{"id":205,"date":"2010-11-07T12:36:50","date_gmt":"2010-11-07T19:36:50","guid":{"rendered":"http:\/\/privatemoneysource.com\/broker-blog\/?p=205"},"modified":"2010-11-07T12:36:50","modified_gmt":"2010-11-07T19:36:50","slug":"a-story-of-adaptation-or-how-to-survive-and-succeed-in-a-challenging-real-estate-market","status":"publish","type":"post","link":"https:\/\/privatemoneysource.com\/broker-blog\/?p=205","title":{"rendered":"A story of adaptation: or how to survive and succeed in a challenging real estate market"},"content":{"rendered":"

Guest post by Matthew Whitaker, <\/em>Managing Member of Magnolia Partners, LLC and Golden Key, LLC<\/em><\/p>\n

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\nIn December of 2007 we were faced with a decision.\u00a0 After three years of successfully flipping properties to low and moderate income buyers, we awoke one day with no buyers and no plan to find new ones.\u00a0 Our dilemma was very simple, do we dissolve the company or do we create a new viable model that will work in this new economy?\u00a0 If we decided to create a new model, what would that look like?
\nWe had just begun to hit our groove in the spring and summer of 2007.\u00a0 We had successfully flipped around 100 properties in the first 2 \u00bd years of business and we were working at about a 4 to 5 house pace per month.\u00a0 We were making money and had been in the black for quite some time.\u00a0 We considered ourselves \u201creal estate investors\u201d and thought we were pretty darn good at it.\u00a0 So when we found ourselves faced with a flight or fight decision only a few short months later, it seemed surreal.\u00a0 My partner, Karen, and I spent days talking about what a viable model was for the new economy.\u00a0 We had heard of other local groups \u201cselling to out of state investors.\u201d\u00a0 We decided to attempt to replicate a similar model, but with a focus on local investors.
\nFor three months Karen and I worked on a plan and developed systems and processes that involved Golden Key (GK) (www.gkhouses.com<\/a>) selling properties to investors that wanted to invest passively in real estate.\u00a0 Our vision was that everyone recognized the opportunity, but very few people had the skills to do something about it.\u00a0 We thought we would approach professionals (executives, doctors, lawyers) and pitch them on the idea of owning 10 \u2013 15 properties instead of investing all their money in the stock market.\u00a0 Locally, based on our expected average sales price, this involved them investing $100K to 150K individually.\u00a0 Our responsibility in this plan involved acquiring the properties, rehabilitating them, leasing them, and then finally selling them to these new found investors.\u00a0 We felt this model would eliminate most of their risk and objections.\u00a0 Questions like, \u201cWhat would it rent for?\u201d and \u201cHow much will the rehabilitation cost?\u201d became commonplace in our initial pitches.\u00a0 What we decided was that we really needed to mold two businesses–an acquisition business (to find the deals) and a management business (to process the houses and manage them on a go-forward).\u00a0 Our office quickly became a \u201cmission control\u201d of spreadsheets and flow charts.
\nIn 2008 we had only moderate success with pitching this business.\u00a0 We had very little trouble getting people to agree that there was an opportunity, but a whole lot of trouble getting them to write a check.\u00a0 We were able to identify some investors, but continuing changes in the lending environment made it harder and harder to close the deals and made it more difficult for one person to purchase multiple properties.\u00a0 This resulted in a time intensive process of dealing with lenders during the close and constantly finding new investors.
\nBecause we became very frustrated with how slowly the business was progressing, we decided if we could pool the investors versus dealing with them individually, this would allow us to really deal with one \u201cclient\u201d and speed up the process.\u00a0 Since we didn\u2019t know how to put together a fund, we approached a local investment bank, Founder\u2019s Investment Banking (FIB) (www.foundersib.com<\/a>) in late 2008.\u00a0 We thought FIB to be a good fit since they had a real estate practice that had previous experience putting together real estate focused funds.\u00a0 At the time, they were disinterested, but we did plant the idea.\u00a0 We continued to approach other similar groups, but with very little success.\u00a0 So we continued to sell to both local and out of state investors, one house at a time.
\nIn the spring of last year (2009), FIB came back to us and said they would be interested in putting together a fund. \u00a0The fund\u2019s investment thesis was to purchase the homes, already renovated with a tenant already paying rent, and then to hold the properties in a portfolio renting them, and as the market recovered begin selling them to homeowners, preferably the tenants.\u00a0 What they saw was that the current market was allowing for a unique opportunity, and they could purchase these homes at similar returns to what they could expect from an apartment community; however, apartment communities will always sell using the same criteria (cap rate, cash flow, etc.) that they used when purchasing it.\u00a0 In comparison, single family homes can be sold to a homeowner who purchases for much different reasons and thus will pay a premium for that home.
\nFIB also saw this as an opportunity to enter the single family management business.\u00a0 They asked if, that in addition to putting together the fund, they could invest as a partner in both the acquisition business and the management business.\u00a0 This fund would give both businesses a tremendous amount of horsepower, so settling on a sales price was a challenge.\u00a0 After a series of meetings, over about three months, we finally agreed on a sales price for a portion of our business.
\nJanuary 1st<\/sup> of this year the deal was completed and the fund was closed.\u00a0 The fund has purchased around 35 properties to date.\u00a0 It takes us about 75 days from the time we acquire the property until the time we are able to sell it to the fund.\u00a0 The fund has provided us exactly what we expected.\u00a0 We\u2019ve been able to produce product with speed.\u00a0 Our margins are about 70% of what they were in the past, but we expect to do significantly more deals under this new model.
\nOur story is one of reinventing ourselves for the new economy.\u00a0 Our biggest challenge these days is finding something that is sustainable long past the opportunities the current economy is presenting.\u00a0 We never want to find ourselves in the same position we were in three years ago.\u00a0 Our management company has grown from 20 houses in 2007 to almost 300 today.\u00a0 We believe that the challenging market will be an opportunity for quite some time; maybe not as BIG of an opportunity as it is today, but we believe the U.S. will feel this pain for the next four to five years.\u00a0 Additionally, single family management will benefit from the slow recovery and continue to grow over that same time period.
\nWe\u2019ve learned quite a few lessons over the last three years which will probably be, as we look back, the greatest return on our adventure reinventing Golden Key.
\nOur first lesson is that very few people really understand real estate investing.\u00a0 This is very dangerous in a business where we talk about leverage being able to multiply an investor\u2019s returns and the same holds true for his losses.\u00a0 Becoming intimate with the actual data is a very healthy process.\u00a0 What are the real expenses?\u00a0 What are the real revenues?\u00a0 How might they change?
\nSecondly, we\u2019ve learned that investing for value over investing based on speculation is a whole lot less sexy, but it sure pays the bills.\u00a0 In the past we purchased properties based on what we \u201cthought\u201d we could sell them for.\u00a0 Today we purchase properties based on what we KNOW they will sell for.\u00a0 Rental value is a much more accurate measure of intrinsic value than a sales price.
\nLastly, it is hard to both manage and invest–so no matter how emotional the month is, you have to examine your business as both the operator AND the investor.\u00a0 Make sure it makes sense for both.
\nWe continue to grow and learn daily and I hope that our story will add some value to what you are doing.
\n Matthew Whitaker is Managing Member of Magnolia Partners, LLC and Golden Key, LLC (www.gkhouses.com<\/a>) in Birmingham, Alabama.\u00a0 He has been investing in single family houses since 2004.\u00a0 He has acquired over 150 houses personally and has a team that has the collected wisdom of acquiring over 400 houses.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Guest post by Matthew Whitaker, Managing Member of Magnolia Partners, LLC and Golden Key, LLC In December of 2007 we were faced with a decision.\u00a0 After three years of successfully flipping properties to low and moderate income buyers, we awoke one day with no buyers and no plan to find new ones.\u00a0 Our dilemma was […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_s2mail":""},"categories":[9,10,17,19],"tags":[30,37,38,39,59,60,62,63],"_links":{"self":[{"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=\/wp\/v2\/posts\/205"}],"collection":[{"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=205"}],"version-history":[{"count":0,"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=\/wp\/v2\/posts\/205\/revisions"}],"wp:attachment":[{"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=205"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=205"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/privatemoneysource.com\/broker-blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=205"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}