Ep384: Michael Morawski – Stay Out of Trouble by Paying Attention to the Red Flags

Andrew Stotz 00:01
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning. In our community. We know that to win in investing, you must take risk but to win big, you've got to reduce it. And if you're not yet a member, please go to my worst investment ever.com right now to join and receive the following five benefits First, the risk reduction checklist to help you reduce your risk second, my weekly investment research email to help you increase your return. Third, a 25% discount on all a starts Academy courses for instant access to our Facebook community get to know the prior guests and fellow listeners and fifth my curated list of the Top 10 podcast episodes. So much value I've created for you. My podcast listeners that are risk takers. This is your worst podcast host Andrew Stotz from a Stotz Academy, and I'm here with featured guest, Michael, better known as Mike murasky. Mike, are you ready to rock?

Michael Morawski 01:10
I am Andrew. Thanks for having me on.

Andrew Stotz 01:13
Yes, I noticed my radio voice there, huh?

Michael Morawski 01:17
Yeah, I should know, obviously, I'm taking a risk.

Andrew Stotz 01:23
Yeah, well, let me introduce you to the audience. Mike is a 30 plus year real estate investment veteran who has controlled over $285 million in real estate transactions. Mike is an entrepreneur, author, real estate trainer, public speaker, and personal coach with a strong personal resilience and deep desire to help others live an extraordinary life. He's caused hundreds of real estate investors to fulfill their dreams. Might take a minute in Philly for their tidbits about your life.

Michael Morawski 02:01
Yeah, sure. Andrew, you want me to start from the beginning?

Andrew Stotz 02:05
Well, yeah, I mean, I think the audience would love to get to know you. Okay.

Michael Morawski 02:09
So I've been in real estate for 30 years, like you said, I went, I had a general contracting business prior to that, and, you know, had built a very successful contracting business doing mostly residential, to the kitchen and bath and room additions. And I woke up one morning, and I was just burnt out, I was still swinging a hammer, and I couldn't do it anymore. looked at my wife at the time and said, I don't know what to do, I'm done. So I sold the business, took a year off. And during that year, my wife and I did a couple of fix and flips we actually house here. And that was on before house hacking was sexy, or the fun thing to do. And we met a real estate agent along the way. And, you know, I really liked this guy's perspective on real estate and how he handled himself. And I thought, well, this might be a good business for me to go into. So I called him up and I asked him and he goes, man, I think you'd be great at it. I said, Great. So can I shadow you and come and learn from you? And he said, No, he goes better than that. I'm gonna make you a cassette tape. Now I'm dating myself, right? Because I don't think you could find was an

Andrew Stotz 03:21
eight track though.

Michael Morawski 03:23
No, it wasn't the never record on those eight.

Andrew Stotz 03:26
Exactly, exactly.

Michael Morawski 03:29
Um, that was a test. Yeah, right. I have that old. Yes. So he made me a cassette tape. And I listen to that tape over and over and over again. And my gut, my whole goal was to absorb what he was teaching. And what's interesting is I look at that cassette tape today, like podcasts of today, we can go back, we can listen to this material, we can listen to that information. So I went into real estate business, my first nine months into business, I sold 78 houses, and went on to build a team selling 100 125 homes a year did that consecutively for the next eight or nine years. And 2005, I saw the market starting to shift, and I knew that I was going to have to do something different if I wanted to keep the production up. So at that time, I decided to go in the apartment business. Now. What I'll say is I didn't just wake up one morning and say I'm going to go in the apartment business. And it's been something I thought about for years because I understood the private equity model. And I understood that you can raise private equity, marry it with a good real estate deal. And as long as everything went well, you stayed in the middle. Everybody made money and everybody was a winner. So I started raising money and buying apartment deals. Well over the next 30 months, I raised $18 million. I bought $16 million worth of real estate was 4000 apartments in five different states. And I went on to build a property management company managing about 7500 units. And today me Meteor What is it called a

Andrew Stotz 05:11
meteoric rise?

Michael Morawski 05:13
Yeah, it was, it was, we grew really fast, very unstable, had a lot of issues that happened along the way. I was over leveraged paid too much for properties didn't mean to a lot of the red flags. And all of a sudden, 2008 came around. So today, as a result of all that I'm in the coaching and training business.

Andrew Stotz 05:38
Got it? Got it. Okay. And I'd say a coach that really has been through it. So you know, one of the things I always say about this podcast is that, for people who are coaches, advisors working with other people, is that when you meet someone who's willing to dig into their worst investment ever, and go through what they learn from it, you know, you really are a valuable person, that that I think, can add a lot of value to the relationships in business that you do. It's surprising the number of people I invite on the show that say, either I've never made a mistake. Or, or say, as my favorite one was. Cool show, not my style.

06:26
Wow.

Andrew Stotz 06:27
And, you know, there's people doing this simply do not want to reveal themselves, you know, in the mistakes that they make, you know, I understand, and there's been times in my life where I've been in that situation. But the point of this podcast is that this is where we do discuss it in a real way. And we discuss, you know, we messed up, and how can other people learn from them. And that's, that's really what it's all about. So, to move into that part, I'd like to ask you, it's time to share your worst investment ever. And since no one ever goes into their worst investment thinking it will be. Tell us a bit about the circumstances leading up to and then tell us your story.

Michael Morawski 07:05
So I think the worst investment ever did was the first apartment deal I did. But beyond that, you know, you brought up a couple of interesting points here. You said, you know, nobody makes Miss, you know, people don't want to admit their mistakes. Well, I've made some mistakes. You know, I named a few, right, I was overlooked. I paid too much for properties. I grew too fast. I was unstable. I didn't pay attention to the red flags around me. 2008 came around, we hit the worst economic crisis the world's ever seen. I thought I could weather the storm. My properties started bleeding. People moved out, I couldn't weather the storm 2010 A imploded. So what I tried to do along the way, was I tried to protect my investors. And by doing that, I thought, well, if I take money from good, profitable companies that are operating Well, I can move that money into non profitable company, and hopefully keep the whole ship afloat. Hey, Andrew, listen, we You and I both seen our share of recessions over the years. Yep. And my experience has always been that there's a 10% correction in the market. And that recession will last 17 or 18 months? Well, this thing, there was a 40% correction. And it lasted seven or eight years, and there's people still recovering from well, so as a result of that, you know, so I get to a point where it's like, I don't know what to do. I don't know how to protect my investors, I should have let a few deals go to foreclosure. I should have let a handful of investors get affected by that and get hurt. But I didn't want anybody to get hurt. And I thought I could be the hero and weather the storm. So I started moving money back and forth. And you know, my attorney, my accountant, they both said, it's fine to do that. Let's just leave notes. So that it's trade traceable. Well, that was fine. But the problem was, I didn't tell my investors and for not telling my investors. I was charged with wire fraud and mail fraud charges, ultimately sentenced to 10 years in federal prison. So I lost you know, everything lost the company. And you know, Andrew, it's, it's interesting because I I had a pretty decent amount of success. I wasn't, I wasn't super rich by any means. But we lived a really decent lifestyle. My lifestyle never changed. I didn't buy big boats. I didn't buy fancy cars. I didn't fly private, didn't take exotic vacations. And you know, I tried to save the business. I poured all this money back in the business, move money around and everything. Employee Did So to all backfire. As a result, I found myself walking into federal prison, a 10 year federal or 10 year prison sentence. And you know, Andrew, at that point, I thought this is as bad as it can get. It can't get any worse. And how old were you at that time?

Andrew Stotz 10:18
Just to put it in reference? Yeah, I

Michael Morawski 10:20
was 55 got it. And actually, I was 54. And I thought, God, he can't get any worse, right? This is the bottom well, but 17 days, after being in prison, my wife decided to leave me. And then it got the worst it could possibly have gotten. I was devastated. didn't know how I was going to mitigate each day that went by, you know, you went from living a upper middle class lifestyle. You know, me being a kids bent, traveling, you know, to now I live in a room with four men that I don't know. 12 by 12 room, and a bunk bed. In a living out of a two by five locker. I've got three green uniforms and, and five pairs of underpants. And you wonder what happened in my life? How did I get here. Um, so I was having a pretty rough time. And I walked into the gym, I was probably in prison for about six weeks, and I walked into the gym. And this guy came up to me and he said, Hey, don't let these people beat you. All they want to do is take everything from you you ever had. They can take your apartments, they can take your cars, they can take your houses, they can ruin your family, but they can't take what you're made of. They can't take your brains, they can't take your desire. They can't take your energy. And he was right. Probably the best advice I've ever gotten. I as a result of that, you know, there's a saying in prison that says you can either do the time or let the time do you. And I chose to do the time. So I went to college, and which is a whole story in itself how this happened. But I went to college, I got a four year degree in theology. So I got a bachelor's degree in theology. I went in and I wrote two books. I wrote a book called exit plan, your complete guide to multifamily investing and, and why you need an exit plan before you buy. Love to give a copy away to your listeners.

Andrew Stotz 12:35
We'll put that in the show notes.

Michael Morawski 12:37
Yeah, I wrote a book on property management. I taught real estate investing, taught property management for five years, I wrote an ethics key, an ethics course. I taught ethics for five years. How ironic, right? I taught Bible studies, I was out an outreach program out because I was a, you know, model prisoner. I went into the community about 40 times told my story to small business owners, local area businesses, and the colleges in the area. As a result of that, I met a professor from the University of Minnesota that we co authored a paper together, it was an ethics case study. And that case study just got published in the Business Journal of ethics in January this year, and gets taught at the collegiate level, where forensic accounting classes sales and marketing classes. So I came home from prison as a result of that conversation with that young man. I came home from prison in better shape physically, mentally, emotionally, and spiritually than I've ever been in my life. Today, I've taken all that wisdom and all that knowledge from years of coaching and training, and I put it on a platform and my goal is to give back to give a message of hope and inspiration that you know, no matter no matter how bad it gets, you can get through it. And there's life on the other side. So,

Andrew Stotz 14:10
so how would you summarize the key lessons that you learned from this experience?

14:19
So,

Michael Morawski 14:20
you know, I have to go back to how I bought property, how I did the investments. key lessons really are first of all, I grew away to best 2007 I close 17 transactions, it was 2700 units. And we weren't stabilizing property along the way. So things were very unstable as a result of that, and if you can picture this, right, it's like balancing on a legs of a chair, lifting your feet off the ground trying to eat your breakfast. So it's very unstable.

Andrew Stotz 14:54
Got it too fast growth.

Michael Morawski 14:56
Yep. I you know, I grew a company hired people by Cuz I thought it was a that, you know, we would grow into needing them and that when they were talent and I didn't want to lose the talent. And so we grew too fast, I hired too many people, I had too big of a payroll overleveraged, I put down 15%, I had $60 million worth of real estate were 85% loan to value, not a smart thing to do, you should be 25 30% equity, you know, 65 to 70% loan to value. I paid too much for properties, you know, the markets going up. And as it's going up, I'm buying properties on the way up thinking that it was going to keep going up. And I should have been negotiating better. And I didn't. I didn't pay attention to the red flags around me, Andrew. You know, I'll be real honest. And in, don't get me wrong, I broke the law, I made some choices. I made some bad business decisions that I shouldn't have done, but around me told me that they didn't trust people that I was in that were in my life, I should have listened. You know, coming home from dinner one night. My wife told me that she didn't, you know, trust my business partner. And I said, Well, I have this under control. And I didn't have anything under control. Yep. So, you know, I should have said, Tell me more. What don't you trust? What don't you understand? You know, she's got things going on that I didn't see. Right? Isn't that always the case in our life? Right, is we get we put these blinders on? And we all of a sudden are like, you know, everything's fine. Well, and in my conversation with him with him would be how is everything going? Everything just fine. got it under control. Great. I get on an airplane and leave town for a few days, you know? Hope? Yep. You know, you don't pay attention to the red flags. I had my eyes bury my head buried in the sand. I didn't look at the KPIs deep enough. You know, and then all of a sudden, Yeah, yep.

Andrew Stotz 17:11
Wow. Okay. So maybe I'll share some, I mean, I've been sitting here taking notes as you've been talking. I mean, let's just review for a moment for the listeners, you know, he grew too fast. He was over leveraged, he overpaid for properties. And he ignored the red flags. I mean, that is gold and help and advice for all of us. You know, to be where, and I want to talk about a few things I've written down. You know, one thing is about in the world of finance, in the world of CFA, where I teach ethics, we have something called, you know, follow the mandate. And it's really important thing between an investor and an advisor, your investor and advisor come upon an agreement, here's what you know, I, we agree that I'm going to do with your money. It doesn't mean that an investor advisor is going to, you know, make tons of money, they may lose money, they may make some mistakes in their investment. But as long as they follow the mandate, they're going to be okay. And so I think one of the lessons that I take away from it, it's just make sure when you've done your, you know, your deals with your investors that you understand your mandate very clearly, and then follow them. And you will be tempted. Which brings me to the next point, which is so hard. When you get into crisis, parts of your life in parts of your business, and parts of your friends are falling apart. And you want to help, but if helping one violates the mandate of another, then now you're getting yourself in trouble. And you can't help someone when you're in trouble. And so it's one of the hardest things and I you know, you mentioned it when you were talking like I should have just let some of those, you know, companies die and let the investors lose, you know, and that brings me to the next point, which is Whoo, you know, I tell the story about my coffee business. When we started a coffee factory here in Thailand, my best friend Dale, it wasn't easy. We went into the 1997 crisis, you know, we were almost wiped out. It was awful. And he was depressed and it was just very, very tough. And, you know, I always said to him, particularly at that time, in his Darkest Hour, you can quit, you know, I'm sorry, but all the people that invested in you, he knew it's high risk investment. They knew the risk of taking and it's business. As long as you haven't defrauded or done anything, you know, wrong. There's nothing wrong with saying I'm out. I did my best and I lost Money. losing money is not a crime. In most countries, some countries, Italy as an example, are can be much tougher on bankruptcy and stuff, which is, which is what I've learned from my interviews is it. But if you're in America, you know, it's okay to fail, and stop and stop the bleeding. The next thing that I wrote down was the idea of communication. And the time for communication, that's the hardest is when it is the toughest. And I think that communicating with your investors is so critical. And the fact is, is that, you know, you could even get an agreement from your shareholders, I want to do this with this portion of money. And if you got shareholder approval, to allocate X percent to that, and you said, this is a troubled thing, but I think that this will help it, you know, whatever,

21:05
leave it to them.

Andrew Stotz 21:07
And if they say, Yep, we approve, and we, you know, authorize you to do that, then that can change your mandate a little bit, nothing wrong with that. And then if they say, no, then you can go back to the other company that's struggling and say, Look, there's nothing I can do. And the other thing I just want to talk about, finally, about, you know, the ethics, I would say, in some ways, I would call it the randomness of ethics. And that is, first of all, when it rains, it pours, right? We say in English, when it rains, it pours meaning when things get bad, they get real bad. So ladies and gentlemen who are listening, get ready. Because your worst moments could be much worse than you expected. And that's when you really need to dig down inside. And that's where I want to end my part of this by saying that, a while ago, I was asked to give a speech at a conference here in Thailand, to financial professionals. And it was sponsored by the SEC, the regulator in Thailand. And so there was a lot of regulators in the room. And there was a lot of professional investors in the room. And I just asked everybody to, you know, think for a moment. And I'm going to ask the same thing right now of people listening, Think for a moment, what was the worst thing you've ever done? Think about that. Worst thing you've ever done. I can tell you, there's many people whose worst things that they've done are illegal things. And now, imagine, there's another person who did that exact same thing. But they got caught. And they went to jail. So which person is more ethical? You who did the same thing, but didn't get caught with them, we did the same thing, but got caught and went to jail. And I use this as a way of reminding ourselves to have some compassion for the people who do get caught and the people who are in trouble. And also to remember that, you know, it could happen to us. And, you know, obviously, nobody, everybody's going to give the advice. Don't do anything wrong. Yeah, obviously, we want to not do anything wrong. But I, I think, you know, I remember a guy that got basically got in trouble in relation to CFA and the financial community in Thailand. And boy, it was a pylon. And he was definitely in trouble. And I was the president of CFA society, Thailand at the time. And, you know, I didn't tell anybody about it, but I called him. And I said, I'm not calling you to blame you or anything, I'm just calling you to say that you can make it through this. And I think that, you know, having compassion for people who make mistakes, and pay the price for those mistakes, is an important elements. So those are some of the things I took away is anything you would add to that. You know,

Michael Morawski 24:17
there's two things that I'd like to add in. One is you were talking about ethics. And a comment that I like to make in and I taught this when I taught ethics is just because you act unethically doesn't mean you break the law, but enough unethical actions, ultimately will cause you to break the law. It's a cause and effect. And I think it happens. The other thing is that when you were talking about communication, and letting your investors know and letting people know, you know, at a situation and actually if you want to pull my ethics paper off my web sight, you'd read this story. But I'm walking into a board meeting in 2010. And now I had a board of advisors, 12 men and women much smarter than me. nine of them from other disciplines weren't even in real estate. So these were people that I trusted, that I could go to on a quarterly basis and say, Hey, this is where we're at. This is what's going on, what do you think? I'm walking into a board meeting and in the spring of 2010, and a met in the parking lot by my in house legal counsel, somebody I pay a couple $100,000 a year to thinking they've got my back. And that How could he be wrong? Right. So I, he says, We don't want you to talk about what's going on right now. We don't have enough information. I said, Wait, I said, we have plenty of information. We've lost occupancy, our cash flow staff, we can't finish the repairs were unstable. We can't pay bills, and we can't pay investor returns. I need help. We don't have enough information. He said. So we have this little debate. And I go against my better judgment. And I say, okay, you're right, we'll wait two weeks, we'll have a conference call in two weeks. And I walk into this meeting with a totally different agenda. Wrong, I should have went with my gut, I should have went doing what I was originally going to do. Because that meeting could have helped change my destiny, that meeting might have helped get some things straightened out or done some things differently. That might have caused, you know, but I took somebody else's opinion that I thought, you know, hey, I pay this guy a lot of money. He's got to know more than me. Right? So. So I, you're right, communication is very important. And I think that we need to be very transparent and vulnerable, and allow people to know, you know, hey, this is a mistake.

Andrew Stotz 26:57
Yep. Yep. So I'm going to wrap up what I've got to say about this by talking about what I teach in my ethics class, which is 10 ways ethics adds value to you. And the point that I think you made is the idea of trying to live by ethical principles. And if you do, you know, it's not going to be in a situation where you build up on ethical actions that lead to getting in trouble. So I like to teach ethics from a positive light. By telling me there's enough stories out there yours as an example, that tells us don't make these mistakes. But let's think about ethics in a positive light for a moment. I like to think about ethics in two ways, your interactions with others, and the way that you work. So let's look at your interactions with others. If you're loyal, trustworthy, fair, and confidential. And finally, number five, you reveal conflicts of interest, loyal, trustworthy, fair, confidential, then you reveal conflicts of interest. You have built into your character, ethical principles that are very rare. But to make it even more rare, let's look at the way you work. If you're diligent, independent, objective, thorough and continually improve, you have built ethics into the way that you work. So number, so number six, is diligent. Number seven is independent. Number eight is Objective Number 10 is thorough, and number or sorry, number nine is thorough number 10, is continually improve. If you combine the way you interact with others, and the way that you were, and you use and apply these 10 concepts, you're going to have built an ethical character that's going to protect you in the future. And it's going to make you very, very rare. And in the world of finance, rare is valuable. So let me ask you. I want to ask you this question based upon imagine there's a lot of people right now struggling with their businesses. They're struggling with cash flow pressures, and family members are asking for money. Businesses are asking for money. They're different businesses in different places. All what went on in your situation going on in other people's lives right now. based upon what you learn from this story and what you continue to learn what one action would you recommend our listeners take to avoid suffering the same fate?

Michael Morawski 29:37
Don't do it yourself. When you're under that kind of pressure, you're pulled in a bunch of different directions, you ultimately do not know what the right choice is to make by yourself. You have to go to someone else with a clear head. Don't go to your business partner don't go internally. Go outside and go to somebody else with a clear head. Listen to the people around you.

Andrew Stotz 30:04
Great advice. Well, last question, what's your number one goal for the next 12 months.

Michael Morawski 30:11
My number one goal for the next 12 months is to continue to push my message out to people. I really believe, Andrew, that there are men and women, CEOs, C suite people, middle management, women running teams, building businesses, men running teams, building businesses that are under this pressure that you've talked about. And you know what, um, not everybody is. But some people are at different times in their life, right? There were plenty of times that things went really great, really smooth. But, you know, then there weren't those times. So there are the times, and I almost believe that it's not, if those times happen, it's when those times happen. Because they're going to happen. And so I want to continue to push my message out there, because I want people to know that there's hope. I want to be an inspiration. You know, if you do fall, if you do some stub your toe, get back up, you can't get back up, you get back in the game, right? It doesn't matter how many times you fail, it matters what you do after you fail. So resilience is really important for people. And, you know, just walking through it. So I want people to you know, others have been through it.

Andrew Stotz 31:47
So I'll have all the information in the show notes so that you can get in touch with Mike, and also learn more about his story, but also take inspiration from it, to keep yourself doing well. Alright, listeners, there you have it, another story of loss to keep you winning. My number one goal for the next 12 months is to help you my listeners, increase return and reduce risk in your life. To achieve this goal, I've created a free membership group with five free benefits I've mentioned above. So go to my worst investment ever.com right now, to join. As we conclude, Mike, I want to thank you again for coming on the show. And on behalf of a Stotz Academy, I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Michael Morawski 32:43
You know, just you know, like we had kind of just said a minute ago, don't go it alone. Reach out, talk to somebody call me call you. You know, get outside of your space and do something different.

Andrew Stotz 33:02
Don't do it alone, ladies and gentlemen. And that's a wrap on another great story to help us create, grow and protect our well fellow risk takers. This is your worst podcast host Andrew Stotz saying. I'll see you on the upside.

33:17
Thanks.