Fun Experiences: Q&A with Tyler & Bryan

“Life is either a daring adventure or nothing at all.” – Helen Keller

Another good quote tied to this one is by Nina Dobrev, “Even though you’re growing up, you should never stop having fun.” 

I think both of these are appropriate for our Q&A session today. 

Moderator (Will, COO):  Let’s kick this off with something juicy to break the ice. Can you both talk about the situation when you had your strangest conversation on the job?

Bryan: Our industry serves people of all different backgrounds, cultures, socioeconomic status, etc., which certainly allows for conversations that might be out of our standard day-to-day or comfort zone. My wife is always fascinated with our pre-acquisition due diligence walks and asks me what kind of things I see and the conversations I have when we are walking all of the units onsite. I always tell her that it could be anything and everything that you could ever imagine. Sometimes the residents know we are coming and why we are there, other times the residents aren’t expecting us or could be unclear of our background which allows for very candid conversations. While many of these conversations are discovery for us as the new owners, the conversation with one particular resident that was convinced his neighboring unit was “haunted”. While we thankfully didn’t find any paranormal tenants next door, that conversation stuck with me and always gives me a bit of a chuckle! 

Tyler: It’s always an adventure to be on site and engaging with residents, whether it be for due diligence where we’re inspecting every unit prior to acquisition, or when we’re on site conducting our asset management regular site visits with our staff. There was a time when we were walking units with a broker prior to making an offer on a target community acquisition where we encountered a resident with a pet parrot in his apartment. I couldn’t tell you the content of our conversation now, because it seemed like the parrot was interrupting every few words and repeating things we were saying. You always hear “Polly, want a cracker?” type of things when you think of a parrot and it was bizarre how this animal could listen and respond. Made me forget for a moment we were evaluating an investment getting lost in that experience.

 

Moderator (Will, COO):  How about a time when someone completely shocked you with their comment or comments?  Is there anything that, when you look back, really makes you laugh?

Bryan: Nearly every time I visit a property I find a reason to laugh. This could be one of the properties in our portfolio or one that we are touring to acquire. Being in a business that serves people is fun, rewarding, and provides us with the opportunity to meet new people on a daily basis. Whenever I am onsite I make it a point to interact with residents to ask them how they are doing, what they enjoy about living at the property, where there are opportunities for improvement, and/or just shooting the breeze with them. Inevitably someone leaves me with a one-liner or thought that makes me grin. 

Tyler: I am sometimes shocked to learn what some deals trade for, whether it’s on a cap rate basis, price per unit basis, or overall acquisition value. We’ve been in a “bull-market” in the multifamily space for a while now, but some deals just make your head scratch. Sometimes we wonder who would actually buy certain deals for numbers that are being reported, and how they could be successful. There are deals where we’re baffled as to “whisper” prices that are shared with us from our broker relationships that ultimately don’t trade which leaves us feeling a bit vindicated.

 

Moderator (Will, COO):  Have you experienced anything interesting with pets while you were on the job? What story sticks out the most?  If not, talk about the weirdest pet you saw while on-site at an apartment complex.

Bryan: While cats and dogs are your typical pets at any community, many residents do seem to have an affinity for reptiles - I’ve seen too many snakes, many different lizards, some turtles, and even small alligators! 

Tyler: I’ve seen a lot of bizarre pets in apartments. I mentioned the parrot earlier. I’ve also run into massive fish tanks, turtles, snakes, tarantulas, and gerbils. People love their pets. I, however, can do without the snakes and tarantulas, specifically!

 

Moderator (Will, COO):  What was the most outrageous thing you have discovered during the due diligence process?

Bryan: Ha - where to even begin with this question?! After so many years in the industry you tend to become more accustomed to sites and scenes that may have surprised you in the past. Many times the way the current owner is running the property is more outrageous than anything that we find at the resident level. Sometimes we are made aware of these overlooked or mismanaged issues ahead of time, other times the discoveries are made while onsite by our team. We handle due diligence a bit like a treasure hunt where you are given clues and it’s up to us to track down the issues that aren’t readily apparent to us.

Tyler: I’ve almost come to never be surprised at anything we find in due diligence these days. In an earlier part of my career I would find myself shocked at the way people live - messiness, dirtiness, and overall lack of organization in their home life. I have since tempered my expectations and avoid placing any label on the way that people live their private lives. However, I would say “outrageous” findings in due diligence tend to lend themselves to items found to be less than revealed by the seller prior to our deal agreement. There was a time when a property owner was adamant that all roofs were in great shape and that we would see as soon as we started our inspections. That turned out to be the exact opposite of what was true. Like we always say, trust but verify. 

 

Moderator (Will, COO):  This one is on the darker side… sort of.  Have you ever had to go through a haunted apartment or apartment complex?  If so, I want details!  If not, what story from the past creeps you out the most?

Bryan: I mentioned the fear of a haunted unit earlier, however, I unfortunately can’t confirm any spirited residents or sites at any of the properties that we have toured. With that said, it might be scarier to think about the way that some of the properties we have been through are run by mismanaged and derelict owners! Typically these mismanaged assets present opportunities for our team so I will be sure to be on the lookout for a haunted story in the future when we are acquiring one of these! 

Tyler: I recently went to Savannah, GA for my sister-in-law’s wedding. Many people know Savannah to be “America’s most haunted city.” We did a ghost tour, and I am totally open to ghosts (and believe they exist!), but I have to sadly report back that I didn’t experience any paranormal activity. I’d love to see it, and am hopeful that one day I can tell you that I made my encounter. Hopefully the ghost will be friendly!

 

Moderator (Will, COO):  Can you think of your own most embarrassing moment on the job?  Let’s hear it!

Bryan: Ask Tyler or any other members of our team and they could likely make this an entire blog post!

Tyler: I embarrass myself daily. It’s a prerequisite to do what we do - make mistakes - and hopefully learn from them and improve. One embarrassing thing I did earlier this week was congratulate one of our property management team members for an accomplishment that actually was accomplished by another member of our team. It’s a little embarrassing to miss the opportunity to show appreciation appropriately to people we count on for day to day execution.

 

Moderator (Will, COO):  The last one is a topic that is in high demand: what story do you think of when you think about the most fun you’ve had together?

Bryan: Thankfully this is an ongoing story! While Tyler and I enjoy giving one another a hard time on a daily basis, it’s truly a joy to build a business, improve our communities, and deliver for our investors alongside him. When we aren’t working specifically on CF Capital we are typically discussing (in no particular order) our family lives, macroeconomics, personal development and fitness, or our beloved Kentucky Wildcats! We both enjoy traveling for business and always try to blend in a bit of personal time as well. And when we get to do it together, even better! Doing great business with a great friend is what it is all about!

Tyler: Bryan and I are fond of thinking back to how CF Capital all started - which was through a series of casual meetings over beer and sometimes coffee. Mostly beer! We also have fun traveling together, having dinner with our wives and talking about personal development or personal goals, and attending conferences. Recently we went to Indianapolis to celebrate a couple successful deals with our debt team and attended the Indianapolis Colts game as well as had a fun night with a nice steak dinner and stopping at a couple other nightlife spots. It pays to do business with someone that you have fun with constantly, and we really have fun evaluating deals together, building a business together and talking macroeconomics together. Who says you can’t mix business and pleasure?!

 

——————————————————————————————————————————————————

Interested in partnering with us? Join our investors list here. 

A Work in Process: Let’s Talk About Due Diligence…

This week we are switching things up and discussing what happens after we have an opportunity under contract. At CF Capital we consider due diligence to be of utmost importance, and how thorough we are in this stage of the process sets us up on our path to success prior to making  an investment.  This phase of the investment process is all about identifying, verifying, refining, and triple-checking the critical characteristics that make up a property.

Our philosophy is that the only way we can be successful in due diligence is if we create a repeatable process while remaining adaptable.  We also believe that this requires a thorough approach.  

What do we mean by thorough?  The common latin phrase, “Nullius in verba,” means “take nobody’s word for it.   We think this reflects our exact mentality when we approach due diligence. 

“No research is ever quite complete.  It is the glory of a good bit of work that it opens the way for something still better, and this repeatedly leads to its own eclipse.” - Mervin Gordon 


We want to leverage our team and best-in-class partners to turn over every stone on our own.  We do this because we want the true perspective of what we are getting ourselves into, and not automatically assume that every bit of information we have collected from the current ownership group is 100% accurate and up to date.  In fact, it is very rare to find a property where everything matches up.  

Ultimately, we want our method of due diligence to gain additional trust in ourselves and the numerous variables in an investment (or at least as much as we can).  After all, we are fiduciaries for other people’s hard earned capital as well as the diligent directors of our own participating capital, and we want to be able to sleep at night knowing that we consistently put our best foot forward as an investment manager.

With that said, let’s dive into some of the nuances of our due diligence process.

At this point, we have received information from the seller, and make assumptions and decisions on the deal based on that information. We overlay this provided data on top of our market knowledge and have discussions with our best-in-class 3rd party providers like property management companies and service providers.  Now we must verify.

Before we dig into the areas that we verify, we believe it is worth mentioning the importance of doing so.  First, verification allows us to identify any problems.  Second, it serves as a means to protect ourselves and any potential downside from a potential investment.  Lastly, it enables us to capture any opportunities when we look to verify every bit of information. 

With flexibility in the order of verifying information, we begin by collecting and referencing as many documents as possible -- financial, legal, and operational.

On the financial side, we verify capital improvements and capital expenditure.  In order to protect ourselves, we also verify income and expenses.  Typically, we look at the past 3 years, but will consider longer historical periods.  

To gain further clarity on the finances, we examine delinquency reports, lease audits, security deposit audits, property tax bills, tax appeals, and historical utility usage to cross-reference with anything we have gathered already.  

Payment history is also reviewed.  No one wants to find out that a majority of the tenants are regularly late on payments!

Finally, on the financial side, we verify forward-looking income and expense projections.  We do this through rent comp surveys, submarket reporting , and required third-party reports.  All in all, our goal here is to make our own projections as precise as possible by validating our assumptions from operational and capital improvement standpoints. 

With regard to the legal due diligence, our legal team reviews piles and piles of documents.  

You might have a mental picture in your head of us working late into the night with our desk lamps, reading through the large stack of property files.  Basically, we are doing just that.

With one property in a target market, we have verified any document from legal audits and service contracts to something as simple as the title.  We also made sure zoning is appropriate, and made sure that there are no encumbrances to the property.  In this case there were no encumbrances, but if there were, we would need to sort it out before closing.

We continue our document review when we go through operational due diligence.  We dig into building plans, floor plans, phase-specific third party reports, and other market reports.  

Operational review also takes things one step further: we do hands-on inspections and investigations.  In the physical inspections, we walk through every unit onsite at the property with our property management team and look at heating, cooling, plumbing, electrical, roofs, and windows just to name a few parts of a long list.   

Furthermore, we will seek out and identify any other property intangibles.  Is the site easy to access? How visible is the property?  How does the property present itself to future tenants? There are many things that could determine the outcome of a property investment.

We even do a higher level investigation of the staff and tenants to get a feel for the past and current status.  A similar investigation is done with nearby properties.

Perhaps you can tell from our tendency to include the “little things” in our articles, but we believe our due diligence process is a direct reflection of our detail-orientation.  From all of this, we hope that you were able to take away some of the main points.  We want to identify and be fully aware of the risks and how we can mitigate them, as well as the opportunities and how we might capture them.  We go through due diligence to solidify our business plan and nail our execution so that we are set up to outperform for our investors.

——————————————————————————————————————————————————————

Interested in partnering with us? Join our investors list here.