Andy Smith is a partner at Lewis Brisbois Law, a national, full-service law firm with more than 1,600 attorneys and 54 offices in 30 states and the District of Columbia. In this episode, Andrew breaks down his most recent acquisition of a 32-unit apartment community in Cincinnati. He also discusses the entity transfer tax loophole and some of the most common mistakes he’s seen people make in contracts with contractors and leases with tenants.
Andy Smith | Real Estate Background
- Partner at Lewis Brisbois Law
- Portfolio:
- 50 units
- Several Airbnbs
- Based in: Cincinnati, OH
- Say hi to him at:
- Best Ever Book: Rich Dad, Poor Dad by Richard Kiyosaki
- Greatest Lesson: Don’t give up. Real estate is very forgiving.
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TRANSCRIPT
Ash Patel: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I'm Ash Patel and I'm with today's guest, Andy Smith. Andy is joining us from Cincinnati, Ohio. He is a partner at the Cincinnati Office of Lewis Brisbois, a national law firm. He specializes in real estate law, and his portfolio consists of 50 units and several Airbnbs. Andy, thank you for joining us, and how are you today?
Andy Smith: Thanks for having me. I'm doing great.
Ash Patel: Awesome. Andy, can you share a little bit more about your background and what you're focused on now?
Andy Smith: Yeah. I'm a real estate attorney by trade. I'm sitting here in my law firm office, so my day job is just being a lawyer - construction litigation, real estate things... And then nights, weekends, throughout the day I'm also a real estate investor; kind of wear both hats, and I'm always looking for the next deal.
Ash Patel: Did you start out as a real estate attorney, or a real estate investor first?
Andy Smith: Attorney.
Ash Patel: Okay. What was it in your course of action that made you start investing in real estate?
Andy Smith: That's a really good question. I didn't know it at the time, but I grew up helping my dad around the house, fixing things up. Went to law school and focused on contracts, construction, real estate, and just really liked building things. My favorite board game growing up - you wouldn't be surprised - is Monopoly. So I just kind of learned a different set of skills that really helps out with it, and I quickly realized even with a really good job that it's really helpful to have passive income, multiple streams of revenue, and just fell into my lap that way.
The first piece of property I ever bought was a small condo here in Cincinnati, two bed, one bath condo, and I've just said, "Why don't I just get a roommate to help out with the bills, get to know somebody?" And that was about eight years ago, and ever since then I've just spent building piece by piece by piece to add to my portfolio.
Ash Patel: What does your portfolio look like today?
Andy Smith: Around 40 units of C-class rental property, a few Airbnbs, including multifamily building, and some single family houses in downtown Cincinnati. I'm trying my hand at flipping properties, so I have a couple of those going on, and then I actually have a much larger C-class building under contract at the moment.
Ash Patel: Alright, hold on now. You're an attorney, you've got single families, multifamilies and Airbnbs.
Andy Smith: Yup.
Ash Patel: So you've got a couple full-time jobs. Who manages your properties?
Andy Smith: Yours truly.
Ash Patel: What are you doing to yourself, man?
Andy Smith: I know...
Ash Patel: Aren't you looking to offload any of these?
Andy Smith: Yeah, I've done some 1031 exchanges recently. So I have some smaller properties, like the first ever duplex I purchased around seven years ago, I recently sold, cashed in all the equity, along with another four-family and 1031-ed that into this, basically a 32-unit that I have under contract. I think I had around 15 buildings at one point, and I'm trying to get fewer buildings, but bigger buildings, fewer roofs, and so on, to be able to really take advantage of that opportunity. So I'm definitely looking to offload some things, some of the smaller headaches and ones that have been around for a while.
Ash Patel: Are you looking to offload your single families first, and are those the most time-consuming?
Andy Smith: So the single families I have are operated as Airbnbs. And I actually do have a management company for the Airbnb side of things. So that's been really nice, just out of sight, out of mind, just checking in once a month or so with the manager, and driving by the properties, and that sort of thing. So those have been not a headache at all. I think it really just depends on the particular piece of property, the exact street it's on, not even the neighborhood. I've had places in rougher areas, but a good street, and I've had places in what you would think would be a better neighborhood, but just have different issues, for whatever reason.
Ash Patel: Would you consider making any of your multifamily properties Airbnb?
Andy Smith: Not really. My whole take with the Airbnb market, which honestly, I'm not a huge fan of, but I'm glad I dabbled in it... I wanted to find places where I would want to stay. If I was coming to Cincinnati, or any city, I'd want to stay downtown, I'd want to stay close to things. I'd want a cool, unique, trendy place, maybe historically cool... I have a house built in 1880 that's been totally rehabbed, and a lot of the original charm, exposed brick fireplaces, all that sort of stuff... So I was really focused on that for the Airbnb side... Whereas I'd be scared to traditionally rent those sorts of structures just due to tenant damage, issues like that.
Ash Patel: What I meant was, would you take any of your apartments? and turn those into short-term rentals?
Andy Smith: I don't think so. Just based on the way I look at the math, I think it'd be worse off than a monthly tenant. And then with the management fees and everything on top of that, furnishing costs, I just don't think that would make sense.
Ash Patel: Why did you say you're not a huge fan of short-term rentals now?
Andy Smith: Different markets, like - I'm in Cincinnati, Ohio; it's just oversaturated. Everybody and their mother thinks they can do Airbnb. I think when I first started, there were around 800 units in town. There's 1300 units. Now. So oversaturation, tons of supply; I'm a basic economics guy, and my undergrad degree was in economics, so basic supply and demand is starting to not make sense. It's very competitive. How do you separate your 500 square foot one-bedroom unit from the next person's? How do you get higher on that list on the Airbnb app? And then management fees - it's no joke; most property managers for short-term market are 15% at the bare minimum, and some go as high as 30% or more off the top. Cleaning fees... There are a lot of expenses. You get your profit and loss statement every month... And of course, the biggest number is factoring in what the customer paid through Airbnb, within the pass-through costs, like cleaning, property management, local taxes... All that's just ignored, and they just show you the biggest number possible. And by the time you get your check in the bank account every month, it's whittled down quite a bit; you don't have those sorts of issues with traditional rental spaces.
Ash Patel: And all this while you're a full-time real estate attorney.
Andy Smith: Yeah. [laughs] I don't know what's wrong with me.
Ash Patel: Tell me about the 32-unit you have under contract.
Andy Smith: It's two 16-unit buildings, one parking lot, quiet street... It's newly rehabbed, so there's not a lot of costs there. A lot of one beds, some studios, some three beds... So it's got a little bit of diversification there... Each building has a "storage room." So being a value-add guy, when I walked that property, my eyeballs lit up, because I'm going to turn each of those storage rooms into additional units. So it's gonna go from a 32 unit to a 34. I think rents are really low how they are right now, so I think there's a lot of opportunity to grow that. And then the thing I like with the bigger buildings - I put dumpsters for trash, even at some four or five, six unit type buildings, still paying for the same-sized dumpster like at a 32 unit building, while getting all of the additional revenue in. And so I think with those factors, I'm excited for it, for sure.
Ash Patel: How did you find this deal?
Andy Smith: This was just on the market. Well, I shouldn't say that; it didn't come out on the Zillows, the Trulias, realtor.com's of the world, but just a realtor I work with, I bug him every single week [unintelligible 00:10:06.17] exactly I'm looking for. In the commercial space, it popped up LoopNet, and the sites like that. I want to see it right away.
Ash Patel: Other than the two units that you're going to add - it's two units per building, or two units total?
Andy Smith: One in each, so two units total.
Ash Patel: Two units total. Other than that, this was pretty turnkey. Did you pay top dollar for it?
Andy Smith: I don't think so. The market's absolutely out of control right now. So you have to be kind of careful. I sold two properties for prices that I would never in a million years pay for. So I had all of that cash, that equity within -- I didn't want to pay similar top dollar for what I was going to use to buy into... And this property had been sitting for a while, had some vacancies, and clearly the owner just didn't care as much about this place as maybe somebody whose only property would be this one... So I think I got a good deal, and then I have it under contract for a lot less than list, and a lot of things are gonna get touched up and improved throughout the inspection period and everything.
Ash Patel: What's the purchase price on this deal?
Andy Smith: 1.9 million?
Ash Patel: And what is that per door? Is that a metric that you use?
Andy Smith: Yeah, it is. I remember the days where it was $40,000 per door, but that's just not realistic anymore. I'd try to say $60,000-ish is the high end of where I feel comfortable. But with this one, I was excited because I don't have to go in and renovate units. I don't have to do any of that. And I think just by getting this property, building out the two additional one-bedroom units and getting rents up, it's going to improve its value significantly. And that would be very, very easy.
Ash Patel: What is the price per door on this one?
Andy Smith: That's a good question. Let's see... As it is, I'm at $59,375 per door. But with the value-add opportunity... There's coin laundry; I think four sets of coin laundry, so that's a little bit of additional income. And another big thing I'm looking for, which I was clueless eight years ago, is property taxes. Property taxes really matter. So this one had been entity-transferred, which is another real estate lingo; a lot of your listeners are well aware of what this is, but it's a way around increasing tax valuation. So as things sit right now, it's only 13,000 a year in property taxes, which is half a percent of the value, compared to 2.5% or more, which is what you should be paying on your property.
Ash Patel: And that's going to be an issue at some point. Right?
Andy Smith: At some point...
Ash Patel: [unintelligible 00:12:45.01] entity transfers... Ohio is one of those states where entity transfers are common for commercial property transfers. And it basically doesn't trigger a sale with the county, the school board, so they don't right away come back and reassess your taxes. However, is there a timeframe on which that catches up with you, if ever?
Andy Smith: That's a good question, and it's a little bit of a political issue, local government issue. At some point - you're right, at some point, it'll catch up. But it's still a loophole, it's still in effect. I haven't really heard anything. I feel a lot of the focus is on the short-term rental market. Hamilton County now wants to tax short-term investment property income... So I think this commercial property loophole is still kind of unknown, and not so much in the forefront. And a lot of the developers downtown take advantage of this as well. So you're right, one day, 5-10 years, whatever it is... But I think, in the short-term, the advantage - it'll be well worth it.
Ash Patel: Yeah, I agree. I'll tell you that in the Columbus market apartments are no longer getting away with entity transfers. School boards are paying attorneys to find these and go after them. So I'm with you; and hopefully, this doesn't come down to our market anytime soon... But for states where this is commonplace, it's a great thing to take advantage of.
Look, you should explain it more than me... Can you explain the transfer into a new entity, that then becomes transferred upon sale?
Andy Smith: Yeah, it's really just an academic exercise... Some standard legal documents; I've prepared them. The theory is you transfer it into a new entity that the current owner owns for a split second, and then gives back to you at closing. It's really just kind of a bizarre concept... But at the end of the day, the advantage of it is huge. The seller has to agree to it, but I've never seen a seller refuse to do that during a closing process. And it's cheap, whether you kind of learn to do it yourself, which I'm obviously qualified to do, or you pay an attorney; you're talking 1000 bucks, maybe 1,500 bucks to literally save tens of thousands of dollars. So yeah, between the 1031 exchanges and entity transfers, those are two things, at least in Cincinnati, that are just amazing opportunities for real estate investors.
Ash Patel: Yeah. And I don't think we've ever talked about entity transfers before on the podcast... But yeah, it is an incredible way of keeping more of your tax dollars to yourself, right?
Andy Smith: Yeah.
Ash Patel: One of the greatest things out there.
Andy Smith: Yeah. My first duplex I ever bought for $115,000. Now, maybe at that price point, these things don't much matter. At most you're paying annually two and a half percent of the appraised value of your property. But once you get into even 500,000, especially the $2 million range, I think it's a no-brainer. Anytime I look at a deal now - I'm even looking at 10-unit buildings, but my ideal goal now is to be buying 20, 30-unit buildings. And one of the first things I look at, I jump on the auditor website, and it's right there. A couple clicks of the mouse. You're looking at - what are you putting in property taxes?
So I've seen properties -- this one's effectively $2 million. I'm going to be paying 13,000 per year in property taxes. I've seen properties listed for a million dollars, paying 30,000 a year in taxes. It's just kind of nuts. It just depends on the history, and whether there had been entity transfers before. But at the end of the day, that's a lot more rental income. That's like 12 more units in this building, compared to that other option.
Ash Patel: Yeah, it's an amazing tool. And any time there's a seller that's hesitant, just have the title company explain it to them. Have their title company explain it to them, somebody they know and trust, and it's usually very simple to get them on board with that.
Andy Smith: Yeah, absolutely. Have a title company explain it to them, have their attorney explain it to them, have Google explain it to them... Like I said, it's kind of a screwy, bizarre academic exercise, but it's really simple. And the benefits are just tremendous.
Ash Patel: Andy, on this 32-unit property that you're buying for 1.9 million, roughly $60,000 per unit, what is it going to cost you to convert the storage rooms into apartments?
Andy Smith: I've been talking with my contractor and a few others... I think it'll be around $25,000 total for both units. And I'm thinking of maybe roughly furnishing them, just because they are smaller units, to add a little bit of a perk to rent those. So I'm going to put mini splits in there, and there'll be brand new... Just kind of smaller, but whenever I see empty space in a building, I'm just seeing dollar signs, and "How can I maximize that?"
Ash Patel: Have you seen those tiny apartments at IKEA?
Andy Smith: Oh, yeah.
Ash Patel: It's amazing how you could get an entire apartment into like a 400 square foot space.
Andy Smith: Yeah, absolutely.
Ash Patel: It's great. It's gonna cost you $25,000... And if you just extrapolate, the $60,000 per unit purchase price, you're adding at least $120,000 in value.
Andy Smith: Absolutely.
Ash Patel: That's a win.
Andy Smith: Yeah.
Ash Patel: Would you consider doing a reverse 1031, and once you buy this, selling off some of your other units?
Andy Smith: Yeah, absolutely. My plan for this one was sell my first two properties I ever purchased with a lot of equity to buy this. And I've got two more already lined up that I've got a handyman getting ready to list, touching things up... And I think I'm just going to do this same process again, once I feel comfortable with a 32-unit building. I remember when I went from a duplex to an eight-unit during COVID, and you're kind of fearful... "Oh my God, 8 tenants, one building..." But really, it just gets easier. It's kind of a bizarre phenomenon. But at least in my experience, the bigger buildings have been easier to deal with.
Ash Patel: Yeah, and you're at scale. Are you going to self-manage this?
Andy Smith: We'll see...
Ash Patel: You were about to nod yes... You were about to say yes, and then you hesitated... You're killing me.
Andy Smith: I've got some managers lined up, but I've just had bad experiences. Nobody cares about your stuff as much as you do. I have zero vacancies in my properties... I know we're supposed to calculate and plan for vacancies, but that stuff just kills me. I've got zero vacancies. I try to operate to maximize everything as much as I can. So I've got some ideas for property managers, but quite frankly, during my day job, I've sued a lot of property managers. It's just hard to find people...
Ash Patel: You're jaded.
Andy Smith: Nobody is gonna mow your lawn as well as you want, except for you. And it's the same concept. So I struggle there. I do. But after this one, I'd like to -- because at that point, I'll have 70-80 units. I'll be able to account for a little bit of a error, let's say, turnover, vacancy and still be doing just fine.
Ash Patel: Yeah. So you know me, I don't do multifamily... But there's that pain point between 50 and 70 units where it doesn't pay to have a full-time leasing person or property manager on board. So you're entering that pain point, right?
Andy Smith: Yeah.
Ash Patel: Let's brainstorm together, because I'm not a multifamily investor. What can you do to offload tasks? Let's not go from zero to full-on handing everything off to a property manager, but background checks... How long does that take when you do that for people?
Andy Smith: It's just a couple of minutes. I fell into the rental property business because my undergrad was in economics, so I understand the basics of economics. And in my day job, whether it's walking down the street to handle an eviction for myself, or drafting a contract for a contractor, or a new lease - that's all stuff that I can handle pretty quickly, with zero expense. So I also have software where I can run a background check for free, in a matter of seconds.
So I am positioned uniquely for some of those things. But you're right, that whether it's collecting rent, or just maintenance inquiries and things, there's definitely some stuff I can offload. And I've gotten better. There was a day where I was driving around every Saturday morning, I was cleaning up dumpsters, I was mowing lawns, I was doing maintenance myself. So I've gotten past that. Got a lawn care company, I've got maintenance people... But to get to that next level of really just making it more passive - that's going to be a struggle.
Ash Patel: Yeah, I get it. I was in the same boat, taking toilets out, putting them back in... In middle of the night, right? So I could put my kids to bed and make sure that the office building is working by the time people got in. We are often our own worst enemy. What about a personal assistant? Do you have one of those?
Andy Smith: I don't, but that's something I've thought about. I'm a really organized, OCD person, so I don't struggle so much -- like, every tenant I have is in my cell phone with their email, their date of birth, their address, I've got spreadsheets on spreadsheets on spreadsheets... So it's really just a matter of trying to figure out where to save little pockets of time, and how to value my time really.
Break: [00:22:34.08]
Ash Patel: Do you use property management software, or just Excel?
Andy Smith: Just Google Sheets. I'll share those if I'm working on a big project with a contractor or something. I use Google Sheets, just very basic stuff. People are probably out there laughing at me right now. But it works for me.
Ash Patel: No, Excel and Google Sheets can work wonders. But I went through that same evolution. So having property management software - it might help you with automating the application process. Just go to this website, create an account, they submit their application... And then once they're set up, they start paying rent through there, and you don't have to send them rent reminders; the software will do that for you.
One of the things that I would implore you to do - and I've asked a lot of people to do this - is do a time audit. So set your phone on a repetitive timer every 55 minutes, and take the last five minutes of that hour and write down what you've done the previous 55. And then don't look at what you've written down for about a week, and go back and figure out what things are repetitive, that you could systemize, or what things you can offload.
I'll tell you, I was very hesitant in getting a personal assistant, but it was the greatest thing I've ever done. It's amazing. And I get it, they're not going to do things the way you do, and the higher your OCD, the tougher that's going to be... But look, at some point, you out of all people - your time is very valuable, just based on what you bill your time at.
Andy Smith: Exactly.
Ash Patel: So I would challenge you to put in some of those systems and offload things. I do want to dive into the conversation about being a real estate attorney. When we started talking about that, one of the first things you mentioned was construction litigation. Does that happen a lot? Or is that just a recent thing that you're dealing with?
Andy Smith: I've been a practicing attorney for about 13 years now. I graduated law school when I was 23, and I've stuck with it here, 36 today. When you're a young attorney, you're just doing whatever you can. But then I really grappled onto construction litigation. My dad was a construction worker, and my favorite thing growing up was playing with Legos. So if I get to go to a job site, see a building, or talk to contractors and stuff, I'm a happy guy.
So what does construction litigation mean? I get asked that a lot. Sometimes you have a situation where a contractor messes up; believe it or not, that happens quite a bit. So I'll be retained, maybe by the owner to sue a contractor, or maybe by the contractor to defend the contractor's company. But there's a lot of what's known as construction defect litigation, where architect plans aren't followed, or for whatever reason there's defects and flaws with the structure. There's always business disputes, just over contractual language, delays, breach of contract stuff... And it's sometimes just negotiating deals.
On that topic, I get it if the contract is very clearly written out. And the GC didn't follow what the architect had asked for, and what the GC agreed that they were going to do. But what about those jobs where you hire somebody - there's a lot of ambiguity in the contract. Are there some things that are customary, that will help protect the person hiring the contractor? Or does it really come down to the letter of the law in the contract?
Andy Smith: There's an old adage I learned, "If it's not in writing, it didn't happen." We're all guilty of this; we're all too busy, we all just have the phone call, and then expect it to go as the phone call went, or a couple of text messages. But I'd really just implore everybody to take the time, put it in writing, put it in the contract, pay the couple extra dollars to have lawyers review the contract, or draft it like myself, and it's gonna save you a ton of money, time and frustration in the end.
But to answer your question, it really boils down to what's in the four corners of that document. But there's tons of situations that happen where it's just not going to be in the contract, some little issue. So sometimes there's these guiding principles in the law that judges have come up with over hundreds of years, and sometimes it just boils down to common sense.
Ash Patel: But really, it's important that you be as descriptive as you can in the contract.
Andy Smith: Yeah. Deadlines, what's to be expected... All those things; just try to really put a lot of time and effort upfront, so you guys can both be on the same page.
Ash Patel: Good advice. What are the most common mistakes that people make, that make you cringe? "Why do I have to keep dealing with this? Why don't people just understand this?" What are repetitive mistakes that just blow your mind?
Andy Smith: I'll see contracts that aren't signed. Multi-million dollar deals just not signed. And then I'll see contracts -- this isn't so much with residential or lower-end deals, but once you get into commercial, more sophisticated entities, you're allowed to put in a lot of what are called liquidated damages clauses, or penalties. So if you're the owner, and you're hiring a contractor to do a big job, you want to make that contract as advantageous to you as possible. So I literally have multiple cases like this right now, where there's attorney fee clauses in there, which is normal, but you can craft that language to be favorable to you. So you can say, "If contractor breaches contract, then contractor owes the owner reasonable attorney fees, court costs, expert costs" and so on. That's great. But I'll see the boilerplate copy-paste from Google languages that says "The prevailing party gets attorney fees." Why would you ever draft a contract that can be used against you?
I have that happening right now in multiple cases, where a case could settle for pennies on the dollar, but there's an attorney fee clause, and it's something that the developer or the owner just messed up, and you've clearly breached the contract, even for a simple, dumb little thing, but instead of being on the hook for the cost of fixing a kitchen floor, you're on the hook for the kitchen floor plus 80 grand in attorney fees. So just things like that.
First off, be the one to draft the contract. Take the bulls by the horn, and make that contract favorable; don't do the other side favors. They might decide not to sign it, and you can negotiate that language from there. But don't just give them a bone for nothing. That just blows my mind.
Ash Patel: I have never heard that. It's million-dollar advice, and I can't tell you - all of our leases, all of our contracts have the prevailing party clause in it. So I just took a note on that. That's gonna change. Incredible advice.
Andy Smith: Yeah. Or venue. Ash, you deal with property not just in your hometown, but elsewhere. Why would you want to get hauled down to North Dakota to go to court? You can do choice of venue. So you can say "You want to sue under this contract - that's fine. But you've got to sue in Cincinnati, Ohio", or wherever. You can put in there "You can't even sue first. You've got to go to arbitration or mediation", which are very smart, money-saving moves. There's just a lot of things like that. And they're always at the end of the contract. So maybe you start reading the contract, and by the time you get to the end, you're just flipping pages [unintelligible 00:32:15.26] But those are some of the most important provisions. Choice of law, choice of venue, and then the attorney fees, or liquidated damages, penalties... So if you're an owner, no project ever finishes on budget, or in time. That's just the reality. But put in there "Hey contractor, if you don't finish by this deadline, you're gonna get fined $50 a day", whatever it is, and make them aware of that.
Ash Patel: This is all incredible advice.
Andy Smith: Or time is of the essence. You might have a deadline in there, but make sure that the deadline is actually important. So one of these archaic legal phrases, "Time is of the essence." That means the deadlines important, basically.
Ash Patel: If you don't have the "Time is of the essence" clause, what can be a loophole?
Andy Smith: It depends. You could establish a pattern of conduct or communications that it was clear that the deadline was important. What I'll even do - I did this recently. I was renovating a house that I thought at the time -- I said to myself, "I'm going to Airbnb this house downtown." So in the rehab contract, I put "Hey, Mr. Contractor, this property needs to be done by this date. Time is of the essence. It's going to be used as an Airbnb, and I expect that Airbnb to make six grand a month. And if you're not done by that deadline, you're paying me six grand a month until you're done." Because if you don't do that, the contractor is just gonna say, "Oh, I thought this was the house, you were gonna move into it... The delays didn't matter." No. It's in writing, you initialed it, it's in bold print... Those are my damages. So then God forbid, you go to court, you show that to the judge - open, shut, case over.
Ash Patel: Yeah. Again, this advice is gold. I have a commercial tenant who's opening up a bar restaurant, and the contractors are just coming and going at whim. So my advice to her was "Listen, schedule a grand opening. Have the mayor do a ribbon cutting, have the band set up, so there's no excuse to miss." But I like your suggestions a lot better - just have it in the contract. Honestly, she probably didn't even have a contract. It was handshakes.
Andy Smith: Yeah. It's easier said than done, but once you get burned once, you're gonna learn these lessons. And I don't care if it's a simple little project or a multimillion-dollar project. I try to put everything in writing, have a contract, make it clear... And it's for the benefit of both sides. Obviously, I'm going to make it more advantageous to my side, but it's important that both sides are on the same page, understand the deadlines, the payment, and so on. And again, it's easier said than done. I'm guilty of it, and I'm an attorney. I've done the handshake deals and all that, but... That's important.
And much to like what you just said, by establishing that grand opening and everything, you're showing the deadline, the damages... So God forbid that situation ever does wind up in a court, that's the evidence of the [unintelligible 00:35:27.13] Because otherwise, it's just "He Said/She Said", "I was going to do this, I would have done this..." All these hypotheticals, which judges hate.
Ash Patel: Andy, a lot of our listeners are wondering "If I have a 20k, 30k, 40k project, do I really need this?" Or is there a minimum threshold, where it makes sense to engage an attorney in contract, writing a review?
Andy Smith: That's a good question. Even at 20,000, I think it makes sense to have an attorney. And once you establish a relationship... I don't gouge every client as if it's a brand new contract. One thing I've done with clients is you can almost create a form for a lot of this stuff. It's very inexpensive to just take that form, plug in a few names, the scope of the job... I've done form contracts for even general contractors. So when they get hired by an owner, it's just plug and play. Some of them are old-school and printed out, and write the scope and price and everything in there, but it's not as if every little project needs a $2,000 legal document. A lot of it you can just copy-paste and really change pretty easily.
Ash Patel: Got it. I want to circle back to an earlier question, where I asked if there's anything that's customary in your example of a contract not being signed. Let's say draws were paid. Would a judge assume that both people agreed to the contract, or does the signature hold that much weight?
Andy Smith: It's kind of a non-issue, because if you perform... So there's something called the doctrine of promissory estoppel, and all these legal phrases... But if you have a written contract, you kind of negotiate it, but for whatever reason people just forgot to sign it, and you perform, money exchanges hand, work is performed, you've got a contract. The question then becomes though, "What are the terms of that contract? Are they actually the terms in the written agreement, or are they just customary, ordinary terms based on the performance?" And that's really a state-specific, jurisdictional issue. You could have a situation where you thought you had a contract, you forgot to sign it or notarize it or date it or whatever, and then some of those terms you thought were in there are not really in there.
Ash Patel: This sounds like a really expensive potential litigation.
Andy Smith: Yeah, it is. Construction litigation is time-consuming and expensive, unfortunately. So let's avoid it.
Ash Patel: What is the biggest flaw or mistake you see with commercial leases? Or residential leases. Or let's do both questions.
Two different questions.
Andy Smith: I think it's the same issue... So with residential leases, the lease I draft for a residential tenant -- because a lot of it is unenforceable. There's the Ohio Landlord Tenant Act; when you're dealing with residential stuff, you're dealing with - at least the law perceives it as unsophisticated tenants. A lot of the stuff you put in that is unenforceable. You cannot get attorney fees from a tenant. Late fees - judges just laugh at that. They'll give you maybe $50, but not this $10 per day until paid. A lot of the stuff you see in residential leases is just unenforceable. So I'll read these 10, 20-page leases, and it's just not worth the writing on the page.
Ash Patel: You're blowing a lot of minds right now, including mine.
Andy Smith: Yeah. I think it's a lot more fruitful to do a simple lease, both sides understand it, and then I'll do an attachment that's incorporated in the lease, of just guidelines and recommendations. So I think we've all seen it... "Don't put baby wipes down the toilet. Don't put hot grease down the kitchen sink." I just do a guidebook of being a decent tenant, and I say in the lease, "Any material breach of that is grounds for eviction." And that's really worked out the best for me, as I've experienced it either with clients, or firsthand, where Municipal Court is almost like Judge Duty. It's not so much about what the law says as fairness and equity to the tenants. So I've focused on that, and changed the way I look at residential leases, or residential tenant disputes. It's a different world. Whereas commercial - you can have that much longer, detailed lease, and it's for the most part all enforceable as written.
Ash Patel: I've never had an attorney where if we went to them, or anybody approached an attorney and said, "Can you draft a commercial lease?", I've never had one do that from scratch. They always want you to present something to start with. Why is that?
Andy Smith: I have a library of leases in my computer, and you can kind of plug and play. But to start drafting a lease from scratch - it just takes an inordinate amount of time. So I think from your perspective, depending on what sort of commercial space you're dealing with, it just helps the attorney to see what exists before. And to be quite frank, that attorney might not have drafted a lease like that before, so they want to see what to go off of, and tweak it in their own way.
Ash Patel: Our whole team has been working on reading through dozens of our old commercial leases, and trying to come up with one badass lease...
Andy Smith: Yeah, absolutely.
Ash Patel: Nut it's not one size fits all, obviously... Tenants that have restaurants are different than tenants that have a liquor license, or whatever it might be. Competition clauses... Every commercial lease is so unique. What a great conversation today. Andy, what is your best real estate investing advice ever?
Andy Smith: Just to not give up. Just keep going. Real estate is very forgiving. If you bought your first place and you had a terrible tenant and they destroyed the place, just stick with it. It will more than pay itself off in so many different ways. Don't give up.
Ash Patel: Yeah. And everybody gets bit, right? We all have [unintelligible 00:41:46.21]
Andy Smith: Yeah. I've got enough horror stories for a couple of podcasts with you.
Ash Patel: Awesome. Andy, are you ready for the Best Ever Lightning Round?
Andy Smith: I am.
Ash Patel: Alright, Andy, what's the Best Ever book you've recently read?
Andy Smith: Believe it or not, I don't read for fun a lot. So Rich Dad, Poor Dad I only recently read, and that blew my mind.
Ash Patel: Yeah. I read that much later in life, and if I had read it earlier, it probably would have changed the trajectory [unintelligible 00:42:14.02]
Andy Smith: Yeah, same here. That, or "Four-hour Workweek." That's a good one, too.
Ash Patel: I've got one for you... "Who, Not How." have you read that?
Andy Smith: I have not.
Ash Patel: It's by Dan Sullivan. Take a look at that. That's another game-changing book. So please, take a look at that. Andy, what's the Best Ever way you like to give back?
Andy Smith: Anybody that wants advice on real estate investing, or being a lawyer, or anything that I do, I say "Come have lunch with me. I'll buy you lunch. You can ask me whatever you want." I never had that growing up, I learned everything the hard way... So I've been on boards, I've done donations, all that, but this is what I feel I do best as far as giving back.
Ash Patel: And Andy, how can the Best Ever listeners reach out to you?
Andy Smith: Oh, boy. Twitter... My law firm [unintelligible 00:42:57.05] I've got email on there, and all that... So in any way, shape, or form.
Ash Patel: Andy, I've gotta thank you again. What a great conversation. We've covered not only your portfolio, your deals your real estate background, but a wealth of knowledge on the legal, real estate side. No legal advice given, but you gave us some great advice. Thank you for your time.
Andy Smith: Thanks for the opportunity. Hopefully it helps somebody out there.
Ash Patel: I'm sure you did. You blew some minds. Best Ever listeners, thank you as well for joining us. If you enjoyed this episode, please leave us a five star review. Share this episode with someone you think can benefit from it. Also follow subscribe and have a Best Ever day.
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