How to deal with adversity when it comes to real estate investing? Mike Morawski, founder of My Core Intentions, has dealt with the ultimate challenge, he was sentenced to 10 years in federal prison, charged on wire and mail fraud after transferring funds from one syndication to another without notifying his investors. He explains how he has overcome this life changing moment.

Tell us a little bit about you.
I've been in the real estate business for 30 years, and I've always believed success leaves clues. If you follow successful people, you can ultimately cut the learning curve, learn a lot faster, and progress a lot faster. I met a real estate agent along the way while we my wife at the time and I were doing some house hacks, he was really successful and he encouraged me to go into business. So I started selling residential real estate. In my first nine months in the business, I sold 78 houses. I was REMAX Rookie of the Year that year, I went on to build a team selling 125 homes a year, and did that consecutively for about 12 years.

In 2005, I started to see the market starting to shift and soften a little bit. I thought I don't know what's really going to happen, but something is coming down the pike. So I decided I wanted to shift to different market classes. I was selling residential, and always wanted to be in the multifamily business so I went out and syndicated some apartment deals. I syndicated my first apartment deal, raised the capital to do it and thought that it was going to be great. I found out very quickly that I made a couple of mistakes, I didn't underwrite it properly. But it caused me to really look at the business, to evaluate what you needed to do. So I wrote a buying strategy and, through it, I was able to go and look for specific types of multifamily deals. I wrote a plan to do the underwriting and to look at markets. I learned all this on my own along the way, I wound up in the next 30 months raising $18 million in private capital. We bought 4,000 apartments that were worth about $60 million. I went on to build a property management company managing 7,500 units. My wife and I ultimately built a $100 million company in that short period of time, one of the things I would say was a mistake was that I grew way too fast and it became a very unstable company.

What happened along the way that was a mistake? What were the CAP rates at that time?
I built a $100 million company with 100 employees working for me. We were in five markets around the country with 4,000 apartments. I thought that I had a team behind me that was getting the work done in restabilizing properties, but that wasn't happening. We should have taken a property, got it stabilized, and then gone to buy the next one, but I didn't do that. As an example, in 2007 I closed 17 transactions for 2,700 units, which was a lot of real estate in a quick period of time. I was undercapitalized and didn't raise enough money, I was over leveraged in that I bought all that $60 million worth of real estate at an 85% loan to value.

Cap rates were 12-14%, they were a lot higher than they are now. As a matter of fact, I wrote a book called “Exit Plan”, and somebody was reading the book six months ago, and he called me to ask if I really bought that deal at a 13% CAP. I said yes. The funny thing is that I know the investor who just bought that deal with 4% CAP. It just goes to show you where the market is.

You had a huge buffer with that high CAP rate, people today don’t have that much buffering in case of an additional 10% vacancy rate. Even though you were at an 85% loan to value that CAP rate is pretty high, so what happened after that?
I just want to revisit that 85% loan to value, I don't think anybody should be in a real estate deal that they're not at 65-75% LTV. I've been looking at loans today, and some lenders sent me an email saying that they have loans at 80 and 85% LTV and I thought that's suicide. 

I had all this real estate, and 2008 comes around, it was the worst economic crisis that the country has ever seen. What happened was people started to move out of apartments, the market shifted and we had all this bad paper and foreclosures go to the market. My thought was, people are going to lose their house and they're going to need a place to live. Well, that wasn't what happened. People went home and doubled up, so our occupancies dropped. It was like hitting a brick wall, we started to come off of the rails and unwind as a company.

By 2010, my occupancies had dropped and my NOI had dropped as a result of it. We went to some lenders and they helped us re-stabilize deals, but we still couldn't mitigate the storm. I had 38 companies at the time, and I had a number of deals that were very profitable and others that were not as profitable. So I started to take money from my profitable companies and move it into my non profitable companies. And my thought around the whole situation was, this is a recession and it tends to last 17 or 18 months. There’s a 10-12% correction in the marketplace, and then it bounces back. Well, this lasted for seven or eight years, it had a 40% correction in the market and people are still affected by it today. I thought if I move money between companies, and when the market comes back, I can put the money back. My accountant and attorney both said it's okay to do that, and just said to leave a paper trail. That's what I did, but the market never came back. As a result of that, I didn't disclose it to my investors. I should have just let a few deals go to foreclosure and let a few investors get hurt and I would have weathered the storm better, but I thought, I'm a hero, I wanted to save everybody. But I didn't disclose it, so for non disclosure, I wound up being charged on wire and mail fraud, and got sentenced to 10 years in federal prison.

Did your lawyer tell you that you had to disclose that? Did he get charged for guiding you in the wrong direction?
No, that was not ever part of the conversation, and I never thought I was breaking the law. Because I was a licensed professional and raised money, I held myself to a different standard. The court says that when you take someone else's money, no matter what the value is, you're held at a different standard and you have a fiduciary responsibility, so you should know better.

I look at it this way today, I made a few business mistakes, I learned from those along the way, and I have a different perspective on business and on the markets today. I think I'm more cautious now, I'm not as prideful or greedy as I might have once been. If I had to look at the five mistakes I made, they were: I grew too fast, the business was very unstable, undercapitalized and over leveraged, and I didn't listen to people around me, I didn't pay attention to the details. 

My accountant and my attorney might have never said I had to let the investors know, and that's ok. We knew what was happening and we had the data at that point, we could operate at that level. And because of what happened in the world, they had to pick the low hanging fruit. 

Here's an interesting story, back in 2008, I was sitting in a closing in Cincinnati waiting to get a deal closed, it was the biggest deal we were closing for, it was about 280 units. I'm waiting for my office to wire $500,000, and in the afternoon I got my ex partner on the phone, and he told me that had taken money from the operating account. When we went into the business, the first conversation we had was that we could never do that, and he broke that rule. He said he knew that and that he thought he’d have the money back the closing. I said, let me sign the papers and I will have the deal closed by next Tuesday and we'd be able to take possession. This was on a Wednesday, the next day I started raising capital, and I raised enough money in the next two days. I gave away his equity in the deal, brought in a few more investors, we got the deal closed. But here's what happened, that Friday night when I went to dinner with my wife, and I never told my wife about business and it was probably a critical mistake in my life, on the way home that night, she says that she doesn't trust him. So I think I'm going to be a good husband and said don't worry about this, I have it under control. And I didn't have anything under control, I knew that the wheels were starting to come off. On Wednesday, a week later after that call after trying to get that deal closed, I had lunch with my attorney, and as we're walking across the parking lot he puts his arm around me and says, "I just want you to know that I don't like what's going on, the things that I'm seeing. I'm not quite sure what's up with your partner, but you better pay attention to some things." So I have two people saying there's something going on, and I'm ignoring the red flags. 

What I tell people today is don't ignore the red flags. I'm a firm believer that God puts women in our lives that are smarter than us.  I should have listened to her, but I didn't. I made these mistakes and wind up getting charged on wire fraud and mail fraud charges. By 2013 I wind up going to federal prison. I think at that point that my life is over and that I'm not really sure how I'm going to get through today, much less 10 years of this. About three weeks in prison, my wife decided she's going to divorce me, and that wrecked me. I never saw it coming, I'm wondering how I'm going to get through it, I'm  hating myself every day. I never flew private, didn't buy a big boat, didn't have a fancy house or car, I was home every night for dinner, I was the neighborhood baseball coach, my wife and I had a great marriage, we were best friends. And I got ripped from that to live in a 12x12 room with three men that I didn't know nor did I like, wondering what happened to my life. 

Six weeks later, I walk in the gym one day and this guy walks up to me and says, Hey, don't let these people beat you. They want to take from you everything that you've ever had. They can take your business, they can destroy your apartments, they can take your money, they can ruin your family, but what they can't take is who you are and what you're made of. They can't take what helps you to build that 100 million dollar company”. We all have these defining moments in our lives, you might have one or two in a lifetime. For me, this was it. It clicked, like somebody turned the light switch on. He said, Come to my class every day and workout, you'll start losing weight, you'll start feeling better. And I took him up on the offer, I started going to the gym and working out, I lost weight, I felt better. I went to go to college for four years, and got a bachelor's degree in theology. I wrote two books, a book called Exit Plan, a book on property management and I wrote an Ethics course. I taught real estate investing, property management, and ethics in prison for six years, I was on an outreach program, went into the community and told my story 40 times to small business owners and local college students. I met a professor from the University of Minnesota and he and I co authored a paper together that we had published in the Business Journal of Ethics that gets taught at the collegiate level today for forensic accounting and sales and marketing classes. Today I'm back home, coaching and training business, I teach multifamily investors how to build their business, and live a balanced lifestyle. Recently I was approved by the SEC to go back and sponsor deals, to be an issuer of securities and partnered with two of my coaching clients, and we wound up just closing on our first apartment deal in Florida.

Mike Morawski
www.mycoreintentions.com/free