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Today’s Investor Story comes from Jonathan Klemm. Jonathan is an entrepreneur with an abundance mindset focused on "Us & we, not I & Me". Jonathan is a construction engineer who has worked for Walsh construction traveling the world for the last decade. With his extensive construction & project management background Jonathan and his team founded Quality Builders, a Chicago based General Contracting company focused on bringing technology & transparency to real estate investors. Jonathan is also an active managing broker, investor, and developer.
Pre-Close
Before moving back to Chicago and purchasing this investment, Jonathan was in Louisville for a few years and performed a successful flip between sips of wonderful Kentucky bourbon. Jonathan moved back to Chicago with money in his pocket from said flip and was ready to invest, specifically in the Bucktown area. However he was the new kid on the block and had not yet established a network to help put his plan in action.
Eventually Jonathan found a realtor through a friend of a friend. Unfortunately the realtor was not extremely familiar with how to work with real estate investors. Jonathan ended up finding a property on his own in Bucktown at the end of 2018. The property was 2331-2333 W Montana which was a 2-unit on one PIN and a vacant adjacent lot. Jonathan was able to schedule an appointment with his realtor’s sponsoring broker (the realtor was not in town), to see the property, and build a very solid rapport with the owner.
The 2-unit was distressed and it was doubtful that it would pass a traditional appraisal/inspection. There were many developers interested in the two lots which eventually led the seller’s broker to call for the best and final offers. Jonathan's realtor advised him to increase his earnest money to 10% (of 650k purchase offer) and write a cash offer that waives your mortgage contingency. Jonathan being a newer investor thought this was a common move and that he would have alternative exit strategies to potentially retain his large earnest money deposit.
Jonathan followed the realtor’s advice and wrote a very aggressive offer along with a personal note to the seller stating that unlike the developers, Jonathan wouldn't tear down the building. Jonathan was awarded the contract even though he wasn’t the highest bid; the personal letter was a big reason for the win. AFTER getting this investment under contract, Jonathan went to talk to his lender. Based on the pictures Jonathan shared, the lender said this building is probably not financeable for them. At this point Jonathan is on the hook for 65k earnest money regardless if the building can or cannot obtain financing.
This caused an obvious stressful situation as Jonathan came to grasp that it was indeed plausible that he would lose his 65k. Luckily, (through an act of God) the appraisal actually came through and his lender was able to come up with required financing to close on time.
Execution and Ongoing Process
Jonathan had to bring over $130k to close which was a lot of his funds at the time. Being nearly out of capital and having a rather large rehab in front of him, Jonathan had to get resourceful and with the help of a family friend did a decent amount of the work himself out of necessity (note that Jonathan has a construction background and worked at Walsh Construction as a Project Manager for ten years). To help keep the rehab as low as possible, Jonathan and his friend were literally pulling out the trash and debris themselves.
The main contractor hiccup was that Jonathan hired an electrician who had great Google Reviews. In retrospect it was obvious that the majority of these were fake reviews. The electrician put up the service pole and the very next morning it was gone. According to the electrician, he claimed someone stole it for the copper. However Jonathan was suspicious that it was a play to just have him pay to install the service pole twice and also saw that this coincidentally happened on a previous review. They ended up coming to agreement to finish the remaining work.
Jonathan hired PMPC Architects (Prashanth Mahakali -SUCI Guest on Episode 21) to handle the architectural duties. The vacant lot (2331 W Montana St.) was currently zoned RT-4 so the plan was to build a 2-unit condo building. They submitted plans to the city, but the city came back and said that another developer had actually worked with the seller several years back and had already performed a zoning change with the seller before purchasing (and then never purchased the property). That developer did a “type 1” zoning change which meant any new developer had to build a “like-kind” structure which was unfortunately a single family home.
Jonathan and his attorney immediately went to the alderman to challenge the
Type 1” zoning change, but the alderman didn’t approve their request as he was already taking heat for an over densified neighborhood. So, now Jonathan had spent $8k on plans that were unable to be used, accumulated unnecessary holding costs, and could not build a 2-unit condo building to maximize the value of the lot.
After accepting this initial letdown, PMPC redrew the plans and submitted them as a single-family home per zoning boards requirement. Surprise number two then hits the team in the stomach as they find out that when the lot was re-zoned, the neighbor’s property was re-zoned and the measurements were off. Thus the original rezoning to split the PINs was off.
So now the city is enforcing Jonathan to get a zoning change on his existing 2-unit building (2333 W Montana St.) which he wasn’t even developing on. To get this change completed, a variance was needed as the current off-set was too close to the street as well as a zoning change for the rehabbed building (2333 W Montana St.) from B1-2 to RT-4. Jonathan, Prashanth & his attorney had to slog through this and two years after purchase and many bureaucratic headaches later, Jonathan finally has a buildable lot.
The good news was that In parallel, Jonathan had cleverly set-up his financing for the build on the vacant lot. The original mortgage for both PINS (2333 & 2331 W Montana St.) - the 2-unit and the lot - was $500k. After rehab, the building appraised for 700k, and Jonathan was able to move that entire 500k loan (originally on both lots) onto one PIN. So now he had a 500k loan plus about 175k of his own money tied into a 700k property, but he also had a free and clear vacant lot that is worth roughly 300k.
Jonathan had finished all the hurdles with the city, had his free and clear lot, and was ready to build. However, banks would not approve his development loan as he did not have a true general contractor hired for the job. Given his experience Jonanthan’s plan was to GC the construction himself, but lenders wanted a licensed GC with experience as a licensed Chicago GC. Finally, after numerous solicits,Jonathan found financing through Waterman State Bank, and construction is currently underway. We will report back several months later to describe the end result and any other curveballs that get thrown at our protagonist.
Lessons Learned
Understand the real estate purchasing and transaction process. Know what levers you can pull to make your offer more attractive, but more importantly, understand the associated risk with removing these different contingencies.
Understand your lending options. On the front end of this example, there were probably better suited products that didn’t involve the same amount of stress of passing traditional financing appraisals and also offer more aggressive rehab terms so Jonathan didn’t have to come out of pocket so heavily.
Understand that it’s not as simple as your assets minus your liabilities. It matters which assets have liabilities, both for your own liquidity and in the eye of the bank if they are going to lend on an asset.
Don’t give up when the first few lenders say they can’t help you. There are thousands of lenders in the Chicagoland area and someone somewhere has the loan product that you need. It’s on your shoulders to ask around and also pick up the phone and call these lenders directly. This is how Jonathan was able to find Waterman State Bank.
This was a bizarre situation, but do everything you can to know zoning information and try to quantify your worst case scenario. Can you still live with this deal if you don’t get the requested variance?
Along the same lines, hire a professional that works with investors and has been there before. Without Prashanth’s help, Jonathan would not have been able to navigate the multiple roadblocks.
Always, always, always vet your contractors. Don't rely strictly on reviews.
Vet advice that is given to you. Just because your realtor or someone tells you something is a good idea, it doesn’t mean it’s the right move for you. Do not get caught in analysis paralysis, but it’s also ok to solicit opinions of others who have done it before. Their answers can install confidence in your decision-making. Trust, but verify.
Jonathan Klemm
Mobile: 512-213-5030
QB Office: 773-234-1611
Email: jonathan@qualitybuilders.com
QB Office: info@qualitybuilders.com
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