Thread by @RedReality4

THREAD:
#CRE #CommercialRealEstate
#business #investing

How I lost $3.5 MM in CASH - and $95 MM in equity

In 2006 I had been building mid to high end homes, about 100 per year. At 29 years old I was flying high, had just missed being on The Apprentice with Donald Trump

Lots of people could feel housing getting pretty frothy. Somehow getting your 29 year old buddies approved for a $600K construction loan on stated income felt "off", but when in Rome, right?

I didn't like it - but there were more and more people getting in, so we kept going

I needed a pivot, and had met a guy a few years older than me doing commercial real estate. He was polished to my rough around the edges. He was connected and patient. I'm scrappy and forceful. We became fast friends.

I'd brag about houses selling for $100k profit.

He would sell a $10MM building and make $150K commission (often rolling commissions back into the deal).

Housing was nuts so I started pitching him deals over Sushi.

I need you to understand - I had NO NETWORK.

I was always the smartest, because I was the only guy in the room.

I had built my little empire from scratch the hard way - and hired people I knew instead of people who knew more than me. Over all we had fared well.

After bringing my Broker friend 5-6 deals he didn't like I brought him one he thought might have legs.

I put $50k earnest down.

This was 26 acres of land half way between Salt Lake City and Provo, Utah. $6MM purchase price. It was WAY over my capacity.

My guy said he would make some introductions, but I would need to come up with half the money to keep half the deal.

"No problem" I said... Full bluff

I spent nights and weekends recruiting money from friends and family, anywhere I could. Theirs along with mine would add up to $1.6 MM. Ugh.

Meanwhile we're blowing through deadlines and I'm writing additional non-refundable Earnest money checks on a clip, would reach $250k.

I was all in, meeting with the big dogs during the day, trying to keep my poker face.

Here's the thing: Noone taught me anything about commercial real estate, but I knew this piece had all the right stuff.

*path of progress
*growing population
*retail /office/ development

What I didn't know was that the guys I was pitching this deal to were heavy hitters, and my broker was an up and comer.

Time keeps going. Platts get recorded. 13 acres for 50 homes, 13 acres for multi family, 240 apartments.

I noticed that the big dogs liked the apartments...

At some point in the process I stopped wanting the deal to happen. I needed it.

And damn it! It seemed like all my houses were taking way longer to sell.

Finally - got the green light from my investors. The big dogs came in with another $1.6 MM. It was done - I was dancing!

My broker buddy is high fiving me, the big dogs pulling me aside "if you perform and this goes well, you will be in"

Funded! Done!

But - but there's a problem.

My bank decides at closing they are nervous. I'm too young, the only guarantor. They want $500k more t fund the loan

I was out of time. The land Seller had given me my last extension. They had $250,000 reasons to walk. I didn't know anyone else with money, and the big money guys would pull the plug...

So I got the Seller to subordinate the $500k more to the bank, take second position.

Genius!

The numbers were the same, and we were funded, so I just did it.

And we got to work. And the bank funded the construction of roads, sewer, laterals, curb & gutter, even fiber optic internet.

Things were working. We were hitting timelines, opened a model home selling trailer!

Do you remember where you were when 9/11 happened? Space Shuttle exploded?

When the housing market crashed I was in Cabo with my family. The banks stopped funding our constructing loans. Froze them.

Didn't matter what phase of construction.

We were just finishing the Roads.

I honestly believed I would be fine. I had the big dogs. I had more units, Apartments, I had diversified. Right?

The next 2.5 years is a blur. I can't tell you the timeline of everything.

I would spend every day for the next 2.5 years fighting for survival like a wounded dog.

Fighting every bank for every dollar, getting half or less. Fighting investors, subcontractors, every person I knew losing credit, money, doing short sales, foreclosure, etc.

I lost my job, my reputation and my family. My personal demons had also caught up, and my wife was done.

You can read more about that here if you want:

https://twitter.com/RedReality4/status/1425019874875625479?s=19

But let's Keep going on the real estate.

The big dogs were half the equity. Me, my friends and family were the other half... And my side couldn't fund carrying costs. I couldn't fund groceries.

I was hustling. We carved off the multi family piece and sold it to reduce debt. Everybody applauded. (What the hell were we thinking)

I got the city to agree to give us 110 town houses in place of our 50 lots - and got our engineer to fit 110 units on our existing roads!

I pitched this hard to the investors.

They agreed:
Love the location
They loved the density increase
I had busted my ass for them
The current market conditions were unprecedented

But:
I hadn't disclosed the seller subordination
I couldn't fund my side of carry costs or cash out

The big dogs didn't want to throw good money after bad...

There were too many opportunistic opportunities to pursue

So they encouraged me to sell, and everybody walked. We walked away from $3.5MM in cash. (we had funded $300k in interest carry for 1 cash call along the way)

Different big dogs gave me feedback about why they pulled the plug.

*Jake you were to young, grasping at straws
*the Seller subordination was not disclosed therefore I couldn't be trusted
*Don't want to be in the deal with my friends and family, don't want to squeeze them out

So we walked away. Poof!

Gone

Today, the 240 Unit Multifamily apartment complex would be worth more than $90,000,000. It would have cost $40 MM to build.

The 110 Townhomes would sell today for $55,000,000 or more. The land alone today would sell for more than $14,000,000.

Plus we had $3.5 MM in it.

It has been 10 years since the bank officially foreclosed on the land we had left.

I declared bankruptcy shortly after the bank foreclosed.

The grieving and loss back then were crushing.

I lost some of my closest friends. My best man at my wedding still refuses to have any relationship.

Some people think I should pay those investors back. That if I were a man with integrity I would.

The big dogs did a forensic audit of the deal and my accounts. What they found is exactly what I have told you.

Most swore me off. A real estate pariah. A flea bitten loser.

I couldn't spend time on this anymore. Losing 2.5 years of income, working for free to save the day.

Lessons I learned :

*Don't be underfunded
*Don't be the smartest guy in the room
*I need a network
*Don't be sloppy
*Communicate

I am smart, valuable. I had sold big time real estate guys a project.

I had sold a multifamily project

I had changed zoning, density

So in the aftermath, what happened to my buddy the Commercial Broker?

I needed cash so I sold him one of my lone remaining assets for 50k.

He told me that he didn't feel it was my fault, that I had hustled. He would defend me, told me I was his friend.

He told about some of his personal hardship, promised me I could get through it, even thrive.

I asked him to vouch for me with my wife. He did. He sat down with her and and told her how hard I had worked to save the deal, that I was a smart guy.

He told me he was praying for me

Years later I would find out that he had also stood up for me to the some of the big dogs. He told them to their face that they are the big boys and that my seller subordination hadn't changed the deal, that they chose to bet on me, the project, and they also chose to bail.

He and I weren't close for a few years while I exited Real Estate to focus on Operating business start ups - some crazy stories there.

Eventually we reignited the "bromance".

By 2015 I was paying cash for my house earned from my businesses. An amazing house with a view.

(I couldn't get a mortgage - no credit 🤔😂)

My buddy represented my businesses on some tenant leases, and while we had not had Sushi, we were friends.

He once told me "Jake I'm your friend. That means I want to know if you go on vacation. I'll be thrilled if you buy a new car. I lost $300K, but to lose you as a friend would be worse. Share your life with me!"

If you get get the chance - BE THAT KIND OF FRIEND! Game changer!

So in 2015 I invited him to come see my new house. He loved the view. He bought the house next door.

We are now literally next door neighbors, and close friends. Through him I've been able to repair relationships with some of the big dogs, and have become close with new ones.

Life is hard. It hurts. It is high stakes.

You are 1 relationship away from a breakthrough. 1 person you help could change their life and yours.

Today, I own 110,000 sq feet of industrial and office commercial real estate. I bet you can guess who my broker is.

I've learned that I'm not a Real Estate developer, I'm an entrepreneur. I build businesses that occupy real estate and leverage my tenancy to create RE opportunities, and invest in deals.

I've learned to slow down, but learned to understand my strengths/weaknesses better.

It is never too bleak. Never give up!

Ask me anything!