My Plan B - I bought 201 E. Clifton next-door

Even before I pivoted away from the massive undertaking that I was planning on my building at 203-205 E. Clifton, another opportunity had shown itself just next door at 201 E. Clifton.

My out-of-town neighbor for the past 5 years (which the city deemed as the "worst land owner in OTR") decided to put all his properties on the market for sale. (Hallelujah!) After years of cutting their grass and picking up litter, as well as annually spraying for the cockroaches that came out of their basement, I was just happy at the prospect of a different owner than these bad guys. 2 years earlier I had actually already tried to get them thinking about a sale by mailing a $5,000 all cash offer (no response), so it was good to finally see any movement here.

A new neighbor alerted me to the opportunity this time around, but they seemed more serious about selling than when I had tried last time. Curiously they listed their portfolio of 11 OTR properties with a commercial broker instead of a residential realtor. So no sign in the window For Sale and really no real marketing to the market as a whole for the most likely residential buyers of OTR. This meant little competition for me and I was the most likely buyer being next door since I also own the rest of the land in the back.

Only problem is that I didn't have any money to buy another building while undertaking my renovation project. My family also couldn't help because they were already helping with the other project too. So I tapped my partner from Chicago & the Renner building for a similar deal on the side and we took a quick low ball shot at purchasing it in late August of 2017.

I started with collecting comps from the entire area. It was looking like shell buildings had sold for $10-12/SF in the area most recently; however friends in the area suggested it would more likely sell in the $40-60k range despite these immediate comps. I still used these low comps in selling my story to their broker to convince his client to sell low however. Next I measured the outside of the building as ~2,000 SF (despite it being marketed as over 2,500 SF....) and made a low ball offer of $10k site (inside) unseen with a comment that I might pay more if I got a full tour. It worked in getting a response and a tour and then we negotiated up slowly until their broker said that their seller would sell for $40k. Having slowly worked my way up I figured that there was still a little room to save some cash, so I countered at $35k.

Then things got more complicated. The seller decided to focus on the sale of 5 other buildings in their portfolio first before dealing with this building and "took it off the market" until the others closed. I learned that these were selling in the $30/SF range and was coordinating with their buyer so that we could get as many of these buildings out of these bad hands as possible. I kept working their broker to make sure that I would get the first shot at this building when they took it back out to market, but really I was kicking myself that I had lost it over being $5,000 cheap and not going up to $40k, which was exactly at the high end of our intended range at the time. So we couldn't do much other than wait it out and focus elsewhere on my other project.

By February when they had closed on the other properties and put this building back on the market, much of my cash was spent on my renovation project and it was even harder to find the money that they wanted if I kept up with my renovation project next door. It was during this time that I freaked out and decided to put my other project on hold, which meant that I now had resources from my family that enabled the cleanest/simplest purchase of this property. I planned to bring my Chicago partner back into the deal once we got to the construction financing and other details of the project.

So I scrapped together the $40k and made them the offer for the price that they had wanted previously. I was dismayed to learn that their broker who I had build up goodwill with previously had left the company (so I had to re-rationalize my lowball offer when they now had a $30/SF comp...) and even worse, now they wanted ~$75k for the building! My first reaction was to tell them that's crazy and we're out (with the intention of letting them sweat and realize there's no other buyer out there in that range before going back to them with a slightly higher number). [Note in hindsight, I guess at some point here it was somehow communicated to the guys that bought the other 5 properties that I was really out on this deal.] 

After giving it some time, I came back to the table and was told by their broker that the seller said they would sell to me at $50k, but that there was now a 3rd party interested. I said that I would agree to $50k now only if the deal was mine (no bidding war with the 3rd party) and was informed that the seller was good with our LOI at that price and that I should put together the purchase contract for him to sign when he got back from vacation. So I did and started making arrangements with their broker to get into the property for inspections quickly so that we could expedite closing.

I was convinced that they used this time to shop my LOI while he was "on vacation" to the 3rd party before signing the contract, which is completely bad faith. Unsurprisingly the seller "returned from vacation" with an offer for $55k.... He asked me to go to $55k with his clear intention of starting a bidding war, so I stipulated that I would only go to $55k if he sent me a signed contract at that price from the seller (so I could sign and be done negotiating in bad faith further).

I was so pissed that they were reneging on our original verbal deal, but I now had a contract in hand. It just kept racing through my mind "who could this 3rd party be?", so I contacted my friend that purchased their other 5 buildings and was coordinating with me to get these properties out of this bad owner's hands. As you can guess, they had thought that I had actually stopped trying to buy it and had thrown in an offer of $5,000 more than whatever offer was out there to scoop it up. (They have need for more parking eventually in their future plans [due to parking minimums only] and the back lot could add a few). After I talked to them, they formally backed down and took back their offer with the idea that we'd try to find a solution to their parking issue using my entire back lot later.

I was advised by friends that I should just try to retrade the contract down $5,000 during my inspection period to get them back, however given the history with losing the deal over $5,000 once, I didn't want to risk it and looked at it as money to just pay this bad owner to just go away for good. So that's what I did. They didn't even come to Cincinnati to close the deal and I hope I never meet them. Thankfully they only still own one other property on this half of OTR and are intent on fully selling out.

So as of last week, I've fully closed on the purchase of this little corner building in OTR and fully own the lot behind it. Here's the money "before" shot that hopefully becomes a whole lot different down the road.

#thisisotr

Learning how to be a Developer - Part A

The biggest update of the last 2 years is what I have been spending a majority of the last 12-15 months doing. As alluded to in earlier update posts, my mindset switched when I got to the next band-aid renovation in 203#1. I was tired of beating my head against a wall doing the same thing over again and continuing to push off the more major changes that were needed to take the building to the next level. Sweat equity was only taking me so far and I was burned out.

So obviously I went to the other extreme. I decided to "go big or go home" and bite the bullet by planning a huge overhaul renovation that would require both a gigantic loan from a bank and a professional general contractor to spent all that money.

And so I did it. I did what I do best - make spreadsheets and put together a sales package to shop to banks. I built a market survey of every market-rate rental in the area to comp against (take that appraisers I thought), built a pro forma that was so complicated that most bankers were afraid to ask a question (take that mortgage underwriters I though), and designed maps and executive summaries to sell the story of the area (believe that loan committee). Along the way I delved into new areas for me like spending money on architects - over-analyzing each and every design detail (and learning how hard it is to both Tetris a bathroom into an existing building and meet code requirements for windows in bedrooms), spending money on entitlement approvals and permits (and bending to their will in the Historic Conservation Board), spending money on LEED certification (and just getting validation that the things I was already going to do check their boxes), spending money on Commercial CRA tax abatement applications (and navigating red tape that won't even let me start demo until I've kissed the ring), and spending time with general contractors (and continuously not understanding in any real detailed way where all that money is going to go!).

Now to be fair, when I started, I was green - like walk into a room and not have any clue green. I'm still a novice, but I think I'm getting to the point where I know enough to be dangerous. It's really been an expensive learning experience (bye $30k), but there is still a ton to learn before I'll ever finish a project; let alone a really good one.

But the bottom line is that I spent a bunch of time & money learning, and got there. On 2/9/2018 I had done it. I had two loan commitment letters in hand from two community banks that were at terms even better than I'd pro forma'd out at the start. I had a contract ready to sign with my general contractor. I had the final bill that my construction permits were ready to be picked up and ready to get started. My CRA tax abatement was ready to send to city council for approval and final blessing by the mayor.

And then I freaked the fuck out and decided to put it all on hold.

That day when I reached the no-turning-back moment, I had to take a hard look in the mirror and ask myself if I was doing the right thing to commit to moving forward. The problem was that my gut was telling me otherwise. Yes, I convinced others that I could do it, and there was a very real chance that I could do it as it was laid out on that paper.

But it just so happened that that same week the stock market dipped hard for the first time in a long while, so I contemplated the downside risk. How confident was I if things didn't go as planned? Was I willing to risk everything I had (because it was all in there - and even more that my family had contributed)? Would I be able to achieve the rents that I had comped and projected if markets did turn south? Then I contemplated the yoga that I had already done to make the ever increasing construction costs work (it went up over $50k in 3 months); how would I handle it if that continued? Then I contemplated where else I could find money if the bank's appraisal didn't come in high enough; how would I fill that gap?

In the end the question that made me hold off was: why am I putting so much pressure on myself to do this now & forcing this project?

Nothing was forcing me to take this potentially fatal leap except my own expectations and the sunk costs. So I wrote down the flipside. What did my life look like if I didn't do this project now? And frankly it looked a lot less risky and like there were a lot more opportunities that I could take advantage of if I didn't do this project now. So here I am today, ready to do this project, but putting it on hold and instead looking for my plan B to get me to the point that restarting this project makes sense.

New Neighbors and Safer Streets

Over the past 2 years, a few other key drivers should not be overlooked and, as it turns out, they are a little bit "chicken & egg". 

The first one is increasing safety in the area north of Liberty. Cincinnati's Police Department has spent a lot of extra resources in our area and it has really started to pay dividends that are starting to be seen and felt today. For years down here I was the only one even reporting many crimes and drug deals that were happening in broad daylight. I can remember weeks where I called in a gun shot every night and some nights multiple. Looking back, I now question my sanity and laugh at my nativity. 

But CPD does a great job of following the data points and it turns out that I called enough for them to realize that they had a hot spot up here worth the extra resources. It hasn't gone away, but regular bike patrols and cruisers are more than welcome in what used to be the wild west in the heart of the city. Another important tool that has been put in place are police cameras throughout the area. They help the police build solid cases against know offenders, so that they can keep them off of the streets rather than cycled quickly though the jailhouse. In my first days in OTR, I would hear stories of a "huge bust" then a few months later see the same offenders return back to the street and back to business. Not so around here anymore. 

It will take a constant effort to keep these forces at bay because literal decades of miscreant behavior has been carved into the collective memory of many of the people now being released from jail and migrating back through the city. They keep coming back! Who are they I ask because I haven't seen them in the last 5 years that I've been here, yet they bring back memories of a past era when you litter on the streets 5 feet from a street can "because it's OTR" and you come to OTR from your other neighborhoods to drink in the streets and deal in drugs that you don't want in you own neighborhood! It's sad, but I don't know of a good way to fight this corrosive culture. 

Which brings me to the second driver for change that has happened in the area and that's new neighbors. And while yes, there are new people moving into the neighborhood and visible signs of buildings being fixed and actual occupancy in buildings that were once vacant blight; that is not what I mean by this. I mean the new community of neighbors in the area that is starting to form. Who are tired of putting up with this bad behavior, who want to have a safe place for their children to live and safe parks for their children to play, and who are chipping in to take their neighborhood back from this corrosive culture. Many of them have been here for years living in fear while the wild west winds blew outside. That's changing recently. 

Part of it has been new owner occupants filling empty buildings and taking more ownership in the area (more than just me on an island). But more has to do with turnover of the rental units and the police effort to eradicate the problem elements, so that the other residents can thrive. More neighbors of all types are getting to know one another and we've started to get more gatherings in Grant Park and elsewhere to further build these bonds. 

Our part of OTR is starting to build a tangible sense of community together and in the coming years we hope to further build on this positive momentum. We've organized a group around Grant Park to tackle many common problems like Safety, Blight, Litter, and plan these type of neighborhood events. We hope to further improve the park, but also build a neighbors directory for easy communication, identify problem owners and find remedies, and help the city departments more effectively service our area. The more we can accomplish these goals and change the culture of this area the more likely we are to make it even safer and reinforce the same community of neighbors. 

243 Renner SOLD

Another update is that my second building (243 Renner) has been sold to another urban pioneer, Greg Edwards, who is still actively trying to get it back on its feet like we were.

Yes, I gave it a bit of baby blue on the door and better secured the window well (after the city gave us code violations). I controlled the downspouts better by wrapping them around the back side of the building (and combined with the balcony tarps, seemed to stop the deterioration of the foundation from water infiltration).

But ultimately the city was getting on us too much about fixing the lean and other structural problems, so we made the decision to test the market instead of making the full investment in rehabbing it. Diana Tissue, our realtor, ultimately helped us get over a 200% return on the project, but it was tough to leave behind the beautify details of this building.

Here's to Greg as he works to save this one. Even with where we sold it to him, there's room to make money here still. I can't wait to see it when he's done!

Hops update

The last hops entry was about my latest experimental growing scheme and detailed my inability to detach the line to let the hop vines down for picking.

That has continued with the 2017 harvest, but I've learned to use a tree branch trimmer extension to cut the vines down in stages from a ladder. Dangerous, but effective (until we find a solution to the detachment problem). 

But one thing that I learned years ago is that the best way to harvest hops is always with a bunch of friends (and nosy neighborhood kids) and this year was no different.  

This 2017 year's hops crop was donated to an aspiring kombucha startup named Motherlode that a friend of mine is starting. Just last week I got to taste the fruits of her labor and it was great! Small disclaimer that I had never had kombucha before this and that all of the flavors were still awesome. I wish her the best success and she can have all the hops she can pick from my lines next year (especially since we got tired and didn't do a thorough job this year, lol). Cheers!

Lessons of a landlord: Compassion and Empathy

Amongst the greatest lessons learned since the last time that this blog was rolling has been on the personal side. It's probably something that will stick with me forever and I'm grateful that it turned out with a happy ending instead of turning truly ugly.

It all began with a common occurrence for most landlords: late rent. "I'll get it to you next week with the late fee" Um, ok... Then it took the form of griping to me about his girlfriend and how she'd "just go crazy" sometimes. Stories then followed: her keying his car (and I saw them), her hitting him or kicking him out of her place, and then it even escalated to her getting him fired from his second job by calling his boss and telling lies. It was entertaining and a "man that sucks, why don't you just move on?" type of thing. But then the next time, something was different. The rent wasn't just late, he wasn't there to tell me about the lame reason why. And the daughter that lived with him was the only one around the apartment. It took a while, but then I got a call that he was in jail. For what? Oh, domestic violence because he hit her. It shocked me because I've lived with him for 4+ years and he's not a hot-tempered or aggressive person. He must have snapped is all I can figure, but I don't really want to know the exact details. Apparently it was one slap and the cops were there in minutes carting him off. When he got out, I learned that his probation meant he had to stay with another daughter since the girlfriend's place was too close to this apartment. He also couldn't talk to her and every time he called is was on a private line without a callback number. But he assured me that he'd make up the late rent. He made little progress and the hole started to get deeper. Somehow he slipped on his probation and was back in the tank for a few more months this time. The hole kept growing and his 20YO daughter started babysitting kids after school to make extra cash and help out. She kept it at bay for a few months, but once the holidays came it started growing deeper again. By the time that he got out, it was a serious amount of money that I was owed. And now he also had to pay the courts a fee and do community service time that gave him less hours to work overtime. He made some initial progress then it began to grow even deeper.

I saw the writing on the wall. It wasn't looking good here and I had to start covering my ass. I took stock of where I could look to recoup what was owed. His security deposit, his car, and then .... not much. I decided that if it got bigger than what I thought his car was worth that was it. Then it happened. He came to me with a look of desperation on his face the next time that rent was due. We had a father/son talk with our ages reversed. He asked for help and I told him to meet me the next day to form a plan of action to get him back on track towards solvency. I spent the next 24 hours doing what I do best - making spreadsheets. What are his assets/liabilities, what are his expected incomes and expenses, where/what can he cut to make it back to the green, and then it became real of how screwed he was without some serious discipline and a long enough runway to dig himself out.

Until that point I had never been so intimately in the shoes of someone so unfortunate from sheer circumstance. His lack of financial preparation from the start & lack of a family to fall back on coupled with the firestorm of jail time had left him in a place that even a college educated person was having a hard time finding a way out of. It really made me appreciate the people around me that taught me to be financially stout from a young age and gave me pause for the thought of what it would be like to go through as destabilizing an event as jail was for him. Morally it was hard to know which path to take with him next. On one hand, he had been through enough already for me to now give him the boot; on the other I'm running a business, not a charity here.

Ultimately, I'm a pushover, so I had him sign away ever getting his security deposit back which gave him the boost that he needed to see that there was any glimmer of light at the end of the tunnel. He started working harder than I'd ever seen him to get overtime and bring home more bacon. But after 6 months of progress, he began to slip again. It had been a year since his jail time and at this rate it was going still be a long time until he was back to square with me. There were 3 months until the end of the year and I gave him an ultimatum: Get to a $0 balance by January 1st or hit the road. It was the kick in the pants that he needed to cross the finish line. And he did it!

Today, we're square and he has continued to dig his way out of the other debts that accumulated. He's tried to make it back up to me by referring his brother as another tenant in the building. We'll see what the future holds, but yesterday he brought that girlfriend back around, so stay tuned......

205#2 still ready to rent

It took me a while (3 months I think) to find someone to rent this apartment in the dead of winter, but I did it for $900/mo. I found two girls that were great and treated it well. I recouped my entire renovation amount and then a little. Couldn't ask for anything better.

Turning to this new longer-term mindset, I began to set the table for a larger renovation project by putting all of my tenants onto month-to-month leases to allow the flexibility needed to start construction when needed. It ended up back firing with this apartment as the girls came to me early asking for a 12-month renewal, but instead when offered a MTM, it caused them to look elsewhere. Again holding out for the imminent construction to start, I continued to hold this unit off the market and not collect rental revenue in the meantime.

Looking back on this, I kick myself for not heading to their desire for an early renewal. I left a lot of money on the table and now have this apartment back on the market looking for another long-term tenant after all. You'll find out why in coming posts.