Seth: Everybody, how's it going? This is Seth Williams, and you're listening to the REtipster podcast.

And today I'm talking with my friend, Chuck Dreison. So I met Chuck this past year when I was looking for people in our community who had experience doing subdivisions because I wanted to learn from them firsthand about how the subdividing process works in their market. And Chuck was one of the few people who raised his hand.

And he and I have spent a fair amount of time together, as he's shown me the ropes of how subdivisions work in his market, which actually has a lot of differences from how I've seen it work in other markets around the U.S. This may or may not come as a surprise, but there can actually be some huge differences in what's required, the costs involved, and what the municipality will allow. And a lot of the most important due diligence issues that you'll have to look at from one state to another.

One of the biggest things I've learned from job-shadowing subdividers around the country is that having a lot of experience subdividing in one state doesn't necessarily make you an expert in how to do it in the next state over, even in the next county over, in some cases.

So Chuck has just been an invaluable relationship for me as he's taught me a lot of great stuff. And I wanted to get him on the podcast so we could talk more about his story, how his subdividing business works.

And I also want to talk a little bit more about partnering with other land investors, either as an operator or even doing the funding for the deal if you're providing the capital. Chuck and I have talked quite a bit about this as well. It's a topic that goes hand in hand with subdividing in a lot of ways because a lot of subdivides are naturally bigger deals that require a lot more money to acquire and do the work of subdividing.

And as I've been trying to come up with a solid framework for how I fund deals for other land investors, he's given me some great feedback about what he's seen in the industry and what he wants to see from the operator's side. And he's just given me a lot of good things to think about on that whole subject.

So I'm excited to get into this and I hope you are too.

Chuck, welcome to the show. How are you doing?

Chuck: Thanks for having me. I appreciate the intro.

Seth: Yeah, absolutely.

So I had a great conversation with you that was recorded and it's in the Land Elite Masterclass. I mean, you just blew my mind over the course of an hour, just teaching me so many things about subdividing. I don't know that we'll get into all that because that was like a really deep dive, but maybe we'll just start by having you rehash your story. So how did you get into land investing?

Chuck: Sure. I started my career in another field. So I was fortunate enough to start my career as a U.S. Marine. I worked as a reconnaissance Marine and had the opportunity to work under a number of great leaders.

I've worn a few hats since then. So I've been fortunate enough to work as a philosophy professor as well and segued into land investing about five years or so ago.

Seth: I didn't know you were a philosophy professor. At what school?

Chuck: California State University, Los Angeles.

Seth: Wow. Man, one of my college roommates was a philosophy major and I had an intro to philosophy course when I was in college. So I'm probably not as smart as you are in that realm, but I've had a lot of interesting conversations about all that stuff.

Chuck: Yeah. It can be fun to get into. And some of the some of the decision matrices help in business and whatnot as well.

Seth: How long were you working as a normal land flipper before you decided to start exploring the subdividing game? Like, what motivated you to go down this new path? And how long did it take you to reach expert status at it?

Chuck: I appreciate you saying that. For me, it's always a process of experimentation. And so, especially when working with investors and working with their funds, it's looking at different opportunities to be able to win deals.

So I started five years or so ago, but my first subdivision was about four years ago. And that was one subdivision that year. And so it was looking into it. It was vetting providers and taking a step forward with it.

And then, in terms of “expert status,” I appreciate you saying that, but this expert status, as you mentioned in your intro, is, I think, a product of where you're working too. And, as you and I have kind of been working together, it's accumulating knowledge in a particular county, accumulating more knowledge in a particular jurisdiction. And then once you have that, it's really being able to step on the gas in that jurisdiction.

Seth: So that first one that you did, I think you said you did that one in the entire year. Did everything kind of go as planned? How do you even start with that? Did you have to learn from somebody or do you just start diving in and start Googling for the answers to your questions? Or do you just have to embrace the discomfort of what you don't know and just jump into it? How did you manage that?

Chuck: So, for me, it really is a three-fold process.

One is digging into the paperwork that the county has. So these counties have a set number of regulations and a set process to that. And that can differ amongst counties, right? And there can also be some unknowns there for some particular subdivisions. At the end of that set process, there can be a county review board, in which case you have some unknowns. But for a majority of the minor land divisions, there's a set process. And so digging in and reading those, getting familiar with exactly what's going on.

And second, from there, calling some folks at the county to ensure that what you're reading actually jives with their local knowledge and their work processes and whatnot.

And then the third thing would be talking with those land surveyors, those civil engineering firms, and figuring out if you can get a provider on board to actually help you with this process, especially if you're working on a project that's out of state or a little bit farther away from you.

Seth: Yeah, I think that was one of my biggest surprises working with you is just the importance of that surveyor. I mean, I knew they were important, but the fact that you might not even be able to find one. Like, you got to make sure that person exists at all, who can do the work, the costs are in line to make sense, and they can do it fast enough. And a lot of stuff hinges on that, which was one of my big takeaways from working with you.

Chuck: And there's enough of them there in the environment. I mean, as we've talked about before, when there's some competition there for surveyors, you can find an appropriate provider, you can find someone who's communicative that works with you well, that works with your processes.

Whereas if you're talking about a very far-flung locale where there might be one or two providers that might not be necessarily as motivated to get the work done, or there might not be as much competition, that process can extend for a long period of time.

I mean, for example, to put that into concrete terms, we've had a subdivision take as little as two weeks and as long as right up to 13 months. And that's a huge contrast when you're talking about hold periods and trying to get returns.

Seth: Yeah, it is interesting, the lack of competition for those professions in certain areas. It seems to happen, at least I've noticed it a lot in very rural areas. The only time I've ever been yelled at by a title company or a surveyor is when working in these super rural desert areas where like there's nobody else. Like I'm a slave to them. them. If they don't do it for me, I can't do the deal.

It's just funny. If I were working in a big populated city, I'm sure there would be dozens of surveyors and title companies to choose from. And they're all kind of fighting for your business. But when you're in those areas where it's like you need them, they're not as polite.

Chuck: Exactly right. Yeah.

Seth: So how many states have you worked in your land business as a whole?

Chuck: Six states across the board.

Seth: And what's the state where you do the most subdividing?

Chuck: I do the most subdividing in Arizona.

Seth: Okay. And you don't live in Arizona, right? You're in California?

Chuck: Correct.

Seth: To those who've never flipped land before, maybe you're not aware, but it's not a huge challenge to flip land remotely in other states (and never really see the properties you're dealing with in person), because you can always find photographers and agents to do a lot of this groundwork for you.

But when you're talking about something like subdividing, which is a little bit more involved, is that ever a challenge or is it pretty much the same thing where it's like, you've never really had to be on-site to see anything, like any of the information you need to get, you could get from a drone photographer or a surveyor? Does that ever create challenges to not be there in the market where you're subdividing?

Chuck: For the subdivision itself, there are no challenges. When it comes to the actual paper subdivision itself. As long as there's that appropriate provider that you can work with.

I would say some challenges come into play when you're talking about improving a property outside of the paper development. So being able to, say, write in an easement on paper, but then actually get someone to put in a road there, whether it's a dirt road or what have you for a rural property. That's where some additional connections in that locale, if you've been working there for a while, can be helpful.

But generally, if you can reach out and touch people with email or phone or whatnot, you can get a lot done.

I found, too, that especially working with a realtor in the area, can help a lot. We have some areas where we work with a core group of realtors. And we bring tens of thousands of dollars to that realtor's family every year.

And so they're happy to introduce us to the local guy that will put in a road that will make it easier for them to sell the property to and generate income for themselves and their photographer or their title company. It just creates a kind of nice, well-rounded relationship that benefits everyone, which is nice.

Seth: You've worked in six states and all your subdivides are in Arizona. Why are they all in Arizona? Like, why not do this in all the states you work in? Is there something about Arizona that makes it easier? Or do you just kind of know that area better than most for some reason?

Chuck: Part of the reason that I do subdivisions and part of the strategy behind the business is seller financing properties.

And so it's ensuring that we work with our attorney to work in a jurisdiction where we are set up to appropriately lend in that jurisdiction, which can help us offset risk and mitigate risk.

So for example, one of the reasons why I appreciate subdivision so much is in one case, if we're buying a property, and we're doing a simple repositioning and flip, we have a hundred percent of our cost basis tied up in that property for the entirety of the hold period until it sells.

Whereas with a subdivision, what we can do is we can start selling off those child parcels in a manner that reduces our cost basis in that in a stepwise fashion.

And so that's helpful to do both from a cash perspective, but then also from a terms perspective, right? You could imagine if you split a parent parcel into five child parcels. You have 20% of your cost basis, let's say, in each of the child parcels.

And then a cash sale, and then perhaps a 25% down payment on each of those other parcels. Depending on your sales price to your actual investment in the property, you can make up your full cost basis fairly in a stepwise fashion that you can't do with a simple repositioning.

And so to kind of circle back to your question, it's ensuring that both our business strategy aligns with kind of the regulatory environment in which we're working.

Seth: What does a typical deal look like when you're acquiring it, doing a minor subdivide and then selling it off? What is the typical cash outlay? How long does it take? How much does it cost to do the work? Is it selling like six months later? 12 months later? Two months later? If you had to average it out or look at a typical deal, what does that usually look like?

Chuck: Typical acquisition costs are between $25,000 and $100,000 for the property itself.

And then in terms of the cost to actually subdivide the property, depends on the location again. But we could generally say somewhere between $2,500 and $4,000 or $5,000 to go through the whole process. Depending on if there's how many parcels we're creating, if there's county approval that applies in this situation.

There are some nuances there, but generally, if we're putting in a little more physical improvements and there would obviously be the cost for that, like putting in a road or what have you, but generally around that, and splitting it up in a way that makes sense for end buyers.

And then in terms of the actual sales process itself, we average right at about four and a half months on a weighted cost basis for sales right now.

Seth: You mentioned physical improvements, like putting a road in and that kind of thing. How often does that get involved? I know a lot of subdividers, they don't touch it. It's just a paper subdivide. Maybe they'll put an invisible line down the properties and carve them up that way, but it sounds like sometimes you'll maybe put a road in or something else.

How expensive is that? How difficult is that? Is it a super-involved process or is it straightforward?

Chuck: A lot of the properties that we work with are off of dirt roads. And so there will be a dirt road to, say, that larger parent parcel, but not necessarily to all the children parcels that we split up on paper.

And so we want to make sure that everyone has access to their property. We don't want to create children parcels that are that are unusable to folks or what have you. So that could mean an easement, or it could mean utilizing existing easements if perhaps there are some on the periphery of the parent parcel and then potentially putting in a road.

So we've done this a few times, and typically we won't do it right at the outset. But if we are having, if our realtor is giving us feedback that folks are having a hard time envisioning being able to get to this property or what have you, then we've worked with him before to get his local provider to put in a road.

And that helps a lot. I mean, it's nice to be able to drive up to your property rather than have to put in that road yourself, right? It’s already done for.

Seth: One of the big contrasting things that I noticed when talking with you versus when I was talking with Neil Clements, who does kind of a similar thing in Texas, is that in Texas, water is a huge deal and it's like a big potential obstacle to getting that thing sold. If you can't get water, whether it's drilling a well or getting a utility line in there—and I would imagine in the desert, it's probably even more of an issue.

So like, what do you do about water? Like, do you have to make sure it's there or do you just assume there's no water and people have to figure that out on their own, or just not plan on getting water there? What kind of an obstacle is that? And how do you get past that?

Chuck: Yeah. So, there's like a couple of different subdivisions in Arizona, there's what's called a major subdivision and then a minor land division.

For major subdivisions, this is six or more lots. And in those cases, the developer needs to prove that there's a 100-year water table there, in addition to potential traffic engineering studies and environmental impact studies and what have you. And so there's a lot of infrastructure there, a lot of work there that wouldn't necessarily be economically feasible for a six-lot subdivision but could very well be feasible for a 150-lot subdivision.

It's not what we're doing currently. We're doing minor land divisions. And so this is five or fewer lots. And minor land divisions do not require that proving of that 100-year water table.

And so for rural properties, folks will tend to do a couple of different things. There are a lot of water delivery services in Arizona that are very, very reasonable. And so it's something like around two and a half to five cents a gallon to actually have water delivered and put in someone's cistern right there on the property.

And so a lot of times folks will invest in this 1500-gallon cistern and they'll have water delivered to it. And that can be delivered typically every couple of months. And they're A-OK

And then, you know, they might, if they're going to move out to the property or make it something more permanent, they might consider doing a well. And wells can be tens of thousands of dollars, but that can also feed into the cistern and then feed the house.

So they can kind of work their way into the water in that same kind of stepwise fashion as well.

Seth: I know you said you typically do minor subdivisions. Have you ever done a major subdivision or only the minor ones?

Chuck: I don’t. Only minor land divisions.

In Arizona, there is a component to major land divisions where there is a county board or county supervisor hearing and approval process. And that introduces a lot of risk to projects.

I know, before, you interviewed a guy who's doing a lot of major subdivisions and tends to try to stay away from those jurisdictions just because it turns into a lot of local politicking and trying to work on getting this approved before the actual approval itself, which tends to be a very localized game.

And again, with being away from Arizona, I'm looking for more of those buy-write jurisdictions where we can check these boxes, we can mitigate risk for investors, and get the project done.

Seth: And in terms of how you split these things up, my understanding is you basically decide how you want to do it and you tell the surveyor, and then they do that. But how do you know how to do it? Is it just, okay, there's road access on this one side, so we're going to split it up so that each parcel has road access?

You actually wrote a great blog post for us where you kind of illustrated some of the topographical issues that can come into play. Like, if there's a big valley running kitty-corner across the property, you might want to carve it up so that it kind of flows with the land instead of just cutting right through that.

So, how difficult is that? Do you just have to be able to see the contour lines of the land and be able to understand what are the consequences of me putting a line here versus there? How do you think through that?

Chuck: When you think about splitting up the land, it's combining two aspects: it's looking at the zoning and the CC&Rs of the land in concert with the topography.

And so imagine the zoning, for instance. Imagine we're looking at a 10-acre parcel and we're interested in splitting it up and making child parcels for particular end buyers. We could have zoning that's, say, residential 10, which only allows a minimum of 10-acre parcels in that area, in which case our hands are tied. That's going to be that parcel forevermore.

Now, there are folks who, somehow, get subdivisions through and create massive issues for end buyers because they will subdivide these properties into inappropriate zoning areas. And then their end buyers aren't able to secure building permits. So don't do that. Stay away.

But then we could imagine we have perhaps an R2 zoning or an R1 zoning, where parcels are two-acre minimum parcels or one-acre minimum parcels. And if we're looking at Arizona where we could do five parcels in a split, we could take that 10-acre parcel and we could split it into five two-acre parcels in accordance with the zoning.

Now, one of the additional considerations that we'd want to think through is, do the CC&Rs allow for this? And then from from just a financial perspective, what is the impact of those CC&Rs?

We've seen some of these communities where there's an $800 exit fee from the parent parcel and then an $800 entry fee for each of the subsequent child parcels. So we're talking about eight hundred times six. We're talking about what, $4,800 dollars to simply do the split, irrespective of the surveying and all the other costs.

So one consideration there as well, but then also looking at zoning. Because if we have, say, an R1 property and we have minimum one-acre parcels, we could also split that 10-acre parcel up into five two-acre parcels, right? We're A-OK.

But we really want to consider the topography in concert with that actual zoning. So I'll give you an example. Let's have a 10-acre parcel and half of the parcel is sloped and has a draw in a manner that wouldn't be appropriate for a building site. And the other half is nice flat building sites.

If we have that R2 zoning on paper, just looking at zoning and CC&Rs, great, we can split it up into five two-acre parcels. But what we find when we do that, if we don't look at topography, is that we have two parcels that are on a terrible slope that are unusable for end buyers. We have one parcel that's half on a slope and half with a building site, and then two appropriate parcels. So in essence, what we have is three parcels that are sellable and two that are worthless, right?

Whereas if we have that same topography and a slightly different type of zoning, both on paper, we can create five lots.

But if we have an R1 zoning, then in reality, we could create a six-acre parcel out of half of it. So one parcel will have a one-acre building zone and then five acres of kind of sloping land that might be beautiful to look at, but they're not going to necessarily build on. And then the other four parcels have build sites.

So, again, based on the zoning and the topography, you can get very different results. In one of those cases, you have five nice lots to be able to sell to end buyers, whereas in the other zoning situation, you have three. So looking at those both in concert is very important.

Seth: How do you gauge the demand for these child parcels after they're carved up? How do you know that they're going to sell fast enough once the work is done?

Chuck: In the same manner that investors look at properties. Right now it's doing your due diligence for subdivisions, but doing it twice over.

So if we are just marketing for properties that we're going to flip and reposition and market and sell, we might just be doing due diligence for one-acre parcels, two-acre parcels, or what have you, and looking at what they're being, what folks are paying for those, what they're exiting at, what the proportion of cash to term sales is and getting a sense of that market. Whereas if we're going to be doing a subdivision, our due diligence doubles, right?

Now there are benefits to that, but we're going to be also looking at the cost of 10-acre parcels with respect to the cost of one-acre parcels or two-acre parcels and seeing if there's a match there that actually makes sense.

Seth: If I remember right, you said the acquisition cost is between like $25 to $100K. Is that right?

Chuck: Yep.

Seth: So what is the disposition price? Like what is the gross profit on the back end of these things when you sell them all?

Chuck: It depends on terms versus cash. It depends on locale and what have you. But I would generally say it's 2 to 2.5 to 3.

Seth: I think you'd mentioned there was a case where you had to wait like 13 months for this all to happen versus like maybe a couple of months.

What would make it take so long? Did something go wrong or what happened there that delayed it so much?

Chuck: Two things went wrong.

One is there was a service provider. There was one service provider in that area. Through trial and error, I found that they were not overly motivated. And it wasn't necessarily their fault. I think it's important for folks who are considering doing this to think about what type of business they're engaging with as well. And this has been a lesson learned along the way.

The only firm in that particular area was a large engineering firm. And I am providing them with a $3,000 or $4,000 job. And they, as a business, need to balance that with the large construction companies that they work with that are bringing them consistent six-figure engineering work every year.

So I am a very small fish in that business's pond. And we're also talking about a rural subdivision, and we're talking about a county that has an extended approval process. So those were situations that exacerbated it.

But in looking at other counties and other areas, one of the things I've found that's helpful is to look at surveying firms as opposed to engineering firms.

So you have a surveying firm whose bread and butter might be doing $1,000 lot surveys for folks buying a home in that area. And so now when you come in with a $4,000 project, you're in essence a big fish to them as a small surveying firm.

And if you can bring that in consistently month after month, then you can start establishing a very nice relationship with that firm. Whereas, again, if you're bringing in $3,000 or $4,000 to that civil engineering firm, they're not going to bend over backwards for you. They're going to bend over backwards for their very important clients.

Seth: So given these acquisition prices, I mean, these aren't really like cheap properties necessarily. It's going to take some capital. So are you always using your own cash or like how often do you have to get bank financing or land funders or even like buying them with seller financing? Does that ever happen?

Chuck: So we have investors in the fund. So we have equity investors that help with funding deals. And then we also use debt to fund some some of the deals. Now that's not bank debt, but that's typically through seller financing properties.

So it's a combination of full equity financing and then some debt with the seller carrying back a portion of it.

Seth: So do you ever just use your own cash and you pretty much always go to this fund that you've created to get the money for it?

Chuck: It's been a process throughout the last five years. I started using all of my own capital and then I'd say four years or so ago, close friends and family were interested in investing. And so what I created, unbeknownst to me at the time, was a misstep, but was a series of different entities in which each of those investors was involved. And so be doing deals in each of those entities with each of those investors.

And as you can imagine, that only scales to a certain amount, right? Once we have of four or five different entities all doing deals there, there comes a point where bringing on other investors and creating other entities and scaling in kind of a parallel fashion would be problematic and be overburdened in terms of infrastructure.

And so it was then a process of consolidating that into one fund where investors could come in.

Seth: So if I understand this right, you had an individual entity per property, and there were different owners tied up in each one? Or is that not how it worked?

Chuck: An individual entity per investor, and then properties would be underneath that certain entity.

Seth: So that entity per investor, did you have any ownership in that or was that just totally them?

Chuck: Yeah. We would add joint ownership in that entity and we would do business and the investor would receive disbursements from it.

Seth: Okay. So would that mean that you would like both have to sign off on everything? Like, would you have the authority to make decisions on behalf of the whole LLC? How did that part work?

Chuck: It was set up as a manager-managed LLC. So there was also a management entity over top of those kinds of parallel entities. And so the management entity would make decisions for the fund. So the investor, for all intents and purposes, was a silent investor.

Seth: So were you the owner of that management entity?

Chuck: Yes.

Seth: So given how your business works now, how crucial is access to this funding? Like, would your business work if you hadn't figured this out, like how to get money from other sources?

Chuck: It's helpful to grow and it's helpful to help other investors.

So it's interesting to be able to do these subdivision deals and these seller financing deals and these deals where investors come in to finance a portion of the equity because it's just looking at trying to help a number of people in a number of different ways, right?

The investors are looking for solid, consistent returns on their equity. We have folks who are interested in buying properties and being able to do so with a reasonable down payment and be able to become a landowner. We have folks on the flip side of that, who are interested in buying secured notes.

So we're helping them out with their investments. And so it's looking at kind of combining these factors to try to help out a number of different parties in a way that suits everyone.

Seth: The way that it originally worked was you would create this new LLC per investor, that you had partial ownership in, but that's not really how it works anymore, right? Now you have this fund and you take from that fund to pay for deals?

Chuck: Correct. It's one blind pool fund. So there's one fund that investors come into and then that fund does business within that fund. So it invests in a number of properties. When the investor comes in, they understand our business model, our strategy, and that we're going to be doing these types of deals and these types of areas and this type of business.

And so they'll come in with an ownership interest in the entity, and then we'll do our business and then investors receive disbursements from that.

Seth: Do these investors need to be accredited in order to participate in this? Or how does that work?

Chuck: They do. They do need to be accredited. So it's a private fund. Accreditation standards are generally $200,000 of income for an individual, $300,000 for a couple, or a million dollars of net worth outside of their primary residence.

Seth: And once they put the money in this fund, they kind of just trust you, right? They're not looking over your shoulder every day and ask, “So how's it going, Chuck? What's going on with my property?” Because there's not one property tied to their dollars, right?

Chuck: A lot of properties. So there's a very specialized strategy, but a lot of properties across that strategy.

And yeah, there's a lot of communication with investors as well. I think it's important to communicate where we are and what we're doing, what we're seeing, what we're achieving. There's constant communication with investors.

But yes, investors are our limited partners in the fund. They're coming into it with the expectation that they're going to be able to achieve this return with this specialization, right? And investors that are accredited, you know, typically have investments across the board.

And so they are looking for some specialization, right? They already have the S&P, they already have the index funds, they already have the bond funds. And so they're trying to seek out, you know, specialized investments that will provide them with more upside.

Seth: So you've got this fund. Say if I come in and I put $100,000 in there, does that mean I get like a percentage of ownership in the LLC that buys the properties or… Is that not really how it works?

Chuck: Yes.

Seth: Okay.

Chuck: And then a preferred return based on how the fund does.

Seth: Is there some kind of expectation that people should have when they go into this? Like, if I put these dollars in, I should get this kind of return back within this time frame?

Chuck: I'll preface this with there are a couple of different funds. There are a couple of different exemptions to funds. There are 506B funds and 506C funds.

506C funds could market on Facebook ads or Google or to whomever. Whereas 506B funds, someone needs to know the operator and have a relationship and then can discuss particulars.

And we have a 506B fund. So I certainly don't want to step into the 506C territory.

But broadly speaking, we have a preferred return for investors. And then we also have kickers on top of that, depending on fund performance. And so for a preferred return, management wouldn't earn a penny until all of the limited partners earn a 10% preferred return. And then there are additional kickers on top of that.

Seth: Explain kickers to me. What does that mean?

Chuck: There is an additional return that investors can achieve based on the fund's performance as well above 10%.

Seth: And how do they get that?

Chuck: Based on the fund's IRR. But the setup is, if the fund does very well, the investors do very well as well.

Seth: The person investing in this kind of fund, do they have any security? I mean, I guess they would have the portion of ownership in the LLC that owns the properties, right? But it's not like collateral or something.

Just trying to differentiate between this and like what a bank would get where they get a collateral position on the property.

If I invest money with you and, say if something went horribly wrong, or if you disappeared off the face of the earth, I'm not saying that would ever happen, but… Just trying to think of worst-case scenarios for that investor. What kind of security do they have?

Basically, they shouldn't be doing this unless they really trust you.

Chuck: That's absolutely correct. They should not be investing in a private fund unless they trust the operator running that private fund. That is for sure.

And then it's also important for investors to look at the waterfall of funds, right? Both when things go well and if things went awry. So looking at how the payouts are structured, right? And who gets paid first.

And paying particular attention to the fees involved there. So whether things go well or go awry, who gets paid first? And if there's an acquisition or if there's a disposition or what have you, are there additional fees tacked on to each of those before limited partners would get their fees?

So it's really important when looking at an operator, looking through the fund's paperwork to determine and talk with that operator to figure out who's placed first in this order.

Seth: On that whole thing, what is the standard? Like, what should they expect to see? Like, if someone gets paid first before everybody else, how much is normal? Like, if you see, uh-oh, this person's getting paid this percentage or this amount before anybody else, at what point is it officially a problem?

And I know you can't give financial advice. I'm just trying to figure out, like, if somebody has never done this before, like, how would they even know when something's a red flag or not? How do they make sense of, okay, I should watch out for this specific issue? Any thoughts on that?

Chuck: It's not atypical. So I suppose first with a management fee, it's not atypical for funds to have a management fee and that management fee would be used to offset their fixed costs in doing business. There are also a number of funds that don't have a management fee that is only paid if the fund is successful.

And then I would say one thing to perhaps be cautious about is looking at additional fees, if that fund has a management fee, looking at additional fees outside of that management fee. So if there's an additional fee tacked on every time a property is bought, if there's an additional fee tacked on every time a property is subdivided, if there's an additional fee tacked on every time a property is sold—those can add up quickly and start eating into limited profits in a way that might be detrimental to them.

Seth: So does yours have a management fee?

Chuck: We don't have a management fee, and we don't have the additional fees.

Seth: Any reason why not?

Chuck: Well, we do well, and we have a track record of doing well. And I really value consistent performance over all else. So being able to achieve those consistent returns is something that we've done.

And I want to make it a fund in which I and management only do well when investors do well. So we are second. And I think overall that respects the investor's capital in a much better fashion.

Seth: How common is that where there is no management fee? Seems like that might be kind of uncommon, but I don't really know. I haven't looked at enough to know.

Chuck: It depends on the size of the fund. We are a specialized small fund, and we have a specialized process and strategy and work with investors that we know and that we've built relationships with.

Contrast that with a large fund that has significant fixed costs; it very well might make sense for them to introduce a 1% or a 1.5% management fee, which will ultimately be for the investor's benefit because they can take care of those fixed costs in a way that stabilizes the business, but also does really well by the investors.

And so certainly not a death knell to have a management fee. I think perhaps the fees that kind of pick off returns here, and there might be something to look at more. But on the positive side, it can also stabilize an investment fund as well.

Seth: So as the manager of this fund and the person who was doing all the hands-on work to buy these properties and subdivide them and sell them, are all the decisions pretty much up to you in terms of like, what is the sale price going to be? And if we get an offer with seller financing, do we take that or do we go with the cash offer?

I'm assuming nobody else really gets their hands on that, right? It's just up to you to decide what's best.

Chuck: The limited partners aren't involved in the day-to-day. The idea is that they're working with a manager who has the specialized skill in order to get them those returns that come with that specialization, but they don't necessarily want to become a specialist in this particular investment area.

Seth: So like if a property takes longer than expected to sell or the sale price ends up being lower than expected or something like that, they're kind of just like, okay, like we trust that you've done everything you can and that's fine. Is that kind of the position they have to take?

Chuck: I think investors are not necessarily, in my experience, interested in the metrics behind specific property A, B, or C. They're interested in the output of the portfolio of the properties. And so different properties can offset other properties, different note sales can offset. They're looking at our portfolio at large, our returns at large, and then tracking that with whether we’re providing their preferred return and we are providing the upside in addition to that.

Seth: How often are you selling these properties with owner financing versus for cash? Is there a ratio you try to stick to or is it just all cash?

Chuck: Typically, we are at about, in terms of term sales and then cash that we get at acquisition, it's about 60-40.

So we'll carry about 60% of the sale price, and then 40% will come in through cash or through down payments or some combination thereof.

And then it's looking at staying liquid enough and again, being able to help out note investors as well and be able to sell them seasoned secured notes that work with their investment strategy. Which for us is a way to gain liquidity back and rinse and repeat.

Seth: How often do you end up selling those notes? Is that usually what you try to do or do you just kind of let them ride out for the full term?

Chuck: It depends on where we are and how much capital we have to deploy, right? A note earning a nice yield is not something that we necessarily want to sell unless we have other opportunities to do better than it.

And so it's looking at the opportunities that we have coming in. And then, what notes are yielding on the sales side as well, in terms of looking at a discount to UPP (unpaid principal balance) and then what would make sense in terms of our investors.

Seth: Of all the properties you buy with this fund, what percentage of them end up being subdivided in Arizona versus a normal land flip in some other state?

Chuck: I certainly don't want to make subdivides sound like the be-all and end-all, right? They're certainly not. We do a lot of repositionings and remarketings as well.

Subdivisions also take time. And so they may or may not make sense depending on where someone is, even in terms of seasonality. We do a lot of subdivisions, but we want to make sure that it works for our strategy.

So, for example, if we were to acquire a nice 40-acre parcel or 10-acre parcel that we were considering subdividing, and we brought it in, say, July or August. And perhaps we do it in an area with elevation, in a northern area where there's going to be a lot of snow in the winter or what have you. It might make sense to look at that as a simple repositioning, rather than adding an additional four months of the subdivision time, the hold costs, and the provider costs. And then having a set of products that we have available in the winter, where it's really going to take to the spring to be able to get a lot of traction on the on the sales side.

So it makes sense, but it makes sense in certain situations as well.

Seth: For people out there who have cash, and they want to get into funding other people's deals, maybe in this kind of setup where they're investing in a fund rather than like on one-off deals, one at a time, what are the best ways to find people like you and basically be able to trust them to put this capital to good use?

I mean, how do you vet someone like yourself to make sure they're going to do what they say they're going to do?

Chuck: I would look for someone who does a lot of business first and foremost. I'd look for someone who has a specialization. I'd look for someone who effectively manages risk. And then I'd look for someone who can provide consistency.

So in terms of specialization, again, with accredited investors, they can and oftentimes do have a lot of breadth and diversity in their investments. And so oftentimes they are looking for that specialization.

And so if you have an operator that's a jack of all trades, you can get the jack of all trades with investing in an index fund or more broadly speaking. And so perhaps someone with a specialization can achieve an outsized return.

Risk management is very important to us, especially, again, with the subdivision process, with being able to recoup cost basis in a stepwise fashion. That's critical for me and really the reason why we went into subdivisions. So I know a lot of folks talk about subdivisions as a way to be able to take one property and create more properties and, in essence, get more out of that, get a higher return.

For us, there is that benefit, but it was done for a completely different reason. Again, it's done for the reason of being able to when each child parcel sells, we have reduced risk, reduced risk, reduced risk. And ultimately, that's that's for the benefit of investors.

And then I'd say consistency. You know, some folks, a nice example, are looking for large, large wins. And they're going to take a lot of swings and a lot of misses. And when they connect, if they can connect on a big win, that can be beneficial.

I certainly agree with that. Our strategy is that consistent wins over time are the best way to achieve wealth.

So look at a strategy that works for that particular investor and that particular investor's investment strategy.

Seth: From the operator's perspective. So if I'm trying to find somebody like you either to invest in a fund like this or even just do a one-off deal with them, where should I be searching for that? Like, do I need to Google something? Do I ask ChatGPT? Do I get into a certain Facebook group?

Like, how do you go about finding people like you who know what they're doing and they can put this kind of capital to good use?

Chuck: Looking around to try to find folks who are doing a lot of business is helpful.

So for instance, someone could call up a real estate brokerage and ask them, “Hey, are there any investors that you guys work with that are doing a lot of deals in the area?”

Call up a surveyor. “Hey, are there any investors that you're working with that are doing a lot of deals and are successful in this area?”

But then importantly, or perhaps seeing someone on an interview or hearing someone through you. But then importantly, going back and looking and determining if that track record is actually correct. And the beauty of real real estate is that everything is recorded, right?

So finding out from that operator, “Could you tell me those entities that you're investing with?” And then simply popping onto a recorder's website with those entities’ names and figuring out, Hey, is this operator actually doing this business that they say they're doing? And guess what? It's, it's all there in the public record.

So it's a nice way to confirm that an operator is actually doing what they're saying.

Seth: Yeah, no, it is actually, I think it's a little easier in some states than others. I think, if I remember right, in Arizona, you can search for business entities based on the person's personal name. Maybe you know better than I do, but in other states, you can't. You have to know the entity name in order to do that search.

But even once you know the entity name, it's pretty easy in DataTree even just to see every property that that entity owns nationwide. Kind of knowing your way around those systems, it's pretty easy to verify and cross-check stuff.

Chuck: Absolutely, yeah. And a limited partner that's not necessarily a real estate operator might not have DataTree or whatnot, which is why I suggested the recorder's office, but you're absolutely correct. If you have a service like DataTree, very, very easy to find.

Seth: I know this kind of fund is not a new thing, especially in apartment syndications. And I think of Fundrise or RealtyMogul, where they have people invest in these big pools of funds that go all over the place, buying hundreds of properties.

So, what are the benefits or the pros and cons of doing this with a land fund? like what you've got going on versus something like these other more well-known established conventional types of real estate funds?

Chuck: I think it's important to look at all funds through their pros and cons, right? And a land fund doesn't necessarily have everything that every investor wants, but it also has a lot of what investors want.

So one of the things that's super-beneficial about apartment deals, or these large-scale deals where you have improvements, is the depreciation. Investors can come into those funds and they can come in as limited partners and they can enjoy depreciation through their investment, and perhaps that operator can also work in some additional bonus depreciation depending on their strategy. Which is really beneficial in offsetting the gains to that investor.

Now, there are additional things to think about with those investments, right? That investor is probably going to try to exit that investment three to five years from there. You know, that's highly dependent. The actual, the profit, that the limited partners are going to realize is highly dependent on the cap rate that they're going to be able to exit at, which is highly correlated to where interest rates are.

And so if it's the case that they can exit at a much lower cap rate, well, then everyone does really, really well. Limited partners do well. There are also some of those gains that are offset by that depreciation and things go very well.

There's not necessarily a series of significant cash flows throughout that investment. The large kind of equity or the large kind of profit chunk is at the end.

And so what we found is that a lot of investors that are invested in other funds that have depreciation benefits can really benefit from a fund that kicks off, that is more set up to kick off cash flow to investors on a quarterly basis. And they're utilizing that depreciation that they're getting off of this type of investment to offset the actual cash that they're getting from a cash-flowing land fund.

And so I would say neither is better. But if you look at funds that kind of have a long tail with potential equity and then depreciation benefits to them and combining those in concert with a fund that can kick off cash flow that can be depreciated from a tax perspective, there can be a lot of synergy and a lot of benefits there.

Seth: So if somebody invests in a fund like yours, what kind of extra work is there at tax time? Like, is there a lot of extra accounting expenses or movement required to file and report everything correctly?

Chuck: There are K-1s that are issued by the fund. And this is something that private investors in private funds are very familiar with. So it's simply a K-1 that they'll receive from the fund and then pass to their CPA.

Seth: That basically just says how much that person made that year?

Chuck: Exactly. Any depreciation, their capital account, exactly.

Seth: So is there any kind of licensure that you need to have as a fund if you're selling properties with owner financing? Is that more complicated than if you just owned it outright and sold it with seller financing?

Chuck: There is a lot of licensure involved in lending, which I think is, from my perspective, one of the problems that I see in the land space. One that would be great to correct, but one that I think, with respect to an investor looking at and evaluating an operator, is something to be very careful about from a risk management perspective. Because there are a lot of different lending laws that take place in various states and different jurisdictions that apply to folks who are lending on properties.

And so if an operator is engaged in seller financing, it is important to ensure that they work with the right folks to ensure that they have licensure.

So for example, it is very expensive, but it's also beneficial to go through a securities firm that also has a specialization in lending. And so in setting up our fund, we set up our fund through one of those specific niche securities attorneys firms, which give us guidance on not only the securities aspects but also the lending laws and where we can go and what we can do based on the absolute nitty-gritty of our business and our strategy.

And it can differ and shift in terms of licensure based on acreage, cost, approach, jurisdiction. And that's a way where folks can face a lot of repercussions.

Seth: Yeah. So as somebody like yourself who is managing a fund, is it ever stressful? Like when I think about buying deals with my own money, that carries its own amount of stress with it.

But if I've got somebody else's money where they're giving it to me and I have this expectation that I make them a certain amount in a certain amount of time. And I don't know, it feels like it would stress me out. Does it ever stress you out or do you just kind of think about it differently?

Chuck: There's a weight and a respect to it from my perspective. And I think the setup of the fund can do a lot for that, right? Determining and putting investors first and structuring that in the actual fund, I think can alleviate a lot of that because if an operator is consistently successful and they put their investors first, oftentimes those investors will do well.

And the person who may or may not face those repercussions could be the operator who's second in line. Again, with that respect and putting folks first, I think is the right.

Seth: Yeah, that's a great point, though. I mean, from the outside investor's perspective, I mean, even if I'm not happy with what's happening, what I wouldn't want to see is you're doing great, but I'm suffering as the investor.

But if it's kind of on equal ground, it just says something, you know, it probably motivates you as well to like, just realize like, Hey, I got to do this for me just as much as for them.

Chuck: I agree with that. And what's beneficial, from a limited perspective, is an operator that is doing well. Because you want an operator, you want to do well as a limited partner, but then you also want a firm, a fund that's also doing well because then they can provide these consistent returns for you.

Again, it's not this one grand slam followed by this strikeout. It's trying to construct those consistent wins so that it's sustainable for everyone.

Seth: Do you want to do our final three questions or is there anything else you want to talk about?

Chuck: I think we've covered it all. It's been fun. Yeah, let's fire away with the questions.

Seth: Cool. So what is your biggest fear?

Chuck: It is the fear of failure. It is the fear, of disappointing people that I love and care about.

I would not say that that drives me. What drives me is more about doing well for the people that I know and care and love about. But that would be a fear that would not put me in a good place.

Seth: Why is that such a problem? Because failure is how we learn a lot of stuff. A lot of things we just don't learn unless we're failing.

You heard it was like the Native Americans, they didn't even have the word failure in their vocabulary. They would always use the word learn there instead of fail.

Why is it such a terrible thing to fail? Maybe it's just like we sort of internalize it or we let it define us as people or something. I know I could kind of see myself doing that.

Chuck: Yeah. I get that. Failures on my part that affect me, I think, can be nice learning experiences. Failures that have lasting ripples and repercussions for others, don't sit well with me because I don't want to let other people down.

Seth: Yep. I gotcha. So, what are you most proud of?

Chuck: My daughter and my son for sure. I remember when my daughter was born, my wife had a C-section and they passed my daughter to me and I held her, and the world just absolutely melted away to the point where the nurse had to come smack me on the shoulder and say, “Hey, stupid, bring your baby over to your wife.”

But I'm very proud of them. They're happy and fun.

Seth: How old are you kids now?

Chuck: Eight and one.

Seth: Yeah. I remember hearing these kinds of stories from people all the time before I had kids. And I was like, yeah, okay, great. Good for you, kind of thing.

But like when I had my kids, like I had a very similar experience and, yeah, it changes everything. It kind of changes who you live for, what you do, and your motivations and I can relate.

Chuck: It is. Yeah.

Seth: So let's pretend you just got a hundred million dollars wired to your bank account and you're not allowed to keep investing in land or doing anything you're currently doing on your current career path, but you can do anything else you want for the rest of your life. What would you do?

Chuck: Maybe I'd spend my time… half, maybe I'd go back into philosophy a bit and spend a little time in philosophy. Maybe I would spend half my time investing in another area.

It's tremendously fun in a way that I didn't envision when I started to be able to achieve again with that kind of ripple effect that we were talking about. It's amazingly fun to be able to achieve success for other families and other folks and and their children.

That's it's just tremendously rewarding to be able to create that.

Seth: Yeah. You know, I actually had a moment earlier this week where I had a couple of property tax bills on my desk that I had to take care of. And, you know, initially, it was kind of just an annoyance, like, great, another thing I got to do.

But then I was like, man, like I own land. At all. Like, that's just crazy that I own something like that. A lot of people can't even dream of owning real estate, let alone owning dozens of properties all over the country. I don't know. It's a pretty huge privilege to be able to do that and have the skillset it takes to know how to find these properties and make money from them.

And I think sometimes like, I forget that. I forget just how amazing that is that I have the means and the ability to do that. And it's a huge privilege.

Chuck: For sure, yeah. And even for folks that aren't working with investors, being able to sell a property quickly under market value and create landowners in that family or seller finance something and have a family become landowners for a reasonable down payment that works for them. It's fun. It's rewarding.

Seth: Yeah, for sure. So if you certainly don't have to share anything here anymore, Chuck, but if people want to find out more about you, is there any particular place you recommend they go to do that?

Chuck: Yeah, website is meridianrei.com. And then I'm also on LinkedIn and happy to connect. So Chuck Dreison on there. Happy to chat with anyone who has any questions. Feel free to reach out.

Seth: I'll include links to all that stuff in the show notes for this episode. That's retipster.com/183 because this is episode 183.

Chuck, thanks again for coming on. It's awesome to talk to you. It's great to know you. And I hope we can talk again soon.

Chuck: Yeah, look forward to it. Thanks for having me, Seth.