June 9, 2018

JF1376: When Deals Don?t Go As Planned, Try To Fall Forward #SituationSaturday with Ivan Barratt

On Ivan’s third apartment acquisition, everything went wrong and “almost ruined” Ivan. To start with, Ivan paid too much for this 30 unit re-development deal. The deal was very distressed, and in a less than ideal location, but Ivan had faith in the area rebounding. Hear how he handled this situation with terrible tenants that wouldn’t pay, the property falling apart, bad plumbing, bad electrical, just about everything you can imagine went wrong with this place. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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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.

I hope you’re having a best ever weekend. Because today is Saturday, we’re gonna be talking about Situation Saturday – it’s a special segment. We’re gonna talking about a challenging situation – in particular, our best ever guest’s third apartment deal was a 30-unit that just did not go at planned… So that when you come across a deal that doesn’t go as planned, you can listen to this episode or think back to this episode, and hear what has happened to someone else and how they approached it, and how to do or not do what they did.

So with us today to talk to us about the 30-unit – how are you doing, Ivan Barratt?

Ivan Barratt: Hey, Joe. I am doing well, man, and I hope you are, too. It’s great to be back on the show.

Joe Fairless: I am grateful that you’re back. I enjoyed our first conversation so much, I was like “Wait, there’s more to it. I’d love to learn more.” A little bit about Ivan, as a refresher – he’s a multifamily owner, manager and syndicator who specializes in agency and FHA financed projects. He has raised over 24 million in equity, and acquired over 1,800 units since 2004. His company manages well over 100 million in assets, comprising of 2,200 units. Based in Indianapolis, Indiana.

With that being said, Ivan, will you give a refresher just about your background? Then we’ll dive into the story.

Ivan Barratt: Sure. So I’m a pretty lucky guy… My dad was an attorney, and growing up, he had a bunch of rental properties, so I got a taste for the real estate bug early. I even went to school for it, I learned all about finance and investing in real estate, got out, got my foot in the door working for a real estate developer here in Indianapolis, Indiana by saying basically “I’ll work for free. Pay me if I sell something, but otherwise I’m working for free. I just wanna learn.”

Eight years later, at the bottom of the great recession, I decided to start my own company. I started a property management company in my spare bedroom, and I was a one-man show for a while, until I continued onwards, scaling, hiring, firing people… Today we’re actually close to 150 million in assets under management. We’ve acquired some more properties, and also still manage apartments for other folks along the way, and that’s where we’re at today.

Joe Fairless: Alright, well thank you for that refresher. There’s lots of stuff we dove into on the previous episode, so Best Ever listeners, just search Ivan’s name and my name in Google and you’ll come across that episode. So let’s talk about your challenging situation. Tell us about this 30-unit that you did.

Ivan Barratt: We could go on for a couple of days about all the mistakes I’ve made. I thought one that would be really relevant to your audience would be my third apartment acquisition. I bought several smaller deals, then I bought a six-unit, and then a 35-unit, and when I was feeling really high on myself and really confident I bought a 30-unit redevelopment deal here in Indianapolis, Indiana.

Basically, it almost crushed me, almost  killed me, almost ruined me. Everything that could have gone wrong went wrong, and I made a bunch of mistakes, so I’m happy to start wherever you like. Right out of the gate, Joe, I paid too much for it.

Joe Fairless: Okay. Tell us maybe how you found it, and when you say redevelopment, will you elaborate on what that means?

Ivan Barratt: Yes. This deal was actually on LoopNet. It had been on there for a couple years, and I had this suspicion that this area that it was in was going to turn around. It was in the path of redevelopment. So I went in and made a much lower offer than the seller had on LoopNet for it, and actually was able to strike a deal… 30 units for about – by the time I closed – $600,000.

Joe Fairless: What was it on LoopNet for?

Ivan Barratt: I think it had been listed on LoopNet for 1.1 million for a couple of years… And it was in an area that I could tell was going to redevelop, but at the time it was a very, very distressed project, and I thought that I was ready for a bigger renovation deal, and that I could handle it with the team I had in place, which ended up not being the case.

Joe Fairless: Initially, if it’s on LoopNet, 1.1 million, and then you’re able to get it for 600k, I imagine initially you’re celebrating.

Ivan Barratt: Oh yeah, I thought I had a deal on my hands, big time.

Joe Fairless: How much did you think you needed to put into it per unit in order to get it to where you wanted it?

Ivan Barratt: My biggest mistake was thinking that I could put some more lipstick on it, and I could — basically, I committed one of the mortal sins of real estate; I walked away from the closing table with about 100k in proceeds to help me do some renovations, and I thought I could do the rest out of cashflow.

Joe Fairless: Okay. How much did you plan on doing out of cashflow?

Ivan Barratt: I figured I only needed a couple hundred grand to make it better.

Joe Fairless: In addition to the hundred that you had allocated?

Ivan Barratt: Yeah, I figured over the first couple of years I would continue to recycle all the positive cashflow, all my profits back into the deal to continue to improve it and make it better.

Joe Fairless: Okay. Why is that a mistake?

Ivan Barratt: Well, in this particular instance, the property was in such bad shape, and the tenants were so awful that it was hard to collect rents, it was a constant amount of phone calls… The ones I took over as a new management company, the phone started ringing off the hook with folks that think that you’re there to fix everything right away… So because I’d been pretty loose on my due diligence and just thinking “Well, I’m getting this property for such a great deal…. I’ll figure it out”, sort of that cowboy mentality of buying real estate really hurt.

Every time you peeled back the onion, there was another layer of problems. The HVAC was all in bad shape, there were heaters that were just on their last leg, water heaters leaking like sieves, bad plumbing all around… But the worst part was the resident class there was so awful; even if I had fixed/renovated units, I wouldn’t have even been able to attract quality residents.

The average rents when I bought the place were in the $500, and just trying to get residents in there, I ended up  having to drop rents just to try to get cashflow going. It just kept getting worse and worse. My partner and I ended up putting in more capital, I took out some business lines of credit just to push more cash into the deal, and it kept getting worse and the debt just kept stacking up. We kept going down what I think you and I would maybe call “the maintenance and repair death spiral.”

Joe Fairless: Absolutely. If you were to close – God forbid – this property again, different name but all the same fundamentals, and you bought it for 600k… I’ll even throw this other variable in there – you didn’t learn your lesson from the first one in that you still only have 100k in cap-ex… Would you a) do what you did on the first one, where you dropped rents to get cashflow going, or b) would you just rip off the Band-Aid and evict who needs to be evicted, fix it up and then build up from there? Or would you do c, which is something I didn’t mention?

Ivan Barratt: I don’t know if this fully answers your question, but the problem that we had there with these low rents is that when we would throw people out, it was also very tough to get quality tenants at that rent rate. I mean, that’s pretty low rents, right? So you would throw people out and then one out of three would end up being bad residents again, which would cause even more problems; you’d be farther into that issue.

I think what I would tell you if I had a time machine, I would have done my homework a little bit deeper, I would have gone back to the seller and said “Listen, I’m gonna need X price for the property.”

Joe Fairless: What would that price be?

Ivan Barratt: It would have been probably closer to 400k… And say “Hey, I’m walking otherwise…” And I also would have done the financing completely different, which is what ended up saving me. Late in 2016 we were able to refinance the property, and I can tell you how in a moment… But I would have gone in with my private or hard money lender as some people might call them, I would have gone in with him out of the gate, with much more capital set aside for the improvements. I would have thrown everybody out on day one, literally vacated the property and started over the right way; that’s how I’d rip that Band-Aid off. That’s actually what we ended up doing in late 2016 to turn this thing around.

The only thing that really saved me, Joe, was the fact that I did end up buying in that good location. It took longer for the area to redevelop, which is almost like being wrong, being early… But the area did finally catch up, and my private lenders – we put together a new business plan for how we would essentially throw everyone out and start over, and do new kitchens, new windows, new parking lots, new HVAC, new surfaces… All of the things that we really should have done right out of the gate. We were able to convince our private lender to do that, so we were able to take out that old legacy debt and throw everyone out.

Fast-forward to now, I’ve got a much better team to execute the project, and we were able to turn it around and get it refinanced with Freddie a few months ago.

Joe Fairless: Oh, wow. A few months ago as of this interview?

Ivan Barratt: As of this interview, yeah. In early ’16 we got our approval from a private lender to do basically a redevelopment loan… So we retired the bank debt that was on it, and we had – gosh, almost 400k in reserve for renovations and for some interest expense on the debt while we threw everybody out.

So over the course of ’17 we got it renovated, got it released, and got 90 days of trailing financials, so basically by early ’18 I refinanced this property with Freddie on a valuation of 2.1 million.

Joe Fairless: Are you gonna make any money on this?

Ivan Barratt: Yeah, we’ve actually got a bunch of our capital out, and we’ve still got some hard equity in the deal, and as of recently, we’re in PSA negotiations with a buyer to buy us out at a similar valuation, and assume the Freddie debt in place.

Joe Fairless: That’s outstanding. Congratulations on that. You mentioned the team that you had initially didn’t work out… Can you elaborate?

Ivan Barratt: Yes, I absolutely can. I had a very inexperienced contractor that thought he knew what he was doing, because we had renovated some smaller assets together and he was renovating other single-family homes… And I trusted him too much to be able to execute. His pricing was correct; I didn’t have the management team I have now, I didn’t have the maintenance and construction oversight that I have now.

Then we’ve got a director of maintenance and construction, I’ve got a director of property management, an internal accounting team, and then my partner who runs a lot of the day to day operations on the management side now. In short, I worked really hard to be the dumbest guy in the room when it comes to my executive team, because of past challenging situations such as the one that we’re talking about.

Joe Fairless: How hard do you have to work to be the dumbest person in the room?

Ivan Barratt: Really hard.

Joe Fairless: Oh, really? [laughs] It’s easy for me. I just enter the room and automatically I’m the dumbest person in the room. [laughs]

Ivan Barratt: Yeah, I thought there might be a little bit of humility in there. You know, finding people who can execute in their lane and that don’t need a lot of hand-holding and a lot of oversight used to make real estate seem easy. Now we’re having a lot more fun; we’re really focused on our management culture. We’ve got great staff at the top, running their various disciplines within the organization, and they all report to my partner, who’s the COO who runs day-to-day decision-making.

Being the entrepreneur/visionary kind of guy I am, getting out of the way of the people who can mind the details far better than me has been a game-changer for the organization.

Joe Fairless: I hear you. Absolutely. Everyone benefits as a result of that. After hearing you talk about this deal and talking to you about the deal, it sounds like the lessons are 1) proper due diligence, and that goes with the residents, as well as the cap-ex mechanicals (that sort of stuff) on the property. 2) Being properly capitalized to execute the vision, and then 3) selecting the right team. First off, is that accurate? And secondly, if so, is there anything else that comes to mind?

Ivan Barratt: Yes, I would tie off that list with discipline as the deal sponsor. I was too impatient, I was too eager to get another big deal. Today we might be doing 200 and 300-unit acquisitions, but at the time it was a big deal and I was really eager to get my next project going. I had investors on the sideline wanting to invest, I had a little bit of a track record, and I let my own ego and my arrogance get in the way and cloud my judgment.

Joe Fairless: With the due diligence items and being properly capitalized, what’s different now about your company? And ideally, if you could get into some specifics on what you do now, that would be helpful.

Ivan Barratt: Absolutely. The collective brain power first and foremost is much larger now, with that director executive team I mentioned before. There’s decades of apartment industry experience. Now we look at probably 200 or so projects before we choose one, so there’s a lot more discipline there. We can walk away from just about any deal at any time, if we need to.

Cultivating that culture that “Hey, we’re in this for the long haul…” We wanna do, say, six deals a year right now. Last year we did three. This year we may only do another three, and that’s okay; we no longer need to do a deal or refinance a project or sell something to make payroll. The management company is self-sustaining now.

Joe Fairless: When you were pumping money into the bottomless pit, as it seemed, I imagine, at the time, were you in a tough spot financially, just as a business and personally?

Ivan Barratt: It didn’t feel great. Not necessarily a real tough spot yet. I had a good partner and we both put some more capital into the deal. I was perfectly fine taking out a business line of credit in my name attached to the property to show that I was not interested in losing this project or letting it go… But it resulted in a lot of sleepless nights, a lot of stress, absolutely.

Joe Fairless: How do you psychologically get through that?

Ivan Barratt: Well, that’s a great question. Working out definitely helps. Gosh, where do I start…? I think first and foremost facing yourself, and then God, or the Universe, or however you wanna language it. For me, facing God… That I’m being taught this for a reason. Sometimes I would say to myself over and over again, almost like a mantra, “I’m learning on 30, so that I don’t make this mistake on 300”, and I am so thankful that I paid tuition on 30 units, not on a really big deal, with a lot of capital at stake.

Joe Fairless: With that comment, what would your advice be to someone who wants to go from singles to 50 units, or 100 units?

Ivan Barratt: In today’s market I think it’s gonna be pretty difficult, but I think if you have the discipline and the perspiration, it’s not impossible at all. You’ve probably talked about this before – it’s the difference between simple and easy. A lot of the things in real estate are simple to learn and understand, but to actually execute them it’s anything but easy. If you’re willing to look at 200 projects before you buy one 50-unit deal, you’re gonna have a much better visceral understanding of what a good deal looks like, than if you were like me and you were just eager to go out and get your hands on something.

I think knowing a lot of property managers is a good idea… At least having one or two that you really trust, that you can get a couple of different angles of opinion on a project. That’s probably one of the first two things that come to mind. As you know, in this market it’s really, really difficult to find an actual good deal.

Joe Fairless: Yes, that is true, and the team is very important, that’s for sure. First off, congratulations on seeing through almost full cycle… But certainly having it in a good spot now, regardless of if the buyer closes on the transaction, you still got it in a really good spot. How can the Best Ever listeners get in touch with you and learn more about what you’re doing?

Ivan Barratt: I’m pretty easy to find, Ivan Barratt – it’s not a very common name. BarrattAssetManagement.com is a great place. I’m on LinkedIn, Instagram, @ivan.barratt… I’m trying to make myself easy to find.

Joe Fairless: Awesome. Well, Ivan, thank you for being on the show and talking about the 30-unit, the lessons learned from it… 1) Due diligence on both the property mechanicals, as well as the residences or the tenants. 2) Having it properly capitalized. 3) Having the right team. 4) The discipline that it takes in order to stay on the sidelines until you have the right opportunity, versus forcing your hand and being a motivated buyer, which is usually not a good thing.

Thanks again for being on the show. I hope you have a best ever weekend, and we’ll talk to you soon.

Ivan Barratt: My pleasure. Thanks for having me, Joe.

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