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Part 6: How To Get $1,000,000 For Your Dream
After building individual houses, after trying to get others to adopt his ideas, Keith decided that the only way to have an effect on the quality of housing construction in Johnson County was to become a developer himself - to create a subdivision from scratch based on his concept. All the houses in the subdivision would meet his rigorous definition of quality. Quality would be written into the deed restrictions: 4"x6" framing, 40 year Timberline roof, all brick exterior, etc.
Just finding the land was a major hurdle. One potential deal dragged on for months. When it fell through, Keith found out the landowners had been negotiating with a competing developer who closed the deal. What seemed worse, it was the same developer Keith had been trying to partner with just a few months earlier.
Eventually he found landowners who would sell him the land he needed - 88 acres in Olathe. The sales price was around $840,000. After figuring in the cost to prepare the land - roads, dry sewers, etc. - Keith calculated that he needed over $2,000,000 just to get to the point where he could sell the land and begin building houses.
He signed a contract with the landowners: put down $5,000 in earnest money toward the purchase and guaranteed that by October 15, 1997, he would obtain the financing necessary to close the deal.
Investors
Two friends agreed to be investors. They would contribute collateral, once Keith arranged a loan, but Keith would pay all the upfront fees out of his own pocket.
"One's a real good friend of mine. I've known for years. Another one's a friend that basically I just met a year and a half ago, through a church. Real good guy. He's an engineer. Real sharp. Has the same views on building and the Johnson County market. We could sit and talk for hours about the quality of housing and all the other stuff we talk about. So we clicked it off real well."
"He sat through all the planning stuff and I think by the time it was done he definitely wanted to get involved. Very competent, very knowledgable about the project."
Asking For Money, Getting Turned Down
How do you get someone to lend you over 2 million dollars for your dream? A dream that most consider unworkable.
Keith prepared a packet describing his proposal in detail, then he went to a telephone book and started calling banks and mortgage companies. It wasn't until after he had called 12 to 15 banks that he found a few that seemed interested. He sent them his packet. If they showed interest, he would arrange a meeting.
"The first two meetings were probably a little uneasy just because I wasn't used to talking that kind of money. But the more I started doing it and looking at the numbers and started realizing that especially these guys you're talking to - this is nothing to them. I mean, they're dealing with 20's and 100's of millions of dollars, not one or two. This is a small project to most banks. Once I started realizing that and then talking to them, it really wasn't a big deal. But the first two were kind of interesting. "
"It bothered me more, I think, knowing what kind of money we're putting in individually, but again, the further we get along I realize, and we talk about this all the time, that you never get anywhere if you don't take a few risks."
"Yeah, it's a risk, but we think it's a good risk based on our research and just Johnson County market, which I still think is a unique market here."
"We sent that survey out and we feel very confident that people confirmed what we're trying to do is what they want"
But even the banks that showed interest did not pan out:
"I can think of one where I went in (it was a smaller bank, I think that was North American Savings or something) and basically asked them, 'What do you think? I mean is that something you would be interested in?' He was all excited. We talked for hours about this project. He thought this would be a great thing to work on, because he liked a lot of the unique things we were doing."
"He looked at the numbers. You know, those guys that really do development, they could tell just based on how much you paid for the ground and what your development costs are. They can figure out your per centages to see if you're even in the ball park; to see if they would go or not, and he said:
'Man, these numbers look great. Let me get back to you on this.'
"Two days later I called him back. 'Well, nope,' he said, 'I talked to my big guys that know that area very well and they said 'No'. They think that's crazy.' "
"There was a kind of pattern there. We'd go in there and sell the project and they'd initially say,
'Yeah, it looks real good. Let's sit down and talk the numbers.'
"Then a week or two weeks or three weeks later they'd call back and say,
'Well, we're really not interested.'
"That happened 5, 6 times. It got very frustrating."
Not everybody who arranged to meet with Keith started out positively. The Nation's Bank representative interviewed him and immediately told him what was wrong with the concept.
"You could tell, red flags were going up:
'Oh, why do you want to do brick? Why would you force them to do this? Why would you force them to do that? You know, we've been building houses for 15 years this way and we're doing fine. Why would you want to change?'
"You could tell he just didn't buy in."
"He was sharp. I don't question that. He does a lot of development. Very sharp guy. Does all kinds of development loans. He knows the market. But you could tell... He flat out told me that, too, at the end. He thought it was very, very poor to restrict yourself to all brick. He said if you go in there and start building all brick and then it doesn't go well and then you change it to allowing in some wood siding, those people are going to be upset that bought in at all brick, which I can understand."
"But, again, I look at it totally opposite. People would love to have an all brick community and make sure everybody does the same. It's just how you look at it, I guess. What you think will work. He was basically very honest and said, 'No, I think you're crazy to put these too tight of restrictions on this.'"
October 15th came and went. The $5,000 was now forfeit.
Sheri, Keith's wife, was not taking it well:
"She was fighting it all along and thought it was a crazy idea. A stupid idea. 'Why would you risk everything you've saved for in your life to go throw it into something like this.'
"But, as most people know, the payback would be five fold, so I mean, to put in $50,000 to make $250,000 or whatever. Just as an example."
Keith and his partners went back to the landowners and asked for an extension.
"At that point they allowed a month extension, I believe, to November 15th . For another $5,000. Non-refundable. Not applied to the purchase. Just to give us the benefit to go forward or to give us another chance. That month, that date went by in a hurry."
Meanwhile, banks showed interest, then dropped out. People's Bank was one of them:
"I had many meetings with them and it ended up dying three weeks later. So I mean, it was very rough."
"I was frantic. That was back kind of the last phase there, back in November timeframe where we basically ran out from the other banks I thought we had lined up: Metcalf Bank, Johnson County Bank, People's Bank, Mercantile - I thought all those had a good chance at one point."
"They got past that initial person being very excited. They took a formal proposal to the board. That's where it got turned down. Again, I was frantic. I was calling banks out of the phone book and anybody I could think of. I was looking in the phone book, under, like, I can't remember what the title was, just financial institution or something or investing I think is what it was."
Keith appeared to hit pay dirt: a bank that would lend the full $2 million with minimal collateral. But the timing was wrong:
"There was this company called American Lending Group. They're a broker that goes out and solicits out-state banks or whoever to do funding for these kind of projects. They were very helpful. It's just the timeframe, didn't work out for this one, but I'll definitely stay in contact with them for future. I just wish I would have called them three or four months ago. I think we would have had this wrapped up a long time ago."
New Idea
He gave up on trying to obtain the whole $2,000,000 and went back to the landowners with a 2 phase development approach. That way he could ask banks for only $1.2 million, develop the first phase of 46 acres, and use the profits to finance the second phase. Keith presented the idea to the landowners.
"They were very upset, to be honest."
"We asked the landowners if we could purchase the first phase. They would hold a mortgage on the second phase. So basically take it down to two phases. They did agree to do that and extended, I believe, through the end of the year. I think it was December 31 for another $6,000, non-refundable, non-applied towards the purchase price."
"So I'm out $16,000 plus, just to look back on the financing, another $3,500 on engineering and other fees, I'm out $20,000 approximately at that point."
"We're kind of scrambling and we found this bank, Security Savings Bank over in Olathe, a very small bank. Actually, it's Tom Bell's bank. I think I told you that. It's one of the bigger builders, if not the biggest builder here. Created his own bank. They do a lot of construction financing."
December 31 comes and goes. Keith must once again go back to the landowners.
"However, at that point we've got a commitment from, at least a verbal commitment, from Security. So we feel a little more comfortable at that point, but yet it drags out this long because they had to re-order another appraisal and an environmental report. That of course takes two or three weeks for each one and that pushed us back to the end of January. "
"Then the landowners are up in arms again because technically that date went by on the contract."
"So, what I had to offer to them to appease them was I was willing to pay interest on that loan. Or the purchase price - which was $840,000, roughly, for the month of January. So we're out another, I forgot what it came to, $6,500 to, in a sense, show them we were serious and wanted to still close on the deal."
The Loan
On February 13, 1998, Advantage Communities, the Limited Liability Company that Keith and his two investors formed, finally closed on a $1.1 million building and construction loan. They immediately drew down the payment for the first phase and purchased the 46 acres from the landowners. They also signed a note with the landowners on the remaining acreage, so their company now owes about $850,000 for the land. Another $700,000 of the bank loan remains available to develop the land in the first phase.
At this point, Keith is completely committed financially.
"Everything I own is into this right now. Pretty much. But I've said that all along. I'm willing to do that. The other friend of mine has a little different approach on it. Of course, he's got a little more income than we do, but he said:
'Hey, if it doesn't work, so what. We're young. We can make it up.'
"And I'm, like, well that's a good attitude to have."
Keith laughs.
"I couldn't say that, but it took me a lot longer to get to what I had, because I had a lot less income coming in. No, I'm really not, at this point anyway, I'm not worried about it. I'm just as excited as all get out to see if it's going to go, because, not to be vindictive or anything, but there's a few people I would love to say: "I told you it would work and you didn't believe me." For every ten people we've talked to, I'll guarantee you, 9 1/2 said,
"You're crazy. It will not go."
Sheri, too, now supports the project.
"Sheri in the last month anyway has been much, much better about it. She talks about it all the time. Asks me questions how this is going, how that is. I think maybe there was kind of a hump there or something that she finally got over. She's actually much better with it. Asks a lot more questions."