BiggerPockets Podcast 063 with J Scott Transcript
Link to show: BP Podcast 063: Automating Your Investing, Long Distance Rehabs and Spec Building with J Scott
Josh: This is the BiggerPockets podcast show 63.
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Josh: What’s going on everybody? I’m Josh Dorkin, host of the BiggerPockets podcast here with my co-host Brandon Turner. Hey, Brandon.
Brandon: Hey, Josh. Good morning.
Josh: Good morning to you as well, sir.
Brandon: Thanks, how you doing?
Josh: I’m doing okay. I’m okay. You know, living life. I’m excited about today’s show. We’ve got our second repeat guest so it should be fun.
Brandon: Yeah, today is one of my favorite people, actually one of my favorite investors, of all time, J Scott who we’re going to talk to cause last time I felt like we could have gone on for twelve hours a year ago when we interviewed him.
Brandon: Today we go on for eleven and a half, so have a seat it’s going to be a long—I’m just kidding.
Josh: No, no, but I agree. Hey, listen, a year ago when we first started doing the podcast I don’t know that we knew necessarily what we were doing, and I think we’ve come a long way. We’re still improving, we’re still getting better, but we’ve definitely come a long way, and I think we get to cover some really cool stuff in the show, but for today’s show we do talk with J Scott. J is one of the more active members of BiggerPockets, he is a big-time rehabber, and J has done some really cool stuff over the past year; Like flipping at a distance in Milwaukee, he’s done a bunch of rehabs long distance which is really interesting to hear about, he’s also done his first spec build and we get to talk about that, and learn a little bit more about what it takes.
So, definitely dig in, listen all the way through, we’ve got some really cool stuff, and J is just amazing when it comes to sharing really actionable feedback and tips so you definitely want to bust out a pen on this one. Otherwise, I just want to remind you this is show 63 of the BiggerPockets podcast, and you can follow the show notes at BiggerPockets.com/show63. In those show notes we’re going to have links to everything we’re going to talk about in the show, and otherwise definitely make sure, if you haven’t already, to leave us ratings and review on iTunes. That certainly helps us get a little more visibility for the show, and bring in better guests so we appreciate that.
Brandon: One thing I want to jump in really quick and say is that if you’re somebody that listens to, like, part of the show, but never actually finishes it; J shares something at the end that is just incredible. It’s the five, I don’t know what you call it, the five “ations” of automation. That’ll make more sense later, but he’s got five tips for automating your business. It’s incredible advice so listen to that part of the show. Incredible stuff.
Josh: Yeah, I agree. Yeah, definitely want to listen to the end. That was probably one of the last things we covered in the show so, stick around. Otherwise today’s
Josh & Brandon: Quick Tip
Josh: Is we have been putting together what we dub The BiggerPockets Community Book, and that thing is now out, and live and I’m going to let Brandon really quickly tell you what that thing is.
Brandon: Alright, cool. Well, it’s called Real Estate Rewind, it’s basically we asked a bunch of people on the forums, “what would you do if you could go back and start over and do it all again knowing what you know now?” And this was twelve seasoned investors talking about what they would do differently. I think it’s a fascinating book, and it’s 100% free so if you want to get it just go to BiggerPockets.com/CommunityBook, and that’ll send you to the file place where you can download it.
Josh: Awesome, good stuff. Well, let’s jump into this. we’ve got a great show, and let’s get it started so, J, welcome to the show!
J: Hey, guys! Great to be here! Thrilled to be back!
Brandon: Great! Yeah, we’re glad to have you here, it’s been a solid year since you’ve been here, and I’m sure you’ve been through a lot of stuff so we’re going to talk about what you’ve done, and where you’re going today.
Josh: For sure, for sure. Well, before we do, really quick, about a year ago J and I had hopped on a call, longer than a year ago, and talked about putting out a book, and I’m proud to say last March 2013 we did. We put out The BiggerPockets Book on Flipping Houses, and its companion The BiggerPockets Book on Estimating Rehab Costs, and you can find those at BiggerPockets.com/FlippingBook, but these things have been amazing. We’ve sold over 10,000 copies of the books which is absolutely spectacular, particularly for an independent publisher like BiggerPockets. So, I’m really exciting about that, and I’m super proud to be associated with him, and I just wanted to take this opportunity to thank J for being a part of the team with that.
J: Thank you guys! It’s been a tremendous experience. I’ve gotten some tremendous feedback, and thrilled that we were able to pull it off. All of us have done a great job.
Brandon: Not me. Not me. I just read the thing. I don’t know how I got roped into this, but it’s a great book. I mean, I recommend it to people all the time. So, speaking of books I figure this is a good time for me to jump in and announce that we have a new BiggerPockets book coming out here in the next month that I actually wrote a lot of.
Josh: Oh, that’s what you’ve been busy doing when you’re supposed to be working.
Brandon: That’s what I’ve been busy slaving my nights and weekends for the last 6 months doing.
Josh: Uh-huh, Uh-huh.
Brandon: Anyway. That is coming out soon. I don’t know exactly the date, but I just wanted to give a little teaser that I expect every single one of you who bought J’s book to buy mine.
Josh: Nice. Nice job hijacking J’s podcast. That’s awesome.
Brandon: Yes, you know what? I got to get in where I can so I’m coming for you, J! How many copies did you say you sold of that one?
J: We hit 10,000 a couple weeks ago.
Brandon: Alright, so I’m going for 12,000.
J: And not only that, but we’ve been number one in Amazon Real Estate for much of the last year so we can get all the BiggerPockets books in the top five at Amazon and crush the competition.
Josh: That would be cool.
Brandon: That would be nice. Oh, and that book that’s coming out is not the one we talked about in the Quick Tip today. That’s the Community Book. That’s another book that we just released today in the community, that’s not that. So, anyway, expect it in the next month.
Josh: Can we move on?
Brandon: Yeah, yeah. Enough self-promo-ing.
Josh: Alright, thank you.
Brandon: I spent hours and hours and weeks and years on this project!
Josh: Alright, enough. J! Let’s get to you man. This is all about J. So, in the last year what really pops out for me are a couple things; First you’ve been doing some projects in Milwaukee, we’ll get into that, the spec build where we did this thread and we put out an e-book about this pretty much soup to nuts build this entire build that you’ve done so I want to—
J: The Diary of a New Construction Project.
Josh: Diary of a New Construction Project, and we’ll link to that in the show notes at BiggerPockets.com/show63, and otherwise I want to talk about the business of real estate investing, and from there really going to what you’ve got planned for the future.
So, let’s start on this Milwaukee thing. You decided that you wanted to expand your business, and ended up partnering and getting into the flipping biz at a long distance in Milwaukee. Why did you decide on Milwaukee?
J: So, it all kind of came about right after the BiggerPockets conference a couple years ago. Built some relationships there, and met somebody that we started talking, he flips houses, I flip houses, and we said, “hey, let’s consider doing this together in a different part of the country from where either of us lives,” and it kind of took a life of its own and before we knew it we were investing in Milwaukee, Wisconsin. I can get into a little bit of the reason why we picked Milwaukee, it’s actually, it’s interesting, but ultimately between January of 2013 and right now we’ve rehabbed, or we’ve purchased, I think it’s 16 or 17 properties. Many of them we’ve resold, some we’re working on currently. Rehabbing at a distance has been one of the biggest challenges I’ve faced in real estate, and maybe in business in general.
Rehabbing at a distance, really it takes such a unique set of skills, and, honestly, this past year has been more eye-opening, and more educational for me than any time since I’ve first started doing this business.
Brandon: Well, let’s actually get into that then. I mean, why was it so tough? I’ve never flipped a house further than 20 miles away so for guys like me who have only flipped locally, or who have never flipped what is so difficult?
J: It’s going to sound cliché, but it really boils down to there’s nobody who cares about your property, your assets, more than you do, and when you’re flipping houses you rely on a lot of people to help make you successful. Nobody does this in a vacuum. So, you rely on your agents, you rely on your contractors, you rely on your inspectors, your appraisers, your project managers, and GC, and there are all these pieces that have to come together perfectly in order to flip a house, and when you’re far away you’re basically letting all the kids play by themselves, and hoping they don’t break anything.
J: So, the key is having at least one person on the ground where you’re doing all this that you can trust, essentially, with your business, and finding one person is tough enough, but it’s even better to have 2 or 3 or 4 people that you can trust with your business because there really are so many moving parts that if somebody is keen on not seeing you succeed, or they don’t even need to want to see you succeed if they’re indifferent to your success they can really drag your projects down. So, that means having contractors who are really tuned into what must be done even if they’re not being told minute to minute, hour to hour, day to day what to do they need to be trusted to make the right decisions, and your real estate agents need to be trusted to do the right thing, and your stager needs to be trusted to do the right thing, and if everybody’s not really on board and driving towards the same set of common goals things break down quickly.
Josh: Yeah. Well, so from my perspective I see the different between the long distance flip and local is oversight. Because all those same things can happen locally as well. I mean, if you’re asleep at the wheel and your stager’s not doing their job you’re going to have issues, or your contractor.
So, it seems like something where you really need to have boots on the ground pretty consistently until you built up those relationships where you do trust those folks. You’ve been at it for a year now, have you guys found that local person who can really be your eyes and ears, or is that still a struggle?
J: So we have. We found a couple people who fill that role in different capacities. We tried finding one person that could do everything, and what we found is if you can find the perfect person to manage your rehabbing business in a different location most likely they’re good enough to be doing it on their own, and they don’t need you.
J: So, what we found is it’s pretty tough to find that one perfect person that can do everything. That can handle the acquisitions, that can handle the rehab, that can handle the staging, and handle the selling, that can manage the contractors, that can manage the real estate agents, and inspectors. If somebody has the skills to do all that they’re probably not going to be working for you, they’re going to be competing with you.
Josh and Brandon: Yeah.
J: So, what we found is we’ve had to break up the business into some big components, and find different people to run different aspects of the business. For example; we have our carpenter turned out to be a great leader. He had built a great rapport with a couple of our other contractors; he actually recommended a few of the other contractors that we have been using on the projects. They look up to him so it wasn’t too tough to transition him into the role of project manager, as well as carpenter, on the projects, but he doesn’t have the business knowledge. He doesn’t understand how to analyze deals, he doesn’t understand how to find deals, he doesn’t understand the staging, and selling, and marketing stuff on the back end. So, while he was great at the day to day rehab stuff we had to find somebody else, in this case a real estate agent, who could fill in as kind of the person running everything on the purchase side, and on the sale side.
So, basically we had our carpenter managing day-to-day, we had our real estate agent managing the acquisition process, and the dispersement process, and then we had to find somebody else local that could help us with the financing piece. There are plenty of national lenders, hard money lenders, private lenders out there, but when you want to scale it really helps to have local lenders, local hard money guys in the areas where you want to invest for a couple reasons.
One, they know the area. They know, they can make quick decisions because they know the area, and they can analyze the deals quickly, but two; they’re a great resource when it comes to looking at a deal, and perhaps noticing things that you might not notice if you’re not local. They see how different areas trend so they can say, “hey, this area, it might look good, but you go one or two streets over, and things get rough real quick. Be careful, look out for various things,” so having guys on the ground that really know the financing piece, and the lending piece actually helps a lot.
Brandon: There’s two things that I want to point out in what you said. First of all, you talked about the hard money lender being a really good asset to have because they understanding the area. That’s something that I wish I would have, looking back on my early flipping, done a better job of, like, I had a couple hard money lenders turn me down for loans, and I thought, “ugh they’re an idiot. This is clearly a good deal,” which then turned out later not to be a good deal. So, I think people need to trust their hard money lenders a lot more, and not think of them as an opponent you’ve got to beat, or talk into, but as an asset exactly as you said cause they probably understand the game a lot better than you do.
Josh: Oh, great advice.
Brandon: It’s so important, and I look back and I’m like, “man, why didn’t I just listen to that guy? I should’ve,” you know, whatever. Mistake.
Josh: Well, it’s hard when people say, “no,” that’s the issue, right?
J: I’ve had a lot of people that have come to me that have said, “hey, I’m looking to do this project, can you finance it for me?” And I say, “well, what other avenues have you tried?” And more times than not they’ll say, “well, I talked to a hard money lender, and they weren’t interested blah, blah, blah,” and that’s all I really need to hear. Because if a hard money lender, somebody who does this professionally, and knows the area, a local hard money lender, if somebody who does this professionally, and knows the area wasn’t interested in the deal well they know something that either I don’t know, or I need to know, and that’s generally enough information to know that it’s probably not a good deal.
Brandon: You know, that’s just a really good tip that are looking to lend money as well.
Josh: Oh, yeah.
Brandon: That’s a really good tip.
Josh: Yeah, you think that’s a good tip? You can say it one more time.
Brandon: I can repeat it one more time, yeah, thanks. One more topic you mentioned, and I know you’re probably going to get to this, but you mentioned in the last podcast you did, and we bring this up all the time cause I like it so much, when you’re trying to find a contractor you said show up at Home Depot at six in the morning, or seven, and see who’s at the pro desk. I thought that was a great tip. If you’re long distance how’d you find your contractor, your agent, how are you meeting people at a distance? What did you guys do in Milwaukee?
J: So, my number one tip for finding great contractors, and this is probably true in any industry; great people tend to associate with other great people. Great people tend to recommend other great people. I’ve always said if you can find one great contractor you can find a great crew because a great contractor isn’t going to risk his reputation by recommending somebody who isn’t great. So, the hard part is finding that one great contractor, and to do that, yup, like I said; Hang out at Home Depot at 6 AM even if that means flying to city where you’re rehabbing, and spending a week or two there finding that first great contractor, but once you find him he’s going to introduce you to other guys who are just as good, and they’re going to introduce you to other guys who are just as good.
Most of the contractors that I’ve used in every city where I’ve rehabbed houses, they know each other. They’ve worked together before, they recommend each other, and not only does that mean you get a great group of contractors, that means you get a great group of contractors who are accustomed to working with other, know each other’s idiosyncrasies, know how each other works, are comfortable picking up the phone and calling each other if there’s a schedule change, or if they have a problem, or if they have a question, and when your contractors are willing to interact with each other, and call each other that goes a long way towards taking the burden off of you of being the middle man.
Brandon: That reminds me of, like, in the book The Four Hour Work Week, which is not about real estate at all, but Tim Ferris talks about if you have a business if you can get your people on your team to interact with each other, and not have you as the bottleneck your business runs so much more smoothly, and that’s a really good example of how we can apply that to real estate.
Brandon: I’ve never really had that in my business. I’m always the bottleneck cause, I don’t know, you know half the guys I work with don’t even have cell phones? They don’t own a cell phone which I don’t understand.
Josh: Yeah, that’s astonishing.
Brandon: Well, half the guys I used to work with.
Josh: I think that’s the point that you need a better crew.
Brandon: That’s—exactly. So, I got this guy, to go off of the point that J made, good friend of mine, his name’s Christer. He’s a designer, he does, like, house plans and stuff, like, he’s the guy now that every time I need something—
Josh: This isn’t the guy that tried to sell you the bad deal that we talked about in the show before, right?
Brandon: No, this is a different guy.
Josh: Oh, cause that was your best friend who tried to rip you off with that deal.
Brandon: No, this is Christer, and I’m going to give a plug it’s Plank Island Studios, amazing guy. So, he just says, I call up and I say, “hey, I need a plumber,” he’s like, “here, I’ve got A, B, and C. Call these three guys,” and, I mean, they’re not the cheapest guys, but they are the guys that he works with on every project. They all work together, they all recommend each other, and I’m finally in that group for the first time in my life, and it’s totally transforming the way that I run things. Yeah, I highly recommend it. I can totally agree with you, J.
J: Yeah, and the other thing to keep in mind is great contractors really respect customers, and clients who do things the right way. The guys who aren’t going to ask them to make up for their lack of planning, “hey, I need you to come in on Sunday because I didn’t schedule right,” or those guys who don’t pay on time. They don’t like those guys who don’t pay on time. If you treat your contractors well, if you’re professional, if you pay them on time they’re going to love working with you, and they’re going to prioritize you over their other clients, they’re going to get their other contractor friends, they’re going to come to you, and say, “hey, I’ve got a great mason, and I’d love for you to use him on an upcoming project,” or, “I’ve got a great plumber that, I know you like your plumber, but this guy is awesome, and he’ll give you great prices,” and your contractors will actually start bringing you other contractors to use. So, treat your contractors well, be a model client, and they’ll be model contractors.
Brandon: That’s great advice once again. That’s awesome.
Josh: Well, so let’s talk a little bit about that. A few things you said in there are really relevant, not only to house flippers, but a lot of people like to buy properties at a distance for buy and hold, and I think everything you said applies which is awesome. How often were you going out to manage these projects? You still had people that you trusted, but assuredly you’re wanting to go out, and see things with your own eyes. So, over the course of the year how many times do you think you went out to visit, and oversee, and manage, and scope people, and the whole kit and caboodle?
J: Well, like I said, this was a tremendous learning experience, and one of the things I realized was if this was going to work I needed to be there as much time as I wasn’t there especially if we wanted to scale. So, for a good portion of the first 6-8 months I was there a good 40%-50% of the time. As you can imagine I have a family, I have two little kids, that was tough.
J: I mean, the story I like to tell to illustrate the point is; I got a phone call, this was the second project we were working on, I got a phone call one day from my carpenter who said we had an issue. I said, “what’s the issue?” and he said, “the kitchen doesn’t fit,” I said, “what do you mean the kitchen doesn’t fit?”
J: Basically the cabinet layout we had come up with wasn’t going to work. There was some loadbearing structural support in the kitchen that would have been several thousand dollars to move around to get the kitchen layout to work as we had originally envisioned it. We had ordered our kitchen cabinets, they’re getting ready to come in, and basically our existing layout wasn’t going to work.
J: Yeah! So, he’s asking me, “what do you think we should do?” he’s sending me pictures, we’re doing Facetime so I can actually see a layout of the kitchen, I’m asking him for measurements, and I am at a total loss. I just—I knew the house, I could visualize it, I just couldn’t come up with any ideas just looking at pictures, or being on Facetime. My wife looked at it, and, I mean, she’s fantastic at that, she couldn’t come up with any ideas, and the project was essentially coming to a standstill until we could figure out what to do with the kitchen because it was going to be a two-week lead time on the new cabinets if we had to change out the cabinets. We couldn’t do the sheet rock until we knew what the layout was going to be cause we were opening up some spaces so I literally booked a flight for the next day to fly out there just to figure out a kitchen design. Only took me about two hours once I was there, but the fact that I had to spend $600 on a flight, and pick up and fly out on about 14 hours’ notice it was tough, and if you’re going to rehab at a distance those are the types of things you’re going to run into. No matter how experienced you are, no matter how experienced your team is, these are the types of things you’re going to run into at some time or another so be prepared to handle that.
Brandon: Yeah, hey, I’ve got kind of a deep question for you. I want to know was it all worth it? You said you were gone half the time, and that you missed your family. Would you think it was worth it, would you do it again if you were to go back in time?
J: So, in general the answer is yes. So, I would certainly rehab at a distance again. I still do some projects in Atlanta, and we can talk about the fact that I have now relocated from Atlanta. I still do some projects in Atlanta, but that’s because I have some partners down there that are local who I trust unconditionally. I know that they can manage things, and run things.
What I’m finding is, with Milwaukee at least, is we were never able to find a set of people that could manage the business, that could manage the rehabs anywhere near the level that we needed, and I’m sure a lot of people are asking, “hey, Milwaukee can’t be that different from anywhere else, either you can or you can’t,” but actually Milwaukee was somewhat different from other places. It’s not a real estate town. I’ve never seen a place with as few rehabbers as Milwaukee has. A ton of buy and hold investors, there’s a ton of great buy and hold inventory there, but very, very few rehabbers. I was very involved in the REA there, I was very involved in a lot of the contractor networks there, and what I found was contractors weren’t accustomed to investors, the investors weren’t accustomed to rehabbers cause they were all buy and hold guys so Milwaukee was a very, very difficult place to find a team of people that really understood how rehabbing worked, and could manage the business for us.
I’m not saying it would have been impossible, but the price we would have paid, and the time and effort that would have gone into finding those teams to essentially allow us to extract ourselves from the day to day operations just would have been enormous so I think what we found is that, for the time being, we’re going to slow down, and perhaps pull out of the Milwaukee market, but certainly that doesn’t mean that I wouldn’t rehab at a distance.
Like I said, and we can talk a little bit about this, we’re still doing projects in Atlanta where I used to live. I have some trusted partners down there who can manage things so what I would say, if I can go into sort of advice mode here, I would say the only thing harder than rehabbing at a distance is rehabbing at a distance if you’re not experienced.
So, I would say anybody that’s looking into rehabbing certainly start in your backyard. Start within a half hour to forty-five minutes at most an hour from where you live so you can pop in on the properties at any time, you can be intimately familiar with what’s going on on a day to day business, and then if you decide to branch out choose locations that are easily accessible. Someplace where you don’t normally have to pay $700 for a flight on short notice because you will be taking some short notice flights. Places where you have people that you know and you trust because building a team from scratch is really, really tough. So, I’m not saying don’t do it, and I’m sure there are people out there that are smarter than I am, and that are better rehabbers than I am, but certainly I would say put together your plan before you decide to jump into long distance rehabbing because it is quite, quite, quite the exercise in creating a self-sufficient business.
Josh: And you might want to get that. That might be Milwaukee calling.
J: Sorry about that.
Josh: So, you’re going to keep on doing your thing, possibly at a distance. Atlanta, sounds like your wrapping up some projects in Milwaukee, any kind of key tips on avoiding mistakes? Mistakes to avoid, or things like that beyond just the contractor side of things in rehabbing at a distance?
J: Yeah, I’d say the biggest one is don’t trust anybody. I should rephrase that…
Josh: “Leave me alone! I don’t trust you! Go away!”
J: Trust, but verify. The concern, in my experience, wasn’t so much that people were purposefully trying to do the wrong thing, or trying to screw us, nobody was doing that, but there were a lot of people that didn’t really know what they were doing even though they represented that they did. So, there were a lot of little things that would go wrong that would drag out the rehabs, that would compromise the quality. Not so much, again, because they were looking to sabotage the projects, but more so just because they didn’t understand what we were looking for, what we needed, they couldn’t make the decisions that we were entrusting them to make because they just didn’t have the experience. So, yeah, the biggest issue is that you want to trust the people, and I think a lot of people that invest at a distance put too much trust in their local resources, the guys with boots on the ground, and then it’s too late before they realize that maybe I shouldn’t have trusted them as much as I did, or assumed they knew as much as I thought they did.
Josh: Yeah, I think that’s really good advice. I mean, again, I did that on buy and hold, and it was a terrible experience for me. Trusting people, and putting too much trust in the wrong folks, and so I’m glad that you brought that up. Is there any advice that you have on how to do the verification? Whether it’s on property management is one thing, contractors, licensed bonded, recommended by other folks maybe, did the REA come in handy in this contractor network that you mentioned? Were those helpful in the verification process of who’s good, and who’s not worth it?
J: Yup, absolutely. Again, it wasn’t so much people that weren’t trustworthy, and weren’t trying to do the right thing. We actually didn’t have any problems with that. Everybody was really motivated, gung ho, tried to do the right thing, worked hard, like I said, you find a couple good contractors, and the rest will fall into place. We found a great real estate agent, and that just kind of fell into place so it wasn’t so much a trust issue as it was they didn’t understand the level of quality we were accustomed to, they didn’t understand the schedules we were accustomed to, they didn’t necessarily know what materials we used, and what we wanted the finished product to look like, and, really, the only solution to that problem is to actually be there on the ground, and teach your contractors, and your real estate agent, and all your team members what it is you’re looking for. That’s not something that can be done from a distance so anybody that’s going to be rehabbing long distance I would suggest carve out six months of time where you don’t mind being in that location 50% of the time, or 60% of the time, or 80% of the time for the first six months. If you can find a great project manager, if you can train your contractors, if you can really create a symbiotic relationship with your real estate agent ultimately there’s no reason you can’t put the whole thing on autopilot, but to think you can do that without spending a good bit of time, several months, with those people before you put it on autopilot that just can’t be done in my experience.
Josh: Gotcha. Right on. Great advice. Let’s move into this spec build that you did. First off, this thread. If you haven’t seen this thread, or the e-book, again, we’re going to link to it in the show notes at BiggerPockets.com/show63, you’ve got to take some time and go through this. Whether or not you ever want to go into spec building there is an incredible amount of information to be learned from checking this thing out. J literally details what he did from day 1 until day, like, 365, I think it took a full year to do this thing, and he’s got copies of receipts, and contractor statements, and bids, and photos of befores, and afters, and graphs, and all sorts of stuff.
Brandon: Did you mention it was free? I don’t know if you said that.
Josh: I did not. It is totally a free e-book, and thank you for bringing that up, and, again, we’ll have those linked on the show notes. So, J, why a spec build? Why did you decide to do this?
J: So, we were looking for something a little bit bigger, something new to try. I hate to say I was getting bored, because honestly I never get bored in real estate, but I was looking for something a little bit more challenging, and I have a friend/colleague/another investor in Atlanta. Somebody I actually met on BP a couple years ago, and we’ve kind of worked together in parallel, not partnership, but in parallel, on several projects in the past. He comes from a long line of developers, and yet he had never done any new construction in his real estate business, and one day he came to me, and said, “hey, I’m thinking about doing a new construction project, would you be interested in partnering?” and, like I said, I was really interested in trying something a little bigger, a little bit challenging, so I said, “yeah, let’s do it,” and it was just a few weeks later that we found our first project, and that was our project that I detailed in Diary of a New Construction Project.
Josh: That’s awesome. That’s great. So, you guys decide to do it, jumped in full out. What worked? Certainly you’re coming into this thing with some knowledge as a rehabber so you know, generally, how to fix up a house, but tearing one down, and building from scratch has got to be different. Tell us A: what’s the difference? Then, B: let’s kind of cover how’d it go?
J: So, tearing down the house, and then building from scratch there’s a lot that’s very similar to doing rehab work. In fact, once you get the frame up, and you’re left with essentially the mechanicals, and the sheet rock, and the paint, and the finishes that’s all the same, and we had done that many dozens of times. My partner had done that many dozens of times. The pieces that we had never attempted before were the demo of the original house which you tend to think, “hey, what can go wrong? All you’re doing is knocking down a house. It’s easier to knock one down than it is to build one up,” but actually there were some interesting developments there.
Foundation. There’s a lot to be known about foundations that until you really dig in—
Brandon: Ha-ha! “Dig in,” get it?
J: Dig in.
J: That was punny.
Josh: You guys…
Brandon: New low.
Josh: I know.
J: It’s one of those things that you don’t know what you don’t know, and you don’t know the questions to ask. Same with framing the new house. So, basically going from a blank foundation to a framed house. Now, once we got the demo done, and the foundation completed, and the house framed up, like I said, the rest was just like a big gut rehab; which I’m not going to say is easy, but we’ve done it enough times that it wasn’t too concerning. Just getting bids for the demo, getting bids for the foundation, getting bids for the framing of the house it was an interesting process because, like I said, you don’t know what you don’t know, you don’t know what questions to ask, and I actually learned something that I think a lot of new rehabbers will find valuable, and this is something that I kind of have done over the course of my career, but I was never able to articulate it like I can now; I found that there’s nothing wrong with, and I know the contractors out there are going to hate me for saying this, there’s nothing wrong with getting one or two contractors out where basically you tell them, “I have no idea what I don’t know, I have no idea what questions to ask, walk me through the process. Tell me everything there is to know, and then give me a bid”. What I found is there bids are usually going to come in higher than other guys because they know you don’t know anything, they know you have nothing to compare them to, but after talking to them you’re suddenly going to know all the questions to ask, you’re going to understand the process, and then you can bring in other contractors, and you can actually speak more intelligently as if you actually know what’s going on, and you’ve done this before, and their bids will tend to be a lot more realistic because at that point they think you know what you’re doing.
Brandon: That’s a good tip.
Josh: Yeah, and, you know, on the point that they’re going to have an issue with it; I think if they actually gave you a reasonable bid, and didn’t inflate it because they thought that you were green then that’s great, but by the fact that they’re doing that to me they’re just asking to lose business.
J: 100%, and let me tell you something; if I get an equivalent bid, or even a close bid from some guy that spent an hour and a half talking to me, and explaining his trade to me versus some other guy that just came in, answered some questions, got our specs, and gave us a bid I’ll go with the guy that spent the time with us 10 out of 10 times. Unfortunately, what I found is a lot of contractors, especially in the new construction side of things, they will take advantage of people that don’t know what they’re doing because they think, “hey, this guy doesn’t know what questions to ask, he certainly doesn’t know what things should cost,” and so a lot of times we saw inflated bids from the first few contractors we brought in because they could tell how naïve we were.
Josh: How many bids do you get for knocking down a property? How many bids do you get for putting in a foundation? I mean, do you do three bids? 5 bids? 10 bids?
J: So, we will tend to get as many bids as are necessary to be comfortable that we really know what things cost. We’ve had times where we’ve had one or two companies come in, give us bids, and talking to other investors we find out yeah, that’s about what you should be paying, and then we’re perfectly happy not to get anymore bids. We’re not just looking to get guys out there to compete with each other, or to waste their time. As much as contractors don’t like wasting their time to give bids, we don’t like wasting our time having to stand there, and walk through our scope of work with twenty different contractors so if we can talk to one or two contractors and be comfortable that the numbers they gave us are reasonable, and generally the best way to do that is to talk to other investors and find out what they’re paying, then we’re happy to get one or two bids.
Then there are times where we’ll start to get bids, and we’ll have some bids down at around $4,000, and other bids around $20,000, and we have to figure out where the discrepancy lies. Are they using different materials? Are they interpreting the scope of work differently? Are they engineering a solution differently, or is one company just a lot more expensive than another company? Until we can figure out why we’re getting bids all over the place, and the level of bid we need, and the solution we need, and the materials we need, if we have to bring in five, or six, or eight contractors before we’re fully comfortable that what we’re committing to is the right solution to our problem, and at a good price we’ll bring in five, or six, or eight contractors if necessary.
So, we don’t have a—I know a lot of people say, “get three bids,” and I think three bids is great if you’re doing more of a retail type job where you know that all the contractors you’re bringing in are kind of the same level, same quality, but as an investor some of the contractors we bring in are going to be retail contractors, some of the contractors we bring in are going to be small mom and pop guys that just specialize in working with investors, and when you can’t compare apples to apples on the contractor you have to be able to compare apples to apples on the bids.
Josh: That’s great advice.
Brandon: That is great advice. Well, one story to go along with that, and I may have told this on one of the early episodes of our podcast, but there are two roofing companies in my town, I mean, there’s a lot more than two, but the two largest roofing companies in my town; Very few people know this, but when I was a contractor I found this out, but they’re actually owned by the same person, like, one’s the father, and one’s the son. I learned this because they’re the two largest, they’re the first in the phone book, they’ve got the big ads, they advertise everywhere. So, the majority of the people in my town will go call both of them, and go get two bids, and amazing, it happened to me, I got one bid for $18,000, and the other came out at $17,500 and something, and it was like, “oh, okay, well that must be what I’m going to pay”. Well, I went and got a third bid it came out at $3,000. I mean, that’s how big of a difference there was, and these guys do this racket all over town.
Brandon: Yeah, it’s amazing, and I tell people this now in my town, and they’re like, “I never knew that! I thought they were expensive, but they were the same as the other guy!” It seems illegal. I feel like I should do something about that.
Josh: Yeah, that’s like price fixing.
Brandon: Price fixing. Yeah, basically.
Josh: Yeah, something.
Brandon: I mean, they may be good companies, and they probably do good work, but they’re so much higher than everyone else, and they get away with it cause they just up the game.
Josh: Cause people do two bids, and they—
Brandon: Yeah, they do two bids.
J: If they were smart they’d get the third number in the phone book and have that bid come in at $12,000, and people will think they’re getting a great deal and they’re still paying $10,000 too much.
Brandon: That’s exactly it, yeah. So, anyway. I don’t know what people are going to take from that, but make sure the companies aren’t owned by the same guy I guess. Actually, I mean, the point you made is the best way to find that out is to talk to other investors, right? Like, a guy talking to me I can tell him that. I can tell him, “hey, don’t use these two companies cause they will rip you off,” that’s how you figure it out. Don’t rely on the contractor as the end-all be-all price setter.
J: I’ll tell ya, if I have a reputable investor, somebody I know and trust recommend a contractor I get one bid, and I normally won’t even negotiate it. If he says, “hey, call this guy,” I call that guy and I say, “hey, you were recommended by so in so, and he says, “oh great! I’ll come on out,” and he gives me a reasonable bid and I can go back to the first investor and say, “hey, does this sound reasonable to you?” and he says, “yes,” I’m not going to get another bid. I mean, the reputation thing, the referral is more important to me than anything else in this business.
Josh: I use BiggerPockets for that all the time. Any time I’m looking for somebody local. You know, I wish I had done this before I had gotten screwed a couple times, but any time I need somebody to do work for me I go on BiggerPockets. I’ll hit up some of the local folks that I know, and I’ll say, “hey, I need somebody to do this,” when I get a recommendation, if it’s somebody that I know does good work, an investor in town who’s rocking it I don’t go for another bid. I mean, it’s pretty easy. So, that’s great advice.
I wanted to talk about what didn’t work. So, you know, you’ve done this project, you didn’t know what you didn’t know, you start to figure it out, but what went wrong?
J: Luckily nothing major. A lot of times, not a lot of times, but certainly there’s a risk when you do new construction that the thing that goes wrong can sink your entire project. Luckily for us that the only things that went wrong were the things that cost us a little bit of money here and there.
The first biggest thing that went wrong was we brought in our architect, we brought in our foundation company, and they were both pretty convinced that the existing foundation on the house that we were knocking down could stay. It was a brick foundation, and we all assumed that there was cinderblock behind the brick so there was, of course, the brick, and then there was cinderblock foundation behind the brick, and when we knocked the house down we could leave the cinderblock, maybe the brick would crumble, but we could at least leave the cinderblock foundation and start building from there. I put some pictures in The Diary of a New Construction Project of basically when the house came down what you saw was the brick just crumbled. Basically this entire house, and it was only a 1,200 square foot little ranch house, but this entire house was being supported by literally one course of bricks all the way around. Had lasted 100 years so clearly it was pretty strong, but basically there was one course of bricks, and when the house got knocked down all the bricks crumbled, and basically the foundation was gone. So, we went from assuming we had a usable foundation that we could start from to having to essentially start over on the foundation.
Josh: And how much time did you lose to do that?
J: A decent amount of time because we had to go back to the permit office, and get permits for the foundation work. Then we had to get bids on the foundation work. The time was less important than the money on that one. That was a pretty expensive mistake. Ultimately that cost us about $9,000.
J: So, on a $160,000 project there’s 6% of your budget right there that we would have had to spend either way, but had we known a little bit sooner that we would have had to spend that money we could have cut back in other places.
Josh: Well, and you also had all the holding costs, and the cost of money that went along with it, so it wasn’t just that 6%, was it?
J: That’s absolutely correct. I mean, anytime you add time to a project, and for this project every day was pretty crucial. It took us about 6 months to get our permits approved.
Josh: Wow. Is that typical?
J: City of Atlanta is notoriously tough to get permits approved. Ultimately, and we can go back and talk about this in a minute, but ultimately we ended up using what’s called an expeditor which is somebody whose job it is to help us get permits, and once we brought her in the process went a lot more quickly and smoothly.
Brandon: Let’s actually talk about that. I’ve never even heard of that before.
J: Okay, sure. So, a lot of big cities they have these things called expeditors, and these are people who are intimately familiar with the permit process for that particular area. A lot of them used to work for the building department. Some of them actually still work for the building department, and moonlight even though I assume in a lot of places that’s frowned upon, but these people you hire them to essentially take your plans, take your drawings and submit them to the city for you, and before they submit them they’ll look through them as if they were approving them, and they’ll say, “yeah, you need to do this differently,” or, “you need to add this,” or, “you need to add this section,” or, “you need your engineer to stamp this,” or, “you might want to reconsider that,” so before you even try to submit you generally have something that’s more likely to be approved. Then they’ll take them down to the permit office, and the permit office will give feedback, but they’ll give the feedback to the expeditor instead of to you so the expeditor really knows what it is that needs to be changed. There’s no, you don’t have to worry about not understanding the changes that are needed, and the whole process goes a lot more smoothly.
We were lucky that the expeditor we chose had spent many, many years working in the permit department so not only did she know exactly what was needed, but she could take our plans, she’d walk into the permit office, and whereas we would have to sit for three hours to wait for our name to be called to even meet with somebody she’d just walk them right behind the counter and hand them to somebody.
J: So, there was that kind of, she had that “in” at the permit office that just made everything go a little bit more smoothly.
Josh: What did it cost?
J: It was, she was $1,000, and we found that the price—
Josh: Well spent I would say.
J: Yes. The $1,000, I mean, that was two or three months of holding costs, but more importantly what we found is we bought this property on January 1st, or maybe the 2nd. Took us six months to get permits. We didn’t break ground until June. It takes three or four months to build a property. You’re looking at not listing it until October-November. Those are the winter months. You don’t want to be listing a property in the winter months. So, had we been able to list the property a month or two sooner we may have made an extra $10,000, $15,000, $20,000. In this case we likely, if we could have listed 3 months sooner we probably could have made $30,000, or $40,000 more on the property so that extra—even if it’s only $10,000, or $20,000, that extra $10,000, or $20,000 the $1,000 it costs just pales in comparison.
Josh: Yeah. That’s fantastic.
Brandon: Yeah. So, actually, since we’re talking about the numbers a little bit, why don’t we go into that? What did you buy it for, well, I guess, yeah, originally what did you buy it for? How much did it cost to fix up, and then sell it? Whatever you could share with that would be awesome.
J: Sure, so that property, let me bring up my spreadsheet real quick. So, we paid $30,000 for that property.
Josh: And that was the house and the land, correct?
J: That was the house and the land.
J: Basically my partner was driving around the area. I honestly don’t know how it came about, but he met the owner. The owner was looking to get out, he was willing to sell for about $30,000 which was about market value for these really old, run-down houses in this area. It’s an area that a lot of investors had started moving into, and so a couple streets over there were a couple of new construction projects. The house right across the street was a new build so it was certainly a neighborhood that supported new construction yet had a lot of really old, run-down houses selling in the $30,000, $40,000, $50,000 range.
So, we picked this one up for $30,000. Ultimately the entire build cost us $161,000. It was a 2,700 square foot, two story colonial type house, and we ultimately sold it for $270,000.
Josh: So, you’re $191,000 in, and you sold it for $270,000.
J: $191,000 in, sold it for $270,000. After all the holding costs and everything I think we made somewhere in the $58,000 range.
Josh: Oh, okay so your build costs were $161,000. What were the holding costs?
J: Holding costs on that one, I’m looking at my spreadsheet, we didn’t have a whole lot. We had about $1,900 in property taxes, we had $1,000 insurance, and then we had about $580 in utilities so total we were right around $3,300-$3,400 in holding costs. It really wasn’t that much. We paid cash for the property so we didn’t have any financing costs in there which certainly would have changed the numbers somewhat. So, yeah, that’s the nice thing about new construction is you don’t have to worry about insurance costs until you actually start the build which is normally halfway through the entire process. You don’t have to worry about utility costs until you’re almost done with the build. Obviously property tax is an issue, but normally if you’re knocking something down the value of the property before you knock it down is pretty low, and they’re not going to re-assess it until after it’s sold so generally property taxes for something that’s new construction is considerably lower than what the value of the new construction itself is.
Josh: So, I’ve got two things that kind of shout at me right now. First, you bought this for $30,000 and you sold it for $270,000, did the area—well, obviously the area supported the comps. Was this, like, the $30,000 POS house surrounded by a bunch of $270,000 houses, or what did the area look like?
J: So, the area was actually a whole bunch of $30,000 POS houses with two or three of the $300,000 houses kind of thrown in. So, this was an area where investors were just starting to jump in. it was an area where I have a friend, another BP member, who had built two houses two streets over, and sold those for nearly $400,000 because you go two streets over and the neighborhood improves drastically. So, this was kind of, you could call this a path of progress type neighborhood where last year, or two years ago you couldn’t build a $300,000 house; next year, two years, three years from now every house is going to be a $300,000 house, and we just kind of got in on the front edge of that.
Josh: Are you going to be buying more of those houses? Cause I’ve got some money I can give you.
J: It’s funny, my partner, we just bought about two more lots about three streets over from there.
Brandon: In the good direction?
J: In the good direction, yes. We paid a little bit more, but it’s in the good direction so we should be able to sell them for a little bit more, and we can probably use the exact same floor plans that we used from this one so we’ve got something to scale there.
Josh: So more spec builds?
J: Yes, more spec builds.
Brandon: So, I mean, maybe that kind of answers my question a little bit, but I guess I kind of wanted to ask the same question I did on the Milwaukee project, was it worth it? I mean, $60,000 for a year of work that doesn’t seem all that great for what you usually do for flipping houses which might be $30,000 for a 6-week project, but what’s your thoughts on that?
J: So, I look at this as a means to an end. If somebody would have said to me on a flip that you’re going to spend a year working, and you’re going to make $60,000, don’t get me wrong $60,000 is amazing and I’m not sure we’ve ever—this is the most I think we’ve made on one of our deals, but if it were a typical flip and you told me it was going to take a year to make $60,000; well, we normally make $25,000-$30,000 in four months so it wouldn’t be what I would consider a great deal, but this was a learning experience for us.
I think my partner and I both went in with the attitude if we make nothing, if we break even it’ll be a tremendous success because if you can get a free education there’s nothing better than that. So, we were thrilled to have made the $58,000 on this, and, again, we would have been happy if we broke even, but moving forward there’s a couple things we can do differently.
One, like I just said, economy’s a scale. So, we just picked up two adjoining lots a couple streets over so in this case we’re doing two properties that will take the exact same amount of time. We’ll submit for permits at the same time, we’ll use the same floor plans, we’ll probably get cheaper build costs because our contractors are going to come in and we’re going to say, “hey, we want to use you on two projects at the same time right next door,” so they’re going to be willing to cut us a break on the build costs. So, the guys that are a lot smarter than we are are doing the same thing, but they’re building 30, 50, 100 houses in a subdivision. So, we’ve gone from 1 to 2 and hopefully, in a couple years, we’re going 2 to 5 to 10 to building whole subdivisions and that’s where the economy to scale really kick in, and instead of making $60,000 a year you’re doing 20 houses in the same subdivision and you’re making $50,000 off of each and there’s your $1,000,000 a year.
Brandon: So, here’s my fear about spec building, and I think this is probably a lot of people’s fear, is when you look back on the economy, what it did in ’06 and ’07, it was the spec builders who got left holding the bag, right? I mean, it’s the people—I mean, out the entire real estate market it feels like they were the ones that, at the end, it’s like musical chairs, right? If you’re the one without a seat when the market comes down you’re left with a property that you’re upside down in, or whatever. How do you--
Josh: Nice analogy, Brandon.
Brandon: Thank you. Musical chairs. So, what do you do to prevent that? Are you worried about that, or what are your thoughts?
J: So, what I do is I lose sleep. I’m not going to lie. On this first spec build—
Brandon: That was the best answer, by the way, that I think I’ve ever heard on this show. That was great.
J: Yeah, I can’t really—I wish I had some Buddhist philosophy here I could throw out about how to relax, and never have to worry about stuff like this, but it boils down to: that’s a real concern. For us the way we kind of mitigate it is that we’re scaling slowly. I think both my partner, and I would have been comfortable, from a pure construction stand point, to go out and buy 20 lots, and build 20 houses instead going out and buying 2 lots and building 2 houses next, but we just, from a pure economic standpoint, from a pure economy in that part of the country. I mean, Atlanta has exploded again in the last year, year and a half. Neither of us are comfortable doing a ton of these projects all at one time because we don’t want to put all our eggs in one basket.
J: So, I think moving forward I think there are going to be certain parts of the country that are a little bit more amenable to spec builds, and new construction. I think right now Atlanta is probably at risk of having another correction so we’re taking things slowly there. We are getting ready to start our first luxury build in Atlanta so that’s another fun thing that we’re doing.
My partner who has had a ton of lots that have sort of fallen in his lap the last couple months has actually turned down a lot of deals, and because I’m in Maryland I’m actually looking to him to make the go/no-go decisions, but he’s turned down probably 50% of the deals that have come along just because he doesn’t want to, and we don’t want to, get over-leveraged and over-burdened with land knowing that there could be a correction in the near future.
Josh: Yeah, that’s right. Smart, smart, smart. Well, that’s fantastic. Again, for anybody who is interested J’s got this entire spec detailed in The Diary of a New Construction Project, again, a free e-book from BiggerPockets, and you can find the link to that at BiggerPockets.com/show63.
Really quickly let’s dive into this business of investing, and scaling your business. I’d like to start with automation. We talked about that a little bit before the show, and what does that mean? How do you automate your business, you know, just in general? Then, maybe you can give some tips for folks who are listening as to how they could go about automating their own?
J: Yup. So, I’m a big fan of automation. I am, by nature, very lazy and like to work as little as possible, and I found the best way to do that is to kind of put my business on auto-pilot as much as possible. When I say I’m lazy it’s not really lazy, I just like to do other things besides work in addition to work, and by automating things in my business it frees up some time to focus on other stuff like family, and other projects. I’ve found that there’s essentially five areas that I think about when I think about automating business.
The first is delegation. So, I think most people should be familiar with that term, but it basically boils down to: don’t try to do everything yourself. Whether it means letting your contractors do more work, whether you hire employees. In Atlanta and Milwaukee both we had full-time project managers whose job it was to manage the rehabs day to day, and I could then extract myself from that part of the business. Certainly I’d get phone calls every day, and I wanted to get phone calls every day, but I didn’t have to interview contractors, I didn’t have to be at the houses for hours in a day managing contractors. So, just delegating has allowed us to free up a lot of resources. We have, in areas where we don’t live, a separate real estate agent, we have the same closing attorney that we use for every deal, and basically our entire team knows each other so they can communicate with each other without us being involved. So, delegation is the first big area of automation.
The second one is replication. So, I like to do things the same way over and over and over again. I know people that every time they start a rehab they’re excited about going to the supply shops, and to Home Depot to pick out the materials they want to use for that particular house, and pick out what paint colors they want to use for that particular house. I like to go the other way. I like to use the same materials in every house. I use the same paint colors in every house. We use the same flooring, we use the same appliances, we use the same countertops, and the reason for that is we can negotiate prices one time, and our contractors don’t have to ask us, “hey, what light fixture do you want to use on the dining room for this house?” and when they don’t have to ask me that question I don’t have to answer that question, and I don’t have to figure out the answer, I don’t have to spend time at Home Depot. So, by replicating our rehab materials, and process on every deal we save a lot of time.
Brandon: Well, you know, and a specific example of this; I wrote a post a long time ago, probably a year ago, called What is the Best Paint Color for Land Lords and Flippers to Use? So, I did this test where I tested, I think like, a dozen different types of paint, different quality, different sheen, different brands, different stores, and in the end what I came up with every single paint used two coats of paint to cover a decent wall, and in the end the cheapest one was Wal-Mart Color Place, and so I said in this post that I used that on everything. It’s called Country White, it’s at Wal-Mart, I love it, I’ve used it everywhere. I’ve since changed that a little bit cause half the time Wal-Mart’s out of it so I’m actually looking for a new color right now, but I know exactly what you mean. I use the same color so that way any rental we go into, and this is for flippers, rentals, whatever, any property we go into I’m like, “oh, that’s the color. It’s Country White. Hole needs to be patched? It’s Country White,” we just buy it in big five gallon buckets and always use it.
Josh: Well, the nice thing is you’ve got it handy. It’s never, like, “hey, I’ve got 16 cans of unused, you know, Petal Gray, and whatever,” but you’re never going to have cans that go unused, right? It’s like the restaurant business. You don’t want to have product that you’re purchasing that you’re throwing away.
J: Yup, and even stupid little things like you’re getting to the end of a project, you’re doing the punch list, and your project manager calls you and says, “hey, we need to do some touch up paint on this house, what color do we use?” I don’t get those phone calls cause we use the same color on every house. So, that’s—replication has been a huge help for our business, and, again, don’t—going back one of the other big advantages to replication is negotiating prices. So, we can buy five sets of appliances at once for cheaper than we can buy one set of appliances. So, we can negotiate prices on larger volumes of stuff, especially when you’re using the same stuff over and over and over.
Josh: That’s great.
J: Third area of automation: prioritization. So, this basically involves do the things that are most important, don’t do the things that are least important. This is the thing that I think a lot of people have problems with because the things that are most important are often the things that are the least fun. I know a lot of people that will spend a lot of time focused on the aspects of the business that they really enjoy, and they put off the things that they don’t enjoy even though the stuff they don’t enjoy might be the most important. So, what I find is a lot of times I will not prioritize things like finding new deals, and finding money. Even though finding new deals, and finding money are actually what make money in this business. So, I found that by prioritizing appropriately you’re automatically going to be spending less time on the things that are less important. You may not enjoy the stuff you’re doing as much, but you’ll get more accomplished in a shorter amount of time.
Josh: Like, for example, installing a fence, or something like that by yourself.
J: Exactly, exactly.
Brandon: Josh is ripping on me because I spent my weekend installing. It was for my own house, for my own backyard to keep my puppy in.
Josh: Oh, okay.
J: But that’s a great example. I mean, there are a lot of people that want to do the work themselves as opposed to using contractors, and by prioritizing they realize that their time is better spent doing the things that are making them $200-$300 an hour as opposed to doing the stuff that’s saving them $10-$15 an hour.
Brandon: Yeah, I—go ahead.
J: Okay. So, real quick, so the fourth piece that I find important for automation is segmentation. That basically means figure out the major components of your business, and treat them differently. So, for us we look at our business as having four major components. There’s the acquisition piece which is finding properties to flip, and to buy. The rehab. The selling and the marketing, and then fourth the raising money. So, those are the four areas, and we treat those four areas very differently.
I’m responsible for the acquisition, and the money raising. We have a project manager that’s responsible for the day to day rehab, and my wife or real estate agent, depending on what market it is, is responsible for the marketing and the selling. So, we’re very careful to segment our business in very discreet pieces so that we can then go back to the first thing I was talking about which is the delegation.
Then, number five on things you can do to automate your business is documentation. So, write down everything you do. If you do something more than once write it down so that someone else can do it for you, and all of these go hand in hand. I mean, the documentation is there so you can delegate, and the segmentation is there so you can replicate. So, all five of these pieces kind of go hand in hand, but when it comes right down to it there’s delegating, there’s replicating, there’s prioritization, there’s segmenting, and there’s documenting. Do those things, and you’ll find that your business is a lot more on auto-pilot than it currently is.
Josh: That’s fantastic.
Brandon: Yeah, that’s incredible. That’s really good stuff, and I like that because it’s all about the whole e-myth theory where like the whole idea of working on your business, not in your business, and people don’t run their real estate, at least a lot of people, including myself, tend to not run it like a business. We run it like a hobby, and that’s a constant struggle with every investor that I know it’s how do you run it more like a business? How do you run it more like a tech start up or more like a Fortune 500 company? Like, what are they doing to make it work, and scale, and how can I apply that to my own business? So, very cool.
J: Let me just throw one more thing out; I had lunch with a guy that I originally met on BP, and then who goes to the local REA, and I met him there a couple times. We had lunch today, and we were talking about his flipping business, and he lives in Maryland, but he flips in a different state for the most part, and basically his entire business is automated through virtual assistance. I’m going to try to get you to get him on the show because I think a lot of people would be interested in that, but just throw that out there right there. Virtual assistance, if used correctly, can be a huge boom for improving productivity and automating your business.
Josh: Can’t wait to hear that one because I’m a big time skeptic. I mean, we use VA’s once in a while, but there’s some things that I just wouldn’t use them for, and I’m fascinated by how different people do use them so that’d be very interesting. Well, with that, listen, we covered a lot of stuff here, and I think the feedback has been fantastic, why don’t we move onto our—
It’s time for the Fire Round
Brandon: Alright, so the Fire Round, these questions, actually I changed it up a little bit. These questions don’t all come from the forums, I added a couple of them in just because I wanted to know. Last week we did something for the first time, and I thought it went really well so we’re going to do it again.
The Fire Round, this is a, “what would you do?” sort of Fire Round so these are scenarios, real life ones, that either I, or other investors that I know, have come up against so we’re just going to fire them at you, and see what you would do in these cases.
So, I will begin with number one: during the middle of a house flip your contractor calls and tells you that he underbid the project cause there were some things he didn’t expect once the demo started, and now needs an additional $20,000 to $30,000. What do you do?
J: The first thing I’d do is I’d never use that contractor again. So, my contractors know that I’m a pretty reasonable person, and I understand mistakes happen, but $20,000 to $30,000 is quite a bit of money. So, I also recognize that being spiteful and standing on principal doesn’t really help your flip get done so I’d bring in some other contractors, I’d get some other bids, if I determine that his number is actually pretty accurate I’ll let him finish the job, and I won’t fire him on the spot, but I probably won’t use him again because ultimately that’s something that’s going to hurt the business, but if his numbers were what I’d be spending on somebody else anyway I’d rather have the guy that started the project finish the project if at all possible.
Josh: Yeah, fair enough, and it sounds like a $20,000 under/over bid is probably not going to happen that often if you’re doing your job of screening these guys, and screening what they’re bidding on.
J: Yeah, and the other thing is if the budget’s off by $20,000 then I made a mistake as well because as somebody in this business I need to have a pretty good idea of what it costs to get things done. So, if he missed it by $20,000 or $30,000 there was probably something that I missed as well, and it would have been difficult for any of us to figure out so I might give him the benefit of the doubt there.
Josh: Your contractor doesn’t show up for three days in a row. He’s working on other projects, not the second house that you guys are spec building.
J: Is there a question in there?
Josh: Figure it out man, come on. Seriously, do I have to spell it out for you?
J: If a contractor doesn’t show up without a good excuse one day then a different contractor will be there the next day. So, I wouldn’t give a guy three days because if he’s taking three days that shows a lack of respect, and a lack of professionalism, and I’m a big fan of if you’re going to fire a contractor do it sooner rather than later because they don’t get better, they only get worse. That’s not a dig on contractors in general. There are a lot of great contractors out there, but the bad ones if they start out bad things are only going to go downhill. So, if somebody doesn’t show up, and doesn’t call I generally will have him replaced the next day.
Josh: You know; I think that applies to all components of life. I had a contractor I was using as a developer for BiggerPockets back in the day, and he didn’t show up for work one day, and I called, and called, and turned out he was in jail. So, he had a good excuse, however, he was summarily fired for the reasons that put him in jail.
Josh: But, yeah, I think having a one-day standard is probably a pretty good one.
J: I don’t have a zero tolerance policy, but it’s pretty close. It’s served us well.
Brandon: Alright, after purchasing a house to flip you discover that the basement leaks really bad when it rains. Maybe you bought it at the wrong time of the year, and you didn’t notice it. How do you go about fixing that? What do you do?
J: I’ve actually had that happen several times, and I lick my wounds and move on. Spend the money you need to spend, and don’t make your problem your end buyer’s problem. I would rather spend extra money, potentially lose money on the project, but do a quality rehab so that buyer doesn’t have to worry about the problems that I ran into, and just fix it. There are times when it’s nobody’s fault. I mean, certainly if you’re buying it from a public seller they should have disclosed that, but more often than not you’re buying it from either a bank, or you’re buying it from an owner who doesn’t live on the property, maybe an absentee land lord, and they honestly may not have known about the problem, and even if they did know about the problem part of an investor’s job is due diligence, and things like that come up. So, you lick your wounds and you move on.
Brandon: Yeah, the reason I asked that question, actually, is I have some friends up in Tacoma, Washington who bought a flip from somebody who flipped a house and after they bought it their basement flooded and they’re pretty sure that the flipper knew about it, and covered it up cause there were a lot of signs of, like, reoccurring problems with the moisture and now they have no basement. They have a one-bedroom house now instead of a four-bedroom house. It’s sad. I mean, I can’t tell if it’s a contractor or not, but I like to hear you say that. Bite the bullet, fix it up, do it the right way.
Josh: I guess the question is where the line is, right? So, maybe they tried to fix it, and I’m not taking anyone’s side on this particular one, you know, did they try and fix it? Where was the inspector? My guess as a buyer is, “hey, the inspector’s going to find these things,” did the inspector fail to do their job? You know, I think there’s a million different variables that kind of come into this thing.
Brandon: Yeah, and that’s one of the hard parts too. If you live in an area where you have a rainy season like we do, like, they bought their house in the middle of summer. There’s no rain. We have a drought for three months every summer so how do you know? I mean, if it’s all covered up with sheet rock and carpet, I don’t know, that’s tough, and, again, I don’t know how you’d blame for that. I don’t know, J?
J: It’s, yeah, every situation is going to be different, and certainly if you’re buying from another investor/rehabber you’re going to be a little bit more skeptical that it was a problem that wasn’t known about than if you’re buying from a home owner, and, again, if you’re buying from a home owner you’re going to be a little bit more forgiving if they don’t disclose everything because they’re motivated not to. If you buy from an investor, again, that’s—we have our reputations, and it’s investors like that that can give the rest of us a bad name. Again, I’d say you just have to lick your wounds and move on, and you do the right thing so that your reputation doesn’t end up the same way.
Josh: Well, here’s another question. Sounds it’s probably one from Brandon’s personal experience.
Brandon: Maybe slightly.
Josh: So, thanks for providing me with these great questions to ask, Brandon. So, a roof has one layer that’s maybe 12 years old, it’s very specific, not 11, but 12, not leaking, but very small shingle curls, you estimate it has about 8 years left on it. Do you replace, cover, tear off, what do you do?
J: I don’t do anything. So, generally my rule of thumb is 75% of useful life we’re replacing stuff. So, typically a water heater, they expect less, about 8 years if it’s under 6 I won’t replace it assuming that there’s no indications that it’s nearing end of life any more quickly. HVAC system tends to be about 20 years so if it’s less than 15 years I won’t replace it. Roof tends to be about 20-25 years so if it’s less than 15-17 years I won’t replace it. Certainly, if it looks like it’s more worn than what the age would indicate; so if there’s a roof leak, or there’s a rusted out water heater it’s not as old as the 75% I will replace it. So, assuming everything tends to be functional, and looks to be pretty good if it’s less than 75% of it’s useful life age then I won’t do anything.
Josh: That’s a really good rule of thumb. Is that a standard house flipper rule of thumb, or is that just kind of what you do?
J: Never heard it before. So, let’s call it the 75% rule and I’ll—
Josh: Call it J’s 75% rule.
Brandon: The reason I did ask that question, and this was a flip I did, I don’t know, four or five years ago, and it was really hard to sell. It was a really difficult flip to sell and at the end I started to think that maybe the reason why is because from the outside the roof was not new. The whole house was new, it looked beautiful, but from the outside the roof looked 10-12 years old, and I always thought maybe that was the reason it dropped so much in value. I mean, there’s really no way of knowing, but—
Josh: That’s because it was rough, not a roof.
Brandon: It was a roof! What do you say?? Oh, making fun of my accent. Okay, alright. So, let’s move onto the end of the show which is our—
Brandon: Alright, so the Famous Four. These are questions we ask every guest, and, yes, J, we did as you these questions last time, but just in case things have changed in the past year, which they tend to, I’m going to ask them again and see if things are different.
J: I definitely have a bad memory so I probably don’t remember what I said last year.
Brandon: Alright, well this will be fun then. Number one: what is your favorite real estate book?
J: My favorite real—ooh. I’d say the advanced copy of the book you sent me about two weeks ago that you’re getting ready to release. I’m pretty sure, I can’t say the name, but—
Josh: Oh, come on. You guys make me sick. It’s disgusting how much butt kissing is going on in here. What the heck guys?
J: It’s true, have you read it, Josh?
Josh: I have not! I haven’t even gotten a copy! Brandon won’t even send it to me which is funny because I’m publishing it!
Brandon: It has to be perfect! It has to be perfect.
Josh: It better be!
Brandon: It’s not quite there.
J: We’ll make sure that by the day it’s released you get a copy.
J: You will agree it’s the best business book you’ve ever read.
Brandon: I’ll even autograph it for you, Josh.
Josh: Nice. You guys are so sweet. Alright, so your favorite real estate book is a book that does not yet exist. That’s fantastic. What about your favorite business book? “The soon to be authored biography of—“
J: So, it might have been the same one I said last year, but I’m a huge fan of the Four Hour Work Week. I’ve, in many ways, modeled my business, and the way I do business after the principals in that book. Certainly there’s a lot of fluff in there, but if you really think about why he’s saying what he’s saying, Tim Ferris that is, in the Four Hour Work Week it can really help you automate your business. I’m a huge fan of the Four Hour Work Week.
Josh: So you actually read that book? Okay, good.
J: One of the few, one of the few.
Brandon: Josh is still on page 29 on that one.
Josh: I am. I’ve given up all hope. Alright, so question three is always; what do you do for fun?
J: What do I do for fun? Probably the same answer I gave last year, but it’s pretty much family, family, family these days. I will say that I recently moved from Atlanta back to Maryland, and the week I moved back they opened one of the largest casinos on the east coast with one of the nicest poker rooms, and everybody who knows me knows I’m a big poker fan so occasionally when I can get away from the family I play a little bit of poker at the new casino near me. Other than that pretty much hanging out with the family, and the two little kids.
Josh: So, in other words, J is taking advantage of those folks who aren’t very good at poker, taking all their money in the poker room, and giving them his famous stare.
J: The Steinborn stare.
Josh: There it is.
Brandon: Final question of the day, from me: what do you believe sets apart successful real estate investors from those who fail, or give up?
J: Taking action. I’m guessing that’s probably not a unique answer right there, but what I found is those that don’t succeed generally don’t succeed because they don’t generally get off their butt and do anything. General rule of thumb is I don’t know anybody that’s done one real estate deal. Anybody that’s done one real estate deal has probably one five, or ten, or fifty. If they haven’t, they will. So, my thought there is make yourself do the first, and everything will snowball from there.
Josh: Great advice. Good advice. Alright, J, lastly, where can people find out about you, once again?
J: www.123Flip.com. That’s 1-2-3 F-L-I-P.com that’s my blog, and website. I don’t sell anything, but for the last six years I’ve chronicled every flip that I’ve done in gory detail. All my financials, pictures, analysis, spreadsheets, everything. I kind of look at it as, “hey, here’s all the mistakes I’ve made the last six years, don’t make them yourself,” so feel free to check that out.
Josh: Nice. Awesome. Well, listen, fantastic, fantastic show once again. I guess I’m not going to regret having you back on as I thought I might, but no, listen, we’re really honored to have you back, and definitely appreciate you taking the time. Of course, like I said, really excited that we continue to sell a lot of books on the Flipping Book, it really is a phenomenal book.
One more thing really quick before we let you go. You started a thread, and we’re going to point to this thing on the show notes, you started a thread about BiggerPockets, and here’s my self-interest coming in, it was about how important a role BiggerPockets has been in your business, and you talk about all these deals, and partners, and money, and all this other stuff that you’ve done on this site. For those people who are listening who might be fans of the podcast, but who haven’t taken the time to create an account, and to actually participate, because I like to end the show always saying, “hey, guys! Jump in, participate, it’s really good for you,” you’re somebody who’s done that and it’s paid off in spades for you. Can you just kind of tell us a little bit about that?
J: Sure, sure. So, I’ve been part of BiggerPockets since, I think 2008, just before I did my first deal. I credit BiggerPockets with helping me get through that first deal, and then the 60+ since then, but the biggest benefit I’ve gotten from BiggerPockets has certainly been the relationships that I’ve built. So, like I mentioned, lived in Atlanta for a long time, just moved away recently. Two of my closest friends in Atlanta I originally found on BiggerPockets. They’ve become friends, they’ve become partners. One of them I mentored and is now doing as many deals as I am. The other one is my partner on all the new construction stuff. I’ve probably been, between the two of them, I’ve probably been involved with 50 deals that we’ve done in some capacity together. I’ve purchased houses from BP members. So, just in the last two months I’ve purchased houses from four different BP members as wholesalers. I’ve wholesaled houses to BP members. There have been 3 or 4 houses that I’ve wholesaled to BP members. I’ve borrowed money from BP members. I don’t know exactly how many, it was like three or four or five BP members that have come to me with private money offerings, and so I’ve borrowed money from BP members. I’ve loaned money to two different BP members, and—
Josh: Are you getting paid back on those?
Brandon: He’d better be getting paid back on those.
J: So, one has been fully paid back, and the other one has been paying routinely monthly interest for the past year or so, and I would love to keep loaning to BP members so I have a feeling my inbox is going to get flooded now.
Josh: Yeah, look out!
J: I’m very picky. If you want to borrow money in an area where I’ve lived, I’ll highly consider it. I found a GC that I worked with in Atlanta probably on ten different projects on BP. Fantastic general contractor. I’ve had two people from BP that I have mentored, and that are both doing very well now, and anybody that’s done any mentoring knows that you learn as much doing the mentoring as you do getting mentored. So, that’s for me has been—
Josh: You’re talking about real mentors, not the guys that charge you a lot of money to take advantage of people?
J: No, those are coaches. No! Those are gurus. So, there’s three levels. There’s mentors; those are the people that do it because they know you, they like you, they want to help you and they don’t charge you money. There are the coaches; those are the people that charge you money, but have your best interest in mind, probably local and they’re not ripping you off. Then, in my book, the third category is the guru; those are the guys that are doing it just for the money, and they’re probably charging you a lot more than what their material is worth. So, I’m okay with mentors, I’m okay with coaches, stay away from the gurus.
J: Let’s see… like I said, I’ve moved to Maryland recently, I found a BP guy that we’re probably going to start doing some spec builds in the next month or two so somebody else. I guess the best relationship I’ve built off BiggerPockets is with you guys. You helped me release my book, you published the book, and that’s been a life changer for me.
Josh: That’s awesome. Well, there you go, and all that is from just being active, and participating, and just being involved in the community. Posting at some kind of regularity, and interacting with people answering questions and stuff, right?
J: Absolutely, and I have lunch once a week, I try to set aside one day a week to have lunch with some new person, and I’d say 90% of those people come to me from BiggerPockets these days.
Josh: Okay, that’s awesome, and really, really great, and you said it so I don’t have to. Really quickly; if you are listening to the show still, hopefully you are, definitely jump onto iTunes, and make sure to leave some feedback for us on the BiggerPockets podcast. Those ratings and reviews really help us. Just get on there, share your honest feedback, and help spread the word about the show. So, that’s it. J, thank you so much for coming back, and we look forward to seeing you back on BiggerPockets!
J: Thanks guys! Thrilled to be here, I’ll see you again next March!
Brandon: Alright, then, why don’t we close this?
Josh: Alright, I’m Josh Dorkin, signing off.
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