July 8, 2022

Due Diligence And Qualifications with Sam Bates

Due Diligence And Qualifications with Sam Bates

“…high integrity, people that do their job is essential….”   In this episode of Cash Flow Pro, we talk with Sam Bates, Founder and CEO of Bates Capital Group. Sam has a Bachelor of Science degree from Texas A&M University in Finance,...

“…high integrity, people that do their job is essential….”


In this episode of Cash Flow Pro, we talk with Sam Bates, Founder and CEO of Bates Capital Group. Sam has a Bachelor of Science degree from Texas A&M University in Finance, an MS in Personal Financial Planning, and an MBA from Texas Tech University. He also spent more than a decade in corporate America before starting a career in real estate. His sole focus is to help others improve their life conditions through real estate investing. His portfolio currently has 1,035 multifamily units in Texas and the Southeast. They have 1,100 units in the development pipeline. Sam and his team have provided an average IRR of 61% on all deals that have gone full cycle.


Bates Capital Group is a real estate investment company committed to acquiring value-add investment opportunities for investors. They aim to acquire high-quality assets that provide risk-adjusted returns to our investors.



In this episode, we discuss:


  • Property management and how it can affect your investment
  • The importance of finding qualified personnel and when to invest more in services
  • How due diligence can save your deals



Make sure to tune in on this episode to find out more!


Find your flow,

Casey Brown


Resources mentioned in this podcast:


Unknown Speaker  0:00  

Unknown Speaker  0:06  
Hey there and welcome to today's episode of cash flow Pro, your daily real estate investing podcast and YouTube channel. I'm here today with Sam Bates of Bates Capital Group now, Sam is actually he's Hotelling it today Hotelling however you want to say it. So but we get that a lot simply because you know, as as capital raisers, as real estate folks as everything that goes on we, you know, we're moving constantly. And so Sam, how are you today? I'm doing great. Thank you for having me on the show. Casey, I look forward to talking to you and talking to your listeners and hopefully share some wisdom and talks and dimes. Absolutely, man, that's great. Well, you know, we we all the time. This discussion always starts with Okay, your backstory, where did you come from? How did you get to where you are, obviously, is the initial part of this. But then we always seem to find little, little nuances and caveats that people have gotten into, or maybe some some sub markets that people have found that work for them. And ultimately, what we're trying to do is, is connect something from you your story to the listener, and then, you know, because because we want, we want to kind of take a different angle at virtually every aspect of this capital, raising every aspect of this, syndicating and so on and so on. So on. So anyway, so tell us a little bit about yourself, where you come from, how you got where you are, and then we'll kind of take it from there. Yeah. I didn't know what real estate syndication was, I didn't really honestly know what a real estate investor was when I was younger. I grew up in a farming community, very blue collar. And I was always good with numbers. I liked math. And so for undergrad, I decided to finance and I still didn't understand what real estate investing was. But at that time, I liked the stock market. I thought that was a way to build wealth. I thought that was the way to help people grow their portfolios. So I planned on doing that and I got an internship with

Unknown Speaker  2:24  
one of the largest banks in the world loved it. I then accepted a job there and was working as an equity analyst putting together portfolios to

Unknown Speaker  2:35  
high net worth clients, typically, probably two to 10 million. And it was a great job. But at the time I was out in LA I wasn't making a lot of money. I'm from Texas, I wanted to go to grad school. So I moved back, went to grad school, I majored in personal financial planning, and they had an MBA program that was a joint degree. When I was in there, the market crashed. And that basically shifted my paradigm and I'm like, Okay, I just saw people I knew I saw family members lose 3040 50% of their money, virtually overnight. Yeah. And it left me with a lot of thinking and a lot of just like realizing this wasn't what I wanted to do full time more. So after really six years of college, I had to reinvent myself and I worked I went and interviewed a consulting firm honestly didn't know really what I'd be doing there but I had some friends from undergrad and grad school at work there so I thought it'd be a great opportunity and culture I quickly realized I did not want to be in consulting for 40 years Yeah, I was going from a UBS

Unknown Speaker  3:53  
interesting base until consultant I want to talk to you

Unknown Speaker  4:01  
and you're just reading tons of tax law oil and gas dictionary

Unknown Speaker  4:07  
or something else and during grad school I read a few real estate

Unknown Speaker  4:12  
just in kind of just through what I took

Unknown Speaker  4:18  
I find this guy turned out he was the

Unknown Speaker  4:22  
is invested in real estate and just started talking

Unknown Speaker  4:28  
propelled I guess my

Unknown Speaker  4:33  
I'm in Dallas so there's a lot of real estate organizations network

Unknown Speaker  4:39  
this is like a wait oh nine timeframe but there's still

Unknown Speaker  4:43  
so I started surrounding myself with like minded individuals.

Unknown Speaker  4:49  
Realizing Hey,

Unknown Speaker  4:51  
that you can grow well.

Unknown Speaker  4:55  
Actually doing it is one thing.

Unknown Speaker  4:59  
You have

Unknown Speaker  5:01  
My granddad was a business owner. My dad was a

Unknown Speaker  5:06  
sole proprietor, and they kept saying is risky. And

Unknown Speaker  5:10  
once I saw people doing it, it just helped me jump in full

Unknown Speaker  5:15  
as an

Unknown Speaker  5:17  

Unknown Speaker  5:22  
Oh, yeah, so let's let's check real quick. So are you in the house now that I am trying to? Yeah, I live in Dallas. Okay.

Unknown Speaker  5:33  
Okay, well, what's your but your your hub is in Dallas? Right?

Unknown Speaker  5:38  
Okay, good deal. Now, how many what? How many properties or how many doors I guess is the way they look at it now. Do you all have under management? Yeah.

Unknown Speaker  5:52  
I went

Unknown Speaker  5:58  
fix and flip deals in about 18 months, I realized that wasn't a skill. So

Unknown Speaker  6:04  
I moved into multifamily.

Unknown Speaker  6:11  
developed or acquired over 1000 units in four states. And I'm also a partner in

Unknown Speaker  6:19  
that we are single family business we were on

Unknown Speaker  6:24  
to do 109 developments.

Unknown Speaker  6:27  
Primarily just in DFW.

Unknown Speaker  6:31  
Wow, man, that's unbelievable.

Unknown Speaker  6:35  
And so

Unknown Speaker  6:38  
I guess tell us a little bit about so you're currently looking at properties. You know, this is the trip to Atlanta is you looking at properties, right? Well, we have an asset in Atlanta. So I came down for a conference and also just kind of going and seeing how it's performing right now. We we bought it last January has done.

Unknown Speaker  7:01  
And just kind of checking in to make sure the we

Unknown Speaker  7:05  
raised and making sure that they're doing a good job.

Unknown Speaker  7:08  
And how many doors is there in Atlanta? That's 134

Unknown Speaker  7:14  
Wow, okay, well, good. And so you say you have a third party property manager? Any any issues or problems with that? Also, I guess the big the big question is always what do they charge?

Unknown Speaker  7:27  
You know, we got now that may be too personal or too close to whatever. But you know, we're we're here in six 7%? It seems like anymore.

Unknown Speaker  7:37  
But what did they tell us a little bit about that and what problems might be associated with it? Yeah.

Unknown Speaker  7:45  
Fortunately, and unfortunately, I went through a lot of property managers.

Unknown Speaker  7:49  
On the single family side, I've had probably seven or eight property managers, and they tend to charge the five to some will even charge 10%.

Unknown Speaker  8:00  
And then on the multifamily side, we've used, I believe, eight property managers, some of it has been just geographical geographically, we want to put the property manager that is in that location with that asset. And then some of it we've had to hire and fire people just because they weren't doing their jobs. But they all have strengths. They all have weaknesses, I think it's really important to vet and to conduct a thorough DD on them. And sometimes that's hard, because when you're just interviewing through phone, they're going to tell you exactly what you want to hear. So I think going to properties they manage talking to their owners, talking to people that have been in the industry for a while and might know I'm just getting feedback from them, I think helps out a significant amount. What are your thoughts on a course?

Unknown Speaker  8:56  
It's probably 6040 60% Say we want vertically integrated in house property management 40% Maybe it's 7030 70% in house fully integrated, vertically integrated property management 30%. outsourced I don't want to fool with it.

Unknown Speaker  9:15  
We just pay them and but but to me, it's there's a fine line. And you can correct me if I'm wrong because you obviously have the third party property management experience as we all do. But there's a fine line between negotiating a deal with a property manager that's best for your investors

Unknown Speaker  9:36  
and getting somebody to actually perform the duties they are employed to perform at a reduced rate. And that line is typically where you run into issues. Obviously, it becomes you pay what you get for kind of scenario. Somebody that's going to cut trim way back and run bare bones.

Unknown Speaker  10:00  
owns and you're gonna almost get a bare bones thing. But for you to be responsible for investor money, is it more responsible for you to pay an extra percent on the property management? Say 8%? Or seven, whatever it is? And

Unknown Speaker  10:16  
then you have to decide where it's profitable, I guess. Yeah, and that's a really good questions. I think each company has answered themselves and like further apartments in the size of apartments that we own, we're paying the property manager three to 4%. So their margins are razor thin. And also, another question I've had with other investors, with my partners with people, we expect a person making 50 Now with labor increases, maybe 60,000, to operate a property that is valued at 1020, even 40 million. And from economic standpoint, it's tough, because they basically probably die off in a while. So if you're paying somebody 100, or 150,000, to manage it, your NOI is gonna be significantly decreased, but you're gonna get a better quality manager more than likely. So what we've done, and this is been through the experiences, we obviously want a solid on site staff, but we look at the regional manager and see how much experience they have. And that helps and see how busy they are. Because some of the shops are kind of sweatshops. And regional manager might be over 13 properties, we found one group that we like, significantly, and we'll probably give them most of our assets going forward for their regionals are over four, six properties usually. So they have a lot more bandwidth, and they can on three, three or 4% management fee or a little higher. Yes, three or 4% management fee, and wow, the property will pay for the onsite staffs,

Unknown Speaker  11:53  
salaries. But oh, that you got somebody one step above. I see. I see what you're saying. Because the onside stuff seems to be where most of the problems lie, because that's where that's where the majority of your have your

Unknown Speaker  12:09  
what would you call like, like your, your, your, your problems, your your everyday problems or niched way down to what happens on site at 331 afternoon is far more important than collecting the rent for oh, you know, like, obviously, you got a kid or somebody that's an arsonist or playing with fire, whatever, you got to take care of that right now. And if you don't have an onsite staff, that doesn't take care of you, or you don't have an onsite staff, then he burns build. Now, you have an outside staff. So my season stops right there. I guess that's obviously a wild scenario. But I'm just saying that that, that the onside stuff seems to be far more forward. So collectively, between a regional manager and on site, whether it be whether the the on site, folks, you a lot of people give one of their units away, for an on site, somebody that just kind of

Unknown Speaker  13:02  
I don't know, the pool lady, we're not when I was a kid, we live in apartment complex, she liked to sit by the pool and drink wine, like, all day, every day. And that was what she did. But she had a free place to live. Not free. But I mean, you know, we haven't given anybody a free place. But we'll give discounts and like some of the properties will have security guards that are constantly walking in patrolling, it just kind of depends on the tenant makeup profile of the tenant. And it's a location to location, but you are correct, like it is.

Unknown Speaker  13:38  
Staff and the regional go in tandem. And it's very important that you have, I think high integrity, people that do their job is very important. And like one asset we bought, I should have went with my gut, and I didn't, but I walked in, and I met the onsite manager, and I just got a bad feeling about it. And we had used a property management company before so I trusted them. And I was like, Okay, you you believe she'll do a good job? Well, we'll leave her in. And six months later, we fired the management company because they want to replace her and she wasn't doing a good job. Well, and let's be honest, you know, there's so many companies out there that are trying to stand between us as employers.

Unknown Speaker  14:29  
Like, for instance, I guess what I'm getting at is, is let's look at the resume companies like let's go with, with just the big ones that we know of, if you want a job, you post your resume on these websites, right. All right. Well, there they have such a profitability model, that it's making it really difficult for people like me and you to get through to the people we want to get through to and actually have a pool that we can pull from and say, Hey, let's interview these 10 people. Instead, you're getting

Unknown Speaker  15:00  
You're getting people that are not qualified for anything that are applying. And it's making it really hard to get a pool of people that are qualified to do what you want to do. And that you can go in and interview 20 of them and say, oh, man, look, this guy right here, or this girl right here is exactly what we need. And so it's just, it's almost like a headache, really. And then, by the time you spend a day,

Unknown Speaker  15:29  
a 10 hour day searching to hire a person that's going to make $50,000 that the year, it's just like it, it makes you want to pull your hair out, you burned all this time. And now you're still now you're where you want to be. And now you got to fire or whatever. Yeah, and I think from an asset management perspective, that's where it's key to continually have the relationship with the property manager, like we have. With all our managers, we have weekly calls, sometimes we're talking, if we're in like a renovation or lease up, or some phase that's labor intensive, and not when we're stabilized, we're talking significantly more than once a week, and you can figure out, you can kind of sift through some of the BS that they're telling you or you can determine that they aren't a good fit. And you can quickly make a decision. Like right now we're doing a large renovation, that's roughly $4.6 million

Unknown Speaker  16:33  
renovation, and we've learned that the contractor is probably not the best fit. And this week or next week, we're probably going to have to release some of his duties. But we've, we've seen it and we realize he's over his head. And that's just because we've been talking to him on a weekly basis and stopping by the property on a every once or twice a week. When that comes the same, those those are the same models that tend to bite you in the rear end as the property management we discussed time, you know, you get you have a decent contractor that comes in and they're like man, um, 10% 10% of the gross spend or whatever and you're like my man, what you know, I'm not paying you X amount of dollars to do you know, X amount of huge dollars a year investors money to do this. We're gonna go find somebody that wants to do it that will do that'll do it cheaper. It's a double edged sword, it always ends up being where is it responsible to spend investor money a little bit more. And then it just, you know, it's that it's the, it's the whole

Unknown Speaker  17:42  
caboodle of everything there that you have to be so careful of. So. So you mentioned there, you're doing a renovation. Tell us a little bit about that.

Unknown Speaker  17:51  
This, this is by far the biggest renovation projects we've done. And we have a lot of experience, we've probably done seven or eight groundout developments, we have two more in the pipeline. But these, these are in a good location. Dallas, is actually a three property portfolio that was built in 3437 and 73. And the units basically just need completely being gutted. Yeah, when we were walking it, we bought it directly from the seller off market, but when we were walking it, there was meth units, there's

Unknown Speaker  18:30  
the the seller was the stereotypical

Unknown Speaker  18:34  
slumlord, and just let anything and everything go on. So we're having to come in and put 40 to $50,000 per unit in to get it up to the standards where we need it to be. And they are very close to downtown. So once we do renovate it, there'll be basically brand new, and we can attract that younger professional that wants to live close to the to the center of the city. Because they weren't there or their friends are there just although all the life is there. Yeah, yeah. Yeah. And I And now where is that at? It's there's three properties in East Dallas that's close to downtown and the, I guess the young, young professional area, but they're by far the eyesores in the neighborhood. Sure.

Unknown Speaker  19:22  
Once we turn them around, that shouldn't be great assets. Now, you said they refresh my mind I was thinking about some other things you were talking about there? What yours did you say they were Bill 1934 37 and 73. So yeah, I mean, man, you're almost tearing plaster walls out. Basically if you're getting that deep, I mean, the little shims in the slabs then they put the moat over top of it. I mean, that's a Wow, interesting.

Unknown Speaker  19:54  
At 4.7 million, how many units as 110 so

Unknown Speaker  20:00  
And well, I mean, how much do you think you're gonna? What's your? What's your total projection look like there? Well, we bought it for roughly 11.2 11.3. But in that

Unknown Speaker  20:15  
once we stabilize it, we think it could the stabilized value will be close to 20 million. Wow.

Unknown Speaker  20:25  
And did you what type of arrays did you do for that?

Unknown Speaker  20:30  

Unknown Speaker  20:32  
at the very end we had to bring,

Unknown Speaker  20:35  
well, they changed the terms of the very last minute because the lender realizes much heavy lift than we thought. So we're anticipating raising about four and a half million, but our final equity raises roughly six.

Unknown Speaker  20:51  

Unknown Speaker  20:53  
know 6 million saved about one and a half additional last week to close. Oh, wow. Oh, my gosh. Now, did you already kind of have that soft committed in any way? Or was that basically just bare bones? Hey, let's go after what? It was both. Luckily, this arrays, we oversubscribed, within like 48 hours. So we did have a list of people. But that was probably almost two months after we started the race. So some people were still interested, some people weren't. So we're having to pick up the phone and call and email and see if the people that were on the waiting list still wanted to invest. Now, that brings up an interesting point. And I'm sure you probably have no idea where I'm getting ready to go with this. So

Unknown Speaker  21:45  

Unknown Speaker  21:47  
you said that that was a couple of months into the race, right? Now. What and then you mentioned this was an off market, slumlord kind of deal that you purchased it from. Now, when you were negotiating with the owner, what was your closing timeline? Like? And how did you position yourself when you presented to him that hey, we because because here's the thing, a lot of times off market sellers, individual owners, people have whatever they just own or inherited or whatever 150 unit complex, let's say like what you're talking about, they don't understand you have to go in and almost basically educate them and say, Hey, listen, I want to buy this. But listen, I need some time, because I'm gonna have to raise this much capital, then I'm gonna have to go do this. And I'm gonna do that. So. So how was that positioned? From the standpoint when you first approached him and said, Hey, we want to buy this. But

Unknown Speaker  22:52  
that's a really good question. And we actually had a pre existing relationship with him so significantly, and he knows in bad shape. But once we started due diligence,

Unknown Speaker  23:05  
we were able to uncover just somebody just how bad a shape it was in Yeah, and

Unknown Speaker  23:13  
disclose it to us, or he just didn't know. It could have been a little bit of both. And so we like we were planning on closing last September ish. And we didn't close until in the last year, just because once we got in, we had to bring in more people for due diligence, the lender had to come back and inspect it multiple times. We had to go through multiple rounds of price reductions. And it was just, and each one of those is like negotiating for the first time. Exactly. And we dropped the price by almost $2 million from when we started to where we ended up and it was always a tough negotiation. And I think if it wasn't for that pre existing relationship that we'd had for six or seven years, either we would have pulled out or he would have pulled out. But we knew is a good deal. If we could get the price that we needed. Well, and basically when you're when you're talking about due diligence, you know, you're not like, hey, seller, we want to buy this for $2 million last year, guys give it to the seller and saying, Hey, dude, I got $2 million worth of repairs over here that you didn't tell me about. And now I've got to figure out a way to invest to convince my investors if this is still a good deal, or even the seller has has a little bit of a liability on them to explain to you why you should continue this purchase when you've got all this extra stuff that has to be done. And somebody the other day was telling me about a $250 sewer issue that they uncovered and due diligence and I was like, wow, that you know, otherwise, did you got to eat that at some point.

Unknown Speaker  25:00  
If you don't do that, so due diligence can be really, I mean, obviously, we all know how important it is, but, but if you can get somebody that's reasonable that says, hey, I'm gonna sell you this for this price, do your due diligence, you know, let's be let's both be reasonable. And it sounds to me like at the end of the day, that's what you all ended up with was somebody that new a was in bad shape. And, and a lot of times, the thing is, is that that it's kind of like when you know, from the real estate sales business, it's a whole lot different when I come in, and I'm ready to sell your house, because you're that you brought your kids home to when they were born, because your house is a commodity to me. You are emotionally attached to it. And so when you have a seller like that, that you can really just kind of work in there and say, Hey, this is what it is, you know what it is, then that's a little different. So why why? Well, good, man. That's great. Well, congratulations, you're getting that deal done and closed. And you're right, though, man, that sounds like a heavy lift is is like I guess a understatement. I feel Yeah, it seems that way for sure. Well, we certainly be glad to see the end result when you get when you get finished and and just show the people and your investors now.

Unknown Speaker  26:14  
The $6 million raise how many investors was that? That was 42. So So is this actually one of our larger

Unknown Speaker  26:24  
investor pools, or raises with investors? We've done raises in the past, but that was one where we initially thought we're gonna be bringing four to four and a half million, then it turned out, it was a lot more. So we're scrambling kind of where we're Where were you? How do you build your lists of potential people just through social media, or we're in 5506, B, or C, I guess, first off, most of the time, we've always done 506 B, we're just starting to grow our list through social media. That's, honestly, that's probably our Achilles heel at this point is not advertising. In the past, through business relationships. Luckily, we've been able to make a lot of connections with that way with business owners, just friends over the last 1015 years now. Now, the last few years have been getting referrals. So it's been growing. But

Unknown Speaker  27:24  
this year, we've made more of an effort to get on social media, we're looking at crowdfunding options, we're looking at

Unknown Speaker  27:31  

Unknown Speaker  27:33  
placement agents to raise the fund potentially. So I'm just looking at all different areas at this point. Sure. Good deal. Well, all right. Well, Sam, listen, we're getting towards the end of the episode. And I've got a couple of questions we ask every guest that comes on the show. There's no right or wrong answer. But the first one is, what is the best book that you have recently read or currently reading? I would say the best book recently read is last year, but it was not how and

Unknown Speaker  28:05  
like the sixth time two weeks, I've gotten

Unknown Speaker  28:09  
a simple read. It's common sense. But it honestly, I guess it's just getting reinforced in your brain kind of pulls your wandering mind backwards should be in a way. Exactly. And that helps you realize you shouldn't do anything not, you shouldn't do everything. And you can't do everything. And like, we went basically from me and two partners to over 50 employees. And that was a big shift. I think definitely for me, and I think for the other guys that we have to start delegating to grow the business. Sure, sure. Yeah. Well, good deal. Now what is a dream vacation that you have either taken or hope to take?

Unknown Speaker  28:51  
One of my hobbies is traveling and so I love to travel.

Unknown Speaker  28:56  
During COVID, I was supposed to go over to Budapest, Prague. Bratislava in Austria, so I guess I'll say that maybe it's

Unknown Speaker  29:08  
it's definitely a dream vacation might not be a vacation. But since I was on my mind a couple years ago, I definitely want to do that again.

Unknown Speaker  29:16  
Cool deal, man. Well, good. Well, listen. So you had mentioned, you know, you all are looking towards moving in the fund direction or or, or placement agents and so on, so forth. But if there's a listener out there that heard something that resonated with them that maybe they want to ask more questions about or even potentially being invested with you at some point. What is a good way for people to get in touch with you? Yeah, definitely. I love talking to people about real estate. It's a passion of mine. So you can reach me at Sam at base camp, calm and we can set up a call or exchange emails, whatever you feel

Unknown Speaker  29:51  
is your preference. Good deal. Well, Sam, thanks for being with us today. We really appreciate it. And listeners if you don't mind to

Unknown Speaker  30:00  
You go give us a review and give us a five star review. We hope. If you like what you've heard today and you'd like what Sam had to pass along, you can always he just gave me the way to reach out to him. So we do as always, we do appreciate you listening and hope everybody has a wonderful rest of the day, Sam, thanks again. Thank you, Casey. I enjoyed it. Yes, sir.

Transcribed by

Sam BatesProfile Photo

Sam Bates

Bates Capital Group