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

It started with creating real estate deals on my terms.

You know how the real estate market came to a halt in 2007–2008. Property values plunged leading to the drying up of credit. Then, in February 2008, almost like a light switch was thrown, financing stopped. All the large commercial deals we had on the books and 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. 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 as we improved the properties, the plan was to sell those off at a profit. 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 focused on long-term wealth and cash-outs only.

We were responsible for hundreds of subcontractors and a dozen employees. We had 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 had 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 a refinancing on a personal residence was a bandaid that allowed us to pay expenses for our businesses temporarily but required another round of refinancing at a lower interest rate within 12 months or the rate stayed high. Chest pains were constant with all that stress during this time.

Before the real estate crash, about one-third of our purchases were commercial or mixed-use properties and 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, as 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 2007–2008. And 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, is not a good strategy. Every deal whatsoever should create immediate and continuous cash flow!

DIGGING OUT

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, Massachusetts, 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. That helped me a lot with dealing with creditors, vendors, and investors, and I’ve reminded him a few times and thanked him. It flew in the face of advice from the numerous attorneys and friends who said I should just file bankruptcy. 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:

• no more personally signing for loans

• constantly communicate with mentors

• buy only properties that can be obtained without large amounts of cash or utilizing personal credit

I call these standards buying and selling on your terms. As of this writing, we control 55–60 or more residential properties (pending cashouts), 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 2004–2008. We now not only buy and sell our own but help students around the Country to the same thing and 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 under your name or your company name and then resell that property, you’re acting on your own behalf, and you’re not conducting a service for a fee, so no license is required. (I’m not a lawyer or a licensing expert, so you should consult a local attorney because state laws vary. You’ve got to be careful to have the proper paperwork and the proper structure to comply with state and local licensing guidelines.)

The main way we fixed our cash flow challenge was by creating the Three Paydays per deal:

1. The monthly cash flow per deal, averaging $409, or about $5,000 a year on terms (ranging from a minimum two years to as many as 10 years)

2. The non-refundable down payment upfront

3. The cash-out at the back end

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.