EP 179 – Crawl Before You Run

NCS 179 | Crawl Before You Run

NCS 179 | Crawl Before You RunScott discusses the importance of taking things in stride and not biting off more than you can handle as a real estate and note investor, you should crawl before you run.

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Crawl Before You Run

We’re excited to be heading to Houston. I’ll be speaking at the Quest IRA Self-Directed IRA Boot Camp with a great host of speakers. I should be there all day hanging out. I should be hanging out, networking and talking with investors. We have a few JV partners that’s going to be there, just going to catch up. The beautiful thing about the event is what Quest IRA does. Their whole staff is phenomenal. They’re like our extended note family. It’s always good to hang out with them. When you travel as much as I have the last couple of years, the vendors that you see at events is like family. It’s a true belief and coopetition. Even if you’re not using specific vendors, most of the time everybody is very, very cordial and just enjoying each other’s time. It’s nice to surround yourself with like-minded individuals versus those that are negative.

The thing today we want to talk about in this episode is Crawl Before You Run. You’ve got to learn to crawl, before you walk and before you run. I see people that haven’t closed on a note deal yet or maybe one or two who text me, “I’m speaking with a bank about the commercial notes.” Paper is paper. You secure, you control the asset, whether it’s residential or commercial, by being in the first lien position. Commercial loans have some different layers to them, some different niches. We’ve bought plenty of commercial paper, we’ve done workouts, flipped properties, foreclosed, took the property back.

NCS 179 | Crawl Before You Run

Crawl Before You Run: Commercial debt, it’s just a different avenue. You want to go with the low hanging fruit.

I cut my teeth on commercial investments but I was very fortunate that I came from a couple of investors that taught me the note business that that was their focus. Their primary focus was commercial, whether it was building it from the ground up or going in and taking it over. One of those people who has a very, very huge successful fund, actually they just closed on a large portfolio of FHA apartments. We’re talking $35 million, $40 million fund on a large purchase where she’s going through and working out ten to eleven large multi-family properties right at the state of Louisiana. Jamie knows her stuff. We’re involved in a couple of hotel projects with her along with a strip mall. She did use to teach the commercial aspect of Ron LeGrand’s master’s program, teaching on commercial notes. A little side note, Ron LeGrand, famous and very talented investor, I learned a lot from Ron. He dived in the commercial space a few years ago and lost his ass. He’d be the first one to say he should have stuck to his residential stuff versus commercial projects. That’s important to keep in mind.

We have somebody as famous, as well-known as Ron LeGrand, he had been in the business for 40 plus years, who makes a mistake. He literally made a huge mistake. Only one project got completed. That was actually a strip mall up in Forney, Texas by the high school that actually Jamie managed from the ground up. Ron called her to manage that. She did a phenomenal job. It was only got built up, got finished out, and unfortunately some things happened. Jamie did her part and handled it. I was very fortunate early on to learn about commercial notes. I know that I don’t focus a lot on what we teach, but buying commercial debt, it’s just a different avenue. You want to go with the low hanging fruit.

I think a lot of people get so excited on commercial and start seeing the numbers, or as I like to say the different commas, to a deal, then you go from a $100,000 note to $1 million dollar note relatively quickly with notes, especially in the commercial side. It’s a different animal. The biggest thing that you have to realize is that you have so many different asset classes inside a commercial. Some people consider apartments are commercial loans and I agree that it is a commercial loan. It’s residential because it’s very easy to go get comp on rents, rates and things like that. If you don’t get the financials, which most of the time on a note deal you’re not going to get the financials from the apartment complex, you’re going to have to be the old Sherlock Holmes aspect. Go there and try to recreate them as best as possible. It’s not that hard for an apartment complex to recreate the numbers. That’s pretty easy. You call, find out if they’re occupied. You call the existing manager, but you do this on the down low. Call and find out existing management, find out the make-up.

Oftentimes if the property has been listed for sale on LoopNet previously, there may be previous financials available that can act as your guide. You’ve got to figure expenses, you’ve got to figure if it’s individually metered or not individually metered, adjust your expense ratios. What you see happen a lot of times, right now you can see a lot of people go and buy apartments at peak values where the apartment’s rent is 20% below market rate or there are some easy, achievable things to either upgrade some of the apartments. Somebody will start the upgrade, boost the value, they want to get out, so you come in and finish off the second half. It’s helpful to see that quite a bit or there are just auxiliary money to be made, A, “Let’s get them individual meter,” or B, “Let’s start putting on auxiliary things around the complex.” One of the easiest things to make money on an apartment complex no matter how big it is is to put in vending machines or laundry or have the office start selling calling cards. Especially if you’re in the C class, D class or low B class and you’re selling calling cards, especially in Texas where they’re calling Mexico or wherever, is a very easy and very profitable play that we used to do with some things. What you have to realize is you’ve got to know your NOIs, your net operating income to figure that out, and figure in what kind of cap rate you want to sell it on or buy it on to make sense where you’re in the apartment side.

One of the biggest rules has been pounded in my head has been the fact that you never buy on a low cap rate. You always want to buy somewhere on 11% to 12% to 13% cap rate. What’s a cap rate? It stands for capitalization rate. It means it’s basically the ROI. What’s the interest rate on your money going to be? You have to take a look at the net operating income and divide it by the cap rate to figure out roughly what the property values you offer in prices. You always want to buy in a twelve or thirteen cap, and then when you turn around and sell it, you want to sell with six to eight cap. That’s the preferred method.

What’s unfortunate is I see people buying stuff at a nine, eight cap or below that, and they’re paying too premium a price for apartments. If you’ve got some creative financing or owner financing where the seller will carry paper for you for a while to do a master lease for you, those are different options available for you. The big thing is apartments are not the only commercial loans that you see out there. We see a lot for big-box stores. We see a lot for strip malls. We see a lot for individual buildings. I see a lot of auto repair shops. I’ve seen car lots. I’ve seen churches. You actually got a tape in from a bank on a church portfolio. I don’t want to foreclose on God. The most interesting one I’ve ever seen is a tape of funeral homes or cemetery loans. People were dying to get out of there.

I’ll give you an example. We picked up a note years ago from Capital One. It was on a four-unit small strip mall here in Austin, Texas off of Airport Boulevard. It had a washeteria, a Laundromat, it had a payday loans, quick loan place, it had a pizza joint, and I don’t remember what the fourth one was. The thing you have to keep in mind, it’s all about cashflow. When you’re buying a note on a commercial project, you have to try to figure out what’s involved with the leases? What kind of money is coming from the rental space? What’s the dollar per square foot? This is where you’ve got to reach out to local experts such as commercial realtors to get a better feel for the land, to see if they have any experience. There are really just a few commercial guys in every city that really know what’s going on. A great resource is to reach out to your title company’s commercial title rep. These guys and gals are the often connected and put you in touch with the right thing. The most important thing to keep in mind is you’re not going to have financials. You’ve got to try to recreate it.

NCS 179 | Crawl Before You Run

Crawl Before You Run: One thing that we have seen in the commercial space is people taking properties that are one type and then reclassify them.

One thing that we have seen in the commercial space is people taking properties that are one type and then reclassify them. We’ve got a buddy of ours who was taking these empty big box stores like Walmart or H-E-B or grocery stores or things like that and turning them into executive office spaces or turning them into public storage facilities. That’s great, it’s just that there’s a lot of capital improvement that have to go into it doing different things, reclassifying things. You’ve got to do a lot of construction. You’ve got to put some budgets into that. It’s a whole different ball game when you see that stuff. A really popular thing in some parts there is office space. There’s a lot of office space available. Our good buddy, Jason Bible, has talked about this on his show before especially in the Houston market where he’s buying all that stuff. There is a glutton of office space. You have to be careful when you go into buying a commercial note, will you flip it or to take the property back. If you’re going to take the property back or flip it, you’ve still got to know what’s your competition.

We had a bank reach out to us a while back that was looking to sell self-storage facility around Atlanta. It was a bigger box. It was only at 60% occupancy. They were trying to sell us on the fact that, “It’s only 60% occupied, the owner operator is not performing properly. You’ve got some upside to it.” It was really easy to do some due diligence on it. All I did was just draw a map, basically five miles and then ten miles around the self-storage facility, and started calling its competitors and finding out what they were sitting at. They had plenty of space. Honestly, the area was over-saturated with self-storage. The average occupancy was roughly 68% at each of these buildings or each of these commercial spaces that were for self-storage. That tells you there isn’t a lot of upside, it’s too big an inventory, so your max is probably going to be around 65%, 70% occupancy, so you’ve got to figure that as your peak and work the numbers backwards.

Somebody called me yesterday, “Scott, I’m talking to the director of commercial loans sales for a bank all across the country.” I’m like, “Have you done commercial notes?” He’s like, “I sold a few a few years back earlier.” I was like, “It’s a different ball game.” This is where really Distressed Pro, my buddy Brecht Palombo’s software, comes in really, really handy. If you’re going to be in the commercial note space, get Distressed Pro. It’s well worth it. You can log in, track down the quarterly reports that banks file with the FDIC to see what their default rates, how much they have in charge of, 90 day lates on the residential but also the commercial space. Commercial space will often have it separated down into more specific categories so you can take a look at what it looks like for them, what’s their total number. It gives you a lot more fodder when you go in to talking with them.

When I was travelling three plus years straight across the country, when I have meetings with an individual banker, I had to have that information to add value to the conversations. Oftentimes, I had bank presidents or managers of the banks that are quite a bit older than me and they just looked down their nose until I’ve spouted back up information, “I know you have this in default. I know that you have this, this, and this.” They literally were rocking back on their heels, “This guy knows what he’s talking about.” It took away the age or the youthness of the conversation when you can tell a 60-year-old bank manager, “You’ve got $4 million or $10 million or $40 million in defaulted loans. We’re here to help. That’s what we do.” It does take away a little bit of that animosity of them, “What the hell do you know, you young whippersnapper?” I did have somebody call me whippersnapper. I have had that happen before, “What do you know, whippersnapper?” I was like, ” I know this.” He’s like, “You did do your homework. Okay, follow me into my conference room.” There on a big conference table, stacked literally four foot to six foot high, across almost the entire table, was their defaulted loans. That’s always an interesting conversation when you walk into something like that and the bank manager said, “This is my assistant, here’s all our files. Take a look at anything. If you need anything, make copies of or scanned, my assistant will help.” That’s a very interesting conversation to have and also you’ve got to know what you’re looking at because otherwise, you can easily burn a bridge relatively quickly if you’re not comfortable with the conversation.

The title of this is to Crawl Before You Run. Commercial is running. I’ll quote Ron LeGrand here because he’s been a mentor of mine in the past, “You make your money your bread and butter, you bring home the bacon with your residential deals. You then retire on your commercial deals.” That’s not saying that your residential deal residually is an income and bringing in stuff like that, that’s great. Totally agree with that. The commercial deal space is where it’s longer to close. You’re going to need to put some money down to do any due diligence, to pull numbers, pull everything. It’s not a close-in-seven-days deal. It may be a six-month trade or it may be a three-month trade as you’re working through things. Then you run into the whole thing of if it’s a note deal, then you’ve got usually a very aggressive borrower who is not always willing to work with you.

Occasionally, only on two separate occasions out of all the deals we’ve done, we’ve talked to the borrower first, the borrower approached us. We reach out to the bank. We’re able to negotiate their loan at a substantial discount where the borrower had other investors might come in and fund that note purchase to help them and basically do their own short sales. Then a self-storage facility in South Carolina, that was a fun time from Palmetto Bank, actually we bought a few notes from them. We also did that for another self-storage facility out of Synovus Bank. Commercial notes are available out there. You just got to be careful at what you’re buying and what you’re looking at. Everybody I talk to economically-wise is saying you have to be careful about commercial because the commercial stuff is starting to hit. They’re starting to lag, especially depending on the classification looking at it now. I’m talking across the board commercial notes. You’ve got some people where apartments are all high. Apartments are more of a residential play versus commercial.

It’s a whole lot of different animal on a commercial short sale than is a residential short sale. One thing that we see a lot of is term loans. We’re talking three-year, five-year, ten-year terms with loans where they have balloons. It’s not illegal to have a balloon on a commercial property at all. People get into an arm or they get into something with a commercial property and they’ve got so many years and after five years they got to refinance out. With the commercial markets peak, that’s when a lot of people are buying because they think it’s a good play. When they start to go down and they lose value, oftentimes the properties are worth at par where they’re at, where in acquisition mode when you’re buying a commercial property, you often have to put 10%, 15%, 20% down in cash to take the property down. If your property values drop by 20%, there is no equity there for you to be able to go out and get a conventional style loan and get refinanced out. Then you’re at par, then you’re looking at bringing in another 5%, 10%, 20% as a down payment to get the thing refinanced, and nobody’s got that. That’s why you see a lot of commercial default rates out there. What happens a lot of times, we’ll get listing and you’ll have everything under the sun. You’ll have warehouse, you’ll have mixed-use, you’ll have small apartments, you’ll have churches, graveyards, big-box stores, some smaller self-storage.

NCS 179 | Crawl Before You Run

Crawl Before You Run: That’s the stuff that the banks don’t want to spend a lot as much time with, is their big multi-million dollar projects.

Let me give you a little bit of advice if you’re looking at the commercial space. Anytime you can pick up commercial loans that are under $1 million in UPB, there’s a glutton of that out there. That’s the stuff that the banks don’t want to spend a lot as much time with, is their big multi-million dollar projects. Maybe a little bit more flexible on your smaller balanced commercial space stuff. It is what it is. When we get listing from banks and literally the stuff they want to move is almost all of $1 million in unpaid balance or less, they should tell you. One of the biggest fears, one of the biggest nightmares is all those banks out there.

One of the best places I did early on was target smaller lenders. I would go out and use Scotsman Guide to identify commercial loans. I had a conversation with him at the Distressed Mortgage Expo. He was looking for one specific type of commercial property. I said, ” You can do a couple of things. One, you can go on to Scotsman Guide,” and Scotsman is a free online resource and they have a residential and a commercial site. For those who are ex-mortgage bankers, we used to get Scotsman Guide in once a month. It looked like a big thick awkward-sized mailer. It would basically tell you who’s lending on who or who’s doing what. You can go to Scotsman Guide, type in which state you’re looking for, what type of asset class you’re looking for, how much loan, purchase or re-files, and then run a search. It will tell you exactly who are the commercial lenders who are lending on those types of assets and the states that they’re lending in. You have the biggest state in the front-end but oftentimes it gives you a grid. Then you can see the checks or the yes or no’s across the board of what Scotsman Guide shows you.

Going to Scotsman Guide will tell you who the lenders are. Those are great sources because most of them are portfolio lenders. What does that mean? A portfolio lender is somebody who makes that loan and retains it on their portfolio. You can also look for people that do warehouse lines of specific types on Scotsman Guide. Find out who the bigger banks are, who’s in the bigger institutions that are giving lines of credit to mom and pop mortgage bankers to do loans on, and then they often have paper out of it. That’s a great way to reach out to those business development people at banks with warehouse lines, who give warehouse lines to see if they’ve got any loans that are dragging or lagging on these warehouse lines that they’ve given to mortgage brokers because they’re tying up their lines, they’re not allowed to make as much money.

Another play to use if you’re looking for commercial loans and motivated sellers, this is a work-both-sides of the equation aspect of that, is join the states that you’re interested in membership associations. I’ll give you an example. If I want to look for self-storage owners in Texas, I would go to the Texas Self Storage Owners’ Association and would then join. Oftentimes there’s a message board or oftentimes they’ll give you a registration list of fellow members. Why is that important? If you take that list and do just a simple drip marketing campaign, once a month, “We’re looking to buy more units in Texas. Anybody have any units they’re looking for Oklahoma or anybody looking to sell?” Oftentimes, we would get people that respond like two people, “I’ve got one available, I’m going to resell.” What we’re going to do is talk to the borrowers, try to get the financials, and then go to the bank indirectly and try to buy the note.

One of the big questions, “Are you on time? Are you in default? Have you been scratching debt loans where you’re continuously late but you get made up?”  That gives us some opportunity to go and buy the paper at a discount. We cannot negotiate the paper down. In some cases, on commercial only, the banks will be glad to sell you the note or finance the purchase of the note to you if you’re taking a property back and convert it, re-cast the loan into a new loan for you if you’re taking the property over. You’ve got to provide some financials. You’ve got to show some good experience. You’ve got to have a resume of experience. You’ve got to have a good team buying it. This is not where it’s just Scott Carson or somebody doing. You’ve got to have a team of experience, the banks are going to want to look at that before they underwrite. You have to re-cast the loan into a performing loan for it. On your million plus loans, a lot of banks will look at doing that sometimes. They’ll consider that or they obviously will consider that on a residential.

There are a lot of commercial banks out there that have paper. Actually, as an ex-banker, that was one of the biggest things when you’re opening a new branch is they want that new branch, the more commercial loans you do, the better off. Their higher balanced bank loans means more fees for the bank, means more interest to really help set things up. I’ll give you an example. This has been about ten years. When Chase Bank would open a new bank, a new retail banking center in Austin, it was about $1 million cost to them, not only for the land but to get up and running about $1.25 million to get things rock and rolling. They wanted you to have that in loan fees by the end of year one. That’s why they’re very aggressive with something that new people open new account and things like that. They’re very aggressive on that.

I’ll give you an example, seven years ago, Chase made zero total commercial loans in the state of Texas, when everything was hitting the fan. They’re like, “We’re not going to do it. We’re not going to prove anything.” Was there plenty of commercial loans hitting the spot? Yes. Are there other lenders coming in being greedy? “We’ll do $0.85 on the dollar or $0.90 on the dollar,” or “We’ll do a first for $0.75 and a second for $0.15 and make somebody bring in 10% down,” you’ll see less. We’re starting to see a lot of that come back in the market where we’re very flushed with cash in the market, a lot of people are willing to lend and be a little greedier. FICO scores are going down, but LTV is going up. Keep that in mind when you’re doing it.

As I say, you often need to crawl before you run. Make your money on the residential side. Getting in the note space is not the same thing, especially when it comes to commercial that is residential. It’s not the same thing, “I’m just going to flip it.” It doesn’t work that way. You’ve got to find individuals that are interested in that. It’s a smaller niche. It also takes a lot more due diligence. You’re also dealing with some of the smarter people at the bank who are going to see through BS relatively quickly, and not give you the time of the day. If I can get Capital One to send me a list that’s 70 pages deep or 35 pages deep or whatever, so many phone calls and we buy stuff, anybody can do it. You’ve just got to be smart in what you do. You’ve got to have your ducks in a row when it comes to you. You’ve got to have a rigidity. If you don’t have a LinkedIn profile that’s complete or looks like you’re a cell phone dealer in your spare time which I’ve seen this, they’re not going to sell to you. They’re not going to waste your time. They are like, “This guy is a joker broker. This chick is a daisy chain handler. It’s not going to make any sense.” You can burn bridges relatively quickly. That’s why we talked about LinkedIn being so important.

NCS 179 | Crawl Before You Run

Crawl Before You Run: If you’re calling to try to get into apartments, you might as well go do something else.

You’re also going to have the need to show some experience of stuff. I have ten years of experience in distressed debt, “I’ve done a lot of fix and flips. We’ve done some commercial projects.” The biggest thing you need to know what your bread and butter is when you’re communicating that to commercial lenders, especially commercial asset managers. We’re looking for specifically a million balance or below on strip centers or self-storage facilities. If you’re calling to try to get into apartments, you might as well go do something else. If you see any apartment loans, “I’ll buy them.” Yeah, of course you would. You don’t think I’m going to? If I see anything and it makes sense, I’m going to jump on it first. I’m not going to sit here and be somebody’s waiter or their bird dog. We’re way beyond that. I get that every week, people are like, “If you see anything, send it my way.” “No, I’m going to buy it myself,” if that makes sense. If you’re chasing apartment loans, no offense, go do something else. You’re just not going to see the banks. Just know what those assets are worth. They’re going to sell them at $0.90, $0.95 on the dollar. I’ve seen non-performing apartment loans selling in the mid-90s. It just doesn’t make sense.

A big opportunity is the mixed-use, your smaller strip malls, or if you’ve got the feasibility to take a building and convert it. A very hot trend has been for the long-term care facilities, buying up smaller hospitals and smaller areas and converting them to long-term care facilities where you can get $4,000 a month in rent for long-term care. Instead of having a bed at a hospital, you can turn it into a live-in facility. That’s been a popular thing with a lot of commercial debt. Taking some of the smaller, mid-sized, big-box stores and converting them into something else, whether you’re splitting it up and putting three tenants instead of one. We see it right across the street over here, we had a big grocery store that converted to four units. You have Goodwill going on one, you had a gym going at the other part of it, and you had a few other things going on the other thing.

You’ve got to keep in mind, it’s a longer process, it’s more money, and it’s a harder process. Make your money on the residential side because there’s still such a glutton of it out there, whether it’s first liens or contract for deeds or whatever it is. Make your money on that, get some experience, go through the bumps and bruises on a $30,000 asset versus a $3 million asset. You can go bankrupt relatively quickly if you just focus on the commercial space. Trust me, plenty commercial investors have been ups and downs. It’s feast or famine when it comes to this. I’d rather have people out there making money on the residential side. As they evolve, they’re adding the commercial assets to their spot on an individual basis.

I think this is honestly on the commercial side, you’ve got to have good manager first and foremost, somebody who’s really going to take care of the property and who’s going to manage it. You’ve got figure that in to your expenses. It’s a very big thing. If you think you’re going to be mowing the lawn and keeping the commercial building, I’m not saying that you can’t, it’s just going to limit the amount of deals that you can do. Nobody wants that sound, nobody likes it at all. I know some commercial property managers here in Canada. They’re constantly busy dealing with just stupid stuff whether it’s lawn care to maintenance to ACs, to trying to maximize the occupancy.

Another really hot things taking mixed-use once you have commercial buildings on the bottom and residential at the top. Mixed retail is really a hot thing. We see a lot of that building up here in Austin and other cities where they’re trying to maximize apartments and also the commercial space for that. We often see a lot of those who they drag out and there are still vacancies after the year one or year two, depending on what’s going on. Often as the rent for those business units is higher than normal, you have to find somebody who can come and afford an established chain for the most part versus a smaller mom and pops business. You also want to see something, if you’re looking at your due diligence, where some of these got signed a long-term five-year lease is important. You see that more so than in residential where it’s a one-year or six-month lease. You see that more so than in a residential where it’s a one-year or six-month lease. A lot of times, your property manager has won a three, four, five-year lease. That’s good. You’re buying the debt so you’ve got that in there, but if those leases are starting to expire, you’ve got to keep in mind your income is going to drop. You need to be working to get something in there.

The reason the residential is easier is because you’ve got realtors. Your biggest number is it’s one-door or just a few doors, and your biggest way to check it is to pull comps. What’s the value? What’s the market rent? You’re using MLS full comps or you’re using Rentometer if you’ve got to do that. That’s very relatively easy. It’s very different on the commercial side.

What is also a hot play is people taking and turning a bigger building into an executive office like what we have here in my office. We got roughly about 80 to 100 entrepreneurs in different offices through what we do here. They come and go in short-terms, six to twelve month leases. We also, in a building here that’s got Q2. It looks like we’ve got TransUnion moving into it. There are a few other companies that are in here, exactly like office space. That’s nice because they divided it up, they’re charging per square foot and much cheaper than the whole building would be or the whole floor would be, but still getting a peak for rent. With my rent here, it’s a little higher than what I can get at other places, but the convenience, the classiness of the place, let’s stay classy at We Close Notes. It’s a nice office.

You’ve maximized your time, maximized what you have available, especially if you’re working full-time, still have a full-time job, you’re not going to have time to negotiate commercial deals. Stick with the notes on the residential side because that’s the easiest access to that type of due diligence. It’s easier to find that space out there. If you did get some list, partner up with somebody, get that list to somebody who can look at it so you can actually find something that makes sense, find something that looks good. Often banks will have the one-off crazy assets. I have seen the 800-acre equestrian farm in Florida.

NCS 179 | Crawl Before You Run

Crawl Before You Run:I felt really bad for the borrowers because now they’re on the hook for these loans.

What is a popular thing is like a mobile home park, we’ve seen that. You’ve got to be careful because sometimes it’s going to be what’s on it. Are the homes actually a part of it on there or is it just the lots and what’s the rent for the lots? It’s almost like an apartment complex but it’s a very high-cash business. You’re dealing with people that aren’t in homes. They’re in mobile homes, as we like to say, tornado magnets. You have to be careful. I’ve seen that where it made more sense at one point. Let’s take the bottom of the mobile home park, not ready to lease and then convert the land. Get it rezoned for apartments and build town homes or apartments on it. That’s happened in a few places. I haven’t seen so much of these recently because a lot of the home builders went out of business a few years ago. They started to pop back up. You’ll see lots of land where they’ve got sixteen or they’ve got a chunk of the homes built, and then the builders go out of business. We saw a lot of that at the downturn where you have half lots, half houses or half slabs in a lot of these. You could buy the debt relatively cheap.

I was in Phoenix, Arizona a few years back with a student who told me about a gated community that went bankrupt, where the builder ran with the money. This is outside, up in the hills there in Camelback Mountain. It was basically just under 30 very nice $500,000 to $1 million homes in a gated community where those buildings got the individual property owners to go out and get individual construction loans to build this up. What the builder did is they got about 90% on the way through, took the last draw of all the funds from all the property owners and ran with the money literally. It went on bankruptcy. It’s about a $16 million project that sold at the bankruptcy sale for roughly about $4 million. First Magnus Mortgage actually financed all the residential loans. I felt really bad for the borrowers because now they’re on the hook for these loans.

Literally, I jumped the fence, was walking around there, trying to take down addresses to follow up with it and figure out who the lender was on it. It was funny as two cop cars pulled up. I’m walking along here in green suit, just chilling and walking around taking in the neighborhood. Literally, I can walk into these houses if there were no locks on the front door. Just walk in, look around, these are some really nice-looking homes, and walked back out and there’s cops pulling up, “What are you doing?” I explained what I’m doing, and what’s funny is I handed my business card, tell them what I’m doing walking around there, “Jump in real fast. We’ll drive you around really fast.” I’m in the backseat of a cop car driving around, getting specific addresses. My investor who was sitting at the gate, she saw the cops come. She jumped in her truck and took off. She left me there. She was scared. She took off. We went around, we visited for a little bit and I gave the cops my business card, and we had a good chuckle about it. I said, “We’re just trying to make something happen.” They’re like, “We don’t live far here. This would be great because this property, this development, is affecting everybody’s values in the area, whether they’re foreclosures and things like that. It’s just dropping values there.” Phoenix is already getting hit hard at the time.

That’s the thing to keep in mind. Look at the foreclosure and look what’s going on the market. You have areas like Cleveland, Detroit where commercial space is going like this because of other investors like Dan Gilbert who owns the Cavs and Quicken Loans. Gilbert’s coming in and investing a lot of money in the commercial space to re-gentrify it and of course, that’s bringing the value up. You just got to be careful when you buy something like that. A lot of banks would look at that stuff and see, “Values are going up, we’re going to value the debt a little bit more because we’ll take it back and sell it.” It’s not always the case. I don’t necessarily like in a downtown because it’s usually the price in real estate. I like areas that are blue-collar, no-collar areas because the debts are usually cheaper to buy. You often buy in a number that makes sense to put tenants in there, get it operated up after twelve months or eighteen months, re-gentrify it a little bit, bump the rates into something that’s really close to the market rent. A commercial property is a much longer process than a residential property.

My biggest, biggest, biggest tip to you today is it’s nice, it’s exciting, it’s sexy talking about commercial property. It’s exciting to get a list. If you don’t know what you’re doing, you’re going to end up just burning that list. If you do get a list of commercial properties, reach out to somebody, “I need some help. I’m looking some stuff.” Our buddy Keith Kang and Lisa Guzman got a commercial tape in from a bank that I know. He’s looking at working one in the Cleveland or Ohio area there that’s not too far from him. I’ve sold apartment complexes. I’ve sold self-storage strip malls, mobile homes we’ve brokered, mixed-use. I’ve sold a beer barn back to the distributor. I bought a note in Pennsylvania where the Coors Light distributor was a tenant. We bought the note and then I reached out to the distributor and we sold the property to the distributor, so they took the property back. That was a nice little thing. I’ve also seen plenty of individual condo units, units inside of a strip mall that were condomized off where the borrower is not paying their owner-operator. We’ve seen that and actually done quite a few of those over the years that were residential real estate companies that had feast or famines. We negotiate with them, re-modify the loan and kept them in the property as we possibly could, and then sold it off after a while.

I want to first of all say thank you for all the positive comments, the emails that we get from people all the time that are really enjoying the podcast. Please do me a favor, go in and hit reviews and type us a little review. If you’re happy, leave a review. If you’re sad and don’t like it, leave a review, let us know how we can get better. This is an evolving show, it’s an evolving podcast that we try to bring value to everybody and help out with everything. Thank you for listening in and sharing this with the people.

We’re also T minus less than two weeks from Note Camp. We’re pretty stoked. We got a lot of people opting in and signing up for it. Have a great week. Go make something happen and we’ll see you all at the top.


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