The Valley of Death - Bruce Wuollet

Bruce Wuollet joins Jerome Myers on the Myers Methods Presents Multifamily Missteps Podcast to discuss Bakerson's missteps on properties in Arizona. We learn the risk associated with properties that have chiller systems.  Bruce shares how they negotiated a $250,000 credit and how a strong economy made up for some of their challenges.  He also takes us through a discussion on the "valley of death" which is when you are writing checks to pay your mortgage and other obligations associated with the property

Bruce believes that you have to be a rock in uncertain times and you shouldn't let the winds of change push you around.

In this weeks show we learn about:
- capital calls
- dilution of equity
- what happens when your property can't pay the mortgage and other bills
- how a strong market can save you from unexpected challenges

If you are interested in getting more multifamily investing education go to www.myersmethods.com

Say hi to Jerome
Say hi to Bruce

Transcript

Bruce Wuollet:   0:00
So we came back to inspect it, and the person who bought it from was a slumlord. And so we're looking at it. We got there before her to the appointment, and the maintenance guy said, Hey, come check this. You guys come check this out. Look what I'm doing over here. So one of the building, an underground, he had had a leak and he had to go 17 feet busting up the concrete between two units to find at the end of the league because the pipe was just crumbling. What happens is when you that pipe crumbles, you just keep chasing that leak and you know that it's it's never gonna end. So we said a, this is bad. This is this is horrible. We got to replace all the plumbing now because if it's that bad underground, we've seen the pipes. We said this is not the only isolated places everywhere has deteriorated. We were in our inspection period, so we went to the broken said, Listen, we got we need a $250,000 credit or were they

Jerome Myers:   0:47
as an operator? I know other investors are romanticizing multi family investing, and I'm looking to learn from other investors. Mistakes. I know you are, too. You found the right place. Welcome to Myers Methods. Presents multi family missteps, everybody, and welcome to my use methods. Presents multi family missteps. I'm your host, Jerome. And I've got the great players of having Bruce would let with me that I get that right. Bruce,

Bruce Wuollet:   1:27
that's good. Bruce will let Yes, with Baker son

Jerome Myers:   1:30
Baker Seuin. So you came to us through Reuben and

Bruce Wuollet:   1:36
the capital Razor Show? Yes,

Jerome Myers:   1:38
uh, had the great pleasure of being on the Capitol razors show and networking with room and Ruben over the past few months. And when I reach out to the link, then family He jumped in and tied you guys that baker, son and wanted to demonstrate how well you guys have been doing in the marketplace. And so, with that, would you do me a favor and share with the listeners a little bit about your background?

Bruce Wuollet:   2:00
Sure, I'll keep it. I'll keep it brief. Baker, son. I've been a business that founded the company in 2002 in October and partner with the fella by the name of Jack Martin and we both of our father for bakers. In fact, they worked together at the roulette Bakeries family, my family bakery, family's bakery in Minnesota back in the sixties. And so that's where the name Baker son came came from, or sons of Baker's. So I tell people, Yes, I'm an S o B. I'm a son of a baker, so it gets people's attention. They remember that then we, ah, before in the business and we started the by fix and sell of single family homes. And this is 2000 to 2003 and we could find way more properties we could possibly fix and sell. So, uh, I was introduced to wholesaling, and we hold sailed over over 2000 homes in the course of our career and about five or six years ago were flipping multi family. We said, Hey, why don't we buy Fix himself? Forms indications we could create value do value creation. So we did that with six buildings in Phoenix is where we started, and then the Phoenix market got a little bit little bit crazy in our mind, even though it's doubled since then. Um, it was pretty crazy four years ago, so we started Ah, pursuing things in Tucson. And around that time Jack Martin and I went different ways. The good news is we're still best friends. We talk every week. Um, no, No bad blood at all. He wanted to pursue other dreams, and I wanted to stick with the with Thea brick and mortar multi family. So we, uh we didn't I guess that we did. Ah, he was part of the buildings in Phoenix. No, what? I wanted to Tucson branched out on her on her own. And we've done 10 buildings down, their smallest being 12 largest, being 107. And in Phoenix, air smallest with six largest was 120. So there our sweet spot is the 52 150 to 100. The other on 75 is really a good nature for us, and we're able to carve that out and do pretty well with those. So that's a really fast introduction of who we are. Um, so that's when we can get into more detail as you ask more questions.

Jerome Myers:   4:08
M s O that super impressive 2000 homes. And that's before the big wave of whole Salin and Dona Virtually and being in the Phoenix market and all those guys that are kind of the thought leaders of the industry. Now, um,

Bruce Wuollet:   4:22
we haven't wholesale since, uh uh, I'm just in 2015.

Jerome Myers:   4:28
Well, wow, that that's that's aggressive. Did you make most of your transactions during the recession or where you kind of even all the way through?

Bruce Wuollet:   4:38
No, we made out. We made a lot of them, actually. Between 2002 to 2007. We sold all of our rental properties in 2007 and got into the land, and we thought we could be some super big developers. We had this big plan. We secured a square mile of land, were working with a group that had contact with Craig Norman. He designed a course on paper and he was gonna fly out. We're gonna become these big, great golf course developers. And then the market had other ideas. Um, so 8 2009 10 The world came crashing down, regrouped in 2011 and then 11 12 13 14 15 is when we really cold cellars. Many history in their homes a year in some of those years, So it was. It was quite a deal on some of those wea the transactions we had done. Our largest is a people talk about single escrow, double escrow. Our largest is four s crows and one property with three title cos it was insane. It was so much fun, though.

Jerome Myers:   5:34
Whoa, I would be scared that happening in close. So, you know, this is a multi family missteps. And I imagine through this journey, you guys have had some hiccups along the way. A bunch of pivots. Is there specific deal you want to talk about today?

Bruce Wuollet:   5:50
Well, there's 33 properties I want to share where we had some missteps. But the good news are that the missed us and they're similar, similar cases, So I want to just dive right into it. I could just start sharing. Okay? We had a M. We purchase a 74 unit property in Tucson. Um, and during the inspection, we ah, we went there that we said, you know, we're gonna another inspection of the chiller system because it's a master metered chiller system. If you're not in the South Southwest, you may not know what that is, but it's Ah, um, I guess they probably happen in other areas, too. But it's Ah, the heating and cooling is done through hot water and cold water. And so the summertime there's cold water pipes run through the pipes and then runs through a coil in the air blows through that and it cools the place off. So it's it's water based and it's a sealed system, and it was not sealed. Uh, then, you know, then you have a problem because you can't, uh, you know, have running water through there. You can't keep a cooler hot. So we notice that the that the meter there's there's a meter on that tells you if the water is leaking and was slowly moving, which means it was losing, you know, I think was 6 to 10 gallons a minute. Six gallons a minute. I don't have exact numbers, but it was you see that the meter was moving, which is not good, cause the sealed system should not move. So we came back to inspect it, and the person who bought it from was a slumlord. And so we're looking at it. We got there before her to the appointment and the maintenance guy said, Hey, come check this. You guys come check this out. Look what I'm doing over here. So we're in the building. An underground. He had had a leak and he had to go 17 feet us and of the concrete between two units to find at the end of the league because the pipe was just crumbling. What happens is when you that pipe crumbles, you just keep chasing that leak and you know that it's it's never gonna end. So we said, Hey, this is bad. This is this is horrible. We got to replace all the plumbing now because if it's that bad underground, we've seen the pipes. We said This is not the only isolated places everywhere has deteriorated. We were in our inspection period. So we went to the broken said, Listen, we got we need a $250,000 credit we're building. While the lady was was scrambling to sell, she accepted it and were able to get a $250,000 credit. And then the repair on that ended up being about 3 75 So it was one over what we wanted, but we budgeted so we weren't, um It did cost more, but they're so we bought it low enough. 20 something, $23,000 a door. And so that was way averted. A major deal, thereby going for that second inspection. Had we not done that, we had had a mess on her hands without an ability to really overcome it. I think it could have been a really big problem. So that the misstep was that the the first we missed that in the first inspection, the second inspection, it was alerted to us just by the luck of chance that the meeting this guy told us what happened was he twitches was in April. He had switched from winner toe to summer. So you gotta come from cold water Too hot. We're supposed to bring it down to ambient air champ. We wanted on the ambient air temperature and then converted over. If you do it too quick, go from hot to cold. It shocks the system and some of the some of the joints he come loose. And she was really upset that he flipped it over before while they still owned it. So we were very thankful that it happened because we able to get a big, big credit.

Jerome Myers:   9:08
Do you still buy buildings with chillers in?

Bruce Wuollet:   9:12
Yes, we have three abilities currently in to sound 74 75 90. And they all have master meter chillers on him.

Jerome Myers:   9:19
So they don't scare you at this point just because you were able to get the credit done. And really not a whole lot of other impact. Otherwise,

Bruce Wuollet:   9:26
Well, that was Ah, you can call that one a seminar. We learned a lot about a chiller system, and my son went to school on that, so to speak. And he learned inside and out. And he became an expert relatively quick. Once you understand him, they're actually quite they're not over there, Not too much. But we first got in there like, Well, there's way too much to understand, but he just asked a ton of questions, a ton of research, and now we love them. I will, gladly buying anywhere in Texas. Texas has him as well. And I'd love that love to pursue some of those when we expand other markets. But yeah, it's That was the biggest, um, scare. We had it while we're so glad we found that.

Jerome Myers:   10:01
Now you mentioned the 3 75 was a total expenditure. To fix that, you've got a 250,000 credit. Did you expect it to be 2 50 to fix it? Or did you budget of 3 75?

Bruce Wuollet:   10:16
No, we got a pretty solid number that it was still within the budget. But we knew that once we replaced all that added value to the property because the screw machine that condenses air that creates the heat of their creates a cooling was brand new. And so she had had that is only a couple of years old. And the furnace was fairly new. So for the hot water. So there was very, uh, once we got done, almost everything. Except for the little tower out. The cooling tower outside was brand new. So we have 30. This a 30 year system. Now, if you maintain it properly, you can run that for 30 years without an issue. So that's why that became, um, value. Add that we could see a way even for 2 50 um, knowing that's gonna cost us more. But we said, you know, that's OK. That's a risk we're willing to take. And it's an escort right now. We should be closing here in a couple of weeks on that one for a sale, and it's it's gonna do really well.

Jerome Myers:   11:07
Really. So you're exiting the deal after making a value? Were you able to bump rants and do all the other stuff? Tell me a little bit more about the deal. And since you're going full cycle,

Bruce Wuollet:   11:17
Yeah, that one. There we were, Yeah, wherever the push around, quite a bit further than we thought. We added rubs experience for reimbursements for utilities, and that is that 50 to $100 per unit in addition to the rent. So we're pushing that pretty high, but it's all built, all bills paid when they come in theirs, they're they're electric, Um, and water and heating and cooling is all covered in the rent. So we have rubs. The bigger units are $100 per unit in addition to the rent, but that the resident base that we have, it's really good for them because they don't know they may not qualify for the turn on and turn off of power and all that. Some of those just can be difficult for the lower income individuals too well to do that. So since it's all cable bills paid, it works well for us. So were we were able to push rents. Three went over budget on that. But the good news is the market saved us in the other two units, other to process and share with you as well that had similar issues. The market has saved us, and that's Ah um, so if we have been a different market, that great now, if we have been getting into him, that would be a little more nervous. But we bought him, you know, 23 years ago, so the market was lower than and it's just gone straight up since then.

Jerome Myers:   12:28
What's up, guys? Is your host to Rome? I just want to let you know we lost my methods in the follow 2019 with ambition to inspire a new breed of multi family. If you are interested in getting in a multi family, are scaling your current business up over to our Web site at my methods dot com grabbing free forceps guy. How they get now, let's get back to the O nice. Nice. Um, now, are you saying there's two more deals you want to talk through? Or is it the same issue on all three?

Bruce Wuollet:   13:00
No, it's just a little bit different issues that the biggest challenge we had we went into to sound and in tackling our first deals on her own was underestimating the cost of plumbing in the air conditioning and to the A C they CIA estimates were off usually around 20% in the plumbing around 20%. However, on a 30 32 unit that we purchased in, um was half a vacant. We write it down to four occupied units out of 32 during the repositioning, and so we completely vacated it, rebuilt it inside out. But we went over. We had three times the budget on heating are in the A C units and the plumbing because of the issues that we ran into once we dove into it cause those are hidden from the from everybody, right? So we had three times over budget. We were pretty nervous, but the market was very good to us, and we sold it and really did well on it. But there's only because of the market was nothing that we did in the restaurant. We were able to push rents higher than we put on a performance, so that helped push the value. But if it wasn't for that, you know, it could have been a whole different story. So, yeah, we're thankful that the market the market spoken were able to turn it effectively in turning good profit.

Jerome Myers:   14:11
So you said you were 20% over budget on you're a tree. A see what? What is a dollar for?

Bruce Wuollet:   14:17
No, that's no, I'm sorry. On the one property word out, a couple of problems with 2020 over budget. But on this 32 unit, we went three times our budget. So were 300%

Jerome Myers:   14:29
Wow. And so that's a 1,000,000 bucks.

Bruce Wuollet:   14:35
No, it didn't being way had done lighter because we didn't think that once we got in there, we'd have to replace some of the, um the split your that. The A C units were outside the door, and then the heat, the heating portion was inside and there was a split system, and we didn't realize the cost of of of of, um, revamping the split system around a lot of issues once we dove into and turn them on. There was a lot of issues internally that we did not foresee because they're in a closet in the hall that the A C units and then the condensers air outside, um, hanging on the wall. So

Jerome Myers:   15:12
I mean, you just you just write a check to fix the problem, or I mean, how'd you guys work through that? Cause that I mean, that's a big number. I mean, we were

Bruce Wuollet:   15:20
on our way, so we went back to the investor. There's a one off investor. We went back for Ah, capital call, and he was gracious enough to push it, get us some more capital. We put in our own capital as well to cover that. So it was, um, it ended up all right. But again only because of the market shift to be able to push rents higher than we thought. Hi, the performer that it was turned out to be a good, really good return.

Jerome Myers:   15:42
So I feel like everybody dreads the capital call. How was that conversation? Was that painful? Or was he pretty gracious?

Bruce Wuollet:   15:49
No, He was very gracious. It was shared with somebody says, long as that goes in is the same. Same return is the rest of that. It doesn't hurt, doesn't hurt him. It doesn't dilute his shares. He says he's going to do that and we're able to do it and not dilute his share. So they still had over 18% annualized I r. So we're able to score on that because we were able to show that we're able to push rents and get a better value out of the property.

Jerome Myers:   16:13
Okay, So

Bruce Wuollet:   16:14
again, like I said, though, if we were in A in a softer are dropping market, who knows how we would handle that? I don't want to know. I'm pretty pretty grateful, and it worked out the way it did.

Jerome Myers:   16:25
So for the folks who don't know delusion of equity means anytime or capital comes into the deal, it can change the ownership percentages. And so did everybody contribute at the same amount? Or how did you guys actually make sure that the equity wasn't deluded cause he said you guys were

Bruce Wuollet:   16:45
Yeah, there's only one investor in there and we just we just maintain that he got the same same return that we had on the performer for the initial and he is able toc through that we're able to show him that. Hey, this is actually gonna help if you put this and this is where we're gonna put the value in your it's not going to do your shares because we're pushing value by making these additional bears and and we're able to push rents because of what we did on the turns on the inside, making it a almost a B minus quality. We ran it as a B minus even though it was a sea property. See neighborhood. Really push it because of the surrounding amenities. There's nice malls. It's really nice. Smile with higher and stuff right nearby so that people that work there had the higher wages. We have people from the hospital as well as police officer renting from there. So it's a very safe, almost a B minus property. But we bought it. It was it. I guess it was a slum lord. It was 50% bacon. I've got it down to four occupied units, which, by the way, that's another thing that people may not have the stomach for. Our 74 unit we brought down to 17 occupied while we're turning that because we had to shut everything down with that re piping that chiller system and, you know, no heat and no snow, you see, so we couldn't summertime. We're working on it. We couldn't have people in there.

Jerome Myers:   18:03
Did you guys plan to go that low? Cause I mean, you absolutely can't pay your mortgage with that. So was what

Bruce Wuollet:   18:09
we call it. Now we call that the Valley of Death. Um, when you when your expenses, there's no income. So we do budget that in there we show the investors that hey, that one was that wanna syndicate? We showed the investors that during this time, your equity is going to fund the debt and here's how it's gonna work and we push through that and still, you know that that's on the market now for what 60,000 door we're in. And we bought it for 23. So the return is going to be pretty solid.

Jerome Myers:   18:38
How much are you guys putting into rehabs? If you don't mind me asking

Bruce Wuollet:   18:43
on the 74 unit, we put close to a 1,000,000 in rehab and the 32 unit we put. We bought it for 8 50 and we put a close to the same in rehab. So so

Jerome Myers:   19:02
12 the door. So something like that?

Bruce Wuollet:   19:04
Yeah, that one is that one. Some of those who have gone a little bit quite a bit higher. I suppose I should figure out the door. Um, yeah, we're 13,000 adore and rehab on the 74 unit. And then, um, you see that? And we're, 0 28 door on that other 1 32 units. So it's pretty steep. Those air rough estimates, but yeah, there's a really, really heavy turns. And I'm not afraid of those,

Jerome Myers:   19:37
Right? Right. So I mean, let's wrap this thing go because we promised these things will be assured and jam packed. And you've had a lot of value for me because I'm in the process of looking at a 66 with ah chiller system. So the thing that you just offered to me is pretty rewarding.

Bruce Wuollet:   19:56
My homies call us if you have any questions, Any any questions at all on the tiller system or what you need to look for? Call us. Call us collars were open book on this one. It's a very large sandbox. We can all play and get along, so don't hesitate to call with questions, please.

Jerome Myers:   20:10
I really appreciate that. Bruce. What? Where's the wisdom? Do you offer to the folks that are entering into this place or skeleton in this place?

Bruce Wuollet:   20:19
Well, it's a phrase that I coined two weeks ago. A tuneup restored, our Monday morning meeting be the rocket, and in times of uncertainty that as a leader of the organization, you really need to be firm and be the rock and not be pushed around by the winds of change.

Jerome Myers:   20:34
And so how is that? How are you? How is that impacting your business? What are you guys doing where you study? Where you placing your rocks right now?

Bruce Wuollet:   20:43
Right now, we're very that pushing, pushing rents and working with the residents s. So far, we've got only a couple out of the 200. So residents that have asked for any forgiveness are some relief due to the Corona virus saw. Currently, we're not affected at the proper level. We're bracing ourselves for the next week cause today is your rent or do so we'll see how it goes over the next couple weeks. But as of yesterday, the manager said that it looked very optimistic. Just be informative. Keep communication open with the residents and realize that they are in fact, your customer.

Jerome Myers:   21:15
Awesome. Bruce, really appreciate your time. And if I could do anything to help out, please let me know.

Bruce Wuollet:   21:23
So it was good. Thanks so much. Let me be on your show. This is awesome.

Jerome Myers:   21:27
Thank you. Talk to you soon. You made it to this juncture. So you really love what we shared on this episode of Meyer's methods presents multi family. Mr. Do us a favor, give us a five star rating, give us a review and share this with somebody who's interested in the way.