August 14, 2021

JF2538: Raising $4M in 12 Days with Chad Sutton #SituationSaturday

At the start of the pandemic, Chad Sutton was on his way to closing a deal…until the lender backed out 12 days before closing due to projected economic changes. Now, Chad’s left with raising $4M before time runs out. He tells us his first three calls he made after finding out the news, the first fire he put out, and how he made it happen against all odds. 

 Chad Sutton Real Estate Background: 

  • Previous episode: JF2372
  • Full-time real estate investing, formerly Aerospace/Mechanical Engineer and then Global Sourcing Leader
  • 2 years experience
  • 600+ multifamily units and growing
  • Based in Nashville, TN
  • Say hi to him at:


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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 the fluffy stuff. With us today, Chad Sutton.

How are you doing, Chad?

Chad Sutton: Joe, I’m doing well. How are you?

Joe Fairless: Well, I’m glad to hear that, I’m doing well. And today, Best Ever listeners, because today is Saturday, we have a special segment for you called Situation Saturday. And if you want to hear more about Chad and his story, then go listen to Episode 2372. And the title of it is Generating Off-Market Deals Through Broker Relationships. How intriguing that title is… I might go listen to it and get a refresher on that myself. Chad has 138 units across five properties and it is growing. Is that number still accurate, Chad?

Chad Sutton: Actually, we recorded our episodes so long ago… We’re closer to 600 units at this point, and we’ll be acquiring more at the end of the month.

Joe Fairless: Alright. Well, there’s that. 600+ units and plans to acquire more. Based in—are you still in Nashville?

Chad Sutton: Correct.

Joe Fairless: Based in Nashville, Tennessee. So today, here’s the situation that Chad’s going to talk to us about… And it’s going to make you a little sick to your stomach as you hear me tee it up, because you don’t ever want to be in this position… But should you come across this position, here’s how he and his team handled it.

So the situation is you have a property under contract, you have $250,000 non-refundable, and you are 12 days from closing on the property. And the curveball/fastball to your face is that the lender now backs out. What do you do? So Chad, tell us what happened.

Chad Sutton: Thank you, Joe, for that preframe, I really appreciate it. So Best Ever listeners, we have to really go back to March of 2020. And if you remember, this is before the world stopped turning. This is before COVID graced our shores with his presence. We endured lockdowns, we endured restrictions to keep everyone safe. Businesses were going out right and left. The world changed on us right there, right? We had no idea what would happen in the real estate world, nor did we ever envision that an eviction moratorium would show up and really change the way the real estate market operated for a short time. So that’s where we are.

But envision you didn’t know any of that yet, right? We’re now in 2021. That’s history, or becoming recent history… But envision that you have a portfolio of properties in Knoxville, Tennessee – that’s where this was, so not far from where we are. It was a deep value-add project. We had teed up a lender, it’s a known secondary market bridge lender. So that’s a very important fact; what they do is they originate let’s say $50 million in short-term bridge loans and then they will go sell it on the secondary market to investors who buy debt. So that’s who we’re working with at this point; we had no reason to believe the loan wouldn’t go through… This was exactly what their avatar is for properties that they lend on, and we knew how to acquire and rehab these properties. There’s nothing out of the ordinary.

At this point, we had all of the equity raised, including our own. We had $250,000 non-refundable… And that’s not because we got ourselves in a bad position, that’s just because as typical contracts due after due diligence, money goes non-refundable, and as you’re working with lenders, you’re fronting acquisition costs and survey costs and all sorts of third-party reports. So we had a lot of costs committed on this deal. We were buying this deal.

And then imagine you get a call from your volatile seller who we’ve been dealing with for several months… He actually was also purchasing a commercial property, he was 1030-ing into one, so he has his seller to deal with. And envision that you get a call from a volatile seller, saying, “Hey, I just heard that your lender’s pulling out.”

Joe Fairless: And you hadn’t heard that yet?

Chad Sutton: I hadn’t heard that yet. Imagine getting that, and the cold chill that goes down your spine. You are 12 days from closing. I said, “What?” So I said, “I’ll get back to you.”

Joe Fairless: Who’s your first call, the lender or your business partner?

Chad Sutton: My first call was to my business partner. But my second call,  or our second call—

Joe Fairless: What did you say to your business partner?

Chad Sutton: What did I say? I don’t even remember, Joe. “You’re not going to believe this,” something like that. “I just heard from the seller that our lender is pulling out. Do you know about this?” She says, “No.”

So the next call is to the mortgage broker; because we believe in mortgage brokers, they help you get the right tool for the job… We call them and we said, “What in the world is going on?” They didn’t know. So what had happened is, right around this time is when COVID showed up, the stock market plummeted… All of a sudden these secondary market lenders couldn’t hit their margin calls, and they just stopped. This particular lender exited the market. It didn’t matter where the deal was, they had hundreds of deals that they just dropped and said, “Sorry, good luck.”

So if they can’t figure out what they can package those things up and sell them for, they just stop; they just quit originating. And that’s a smart business decision for them, but it’s kind of a problem for us, because what happened is the first call they made was a halt on all the third-party orders. So there was a rat on test that was going on at the property. The guy is sent back out to pick up the traps, and the seller says, “Oh, is it done? How did it go?” So this is the third party vendor, tells the seller, “The lender said the deal’s off, I’m just picking up my tests.” That’s how he found out.

Joe Fairless: Okay. [laughter]

Chad Sutton: So we look like complete imbeciles, because it looks like we don’t know what’s going on at this point… So the fury does not even begin to describe the emotion we’re feeling at that moment. So we eventually triangulate and find out that our lender is pulling out of the deal. They pulled out of all deals, we found out. And they said, “Oh, by the way, you remember that $35,000 cheque you wrote us for third party reports and underwriting and all that? Here’s the six grand we haven’t spent. Good luck.” Patted us on the back.

Joe Fairless: Yes.

Chad Sutton: So that’s where we are at this point.

Break: [06:49] to [08:49]

Chad Sutton: The fun situation that endures after this is figuring out where in the world are we going to go? We just lost our biggest investor.

Joe Fairless: What was the loan for? How much?

Chad Sutton: It was about $4 million.

Joe Fairless: Okay, so you needed a $4 million loan.

Chad Sutton: We needed $4 million, and we had 12 days to get there.

Joe Fairless: Okay.

Chad Sutton: Or we lose a quarter million. So that’s kind of where we are. Now, the first thing we did – and I’ll tell you, Joe… I know you’ll back this, because you’re very good at this with your investors… Communication was key. We didn’t hide a single thing. We got everyone on the call, all of our investors said, “Look, here’s where we are. If anyone wants out, this is your chance.” But then we assured them that we’re going to continue, but the risk is ours; you will not lose money. If this falls through, we bear the burden of the cost, and you get your money back. So there was constant communication with them. That was the first fire we had to put out, just explaining to them why we are not going to be–

Joe Fairless: How many—how much equity did you have raised?

Chad Sutton: It would have been about 1.1-1.2, something like that.

Joe Fairless: Okay, so about how many investors?

Chad Sutton: We did a joint venture on this one and it was only five investors. So not a lot.

Joe Fairless: Got it. Okay.

Chad Sutton: So this is not a big syndication, this is a joint venture of several savvy individuals. So I guess that makes it a little easier, right? They kind of know how the sausage is made. So now we have to solve the problem.

So what we didn’t realize was the downward spiral that the debt market was getting into at this point is, if anyone remembers, the debt market seized up for a short period; we were on the very beginning of it. So every day, my entire team – there are five of us – was basically reinvigorating conversations from other lenders we worked with on this deal, and then broadening out and talking to three different lenders every day. We talked to three different lenders, we’d get them up to speed, they’d be interested, and the next day, we get a call, they stopped lending.

After about 16-20 hour days in a row, which, by the way, at this point, we’ve had to do an extension… So we said, “Look, we’re going to figure this out.” Of course, our seller who was negotiating with his seller made it more expensive for us, so now we had to put more money in, just to keep the deal alive.

So just envision what you feel like doing that? You have a quarter-million dollars already at risk, your time is up, you know you want to buy the deal, you don’t want to lose that money… We can figure this out. Imagine the courage it takes to write another cheque knowing you may not ever see it again. It’s like you’re doubling down at the poker table, it’s that kind of thing.

Joe Fairless: So you wrote a cheque for how much more?

Chad Sutton: Another 50k.

Joe Fairless: Another 50k.

Chad Sutton: To keep it going.

Joe Fairless: Okay.

Chad Sutton: So now we’re at 300k.

Joe Fairless: Alright.

Chad Sutton: And we had two more extensions before we got this deal closed, so it kept getting better. But envision now that we’re 20 days into this, we’ve already put money upfront, and we’re like, “Look, we don’t have a horse to ride. We’re done.” Everyone had stopped lending, no one is making it happen. We’re literally on a call at midnight, on the 20th day, after the 16-20 hour days, and we’re just having this gut check with each other like, “Look, we have to put another extension up. Do we go forward, or do we just call this what it is and live to fight another day?”

Joe Fairless: Were they 15 or 30-day extensions?

Chad Sutton: The first one was a 20-day extension, I think.

Joe Fairless: Okay.

Chad Sutton: Making sure I get my math right… And then we got another extension, that was a 30 day after that, but we had proof of life at this point. So let’s get to that part of the story, right?

Joe Fairless: Alright.

Chad Sutton: So basically, the only lending options we had at this point were the 12% hard money types, right? It was really an irresponsible loan to take even, to get the deal closed at that point. Knowing what I know now, I might have been able to make those economics work, but back then I wasn’t. I didn’t understand the economics of those loans. So it was not a wise decision at the time.

So midnight, on the 20th day, we’re having a heart-to-heart as a team saying, “Do we want to continue?” So we agreed the next day, we’re going to make five more calls each, five more calls, and then we’re going to call it.

I kid you not, on the 20th day, my fifth phone call, we got a hit. I called a woman who I thought was a typical bridge lender, turns out she actually originates non-profit community development money. Our properties fit the bill for what the government was trying to do, and they weren’t really worried about the market; it’s government money they’re lending. So they were still originating. And I kid you not, Joe, I’ll fast forward to the end of this story and then we’ll go through some of the heartache… But we were able to get a better loan than we had in the beginning by persevering through this.

Now, we were supposed to close this deal in March… We didn’t get it closed until July. It was end of July by the time this deal finally closed, just because we had to go through that cycle and then get into origination with this government loan, which takes a long time. So the first time we had to say, “Okay, we’ve got to buy it. Let’s go ahead and put up the extra earnest money one more time.” So we put another 50j in, and so now we’re 350k in. And it’s almost like getting a HUD loan, but a shorter cycle. So we had to go through the excruciating underwriting process with them, making sure that they were comfortable along the way, and we wound up closing the deal in July, Joe.

So I guess the lesson here is really, don’t be irresponsible with it, but never quit. Times are going to get hard. If you’re in this business for any period of time, you’re going to run into these issues; you’re going to have the big investor back out, you’re going to have a lender back out, you’re going to have something pop up on your deal that is not per plan. It stresses some people out, but that’s the fun of it, Joe. People don’t invest with you and people don’t lend you money because you can write a good pro forma. They don’t invest with you because the property’s great. They invest with you because they believe you are intelligent to either make that thing perform to the plan you wrote, or figure it out along the way and react properly.

Joe Fairless: Yes, it’s a great point. And on that note, you mentioned that knowing what you know now—I think you said you could have made that 12% hard money loan work… So what do you know now that you didn’t then, where you could have made that loan work?

Chad Sutton: Yes, not every loan is this way, but I have learned that there are some deep acquisition rehab loans… I’ve done one at this point. Companies like Lending One, for example – they’re going to be 7-10 percent, depending on the risk of the deal. But what you don’t realize is they actually will include 12 months of debt service in the loan amount, and you actually don’t have to pay debt service for the first 12 months. So tI’m not saying that always works, but, for example, we just took over property in Augusta, and half of it is down to the studs, it’s got a fire unit… This is the closest thing to construction without starting over that you’re going to get. So it makes perfect sense there, because I literally have to dump all the toys out of the toy box and start over, if you think about it that way. So they know, they’re like, “Look, man, we know this property’s not cash flowing. We know it’s not going to service debt for the first year. Let us just put that in escrow and add it to the loan. You go spend this money responsibly, get it done and get this thing stabilized as quick as possible. Throw caution to the wind, don’t worry about vacancy, get it done. Because we want to be refinanced out in 18 months, and go do this again.”

So had I understood that there were lenders that worked on those kinds of economics, we might have been able to stomach a short-term bridge note on this property. I still stand by the decision we made, that the ones we were seeing we didn’t want to do, because it was more kind of like the lend-to-own types, right? There was a lot of gotchas in there that was—

Joe Fairless: Yes.

Chad Sutton: So we didn’t really want those. But I guess the lesson there, Joe, is you have a toolbox, right? You have a screwdriver, you have a hammer, you have a saw, you have—give me another tool.

Joe Fairless: You’re asking the wrong guy. Tape measure… [laughs]

Chad Sutton: Tape measure, there you go. So lenders are tools in your toolbox. An agency lender doesn’t work everywhere, a local community bank doesn’t work everywhere, and this high-interest rate bridge note doesn’t work everywhere. Deals are not found, they are made; and they are made by structuring the proper capital stack. And the proper capital stack requires knowledge of how to leverage private equity, how to leverage different types of senior and mezzanine debt, and everything in between. That’s really the art of the deal, man.

Break: [16:33] to [19:36]

Joe Fairless: How much of your background as a mechanical engineer comes into play when you’re thinking through that?

Chad Sutton: I’ve had a hard time relating it personally, but I think my team sees that. I, personally, am a very analytical member of the group. I am very comfortable in complex spreadsheets and applications of financial models. So I see numbers a little bit differently, and I think everyone does that, but I’m finding out that’s not true. I can relate numbers to shapes and sizes, and it becomes a pictorial thing in my head. So when I’m thinking about the capital stack, for example, I can visualize how these loans are going to work together with private equity and things like that, where a lot of people just see numbers.

So I think my engineering background — my team calls me a recovering engineer, almost like a recovering alcoholic, I have a lot of tendencies there… But I think it’s been very good to have that technical aptitude and the ability to look at things a little bit differently because we see value where others don’t, in a lot of situations.

Joe Fairless: What else that we haven’t talked about, do you think we should as it relates to this story and lessons learned?

Chad Sutton: Well, let’s see… The other part of it is – and I always forget to tell this piece… I think Vinnie Chopra says it best in his book, “Being a syndicator and putting deals together is almost like spinning five plates at one time on a pole. As soon as one of those plates starts to wobble, in this case, the debt, all attention goes to getting that thing balanced again and spinning. Well, when you take your eye off the other five plates, one of those can fall.”

So once again, we get to where we’re ready to close this property and we hadn’t even had a thought to go revisit insurance again, because it had been six months since we quoted… And we kind of knew the insurance market was hardening, but unbeknownst to us, Mationwide, who we had gotten our quotes for on these properties – these were like [unintelligible [00:21:21].26] Well, there was a time last year where they decided “The habitational market, we don’t want to insure anything or to write anything older than 1990.” So we had to go up the chain several levels to get approval for them to stand by a quote they wrote for us back in March, in July, which would have been another thing that could have gone wrong on the closing. So I guess the lesson there is it’s important to always be watching the other balls, even if you’re watching the one that’s on fire.

Joe Fairless: Well, closing this out, Chad, how can the Best Ever listeners learn more about what you’re doing?

Chad Sutton: Yes, so as you mentioned, listen to the episode from before. I think it was—what was it? 2,000…

Joe Fairless: 2372.

Chad Sutton: There you go. You can also go to our website at the, I’m sure Joe can put that in the show notes, but Quattro is Q-U-A-T-T-R-O. There you’ll find information on me, my partner’s, what we’re doing, the assets we own, and just all things Quattro. So, I’d love to hear from you, even if it’s just to say hello. We love talking about this stuff, and I’d love to see how we can help each other.

Joe Fairless: Chad, thanks for being on the show, sharing this story. Hopefully, we do not come into another worldwide pandemic… But regardless of what is the cause of the situation, there will be, unfortunately, Best Ever listeners who come across a situation where the lender pulls out right before they’re supposed to close, and this is going to be very helpful for them. So thank you for sharing your thought process and how you and the team navigated that

Chad Sutton: Absolutely, Joe. And Best Ever listeners, the final comment for me is, there is always another way; always, always, remember that.

Joe Fairless: Hope you have a best ever weekend and we’ll talk to you again soon.

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