Back to the grind, as of today. But I've been going through my emails and apparently while I've been gone (all last week), my investor partners have been busy getting deals together with my students and there were a total of 4 deals put under contract last week. This adds up to be a total of $6.2 million in deals when adding together these 4 deals.
So, I guess it pays for me to relax a little while just letting things be. Truth be told, I've been getting very stressed out in these past few months and I really needed to get away before I ruptured a nerve or collapsed from a stroke.
Yes, my life is that stressful. I'm already wound like a stretched-to-the-max rubber band. Add any type of fuel to the fire and I'm equivalent to an atomic bomb with that ticking time clock thing attached...with only 29 seconds left until detonation.
With the good, though, there's always the bad that comes along with it. There have been a slew of deals that were rejected by my investor partners for several reasons. And, unfortunately, these reasons were completely avoidable if these students would have simply followed my very basic short list of instructions.
Here are some of the big reasons for the rejections:
1) A couple of students decided not to do a mini business plan (as required) and, instead, chose to use the Offering Memorandum (OM) provided by the listing agent and/or brokerage firm. While I did my best to weed these out before sending them off, it was getting really intense at the very end and I found myself forwarding pre-approved deals (off the CFE) to the investor it was designated for. As long as there was a PDF (for the biz plan) and an Excel file (for the CFE), it got forwarded.
Here's the problem with sending the listing agents OM: it has the listing agent and brokerage firm's contact information ALL OVER the OM. Furthermore, it can't possibly include details about the exit strategy including the deal being a buy-and-hold property for 3 to 5 years...or any information about the proposed equity splity (67/33) and how much the investor partner would stand to make in both equity and cash flow over the life of the deal.
So...ALL of those deals that included the OM were rejected right off the bat. This is what happens when my students get lazy. They choose to lazily use the hard work of the listing agent and end up getting nothing in the end because they didn't at least want to take the time to print off then retype the OM in a NEW document while implementing the student's unique information NEEDED to execute the deal.
Oh well...can't retrain stupid.
2) It became clear in some of the deals that the student (but more so probably the seller or listing agent) were lying about the numbers of the property. While I do a damn good job weeding through CFEs and pretty much know whether the expense ratio is way off BEFORE submitting anything to my investor partner, sometimes I can't catch everything before it weasels its way through the crack.
Here's what I mean: you can't realistically have a 40-unit apartment building located in Chicago that has an expense ratio of 25%. Not possible. A building of that size located in a cold climate is going to cost about 55% (minimum) to operate. That's 55% of the Gross Operating Income (GOI). So, if the GOI (annually) is $100,000, it'll cost $55,000 of that $100,000 to operate that property. Yet I kept getting CFEs showing some super low Gross Operating Expense (GOE) number and I'd laugh like..."As if this property can operate at a MUCH LOWER cost than every other property of that size in the SAME area!"
A lot of deals did get rejected based on this.
Listen, it's NOT CHEAP to do due diligence. Furthermore, when you're dealing with people like me and my investor partners, we know what it costs to operate a multifamily property whether it's an apartment building or mobile home park and whether it's in Georgia or Missouri. So...trying to slide a deal in at a much lowerGOE than what's realistically possible or probable to operate that property isn't going to fly. You're not getting anywhere by trying to cheat the system because we already know what the rules are in this business. It's like telling a pilot of an aircraft who has been flying for decades that his Boeing 747 can fly 900 miles an hour. He'll freaking laugh in your face. Not possible.
So, when you or the listing agent (or even the seller) is blatantly lying about how much it costs (itemized) to operate a property and we look at it knowing that it's not possible, you're expecting us to then participate in the costly endeavor of doing due diligence. This is when the lies are uncovered. After we've spent thousands of dollars doing forensic accounting on the docs given up by the seller, we suddenly realize (GASP!) that we were right all along! In the initial income/expense sheet seller "forgot" to including the sewage bill and "forgot" to include additional marketing costs and "forgot" to include the phone bill...on and on and on.
When you're the one willing to throw good money away like that, you realize that it's better to be smart on the front-end and simply KNOW (based on experience) what each type/size building costs to operate in various parts of the country. Again, this is based on vast experience developed over several years and not something we are simply trying to invent to reject your deal. (Trust me; these investors WANTyour deals if they're as profitable as you say they are!)
3) CAP rate was too low on a lot of rejected deals. Some students tried to slip in deals that were at a 7% or 8% CAP when the instructions CLEARLY STATED that the CAP had to be at or above 9%. No exceptions.
So, it went back to chiseling expenses off, hoping no one would notice, to get the CAP rate up there (in some cases) while other deals were just sent in at a CAP below the 9%.
Again, this goes back to the expense ratio. If the expense ratio was pushed down to 25% to push the CAP rate over 9% then...that's a really easy scam for us to ferret out. Others did a much more complicated job in boosting the CAP including eliminating all management costs or removing required expenses such as snow removal (in colder climates) or landscaping. I guess we were supposed to believe that the student was going to perform these services in lieu of a professional service.
While I'm all for saving money, it has to be realistic. We investors have to be able to know that if we need to sell the property one day, we can show these numbers (including management, landscaping, snow removal, etc.) to another investor who may not want to provide these services on his or her own.
Additionally, some lenders want to see a minimum of a 7% allocation off the GOI for management costs to ensure that a management service is affordable. A lender also wants to see replacement costs (which is a mandatory 2.5% of the GOI) to ensure that you'll have enough money when things break down and go wrong with the property. Many students removed these essential costs as well, hoping we wouldn't notice.
Here's the bottom line:
I'm assuming that most of you are in this real estate game to eventually acquire passive income properties for yourself so that you can enjoy a lifetime of financial freedom. If you don't know certain things because you're new at this -- such as how much it costs (GOE) of your gross annual rental receipts from tenants (GOE) in your particular city/state area that you are choosing to invest -- LEARN this information. There's no excuse as to why you can't take a weekend and simply LEARN the business because it's not that hard, folks. It really isn't!
So...back to what I was talking about earlier. The $6.2 million in deals. Remember, we had $7 million in down payment money to work with which leverages us around $25,000,000 to $30,000,000 depending on down payment size. Most residential-commercial buildings require a 20% down payment while MHPs require 30% to 35%.
And we're nowhere near $25,000,000 to $30,000,000 in property deals.
Based on the reports I've received from my investors on the deals that have been submitted, we're not going to hit our mark as we had hoped.
Looks like I'll have to make an offering at my next Detroit event to fill in the gaps on these deals. This is NOT what I wanted to do. The same deal will apply, however. Those who attend the event can participate. Everyone else...no can do.
Here's the link to register for Detroit if you haven't already: http://www.monicamain.com/detroit_underground_seminar
By the way, I'll let you know that this is the last week you can get the early-bird pricing then the price goes up. Way up!
Also, I'm offering the $100 hold deposit deal so that you can hold your spot and your pricing for only $100!
Again, here's how you can register today: http://www.monicamain.com/detroit_underground_seminar
If you have any questions, call my office at 661-295-5050.
See you at the top!
P.S. I'm offering a killer kick-ass bonus for those who register for this event by Friday. CLICK HERE for the bonus!