David:
This is the BiggerPockets Podcast, show 817.
Dan:
I started as a poker player. So negotiation is actually my favorite part of being a real estate agent. I love it. When you’re thinking for yourself like, what is this property worth? And you’re evaluating it for yourself, you’re looking at properties completely different than an agent that has never bought an investment property or maybe even hasn’t bought a property themselves at all. They don’t understand how to value the property and where the price should be because they don’t know what it’s like to have skin in the game, and they don’t know what it’s like to have skin in the game over and over and over again.
David:
What’s going on everyone? It’s David Greene, host of the biggest, the baddest, and the best real estate podcast on the planet, aka The BiggerPockets podcast. Welcome all of you. We’ve got a great show for you today. I am joined by my co-host, Rob Abasolo, who’s looking svelte, fit, trim, handsome, dark, well-dressed, well-manicured. Like can you just slow down this glow up that we’re all getting to experience in real life?
Rob:
Yes. I’m now changing my title to co-host with the co-most.
David:
Hmm.
Rob:
Yes. Yeah. So, if you could start referring to me as that, that’d be awesome.
David:
This is a true marketer at heart because that’s incredibly cheesy, yet will still stick in my brain. Sticky cheese, the Sticky Cheese Method with Robert Abasolo, Marketing Co.
In today’s show, you’re going to hear all about two popular markets, Chicago and Houston, as well as agents that work in those markets that can give you the scoop on what to look for, what to avoid, and how to approach buying real estate there. We talk a little bit about cashflow versus equity, identifying up and coming markets and the right approach to take in a challenging market.
Rob, what do you think investors should keep an eye out for on today’s show?
Rob:
Honestly, I think it’s a really great educational episode for anyone that is new at working with real estate agents in general because as you’ll hear in today’s episode, you’re going to hear how they provided value, how they were able to save deals, how they were able to price properties, and it really is just nice to know that there are realtors out there that are really thinking about your deal from every angle. We talk about owner financing and how not all realtors are down to have that conversation with the sellers and the importance of having someone that’s willing to go at bat for you.
David:
That is true. Having the right agent in your quarter can make a huge difference in having a portfolio that scales or having a portfolio that fails. Today’s quick tip is simple, head over to biggerpockets.com/agentfinder to match with an investor-friendly agent now. It’s fast, it’s free, and it’s easy. That’s biggerpockets.com/agentfinder and I am on there too, so hopefully, you all go find me and click on my beautiful bald face so that we can get in touch. All right, let’s get into today’s show.
Dan and Jodi, welcome to the show. So nice to have you two here today. We’re going to get into some interesting markets, Houston and Chicago. We’re going to run through each of these markets and then we’ll get into some recent deals that you two have helped close. Then we’ll talk about what made those deals work, and all of our listeners can use these insider tips and secrets on their next deal too. So we’ve done these before. They were a hit. We’re going to be learning all about what is available in Houston and Chicago.
Dan, we’ll start with you. A little bit about your background here. I understand you’ve been in real estate for 20 years. You’ve been an agent for five. You were full-time in learning development and training agents, started flipping with dozens of houses being flipped over the years. 10 units total. Made up of single family and multi-units. And you are a poker player who used your winnings to start in real estate. Did I miss anything there?
Dan:
No, you got it. That’s right.
David:
Awesome. All right. Jodi, you’ve been in the game for 20 years. You own a boutique brokerage where you have 12 agents that work for you, a property management company with home design and remodeling, a little bit of everything. 22 single family homes, a couple commercial properties. You’ve got historic homes that have been converted into office space. You flipped 30 houses, and one of the agents on your team was an investor that you met through BiggerPockets and you helped them acquire their first few properties. They later became a full-time agent on your team, and now you’ve got a full brokerage. Did I miss anything there in your story?
Jodi:
I think that pretty much sums it up.
David:
Awesome. Well, it’s nice to have you two here. Now that we have a little bit of background on you, let’s get into your markets. Dan, I’ll start with you. What are some of the long-term benefits to Chicago?
Dan:
Well, Chicago really didn’t go through the huge growth spurt that a lot of the other markets did. We increased about 3%, 5% depending on what part of the market we’re in a year. And some of our areas are just now returning to pre-recession prices. So that tells you that while our prices have gone up, there’s still a long way from what you’ve seen in the other markets. So there is incredible opportunity to appreciate price, and as you always say, there’s going to be a lot of appreciation in rent as well.
David:
There you go. What about population shifts? What’s the economic engine that’s driving Chicago?
Dan:
So, like every northern city, there’s always people as they get older, they tend to move to warmer climates. But for the most part, our population has done really strong work. Now, getting all the people that thought that they could live forever in Tahiti and work remotely, realizing they’re going to have to go in the office, they’re returning and we’re starting to see all that happen.
So there’s a couple of things. Number one, we have major hubs here like McDonald’s and Motorola and Allstate, Grubhub, and then United Airlines. And United Airlines is important because they have a hub here. And as part of that, there’s a huge consultancy part of Chicago. So, we have all the big companies like Deloitte, McKinsey, and Bain. And those people tend to be nomadic unless they take a full-time job that’s going to last forever. Most of those people expect to be here for a short period of time. And that period of time is one to three years. That’s what they expect. So they’re going to be renters even though they can easily afford properties.
But companies like United, when you have a hub at United, you think of people that the captains of the airlines, but you also have all the people that are just getting the snacks to the cart and there’s just tremendous opportunities. So whether it’s white collar or blue collar, there’s great paying jobs all over the city.
David:
But you’re seeing a tenant base is what you’re getting at. These are people that need to rent?
Dan:
Yes, exactly.
Rob:
And tell us, Dan, why should people consider Chicago?
Dan:
Well, Chicago is an extremely popular city to live in. We recently had the number one ranked restaurant. We have lots of world-class restaurants. It’s the place that improv lives and it’s the number two theater city in the United States. A lot of people move here when they graduate from college in the Midwest because it is the New York of the Midwest. There’s endless opportunities. The public transportation system is incredible. You don’t have to own a car here, but you can also own a car and find parking here. So it’s a great combination of both. So there’s a lot of reasons that people want to live here. So you’ll always have people that want to live here to buy and to rent.
David:
What would you say are the specific strategies that work best in the Chicago market?
Dan:
Anything works in Chicago. When you think about short-term rental, Rob, I loved your @BPCon this year was great.
Rob:
Oh, thanks.
Dan:
When you talked about short-term rentals, just the creative ways in which you can do it, and I think that helps you stand out because there is a lot of competition in short-term rentals, but you should know that the city ordinance to say that you do have to live in the property. So whether it’s a multi-unit property or single family home, you have to live in it. So it’s not something you can easily do out of state. So most people are moving to midterm rentals.
Obviously, I’ve flipped a lot of properties. It’s really easy to flip in Chicago because not only do we have tons of distressed properties, Chicago is unique in that on the same street, you’ll have a property that’s $350,000 sitting next to a property that’s $850,000 around the corner from a property that’s $1.2 million. So those other properties make the appreciation happen very quickly if you make the right changes to the property.
But I think the bread and butter in Chicago, the thing that most people should focus on, two to four unit properties. We have tons of them in Chicago, but they’re getting torn down every day because as people are looking for places to build single family homes and convert into condos, those are the best ways to do it without having to build completely from scratch. So, if you get into a two and four-unit now, it’s going to be become more and more valuable because it doesn’t make any financial sense to build them, they were built a long time ago when labor and materials were cheap. And if you were going to spend that amount of money on a property now, you would build a single family home or you would be able to hide in rentals or high-end condos. You would not build what’s there today. And there’s 1200 for sale right now in the area. So, there’s lots of opportunity.
Rob:
Awesome, man. Well, thank you for the snapshot. And before we move on to Jodi here, just wanted your take on the pizza, yay or nay?
Dan:
I am a huge fan of deep dish pizza, but you should know that true Chicagoans don’t actually think that’s their pizza. They have a different style called pub pizza, which is actually cracker thin. That’s what they think is their pizza. So, the people that think that deep dish is a Chicago local pizza, it’s really people that transplanted here that fell in love.
Rob:
Oh, interesting.
Dan:
But I love it all.
Rob:
Yeah, I did not know that. I’m a New York sliced guy, but occasionally, I do like to eat lasagna, and that’s where the deep dish comes in. But yeah.
Dan:
Yes, exactly.
Rob:
I think it’s all right, I got to try that. Well, thanks, man, I appreciate it. So Jodi, I’m going to ask you the same question. Can you tell us a little bit about some of the long-term benefits of investing in Houston?
Jodi:
Sure, absolutely. So I think some of the long-term benefits, and we’ve got a very favorable tax environment here in Texas, both for investors, property owners, as well as businesses. We’ve got good steady appreciation over the years. It’s a very landlord-friendly state. And we’ve got a very strong rental demand here in Houston. I know we’ve just had a 19% increase in rental properties over the last year, 3% increase in price. I think our average rental price now is about $2,350. So it makes it a very lucrative location for investors to look at long-term buy and holds.
Rob:
And what are some of the population shifts in Houston and some of the economic engines in the area?
Jodi:
So Houston is the fourth-largest city. Personally, I’ve experienced a ton of out-of-state people moving into Houston. I think the statistics are, we’ve had about 85,000 newcomers to Houston over the past year, two-thirds of those being people moving from other states. I think on an average over the past several decades, Houston has seen an increase of about 2% population. Some of the big economic sectors in Houston. Of course, everyone knows us for oil and gas. However, there’s a huge healthcare. We’ve got the number one largest bed center in the area, so that’s a big driving factor there. We’ve also got aerospace and biomedical research, tons of job opportunities in Houston.
Rob:
Yeah. Yeah, for sure. Oil and gas is a big one. NASA, like you said, and then overall, not specific to Houston, but we also have Whataburger and Bucky’s here, and that’s just an overall economic driver for Texas in general. Other than those two amazing things, why should people consider Houston?
Jodi:
Well, I think they should consider Houston based on a couple of what we’ve discussed in regards to our population, our good long-term appreciation rates. We’ve got a vibrant art and food scene, which is very important, low cost of living. Houston’s a very diverse community.
Rob:
And did you mention that the average rent in Houston is about $2,300?
Jodi:
Yes.
Rob:
Okay. Yup.
Jodi:
About $2,300 in Houston, yes. That is about a 3% increase from last year. Single family homes have jumped 19% year over year with the average lease price climbing 3%, which is now at $2,363, which is a record high. There’s also been a total of $4,396 leases were signed compared to $3,690 in July, which is the highest volume of single family leases that have ever been recorded in Houston history.
Rob:
Wow.
Jodi:
So we have a very strong rental market. The demand is there.
Rob:
It is. I mean, I grew up in Houston from zero to 18. I feel like it’s just such a different city 10 years later, which I guess you could say about really any city, but being from here and actually returning, it is just crazy how much development. And honestly, yeah, the real estate seems to be growing at all times. The rent prices definitely seem to be so much higher every single year. What strategies are currently working here?
Jodi:
I see I’ve got a lot of clients that are interested in the long-term buy and holds. Of course, with interest rates increasing the way that they are, it is a little more difficult to cash flow, but I’ve got a lot of investors focused on more long-term appreciation. And so, some of the metro areas in Houston, areas that have very good school districts, I have noticed I’ve got a lot of clients that are interested in that for the long-term appreciation aspect.
I think Houston is such a diverse area. It’s so large that you can really focus on multiple different strategies just based on what the investor’s goals are. So, I’m seeing a lot of newer investors that are purchasing properties, house hacking, or inside the loop, possibly looking at properties with garage apartments, doing short-term rentals there in order to offset those mortgage payments and be able to get in oftentimes with a little less than the typical 20%, 25% down payment for investment properties of owner occupying them. So I think there’s multiple strategies.
Of course, we also have older homes. So, doing the BRRRR strategy. Over the past few months, I’d say the majority of my clients are looking for the long-term buy and holds and small multifamily anywhere from two to four units, and we’re having great success there.
Rob:
And then when you said the loop, what do you mean by the loop?
Jodi:
I’m sorry. Inside the 610 loop, so that’s more inner city. And then you’re going to have, there’s three loops in Houston. And you’re going to have the 610 loop and then the Beltway, which is a little more suburban and far out, which used to be considered far out, is the Grand Parkway loop where you’ve got all the more suburban areas. And those are some of the areas that are really good for long-term buy and hold. Good appreciation, great school districts.
Rob:
Very cool.
David:
So I want to ask each of you a question that doesn’t get brought up a lot in real estate, but I think it’s a question that needs to be asked. The last decade, we’ve primarily invested for cashflow. Podcasts have described cashflow as the reason to invest. This has been the right motivation is you should invest your money to get cashflow. And if appreciation happens or if rents go up, so much the better, but you need to really rely on cashflow. And Jodi, as you mentioned, rates have gone up, but prices really haven’t gone down. Supply and demand is out of whack right now. There’s still much more demand than supply. So cashflow has been largely eaten up in a lot of markets, but prices haven’t come down to fix that.
What are your thoughts? We’ll start with you Jodi, on if a buyer is not going to get cashflow, are there certain markets they could focus on within Houston where you think rents will go up, So eventually they will? Do you think that there’s a strategy where they should be okay with breaking even if they believe the property values are going to increase? Or do you think that investors should just stop buying properties unless they cashflow really strong?
Jodi:
I think if a property makes sense, and especially buying in some of the areas that I had mentioned, some of the suburban areas where you’ve got steady appreciation and I think it’s always a good idea to buy if you can have someone else cover your mortgage and help build equity. And so, I would suggest some of the areas, some of the suburban areas, I’d say like Katy, Cypress. The school districts are the driving factor. You’ve got a lot of people moving from out of state specifically looking for those areas, wanting their kids in good schools. And so, you’re going to have long-term renters, good steady appreciation on average about 7% per year. So I am seeing a lot of investors now that are diversifying their portfolios and they are perfectly fine with breaking even and focusing on areas that have good long-term appreciation. That is something that we assist in guiding our clients and showing them the statistics in specific areas and giving them their feedback of which areas are ideal for that.
Rob:
Yeah. Houston is a really interesting city in that it is 80 cities all clustered around one big city. It feels like every suburb of Houston is just its own little metropolitan area. Like Cypress for example, I think that’s a really great booming area in Houston. But five years ago, it didn’t look like that. It was just fields. And you drive by Cypress now and it really is its own living, breathing city. I agree though I think a lot of those cashflow opportunities I think do tend to come from some of the suburban areas. It’s interesting how it is seemingly tougher to break even.
I’m actually working on a seller finance deal in Houston right now at the moment, and it loses money. And the seller proposed the terms to me. I said, “Hey, this loses money.” And he was like, “Well, the thing is with real estate investing, sometimes you got to lose money, but you understand that you’re building equity over time.” And I was like, “Well, yes, but I don’t like to walk into deals where I’m losing money automatically.” So we’re trying to work out terms to break even, but it definitely gets tougher in Houston specifically because the property taxes in Texas seem to be pretty high.
David:
Dan, what about you? What are your thoughts on investors that are having a hard time finding cashflow in the Chicago market? Do you think that there is an argument to be made for taking maybe a delayed gratification approach if the fundamentals are strong and you believe you’re going to have rent and price growth, that it’s okay to invest in those markets? Or are you like, “Hey man, cashflow till I die. That’s the only reason to invest. If you can’t find it, just don’t buy.”
Dan:
I’m really glad that you brought this question up and you guys had a great interview recently with Barbara Cochrane where she talked about she expects to overpay for properties and she’s thinking long-term. When you think about year one of a rental property, I just don’t think it makes any sense. Real estate to me is a long-term process and I just don’t think it’s that hard. You buy a property, your tenant pays down your mortgage and eventually, you are going to make a lot of money. If you’re not making a lot in the beginning or even breaking even or a little below it, eventually you will. The rents will go up. The price you’re paying for the mortgage will stay the same.
As somebody that invested in properties not knowing what he was doing in the beginning, I started before I even knew about BiggerPockets. We didn’t know what we were doing it, and here we are years later, our properties are worth two or three times what we paid for them. And we’re cash flowing and everything. I just think if you focus on short-term today, that was a strategy for 20 years ago. That’s not the strategy for today.
David:
That’s a great point. What worked before doesn’t always work now. And let’s give a disclaimer. Rob made a good point. This does not mean buy a property that bleeds two grand a month hoping that it goes up. That is not what we’re saying. We are talking about if fundamentals are strong, businesses are moving into the area, there is not enough supply for the demand that you see. Let’s assume Cypress, I know nothing about it, but hypothetically speaking, this is an area everybody wants to move into. The school scores are high, wages are higher in Cypress than they are outside of it. You have every reason to believe that this area is going to grow at a faster pace than the others around it, but wages haven’t gone up to the point where the tenants can afford to pay enough for the rent to make it cashflow. Right?
There is an argument to be made, I think, that buying in better areas will make you more money over time, but they may not crush it right away. That is not to say buying in a war zone and hoping that rents go up is a good strategy. I want to clarify that because it seems like there’s always someone, no matter how much I try to make this clear, that finds a way to be confused and accuses me of saying, “David Greene said cashflow doesn’t matter and we shouldn’t even analyze properties, and you shouldn’t even look at it.” That’s definitely not what we’re getting into. But I do think that some of the better markets like what we’re talking about today, have more competition for the homes which drives the prices up, which does eat up a lot of the cashflow, unless you find that unicorn that we’re always looking for.
So ,let’s move on a little bit here. Each of you has a deal that you’ve done. Jodi, I’m going to start with you. Tell us about the last resort.
Jodi:
So this was a property that one of my buyers located. It had been in contract previously. Typically, when I see that, I like to reach out to the listing agent, get some background information, see if they have any current inspections on the property, just try and figure out any insight that I can get that would be beneficial for my borrower going in. Got under contract, I think we negotiated after reviewing the inspection report. So she had a good idea of knowing what issues were going on with the property, which it was pretty much renovated, not many issues at all. We were able to negotiate about a 20K price reduction and got into contract. Everything was going smoothly. She opted to have another inspection report done. We negotiated a few repairs there during the option period.
Moving towards closing about three days prior to her financing contingency, found out that the lender had miscalculated her monthly incomes. Let me backtrack a little bit. She’s self-employed so this was a stated income loan. So, found out she wasn’t able to get approved. At this point, she had already sold her home in Austin, packed up and moved to an Airbnb waiting for closing in Houston.
So, we went to every other lender. I’ve got a good resource of lenders that I’ve worked with over the years and basically, everyone said no, they didn’t even know why the first lender approved her. The funds just aren’t there, she’s not going to be able to get it approved.
That initial lender had suggested going in with basically private moneylender or hard moneylender. Her rate was just jumped up to 12%, wasn’t going to make sense. I sat down with her, said, “Look, I know you really want this property, but you’ve got to take emotions out of it. Put your investor cap on. It doesn’t make sense.” Her intention was to occupy one side of the property and short-term rental the other. It was still, with that interest rate, going to make it very difficult for her to cashflow anything.
So, as a last resort, I reached out to the listing agent, was able to negotiate with her, and the seller agreed to seller financing with some pretty favorable terms. The terms were actually about 2% lower than the initial rate that she was going to go with, with the stated income loan.
So, we were able to negotiate that. Another hurdle came up that found out there were open permits on the property and the contractor that had done the renovations walked off. Seller couldn’t get ahold of them. And if anyone knows, working with permitting in the city can be difficult at times.
So at that point, we stepped in. I also have a construction design remodeling company. Got my project manager involved. They were able to go to the city, pull some strings with some people they know, and we were able to get those permits passed. And we actually closed on that deal about two weeks ago, and she has had it leased out on short-term rental for the past two weeks. She’s had full vacancy.
So it was a deal gone south that had many hurdles, but we were able to shift gears when needed and use our resources to actually get a more profitable deal for the investor as opposed to what she was initially going in at.
David:
You had me at pulled some strings with the city to get the permits approved. You just became my go-to Houston real estate agent. Congratulations, Jodi. You’ve skipped to the front of the line.
Jodi:
Well, it is hard to do. But at the end of the day, I mean what we’ve learned and we’ve learned in many municipalities in working with permitting, ultimately, they just want the job done right. And if you do it right and you do it the first time and you follow the guidelines, it’s not that difficult. So, we’ve got a good reputation working with many of the cities, and they know if we’re on the job that it’s going to be done right the first time. And so, not necessarily… no money under the table, anything like that, but just representing our clients to the best of our ability and getting the job done.
Rob:
And when you said that she was booked full occupancy, what do you mean by that? Do you mean that she listed on Airbnb and every night was just getting booked by guests?
Jodi:
Yes. Yes. For two weeks. She can’t believe it. She is a newer short-term rental or Airbnb host. She had her last property in Austin and she said she had about 50% vacancy there. So she’s new and she’s been booked for the past two weeks, so she’s super excited about that.
Rob:
Cool. Very fun. Well, how did you find the deal?
Jodi:
It was on MLS. And as I mentioned, in this market, just well, given the past year market, you had to be a little more creative to find deals. So I always like to look at properties that have fallen out of contract. Oftentimes, you’ve got sellers that are motivated, they may be in contract for something else. And so, when I see that something’s fallen out of contract, I like to jump on those and try and get it locked up as quick as possible for my clients.
Rob:
Awesome. And how did you help with the due diligence, the team building and some of those other aspects within the deal?
Jodi:
At first, I assisted in recommending our inspectors, lining that up. As I mentioned, our contracting company came in and they were able to get the permits cleared, which the seller was unable to do. I also got her in touch with an attorney that was able to structure the owner financing terms and draw up the paperwork. Also connected her with a property management company that she hasn’t employed yet because she’s been doing the management herself for the short-term rental, but that she would possibly, in acquiring her next one or other properties, she would help utilize.
Rob:
And you talked about it with some of the connections that you were helping to make, but were there any other ways that you demonstrated value to your client?
Jodi:
I believe just not giving up and being persevering over the hurdles that we encountered. Many people would just walk away, but ultimately, I mean I make a connection with all of my clients. And at this point of the transaction, I wasn’t giving up and I was making sure that she was going to be able to get this closed no matter what. So I think thinking outside of the box such as owner financing, that that’s something that I would say retail agent may not consider, but as an investor myself, I know that where there’s a will, there’s a way, and you don’t know unless you ask. So first, suggesting it and then putting her in touch with the correct people that were able to structure the deal and get it closed. I think that’s a way that we were able to turn tables on, what could have been an ugly situation and made it profitable for both her and the seller.
Rob:
In general, because I agree, I think any realtor that is willing to go to bat on the owner financing side, an amazing, amazing trait and characteristic. Do you feel like in general, most realtors are pretty, not anti, but won’t really ever take that to the seller?
Jodi:
Absolutely. I think most realtors, just because they don’t necessarily understand it. And I think a lot don’t want to come to their seller and propose something that they don’t understand or can’t educate them on. So, I have encountered many that do not want to. And then, as I educate them on how it can be most beneficial to their seller, as well as the buyer, I’ve been pleasantly surprised that others will. I believe that they need to be educated at first and know how it can help all parties involved.
Rob:
Awesome. Well, keep fighting the good… Now, I know who to come to for all my owner finance deals.
David:
All right, Dan, let’s talk some Chicago real estate. By the way, how come you don’t have an accent? Why is it that I go to cities? I just got back from Boston, I was there for the UFC fights. 20% of the people had an absolute iconic Boston accent like you hear in movies, then 80% of them just sounded normal. How does that happen?
Dan:
I was not born in Chicago. I actually was born in Indiana, so I have an Indiana accent.
David:
Okay, you are off the hook. What about everybody else that lives in a big city but doesn’t have the accent?
Dan:
Well, it really depends on the community you’re from. You mentioned this about Houston, but Chicago, it is really a collection of neighborhoods, and there are neighborhoods, and you live and work in that neighborhood, and everybody sounds the same. And then, in a different neighborhood, they sound completely differently. We have Polish neighborhoods where people only speaks Polish, and we have lots of neighborhoods where people only speak Spanish, and then we have lots of neighborhoods where people sound like Saturday Night Live Skid.
David:
That is a sound answer. I threw it at you out of nowhere and you gave a very good explanation. You also highlighted what I should have thought about, which is not everybody that lives there was born there and grew up in grade school, so there could be some transplants that I should have thought about. But the Saturday Night Live Skid is exactly right. It was actually my first time visiting the East Coast. And I kept thinking, every time I would talk to someone with a really thick accent, they’re pretending to be a character out of a movie in Boston. There’s no way that they actually talk like this all the time. And then I eventually realized, “Oh no, it really is that accurate.” They don’t like Rs. The letter R gets dropped out of everything they say. They’re just not fans of the R. All right, so tell me about Logan Square.
Dan:
So I had a client that had called me up from the Agent Finder on BiggerPockets. And I talked to him, got a sense of what he wanted to do, and got him qualified with a lender that works with multiunit properties, and felt really good about him. And very rarely, but every now and then, I find something on the private listing, which is just absolute slam dunk. So I called him up, and I said, “We should do this.” People don’t know private listing or listings that you can’t see on Zillow or Redfin that only brokers that know how to access them and make them available to their client, can show them. So I called him up.
And so many people that are listening to this podcast are listening for years and are afraid to buy something. And I found that when I offered him that, that he was suddenly dragging his feet nervous because it was the first thing I was showing to him. And I said, “Trust me, this is an absolute great deal.” And he looked at it and he loved it. They had redone the whole thing.
But David, as you know, a lot of the people that sell multiunit properties have no business doing it. They don’t know how to price them, they don’t know what they’re doing. And he just listed it way below market. But because it hadn’t hit the public market yet, there wasn’t much competition. So I’m begging this guy to get the offer in and he’s thinking and thinking. And finally, we get it in, and they said, “Oh, we just got another offer that’s much higher than that, and so we’re going to go that way.” So we lost out in it.
And then, he spent the next day going through, looking at his numbers and going, “Oh my God, I really screwed up, didn’t I?” I said, “Yeah, you really missed out on something.” And I don’t tell people this, but when there’s a multiple offer situation, I don’t tell them because I don’t get their hopes up. I’m always calling that agent saying, “Listen, if anything’s going wrong with this deal, give me a call. We’re going to get this done. It’ll be a sure thing.” Because a lot of people when they bid over asking price, once they do that, then they start to regret it and they have second thoughts about it, and then they start renegotiating the price. And so, that was happening. He called me up and he said, “Is your buyer ready to go? And I was like, “I hope so.” And I said, “Yes, absolutely.” I called him up. And by then, he was really excited for the deal. We got it under contract and everything looked great.
So this is a unique property. It was a two-unit property in Logan Square. And Logan Square is a neighborhood that is appreciating like crazy. There’s great restaurants and bars and breweries. People want to live there. So there’s lots of opportunity if you get a property there to find renters. But what was unique about this property was there was a top floor and then the bottom unit had two floors. And the people that lived in it were brother and sister. And in order to give themselves privacy, where the stairs were, they put a piece of drywall to separate them so they had privacy. And so, when the appraiser came by, he said, “This is not a two-unit property, it’s a property that has two pieces that aren’t connected.” And he couldn’t understand. All we do is take down a piece of drywall and it’d be fine. So he did not appraise at value.
So I had just promised this agent that we could get this done and now suddenly, it’s not appraising. But fortunately, the lender I worked with is really creative and we came up with an idea and we went back and I said, “Look, can you get the seller to take the drywall down? We’ll redo our loan so we get another appraiser out.” Because usually if you send the same appraiser out, no matter what you do, it’s not going to appraise above value.
So they had to, at cost, take down the drywall, clean it all up, make it look great. We sent out another appraiser. And a nice twist of fate, it appraised at $60,000 above what he was paying for it. And he got it. He got $60,000 of equity from moving in, and it’s cash flowing from day one. He’s really excited.
David:
You said something earlier, I don’t want to skip over. There is a psychological condition where if you are paying less than the asking price, you think you’re getting a good deal, and if you’re paying more than the asking price, you think you’re getting a bad deal. And it drives me nuts because it’s like tell me you’re an amateur without telling me you’re an amateur. It’s you use the list price to make your decision on the value of the property. It does happen where a house is listed low and writing an aggressive or over asking price offer is the smartest thing you could do to lock it up before they get a lot of other offers and realize they listed it low.
So what probably happened is you were speaking to that listing agent, they knew your guy was sniffing at the bait, but he hadn’t actually bit on the worm yet. You were trying to get him comfortable with going in strong and playing the listing agent like, “Hang in there, hang in there, hang in there. Come on, buddy, we got to do this.” And then someone else called and the listing agent told them, “Oh, I got another buyer.” And his guy was like, “Oh hell no, I’m buying that thing now.” Came in 20 grand higher, he gets the great deal. Your client wishes that he had.
I just want to co-sign on what you’re saying here that it is not inherently bad. Your agent is not ripping you off if they ask you to pay over asking price or I should say they recommend that you do that because sometimes properties are priced low, sometimes they’re going to get seven offers and the new baseline for what the seller expects, it goes from the $600,000 asking price to $650,000 because that’s where the offers have come in at. And had you paid $610,000 in the beginning, it would’ve looked like a good deal. Have you experienced that as well, especially with some of the small multifamily?
Dan:
David, yeah, that’s absolutely the bane of my life is I always tell people it’s not the price of the property, it’s the starting price. So sometimes the starting price is too high and sometimes it’s too low. And you can use the data to figure that out. It’s not hard to figure that out. I can tell usually if a property’s going to go the first weekend. So do you want the property at the valuation you put it or do you want it at the valuation that some agent, who may not even know what they’re doing, listed the property at? Yeah, I totally agree.
David:
There’s another point there where when you’re selling your house, because I know a lot of our listeners, at some point, we’ll need to sell a house with an agent. There is a temptation to choose the agent that says, “I want to list it at whatever the highest price is.” It feels safer. Like, “Well, this person said $700, but this person said $800, I’m going to go with the $800.” And then it sits there for four months not selling and it becomes stale product and nobody’s seeing it in the searches, and the showings dry up, and you have to drop it to $700 and then you get offers at $650 because it’s been there for four months and nobody wants it at that price.
It’s your own fault because you went with the agent that told you what you wanted to hear versus the agent that said, “Let’s list it at $700, try to get several offers and now my skill as a negotiator will play and I will push those offers up to $750,” versus, “Let’s price it at $800 and maybe someone will write an offer at $750.” It just doesn’t work that way. That’s another thing I want to highlight. The skill of the agent you choose plays a huge role in how much money you make. But most clients, and I think you probably can both agree, have no idea if they got ripped off or if they won. All they know is what their agent tells them.
You both negotiated against other agents that did a terrible job, and you knew it, and you knew they cost your clients money because you knew you made your clients money. In order for one side to make money, somebody had to lose it. That’s the way that it works. And I’m sure those agents never go and tell their clients, “I screwed up. I listed your house too high. I got too greedy. I went on vacation for three days and didn’t want to answer my phone. And so, the buyer that we had moved on somewhere else,” whatever the case was. They say, “Oh, those buyers are just jerking you around.” It’s just be very careful who you choose as your agent and make sure they have a lot of integrity because they can color how that went down however they choose to and you won’t be privy to that information.
As investors yourself, I’m assuming that each of you have a different perspective when it comes to this. So I know, Dan, we’re still wrapping up on your deal here, but do you have experience with selling real estate where you feel like your experience as an investor is helping your clients because you can shoot straight with them where other agents that don’t own their own rentals, that need that deal to pay their mortgage, feel pressure to tell them what they want to hear?
Dan:
Yeah. You mentioned at the beginning I started as a poker player, so negotiation is actually my favorite part of being a real estate agent. I love it. And some agents don’t. They can’t sleep at night going through the negotiation process. But yeah, when you’re thinking for yourself, what is this property worth? And you’re evaluating it for yourself, you’re looking at properties completely different than an agent that has never bought an investment property or maybe even hasn’t bought a property themselves at all. They don’t understand how to evaluate the property and where the price should be because they don’t know what it’s like to have skin in the game and they don’t know what it’s like to have skin in the game over and over and over again.
David:
Jodi, how about you? Have you seen experiences like this?
Jodi:
Yes, absolutely. For example, I had a property. I had someone that called us that an investor wanting to do a full rehab on a property. And they called in our design remodeling company, and one of my salespeople went out to do the bid. They realized, “Hey, this person probably doesn’t need to put in $80,000 to sell the property.” They consulted with me, and they had multiple other agents that told them, yes, they need to put granite countertops in, they need to change the floors, they need to put in a roof.
And when my salesperson came in and said, “Hey, I want you to look at this property, they want to do a full remodel, I don’t think it’s necessary.” I evaluated it, looked at the comps and said, “Absolutely not. It’s not necessary. Put some paint on the walls and the property’s going to sell.” There’s no inventory in the neighborhood right now. So I put my investor cap on thinking, no reason to go in and spend all of this money to maybe make a $20,000 difference because the home’s not going to appraise if not. So, absolutely. I think many times as an investor, we put that cap on and think how we’re going to save our client’s money as opposed to making it the most beautiful home in the neighborhood and making our marketing collateral look good.
David:
Yeah, a lot of people don’t realize agents don’t get training in what they’re supposed to do. A lot of it is just whatever occurs to them is the right way to think about it. It’s sort of the Wild West, and that’s why choosing your agent wisely is so important.
One of the things that I’ll do, just like you said, Jodi, someone will say, “Hey, I want to sell my house.” And I’ll look at it. It’s not updated. It’s got the green shag carpet, the white tile, brown grout linoleum, the oak cabinets, wallpaper with sunflowers, just your typical, this is not going to show well. I don’t assume that they need to go spend a $100,000 to upgrade their house because they may only get A $100,000 back if they do that, but they spend three months going through this really annoying rehab that ruins their life.
I just look and see, well, how many actives versus pendings do we have? When there’s nine active properties for sale and one or two pending, there are too many homes for the buyers that are out there looking. And so, we are going to have to do something to improve the condition of this property if we even want a chance versus there’s one property active and nine pending, there’s so many buyers out there looking for these properties that you don’t have to do anything. They’re going to pay almost the same price because they have no other option.
And that little thing, I swear, agents don’t even think about it. They just go and look up comps and they get a price and they say, “Here you go.” They don’t call the other agents and ask them, “How many showings are you getting on your listing?” They don’t call the agents of pending properties and say, “What did you go under contract for? How many offers did you get?” That’s really the only way I’ve found to get a snapshot of what’s going on in the market, is to talk to the agents that have pending homes for sale and ask them, “How many offers came in? How aggressive were they? Would you price it at the same price? Would you go higher? Would you go lower?” But that one little thing will make such a big difference when you’re giving information to your clients.
So all of our listeners, as you’re going to choose your agent, hopefully you’re using the BiggerPockets Agent Finder to do so, ask questions like that. See if the agent… When you say, “What do you do to sell a home? How do you make sure I know I’m pricing it correctly?” If you just get a, “Um, uh, well, we look at comps,” probably not the agent you want selling your home.
And the same goes for buying a house. You want to be asking them similar questions to what you hear Rob and I asking on today’s show of Dan and Jodi, because you could tell from their answers they know their market, they know what’s going on, they know where the opportunities are, they know what to help you avoid, and that’s what you’re really looking for, especially if you’re investing in a market you’re not familiar with.
And if you like more information than how to do that, check out Long-Distance Real Estate Investing where I explain the process for doing so and having the right agent is a crucial piece in that puzzle.
Dan, Jodi, thank you so much for being here. I really appreciate you guys. Jodi, if people want to find out more about you, if they want to reach out, where can they find you?
Jodi:
So I can be found on thisislivin.com. There’s no G at the end. And on Instagram and Facebook, Thisislivin_Properties.
David:
All right, and how about you Dan?
Dan:
Dan Loves Houses everywhere, including my website.
Rob:
Nice.
David:
Is it like Dan heart for loves like the poker suit?
Dan:
No. That would’ve been great. No.
David:
Rob, how about you? Where can people find you?
Rob:
You can find me over on YouTube and Instagram at ROBUILT, R-O-B-U-I-L-T.
David:
Did you give up on TikTok because someone stole ROBUILT over there?
Rob:
No, I’m still on TikTok, but you get the good-good over on Instagram.
David:
There you go. You’re only giving us the best version of Rob, not the mediocre.
Rob:
That’s right, that’s right. The weird stuff is on TikTok, but the good stuff, Instagram.
David:
Yeah, if you want to get the best of Rob, it’s like the very end of the buffet. Don’t eat early, avoid the TikTok. Wait till you get to the end. That’s where you’re going to find the most expensive items. Don’t fill up on all the mac and cheese that they put out early.
You find me at davidgreene24.com or @davidgreene24 on Instagram or your favorite social media.
Thanks again, both of you. Really enjoyed having you here. Rob, anything you want to say before we get out of here?
Rob:
No. No. Thank you for your time and maybe I’ll be investing in Chicago and more in Houston with you all, so thanks. We appreciate it.
Dan:
Thank you. I really enjoyed it.
Jodi:
Thank you all so much. I really appreciate it. Thanks for the opportunity.
David:
This is David Greene for Rob “End of the Buffet” Abasolo signing off.
Is there any cheese you don’t think is great, if we’re being honest here?
Rob:
Blue cheese, like crumbles, not a fan, but I like blue cheese dressing for my wings.
David:
So you like rotten cheese in its liquid form, not in its solid?
Rob:
Well, when you put it that way, it doesn’t really change anything, but it does make me feel worse.
David:
Well, if you like blue cheese, you should check out some green cheese, and you’re going to hear more of that coming up now.
Rob:
Green Cheese, that was your nickname back in prison, right?
Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it!
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MIAC settles compliance case with the SEC
New York-based Mortgage Industry Advisory Corporation (MIAC) has agreed to settle with the Securities and Exchange Commission (SEC) over allegations of multiple compliance failures. The investment adviser and analytics firm will pay $100,000, according to the agreement made public on Monday.
The case first started in 2006, when the SEC’s division of examinations received notice of some deficiencies at the company, among them failures to adopt and implement written compliance policies and procedures, conduct an annual review of its compliance program and establish and enforce a code of ethics, the agency said.
MIAC consented to a cease-and-desist order without admitting or denying the findings.
A spokesperson for the company did not immediately reply to a request for comments.
According to the consent order, MIAC maintained an employee handbook, but it was not a compliance manual. It was designed, among other things, to describe some of the employee policies, programs, and benefits, the SEC said.
“While the Employee Handbook (…) included a section that described insider trading generally, the Employee Handbook primarily addressed general human resources issues, including unexcused absences, sexual harassment, and dress codes. The Employee Handbook did not include any specific mention of the Advisers Act or the rules adopted thereunder.”
In addition, the consent order states that while MIAC maintained written internal controls concerning its business operations to guide its employees in their day-to-day business functions, these policies were not reasonably designed to prevent violations by the adviser and its supervised persons.
“The order also finds that MIAC only implemented new policies and procedures, began conducting annual compliance reviews, and adopted a written code of ethics in February 2022 after a 2021 examination by the Division of Examinations again noted MIAC’s compliance deficiencies,” the SEC said in a statement.
In 2022, MIAC hired a new chief compliance officer tasked with improving MIAC’s compliance program and retained a third-party compliance consulting firm to advise on its overall compliance program and its policies and procedures.
MIAC, registered as an investment advisor since 2002, had about $1.195 billion of regulatory assets under management, according to filings with the SEC on March 20, 2023.
The company, which provides risk management and hedging advice to mortgage originators and holders, employs approximately 90 individuals, eight of whom perform investment advisory functions.
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Opinion: The evolution of the independent mortgage bank
These current mortgage markets are what make it challenging for independent mortgage banks (IMBs). For many of these transaction-oriented, monoline mortgage lenders, it’s always a question of feast or famine. For most of this century, they’ve come out on the winning side. Today, many might feel sorry for the IMB.
This is true, even though we all know there are very few winners when the industry slows down as quickly and significantly as it has over the past 24 months. Mortgage loan volume in the second quarter of 2023 was down 56% from the same period last year, according to ATTOM. It’s down 70% from its peak in 2020, a 20-year low, the company said.
Interest rates have risen from a low of less than 3% in 2012 to over 7% today, meaning that 99% – according to Goldman Sachs – have a lower rate and would not benefit from a refinance.
So, one could assume that the independents, many of which have feasted on refinance business that is no longer available, would have dried up and blown away by now. That assumption would be incorrect.
While these lenders have suffered as much as everyone else during this downturn, any rumors of their death have been exaggerated.
In our work with all kinds of lenders, we have found that independents operate under several business models. IMBs operating under one of those models did extremely well during the refi booms, but are faring poorly now.
But there are two other models in use today, and those lenders are doing much better. One of these groups could emerge from this downturn as industry leaders.
The fate of the specialist when the market shifts
The independent mortgage banks most of us think of when someone mentions IMBs originated as a result of the Savings and Loan Crisis of the 1980s.
During this crisis, many savings and loans failed, and the federal government stepped in to bail out the industry. As a result, many savings and loans were consolidated into larger institutions. This left a void in the mortgage lending market, which was filled by IMBs.
IMBs are non-depository institutions that specialize in originating and servicing mortgages. They are typically not affiliated with any other financial institution, and they vary greatly on the number of storefronts and branches they have. IMBs are often more flexible than traditional banks, and they are more likely to lend to borrowers with less-than-perfect credit due to their strategy of having multiple investor outlets.
During the extended period of artificially low interest rates, these institutions became the leaders of the online, streamlined rate-and-term refinance transaction. In addition, they were leaders in originating FHA, VA and USDA loans. As a result, the IMB sector saw significant growth, but that specialization would prove to be a risk embedded in their business model.
In 2008, IMBs originated less than 20% of conventional mortgages. By 2021, according to the Mortgage Bankers Association, they were originating over 60%.
However, when rates rose and refinance mortgages fell to a historically low share of all mortgage originations, the writing was on the wall for many of the lenders who catered to consumers instead of the real estate industry.
Since IMBs tend to be more flexible than traditional banks, this gives them an edge in the competitive mortgage lending market if they are willing to evolve beyond the refinance business.
The first stage is becoming a catch-and-release shop
When it became clear that rising rates would destroy the refinance business that had made these firms so successful, some leaders in this sector evolved their businesses to originate assets for other investors.
The game was to find out what types of loan products were in demand by various investors and quickly ramp up a system to originate those loans and sell them off.
It was still transactional revenue, but they weren’t originating loans to create their own pools of refinance loans for securitization anymore. Instead, they were filling a need for other investors who still had liquidity.
Some are still doing this today and doing quite well. They are like super-broker shops that use their own third-party origination networks like a mortgage-bank-in-a box for others who have an appetite and are willing to create their own mortgage-backed assets.
There is yet another stage to the IMB’s evolution and it created a new kind of originator that may well emerge even stronger after the downturn.
The second stage is becoming an emerging market leader
The evolutionary step from catch-and-release mortgage banking turns the IMB into a new kind of institution that originates assets for its own benefit and puts them on its balance sheet as assets, consisting of their origination pipeline and their mortgage servicing rights.
Some of these firms are backed by venture capital or hedge fund assets and are changing the game in the sector.
Once they have these assets, they can create yield to attract investors. As they continue to evolve, they may appear as if they are not necessarily in the mortgage business and look more like asset management companies.
We have a number of examples in the market today. If you look at NewRez and Mr. Cooper, you’ll see REIT/private equity-backed institutions that are originating assets for their own financial vehicles and attracting outside investment in the process.
Firms like these first came to our attention because they were working to mitigate the risk of developing overcomplicated tech stacks. Because they originate many different types of products, tech sprawl is a risk that could result in high downstream maintenance costs and untenable total technology cost of ownership.
It makes sense for these organizations to do as much of their work as they can on a single tech stack, whether they are originating traditional mortgages, reverse mortgages, fixed seconds, HELOCs, Non-QM or Jumbo loans. And these firms are likely to do it all; anything that will attract yield and subsequently be attractive to investors in the market.
It may have been necessity that drove these institutions to evolve, but breaking free of the refinance transaction and mastering the origination of a wide range of mortgage products has positioned these lenders very well to be top mortgage competitors when the market turns.
In compiling nationwide third-party originator networks, many have the internal systems both for originating a wide range of products and managing those assets for a good return, and the capital to choose the right origination platforms to support their business.
It appears that this might be too early to feel sorry for the IMB. As they say, adversity is the engine of innovation and it’s likely that smart lenders will create similar strategies so they can compete when the market returns.
Joe Camerieri is Executive Vice President of Sales and Strategy at Mortgage Cadence.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Joe Camerieri at joseph.c.camerieri@mortgagecadence.com
To contact the editor responsible for this story:
Tracey Velt at tracey@hwmedia.com
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2 “Slam Dunk” Small Multifamily Deals in 2023
Small multifamily properties are one of the EASIEST ways to get into real estate investing. But, your market may be a little too pricey or lack the supply for you to invest in these “slam dunk” deals. So, where do you go? We’ve got two elite agents from the South and Midwest that can help YOU get your next killer deal in metro areas that are seeing STRONG demand, renter growth, and rising rents.
To tell us about Chicago, the “we don’t actually love deep dish” city, is Dan Nelson. Dan was recently able to access a “private listing” that was severely underpriced. He brought this deal to a rookie client of his, who ended up making a MASSIVE amount of equity on closing. We’ll also chat with Jodi Gauthier, a Houston-based agent who secured a very lucrative seller-financed deal for her client, who couldn’t get a mortgage anywhere else.
You might think these deals are too good to be true, ESPECIALLY in 2023’s housing market. But, we’re here to prove that as long as you’re in the right market, running the right numbers, with the right agent, you too can lock down these “slam dunk” small multifamily deals.
David:
This is the BiggerPockets Podcast, show 817.
Dan:
I started as a poker player. So negotiation is actually my favorite part of being a real estate agent. I love it. When you’re thinking for yourself like, what is this property worth? And you’re evaluating it for yourself, you’re looking at properties completely different than an agent that has never bought an investment property or maybe even hasn’t bought a property themselves at all. They don’t understand how to value the property and where the price should be because they don’t know what it’s like to have skin in the game, and they don’t know what it’s like to have skin in the game over and over and over again.
David:
What’s going on everyone? It’s David Greene, host of the biggest, the baddest, and the best real estate podcast on the planet, aka The BiggerPockets podcast. Welcome all of you. We’ve got a great show for you today. I am joined by my co-host, Rob Abasolo, who’s looking svelte, fit, trim, handsome, dark, well-dressed, well-manicured. Like can you just slow down this glow up that we’re all getting to experience in real life?
Rob:
Yes. I’m now changing my title to co-host with the co-most.
David:
Hmm.
Rob:
Yes. Yeah. So, if you could start referring to me as that, that’d be awesome.
David:
This is a true marketer at heart because that’s incredibly cheesy, yet will still stick in my brain. Sticky cheese, the Sticky Cheese Method with Robert Abasolo, Marketing Co.
In today’s show, you’re going to hear all about two popular markets, Chicago and Houston, as well as agents that work in those markets that can give you the scoop on what to look for, what to avoid, and how to approach buying real estate there. We talk a little bit about cashflow versus equity, identifying up and coming markets and the right approach to take in a challenging market.
Rob, what do you think investors should keep an eye out for on today’s show?
Rob:
Honestly, I think it’s a really great educational episode for anyone that is new at working with real estate agents in general because as you’ll hear in today’s episode, you’re going to hear how they provided value, how they were able to save deals, how they were able to price properties, and it really is just nice to know that there are realtors out there that are really thinking about your deal from every angle. We talk about owner financing and how not all realtors are down to have that conversation with the sellers and the importance of having someone that’s willing to go at bat for you.
David:
That is true. Having the right agent in your quarter can make a huge difference in having a portfolio that scales or having a portfolio that fails. Today’s quick tip is simple, head over to biggerpockets.com/agentfinder to match with an investor-friendly agent now. It’s fast, it’s free, and it’s easy. That’s biggerpockets.com/agentfinder and I am on there too, so hopefully, you all go find me and click on my beautiful bald face so that we can get in touch. All right, let’s get into today’s show.
Dan and Jodi, welcome to the show. So nice to have you two here today. We’re going to get into some interesting markets, Houston and Chicago. We’re going to run through each of these markets and then we’ll get into some recent deals that you two have helped close. Then we’ll talk about what made those deals work, and all of our listeners can use these insider tips and secrets on their next deal too. So we’ve done these before. They were a hit. We’re going to be learning all about what is available in Houston and Chicago.
Dan, we’ll start with you. A little bit about your background here. I understand you’ve been in real estate for 20 years. You’ve been an agent for five. You were full-time in learning development and training agents, started flipping with dozens of houses being flipped over the years. 10 units total. Made up of single family and multi-units. And you are a poker player who used your winnings to start in real estate. Did I miss anything there?
Dan:
No, you got it. That’s right.
David:
Awesome. All right. Jodi, you’ve been in the game for 20 years. You own a boutique brokerage where you have 12 agents that work for you, a property management company with home design and remodeling, a little bit of everything. 22 single family homes, a couple commercial properties. You’ve got historic homes that have been converted into office space. You flipped 30 houses, and one of the agents on your team was an investor that you met through BiggerPockets and you helped them acquire their first few properties. They later became a full-time agent on your team, and now you’ve got a full brokerage. Did I miss anything there in your story?
Jodi:
I think that pretty much sums it up.
David:
Awesome. Well, it’s nice to have you two here. Now that we have a little bit of background on you, let’s get into your markets. Dan, I’ll start with you. What are some of the long-term benefits to Chicago?
Dan:
Well, Chicago really didn’t go through the huge growth spurt that a lot of the other markets did. We increased about 3%, 5% depending on what part of the market we’re in a year. And some of our areas are just now returning to pre-recession prices. So that tells you that while our prices have gone up, there’s still a long way from what you’ve seen in the other markets. So there is incredible opportunity to appreciate price, and as you always say, there’s going to be a lot of appreciation in rent as well.
David:
There you go. What about population shifts? What’s the economic engine that’s driving Chicago?
Dan:
So, like every northern city, there’s always people as they get older, they tend to move to warmer climates. But for the most part, our population has done really strong work. Now, getting all the people that thought that they could live forever in Tahiti and work remotely, realizing they’re going to have to go in the office, they’re returning and we’re starting to see all that happen.
So there’s a couple of things. Number one, we have major hubs here like McDonald’s and Motorola and Allstate, Grubhub, and then United Airlines. And United Airlines is important because they have a hub here. And as part of that, there’s a huge consultancy part of Chicago. So, we have all the big companies like Deloitte, McKinsey, and Bain. And those people tend to be nomadic unless they take a full-time job that’s going to last forever. Most of those people expect to be here for a short period of time. And that period of time is one to three years. That’s what they expect. So they’re going to be renters even though they can easily afford properties.
But companies like United, when you have a hub at United, you think of people that the captains of the airlines, but you also have all the people that are just getting the snacks to the cart and there’s just tremendous opportunities. So whether it’s white collar or blue collar, there’s great paying jobs all over the city.
David:
But you’re seeing a tenant base is what you’re getting at. These are people that need to rent?
Dan:
Yes, exactly.
Rob:
And tell us, Dan, why should people consider Chicago?
Dan:
Well, Chicago is an extremely popular city to live in. We recently had the number one ranked restaurant. We have lots of world-class restaurants. It’s the place that improv lives and it’s the number two theater city in the United States. A lot of people move here when they graduate from college in the Midwest because it is the New York of the Midwest. There’s endless opportunities. The public transportation system is incredible. You don’t have to own a car here, but you can also own a car and find parking here. So it’s a great combination of both. So there’s a lot of reasons that people want to live here. So you’ll always have people that want to live here to buy and to rent.
David:
What would you say are the specific strategies that work best in the Chicago market?
Dan:
Anything works in Chicago. When you think about short-term rental, Rob, I loved your @BPCon this year was great.
Rob:
Oh, thanks.
Dan:
When you talked about short-term rentals, just the creative ways in which you can do it, and I think that helps you stand out because there is a lot of competition in short-term rentals, but you should know that the city ordinance to say that you do have to live in the property. So whether it’s a multi-unit property or single family home, you have to live in it. So it’s not something you can easily do out of state. So most people are moving to midterm rentals.
Obviously, I’ve flipped a lot of properties. It’s really easy to flip in Chicago because not only do we have tons of distressed properties, Chicago is unique in that on the same street, you’ll have a property that’s $350,000 sitting next to a property that’s $850,000 around the corner from a property that’s $1.2 million. So those other properties make the appreciation happen very quickly if you make the right changes to the property.
But I think the bread and butter in Chicago, the thing that most people should focus on, two to four unit properties. We have tons of them in Chicago, but they’re getting torn down every day because as people are looking for places to build single family homes and convert into condos, those are the best ways to do it without having to build completely from scratch. So, if you get into a two and four-unit now, it’s going to be become more and more valuable because it doesn’t make any financial sense to build them, they were built a long time ago when labor and materials were cheap. And if you were going to spend that amount of money on a property now, you would build a single family home or you would be able to hide in rentals or high-end condos. You would not build what’s there today. And there’s 1200 for sale right now in the area. So, there’s lots of opportunity.
Rob:
Awesome, man. Well, thank you for the snapshot. And before we move on to Jodi here, just wanted your take on the pizza, yay or nay?
Dan:
I am a huge fan of deep dish pizza, but you should know that true Chicagoans don’t actually think that’s their pizza. They have a different style called pub pizza, which is actually cracker thin. That’s what they think is their pizza. So, the people that think that deep dish is a Chicago local pizza, it’s really people that transplanted here that fell in love.
Rob:
Oh, interesting.
Dan:
But I love it all.
Rob:
Yeah, I did not know that. I’m a New York sliced guy, but occasionally, I do like to eat lasagna, and that’s where the deep dish comes in. But yeah.
Dan:
Yes, exactly.
Rob:
I think it’s all right, I got to try that. Well, thanks, man, I appreciate it. So Jodi, I’m going to ask you the same question. Can you tell us a little bit about some of the long-term benefits of investing in Houston?
Jodi:
Sure, absolutely. So I think some of the long-term benefits, and we’ve got a very favorable tax environment here in Texas, both for investors, property owners, as well as businesses. We’ve got good steady appreciation over the years. It’s a very landlord-friendly state. And we’ve got a very strong rental demand here in Houston. I know we’ve just had a 19% increase in rental properties over the last year, 3% increase in price. I think our average rental price now is about $2,350. So it makes it a very lucrative location for investors to look at long-term buy and holds.
Rob:
And what are some of the population shifts in Houston and some of the economic engines in the area?
Jodi:
So Houston is the fourth-largest city. Personally, I’ve experienced a ton of out-of-state people moving into Houston. I think the statistics are, we’ve had about 85,000 newcomers to Houston over the past year, two-thirds of those being people moving from other states. I think on an average over the past several decades, Houston has seen an increase of about 2% population. Some of the big economic sectors in Houston. Of course, everyone knows us for oil and gas. However, there’s a huge healthcare. We’ve got the number one largest bed center in the area, so that’s a big driving factor there. We’ve also got aerospace and biomedical research, tons of job opportunities in Houston.
Rob:
Yeah. Yeah, for sure. Oil and gas is a big one. NASA, like you said, and then overall, not specific to Houston, but we also have Whataburger and Bucky’s here, and that’s just an overall economic driver for Texas in general. Other than those two amazing things, why should people consider Houston?
Jodi:
Well, I think they should consider Houston based on a couple of what we’ve discussed in regards to our population, our good long-term appreciation rates. We’ve got a vibrant art and food scene, which is very important, low cost of living. Houston’s a very diverse community.
Rob:
And did you mention that the average rent in Houston is about $2,300?
Jodi:
Yes.
Rob:
Okay. Yup.
Jodi:
About $2,300 in Houston, yes. That is about a 3% increase from last year. Single family homes have jumped 19% year over year with the average lease price climbing 3%, which is now at $2,363, which is a record high. There’s also been a total of $4,396 leases were signed compared to $3,690 in July, which is the highest volume of single family leases that have ever been recorded in Houston history.
Rob:
Wow.
Jodi:
So we have a very strong rental market. The demand is there.
Rob:
It is. I mean, I grew up in Houston from zero to 18. I feel like it’s just such a different city 10 years later, which I guess you could say about really any city, but being from here and actually returning, it is just crazy how much development. And honestly, yeah, the real estate seems to be growing at all times. The rent prices definitely seem to be so much higher every single year. What strategies are currently working here?
Jodi:
I see I’ve got a lot of clients that are interested in the long-term buy and holds. Of course, with interest rates increasing the way that they are, it is a little more difficult to cash flow, but I’ve got a lot of investors focused on more long-term appreciation. And so, some of the metro areas in Houston, areas that have very good school districts, I have noticed I’ve got a lot of clients that are interested in that for the long-term appreciation aspect.
I think Houston is such a diverse area. It’s so large that you can really focus on multiple different strategies just based on what the investor’s goals are. So, I’m seeing a lot of newer investors that are purchasing properties, house hacking, or inside the loop, possibly looking at properties with garage apartments, doing short-term rentals there in order to offset those mortgage payments and be able to get in oftentimes with a little less than the typical 20%, 25% down payment for investment properties of owner occupying them. So I think there’s multiple strategies.
Of course, we also have older homes. So, doing the BRRRR strategy. Over the past few months, I’d say the majority of my clients are looking for the long-term buy and holds and small multifamily anywhere from two to four units, and we’re having great success there.
Rob:
And then when you said the loop, what do you mean by the loop?
Jodi:
I’m sorry. Inside the 610 loop, so that’s more inner city. And then you’re going to have, there’s three loops in Houston. And you’re going to have the 610 loop and then the Beltway, which is a little more suburban and far out, which used to be considered far out, is the Grand Parkway loop where you’ve got all the more suburban areas. And those are some of the areas that are really good for long-term buy and hold. Good appreciation, great school districts.
Rob:
Very cool.
David:
So I want to ask each of you a question that doesn’t get brought up a lot in real estate, but I think it’s a question that needs to be asked. The last decade, we’ve primarily invested for cashflow. Podcasts have described cashflow as the reason to invest. This has been the right motivation is you should invest your money to get cashflow. And if appreciation happens or if rents go up, so much the better, but you need to really rely on cashflow. And Jodi, as you mentioned, rates have gone up, but prices really haven’t gone down. Supply and demand is out of whack right now. There’s still much more demand than supply. So cashflow has been largely eaten up in a lot of markets, but prices haven’t come down to fix that.
What are your thoughts? We’ll start with you Jodi, on if a buyer is not going to get cashflow, are there certain markets they could focus on within Houston where you think rents will go up, So eventually they will? Do you think that there’s a strategy where they should be okay with breaking even if they believe the property values are going to increase? Or do you think that investors should just stop buying properties unless they cashflow really strong?
Jodi:
I think if a property makes sense, and especially buying in some of the areas that I had mentioned, some of the suburban areas where you’ve got steady appreciation and I think it’s always a good idea to buy if you can have someone else cover your mortgage and help build equity. And so, I would suggest some of the areas, some of the suburban areas, I’d say like Katy, Cypress. The school districts are the driving factor. You’ve got a lot of people moving from out of state specifically looking for those areas, wanting their kids in good schools. And so, you’re going to have long-term renters, good steady appreciation on average about 7% per year. So I am seeing a lot of investors now that are diversifying their portfolios and they are perfectly fine with breaking even and focusing on areas that have good long-term appreciation. That is something that we assist in guiding our clients and showing them the statistics in specific areas and giving them their feedback of which areas are ideal for that.
Rob:
Yeah. Houston is a really interesting city in that it is 80 cities all clustered around one big city. It feels like every suburb of Houston is just its own little metropolitan area. Like Cypress for example, I think that’s a really great booming area in Houston. But five years ago, it didn’t look like that. It was just fields. And you drive by Cypress now and it really is its own living, breathing city. I agree though I think a lot of those cashflow opportunities I think do tend to come from some of the suburban areas. It’s interesting how it is seemingly tougher to break even.
I’m actually working on a seller finance deal in Houston right now at the moment, and it loses money. And the seller proposed the terms to me. I said, “Hey, this loses money.” And he was like, “Well, the thing is with real estate investing, sometimes you got to lose money, but you understand that you’re building equity over time.” And I was like, “Well, yes, but I don’t like to walk into deals where I’m losing money automatically.” So we’re trying to work out terms to break even, but it definitely gets tougher in Houston specifically because the property taxes in Texas seem to be pretty high.
David:
Dan, what about you? What are your thoughts on investors that are having a hard time finding cashflow in the Chicago market? Do you think that there is an argument to be made for taking maybe a delayed gratification approach if the fundamentals are strong and you believe you’re going to have rent and price growth, that it’s okay to invest in those markets? Or are you like, “Hey man, cashflow till I die. That’s the only reason to invest. If you can’t find it, just don’t buy.”
Dan:
I’m really glad that you brought this question up and you guys had a great interview recently with Barbara Cochrane where she talked about she expects to overpay for properties and she’s thinking long-term. When you think about year one of a rental property, I just don’t think it makes any sense. Real estate to me is a long-term process and I just don’t think it’s that hard. You buy a property, your tenant pays down your mortgage and eventually, you are going to make a lot of money. If you’re not making a lot in the beginning or even breaking even or a little below it, eventually you will. The rents will go up. The price you’re paying for the mortgage will stay the same.
As somebody that invested in properties not knowing what he was doing in the beginning, I started before I even knew about BiggerPockets. We didn’t know what we were doing it, and here we are years later, our properties are worth two or three times what we paid for them. And we’re cash flowing and everything. I just think if you focus on short-term today, that was a strategy for 20 years ago. That’s not the strategy for today.
David:
That’s a great point. What worked before doesn’t always work now. And let’s give a disclaimer. Rob made a good point. This does not mean buy a property that bleeds two grand a month hoping that it goes up. That is not what we’re saying. We are talking about if fundamentals are strong, businesses are moving into the area, there is not enough supply for the demand that you see. Let’s assume Cypress, I know nothing about it, but hypothetically speaking, this is an area everybody wants to move into. The school scores are high, wages are higher in Cypress than they are outside of it. You have every reason to believe that this area is going to grow at a faster pace than the others around it, but wages haven’t gone up to the point where the tenants can afford to pay enough for the rent to make it cashflow. Right?
There is an argument to be made, I think, that buying in better areas will make you more money over time, but they may not crush it right away. That is not to say buying in a war zone and hoping that rents go up is a good strategy. I want to clarify that because it seems like there’s always someone, no matter how much I try to make this clear, that finds a way to be confused and accuses me of saying, “David Greene said cashflow doesn’t matter and we shouldn’t even analyze properties, and you shouldn’t even look at it.” That’s definitely not what we’re getting into. But I do think that some of the better markets like what we’re talking about today, have more competition for the homes which drives the prices up, which does eat up a lot of the cashflow, unless you find that unicorn that we’re always looking for.
So ,let’s move on a little bit here. Each of you has a deal that you’ve done. Jodi, I’m going to start with you. Tell us about the last resort.
Jodi:
So this was a property that one of my buyers located. It had been in contract previously. Typically, when I see that, I like to reach out to the listing agent, get some background information, see if they have any current inspections on the property, just try and figure out any insight that I can get that would be beneficial for my borrower going in. Got under contract, I think we negotiated after reviewing the inspection report. So she had a good idea of knowing what issues were going on with the property, which it was pretty much renovated, not many issues at all. We were able to negotiate about a 20K price reduction and got into contract. Everything was going smoothly. She opted to have another inspection report done. We negotiated a few repairs there during the option period.
Moving towards closing about three days prior to her financing contingency, found out that the lender had miscalculated her monthly incomes. Let me backtrack a little bit. She’s self-employed so this was a stated income loan. So, found out she wasn’t able to get approved. At this point, she had already sold her home in Austin, packed up and moved to an Airbnb waiting for closing in Houston.
So, we went to every other lender. I’ve got a good resource of lenders that I’ve worked with over the years and basically, everyone said no, they didn’t even know why the first lender approved her. The funds just aren’t there, she’s not going to be able to get it approved.
That initial lender had suggested going in with basically private moneylender or hard moneylender. Her rate was just jumped up to 12%, wasn’t going to make sense. I sat down with her, said, “Look, I know you really want this property, but you’ve got to take emotions out of it. Put your investor cap on. It doesn’t make sense.” Her intention was to occupy one side of the property and short-term rental the other. It was still, with that interest rate, going to make it very difficult for her to cashflow anything.
So, as a last resort, I reached out to the listing agent, was able to negotiate with her, and the seller agreed to seller financing with some pretty favorable terms. The terms were actually about 2% lower than the initial rate that she was going to go with, with the stated income loan.
So, we were able to negotiate that. Another hurdle came up that found out there were open permits on the property and the contractor that had done the renovations walked off. Seller couldn’t get ahold of them. And if anyone knows, working with permitting in the city can be difficult at times.
So at that point, we stepped in. I also have a construction design remodeling company. Got my project manager involved. They were able to go to the city, pull some strings with some people they know, and we were able to get those permits passed. And we actually closed on that deal about two weeks ago, and she has had it leased out on short-term rental for the past two weeks. She’s had full vacancy.
So it was a deal gone south that had many hurdles, but we were able to shift gears when needed and use our resources to actually get a more profitable deal for the investor as opposed to what she was initially going in at.
David:
You had me at pulled some strings with the city to get the permits approved. You just became my go-to Houston real estate agent. Congratulations, Jodi. You’ve skipped to the front of the line.
Jodi:
Well, it is hard to do. But at the end of the day, I mean what we’ve learned and we’ve learned in many municipalities in working with permitting, ultimately, they just want the job done right. And if you do it right and you do it the first time and you follow the guidelines, it’s not that difficult. So, we’ve got a good reputation working with many of the cities, and they know if we’re on the job that it’s going to be done right the first time. And so, not necessarily… no money under the table, anything like that, but just representing our clients to the best of our ability and getting the job done.
Rob:
And when you said that she was booked full occupancy, what do you mean by that? Do you mean that she listed on Airbnb and every night was just getting booked by guests?
Jodi:
Yes. Yes. For two weeks. She can’t believe it. She is a newer short-term rental or Airbnb host. She had her last property in Austin and she said she had about 50% vacancy there. So she’s new and she’s been booked for the past two weeks, so she’s super excited about that.
Rob:
Cool. Very fun. Well, how did you find the deal?
Jodi:
It was on MLS. And as I mentioned, in this market, just well, given the past year market, you had to be a little more creative to find deals. So I always like to look at properties that have fallen out of contract. Oftentimes, you’ve got sellers that are motivated, they may be in contract for something else. And so, when I see that something’s fallen out of contract, I like to jump on those and try and get it locked up as quick as possible for my clients.
Rob:
Awesome. And how did you help with the due diligence, the team building and some of those other aspects within the deal?
Jodi:
At first, I assisted in recommending our inspectors, lining that up. As I mentioned, our contracting company came in and they were able to get the permits cleared, which the seller was unable to do. I also got her in touch with an attorney that was able to structure the owner financing terms and draw up the paperwork. Also connected her with a property management company that she hasn’t employed yet because she’s been doing the management herself for the short-term rental, but that she would possibly, in acquiring her next one or other properties, she would help utilize.
Rob:
And you talked about it with some of the connections that you were helping to make, but were there any other ways that you demonstrated value to your client?
Jodi:
I believe just not giving up and being persevering over the hurdles that we encountered. Many people would just walk away, but ultimately, I mean I make a connection with all of my clients. And at this point of the transaction, I wasn’t giving up and I was making sure that she was going to be able to get this closed no matter what. So I think thinking outside of the box such as owner financing, that that’s something that I would say retail agent may not consider, but as an investor myself, I know that where there’s a will, there’s a way, and you don’t know unless you ask. So first, suggesting it and then putting her in touch with the correct people that were able to structure the deal and get it closed. I think that’s a way that we were able to turn tables on, what could have been an ugly situation and made it profitable for both her and the seller.
Rob:
In general, because I agree, I think any realtor that is willing to go to bat on the owner financing side, an amazing, amazing trait and characteristic. Do you feel like in general, most realtors are pretty, not anti, but won’t really ever take that to the seller?
Jodi:
Absolutely. I think most realtors, just because they don’t necessarily understand it. And I think a lot don’t want to come to their seller and propose something that they don’t understand or can’t educate them on. So, I have encountered many that do not want to. And then, as I educate them on how it can be most beneficial to their seller, as well as the buyer, I’ve been pleasantly surprised that others will. I believe that they need to be educated at first and know how it can help all parties involved.
Rob:
Awesome. Well, keep fighting the good… Now, I know who to come to for all my owner finance deals.
David:
All right, Dan, let’s talk some Chicago real estate. By the way, how come you don’t have an accent? Why is it that I go to cities? I just got back from Boston, I was there for the UFC fights. 20% of the people had an absolute iconic Boston accent like you hear in movies, then 80% of them just sounded normal. How does that happen?
Dan:
I was not born in Chicago. I actually was born in Indiana, so I have an Indiana accent.
David:
Okay, you are off the hook. What about everybody else that lives in a big city but doesn’t have the accent?
Dan:
Well, it really depends on the community you’re from. You mentioned this about Houston, but Chicago, it is really a collection of neighborhoods, and there are neighborhoods, and you live and work in that neighborhood, and everybody sounds the same. And then, in a different neighborhood, they sound completely differently. We have Polish neighborhoods where people only speaks Polish, and we have lots of neighborhoods where people only speak Spanish, and then we have lots of neighborhoods where people sound like Saturday Night Live Skid.
David:
That is a sound answer. I threw it at you out of nowhere and you gave a very good explanation. You also highlighted what I should have thought about, which is not everybody that lives there was born there and grew up in grade school, so there could be some transplants that I should have thought about. But the Saturday Night Live Skid is exactly right. It was actually my first time visiting the East Coast. And I kept thinking, every time I would talk to someone with a really thick accent, they’re pretending to be a character out of a movie in Boston. There’s no way that they actually talk like this all the time. And then I eventually realized, “Oh no, it really is that accurate.” They don’t like Rs. The letter R gets dropped out of everything they say. They’re just not fans of the R. All right, so tell me about Logan Square.
Dan:
So I had a client that had called me up from the Agent Finder on BiggerPockets. And I talked to him, got a sense of what he wanted to do, and got him qualified with a lender that works with multiunit properties, and felt really good about him. And very rarely, but every now and then, I find something on the private listing, which is just absolute slam dunk. So I called him up, and I said, “We should do this.” People don’t know private listing or listings that you can’t see on Zillow or Redfin that only brokers that know how to access them and make them available to their client, can show them. So I called him up.
And so many people that are listening to this podcast are listening for years and are afraid to buy something. And I found that when I offered him that, that he was suddenly dragging his feet nervous because it was the first thing I was showing to him. And I said, “Trust me, this is an absolute great deal.” And he looked at it and he loved it. They had redone the whole thing.
But David, as you know, a lot of the people that sell multiunit properties have no business doing it. They don’t know how to price them, they don’t know what they’re doing. And he just listed it way below market. But because it hadn’t hit the public market yet, there wasn’t much competition. So I’m begging this guy to get the offer in and he’s thinking and thinking. And finally, we get it in, and they said, “Oh, we just got another offer that’s much higher than that, and so we’re going to go that way.” So we lost out in it.
And then, he spent the next day going through, looking at his numbers and going, “Oh my God, I really screwed up, didn’t I?” I said, “Yeah, you really missed out on something.” And I don’t tell people this, but when there’s a multiple offer situation, I don’t tell them because I don’t get their hopes up. I’m always calling that agent saying, “Listen, if anything’s going wrong with this deal, give me a call. We’re going to get this done. It’ll be a sure thing.” Because a lot of people when they bid over asking price, once they do that, then they start to regret it and they have second thoughts about it, and then they start renegotiating the price. And so, that was happening. He called me up and he said, “Is your buyer ready to go? And I was like, “I hope so.” And I said, “Yes, absolutely.” I called him up. And by then, he was really excited for the deal. We got it under contract and everything looked great.
So this is a unique property. It was a two-unit property in Logan Square. And Logan Square is a neighborhood that is appreciating like crazy. There’s great restaurants and bars and breweries. People want to live there. So there’s lots of opportunity if you get a property there to find renters. But what was unique about this property was there was a top floor and then the bottom unit had two floors. And the people that lived in it were brother and sister. And in order to give themselves privacy, where the stairs were, they put a piece of drywall to separate them so they had privacy. And so, when the appraiser came by, he said, “This is not a two-unit property, it’s a property that has two pieces that aren’t connected.” And he couldn’t understand. All we do is take down a piece of drywall and it’d be fine. So he did not appraise at value.
So I had just promised this agent that we could get this done and now suddenly, it’s not appraising. But fortunately, the lender I worked with is really creative and we came up with an idea and we went back and I said, “Look, can you get the seller to take the drywall down? We’ll redo our loan so we get another appraiser out.” Because usually if you send the same appraiser out, no matter what you do, it’s not going to appraise above value.
So they had to, at cost, take down the drywall, clean it all up, make it look great. We sent out another appraiser. And a nice twist of fate, it appraised at $60,000 above what he was paying for it. And he got it. He got $60,000 of equity from moving in, and it’s cash flowing from day one. He’s really excited.
David:
You said something earlier, I don’t want to skip over. There is a psychological condition where if you are paying less than the asking price, you think you’re getting a good deal, and if you’re paying more than the asking price, you think you’re getting a bad deal. And it drives me nuts because it’s like tell me you’re an amateur without telling me you’re an amateur. It’s you use the list price to make your decision on the value of the property. It does happen where a house is listed low and writing an aggressive or over asking price offer is the smartest thing you could do to lock it up before they get a lot of other offers and realize they listed it low.
So what probably happened is you were speaking to that listing agent, they knew your guy was sniffing at the bait, but he hadn’t actually bit on the worm yet. You were trying to get him comfortable with going in strong and playing the listing agent like, “Hang in there, hang in there, hang in there. Come on, buddy, we got to do this.” And then someone else called and the listing agent told them, “Oh, I got another buyer.” And his guy was like, “Oh hell no, I’m buying that thing now.” Came in 20 grand higher, he gets the great deal. Your client wishes that he had.
I just want to co-sign on what you’re saying here that it is not inherently bad. Your agent is not ripping you off if they ask you to pay over asking price or I should say they recommend that you do that because sometimes properties are priced low, sometimes they’re going to get seven offers and the new baseline for what the seller expects, it goes from the $600,000 asking price to $650,000 because that’s where the offers have come in at. And had you paid $610,000 in the beginning, it would’ve looked like a good deal. Have you experienced that as well, especially with some of the small multifamily?
Dan:
David, yeah, that’s absolutely the bane of my life is I always tell people it’s not the price of the property, it’s the starting price. So sometimes the starting price is too high and sometimes it’s too low. And you can use the data to figure that out. It’s not hard to figure that out. I can tell usually if a property’s going to go the first weekend. So do you want the property at the valuation you put it or do you want it at the valuation that some agent, who may not even know what they’re doing, listed the property at? Yeah, I totally agree.
David:
There’s another point there where when you’re selling your house, because I know a lot of our listeners, at some point, we’ll need to sell a house with an agent. There is a temptation to choose the agent that says, “I want to list it at whatever the highest price is.” It feels safer. Like, “Well, this person said $700, but this person said $800, I’m going to go with the $800.” And then it sits there for four months not selling and it becomes stale product and nobody’s seeing it in the searches, and the showings dry up, and you have to drop it to $700 and then you get offers at $650 because it’s been there for four months and nobody wants it at that price.
It’s your own fault because you went with the agent that told you what you wanted to hear versus the agent that said, “Let’s list it at $700, try to get several offers and now my skill as a negotiator will play and I will push those offers up to $750,” versus, “Let’s price it at $800 and maybe someone will write an offer at $750.” It just doesn’t work that way. That’s another thing I want to highlight. The skill of the agent you choose plays a huge role in how much money you make. But most clients, and I think you probably can both agree, have no idea if they got ripped off or if they won. All they know is what their agent tells them.
You both negotiated against other agents that did a terrible job, and you knew it, and you knew they cost your clients money because you knew you made your clients money. In order for one side to make money, somebody had to lose it. That’s the way that it works. And I’m sure those agents never go and tell their clients, “I screwed up. I listed your house too high. I got too greedy. I went on vacation for three days and didn’t want to answer my phone. And so, the buyer that we had moved on somewhere else,” whatever the case was. They say, “Oh, those buyers are just jerking you around.” It’s just be very careful who you choose as your agent and make sure they have a lot of integrity because they can color how that went down however they choose to and you won’t be privy to that information.
As investors yourself, I’m assuming that each of you have a different perspective when it comes to this. So I know, Dan, we’re still wrapping up on your deal here, but do you have experience with selling real estate where you feel like your experience as an investor is helping your clients because you can shoot straight with them where other agents that don’t own their own rentals, that need that deal to pay their mortgage, feel pressure to tell them what they want to hear?
Dan:
Yeah. You mentioned at the beginning I started as a poker player, so negotiation is actually my favorite part of being a real estate agent. I love it. And some agents don’t. They can’t sleep at night going through the negotiation process. But yeah, when you’re thinking for yourself, what is this property worth? And you’re evaluating it for yourself, you’re looking at properties completely different than an agent that has never bought an investment property or maybe even hasn’t bought a property themselves at all. They don’t understand how to evaluate the property and where the price should be because they don’t know what it’s like to have skin in the game and they don’t know what it’s like to have skin in the game over and over and over again.
David:
Jodi, how about you? Have you seen experiences like this?
Jodi:
Yes, absolutely. For example, I had a property. I had someone that called us that an investor wanting to do a full rehab on a property. And they called in our design remodeling company, and one of my salespeople went out to do the bid. They realized, “Hey, this person probably doesn’t need to put in $80,000 to sell the property.” They consulted with me, and they had multiple other agents that told them, yes, they need to put granite countertops in, they need to change the floors, they need to put in a roof.
And when my salesperson came in and said, “Hey, I want you to look at this property, they want to do a full remodel, I don’t think it’s necessary.” I evaluated it, looked at the comps and said, “Absolutely not. It’s not necessary. Put some paint on the walls and the property’s going to sell.” There’s no inventory in the neighborhood right now. So I put my investor cap on thinking, no reason to go in and spend all of this money to maybe make a $20,000 difference because the home’s not going to appraise if not. So, absolutely. I think many times as an investor, we put that cap on and think how we’re going to save our client’s money as opposed to making it the most beautiful home in the neighborhood and making our marketing collateral look good.
David:
Yeah, a lot of people don’t realize agents don’t get training in what they’re supposed to do. A lot of it is just whatever occurs to them is the right way to think about it. It’s sort of the Wild West, and that’s why choosing your agent wisely is so important.
One of the things that I’ll do, just like you said, Jodi, someone will say, “Hey, I want to sell my house.” And I’ll look at it. It’s not updated. It’s got the green shag carpet, the white tile, brown grout linoleum, the oak cabinets, wallpaper with sunflowers, just your typical, this is not going to show well. I don’t assume that they need to go spend a $100,000 to upgrade their house because they may only get A $100,000 back if they do that, but they spend three months going through this really annoying rehab that ruins their life.
I just look and see, well, how many actives versus pendings do we have? When there’s nine active properties for sale and one or two pending, there are too many homes for the buyers that are out there looking. And so, we are going to have to do something to improve the condition of this property if we even want a chance versus there’s one property active and nine pending, there’s so many buyers out there looking for these properties that you don’t have to do anything. They’re going to pay almost the same price because they have no other option.
And that little thing, I swear, agents don’t even think about it. They just go and look up comps and they get a price and they say, “Here you go.” They don’t call the other agents and ask them, “How many showings are you getting on your listing?” They don’t call the agents of pending properties and say, “What did you go under contract for? How many offers did you get?” That’s really the only way I’ve found to get a snapshot of what’s going on in the market, is to talk to the agents that have pending homes for sale and ask them, “How many offers came in? How aggressive were they? Would you price it at the same price? Would you go higher? Would you go lower?” But that one little thing will make such a big difference when you’re giving information to your clients.
So all of our listeners, as you’re going to choose your agent, hopefully you’re using the BiggerPockets Agent Finder to do so, ask questions like that. See if the agent… When you say, “What do you do to sell a home? How do you make sure I know I’m pricing it correctly?” If you just get a, “Um, uh, well, we look at comps,” probably not the agent you want selling your home.
And the same goes for buying a house. You want to be asking them similar questions to what you hear Rob and I asking on today’s show of Dan and Jodi, because you could tell from their answers they know their market, they know what’s going on, they know where the opportunities are, they know what to help you avoid, and that’s what you’re really looking for, especially if you’re investing in a market you’re not familiar with.
And if you like more information than how to do that, check out Long-Distance Real Estate Investing where I explain the process for doing so and having the right agent is a crucial piece in that puzzle.
Dan, Jodi, thank you so much for being here. I really appreciate you guys. Jodi, if people want to find out more about you, if they want to reach out, where can they find you?
Jodi:
So I can be found on thisislivin.com. There’s no G at the end. And on Instagram and Facebook, Thisislivin_Properties.
David:
All right, and how about you Dan?
Dan:
Dan Loves Houses everywhere, including my website.
Rob:
Nice.
David:
Is it like Dan heart for loves like the poker suit?
Dan:
No. That would’ve been great. No.
David:
Rob, how about you? Where can people find you?
Rob:
You can find me over on YouTube and Instagram at ROBUILT, R-O-B-U-I-L-T.
David:
Did you give up on TikTok because someone stole ROBUILT over there?
Rob:
No, I’m still on TikTok, but you get the good-good over on Instagram.
David:
There you go. You’re only giving us the best version of Rob, not the mediocre.
Rob:
That’s right, that’s right. The weird stuff is on TikTok, but the good stuff, Instagram.
David:
Yeah, if you want to get the best of Rob, it’s like the very end of the buffet. Don’t eat early, avoid the TikTok. Wait till you get to the end. That’s where you’re going to find the most expensive items. Don’t fill up on all the mac and cheese that they put out early.
You find me at davidgreene24.com or @davidgreene24 on Instagram or your favorite social media.
Thanks again, both of you. Really enjoyed having you here. Rob, anything you want to say before we get out of here?
Rob:
No. No. Thank you for your time and maybe I’ll be investing in Chicago and more in Houston with you all, so thanks. We appreciate it.
Dan:
Thank you. I really enjoyed it.
Jodi:
Thank you all so much. I really appreciate it. Thanks for the opportunity.
David:
This is David Greene for Rob “End of the Buffet” Abasolo signing off.
Is there any cheese you don’t think is great, if we’re being honest here?
Rob:
Blue cheese, like crumbles, not a fan, but I like blue cheese dressing for my wings.
David:
So you like rotten cheese in its liquid form, not in its solid?
Rob:
Well, when you put it that way, it doesn’t really change anything, but it does make me feel worse.
David:
Well, if you like blue cheese, you should check out some green cheese, and you’re going to hear more of that coming up now.
Rob:
Green Cheese, that was your nickname back in prison, right?
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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Parent of National MI grows its leadership team
Lesley Alli and Andrew Greenberg both joined NMI Holdings to serve as senior vice presidents, announced the parent company of National Mortgage Insurance Corporation Monday in a statement.
Adam Pollitzer, president and CEO of National MI, said that the addition of Alli and Greenberg would help drive value for borrowers, lenders and shareholders.
“We’re delighted to have two executives as talented and experienced as Lesley and Andrew join our strong executive management team,” said Pollitzer in a statement.
Alli was named senior vice president of industry relations and corporate communications. In this role, she will lead the company’s efforts in external public and industry relations, touching on corporate communications, public policy, government enterprise and agency affairs. Prior to this new position, she served as the chief investor and industry relations officer of Home Point Financial Corporation. She also held senior managerial positions at Federal National Mortgage Association (Fannie Mae) and Countrywide Home Loans, amounting to a 20+ years career in the mortgage industry.
Alli also received numerous accolades in her field: she was recognized as one of Housing Wire‘s 50 “Women of Influence” in 2021.
Meanwhile, Greenberg was promoted to senior vice president of finance where he will oversee investor relations, financial planning, analysis, data analytics and treasury. He previously served as senior vice president of business development and investor relations at Triton International Limited, a leading publicly-traded specialty finance company. From 2002 to 2014, Greenberg was a director of investment banking with Barclays where he led strategic advisory and capital raising efforts for financial institution clients.
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Opinion: Who will buy the mortgages?
The question many in capital markets have been asking since the GSEs were put into conservatorship is this: Without Fannie, Freddie, or the Fed, who will buy the agency MBS? Today we are seeing this play out with a shortage of MBS buyers to the tune of about $2 billion in demand per day.
Supply and demand — when demand is low, MBS prices will drop at sale and the corresponding yields will rise.
Late last year, Laurie Goodman, the famed MBS expert and a leader at the Urban Institute in Washington, penned an article in Barrons to explain why rates were so high. She gives a very thorough explanation as to why the 30/10 spread is so high, stating, “Before and during the Great Financial Crisis, the Fannie Mae and Freddie Mac portfolios essentially served as shock absorbers, buying mortgage-backed securities, or MBS, when spreads were wide, selling when they narrowed.
“In 2009-2010, the combined portfolios were over $1.5 trillion. In the wake of the Great Financial Crisis, Fannie and Freddie have been mandated to reduce their portfolio size. The two portfolios together are now under $200 billion. Meanwhile, the Federal Reserve was a fairly consistent buyer of MBS after the financial crisis, as part of its quantitative easing strategy. But as of June 2022, the Fed began to allow its portfolio to run off.”
Today, as Laurie points out, the GSEs are restricted in what they can buy. Per the 4th amendment to the PSPA (preferred stock purchase agreement), essentially the governing document for the two companies in conservatorship, it is stated clearly. Historically, the GSEs could make up for the short in demand if needed.
For example, if the current short was absorbed by GSE purchases, the spread between 30-year mortgages and and the 10-year treasury would likely collapse to it’s more normalized level, likely bringing mortgage rates down about 100bps +/-.
But the PSPA 4th amendment states the following: “Limit Future Increases to the Retained Mortgage Portfolio: The PSPA cap on the GSEs’ retained mortgage portfolios will be lowered from the current cap of $250 billion to $225 billion by the end of 2022, aligning with the FHFA conservatorship cap the GSEs are required to comply with today, while providing the GSEs with flexibility to manage through the current economic environment. As of November 2020, Fannie Mae’s mortgage portfolio was $163 billion, and Freddie Mac’s mortgage portfolio was $193 billion.”
So why haven’t we seen spreads wider more often since conservatorship in 2008 until now? It’s simple really, the Federal Reserve engaged in three rounds of quantitative easing post-2008 during the Great Recession and then another massive round in the spring of 2020 due to COVID-19 recession fears. They created the short in supply that pushes prices up and yields down.
The problem now is that we have the greatest quandary in the markets. We are missing the two largest buyers of MBS on this planet. And to top it off, the FDIC is auctioning off the MBS and Treasury portfolios of the failed SVB, Signature, and First Republic Bank, which only increases supply into the market.
In a recent article in International Banking, Viral V. Acharya, C.V. Starr professor of economics, department of finance, New York University Stern School of Business (NYU-Stern), and Satish Mansukhani, managing director, investment strategy at Rithm Capital, state, “The Fed is thus caught between a rock and a hard place, with the demand- and supply-side effects of its tightening working in opposite directions. Which way will the pendulum swing? It is hard to know, but this may precisely be why interest-rate volatility has remained high.”
This is not a small market. Agency MBS is the dominant feature of the mortgage market with an approximate $9 trillion in outstanding volume. The hole being created here is enormous.
So what are the options?
First is to just leave this alone and let the markets function without interference. This would likely be the goal of fiscal conservatives who have argued that this excessive involvement by the Fed and the GSEs over decades has resulted in the market dysfunction we see today. Industry vet James Johnson penned a great piece for Rob Chrisman’s daily report in which he describes the current supply/demand conundrum and calls the period we are in as the “great reset,” a very appropriate reflection on the scenario today.
But there are other options to consider, and the reason to consider other options is because this excessive mortgage spread is hurting the people that this current administration is the most concerned with protecting.
High rates make affordability a significant barrier to homeownership. And with no end in sight, we as a nation are likely to only widen the opportunity gap between wealthier Americans and those with less means. First-time homebuyers and people of color who often have less inherited wealth and lower wages are the ones impacted the most in a time like this.
More importantly, this scenario is the unfortunate outcome of putting too much stimulus into the economy during COVID-19 combined with supply chain shortages that resulted in hyper inflation, leading us to todays scenario.
So option No. 2 is this: let the GSEs use their roughly $119bb available in remaining capacity within the limits of the PSPA to begin some purchase activity. And if there was a modification to the PSPA to allow a slightly higher balance, the GSEs could do what they have done all during the Great Recession and the COVID-19 pandemic and act as a “shock absorber” as Laurie Goodman describes. They could become tools to help stabilize a scenario, much of which was the result of the same set of agencies that produced the environment we are in today.
The unfortunate reality is that the FHFA would likely come under fire for using the permissible balance sheet to at least help temporarily. And those attacks would be something the administration would like to avoid in a heated election period. But this is an option and one that could help — particularly those who need the help the most and are now victims of hyper inflation that they did not participate in creating.
America is a great nation that has risen to beat back the Great Depression, two world wars, a variety of other conflicts, the oil patch crisis, and more leading up to the Great Recession and the COVID-19 crisis. But for the American dream, now threatened by this supply/demand imbalance, actions by federal agencies that played a partial role in the current scenario are also the ones that can help to balance out this dysfunction. And the ones who would be most impacted to the better would be those that need the help from our nation the most as they have been literally priced out of the housing market altogether.
And yes, there are other challenges, beginning with this terrible dearth in housing supply. But to use other variables as an excuse to not help here is a difficult argument to justify.
The bottom line is this, we have lost the biggest buyers of MBS in the world and this could keep rates artificially higher than would be the case in a more balanced supply versus demand environment. This is a project for the Biden administration to lead, which should include the NEC, Treasury, the Fed, HUD, and FHFA.
David Stevens has held various positions in real estate finance, including serving as senior vice president of single family at Freddie Mac, executive vice president at Wells Fargo Home Mortgage, assistant secretary of Housing and FHA Commissioner, and CEO of the Mortgage Bankers Association.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Dave Stevens at dave@davidhstevens.com
To contact the editor responsible for this story:
Sarah Wheeler at sarah@hwmedia.com
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Rate lock volume plummets in least affordable housing market in 40 years
Rate lock volume fell 1.5% in August, the third consecutive decline as mortgage rates climbed to the highest level in more than 20 years.
Overall lock volumes were down 9.5% over the last three months and were 55% below that of August 2022, according to Black Knight’s August originations market monitor report.
“Interestingly, we saw very slight upticks in both cash-out and rate/term refinance locks in August,” Andy Walden, VP of enterprise research for Black Knight, said in a statement. “From what the data is showing us, much of this still very scarce activity is occurring among first-lien holders with older mortgages, or with particularly low balances, for whom today’s rates become less of an issue.”
Rate/term refis decreased 13.5% over the three-month period and 18.6% from the same period last year.
Purchase locks — which were down 1.9% from July and nearly 20% year over year — continued to make up 88% of all lock activity.
August was another rough month for mortgage borrowers from an interest rate perspective.
The 30-year mortgage rate climbed to nearly 7.3% to hit their highest level in more than 20 years before ending the month at 7.07%.
Demand for adjustable-rate mortgage (ARM) loans slipped to 6.56% of total locks as jumbo rates finished the month at 7.46%.
“Current housing market dynamics continue to put a damper on mortgage demand. Rates did edge down toward the end of August, but prospective homebuyers still face the least affordable housing market in nearly 40 years,” Walden said.
The average loan amount fell $6,000 to $352,000 in August, while the average purchase price on locked loans was down to $450,000.
The average credit score among primary residence purchase locks dropped slightly for the first time since November 2022, but remains close to an all-time high
Credit quality of conforming and FHA borrowers remains strong, but scores appear to have plateaued.
The average score for a conforming loan edged lower by 1 point to 753, while FHA increased 2 points to 671 and VA remained steady at 712.
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Housing inventory is barely positive heading into fall
Last week we saw a noticeable decline in new listings and active inventory was barely positive. Does this mean housing inventory has begun its seasonal decline? Here are the weekly numbers:
Weekly housing inventory
At first glance, it seems we’re now seeing the seasonal active inventory decline since new listings data fell noticeably and active listings slowed to where we almost had a decrease in active listing growth. However, one week doesn’t make a trend. Yes, we are at the period of the year where we traditionally see a seasonal decline, but we need more confirmation.
Last year, we saw an active listing decline in the same week but then listing growth continued until Oct. 28. However, in 2022, home sales were collapsing in the fastest fashion ever in history, so we must be mindful of comparing this year to last. That said, I hope we extend inventory growth longer before the seasonal decline. Here are the numbers, according to Altos Research:
Inventory growth has been slow this year, especially compared to last year. This is why I tell people to be cautious in reading too much into the negative year-over-year inventory since June 2022 will always be tied to the most significant one-year sales crash in U.S. history.
New listing data is getting interesting: two weeks ago, we had a noticeable decline from the trend and then a weekly rebound. I chalked it up to Labor Day holiday timing, but last week, we had a more noticeable move lower week to week. I am hoping we regain the previous trend next week. Here’s the new listings data since July 21:
We had an orderly, slow seasonal decline for some time, but the last three weeks have been bumpy.
Mortgage rates and the bond market
Last week, mortgage rates caught up with the rise in bond yields and rose as high as 7.33% before ending the week at 7.22%. The one critical level for me since we broke above my peak 4.25% 10-year yield call is whether the 10-year yield can break over 4.34%, which was the intraday high of last year.
So far, three attempts to break that level haven’t panned out, but I am focusing on it because a break above that level could send mortgage rates to a brand-new high for 2023.
Purchase application data
Purchase application data was down 2% weekly, making the year-to-date count at 15 positive, 18 negative prints and one flat week. If we start from Nov. 9, 2022, it’s been 22 positive prints versus 18 negative prints and one flat week.
Higher rates have slowed demand and sent purchase apps back to 1995 levels. But, the bar is shallow here, with the data line back to 1995 levels and we have to remember that purchase apps are very seasonal since total volumes always fall after May. Last year, when mortgage rates fell, we saw demand pick up a bit, but context is key; we are working from deficient levels today.
The week ahead: Inflation week again
We are at that part of the month where we will get the two inflation reports, CPI and PPI data, to give us a sense of where inflation is running. Headline inflation has increased recently with oil prices rising, but core inflation has more downside. The Federal Reserve is more concerned about core inflation data, which should be the key in this week’s CPI report.
Retail sales and jobless claims will also come out this week, so we have some key economic reports that can move the bond market. And of course that could also move mortgage rates since these two have been in a lovely slow dance since 1971.
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How to Work LESS and Earn MORE by Putting “Profit First”
We know what you want: more profit while working less in your real estate business. As a rookie, investing in real estate can sometimes seem like more trouble than it’s worth. But, a few simple adjustments can take HOURS off your plate while making you more money than you can imagine, as today’s special guest will demonstrate!
Welcome back to the Real Estate Rookie podcast! In this episode, we’re joined by Mike Michalowicz—serial entrepreneur, business coach, and multi-time best-selling author. Today, we’re dialing in on two of Mike’s books—Profit First and Clockwork—and discussing how they can help YOU in real estate. If you feel like you’re treading water with your real estate business, this is an episode you need to hear!
By turning the traditional profit formula on its head, Mike shows you how to rewire your brain and the way you think about profit. You’ll learn the importance of paying yourself first and building a buffer for the inevitable expenses you incur as a real estate investor. You’ll also learn about the first hire ALL business owners should make and how to free up more of your valuable time through the power of delegation.
Ashley:
This is Real Estate Rookie episode 320.
Mike:
What Profit First is, is we flip the formula to be sales minus profit, that equals expenses. In practice what you do is every time there’s a transaction we take a predetermined goal profit, remove it from the business, hide it away and then the remainder is what we run our business off of. It’s the pay yourself first principle applied to business.
Ashley:
My name is Ashley Kehr and I’m here with my co-host Tony J. Robinson.
Tony:
Welcome to the Real Estate Rookie podcast where every week twice a week we’re bringing the inspiration, motivation and stories you need to hear to kickstart your investing journey and today we’ve got one heck of an episode for you guys. We have the author, entrepreneur, coach Mike Michalowicz. He’s written tons of high selling books, super popular in the world of entrepreneurship and real estate investing. We had him back on episodes 30 for actually business, so the BiggerPockets Business Podcast. He was in episode 30, he was on the rookie show for episode 132 and he’s back today for another amazing episode. Mike has authored the book Profit First, he also wrote the book Clockwork and we talk about both of those books in today’s episode and you’re going to hear a lot of great information that applies to both real estate investing and entrepreneurship in general.
Ashley:
Yeah. Last time we had Mike on we talked a little bit about Profit First, which we’ll touch on again and then it was Get Different was his other book that we talked about but today our major focus is going to be on Clockwork. So Mike does a great job explaining as to how to delegate and that you want to give yourself time as an entrepreneur. So we’re going to go through creating not tasks for people to do for you but outcomes. So it’s a very interesting take here that Mike will explain as to why he doesn’t like to assign tasks.
Tony:
Mike will also get into, and I guess more so answer the question of at what point should I hire my first team member? How big does my business need to be before I should think about bringing someone on to help? I’m telling you guys, the answer’s going to surprise you 100%.
Ashley:
At the end of the episode, we have limited time with Mike so we literally just drill him with questions and he gives straight answers. There’s no time wasted in this episode, but at the end Tony and I will go through and recap the episode and why it is valuable for you as the rookie investor.
Tony:
All right. Before we transition over to Mike’s fantastic episode, which you guys are going to love. I want to give a quick shout out to someone that left us a five star review on Apple Podcasts. They go by the username of JR Schmitt 2012 and JR says, “This is the best information out there. Thank you for providing so much useful info, I haven’t made that first purchase yet. But I’m in the middle of moving to a new market and I don’t think I would be as confident as I am without this podcast.” Keep it coming guys. So for those of you that are fans of the rookie podcast or even if you just like me and Ashley, just an eeny, teeny, tiny little bit. If you can take just a few minutes out of your day and leave us an honest rating and review. The more reviews the show gets the more folks we can reach and we’re having an impact with this show and our goal is to impact more people, so take a few minutes and leave that honest rating and review.
Ashley:
So this week’s social media shout out is going to go to Real Simple Real Estate Gal. Andrea is sharing her journey, she has an experience in vacation rentals, fixer uppers, commercial and passive investing. So go ahead and give it a follow.
Tony:
Mike, super excited to have you back on the podcast. You were a guest back on episode I think it was 132 if I’m not mistaken, so we’re super excited to have you back. We talked last time about your marketing book Get Different, today we wanted to focus a little bit more on two books that honestly had a really big impact in my business and that’s Profit First and Clockwork. I want to talk about both, but if you can let’s maybe start with Profit First first and just kind of give us the 30,000-foot view. What does it mean to implement Profit First into your business and then I want to get into the details of how we can do that as real estate investors?
Mike:
Yeah. You got it Tony and thanks for having me back. I think it was episode 132B, if I remember correctly. So Profit First the 30,000-foot view is this. 17% of businesses are sustainably profitable which means 83% of small business, companies doing $25 million in revenue or less are not profitable. They’re surviving check by check, which is interesting because every entrepreneur I’ve interviewed has gone into business in part or in whole for financial freedom. So I investigated why are we not doing this? Is there something wrong with us? But that’s when I came across the traditional formula, the gap formula that says our sales minus our expenses result in profit. The problem with that formula, while it’s very logical does not make behavioral sense. It’s human nature when something comes last to defer it, delay it or never do it’s the Mañana syndrome. So most people wait for the profit at the end of the year, it’s not there and they say, “Oh, shucks.” Or a different choice word and then they try to do it next year and then they go oh, shucks again.
What Profit First is, is we flip the formula to be sales minus profit that equals expenses. In practice what you do is every time there’s a transaction we take a predetermined goal profit, remove it from the business, hide it away and then the remainder is what we run our business off of. It’s the pay yourself first principle applied to business.
Tony:
So Mike here’s my question, because most of the folks listening to this podcast are real estate investors and I think I can understand the concept as a traditional business owner that’s producing widgets or maybe it’s like a service-based business. But for someone that’s, maybe their income is not fixed necessarily but say it’s based on the rent that a tenant’s going to pay and there’s this fixed number that’s coming in every month. How do you kind of make sure that you can protect that profit? Because say I want my profit to be whatever, 20%. Right? But I have a water heater that breaks and now that month I have to dip into that but I don’t have the lever to increase the income. I guess how do you handle that as a real estate investor?
Mike:
Well, what we do is we start off with a lower profit percentage. I don’t suggest people go in super aggressive and then they say within a few months, “I can’t sustain this.” And they start stealing from their profit. So what we do is we start off very low, maybe one or 2% of a profit allocation. But there’s also other accounts accepting Profit First. So one may be maintenance or equipment, we know the hot water heater is going to go the question is just when? They have a lifetime expectancy, so we allocate money toward that. You start prepaying for that inevitable expense effectively. The other lesson from Profit First is when you allocate profit, if you don’t have enough money to pay your bills that says that there’s actually a mismanagement in the business. Maybe the rent isn’t at the right price, maybe it should actually be a little bit higher because if you want to have a 10 or 15% profit you must work within the confines of what’s available. So it starts teaching you to observe and figure out how to operate your business, maybe…
And I don’t know anything about hot water heaters. Maybe you can get a used one at half the price and it has a long enough shelf life or service life that it actually is a better move. So it forces us to think innovatively about operating a healthy business. The thing that Tony and Ashley, that most people do is they say, “I’ll be profitable one day, I have to…” I’m putting air quotes around that, “Have these expenses and one day it’s going to magically flip.” But what happens actually is we start getting this momentum of burden. We keep on keeping those expenses, hoping things will grow and as we increase our revenue the expenses increase at the same rate and we never break out of that paradigm.
Ashley:
Mike, I want to ask how should somebody find out what’s a realistic profit for them? They’re starting this new business or they just bought this rental property. What if they say, “I want to make $1000.” But it’s not realistic, they’re going to put themselves way into the hole. How do you go and figure out what’s that realistic profit that you can take each month?
Mike:
Yeah. So I wouldn’t start with a hard number like $1000 per month or whatever. I would look at a realistic percentage or a goal percentage and what I would do is look at my contemporaries and say what are they doing? Now here’s the key, don’t look at the average normal business because most businesses are not profitable. Look at the elite companies in your industry, the people who are really crushing it. What are they doing? And then back calculate their percentages, learn from them and you may be surprised how much business owners are willing to share. So learn what they’re achieving, make that your target and for some new businesses we actually start there. So they start with a very healthy number and they’re forced from day one to run a healthy business. Now, if you’re already established and you’re not profitable making an abrupt adjustment actually could hurt the business. So in those cases we usually start off with a very low profit percentage, one or 2%. The reason we start that low is it’s inconsequential to the operations, if a $5,000 rent check comes in 1% is 50 bucks.
So we’ll take 50 bucks, put that to profit and if you can run that property off of 5,000 you can run off of 4,950. But that 1% is highly consequential in that you start seeing that, “Oh, my gosh. I can take profit first.” Then over time we incrementally move it up which puts pressure on our expense, makes us pursue opportunities for increasing margins and so forth. So we say start slow and let it grow.
Tony:
Yeah. I love that advice Mike and I’ve taken a lot of what you teach in Profit First and applied it to my business and we’ve got 30 properties or so in our portfolio. So I’ve got quite a few bank accounts right now.
Mike:
Yeah, I can imagine.
Tony:
For people that are listening I’d say find a business bank that you like and Mike actually we use the same business bank if I’m not mistaken. But we use Relay Financial and yeah, I know that they recently rolled out a lot of the Profit First tools and we’ve had a relationship with them for a while and I’ve been begging them like, “Guys, you got a lot of this stuff. It’d be cool if the transfers could happen automatically.” And they just recently rolled that out I think a few months ago, so I appreciate you for pushing that on them as well.
Mike:
Oh, it was my joy. I worked in concert with them in implementing Profit First the right way. They’re the only online banking platform or any banking platform that does it. So a little pluggy if you don’t mind, if anyone wants to check it out go to Bank Like Mike. Because that’s who I bank with, banklikemike.com and it hooks you up with Relay. You can get your account set up right away, you can do accounts for different businesses all within one login. It’s a pretty cool setup.
Tony:
Mike. I want to transition to Clockwork because I think that’s another very important concept for new investors to understand and this is more so for our listeners right now. But I think a mistake that a lot of people make when they become real estate investors is that they only think of themselves as investors as opposed to business owners that are in the real estate investing space. I want to push more people to see themselves as business owners that are just buying real estate and not just isolating themselves. So can you define what it means to Clockwork your business?
Mike:
Sure. So Clockwork is where the business owner moves from the operational components to ultimately what I call the design components. We move from doing the work to designing a vision and how I explain this to entrepreneurs in any space is the number one job of entrepreneurs is to create jobs, not to do the job but to be a creator of jobs. There was an interesting statistic and I don’t recall the source, but it was about 15% of the global population will ever become an investor or start a business, 15%. So in kindergarten there was 30 students in my class, 15% if I run the numbers right is about four people. So four people started a business but here’s the most interesting statistic, less than 20% maintain a successful business. So you take that 15% times 20%, we’re talking about 3% total. Which means one kid, one kid from your kindergarten class is running a successful business and it’s you. Every other person is looking for a good job with a good business, so our job is to create jobs for people looking to work for good companies.
So that’s our job, you’re not an investor. You are building something that supports our economy, hopefully supports you very well and it has an opportunity to support other people. Our mission is not to do the work it’s to design that vision, to design the outcomes we want and empower other people to have a joyous experience in doing the work within our organizations.
Ashley:
Mike, a really hard thing for me has been letting go of control. Let go.
Mike:
You sound human by the way. You sound very human.
Ashley:
So how do entrepreneurs deal with that? They’ve become attached to their businesses and now they have to kind of learn how to let go and how do you balance that?
Mike:
So two things, first of all is to realize there’s two standards in the organization. There’s the owner’s perception, this is my standard and there’s the organizational standard and they’re two different things. But a person who says this is my standard, our organization needs to run at that level will constantly be inserting themselves to pull the business up to that level. What we need to do is to actually see what the organizational standard is by removing ourselves. So if we extract ourselves, it will settle somewhere but our job then is to be designers to figure out how do I take it from where it really naturally is without me and move it up through systems. So first the realization is they are two different things and we have to treat them that way. The second thing is… Well, I’ll give it through an example. I do a lot of presentations and I’ll ask an audience who here has a personal assistant? It always shocks me that it’s the minority who does, the majority of hands that go up respond to when I say who does not have a personal assistant.
Then I say, if you’re raising your hand right now you are the personal assistant and this is the first hire I think any business owner should make regardless of the size of your organization is get a PA. Virtual or otherwise, part-time or otherwise, but it’s not about having an assistant taking care of certain aspects of our business or our personal life for us. It’s our training as an owner that we need in the process of delegation, delegation is not the assignment of tasks, that’s called task rabbiting. Go do this, come back and I’ll give you the next task. What delegation is the assignment of outcomes, I need you to help me facilitate our organization in invoicing effectively and we give them best practices. This is what we’ve done historically but get us that outcome as opposed to task rabbiting do in return. It’s help us achieve X and once a business owner starts understanding the assignment of outcomes as opposed to tasks is when we become true delegators and the business starts growing without us and we can actually remove ourselves.
Tony:
Mike, I want to drill down on that a little bit. I love the idea of the delegation piece but how do I know… I guess two parts to this question. First, how do I know when I can afford to start that delegation? Because for a lot of small business owners the revenue is barely enough and to think about peeling some of that away to give it to someone else probably terrifies a lot of people. So first, how do I know when I can afford to do that? And then second, once I’ve made the decision I’m financially ready. How do I know which task to start delegating out?
Mike:
Those are great questions, Tony. So step one is you are ready now regardless of the size of your business and regardless of the income you have coming in. Because we can delegate to a part-timer, a contractual person, a virtual assistant for one hour a week. Again, it’s the training that we get, we start to learn this process. My first virtual assistant helped me three hours a week, they were offshore $10 an hour. I could afford the 30 bucks and actually even the 30 bucks was a little bit of a pinch but that was a great lesson in how to delegate and start building. Whenever I was delegating work and we weren’t achieving the outcomes that we’d agreed to, then I started focusing on what systems are missing and I started to improve the systems. So it makes you a great observer of your business, there is no excuse not to start today. The technique is through what’s called fractionalization, I think a lot of business owners and this is how I behaved. I said I need someone who’s like me, that’s probably the biggest mistake I’ve made looking for another Mike.
First of all, the world does not need another Mike between me and you. Secondly, it’s very hard to find a clone of you Tony or Ashley or me. We’re only one of us but if we break ourselves into pieces we can look at all the individual tasks we have. The first task to assign out is not the one you like least it’s actually the one that’s the easiest to sign out. Again, we need to learn how to delegate out work. So take that first thing off your plate that is easy for someone else to pick up and achieve the outcome you want. Once we start learning that, then we start getting rid of the stuff that we don’t enjoy necessarily and start assigning that as outcomes. My own organization here, we have 20 plus people. 80% are part-timers and there’s a massive market in my experience of people who are looking for part-time work because they’re not looking for a job to support a lifestyle necessarily.
They’re looking for a job to be an expression of themselves or just to get away from the routine of their life or whatever it may be. There’s a big market out there for part-time and contractual help.
Ashley:
Now when you’re hiring these people, putting together SOPs, so standard operating procedures. What are some tips you can give rookie investors when they’re starting to learn how to actually put together SOPs and run their business like clockwork?
Mike:
Yeah. So I’m going to give you an alternative to SOPs and this is a lesson I had when I met with my publisher, it’s Penguin Books. I went to their offices, this was many years ago as I was writing Clockwork and I met with my editor and there was this big book sitting on his shelf and all these other books displayed. I’m like, “Oh, that big one. Is it the Bible? The first one ever printed.” It was covered with dust. He pulled up and he was like in an Indiana Jones scene, blew it and this dust comes off and on there it said, “Penguin Random House SOPs.” I was like, “That’s everything.” It was like this big, I’m like, “That’s the Bible to the operations.” He’s like, “I’ve never looked at it.” That was this awareness that SOPs, while they’re the procedures that you expect people to follow don’t get consumed well and they take a lot of time to develop. The second challenge with SOPs is we’re in such a dynamic environment now, you can write an SOP and it may not even be valid within days.
As an example, we had a shipping SOP here and the day I released the 12-page SOP for shipping products. UPS updated its website and it no longer worked with my SOP and I was like oh my gosh. So here’s the alternative or the enhancement, I call them captures and what a capture is, is when you or someone else is doing the process to record it. There’s basically three ways we do things now, over computer like we’re doing now this could be recorded. We communicate verbally, maybe one-on-one that can be recorded with your smartphone or maybe we physically move something that can be recorded also with a smartphone. So as you do the process record it and give the instruction set over it. That’s step one, step two is you give it to the person that’s now going to be responsible for this and you say this is the best practice we have so far. Your job is to get us to this outcome, whatever the outcome we agreed to and follow this there.
But also improve it over time, then and this is the biggest component and the most important thing that almost no one does. Once it’s been properly assigned and the outcomes being achieved, maybe a few weeks or a few months later go back to that person now responsible for this and say record a training video, explain this process. The reason we need to do this is is the best student in every room is the teacher. Once a person can teach it, they’re showing they can master it. So it’s a way to show their mastery is by teaching it, secondly should they choose to leave you now have their best practice reserved and preserved.
Tony:
Mike, that was a big game changer for me. We leverage virtual assistants in our business, I have a personal assistant here. I have other team members here locally and that concept, that last little piece of having them redo the captures it blew my mind. But it’s been such an effective practice for them to really like you said understand what it is you’re trying to teach them, so I appreciate that piece.
Mike:
Oh, thank you.
Tony:
Last thing I want to call out before we let you go here, Mike. I know that you recently re-released Clockwork, there’s a revised and expanded edition. First, what prompted that and then what are some of the differences between the original version and the new version?
Mike:
Yeah, thank you. So what prompted it is this reader feedback, areas of confusion. Saying, “I don’t really understand how to implement this.” So those were opportunities to simplify. But one of the big ones was a reader emailed me and said, “I love Clockwork, I’m implementing it, but I can’t tell my employees about this because they’ll think that my objective is to sit on the beach drinking Mai Tai’s or something while they’re working in the sweatshop.” I was like oh my gosh, that’s the exact opposite of what I’m looking to achieve. What I’m looking to do is empowerment of our colleagues. As the business can run itself in our absence, that means our colleagues get to elevate themselves to the greatest of their capabilities. It’s the greatest compliment to our team, so that was another trigger to rewrite it. So every section now in Clockwork has a employee component, not just the business owner or the business leader but every single employee has a part of Clockwork I teach in there. Other concepts have been simplified.
I would say, actually I know that 60% of the book is brand new content and then the other 40% has been reorganized. So it’s 100% reorganized to be faster and more efficient and 60% new from the original book.
Ashley:
Well, Mike. Thank you so much for taking the time to kind of give this overview of Profit First and Clockwork. Where can everyone get copies of these books?
Mike:
Actually, it’s been my joy. If anyone wants to get a copy of these books or at least explore them before you purchase them, they’re on all the major retail platforms. But you can go to mikemotorbike.com. That’s my nickname, I think I told Tony this once before. That’s my nickname from grade school, it’s the only PG nickname I ever had. The other ones are too profane for me to ever buy that domain but if you go to mikemotorbike.com that’ll bring you to my website. No one can pronounce my last name, Michalowicz. When you land there, all the books are up there with free chapter downloads. I used to write for The Wall Street Journal, you can get those articles and I have a podcast too.
Ashley:
What’s the name of the podcast?
Mike:
Entrepreneurship Elevated, basically how to level up as an entrepreneur effectively.
Ashley:
Well, Mike thank you so much. This was a wealth of information and we were really excited to have you back on here. So thank you, everyone is going to get tremendous value from this.
Mike:
Ashley, Tony, it’s been a joy. Thanks for having me.
Tony:
All right. Ash, what a great conversation with Mike Michalowicz. You know guys I’ve enjoyed Mike’s writing for quite some time now and to kind of get him back onto the podcast and be able to dive deeper into two of his books that have had a really big impact on me it’s just really super cool. But Ash and I just want to kind of digest and point out some things that we thought were interesting or insightful or useful for you guys based on Mike’s conversation. So maybe let’s start with Profit First first. So I loved Mike’s definition of what Profit First is and why it’s important, so he said profit in his definition or the way that you calculate profit is the inverse of how you typically do it. Right? Most big businesses go sales minus expenses equals profit. Mike’s saying kind of flipped that on it’s head where you go sales minus profit equals expenses. I don’t know, just how did that jive with you Ash as a real estate investor? Because I know for me it was a little tough to kind of accept that initially.
Ashley:
Yeah. So my first question that I had was how do you figure out how much profit to take? So Mike did a great job of kind of explaining that to me as to the best way to do that and that was to take a small percentage. Start small, you can always increase it later on. I think what did he say? Just start with 1%.
Tony:
1%, yeah.
Ashley:
Of what your revenue is, that 1% and then you can always slowly increase it and it almost becomes a challenge to see how much you can actually increase it. But that was the part that I was like okay, so what if I go in and say I’m going to take $5,000 a month. How do I even pick that number? That becomes realistic. So his suggestion of doing a percentage and just starting that percentage small and just getting in that habit of using this formula of taking that profit first.
Tony:
Yeah. I think we didn’t get to touch on this as much in this conversation but one of the other kind of bank accounts that Mike encourages you to have through Profit First is you have your profit hold account like your profit account. But you also have an owner’s pay account and people oftentimes get those kinds of two things confused. But the distinction between the profit and the owner’s pay is that the owner’s pay account is what you pay yourself for the work you do in your business. The profit hold account is what you pay yourself for owning the business and a slight nuance but big difference there. So the owner’s pay is like if you’re still communicating with tenants, if you’re still writing up leases, if you’re still showing units, if you’re still managing contractors, if you’re still talking to guests, if you’re still doing pricing, if you’re still doing door knocking. The activities in your business, you would pay yourself out of the owner’s pay account. The goal is that as you kind of build your business up the allocation percentage for your profit account starts to get bigger. Right?
So you go from 1% to 5% to 10% and the allocation for your owner’s pay account gets smaller. So you go from whatever 50% or 80% if it’s just you at the beginning down to 50, down to 40, down to 30 and then that money from the owner’s pay account starts to shift towards paying your team members. But also now you’re able to start getting money from your business without you actually doing anything. So I love the idea of starting at 1% and then scaling it up from there.
Ashley:
Tony, what percentage did you start with when you started implementing Profit First into your business?
Tony:
Yeah. So we started off probably too high and then we kind of had to pull it down because we still have an owner’s pay account as well. Right? Because there’s still a lot that we do in our business that we’re still pretty active with. So I think right now our profit is at maybe 10%, somewhere in that ballpark is probably what we pull out and the goal is obviously to keep growing that. But we probably started off with single digits and we’ve kind of pushed it up since then.
Ashley:
Okay. Then we kind of transitioned with Mike to his book Clockwork, so this is our first time talking to him about Clockwork. We’ve had him on before to talk about Profit First, so it’s very interesting to hear more about this new concept that he has basically delegation. How to become a leader, how to hold your employees responsible but also you’re self-responsible too as the leader. I think he has a very interesting take on how he’s actually implementing that. So he gives the example of you’re on vacation or whatever and your employee goes like, “I’m stuck here doing all the work while the owner’s off gallivanting on the beach.” And he says, “I want the opposite effect. I want the employees to feel empowered like he’s gone, we can run the business without him. We know exactly what we’re doing, we have control and feel empowered from that.” So I think that was a really huge takeaway from me is that I want to be able to do the same.
Is completely walk away and everyone else is excited that they don’t need me to micromanage or to do parts of the role and for myself when I’m working on a project I actually do struggle when I need to get somebody else’s approval or permission or things like that. It definitely does give you a sense of empowerment when you feel very confident in the work that you are doing.
Tony:
I think one of the biggest points of that conversation with Mike especially about the Clockwork kind of framework, is that even if you are a real estate investor you are still a small business owner and I think that’s something that a lot of new investors forget. They put on this cap of real estate investor and they think that it means DIY everything and I’m a one man or one woman show and I got to figure all this out. But in reality the goal of what you’re doing is hopefully building a business that supports whatever lifestyle it is that you want. For a lot of people the reason they get into real estate investing is because they want more time and freedom, they want more flexibility but you can only really achieve that if you start to build a business around your real estate. So just first, I think that’s a really critical thing. But one of the concepts that Mike called out that I think is worth discussing a little bit more is the idea of delegation and he talked about the task rabbiting versus outcomes.
I think that’s a big mistake that a lot of entrepreneurs make is that when they bring someone onto their team in whatever capacity, full time, part-time, super part-time. Initially they’re just so overwhelmed with a lot of work they’re just like, “Hey, okay. Go knock this out. Okay, go do this. All right, go do that.” But the danger of that is that you condition your team to always come to you for, “Hey, what should I be doing next?” Mike’s suggestion of delegating outcomes as opposed to delegating tasks means that when you talk to your team member, whoever it is that you bring on. Instead of saying, “Hey, I want you to input this receipt.” What you tell your team member instead is at the end of the month when I go to run my books every single transaction needs a receipt attached to it. So very similar kind of ideas there but slightly nuanced in how you deliver it.
Now that person knows okay, once I finish this receipt I got to go to the next one and now every time a receipt comes in I’ve got to grab that. Then they might start to think okay, what’s the optimal way for me to capture these receipts from Tony or Ashley and get them into our QuickBooks software or whatever accounting software we’re using and they start to optimize that process. So that one really jumped out at me Ash about optimizing that process.
Ashley:
Yeah. I think the hardest part for me when bringing people on board, especially VAs and even employees too is defining what task they should actually do to assign on them and then when Mike says, “Well, it’s not about the task it’s actually about the outcome.” But I still couldn’t wrap my brain around as to what even those outcomes were. So something that really helped me was I was looking at what I was doing every single day and Mike talks about if you’re hiring your first person to delegate things to, it could only be three hours a week or one hour a day or something like that. You don’t need to hire somebody full time and that’s a great thing about virtual assistants is that you can hire them for just a little bit of time. I think my personal assistant VA that I just have to random stuff for me, last month I think she only worked maybe four hours for me, the month before that I think it was like 22 hours.
So it can definitely vary and that’s the nice convenient thing and when you’re trying to figure out these tasks, just start small. Even if it’s something you have to do once a month like pay a water bill that takes you literally five minutes. But those five minutes start to add up every single month and if you can find other five minute tasks you’re doing and fill a whole hour through a VA, that gives you back an hour of your time. Honestly the VA will probably do it faster than you, because they’re focused on doing that task where you as an entrepreneur are trying to do 20 different things at one time. You’re about to go pay the water bill and then you get an email about something else and then you’re like, “Oh, yeah. I still have the tab open for the water bill I better go back to that.” And then you get a phone call, all these different things happening and they can probably get it done faster than you actually can.
Tony:
One of the exercises that I did Ashley this last year that I thought was super helpful for me was that, everyone talks about the to-do list and here’s everything I need to do. I started to create a not to-do list, so anytime I found myself doing something that I didn’t want to do anymore I would capture it on the list. So as I started to bring people onto my team, my assistant, my marketing coordinator, our virtual assistants. I was able to say okay cool, this is something that I can delegate to them. A small example would be, we get invoices sometimes from brands that we work with for content or partnerships or whatever we do with some of these brands and some of them send invoices on a monthly basis. So I have to create an invoice for them. They’ll say, “Hey. Here’s what we owe you, create an invoice and we can get you paid.” Not a super time-consuming thing but it adds up to time over the course of a month and this kind of goes into the next conversation about the software that we use to kind of onboard these people.
But I would basically just create a video of myself creating that invoice and then when that person came on board I just shared that video with them. So I was both keeping track of everything that I didn’t want to do while also trying to easily document how to complete that task would be easier to train someone when they came on board.
Ashley:
As far as that list piece you talked about, I’m reading a really good book. It’s called Getting Things Done: The Art of Stress-Free Productivity.
Tony:
I love that. That’s one of my favorite books.
Ashley:
I’ve been jotting down notes. I actually started reading it very casual and then I restarted it so that I could take notes and everything like that. But that’s a great recommendation for anyone that wants to kind of get their priorities straight and maybe we have to get to David Allen on the show to talk about it.
Tony:
To come on the show, yeah.
Ashley:
Yeah.
Tony:
It’s literally sitting on my nightstand right now. I brought a bunch of books to the office and that’s the one that I left on my nightstand so I can… I like to kind of read through it at night before I’m going to bed right now. It must mean something, right? If we’re both reading that book at the same time, we’re at similar places in our lives where we’re just feeling overwhelmed and disorganized.
Ashley:
Usually all of the books that I purchase are because somebody shared them on social media and I don’t think it was you though, it was somebody else I think that shared that book on social media is the reason I bought it. Yeah.
Tony:
It’s a good one. But yeah, Getting Things Done by David Allen. There’s a whole community and there’s the GTD community and there’s a bunch of YouTube content around Getting Things Done. But anyway a really, really good book I enjoyed that one. I guess let me just share with our rookies some of the stuff that I’ve delegated in my business to both virtual assistants, regular assistants and just team members in general. So the content creation, Ashley and I on the podcast we created a lot of content and kind of taking these 45 minute podcast episodes and turning them into things that we can share on social media. I was initially doing that myself and that was a lot of work, so that was one of the first things that I offloaded. I found a virtual assistant overseas, I said, “Hey. I want you to watch this 45 minute podcast episode. Look for the pieces of the podcast that are maybe most insightful, most educating, most entertaining and turn that into a social media clip.”
I’ve got two VAs working for me right now that do that both for our YouTube videos with the Real Estate Robinsons, for all the stuff that has to do with the Real Estate Rookie. I have one of my actual assistant who’s here at stateside, she manages my inbox for me. So every day she goes through all of my emails and she kind of responds to whatever she can respond to. She’ll delegate to whoever she can delegate to and then only the stuff that she really can’t take care of herself she sends me a little list at the end of every night and says, “Hey, Tony. Here are the five emails from today that you actually need to respond to.” Then she’ll actually call me every day at 6:00 PM and we’ll go through those emails and then a lot of times in a quick 15-minute conversation I can give her the information that she needs to go and action it herself. So if you’ve emailed me recently and noticed that it hasn’t taken weeks to get a response, that’s probably why.
But there’s so many things you can do with your team that allows you to kind of free up your time to focus on what you’re most uniquely qualified for. What about you, Ash? How are you using them in your business right now?
Ashley:
Yeah. So I started a property management company this year just for my properties and for any of my business partners, any of their properties. So I’ve been really working on getting myself removed from that business. So I pulled up a list that I made for a leasing agent VA also kind of property management assistant. But I was going to just go through this quick of all the things that this one VA for $10 an hour will be able to do for me and it’s little things that just they’re super easy to do but they take up time to do. So the first thing is on the sixth of every month email tenants unpaid charges reports. So send them to the tenants that anybody that has a balance due, then the next thing is going to be on the 10th of every month email the attorney the tenant information for overdue charges to start eviction process. So it goes through the list of things to include in the email, who to email and then the follow-up. Okay?
And then the next thing, usually I do a Loom but for this one I did a Google Doc and I inserted screenshots. So I just take a screenshot of my computer and I’d put it in there, so I’m playing with what I like better as to doing it all as written out as Google Doc or do it as a Loom video. So one of the reason I’m trying it as a Google Doc is because I am working with this VA company who said, “Okay. Every day software, the internet something is changing.” And he said it’s way easier to go into a 20-page document and to change the one button that they need to now click instead of going and recreating a whole new video. So I thought that piece was interesting, but then also after talking with Mike it should be the person who is doing that role’s responsibility to go in and remake the video and show how the process should be done now. So very interesting.
Tony:
Can I just comment on that really quick, Ash? Because I love that just before I lose this thought. I’ve struggled with that too, but one of the things I’ve been trying to do is to break up my Loom videos into smaller chunks. So instead of doing one 20 minute Loom video that walks through every single step. I’ll do multiple, like a two-minute video, a two-minute video, a two-minute video, that way if one of those steps changes then it’s a little bit easier to kind of go back and swap it out.
Ashley:
Yeah, I do that too in the really small portions. Some of them are even a minute-long, basically how to click this button like here, go here to find this and then click this. But yeah, that’s a really great point to do that. But it is funny recording the Loom videos and talking to yourself while doing it, it’s very awkward to listen to it back. So then a couple other things they’re doing is like, okay, how to put the tenant into like they’re going into eviction, how to set their portfolio now within our system, then another task they’re doing is tenant gives notice to move out. So they get the email the tenant is moving out through their portal, what are the actions that need to be taken so that everybody on the team knows this tenant is moving out and then sending the tenant form for pre move out inspection. Sending it for the actual move out inspection, the start the unit turnover after move out.
So the steps they need to implement, so our maintenance team knows this turnover is going to be happening, here’s all the information that we need on our side. When are you going to schedule it? What’s the scope of work? Things like that, and then once the unit has been turned over closing out the turnover, listing the unit complete and listing it online. Then what happens when a guest card is received? What happens when a rental application is received and then turning an approved application into a move-in. So those are just things that seem really simple to do, but they take up time especially when they’re not things that consistently happen every month. Thank God we don’t have an eviction every month, we don’t have a vacancy every month. We don’t have something that needs remodel turnover every month. So those are just some of those things that I’ve put together that a VA is going to do for me and then also we have a VA that’s been with us for maybe three or four months now who does all of our payables.
So she actually enters all the bills. One thing I have hated so much is opening the mail. So we actually have a company now it’s called PostScan Mail, I think it is and they actually scan in all of our mail and then it just gets forwarded to her and she puts it into our software and enters the vendor, the amount, what property it’s for and then gets it ready to pay. Then at the end of the week, I just go through, I confirm everything and I hit pay, pay, pay, pay and it’s all bill pay.
Tony:
That’s amazing, I got to get that digital virtual mail thing because the mail in my house is getting out of control.
Ashley:
[inaudible 00:41:07].
Tony:
I want to comment on the… So what we just described is the right way to onboard that VA, right? You give them an onboarding plan, you give them SOPs, you give them instruction. We made the mistake when we first hired our virtual assistants of doing it the complete inverse, we hired three VAs all at one time. We had no formal onboarding process, we had no documented SOPs, we had all the knowledge. Right? There was a lot of tribal knowledge between me, Sara and our third partner Omid. But we had no documented resources. So the majority of our day for the first three months was us just responding to every single little question that our VAs had. But a lot of it was because we didn’t equip them with the right information and you thought that I would’ve learned my mistake the first go round, but I didn’t and a few months later we ended up hiring two VAs.
So those first three they did our guest messaging and they were kind of the front of house, and then we hired two VAs a couple of months later to take on pricing for us and unfortunately, I just let both of those VAs go last week and part of it was on me. But we just did not do a good job of really giving them the right understanding of how to manage pricing. So there’s a right way to do this and there’s a wrong way to do this and if you do it the wrong way it almost becomes more of a burden than a help. So you want to make sure you invest a little bit of time upfront before you bring someone on to at least give that onboarding plan. At least plan the first two weeks, and really make sure that once they check these boxes and I feel good about them doing this on their own. Because if you just kind of throw them to the wolves, both you guys end up in a less desirable situation.
Ashley:
Let’s go into a couple of examples of what everyone can use, so we talked about using Google Docs and then also Loom. So loom.com is a website where you can screen record but also talk, so it will record you talking and what you’re doing on the screen. So especially for somebody that is a visual person this is super helpful, instead of… I’ll read you one of the things on my Google Doc. It’s, “After you have the approved tenant by sending approval under the task menu, then start the move and process by clicking the third button down.” I know it’s not easy, and then I include the screenshot of it. But just being able to say and show at the same time, I think Loom is very valuable in that.
Tony:
And Loom also recently updated their product where they have automatic transcripts and the transcripts are pretty good, and they’ll even add automatic chapters to your Loom video. So they’ve made quite a few adjustments or improvements to the product to make it super easy. But the majority of our SOPs are done through Loom, and it’s been a super quick and easy way to train our team up. Another piece of software that we use is monday.com, but really you can use any type of project management software. So Monday is a big one, Asana, Wrike, I know some people use Notion, there’s tons of tools out there. I personally use Monday, I think Aah you use Monday too, right?
Ashley:
Yeah, I do.
Tony:
Yeah, and it is just a really cool place to a capture all of the tasks that need to be done on a regular basis. But we also store a lot of our Loom videos in a library inside of there as well. We have a section for all of our property details, so like hey, what’s the address? What’s the parcel number? What’s the short-term rental permit number? Who’s the mortgage with? Who’s our electric provider? Just all the details about the property we try and put into this Monday project management software as well. So I think having some kind of home base for that is pretty important as well.
Ashley:
Yeah, and that’s another great task for a VA too. Is every time you onboard a new property, what is the information they need to get? Because a lot of information you can find online and consolidate it like who’s the electric company? What’s the account number for the electric company? What’s the contact number for the electric company? Things like that. So as you are implementing this new property, having the list of all that information you want to know about that property and have them kind of piece it all together for you. We just started doing that recently with apartments down to the fridge model number, any warranty on it, pictures of the outside, the inside of the fridge. We’ve gotten so detailed as to what information we need to know about the property and like for the fridge for example, it just helps us know, okay, how long has the fridge been there? Should we just replace it anyways? If we call the appliance place, here’s the fridge model number so they can better assess like okay, here’s the parts we probably need to take instead of running back and forth, things like that.
The last piece of software I want to give you is Otter, which actually our producers use and it is an AI note taker. So if you just want to talk, you don’t want to type anything out. You can talk and Otter will actually write out your notes for you and then you can kind of go through and format them. But that’s another one to try to create your processes and systems to delegate.
Tony:
Yeah. Well, lots of good information. Hopefully our rookie’s got some value from that, right? It’s slightly a different angle, but I think information that’s beneficial about again, building that foundation for your real estate business and not just focusing on being a, “Real estate investor.”
Ashley:
Yeah. Tony and I have deep regrets, so learn from our mistakes of not hiring soon enough and not hiring correctly. So just take a couple tasks, I will challenge you this week to find one simple task. Go on a website like Upwork and find somebody to do that task for you. Like Mike said, even if you’re spending $5 a week that’s a cup of coffee nowadays. But yeah, just find one little thing you can outsource. There’s other websites too like VPM, Virtual Property Management so they’re more real estate specific. There’s Scale Virtually, they’re a little bit more expensive but there are companies out there that will find you virtual assistants. Tony, I think you said Pace Morby just started one maybe.
Tony:
Yeah, there’s a bunch out there. Virtual Staff Finders, another one OnlineJobs.PH, there’s a bunch of them popping up right now. So I think just spend some time kind of sourcing, interview a bunch, you might have to let go of a couple when you first start. But I think the sooner you do this the better and just the last piece I’ll share is some people think, okay, I need 100 units before this makes sense for me. My recommendation is that you hire especially the first virtual assistant on property number one, because if you can let that person grow as your business grows and they really get familiar with your business when it’s at a small level. Then it becomes easier to kind of add more people as you add more units and hopefully you can get to a point where that first VA that you hired is now the person that’s interviewing and hiring your other VAs and I have friends in my life who are at that level with their virtual assistant staff. So lots of ways to leverage your time better if you set it up the right way.
Ashley:
Well, thank you guys so much for listening to this week’s Rookie Reply. I’m Ashley @wealthfromrentals, and he’s Tony @tonyjrobinson on Instagram and we’ll be back on Wednesday with a guest. We’ll see you guys then.
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Revive launches AI-powered listing tool for real estate agents
Revive has released a new tool named “Revive Vision AI” designed to assist real estate professionals in property valuation. This AI-driven tool uses computer vision technology to evaluate the current condition of a property and provide a detailed assessment of its current market value and potential value post-renovation.
“Revive Vision AI” aims to provide a more precise value assessment than traditional automated valuation models (AVM) by analyzing property photos. It also uses Revive’s recommendation engine to offer renovation estimates supported by local contractors.
Some of the key features of this tool include:
The tool requires real estate agents to upload a minimum of 10 photos of the property. “Revive Vision AI” then compares these photos with similar properties in the area using images from MLS records. The tool applies advanced machine learning algorithms to the gathered data to produce renovation cost estimates, potential market values, and expected returns on investment.
CEO and Co-Founder at Revive, Michael Alladawi, emphasized that while “Revive Vision AI” provides comprehensive information, it should complement and not replace expert advice. Homeowners are still advised to seek guidance from industry professionals tailored to their unique situations.
Access to “Revive Vision AI” will initially be exclusive to agents affiliated with Revive, with details on subscription pricing to be announced soon.
This content was generated using AI and was edited by HousingWire’s editors.
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Opinion: Automate title status check info with AI
If you’re in the real estate industry, you certainly know that the average time from mortgage application to closing has been hovering around 50 days. It’s not a point of pride or badge of honor for any mortgage, title, real estate or valuation firm. If anything, it’s been one of the most stubborn (and most publicized) blemishes on the image of the entire home-buying process. Much of that average time to close tends to pile up in the title and settlement stage of the process.
Even many real estate professionals can’t really tell consumers what’s going on during that period. But most understand that there are a lot of phone calls, emails and texts exchanged. More than a few real estate agents have come to dread calling the closing company to find out when they can close. Loan officers dread having to email an appraisal firm for the report they’re waiting on.
Title agents dread being blamed by everyone from the buyer to the seller, from the real estate agent to the lender, for that delay that falls between the signing of a sales agreement and the signing of the closing documents.
We’re in an automation revolution
We’ve been in the midst of an automation revolution for some time now. Our industry as a whole has made tremendous strides in that regard. A potential homebuyer can today apply online and possibly be approved in minutes. More closings are happening remotely via convenient, digital processes. Consumers can tour a potential home without leaving their own living rooms. Yet, what’s often most remembered is surprisingly not the moment the keys are exchanged. It’s the unending back-and-forth from business to business and the waiting.
We can start with the little things
Status checks between different firms. Missing information that’s required to process the loan or finalize the closing. Small but vital tasks that fall through the cracks because someone didn’t get an email or went on vacation without others knowing where that task stood.
It’s also the sheer volume of questions asked and answered in the course of an extremely complex process and the typical consumer’s extremely limited understanding of that process. Also adding to the pressure to streamline is the overall economic trend toward nearly instantaneous, do-it-yourself purchases (a la Amazon), virtual tours for new listings and even a rise in FSBO listings. Consumers (and real estate professionals) are increasingly demanding that their transactions be conducted quickly, whether they involve socks, new cars or houses.
It’s also things like wire fraud, its potential, and some of the less effective or manual means of combatting it. It’s traceable to overuse and misuse of phones and email as project management queues and order-entry portals. In many ways, that 50-day turn time can be traced to the way we communicate with each other.
Does anybody inside the industry truly believe that a 50-day average is the best we can do, or that we’re making any more money because of it? Most likely the converse is true. While there’s not a single silver bullet out there to eradicate the root causes of that wasted time, knowing the cause of several of these inevitable delays is a great start towards streamlining them.
Where automation can help
It’s easy to think that investing in technology can solve some of our biggest communications bottlenecks. Where the right technology is strategically selected and wisely implemented and used, it certainly can. It starts with the planning. Owners and decision-makers should not start their search with a technology in search of a problem, or the coolest demo, but rather with a thorough diagnosis of their own operations. At what points in the workflow and pipeline does the march toward closing inevitably slow down or even sit for days?
Odds are, you’ll find that, especially in the title, escrow and settlement phase of the home purchase, your biggest time traps data entry, data extraction or moving a part of the file from one system, company or technology to another.
Look for solutions that can help remove as many silos from the process as possible. If you know that most of your biggest broker clients strongly prefer to work with text messaging for communications, rolling out another smart phone app to communicate with agents—especially when they might already have 10 other title agency apps they need to log into every other day—may not be the best way to streamline effectively.
Where it takes more than just tech to streamline
Admittedly, every settlement services business is unique. They serve different markets with different rules. There are many unique situations making it nearly impossible to build a universally applicable technology to create truly seamless pipeline.
If you look around, you’ll see numerous examples of otherwise efficient and effective employees doing the right job with the least effective tool. How many of your employees tend to use their inboxes and email folders as virtual project management queues or for some other function they weren’t truly intended to be?
How many of your teammates are using their personal cell phones to text real estate agents, unintentionally creating a serious business risk by using a communications channel which is unmanaged and unmonitored? How many voice mails does your team leave for Realtors, consumers, lenders or appraisers on a daily basis? How fast—if at all—do they get a return call that resolves what drove their call in the first place? How do your new orders come in? If you’re like many title agents, you get some by email, a few through an app or your website, a couple by text and maybe even something in the mail. How do you manage to get all of that information from different sources into the same production platform?
It’s not a simple fix, but odds are, as an industry, we could shave days or weeks off of the time it takes to finalize the closing by rethinking how we do it at the tactical level as well.
It takes a human touch to bring the American Dream to light, no matter how much we automate. It’s a myth to imagine that Chat GPT or Blockchain or some other technology will eventually automate the process 100 percent. Buying a home is a major event in many people’s lives. Most will wish to look to a knowledgeable source and experience human interaction at some point when buying or selling a home.
We’d be much better off, however, by reviewing our workflows and how we perform them. By attacking the many seemingly minuscule time wasters and introducing better means to-communicate—or even eliminating altogether the need to communicate in some places—we’ll improve the real estate transaction.
Hoyt Mann is a co-founder and president of McKinney, Texas-based alanna.ai, a conversational AI assistant for title agents.
This column does not necessarily reflect the opinion of RealTrends’ editorial department and its owners.
To contact the author of this story:
Hoyt Mann at brian@trueimpactcommunications.com
To contact the editor responsible for this story:
Tracey Velt at tracey@hwmedia.com
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