Commercial Real Estate Investing From A-Z 5 Lessons From Going From $100M to Jail
Imagine building a $100M real estate company, losing it all, and then going to jail on top of it? That's what happened with Mike Morawski, he was sentenced to 10 years in federal prison, charged on wire and mail fraud after transferring funds from one syndication to another without notifying his investors. He discusses his top 5 lessons learned.
You can read this entire interview here: https://bit.ly/3KQJYU1
Let’s start with the growing too fast mistake. How slow is ideal for you and why?
I catch myself sometimes wanting to go do something else, I have to put a pause and not look at deals because we're underwriting a whole bunch of deals right now. We're not willing to pull the trigger yet because we're waiting to get a little bit more down the road with stabilization, we bought our first deal, what we're doing is pausing a little bit. We're doing capital improvements, turning some units, we will get 25-30% of the complex turned, then we’ll go do the next one once stabilization processes are underway. Whenever you walk into something, just walk cautiously. I think too often we walk into things with so much excitement, so much vigor and energy that we don't pay attention to the little things, take the blinders off and use your peripheral vision.
Moving on to the lawyer issue, if I were to ask a lawyer for some advice, I would follow their advice and think that I'm doing the right thing. Have you implemented something around that?
Yes, I became the question guy, people say that I ask way too many questions, and I say it's because I'm curious and I also wanted to make sure that I'm safe. I don't think we should ever be afraid to ask questions, no matter how big or small, and we need to fact check. Just like when a doctor said you had cancer, and you didn't think you had it, you go get a second opinion. I think it's the same thing in the legal profession.
When you're held at that higher standard, because you raise capital, or you have somebody else's best interest at hand, you're the fiduciary, and you need to tell them everything. Transparency and communication is more important today. You should have more investor calls, newsletters, written documentation, pictures, and things that the investor can't ever push back and say, I didn’t know this. When occupancy drops, call your investors and let them know what you're trying to do to solve the problem.
In terms of vacancy, what was it before and what ended up being during the crisis?
We would buy properties that were typically low 80s and high 70s in occupancy, people didn't want value add back then. Everybody loves it today. So we would buy these value add deals, and we would turn them around. We actually had occupancy rates in the high 80s, low 90s, 92% is where we averaged. When 2008 rolled around, occupancies dropped back into the high 70s. And it was overnight, and some properties went even further than that. I owned a deal in Anderson, Indiana, when we bought that property it was rated on a list out of of 275 by Money Magazine, the number three city in the country to raise a family, we bought that property, and within nine months it was fourth from the bottom, it was 281. Anderson was in the automobile industry, and those were one of the industries that got hit the hardest in 2008, automotive and transportation. We were heavily invested in markets like that. As a result, businesses went out of business, and people lost their jobs and had to move. I had a property manager call me on a Monday morning from this property in Anderson in tears, saying, I have 30 moving trucks in the parking lot this morning. How do you weather that storm? This goes back to being under capitalized, we didn't have enough money.
Mike Morawski
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