Cindy would apply for them and get the money and then pay our back rent. That was part of it. It was a mess. This was a curveball out of the left field. A Black Swan event is to summarize it in a way that I think is accurate.

When you’re going to syndicate and to raise money with investors, what you’d like to try to do is to tell them all of the risk factors. Here are all of the things. The SEC makes you do this if you’re going to sell a security or an investment of the stock. In someone’s annual report, you’re going to see, “Here are all the things that could go wrong because you’re legally bound, but you’re morally bound to do that if you’re raising money from somebody.” I tried very hard with every investor to say, “Here are all the things that could go wrong. I can’t predict the future. There could be a nasty downturn, interest rates could go rocketing up, sales prices could drop.” If all of these things happen, we still think there’s enough padding in there.

The truth is we didn’t ever think about a pandemic and nor did we ever tell some of that was going to happen, but the beautiful part of our deal and I do remember having this conversation with several of the investors before we closed. If the ugliest recession happened, there are still people or the tenants that are going to want to live there and we’ll still collect rent. I might not be able to give you your money back for a few years, but we’ll be able to keep collecting rent, paying down the debt. It might be a long time before you get your money. That’s the worst-case scenario because these assets aren’t going to zero in. If they did, we wouldn’t sell them. We would keep collecting rent because people need this housing in this market.

That’s exactly what we did for a few months is we kept collecting rent. We focused on using the programs we had available. This where your department shined. The 75-unit portfolio didn’t give your construction team as much of a chance to shine, because a lot of the deals we didn’t put in as we had fifteen deals in there where you and I talked to before we close this. We might put $100,000 in there. Those would have been sweet to look at and fun. They would have been complete rebuilds remodels. The typical Cava blowout, $500,000 after you buy it for two. What did shine in my eyes is the ability to have 75 tenants in a pandemic who were on furlough, not working.

You collected 99% of the rents that our cashflow was positive every month and the pandemic. Before coming in, I knew some of your construction guys, and you had a good mind for that stuff. I’m like, “Frank buys right. He has a good construction team. We’re going to make some money on these deals.” What I wasn’t as versed in was Cindy, her team, and your ability to manage 75 tenants who are all stressed and not paying you and work with the government agencies to get them the money to keep collecting rent. I didn’t have any concept of how good you were at that until we had to do it. You learned a little bit about your own team in doing that of how good they were.

This is going to segue nicely into what I wanted to talk about. The woman who runs our property management department won MVP for us for 2020. She was incredible. She went back and got somewhere between $700 and as much as $7,000 from one resident. When your rent is $900 a month, $7,000 in arrears is a ton. She went back and got almost $100,000 worth of money. She found it through being smart, using not-for-profits, the government entities, all of this stuff. She’s great. She also brought with her when she came here, an attorney that she works with. They are specifically a property management attorney. She’d worked with them before. She had a great relationship with them. What they did is they went into the law and did a lot of the work. They read it, understood it, told her what to do, educated her and gave her the information that she acted on, but she had incredible information.

She had a good network and was good. That’s why Eddie was good at anything. They have a good network.

That’s why I wanted to go with this as a network. I talked about my network, you and Nico. I would talk to my friends in San Diego, I’m like, “Who are you talking to?” What’s critical is the newspapers and the TV were telling us one thing, but the boots on the ground were telling us something different.

Never apologize for taking a profit. Click To Tweet

I think I’m fortunate that I have a pretty diverse set of friends that are in and out of real estate in different industries. What I was gathering by mid-summer is the pandemic was crushing restaurants, hospitality, and not much else. By everyone else I talked to whether they were industrial businesses, real estate businesses, finance, they were all hiring. They were all up to their ears and work, trying to keep up. Their sales and revenue were up. These are all executives that are too busy to even keep up. They’re all saying that they’re doing this while everyone’s working from home, which was blowing my mind that no one was coming to an office and yet people were busier than they ever were and they weren’t losing revenue and sales. I started to feel a lot more confident by mid-summer that the stock market was not a gauge of what was going on at the grassroots.

For those of you that are reading, the four-page write-up for Q1, Q2 was four paragraphs.

I was able to say we sold a few. The one I did three months before, I was like, “We haven’t sold shit. Here are all the reasons why.” When I have eleven sales, it’s like, “Can you believe that in April, May, and June, we got eleven sales?”

We made fun of the fact that things happened with the Washington Football Team. It was a little bit of humor, but let’s get right to the point and shut up because there are green shoots. We don’t need to say too much. It’s move on. This is critically in the power of your network. For Cindy, the network helped her to give us good information and ultimately made us profitable in this deal. I was talking to a very successful investor from Pennsylvania. The guy that runs his property management department was like, “We’ll make an extra $2,000 on every house we assigned to make up for the loss rents.” He didn’t know that he could do these things.

I was on the phone and I’m like, “I’m going to send you the roadmap. Go do it. You’ll get the money back.” That’s what we had the ability to do from our network internally. Our networks told us, “There are green shoots here. Don’t panic. Start looking, think proactively, and don’t read the newspaper.” We’re seeing different things. We are sold X number of houses, NVHomes in Maryland sold $800,000 houses. We can easily say people didn’t go on vacation. They had extra cash. They weren’t spending money on clothes. They weren’t going to dinner. All of these things stopped. They said, “Screw it. I’m going to build a pool in the backyard or I’m going to buy a newer house because it put a stress test on their current environments and the housing market popped.”

I was talking to you a lot about that because at the time, you were still interacting a lot with small guys who were panicking too. I was interacting more with big companies and I was sharing with you that this market is blistering. “Don’t panic.” A lot of people you’re talking to are up to their eyeballs in debt. They’re freaked out. Whereas in I’m like, “Capitalized companies, there’s demand. It’s strong. Let’s not panic.” It came to a place where we had closed about 40 of those 75 units. I remember talking to you about it, and I’m like, “Why are we killing this thing?” We finally had to have a conversation where you were like, “Here’s why and what’s going on.”

On a few of these, we underestimated the expenses, but then you started listing here’s where all of my expenses are going up. There was some inflation in the services of the real estate market. That was another lesson for me of we had the storming in the beginning and in the summer, it was like, “I was on you to pick up the pace.” I’m hearing all this great stuff everywhere. You had to bring me back to the reality of, “Here’s the reality in Richmond. A little bit of what we’re dealing.”

This deal closed in January of 2021, we’re in July, August. You and I got some momentum about 40 of these deals sold or under contract, and we’ve got a handful left. I brought to you, “Ian, I see an exit.” Why don’t you talk to me and recall that conversation?

You believed you could sell off a large traunch of them because we initially had thought that was going to be a good opportunity for us. You would sell these in batches of fifteen to some aggregators. March comes and the aggregators went and hit for six months. They were gone. We get into fall September, October and you start hearing from aggregators. An aggregator is someone who buys properties and multiples. They buy 5, 10, 15 at a time and they look to add value. It’s similar to what we do with the 75. We were an aggregator.

Let me give a couple of names. There’s a company called Roofstock. They’re a big buyer. They’re the biggest player in this space. Norada is another name that’s in the space. Those are aggregators. Those are people and RP Capital. If you google any of these companies, if you want to understand this, this is the nuts and bolts. Those are aggregators. Those people dried up.

The thing with an aggregator is they can take a bunch of assets off your plate, but they’re going to be similar to the way we bought this. They’re going to beat you down on price. You’re not going to get full retail for what it is, but the value is you get the time value of money. You get your capital back a little bit faster. I was a little skeptical at first when Frank started saying, “The aggregator is enough.” I’m like, “Frank, the market’s hot. Let’s take these listing prices.” The more we started doing the math, we thought we had a choice. This was late in the year where we thought we could sell off the last 30% some and give the entity at a 30% profit margin, which would give our investors 28%. If we sold that other 30%, it might take us another 9 to 12 months to close them all out of retail.

The calculus we had is if things stay where they’re at, we could finish at a 40% plus return. The thing about it was the way we had the profit waterfall set up, even if we got to 40%, it meant that the investors might get to another 3 or 4 points. We looked at it and thought, “What’s better for the investors?” To give them all their cash or make them wait a year for another three points and make them worry about the risk of 2021. We already know we’re sitting in a bubble. This is not breaking news. It’s a bubble in every asset. It’s going to pop. Maybe we should take some of this risk off the table and give them their return. Is it better to give them a 28% return at 13 months or a 32% return in 24 months?

The more we thought about it, we didn’t think there was one investor that would take the second one for the risk. It made sense for us to close the deal out with aggregators. I give you credit. You had the relationship, you were close to the market, you were able to move those units and our investors were thrilled with getting that return in thirteen months. Especially after we went through the pandemic where a lot of them wrote off the chances of getting any profit most were hoping, “It’d be great if I got my capital back.”

As fans of this show, you know that we are fanboys of Warren Buffett. Jim Cramer always says, “Never apologize for taking a profit.” Buffett always says, “Pigs get fat, hogs get slaughtered.” What we learned in this deal and working together is we aren’t always universally aligned on where we start, but towards the end, we both understand the other person’s perspective. If I bring up a point to you, you may not listen to it initially, but a day or two later, you’ll say, “I listened. I thought about it. I contemplate that I hear what you’re saying,” and vice versa. We both had to do some of that with each other. With this one, it was like, “I’m worried about plywood prices. I’m having to figure out how to get appliances. I’m taking appliances from houses, I’m buying on the retail side and I’m putting them into these rentals because I can’t buy appliances.”

There were other things. I was like, “This makes sense.” We did what good partnerships do. One of us who’s doing it brings it up. The other person asks some contrarian questions and slowly what we whittled to was, “This does make sense.” What you did is you asked. You asked an investor on your side, “What do you think of this?” I remember I talked to my brother and his initial reaction was, “Can you wait until January 1st so the tax can be changed?” What ultimately happened was he gave me the best quote and the best compliment. He goes, “That’s incredibly impressive. Through a pandemic? Wow.” We have a slide that we put on where you compare the performance of our portfolio in thirteen months.

The same money in the Dow Jones was 9.7% on the day we went, for that thirteen-month period, Dow Jones was 9%, 7% S&P 500 was 15%, 8%. Ours is 28%. It’s pretty hard to argue that. You could have put your money in Tesla and you’d donate 100%, but who was doing that? No one. What should be considered an alternate investment in real estate that has maybe a low upside, but not normally the upside of a tech stock, you gave tech stock returns, which most people were very excited about. When I say most, everyone was incredibly excited.

If you’re going to do a deal or you strive to do a deal like this, what’s critically important is to realize that you must have humility. You have to understand what you don’t know. Imagine if we didn’t do that 30-unit deal years ago now and I overpaid. We would’ve crushed in the pandemic. What if we would have done this without the property management department? What if I didn’t have Cindy that found an extra couple of $100,000 sitting here? There are so many little things. Malcolm Gladwell in one of his books wrote, “It takes seven critical mistakes to crash a plane.” We could have had seven critical mistakes but what we looked at is we were prepared. We did a lot of the right stuff. We got lucky, and this is good. Let’s get out. We could ring the bell a little bit more, but why? This is pretty darn good. Let’s move.

 

Our investors are being good. Our investors deserved a reward because they could have been active, nervous investors that were demanding. We were selling more units and taking risk off in March and April. None of them did that. They all talked to us and said, “We trust you. You’re the operators.” They deserved a return.

What we’d do before we get into the lessons learned, which is how we end this show, is I think we should do two things. Let’s talk about first we set a quarterly update. One of our investors who’s in Indianapolis. He’s one of the very largest realtors in the entire state of Indianapolis. There were some changes or something happened and he didn’t get our message. He then finds out he’s getting a payoff and he’s like, “I’m going to Vegas. I’m going to blow it all.” It was a significant amount of money. It was $60,000.

He is the investor we talked to the most and he thought that we purposely didn’t send an update out that time for the fourth quarter because things were bad so we laid off on the updates.

There are two things we should do here to wrap this up before we get into the lessons learned. We’ll tell the Chicago story to wrap, but why don’t we talk about him funding this deal before we get through our Chicago pay-off? We’re going to flip out a lot of these names. Jeff Paxson, we are talking to you.

Out of all the investors, he’s the one I was most worried about with details. He’s an incredible sales guy, but details, not so much. I’m driving down to Richmond. All the investors said, “The wire is ordered. It’s going to be in your account.” I’m driving down there and I’m signing documents. I’m going to go to the title company with Frank. He’s got everything lined up and all the paperworks printed. I get a call at 9:30. Paxson hasn’t returned my call for a couple of days. He calls and I think he tried to call you first. I remember he went into voicemail. He was scared to call me because he knew I was going to lose my mind.

He gets all to me and he goes, “I guess there’s some rule about if you transfer $200,000, you can’t do it on the same day with the wire.” I’m like. “Jeff, what are you trying to say? Is the money not going to be there now?” I’ll get to my favorite part about you on this. He goes, “Yeah. Here’s what I tried to do.” He goes into this long story. Unbeknownst to us, Jeff cuts a side deal with a friend of his who’s a 70-year-old doctor. He has a piece of paper like in some kind of a deal where he was getting a rip. He was getting a commission off of this guy’s piece where he was going to take $100,000 from the doctor and put $100,000 in of his own money.

The doctor got cold feet at the last minute, but this was unbeknownst to us. We didn’t know he was going to do this, but they were going to have a side deal that wasn’t even legally enforceable or whatever the deal was. This doctor would give Jeff some money and Jeff would move it. The doctor backs out, Jeff is in a bad place and he has to wire money. To get the money, our boy, who’s an amazing realtor goes to his office and finds 50 or 60 realtor checks that he’s been just stacking on his desk for 4 or 5 months. His accounting practice is when the stack looks pretty big, he goes to the bank and signs them all. These are $3,000, $4,000 and 5,000 checks.

It added hundreds of thousands of dollars.

He has the stack so big that he has $200,000 worth of it sitting on his desk. He’s like, “Normally one of the girls in accounting comes over and tells me if the stack’s getting a little too big.” He’s explaining this and he goes, “As I’m explaining it to you, you probably think I’m so unorganized.” I’m like, “I do. How are you the number one realtor in Indiana with a practice like this?” I’m chewing them out and I finally realized this is not getting anywhere. I called you because I’m embarrassed. I’m like, “My one job is to have all the money there and I’m going to screw this up.” I know that’s a lot of risks because the debt relies on the down payment. I know how hard it is for you. You were stressed because the loan was not going perfectly. You’re bouncing the lender and getting pissed at them. I’m like, “You’ll have the money. You deal with the loan.” I called you to tell you what just happened.

I’ll let you tell you my side of it because I don’t remember what I said to you.

The best part is you go, “I expected this would happen. This day is not the closing date. It’s in three days. I just told you that.” I’m like, “You lied to me about the closing date?” You were like, “I do this all the time. Don’t be offended.” I’m like, “I’m offended. You could have told me this and I would have told Jeff that.” You go, “I had a feeling Paxson would screw this up so we’re not really closing, but you’re signing now.” I was signing a bunch but the dates were different. It was hilarious.

I remember where I was sitting when you called me with that. For some reason, that’s like a flashbulb moment.

You loved the story though. You love the schnitzel.

Ian was like, “Frankie, do you understand what Paxson is trying to do? He was trying to schnitzel a couple of bucks out of his doctor.”

He was trying to get an extra commission on the extra.

This deal closed on the Friday before Super Bowl Sunday. What we did is we had to get the documents. The deal closed in January 2021 but the first weekend of February is typically the Super Bowl. What we want to do is we wanted these people to have their checks in hand. We did a couple of things. Whenever I do a deal with my dad, I don’t wire him money. I always send him a check and my dad has worked his ass off and he’s built a really good life through going and sweating every day. His favorite part is that check. He’s like, “Just wire me the money.” I’m like, “Dad, I’m not wiring it. I’m sending you that check.” He always calls me. He’s like, “Frank, I got that check.”

This is the coolest thing. In one of the first deals I did with him, there was a closing packet of paper that’s thick. He gets the paper and he gets the check. He’s like, “I got all the paperwork.” I don’t do the paperwork. The closing company does the paperwork. It’s title insurance and a bunch of things. I don’t do a damn thing. I sign a check and it just all happens. He goes, “I got that check.” I got all that paperwork and he goes, “You’re wearing a hell of an outfit up there.” I had a hard time telling him that it’s not me. I was like, “No problem.”

We sent everybody a FedEx with the check. Ian and I talked and he’s like, “We know these people.” We got them some swag. We got on some Cava Yeti mug. We got them a Cava hat and a Cava beanie. We sent them a bottle of Richmond bourbon, which Ian said, it tasted great with Coke. I was like, “As good as it is like, “I drank the bottle with a bottle of Coke. We wrote on my handwritten card and I wrote the cards myself. I wrote him something funny. I wrote a nice message to both Ian and my brother because my brother has been investing in these since the very beginning. It was one of those things but they didn’t know that this was coming.

Always have humility and admit what you don’t know. Click To Tweet

We send them the wrap-up email on Friday morning and on Friday afternoon, they got two FedEx packages from us. One was the check and the other one was the care package with a note written from me to them. As I said, I know most of these people, but it was something personal and the ones I don’t know very well, I told stories that I knew through Ian. The coolest thing is every single person in the deal sent me a text, an email or called some way or another. It was awesome. Why don’t you tell the story about us going to Chicago and I’ll add some color?

One of the guys who were invested in it, the guy that owns the restaurant chain that he had just sold their company. He’s still there running it as a CEO and they did damn well. He has his own jet and he had picked me up late in 2020 in DC just to fly to Philadelphia to eat steak and drink on his jet and fly back. It was all in one night. I don’t know what the hell he spends on that. Maybe it was $20,000 because we hadn’t flown on his jet yet and he wanted to go out. We went and got some cheesesteaks. We saw the Rocky statue, but somewhere on the fourth or fifth bottle of wine, he told me about one of his restaurants they bought from Del Frisco’s which has the top five wine cellar in all of Illinois.

I told him, “We’re doing pretty good on this real estate deal. We’re going to make you money.” He was all pumped up about it. He goes, “If we make money on it, you guys are coming in town and I’m going to open up the good stuff.” We’re going to get into my private stash there because as part of the deal, when they did it is he bought a chunk of the wine cellar himself. We close this. I texted him. I’m like, “We’re coming in. We’re doing that.” He goes, “For sure. You want me to come to get you?” I’m like, “No. We’re coming in ourselves.” We flew into Chicago in the afternoon on a Thursday and met him at his restaurant at 5:00. We were there until midnight just drinking some of the most obnoxious bottles of wine. You could get a used car for each bottle of wine that he pulled out. I think one was from 1980. It’s a Penfolds that was a 100-point wine. There was a Screaming Eagle in there. We might’ve spent half of his profits from the real estate deal on wine which is obnoxious.

He’s a wine guy. We’re wine nerds but we don’t have his budget and we don’t have his access to wine. If he was to pay retail for those wines, he would have spent all of his profits for sure. He told me, and this is the coolest thing. It’s almost like you’ve been to Vegas in the Aureole where they have like the wine angel that goes up and down. This is like a three-story wine cellar but that belongs to the restaurant. It’s called the Founder’s Collection. It lines the walls and it’s just his. He’s the only one with the special key fob. Ian knows this guy. I’ve met him 5 or 6 times. He’s always been incredibly gracious and generous with me, but Ian standing there and he’s like, “We should get a bottle of the Eagle, which retails for $13,000.” I’m like, “Ian, don’t get one of those.” The other thing that’s crazy about this is the restaurants closed. They’re only doing takeout. They have one table, it’s us. He’s got his sommelier who’s waiting on us.

Chicago is not even open.

There were five dudes that drank seven bottles of wine. The best part about this is I look at Ian at one point and I’m like, “I am currently without speech.”

For my big Italian friend to not being able to talk, he’s had too much wine, for sure. He was grinning and smiling. When we say his private stash, it’s an entire wall. There are thousands of bottles in this thing that came with part of the package. He, similar to RB 75, bought this restaurant distressed and the seller distressed. He got a lot of these for prices way under and he already owns this. He’s like, “It’s a sub cost. I’ve owned it for years. Who the hell else am I going to drink it with in celebrating something like this?”

One of the things that Ian and I have learned about people that have cool stuff is you’re speechless being on a private plane, which I’ve never been able to do or drinking this at retail that was $40,000 to $50,000 worth of wine. He bought it at a discount but it’s still ridiculously expensive. What you start to realize with people who do something this cool is they want to enjoy it with someone who enjoys it with them. They don’t want to feel like they’re being fleeced or someone doing something shady. It’s his boys and doing it. We went on a buddy of yours’ boat years ago. It was so cool when we were on his boat and we were both like, “Yeah, but he’s having fun with us too.” We were like, “We don’t want anything from him. We just want to have a good time.”

He has like a 40-foot sailboat in Annapolis. I remember that we were thanking him so much and he goes, “I’m on this boat all the time by myself. I don’t normally have girls that look like that on the front. You guys brought that so you’re adding value to it.” This is my wife and your girlfriend at the time, but it was like, “Thanks. That’s great.”

I think the coolest thing that you said about your friend that owns the restaurant is clearly he wasn’t expecting to get his money back. Look at the way he’s reacting. Let’s get into the lesson.

Let’s blow through this time. I’ll take the odds, you take the even. The obvious one is to pick the right people from who you take money. That was important. We had patient investors. They didn’t pressure us. They didn’t stress us. They were the right people that we called and all of them said yes. They were exactly what we thought they would be, which is they let us do what we needed to do as long as we kept them updated.

One of the things we didn’t talk about is the contract. Ian and I went back and forth on the contract. The lesson here is the details of the contract matters. The next point is you don’t assume that people know what you know and Ian will tackle that, but the contract was important because the two of us had to go line for line through this. My attorney wrote it and your attorney came in and asked a ton of questions. I was like, “Why the hell would he ask me that? It doesn’t make any sense.” It went back and forth. One of my favorite books I’ve read in the last couple of months is a book called The Dynasty. It’s a book about the New England Patriots. Most NFL franchises owned the stadium, the parking lot and the team, all three of those things.

The Patriots back before Robert Kraft bottomed were owned by one person, someone else owned the stadium and someone else owned the parking lot. What he did in order to buy the team is he bought the parking lot first, the stadium, second, and he slowly merged in and bought the team. He squeezed them. The guy he bought the team from ultimately is like, “You’re a real hard landlord.” He goes, “You should have read the lease.” That’s why the contract is critical.

Don’t assume people know what you know. On a number of different occasions when there was friction between either me or Frank or me or the investors, it was just because we weren’t sharing enough of what we knew or how we were feeling or what we were sensing. I think that every time there was ever friction, honest and candid feedback was great on both sides.

 

The other thing that plays into that is there must be give and take in a partnership. You must understand what the other person is concerned about. I’ve only been married for about four years, but what I can tell you is in my marriage, when I get out of line with this, it’s bumpy. When I sit, I stop, I ask questions, I understand fully and I compromise, life is way better. A business agreement, make no mistake, it’s a marriage. If ends poorly, it’s a freaking divorce and that’s not where you want to end up is down the divorce route. What you must do is listen, compromise, understand and give. If someone asks something of you, you have to look at it and say, “I entered into this. This is what they’re asking for. What are the consequences if I don’t?” Those can be pretty challenging if you don’t. That’s where you have to be mindful of what you’re in on.

The next one is to listen to really understand what you’re hearing from somebody. Early in the process, as I was asking Frank, a bunch of details about money, finance, and the contract, what Frank needed to hear was, “I can’t screw up relationships that I’ve built for many years.” After all of those bullet points we got through, what Frank needed to hear from me is, “Look me in the eyes and tell me that you’re not going to blow these relationships because they matter a lot to me.” When you’re negotiating, there’s always something superficial people put on. People tend to give information in layers like peeling an onion. You have to get through a number of different layers and my layer was, I was fiercely defensive of the people that were trusting me to give me $100,000, $200,000 and $400,000. My reputation mattered and that was what was behind all of my bullet points.

I think this is incredible. Bullet point six on our wrap-up is you can never anticipate everything that can go wrong. I want to read you this. This is from the Q1 Quarterly Update. Ian wrote this, “When Frank brought this deal to me, I spent zero time asking about upside and home prices. From a personal perspective, I’m more interested in protecting my capital than speculating for a big payout. This stance only intensified when I decided to bring in personal friends. I asked Frank about every contingency from our session, credit crisis to a nuclear war. I neglected to ask him about a global pandemic that would force businesses to shut down for a few months but I felt comfortable that we were buying a castle with a very wide moat.”

You often hear the term analysis to paralysis. We’ve talked several times about the 40/70 rule. We talked about it in an entire episode. We talked about it now. You never know what you don’t know, but if you don’t take action, you’re never going to get anywhere either. What you have to do is look at it from the perspective of, “Do I know enough? Do I trust the operator? Do I trust what’s happening around me? If things do go wrong, do we have enough contingency built-in?” What we uncovered at the very beginning of this conversation is I looked at this deal for more than eighteen months before I bought in. I whittled the price down from well over $100,000 a door to $70,000 something a door. In doing that, we built the moat. We didn’t know we had a pandemic in front of us, but because we did all the fundamental stuff right, we were prepared way ahead of needing to be.

I think that’s right. That’s spot on. Don’t panic during a market correction. With time, things always seem to look a little less scary. As we sit here and talk about it now in 2021, it’s been a year. I forgot about the whole mortgage crisis. That had me spooked, but my old company was calling the founder of the mortgage company and asking what he thought they should do. He told me all about that story and I said, “They called you. You haven’t been there in fifteen years.” That freaked me out when I heard the CEO was on the phone with our founders. It scared me to death because he hasn’t been in the business in forever. If you’re calling him, you don’t have answers. You’re scared.

As I get older, one of the things that I realized is that the only easy to have ever had is dead or it’s already passed. You forget how hard it is to navigate day to day, but that’s part of not panicking. It also comes down to having a steady hand when you need it. Our eighth bullet point is execution trumps salesmanship. It’s funny. Jason Medley and I joke about this a lot. It used to be, “I’m a real estate investor,” but now that banking has worked its way into our world, I’m not called an investor. I’m called an operator. I’m an operator out of Richmond, Virginia. That’s what’s so important. I know how to operate a business.

Because I know how to operate a business, I know how to execute. The execution is what this all came down to. It came down to a lot of pieces, but this is a panic thing. It could’ve gone way wrong, but because we knew how to operate because we didn’t panic, it didn’t and it turned out incredibly well. It wasn’t a slick oil or like a snake oil salesman type of a thing. It came down to execution and that’s why both of us are operators. Because of that, it worked out well.

Take nine, because you deserve the credit for that.

You make money when you buy, you realize profit when you sell. I’m a paid consultant for a real estate group and I say this all the time. Rookies think you make money when you sell. The pros realize you make money when you buy. You and I are fanboys of Buffett. We talked about it all the time. He gets better prices on stocks than us. we can talk about a thousand different deals that he’s done and it’s all because of the way it’s been acquired. Our buddy with the wine cellar, I think he would have done it if he paid retail, but we’re sitting there hammered drinking these incredible wines. He’s like, “I bought it at $0.30 on the dollar. That’s why it feels good.

The last thing I would say about that is, you can’t do this in every aspect of your life. When I go to buy a car, I’m pretty good at cars. When I go to buy technology or electronics, I get hosed. I don’t know how to negotiate. It isn’t me. I have my IT company buy all of our computers because he knows how to negotiate and buy low. I don’t. I know how to get hammered and hosed. Know where you’re good at it. If you’re not good at it, find someone else who is and realize that. It’s really important to preserve the margin on the front end. You can take the last one.

The last one is so important. If you’re starting off, you’re not going to do a $10 million deal, but everyone always wants to tell you how they would do something, but few actually do it. The only way to get started is to start. You have to take some risks. Throughout this whole story, are you and I’m saying yes to something before we were 100% comfortable? You didn’t know what syndication was. You didn’t even know you were going to syndicate. You didn’t know how you were going to get the debt. You could have lost your hand money. I had about two weeks to get my arms wrapped around should I do something I’ve never done in my life. Put my name on an LLC and by the way, go bring in some of my friends into a deal that I was trying to get comfortable with.

I could have just said, “Frankie, I don’t need this right now. I’ve got a lot of other things going on in my life and I did,” but we’d still be talking about one day we’re going to do a fund and we have never done a deal together. Now, we’re one deal closer to doing a fund. We’re one deal closer to doing a second deal and then a third deal and that leads to something. For me, this whole thing is about doing, not talking about it. I think that’s what separates successful people from those who talk about what they should have done.

I’ll say something in closing here. Everyone wants to tell you how they would do it, but only a few do. There are two things. First, this show. We probably have no business doing this. We typically do it alone on crappy mics. An example is once I had my mic propped up on a couple of architecture books, but we did it. We’ll apologize later for how crude it was to start, but we’re trying something. In addition to that, when we were at break and we were setting up some stuff, we talked as a group about the thing that drives us crazy about other shows is they microwave the details and they want to sell you some bullshit course. What we’re doing with this entire podcast is we went granular.

This is a three-hour show and neither of us is named Joe Rogan. We want to show you the details. This is the nitty-gritty that goes into a really big deal. I was eleven years into my career before I even thought of chewing off a deal like this. This is almost like a capstone class of what goes into a big deal. We want to take our gloves off and say, “This is it,” because this is how we did it. You could shoot holes in it. Some of it was probably wrong or different than you would do it and that’s cool but we wanted to show the nitty-gritty of what goes into a show and how we did it. In the end, it was a pretty kick-ass thing. It was a fun experience for both of us. We have some happy people on the other end and there was a big success. Was it perfect? Hell, no.

Frank, you son of a bitch. Good job, buddy.

It was fun.

That’s it.

Important Links:

• Part One – Anatomy Of A $10M Deal
• The Dynasty