How I Dug My Way Out of $2.2 Million in Losses

It started with creating real estate deals on my terms.

You know how the real estate market came to a halt in 2007 to 2008? Property values plunged, leading to the drying up of credit.

Then in February 2008, almost like a light switch flipped, financing stopped. All the large commercial deals we had on the books and had projected to provide hundreds of thousands in profit were dead in the water.

Clearly this was not real estate on my terms but rather on the banks’ terms. Financing at the time was a challenge because I had purchased buildings the conventional way, putting 10 percent or 20 percent of our money (or investors’ money) down and signing for a loan.

How It All Came Tumbling Down

The goal pre-2007 had been to accumulate 20 or so properties using cash, investors, and bank loans. Then as the market continued to rise and we improved the properties, the plan was to sell those off at a profit.

But that was no longer viable once market values fell by one-third to one-half in 2007. We had no safeguard against the crash nor any ongoing cash flow. We were only focused on long-term wealth and cash-outs.

We were responsible for hundreds of subcontractors and a dozen employees. We’d had some amazingly profitable years together and owned 23 properties, some with partner-investors. The properties were all either in foreclosure, going through the foreclosure process, or in a short sale.

It was a full-time job just to handle that. We had the IRS calling and our credit cards had been shut off, sometimes without notice. Eight to 10 years’ worth of savings, investments, college funds, and retirement funds had been cashed out to try to survive and save credit.

I made the ultimate mistake of thinking the housing market was never going to stop climbing. Too many of us used our real estate holdings like an ATM machine.

The cash-out we had gotten from refinancing on a personal residence was a Band-Aid that allowed us to pay expenses for our businesses temporarily, but it also required another round of refinancing at a lower interest rate within 12 months or the rate stayed high.

Chest pains were a constant with all the stress during this time.

Before the real estate crash, about one-third of our purchases were commercial or mixed-use properties; the rest were two- to six-unit apartment buildings, half of which could become condominiums. We would rehabilitate the multifamily units, convert them into condos, and resell at a nice profit. Then we got caught with four or five units that we had to rent or sell at a loss.

Some buildings we kept as multifamily rentals. With no profit coming in from the other properties to fix up or even properly maintain those apartment buildings, we had no exit path from those purchases. They were not attractive to buyers unless offered at less than what we owed (or what bankers call a short sale). The banks forgave debt during the crash for some individual property owners but fought to collect from investors—although eventually they had to write off debt or settle on short sales with us.

At the time, we took a big hit. But since then, we’ve more than made up for losses by profiting on the many lessons learned from 2007 and 2008. You too can learn from these lessons and avoid the same mistakes in your business.

Now that you know how I used to do business, forget about it—unless you want to experience the heart palpitations and stress I did.

I have told you these details because it’s important for you to understand that signing personally on loans, refinancing properties for cash-out, and not having a specific exit plan are not appropriate elements of a good strategy. Each and every deal should create immediate and continuous cash flow!

Digging Out From Under the Market Crash Rubble

I didn’t survive alone. With the help of a supportive wife and some great mentors, I dug my business out of the hole over the ensuing five years without filing bankruptcy. But it wasn’t easy.

Back in 2008, my friend Cle Blair, a successful builder and business owner from Rutland, Mass., told me, “It could take you 10 years. It could take you five. Whatever it’s going to take, you communicate with people. You be open with them. You let them know what’s going on. The whole nation is dealing with this. You be the one that speaks up and communicates well. And remember, you didn’t personally take down the national real estate market!”

I never forgot that. It helped me a lot when dealing with creditors, vendors, and investors, and I’ve reminded him a few times he said it and thanked him. It flew in the face of advice from the numerous attorneys and friends who said I should just file bankruptcy. Instead we painfully went through setting up payment plans with creditors, vendors, and banks as necessary.

At a certain point, I had to resume the focus on creating cash flow, which would be the real solution to satisfying the creditors, as well as getting ourselves back on our feet. I committed to spend half of each day moving on to new business.

I set standards for that new business, including:

No more personally signing for loans
Constantly communicate with mentors
Buy only properties that can be obtained without large amounts of cash or personal credit

I call these standards buying and selling on your terms. As of this writing, we control 55 to 60 or more residential properties (pending cash-outs), mostly single family homes. We either have title or control them through a lease-purchase or other agreement.

But each month we are taking on new properties and cashing others out. Buying and selling on terms is the opposite of what I did from 2004 to 2008. We now not only buy and sell our own but help individuals around the country do the same thing. We even do the deals with them.

You don’t have to be a licensed real estate agent to buy and sell property on terms. If you buy property in your name or your company’s name and then resell that property, you’re acting on your own behalf. You’re not conducting a service for a fee, so no license is required.

(Note: I’m not a lawyer or a licensing expert, so you should consult a local attorney as state laws vary. You’ve got to be careful to have the proper paperwork and structure to comply with state and local licensing guidelines.)

The main way we fixed our cash flow challenge was by creating our custom strategy of three paydays per deal.

For us, this means:

A monthly cash flow per deal averages $409, or about $5,000 a year, on terms (ranging from a minimum of two years to as many as 10).
A non-refundable down payment up front.
A cash-out at the backend.

When combined, the three paydays average from a low of $45,000 per deal to a high of $110,000 per deal all around the country and our own team around $75,000 per deal.

Is that type of money worth your time? Well, if you do a few of those deals per year, it’s more than most people make at a full-time job—so I’d say so.

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Were you investing during the market crash? How did you fare? How have you bounced back? What do you think of our strategy?

I’d love to chat. Comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.