October 24, 2019

JF1878: How To Communicate With Investors When Something Goes Majorly Wrong | Syndication School with Theo Hicks


Floods, fires, crime, wind damage, etc… They all happen, how you communicate with you investors about their investment is crucial. Communication on current deals will likely sway your investors on whether they will invest with you again or not. Ideally, when things go wrong, you respond quickly with relevant information for them. Theo will cover what we have done when a property was hit by hurricane Harvey. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.


Theo Hicks: Hi, Best Ever listeners, and welcome to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks.

Each week, we air two podcast episodes, every Wednesday and Thursday, on the Best Real Estate Investing Advice Ever Show, that is the Syndication School series. These episodes focus on a specific aspect of the apartment syndication investment strategy. For the majority of these series, especially the first 20 or so series, we offered free resources. These are PowerPoint templates, these are Excel calculators, how-to PDF guides, things that accompany the series that we talked about, that will help you in your syndication business. And those are, of course, for free. All of these free documents and free Syndication School series can be found at SyndicationSchool.com.

In this episode, as I mentioned yesterday – or in the previous Syndication School series – is how to communicate with your investors when something goes majorly wrong. This is a process that we came up with after going through the process of communicating a major issue with investors.

This particular issue was not the fault of anyone at our company, at Ashcroft. It was actually a hurricane. The majority of Joe’s portfolio is in Texas, and this was two years ago; it was Hurricane Harvey. If you remember, Hurricane Harvey was a huge hurricane that hit Texas… And we obviously had to communicate that to our investors and let them know what our plan was if something were to happen to our properties from the hurricane.

Obviously, this could be a hurricane, it could be a fire, it could be an earthquake, it could  be a flooding, it could be any sort of large issue that happens, that affects the entire property – how do you communicate that to your investors.

You can also apply this approach to smaller issues as well, but today we’re gonna talk about this in the context of a huge national disaster type issue that affects the entire property. Obviously, this is going to have an impact on your investors if something were to happen at the property, and they might not necessarily know what the insurance process is like, or things like that… And they might be afraid that they’re not gonna be able to get their capital back, make their money back if the property was entirely destroyed by a hurricane.

So here is the three-step approach that you’re gonna wanna use once a natural disaster type even has occurred, from your perspective, in order to communicate this effectively to your investors. This approach – we’re calling it the S.O.S. approach. The S.O.S. approach stands for Safety, Ongoing communication, and Summary.

The first S is Safety, and the first step when any sort of major crisis occurs is going to always and most importantly be safety. That, of course, can be safety for the people at the property, as well as the safety of the money that was invested by your passive investors. So from the people perspective, one of the first things you’re gonna wanna do is ensure that your residents and your team members on the ground are safe.

For this Hurricane Harvey example, it actually hit Houston, and at the time Joe had two apartment buildings in Houston. One of the buildings was unaffected, while the other one was in a flood zone and received some minor damage. So fortunately, for these properties, all the residents and all the team members on the ground were safe and secure.

Now, obviously, if this wasn’t the case, then you’re gonna have to take some extra steps to make sure that your team members are safe. So if the hurricane/fire/whatever impacted the property majorly, then you’re gonna wanna take steps to make sure that everyone is okay at the property, make sure everyone is safe and sound, and if they’re not, take the appropriate steps there.

From a money perspective, one of the properties – the one that was in the flood zone, in this example – took in small amounts of water, but fortunately they had flood insurance. So after they did a final assessment, they went ahead and decided whether or no they were gonna make an insurance claim or not.

So from a money perspective, whenever a crisis like this occurs, what you’re gonna wanna do is you’re gonna wanna review your insurance policy. So if it’s flood, do you have flood insurance? Do you have hurricane insurance? Do you have fire insurance? Earthquake insurance? We don’t have a Syndication School episode on this, but we did do a blog post about how to underwrite deals that are in flood zones.

Basically, what you wanna do is whatever that additional flood insurance is going to be, add that to your operating expenses. So if your property is in the flood zone and you decide to go ahead and get flood insurance, when underwriting your deal make sure you’re including that expense in your operating expenses.

Ideally, if something goes majorly wrong, you have insurance to cover that. If not, then hopefully – and this is why we recommend having an operating account fund upfront, to cover things like this. So raise extra money to cover potential issues that happen like this. Because if you don’t have insurance and you have no money, you’re either going to have to pull money from your operating accounts to cover the costs, and/or do a capital call. Or you might even have to sell the property because you can’t cover these expenses.

So for safety, 1) ensure the safety of your residents and your team members, 2) ensure the safety of  your money, which means going over your insurance policy to see if you can actually file a claim to cover this, or if you actually have to pull money from your accounts, raise money from your investors, or (God forbid) sell the deal because you don’t have that money to fix the issue to bring the property back to stabilization. So that’s S.

Number two is O, Ongoing communication. So once you’ve ensured the safety of the people and you have an understanding of the initial damage done to your property, that’s when you want to bring your investors into the loop. You don’t wanna just instantaneously reach out to your investors right away. You wanna first make sure everyone’s okay, and then figure out what exactly happened to your property, what the effects were from this disaster at the property.

Now, for the Hurricane Harvey example – for hurricanes you get some forewarning. For Hurricane Harvey I believe they were talking about it probably a week before it actually came. So once Hurricane Harvey actually made landfall, we were able to send an initial email to our investors to let them know if the property was impacted. So everyone was ready for it to come. Once it hit, they made the assessment quickly and were able to reach out to their investors right away and tell them that “This property is okay, and this property took some minor flood damage.”

And for that property that took minor flood damage, that’s what was included in that email. For the one that didn’t, that’s what was included in that email. So for the property that did take in the water, we communicated that information and then stated that we would provide another update with more details once the hurricane actually weakened.

So for hurricanes there’s gonna be forewarnings, so you can send  an initial email right away to say “Hey, there is damage. We don’t know the extent, so once the hurricane weakens we’re going to go ahead and go in there and do a full review, and we’ll provide you with an update at that point.”

If it’s a fire or some sort of other flooding, or an earthquake, or something like that, then you can send out an initial email as well. If you know there’s damage at the property, you can say “Hey, there’s damage. We’re assessing. We’ll let you know.” But basically, you don’t want to send an email with no information at all.

A few days later, after the hurricane did weaken (for this example), we sent the investors a second email with another status update that included what happened to the property – we had some minor flooding – and also “Here’s how we plan on managing the situation moving forward.”

What’s important in that second email, and what’s important if there’s a fire/earthquake in that first email, is 1) let them know what happened to the property, what the damage was, and 2) let them know what your plan is to fix the problem. Did you file an insurance claim, where is the money coming from, how long is it gonna take to fix, and how is that gonna impact the KPIs at the property – occupancy, renovation schedule, things like that.

Overall, when you’re doing your ongoing communication, it’s better to provide a few updates that are spread apart, that have a lot of information, as opposed to sending hour-by-hour updates… Because you’re not gonna have information coming in to you to provide enough information to your investors to make hour-by-hour updates really relevant to them. So that’s number two, ongoing communication.

The last one is S, so that’s Summary. S.O.S. – Safety, Ongoing communication, and Summary. For this particular example, about a week or two later we had a much better understanding of the situation, and at that point we provided our investors with a summary of where we netted out from an insurance claim standpoint, or if we didn’t do an insurance claim standpoint, how we’re going to fund the repairs, and really any other developments that happened since then.

Overall, the process is 1) Safety – make sure first that everyone at the property is safe. Then once everyone at the property is safe, you wanna assess the damage at the property to see how that’s gonna affect the money, so making sure the money is safe. Once you know the damage at the property, the next step is ongoing communication. This could be one email, two emails, three emails, depending on the type of crisis. But whenever you’re communicating, you always wanna make sure that you have new information. So don’t just send the same email three times every hour. Instead, send the first email that maybe says “Hey, the hurricane did hit our property. There is some damage. The next steps are to assess the damage and figure out exactly what we’re gonna do.”

Email number two – “Hey, we assessed the damage”, so addressing the next steps from the first email in, the second email first. “Hey, we assessed the damage. This property has some minor flood damage. We’re gonna file an insurance claim to cover the costs.” Again, address the next steps from the first email in the second email, and then provide more next steps on what you’re gonna do next.

Then, for this particular case, a few weeks later – “Hey, we did the insurance claim. Here’s how much money it cost, here’s how much our insurance is gonna go up. It’s not gonna impact your returns.” Any other developments that happened; maybe the hurricane came back and it hit again, so you need to go through the process again. Again, it really depends on the crisis, but overall, for the ongoing communication, the point is don’t do hour-by-hour updates. Provide updates that 1) have new information, and 2) has what your next steps are going to be.

And then lastly, Summary – at the end, when everything is said and done, you wanna summarize essentially everything that’s happened so far. “Hey, the hurricane hit. Here’s the damage, we assessed it. Filed an insurance claim. Here’s how much it cost. Boom, we’re done. Everything’s back to normal now.”

So the last email should be ending with — you don’t wanna say “Everything’s back to normal”, but it should be at the point when everything is back to normal.

So when a crisis occurs, follow the three-step procedure, S.O.S. Safety of the people and the money, Ongoing communication to provide your investors with status updates, and then providing a summary a few weeks later.

Of course, hopefully you never have to go through this, but it’s always important to have a process in place for these worst-case scenarios. Because if you don’t know what you’re going to do in these situations, then you’re not gonna be able to communicate it properly to your investors, which they’re not gonna like, which could reverberate into them not investing in future deals, which could be a complete mess for your business.

So use this S.O.S. approach whenever a natural disaster, any major crisis happens at your property, to make sure that you’re keeping your investors in the loop and that you yourself are on top of it. Because if you know you have to send your investors an update, well you’re gonna work a lot faster than maybe if you plan on just not telling them anything at all. If there’s a fire, for example, you don’t necessarily have to tell your investors, because they’re not gonna read about it in the news, or anything; or it’s not gonna be on the major news networks. But a big thing that we’ve learned that passive investors don’t like is a lack of communication when things go wrong. So they’re not gonna be mad if something goes wrong, they’re only gonna be mad if they don’t know that thing went wrong until it actually affects them monetarily… Because maybe there’s something you could have done beforehand to alleviate that from even happening in the first place.

Again, S.O.S. – Safety of people and money, Ongoing communication, Summary.

That concludes this episode. To listen to the other Syndication School series about the how-to’s of apartment syndication, and make sure you also check out all of our free documents – those can be found at SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow.

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