Josh Cantwell: Hey, what’s up, guys? It’s Josh, and I want to just say, hi, Happy New Year. I’m excited to be back with all of you guys. And today, I want to talk about a deal that we just closed where the lender shorted us a million bucks at closing. So, the deal is what we call 220 Brookside Shady. It’s 220 units. It’s a portfolio that we bought and closed on December 30, 2021, just a couple of weeks ago, and a great deal off-market had a broker that brought it to us. Nobody else knew about it. Nobody else ever saw it. They brought it to us off-market, and we were excited for the opportunity. The price that the seller was looking for was about $15 million, and it was off-market, so we went to see it. We loved it. It’s right in our wheelhouse. It’s 50 units in Lakewood, Ohio, and then another 170 units in Cleveland, right by the Cleveland Zoo, which is a pretty solid area.

So, the price that they were looking for was about $15 million, 220 units. So, that’s about high 60s a door, right? And so, we agreed. We agreed at a price of $14.85 million with a $200,000 reduction in that price if we could close by the end of the year, so $14.65 million. We went into contract officially on November 20, 2021. So, November 20, 2021, we’re under contract, we’re rolling through the due diligence, we’ve got 30 days of due diligence and basically 40 days to close a $14.65 million deal. If we can close it by the end of the year, it saves us 200 grand. If it doesn’t close, the price goes up by $200,000, it goes up to $14.85 million.

And because it was off-market, because we knew we could close it, and because the seller wanted to be confident that we would indeed close the deal, the seller said, “Hey, we want hard earnest money.” So, we actually offered $200,000 of hard earnest money as soon as the PSA was executed. So, we put up $200,000, that’s locked in. Fast forward, we go through the due diligence, we love the property, we love the underwriting, we love the opportunity to increase the rent. We love the area, 50 of the units are in what’s called the Gold Coast of Lakewood, which is right on the water, and the rents are $300 below market value easily, could be $400 below market value if we do a heavy CapEx program.

The portfolio was originally built by the dad in the 60s, so the buildings are 60 years old. The dad, the developer, passed away. The kids inherited it and the kids live all over the country. Well, one I heard is a judge in California, one is a lawyer in Chicago. None of them live in the greater Cleveland area. So, they want to sell it, they want to get out of it, they want to exit the portfolio. And for sure, they want to sell it and cash out, and we want to buy it. So, we go into it, we make the offer, we agree. We put up $200,000 of earnest money. Then it has an original closing date of the end of the year. So, if we close by December 31^st, we can close and we can save $200,000. But if we need an extension, not only does the price go up to $200,000, but we’ve got to put up another $50,000 of earnest money. So, we’re going through due diligence. Everything’s checking out. We’re getting our lender quotes in early December, we get a quote from a lender.

And the property because the rents are so low, it doesn’t qualify for permanent financing. Even though the building is super stabilized, 97% occupancy, the debt service coverage ratio is too low for us to get permanent financing. So, we look at bank financing, we look at bridge financing. At the end of the day, it made the most sense in the capital stack to get bridge financing because the bridge lender was going to give us the highest loan to cost. They were going to give us the most money at about 5% interest, and then we had to raise about five million bucks in private money.

So, I did the raise right after Thanksgiving, did the raise, raised all $5 million, actually got $7.5 million in commitments. We worked with those investors. We finalized the money. We got all the money in the house before Christmas. So, within two and a half weeks, three weeks, we had all the investor money in-house, ready to close. So, we’re sitting on the money, it’s ready to roll. And we’re told that the appraisal is supposed to come in right before Christmas. So, we’re like, okay, right before Christmas, no big deal, everybody goes on Christmas break. The Monday after Christmas, no appraisal. Now, it’s December 27^th. We’re supposed to close on the 30^th. No appraisal on 27^th. No appraisal on 28^th. Appraisal finally comes in on the 29^th, and the current as is value in appraisals. Awesome.

The appraiser, however, takes all of our projected rents in our CapEx budget. We have an almost $1.8 million CapEx budget to improve the building, raise the rent, and our pro forma is four years from now. Okay, four years from now, we’re looking to increase the rents by about 350 bucks a unit. With a heavy CapEx plan in four years of time, this is indisputable. We should be able to absolutely get these rents. There are other comps that are getting these rents today, including some of my own buildings that I own in this area that were already getting on it. Like on a two-bed, one-bath, 800-square-foot, we’re already getting $1,200 in rent today. Two-bed, one-bath, fully improved, big CapEx program, we’re getting $1,200 a month in rent now. But the appraiser decides to short the rent by $100 a unit.

And because of that, the future stabilized value that the appraiser marks on the appraisal, it ends up coming in, meaning that we’re going to be short $933,000 at the closing table. Now, mind you, this is December 29^th. We’re supposed to close on the 30^th. The title companies, the banks are closed on December 31^st. So, we get the news at 9:16 in the morning on Wednesday, December 29^th that we’re going to be short $933,000 at the closing table. Okay, no problem. So, instead of having to bring roughly $3.8 million to closing, we’ve got to bring $4.8 million to closing. And looking around like, okay, what are we going to do? And Pete Carroll, the head coach of the Seattle Seahawks is famous for a quote, and that quote is, “So what? Now what?” “So what? Now what?” And so, you get information, you learn something, something happens, and then football could be that somebody gets injured, somebody gets COVID, somebody can’t play, somebody gets traded. So what? Now what?

And so, I thought to myself about that quote. So what? Now what? So what that we’re short a million dollars at closing? And we’ve got to close essentially tomorrow before the end of the year because remember, if we close by the end of the year, it saves us $200,000 in the price, right? Also, the broker that brought us the deal wants us to try to close if we can. We can certainly extend. We already put up another $50,000 to extend the closing if we needed it, okay, if we needed it. And so what? Now what? So, I call my team, I bring them all in, we get on the phone with the lender, everybody’s looking around. It’s a million bucks short. It’s 9:16 in the morning. By the time that call wrapped up at around 9:30, I told our broker who was brokering the loan. I said, “Dude, look, it’s no problem. I’ll wire in an extra million bucks, and we’ll get it closed. We’re going to close tomorrow.” And he’s like, “Dude, I’m sorry,” like “I can’t believe this, the appraiser was supposed to send this in last week.”

Normally, here’s how it goes. Normally, if an appraisal comes in short, it’s usually for two reasons, either the real estate taxes are higher or the rents are short. That’s why. That’s why appraisals come in low. So, the taxes were spot on the taxes that he assumed or exactly the taxes that we assumed, but he shorted us $100 on the rent. Well, that’s a lot of money, $100 per month times 220 units, $22,000 a month, and it’s a quarter-million dollars a year at a 6 cap. Yeah, it’s worth two million bucks. And so, we’re short a million dollars of funding at the closing. The lender is going to fund all of the CapEx, the full $1.8 million, but that’s done on a draw. That’s still there for us to draw against, but we’re short the million at the closing table. So, what do you do, right?

So, what we ended up doing is, yep, we had over raised for this deal because we needed operating capital. We were also going to take an acquisition fee of about $300,000. So, we had over raised, just so happens, we had over raised by $700,000 to cover the acquisition fee, to cover the operating capital, to cover some of the cash bleeds. Remember, the rents are super low. The debt service coverage ratio was low, so we knew it was going to cash bleed. So, I tell our CFO, “Hey, Roberdo, go ahead and wire $550,000 to the closing table.” And he does. And then I find out, okay, well, we’re $933,000 short. So, we’re going to source the $300,000 which we did through some different accounts of mine and our company, and we funded the other $300,000.

And so, we’ve got all that money in-house now, it’s ready to close. The next day, we go through our final closing checklist with our lender, our attorney, their attorney. We get everything done, everything in, there’s a couple of forms that have to be signed and turned in. Our property manager has to sign a form. I have to sign a form, send them in. Some of that has to be originals, so we’ve got to sign them. We got it notarized. I’m going to drive them to the title company. This is on December 30^th, Thursday. A week later, I’m recording this on January 7. So, this just happened eight days ago. It seems like forever ago already, but this has happened eight days ago. And sure enough, we closed. We get a notice from the title company at around noon on the 30^th that she sends us an email and says, “Hey, I’m effectively considering this deal closed.” Before the end of the year, we’ve got to wire out all the money and we’re done and we’re ready to go.

And so, we get the notice, the deal closed even when the lender shorted us a million bucks. Now, what normally would happen when an appraisal comes in short? I didn’t cover this. Normally, what would happen is you’d have maybe a week or so, you would go back to the appraiser, you would reprove your comps, you would go back and show them what the comps are. Literally, there are buildings renting right now for the same rent that we were projecting four years from now. So, why this guy thought he would short us $100 a unit is beyond me because there are other buildings getting the rent today that we’re projecting, we’re going to get four years from now. So, I thought it was pretty conservative. We bought it for $14.65 million and we’re projecting that the future value is around $24 million after the CapEx program and after we bumped the rents and after four years of inflation. I mean, we know we’re going to get these rents. I’ve got other buildings in these markets. I’m getting these rents today right now.

I’ve got a comp, we call it 52 Lake with a building that we own is called Clifton Lakes Apartments. You can look it up on Google. Go ahead, check it out. You can find the listing on Apartments.com. You can see the work that we do. You can see the units that we’re turning. You can see the commons, it looks amazing. You can also look up Forest Ridge Apartments. You can look it up on Apartments.com, Forest Ridge Apartments in Parma, Ohio. You can look up on, again, Apartments.com. You can see the work that we’re doing. These units look amazing, granite, LVP, white shaker cabinets, black matted hardware, stainless steel appliances, all new bathrooms, tubs are glazed, tubs surrounds. The tile is glazed, new toilets, new vanities, new mirrors. It looks amazing. I know we’re going to get these rents, but this appraiser, for God knows why, decided to short, not the house’s appraisal, but the future stabilized appraisal. And the lender shorts us a million. We get it closed anyway.

So, now, I’ve got a little bit of work to do because I need to backfill that million bucks. I’m going to raise that million. As a matter of fact, today, I got a commitment for half a million dollars to come in and fund that half of that difference. And so, here’s the end result of what we’re actually going to happen is the $933,000 that we were shorted, instead of getting that bank financing at 5%, we’re going to raise half of it in equity. And that half a million of equity, we’re going to pay a 10% preferred return plus give up 2.5% equity in the building. So, we lose 2.5% equity, big deal, okay. We got to retain, this isn’t a normal syndication where the GPs get 30% and the LPs get 70%. In this syndication, we kept 77% and the LPs got 23%, 22.5%. So, now we back down, we’re still keeping 75% of the equity and the LPs are getting 25% of the equity now. So, we’re good, like it’s no skin off my back. Okay, we’re good.

And then the other half a million is essentially the money that we just needed to fund the cutbacks so that we could then go to our lender and do a draw against the $1.85 million construction budget. You following me? So that, we’re actually going to raise in the form of debt. We’re going to raise that from some private investors, have them lend the money to us instead of doing equity to debt, lend it to us so that we have the capital that we can then use it, do the construction to half a million dollars worth of work, and then go request a draw from the bridge lender. You see what I’m saying? So, instead of giving up more equity, we’re just going to do a line of credit, do the work, and then go nick the bridge and pull that money back into the deal.

So, what are the lessons that you can learn from this real-world case that it just happened eight days ago? First of all, always over raise, number one, always over raise for your deals because people will flake out, private lenders will not be able to fund on time. I would rather over raise and give up a little bit more equity than under raise and be short. That’s number one. Number two, look, when you’ve got an opportunity to close, close, okay. Find a way, come hell or high water, find a way to borrow, beg, borrow, don’t steal, that old statement, beg, borrow, and steal, beg, borrow, but don’t steal because, number two, the amount of credibility that we were able to get from our broker lender and from the broker that brought us the deal, the real estate agent that brought us the deal, some of the words that they used to when we closed, so my broker’s like, “Dude, you’re an animal.” Broker, says, “Oh my God, the growth that you guys are having is legendary.” Look, I remember last year, we bought almost 1,400 units of apartments just last year in 2021 in the middle of a pandemic, 1,400 units. It’s pretty amazing.

And so, the amount of credibility now that we’ve earned from the lender, the broker, our investors, imagine if this deal didn’t close. I mean, oh my God, it would have just been like, if we didn’t close, now, we’ve lost $250,000 of hard earnest money. But if we also didn’t close, it just doesn’t look good, right? Not only did we close, but we closed in 40 days after we got shorted a million dollars. We got a $200,000 reduction in the purchase price and we had $250,000 hard that we would have lost. So, we check all the boxes, we get it closed. So, one is look, always over raise for your deal. Number two, when you can close, close early. Number three, look at the credibility that we were able to get by closing early. Number four, beg, borrow, don’t steal, right? If I had gone back to my investors, I bet you if I would have made half a dozen phone calls, I could have raised another million dollars because of the relationships.

So, number five, the relationships that you build with private investors become personal relationships. Personal relationships are where it’s at because those personal relationships, it’s what’s going to allow you that when you get in a situation like this, I wouldn’t even call it a bind. For a lot of people, it would have been a bind, but for us, like, we’re scaled up and ready for this kind of crap, right? But if I’d gotten in a bind, if I’d made a half a dozen phone calls, I’m sure those guys would have wired it a couple hundred thousand dollars each, we would have been able to close. That only comes with creating personal relationships.

Gary Vaynerchuk talks about in a lot of his videos about your scale only happens by having people know and care about their job. People that want to put in the extra time and effort and people buying into the culture of your ecosystem or your company, it doesn’t happen by, like people playing foosball or ping pong during launch, it doesn’t happen because of the freakin’ snacks in the company launch room. Culture happens by building personal relationships with people. So, when I think about building personal relationships with investors, those investors, I learn about them, I learn about their kids, I learn what’s important to them, why are they investing with us? Tell me about your family. Tell me about your spouse or even your kids, your grandkids. What are you going to use the money for? So that when I get caught in a bind, if it was, in this case, a lot of people would have been in a bind for us, no big deal like we were ready. But if I ever get in a bind and I’m sure I will at some point, it’s those personal relationships where people will have confidence, they’ll have confidence in you, they’ll have confidence in your deal, they’ll want to help you out, they’ll want to pitch in because you asked questions, you cared, you gave a shit about their kids, their grandkids, why are they investing? What’s in it for them? That’s why people invest with you or with me, is because of the personal relationships, and that’s ultimately what it’s about.

Look, I didn’t need to make half a dozen phone calls and raise the extra million dollars at closing, but now the closing is over, I’ve got time, I’ve got a couple of weeks, I can go backfill that million bucks. I already got a half-million dollars of it today. And it’s not because I’m special, it’s not because I’m super talented, it’s because I invested in the relationship, it’s because I care about people, I want to learn what they’re doing, like, what’s their golf score? What did they do for Christmas? How are their kids doing? I’ve got one of our investors whose son’s fighting cancer. How’s he doing? How’s he holding up? What’s the latest on his prognosis? That’s what matters.

So, if you’re looking to just I want to invest and I want to own 10,000 units because I want to make a lot of money, I would submit to you that you’ll own 10,000 units if you invest in relationships with people. I’ve got guys investing now that are into us for over a million, million-five that started with $100,000 five years ago because of the personal relationship. Think about it. Invest in it. Invest for the long term, not for today, not for the next deal, but for the next 5, 10, 15 years. In 5, 10, 15 years, you’ll wake up, you’ll be wealthy, you’ll be full of relationships, you’ll be full of happiness, you’ll be doing it the right way. And if you’re short a million bucks at closing, you’ll have people stepping up to fund it for you.