With over 30 years of real estate investing experience, Dave Sherbal discusses what it means to follow the cash to find savings and find the waste. Some of his advice today is to take the deals no one else wants – the hairier the better. He speaks on the balance sheet and the importance of due diligence (more than just basics). Finally, he shares the most common areas for optimization in apartment buildings.
Dave Sherbal Real Estate Background:
- Partner of C2G Asset Management (Cradle to Grave)
- 30 years real estate investing experience
- Currently, oversees 5k units and 600k square feet of office & retail.
- Coral Springs, Florida
- Say hi to him at: www.c2gcapitalmanagementllc.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. 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, Dave Sherbal. How are you doing Dave?
Dave Sherbal: Doing fabulous. Yourself?
Joe Fairless: I’m doing fabulous also. I’m looking forward to our conversation. A little bit about Dave. He’s a partner of C2G Asset Management. He’s got 30 years of investing experience. Currently oversees 5,000 units and approximately 600,000 square feet of office and retail space. His company is really interesting. It’s a third-party asset management company and he’ll talk about it a lot more in detail. Based in Coral Springs, Florida. So with that being said, Dave, do you want to give the Best Ever listeners a little bit more about your background and your current focus?
Dave Sherbal: Yeah, I’ve been in real estate since the late 80s. I started out as a workout person. I worked for companies over the years from Sydney Financial in the early 90s, to JPI and The Fifteen Group up until 2014. Each of the entities would be buying busted deals, putting them back together, and then flipping them. 2014 I decided to go on my own and I found clients that were either young acquisition officers, syndicators that liked chasing and buying deals but might not have had the experience of the due diligence, the underwriting, and working with the management companies, rehab companies. So I was more of a plug-and-play type of operation. I have overseen investment funds that I do asset management. Depending on where they are in the cycle, the C2G (cradle to grave) we help our clients anywhere within the lifecycle to maximize the value. We’re a national company as far as where our assignments are. We’re up North in Michigan, we’re in California, we’re in Texas, Florida, Georgia, Virginia, Maryland; anywhere where our clients ask us to go, we go. We work with 10 different property management firms; we’re not a management company. My partner and I, Clint Miller, who’s out of Tampa, we help a diverse group of clients. We’ve been through the upcycles, the down cycles, and we help guide newer individuals in the business for where the landmines are, not because we’re smarter, it’s probably we’ve hit those landmines over the last 30 years so we kind of know where to look.
Joe Fairless: Let’s talk about that. Where are the landmines that you know where to look, but perhaps a beginning investor… It sounds like it’s primarily multifamily, but you do have 600,000 square feet of office and retail. But just for the simplicity of this question, let’s assume it’s multifamily. Where are those land mines that a beginning some reassurance and multifamily asset managemnet investor, who can put a deal together, but wantssome expertise on the asset management side, wouldn’t necessarily know to look where you all look?
Dave Sherbal: What I tell some of my clients when I get involved after they’ve closed on a deal, I find that the focus on due diligence was more of putting the deal together, taking the broker’s book, and just repackaging it and not really scratching below the surface. If anything, more effort should be on due diligence. I’m not just saying the unit walks and the lease audit, but what’s going on behind the walls? What’s going on with the plumbing? Are you looking at the work order history to see a common trend? Are you going through the paid bill files and calling up the current vendors? Are you videotaping the lines? Because a lot of times new people in the business, they’re buying the older deals that are not institutional-grade deals that are in that 10 to 15 million dollar range, where that’s kind of where they fit because for the big guys it’s too small, and regional players are not looking for an older deal.
What happens is on these older deals, that’s where your repair and maintenance dollars really, really need to be analyzed. So I’m looking at source documents to figure out – we say where the weenie is hidden. Plumbing is a big item, electrical is a big item. The broker, they’re selling you a story; their job is not to tell you where all the landmines are hidden. Their job is to find the one person that’s going to come through the door and order the hamburger at McDonald’s. You have to do more digging around than just the basics. You need to use that time to have vendors out there walking and looking, and you have to go to the source document. Residents fill out work orders; you’ve got to look through the work orders and see where the trends are, you’ve got to go look at the detailed GL and see which vendors are being called, so that you can call them and say “Yeah, is there anything wrong with the plumbing lines?” “Yeah, we’ve put quotes in”, but the seller’s not going to tell you that.
My sense is you have to dig more than just the OM; you have to dig more than with the in-place management company is telling you, and you have to really do more of this front end so that you don’t have these hiccups down the road. You know what they are and they’re risk-adjusted decisions that you’re making that you want to buy the deal.
Joe Fairless: That’s a very good approach to hear, and also some excellent tactical advice. Thank you for that.
Joe Fairless: When you are mentioning look at the GL to see what vendors are being paid, then calling those vendors, and you gave the example about anything wrong with the plumbing lines, you also talked about electrical being a big item…
Dave Sherbal: You could do the same thing for pest control, you could be looking at all the turn vendors to see how they’re charging, are they charging for extra stuff that you may not want to do? But most people just look at the P&L. I know with my clients, we go through the detailed GL, and we have access to all the management company software, so we’re able to see the source document to see where we can improve after we acquired the deal, where we can improve on pricing, scope of work. I always tell clients “Don’t just rely on the P&L. Look at the source documents that make up the P&L.”
The other thing is, every month and even during due diligence, you’ve got to go through the balance sheet. A lot of sellers put things on the balance sheet versus the P&L, so that they over inflate their NOI. I like to see what’s making it to the balance sheet and then go to the source documents. I’m a CPA by background, never liked public accounting, but my advice is to follow the cash and learn how things make it to financials, because that’s where you find where the waste is.
Joe Fairless: Can we give some examples of by looking at the balance sheet, how that’s helped in the past, some specific examples?
Dave Sherbal: You’ll find that they’re taking costs that you put below the line and cap-ex replacement reserves and then booking it directly to the balance sheet; most people who aren’t looking at the balance sheet, they look at the P&L and the cash flow. But the stuff that gets directly booked to the balance sheet is not making its way to that net cash flow. You’ve got to kind of look and see. Even if you own the deal, sometimes management companies are booking stuff, resurfacings as part of the cap-ex cost, but you’re not putting the two statements together to figure out what the real net cash flow is.
Joe Fairless: What’s been a recent and challenging project that you and your business partner have picked up and had done the asset management for?
Dave Sherbal: I’d say most of our assets we’re not hired to do stuff that’s stabilized and the clients feel it’s running properly. We’ll always ask people to send us the T12s, the balance sheet, the rent roll, and we’ll take a quick look to see where we think there can be more savings. But most of our deals are deals that the metrics that have been underwritten or expected have been missed. A lot of the time it’s 1) people aren’t paying attention to doing property management 101; ownership is not focused on it because they’re looking for the next deal, or they’re just looking for the distribution amount, and they’re not paying attention to the day to day. Because to them, that’s what the property management companies are supposed to do.
But property management companies – sometimes they’re stretched thin, they have turnover, and they’re really looking at occupancy as their metric. They’re not looking at the details of what’s making up that number. Again, sometimes they’re not motivated by improvements, they’re motivated by management fees. So if you’re not watching them, and they’re not watching the third-party vendors, no one’s really watching your 10 million, five million, 50 million dollar business. That’s what I tell my owners. You’ll be a better underwriter if you understand how properties actually operate.
Joe Fairless: Agreed with that. It’s a very logical statement. Let’s go to the first category of people where you said sometimes a property is operating effectively, but they send you the information that you mentioned to see if you can do a quick look to see if there are more savings. What do you look for in that quick look? If we were just on your shoulder, watching you review those documents and you were making a quick look, tell us your thought process.
Dave Sherbal: The first thing I do is I start looking at some of the basic metrics. Occupancy is important, but if you’re giving two or three months free rent or you’re not collecting, economic occupancy is not going to be high. I always break it down into economic occupancy, because that’s a more important metric. That’s looking at your lease loss, your concessions, your bad debt; it’s truly getting your net rental income. How much cash are you putting in the bank? If I see that a property is consistently 95 to 96, but economic occupancy is in the low 80s. Okay, what are the sources? Well, maybe I’ve been putting people in that shouldn’t be on the property and that’s causing a lot of bad debt. Well, I go look at how much they’re writing off, I go look at the balance sheet, how much is on the balance sheet with the policies of how they do write-offs. Some management companies don’t write off until the person moves out. Well, you can have three months of bad debt expense sitting on your balance sheet – that eventually is going to hit the P&L. Or maybe their credit criteria are too low and they’re putting in the wrong people. Or maybe it’s right, but people aren’t following it. So I’m looking at applications and lease files. To me, the economic occupancy is very important, and how each of the components makes up that number.
Then I look at what I call artificial vacancy. When I sort the rent roll, is everyone’s lease expiring on the last day of the month? Well, if that’s the case, you know your turn vendors and your in-house staff can’t control the units right away. It’s going to take time, so you’re kind of causing artificial vacancy because you have everything expiring at the end of the month. Are you doing it weekly or bi-weekly expirations? How is your lease expiration management? Is it set up properly? Is every tenant that are on the rent roll, they have expired leases? Are you charging them a month-to-month fee? The fee plus going up to market. So I look at the P&L and cross-tabulate that.
There’s a lot of things that these source documents are telling you that are red flags. When I go to the GL, are late fees being written off a lot or waived? There are things that you can just look at line item by line item and see what’s going on. What percentage of your water bills are recovered? What about your trash? What about your pest control? What about your gas? Are they billing back for as many expenses as they can? Because if you can’t get rent growth, getting reimbursement increases, and recapturing it, to me, is just like a revenue source.
So I’m going through each of these items on the P&L to see where we’re at. Where are we on eviction status beginning of the pandemic and when times are normal? Are you getting people off your books as quickly as possible? Because you don’t want someone living in a unit when they’re not paying. It’s an opportunity cost; you’d rather have the unit empty, clean, and ready to turn.
I’m looking at work orders, are they getting done timely? Done right the first time? I’m looking at ready product, are we turning units in a timely manner? Or are we trying to save money on the budget because we’re off somewhere else, so we’re not turning units timely? We’re turning the units when the leasing staff says they have somebody, rather than turning it in five days and then forcing the leasing staff to have to go out and find a tenant. They’re just red flags that you can look at if you’re looking at all the information that most of the management software provides, but people don’t have the time to look at it or they don’t know to look at it.
Joe Fairless: Yeah, I would say it’s they don’t know to look at it, or they choose not to look at it because they’re prioritizing other things. That would be my guess. Thank you for going through that in detail again. That’s very helpful. Of all those things, what are the two to three most common areas for optimization that you find the apartment buildings, specifically?
Dave Sherbal: I find that change in management, not the companies; people get comfortable. It’s hard to start turning the utilities back to the residence. So you can do it in slow increments. Because when you have to tell someone that they have to pay more now, the managers get nervous because they’re always afraid that it’s going to affect their occupancy. So you’ve got to get them to buy into it and to understand, and you really have to sit with your management folks and managers. They’re running a business; we’re the only industry where they may not understand what the financial statements are saying and what they mean. But they’re running a 50-million-dollar business. I’m not saying it’s everybody, but there’s a good chunk of people that if you sat them down and ask them to analyze a P&L and a balance sheet, they may not know.
But when you get your variance reports, a lot of the answers are, “Well, we mis-budgeted because occupancy is below.” Well, was it below because your traffic counts are low? Was it below because your ready product wasn’t there? Was it below because your pricing may not be right? They give you the symptom, but not the root cause of the issue. Or maybe we had too much move-outs and occupancy was lower because we raised our rents higher, we tried. Or maybe our customer service is not where it needs to be and that’s why people are moving out. Again, it’s more of teaching people to understand property management 101 a little deeper. I’m not asking people to run marathons; let’s start walking first, and then we can get to the heavy-duty stuff. I think people are missing how we used to do it 30 years ago before we had all these reports and computer systems. There’s some basic stuff that’s being missed.
Joe Fairless: Can you elaborate on that a little bit? Why you say that and what you mean.
Dave Sherbal: In the old days, a manager would be the ones in the regionals. They would know their market, they wouldn’t know what unit types to raise rents on, which ones to decrease on, and you would know if you raise your rents too much your leasing velocity would shrink. Now everyone just relies on LRO and YieldStar. I find that a lot of times people are just overriding it or they’re not managing it. They think because it’s an app, it’s automatic. In the old days, I would save the money, myself, the managers, the regional managers, we would know what our pricing would be; we would know what our comps were offering, we would know who had good floor plans versus bed floor plans.
A lot of times now it’s just out of their hands. The system is running and they have a marketing director in a regional office that’s doing their advertising and updating the ISL. When everything gets removed from the manager and the staff, the accountability is no longer there, someone in a corporate office. To me, the people that are sitting on your real estate, who are in those markets, they need to be held accountable for the business they’re running, that they’re living in that market and they understand what the competitive set really is.
Joe Fairless: We’re going to take a step back and I’m going to ask you what is your best real estate investing advice ever?
Dave Sherbal: Follow the cash, take the deals that nobody else wants; the hairier the better. If you just dig a little deeper, you’ll find that all the hair is easily removable. You’ve just got to understand why it’s there and go to the cause and not follow the symptom.
Joe Fairless: That is great stuff. I’m glad that we’re having this conversation. We’re going to do a lightning round. Are you ready for the Best Ever lightning round?
Dave Sherbal: Shoot away.
Joe Fairless: Alright. First, a quick word from our Best Ever partners.
Joe Fairless: Alright. Best Ever book you’ve recently read.
Dave Sherbal: Bruce.
Joe Fairless: Any books in particular on asset management that you’d recommend?
Dave Sherbal: It’s funny, every company treats asset management differently. If you put 10 companies out there and said, “What does your asset manager do?” it could be everything from macro-level stuff to micro. So macro to me, some institutional people that come out twice a year, they take a mental snapshot, they’re kind of looking at refinancing and some big-ticket stuff. Micro, which is myself, even though I do the macro for my clients, we’re hands-on. Before the pandemic, we were on our real estate every month; if it’s a new deal, it could be every two weeks, we’re on the weekly phone calls, we’re managing cash. We’re hands-on and we’re driving value. When the deal is stabilized, then you can get more into a routine. But when deals are not running properly, you really have to be hands-on.
Joe Fairless: Noted. I was asking about a book. Any book on asset management that you recommend?
Dave Sherbal: No, I don’t think there are any books. I’ll be honest with you, there’s more in property management, but asset management is a little bit different of a beast.
Joe Fairless: Of course. Okay, Best Ever way you like to give back to the community.
Dave Sherbal: The way I give back that I do, is that – no one took me under their wing when I was starting the business. So there are a lot of people out there that I will introduce to clients and try to be a marriage maker, whether it’s a vendor with a client, an employee with a client… I’m always willing to answer a phone call and give people my two cents. I’m always willing to go and help people that are younger than me, because it would have made my life a little easier over the last 30 plus years. So I try to give back and help people out. I don’t ask for anything. It’s always good karma. You find out that when times are great, everyone’s your best friend, when times are tough, you find out who your true friends are. Those are the people that you should always stay in contact with, the true people.
Joe Fairless: What do you all receive in compensation for the asset management?
Dave Sherbal: Well, it depends on pricing. But our fee, the way we structure it, it’s a flat monthly fee plus travel. It’s going to be cheaper than bringing staff in house and you’re going to get 30 plus years of experience. All of our deals are handshakes. If you don’t like us, we don’t like you. You just tell us, “Let’s end the assignment.” If it’s a short-term deal – same way, we move on and we go. But you’ll find out that a lot of our clients that is two years, three years, four years, and we’ll help train their staff so that one day they can fly solo. We have some clients that we’re just purely advisors, just to help them out. Maybe they want to build a management company. Well, my partner and I, we’ve run management companies in our past.
Maybe they want to build an asset management infrastructure, we can help them do that. We do anything from cradle to grave, whatever our clients ask of us, and we make sure that our pricing is more efficient than bringing it in-house.
Joe Fairless: How can the best listeners learn more about you and your company?
Dave Sherbal: Well, they could always call, or you can go to our website, C2G Asset Management, and you can find us on LinkedIn, Dave Sherbal and Clint Miller. We don’t do any third-party marketing; all of our businesses are word of mouth. We’ll give you a list of every client that we’ve worked for and they can tell you the good, they can tell you the bad, they can tell you what worked, what didn’t work. But you’ll find that most of the people will tell you it worked.
Joe Fairless: Thank you for being on the show sharing some very tactical things that can be implemented immediately for apartment investors and asset managers, as well as sharing your philosophy and approach. The following, the source, making sure you know what is the cause, not necessarily treating just the symptoms. And then again, I love the specific examples that you talked about. Thanks for being on the show. Hope you have a Best Ever day and talk to you again soon.
Dave Sherbal: Be well, God bless.
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