David:
This is the BiggerPockets podcast show 734.

David:
Always have your attorney look over anything that’s unusual or I would say most things, but especially any unusual contracts that you’re dealing with. If it’s not something that you deal with on a very regular basis, have your attorney look over it. The number of times my attorney has told me that if I had him look at something sooner, it would’ve saved me money is… Yeah. I’ve learned that lesson more times than I should have learned that lesson, but this was definitely the biggest learning of that lesson.

David:
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast, the biggest, the best, the baddest real estate investing podcast in the world, here today with my stellar co-host, sidekick, and partner in fighting crime, Rob Abasolo. Rob, how are you today?

Rob:
You know what? Feeling extra chipper because I think after being sick for 16 days, David, I think I beat it. I think I beat this. I think I’m back to my usual self.

David:
Let’s talk about the things I’ve seen you overcome in the short period of time that I’ve known you and we’ve been hosting a podcast. You got into fitness and then destroyed your lower back and spent months basically as an invalid. You had 75ccs of puss pumped out of your throat in what was probably the most painful throat condition ever. We’ve recorded a podcast where you really couldn’t talk and you use one of those voice synthesizers that people hold to their neck just to be able to say something at all. People had no idea.

Rob:
The stair bruise?

David:
Yes, the worst bruise I’ve ever seen in my life, which is saying something with my sports and law enforcement background. Your butt looked like a version of a different galaxy with all of the intricacies therein. Never have I seen a bruise like that and somehow, you survive that too.

Rob:
Well, you know I love Interstellar. Sony, Galaxy, I can get going. I’m always a fan of. But yeah, man, that was probably the worst one. Lesson learned here for everybody. Don’t walk down wooden stairs when it’s raining wearing Crocs, because I did that and I slipped and I was angry at myself because I was like, that hurt. That’s going to leave a mark. Then the next day, everybody was like, “Oh, my, you need to go to the doctor.” I was like, “It’s fine. I’ll probably be okay.” A month later, it finally cleared up. Then we also can’t forget, David, when I became the co-host of the BiggerPockets podcast, I had COVID. By the first audition, the first show I ever did, I think it was with Kendra Hall, I had COVID and everybody was like, “Can you do this?” I was like, “Oh, yeah, I feel great,” and then inside, I was dying.

David:
So we’ve still never seen the full strength Abasolo. World, you’re put on notice. It’s coming. So wooden stairs, rain, and Crocs became an intersection of a perfect storm that led to you receiving the worst butt bruise in the history of humanity. That is a good segue into today’s show because in today’s show, we interview David Pere who pulls back the curtains and shows the warts of a deal gone wrong that you rarely ever get to hear, but this is BiggerPockets and we bring you more value than everyone else. David shares some of the examples of how a perfect storm hit a deal that he had that was a lease option, which you’ll learn more about what that is in the show, all the things that went wrong, but most importantly, how he countered them, bounced back and built a portfolio much bigger than he had before this happened.
This is a rare, one of a kind opportunity to see what happens in real estate that isn’t the good news that everyone shares. Now part of that’s because the last eight years, there’s been nothing but good news as the whole market has just exploded. Even if you made a million mistakes, the rising rents and the rising cost of the asset could cover them. But a lot of that’s starting to change and you’re going to be hearing more and more and more of stories like this one of deals gone wrong and money that was lost, because you can lose money investing just like you can make money, and it is even more important to not lose money than it is to make money in real estate. So you’re going to get that today. Rob, what were some of your favorite parts of today’s show?

Rob:
Well, I would say this is a really interesting deal specifically because he checked all the boxes. It seemed like he ran his due diligence. The deal looked and really penciled out to be a good deal, but there was just other circumstances that led to the wheels falling off the bus, if you will. I think stick around until the very end because we get into some of the lessons that David learned that could have possibly have helped him avoid this. I really just appreciate the honesty. He’s a rockstar, so it is really nice to hear rock stars be vulnerable and then put it all out there. For any of you that have ever made a mistake in real estate, I think this episode will make you feel better and think, hey, it’s okay. Sometimes we’ll make mistakes, but we’re going to be better from it.

David:
That’s right. And if you appreciate listening to a podcast that shows you the bad and the ugly and not just the good, you don’t have to set up a GoFundMe and send money directly to David Greene. All we need is for you to leave us a five-star review in whatever app you listen to this podcast. Before we get into it, today’s quick tip is when you’re evaluating a deal, remember, it’s more than just a deal. There’s a person on the other end, and when you’re using creative financing, off the market opportunities, a lot of the techniques that are being talked about right now, you are absolutely increasing your risk for what can go wrong. In order to counter that risk, consider bringing in a lawyer, a property manager, other people to look at the deal and not doing it yourself and then handing it over and saying, “Okay, guys, here’s the deal. Go make it work.” Dave’s story talks a lot about how certain things that were going wrong would’ve been caught earlier if he had brought in backup to look the deal over.
So consider who your team’s going to be and get them involved early. Get them involved often. Don’t be a solo hero. All right, let’s bring in Dave. Today’s guest is a friend of BiggerPockets as well as myself and many other BiggerPockets personalities. He has 115 units across 15 properties including single family, multifamily, and an RV park. As a fun fact, David was homeschooled and still considers networking to be his superpower. So for all of you other homeschoolers out there, there is hope. Here today to talk us through a deep dive of one of his biggest investing mistakes and the red flags he missed along the way, allow me to welcome David Pere. David, welcome to the show.

David:
Thanks for having me, brother. It’s good to finally be here.

David:
Yeah. It’s nice to have you back. Now, I believe you and Rob were just getting acclimated. The two of you have not met yet, is that correct?

David:
I was, I guess you could call it a temp guest on one of the unaired interview trial runs when Rob was testing, but it was never aired, so it is unofficial. That is the only conversation Rob and I have ever had.

Rob:
No, that’s not true. First of all, that hurts because we talked at BPCON. I said, “Military millionaire,” and you’re like, “Yeah.” Wow. So first of all, dagger to the heart, but second of all, welcome back in an official capacity.

David:
Well, I appreciate it and I apologize.

David:
No apologies needed.

Rob:
All good, man.

David:
David has hung out with Brandon and I in Hawaii several times. In fact, I think that’s where we got to know you. You’re a well-known personality amongst the BP ecosystem, but I realized like, oh, Rob is somewhat new here. He’s like the kid that just transferred into school and jumping in in sixth grade and we’ve all known each other since second grade. So I wanted to get you guys introduced here. Anyway, Dave, you have a very interesting story that we are going to dig into today. There is a property that you bought. It has created enough drama that you could write a book about it someday and maybe that’s already in the works. I was lucky enough that I was there at its conception when you were first starting to look at this deal and you ran it by me and there were some things that you were thinking could go wrong and then many more that you probably didn’t see that could go wrong and then just twists and turns that no one could have expected from a seller that was less than scrupulous.
So we are going to get into all the juicy tea, as the young kids are saying today, green tea, if you-

Rob:
Well, they say that you spill the tea. We’re going to spill the tea.

David:
Did I just sound like an old guy that doesn’t know?

Rob:
A little bit.

David:
Yeah.

Rob:
Let’s get into the tea, fellow kid.

David:
Well, if you spill it, I suppose you got to get into it when you’re cleaning it up. I could probably try to defend that, but we’re just going to move on.

David:
We’re all entirely too old to try to figure out what the actual phrase is. We bring in my stepson here real quick and he’ll straighten this all up.

David:
Maybe it was give me the juice. Give me the juice and spill the tea. They’re both beverages and that’s why I got them mixed up. Someone in the comments on YouTube, please differentiate for us how this is supposed to be done and do it kindly. All right, Dave, let’s hear when you first found this deal, tell us what it was and what made it look so dang good?

David:
Yeah. I guess I should probably frame that this would’ve been my third real big investing transaction. At this point, I had house hacked a duplex. I had bought some raw land that was next to my primary, but I don’t really consider that an investment deal. I owned a 10-unit, which is actually the best deal I’ve ever done to date. I believe I bought that thing crazy terms, like 85% bank, 10% seller carry, whatever. It was a great deal. This was transaction three. The reason that I got into this, and I think this is important to note for people is, I had gotten sucked into the whole 10 extra goals, doors, buy more, go, go, go, go, go mentality that you hear a lot of investors get into. So I had decided I’m going to buy three doors and then oh, well, I should 10X that. Let me buy 30 doors this year. Then in this year, I had already purchased 10 and so I’m looking for another 20.
This thing, my agent brought this to my attention. It was like 35 with another potential five in construction, but it was a mixed-use building. It’s 64,000 square feet. It’s four stories. It’s 20 current residential with five in construction permits pulled being turned into Airbnbs internally and another 15 mixed-use and this is in for anyone who’s familiar with the area, Branson, Missouri, which I kindly refer to as old people Vegas. If you took Vegas and you took all the gambling and inappropriate adult stuff out and made it just shows and musicals and stuff. So there’s a murder mystery theater in this building and a wedding venue and a escape room and a thing called the Johnson Strings, which is a family of seven that played string instruments and had a little mini amphitheater in it. At one point, it had three commercial kitchens. So the history on this building is that it was a steakhouse. It was the majestic, it was the largest steakhouse in the state.
The bottom floor was 20 residential apartments for employees and then the floor above it was all supplies and the top two floors was three commercial kitchens and seating. Then it went out of business five, 10 years before this. Changed hands a little bit and at this point, it had one remaining commercial kitchen and a bunch of tenants, various commercial tenants, 20 residential units and some space on the ground floor that was either rented or in the works of being rented by various tenants like a Coldwell Banker was signing a lease or had signed a lease, various tenants like that. That’s the backstory. As I’m looking for more doors, more deals, this thing gets brought to me by my real estate agent. It’s off market. The gentleman is looking to do a lease option transaction. Purchase price, 2.795. He was asking for $200,000 down. We talked back and forth to $150,000 down and just went back and forth on terms. So lease option for anyone not familiar, basically you are purchasing the right to execute a purchase at that purchase price.
So I would be saying, “Hey, we’ll give you 150 in the next three to four years,” and I believe this was a three-year option, sorry, it was a three-year option. We have three years to purchase the building at 2.795. Should we come up with the mortgage, we close at that price, and if we don’t, then we can just walk away without our option fee in that timeline. That’s the premise leading up to this thing.

David:
So that lease option is pretty cool. We don’t see this happening a lot because the market’s been so hot. Sellers haven’t had to do that type of thing. But now as things slow down, we’re starting to see them pop up more. Basically, what you’re saying here is you agree to buy the property for a certain price several years down the road. You paid money for the right to be able to do that, which was your lease option fee. If you choose not to buy the property, the seller keeps the money. If you choose to buy the property, the money goes towards the purchase price or whatever. You just buy it at the terms you have. These were very popular in the past, but I think a lot of the reason that they stopped being so popular was inflation became so rampant. Sellers wouldn’t want to wait to sell your property in three years at today’s price. It used to be. Real estate was normal and it just slowly appreciated or didn’t appreciate, so you could do this.
Before we move on to hear more about this deal, I want to get Rob’s perspective. Because I’m trying to put us in Dave’s position as he’s hearing this deal. Rather than the benefit of hindsight, as you’re in the moment and you’re okay, you’re being posed with this multiuse lease option, you got to feel good about the lease option. That tends to benefit the buyer here. So Rob, what would you be thinking when you heard about the multiuse aspect of this property?

Rob:
Mine would be racing as it was as David told us about this because I’ve always wanted that. I have shiny object syndrome and so for this, it seems like you can execute so many creative things under one roof. I guess the other thing that sounds really appealing to it is that obviously from a valuation standpoint, the more money you make, the more valuable the cap rate is on this building. So that would be something that plays into it, which is, what are all the different types of businesses and income streams that I could create from one building to ultimately increase the overall valuation of it?

David:
I knew you were going to say that and that is just the difference between Rob and me right there. Because you hear that and your mind explodes with opportunity and creative options and I could make it worth more. I hear that and I’m like that is not a well-traveled path. That sounds like a lot of work to have to figure it out. That’s going to take away money from all the other things that I’m trying to do. I don’t like multiuse options because there’s a higher ceiling but there’s a lower floor. I tend to be drawn towards a well-traveled path that I can buy this thing, set it on its way, there’s a very established trade route, I know exactly where it’s going to go. I can forget that I own it and I’m good.
But this is important to bring up because as, especially newer investors are out there looking for deals, looking for something creative, trying to put this together, analyzing everything they can get their hands on, we know what it’s like when you get that RE bug and just the world’s your oyster, it can be misleading to look at an opportunity which is multiuse or value add or something and only see the benefit of it. You only see the upside. You don’t see what could go wrong. I remember, Dave, we had a conversation about this because you had some of those initial thoughts in your head. Before we get to that, I want to ask you what did you love about the deal and then let me know what do you remember about our conversation and what were your concerns about the deal.

David:
Yeah. Absolutely. And there’s a few more, Rob, because it sounds like you think the way I do. The gross stated current monthly rents was 34,000, so over 1% rule right off the bat. There were still several commercial spaces not rented. The five residential spaces were under construction. So four were going to be Airbnb with a fifth one that they hadn’t actually identified as whether it was they were thinking Airbnb or office, but it was a space big enough to put a studio. So nothing crazy but a space. Then there were some other things, option, potential. But as the numbers were presented to me, at least broke even, but should have cash flowed about $7,000 a month or actually should have been a little bit more than that. I’ll get to the 7,000 number, how I came to that. What happened is as we’re talking through this, I’m fact-checking a lot of this.
This gentleman was also out of state and very mom-and-pop numbers, his accountant, just a lot of typical mom-and-pop things that you encounter where as you’re digging into stuff, you’re like, well, that’s actually off by a little bit. Let me tweak this. Let me tweak that. And I came back to them and I was basically like, “Hey. It looks like these two leases are actually projected leases. Perform a typical stuff. These are not current, these are potential or signed, but they haven’t started yet. So can you give me the no joke, current rent roll, who paid this month, accurate,” whatever. And they came back and it was about, I think it was 27. So the net on that would’ve been about seven and that’s where it was. This is when David and I, I think I reached out to him and there were three other people. For David’s reference here, he never saw the numbers. This isn’t like a, here’s all of this stuff, please. I never did that to anyone and I wouldn’t recommend anyone do that.

David:
Yeah.

David:
What I would do to people or do with people if I was ever going to somebody for a fact-check was like, “Hey, I ran all of this and here’s what I came up with. I have one or two minor concerns or I’m at this point. Do you see any major, absolute stopping red flags?” Maybe there’s a couple concerns, but unless everybody I talk to is absolutely no, then it’s okay. There’s a couple concerns here, but this isn’t just off the rails, I’m an idiot type of deal.

David:
No, not at all. And that’s a good point you bring up. We should highlight this. When you are going to someone for advice, the wrong way is to just info dump every single thing you have on them in a big, long email or a message or hold them hostage to make them hear about this. I would never go to Rob and say, “Hey, here’s everything that I’m doing. Tell me if I should buy this deal.”

Rob:
Hey, but you can though, just so you know.

David:
I appreciate that.

Rob:
You can always vent to me.

David:
You can always do that one time and then they’ll never take a call.

David:
I would imagine that is an invitation to David to do that, not the audience. I’m saving you right now, Rob. I’m saving you.

David:
Yes, yes, yes. Yeah. So what you do want to do is go to someone else and say, is there something I’m missing? Because it’s never what we knew could go wrong that hurts you. It’s what you don’t know that could go wrong that can hurt you, as well as, is the way I’m looking at this correct? When I’m analyzing this, am I using the right set of data? Is this the right formula? It’s something like that because if you have the wrong formula, even with the right inputs, you get something incorrect. If you have the wrong formula or the other way around, the wrong inputs with the right formula, you can also mess it up. So that’s the stuff we’re looking at. What I want to ask Dave is as you’re looking at this deal, I remember you being super excited about it. It was almost like a game changer. If this thing works, because you weren’t quite sure, this could propel me to a completely different place in life, and that always adds some extra juice.
When it’s not just the deal of being a [inaudible 00:20:03] merit, when you’re thinking about the change it can make in your life, I’m not saying that’s wrong, I’m saying it gets more complicated. If you’re looking at a deal and you know if I buy this, I can quit my job, if I buy this, it’s generational wealth, if I buy this, it gets me out of X problem that I have, different stuff starts creeping into your decision-making process that’s rooting for this to happen. The Real Estate Radio Guys, we had them on and they told a story about how they would buy properties just solely for the tax benefits. They weren’t cash-flowing, they weren’t good deals, but they were saving money in taxes and that was influencing their decision-making and ultimately, they went bankrupt. They lost all those properties from that. So tell me what’s going on in your life at this moment that’s affecting your framework as you’re analyzing this opportunity?

David:
Yeah. I’m in the Marine Corps and I’m getting promoted.

David:
Rich.

David:
Yeah, I’m not rich. I’m getting promoted, which is great, but for anyone who’s been in the military, the more you get promoted, the less fun you have, the more office you do. There’s not a way to say this part without sounding, I don’t know that this ever comes out the right way, but the war ended, and so I’m not like a sit on the couch, twiddle my thumbs bum type. Not to say there’s anything wrong with that, I suppose, but for me, as the type of marine that most or a lot of marines are, as you get promoted and wars end, the Marine Corps is not as much fun as when you’re young and [inaudible 00:21:39].

David:
You don’t have the same purpose.

David:
Yeah. Afghanistan and combat and training and the purpose and the adventure and the excitement was a whole lot more appealing than training where you’re not going anywhere.

David:
You wanted Call of Duty, not office duty basically.

David:
I can always count on you. See? Look at that. This is why you got that Dundie award all those years ago.

David:
So what you’re saying is that your mind is going to a place of I don’t like where I’m at. The walls are closing in on me. That’s funny. David did send me a Dundie award. It was for best [inaudible 00:22:13] book or something, which is funny because it’s the only [inaudible 00:22:15] book that was written other than the impostor books, and that’s a Office reference. So you don’t like where you’re at in your job. The walls are closing in. You can see this is not a path that I’m going to be happy to stay in. Of course, our mind starts looking for alternative options here. Then this deal crosses your desk in that moment, right?

David:
Yeah.

David:
Okay, so as you’re considering it, tell me what you’re thinking.

David:
Yeah. And I guess one other piece that I didn’t mention yet in this, because we did say not rich, I didn’t have 150,000 put down. So I brought a partner in which I will not mention who or what relation said partner is to me because he remained… Well, the LLC was set up. He managed to remain anonymous through a four-year lawsuit including a in-person trial where he was not even in the state for, so success. But he was a two-third, I was a one-third. He brought 100, I brought 50 and my 50 came out of a HELOC. That was how I was able to put this in without being “rich.” So just throw that out for context so people aren’t like, “Wow, he said he is a broke, young, enlisted marine, but he put 150 down.” No, not quite. I was creative. But yeah, so that’s the frame to that.
My logic on a lot of this is, and for the record, has worked out well way more often than it has failed me, which is the whole point of this logic. I think Nassim calls it the barbell method, but what is the risk of ruin? If this goes absolutely wrong, what’s the worst case scenario? In this, the worst case scenario was essentially, we lose our lease option, maybe a little bit extra, but that’s pretty much it. The best case is magnitudes more and the building ends up being worth five million or it cash flows $20,000, $30,000 a month. As we were running all the math and all the numbers, as long as what we had been presented after I’d gone back and corrected some stuff and he came back and this, that and the other and I’d walk the building, as long as what we had been led to believe and what the inspection and what the numbers and the rent roll and the accounting and everything was accurate, then this really didn’t seem like a big risk.
You take over the building. You could control the asset as long as you don’t royally mess everything up. Then in the negotiation and in the contract, we negotiated a lot of things like foreseen issues. We negotiated like, hey, you got 45 days to finish those four Airbnb units or you owe me $16,000 or I think we dropped it to like 8,000 or something like that. You got 90 days to replace the commercial roof or you owe me 100,000. You’ve got two weeks to crane two HVAC units onto the roof after the commercial roof is finished or after we close to get the top floor HVAC-ready so that we can rent the top floor out or you owe me this much. Most of the things that were risks that were identified were put into the contract as, hey, within the first 90 days, seller is going to do X, Y, Z, and if he does not, he’s going to owe the buyer 8,000, 100,000, 10,000, whatever.
I think a lot of that was actually from conversations with you and other people where it was like, “Cool. Well, this might come up. Here’s how you can mitigate. Make sure that it’s in the contract that they will pay you X if they don’t do Y so that it happens one way or the other.” Because if they’re not going to do it, then you have the cash to take it down yourself.

David:
So it sounds like you were pretty aware of what could go wrong and had a contingency plan in place like every good marine would for if A happens we’re going to do B.

David:
So we thought.

Rob:
Right. Okay. David, I have a couple of questions on this option, on the lease option, because you said you put $150,000 down. The way we talked about it earlier on the podcast is typically with the lease option you say to the seller, you’re like, “Hey, I’m going to pay you this amount to reserve the right to buy it at this price in three years from now.” So $150,000 was the down payment. How much of that was the fee associated with the lease option?

David:
Actually, I guess realistically, he just counted the entire thing as both the down and the fee, so the whole thing went towards equity, was the way that it had been drafted. The note was almost drafted, and this is part of what came up in the lawsuit was how poorly all of this was drafted. It was drafted almost as if it was a seller carry. It read much more like a seller carry with a down payment and a interest rate and a monthly payment than a lease option except for the fact that we had the option to just walk. So it was almost as if it was a seller carry with a three-year balloon except that we had the option to walk away from the lease.

David:
So if I’m hearing you right, are you saying it looked less like a lease option and more like you put a deposit down on a property and you could forfeit your original deposit if you chose not to complete the purchase in three years versus a lease option? They’re very similar in the execution. Is that what you’re getting at?

David:
Yeah. It is not that that was what we discussed so much as that it was very poorly written and executed and I was not savvy enough with this stuff to know the difference. He drafted all the contracts on his end. Because he and I had negotiated everything verbally and he sent it over and I was like, “Yeah, those are the terms we talked about,” I just was like, “Yeah, cool,” and it turns out he wasn’t as savvy as I thought, which ultimately worked out for me when we got into court stuff because the judge is like, well, this doesn’t look like what you’re saying it’s supposed to say and you drafted it so you can’t say it doesn’t mean that because you wrote it.

Rob:
Right. That happens too. A lot of times you negotiate terms, they sound good, but no one ever actually sits down and pencils it out in a model or in a spreadsheet and so they don’t actually know logistically or tangibly what those numbers work out to. Then once they see that after the fact, there’s a little bit of panicking and wait, that’s not what we talked about. It’s like, well, it is, you just didn’t do your due diligence beforehand. The other question I have about this, because that sounds like a lot of logistics to just deal with the seller and negotiating… Sounds like they’re collaborative, they’re playing ball and so not really a big deal there, but on the flip side of this, you’re really taking on a really big business. We talked about it’s creative, so many ways that you can make money in cash flow. Did you give any thought to the actual property management of this overall business?
It’s not just a property manager that you’re going to hire for it. It’s not like a commercial property manager. It’s not an Airbnb property manager. Who was the one that was actually going to run this operation?

David:
There was a onsite property manager who had been working with this gentleman and she had offered to stay on as a full-time manager and she had a maintenance guy and she was full-time there. When I went and looked through the property, I walked through and I met with her and she showed me everything and she seemed awesome. She knew everything about the place. When we get into lessons learned, one of the things that I will talk into is that I should have immediately brought my actual property manager and my team through with me instead of going with her. I can either confirm nor deny because there’s no proof and this didn’t come up in court, however, from my understanding, there was a under the table agreement on a maybe or maybe not consulting fee for that property manager if she helped sell the building.
So she was incentivized to make things look really good when I walked through with her. When we took over, the property manager that I thought I was getting was not the property manager that I got. It was within the first two or three weeks that I fired her and brought my team in. Should’ve, would’ve could’ve, I guess. I should have brought my team in immediately. But it’s a bummer because that was part of the issue. I don’t know how much we want to get into that part right now, but there were literally tenants in the residential side that when my property manager walked through said, “Oh, yeah, we don’t pay rent.” She was like, “Says you’re on a lease and you’re paying rent.” They were like, “Well, yeah, we were just told that if we said we were paying rent that we could just stay here for a while for free until the new owner took over and eventually would evict us whenever that timeline took place.”

Rob:
Wow. Oh, wow.

David:
That’s cool.

Rob:
Okay. It sounds like this is about the time wheels start falling off the bus here. I want to get into that, but just to summarize where we’re at, what deal is this in your pipeline? How many deals had you done before this?

David:
Three legit investments and then some raw land and some other stuff. This is not-

Rob:
Four-ish?

David:
… super far along. Yeah.

Rob:
Okay, cool. Then the purchase price for this was a total of how much?

David:
By the time we would’ve closed, 2.795.

Rob:
Okay, 2.795. You put down 150,000. You brought in 50,000. You had another partner that brought in 100,000 and this was a 20-unit mixed residential use property in which we were still waiting for four short-term rentals to be completed. Is that right?

David:
20 residential side and another 20 to 25 once the construction was done, and then another 15 potential commercial space, so like 40 total, 35.

Rob:
Great. Then you worked out with that seller timelines and milestones of when things had to be completed, otherwise they would owe you money overall?

David:
Yeah.

Rob:
Great. Okay, so let’s dive into when the cracks in the foundation start appearing. Can you tell us a little bit about that?

David:
Yeah. Month one. Some of the big red flags came right out the gate. Ironically, I’m still stationed out in Hawaii, so the first major red flags are happening while I’m on a one-week cruise that you can book while you’re in O’ahu and it goes to all the islands. I’m on this cruise ship and I’m trying to enjoy this cruise while I’m firing a property manager and getting calls from commercial tenants and we’re two and a half, three weeks into this thing. I’m like, what in the world is going on? None of this is making any sense. There’s no way this is realistic. Text messages and things that I’m getting, I’m hearing are just insane. What’s happening is to summarize, the amount of money we collected, well, I didn’t get the prorated rents for the first month from the seller, which was in the contract. Then he was like, “Oh, yeah, no. We agreed to something different. We must have messed that up with the contract.” I’m like, “The contract says otherwise and we didn’t agree to that, so I need that” and I never got it.
So that was red flag number one. There’s $17,000 coming to me and you want my first month’s monthly payment, but you’re not giving me the prorated. That’s a very significant chunk of money to not give me at this point. Then on the first, the rent collected was to the tune of $7,000 or $8,000 less than what the stated rent roll for the previous month had been. I’m like, okay, something’s off. That’s a huge number. It’s because one of the “current” commercial tenants that was $4,500 isn’t paying. So I get ahold of them and they’re like, “We don’t have a lease there. We broke our lease. Did he not tell you? That was last month or whatever.” There’s a lot of weird things that I’m starting to like, hang on. No, I did not get told that. This number clearly states that you were a current tenant that paid last month. The bank account shows that money hit the account. That doesn’t add up at all.
Then my property manager starts going through and the rents that were told to us aren’t accurate. Not all the tenants are paying and they were told they will say they were paying, some of that issues. So overall, it was $7,000 or $8,000 gross less came in. Then the seller is making decisions, talking to tenants, having people do things like having the lady that I fired do repairs in the property even though I’m telling him, “Hey, I fired her. I want her out of the building. I don’t want her in the building. What are you doing? I signed this lease option. I have control of the building. I don’t want you to touch anything. I don’t want you to talk to anybody. This is my asset for the time being. That’s why we paid you $150,000 so that I could take control of the asset.” It was just this weird transition period of like, okay, something’s off. Numbers don’t add up.
He owes me this money right off the bat that he’s not giving me and he’s hiring these people that I fired to do work that doesn’t need to be done on a building that he no longer has control of. He’s telling me he’s helping me, but every time he hires them for something, it hurts me somehow. That was where alarm bells start going off. I’m on this cruise. I’m going to Maui. I’m going to see Brandon this next day. I’m like, yeah, it’s a mess.

Rob:
Man, so you are really putting out fires really quite immediately. As soon as you close on this thing, you’re super excited. You’re finding out that all this stuff that you heard about is either untrue or inaccurate or you don’t have all the information. How are you holding it together at this point? Because I think at this moment, most people would probably be freaking out.

David:
I don’t know, lots of Marine Corps dealing with crap.

Rob:
Yeah. That’s probably a lot less substantial than some of the stuff you’ve seen.

David:
Yeah. What can you do? Losing it doesn’t really solve anything, so you just try to figure it out. And also, I think part of it is that I don’t know that I really believed that it was happening. I’m just like, there’s no way that this is legitimately what’s going on. He can’t actually be meaning to do X, Y, Z. Surely, this isn’t the real deal. Yeah, the flash-to-bang on this bad boy was real quick. As we get through the timeline on this, the closing date to date I file a lawsuit is less than four and a half months apart.

David:
So at this initial step though, Dave, you have to be feeling some betrayal, some confusion. Your brain’s trying to make sense of what’s happening. So either it is as bad as you’re thinking it is, in which case you’ve been betrayed, you cannot trust this person, they have some motive you didn’t know about like a side deal with the property manager or side deals with contractors, and then your brain’s like, well now I got to dig it and figure that out, or you’re just misinterpreting the whole thing and if you give it some time, it’ll work itself out. So you’re in that stage where you don’t know, have I been had or am I just being paranoid right now? Is that more or less what you’re dealing with?

David:
Yeah, and I’m trying to get my property manager in to like “Jerry, get in there and please [inaudible 00:38:58].”

David:
And Jerry’s confused. He’s like, “You’re dropping me into hostile territory here,” or is it hostile territory? I don’t really know.

David:
Yeah. Jerry’s a female, but yeah, she’s running in there and guns are blazing. What are we getting into? Then she starts calling me and telling me that-

David:
Okay. That’s what I was getting at. So Jerry is what helped you figure out which of these two roads it was. She went in there objectively, looked through everything and then she reports back and she’s like, “All right, boss, I got some intel.” What do you guys call that, a sitrep? So tell us what was Jerry’s report to you?

David:
Uh-huh. Jerry was basically like, “Why didn’t you bring me in sooner?”

David:
Yeah.

David:
So Jerry starts talking to the commercial tenants and I figure out that the former property manager,-

David:
God bless Jerrys, by the way. Can we just take a brief moment to just say, thank you so much out there? Because you’ll just probably still be trying to wade through this and so would I if we didn’t have people like that in our life.

David:
Jerry showed up at the trial four years later for me, sat outside for four and a half hours, came in and testified for 40 minutes with no reason to other than she’s still my property manager to this day. Yeah, so.

David:
Awesome. Okay, so she goes directly to the tenant. She’s like, “I’m not dealing with the previous owner. I’m not dealing with the current people. It’s all corrupt. I’m going right to the source and I’m going to talk to the locals on the ground. I’m going to figure out what’s real.” I’m using all these military analogies as we’re getting into this thing. So she goes and she gets the brass tacks and what did she find out?

David:
Well, a couple of very interesting things. The murder mystery theater is still actually there as a tenant and awesome. I won’t name them, but they’re great and so they were giving us a lot of inside scoop. One of the things is that the former property manager and the seller, their relationship is much more intertwined through things than I had been led on to believe. I knew that there was a lease signed for a paintball place to be built in the back part of the park. This place, it’s five acres. It’s a massive parking lot. In the back corner of the parking lot there, was going to be an outdoor paintball place put up. That was a lease that was future dated for March. We closed on this in September. Starting in March, they were going to begin construction and be opening and begin paying in March. I knew that. That was signed. That was executed. That was whatever.
What I did not know until we got Jerry in to talk to this other lady is that the paintball lease was in fact the property manager’s company and that it had been funded by the seller and that there were actually two leases like that in the mix of all of this that were property manager’s LLC funded by seller that were just like, oh, great. No wonder they keep meddling with things because they still have a vested interest in this building in ways that I was never made aware of. No wonder this lease was written to where they can start building their paintball place immediately, but don’t have to pay rent until March. So now I’m dealing with a tenant who’s starting to block off sections of the parking lot even though the lease clearly says that I have to approve the plans before they can do anything. She’s like, “Well, I’m talking to the owner” and I’m like, “He doesn’t own it. He has no control of this building anymore. I do.” That’s a whole another piece.
That whole paintball thing, we could go way rabbit trail, but I’ll just sidebar as former property manager called my property manager, called the police on her twice over the timeline of me basically telling the city I haven’t approved her plans. Do not give her a permit. Then she spray-painted on the door of a closet inside the building, property of paintball such and such, District 9 Paintball. I’m like, “The closet’s not part of your lease. What are you doing in the building?” So there was all kinds of weird deal. She started construction on a space inside the building that she didn’t pull permits for because she thought it was part of a lease that she had that… Yeah.

David:
Okay, Dave. So reality hits, things come to light. Jerry is your boots on the ground that helps you get to the bottom of it. You realize that there are falsified numbers, falsified leases, this rent-to-own situation and lease to buy became commingled and confused. The property manager was fired. I understand they flooded the property and then they cut electrical wires to sabotage what was going on. Any other details there?

David:
Yeah. A whole bunch of things along with all that other sabotage stuff that just wasn’t ever really brought to light in the court case, but things that were just really weird going on that never brought in. The biggest things that, as far as “sabotage” or whatever that really played into this is that all those things I mentioned at the beginning in the contract were never done and were never paid. So a hundred days into this thing, the units aren’t done, the roof’s not done, the HVAC’s not done, and these things are causing tenants to leave or space is not to be able to be rented or roof to leak or whatever, and this guy owes me $110,000, $120,000 for the things that aren’t done in the contract and hasn’t sent the money, hasn’t done anything with it, won’t sign an addendum to change anything in the agreement, won’t waive the monthly rent to or payment to himself in lieu of that.
I’m just at a point where clearly, this dude is just trying to basically tank this deal to keep my lease option fee and move on, get me to move on so he can do it again.

David:
Which is a clear breach of contract, but luckily these things were in the contract.

David:
Yes.

David:
So you did what you had to do and you brought this to court four months in. When did you finally settle? What was that court process like?

David:
Four years and some change later, we finally settled. We filed, well, I guess four years from the purchase. So I guess three and a half years after filing, it settled, four years after purchase. The reason for that is just COVID. We started and then we had a court date or a deposition date, trial date in 2020. There were a lot of missed deadlines. I don’t know that the other party actually hit a single deadline throughout the entire trial. In fact, the other party missed a deposition and the judge actually made them pay for my attorney’s time, which my attorney said he’s never seen happen, that the judge actually grants that since he’s been an attorney. So that puts in perspective how many deadlines they were missing and for what kind of excuses. Then because of that and how backed up things got in the court system with all the pandemic and in-person, out of person judge type of rules and things, we just kept getting pushed because we just weren’t the most important thing on the docket.

David:
So four years of this, which is a great lesson to be learned that even when you cover yourself in the contract, that doesn’t necessarily mean you’re good to go. There still are consequences and a price to pay when you get caught up in a bad deal or a good deal gone bad or however you want to describe this. So what were some of the lessons that you learned from this?

David:
Four years and about 40,000-ish in legal fees throughout that which we recouped, but you still got to fork it until you recoup it.

David:
And you got to hope you’re recouping it. It’s not guaranteed.

David:
Yeah. That’s valid. So you got to know you’re in the right. Your gut’s got to be in the right place. A lot of lessons, tons, but big one, always have your attorney look over anything that’s unusual or I would say most things, but especially any unusual contracts that you’re dealing with. If it’s not something that you deal with on a very regular basis, have your attorney look over it. The number of times my attorney has told me that if I had him look at something sooner, it would’ve saved me money is… Yeah. I’ve learned that lesson more times than I should have learned that lesson, but this was definitely the biggest learning of that lesson.
Let’s see. Setting unit goals. I think going big just because you can, setting a unit goal, I don’t want to say that’s an ego thing because I think that it’s good to have goals, but I don’t think you should get caught up in goals just because the number sounds cool. Set a passive income goal. Set a financial freedom goal. Set a net worth goal. Set a personal goal. But I think the doors and units thing turns into a bragging match online and people get wrapped up into it. I got sucked into it and just it is what it is. I had no business buying this building at that point in my investing trajectory. I would say the other piece of this is don’t pull your punches when you get hit in the mouth.
We haven’t told this, but through this four-year process, when I purchased this, I only had 12 doors, two other properties, and by the time this lawsuit closed, I’m out of the military, million-dollar net worth, financially free, not taking another job, over a hundred doors. Again, not that doors matter, but the point being, I stayed consistent. I kept investing. I didn’t let it deter me from everything else, but I stayed simple. I pulled back and I started going back to the basics. Always have your team walk through deals, the tried and true team. Always have them walk through everything with you. Don’t just take the other person’s word. Have your property manager come in. Have your team go through. Then I think this is the biggest one, and David, you already alluded to this, or maybe it was Rob, we already talked about this briefly, but document verbal agreements immediately after making them.
There were a lot of things that we negotiated through this process and we would have a phone call because we were long distance. We’d have a phone call. We’d negotiate all this stuff. What I failed to do was immediately follow that phone call with an email saying, “Hey, great call today. We talked about X, Y, Z. Please reply confirming that this is what we agreed to.” So when we got into all this mess, there are still things that I wasn’t able to bring up because I never got a written confirmation that we had agreed to it.

David:
Such a good point. This comes up all the time with real estate sales where the agents will have a conversation. One agent will say something. The other one tells the client. It never gets put in the contract. It doesn’t even get put in an email. It turns out that one side doesn’t want that to be the case and they conveniently forget it being said or claim it wasn’t said and now people are scrounging through text messages or making character assassination attempts because they’re mad. It just does not matter what is said. It matters what is recorded. If it is not written down, it doesn’t exist. I’m glad you learned that lesson early in your career and that you can share it with everyone else because I know the vast majority of people were just naive. We’re like, they said it, it goes recorded in my brain as a term that we’ve agreed on. You move forward as if it’s the case and then when the other side realizes they don’t like how this is going, they claim it wasn’t said and there’s nothing you can do.

Rob:
Yeah. I would also say, David Pere, you said that you had no business buying this deal. I don’t know if I believe that, honestly. If you had three under your belt and you were ready and excited to take on… I think that real estate should scare you a bit and it should cause us to get into uncomfortable situations. Obviously, this one did not work out the way that it was supposed to, the way it was intended, but there are a lot of other scenarios where it would’ve worked out and the fact that it didn’t, I would never want you to feel like you made the mistake that you shouldn’t have believed in yourself. Ultimately, I think you have a lot of good lessons from this. You’ve obviously bounced back. You’re crushing it now. Honestly, probably the reason that you’re crushing it now is from all the stuff that you learned from this deal. So there is always a little silver lining there, in my opinion.

David:
That’s a valid point. Because had this not ended up the way that it ended up, it very well might have been. Had it been the deal that was actually set in front of me and not as we’re about to get to what the court case says it was, then yeah.

David:
Yeah. It is very easy to look at these and say, see, that’s why you shouldn’t do real estate because things can go wrong. You couldn’t be more wrong with it. You just have to accept in any endeavor you go in. If it’s snowboarding, you’re going to fall on the snowboard. If it’s weightlifting, you’re going to pull a muscle. If it’s a sport, at a time, you’re going to make a turnover. That does not mean you shouldn’t play the sport. This means you learn from how you made the mistake. You get better and you go forward and the points that you score in the future are much better than if you never played at all. So thank you, Rob, for pointing that out. So yeah, how did this lawsuit end up working out?

David:
Yeah, I was going to say. We only have an hour, so obviously, this story’s way crazier than we were able to get into. If anybody really wants to dig into the details, I told the producer, and I think they are going to link to the case notes down below, which is where you can pull the full public record of the court case, because I am totally cool with that being out there because it’s public record, so why not? We won, hands down. Basically, we got made whole. We got our money back, close interest over the time period, which is a win except for the whole four years of stress and headaches, but basically a free education in legal. We won. There were four counts that we sued for and we won three of them and the fourth one was basically… So here’s how it broke out.
We won breach of contract. It was awarded to us. Fraudulent misrepresentation was awarded to us. Negligent misrepresentation was awarded to us. Then the fourth count would’ve been unjust enrichment, but that was barred from being included in the trial because it was deemed that there was a contractual agreement. If we hadn’t won the breach of contract because it was deemed there was no contract, then we would’ve gotten into that count. Ultimately, basically played out as, and you can read through the contract and read through all the comments from the judge and everything, and it gets pretty crazy, but basically, it reads out as we did what we were supposed to, they didn’t, so we were made whole.

David:
Really good lessons there.

Rob:
Glad to hear it, man. I’m glad that you came out. You were made whole. In all of this, was there more compensation? I know you said that your lawyer’s time was compensated for, but did you at least come out on top for maybe just a little ahead or not? Is that not really how any-

David:
There was an interest amount accrued over the time period. Whether that keeps up with inflation or not, who knows? I haven’t done the math.

Rob:
It’s something.

David:
There’s something I’ve been saying a lot of lately in different formats and mediums. Money can be taken from you. You can make every single decision to the best of your ability and things can still go wrong. In this case, an unscrupulous seller sabotaged your deal. We analyze deals, we don’t analyze people. It’s very difficult to get to the point where you could have seen that coming. There’s lots of other cases where mistakes happen that just cannot be avoided, sometimes just from raw luck and sometimes from inexperience. You can lose money. What you learn going through these experiences will stick with you forever, and those can be converted into much more money in the future, which is why I tell people to focus on learning over earning. But the knowledge that you gained through going with this deal will give you confidence, skills, approaches, put systems in place.
You’re never going to not bring Jerry in on a deal earlier. You’re never going to not bring lawyers in on a deal like this again. It’s going to allow you to have confidence to scale to a bunch of bigger deals, which it has in the future, and that’s the lesson that I would like everyone to take from this. I also want to thank you for just pulling back your shirt and sharing the warts because we always hear about the good deals. We don’t always hear about the rough ones. Now, before you go, because I do want to have you back to get your full investing story in a different time, I want to call out that this property is still a line item on your property tracking spreadsheet. There are no numbers on that line item, but there are some words. Can you tell us why you keep it the even though it’s totally off your books now?

David:
Are you looking at that line item right now by chance?

David:
I may or may not have means and resources. I wasn’t a marine, but I’ve got other mediums of use here.

David:
Oh, if it’s in front of you, you’d be able to read it because I don’t have it pulled up.

David:
Oh, I can read, yes, but I’d like you read it and then I’d like you to tell us why.

David:
Let me pull it up so I can read it, make sure that I actually say the words right. Otherwise, it doesn’t have the-

David:
I’ll read the words for you if you like, and you could interpret it.

David:
Okay. This is on my property tracker that’s on my net worth tracker that I update every month, the most important metric to track in my opinion. It says, “No longer in existence. Just left it here as a memory of the lawsuit won and lessons learned.” That’s exactly why it’s there, because I want that to always sit on my property tracker. It’s in a different color than every other property that is highlighted on my tracker so that every time I pull up my deal and I’m doing equity and debt and tracking my properties and yada yada, it’s just always a reminder.

Rob:
I love that, dude. Thank you. I genuinely thank you because you’re obviously crushing it. You’re a seasoned person. You’re a friend of the BP family, and so I know it’s really hard to come in and tell these types of stories, but believe me when I say this has helped so many people out there who have made mistakes and won’t forgive themselves for it. You have clearly moved on from this and learned from it and I think a lot of people can really just realize that sometimes we make mistakes. It’s cool. We get better from it. We remember them. We learn from those lessons and we get better.

David:
All right. Well, thank you, Dave. We went a little long, so we’re going to get you out of here. Any last words before we let you go? How can people find out more about you?

David:
Yeah. I actually just created this. This is the first time this is ever going to be done, so I’m excited. I love BiggerPockets. This is actually from a mutual friend of ours gave me this idea for this URL. I don’t know. I never know what to say here when I talk podcast. I wanted to give away a free copy of my book. I wrote a book, No B.S. Guide to Military Life for service members or vet. So if you’re a service member or a vet and you’re listening to this, when I come back on sometime, we’ll talk more about all the military stuff, but I just want to give it away. If you want a free copy of the book or you know a service member or a vet and you want a free copy of the book, the best way to get ahold of me and this page has all my social media stuff is to go to, and this is what I’m excited about, thebestpodcastguest.com, and you will be able to download that free book.

David:
That’s funny. That’s really good. Rob, how about you? How can people find out more about you and that beautiful, creative, wonderful mind of yours?

Rob:
You can find me over on YouTube @Robuilt, Instagram @robuilt and that’s it. What about you?

David:
I’m @davidgreene24 just about everywhere, including YouTube. I also have a new website coming out pretty much when this airs, I think, davidgreene24.com. All right, we’re going to let you get out of here, Dave. Appreciate your time. Thank you for sharing this story. We’ll have you back on in the future. This is David Greene for Rob, putting the dues paid in due diligence, Abasolo signing off.