March 31st 2009 was no April fools day. Over 5 years ago we were fortunate to negotiate a $2,100,000 real estate transaction 100% owner carry. In exchange to put the deal together we cross collateralized our 20 unit apartment that at the time had about $400,000 in equity. We also put up a 3 unit that had about $90,000 in equity.
I being what I thought was a really good negotiator did not tinker with the asking price rather I asked for very favorable terms. I thought I was on top of the world. All that had to happen is that my area continues with very average appreciation, 5/6% annually, increase rents maybe $15.00 a door a year and minimize any deferred maintenance. My exit strategy was to hold the portfolio long term as a “seed” that would grow into one branch of our financial freedom future.
But we all know what happened over the past 12 months in the world of real estate… what you may not know is that it hit Colorado Springs rental market about 36 months ago, starting with the deployment of over 8,000 soldiers (and soon after their families left too.) Market rents have declined in our area by 30%.
When a “Perfect Storm†comes into you life one thing you will realize it and you will know it…!
Here is what happened right out of the gate, the 11 condos we picked up as a part of this transaction were assessed a $125 a month for deferred maintenance it went for 2 years until we said no more. The u nits were a break even when we purchased them so out of pocket each month went over $1,400 times 12 months times two years….off to a great start.
In our excitement over the purchase terms, we missed a few things in our due diligence such as asking the HOA president, “Do you anticipate any assessments to the condos?” (The assessment was already anticipated but we never thought to ask that question!)
To make a very long 5 year story shorter we ended up putting in real cash, accumulated over $200,000 deferred maintenance, and over the past 36 months we have had to put in another $3,000 Monthly out of pocket just to break even.
The highpoint of the portfolio came in one 2 week period when 9 of our 21 tenants let us know they were moving out. Rents around town had lowered so much they could get more for less. Our payment was fixed and we really could not lower our payment, I had called to see if we could renegotiate the original transaction it became very clear that was not an option.
Here is what I learned from this and why I am sharing so transparently with you:
We knew 2 years ago that this was going very side ways, pride and ego blinded me from facing the truth. Just like my daughter when she gets scared at night, I pulled up the cover over my eyes and didn’t take the hard steps I needed to do then.
One of my real lessons, and one that I know is on many of your hearts, is that when I saw that I needed to take my lumps, I should have cut hard and deep FAST. I should have just gotten it over with… Either I should have renegotiated with the lender much earlier, or if he wouldn’t do that, I should have walked away sooner when we knew we could not turn this around or that it wasn’t worth sticking with it to turn it around.
So this past Tuesday March 31st 2009 we signed the original portfolio, our 20 unit and our 3 unit over to the owner. It was a deed in lie of, so it was not a foreclosure. It was a tough lesson to take, but one that I needed and will ultimately profit from.
I tell you all this because I know there are a lot of you out there in businesses or real estate deals that don’t make any sense anymore… you know that you’re going to have to eventually make your cuts to leave your losses behind and free yourself to move forward towards your goals once again.
If that’s you, don’t delay the decision. Dragging it out only makes it worse.
Trust that you can and will move past it… it will hurt, it hurts me too. But we’re both going to get past it and move on to bigger and better things.
I want you to know that I too have had and will have more business setbacks and failures. And I too will have business successes. This is all part of the tapestry of our lives, just maybe a darker colored thread for this patch. I’m not on a pedestal, I’m right beside you on the road, walking lock step with you.
It is very humbling to tell you all this but life is life and I too deal with negative life situations. What does not kill you will make you stronger, I know that to be true.
This process helped me put so many things into greater clarity…
My faith will not waiver, my marriage is stronger and my love for my daughters greater.
What is really important to me has very much shifted. It’s so much less about the money now, but rather about the things that matter so much more.
Thank you God for loving me enough to continue to teach me and mold me into more and better…
Any of you willing to share your “lessons” from the past 12-24 months? Respond to this blog post and lets see what we’ve learned.
{ 4 comments… read them below or add one }
Stephen,
You have great courage my friend to just put it all out there. I love and admire that about you.
Few of my “lessons” past 24 months:
Overpaid by $181,000 on a business I bought (now the party who owes me the money is in final stages of bankruptcy…)
LESSON 1: Learn to read those financials, especially the statement of cash flows!
Lesson 2: Make sure I understand the motivations of the advisers I use on a deal and if there is a conflict of interest, find a more disinterested party to advise me.
Have office building portfolio that’s taken a knock… from six figure cf to working hard to break even (market rents and vacancies in area for office space shot up over past year).
LESSON: Build a better safety valve into my financing that will help me have more flexibility to ride out a down market.
And there are others… I’ve been very blessed over the past few years with great businesses and investments, but I’ve got my share of “lessons” too…
Who’s next to share?
Thank you so much for sharing that Stephen. That HAD to have let you breathe at least a bit easier…the letting go AND the sharing.
I’m proud to know someone that models radical transparency and authenticity. You stand for so many of us.
Yes, brother, Countrywide is the proud owner of a lovely Las Vegas condo of mine.
Definitely wiser.
And gee, who is it that Countrywide is now owned by… Maybe if you’d kept making those payments Thomas… Nah!
Thanks Stephen for being so open. I’m also facing a similar issue of giving back my apts to the bank. I’ve been learning, the hard way, that leverage is a double-edged sword. I bought my apts with none of my own money but didn’t negotiate a debt load that the apts would support. So, after almost 2 years of negative cash flow, I’ve said enough is enough.
I told the bank we needed to restructure or they would get it back. No deal. Same with the 2nd (owner carry). Nope, they didn’t want it either, at least with the 8% 1st.
So, its for sale. (Anyone intested in a good deal? Perhaps a short sale?)
Anyway, Stephen, thanks for the encouragement. Be encouraged, we are right there with you.