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Sterling White Background:
– Co-Founder of Holdfolio a real estate crowdfunding platform
– Has been directly involved with both buying and selling over 100 single family homes
– Specialties include Sales, Marketing, Crowdfunding, Buy & Hold Investing, and Investment Properties
– Based in Indianapolis, Indiana
– Say hi to him at www.holdfolio.com
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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 of that fluff.
First off, I hope you’re having a best ever weekend.
Because today is Saturday, we’ve got a special segment with a returning guest, called (this is the segment, not the guest’s name) Situation Saturday. The guest name is Sterling White. How are you doing, Sterling?
Sterling White: Hey, I’m loving life! How are you doing, big Joe?
Joe Fairless: Sweet! Well, I’m loving life as well, and I’m looking forward to you sharing this story — you gave me a taste of it earlier before we started recording, and it is certainly a cautionary tale for Best Ever listeners and myself, and everyone who comes across this episode.
The sticky situation – the situation that Sterling was in – is he had a deal under contract, and then some things happened… So he will talk through that.
A little bit about Sterling though, in case you don’t recognize his name… He was a guest on the show, episode 655; you can listen to his best ever advice on that episode. Sterling is the co-founder of Holdfolio, which is a real estate crowdfunding platform. He’s also the host of Holdfolio Download, a podcast that you should go check out. He has been directly involved with buying and selling over 100 single family homes, and he especially includes sales, marketing, crowdfunding, buy and hold investing, and of course, investment properties. Based in Indianapolis, Indiana… With that being said, Sterling, how about you give the Best Ever listeners a little bit of a refresher of your background and your focus? Then we’ll roll into your situation.
Sterling White: Since early childhood I’ve always been into the whole entrepreneurship real of things. I remember as little as eight, nine years old I was getting my hands on Kool-Aid and selling it to kids throughout the school, and that kind of really just transitioned to getting into real estate with wanting to provide as much value for individuals out there. I started on the construction side, getting my hands dirty on large commercial projects, which were fire stations, churches etc. Then about two years after working into that, that’s when I then found my mentor, and that’s when I really wanted to better understand the investing side. I partnered with him, and really took about 20-25 years of his knowledge and compacted it into 2-3 years, and I absolutely worked for him for free, in order to gain all of that knowledge, which is something I recommend to newbies.
Transitioning to now – bought and sold hundreds of single-family homes, and now with the current company we do single-family homes as well in portfolios of ten, and now we’re shifting over to the multifamily side to expand our footprint.
Joe Fairless: ANd what a perfect segue for your story. Will you tell us the story and tell us the situation that you were in?
Sterling White: Alright. Well, it’s still a little bit gut-wrenching, to tell you the truth… It was a property that was in Ohio, 118 units. We were very interested in purchasing this asset, and went back and forth with negotiations with the seller for the course of I’d say about a month, a month and a half, and we finally agreed on the purchase price, but with that under the condition that numbers still worked, but throughout the due diligence period no huge surprises… We didn’t want to expect [unintelligible [00:05:45].20]
Joe Fairless: And a couple quick questions… A month and a half of negotiations – was it an on or off-market deal?
Sterling White: This was an off-market deal.
Joe Fairless: Off-market deal. How did you come across it?
Sterling White: We came across it by pulling the public records, noticed it was owned by an LLC, used Google to trace down the actual owner of the LLC and gave him a call.
Joe Fairless: The purchase price was agreed upon for a 118-unit deal – in what city?
Sterling White: This was Cincinnati, Ohio.
Joe Fairless: In Cincinnati… And what was the agreed upon purchase price?
Sterling White: This was 4.7.
Joe Fairless: 4.7 million dollars… I was gonna make a joke — I couldn’t figure out a joke; I’m not fast enough to make a joke there! Okay, 4.7 million dollars, about $40,000 a unit. What was your business plan for this?
Sterling White: Our business plan (and one thing I reach out to you) was we were gonna go in there, and the units were a little bit outdated, and they were under-rented by about $100 to $125, so we were gonna go in there, make the necessary changes to renovations such as flooring, paint, countertops, and then that’s when we were going to ask for those rent bumps.
Joe Fairless: Okay. And the market comps were supporting your business plan, I assume?
Sterling White: Yes, there was a property right across the street that was 100% occupied at those increased rents.
Joe Fairless: Okay, alright. That helps us set the stage. Please proceed into the situation.
Sterling White: The deal was off-market, and the seller originally started at 5 million dollars for the purchase price, and we were about 4.3 or 4.4, and then finally — that’s what I mentioned, we were able to get to the 4.7. That was a little bit on the top end for us. At that point, that’s when we went under contract and we sent over everything to our lender to get the ball rolling on the finance side.
It was a week or two, we were still doing our due diligence on the market, the immediate area, pulling additional comps, and that’s when we scheduled an inspection with the lender’s inspector and their engineer, and we walked through all of the units.
Joe Fairless: Okay.
Sterling White: At that point in time, a lesson now that I reflect is the seller mentioned that there has been some leaks throughout the building… So there’s ten total buildings, 118 units, and he mentioned there was leaks, but since he’s owned it, which was about 18 years, which was something else (hindsight 20/20) is he mentioned he’s been making repairs throughout, so we’re thinking in our heads “Okay, well maybe it will be fine once we get the roofers up there and we’ll further assess.”
So when we were walking through all 118 units, the top floor you notice a common thread that there was a leak — I wouldn’t say in each and every one of the units, but you can consistently see that there’s leaks.
Joe Fairless: Okay.
Sterling White: And it turns out once we got our roofers right after we finished the inspection, we got about three or four different bids, and they all stated that there’s no way we would feel comfortable making these repairs; you guys are gonna have to replace, and the cost, by the way, is gonna be close to 400k.
Joe Fairless: Yowsers!
Sterling White: Yes…
Joe Fairless: There’s the difference there between your 4.3 and 4.7 purchase price…
Sterling White: Exactly. And that was one of the biggest learning lessons for us — well, me in particular… I was very eager to get the ball rolling on the deal, and once we heard about those leaks, we should have instantly got those bids and got someone to get eyes on that, versus later in the process, where we’ve already spent money and had the inspectors come out.
Joe Fairless: And why is that? Were there costs associated to it?
Sterling White: For on the lender side, yes there was. I don’t know the exact figure, but it was between 5k to 8k that we paid out for that.
Joe Fairless: Just for the lender’s inspectors to go out there, because you had gotten through to the process where the lender had given you the term sheet, I imagine, and everything looked good, and now the lender was doing their due diligence on the ground.
Sterling White: That is correct.
Joe Fairless: Okay.
Sterling White: And we had a sit-down with the seller after everything was said and done, we’ve walked all the units, we’ve got all our bids from the roofers, and we said, “Well, this is something that we did not expect. Is there a way that you could accommodate us on this? If not, then we’re simply gonna have to walk away.” And he said no, so we walked away.
Joe Fairless: Was he a local person, or was he from out of state? It sounds like it was a local person.
Sterling White: Definitely local.
Joe Fairless: Okay. And what was the reason why he was wanting to sell?
Sterling White: That is a great question. I believe the main thing was he was just simply tired of managing it himself.
Joe Fairless: Was there a proposal for creative financing, maybe a master lease, that you could take over management, regain control of the property, and them pay him off over a longer period of time?
Sterling White: This is by far the most stubborn seller I have dealt with in my career. There was no budging.
Joe Fairless: That’s a definite no then.
Sterling White: Yes, definitely no. No budging from that individual’s end.
Joe Fairless: When you met with him, was it over the phone, or in person when you had the conversation about the roofs?
Sterling White: Both. I’d say it was more so in person. And even the owner is the operator, so he’s pretty hands on, and when we did send the roofers out there, he actually was engaged with them as well, trying to frame it “Oh, well that doesn’t necessarily need to be replaced… I think we could just repair that.” So there was a little bit of that in there, too.
Joe Fairless: Oh, he is very hands-on… Talk us through the conversation. You plan to meet with him in person… Where do you meet, first off?
Sterling White: We met at the property.
Joe Fairless: You met at the property… Are you in the office or are you standing somewhere on the property?
Sterling White: We actually met in the clubhouse that’s on site, and one thing that I always do when I’m meeting with a seller is I bring a thank-you card that just states “Thank you for your time today and allowing me to view this property.” I’ll always bring that with me and I’ll give it to him; it’s just a courtesy.
Joe Fairless: Okay, and why do you bring that up?
Sterling White: That is something that I believe goes a long way. Every time I have given that to a seller, I can see their eyes light up as if they’re shocked that someone took the time to go out, get them a card and give it to them.
Joe Fairless: Okay. So you have a card, you meet at the clubhouse on site… Do you two sit down and have a discussion, or are you two standing up?
Sterling White: Yeah, and this is me, my partner, and also a fellow colleague of ours that does solely focus on multifamily acquisitions… So it’s all three of us that’s in negotiations.
Joe Fairless: Alright. And then it’s just him?
Sterling White: Yeah, it’s just him.
Joe Fairless: And roughly how old is he?
Sterling White: Mid-fifties.
Joe Fairless: Okay. Now, how does that conversation go?
Sterling White: The conversation is — is this upfront, or is this after we’ve had all the inspections?
Joe Fairless: This is after you’ve had all the inspections.
Sterling White: Okay. We have the sit-down with them and mention we recently received the bids back from our roofers, that were able to go up and assess the condition of the roofs. “It turns out that we’re walking into something that we did not foresee when we originally spoke with you. At the time, we were at 4.2 or 4.3 (I forget which one we were originally at), but we came up halfway in order to accommodate you, since you were at the 5 million dollar purchase price, and at that point that was a little over what we were committing to. Now, with the recent development over these roofs, there’s no way we’re gonna be able to justify paying the 4.7 without getting ourselves in financial trouble. With that, is there a way that you’d be able to compromise and provide a credit in order for us to have this deal go through?” So that’s kind of the dialogue word for word.
Joe Fairless: Okay. And what was word for word his response? Ish…
Sterling White: It was more so that “I necessarily do not believe you guys have to replace all those roofs.” That was the main… And “I told you guys up front that I was gonna be firm at that 4.7 purchase price.”
Joe Fairless: And then that was it?
Sterling White: That was it.
Joe Fairless: Everyone got up and shook hands…? Did you take back your thank-you card and you walked out the door? [laughs]
Sterling White: No, I did not do that… [laughs] We did send over a mutual release to [unintelligible [00:15:16].08] but no, I did not pick up the thank you card and rip it up and step on it… [laughs]
Joe Fairless: I just see you looking at him, snatching it from his hands… “I’ll take that, please…” [laughs]
Sterling White: But you can feel the intensity, or… What’s the other word I’m looking for? The vibe that’s in the room when negotiations get really tight like that.
Joe Fairless: Yup.
Sterling White: I love that feeling, for some reason.
Joe Fairless: Now let’s talk about what you will do differently on the next deal. Well, first before we talk about what you would do differently, how much money did you lose in this transaction and where did that money go?
Sterling White: I’d say that number that I’ve mentioned, the…
Joe Fairless: 5k-8k for the inspector…
Sterling White: Yeah, that’s just about it. But the biggest thing was the time that was invested, which is something we can never get back. It was a significant amount of time. But outside of the cost to the lender, there was nothing… Maybe the cost for gas…
Joe Fairless: Right, because you live in Indianapolis and you just drove to Cincinnati… So the cost for gas, travel etc. but the big chunk would be the inspector. What about all the other due diligence you did on the property? Did you not have to pay any of those vendors?
Sterling White: No, I didn’t have to pay any of them?
Joe Fairless: What did you get done with vendors, just so we know who was doing what type of work he did, and that you didn’t have to pay him?
Sterling White: Well, from my experience, there is quite a bit of roofers that just wanna go up and provide a quote, and in the event that you do proceed with them, they provide a free estimate.
Joe Fairless: Yeah, I get it on the roofers, but as far as just your management company going through, doing units walks, or getting any type of other inspection reports… Did you get any of those done? HVAC, or anything like that?
Sterling White: No, I don’t believe we were able to get today.
Joe Fairless: Okay, cool. So the roofs were the only thing, and it was just the lender’s inspector… Alright, so it was 5k-8k out of pocket cost, a good down payment on one of those single-family homes that you love… But it’s a good lesson learned. What will you do differently moving forward?
Sterling White: Initially – and that’s what we’ve done on our other deals as well – as soon as something is questionable, we’ll go to a property that we’re close to negotiations with on the seller, we’ll check the condition of the roofs, and we’ll also look if it’s a brick building (which is predominantly what we go for), we’ll check the masonry as well. Those are items that we look at as big tickets – the masonry, the foundation, and if anything is settling… And if something is a concern, that’s when we’ll start calling out different individuals in those traits and get them out there before we send out money to our lender to go out and do the financing component.
Joe Fairless: Okay. Anything else that you wanna mention as it relates to this story, that we haven’t talked about?
Sterling White: Well, one thing that I’ve mentioned on the recent video I provided on the update on this is to bring a snack, which is a funny thing to mention, but… When we walk all the units, everyone that we were with were pretty hungry, so that’s one thing that I’d mention. When you’re taking a whole day and walking off these units, just make sure you have your energy.
Joe Fairless: Got it. Alright, well bring a snack, have some energy, have a thank-you card, be prepared to snatch it back from the seller if they don’t agree to your negotiation approach, and then most importantly, if something is questionable, make sure that you dive into it quickly and get quotes, so that you can renegotiate. Unfortunately, 5k-8k on a large purchase like that – it’s just gonna happen sometimes.
Sterling White: It’s tuition, that’s how I look at it as… Paying tuition. And one thing I wanted to mention too is I would recommend not to try and construe your numbers to try and make it work, if that makes sense.
Joe Fairless: Oh yeah, great point. This very well could have been an interview 24 months from now about how you went bankrupt after buying a 118-unit in Cincinnati, Ohio, because you tried to inflate your purchase price and thought you’d recover, but in reality it would have been better to lose 5k-8k by not closing on the deal… So good point, and definitely something important to keep in mind.
Thank you, Sterling, for being on the show. How can the Best Ever listeners get in touch with you?
Sterling White: Just e-mail me at Sterling@Holdfolio.com. I’m more than happy to create as much value for all you Best Ever listeners out there, because you are awesome!
Joe Fairless: Well, you are awesome, too! Thank you for being on the show. I hope you have a Best Ever day, I appreciate you telling us the story, and we’ll talk to you soon.