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Show Summary
In this episode of the Investor Fuel podcast, host Michelle Kesil interviews Sean Phalon, an expert in distressed debt investing. Sean shares his journey from working in real estate financing to becoming a successful investor focusing on distressed properties. He discusses key strategies for maintaining a smooth business operation, the importance of scaling and capital raising, and the nuances of navigating different types of real estate deals. Sean emphasizes the significance of networking and the courage to ask for help in the complex world of real estate investing.
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Investor Fuel Show Transcript:
Sean Phalon (00:00)
So right now we’ve taken down a few hundred units. ⁓ Most of those we’re doing a major value add, a forced appreciation component on them. Where we’re pivoting very quickly around the corner is going after three large major development deals. Again, we only go after deals that already have plans that are approved. So we’re either just taking over a deal where the plans are already entitled and there’s just major financial distress.and there’s an opportunity to come into it before the lender forecloses, before it goes to auction or some other type of sell-off happens. And so we’re getting those things from 30 to 60 cents on the dollar so.
Michelle Kesil (02:15)
Hey everybody, welcome to the Investor Fuel podcast. I’m your host, Michelle Kesil. And today I’m joined by someone I’ve been looking forward to chatting with, Sean Phalon, who’s been making serious moves in the investing space, particularly in the distressed debt market. So, excited to have you here today on the show, Sean.Sean Phalon (02:42)
Thanks so much, Michelle. Glad to be here.Michelle Kesil (02:44)
Awesome, yeah, I think our listeners are really going to take something away from how you’re really merging your knowledge from finance and investing and yeah, just combining those two expertises that you have. So let’s dive into all of that.Yeah. So just first off, for those who are not familiar with you and your world, can you give the short version of what your main focus is and what you’re up to?
Sean Phalon (03:15)
Yeah, I have a background in real estate financing in the banking and debt structuring world and have been doing that for well over a decade and through that network have a big network in the distressed debt space. And so that’s what we highly focus on is going after properties that we find that are just a mess. Sometimes the building is in distress, but sometimes the partnership is or the finances of it or the process or the place that they’re in. And so we typically find properties that are30 to 60 cents on the dollar as is that either need a major rehab component or have approvals that are already approved and are just kind of sitting dormant that were resurrecting. So it cuts down on the timeline. And through that, we’re able to give investors back ⁓ phenomenal returns, but also get an asset that really needs to be resurrected, right? And be able to deliver a great product to the community and areas where inventory is really, really needed. And with the background in the finance world and in the debt and the banking world, ⁓
of that network it’s been a great advantage to find those deals be able to source them and continue to capitalize on them.
Michelle Kesil (04:21)
Yeah, amazing. And what markets are you operating in?Sean Phalon (04:28)
So it’s opportunistic to some extent. ⁓ Obviously, we don’t want to go someplace where we’re just completely unfamiliar or we don’t have some ⁓ really good connections either from a political or economic standpoint. But I’m here in the New Jersey, New York area. So some of our projects that we’re in the middle of taking down right now, a lot of them are down by the Jersey Shore. You have a lot of New Yorkers ⁓ with strong economics migrating from the city actually down to the JerseyIt’s continued to grow steadily over the past five to seven
and inventory demand is really, really high right now there. And so we’re focusing there because there’s a lot of these projects available and we believe that will continue to grow and even stabilize well into whatever’s ahead on the economy. And those are all to buy and sell for the most part. We have also 200 other units. Those are in the South. We focused on the Shreveport and the other pseudo Louisiana market and other areas in the South.
where they’re very landlord friendly. ⁓ Part of that was economics because we were able to get those assets for pretty, cheap, ⁓ completely different economic structure than up here in the Northeast. But again, we focus on where there’s a massive need for inventory, where the local municipalities and the governing authorities are aware of it and are going to put a lot of support ⁓ and where there’s either a development or a building approval already in place, or there’s just a big renovation component. And so we can do a value add.
powers that be that want to help us that want us to be able to complete a project and it’s within that buy box of getting it 30 60 cents on the dollar and so ⁓ we not I we probably wouldn’t necessarily go out to like California or Denver or or maybe Scottsdale or someplace that we’re really not familiar with but those areas where they’re very landlord friendly there’s a major need for inventory or there’s a really strong economic curve with that same type of deal structure and buy box that’s where we’re focused.
Michelle Kesil (07:15)
Awesome. Yeah, I think that’s so important to know the types of areas that work best for you. So what got you into this side of the investing world?Sean Phalon (07:29)
So way back when when I was in high school, I used to work for a builder, landscaping, cash, and he was doing flips from the fallout, from the market, kind of collapsing. He rode the wave up on all the new construction when things were going really well in the early 2000s. And then he capitalized on all of these.undervalued properties coming to market that you could buy at auction, flip and still sell for a good margin. And I remember looking at the market and kind of learning it from being there on site, watching what was happening and thinking, if there’s ever an opportunity to do this again, I want to be a part of it. You know, I didn’t have maybe 20 bucks to my name back then. And so then I eventually got into real estate financing and you were on the other side. was on the finance side, financing what an investor is doing and looking at their returns and looking at the strategies that they have.
And so flip some properties and made some money doing that and consulted for some larger deals But I really wanted to be a part of the deal I really wanted to go after those assets myself and
over the past few years as the inflation has gone through the roof as Distressed debt has kind of started now to drip into the market We figured that this was a really good time to begin pulling in a lot of capital and going after a very specific types of asset classes that were
going
to be quick and that we’re going to bring inventory to the market. so, you know, it’s been, it’s been a long time really watching it and being a part of it from a couple of different angles in the real estate space, particularly financing it. And now it’s from acquisition to raising capital, to negotiating, to deal structuring, and to getting the financing all in one conglomerate. So it’s kind of all come full circle.
Michelle Kesil (09:17)
Yeah, I love that how your earlier life has pulled you into where you are now. I think that’s a really cool story. ⁓ So what is the key to keeping your business running smoothly? I’m sure there’s multiple moving parts to getting everything under control.Sean Phalon (09:40)
So it depends upon where you’re at. ⁓career has really been in scaling teams on the lending side and be able to put dollars on the street and grow business that way. so scaling larger teams and watching processes and procedures is kind of my love language in business, I guess.
I always say simplify structure and then scale. so try to translate that here into the real estate investing world. When it’s a large project, it’s a large renovation. When there’s a lot of dollars going a lot of places, I actually think it’s really important
to find either partnerships or people you can hire to do what you’re just not good at. Not to say you couldn’t do those tasks, but at the end of the day, if it’s going to take many times longer or it’s just gonna drain the energy out of you and it’s taking time away from what actually keeps the business going, which is new deals, which are the attractive part to raise more capital and to continue to ⁓ keep cashflow going, right? Somebody has to do that. In that case, in my world,
That’s me, right? And so I want to make sure that I’m giving all of those other tasks as much as I possibly can to somebody who is going to be good at doing them, but also has a much natural tendency to do them than somebody like me. I think that’s a very underscored point and it’s very difficult to find. know, fortunately with the couple of partnerships that we’ve had, we’ve been very fortunate to find some folks who do it, but listen, it’s expensive, right? It does take some money and I think
I a big… ⁓
aspect that a lot of investors miss and even folks in business in general is not budgeting for essentially paying somebody to do what you’re not good at doing. know, most of us who are pretty successful or even doing this are wound up A-type and we think we’re awesome at everything and I think we need that in order to do what we do every day. But I believe it’s also really important to recognize that you’re not going to be able to do everything. You’re not going to be able to do everything well and the deal itself needs to
support somebody or a team or some partnership that can fill in those gaps.
Michelle Kesil (12:30)
Yeah, definitely. It’s so important to know your strengths and knowing that other people might have those strengths in the areas where you’re maybe not having the time or the mental capability for and yeah, finding those partnerships and lightening the load, especially if you plan to expand. So super important. So let me ask you this.Where are you most focused on solving or scaling to next in your business?
Sean Phalon (13:05)
So right now we’ve taken down a few hundred units. ⁓ Most of those we’re doing a major value add, a forced appreciation component on them. Where we’re pivoting very quickly around the corner is going after three large major development deals. Again, we only go after deals that already have plans that are approved. So we’re either just taking over a deal where the plans are already entitled and there’s just major financial distress.and there’s an opportunity to come into it before the lender forecloses, before it goes to auction or some other type of sell-off happens. And so we’re getting those things from 30 to 60 cents on the dollar.
with that being said, we wanna go to things that we can take over those assets and we can enact the approvals that are already there rather than just finding a great property, a great location, a piece of land where there’s a lot of potential, but now you might add a year, a year and a half
on just to get the approvals done. ⁓ That’s not my place I like to play in at all. I think there’s enough distressed assets that are already far long enough to take over them where they’re at. And that’s that very specific niche that we focus on. And so on the math side of it, right, has to be about 30 to 60 cents on the dollar or less, right? We’ll certainly take less. ⁓ But that’s typically where we find it at. Have having those approvals ready to go. But also the math has to make sense from a from a financial standpoint.
because we’re heavily pushing on capital. We have one deal that we’re wrapping up right now that’s going to give our investors 33 % annual returns and it’s a 24 month project. Why? Because we’re buying the property at 44 cents on the dollar. The buildings are already worth 25 million and we’re buying it for under 11.5. So there’s a phenomenal upside to it day one in the purchase but we’re raising capital for that and then we’re raising capital for the other two. So
a big focus is
the 30 million that we’re taking down in capital raising over the next ⁓ six to seven months so that we can continue to acquire these types of assets, give great returns back to the investor and really show those small institutions, small to mid-sized family office, high net worth individuals, small funds who are looking to take advantage of this next real estate market that there are these deals out here, right? It’s not just getting your seven or eight or 10 % or putting money into a read or
or some other type of a more larger stabilized institutional play that there are phenomenal deals out there in great locations. You just have to know the people to find them. And that’s where we come in. That’s where I believe we, myself in particular, bring the most value to the market is because we can source these deals. I find them. My network brings them to me. We structure them, negotiate them, and then we put the money together. But you’re looking at returns two to three times.
more than the average real estate deal for these investors.
Michelle Kesil (16:50)
Yeah, amazing. That’s such a unique way to scale this business. And when it comes to raising capital, like do you guys have certain like creative solutions or certain strategy that you’re able to share with the audience?Sean Phalon (17:10)
Yeah, I wish I had a magic formula for it. If I did, I’d be using it’d be great. ⁓ But I think, ⁓ you know, it’s an evolving thing, raising capital, I think any investor in any business, let alone real estate or anything else will tell you that because ⁓ one real estate project could require a completely different type of capital source than maybe the previous one you did or the next one. I think that’s why it’s important to begin to find the right type of deal flow so that you can scale appropriately.and your investments are similar just from a business structuring standpoint, right? And so that’s why everything we go after has a very specific component. So we know we can deliver a certain deliverable to the investors at a good return. I think that’s something that maybe a lot of investors don’t focus on because there’s a lot of good deals out there. But the question is who’s the investor and who’s gonna plug money into your deal, right? And if you don’t have a good structure, a good deal flow and a consistent type of deal
flow for an investor to especially if you’re talking about a small family office somebody who can cut five ten million dollar checks they’re looking for scale they’re looking for things that they can build they’re looking for a really good investment opportunities and ones that aren’t just everywhere out on the street so you have to really know if you’re asking for like you know what’s kind of the secret sauce I don’t know if there is one but in my in my world you really have to know what your capital source is looking for and most of those ⁓ entities I just mentioned they’re looking for
kind of the under the table deal behind the curtain, things that most people are not going to see in the market, maybe getting an earlier on a play like distress debt that kind of really hasn’t poured into the economy, but it’s starting to drip in ⁓ deals where ⁓ they’re able to get a great return on their money. But there’s a certain component that makes the deal go faster than everybody else would typically would. It’s not just I have to go through approvals and then build it right. No, it’s already in
So there’s kind of ⁓ a benefit there that isn’t on a regular real estate development deal. So you have to know that they’re looking for unique things. They’re looking for special places and special opportunities to park their money and then make sure that your deal actually fits what they want. Right. I think it’s ⁓ maybe credit Brandon Turner were saying instead if you have a good enough deal you can always find money for it. Right. I think the where a lot of ⁓ investors and operative
Michelle Kesil (19:35)
Yeah.Sean Phalon (19:40)
even like myself, will fall short is finding an asset and a deal that just doesn’t work for the investors that they’re trying to get money from.Michelle Kesil (19:52)
Yeah, can you expand on that? Like, how can someone tell or know what that criteria looks like?Sean Phalon (19:57)
Right,if you’re flipping, let’s say, five houses.
and maybe you’re buying all five of them for $700,000 to a million dollars and you’re going to sell them for 30 to 40 % margin. You could truly raise money by passing the hat for your friends, family, wealthier folks, maybe some retirees who can cut you $100,000 check, maybe some money from your own funds. You could piece that together and get those deals done. Now, let’s say you’re looking at 150 to 200 unit apartment complex that you need to purchase for a couple of
million and you need to renovate for a few million dollars. So now you have a major debt component. Now you have a much longer time period. Now people need to be comfortable with not seeing their money for a long time. Right. You’ve got a lot of permits. You’ve got contractors. It’s a very different type of deal. It’s a very different type of investment. And then let’s talk about like even one of the ones I’m doing right now. We’re doing several dozen condos that are already approved on a gutted building or set of buildings that were
taking over for very, very cheap on the dollar here, that’s another completely different structure because we need to raise $12 million for it. Right? So you’re talking three different real estate projects as real estate investing as a whole, but three completely different capital sources that you need. Right? You typically can’t raise money from $12 million from friends and family. If you can, you got an awesome network, right? Good for you. you know, you should be in for capital raising if your friends and family can give you 10 million plus.
But typically speaking you’re gonna need to go to a family office, ultra high net worth individuals, or you’re have to engage with somebody who’s very well connected to those who can partner up with you, right? So sometimes it’s getting into that proximity. And so those are three different categories of raising money and you have to know that in order to graduate from a smaller type of deal and keep going up, and I don’t say up, everybody has their niches, but if you want to get into higher dollar amounts you have to make sure
Michelle Kesil (21:30)
ThankYeah.
Sean Phalon (22:00)
surethat you’re prepared to go after the source of capital and you have what they need in order to advertise them to actually invest, right? You’re not going to be passing the hat around. You’re going to be putting professional decks together. You’re going to be putting professional performance together. You’re going to be getting third party validation. You you’re going to be sitting in front of CIOs, right? And executives who are running multimillion dollar capital deployments, very different than sitting down with Uncle Bob who might have two million in the bank as well to give you a hundred grand, right?
Michelle Kesil (22:09)
ThankSean Phalon (22:30)
to know your audience.Michelle Kesil (22:31)
Yeah,thank you. That’s so helpful. I really love that insight. So let me ask you this. When it comes to growing your business and your network and building new relationships, what do you feel is the thing that made the biggest difference for you?
Sean Phalon (22:52)
I think having no shame. And what I mean by that is not being afraid to be embarrassed, not being afraid to ⁓ try something new and kind of learn as you go. ⁓Michelle Kesil (22:54)
Mm-hmm.Sean Phalon (23:07)
this market that I play in the distressed property and distressed debt space is very complex. There is a lot of things on it, even on some deals that we come across as it, man, I’ve never seen that before. I don’t know, right? I’m going to have to call up one of my buddies who’s much more experienced and has a much more sophisticated operation than me and have the humility to call him up and say, Hey, listen, I think this is a good deal. And then he looks at it and says, you’re not considering X, Y, and Z because I know that market a lot better than you do. And I might look foolish on that phonebut I’d rather look foolish on a phone call than look foolish losing a lot of money, right? And that’s kind of a very rudimentary way to saying it. But I think it’s understanding that it’s real estate. It’s complicated. If you’re doing larger and more complicated projects or even just a type of property, a type of deal that you haven’t done before, a situation you haven’t seen, you might walk away
Michelle Kesil (23:48)
Yeah.Sean Phalon (24:02)
some humility as you get into it. And that’s okay.being not being afraid to network up and tell people here’s what I am trying to do and here’s what I need and here’s the help that I need from you. Can you help me? All right, that can make all the difference in the world. Many times I think people don’t leverage the network that is right in front of them or semi connected to them simply because they don’t have the courage or maybe the humility to just simply ask for help and tell people what they’re trying to do. They don’t want to look embarrassed. They don’t want to look
They don’t want to look like they’re just building something or not established. But at the end of the day, when you ask for the check, people are going to know where you’re at anyway. So you might as well be straightforward, honest, and don’t be afraid to ask for the help that you need.
Michelle Kesil (24:46)
Yeah.Yeah, I love that. That’s so important to, yeah, you don’t ask, you never get an answer. So definitely awesome. So yeah, before we wrap up here, if someone wants to reach out, connect with you, collaborate or learn more, where’s the best place they can find you?
Sean Phalon (25:00)
100%.Sure, they can email me. It’s Sean, S-E-A-N at phlexventures.com Sean at phlexventures.com or hit me up on Instagram. ⁓ That’s Phalon my last name, P-H-A-L-O-N-F-W-D, Phalon forward.
Michelle Kesil (25:30)
I really appreciate your time, your story, and your perspective. So thank you for being here.Sean Phalon (25:38)
Appreciate it. Thanks for having me on, Michelle.Michelle Kesil (25:40)
And for those of you tuning into the show, if you got value from this, make sure you’ve subscribed. We have more conversations with operators just like Sean who are building real businesses and we’ll see you all on our next episode.
