Fat Property – A history from start to 12/2012
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.
First things first: 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 a company name that had a corresponding domain name available (i.e., ‘OurCompany.com’). As you might know, almost every combo of 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.
First baby: 8 unit on the 2000 block of Branard in Montrose:
Fat Property, LLC officially came into existence in June 26, 2007. 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 on something I owned. I didn’t even know where to get a blank lease or what to do with it. Luckily I had a friend that helped to manage an apartment complex across the street from my house. She went with me to met our first new Branard tenant at a coffee shop and together we got it filled out.”
Next up: 16 unit on the 700 block of Colquitt in Montrose:
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”. There were many units that were in painful need of upgrading, but other than that it was pretty solid. Soon after purchase, several of the units ended up being upgraded, with additional units 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 later, 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. With these large capital upgrades, we learned that there are bigger challenges to running a multifamily property than repainting units between tenants.
Our first venture out of Montrose:
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. And when you go out of high demand areas, the rental income vs. the purchase price is radically different. 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 handle remotely. We got the properties somewhat stabilized but they became more work than they were worth and were later sold. When asked if would have done it over again, Cody adds
“Obviously you don’t like to lose money on operations or on a sale. Given that we sold these for about what we paid for them, there was some loss when the transaction costs are factored in. More so if you factor our capital upgrades and the opportunity cost of time. However, I learned a lot from the process. I’ve found that sometimes the best way to learn is just to do. If there is a cost to doing, think of it as the cost of knowledge. Knowing what I know now I wouldn’t have bought those properties; but I didn’t know then what I do now so its not fair to go down that road”
A move to flipping single family homes:
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). This made us think “Why not target multifamily properties that need help, with the intent on fixing them up and selling them to someone that doesn’t want a project property”. Plus, in such a property you have rental income during the upgrade and while you’re trying to sell. Taking away the pressure of trying to sell quickly.
Our first multifamily bought in order to stabilize and sell:
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.
More in Montrose….
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 anything about it (other than calling 311). 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 actual project that’s hard provides the biggest challenge:
“Thinking back to this project 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. I gave them all my contact info and meeting with local groups when buying a distressed property is still something we do to this day. I think it was the very 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. The work we were told by the city to do became downright silly — but we complied. 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. I have them lifting up the tarp to take their pictures. The reason there was trash there is there were so many upgrades going on that we couldn’t get rid of the trash fast enough. I didn’t want a big ugly pile of trash — even in the back yard — so I put a tarp on whatever was there in-between dumpster runs. I ended up winning that case. But it taught me a lesson. You don’t get brownie points just for fixing up a blight property — you still have to kneel to the city.
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 more money to transform the place. Trying to fix this place up caused my company to be flat broke for quite a while. 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. We felt a little let down that in fixing up the property that had caused the neighbors so much grief in the past, that they’d send the mayors office out due to trash in the back yard rather than work with us. 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.
Our first boarded up building…
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. Very cool place, and sad that it was just being left to rot. Since it was right down the street from our Colquitt property, we were excited to buy it and fix it up.
In terms of interior, this was our largest upgrade to date. We were happy to have 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 (we left the existing ones in place as they were fairly new). Despite being only a few years old and in good shape, we found out they needed to be lifted 18″ off the ground. No problem. It’s odd how this got brought to our attention but we’re happy to make something safe.
I remember hearing about this red tag from a resident. It occurred when I was pretty much the only employee. I called 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. . For a small company who just went out of pocket a lot of money to fix up an abandoned property, having a $4,500 fine was rather painful. Sadly, it caused us to put off some exterior upgrades we wanted to do to the property such as new paint and landsacping.
Our big break: The former Skylane properties…
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 — leaving 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’ll be honest: I was pretty nervous to buy these as it was more than doubling our unit count in one deal. We also had no where near the money needed to put down on these properties. I’m not sure how we got the bank to go with our bid, but I’m still thankful to this day for putting their trust in me.
These were also ROUGH properties. 219 W. Alabama was the “Go To” place for drugs and prostitution. Cops would tell me ‘when we need a quick drug bust, we know where to go’. 502 W. Alabama wasn’t much better with cops going in every day. I know this as I lived almost across the street at the time. I quickly setup shop in one of the units in the 502 building, making it my office, 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 wanted to jump out of the car right there, but I parked down the rode since my wife was with me. I got out of the car and ran over to the property. I 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. This property also gave us knowledge in dealing with distressed properties that would have been impossible to get any other way.
3rd and final Montrose Skylane gets fixed…
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 opperational 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 ownership 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 — Richwood Place — 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 had multiple crews working there every day. We ran ‘super sales’ and got new tenants in there as quickly as we could get the units ready. When asked about the first new tenants, Cody comments:
“Ironically, and contrary to popular belief, you often have to charge less to get a good tenant. Most people think if you raise the rents you’ll get better tenants. However, when you’re fixing a place up, you need to charge good tenants a bit less as they have other options. Bad tenants will pay more as they will go where ever they can. When we were kicking out the dealers, we’d often kick out someone paying $700/month only to spend a ton of money upgrading their unit and replacing them with a tenant paying $600/month. It was worth it to have a stable tenant who wasn’t going to cause us problems down the road.”
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.
It wasn’t all smooth sailing. 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” (RAP). 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 and had some suggestions of things to do to make the property better. Their list of tenants 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 1901 Richmond as a nuisance property and stating we’ve allowed crime at the property. Other than believing this to be untrue, the claim was heartbreaking to all of our employees who spend their time making these properties safe for our residence and neighbors. Luckily, we believe the facts are on our side. From the time and money invested at the property, to taking the property out of Remedial Action, to kicking out dozens of bad tenants, to following many outside the suggestions given. We hope that the city/state rethinks it’s position on this issue.
A move back to smaller “done” properties in Montrose….
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.
Another little guy on the same street…
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.
More in Montrose….
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.
Even more in Montrose (and our last one in the neighborhood)…
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.
Our move to Midtown….
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. We have received dozens of complements from the local police, constables, and civic groups. 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.
Our growing company needs an office…
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.