16 Mar Apartment Opportunity! Why. We. Walked.

While we didn’t end up pursuing this deal or the partnership, we did take a pretty deep look into a two building apartment purchase in southern MN and the story surrounding it is more of how it came about than the actual deal and due diligence itself.  In March of 2019 right before we closed on our second house we my wife and I went on a cruise for a vacation in general but also to celebrate her birthday and get out of the MN relentless winter.  While many might listen to music on their headphones beach side I’m always listening to books and podcasts, even with the ocean in front of me I like to sharpen the mind.  I left the vacation with a couple goals surrounding networking and going to some meet ups.

I found a Bigger Pockets Meetup and went to it, even though the subject was something I had a pretty good understanding of, I just wanted to get in a room full of investors.  At that meeting I met another investor that invests in rural towns in Northern Iowa and his wife graduated school a year behind my wife in a town of 2,000 people with 70 graduates per class.  He’s been a good connection and resource to bounce some ideas off of here and there, while we’ve never done a deal together its nice to have the lifeline of someone that is doing something similar to what we are doing in rural or semi-rural Minnesota.  I sought after another meetup and found one that was a group newly started with a couple of guys that were new to real estate, one was an agent and the other worked in commercial property management.  There were about 7 investors or potential investors at that meeting and we all just had a good chat about what we were doing, what we were working on and what we hoped to accomplish.  I didn’t attend another meeting for a while, lack of consistency is never a good thing but in any case I didn’t show up to any meetings.

A couple months later the two guys that had started that meet up emailed or called me to talk to me about an apartment deal in southern MN, they called me because of the one deal I had done in Southern MN.  It’s not like they saw me as or called me an expert, surely I wasn’t but they knew I had done a deal 20 miles away, and that I drove pretty close to the town to and from the family farm 4-5 times a year and may add value to their pursuit of the deal.  We never fully discussed the terms of the potential 3 way partnership but we all worked on things pretty equally and intended to invest the same amount of money each from varying funding opportunities we each had.  I was going to use a hybrid of cash and HELOC, one was going to sell their duplex and pair that 1031 exchange with some cash, and I don’t remember how the other gentlemen was funded but he had his share squared away.  We began pursuing the sale of two buildings in two different towns in southern MN.  One of the two buildings I’d literally driven past 3-5 times a year for about a decade at that point, and never thought once about it.  The other was south of the farm by 20 minutes or so from the farm and was the building that made the whole thing a project that still needed stabilization.  Whenever I look at something in Southern MN I call on my resources which are a combination of my friends’ parents that are from down there, the banker that I looked into the laundromat with, and of course my farming and former commercial lender father in law.  I called my father in law first and told him about the two buildings we were looking at, the purchase price, and terms of the deal that we were considering but hadn’t talked very seriously with the seller yet.  My father in law was the original lender when the building was built, it was a USDA property and he was the local lender that wrote the construction note, what are the chances.  Unfortunately he didn’t have much of an insight on the buildings value’s or cap rates as he didn’t do a ton of lending in the commercial space and primarily was in agriculture but encouraged me to call and ask his friend who owned the bank what he thought of the deal.

I called him, and knew him from various parties and gatherings at the farm, and oh yeah we almost bought a laundromat together.  It turns out, he held the note on the property and knew the seller so he really couldn’t say or share much with me other than that if the buildings were going to change hands he would do as much as he could within reason in hopes that he could keep the note on the books at his bank.  We then made arrangements to talk with the seller and the 3 of us got on a call together to talk through the story of the property, how he came to own them as he wasn’t from the area, and where is valuation of the property came from.  I let the realtor lead the call as this was really his world of expertise, and at a certain point the call started to dwindle a bit.  I asked a few probing questions here or there to get the conversation moving again and back on track and then once I felt I had a bit of rapport with the seller I said “you know, we probably should have lead with this but I wanted to let you know that I called my resources down in the area and one of them is a friend of my father in laws that owns a local branch bank.  That branch, holds the note on your properties, he couldn’t share much information with us because of that conflict of interest but I wanted to be sure you knew that and didn’t feel uncomfortable with the situation”.

That broke down a wall and he opened up a whole lot about the space, the challenges with the location that I hadn’t yet seen, and said that although they were tough buildings he wasn’t going to “let them go for nothing”, which we hadn’t made any kind of any offer to indicate we’d offer next to nothing.  We must have talked for an hour taking copious notes along the way to then use to lean on during financials review and due diligence.  After we dug into the numbers and asked a number of follow up questions of the seller, we determined our best and highest offer would be much closer to “letting them go for nothing” than it would have been to his asking price.  We threw out a range number on a phone call and he said he appreciated our honesty on the deal and how we handled things but that he’d keep working them to be further stabilized and keep them for the mid-long term.  We re-grouped amongst the 3 of us a few times thereafter and our position hadn’t changed on purchase price for the value we’d receive and amount of work we’d need to put in to get them going and stabilized where we’d want them to be.  We disbanded the partnership that never actually started and I think we all learned a whole lot from it.

I mentioned that this was more about the story of how I got an opportunity to even consider this deal, than it was about the deal itself because we obviously didn’t win the deal, or get it under contract and see it fall through.  This post is solely about the power of networking and actually doing something, especially if you have a more than full time job like I find myself in.  I was intentional about going to a couple of real estate meetups and the result was making some valuable connections and an opportunity at an apartment building boasting 16 units when I currently owned two single family rentals.  In a sense I’m writing this post for myself because I still don’t do enough in the ways of networking, and could make a regular attempt to go to even one meet up per month to become more consistent and have more opportunities and connections potentially fall in my lap.  The layers of connections and that have been made over the years put me in a position to look at this deal and credibility by knowing the lender, you can’t get there without putting yourself out there, so put yourself out there and get your network going (and yes, I’m talking to myself right now too.)