July 18, 2020

JF2146: Lessons From A Buyout With Garrett Lynch


Garrett started wholesaling deals in the Chicago area and after realizing it wasn’t a sustainable model that he could grow into a business. He eventually had a business partner and acquired 3,400 units and due to some fallout between the two, he was bought out and took the lessons he learned to go on a break and came back strong with a new partner now owning 500 units.

Garrett Lynch Real Estate Background:

  • Full-time real estate syndicator
  • 9 years of real estate experience
  • Sold his portfolio in 2016 consisting of 3,400 units 26 properties
  • Currently owns 500 units 
  • Based in Scottsdale, Arizona
  • Say hi to him at https://nighthawkequity.com/

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Best Ever Tweet:

“Buy-sell insurance in place, I think everyone should probably have” – Garrett Lynch


Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever; we don’t get into any of that fluffy stuff. With us today, Garrett Lynch. How are you doing, Garrett?

Garrett Lynch: I’m doing great. Thanks for having me, Joe.

Joe Fairless: Well, it’s my pleasure and glad you’re doing great. A little bit about Garrett – he’s a full-time real estate syndicator, he’s got nine years of real estate experience, he sold his portfolio in 2016, which consisted of 3,400 units in 26 properties, and he currently owns 500 units, based in Scottsdale, Arizona. So with that being said, Garrett, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Garrett Lynch: Yeah, I started this business about ten years ago and I started out wholesaling deals in the south side of Chicago, just some of the rougher areas of Chicago, roughest in the country, probably. After that, I realized that that wasn’t really a sustainable model and decided to go work for a guy with 1,000 apartments, and in doing so, I learned the bigger business, and realized that we had resources to go and start syndicating deals.

So myself and my best friend at the time started a company in 2013. We started buying out portfolios of D Class properties, mostly Section 8 stuff, and then ended up converting into some larger multifamily deals. We started with a 50-unit and we did a 70, a 120 and then jumped to a 380-unit deal, and then after that, we’re like, “Oh, we can buy these bigger deals. Let’s just continue doing that because it seems to work a lot better,” and so we scaled that operation about three and a half years to about 3,400 apartments, self-managed the entire portfolio. We got screwed over by a couple of management companies early on in the beginning and decided to just start our own without really knowing anything about it.

So lots of lessons in doing that, but at the end of 2016, I got bought out of my part of the portfolio, and then since transitioned out. I went on a little bit of a hiatus for a couple of years, traveled around the world for a bit, then I came back and found Michael Blanc and [unintelligible [00:04:58].03]. They had a portfolio of about 800 units, and so I came on board with them as a partner to help them scale the business and add value to their operation. So that’s where I’m at now, and we had our last closing actually in December of 2019. We closed on a 276-unit deal in Huntsville, about a $18.1 million purchase price. So we’re still looking for deals even in this crazy COVID era, and our typical deal ranges anywhere from $8 million to about $35 million, and we target the south-east region.

Joe Fairless: Okay. Well, we got a lot to unpack here and thanks for sharing that. So let’s talk about — in no order of importance, but let’s talk about in 2016, you got bought out of your portfolio. So does that mean you all did not sell the properties, but you personally were bought out of your ownership in those properties?

Garrett Lynch: Yes. Just to be candid, it was a partnership fallout. So the partnership didn’t work, we got to [unintelligible [00:06:04].20] So there was a lot of things involved in that, but it just didn’t work out. When we got to that point, things changed and some things happened, and so we had to negotiate a buyout. So it was mostly done through lawyers and all that stuff, but we essentially defined the value of every property that we owned, and then I had a partner, my partner cashed me out.

On the other side – it was probably very lucrative. Obviously, I made a decent amount of money on that buyout. So it’s all the equity that I was owned was paid in cash for me to arrive at the values of each property and I got paid out on that. The downside is that I had to pay a lot of taxes on that, because I wasn’t able to attend 1031 any of those, and I had to pay out on depreciation recapture. So it was an interesting experience. I had to do that in order to get to the level that I’m at now, for sure, and it was a very challenging time, but I’m glad I went through it and I’m back here now.

Joe Fairless: On the buyout, when you’re finding the value of all the properties, and then here’s the percent I own and this is the value, is there a discount placed on what your value is, since you’re getting cash, and it’s not the value is the value of someone pays you for it?

Garrett Lynch: I did take about a 15% haircut, but it was more like a negotiating process. So it actually took eight months to agree on the pricing of every deal. So we went through every deal, and went “What is this worth? What is this worth?” on each one and then what do we pay for it, and then what is my percentage ownership in that? I owned a quarter of the GP on everything. So we had to go in, figure out what that looked like in cash, and then I took a natural discount because we were just trying to arrive at the pricing and how it all worked together. We had 25 assets that we had to basically agree on, so I couldn’t just sell all of them, it would have taken forever. So we just had to do our best at it, and it moved through surprisingly fast, considering all we had to go through, and so once we arrived at that number, that was just what happened.

Joe Fairless: And how do you determine the value of the property?

Garrett Lynch: We just went in and underwrote it as if we were going to sell it in the market. We got brokers opinions on each one, we came up with a big spreadsheet of every single asset, the mortgage, how much equity was in there, and then we just had to come up with a number and I had them throw out the first number. I always do that because it’s a sales strategy, just to see where they thought things were falling, and then if I had back up on any deals from broker opinion or anything like that as to where things would trade, I would include that as well.

We underwrote in an exit broker fee which– we didn’t need to do that. I think as part of the negotiation we did, it where it was 2% on any deal that was over $5 million and then 3% on a deal that was under that, or something. I can’t remember the exact details, but it was like a tiered brokers percentage that went into it. We were simulating a sale, essentially, on each deal.

Joe Fairless: That’s interesting. I’m grateful that you’re sharing this. It’s something that isn’t talked about a lot, and it’s something that when someone does come across this situation, what you’re saying now is incredibly valuable to those parties who are trying to navigate the buyout structure. So thank you for sharing this.

Garrett Lynch: Of course. Another way to just avoid that is to get buy-sell insurance in place, which I think everyone should probably have at a certain point. There’s a lot of things that can happen in a partnership. Let’s say your partner somehow, God forbid, passes away, and then their spouse is now your partner and you hate their spouse. So having that insurance in place, I think, can be helpful.

Joe Fairless: So knowing what you know now, with a type of partnership that doesn’t work, and I know you’re currently in a partnership, what are some lessons that you learned for the partnership that did not work? Maybe I shouldn’t say it didn’t work because clearly, you all had success…

Garrett Lynch: I think it was actually, Trevor McGregor that told me this that most partnerships lasts three to seven years, and I think the biggest thing that we didn’t anticipate– we went into it, we were friends, I was the deal-finding guy, and then my partner was more like the equity and accounting and finance guy, and I was the operation guy, too. So we did offset each other; that was good, I think, in a partnership. And I think what we don’t want to do going into a partnership is just go into it with your friends, unless they have a role that either complements you. You don’t want to do the same thing, you want to have different roles, obviously, in a partnership. But I’ve seen a lot of people that just structure deals and it’s all messed up. It’s a very tricky thing, it’s hard to navigate, and I think that we were very close friends, plus we did offset each other, but you have to be realistic about how things are going to change and evolve, and you have to be able to pivot as they do, and I think that we were lacking in that department.

Joe Fairless: For example?

Garrett Lynch: For example, we were taking on employees as we got larger, but some of the roles that myself or my partner should have maybe taken on, we didn’t really outline how we were going to do those in lieu of the new employees that we were able take on, and so what happened was maybe some of the roles that I used to before– I was wearing many, many hats, I didn’t wear as many hats, and so maybe I was perceived as being less valuable and really, maybe we should have pivoted into something else. That could have been part of it, and vice versa, with my partner, in some respects.

So having clarity around at what level and what roles and responsibilities you’re going to take on even with having employees, I think… People get into partnerships because they can’t afford to pay employees, that’s one reason. So they partner with someone and then they split it up, and then as you grow, you can afford to pay employees to do those roles, and that’s where you want to be. But keeping an open mind to structural changes as things progressed, I think, is what we didn’t do, and that’s something that you definitely need to look at as things pivot. Maybe there’s a partner that just doesn’t serve the partnership anymore as things progress, so having an exit plan in place is important in that respect. So it’s like, “Okay, well, if things go sideways, we hate each other, or whatever, what is that going to look like?” I think the easiest way to protect yourself is just keep things on a deal by deal basis. Personally, I think if we had done it more like that, it would have allowed for us to pivot in the proper way and things, maybe it would have worked out better.

Joe Fairless: So now let’s switch gears and talk about, you said earlier, you got screwed over by management companies. So let’s talk about that.

Garrett Lynch: Yeah.

Joe Fairless: Please tell us.

Garrett Lynch: So first off, it’s impossible to have D Class properties run by a third-party company; there’s too many moving parts. I think that was part of it for us. D Class– nobody really that we know are probably doing them right now;  maybe a few, but that’s where we started. So the property management companies, there’s really two types. There’s bigger assets, they’re running your property for 3% or whatever it is, plus you pay the payroll, but we had a portfolio. The other side is they’re going to charge you 10% and that includes payroll to some degree, and they’re managing multiple sites, and so you’re fighting for their attention in a lot of ways. So we had probably got screwed over by four different companies. The first time, they said they were going to [unintelligible [00:13:24].15] on our expenses. So if there was a lock that need to be changed by a third party company or something silly like that, you’re just supposed to absorb that exact cost. Well, they were taking the invoices and marking up 20% and changing – actually committing fraud – and then passing them through to us, and they’re keeping a 20% difference.

Joe Fairless: Wow.

Garrett Lynch: Yeah. So we caught that and we had a huge issue.

Joe Fairless: How?

Garrett Lynch: They made a mistake on one of them. They left both numbers on the invoice. They didn’t doctor it properly and we caught it. We went in and did– yeah, so stupid. So they didn’t doctor it correctly, we went in and then we started auditing and everything and we actually called the companies directly… A bunch of them that we found, that their actual invoices were less than the ones that we’re getting from the management company.

So that was a huge exit and departure from that company; that was the first one. And we had just one company that was actually finding all the vendors in the market, and creating their own LLC, and then doing something similar with billing us through their construction company or whatever, using the vendors that they found in the market; and similarly, they said it was going to be a pass-through situation, but all they did was find the vendors and then use them almost as subs under their LLC company, and then they marked everything up. So we found that out, too.

Joe Fairless: Wow.

Garrett Lynch: So it was just really silly stuff that was going on and we just had it right away — we had a bad taste in our mouth with third party management; we wanted more control.

Joe Fairless: Those are two different groups.

Garrett Lynch: Two different groups, similar issues; they just did it in different ways. Both groups, we thought were pretty repeatable, which was interesting.

Joe Fairless: Yeah. What made you think that initially?

Garrett Lynch: Just who they were affiliated within the marketplace. One of the groups is affiliated with auction.com. We’re like, “What? How did this happen with these guys?” So maybe we didn’t do enough digging or enough homework in the beginning, and I’m certainly not having that experience with our management companies now. So I’m not as afraid of them, but at the time, we were just like, “Look, we can’t even deal with these third party companies.” Silly stuff. So management companies don’t really make that much money, unless they figure out ways to make money. For example, there was one company that wanted to charge us 5% instead of the 10%. They’re like, “We’ll be nice. We’ll just charge you 5%,” and we’re like, “Okay,” and they were nickel-and-diming us on every single thing that happens. They’d go on a Section 8 inspection, they’d fail it, they’d charge us 200 bucks, then they’d have to do three more; charged us 200 bucks every time. Any maintenance, they’re charging us 250 bucks. So now they’re making money on piecemeal stuff in addition to the 5%. So it ended up adding up to 25% when you added it all up and it was just like [unintelligible [00:16:20].04] off where they’re just like, “Oh, well. Oh, landscape.” Their contracts are super simple sometimes, which is problematic, and they don’t tell you “Oh, this 10% includes this, or that, or whatever.” It was just– well, they made it up when you got in the situation.

So those were just learning lessons in the beginning, and it’s obviously much tougher with a property management company when you’re not doing large multifamily deals. But a lot of people are still doing 50 units, 20 units and they can run into the same issues.

Joe Fairless: If there are questions you could ask a property management company to attempt to mitigate that from taking place if you [unintelligible [00:16:58].22] properties?

Garrett Lynch: Yeah, I would dissect their entire operation, and I’d be like, “Listen, there’s two ways that property managers make money on an individual’s fees for visiting the site. Tell me about how that works, and then tell me what’s included in your actual percentage fee? What do I get with that? Does that include landscaping? Does that including unlimited access to your maintenance guy? How do those differ? And what can I expect as far as charges go?” and then I would try to get the redacted version of statements that they send out to other groups that they work with, and then of course, get references.

What I do now actually if I’m trying to get a third-party management company, instead of getting their references directly from them, I’ll go on their website and find the properties that they manage, and I’ll just point out five that are similar to mine and I’ll ask for those references… Because you know you’re going to get the best references if you just ask them for references… Which can be helpful, because you can dig into those references, but you want to just get unbiased random references. So if they can’t provide it, then that’s a red flag.

Joe Fairless: Yeah, good stuff. That’s a great tip. Just going on their website and then finding the properties that are similar, whether it’s the area or class, and then asking the management company to get you in touch with those owners so you can talk to them about their experience.

Garrett Lynch: Yeah, and I just did it with our company in Nashville, and they literally passed with flying colors. I checked, I think, six references and a random just point at on their website, and I checked [unintelligible [00:18:36].00] reviews and were having a great experience with them right now.

Joe Fairless: Imagine that. That’s a really good tip. Thank you for sharing that.

Garrett Lynch: Of course.

Joe Fairless: So you don’t buy D Class anymore?

Garrett Lynch: No.

Joe Fairless: Why not?

Garrett Lynch: D Class is like low hanging fruit. On paper, the returns look really attractive, but when you get into them, there’s a lot of unforeseen deferred maintenance issues typically that come with the tenant base that you’re working with. So we had a portfolio of 300 apartments; 150 of them in the beginning were this market rate, and half were– so 150 were Section 8 or around that. We had to convert the entire portfolio to Section 8, because people were losing their jobs so often on the other 150 market rate. Even good tenants, having a decent track record, they’d just lose their jobs. It’s typically more transient of an area and so you get that turnover. People don’t care about credit. You can’t screen people properly because credit’s just non-existent. So you’re dealing with a whole slew of issues.

Joe Fairless: What area, market and sub-market?

Garrett Lynch: Southside of Chicago. I was in Southside Chicago.

Joe Fairless: Okay, thank you.

Garrett Lynch: So over there, unemployment is really high, and people just switch jobs like it’s nothing, and so we had that experience. So the only way we were going to get paid is if we switch it to Section 8, and then when we got into Section 8, it’s very tough to figure out who’s a good and a bad tenant even if you get Section 8. So there’s those challenges in that, too.

Imagine if you rehabbed an entire house or an entire two or three flat, and then you put in the tenants and within a couple of weeks or a couple of months, they destroy the entire property. We saw that all the time. So you spend all this money to rehab it and now you’ve gotta rehab it again when they move out; or you fail an inspection because they didn’t get rehabbed property or because they destroyed something, and if you fail your inspections, you can go into abatement and you’re not getting paid. So there’s a lot of issues like that.

And then also the employees that you’re dealing with in those areas and those types of asset classes mirror the tenants. So you’re not getting the highest quality labor either. So this is the most distinct thing I remember. I had a staff– ten guys that were going around running these properties of the 300 units, and I was like, “You know what? I think some of these people are not working right now, they’re not doing their job properly,” and so I fired eight of the ten people, I kept two, and the properties ran exactly the same as if we had ten.

Joe Fairless: How’d you find out that eight out of the ten were not doing anything?

Garrett Lynch: I had a hunch because tasks were not getting completed on time that should have. I would just pop in randomly and go visit them. I’d figure out where they were and I’d just do random site visits and see what they had going on, and sometimes they weren’t doing anything or they’re just sitting around. So eventually, I just– it was more of a gut thing than anything and I was like, “You know what, I can hire these guys back if I’m really messing up now, but my payroll is insane from breaking even or losing money… I don’t really have a choice, so let’s just see what happens.” And so I just did it, and then sure enough, it ran exactly the same. Two guys could run this thing. It was just nuts. It was like a snowball thing. So we thought– we were like, “Oh, we’re not running properly. Things aren’t working, and we need to hire someone else. Oh ,we need someone else.” So we just kept doing it.

Joe Fairless: Okay, yeah. Because those guys were training each other. “So here’s what we do from 8 pm to 6 pm. We go in this little corner over here and have a little siesta.” [laughs]

Garrett Lynch: Yes, so it was just foolishness on our end… But any high crime area or anything like that, you’re dealing with a whole different set of rules, and it’s very tough to navigate it, because there’s so many tasks that you have to complete that you may not deal with on a B Class property, and it’s just based around the tenant base in the area that you’re in. A lot of variables that are unseen; and then there’s also very little equity. Of course a lot of your listeners know, but it’s like you have the lowest amount of equity in D Class deals, and then A can be the highest, actually. So it’s an inverse on that, but the D Class has the highest cash flow potential… Which is somewhat true, but you’ve still got to sell out of it at some point, and so when it came the time to sell all of these things–

Joe Fairless: Someone’s gonna buy it.

Garrett Lynch: –who wants to buy this garbage that Section 8 tenant left and destroyed the place? You’re not selling that thing for more than what you paid for it at that point. So the basis rose up way too high, and then when it came time to– actually, I think we lost money on a lot of them.

Joe Fairless: Taking a step back, and it might be something that we just talked about, but what is your best real estate investing advice ever?

Garrett Lynch: My best real estate investing advice ever, I would say, is to understand that this is a partnership business, and you need to figure out if you want to enter into this business, where you can add value to someone else’s operation and then just do it for little to nothing in the beginning; just add the value and do as much as you can. So you have to figure out what they need and bring it to them, and don’t expect compensation for it in the beginning. If you can just do something to learn the skill — the knowledge is way more important than actually making money in the beginning, and sometimes that’s tough for people to understand. But if your skill and knowledge level aren’t there, you’re not going to be getting paid anyways.

So for me, I started out making very little in the beginning. I didn’t know anything. I was just wasn’t that valuable to the marketplace, and it took time and surrounding myself with other like-minded people and trying to add value to their operation consistently to get to the level of actually making a decent amount of money. So I would say, don’t be afraid to go in that direction and add value with little to no compensation to get yourself ahead, so you can make a lot more later.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever lightning round?

Garrett Lynch: Yep.

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

Break [00:24:26]:07] to [00:25:43]:05]

Joe Fairless: What’s the best ever deal you’ve done?

Garrett Lynch: Best ever deal I’ve done was a 360-unit deal I found completely off-market in Columbus, Ohio. I think we bought it for $8 million, and in about a year, it was worth close to $15 million.

Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about already?

Garrett Lynch: A mistake I made was we went for a loan — we were going to close a deal with Fannie, and we didn’t put a stipulation in the contract that they had to show 90% occupancy. So the seller decided to drop their pants on the deal and just let it go. So the occupancy fell from 95% to 88% in a couple of weeks, and that didn’t meet the lender’s criteria, and so I didn’t have anything in the contract to protect us from that, and our money had gone hard at that point. So learning from that, obviously, you want to put some language in there to protect you if you’re going after debt that requires a certain occupancy.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Garrett Lynch: You can actually shoot me a text or a call, 630-709-8636, or email me at garrett@nighthawkequity.com.

Joe Fairless: Sneaky things property management companies can do. So thank you for identifying some things that have happened to you so we can look out for them, as well as how to approach partnerships, and when a partnership does go not as planned, how to navigate the buyout and getting into the specifics. Great stuff there, as well as talking about D Class properties. So thanks for being on the show. I hope you have a best ever day. Talk to you again soon.

Garrett Lynch: Thank you so much, Joe.

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