Dan Peña - 50 Billion Dollar Man Dan Pena QLA - Quantum Leap Advantage Advanced Part 6 (Audio)

Key Takeaways

Okay, Sean. Stefan, nice to meet you today. Uh, my company is Apex Real Estate Investments. Uh, we're in the Northern California flip market. Uh, we're doing two to three flips every week. Um, we are looking to now do a residential buy, hold model. Uh, the United States residential market has just tanked. Uh, you can purchase properties for less than replacement cost. Uh at the current time uh we're active in three courouses and we are able to purchase uh cash flowing single family residential properties at about 20% below uh fair market value. Uh so we have a inherent uh discount in the purchase. The rental market is very strong and we are able to cash flow $300 to $400 per month per asset. and we are looking for a allcash uh investor uh to back the fund. Um we could put about 40 million into uh five markets uh over the course of about 18 months and we have a very senior board of directors that's back in the project. Okay. So you you have collected $40 million to to go into this new fund. We would like to raise uh $40 million per market for five for five markets. Correct. So you're you're raising this from private investors. No, we're going to institutional institutional investors. And you will get use that 40 million then as equity. No, you're looking you're looking for us to provide you with the finance of which to 40 million equity. Are you pitching to me for the Are you pitching for me to invest in your fund or are you pitching to me to provide the finance for the properties you will buy and hold? That's correct. To provide the finance for the properties that will buy and hold. At the time you bring the first deal to us, you will have 40 million in cash in your account. No, no, we're looking for 40 million per market in five markets. 40 million is unlevered. Yes, understood. Uh and we're looking for a group that sees and understands the business plan and knows that we're not going to be buying any properties that are not currently cash flowing. Okay. And how how much leverage are you looking for? Well, we're not we're not looking for leverage, but if we do a leverage play, we need about 5 million per market. Okay. Or you can put up the 20% equity and then we'll we'll raise the debt once once we buy the once we buy the assets we can cash out that. So you have a second alternative for me. Yes, we do. Okay. Run by the two alternatives. So we from my perspective Yep. We have a debt partner in Los Angeles uh who will do the cash out refinance uh postacquisition and they'll come in at 80% loan to value uh but they don't want to put anything less than about 5 to 10 million out at a time. Hence, we need an equity partner that can come in on the front end and help us get these blocks or these pools of uh properties financed. And then we can come in with the partner in Los Angeles and we can do an 80% takeout uh which would uh put 80% of the cash back into your bank. Okay. So, in order for them to finance 5 million, you said that's a minimum branch. They providing 80%. So, you need somebody else who brings the first 1 million. Correct. Okay. And and what is your current liquidity in your current uh company? About a million dollar. Okay. So, you with your own equity, you could invest 1 million. Uh you have a partner already lined up uh for to finance the 80%. Then they would give you the the 5 million. We're looking for the 5 million. Correct. Okay. So far you have flipped the properties two to three a week you said. So how how long was your holding period? The holding period average is 65 days. 65 days. Um and and now in future you are intending to buy and hold. What is your future holding period? We want to run the two strategies uh simultaneously. Uh and we are looking to go nationwide with this platform because you can buy uh discounted properties in very strong rental markets uh all across the United States, but we want to get started in a local market uh so that we can pilot the model uh and attract cheaper capital. So our long-term goal is to have 500 million or a billion dollars under management, but currently we're just looking to run the strategy in our backyard. I understand but you're talking about volume and geography whereas my question was about your future holding period uh five years sorry five years okay is there any do you have experience how to manage properties for a longer period because obviously in 65 days all you do is you buy and you market in order to sell correct do you have any experience in property management we actually have a partner uh who's one of the top property uh managers in Northern California uh who we're going to bring in on a fixed cost basis to handle all of our uh lease ups. And the fixed cost is that per unit or fixed annual fee how what do you fixed annual fee of 3% of total rents? And they're going to also do the new rentals for you. Correct. And what's what's their incentive for for that? Uh it's a portfolio. Uh so they're able to uh bring in a ton of business uh with one client. But are they being are they being incentivized if you have empty vacant units to to rent them out or is 3% off the net rent which is basically covering their their cost of starting the only incentive or do they get three months rent if they rent something out which is so public? What they get a signal bonus. So they take half of the first month's rent. So the quicker they get that place rented, the quicker they get a signal bonus, which is half of first month, which is about probably six to 700 $800. Okay. You were talking uh about your cost price and and replacement cost. What is uh if you take a a standard three-bedroom family home detached, what is uh the current replacement cost for that? And what is your cost price? Uh currently we're at about 50% of replacement cost. Uh so uh land as well as construction cost uh to build a home in the Northern California market that we operate in uh would run you around 200 to 300,000 right now. 200 to 300,000 is the replacement cost. And so you will purchase it as 120 to 150,000. And what's the difference in in in the rental income in the new unit and your current unit? Probably only several hundred because most of the units that we're buying are under 30 years old. Okay. And in real figures, what's You give me a standard rental income for a new unit and the rental income for one of your secondhand units. New unit would be around uh 1,900 to 2,000. Uh one of our units per month, one of our units would be probably the 14 to 16 range per month. So at 18 what our our our real plan is if we have a 18month buy cycle at three a week which represents one market and we take a 20% discount uh on the asset to fair market value and we times the annual capital appreciation on the portfolio by 5 to 6% per year which is very conservative. Uh, our market's gone up about 15% in the last 12 months because the home values in this area are much lower than they are in the Silicon Valley where everybody's going into foreclosure at 8 $900,000 homes. So, they're able to move to Contraosta, East Bay, Northern California, and pick up the same house for onethird of what they could live for. Uh, so their cost of living goes goes down dramatically. And we that's the driving force behind uh our market. That's why sales are good. That's why the rental markets are strong. And at three, you're talking about sales, but you're you're actually not intending to sell any of these properties. Well, no, this supports our our rental our rental market. Okay. And so you mainly hope for tenants who are relocating from Silicon Valley to your area. Correct. And these are many people who who lost their jobs in Silicon Valley or No, no, they haven't lost their jobs. Uh they've gone into foreclosure on on on their current home or the cost of living is too high. So they Yeah. So they they've gone themselves into foreclosure. So your new tenants, the majority of your new tenants will be people who have been foreclosed in their old homes. So they will probably have a lot of debts and and and a bad credit record and so on. Not the majority, but definitely a a good percentage. Probably 20% of our renters will have some type of a credit issue. And sorry for my ignorance. I should know that there's a local uh banker, but what's the distance between Silicon Valley and your location? 45 minutes to an hour. Okay. So, people will um people will commute in future to Silicon Valley from where you are or or they will settle in the new community entirely? No, they'll still do the commute every day, which is not uncommon for where we live because Google, Yahoo, eBay, uh, Sun Microsystems, all of the major technology groups are in Silicon Valley and most of the people are commuting either from San Francisco or the East Bay as it is anyway. Okay. Which which interest payments uh can your cash flow support for the value? Um, we're underwriting these properties about between an 8 and a 12 cap. Uh, so we'd like it if the debt was somewhere around uh 7 to 8. That'll give us some arbitrage play, which you guys can take a first lean on. And we'd also like to offer the bank a security pledge on the LLC to hedge against any capital losses. Okay. Okay. So from from our point of view, we would take uh pledge of the shares of your entity. Correct. Um and you will have all the assets in one entity. Correct. So you will not uh put up a new entity for each 5 million. Okay. Um and we have mortgages against all the properties. First link position. Correct. Yeah. Assignment of rental income. Assignment of rental income. guarantee of directors? No. No. Why? You don't have any confidence in in in your business? No, we absolutely do. Uh we just have other options and right now we're not we don't need to go uh full recourse. Okay. So, if you're not going full recourse, what is an amount you would feel comfortable to support? Uh um a guarantee for a limited amount or whatever. Um we can talk about that but right now we have uh three other banks that uh we have term sheets from who are very supportive of this deal. Are you happy to share their term sheet with me? Yes. Okay. Have uh these have been redamped in here so you don't see uh the names of the banks that we're working with. All right. All I do recognize layout. Um okay. That's fine. So, so we we could get a deal if we match these terms. Yes, sir. Okay. Why why is that? Why why if we matching these? Well, what is the uncertainty in in this term sheet or the conditions present? You still have agreed if you say, look, if I match these terms, I could definitely get a deal. Well, these guys over here can only do 40 million in two markets and we need to fill the capitalization stack for the remaining three. Okay. Okay. So when when do you think you can bring the first sample properties to our attention? Uh we have a current portfolio that where we can show the samples and financials if you want to take a look at some sample deals. But what we'd like to do is start uh with the first uh 4 million in the account and we could spend about 450 of that a week in one market. Okay. So, if I go back, you said you currently have 1 million in cash um in in your account. Correct. Uh you're happy to transfer that 1 million to us. We basically provide 4 million. So you have a hunting facility of 5 million which you can prove uh to the prospective sellers of the property or which can prove to call if you're in a foreclosure. Um so basically from your million 1 million we make it 5 million. We're not actually looking for a a co-invest. Um we're looking for um you guys to put up 100% of the finance in the beginning. our LA partner will cash you out 80% loan to value and since we're buying these at about a 20% discount uh that takes out your entire capital position so that is our equity but you want you want us to take 100% of the risk to start with correct because it is a uh cash flow positive model uh with a uh 20% discount to fair market value so the bank's position is hedged yesterday. Okay. But at the beginning of the deal, you said you can bring 1 million to the table. I mean, which is not a lot talking the size we we're talking about. Uh in in the course of your ambitious plan. Okay. We'll put the million in. You put a million. Okay. Good. Um no, it sounds much better. Okay. So, that's fine. There's only really two two questions left. Um the first thing is you said you have somebody who provides you with 80% loan to value correct and you say you're purchasing at at a maximum of 80% loan to value correct so your entire business model depends upon this one other funer uh in San Francisco which provides you with 80% loan to value Los Angeles Los Angeles sorry um and what if they turn around and say look we send around the valuers and they come up with the same value you bought at or if they come up and say look you paid you paid 200,000 for this we give you 160. So if if they are 80% which is quite high in the current market to provide me with 80% funding but they will say it's 80% to purchase price rather than 80% to value from two years ago. Well, since there's a a 20% uh equity piece in in the capital stack, uh wait, I just drew a blank. Can you ask that question again? Sorry. Okay. Um the the whole model seems to I mean what we're doing is we're basically providing the bridging finance because uh you have somebody who funds 80% of loan to value. Correct. and 80% of loan to value. You say look the problem you have is that they only want to roll out in five and 10 million batches. That's correct. They don't want to deal with each specific house. That's correct. But once you have a portfolio of 5 million value, they will lend you 4 million. That's correct. Yeah. So um my whole against loan against the loan to value in in in the property. So it is it is uh it's a function of the value on the home which means that your position can be refinanced at 100%. Because we have the inherent discount at the time of purchase. Okay. So so basic and and this is a firm commitment of the land in Los Angeles. We have term sheets. Yes. You have term sheets similar to this term sheets of of our competitors for our role. You have a term sheet for that. Yes. because and we're happy to support you but I think it would be good for both of us to work together when you negotiate with with the lender in Los Angeles because it seems like your whole business model and in the end our risk will entirely depend on whether the lender in Los Angeles will accept the valuation so we come to the same value of the property because if the lender in Los Angeles quite understandably turns around and says look the value in the current market is determined by the market forces and therefore the value is what you bought it for. Well, then we're 20% short. That's correct. Uh we have a long track record of of doing these deals. We've done over 100 on the flip model and we have a portfolio of roughly 5 million on the buy hold. So we can show pro performer numbers and the the bank in LA has approved our uh appraiser and and you still continuing the flip model at this moment in time or you simply switch to uh a buy and hold strategy now uh because it's difficult to flip homes quickly in the current market. Actually, it's not uh difficult and we're maintaining the uh buy flip model because it generates cash flow and all the guys down at the courthouse are not going after the lower balance uh buy and hold assets. And that's why we've seen this opportunity in the market because none of the guys that we compete with want to put that kind of money uh at risk for 2 months uh just to make 10 or $15,000 on one home. And that's why there's this incredible buyold opportunity. But yet you're asking us to put our capital at risk for the period between your purchasing and being refinanced by the Los Angeles institution. Well, it's not a risk. The reason why these guys aren't putting their money up is because they could put up 200 to 250 and make a quick 50 or $70,000 pop on a larger deal versus putting in less money on a smaller deal, but the risk profile for both are the same. Okay. And how much of your time and and and of your fellow director's time will you put into uh the buy and hold fund? Is it 100% commitment of your time or our business is already set up at with the uh foreclosure uh courts and so we're actually down there 100% of the time anyway. So there's actually no extra work uh being performed on our part to acquire these homes and to portfolio them. But what I'm really asking for is you have you say you will continue the flip model on one hand and you will in parallel set up a buy and hold model. Correct. So what I'm asking for is you have not so far financed your flip model. What you know of your commitment of the real expertise in the company should be better by now. Um um you how much are you going to devote to the new venture? The new venture is uh my responsibility and my board's responsibility 100% while the existing team for the buy flip are going to stay. So you will not have a say in the in in the buy and flip part of it anymore. No, I'm heading up the buyole. Okay. So how do you manage the but you have the same shareholders in both or uh this is actually a new fund and there's uh there are two managing principles myself and my partner. Okay. and and you and your partner will take the decision. Correct. And who will take the decision in in the flip model? Um he is actually making the decisions on that business and you take it together with him in yours. So how do you manage the conflict of interest because what what I have to explain to my colleagues is you're buying a great deal um you got it down at the courthouse. At the courthouse you still represent flip as well as buy and hold. Correct. What we don't want is that all the ones you can flip, you take the profit entirely. We do not participate. All the ones which may not have been such a good buy just come into the hold basket because you're not able to flip them. So, how do you manage that conflict of interest? How is it transparent to me? Yeah. But, you know, the good deals will will also go into into the hold. That's a very good question. And since you guys are providing debt and you're not providing equity on the deal, um the backside of any transaction you're not actually participating in. Uh so whether it was a buy hold model or a buy flip model since you guys are putting up debt uh for this deal uh it wouldn't matter if we were making more money or less money at the time of sale. Well, what happens to me is is the value of my collateral and and I could understand and share your attitude. If we were not providing any risk capital if if we are simply providing 40 50% loan to value then I may not care whether you intend to flip it or you intend to hold it. However, if if we provide you with as close to 100% finance as possible, then I can't say all your good buys, all your good properties, you're going to flip and keep the profit. All the bad ones you you are holding. Um because that's the value of my collateral and that's the value of of my cash flow. So I think there needs to be a clear understanding between us how you manage the conflict between the two models and how we make sure that if a certain property comes up you take a decision in advance you know this is a property you want to send to us we approve it for the buy and hold but once it's approved for the buy and hold it stays in the buy and hold until such time that it's refinanced by the Los Angeles institution you know or if you want to take it out at that moment time when we are being repaid that's fine but you can't take it out before we being repaid for trans. What we could do is form one single entity um that we run all the properties through and uh that all the properties go into and anything that's flipped out uh we take the upside and anything that remains in the fund uh stays financed. Yeah. If everything is in one entity that's fine and and we pay the cash flow of the flipping into the same entity and it gets released to you at the moment I'll refine it. So that's fine and then we got a deal. Okay. Uh two two things two things. Uh the inherent risk in the in the $250,000 deal as opposed to the $15,000 is not the same as what Sean said. It isn't the same. The risk is less because you're doing less transactions for for more money. So it's not the same risk. The guys that are staying on the flip model for $250,000. You got to come up with a better answer than that, Sean. and the guys that are doing the the smaller deals. Uh the reason why I the guys that are keeping the big deal, which I'm very familiar with this model as Sean knows, is that because it's easier to make more money faster in bigger chunks with less less aggravation. And and and I also know the more houses you get involved, the more aggravation. And if it was an experienced property broker or banker, he would know less deals at bigger chunks is better than more deals at smaller chunks. just by for the management. Forget about the risk. The second thing is Sean said, "Well, our real deal is this." That means everything that he said before the real deal was all a [ __ ] lie. You've been taking lessons from um Mjorn and you don't even know him. I mean, the real deal. And so that means and if we if if if I got involved and I would press them, then the real deal would have come out. There would have been a third deal. You don't say the real deal. This is the real deal from the beginning. You don't change you don't you don't change your your verb or your adjectives is used to describe otherwise the guy's going to lose lose confidence. Um the um and he he may describe this model as being uh riskless, but it's not riskless. That's [ __ ] It's absolutely not riskless. And there's really not enough margin. 80% loan to value that that's a good that's in this market. That's good loan to value 80%. But when you're doing this for 10 or 20 grand a pop, um you know, you're not not every house is going to get done. And the 10 or 20 grand per pop sometimes will wind up being no grand for pop or uh lose five grand for pop. And um the uh and the reason why I've gotten out of this business model myself and I've been in this the same thing with Ronald Rand and Damian Lupo and four or five other guys over the last 10 or 15 years is because even though they seem to be managing it coherently now the bigger you get the harder it is to manage and um the um and it is as you pointed out Stephan it's a full-time job and there is a conflict between the two models putting I'm not even sure putting into one solves that. No, I mean basically for me because at this moment I'm simply he said I could get all the profits from his other model into the pool to be security for me until I've received I'm not sure his other partner would agree to that. Well, I I don't think he would, but that was positive. He also he also, you know, committed to putting all his cash of 1 million into my bank account as as additional security. Again, his partner may not agree to that, but you know, once he agreed to all of that and he starts with a small tranch and brings me, you know, has has given me 1 million in cash, you know, assigned to me the shares in his company um as as a security and basically everything he has has said we can talk about a personal guarantee that was still an open issue. You know, I got everything he follows up on it. Stephan went around he was nailing down the corners and then once you nail down all the corners there's not many place to escape that um but I mean so that button that was doing the presentation whether is is a business part agree some of those things is another question but that's more realistic what one of these things should sound like um and uh flow pretty well it's fairly coherent Sean's been hustling money for a while so he's done this before he would just fall off the uh the cart. What do you call those carts in Romania? You call them chariot chariot carts uh in in [ __ ] grandma. So, you know, uh so so it sounded different. Okay. Uh any questions before we break for lunch? Yes, I have. Oh, [ __ ] Well, you want to I want to do Yes. Okay. What is the mechanism that you can that you use to you said like you have four or five rounds of investment and after that you wipe out the investors. No no I don't have most deal many deals a majority of deals don't aren't successful in the first round. So if they come in the second round, the new investors Bjorn looks at Michael put up a million euro and Bujorn says, "Fuck Michael. I don't care what he put up. The deal is worth this. So I'm going to wipe him either completely out or almost completely out. Before he had 70%, now he's got 20%." Okay? Do that. You just do it. It's just like my words to the contract. your equity instead of worth being worth 70 now is worth 20 and my equity is worth 60 and your and obviously your equity goes down. Everybody's equity goes down. Everybody that comes in and puts in new money almost always wipes everybody clean. They want to wipe the debt clean. They want to wipe the uh the um uh equity clean. And if they can't do that because there's too many creditors, then they just bankrupt the [ __ ] and they buy the assets out. And then when they bankrupt the [ __ ] then everybody's clean anyway because we're not going through reorganization. We're going through liquidation. I don't like reorganizations because too many people always you got to fight with liquidators and not with liquidators, but uh the insolveny lawyers and all this other [ __ ] It's easier just to wipe your claim by bankrupt in it. But I mean, I'm telling you, anybody that comes in for the second, third round, I mean, um, this deal, this four season deal with John Molton, to the best of my knowledge, there were there was a second and third round, but Molton's Alchemy put all the money up. They put their own money up, so they weren't wiping anybody out. Um, and I don't really know, but I would imagine uh I would be surprised if they hadn't um um if there hadn't been somebody else cuz sometimes three private equity firms will put up the first round, but then the second round only two will put up the money. So, they wipe the one guy out and so maybe in the third round only one will put up the money. So, he wipes the other guy out.