March 13, 2018

JF1288: Making Money With Partnerships & Distressed Assets with Larry Friedman and Frank Sanchez

Frank and Larry had a third business partner in the past, the three of them grew a firm from 0 to 500 agents in 10 years. Once that relationship began to sour, they went separate ways. Frank and Larry tell us what to look out for to avoid getting into a bad partnership. We’ll also hear about their latest business of acquiring distressed assets through their real estate fund. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Larry Friedman and Frank Sanchez Real Estate Backgrounds:

Co-Founders of SDF Capital, real estate investment firm focused on acquiring distressed real estate assets

-Larry is responsible for financially structuring property acquisitions, asset diligence and disposition strategies.

-Frank is responsible for all property acquisitions, dispositions and overall investment strategy.

-Say hi to them at http://www.sdfcapitalllc.com/

-Based in New York, NY

-Best Ever Book: Never Split the Difference

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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 fluffy stuff.

With us today, Larry Friedman and Frank Sanchez. How are you two doing?

Larry Friedman: Fantastic, Joe.

Frank Sanchez: Thanks for having us on the show.

Joe Fairless: Yeah, my pleasure. Nice to have you both on the show. A little bit about this dynamic duo there – the co-founders of SDF Capital, which is a real estate investment firm focused on acquiring distressed real estate, primarily single to three-unit, so one, two, and three-unit properties in the New York area.

Larry is responsible for financially structuring the property acquisition, doing the asset due diligence and disposition strategies, while Frank is responsible for acquiring the properties and the overall strategy. They’re based in New York, and with that being said, do you two wanna give the Best Ever listeners a little bit more about your background and your current focus?

Larry Friedman: Awesome. Thanks, Joe. Happy to be here. Basically, Frank and I have been in real estate for collectively around 15+ years. Our background with both of us is in residential real estate. We started a real estate firm – pretty much him and I and a few other agents – and we grew it from zero agents to over 500 agents over a 10-year span. At our peak we had 12 offices and over 500 agents. Ultimately, what happened was in our last acquisition we partnered in with someone that wasn’t a great partner, and ultimately it led to the demise of that real estate firm, or at least Frank’s and my interest in the firm.

Then from there, we always had [unintelligible [00:03:46].26] we had flipped one prior to that and we had loaned money to a couple of home flippers, so we decided “Hey, this seems like it could be interesting.” About three years ago, him and I decided to start doing this full-time, and here we are today.

Joe Fairless: So you’re fixing and flipping or wholesaling?

Larry Friedman: We do a combination of a couple of different exit strategies. We fix and flip, we wholesale, and we assign.

Joe Fairless: Got it. Clearly, we have to talk about the partnership that didn’t work out, because you two were up to 500 agents, you grew it from zero, and then you mentioned there was another partner that didn’t work out. What happened and what would you do differently?

Larry Friedman: We partnered with someone who on paper everything looked great; we had complementary skills. This person was bringing a lot of agents to the table – 200 to be exact – as well as more of a focus on sales, we had a focus on rentals. However, we quickly started to realize that from a trust, from a personality standpoint, from a way to treat people we just came from two completely different schools.

It ended in a litigation, and it ended in big fighting, and while we were fighting and litigating, agents want a stable place to work, and it became unstable. That led to the demise of what I think was a great firm.

And just to answer your question about what I’d do differently – it’s definitely know who you’re partnering with; the papers looked great, but I don’t think we did enough diligence, I don’t think we spent enough time; when you partner up, he becomes almost like a best friend, and it’s a very important decision. I think the person’s fiber is probably more important than what they bring to the table from a dollars and cents standpoint.

Joe Fairless: Besides the lawyers, who won the litigation?

Larry Friedman: It was one of those that the lawyers definitely won. Nobody won, essentially… The legal fees were astronomical. Frank and I ultimately decided that this isn’t really worth fighting anymore, and we saw greener pastures and just figured “You know what? This has run its course”, and the two of us decided at that point we’re just gonna see what we can do. We’re young guys, and let’s get into a different venture.

Joe Fairless: So now fix and flip, wholesale and assigning, right?

Larry Friedman: Correct.

Joe Fairless: Okay. What’s the last deal you two did? Describe it for us, please.

Larry Friedman: Frank, do you wanna go for that?

Frank Sanchez: Yeah, sure. The last one was actually one of our most exciting deals. It was a 3-bedroom 2-bath split-level in Brooklyn County. We actually put it under contract for 200k, and literally a week and a half later we put it out there, we marketed it, and we were able to double-close on it with the fund that we have. We made a 100k spread. So we bought it for 200k and just closed for 300k. That was a great momentum swing coming into the new year.

Joe Fairless: Well, it sure was. And you mentioned you were able to double-close with a fund that you have – what is this fund?

Frank Sanchez: Go ahead, Larry.

Larry Friedman: We established a fund basically to fix and flip and wholesale. So we have approximately 12 high net worth individuals that have invested money into the fund called SDF Capital Fund One, and we used the fund to purchase [unintelligible [00:06:54].00]

Joe Fairless: Okay, and how much did you raise?

Larry Friedman: We raised 725k. It was a relatively small raise, and in hindsight I didn’t realize that the whole process is the same if you’re raising 725 million. So it was quite a learning experience, and we definitely will have another much larger fund, but this is a good start.

Joe Fairless: You can’t just add to it? I’ve never done a fund, so I don’t know the details.

Larry Friedman: Joe, from my understanding, we have a finite timeframe, it’s a two-year hard close. So once the capital raise is over, that’s it. That’s the way this fund is structured; that’s the way ours specifically is. I’m not sure in general whether or not you can or cannot, but I know with ours we couldn’t. Because we have had others that have been interested in investing, we just had to turn them away.

Joe Fairless: You had two years to open up to investors and the close it out, or two years for the entire life of the fund to be closed out?

Larry Friedman: Two years for the entire life of the fund to be closed out, so from the day we started to — essentially saying “Hey, the fund is opening, and here is the date that the fund is starting”, it’s two years after that. And that started after we had done our capital raise.

Joe Fairless: All of your deals need to have closed out and gone full cycle within two years?

Larry Friedman: Correct. Most of our deals are relatively short-term in nature. We’re usually in and out anywhere between, as Frank said, a couple weeks, to six months.

Joe Fairless: Interesting, yeah. Congrats o getting this fund together. What were some things that you learned while putting together this fund?

Larry Friedman: Some of the things I think we’ve learned essentially were that when you put together you have to know who is your target audience. So as we were speaking to people, because we do a lot of debt raising as well, certain people that we spoke with, they were not comfortable with a two-year hold. So that was a question that people had. Other people really wanted more on the upside, so more of a profit split.

So I think the most important things we learned were you really have to know “Okay, this is the exact type of person that this makes sense for”, whether it be an IRA investor, whether it be a high net worth individual with extra money. So I think just that focus on who is that avatar, essentially? That’s number one, which I don’t think we had that going into it initially.

Then I’d say number two would be really streamline the structure, make it very simple to understand. I don’t wanna say ours is overly complicated, but it’s slightly complex, so I think going forward our next one would be much simpler.

Joe Fairless: How would you make it simple? What would the structure be?

Larry Friedman: Given what we’re doing, the way I would do it is I would do some type of preferred, which we have now; I would offer a preferred, and then I would do an accrued return. Very simply a preferred, then an accrued return over the same two-year period. It’s just much easier from an accounting standpoint as well.

Joe Fairless: Accrued return over a two-year period as opposed to what?

Larry Friedman: So we have a profit split, and then we have expenses as well in the fund. So we have a preferred, but then there’s expenses, and then there’s an after the fact profit split, which gets a little murky, because you have to figure out what is the profit.

Joe Fairless: Oh, I bet.

Larry Friedman: So that’s kind of something that some investors want more clarity on, so again, in the future I would just make it much simpler.

Joe Fairless: Yeah, so basically, it’s like a debt deal for them, because they know that they’re getting, assuming that it goes according to plan.

Larry Friedman: Exactly. And I think that for the type of investors that are attracted to what we’re doing, I think that would be a better structure.

Joe Fairless: How much does it cost to put together a fund?

Larry Friedman: I’ve heard different numbers. We’ve spent between the filings – because we’re in about four different states – as well as the legal work, we’ve spent around $18,000 to $20,000.

Joe Fairless: That’s pretty good. I was expecting another zero on that.

Larry Friedman: Yeah, I’ve heard the same… I’ve heard all different numbers. We tried to stay simple, and we were only in four states. I think every time we do the blue sky and register in a different state it just adds to the cost.

Joe Fairless: Are all of your investors in those four states, as well?

Larry Friedman: Yes, that’s where they live. My understanding from the securities rules are if you have an investor that lives in that specific state, you must register to do business and file in that state.

Joe Fairless: Okay. Would you recommend some of the Best Ever listeners create a fund, who are doing fix and flip projects on a one-off basis?

Larry Friedman: No. [laughter] I think if you’re doing one-off fix and flips, I would just do that and make it very simple. The reason why Frank and I decided to go this route is we do a pretty decent volume, and we do use hard money, but we also like to use more flexible money, and a lot of our investors, when they were investing with us and we would cash them out of deals, they would say “Well, I don’t wanna be cashed out of this deal. I want my money to still work.” So that’s kind of the reason why we decided to go with this structure. But again, one or two deals a year, or three deals a year, I wouldn’t bother. It’s too much work and there’s also a lot of regulations etc.

Joe Fairless: That’s interesting. So really if we’re a fix and flipper and we’re cashing people out at a volume in which they want to get put back into deals, and we’re constantly having to put people back in and cash people out, put people in… Then when it becomes that point of a headache, then you need to look at doing a fund. Is that right?

Larry Friedman: I would think so. Or if you are tired of using hard money, although we love using hard money, but it comes with mortgage recording tax, and they’re bringing in an appraiser, and it takes a little bit longer to get a deal done… So we just like that speed.

Joe Fairless: With your deals, you said that you two are doing high volume… How are you able to get so many leads?

Frank Sanchez: That’s a good question, Joe. So basically the way we get leads is we have a very big marketing budget. We’re spending $32,000 every single month, including targeted marketing. We’re doing yellow letters, we’re doing SEO, we’re doing pay-per-click, we’re doing a little bit of radio and TV, and it’s very targeted. It’s for people that have low LTVs, homes built in a certain year – usually in the 1950’s, probates situations, homes that are not financeable, people that have tax liens etc. They’re calling us directly.

Our deals are basically off-market deals, directly with the sellers. We’re visiting their homes, we’re sitting down with them and seeing if we can create a win/win situation with them where we’re helping them.

Joe Fairless: Let’s go through a scenario. Your budget just got sliced in half – which is still more than most people are spending every month… Where do you put that money?

Frank Sanchez: Honestly, I would say back in marketing.

Joe Fairless: But where specifically in marketing?

Frank Sanchez: Sure. I’d say we’re getting the most use right now from direct mail. About 60% of our buyers are coming from direct mail.

Joe Fairless: How do you approach direct mail? Is it just a postcard, or is there a system that you have in place?

Frank Sanchez: Yeah, we have yellow letters. We use a mail house, and they basically send them out for us.

Joe Fairless: Okay.

Frank Sanchez: We just give them a bunch of zip codes and our budget, and it automatically gets sent out. We do two mail drops a month. Usually, we do one right in the first week of the month, and then we hit them again the third week, and we repeat to the same sellers; they get a letter every three months.

Joe Fairless: Okay.

Frank Sanchez: So we’re consistently sending that letter out.

Joe Fairless: Every three months… So if I’m receiving your letters, then I get a letter from you the first week of the month and the third week of the first month, and then I get a letter from you every three months thereafter?

Larry Friedman: Well, let me clarify that. So you would get a letter the first week of the month, then a letter three months from that day.

Joe Fairless: Okay, got it. You just split up the first batch, got it.

Frank Sanchez: Yeah, we split up the batches, correct.

Joe Fairless: Okay. And what do you say in your letter?

Larry Friedman: We basically say that we are interested in buying houses in your neighborhood. “If you’re looking for an all-cash offer, with no repairs necessary, sell as is, close quickly, give us  a call”, essentially. It’s a very simple letter.

Joe Fairless: Have you made any changes to it over time?

Larry Friedman: No, the letter pretty much has been consistent. One of the things that we’re contemplating doing is sending a postcard to some of the top zip codes in between that three-month period that Frank discussed, which we know some other people are having a lot of success… Just another touch.

Joe Fairless: Okay. Because right now that letter is in an envelope, so they have to open up the envelope?

Larry Friedman: Correct. And as Frank said, it is our bread and butter, but it’s probably the highest cost of acquisition, it’s direct mail. But it is predictable; obviously, our response rate keeps declining as we spend more money, but I’d say it is (like Frank said) the number one core strategy in a market. At least in our markets.

Joe Fairless: What is your best real estate investing advice ever?

Frank Sanchez: I would say being on the acquisition side it’s really buying the property at the correct numbers. We are in a risk business; buying it correctly – we really want it to allow us to have the most exit strategies and to maximize our profit. I think knowing the numbers is crucial, you’ve gotta know the numbers for that market. And you also have to take into effect all the factors to the property, and it’s location.

We’ve made countless mistakes that we can share with the best listeners ever on our first few deals, just having errors with our after repair value numbers. We typically try to buy between 65-75 cents of the after repair value minus repair costs.

Joe Fairless: Will you tell us a story of one of the lessons learned on when it didn’t go the way you wanted?

Frank Sanchez: Yeah, for sure. It was about our third home we purchased. I went on the appointment, and it was a 3-bedroom 2-bath–

Joe Fairless: So it was your fault. [laughter]

Frank Sanchez: Yeah, absolutely my fault.

Larry Friedman: [unintelligible [00:16:42].04]

Frank Sanchez: So I was running my comps, and I have experience running comps… All the 3-2’s are going for this price, all the [unintelligible [00:16:52].14] everything’s in line within one mile of the subject property. That’s basically how we run the comps, going back six months. So I show up at the house, look over the repairs, speak to the owner, see if we can make a win/win situation… I give him my offer and all of a sudden he shakes my hand. In the back of my mind I said “Something was just too easy with that.”

After we bought it, we realized we only had one exit strategy – basically, to rehab it. What I missed is the house was across the street from a church, which I didn’t factor into the value. And it also had what we call a funk factor. Basically, yes, I was comping it as 3-bedroom 2-bath, however this house – the configuration was very funky. To get to the master bedroom, which was like an extension, you had to go through the dining room where people were eating. And then it was connected to a bathroom that Jack and Jill-ed with the kitchen, and when you go up the stairs, if you’re a big dude it kind of gets real tight at the end; you’ve gotta squeeze up onto the second floor. The shower – you couldn’t put your full body in the shower, because it was ricocheting off the wall, the water…

It was just nuts, and we did a full-blown rehab, which this market did not commend the finishes that me and Larry did. But another lesson to the best listeners ever is don’t over rehab. We put in the marble, we put in the new hardwood floors, high hats, the whole  bang. Picture moldings… And we had it listed at a price the market wasn’t gonna pay, and again, the lesson there was just I should have taken probably a 20% discount off my original after-repair value, after I went into the house and saw it had a funky layout, and saw it had a Jack and Jill bathroom going into the kitchen and all that.

So when you’re looking at the house, you take a discount for that… And you can’t change the location, so if it’s across the street from a gas station or a church (in this case) or an elementary school, that’s gonna be some sort of a value detraction that you have to play in your numbers. So really just knowing your numbers is super important.

Joe Fairless: How do you come up with 20% off for those things?

Frank Sanchez: It’s a number that we feel comfortable with after we see the house. If there are some funk factors in there, we’ll kind of compare to other homes that have a similar layout, or a similar location, and that’s the kind of number we see that are selling, the kind of discounts that are coming off for having those factors into the property.

Joe Fairless: Thanks for telling that story, that’s pretty cool. The last question on that, with the property – was it on the market for a while, so could that have been an indication that there was something up too, or were you one of the first people to come across it?

Frank Sanchez: No, it wasn’t on the market at all. We bought it directly from a seller that was moving into a retirement home.

Joe Fairless: Okay, got it.

Frank Sanchez: It was just a number I gave him, and that’s why he was really happy with it. I should have known.

Joe Fairless: With the church and the elementary school example, I could easily see the seller saying that that’s an advantage and an amenity, and they shouldn’t receive a discount… What would your response be?

Frank Sanchez: I’ve heard the same also, Joe. School can get extremely busy with parking and noise at 9 o’clock and 3 o’clock again, which can be a disturbance, especially if it’s a high school. I know when I was in high school I was hanging out doing god knows what, so that could be another disturbance. It really depends. I mean, personally, from my experience, when we have something on the market, most of the feedback we get is that they’d rather be on a nice, quiet, suburban street, without these types of places close by.

Joe Fairless: Makes sense. Are you two ready for the Best Ever Lightning Round?

Larry Friedman: Yeah.

Frank Sanchez: Yeah.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:20:47].13] to [00:21:18].06]

Joe Fairless: Best ever book you’ve read?

Larry Friedman: The best ever book – actually, I’ve just finished reading it – is called Never Split the Difference, by Chris Voss. He’s a former FBI negotiator. Great book, a lot of nice nuggets of information about negotiation, which I think is critical in every aspect of life.

Joe Fairless: I’ve heard a lot of people mention this book many times recently, so it’s definitely – I think I’ve already bought it – on my list of books to read.

Larry Friedman: Yeah, you’ll enjoy it. I actually listened to it in the car, as audiobook. That’s my new thing.

Joe Fairless: Best ever deal you’ve done that we haven’t talked about, that wasn’t your first and wasn’t your last? Something in between, a best ever deal.

Larry Friedman: Another best ever deal that’s actually similar to the deal that Frank discussed (a double close), we bought a home for I believe it was $100,000. This home was a complete disaster. We put it on the market for 204k to be exact, and we were able to close it at that number with multiple offers. It was on a lake; that helped it. Literally, a lake view. That was an awesome, easy deal to get done.

Joe Fairless: And you didn’t do anything to it?

Larry Friedman: Did nothing to it.

Joe Fairless: Did nothing to it. How did you find that deal?

Larry Friedman: Same, it was through direct mail. I think that one actually was a tax delinquent– he was on a tax delinquent list [unintelligible [00:22:30].04]

Joe Fairless: Best ever way you like to give back?

Larry Friedman: Frank and I, we run something called Deal House. It’s a monthly meetup, and it’s something that we put together for other investors and those in the real estate space. Essentially, we talk like kind of what we’re doing today, about some of the things we’ve done well, some things we haven’t done well, others come and share their advice, and we network together. That’s something we do once a month, and it’s actually an in-person meetup. It’s called Deal House. That’s something we really like to do.

Joe Fairless: Where is that hosted?

Larry Friedman: We hosted in New Rochelle in the Radisson, and it’s the third Thursday of every month, 7 PM.

Joe Fairless: Cool. Well, Best Ever listeners, if you’re in upstate – I call that upstate… Should I not call that upstate, New Rochelle? [laughter]

Larry Friedman: Well, we wouldn’t consider that upstate. [unintelligible [00:23:18].11]

Frank Sanchez: It’s like 40 minutes from the city.

Larry Friedman: Yeah. [laughs]

Joe Fairless: For all of the Best Ever listeners who want to travel 40 minutes from the city, or are near New Rochelle, then definitely check that out. It sounds like a really cool meetup.

Frank Sanchez: Awesome, we’d love to see you there.

Joe Fairless: How can the Best Ever listeners get in touch with you? …which is a perfect segue into this.

Larry Friedman: Awesome. The Best Ever listeners can get in touch with us one of a few ways – they can find us on SDFCapitalLLC.com, or they can find us on DealHouseNY.com. We’re doing the site as we speak. We have some videos as well on YouTube, under Deal House, and like I said, the in-person meetup at Deal House as well.

Joe Fairless: Very cool. And the Deal House website is DealHouseNYC or NY?

Larry Friedman: Just NY. We’re in the process of putting up a new site.

Joe Fairless: Sweet. Well, thank you you two for being on the show and talking about your fund and what you did prior to this, lessons learned with partnerships, and then the fund as far as when it makes sense to put a fund together and when it might not make as much sense to put the fund together. And then lastly, just talking about how you’re getting your marketing leads and the most effective ways that you’re doing that with direct mail, how you’re approaching the direct mail… You might include some postcards in the future to reach people more frequently.

Then how you found some of your most profitable deals, and lessons learned on a not so profitable one. How much money did you lose on that not so profitable one, the funk factor one?

Larry Friedman: We couldn’t sell it and we had to put a rental in there, and we’re actually negative about $150/month.

Joe Fairless: Oh, alright. What do you think it’s worth now, compared to the all-in price that you have in it?

Larry Friedman: I’d say probably our loss, if we had to take that loss today, would probably be about $20,000. If it was a year and a half ago or two years from this happening, it probably would have been about 30k.

Joe Fairless: Good. Well, keep on holding, maybe it will continue to appreciate. But more importantly – I don’t wanna end on that note, by the way… More importantly, I really enjoyed learning about how you MADE money, and the lessons learned along the way. I was just curious about that one thing.

Thank you two for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Frank Sanchez: Thanks, Joe. I appreciate it.

Larry Friedman: Awesome. Thanks, Joe.

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