Okay, how about a plan? - Posted by ray@lcorn
Posted by ray@lcorn on August 05, 2003 at 22:54:22:
I’ve been thinking about this since you first posted, and started to answer a couple of times. But my first instinct has been to tell you the guys will likely never deliver. I can’t count the times I’ve heard this very scenario, and I have yet to see it come about. But I hate to shoot somebody down just because it sounds outlandish. Much of my career has been marked by taking on long-shot projects… a few of them worked and worked well. A few more didn’t. I probably learned as much or more from the ones that didn’t work as the ones that were a success. I’ve often said my title should be “Professional Rainbow Chaser”.
So what do I know… maybe this is the one “benevolent rich guy backer” scenario that will come together… and I like to think in possibilities rather than roadblocks anyway. So here’s one way to approach it… feel free to modify as you wish.
First, spend the next two weeks learning everything you can about commercial real estate. A great overview of the business is Howard Zuckerman’s “Real Estate Investment and Acquisition Workbook”. It’s available on Amazon. Get overnight delivery to save some time. While you’re waiting, read as many of the articles here on CRE Online as you can… specifically, read my article on due diligence at http://www.creonline.com/articles/art-148.html
and the one on valuation at http://www.creonline.com/articles/art-216.html
Then decide which type of investment real estate that most closely matches your abilities and interests (and the market), and spend the next two weeks learning all you can about that particular kind of investment property. There are four major food groups? Retail, Residential (multi-unit), Office and Industrial. Pick one or two, and focus on learning the ins and outs of what makes them, work. Come back here and let me know what kind of property you’re looking at and I’ll try to give you some more reading suggestions.
Then you need to check out the Phoenix market and some properties. Try your hand at doing some preliminary due diligence… dig into a deal and find out what makes it a deal, or if it really IS a deal. Then do it again and again. In fact, spend two weeks looking for at least five good, profitable deals. Real deals are found in about one out of ten offerings. “Okay” deals run about one out of five. The rest are overpriced, wrong type, wrong area, misrepresented, or a seller looking for a free appraisal. That means three out of ten may be acceptable, so figure on looking at twenty deals to get five possibles. Don’t forget to get the market details (competitive supply, rental rates, occupancy rates, population demographics, etc.) to include in your analysis of the best five. Now you’ve got a product to pitch.
Then you’ve got two weeks left to pull together a plan. You should include overall market information, an analysis of the prospective property pool and the five deals you’ve identified, and identify competitive set for each of the selected properties. Your plan should establish the due diligence protocols that will be utilized, and have preliminary information on the selection of a broker, an appraiser, a lawyer and the rest of the team it takes to acquire, manage and maintain property.
You also need to put thought into the operating agreement of the ownership entity. LLCs generally work best for long term hold properties, corps for flips. Joint ventures and REIT structures are not appropriate here. Simple, but thorough, is best. You’ll either need to obtain legal help to get the proper structure in place to protect you, or make time to do a lot more reading. John Hyre on the legal forum here at CRE Online can help there.
You should budget for the operating entity to pay you for your services and establish the operating parameters of who is in charge of day-to-day operations. I would want to own an equal interest with the money partners from the get-go… an earn-in is too tricky to administer, and can take thirty pages of legalistic CYA on both sides. Understand that there is no way you will have anything but a surface understanding of the proposition in this time frame, and even less about who you are dealing with. Keep it simple. The plan should say how much money is needed, how much will be made, and how (and when) it will be divided.
Now you have a decision to make… you can either try to bluff your way through the pitch and hope they don’t ask any really hard questions… like whether or not they could lose money… or be honest and lay out a plan to fill in the unknowns. There will be plenty of them. Me, I would acknowledge what is unknown, and make a priority of getting the answers. I would also lay out a worst case scenario. Experience continues to teach me that Murphy’s Law is alive and well in the real estate business, and ignorance of the consequences is not a defense.
At this point I’d make the pitch for them to fund the venture from that point forward. Your plan should predict the operating funds needed to get through the first year of operation, including acquisition budgets and your fee for putting the whole operation together. I’d ask for those funds to be made available immediately upon signing the agreements in order to move forward.
This is where these deals usually fall apart. The money guys say, “This looks great. Let me get my people to look it over before we sign”, and the chase is on. You’ll spend the next month chasing your tail trying to answer every objection a $400 per hour lawyer can come up with… it’s a lot like wrestling with a pig in a puddle… you get really dirty, and then notice the pig enjoys it.
So worst case, you’ve done a lot of work and they don’t perform. Let’s hope you’re the exception and the next time we hear from you it?s a huge success story and you invite us all out for a barbeque at your new mansion in the desert. But even if the worst does happen, the work you’ve done should not go to waste. You’ll have the best market intel on Phoenix of anyone out there, and if the plan is good enough the funds will find it.
Regardless of what happens with the rich guys, once you’re out in the marketplace, things will start to happen for YOU that wouldn’t have happened had you not put yourself in the position to learn the business. That’s when you learn to develop Plan B… and C, and D. Some of my best deals have come from a Plan C or D that I would never have thought of until I HAD to, because nothing else worked.
And that?s the best payoff of all? hitting the sweet spot? just the right combination of hard work, preparation and opportunity… which some people mistakenly call luck.
Best of Success,