The 3 Distress Signals That Make the Next 12 Months a Buyer’s Market | Suraj Bhakta E61

Michael Russell 0:03

The Hotel Investor Playbook, your guide to building wealth and freedom through hotel and hospitality ownership. Welcome back to the Hotel Investor Playbook. I'm Michael Russell, co-founder of Malama Capital, and your host. On this podcast, we talk story about everything you need to know to make money investing in hotels and hospitality assets. Today, we welcome back Serge Bakda, who was on the show months ago and gave a masterclass on how to think like a real hotel buyer. And that episode, it focused a lot on the fundamentals, but today I kind of want to go a different direction and I want to talk about how the market is shifting. Seems like deals are a little slower. Sellers are maybe holding on to some old pricing and buyers are kind of running into some surprises that maybe they did not expect. Surge, welcome back, man. Good to have you here.

Suraj Bhakta 1:00

Thanks, Michael. Thanks for having me. I think when you look at today and in the transaction world, we're seeing a whole host of different things. And there's a lot of things pushing and pulling on what it's happening. And just let's take their most recent events and scenario when the government shut down, right? If we're talking about transactions, so many people who are getting involved either in their first hotel or their first investment, they may be utilizing SBA. Those came to a screeching halt because we couldn't close deals. And so there's a lot of unique things that like that that keep popping up. And obviously, I like to say the administration can keep us on our toes in terms of all the changes and things that may happen. Now, there's always the inkling that people thought with a reduction in the interest rate that we'd see a movement upwards in the transaction quality, but it really hasn't. I don't think the interest rate has gotten to a point where it's impactful quite yet. It still needs to drop probably a little bit more. But there's two ways to look at that story, right? From a business investor and a hotel owner, person that dwells in real estate. Yeah, love low interest rates all day, every day. For a person who looks at more of the macro level of the U.S. economy and the consumers, we need our medicine. And we kind of have to hold on the rates for a little bit. Otherwise, you run that risk of inflation, the stagflation, and all these other stories that keep coming up. And they're a reality. I mean, we know everything to get more expensive these days.

Michael Russell 2:22

I'd like to know how has this government shutdown, which as of now, the government has reopened, but being in the midst of presumably a bunch of different transactions all at once, what was that like from your perspective?

Suraj Bhakta 2:37

It's tremendous because I'll tell you what, I had approximately seven or eight deals in the pipeline and like middle of October that are all scheduled to close between November and December. And with the screeching halt of the SBA, now some of the folks were still waiting to get to committee. Others were waiting for a loan number to get issued. And they were so they're on the cusp of closing. But with the shutdown, everything stopped. And so now at that point, we had deals that were pushing with no real closing points. So now all the transactions are in limbo. It appears that buyers are unable to perform because we're having to kick these timelines and we had to go to the sellers and make sure, hey, look, this is out of our control. We need to wait till the government reopens. And so it could jeopardize a lot of things. I mean, luckily we didn't have any sellers that were unreasonable or unwilling to kind of listen. But the reality is so many of these deals got pushed. And now with the timeline, I think one of the things I had seen said for every week we were closed, it was almost creating a backlog of about two weeks to get back to normal, right? And now we were closed for four weeks. That would push us well out in advance. You're almost eight weeks out before you can get back onto that docket. Because you got to remember there's new deals coming in, but the existing ones that needed to close couldn't get moved fast enough, right? But now that we've opened, I have seen a little bit of traction. I got a couple more deals that hopefully will hit the finish line before December. But it really can put everyone in a loop, particular buyers who are ready to move, want to close by end of year for whatever situation may hit they may have. And some more complications just to think about, Michael. Look, our industry utilizes 1031 exchanges all the time. And imagine if you're on the clock and the government was shut down. Are you going to eat that capital gains cost?

Michael Russell 4:26

Yeah, I imagine a lot of people were having some sleepless nights throughout this period. Hey, before we get too far into this, for any of our listeners who maybe missed the first episode, can you give us just a brief overview of what your role is in the hotel world?

Suraj Bhakta 4:41

Yeah, so I am actually an attorney by trade. So I've been practicing real estate and transactional work for well over 30 years now. And at the same time, um I also serve as a CEO of NewGen Advisory, which is a niche boutique brokerage firm just in hotels. And so we do hotels clear across the country, from California to North Carolina, Montana to Texas. We've completed deals in 44 states. We have a team of about 20 agents right now and been fortunate that we've seen the best of times and the worst of times, but we keep ticket away. So it's been good.

Michael Russell 5:14

Yeah. Well, you say niche, but I would not say small. I mean, when I gave your emails and I see all the listings that you have, I'm blown away. You got a lot moving and shaking. And so I think that if anyone's qualified to speak upon where we are in the market right now, I think you have enough a large enough sample size to really be able to weigh in accurately here. I I want to dig into kind of where we are in the market cycle. Where are they sitting right now in terms of the sentiment on selling?

Suraj Bhakta 5:39

It's still a little bit of a mixed bag. I think it depends on when your seller came into the asset and what their position is in the life cycle of their asset, right? I think some of the guys that have bought maybe in the last three, four years that may have utilized a short-term loan or some kind of bridge to complete a deal, they're having a harder time. And so those sellers are coming down in some instances, let's call it distress, right? To some level, because they need to find either permanent financing or a way to get to where they want, because a lot of people were buying based on what 21 and 22 performance numbers were. Those were high values. And I think when you look at today, there's a new temperament, right? We're really seeing a lot of suppression from an ownership level, just seeing the numbers kind of crawl down and ref cars are down across the board, and so our ADRs are starting to come down a little bit, but they have to keep up with inflation. So it's a bit of a little bit of a battle back and forth, I guess you're gonna call it, but occupancies have dropped as well. And so we're seeing a lot of issues. Shockingly, Sun Belt was always the strongest little area from California to Florida, but it's also taken a little bit of a nosedive in in terms of recent months, just kind of seeing everyone realign themselves. Now, for the sellers that were in it long term, to give you the back end of the story, I think they have a little more, a little more optionality in terms of what they can do with their asset in today's world. But the problem ends up being they run into other things. So for example, maintenance and pips. PIPS are very difficult today to complete on your property. So those property improvement plans, people try to space those out as much as possible. But the cost of those have gone up. I mean, we know tariffs and all that stuff has relaid some level of impact at any given point. So whether you're trying to get new furniture and fixtures or you're trying to do your roof on your property, there's some impact that's happening across the board for those guys that were in it long term as well. So they have to reevaluate how much are we willing to put in and hold this asset long term. And is it still cost efficient if I put in 2 million into my property or three million for capital improvements?

Michael Russell 7:46

Yeah, absolutely. And so what you're describing is a seller has to evaluate whether or not it still makes sense to hold on to the property, considering that there's CapEx presumably required at a much higher cost than maybe it would have been pre previously. But also, if they're going to sell their property, now they got to consider well, what is the buyer's perspective? So let's let's talk about that. There's a little bit of a buyer and seller expectation gap. Sellers tend to move a little bit slowly compared to how buyers will react to market changes. So, from a buyer's perspective, what are they more cautious about today compared to before?

Suraj Bhakta 8:19

I think buyers, look, they've been watching on the sidelines for a while. And I think we might have talked about that last time that buyers had become increasingly patient. They don't want to overpay. And I think they are now truly living that component. So when they're looking at deals, it's got to pencil, right? Problem is we're still running into the same problem we talked about before, which is the cost of construction is very high. So new inventory, depending on the market segment. So when we talk about, say, upscale, upper upscale, and luxury, those are still being constructed. They still pencil because they're able to have that level of consistency in the performance of those assets and they're able to hold that ADR to where they want it to be. And their clientele or consumer has that kind of discretional spending money, right? So when we look at the other components, the reality is the economic sector and mid-scale, those are probably the two of the ones where we've probably seen the biggest drop-off in new construction because none of those guys are gonna pencil. And so now when we're looking at this from a transactional standpoint and the buyers are looking at it, they're gonna say, hey, well, if I go build it, what's the cost? And if I got to buy it, I gotta factor in these pips now. And so they've been more and more patient. I think they see and wait for the deals. The opportunity, I think. Look, there's always some silver lining for everybody. And I think the opportunity is really gonna lie around some of the more recent buyers that are now gonna become sellers because they bought in the in the peak of the market, somewhere in that 21-22 time frame. And that's where the buyers are focusing is that, hey, can we pick something up that's on its way down or hitting the bottom before it goes back up? Because there'll be a lot of guys that have been patient on the sidelines that are waiting to pounce on that.

Michael Russell 10:05

Hey guys, quick favor if this episode is helping you, text it to one friend who is either trying to buy a hotel or owns and operates one already. Sharing the show is the best way you can support what we're building here. Now, back to the episode. Well, so from a seller's perspective, what are some of the most common unrealistic expectations that you see them still holding on to?

Suraj Bhakta 10:28

They factor in the opportunity into their pricing. I mean, I see it more often than not. And talking a seller into understanding, like, look, if you factor in the opportunity, then there is no opportunity for the buyer to come in. I can't tell you how many guys come to us and be like, oh, I'd like to list, but here's my list price. And I'm like, okay, let me see the financials, right? And you're looking at the financials, you're like, walk me through how you came up with your pricing. And he'll walk you through it. And because they know it, they know their numbers, but they end up looking at what the next guy is gonna do with it. So whether the next guy says, I'm gonna convert it into something else, or I'm gonna do X, Y, and Z, or you can add more rooms to this property, or whatever it might be. The guy fat that that's trying to sell factors part of that in, it all automatically turns the buyers off, or it doesn't pencil for them anymore because you've taken, you're trying to use up their advantage, right? Or the the selling point. So I always tell people, I'm like, be realistic, right? I guess in in really loose terms, it's kind of like telling sellers how greedy can we get, right? We don't want them to have that mindset. If you're gonna get to the marketplace, I want you to have full value of your asset. Don't get me wrong, because we're here to sell it at its best value. But the problem is it still has to pencil because lenders today are very critical. They're gonna look at the deal the same way and say, all right, buyer, tell me how you make money in this deal, right? And they've gotten more critical over time just looking at each of these deals because they realize, like, hey, they're slightly overpaying, or maybe they're paying overpaying by a lot because there's nothing left for them. And if there's nothing left for the buyer, how are you gonna succeed? So those stories come up quite a bit. I think we see that more often than not today.

Michael Russell 12:12

Yeah, I mean, I can attest to that, like firsthand, right? We engaged your firm to help us. Well, we were looking at a couple of properties in Montana, and I'll give you some general parameters. This doesn't necessarily apply specifically to these properties, but let's just say that you've got a seller that has a property that maybe is listed at $80,000 per key, but it needs $20,000 to $25,000 worth of capex improvements to bring it up to what the vision is for the property. But let's say you go and you factor in, well, $80K plus $25,000. So I'm gonna be $105,000 per key all in, but the market value maybe is around $100,000. So it's like, in a sense, I'm going through all that work, all that bandwidth, just to bring it up to maybe I'm overpaying in a sense. And that's an equation where you really got to filter through that and make make certain. It's tough sometimes, I imagine, from a seller's perspective, to say, again, hypothetically, okay, I'll sell this thing for 60,000 when market value as is is 80,000. But you got to understand, well, the buyer needs to add value. We are value add buyers. That's what we do. We find something where we can put in effort and work and raise the value by making improvements. And then hopefully it's going to be worth a higher enough amount that it's going to make sense for our time to put that investment in, not just money, but also time. And so that is like the dance, right? That we constantly see and and and we've experienced. You brought up something that is a factor and is a variable that is sometimes out of the buyer and the seller's control, which is pips, right? And oftentimes the pip is, well, it is always it's controlled by the brand. I I guess this sometimes to me is like such it's concerning, I guess, going into the uncertainty of buying a value add property without knowing exactly what that pip is going to be. Have you seen recently that pips are becoming perhaps higher and killing off deals? What's different now?

Suraj Bhakta 14:15

Yeah, I would probably say we see the pips becoming deal killers more often than not. For years, I think a lot of say brands, independent properties, whoever it may be, they've gotten more lenient about some of these things, especially coming out of COVID, because they weren't trying to put it in. People were accepting what it was, and it was a way of deferring some of the cost and expense. And reality, it's the maintenance. From an ownership level, as a seller, it's really how much do you love your property and how well did you keep it in shape? Everything needs an upkeep and some level of maintenance. And if you keep deferring it over and over, then it piles up. That becomes a big problem at the back end when you're trying to transact. And it's gotten to the point that it's not just that, but it's it's the overall expense of the pip, right? Because along with pip comes labor costs and all these other pieces that have to happen with it. And it's not like any one categorical spot has come down. Everything has incrementally increased. Whether it's you're you're redoing some plumbing, cost went up. You're redoing the bathrooms, the furnishings are coming from overseas, there's tariffs on it, right? You have to get a couple guys to come and do all the install, their rates have doubled, right? So these components always add into that pip factor. And lenders, to be honest, they have so much trepidation around those because at the end of the day, I think we were looking at an analysis recently. It might have been like a Hampton Inn or something like that. And there might be like a two and a half million dollar pip on this thing. It's an older box. But you look at the two and a half million and you're like, okay, well, if you're gonna stay in the asset, one, you need longevity in your brand. So if you're already running at the the end of your franchise agreement, does it make sense to put in two and a half? Maybe, maybe not. In most cases, it won't, because if you only have five years left and make once you make two and a half million dollar contribution, you're asking for an extension on that franchise agreement. So you want to get more time out of it. But at the end of the day, if I put two and a half million in and I fast forward and say, am I going to be able to sell this and recoup this value later down the road? Or am I going to see an uptick in my current cash flow? And that argument right now, as we see things, is really dwindling. Like most people don't see the value. Like you put that back into the property. They're one, they're not going to cash flow significantly higher than where they're at, right? There's they're starting to reach tipping points of where hotel rates can actually be because at a certain point, your consumers just can be like, I can't stay with you. I have to go shop. Right. And we've known the loyalty of brands to be phenomenal, especially when it comes to Marriott and Hilton. They thrive on their loyalty programs. Bonvoy is more important than anything else to Marriott. And that's a unique perspective when you start looking at it. But if your property doesn't perform in the same segment, are you going to recoup that pip cost becomes a big problem? And I'm the argument was you do the math, you're not going to make your money back. And that's a hard pill for everyone to swallow because the value might be 10 million today and barely maybe 10.5 moving forward based on what we have going on right now.

Michael Russell 17:22

Wow. Yeah. I mean, that's a lot to factor through. So I mean, of course, in theory, you could renegotiate to sign on with a new brand, but these these contracts are usually like 20 years. And so if the timing's not right, you know, if you're halfway through that cycle, you're not going to renegotiate. The brand has the control to force this pip. You mentioned that they were probably a little bit more lenient during COVID. They were deferring a lot of the improvements that need to be done. And now they need to be done in order to maintain that standard. So all of this to me is adding up to an equation of distress. I imagine I would expect there is a distress wave coming. Can you provide some input on that from your perspective?

Suraj Bhakta 18:04

Yeah, look, distress can be in a lot of different forms, right? Is it distress being initiated by kind of like the lender or maturing note? The other distress can be from actual improvements, things that need to happen on the property, but they don't necessarily have the capability or the cash flow to maintain it in a certain way. So they're either going to run into a lot of defaults coming out of this thing, whether it's with the franchise or with their lender. And the other factor for distress is real just macroeconomics, right? I mean, are your rates and your occupancy and rep are holding steady or are we ha are we seeing the movement up and down? And the argument I think for some time was that people were manipulating ADR to make sure that they were the rep bars were staying where they needed to be, or even going higher, or keeping up with inflation. But the reality is occupancy is the indicator that says it's always been kind of flat. I mean, it may have recovered since COVID to close to 2019 or maybe at 2019 numbers. But it's not like any of the numbers have moved dramatically up, right? And it's not, it's not like a steady incline in any any respects. So that's part of the distress cycle a little bit, but I do see a lot of it. I think we're gonna see a lot more as cost and expensive, you know, these margins keep getting suppressed, and everyone else is out there at making the next ask, and rightfully so, because lenders know that, hey, these things need to happen. If they have a five-year arm on a loan or something of that nature, someone tried to get in while the market was hot, those are gonna be distressed because who's gonna refi you right now, right? If your numbers have tapered or are on the downward trend, lenders are absolutely cold feet when they come to you. You're either gonna have to find more capital to put in before you do it, or you're gonna decide to sell and cut your losses. So that type of distress will come up more often. And the other was kind of talking about these other improvements and things that may happen. Brands, when people are coming at the end of their cycle on a franchise agreement, that's some level of distress, operational distress for owners. And they got to make some choices to kind of figure out what direction they want to go with it.

Michael Russell 20:12

How flexible are these brands to work with a seller or even a potential new buyer to maybe make it a little bit easier to afford some of these property improvement costs?

Suraj Bhakta 20:22

I think that's very subjective in my mind. And you'll probably hear it differently from most people where they'll say, hey, look, it's standard across the board, but it's not. I mean, if if you, Michael, we'd say you had 10 or 11 IHG properties, right? It's not like IHG is going to sit there and ignore you. You know what I mean? Like if you had a question or you had a request and you wanted to talk about a particular property that might be having trouble in your portfolio, you know, they're going to listen to you, right? You've got you've got some power behind you when you own 10 or 12 assets that are all IHG branded and they see the value in you as a owner and an operator, right? So I think you get some negotiating power when you have the economies of scale. But on an individual basis, if you're going to just do it based on a complaint process, that's not a good strategy. I think there's a lot of one-off owners that will try to negotiate and try to see if they can get the best deal. But there's no there's no real reason for brands to come off of their standard when obviously you're not somebody of scale, so to speak.

Michael Russell 21:26

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Suraj Bhakta 23:22

100%. I will say to all the buyers that have been on the sidelines sipping cocktails and being patient. Now's time to get back in and start doing your homework. Be as diligent as possible. Go look and work with whether it's a brokerage or an individual, if you have a team in-house, find out what it is you want, right? And I promise you that there's ways to find out who in the last five years or something that maybe your strategy is to look at the last 10 years, right? Someone's coming due on some level. And you have to actually catch it on the way down. If you wait till you get to the bottom or you're thinking, like, oh, now it's starting to spring back up, there's too many fish in the in the pond already. So you need to be able to pick it up right now while it's sliding. Are you still going to slide a little bit further? Probably. Is it hard to get lending? Absolutely. But if you've been a patient buyer and you've got the capital resources, now's your time because you want to be able to pounce on these deals as they're still sliding. You're going to always factor into your projection, like, okay, I buy now, I might still have to suck up a little bit for the next 12 months. But then we should be able to see a turn or whatever might happen and whatever your predictions and your pro forma is telling you. I think we're going to be seeing a big movement back up here soon, probably in the next year, maybe.

Michael Russell 24:39

Yeah. Well, that's what you hope for. I want to unpack this a little bit more. If a buyer, I should say, I should say an investor wants to find a distressed property, what sign should they be looking for? How do they identify a property that could be potentially under distress?

Suraj Bhakta 24:56

You could approach this a couple different ways. I think one, there's the type of investor that can go property to property, and just your visual appeal can also tell you where this property is. Because the ones that are distressed, they're going to be wearing down and you're going to be visibly able to be able to see it. Because if you go to enough properties, you know the people that pay attention to detail and the others that don't. Other places for buyers, I think if you're looking for that deal, I think sometimes you're you're looking at, hey, who came in at what time frame? People that came in at the peak of the market, those are the ones that you want to kind of start looking at. And everything's public record. The recorder's offices will tell you when something got purchased. You may not know exactly what it got purchased for, but it tells you that it got purchased. So a lot of times it's just having a team of sleuths go out and say, hey, let's start talking to these guys, right? And if it's branded, you might be able to catch an ear of a franchise sales rep and say, hey, how's this guy doing over here? Maybe you get some information, maybe you don't. Or maybe you figure out, like, hey, that person for a lot of reasons might be either laying people off or, like I said, deferment of maintenance. You can see that stuff visibly. You can find out, like, hey, he's struggling. Something's happening here. So you go in and you go talk to him. The opportunity is always in the ask. And I think when you go and and you know attack it a little bit forward, now everyone is gun shy. If you're having a distress asset, you know, nobody wants to publicize it. That's the hard part. They have a hard time even coming to brokers and agents and telling their lender about it. They feel like it's kind of embarrassing to say, I wasn't able to make my business uptake. But from a from an attorney's perspective, when I talk to clients and I always say, look, you got to have an exit strategy because there's no magical wand that makes your debt go away. That looming maturity day is not going to miraculously move itself. So you have to figure out what your strategy is. And now if your strategy, and again, you have to be open on your strategy, right? Do you cut your losses today? And that tells you, Michael, you're going to be say 300,000 upside down. Your equity is washed out or whatever it might be. Is that better than being liable for the entire note being due? Now you have expenses. So it's your equity is going to go away anyways, but now you have more pieces that are going to be piling up on there, whether it's interest, back fees, late fees, all kinds of stuff that can happen with, you know, defaults and stuff like that. So it's just a I think you can find those things. It's how aggressive of a team that you have that wants to go out and look for those types of distress assets.

Michael Russell 27:23

Yeah, absolutely. Well, look, I would be remiss if I didn't take at least one moment in every podcast to mention there's probably AI for this, right? I was uh listening to something, I don't know uh what source I got this from, but I I watched a whole demonstration on how someone was searching for properties that were late in paying their property tax. And they set up uh, you know, quick program within, I think it was perplexity AI. So, you know, all of these large language models, Claude and Google and the rest of ChatGPT, of course, they're all advancing so quickly, but there are real practical ways to where with the correct formatting of a prompt, you can actually you can get the AI software to search based on the parameters that you're looking for, which if tax liens, for example, are public information, then that might be one avenue. You mentioned you could have a team. I think there's probably folks that you could source this to. I would love actually, if anyone's listening to this and would like to email and say, hey, here's how you do it, shoot us an email, put the the link in the uh show notes. But there is real opportunity here to find some distress. And so I think it's just about finding these patterns, like you said, the timing of when the asset was purchased, if there's any noticeable deferred maintenance, if you're physically, you can view that, or if you know you want to use AI to search for delinquency, all of that is a way in which you can attack and try to find something that is a good value. The other part of this equation, when it comes to getting a deal done, is being able to convince a lender that you're gonna be able to improve the situation, right? If a property is distressed, what are you gonna do that's magically gonna solve the problem? Other than just buying at a ridiculously low price point, you kind of got to have a plan in place. So I guess what I want to know is when you're looking at the deals that are getting financed today, the deals that are actually getting done, do you recognize any patterns from lenders that you can maybe provide like a tactical takeaway for our listeners that if you want to get a deal done in today's environment, what are lenders looking for?

Suraj Bhakta 29:24

I think one of the things I hear a lot more often than not from lenders is the debt coverage ratio. 1.4 is what I've kind of heard for the last year or so. And I think that's one of the big components. Every lender kind of underwrites a little bit different, and that's more of a who'd they hire to put in that position and what's their kind of background. And that kind of depends on how you see things, how that underwriter will see things. Some of the things I've talked to guys about recently is really like, you know, what we gotta do be better about is really underwriting the deal for the underwriter ourselves, right? So giving them things, not just a performa on where it's at, but I saw someone recently put in a sliding scale, right? They literally had an extra page that said, okay, this is your widget. And it was like a little graph. And across the top, it was like, hey, if we make occupancy starting here, and in the middle was where they had their performance at, but they're like, if it goes up or if it goes down, and then on the other side it was like ADRs, like, say if I move it up and down and where that would make the overall value land based on those metrics alone. And I thought that was a great way for lenders to really see, like, look, there's room to wiggle on what this property can do. And if you put it on a sliding scale and they think that the the high point and the low point are within a spectrum that where the market could go, then they'll get a lot more comfortable around things like that. So a couple pieces that, I mean, you still have to do your performer the way it is, but factor in some of these more unknowns in today's world, right? They're concerned, like, are you having your reserves for your capital improvements? Right. We talk about pips already. That's something they want to see in that underwriting process as well. Because last thing they want is one, you undershot your improvement budget, right? We talked about value add. That's usually the scenario. So if you're going to do a value add, so many projects burn out because they miscalculated the expense. But the other part, Michael, key for every buyer going in is make sure you do a real good job on your due diligence, right? Often guys are moving fast, they want to get through there. But you know, if you shortcut and you don't really get in with like a building inspector or something like that. And then when you start peeling away a wall and you realize, oh my God, I have all these other issues here, and then it derails your plan, right? Don't get caught doing that. You gotta, you gotta be diligent. That's why that period is there. That's why you have to do your homework. I think people move quickly thinking, or maybe just focusing on certain components, but that physical inspection and making sure everything's is the way you expect it to be, so important today's world.

Michael Russell 32:03

Oof. Yeah, you're striking a nerve a little bit here, in all honesty, because we had a deal earlier in the year that we were so pumped on, so excited about. It was in LA. And it actually, man, it it on paper, the thing was perfect, like really good price point, a lot of value add opportunity. And so the one area that I think, in hindsight, that I would have done differently is the seller was a little bit unreasonable. He had entered into contract a couple of times and it fell out. And so the seller was like really just pushing, pushing for like this really quick close. And so we agreed to a relatively short due diligence period. And of course, in the run up to getting a contract signed, there's like two, maybe three weeks before you actually get a signed purchase and sale agreement. So we started spending money and doing due diligence and doing all this. So we had a little bit of extra runway, but we were like under the gun, trying to force due diligence. And so my point is we were spending money on things and preparing a capital raise and doing all of this preemptive work, which one should do. But once we started the due diligence, which we did a thorough job of, we hired a professional firm and we probably spent, gosh, between the environmental and the property inspection, 15 grand, I would suppose. And in that process, we found out that there were some seismic retrofit concerns that basically, in order to get permitting, the city would be requiring a huge lift in renovations to make the building conform with current building standards. And so, in hindsight, I was like, oh gosh, like we invested all of this extra money into steps that were kind of like down the road a bit, and we could have mitigated our losses if we had taken it one step at a time. But at that point, the seller was really forcing our hand. Sometimes, I guess through experience, you learn like, okay, not every deal is going to work. We are really excited about that. But it ended up fortunately, we didn't lose anything other than just our due diligence cost, which, of course, to your point, make sure you do a thorough job doing due diligence. But also, hey, stand your ground. When you're going into this negotiation, what I've learned was make sure you've got enough time for that due diligence. So I think all that really, really resonates well. And I want to circle back to just one point you said about as it relates to lenders in today's market. I really like that idea. First of all, whoever did that, we I don't know if it was a module or some sort of interactive tool that could be provided to a lender, but essentially what you described was it's a good idea to provide the guardrails to the underwriter so that you're providing the stakes of the high and the low rather than giving them the liberty to say, okay, great, this is optimistic. What could it be if it were, you know, what's the downside? If you give them the parameters and the benchmarks for the downside, then maybe you're kind of guiding them to focus within those guardrails. To me, that seems like a really practical step when presenting your this opportunity to a lender. Are there any concrete moves that an investor can make right now to navigate this slower market more confidently?

Suraj Bhakta 35:16

Yeah, I mean, that would hold tradition to most deals that you would work on, right? Like get your team together. You're not always doing this alone. And we just spoke of like whether it's people that are doing inspections, someone who's tracking on the finance or doing the pro forma, that kind of stuff, or the other guy that's the visionary, right? Getting everyone together, aligned, and then identifying what it is is that your sweet spot, right? And sometimes that sweet spot might get dictated a little bit about where is the opportunity, right? Is the opportunity gonna be in a particular segment coming up, or is it gonna be say extended stay or what have you? I'm just trying to think of different categories, but there's a lot to know and understand to see what your appetite's gonna be and where you want to be able to stay in your game. Just because we're all, for example, if you're an athlete, you're not gonna just keep playing all the sports all the time. Sometimes you tend to focus in and say, hey, I'm playing basketball really well. I'm gonna focus more on basketball. So it's kind of like that is that look, I'm maybe I'm in the extended state market, or maybe I'm doing great on conversion properties, that type of stuff. Or someone might say, you know what? We just have a great team that does vision really well. And we're gonna work on boutique. Whatever it is, it's gonna be boutique, it's gonna have our own style to it. We have this piece, but it requires the team to have the like-minded mindset as well. Because I know people who are in the business world, especially real estate world, we're all deal junkies in our own way, and we get sidetracked by every next shiny toy. And uh there's always opportunity there. But look, stay, stay, stay loyal to what you're great at. And sometimes those that patience really pays off in a market like this when you have the time to get organized. That's the way to get organized, is like find that spot that makes you guys excel as all-stars rather than just be players in the game.

Michael Russell 37:08

Yeah, I love that. Like to your point, in this business, that the shiny ball syndrome to go chasing a new deal, new style. But but I think that that also is relevant to aligning yourself well with a broker, right? I mean, in your business, you guys brokers have access to the majority of the deals. And if you're relatively new to this business as an investor and you want to get the attention of a broker, to your point, yeah, it seems like stay in your lane, get hyper-focused on what it is that you're investing in, get your team together so you look more credible, right? If you don't have all the experience and the skills, go align with someone that can lend some of that credibility. Because I would assume that for a broker to take someone serious, you got to sell yourself a little bit. I'm curious from your perspective, is there anything that when let's say someone calls upon a brokerage firm and says, hey, I'm looking for a deal, is there anything that you like automatically notice, like, you know what, this guy is a joker. I'm gonna disqualify this person for someone that I would want to invest in to go find a deal for.

Suraj Bhakta 38:07

I don't know if I I necessarily will disqualify someone off the go. I think I'm gonna flip the the script a little bit on you in terms of like when I do tell my my agents, right? We talk a lot about what it is to be a broker. And in our world, we're really more than brokers. I always deem ourselves as advisors, hence new gen advisory. And it's because we talk to everybody, right? It's not just the owners, not just the investors. We're talking to lenders, we're talking to construction guys, we're talking to brand guys, right? We want to know and understand that there's a pulse and an opportunity with everybody. And who comes into the know of what's happening with a particular asset or who has a need for a particular piece that comes from any source. And so being in that position, being in the know, it's important. And I often tell my guys, to be honest, back in COVID in uh 2020, I told my guys, like, look, now's not the time to go sell in a hotel, right? Now it's time to call every guy that you know, friend, client, acquaintance, and just say, hey, how are you doing? Right. You kind of have to check the pulse. And then we became a resource. We literally tried to get ourselves quickly educated on all the programs that were coming out. How are you going to be able to help somebody other than the sale itself? Because the sale is like the last thing on their mind. And so we became these advisors that people started trusting. And when they're ready to unload, they'll come to us on in that essence. The same kind of holds true in today's market, to be honest. We went up and down on a really fast cycle, to be honest. And I think today we're seeing a lot of that. And so I'm having my guys still do the same check. And that goes a long way. Yeah. Oh, that's great.

Michael Russell 39:41

Yeah, I think that this episode has been chock full of practical actions that hotel investors can take right now. I want to end on that note. So, for someone trying to buy a hotel in this environment, what is the very first step they should take this week? Call a broker.

Suraj Bhakta 40:00

Call us. Call us a new jet. That was my shameless plug, but no, uh the reality is like, look, I think that is a good spot, right? If people don't know what you're looking for, then you're the only one looking for it. And it makes it that much harder. So you have to find the people that will get the opportunity or be able to bring those things forward to you. And not everything has to be a deal, right? We we be patient, be be open-minded, keep it coming in. If something doesn't, refine your criteria and get back to that person and say, hey, I'm looking for this, or that one doesn't fit. But here's what I think if you change this perspective of it, I'd be willing to look at it, right? And that starts feeding people's minds and they're able to help you out. And again, you need as many feelers out there. And when I say feelers, it's it's that team, right? Whether it's a lender or uh an agent or someone else, they gotta go do some work for you as well. So have some trust and faith in those professionals and and see if they can get you the deal that you're looking to have delivered.

Michael Russell 40:59

Serge, always appreciate the insight. Where's the best place for listeners to follow your work or connect with you and your team at NewGen?

Suraj Bhakta 41:06

I appreciate it, Michael. Thanks again for today. If you need anything from us, you can find us at wnegenadv.com. Sorry. And feel free to email me as well. I'm sure do you share that on the airboard?

Michael Russell 41:17

Yeah, I'll put it in the show notes. Yeah.

Suraj Bhakta 41:18

Yeah. My email is fine and phone number as well if you like.

Michael Russell 41:21

All right. Well, for everyone listening, my advice to you is to take one thing from this episode and put it into action this week. If this conversation has helped you in any way, share this episode with a few friends who are serious about hotels and also leave us a quick rating or review. And other than that, we will catch you again on the next episode of the Hotel Investor Playbook. Aloha.