Fat Property – A history from start to 12/2013
We’re often asked “How did you guys get started?”. Please allow us to take this opportunity to go into where we’ve been, how we got here, and where we’re going.
Fat Property, LLC officially came into existence in June 26, 2007. And perhaps even more than ‘how did you guys get started?”, we’re asked “Why ‘fat property’? Seems like a odd name”. We agree. Sadly there is no cool or interesting story behind the name. It has no hidden meaning. The reason for the name is rather basic: We wanted an company name that had a corresponding domain name available (i.e., ‘OurCompany.com’). As you might know, almost every combo of normal words with a .com ending are already taken. After about the 1000th try, “fatproperty.com” was put into a search and came back as available. We registered the domain name and secured the LLC.
The first property we bought was a 8 unit on the 2000 block of Branard in Montrose in July 2007. The company was actually formed while we had this first property under contract. While this property didn’t need much work, it allowed us to cut our teeth and learn about property management and upgrading units. As Fat Property president, Cody Lutsch, recalls:
Prior to the purchase of the Brandard property, I’ve never really looked at a lease and especially never had someone fill one out. I didn’t know where to get a blank lease or what to do with it. I had a friend that helped to manage an apartment complex across the street. She with with me to met our first new Branard tenant at a coffee shop and got it filled out.
Feeling pretty confident in running an apartment complex and handling minor unit upgrades, our next purchase came a few months later. A 16 unit on the 700 block of Colquitt in Montrose (Oct. 2007). Like the Barnard property, this complex was pretty much “done”. Several of the units ended up being quickly upgraded, and with new units got upgraded as existing tenants moved out. This added to our understanding of the financial advantages of fixing up properties to meet a higher level of demand in this submarket. Even our president got to get his hands dirty:
This was the first time I really tried to learn as much as I could about every aspect of property upgrades. I’d drive our contractors nuts by following them around, asking them questions, and trying to find out why things were done a certain way. I started doing the tile installation myself on the downstairs units and the hardwood floor units myself on the upstairs units. I knew that scale would prevent me from doing all the work myself but I felt knowing how it was done would be important.
Colquitt wasn’t the type of distressed property that we’d later start buying but it did require a few large capital upgrades. It had a large flat roof that had to be redone. And it had a large chillers system that had to be replaced. We learned that there are bigger challenges to running a multifamily property than repainting units between tenants.
Our next purchase wasn’t until Jan 2009. Everyone knows the financial time bomb that went off in 2008. We were not immune. Financing became impossible to get. We used the equity we had in Colquitt to finance some properties in east Houston (near i10 E and beltway 8) . We had been looking at a 76 unit building out there but could not make the deal happen. The owner was waiting on some insurance to come through and finally backed out of selling. Still hungry to buy, we found a group of fourplexes for sale very close to the 76 unit building. 3 of them were side by side on one street and 2 more were side by side a few blocks away. When asked why the shift so far from Montrose, Cody replies:
When looking for properties, I had a few goals in mind: 1) It must be in an area I’d be willing to live, 2) The purchase price can’t be more than 100x the monthly rent. Rule #2 became hard to find in Montrose so I was wiling to bend rule #1. At this point in time, I thought I was better than I really was at managing properties so I assumed I could take on anything, anywhere.
Managing the properties in East Houston became quite a challenge. At this point of time, Fat Property consisted of 1 person. We had one of the tenants helping to collect rent but there was theft and turn over that was hard to manage remotely. We got the properties somewhat stabilized but they became more work than they were worth and were later sold.
For the rest of 2009, Fat Property purchased 5 single family homes using the remaining equity from Colquitt. They were bought in order to fix up and flip. 3 were sold off, while 2 of them were kept as rentals (24 Presidio and 5855 Hirondel)
Our next apartment purchase didn’t come until March 2010 with the purchase of a 6 unit on the 1600 block of W. Main. This was our first ‘off market deal’. This was also the first time we bought a distressed property. The building was only partially occupied, there was a giant hole in the roof, and the building looked — honestly — terrible. We got to work and put on a brand new roof, did a lot of landscaping, and repainted the whole building. Those were firsts for us for any of our apartment buildings. 8 months after buying the property, it was sold to a new owner. Cody recalls:
Shortly before buying the W. Main building, I had done some house flips and felt pretty comfortable with taking on a bigger project. The W. Main building seemed perfect. It was priced according to it’s current condition and financials — both easily fixed. I learned that we could provided a win/win/win/win by buying some of these older distressed properties and fixing them up. A new owner wins by having a stabilized cash flow property that is turned over to them in turnkey fashion. The neighborhood wins by having less blight. The tenants win by having a better place to live. And we win by being able to increase our capital position to fix up the next place.
Our next purchase was a group of fourplexes on the 1800 block of W. Main in June 2010. There were four of them. Side by side, corner to corner. We bought one, and a friend bought the other two (we manage). These were in bad shape but we fixed them up easily. New roofs, new windows, and a host of interior upgrades. Missing from our purchase was the 4th building. It was owned by a different party and was boarded up and vacant. The property was used as a dumping grounds. People were squatting in the property and tagging it daily. The city would put up violation notices but no one was actually doing something. Finally, in January of 2011 we were able to convince the owner of the 4th property to sell it to us. This lead to our realizing that sometimes it’s not the project that’s hard, it’s working with the city.
Thinking back to this upgrade still gives me cold sweats. I remember that while we had it under contract, I went door to door to the surrounding neighbors to let them know we were buying the property. I told them if any of our workers were being loud, or making a mess, to please let me know (meeting with local groups when buying a distressed property is still something we do to this day). I think it was the DAY that rehab started, we were surrounded by inspectors telling us to stop. Because the building had been empty for so long, it was deemed a ‘dangerous building’. As such, there were multiple hurdles we had to go though. Costs got out of control and all the pre-lease move-in’s we did got pushed back a few times then canceled. It was a disaster. Making matters worse, a special task force from the mayors office came out due to complaints of trash. Keep in mind the trash was in the back yard — under a tarp. Thank god I took photos of the inspectors who were taking photos as I have them lifting up the tarp to take their pictures. I ended up winning that case. But it taught me a lesson. No good deed goes unpunished. We took a property that had been a blight to the neighbors for years. The illegal dumping. The tagging. Squatting. We then bought it — risking our own money — and spent a LOT of money to transform the place. Our ‘thank you’ was dozens of fights with the city, and complaints to mayors office about our trash in the back yard under a tarp. It’s okay though. We survived and the property has been enjoyed but several tenants since. We also have the satisfaction of knowing we improved another property.
Before that fourth fourplex was bought, we purchased a vacant building on the 4200 block of Jack. This was also a building that had been boarded up for years. It was a historic home that was at some point converted into a triplex. Since it was right down the street from our Colquitt property, we were excited to buy it and fix it up. Internally, this was our largest upgrade to date. Another property turned around and now enjoyed by it’s tenants. However, this property also resulted in our largest city fine to date. Somehow, an inspector made it into the gated back yard, and into a locked shed, to notice that the three hot water heaters were not to code. They were only a few years old but they needed to be lifted 18″ off the ground. Our company was made aware of the red tag from a tenant. This is while Fat Property was still basically 100% ran by our president.
I remember calling the city to find out just what the issue was. They said the water heaters needed to be on a stand. I was out of town so I called my plumber and had him go out. He said the room was too short to put them on a stand, so we’d have to replace them with a different type that didn’t require the stand. I hated to waste the money to buy three new water heaters but if that’s what had to be done to comply, then that’s what we were going to do. I gave the plumber permission to buy three new water heaters and I figured we were done. Some time later I found that we had a $4,500 fine for not getting the permits we needed to swap the water heaters. Ignorance is no excuse for breaking the rules so that was $4,500 handed over to the city. I’d still like to know how they got through the gate and into that room. And what made them want to go in there and check? Still a mystery.
On Aug 2010 we sold our property at the 2000 block of Branard. It was sad to see that one go but we also knew that you have to sell from time to time to get the capital to continue to buy. And it was the capital from that sale that really allowed us to take the next big steps in growth.
In September 2010 we purchased the two former “SKylane” properties in Montrose at 219 and 502 W. Alabama (32 and 25 units respectively). Luckily, no one wanted the worst of the two — 219 W. Alabama — l
eaving us as one of the only ones willing to take on both. Somehow we were able to convince the bank that had the properties that we would be the best ones to take them over. Not having the capital needed to put down on both of them, we leveraged some of the single family homes that we still had as rentals.
I was pretty nervous to buy these as it was more than doubling our unit count in one deal. These were also ROUGH properties. 219 W. Alabama was the “Go To” place for drugs and prostitution. 502 W. Alabama and cops going in every day. I know this as I lived almost across the street at the time. I quickly setup shop in the 502 building and began going between it and the 219 property all day every day. Since I didn’t have any property managers at the time, I’d be the one to kick in the doors and throw out the drug dealers. After putting new locks on the gates at 219, I drove by one night to see non-residence just hanging out. I parked down the street (since my wife was in the car) and ran over to the gate, ran up to the guys in the courtyard and started going nuts. There was a shopping cart near by that I picked up and threw over the fence. The guys must have thought I was a crazed lunatic so quickly left.
Of all the properties our company is most proud of fixing up, these two would be it. Mostly because they were so terrible. But also because of their proximity to where our now office is and where many of our employees live.
In March of 2011, the bank that sold us the 291 and 502 W. Alabama properties contacted us to let us know that the owner of the third and final Skylane property at 1901 Richmond was having issues. At this time it was called “Houston Medical Apartments”. The bank didn’t own it, but the owner wasn’t able to make payments due to the tenants living there and it’s condition at the time. We worked a deal out where everyone won. The previous owner got out of the property free and clear, with us taking care of the outstanding tax bills, outstanding mortgage payments, paying off some of the second liens, and even putting some money in their pocket. The bank won by having a bad loan off their books and the property under new management. We won by having a chance to take over management of a building that would have been impossible to buy in the traditional since (as no bank would have financed it — unless they were the one that already had it financed)
Right after buying the property we met with the local civic group to let them know of our intentions to clean the place up. It had been a problem spot for the neighbors for years. This was a problem we were excited to fix.
On day 1 we went through all the empty units to clear them all out and lock them up. Many of the empty units were used by squatters and people looking to get high. By the end of the first few days, the parking lot was a mountain of old couches, beds, furniture, clothes and more. We gave away as much as we could and tossed the rest.
This marked the first property that rather than use a few of our go-to hourly contractors, we hired crews and paid them a fixed amount to upgrade a whole unit. The upgrades were extensive: New windows, new blinds, new tile, new light fixtures, new paint, and a host of other upgrades. We ran ‘super sales’ to get new tenants in there as quickly as we could get the units ready.
After some of the vacant units were fixed up and rented, we started work on clearing out the people who were not paying rent, or had excessive traffic. By the end of the first year, we had replaced 70% of the tenants and invested over $250,000 in upgrades.
When most of the heavy lifting had been done, we began work on making the property look a bit better. To this day, exterior design is still not our strong suite but we put a deck over the old filled in pool in the courtyard, replaced most of the stairs, did some painting, light landscaping, replaced the windows and lights on the Richmond facing side, and some other minor things.
Along the way we hit a few bumps:Just 3 months after buying the property (and deep into the upgrades) we were told that due to previous years of crime, that we would have to take the property through the remedial action plan. Most of the required steps were things we were doing anyway. We quickly complied and the property was removed from the plan after it’s required probation period. We were familiar with the process as the 219 and 502 W. Alabama properties were already in the “RAP” when we bought them.
Our other bump came in Aug 2013 when we were asked to meet with the assistant DA. They had claimed that we had some problematic tenants we needed to get rid of. This was no surprise to us as all the tenants they mentioned had already been kicked out by us, or were tenants we had already filed evictions on. Other than removing problem tenants, the DA gave us a list of things to do: hire a security guard, install cameras, clean up some trash, and gate the courtyard. We quickly complied (other than gating the courtyard, which we felt would make no difference)
If the 219 and 502 W. Alabama properties gave us confidence we could fix a bad place up, the 1901 Richmond property proved it to us. we’re still happy that the property has remained full with a nice mix of students, service workers, and a general diverse mix of Montrose residence.
Update: We learned as of 10/25/2013 that the State has filed action against Fat Property claiming we’ve allowed crime at the property. Besides being totally untrue, it is a giant insult to all of our employees who spend their time making these properties safe for our residence and neighbors. Luckily the facts are on our side. From money invested at the property, to taking the property out of Remedial Action, to kicking out dozens of bad tenants, to following the suggestions (Demands) given. We hope that the city/state rethinks it’s position on this issue.
Our next purchase after Richmond came a few months later. In Sept 2011 we bought a small 6 unit on the 300 block of Hawthorne. This is the same subdivision that 502 W. Alabama is located and 219 W. Alabama is across from. This building had a lot in common with our first few purchases. It was in pretty good shape. Just needed a bit of operational changes. We upgraded all the units as they became available and repainted the whole building. This property later sold in mid 2013 to help fund new projects
In Jan of 2012 we bought a property right down the street on the 400 block of Hawthorne. We were fortunate to buy this property since there were so many people looking at it. Lucky for us, the existing rents were well under market. Why is that good? Because most buyers will look at current financials and view them against a price. We looked at what the property should be getting. A few months after we purchased the property, it was running as it should. We still own it to this day. Like our first few properties, this property did not require much work. It wasn’t until the town home in the back came up that we really had to do some work. The town home was sorely out of date and it was a fun project to modernize it.
In March of 2012 we bought a 9 unit on the 1400 block of Marshall. This one was also not managed as well as it could be. The building itself was very ugly (not to insult the previous owner). We quickly upgraded the street facing portion of the building and repainted. We also repainted the interior of the building and upgraded several of the units to central air. This property was sold in mid 2013 to fund new projects — however we continue to manage it.
In July 2012, we purchased a 10 unit on the 4300 block of Jack. Honestly, this might have been the ugliest building we bought at the time. It was immediately repainted and all the unites were upgraded. There were PILES of trash all around the property that were cleaned up. We received a lot of complements from the neighborhoods which we really appreciated. Sadly, like some of our other smaller Montrose properties, this building was sold soon after to fund new projects.
In October of 2012 we took on our biggest project to date, and our first multifamily property outside of Montrose since the east Houston fourplexes. The location was 1624 Holman. An old 56 unit building that was in major distress. This property made all of our Montrose Skylane buildings look like the Taj Mahal in comparison. Trying to explain how bad it was, or what we had to do, would only look like an exaggeration. We’ll save the details for another day. But long story short, this is the turn around we’re most proud of. We have neighbors walk by every day and thank us for the work we’ve done. Although we’ll likely have to hold and run the property till 2050 before our capital improvements are paid back from operations, it was well worth it.
2012 ended with our buying the building that now serves as an office: 3800 Garrott. While this building was in much better shape than some of the others we’ve bought, it was another example of a boarded up vacant building that we were able to buy, clean up, and make nice. The property features a detached home in the back that was described as a “tear down”. Rather than follow that advice, we decided to clean it up, add central air, and really make it shine. It’s now another unit in our rental pool.
2013: Coming soon…. We expand our staff, and ventur out to 3rd ward, medical center, and other areas of Houston.