How to Invest in Commercial Real Estate

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Episode #059- The Top 10 CRAZIEST THINGS We've Seen in Commercial Real Estate!

by Criterion, Braden Cheek, Brian Duck
April 25th 2022
00:00:00
Description

Today our hosts Braden Cheek & Brian Duck from The Criterion Fund, and Joel Thompson from Precision Equity talk about some of the wildest experiences they've had during their careers in Commerc... More

and so the light went off for me and I got these credit card office all the time so I just started storing them uh keeping them and I thought well if I apply for all these credit cards all in the same night, they won't hit my credit Score and ding it lower and I'll get I'll get you know high balances on all these credit cards and then I'll balance transfer the max uh from these credit cards and that's what I did. I got like 10 credit cards got like roughly $10,000 balances on all of them. And as soon as I got the cards I said hey I want to balance transfer from this card over here once again that this car didn't have a balance. So they just all the credit cards just shipped that card 10 10 grand and so I raised $100,000 and you're like well yeah but you got credit card debt. I did But it was 0% interest for like two or 3 years and so I use that $100,000 to help us buy an apartment complex. Welcome back to that invest in commercial real estate. Today is an exciting day because we're going to go over the craziest things we've come across in our many, many years of doing commercial real estate, at least some of the crazy things that we can talk about on camera and then we remembered Alright The 1st 1 Joel hit us this is your deal.

Yeah this is an interesting one. Things you don't ever think you're gonna run into. We had, we had sold a portfolio of apartments, uh, the year before 318 and hey, we made some money, we're high fiving and then we get a call and apparently while we owned it, uh someone that didn't even live in our apartments, he had been drinking, wandered out the door onto this on the parking lot and there's a section of parking lot that was uneven. It was like a drop of like 3.5 ft. I didn't even know it was there uh maybe it was four ft. Apparently this guy falls and breaks his neck and so we get this call and we're like, you know this guy, you know, he's in bad shape and we're like, what happened? And they tell us. And, and you know, even if it was his fault, we should have had a fence on the parking lot. If you have a drop off of more than three ft or four ft, you have to have a fence. We didn't have it, Luckily we had insurance. Um, and the guy was so messed up that, that we had to settle for the maximum on our insurance $1 million dollar settlement a year after we had sold the property, uh, to take, to take care of this guy, uh, the property, but then you sold the property.

Yeah, I didn't even know, I didn't even know he was hurt like when we came back after he came back after the afterwards. So anyway that was a crazy experience and you better have good insurance to take care of. The insurance company. Didn't tell you you needed the fence so we're not paying. But that didn't happen. Yeah it didn't luckily for us. Thank goodness. Better make sure you have insurance. It's it's literally the last day of closing. Yes. Um All right. Next one. This is a fun one. This is a fun one because a lot of people want to go by their big first deal. A lot of people are in like the residential house flipping game or managing especially from you know the middle of the country. It seems like most people's retirement is a few houses that's their aspirations For retirement. I'm gonna get three houses. Maybe 5 10 is the most and I'm done. But anyway this is a crazy story about how Joel bought his first apartment complex and and I know we may have told it before but give us you know maybe the little faster version. 32nd version. Uh this was back in early 2000s when you were getting balanced transfers was a new thing 0% interest On balance transfers.

And you know I ended up doing one and I you know accidentally transferred a balance to a to a card that didn't have a balance or from a car that didn't have a balance. So instead of transferring it they just shipped my other credit card a check for like $5,000 or $10,000. And so the light went off for me and I got these credit card office all the time so I just started storing them uh keeping them and I thought well if I apply for all these credit cards all in the same night, they won't hit my credit score and ding it lower and I'll get I'll get you know high balances on all these credit cards and then I'll balance transfer the max uh from these credit cards. And that's what I did. I got like 10 credit cards got like roughly $10,000 balances on all of them. And as soon as I got the cards I said hey I want to balance transfer from this card over here. Once again that this car didn't have a balance. So they just all the credit cards just shipped that card 10 grand. And so I raised $100,000 and you're like well yeah but you got credit card debt. I did but it was 0% interest for like two or three years. And so I used $100,000 to help us buy an apartment complex.

You should do that again. Yeah hopefully I'm past those days don't have to do that anymore. You probably can't do that again. I mean there's probably some sort of thing in place to make sure that you can't just go get $100,000 or you can't just, you know? Well I think what they started doing was they started saying, okay well balanced transport for the balance, but it's like a two or 4% fee of any balance that you transfer. So that's how they got around or penalizing guys like me on 100 grand for a couple of years that I took it. Alright um this next one is actually discussing, so if you have a weak stomach, fast forward, 120 seconds, we fly out to to nowheresville north Carolina, absolutely middle of nowhere. And we're looking at a couple of apartment complexes and we already had an apartment complex in the state. So we were kind of looking to expand that operation. We had a management team in place at precision and and we thought man if we could just get, you know, a few 100 more units out here, maybe we just keep this and you know have our management operation in place, whatever.

Um so we're going to tour this apartment complex and everything's looking fine, you know, 30 minutes into the tour, everything's fine. And then kind of towards the end he's like, hey, you know, hop in the back of this truck, I want to show you guys something, he starts driving off property. The guy, the broker. Yeah, the guy giving us the tour, so you know, he's like, oh I gotta take you back here to the sewage plant and we're like, wait, what did you just say the sewage plant, we don't want to buy a sewage plant. So there was no sanitary sewer connection in this municipality, you know, in the middle of nowhere in north Carolina. Well, I mean there there was other places for some reason this apartment complex was not hooked up to city sewer. Yeah, it was in the middle of the city. The city was in the middle of nowhere, but it seemed like it was in, I mean it was in the middle of this town. It's just, they didn't have a sewer connection So they had to process their own ship on like the back 40 and they had this geezer, the guy had to be 70 or something. Well older than that. Maybe. He was like, yeah, the, yeah, the sewage comes right in this pot from, from over there in the apartments and see if we treat it right here and then it was like this line of progression of of, you know, waste.

Should I be taking notes? You know, I mean, how do I do this? Who's in charge of this? And he gets to the end, he's like, yeah, well this, this clean water right here, you can drink this. I'm like buddy, there's no way I'm drinking that when it just came out of their toilet like upstream 50 ft don't say we didn't buy the apartment complex a couple years back. We looked at it and it was like, man, we probably should have bought that, but it was just the idea of treating your own craft. The only reason you didn't buy it, that was the only reason we were like, we couldn't get our head around that whole system and who's running it and what the liabilities would be for messing that up, getting quotes to repair it. It looked like a, like a fifties moonshine gig, you know, in the middle of Arkansas. It was not, it was not good anyway, okay, keep it moving. Okay. So this next one, we have this apartment complex for a year's a long time, 78 years. And um it was built in 68 early seventies couple phases and it was a boiler chiller property and it had a condensing unit. So what that means is there's basically one giant H.

V. A. C. Unit cooling down water that water was piped through the ground through these apartments and a fan blows over it and that's how they get heat and air. That's a massive cooling tower that Exactly. Anyway, it needed repaired and it was gonna increase the cooling efficiency by like 20 or 30% reduced the electricity bill by like half. And the electricity bill was like 16 or $17,000 maybe. I don't remember how much it was going to reduce electricity. But the idea was, Hey, we got 200 families here and they need to have better cooling and so we're going to invest in the property and we're gonna get a brand new cooling tower and we did it had had, you know the best hhc company do the do the design and it's gonna work and we we install it and it happens to be a few feet taller than the last one. See I'm, the jury's still out on that. I don't, was it actually taller? We went to court on this? Yeah, I think yeah, we did. It went it was probably taller. I think it was maybe a little bit taller. Anyway, this lady on the basis of her complaint was hey, I don't want to see this thing in my backyard because there was a there was backed up the neighborhood that backed up.

So now, you know, it used to be lower than the fence. From their eye level. Now above the fence they can see this cooling tower. And so so instead of looking at mansard roof apartment right? Because that's that's what's right behind it is a mansard shingled roof apartment. Yeah. Now they don't see that and they see this cooling tower that's probably 12 ft, you know wide. Uh and they ended up suing us of the visual or the sound both both. And so we thought we did something good and we ended up embroiled in a two year lawsuit, you know, a little bit uh oh I think we did that. Yeah, we did. We built it, we built a fence around it so they couldn't see it anymore and insulated the fence. It attenuated some of the noise, not to be deterred. They were hell bent on making us move this cooling tower, which really wasn't an option. So sometimes when you think you're doing something good, you're not, you're getting you're gonna get sued.

Yeah. And that one got turned over insurance to another great reason to have insurance. Alright, next one I'll do this. Okay, so this is the first retail center we bought and it's at, it's a very good location. Can I say location? I mean it's, it's pretty busy. Anyway, there's probably 50, cars, maybe more a day. And uh we started getting calls from the tenants about, you know, some ship on our sign. Well you mean like some dust and stuff like that was my first thought as well. And then we get out there and and there's there's actual human, human human feces on the sign, on the sign and blew my mind. Absolutely blew my mind how there is shit on, on, on on the sign. I don't even know how you do that. So anyway, we had to hire a security guard specifically to stop the sign shitter. So what happened? There was somebody was in the middle. I think I think one of the restaurants was, was feeding some homeless people and they don't have anywhere to go to the bathroom and and he just ended up doing that and just thought, you know, I hate these guys, I want to rub it on their sign hard corner.

I never thought that we would have that discussion. But that's what this show is about. As some of the weird things. We run into owning property. That's a good okay. All right, this next one is actually really interesting hire good security. Uh We have owned departments in some rougher areas. Uh and this was one of those and workforce housing baby. Yeah, we call it workforce housing. Um and apparently, uh we we hired a security guard and luckily they had body cam because he's trying to escort somebody off the property. And the guy uh reaches for a gun turns and shoots our security guard and our security guard is pulled his gun and is shooting back ends up killing the guy. And the only reason he's alive to kill that guy because when he, when he grabs his gun and points it at the guy, the guy's bullet lands right in his hand right in front of his body, luckily his him pulling his gun, stopped the bullet and he had enough wherewithal to fire again at this guy and the tenant dies right there uh on our property.

And that guy, even though his hand was damaged. You know, he was okay. And what a what an awesome job. He did. The craziest part of that story is that happened super early in the morning, you know, four in the morning or something. And by like nine a.m. This dude is in our office with his exploded hand and cast showing us the body cam footage and it was just like it blew my mind. How are you alive? How how do you have video of this? You caught a bullet with your hand and and and and save the day. You're a hero my man. Yeah. And you just you can't pay, you couldn't pay me. I'm a coward. You can't pay me enough to do that job. That guy needs a race. Okay. Okay. So also in some of these apartment complexes, this woman in this one was in Oklahoma city in a rougher area of Oklahoma City First apartment complex we did in Oklahoma City last apartment complex we did, you know, but not because Oklahoma City in the great market. It is, it's good market. We just, we we kind of bought this on a whim and and it was a little rougher area, but I guess we weren't doing our our tenant visits, our, you know, our unit walk throughs quite enough.

That was quite uncomfortable to do a unit walk through full full disclosure. It was a little risque. Yeah, but um anyway, there is a massive fire, massive fire. I mean there's there's a fire that apartment complexes, I mean not all the time, but frequently. It's not, you know uncommon, they're made out of flammable materials and all it takes is somebody to knock a candle over and, and fall asleep and then the whole thing is engulfed in flames. Well this one, it was a meth lab was a meth lab fire. Yeah, that wasn't good. Just, it's not, it's not great. It's not great. Getting a phone call saying, hey, it really wasn't, it wasn't good for the tennis now. Are they gonna get their meth gotta go off property. I mean, it was, it was literally a downer for everybody involved. I just, I felt bad. Really. We had to ship it in everything was renovated again. Another great reason to have insurance in case your tenants cook, math insurance and getting sued. Seems to be the theme here again. Yeah. But no, no stupidity, stupidity.

Okay, what's the next one? Yeah. So I'll tell you a story about a deal. We almost did in in Little Rock and it was a retail deal and I'll tell you that the tenant in a second. But you know, back then we, we tried to save money on contracts sometimes, you know, I kind of pretend I'm a lawyer and yourself. And so I, yeah, I did a lot of the review myself and it had a pretty good handle on contract law, but I didn't really understand what clauses I needed to have in there to protect me. So we go nonrefundable Pass our due diligence with $250,000, Which means if you don't buy the property, you're not getting your $250,000 back. At least if you're an idiot like me and don't have the right clauses in your contract. So this property had a huge Gander Mountain. And so literally the day, like, like we go nonrefundable at five, Like at 6:00 that evening. An article comes out about Gander Mountain is potentially going to file for bankruptcy. I mean the timing was minutes apart and we launched the investment raised out to our investors that afternoon.

Yeah, so all three same afternoon. Yeah. And I think it was an investor that called me and said, hey bro, I see you launched this investment, you know, you see this article and my stomach sank and I was like, oh no. Yeah, so it turns out, uh, the bank pulls the loan even though they hadn't filed bankruptcy yet. The bank pulls the loan and and we can't get someone else on board and time to close and I lost $250,000 and you didn't want to buy it right because, well, first of all it can to mountains, that's a big tenant, right? So that was a big For those listening, um, you know, get a good attorney, know what a material adverse change clauses and have it in your contract. So you don't lose $250,000 like I did because that was a painful day. Yeah, long story short material adverse change says if there is a material adverse, like if there's a massive change and what you presented me what I'm buying, then I get the opportunity to back out the lender had that contract and their commitment letter. We didn't have that in our contract. Yeah, learn most from your mistakes guys, thankfully we lost a quarter of million dollars and by we, I mean Joel uh so you don't have to Alright, next one.

It's the last one. I think man, roll through them quick. Is that right? Did we do that? Right? Yeah, I'll let you hit this one. Um so one of the craziest things that I've ever done um was on an auction platform. We've talked about it before where I had somehow found, I was looking at auctions because we had purchased some apartments on auction and done pretty well with him. So I was looking and there was a steal in north Carolina. Um, Jacksonville, north Carolina, really small town. I've never been to the state of north Carolina. I call the broker and he kinda convinces me that maybe there's some value out here and I, you know, I went to my business partner, my victory. We need to take a look at this. We had just closed um either a re fire sale and we had gotten this money and vic and I were like, okay, let's be safe with this. Let's not, let's not, you know, don't get up, don't get up, don't, don't risk at all. We, you know, we just got this, this money, this million dollars, whatever it was. And somehow we get to bidding this auction and we realized that there's not a lot of bidders and that maybe we can win the auction. It was the East point refund. No, no, it's the lamp, it was the lamplight sale.

And uh, and so we ended up Bidding and winning the auction, which means we had to wire 10% of the purchase price nonrefundable within 24 hours. And so we ended up doing that. We wired $800,000. Uh, non refundable on a property that I had never seen and that I had never been to the state in which this property was located. You should not do that. And I don't recommend people doing that. It was one of the scariest days of my life actually. Yeah. So flying out to Jacksonville, if you haven't been in Jacksonville north Carolina. When, when you get there, you arrive at an airport that has, I think three or 4 gates small. I'm from Tulsa. I know about small airports, but this has three or four gates. I mean this whole Population is probably 90,000 and 80 of them are are marines, 80,000 of them are Marines. Yeah, there's a huge, there's a huge marine base there. So, so that's problem. Number one problem. Number two is you drive for a cool 45 minutes before you see anything but pine trees, anything, anything at all.

So you're just wondering, what did I do? Where am I? And what did I just buy somehow? Uh, we, we made money on that property we did. Uh, in in my opinion, my opinion, I worked on that project. We did an amazing renovation. I mean that was new roof, new windows, new sighting, take care, take care of all the wood rot, new paint, there was some parking lot repairs, new landscaping in there. I mean that was, that was an overhaul of a deal. So that did great. Yeah, that, but that was one of the crazier things is wiring nonrefundable money on the property. I've never seen insane. So like we did last week. Yeah. You wouldn't have done that if I wouldn't have blazed the trail for you. That would be another episode though. Well guys do not get into commercial real estate investing if you want a boring day job. Those are just some of the things you're gonna come across in a day in the life danger, losing money getting sued and all that stuff. So, and get insurance, Get insurance. All right.

That's it for this time. We will see you next week on ahead of invest in commercial real estate. Thanks guys

Episode #059- The Top 10 CRAZIEST THINGS We've Seen in Commercial Real Estate!
Episode #059- The Top 10 CRAZIEST THINGS We've Seen in Commercial Real Estate!
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