All Forum Posts by: Douglas Gratz

@Jim Flynn this is my first new construction and I used DesignBlendz as my architect.

I have done over 15 full gut flips and have a bunch of rental properties as well

October 7, 2022

The loan officer and partner met with the bank last Thursday 9/29/22. I am awaiting a commitment letter. My other partner won't put his contribution in as per our LLC agreement until we have it. After the meeting, my loan officer said it is in construction underwriting and he would have an answer early this week.

BOY am I frustrated. First off I hate salesmen/women, they are selfish and out for themselves, at least the one I am dealing with who has a habit of telling me what I want to hear, so I take what he says with a grain of salt. My only comfort is my partner is on the board of the bank, to me, this means we will get a commitment and term sheet soon, I could be very wrong, but fingers crossed. This loan officer is POS, since day 1, never facts, just what I want to hear, even after reaming him out and telling him straight up "just tell me the facts, the truth, what's really happening, real timelines, stop ********ting! I have had enough of that from you considering one of your ******** lies is the reason I did not close on my hard money loan (which at this point, my rate is going to be close to that), make something happen, and if you cannot back off and start giving it to me straight  so I can  make a  decision based on facts on whether to  hold it and wait or sell it" 

So one lesson learned, don't trust loan officers. He isn't even the first one I am frustrated with. The loan officer I used to use for my cash-out refinances from Univest Bank, pulls the same bs. Just recently, a refi fell thru. Luckily at the same time, I was working with Philadelphia Credit Union, who got me the refi on that specific property, closing days after Univest fell through.  So have backup plans when it comes to these things.  Much of the bs could very well be related to the uncertainty of the economy, but not all of it, my old loan officer from Univest Bank, pulled **** all the time. I would get a term sheet for a fixed-rate loan and get the table and it's Adjustable! I signed it because I usually pay all or half of my loans within 5 years in order to keep my debt down and allow me to buy more multifamily rentals using a small down payment, but still why the LIE? So yeah big lesson, don't take your loan officer's word for the full truth,  they just want to get the loan done any way they can so they can make their money. If they tell you something make sure you research it somehow to see how much truth is behind what they are telling you. You could run into problems that you have to pay off some other debt to get it, you may run into problems with them asking for more and more paperwork, you might not be getting the product you wanted, it might take a lot longer than they are telling you, and so on...

I used to only buy from auctions, but since COVID, they are all online, and no more 123 sold. They are 4 hours long! What edge I had from the research I would do, GONE, people have four hours to do research on the day of. Easily enough time for a drive-by and walk around :( I really hope there is a law that foreclosure auctions need to be held in person, however after just writing that I googled "Pennsylvania law requires that all foreclosed properties must go through a public auction before becoming real-estate owned (REOs). Auctions can be held in-person (usually at the county courthouse) or online, though online auctions are becoming increasingly popular"

Well that's horrible, they will never go back in person, they make more money online, a bigger pool of buyers. For example, there was a QuadPlex at the last auction, starting with a bid of 75k. I used to be the only person who would bid on properties in this town, 30 min before it ended someone outbid me. My plan was to wholesale it because ARV would be 425k so I would have been able to get 125-150k for it, it needed 175-200k of work, full gut. Given I could have offloaded before the 10 days needed to pay it off in full, I was willing to go up to 110k, in case 125k was all I could sell it for within 10 days, he got it for 115k UGH! My capital is tied up in this new construction or I would have bid higher and held it to fix up and refi. Who else hates that auctions have gone online?

In conclusion, I am frustrated! Like I said my only solace is because my partner is on the board, if he wasn't, I think I would be selling the lots for as much as I can get over what I paid or at least what I paid. I was actually very close to listening to the advice I got on here, 3 or so months ago, I had an offer to sell them for $1,000,000 until my real estate agent advised against it because of how good a location and house it will be and what it will sell for and also because the loan officer was assuring me we were golden. I ended up firing this real estate agent because I realized he is out for his best interest and not mine. Advice #2 you want an agent who is in it for your best interest, who would say, yeah in this uncertain economy, I think It might be best for you to sell and then let me make the decision. My builder who is the second partner is also frustrated because he has been working on the take-offs, lead times, and material prices for months now. One good thing right now is that he is telling me we are within budget and if we were to do a little value engineering where we can, we should do it not to save money and make more profit (because it won't be substantial savings) but instead take that saved money and put it towards something more important inside the house.

For other people who want to get into new construction, I learned about value engineering during this process. It is done to lower the budget and either make more profit or put the savings into another part of the house. For example, and I'm not sure which is more or less money, but let's say glass barrier on a deck is what the plans call for but, iron bars are cheaper, if it won't impact the ARV, look of the house, and won't matter to buyers than you go with the iron. You can do this with a lot of line items on the budget in case your budget is too high...this is value engineering. I believe it would be easier to do on a lower-end house than a $2mil house since people buying at such a high price either know the difference in materials lowes vs a high-end vanity/tile or because I went cheap somewhere it lowered the ARV...

That's all for today, waiting in the waiting game, yup not fun. As advised new construction is a whole new game and that's in a normal economy, you can't imagine the stress I am feeling with all the uncertainty of rising rate hikes, Ukraine, inflation, the jobs market, etc etc. If am being real there's a 30% chance I end up selling the lots if I don't get a term sheet soon.

P.S Trying to look at the bright side of how long this is taking, maybe it is all happening for a reason as I know things do per the STORY OF MY LIFE POST, maybe by the time we are done building the first house, the economy is better and out of the recession we are going into and if not, maybe by the time we finish the second house we are in a better place, materials go down before we start the second house, housing prices appreciate a little (this particular location is kind of in a bubble, and by that I mean, it's not affected as much by the macroeconomic environment) so by the time the second home is built my profit margin is a lot higher and makes up for maybe having to sell the first one for less and or build for more and make less, who knows (shrug emoji)....

@Bill MacFarland Thanks you, I most definitely will!

@Bruce Woodruff I actually plan to write a book at some point. To early as of yet though. I would not change what happened in my past because it has made me into who I am today and I am proud of who I am.  On the side I facilitate mindfulness meditation groups at halfway houses all around my city and at NA I tell my story in hopes that it can show others who have gone through what I have, that, life is not over and positive things can happen if you stay on the right path and keep on trucking. It has made me into a great section 8 landlord because I have lived in ****** conditions at these halfway houses, and since I can relate to my tenants in a large way, I can help them. When I have extra cash around the holidays, I love to send out large gift baskets or send a portion of rent back so they can buy presents for their kids. Little things that really mean a lot to people in tough situations. For those of us who make a good monthly income from our cashflow, don't understand what an extra $200 dollars can do. The smiles I see, well I can't explain the feeling, but you can tell just how much better their life got, no matter how brief, just from having money to get their kids gifts for Christmas. I find that they become good tenants as a result and try harder to keep the place nice and pay their portions on time. As for me, when I receive a thank you card in the mail, it makes my entire week that much better. The secret to happiness is making others happy which is why most people are not, because we are selfish by design. I am talking about sustainable happiness, not the kind that comes from getting a good deal or buying something you really want.

@Mike Dymski Thank you for your post, it means alot.. and @Bruce Woodruff it wont inflate my head, i know where things stand, but it does help to hear encouraging words that acknowledge the difficulty of the project I am taking on. It helps in that, it means something positive about my character and that makes someone feel good about themselves which in turn drives motivation. So again Mike, what you posted, meant more than you know so again thank you. I have heard a lot of negativity on this post and maybe rightfully so, but negative none the less.

Well I am the managing partner and with the majority stake, all decisions rest on me. In the addendum adding them to the LLC it is clearly stated how the profits will be distributed, I made sure of that. With the sale of the first house before anyone takes a profit, the second house mortgage gets paid off. Then I get everything I have put into date after I am paid back to the last cent, that's when the profits split 60% to me 24% to one partner, and 16% to the other. My attorney drew up the LLC addendum in my favor every which way he could. They even have to pay their % of the interest on the mortgaged lot not being built yet and their percentage of interest on the construction loan.

As for the economy, im too deep in now, however, there is a clause that if I sell the lots, which is still on the table... Before we build, that the addendum is void and they are not involved in any way with the money that comes from the sale, essentially it would revert back to me being 100% owner.

By the time we finish the build a year from now, I hope things start to turn around, if they don't I will have to sell for less, which is also in the addendum, that if we have to sell for less than 1.6 million dollars they are not entitled to any profits, they can just get paid back what they put in. In a way, I am happy we did not start sooner because it would be on the market at the heart of the recession we are heading into. The second house won't start getting built for at least a year from now, so 2 years until that is on the market, so I can only hope that things get better, material prices come down etc etc.....So far we have not seen a reduction in home prices in the area yet, just a longer time on the market.  The houses that are having trouble being sold are homes 1 million and down.

If I did not have faith that I can sell this house for a min of 1.4 million no matter the economic conditions then I would be selling the lots now.  

The government should never have printed so much money. I understand the ripple effect that would have happened if they didn't help out small businesses, but they helped too much. Ever since 2008 it's like our government is in the bail-out business, don't let anybody get hurt .  Businesses that did not have a safety net saved up should have been allowed to fail, that's the cycle of life. A business should plan for everything. It gives other businessmen and women the opportunity to buy out these troubled businesses at a discount, it allows for people to get good real estate deals, etc etc. I know it sucks for anyone who would have lost everything but life is not fair. The government has to learn to keep its hands off the wheel, they created this mess. The country shutting down was a mistake. People should have either stayed in if they did not want to get sick (lock themselves down voluntarily) and other if they wanted to chance it, go out. Businesses that want to stay open, stay open, if they wanted to close they could close.

I have actually been having this conversation with a few people, what do you think would have happened if the government did not print so much money and let businesses fail and people lose their jobs?

 This is my first new construction but ive done over 15 flips and own 8 duplex's

If you read the post above, I told Mike that I wanted to talk about my past, so here it is

I have always been smart and stupid. Book smart, and life stupid (choices) bad ones...I always got straight A's in high school but I was suspended at least once a month. In my senior year of HS I was kicked out. Went to another HS for the last 3 months but still walked graduation at my original HS.

I then got into Penn State and this is where life really went downhill. I stole an econ test, not for me, but for my dorm, I was seeking approval ...before I continue, most of my hardships were self-inflicted and I was 100% responsible for them happening...So I was kicked out for one semester and not allowed on campus...next semester I was given permission to get a ping pong table I bought out of my old dorm. Apparently, the person was not allowed to give me permission so I got arrested for trespassing and kicked out another semester. That same week I got my first DUI coming home from a frat party. Self-inflicted because I only had 2 beers, stupidly refused the breathalyzer not knowing if you do that, you automatically get the highest tier DUI. Kicked out for another semester...So I enrolled in another college nearby. this is 2006. I did ARD and did not have much trouble. In 2007 my roommate gave me an ounce of weed for free because he was going to another country for a little. 

I have never sold drugs in my life nor did I want to. But I didnt smoke weed so I wanted to make a quick buck. I ended up selling it to and under cover...Court was set for sometime in 2008. I decided to move home and go to a community college. I did that, then I enrolled at Temple University . On my way to PSU 3 hours away I got another DUI, this time for adderal. I was not going to get a DUI because I was just pulled over for speeding, but the cop wanted to search the car, I should have let him, but It was such a mess I had no idea what he would find so I told him no. He said he would have to impound the car. I asked if I could call my lawyer to which he said yes, but my phone was in my car and he said I could not get it. I went for it anyway and he decided to blood test me at the hospital.

2nd highest bracket DUI. I had to do 3 months in jail, 3 months of house arrest, and 3 years of probation. In jail, I was introduced to opiates being fully ignorant of addiction. When I got out I had a nasty habit. Because of this I kept pissing dirty and going back to jail (Opiates are hell, anyone reading this, if you get surgery deal with the pain because if you ever get hooked, its the worst because the brain compels you to do it even when you know the consequence. it literally pulls you to the drug no matter how hard you try) so I went back to jail a lot of times, 3 months, 6 months, 9 months....

I got clean in jail but eventually relapsed and I knew what was coming, more jail....I could not handle it. At this point in time, it was 2013 and I was a Junior at Temple University....I became suicidal (but not really because I didn't do it) but my dad knew I had a gun because I told him what I was going to do. I eventually calmed down and went to sleep. But my dad wanted the cops to check on me so they broke down my door at Temple. I am not allowed to have a gun so I went running to hide it, the cops saw me with it so and the situation went from 0-100. I reacted, I pointed at myself and told them to leave. Long story short this ended up being a 17-hour standoff with swat, homeland security, and police. I demanded one thing, a phone charger. I wanted to call my probation officer and the news so that I could make sure it was on record that this we a mental issue (for future purposes in court) There's no service in the basement so it took 12 hours before I finally got a full call through.  https://www.nbcphiladelphia.co...

BUT EVERYTHING HAPPENS FOR A REASON and let me tell you why and also tell you how messed up the justice system is....I am on probation in Montgomery County, and the incident was in Philly. Montgomery county picked me up from the hospital and put me in jail for 8 months. In jail, I read every book on real estate I could. My lawyer worked out a deal to hold off my court date and let me do a program. So I was enrolled in a very extensive 18 months halfway house program. At this point I am clean....I knew that if I did not do better than my best then I would go to jail for a very long time.

So I enrolled in La Salle University in 2015 and bought my first REI flip. By the time I finished the program I had completed 8 flips and owned 4 duplex's . Mind you when I kept going back to jail for dirty urines, every time I got out I enrolled in school, I don't give up what I start, so I wanted to graduate. In hindsight It is probably why I kept relapsing, I should have focused on my recovery. When I finally went to court in Philadelphia the judge gave me 5 years of parole, no jail time! WHAT, I did 3 months for Adderal DUI where I was introduced to opiates and hard drugs to help the time go by (yeah I made the choice to take them, but I was ignorant about addiction, I didn't know) so that's why I feel the justice system is messed up, if I never went to jail for a harmless DUI then I never would have become an addict which I have to live and deal with for my entire life.

BUT NO JAIL FOR SHOOTING A GUN WITH POLICE OUTSIDE (I FIRED OFF SHOTS IN THE BASEMENT) 

Anyway from 2014 to the end of 2016, I stayed clean. Dec 2016 I was diagnosed with stage 3b melanoma (this is how bad addiction is when I got the call all I thought was YES! PAIN MEDS.) Had to get 3 surgeries one of which was full lymph node dissection. I don't have any family and no support system. I made a poor choice and did not tell them I was an addict.

So I relapsed because I made a bad choice AGAIN! While dealing with cancer I was still in school and running my business. I graduated in 2018 with a 4.0 GPA. I went to rehab and have been clean ever since. From 2014 to 2019 I had done 15 flips and owned 7 duplexes. I was lucky with having cancer because my Probation officer would not put me in jail for being on pain meds, but then again if I never got it, I would never have relapsed...So I guess i was not lucky. 

From 2009 to 2017 I had been to jail for a total of over 2 years, rehab if you put it all together 2 years, and a halfway house for 18 months. Having spent approx 5 years out of 8 locked away in some form and being diagnosed with cancer I still managed to succeed because there were two options give up and die or keep on trucking and live. I chose the latter and it was beyond difficult. But if all of the above never happened I would not have a business, I would never have read those books in jail, and I would not have forced myself to buy my first flip (because I only did it when I was going to get sentenced) I could have done 20 years....

Now it's 2022 and I have been sober for 4 years now and in remission for 5 years and have my dream project! These plots of land I saw for the first time in 2014, my girlfriend at the time, it was her parent's backyard (you don't have yards in the city so they bought the lots to keep them as a yard, the first thing I said when I picked her up on our first date was when her parents want to sell them CALL ME! From 2014 until recently, I help my ex-girlfriend start her own business and stayed in touch helping in any way I can for the sole purpose that I will be the first person they call when they are ready to sell....I got the call and jumped on it. However, I did not have 720k to pay for the land. But I got the AOS and figured it out. I had just enough in my bank to put the down payment. I stalled closing as long as I can, refinance some homes, and found a hard money lender willing to loan $500,000, so all i needed to close was 148k...that's where the refinancing came in. Rates were so low it made sense either way. So I got the money (not knowing in the beginning if I would, but I refused to let it slip out of my hands) Mind you this is the first time I ever did anything in the sense of winging it. I always plan first, and make sure if I am going to buy a deal that I have everything needed, so this was WAY OUT of what I am used to, talk about stress. I didn't even know if I would be able to get a construction loan, but I did know so long as I owned the lots if I couldn't get the loan I could at least sell them for $1,000,000.

At first my plan was to build 4 SFH row homes 3500sqft each on 20x60 lots. Saw how much it would cost and decided to sell two and keep two. When zoning came back and told me the lots did not meet the sqft of 1440 per lot and that I would need a variance, I was like ****, I don't have time to wait for variance I am using hard money. I convinced the sellers to let me subdivide and give me 8 feet onto their property line through an easement. BUT they had side decks that would need to be removed or shortened, this direction was going to be too much. My architects told me I would have garages by right on these SFH, but that was not true either, I would need variance.

In the end, I found my loophole. First off I did not sell the two lots....the loophole to get garages by right solved my sqft problem too. Instead of building 4 homes, I would build 2 larger homes. The code says if you have 5 feet of open space on each side, you can have garages by the right. Before subdividing, I did research and saw homes in the area of the size I planned were selling for 1.7 to 2.1 million dollars and they were selling in a matter of days. (Those days are over, so I know it might take longer to sell now) but this area is in the top 3 best places to live in Philadelphia. 5 min a drive to the city with highway access really close. 

So I subdivided them, got all the approvals, building plans approved, zoning, street etc etc you name it I got the permits for it. At this point , March 2022, I still did not have a construction loan yet. So that was the next piece of the puzzle. Solved that by getting partners, and will be breaking ground real soon. 

I am scared and worried about our economy, but I do know that in the worst of the worst I could sell these homes for the money I have into them and not lose a dime (1.3-1.5 mil) if I listed them for that, there would be the biggest bidding war in history. 3000sqft homes are selling for $1 million... Now @Mike Smith is right in I am starting to big and that's unwise, however the way I see it, if I built a smaller home or a bigger home, I'm still building, i just have a different clientele profile and to be honest, homes for sale in the $500k range are getting hit the hardest. People want to move and upgrade because they have a larger family now, but do not want to go from 3% rate to 9%. People who can afford a 2 million dollar home, are affected by the recession, of course, but if you have that kind of money, you are either putting down a large payment or buying cash, and if not cash are thinking they can refinance down the road knowing that these houses make a good investment so would be willing to pay a higher rate. Appreciation in this neighborhood is about 5% a year and on a 2 million dollar house, in 10 years the house would be worth $3 million.

In conclusion, hell yeah this is a scary venture for so many reasons. Number 1 is that I am building when the prices of everything are extremely high. We are heading into a recession , Inflation, rising rates, you name it. If I had the capital I would buy out the mortgage and hold the land, but I only have two options, sell the lots for a litter over what I bought them for (because in this economic climate, $1,000,000 that I could have sold them for is not there now, I am closer to $875,000) or build them. I choose to build, but one at a time hoping by the time I start the second, things will have gotten a lot better. It was a scary venture when things looked good, I am entering a new game with no experience in it. Scary but exciting at the same time. But so long as in the worst case I can sell them for enough to get my money back, then I am happy because the connections of people I have met through the process are worth it. I now have a board member of a bank as a resource for future projects, I have a great builder for future projects, and when people see them being built I will make more connections to my network. The network of the people you know in this business is one of the most important parts. They help with the financing, they bring you deals, they partner with you, and they allow you to expand! AND THE KNOWLEDGE, even if I lost 100k on the project, would be worth it! And most important the experience. Banks want to see experience before they lend. If I succeed, I will be able to get loans to do much larger things because my ultimate goal is to build a large apartment complex with 50+ units or to buy a distressed complex and do some value-adding.

I worked very hard to get where I am today as you have read above, and going through what I have, gives me confidence! Everyone who has commented about this (the experienced people) they have been giving me tough love, telling me things I dont want to hear, advising me, etc etc and most of them are not wrong. BUT I BELIEVE IN MYSELF! and to be honest if there was no good exit plan, meaning that my price point is 2 mil+ to sell them, but if I was not sure I could sell them for a min of 1.4M then I would probably have sold the lots but to me with the ability to sell them at a min of 1.4M its all worth it ! Experience, networking, knowledge, pivoting, adapting, learning, gaining patience, and so much more! 

I thank everyone for being a part of this journey and I will keep you updated as things move forward!

@Mike Smith I was born with one very special gift, and that gift is that I can become average or above average at anything I try. From juggling to advanced botany (splicing plants together, cloning etc) I learn very fast. I graduated with a 4.0 GPA....not that that means much to this, but speaks to my IQ....

I have right now 8 duplexes, so 16 units that cashflow after all expenses an average of $1000 each. I started buy business in 2014 but I want to make general post to everyone about my past and what I have battled to get here

@Mike Dymski Getting up to this point has been difficult, but all the bumps I had on the way led me to the one most important partner, and that's the guy whos on the board of the bank. . I have been pivoting for months.  My first loan fell thru. At that point, I was doing this myself 100% with no partners. Because it fell thru I had to pivot, so I had my loan officer who I hold responsible for messing up the first construction loan (which was hard money) I had that locked, at the same time I had been working with other banks as a back up (thats where the loan officer comes in) Let me back up a second

So with the hard money lender, we were about 2 months away from closing, at the same time I called TAM Lending where I got this loan officer I mention above. 1.5 months passed and he said he got me a loan. The hard money was 10% and 3 points, and the loan officer said he got me 9% and 2 points. I said to him I need some type of commitment letter before I blow off the hard money lender. They sent me the letter, I called off the hard money lender, then the loan officer from TAM, said the loan fell thru when the economy started going to ****. So I got on his ***. I told him I would be building by now if he did not screw me over because I would have closed on the hard money construction loan.....Well all things do happen for a reason.

He's a salesman and I told him straight up, you told me what I wanted to hear and not the facts and it is screwing up my project. I had all the documents and told him, my lawyer said I have some recourse here, but I don't want to go that direction, so you need to get me a loan some way somehow....and so he reached out to his friend on the board of first bank, got him to invest and in doing so, made it easy to get the loan. I got really lucky, to be honest. At the same time, I am grateful, I am not 100% invested because I took on partners, and having my builder as one of them makes me very comfortable, because like Mike smith said, it is not wise to start on such a large project, but with the builder invested $150,000, he is going to want to do this right as opposed to him not being invested, it would not mean anything to him.