All Forum Posts by: Garret Rumbea
Garret Rumbea has started 3 posts and replied 20 times.
Post: We Almost closed on an $18M Deal — here's why we walked away.
#1 Multi-Family and Apartment Investing ContributorPosted - Inland Empire, CA
- Posts 20
- Votes 21
most of that 6 months was UW, working w/ the lender, back and forth w/ boots on the ground team before we got it under contract since it was out of state. on large syndicated deals you don't typically get full roof access until that stage. we toured twice early on, roofs looked fine from the ground/aerial view (flat tpo). reports and investor commitments happen during that same period.
Post: We Almost closed on an $18M Deal — here's why we walked away.
#1 Multi-Family and Apartment Investing ContributorPosted - Inland Empire, CA
- Posts 20
- Votes 21
Quote from @Stuart Udis:
I'm having a difficult time wrapping my head around spending hundreds of hours on an $18M acquisition before physically inspecting the roof. It's one of the easiest diligence items to inspect. The cost of the roof replacement appears to be a rounding error in a "home run" $18M acquisition. With a true home run, it should be easy to go back to the bank for a revised loan amount to cover the roof replacement and should have negligible impact on the property's performance.
Was the change in performance expectations that compromised trust or was it the fact such a basic diligence item went unverified leading the LPs to question all other assumption's/diligence about the acquisition? Put yourself in the shoes of the LP's, I would begin questioning every deal assumption if I found out the sponsor never inspected the roof and relied on the seller's disclosure. What other disclosures were relied upon and never verified?
standard process for large multifamily properties. third party roof and pca inspections once under contract. that's when the issue came up. seller had represented the roofs as brand new, they weren't. in this environment it's normal to retrade when something material shows up in DD. seller didn't want to so we chose to protect capital and move on. nothing more to it.
Post: We Almost closed on an $18M Deal — here's why we walked away.
#1 Multi-Family and Apartment Investing ContributorPosted - Inland Empire, CA
- Posts 20
- Votes 21
Quote from @Lawrence Kessler:
appreciate that. every deal's a lesson.
Post: What groups can I connect with?
#1 Multi-Family and Apartment Investing ContributorPosted - Inland Empire, CA
- Posts 20
- Votes 21
Hi @Jason SanMartin I know a few people looking to do deals in SA, Austin, Houston area. Happy to connect you with them.
Post: We Almost closed on an $18M Deal — here's why we walked away.
#1 Multi-Family and Apartment Investing ContributorPosted - Inland Empire, CA
- Posts 20
- Votes 21
appreciate that. we tend to focus on 100+ doors around $8-12m for where we're at right now. on this one we partnered with another team so taking it out of the promote wasn't as straightforward. either way number still worked but once facts changed wasn't the same deal.
Post: We Almost closed on an $18M Deal — here's why we walked away.
#1 Multi-Family and Apartment Investing ContributorPosted - Inland Empire, CA
- Posts 20
- Votes 21
I get what you're saying. It was a home run initially because everything lined up. we were getting it at a great basis in a strong submarket, straightforward biz plan, and returns that made sense for a core plus deal.
once we found out three roofs needed full replacement, which wasn't disclosed prior to going under contract and actually presented as brand new, and having investors wire funds already, it just wasn't the deal we initially underwrote or what was shared to our investors. Probably could've still closed, but would've meant changing assumptions and risk profile after the fact. might not sound like a big deal but in syndications esp once you start raising capital and setting investor expectations around a certain type of deal you can't change the story midway without compromising trust.
Post: We Almost closed on an $18M Deal — here's why we walked away.
#1 Multi-Family and Apartment Investing ContributorPosted - Inland Empire, CA
- Posts 20
- Votes 21
Post: We Almost closed on an $18M Deal — here's why we walked away.
#1 Multi-Family and Apartment Investing ContributorPosted - Inland Empire, CA
- Posts 20
- Votes 21
It was the end of August.
We spent about 6 months working on a deal.
Got it under contract.
It looked like a home-run.
$18M purchase price. 104 doors.
Great submarket in Phoenix.
Numbers lined up.
We toured the property in person, walked every building.
Everything looked good.
But during due diligence, we found out the roofs the seller said were "brand new" weren't.
They were shot. Full replacement needed.
That changed everything.
We went back to the seller and asked for a credit to cover the cost. They said no.
We tried to make it work, but at the end of the day, it just didn't make sense.
Moving forward would've meant putting our investors' capital at risk and hoping we could make up the difference later.
That's not how we operate.
So we walked away.
Was a tough pill to swallow.
We'd spent hundreds of hours on that deal and paid for all the third-party reports.
But it was the right call.
Sometimes protecting capital means walking away from a deal you really wanted.
Here's what that experience reminded me of:
- Don't fall in love with a deal. Fall in love with your standards.
- Due diligence isn't just paperwork. It's how you protect your people.
- And when in doubt, choose discipline over emotion.
We lost some time and money on that one, but honestly it made us sharper. Our process is tighter, our team's stronger, and our conviction in what we stand for is even clearer.
Sometimes the best deals are the ones you don't close.
Post: Anyone building a portfolio passive multi-families investments?
#1 Multi-Family and Apartment Investing ContributorPosted - Inland Empire, CA
- Posts 20
- Votes 21
Quote from @Evan Polaski:
@Garret Rumbea, to be fair the money I am likely losing also underwrote conservatively, at the time. It just wasn't conservative enough. And while they underwrote conservatively, they didn't structure the deal conservatively, in hind sight.
They have a pref in their deals. They have tiered waterfalls, so I keep more if they only perform marginally better than a pref. But at the end of the day, the biggest alignment will come from having real money in the deal.
I understand the point of an acquisition fee. But I no longer invest in groups that the acq fee takes out all of their co-investment. There will always be a misalignment of interest, but using a deal I am currently working on as an example:
Purchase Price: $6.8mm
Acq Fee: 2%
GP Co-invest: $390,000
GP Co-invest net of fee: $254,000
So if the deal starts going sideways, I still have $254k to fight for. But if I didn't have any money left in deal, and it starts going sideways, my only fight is for the carried interest, which can be profitable, but the further a deal slips, the less I have to fight for. So, again, a sponsor needs to have real skin in the game, not the illusion of skin in the game. And we can discuss reputational damage all day, but I can't take that to the bank.
Ah got ya. You're saying if the acq fee offsets or exceeds the sponsor's own capital investment there's no real incentive left to protect the downside (besides their reputation). Totally get that.
Agree with what you said about structure being just as important as underwriting. Yeah, numbers don't matter if the sponsor can walk away whole while LPs take the loss.
Post: Anyone building a portfolio passive multi-families investments?
#1 Multi-Family and Apartment Investing ContributorPosted - Inland Empire, CA
- Posts 20
- Votes 21
Quote from @Evan Polaski:
I will offer the story of someone that found NOT success in passive multi-family.
Ultimately, passive investing is ideal for those that already have very high net worths and/or plan to maintain their high incomes for quite some time.
My "not success" is based on many factors. Buying at peak (my 21 and 22 investments are likely complete losses), buying on floating rate loans, misalignment of sponsor (acq fee resulted in about a 5x+ return to sponsor day one. Put another way: $2mm co-invest into fund yielded about $12mm in acq fees for sponsor).
I know my experiences are very limited in the universe of all passive investment opportunities, so take with a grain of salt. And all of these issues were disclosed up front, so I take responsibility for not being more prudent in my diligence. The sponsor had a great track record prior to that, and held in very high regard in the community. They got greedy when capital was flowing, and I got greedy thinking the COVID boom would only die off slightly.
Thanks for sharing. Really valuable perspective.
A lot of investors got caught in that same storm with floating rate debt and aggressive assumptions. No one could've predicted how fast rates jumped, but it's a good reminder of how critical sponsor diligence and conservative underwriting are. My team and I typically structure deals with a pref and keep our acq fees enough to cover the upfront work but not so high that it misaligns incentives.