Season 1,

18: How to Lose Money in a Failed Condominium Conversion with Scott Meitus

January 13, 2017

Around 1997 Scott Meitus, Founder and Director of the Windward Group, was working for a fairly large real estate firm in Chicago. They did a number of condominium conversions.

The story got interesting when the president of the company wanted to push the envelope. They tried to expand into the Milwaukee area—and it didn’t turn out quite as well as they had hoped.

Green Flag: New City, Same Plan

My boss wanted to expand our Chicago company into the nearest metro area—Milwaukee. What attracted us to a particular property there was that the apartment complex was originally built to be converted to condominiums.

From a physical standpoint, it was ideal. The gentleman who developed it was selling the property in order to open his own restaurant. If he couldn’t sell it, he was going to convert it to condominiums himself.

In case you’re wondering why we would convert apartments to condominiums, it’s the old adage about the sum of the parts being worth more than the whole. If you buy an apartment complex for $50,000/unit and separate it out, a lot of times you can turn around and sell those units for $75,000-$80,000. If you can’t, it’s obviously not a good candidate for condo conversion.

It has to be a good area, and there has to be a market for condos in the area. We did research, and ours was far superior in that area. Others were mostly ‘70s vintage places.

In hindsight, we didn’t do nearly enough research.

Red Flag: Sketchy

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To verify what we were doing, I spoke to a number of realtors up there. They had questions about the quality of neighborhood we were in.

We were right on the cusp of good and bad. Directly north of the property were two high-end country clubs. But to the south of us, it was a little bit sketchy—more so than we thought. And our property aligned more with the south.

We hadn’t noticed or paid attention to those neighborhoods enough, and the realtors didn’t think we’d be able to sell the units at the price we wanted (about $120,000-$140,000).

We were probably within a month of closing at this point. Since I was in charge of all the pre-acquisition analysis, I sat down with my boss at the time and told him what was going on. I thought we should at least slow down and make sure we could sell them for the price we wanted to.

Unfortunately, he had gotten emotionally attached to the deal and really wanted to have a presence in Milwaukee. He said, “Don’t worry, everything will be fine.”

This deal was on the larger side, so it was hard to give up.

Black Flag: Basket Case

We did end up closing the deal, and boy was that a mistake.

When we did a condo conversion, we would try to get as many of the existing renters to buy as possible. We offered a discount, and often they were OK with that. Our target was always 25% retention. Ultimately, the percentage on this property was about two.

One thing we do in order to make our sales pitch to existing tenants is have a community party. Some aren’t thrilled, but others find it a good investment.

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These meetings don’t always go smoothly, but this one went horribly. Virtually everyone said they weren’t going to buy, and one gentleman in particular was quite upset. He explained that the prices were way too high, that we’d never be able to sell them.

Meanwhile, I was a basket case. I saw the whole thing imploding, and I wondered why I hadn’t pushed harder to back out.

The president of the company led the whole presentation, and later he said, “Scott, I’ve done this for a long time. Don’t worry about that guy making a big stink: he’ll be our first buyer.”

He wasn’t.

White Flag: I Left

Again, there were two tenants that bought. Over the next six months, we didn’t pick up another sale, from the tenants or the outside. At that point, we knew there was no chance we’d ever be able to sell 100 units, especially at the price we wanted them to go at.

It was a disaster. The only good thing was we still had a viable rental asset. Although it had been chopped up into a hundred pieces, it was still all in one place.

I left the company around this time, though not totally because of this. I’ve always been entrepreneurial, and this company was very corporate.

From what I understand, my former boss bought the two units back from those buyers for the same price they paid for them. He held onto it for several years, then sold it as an apartment complex several years later.

I don’t know if he made any money on it, but my guess is that he didn’t.

Checkered Flag: 50 to 5

I got over being a basket case fairly quickly, but the whole thing really taught me the value of due diligence.

Especially when you go into an area in which you haven’t worked before, you’ve really got to understand the neighborhood block by block—almost house by house. You’ve got to drive up and down it and talk to the local realtors. It’s the oldest cliche in the book, but in my case location, location, location was everything.

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I think my boss thought this would be the project that “put him on the map.” I saw it ahead of time, but I didn’t go in there saying it would be the worst choice he’d ever made. I should have.

Last I heard, the company was down to about four or five employees from 50 when I was there. I don’t even know if they’re still doing condominium conversions anymore.

Failing Forward

In each episode of How to Lose Money, we ask our guests to answer a few questions about failure. Here’s what came out of this episode:

  • Why did this failure experience happen to you and your company?

A lack of proper due diligence and proper analysis of the area in which this property was located.

  • What is the single most important lesson you learned from this experience?

Do your homework.

  • How do you protect yourself from failing in this way again?

It opened my eyes. Since that point, in other deals I’ve done I tend to overanalyze things, to the point where some people think I’m nuts.

  • Who do you turn to when you need help?

I’ve got a few friends and business associates I rely on, both in and out of the real estate world. Some are friends I’ve known since fifth grade; others I’ve met in my career.

  • What advice would you give to someone in a similar position to yours?

I think if you have a bad gut feel about something, pay attention. A lot of times it’s right. Maybe just back up and look at it from a different angle or get a fresh set of eyes on it.

This episode is based on an interview with Scott Meitus from the Windward Group. To hear this episode, and many more like it, you can subscribe to How to Lose Money.

If you don’t use iTunes, you can listen to every episode here.

Quotations:

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