June 30, 2017

JF1032: Mistakes, Celebration, and Syndication #FollowAlongFriday

Joe and Theo are back giving us life and investing lessons.  The importance of having a growth mentality, why we should always be taking initiative and paying attention to details.  Plus… Who won the basketball game?

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Joe Fairless:
Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.

Today, since it’s Friday, we’re doing Follow Along Friday. I’m joined by the co-host on Follow Along Friday, Theo Hicks. Hello, sir!

Theo Hicks: How’s it going, Joe?

Joe Fairless: It’s going well, and… Well, I’m married.

Theo Hicks: You are married. [unintelligible [00:02:44].13]

Joe Fairless: Yeah, I got the ring, I’ve got the bling… So on Follow Along Friday, if you’re a first-time listener, then welcome, and if you’re a returning listener you know that this isn’t about what we’ve got going on in our lives — it doesn’t really matter about that; it’s about what we’re doing in our lives as real estate entrepreneurs that can then be relevant to you… So what we’re noticing through our experiences and how we can apply that to what you’ve got going on, to ultimately help you. That’s what this is all about.

We’ve got a jam-packed show today, it’s gonna be a lot of fun. We’ve got a new high-profile guest that’s gonna be interviewed on the show, we’ve got some closing, we’ve got some other wedding observations that are relevant to real estate, Theo’s closing on some deals soon, we’ve got some updates on that… Theo, take it away – how should we get started?

Theo Hicks: Let’s start with our deal updates. I’ll start with mine. If you’ve been listening, I’ve got three 4-unit properties under contract, and we were scheduled to close the first week in July, and that’s been pushed back one week. This kind of leads into my mistake of the week, which is from my perspective not taking enough initiative for the deal.

The reason why we are delayed is because – technically speaking – our lender needs information from the listing agent and the seller; they’ve got all of our information, we’ve been on top of that, but I was not on top of the information they were getting from the listing agent and the seller, and throughout the deal we’ve run into some issues with the listing agent when it came to the inspection. The inspection was three hours late, or two hours late… I still haven’t seen every single unit, because every time we go there the keys don’t work. I’ve been there times, and every time before I go there the keys are supposed to work and they don’t work…

So there have been some frustrations on my end, but I’m trying to figure out what it is that I can do, what is in my control that I can do in order to mitigate any of these issues moving forward. One of the main ones is issues on the listing agent’s seller side, specifically when it comes to giving information to my lender – and I guess I need LLC information and leases and things like that… So that’s the process I’m gonna implement for deals moving forward – I’m going to have either on a weekly basis or maybe even two or three days, I’m going to just annoy my lender and say “Hey, what information do you need from me? What information do you need from the listing agent? What information do you need from my agent, from the seller?

The interests aren’t necessarily aligned for anyone but me. I’m the one that’s gonna be buying these deals, I’m the one that wants them to close on time. The listing agent doesn’t really care, they get paid regardless; my agent doesn’t really care, because they get paid regardless, so really I’m the only person that truly has skin in the game. Maybe the seller too, but they seemed to not really necessarily care either when the properties get sold.

So moving forward, my process is gonna be every two days up to five days I’m gonna reach out to my lender and see what they need, and if they need anything from the listing agent, I’m the one that’s gonna be bothering them, or at least bothering my agent to be bothering them.

Joe Fairless: Is your earnest money at risk because it’s being delayed and it’s your lender’s fault, ultimately?

Theo Hicks: I don’t think so… Do you mean will my earnest money not be applied to the loan just because —

Joe Fairless: Well, are you at risk of not being within the timeframe of closing in the contract? I guess that’s the real question.

Theo Hicks: Yeah, so we’re filing an extension. Right now we’re still in the timeframe of an appraisal contingency; we put a contingency in there that the property’s gonna appraise… That could be a way out. So once we get past that, we’re gonna write an extension. The argument we’re going to use is that — it doesn’t really have to do with me… Again, I wanna take responsibility, so it does have to do with me, that I wasn’t taking the initiative, but in reality it’s because the lender wasn’t getting the information from the seller.

Joe Fairless: I guess where I’m going with it is if the seller has found a new offer that’s above and beyond what you are offering and they’re looking for ways to get out of it, therefore they’re dragging their feet, is there a way that this approach could be effective for them, and then they don’t sign the amendment?

Theo Hicks: It definitely could be. We’ve been thinking — because whenever they do something, we’re just like “Why are they being so weird about this?” An example I can think of off the top my head – they reached out to my listing agent a couple weeks after we were under contract and they were getting mad at her because they thought that we had sent out a roofer to look at the roof, and then they mentioned in this conversation that they had all these other offers that they have… I don’t believe they can just pull out for no reason, but they could not sign the extension… We’ll see what happens.

Joe Fairless: If that happens… Worst case, if they don’t sign the extension, can you still close within the timeframe?

Theo Hicks: I guess it’s up to the lender if they can close it on time, but we’re not necessarily sure about that.

Joe Fairless: I might start lining up some backup option with hard money or something, because I wouldn’t want that to be a surprise. They’ve intentionally been doing — I think the worst of people initially, but in contracts you’ve really gotta make sure that you are thinking what would be the worst-case scenario. The worst case is they delay for whatever reason.

Maybe there are clauses in the contract where they didn’t perform what they were supposed to perform; they didn’t provide the information that’s listed in the contract. If that’s the case there in default of their contract, so then — but you obviously don’t wanna go down that road where lawyers are involved… No one wants that.

Theo Hicks: Well, it’s gonna be interesting. A second thing that’s come up – I think I talked about this on the show before, but we’ve got three properties under contract, but we’re only closing on two; it was supposed to be the first week of July, now it’s most likely gonna be pushed back to the second week of July, but this third property, just because of the way they organized the deal, we had to push that closing back two or three weeks. So we need to get a contract extension on that as well. It’s gonna be interesting.

I think what you said about lining up secondary lenders is a really good idea and I need to look into that after this show.

Joe Fairless: Yeah, cool. Good stuff.

Theo Hicks: [unintelligible [00:08:28].24] mistakes.

Joe Fairless: As far as my mistake goes, it ties into — well, we closed on a deal yesterday…

Theo Hicks: Congratulations!

Joe Fairless: Yeah, and…

Theo Hicks: How many is that so far?

Joe Fairless: Ten.

Theo Hicks: Ten deals. That’s awesome.

Joe Fairless: We’ve got ten deals. A little over 170 million dollars worth of apartment communities that my business partner and I have ownership in with our investors. So the mistake is that we were supposed to close last Friday, 23rd June, and in the e-mail to investors it was written last Friday, because I was getting married the day before, I had family over… So we had the e-mail written, that way I could just hit Send in MailChimp; I didn’t have to actually write the e-mail. Well, that e-mail assumed the closing date of 23rd June, and in the e-mail there’s a link to an investor FAQ document. The document answers questions that they might have after closing, like “When is the first distribution? When will we receive our K1’s for taxes? What type of reporting should I expect?” These have been answered in one-off conversations, but we like having it in one document… And one of the things that we put in there is “When will the first distribution be” and we had in there — since we closed on 23rd June, “Your distribution will be from 23rd June through 31st July”, because they’ll be prorated, and that will be at the end of August.

Well, we didn’t close on 23rd June, we closed on 28th June, so we just had to go back and do a little sticky note on that PDF after it was sent out… So I’m sure some of them were like, “Wait a second… We’re just closing on 28th June, but this document says 23rd June”, and that’s just because we didn’t go back and pay attention to the details after the initial thing was written.

So administrative lack of oversight on our part. Not a huge deal, but something that nonetheless was a mistake; it makes us look sloppy. Now when closing are delayed we’re gonna pay more attention to “Okay, wait a second, we already did this document. This has implications.” Now it’s fixed.

Theo Hicks: If anyone thinks “Oh, that’s a small mistake… Why are you worrying about that?” – it kind of reminds me of the life coach Trevor McGregor’s success ladder, how he talked about going from Outstanding to Extraordinary… It’s like one inch. The attention to detail is to go from Outstanding to Extraordinary. So that’s kind of where we’re at right now on that ladder; we wanna push to that top rung.

Joe Fairless: Agree.

Theo Hicks: So those are the mistakes. Transitioning… You’ve obviously mentioned that you got married, so congratulations on that.

Joe Fairless: Yes, thank you!

Theo Hicks: The wedding was amazing, it was a good time…

Joe Fairless: Well, most importantly, we wanted you to have a good time, so I’m glad that that happened.

Theo Hicks: [laughs] You’re really good at pulling life lessons and business lessons out of events. You essentially were able to find a lesson from the wedding, and then other people’s weddings, and kind of comparing it to real estate. Do you wanna go through that?

Joe Fairless: Yeah. I’d say the lesson found me. Colleen and I are married. We changed our Facebook update and said “Hey, we’re married” and tons of people like… 200-300 people like it, comments – it was great. And it’s a celebration, as it should be, of two people coming together. And then I see later that evening a post from one of my friends… I’ll just read the post:

“Today marks eight years of wedded bliss with my sweet Joshua. I’m so thankful for every single day we spend together. Happy anniversary, J Love.” I guess that’s her pet name for him. [laughter] And her name is Sarah. And I noticed that there were 39 people who liked that. Then I got to think, “Well, how many people liked their marriage…?” When they originally made the announcement, “Hey, we’re married”, how many people liked that, compared to EIGHT YEARS of marriage. And I looked back, and it was like three, four times as many liked and commented with congratulations when they got married.

I started thinking, “Wait a second… Why do we celebrate the initial coming together more than eight years of being together successfully and loving each other?” And clearly there’s a parallel with deals in real estate. Why do we celebrate a lot more when we close than when we do a cash-out refinance or when we deliver on investor projections annually? Why not celebrate those a lot more?
I got looking at someone else’s — because coincidentally there was someone else who posted the same thing about an anniversary; this one is from my friend Monica. It’s a picture of her and her husband. “Happy two years, my love! Time flies! Anniversary.” 32 people liked it, and then I went back on the timeline of Facebook when they announced it. “Married to Adam” – over 100 people liked that.

Why do we celebrate that more than when we actually have a successful relationship? I don’t’ know, I don’t have the answer other than perhaps the coming together is a new event and once it’s not new anymore, then the shine wears off from an outsiders’ standpoint, therefore it’s not as new and sexy…

Theo Hicks: Novel.

Joe Fairless: Novel, yeah. Thank you. But really, we should be celebrating more when we have time into something. Congratulations to Sarah and Josh, to Adam and Monica, and congratulations to me and Colleen for getting married… And I don’t wanna trivialize that, but I do want to call that out, that that tends to be human nature, and I believe it’s freakin’ backwards. I believe we should celebrate more the milestones, anniversaries, the successful deals that are delivering on our projections…

People are gonna be like “Oh, that’s a little weird when you celebrate two years worth of cash flow from a deal”, but that’s really what we should be celebrating. The more people I interview who are playing at a three times, four times higher level than I am, the more they’re like “You know, it’s less about actually getting the deal. It’s more about what you do after you have the deal.”

Theo Hicks: There’s a book called The Happiness Hypothesis by – I’ve got his face in my head, in my mind, but I can’t remember what his name is – and I think this relates to this. He basically talks about how to become happy, and he kind of puts forward his hypothesis as to how to become happy and why people are not happy. The analogy that he uses has like a spectrum, and the top is the maximum happy you can be, and the bottom is the saddest you can be.

Obviously, the spectrum is basically infinite, and you have some range on that spectrum where you’re at; in the middle is kind of like your default point… And whenever something new happens – for instance, you get married… Your default happiness is here and you get married, you skyrocket above your entire range if you’ve never been before, because it’s this whole new event and that’s why it’s super exciting. When that happens, it kind of springs up your entire range higher up, so that now that you’re married — at first it was this novel, amazing experience, whereas now from a psychological perspective it’s like “Okay, now it’s normal.” When the anniversary comes, that’s your new default position.

I guess the same thing could be with deals too, if you think about it. When you did your first deal, you were like “This is amazing, this is crazy!” Now you’ve got ten, and the tenth deal feels a lot different than the first deal – maybe; I’m assuming it does. That’s because when you did your first deal, it was here; all the deals are at the same spot on this happiness spectrum, but your range was lower. So at first your range was here, with the happiness of the deal being up here, but now your range is up here.

Anyone who’s actually listening to this, they probably have no idea what I’m talking about [unintelligible [00:16:48].12] Basically, as time goes on, as you experience new things, new events, marriage, new deals, new job, your range on the happiness spectrum moves up or down, whereas the events kind of are at the same spot on the actual fixed spectrum that everyone gets to work with… So that’s just maybe an explanation as to why that happens.

Joe Fairless: Yeah, that makes sense. That makes a lot of sense. One thing and the last point on this and we’ll move on — one thing that it reminds me of is the interview that I dd yesterday with someone; I forget the gentleman’s name, but when the interview comes out in a couple months, it’ll be obvious… He’s in Huntsville, Alabama, he’s a broker. He’s like the second or third leading brokerage, and he’s been around for five years, doing 700 deals a year. He talked about being goal-oriented versus growth-oriented. When we’re goal-oriented, then we have the highs and lows of accomplishing things, but when we’re growth-oriented, that’s the way to be because then we’re continuing to grow and grow and grow and we’re celebrating along the way as we’re growing.

Goal would be just peaks and valleys, peaks and valley, whereas growth would be you’re continuing to climb up the mountain. When we have the growth-oriented mentality, then I don’t think we would — perhaps we’d put as much emphasis on, say, a wedding or a closing, but we would also put more emphasis on a one-year, a two-year, a three-year anniversary; we would celebrate others who are getting those as well, and same with a deal closing, and then successful at year one, year two, year three.

Theo Hicks: I think that’s a good concept. Moving forward, we’ve got a couple of questions from listeners. One of them is in regards to how to improve their credit score. They wanna become investor and they are trying to figure out how they can improve their credit score so they’re able to get a loan; they’ve been rejected from a few loans. The person’s name is Gregory.

Actually, on the real estate license, one of the courses we took was about real estate financing and one of the days in class we talked about how they calculate the credit score, and as an agent you’re working with your clients to help them bump their credit score up. I took a few notes that we can go over today to help answer anyone who’s having this issue.

So this is specific to the FICO score. There’s three different types of scores, FICO is one of them. The way they calculate it is 35% based off of your payment history, 30% based off of your amount owed, and the rest is based off of your length of credit history. So you can kind of look at that and say “What can I do in order to make sure that I am performing well in all three of those categories?”

Some of the advice that I found actually came from FICO themselves on how to do well in these categories. In regards to the payment history, it’s pretty self-explanatory – just make sure you pay your bills on time. Make sure that you set a notification in your calendar — that’s what I do… I have a calendar entry that says “Hey, my credit card is due these days”, and I pay them. So that’s payment history, which is pretty self-explanatory. It’s actually 35%, so one of the biggest chunks.

The second one is amount owed – that’s 30%. From that perspective, you want to make sure that your overall balance compared to your credit limit is low. If you have a $10,000 credit limit, you don’t wanna have it sitting at $10,000 constantly throughout the month, because that will negatively affect your credit score. In order to do that, you want to make sure you’re actually paying off the cards and not doing [unintelligible [00:20:17].25] When you log into your credit card website you see that massive “SPECIAL! 0% for 24 months” stuff, balance transfer. If you do that, you still have the debt; it’s still on your credit history, it’s just moved on a different credit card and you don’t get hit with interest, but you’re still being affected negatively in regards to credit.

Something else — I remember I was told a while ago, but I didn’t necessarily know what it affected… When you have a credit card you’re not using and you close it, thinking that that’s going to somehow positively affect your credit score — well, it actually negatively affects it, because they don’t know why you’re closing it.

I’ve heard that you can send it back; if you wanna close your account, put it in an envelope and send it back to the credit card company, so they know that you’re closing it not because it got stolen or because you can no longer afford it. At the core, in this article they recommended just not doing that at all.

And finally – this kind of has to do with the third one, which is the length of credit history, but it also has to do with amount owed… Don’t open a bunch of new credit cards. If you wanna extend your balance and you think “Oh, I’m just gonna open up a new credit card in order to have more money” – that also negatively affects your credit score.

Joe Fairless: Temporarily.

Theo Hicks: Temporarily, yes.

Joe Fairless: And one thing when you do open up a new credit card – because you should have some credit cards to help with the credit score… I like to not have the annual fees. If you don’t have an annual fee and it’s just a credit card that’s open with a line of credit, then no harm, no foul. But if you have an annual fee credit card – which I have a couple at this point, because I use it for business and it makes sense to have them, I think… I haven’t really looked into it that much… [laughs] Then when you have credit cards, just try not to have annual fees.

Theo Hicks: Yeah, definitely no annual fees. I remember my mom always harped me on that when I opened cards…

There’s two additional tips that I have just from my perspective, that I use; I have a really good credit score. I’ve had a card since I was 18 years old and I’ve always paid it on time. My parents helped me out with that, so it’s not all me, but I have a really good credit score.

One thing – there’s an application called Mint, or Mynt; one of the two)…

Joe Fairless: I’ve heard of Mint, the financial website…

Theo Hicks: Yeah, it’s a financial website. Basically, you’re able to connect all of your credit cards, your house, anything that you’re paying, to one central location. At the end of the month, it will give you a breakdown of your budget and what you’re spending money on. So it helps from a budgetary perspective, because obviously, I’m assuming one of the main reasons why people are having credit card issues is because they’re not very financially responsible.

Joe Fairless: Or they’re just in a tough spot and they have to stop the bleeding with credit cards, for whatever reason.

Theo Hicks: I think the second thing I wanted to mention was having some sort of like alarm or calendar entry to remind you to pay the credit card. I know for me personally, if I didn’t have that, I’d always forget… I’m like, “Oh crap, I’ve gotta pay them today.” So those are my two additional pieces of advice on top of that.

Joe Fairless: I used to use Mint.com ten years ago, or something… I liked it, for what it is, and now I have a bookkeeper and then I have an account with some credit score company so that I can always log in, see what my credit score is.

Theo Hicks: Sorry, I forgot to mention this… The third thing I wanted to mention was – this is something that helps me a lot. When I use my credit card, I make sure that I have enough money in my debit account when I’m using the credit card. I actually use the credit card specifically for building on my credit, but I make sure that “Okay, if I’m gonna buy $100 worth of books, do I have $100 in my account so that I can cover it at the end of the month?”

In the beginning, sometimes I’d be like “Oh, this is so interesting that you can just swipe this card and just kind of get whatever you want without necessarily having that money at the time”, and you’re like “Oh, I’ll get it in a month or two from now”, but I just have to make sure that no matter what, when I spend money with my credit card, I have the money in my account. That’s just as simple as just checking your balance every week, and using Mint to help you keep track of all that stuff.

Joe Fairless: Cool.

Theo Hicks: Alright, so enough about credit cards. Let’s go back to the multifamily syndication stuff. We’ve got one final question from Dave, who’s a listener… Let me pick up my computer because I can’t read that far…

The question is regarding the financing side of deals. “On your deals, you mention that you generally tell investors that they will be investing for 5-7 years. What do you do with your investors after this point and how does the deal look after that?”

Joe Fairless: What do I do assuming that we sold it, or it went longer than five years?

Theo Hicks: I think what he’s saying is “What do you do with your investors after the deal is over?”

Joe Fairless: Well, our goal is to do a 1031 exchange from one property into another. We can’t guarantee that, because I don’t know what the future holds, but that is our goal. If we don’t do a 1031 exchange where they would carry over from one deal to another, or if we have one and they choose not to do that, then just like any investment, they take their money out, get a long-term capital gains tax that needs to be paid, and that’s it. It’s the end of the deal.

Theo Hicks: Okay. As a follow-up question — you basically answered it, but he says “Are you taking 5-7 year loans on these deals and then planning to refinance and pay out your investors the time to maturity, or they will remain invested in the deal?”

Joe Fairless: That’s a great question, because what that hits to the core of is how do you set it up with investors? There’s an interesting point there that you asked about, Dave – when we do a refinance, do we then cash out the investors, or do they remain in the deal? In our deals, they remain in the deal. That is not the way to make the most amount of money in syndication, though.

The way to make the most amount of money – in case you’re curious, Dave, or any of you Best Ever listeners listening – is when you do a refinance, you cash the investors out and then you hold on to the property… And holy cow, you just increased the value of the property to a certain degree, and now you’ve cashed out the investors and you own this property with your business partner 100%. That’s the big time way to build your wealth.

Now, there are a couple downsides… There’s really one main downside, and that is it’s not as appealing to investors, because basically it is a debt-financing play for investors, instead of equity where they have the upside potential… Debt meaning they’re investing for, say, two years, and you probably have some clause in the contract where after you reach a certain return to them plus their money back, then they’re cashed out.

I haven’t presented that opportunity, that type of structure to my investors, but I suspect there would be a large portion of my investors who are like “Wait a second, we’ve been getting upside on these deals, and I love the refinance and then I still maintain the same ownership”, but now you’re saying “When we refinance, I’m exiting out of the deal.” People do that, but we haven’t structured it that way.

To summarize, if you wanna make the most amount of money and build the most wealth to multifamily syndication, then structure your deals the way I don’t structure my deals, and that is cash out your investors on a refinance and then own the whole thing yourself. It likely will be more challenging to raise money that way, because you’re dealing with a different type of investor, but you also might find some investors that only want their money in for two years and are only looking for, say, a 12% or so annualized return.

Theo Hicks: Okay, that answers Dave’s question… A final thing we wanted to mention (that you mentioned at the beginning of this show) is that we’ve got a pretty high profile guest coming on the show pretty soon.

Joe Fairless: Yeah… Do you wanna announce it?

Theo Hicks: You can announce it.

Joe Fairless: Alright, I’ll announce it… Jillian Michaels is gonna be on the show, so if you have any questions for her, then e-mail info@JoeFairless.com and we will be selecting some questions from the Best Ever community. E-mail info@JoeFairless.com if you have any questions for Jillian Michaels. I am interviewing her on 11th July, so get your questions in before 11th July. Jillian Michaels, and we’re also working on some other high-profile people, but right now we’ll focus on her, because we’re looking forward to interviewing her.

Then lastly, we didn’t talk about the basketball… Real quick – we haven’t played in the last two weeks… Theo hurt himself, or something; I don’t know… He knows I’ve been practicing a lot. Are you injured still?

Theo Hicks: Well, no…. I hurt my knee and then I was doing CrossFit and I [unintelligible [00:28:55].11] so my elbow is completely destroyed right now.

Joe Fairless: It doesn’t look swollen at all.

Theo Hicks: It doesn’t look swollen, but it feels swollen, that’s for sure.

Joe Fairless: Alright… So we haven’t played, no one won, and I didn’t lose at basketball… [laughter] So when we do play – so we’re not playing today?

Theo Hicks: I cannot play today.

Joe Fairless: We’re not playing today, so forget the basketball thing. Best Ever listeners, I hope you enjoyed this. Have a wonderful rest of the week and we’ll talk to you soon.

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