He found the best and highest use of real property, and brings it to life! This exciting episode showcases the complicated yet rewarding nature of syndicating and developing deals. Scott, our guest, literally sold all he had and went to war to be a soldier, he learned leadership and initiative, and came home to build an empire. This is a must listen!
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Scott Lewis Real Estate Background:
– Co-founder of Spartan Investment Group, LLC
– In 24 months, SIG has completed 4 projects totaling $2.5M with an average ROI of 36%
– Currently has three more projects underway, and raised over $3M in private equity
– Led several successful real estate developments ranging from single-family flips to raw land development
– Based in Denver, Colorado
– Say hi to him at http://www.spartan-investors.com
– Best Ever Book: It’s Your Ship by Michael A
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Joe Fairless: Best Ever listeners, 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 fluffy stuff.
With us today, Scott Lewis. How are you doing, Scott?
Scott Lewis: I’m doing great, Joe, and Best Ever listeners.
Joe Fairless: Well, nice to have you on the show and I’m glad you’re doing great. A little bit about Scott – he is the co-founder of Spartan Investment Group. In 24 months his company has completed four projects, totaling 2.5 million dollars, with an average ROI of 36%. Currently, he has three more projects under way, and has raised over three million dollars in private equity for those projects. He has lead several successful real estate developments, ranging from single-family flips to raw land development. Based in Denver, Colorado… With that being said, Scott, do you wanna give the Best Ever listeners a little bit more about your background and what you’re focused on now?
Scott Lewis: Sure, thanks Joe. Best Ever listeners, my background really started Chemistry and Marketing major coming out of Michigan State University. I went into the corporate world for a little while, I had a regional sales job with a biotech firm, and kind of got sick of that, so I did the crazy thing and sold everything I owned and joined the army and went off to war, which actually was a really good experience. It got me some really good leadership training and what not, and when my active duty time ended I came out, I went into government service, which gave me some additional really solid training – less on leadership, but more on strategic planning, which I’ll talk about… Which ultimately lead me to build the strategy for my company. Currently – Spartan Investment Group. We’re real estate syndicators and developers. We go out, we find deals and then we put together the money for them. We also develop deals as well.
Joe Fairless: Real estate syndicator AND developers… When you say “develop”, are you talking about ground-up development?
Scott Lewis: Absolutely. We specialize in taking raw land and then developing it. As I’ll get into a little bit later, we look in two different areas. There are larger single-family developments with multiple units, or self-storage, but we like to focus on raw land.
Joe Fairless: Larger single-family development or self-storage… The four projects totaling 2.5 million that I mentioned earlier – what were they?
Scott Lewis: They were all single-family flips. We started, like a lot of folks do, in renovating single-family homes. I will say that I was a little bit non-traditional in that the smallest renovation budget we’ve ever worked with is $165,000 on an 850-square-foot house in Washington DC. One of the houses of those four projects was a raw land development, and that’s kind of what wet our appetite for that. This is a little bit more difficult, so there’s a little less competition in that asset class.
Joe Fairless: It is a little bit more difficult, that’s for sure, the raw land development. It’s interesting… We talked in Denver, and Scott was a speaker at the Best Ever conference, and I really enjoyed getting to know Scott, and I took a lot of notes whenever he was talking. We had some drinks afterwards, and one of the things that I’ve noticed with all of the interviews I’ve done is when I ask a developer “Okay, you’ve been developing for a certain amount of time – is it really worth the risk vs. reward?” and sometimes they’ll say “You know what? I just like doing it. I don’t know if it’s worth the risk versus reward, because there’s so many uncertainties and so many grey hairs that I got through the development process.” What are your thoughts on that?
Scott Lewis: Joe and Best Ever listeners, it’s definitely true. There’s a lot more risk in the development side of the house, but with risk comes reward… And maybe I’m just a glutton for punishment like some of the other developers, but I really enjoy doing it because that’s where the real money is made. Once somebody has figured out the best and highest use for a property, and then entitled it so that it’s ready for the construction phase, they can suck a lot of the juice out of the deal because they’ve done the real work, they’ve done the real risky work.
Being able to go in and do that work and then take it all the way through to fruition to whatever the project is, whether it’s a single-family home, ten townhouses, a four-phase condo development – whatever it is, that’s where the real excitement is, and then also the real payoffs.
Joe Fairless: So let’s talk about a specific project, any one of those four that total 2.5 million on the four over the last 24 months. Can you give us some numbers and just tell us about the project?
Scott Lewis: One of them was the development deal, and it was not quite raw land… A hole had been dug in the ground, so not quite raw, but our contractor that we’ve partnered with over the last six years had a stuck project that he had kind of started and stopped, and we got in there and we helped him look through a [unintelligible [00:07:02].08] which anybody that got the fluorescent tag on their door once in a while knows that that’s a bad place to be.
So we helped him work through that, we did kind of a partner deal. He owned the land already, so he brought the land, we brought the money, split 40/60, 40% going to him 60% going to us. [unintelligible [00:07:21].19], I wanna say we were in at about $450,000 for development and construction and sales and everything, and the out was about $750,000. So we made about $300,000 with $450,000 in, and split – 40% going to the contractor because he did all the work at cost, and then 60% going to us for bringing all the money and helping him work through the city and the utilities and all of the other tangential things that go with development that aren’t there during construction.
Joe Fairless: What would be a couple things – knowing what you know now – if you were presented with those same scenarios on a future deal, that you would do differently?
Scott Lewis: Joe, that’s a great question, and Best Ever listeners… That scenario was presented to us in July of this year and then again in December. Joe, at the Best Ever conference I referenced a deal that I had two different raises on, at two different time points, and which we kind of combined them because we took two pieces of land that were just raw, and one had a house on it that we were going to demolish and get rid of. But the two pieces of land, independently, could get a total of seven townhomes, but combining them and leveraging a special zoning exemption where we were building, we were able to actually get 11 homes.
So one of the things that we’ve done right upfront is we’ve started engaging the utility companies, because that was one of the things that we waited on for our first development project, and it caused us a 60-day delay because those guys were just so backed up, and anyone that’s worked with utility companies in the past knows they are not the most motivated and efficient folks. They’re incredibly burdened, they’re under-staffed, coupled with just how it is out there, that can really stop a project. So in any of the development projects now, after we make sure we’re good with zoning and the tax guide and everybody else from the government, the next thing we do is get everything we need to do with the utility companies going right away, so that we can adhere to their traditional timelines and not be worried about delaying the project.
Joe Fairless: What type of timeframe do you have to allocate for the utility companies?
Scott Lewis: We just got a notice back from the gas company that their timeframe is 8-12 weeks. [laughter] So we’re doing another project that’s a condo conversion, and we’re basically taking a single-family home and we’ve dug out underneath the house and it’s a row home… So there’s a row of probably five or six homes; our property is the second in from the end, so we’re actually digging underneath the two other houses, on the walls and underpinning and going out the back, but we’ll also have to dig out the front a little bit to have an egress to the seller’s condo, and with that there’s a gas line there, so we have to do what’s called gas line abandonment.
The gas company has to come out and [unintelligible [00:10:17].29] and then take it out so that we can dig out, and that’s 8-12 weeks… Which is fine; this isn’t a surprise to us, we knew it was coming, so it’s built into our timeline.
Joe Fairless: How much does that cost?
Scott Lewis: The gas line – they just have to come and turn it off, and then our contractor does all the digging. So it’s just part of our construction cost, it’s not a ton to us. But sometimes the utilities can be upwards of $30,000 if you have to bring new service in… We don’t have the final bill yet, but we have to increase the size of the water line from the street because of the new sprinkler system requirements, and we don’t have the final cost there. We usually budget around $30,000-$35,000 for our projects per unit for utility cost, so it can be pretty significant.
Joe Fairless: Yes, they can be. Let’s talk about the three projects you have under way and have raised three million dollars in private equity for those projects. Have those projects closed as far as you’ve bought them, you’ve got the equity and now you’re implementing the business plan?
Scott Lewis: Yeah, so one of them is actually closed, constructed and sold. Last Friday we just closed on the property. That one went pretty well, it took a little bit longer; we missed our timeline by about two months, so we gave our investors a 2% equity bump just for us missing our timelines. So that one went pretty well other than the timeline. Our budget came in as we wanted it, so that was good.
Joe Fairless: What type of project was it?
Scott Lewis: That was a single-family flip. That one was actually a favor to our contractor. He owned the house since 2006 and he came to us and asked us to help him put it all together and get it ready, just because he didn’t want to. We put some of our money in it, we went to some of our really close investors, and just asked them if they wanted to be in it. Three of them jumped in. We raised $200,000, so not very much for that one, but it was projected to be a six-month timeline for a 10% return. We actually gave the investors 12% because of the eight months… So pretty close to a 24% annualized.
Joe Fairless: What was the all-in price, what was the exit price?
Scott Lewis: The all-in price was about $630,000, and the out price was $785,000. That normally doesn’t meet our 30% ROI criteria, but because of a favor to our contractor and the short timeline, we decided to do it.
Joe Fairless: Cool, $185,000 profit in eight months. Let’s talk about project number two.
Scott Lewis: Project number two was the condo conversion. We’ve been working on that — our plans went in in June 2016, and we actually split those plans into foundation plans and building plans, so that we could go ahead and get started with all the underpinning and foundation work that we needed to do, while the [unintelligible [00:13:04].00] was running its course through the normal application process.
That one is kind of our gold standard, we got a pretty sweet deal on that. We worked on it for about 18 months, trying to track down the owner, and just a random, fortuitous meeting at a corner bakery with an attorney to talk about another project, he referenced having a client with a property on L Street, and we immediately knew who it was. We had talked to the owner a couple of times and she had told us that she had an attorney and we didn’t think that it was even remotely possible, but it turned out it did. The financials are pretty good, we’re gonna be all-in at a million and out at 2.6 million.
Joe Fairless: Condo conversion – is it just one condo?
Scott Lewis: No, so we’re actually taking a single-family and we’re digging out underneath it and we’re adding a floor and a half, so when we’re done we’ll have four two-bedroom, two-bath condos. Three of them will be about 1,000 square feet, and the third one will be about 1,300 to 1,400 square feet.
Joe Fairless: Wow… Okay, I wanna make sure I understand that. You have a single-family house and you’re converting that into four condos?
Scott Lewis: Yes. The real sweet deal about that is we acquired the property as a single-family home, but because we’re converting it to condos, that allows the financials to change a little bit, and that’s where the deal is. It’s a big thing that’s going on in the district of Columbia right now – the condo conversions, because the housing is so limited… And DC – there’s a number of reasons the housing is limited in DC, but one of the things folks are doing is they’re row houses, so you can’t really go out to the sides, and you don’t really wanna go out to the back too much, because you kill the property, and sometimes the lots are really small, so the other way is to go up and down.
Some folks have taken it to an extreme – those are called pop-ups, and they look pretty bad. We probably could have gotten a six-condo out of it, but it would have looked really bad. We’ve actually made the top choice to go with what’s better for the neighborhood and just do the four condos. And even on the fourth condo, we’re only going half a floor, so that it still holds the charm from the street.
Joe Fairless: And you said your all-in price was a million – did I hear that correct?
Scott Lewis: Yeah, the all-in, after everything is done, is about 1.5 million, to include acquisition, construction…
Joe Fairless: And what are you projecting it will sell for once all four condos are sold?
Scott Lewis: Right around 2.6.
Joe Fairless: Nice! What do you do if anything while you’re building it to secure the condos’ sales?
Scott Lewis: That’s kind of a balancing act. As soon as we get the drywall up, we’ll go through and we’ll start soft-marketing them… But with condo conversions there’s a lot of documentation that needs to get approved before you can get your certificate of occupancy, so there’s only so much that you can do prior to the certificate of occupancy.
With this particular one, our agents work consistently in this particular area of Washington DC, so probably maybe 45 days out or so we’ll start letting them pocket-list it, and then once we get the certificate of occupancy then we’ll really go full bore, because we can’t close before that comes in anyways, so we don’t wanna market them too early.
Joe Fairless: You mentioned it was a fortuitous meeting, that you knew exactly who your attorney was talking about when he mentioned the other client… You said before that you had tried for 18 months to track down the owner – what were you doing and why didn’t it work?
Scott Lewis: We were just using the traditional methods that a lot of wholesalers and direct marketers use. We weren’t doing anything crazy. We do have an aggregation process that we use to bring a lot of different data sets together to identify sellers. Whenever we do direct marketing campaigns – which we’ve actually stopped doing – we only do maybe 50 letters at a time, but those 50 letters have been vetted through multiple levels within our organization, so it probably takes us as much time to hit 50 people as some of the wholesales could hit 2,000 people, because we take a very focused approach, versus a wide blast of mailers. Every one of our letters is personally written to the person that we’re trying to get at, and we’ve actually got really good response rates that way.
This one was no different. We got the person’s phone number, we actually talked with her and she confirmed who she was… We met her later because one of the things that we do for any of our sellers is we help them try to reduce any client’s fees/taxes; it doesn’t help us at all, because our contract price is our contract price, but the mission of Spartan Investment Group is to improves lives through real estate, and we’ve had some pretty good luck working with the District. We’ve saved one of our sellers $50,000 in bad taxes and fees; it didn’t go to us, it just gave her $50,000 more. She was a DC firefighter, so that really helped change her life.
This particular seller, she was in her late seventies, her husband had died quite a while ago, and it was probably pretty intimidating to have us call her on the phone. But once we actually got in contact with her lawyer and he vouched for us and verified who we were… I actually went over to her house a couple times and took her down to the District of Columbia, so she would be there in person, and we were able to save her about $10,000 in fees and fines. That was 10k that went right back into her pocket that she wouldn’t have gotten.
Joe Fairless: So your process which does work for other deals didn’t work initially when you were reaching out, because they might have been intimidated, or for whatever reason, but when you talked to her attorney, that proved to be the door that opened up and you were able to get the deal done. As a result of that, do you now make a more focused effort on speaking to attorneys about clients they have and just reverse-engineer that process?
Scott Lewis: We’ve actually moved away from going after the probate guys or the estate attorneys. We’ve got a couple attorneys that will occasionally pitch us deals, that we have relationships with, but we made a strategic pivot in October 2016 to kind of get out of the single-family and direct marketing. Just too much competition down there in that red ocean market, so we recently haven’t even been engaging.
We’ve got relationships with two attorneys that occasionally send us projects that they have as estate attorneys, but other than that we really haven’t even been engaging sellers.
Joe Fairless: So let’s talk about what you are doing and the shift that you’re making. What are you shifting towards? I would suspect it’s self-storage, right?
Scott Lewis: Yeah, Joe, that’s it. We’re 100% going after self-storage, and we are using some of the same methodologies. Lindsay, who is our director of business intelligence, comes from the Intelligence Community in DC, so she takes some of the methodologies that she used there to do the same thing for our business, to identify sellers and to identify pieces of property that we wanna go after.
We found that when we’re going after commercial deals, it’s not a big deal if we contact the sellers, because commercial deals are based on numbers, there’s no emotion involved. I mean, occasionally there is, but the vast majority is based on numbers, so that as long you present a reputable front from your company and that you are reputable yourself, we found that it’s much easier to deal with sellers for commercial deals.
Joe Fairless: Have you gotten a self-storage deal under contract?
Scott Lewis: Yes, using our research methodology we identified a piece of land in Washington state, went through the whole process and engaged — the seller was using a broker, so he pointed us to the broker; we engaged the broker, and now we’re under contract and we’re in the due diligence period now. It’s a piece of raw land, so it’ll be ground-up development.
Joe Fairless: How many storage units would be able to be built?
Scott Lewis: That’s a good question, Joe, and it’s one of the things that we’re trying to look at right now. There’s wetland on the property, so we had our biologist out there last week, and he is delineating the wetland on our survey, and then he’s also classifying them; there’s various classes of wetlands, and depending on the class, they can either be easily moved, or you have to go through board of zoning approvals to get an exemption to move them
Once we figure out what we can do with the wetlands, we can then go ahead and develop our site plan so that we know our unit mix and how many units we’re gonna put there.
What we did initially was we looked at if we couldn’t use any of the wetlands, and we could only use what turned out to be about 40% of the acreage that we’re buying, is this deal still feasible? Could we still pull this off? And the answer to that question was yes, which is why we wrote the contract, and the contract is contingent upon the biologist’s report on the wetlands.
Joe Fairless: Okay. When I was trying to interrupt you, you read my mind, so I’m glad I didn’t interrupt you… [laughs] That’s what I was gonna ask, how you identify what you make an offer if you don’t know how many units can be built? Let’s just say you cannot use any of the wetland area… Do you know how many units can be built just for that 40%?
Scott Lewis: We could do approximately 50,000 square feet of self-storage. Again, we haven’t done our unit mix yet, we’ve just used averages at this point, which a lot of folks might say we’re treading in dangerous waters, but we have the contract written as such that we can kill the contract if necessary if we can’t get what we need, so that’s why we’ve decided to go this route, versus having the complete feasibility studies, which usually include the unit mix, which we’ve done kind of in heuristics to see whether the numbers would work out… And there’s also some self-storage land acquisition heuristics that are out there that kind of point the needle at what your per-square-foot land cost needs to be based on your monthly cost for a 10-by-10 and a 10-by-15 unit.
We’ve done that projection, and if that’s correct, then there’s actually a lot of value in this land already, so we’re okay.
Joe Fairless: How much does it cost your company to qualify a deal like this before you can actually say yes or no definitively?
Scott Lewis: That’s a good question. We’ve done our internal feasibility studies. Lindsay, our director of business intelligence, does our internal feasibility studies, so currently it hasn’t cost us anything, other than her time. And feasibility studies cost anywhere from $3,000 for a desk audit where folks don’t actually travel to your site, up to $7,000-$8,000 if folks travel to your site to do the feasibility study.
Joe Fairless: Didn’t you say you had a biologist or someone going out to look? Aren’t they charging you something?
Scott Lewis: They are. We think we’re gonna put about $10,000 on the line before we actually know whether we can do this or not.
Joe Fairless: And the bulk of the $10,000 comes from where?
Scott Lewis: All of our money, we don’t use investor money.
Joe Fairless: No, I mean what are the expenses that make up the 10k?
Scott Lewis: There’s three major ones; four in this case, but normally it’s three. In this case we need a civil engineer to give us an initial site plan to take to the city. Then we need our biologist to go out there to delineate the wetlands and any protected or invasive species of plants or animals. We need a geotech report, so they can go out there and test the soil and tell us what type of soil it is, so that we can then have the civil engineers calculate the concrete mix, and for this particular area, we actually need a mine hazard report, because there’s some old mines that are there, so we have to make sure that there is no mines underneath. With all pooled, it’s probably gonna be about $25,000, but $10,000 of it is probably money that we’ll have to spend before we make a decision. The mine and the geotech we really don’t need to do before we make a decision, but the biologist and the civil engineer we do, to see what the site plan is, and then ultimately the unit mix. Then we can tighten up our proforma.
Joe Fairless: Based on your experience as a real estate investor, what is your best real estate investing advice ever?
Scott Lewis: Best Ever listeners, the best advice is broken down into two categories. One is just starting out, and if you’re just starting out, take some time to learn yourself before you start. There’s some personality assessments out there… DISC and Myers-Briggs are two that are out there. I really recommend you go out and you figure out what type of personality you are. Then once you figure out what type of personality, build your tribe around your weaknesses.
Myself, I’m a DISC D, that means I’m a driver – I just wanna get stuff done, I don’t really pay attention to details. So I went out and I found a partner who is very into details and he’s very detail-oriented. The two of us, plus a couple other members of our team kind of really round that out.
Once you figure out your team, then start with an education period. Just figure out what asset class you wanna focus on, and then go. For those of us that have been out there and have been in the trenches, constantly challenge your assumptions and operating models.
We recommend a devil’s advocate. The Israeli Mossad, which is their version of the CIA, they call that the 10th man. This person is just the person on the team that disagrees with everything that’s going on. What that does is it ensures that groupthink doesn’t cause you to make a bad decision.
Joe Fairless: Does that person rotate on the dissension, so that they don’t get punched in the face eventually?
Scott Lewis: Absolutely, Joe. So Best Ever listeners, there’s two key components actually. One is (absolutely, Joe) they have to rotate. Somebody else has to come in and be that person. And then second, there is no personal attacks on that person whatsoever.
Joe Fairless: Makes sense, yes. Alright, are you ready for the Best Ever Lightning Round?
Scott Lewis: I am.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Break: [00:26:44].16] to [00:27:26].08]
Joe Fairless: Best ever book you’ve read?
Scott Lewis: “It’s Your Ship” by Michael Abrashoff.
Joe Fairless: Best ever deal you’ve done?
Scott Lewis: Our condo conversion in DC. There’s a million dollars of profit in that one.
Joe Fairless: Best ever way you like to give back?
Scott Lewis: Mentoring and education.
Joe Fairless: What’s the biggest mistake – or any mistake you can think of – you’ve made on a deal that? One that you haven’t mentioned earlier.
Scott Lewis: We had the opportunity to buy a church that was right behind where my partner and I lived when we were in DC, and at the time they needed two million bucks to make the deal work, and we were pretty novice and had no idea about raising money, and we’ve been able to raise two million dollars in like two hours over the last couple months… So that deal, the guy that bought it is building 36 units there that will probably have a sales price of probably 22 million dollars for that deal. We could have had it, but we didn’t know how to raise money.
Joe Fairless: What’s the best place the Best Ever listeners can get in touch with you?
Scott Lewis: Best Ever listeners, if you have any questions about what I said, you can reach me at my e-mail address, which is Scott@spartan-investors.com, or our number is 202 827 5483.
Joe Fairless: I enjoyed our conversation in Denver, and I enjoyed this one just as much, because we’re talking just about you; it was less back and forth, and I was learning more about you and I really enjoyed that, and I know the Best Ever listeners got a lot out of it as well, specifically some of the takeaways…
Utility companies – they are slow; we’ve got to allocate in the timeline for the amount of time that they need (in your case 8-12 weeks). And condo conversion – holy cow! – 18 months to track down the owner, and eventually it ends with you getting in touch with their lawyer coincidentally, and then using that as a conduit into the deal that has over a million dollars in profit, that is yet to be realized but looks really good.
Then the self-storage evolution that you’ve taken in your company. As you said, the red ocean versus the blue ocean strategy – I think it’s a book, I’ve just heard a podcast on it – where there’s not a bloodbath and a feeding frenzy, and that is in self-storage and ground-up development. And the amount of money that you have on the line prior to making a go/no-go decision on that deal.
Thanks for being on the show, we learned a lot. I hope you have a best ever day, and we’ll talk to you soon!
Scott Lewis: Joe, Best Ever listeners, thank you very much!
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