MULTIFAMILY MISSTEPS WITH JEROME MYERS AND TOMMY BRANT
Audio
TRANSCRIPTION
Jerome Myers: Hey everybody, and welcome to Multifamily Missteps. I’m your host Jerome, and I have the pleasure of having Tommy Brant in with me today. Tommy, how are you, man.
Tommy Brant: Jerome, you know, I’m great. The short answer is I’m great. You know you’ve, you’ve had a lot of superstars on this podcast here, so I’m really just truly humbled and honored to be here and have an opportunity to contribute to your listeners.
Jerome Myers: Man, that contribution is the ultimate gift. So for the listeners who may not know about you and where you’ve been and what you’ve been up to, give them a little bit, man. Let them know who you are.
Tommy Brant: For sure. Yeah, so my name is Tommy Brant. I’m a recovering electrical engineer based out of the Nashville Submarket. So I’ve been here 13 years, last January, and ever since I graduated from Georgia Tech, I went full-time in real estate last August. And so with a focus on multifamily syndication, but I got a portfolio consisting of some single-family long-term, single-family short-term. I’m invested in a couple of apartment syndication through some chips on a new development deal, and I’m a joint venture on a storage facility as well.
Jerome Myers: Wow. You’re rocking and rolling, man. You got the income coming in. That’s awesome! So through all of those are the deals you own. I guess you just bought everything you looked at right?
Tommy Brant: On the single-family side. It kind of took me a while to figure out what fit my buy box there. I’m an LP in two apartment deals, LP on a development deal. I guess one of the things we’re gonna talk about is my first GP deal that alluded to me. So a lot of emotional turmoil that I’ve gone through on that one but we’ve got a couple in the hoppers, so you know, we recover just fine.
Jerome Myers: Recovery is part of the game. If you don’t give up, you can’t lose. So talk to me about this deal. Where was it? What happened? Give us the backstory.
Tommy Brant: For sure, yeah, Jerome. It came in and it fit everything we’d been looking for. I’ll break it down for you. So this was a pocket listing from a broker. Came in on Sunday and then we were under contract. Had the team identified just because we knew the market, the property was in the submarket of Nashville, 52 unit apartment complex. And we’re like, okay, you know, this is a good size for us to take down with a small, intimate team, and we are under a contract executed by the following Sunday.
And so within a week we had the team assembled, and we had it underwritten. We knew it was a deal. We had a couple of lenders picked out, and we knew who our property manager was going to be. And so that’s one of those things where it’s like, I can’t be dabbling and be able to move that fast in a week’s time. It helps that you’re focused on your market first, and then you’re assembling the team around your market.
So that’s a good time. So that’s kind of how we source the deal. There’s been really just one broker that we’ve been building a relationship with, for the better part of a year. And so that really came to fruition with that deal. And so we had a pretty good idea who all had seen the deal and we just assembled a team around the strongest players on that had access to that one.
Jerome Myers: So wait, I’ve never heard that strategy. So you went to the other people who you think the broker shared the deal with and said, Hey, instead of competing, let’s collaborate.
Tommy Brant: Yeah. And, and one of them is the favorite of this broker. And we’d been making some offers on other properties together.
And, he’s super busy. And so we’re like, all right, we’ll do the underwriting 12 different ways possible. We’ll do the market analysis, we’ll do the investor deck, investor relations, and all that good stuff. We just need you to sign on as experience and just have your name on a piece of paper.
And so I think we had underwritten it a number of times. As I said, we got it on Sunday. We’d underwritten it a number of times, got the heads up on what the new developments coming to the city, this, that, and the other. And we brought it all to him on Tuesday. He said like, this is, this is everything that we know.
He’s like, I like it. I think y’all are conservative here, here, and here and here. I think there’s a lot of upside to this deal. By the way, I think I got some connections that are really good on the lending side. I think this is gonna make this a screaming good deal at this purchase price. You know, I’d like to participate.
You sleep on it. Y’all let me know if y’all want to be part of the team. And so my partner and I, we talked after that. We were like, okay, this is a no-brainer. We know we want them, but what are the obvious gaps? And we were like, all right, well we need a seasoned asset manager. And he was like, I know a guy.
And so we’ve just assembled a team in short order based on what we knew at the time.
Jerome Myers: That’s outstanding. So I think this is a key point for the listeners because folks who are doing their first deal trying to lead their first deal, think that they’re just going to join somebody else’s team and everything’s gonna be great.
But you took the deal, you took action, figured out the underwriting, decided that it wasn’t just a lead, but truly a deal. Then presented that to somebody who had more experience than you did, and they were like, I’m interested in joining the team. So you created value for yourself in just that part alone. Is that correct?
Tommy Brant: You know it, yeah.
Jerome Myers: Who wrote the contract? Was it you and your partner? Was it some entity that you guys created? Was it the favorite in-air quotes? Who was the guy or who was the lead on that?
Tommy Brant: Yeah. So, as far as signing the contract for the initial one that was actually just me. I don’t think I need to be on the initial one and we’ll do DBA later on doing business ads later on after we get an LLC form through syndication and all that good stuff. So that was just by name on the initial one, but we kind of came together and we said what terms that we wanted.
We wanted the ability to buy 30-day extensions with more earnest money down contingent upon satisfactory inspection. The kind of the normal stuff but we didn’t have to do hard money or anything like that because it was just the broker wants reasonable buyers.
I’ve dealt with a lot of butt holes in the past and I just want people I like to work with, which is refreshing that that’s still out there and they’re not pushing price and the highest and best it this, that, and the other.
Jerome Myers: Okay. Okay. Okay. Okay. And so it sounds like everything’s going perfectly, like every other deal like this, this is just how it’s supposed to go. The broker gave me something I can work with. I got the team. You guys should be right off into the sunset. Mailbox money every month.
Tommy Brant: That’s it. That’s it. That should be the case, right? In my mind, like that definitely should be the case. And so we get to where we’re doing due diligence and inspection and we were a little concerned about the roofs and the interiors of the building.
And so we get to inspection day and it really wasn’t anything that we couldn’t navigate, right? The roofs definitely need to be replaced, but we had budgeted a quarter million dollars just for the roofs of all these buildings. So we’re like, okay, no, no real surprise there. But the thing that was surprising was that.
The roof inspector was like, there’ve been some recent storms. Probably just get them to file an insurance claim. You pay a higher premium than you want, but you wouldn’t have to pay a quarter of a million dollars upfront you would pay it in just a higher insurance as you go, and that’ll casually drop.
But the thing that was really surprising was just the foundation issues. Just a number them. There were 13 Quadplexes that made up the 52 units. They all had a door on the rear and the front as well, so that kind of made up the breezeway if you want to think about it that way.
There were just 13 buildings with two entrances on them, and the doors were always open. So inclement weather, the rain gets in and no one’s shutting the doors. There are low-security things to worry about there and so it really just kind of translated to foundation issues.
Again not really anything we couldn’t navigate. We asked for an extra $150,000 in repair concessions, a little slack jaw at it, but it was kind of their fault, right? They’d owned the property for two years and they hadn’t done any like CapEx injection to the property.
It was funny because we had the inspector that they had when they bought the property two years ago, and the guy’s like, nothing’s changed.
Jerome Myers: Same report. Here you go.
Tommy Brant: We actually got a discount for it. He is like, there’s a lot that I can reuse, so in any knock, like half of the inspection.
So went from 4,000 to 2000 on the inspection report for 13 buildings, crawlspaces, and sampled electrical panels. We took that, but then we also, I think we ended up with like 1500 pictures on inspection day. And so there was a couple of stuff that we added to the inspection report.
There was like, okay, well he missed this, this crack in this foundation and where these cats were torn up, the AC ducts under the house and stuff like that. So it’s good that we did our extra due diligence there, but like I said, we had asked him to, instead of us paying for the roofs, you know, please exercise an insurance claim. Here’s a roofer that can help you do that. By the way, can we get some money off of the purchase price or just cash back credit at closing? That type of thing. And so, begrudgingly agreed to all of that, and then we started getting more of the intimate accounting details. And this is really where it started going south, Jerome.
Jerome Myers: Okay. How’d you underwrite it? Wait, wait, wait, wait.
Tommy Brant: Okay. Okay.
Jerome Myers: Wait, now the broker put something together for you guys. You got some financials, you did your model, and now you go do your due diligence. And the way we teach it, and I think the way you’re doing it is after you did your due diligence inspection, you had to go back and sharpen your pencil and see what you’re actually buying, because what the broker gave you with this new information, things may be different. Am I right?
Tommy Brant: Sure. Well, with the cash back at closing, that kind of made it all tolerable. So they’re like financially speaking based off of due diligence and inspection. Like we really weren’t much different than going into it after-concessions.
Jerome Myers: Yeah but you found out some stuff during financial due diligence on what was presented to you.
Tommy Brant: For sure!
Jerome Myers: And so, come on, give it to me. You’re holding me out, man.
Tommy Brant: So, I guess some of the backstory, so I mean, the short of it is there’s over $120,000 in delinquent rents.
So the backstory there is that the PM franchised out of Nashville that was brought on to manage the property. They hired someone local to the property. They actually hired a tenant that lived at the property to manage the property. And so it got to where they missed a rent payment and didn’t get audited, didn’t get bank rec or anything like that.
And it was just like they realized they weren’t hammered. And if they’re not coming down in themselves, then so they missed another one. Then it just got to where they’re just blatantly not paying rents. By the way, they’re telling their roommates, their roommates are talking to other people.
And so it got to where they were effectively coaching people on how to not pay. They were like, send me a check and I just won’t cash it. And so it got out of control. So I think that we showed about half of the tenant base wasn’t paying for multiple months at a time. There’s also people filing for housing assistance and stuff like that.
And you know, when it gets to be something like that, the payments get lumpy. And so that was where I guess, options at that point were, there could be a substantial discount on the purchase price to convey the risk. The challenge was the person that bought it before also syndicated and they said, well, if I’m gonna sell, it has to be at this range, otherwise it doesn’t make sense for me to sell and incur a loss.
And you know, it’s just easier for him to hold onto the property, right? And so the other alternative at that point is we do some sort of like master lease with option to buy. And so we’re taking over the property, we’re running it, we’re doing the evictions. We’ve got, our dream team PM in there. We’re doing the renovations, how we want it, that type of thing.
The challenge, there are two challenges there. One challenge is if you’re doing a master lease with an option, there’s really no capital injection. From investors closing title and all that stuff. So we would’ve had to take a private loan, you know, construction loan, something, something along the lines to get us capital to start doing renovations, exterior CapEx, et cetera.
And that’s not impossible, right? But we’ll just call it a barrier. The second challenge is there’s really nothing to stop the owner from just saying, you know what? You guys have done such a great job. Sue me and suffer in court for multiple months, or God forbid he gets hit by a bus and it now becomes an estate situation and the kids are like, no, I don’t wanna sell this and you need my approval in, by the way, you need my sister’s approval.
And, you know, anyway, so we talk about risk. It got to where master release just didn’t really seem feasible. We didn’t know the guy, he was out in California and there was just no, no, we’d never done business before together. So we didn’t really see the master leasehold option. Taking other people’s money into a deal like this as being the way.
And so, and then the other option was to back out. We talked about it a little bit, but if this was a JV where we were bringing our capital into the deal and we acknowledge the risk, I’ll also acknowledge the upside. Like there’s probably a world where we would’ve done it.
You know, but we were planning on syndicating. We already had the PPM written up and stuff like that, and taking other people’s money into a deal at that risk level. Like it, it just didn’t, it was just outside the box.
Jerome Myers: How many did you have in the deal? I mean, if you got a ppm, you got an inspection, you might have an appraisal paid for, and you may have paid a bank fee at this point. I mean, how much money did you have at risk at this point?
Tommy Brant: Yeah, so we had put 41,000 for earnest money. We had put in 15,000 for syndication fees, legal fees, and stuff like that. The inspection was in 2000. The earnest money was refundable, so we did end up getting that back. The syndication fees that are still being paid for and so that’s lingering. And so the idea there is as long as we, four individuals do another deal in the future, we can cut a doing business as and reuse that money. And so as of right now, we haven’t recouped those losses but the idea is that whenever this property gets corrected by the current owner and we revisit it in six to nine months, it’ll go into effect.
We’ll see and then the inspection report, right? That’s, that’s basically $500 out of pocket for everybody. So we kind of see the net loss right now as $500 per person because we’re all still interested in this property. We got a recent appraisal at around the purchase price. So we think we can still buy it and make sense of it if we can get the loan product that we want. But yeah, I think gross gross losses at this point is floating around 17. If we don’t get together back as a team.
Jerome Myers: Wow, that’s not terrible.
Tommy Brant: We didn’t have hard money and so not as bad as a lot. There’s another property in Nashville where there was a team in Arizona that had a property under contract and it was like over $200,000 hard and they walked away from that deal. So it’s not nearly as bad as what I hear going on in the market nowadays. So I consider this tame.
Jerome Myers: Okay, so have you made any changes to your process that will keep you from losing this type of cash again? There are making mistakes with financial due diligence.
Tommy Brant: Yeah. Jerome, there’s one big takeaway from me, but it actually doesn’t have a lot to do with this deal, but it’s more just my thoughts around hard, earnest money.
And so I think part of the reason this deal didn’t work out is that the previous operator wasn’t operating as they should have. It just didn’t look like they had a business plan, right? They didn’t have local boots on the ground. They didn’t execute any sort of CapEx or business plan or anything like that.
So if they would’ve done everything as I learned it, at least I think we could have transacted. I think it would’ve been great but there’s a red flag on the operator here, here, here, here. And so when it comes to hard earnest money nowadays, it’s like people will look at a deal and then they see an asset and, and they see the upside and they’re like, oh, this deal, this asset, this real estate business is going to be great.
When it’s in my hands, I will gladly put hard, earnest money down. But my conclusion in all of this is like, you really need to be understanding the previous owners, who are the sellers, and what are the operators like. Did they have a business plan? What did they neglect? Is there a theme that we’re seeing in all the units with just neglected plumbing or nobody’s replacing flooring or nobody’s painting, nobody’s executing some aspect of the business plan that is blatantly obvious to you that should have been executed.
So I would, whenever people are talking about hard, earnest money, I want to know the owners just as much as I want to know the asset.
Jerome Myers: Well said because the current owners are the ones I’ve created this situation that’s there, and I say owners, but I think property managers, asset managers, and owners all work together. It’s one in operating or executing the plan. So the final question, and when I ask everybody is what words of wisdom do you have for the listeners?
Tommy Brant: I guess I’ll leave it to those that are looking to get started. You know, generally speaking, just get educated and then pick your market and then network.
Always be networking, right? So always be talking to other people, whether you’re looking for new investors or new partners to start up your company with or just like-minded people to keep you motivated. So always be networking for sure looking for mentors in this space as well. Just always be trying to find something that can help you get 1% better every day.
Jerome Myers: Tommy, the listeners were like, man, I gotta learn some more from this guy. How can they get in contact?
Tommy Brant: For sure. I appreciate that, Jerome. Yeah, and my name is Tommy Brant. I am, B-R-A-N-T as in Tommy. I’m on Facebook, I’m on LinkedIn. I will be on YouTube one day. I’m not there yet. I’m still growing. I’m still adulting there. I guess if you wanna check out what we’re doing, you can check us out at tbcapitalgroup.com. Also wrote a book for your listeners.
So, you know, I am an engineer. It is very detail-oriented, so I can’t help but be detail-oriented, but it’s called a Passive Investor’s Guide to the Multifamily Universe. That is my gift to anyone that takes a look at the website there and so I do not monetize that. Y’all can go grab that at your leisure.
Jerome Myers: Awesome, Tommy. Great learning. Solid process, man. You said you learned how to do it, and you learned well. It is obvious you went through some formal education, man, so I wish you a ton of luck and hope you guys get to reuse that PPM because that’s money well spent. To the listeners, the packs with you. We’ll talk soon.