Four Lessons Learned From Closing on 192-units

By November 29, 2017 February 10th, 2019 No Comments
Yesterday we closed on a 192-unit apartment complex in San Antonio, Texas. After touring over 30 properties this year in San Antonio alone, this was an asset we had circled as a fantastic opportunity and we are thrilled to add it to our portfolio.
We first toured this asset in late-July, and ended up closing the deal four months later. During the acquisition process, there are several key takeaways and lessons learned I want to share here.
1. Broker Relationships are Key to winning deals, especially in this competitive environment.
This was a marketed deal, and we were not initially awarded the property. After presenting a strong offer with aggressive terms, we came up just short and were disheartened to hear the asset was awarded to another group. Three weeks later, we got a call that the other’s groups 1031 Equity buyer had evaporated, and they did not sign the contract. If our terms still stood, and we were still interested, the deal was ours—the broker was not going to go back to any other groups.
In talking with the broker, the reason they came back to us and didn’t take it back out to other groups was due to our relationship with them. We spend a lot of energy building quality relationships with brokers—always making sure we act professionally, are transparent in our conversations and are looking to add value to them. When this opportunity came back around, it was an easy decision for them to come back to us, as they knew we would act quickly and would close the deal. Without that relationship in place we would have entered a competitive situation with other buyers, and could have lost the deal a second time.
2. Be conservative in underwriting your Loan Proceeds.
In the nearly 4 months since we first got a soft quote for debt, the index rate (which affects your loan’s interest rate) has risen from around 2.0 to over 2.2%. While still historically low and terms we feel very good about, the rising rate means two things. First, our Loan payment is obviously going to be higher. Second, (and where this can really affect your ability to close) higher debt payments mean a lower NOI, which equals lower loan proceeds at closing. Our loan proceeds came in about $200,000 lower than originally expected. We always underwrite to a higher interest rate than originally quoted, to protect from this very thing. But if we had not been conservative, we’d be stuck needing to raise an additional $200,000 in equity or not have the funds to close the deal. In today’s political and economic environment, its critical to pay attention to rates and know there could be movement to rates that could harm your future returns—and you ability to close the deal.
3. Your Best Chance to Grow your Business is When you Have a Live Deal.
We talk with lots of people looking to break into the business that want to start syndicating deals and raising money from investors. It’s tough to sit down and speak in hypotheticals and projections—whether that is with brokers, or investors, or anyone associated with the business. This deal again proved there is no better way to build your business than when you have a live deal to market and discuss.
We are never so busy as when we are trying to complete the equity raise and go through our Due Diligence period on a project we are closing. We’re writing the business plan, verifying assumptions, putting together the legal structures, negotiating contracts, etc. But during this busy period is the absolute best time to put the hammer down and use your active deal to propel your next deal, and your overall business, forward.
On the equity side, we once again saw our network expand. One investor introduced us to his friend; another to his brother. A colleague wanted us to talk with a Family Office he knows. We met multiple future investors that were exited about this opportunity and our business—all because we had a live deal to present to them that is representative of what we do.
On the operations side, we saw our network expand as well. In looking for the best prices on materials and services, we were able to talk specifics related to this property in this market. We found a new appliance vendor that is saving us $300/unit on our appliance package. We got a great contact to construct covered parking spaces for us. We’re building out a list of contractors and suppliers for the market. The list goes on.
None of that happens without having a property under contract, and having actual numbers and specifics to talk with people about. It’s critical to find the time to grow your business when you are busy working on closing the deal.
4. Never Stop Raising Equity.
The chicken or the egg? Do you find the deal first or the equity? We have a cardinal rule that we don’t pursue a deal unless we are 100% confident we can close—our reputation is too important (see Point #1 above). But we don’t have the equity sitting in an account waiting to be spent, either.
For this deal, we had two different equity partners that signed up with us—and neither one performed.The first group committed to funding $4mm (60+%) of the equity, and ended up not bringing a dollar.We also experimented with a Crowd Funding platform who promised us they would bring $1.5mm of equity.Again, we didn’t see a dollar. Even though both groups failed to perform, we got the money raised and closed the deal on time.How?
We never stopped looking for investors and marketing our deal.If we had stopped working and taken it for granted that either of these groups would perform, our equity raise would have been simple.Turns out that wasn’t the case, and since we were working on growing our business (see #3 above), we were having active conversations with investors every day.We tell all our investors that our deals are “first come first served” and mentally we were racing against these other groups to get the money in our account.When each group called us to say they had not performed on the deal we were frustrated, but luckily we were not up a creek.
We aren’t likely to use these two groups in the future, but we’ll continue to experiment and partner with different equity groups and crowd funding platforms as viable paths to fund our deals.
The key lesson for us: Never stop raising equity until the account is fully funded, and if you are hustling to grow your business—and you have a good, marketable deal—you will get the funds you need.
It’s been a whirlwind 4 months getting this one across the finish line, and last night we celebrated the event. Today, we start executing our business plan to ensure we meet our projections, and stay vigilant on the hunt for our next deal.

 

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