All Forum Posts by: John Nachtigall

i think it is about getting maximum returns vs being happy with a positive return but less.   

If you want to "beat" the market and get the absolute most returns you have to buy distressed properties, do the flip yourself and manage yourself.   If you do that you will get maximum returns.   Turnkey give back some of those returns for a more passive experience.    As far as I am concerned there is absolutely nothing wrong with that.  Just like some people like to trade stocks vs buying an index.

Congrats on your success, I dont think anyone should apologize for positive returns.  

Warren Buffet was getting 10% on his warrants for Goldman Sachs that were worth many billions.   He said he wanted to go into a cave and hide so they could not find him to exercise them and buy him out because "if you can get 10% a year on my investment I never want the principle back" .  

Seems like you are getting a relatively stable 10+% a year on your investment (15k on 113k of debt).  What higher rate of return are you hoping for?    Seems like you have a golden goose, enjoy it.  If you sell you would just hope to get what you have now already.

Having invested in syndications for the last 3 years I can say that the thing that surprised me the most is how much more important the syndicator is than the deal itself.   I was told this at the beginning and I was skeptical.   If the deal is good, I thought, then how bad could any professional developer be?   But I can tell you from first hand experience that the syndicator is way more important than the pro-forma.   Which is what makes syndications risky, because how do you analyze a person rather than the math of a deal. 

2 deals as an example. In 1 deal I am in a college housing apartment deal with a 15+ year syndicator with lots of success. when bought it was 96% occupied with a 10+ year track record, the only apartment within walking distance to campus. Simple premise, convert the 10 month leases to 12 months, increase the NOI and sell. Not even value add, more like core+. Everything has gone wrong. It flooded, they had no insurance. Then they didn't fix the apartments for 9 months and missed the window for leasing for the next school year. Then the school and the students rebelled against the 10 month leases and would not sign. Then the taxes went up past the pro-forma. now Covid, which to be fair was not forseeable. So 60-70% occupied and struggling and I wont get all my money back much less make any.. Bottom line is this syndicator with 15+ years of experience in college rentals (a 10+ person organization) and 100s of millions of deals under their belt completely blew it on a low risk apartment. Looking back I have no idea how I would have caught that beforehand.

my other deal is a group up office building in Kansas City.   Way more risk.   But the sponsor has DEEP ties to the city (4 generations).  Like the mayor shows up for the groundbreaking kind of ties, very deep.   And every time something came up they handled it quickly and efficiently.    No power at site, they called in favors and viola a pole showed up in 2 weeks instead of 2 months.  Church next door sues and wont give utility access...viola the council lets them come in from the other side of property.   Covid hits so no restaurant, no problem, they put out a syndication for a new restaurant to al the pro athletes in town.  So in the middle of Covid this building is already 60% leased and everything is on track.  They have every excuse that it should be struggling but they are not.  

I accept the risks, but looking back I have no idea how I would sort out the 1st sponsor from the 2nd.   That is the trick, how do you pick the right sponsor, the deal pro-forma always look good.  

 Keep in mind the US Supreme Court used a similar argument to justify the interment of Japanese citizens in WWII.   The only difference was their constitutional right to travel/live where they want instead of contracts.  The argument was in a time of war the need to ‘protect’ the Union was more important than their rights.   It is a stain on our nation that in retrospect was a horrible mistake and completely unjustified. 

It is easy to overlook rights in an emergency, but it is not as simple as “protecting people”.  You are not protecting the landlords, they are people also.   The government is offloading, without compensation, the responsibility to house people during the pandemic.  

And if you look at those court cases closely, they have rejected imposing immediate injunctions, the matter is far from being resolved.  

I agree it is a complex situation and people of good conscience can disagree.   But you may ask yourself where these government powers can end.  If they can order landlords to house people for free, what stops them from forcing people to house homeless without compensation.  I have an empty bedroom in my house, in the interests of public safety can I be forced to house someone who would otherwise be homeless?   There is no difference in principle.  

I don't think the question is if it is "unconstitutional".   They certainly are a direct restriction of constitutional rights that would not fly in a non-emergency situation, but no constitutional right is without limits.  

Many of the current emergency restrictions in place inhibit constitutional rights.   Forced to wear masks, forced to shelter in place, no freedom of assembly, freedom of association, passing laws without the legislature, property rights, etc.   Many constitutional rights are being infringed at the moment. 

I wont engage in the argument if this is justified, there are arguments on both sides.   Historically, in times of emergency, many rights are curtailed, this is not unprecedented.   On the other hand, imposing emergency orders when you are 10 months in and legislatures are in session is problematic at best and an abuse of power at worst.   It is a difficult situation.  For this particular situation I think it is well established that in times of emergency the government can curtail contracts.   It is less well defined if they can limit access to courts.   In the civil war, the supreme court ruled the government was not allowed to suspend habeas corpus, but the president ignored the decision.  T

To me the real decision is how you get around the "takings clause".   Even if the government can use emergency powers and/or eminent domain to override the contracts, they have to pay.   Right now the government is saying the money is still owed, so they have not "taken" anything, just extended the time.   But those statements are just a fig leaf.   The very reason they suspended the payments are these people have no savings or money.   Forcing landlords to house someone and then saying "oh and that other guy will pay you later" is manifestly unfair and not necessary to prevent COVID.  So the "emergency" justification fails.   In short, at some point they will have to pay the consequences of this policy.

In my opinion the government made a huge mistake with the eviction ban.   Every month hole gets deeper.   They will have to pay or they will have to let the tenets they were protecting hold the bag.  Neither choice will be good for them.

I would suggest a more logical approach to the issue.  In general, humans like to use past experience to predict the future.   For example, if the quarter was flipped 10 times and came up heads in a row, some would say it will happen again or some people will say that tails is "due".  The issue is that past experience could predict the future, but not always.  The "sunk cost fallacy" and other game theories express this quite well.

You are asking if you should sell the property, but you have not established the root cause of the problem yet.    Using a simple investigation technique like "5 Whys" this is an example.

1- Why is this property losing money?   Because the turnover, capital, and maintenance costs are higher than the original predictions

2- Why are the costs higher than prediction?  Because tenets are staying less than a year.   (you would split it here and examine the other costs in a different question but I will keep with tenets as an example)

3- Why are tenets leaving early?   Because the new management company insists on prompt payment of rent unlike the previous owner.  OR   Because they lost their jobs with COVID.   OR   Because the tenet screening is poor   OR   The neighborhood is  [Note:  The way to decide this is to actually investigate.   Talk to the management, speak to the tenets, etc.]

4-  why etc.....

This is just an example, but looking at the 4 made up causes for tenets above some are temporary, some are not.   Some are controllable, some are not.  How you would react to those things is different.   For example, turnover caused by management change is already done, so selling now would be illogical.   Tenet screening would be a solvable issue.   COVID would be out of your control, you would have to decide if the risk and uncertainty is worth it.

This kind of formal decision making is not worth it for simple things like "why did the milk go sour?".   But when talking about hundreds of thousands of dollars perhaps a more systematic approach would be 

In summary:   Before you make a decision, establish a root cause.  Don't make a decision exclusively on past experience.  The decision will be much more obvious when a root cause is established.  
 

It would be a disingenuous to post on a public forum, de facto asking for opinions and then complain that opinions are given.   Anything I post I assume is free game to be agreed with, disagreed with, or cause a tangent that shoots off into space.   That is just the internet.  

As for myself, I think the most controversial opinion I have expressed is my distaste for "subject-to" investment.   I don't believe that stripping the asset from an individual while having them retain the debt can ever be a "win" for the subject person.   Simple math shows that your net worth would plummet.   Additionally, without any legal assurances the process does not ensure that the debt will not come back to harm that person.   I am not alone in this opinion, but I know that many people believe it to be a "problem solver" for people with no equity.   I just see it as stripping the last bit of value from desperate people.

Regardless, I much prefer the debate.   While it is repetitive, you should always understand the "cons" of any strategy in addition to the "pros"   So considering the drawbacks of "C" class neighborhoods is important to understand before you choose to invest regardless.   And learning from other peoples experiences is informative.

I am not a broker or a wholesaler.  I could care less how much money either brokers or wholesaler make.   This is capitalism and it is not the role of government to cap profit.   It is also not the reason regulation of wholesalers are needed.   

1.   In my opinion the primary issue is lack of funds.   Specifically entering into contracts without the ability to execute those contracts.   That is (best case) lack of good faith and (worst case) fraud.  There is not a single wholesaler who approaches the seller and says "I want to contract to buy your house for ~70% value minus repair value and hope to sell the contract to a buyer before I have to actually produce the cash".   That is the actual truth but they go to great lengths to hide it.

2.   Related to the first issue is tying up properties only to back out of the contract.   By targeting the "distressed" sellers they specifically put themselves into a situation where they have all the power and control leaving the seller none.  Lack of education...super.   Financial stress....lets go get them.   Medical problems...cherry on top.   Just sign my magical contract and I will solve all your problems until 2 weeks rolls around and they ghost you and you are even deeper in the hole.   Search out all of the threads on biggerpockets that are title "I got my first contract now what do I do".  Wholesaling is specifically marketed to novices who have no experience and no money.  While there are very experienced and competent wholesalers, most of the industry are amateurs who want a quick buck.   Regulation can drive them out while leaving the professionals.  

3. Pretending not to market the property.   I have never seen a single wholesaler market the contract.   The ad copy never says "Excellent contract, Legal sized paper, 5 pages, blue ink, bonus inspection clause for 15 days, assignment available for 10k".   They market the house.   No one is fooled, no one thinks the loopholes or cagey language is clever.   They are putting a property under contract and marketing the property for sale to cash buyers.   That is brokering and that is regulated.

4.  Not wholesaling directly, but as far as I am concerned there is a special circle in hell for "subject to" specialists which are just a more specialized wholesaler.   Convincing someone to sign over their biggest asset while leaving them with the debt is never a "win/win".   It is (IMO) quasi-legal stealing from unsophisticated desperate sellers.   At least when they actually buy the property the transaction is done.   With "subject to" they are still on the hook for all the debt without any asset to back it up.   Their net worth plummets in exchange for an illusion of relief.   In reality they are worse off than before.   In my mind it is no better than maggots cleaning the very last meat off a bone when all the other carrion have had their fill.   Truly disgusting.   

I am fully aware of the counter arguments of "solving problems no one else will solve" and "the deal maker is the most important person in a deal and needs to be compensated".   Whatever benefit wholesalers bring to the property ecosystem is outweighed the damage they cause.   That is why regulation is needed.  Buy the house then resell it.   Stop cutting corners.  Safeway does not "wholesale" my lettuce and assign me a contract for the lettuce at checkout.   It is not wholesaling, it is just taking advantage of desperate and/or uneducated people.  

So 3 years later it looks like this has come to an end

erentpayments has agreed to pay $400,000 into a settlement fund and the court approved the settlement, but some of that is for the lawyers.   Per the court filing the bankruptcy trustee put pressure on the company to agree to the settlement so it was never litigated.  The original shortfall was ~3 million, so recovery will be pennies on the dollar (I assume) and payout in March 2021.  

https://rentalpaymentclass.com...

As bad as the class action result is, the bankruptcy of the processor is worse.   It is almost done.   The only person who benefited from the bankruptcy was the trustee (lawyer).   3 separate filings totaling more than $365,000 in compensation and fees.  The first 2 have paid out and the third is pending.    

So basically everyone loses because the processor could not just stick to their job and make sure they had the money before they distributed it.  Very Sad.  

Ok, I have to say it since you asked about options.  

Why is a 76 year old man living on SS and pension investing in BRRRRRs? This is a high risk, high reward, illiquid investment where it is very easy to lose your money. I know I will probably get shouted down by a combination of "it's his money" and "it is not really high risk" but in the current market you are not buying BRRRRRs on the MLS. The chances of finding a true BRRRRR are very low. And if you miscalculate you are losing principle or tying it up for a long time to recoup in rent payments. Are you sure you are not wanting to do BRRRRR investment and using your father's money?

80k invested in something like the Vanguard total bond index would yield 4-6% without substantial risk to principle (~$300-$400 a month).  If you insist on real estate I would suggest perhaps a better strategy is for you to borrow the 80k from your father at 6-8%.   That way he gets regular payments and you bear the risk.   Although this is a bit of a fig leaf because if you default will he really go after you?  

Good Luck to you and your father regardless