But before Jesse went on a literal wild ride through this high school, he faced defeats that would stop most investors in their tracks. After making just ten dollars per hour working under a flipper, Jesse tried to do his first deal himself, but things didn’t go to plan. He walked away from his first real estate deal in debt with a massive loss but decided to try again. Jesse learned quickly from his mistakes and started buying rentals in an up-and-coming area right outside of Pittsburgh, Pennsylvania.
David:
This is the BiggerPockets Podcast show 776.
Jesse:
I think it’s important to say when you buy a high school, the very first thing that you need to do is go buy some go-karts and a minibike and rip around the school on the go-karts and minibikes with your friends.
Rob:
Perhaps the best advice ever given on BiggerPockets.
Jesse:
Yeah, yeah. If there’s anything you take away from the day, it’s that.
David:
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast here today with Robuilt, Rob Abasolo, my co-host, and a very cool episode for you. Today, Rob and I interview Jesse Wig, an investor in the Pittsburgh, Pennsylvania area who’s also a real estate broker and salesperson who does a lot of different things in real estate and has put together one of the most unique deals I’ve ever heard of, which I’m sure Rob must have had you pretty gassed up. You like a good, unique deal. Tell me what you liked about today’s show.
Rob:
Well, first of all, I agree that it was a very cool show. And when you said that, I thought you were going to say, “Rob, joining me here in a cool shirt,” because I am rocking, I think, a shirt that I could see you wearing yourself. What do you think?
David:
You know, I don’t know if in my personal evolutionary journey I’m at the point where I can wear a John Mayer shirt. Oh, it’s his whole body too. Even worse. I thought it was just his head and a guitar. This is the equivalent of one of what a 13-year-old girl would’ve put on her bedroom wall of Leonardo DiCaprio or Jonathan Taylor Thomas, and you’re wearing it on your person on purpose.
Rob:
That’s right. Well, for me, I am a Meyer head, if you will. And speaking of being a Meyer head, today we’re talking actually to the unofficial mayor of Munhall.
David:
Yes, we are. That is Jesse’s nickname. And if you have been trying to figure out ways to creatively find deals in today’s market, you stumbled across the perfect podcast. This is a guest that has a strategy that I’ve never heard of that absolutely crushed it. Rob’s jaws and I were collectively hanging on the floor as we were listening. And if that’s not enough, he also gets into a strategy he uses to raise the comps on all of the properties he owns in the same neighborhood while giving practical advice for what you can do to sell your homes for more when you’re flipping. All that and more in an awesome show we have for you today.
But before we bring in, Jesse, today’s quick tip is simple. Consider the ways real estate makes you money that you may be taking for granted or unaware of. Today’s guest, Jesse, has found several ways to create wealth that you may have never even considered, and this could open your eyes to possibilities that were right in front of you the whole time and you never even seen them, just like the love interest in a romantic comedy. Rob, anything you want to add?
Rob:
Just quick tip number two, buy the shirt at the concert. If you’ve been skipping out on t-shirts, I know they’re 50 bucks. And if you’ve gone to concerts for 10 years with the same artist, just buy it live. You only live once, David. As the millennials would say, YOLO.
David:
Yeah. So if you’re feeling really bad about how your real estate investing journey can turn out, just look at Rob wearing the shirt. You’ll immediately feel better about yourself. This is actually the feel-good episode of the year. Without further ado, let’s bring in Jesse.
Today’s guest, Jesse Wig, is an investor and broker. He lives and invests outside of Pittsburgh, Pennsylvania, the proud dad of two pit bulls and soon to be dad of a human. Jesse, welcome to the show.
Jesse:
Thank you very much for having me. I’m happy to be here.
David:
Yes. Now, first question, once you have a human child, does that mean you are going to stop referring to yourself as a dad because you have two dogs?
Jesse:
It’s like the hardest question in the beginning.
Rob:
Got him. I love this.
Jesse:
Yeah, the hardest one out of the gate.
Rob:
I love this. I don’t think we’ve ever stopped someone right out the gate, David.
Jesse:
I know. And I have to… Oh, no, I’m going to get sidetracked. I said, it’ll be easy. I’m going to talk about myself and I’m going to talk about real estate. Look, I’m looking forward to having a human baby. I’m looking forward to having a human baby.
Rob:
Nice.
David:
Wow. What a political answer. See, this is what’s happening. He doesn’t want to offend PETA by saying, “Yeah, I’m going to stop calling myself a dad” because of animals, but he also doesn’t want to offend all of the human race who’s like, “Why do we call people dads because they have dogs?” And that was not fair of me to start this thing off, but I’ve always wondered, it’s a trend right now to say that you’re a dad or a mom of animals. Everybody’s doing it. And I’m like, “But I don’t know anyone with kids that does that.” So I always wondered.
Jesse:
So I’d be like, I still have three kids now once I [inaudible 00:04:24].
David:
Yeah. No one does that. That’s what I mean.
Jesse:
Yeah, right.
David:
Once you have a human baby, no one says, “I’m a dog mom anymore.”
Rob:
Oh, I see. I see.
David:
They’re like, “Now you’re a real mom, right?” I just said real mom. I might have just offended PETA there. If you’re listening to this podcast and you’re an animal parent, please don’t complain. We love you. But yes, this is a tricky thing. So I’m curious, Jesse, how that’s going to work out. You’re going to have to let me know once the baby comes.
Jesse:
Oh, of course. Of course. Yeah. I made notes.
Rob:
And I’m curious about your real estate journey.
David:
Oh, yeah, I suppose. We could talk about that, I guess, if you guys want to be boring. So today we’re going to dive into an unusual but highly lucrative deal that you were a part of. A couple rapid fire questions to give us the quick stats on that before we get into your story. First off, what kind of property is this?
Jesse:
Sure. You’re talking about the school. Yeah. It’s a 55,000 square foot Catholic high school that myself and my partners purchased.
David:
Officially the first person that I’ve ever interviewed or even met that turned a school into housing. This is super cool.
Rob:
This is cool.
David:
What did you pay for this property?
Jesse:
$100,000.
David:
$100,000 for an entire school?
Jesse:
Yep. Yep.
David:
Okay. We’re going to have to figure out this thing. What’s the cash flow right now?
Jesse:
Let me say this, we probably generate close to 41,000, 42,000 a month gross income from the building.
Rob:
Wow.
Jesse:
I’m going to say that, yeah.
David:
Are we going to get the details later? Are you going to tell us what the net profit is?
Jesse:
We’re probably around the ballpark of netting low 20s a month.
Rob:
Yeah, I already knew I was going to be mad. Like you said, you bought at school and I was like, “Oh, I already want that.” And then you’re like, “We bought it for 100K,” and I’m like… To squeak out a decent return, we’re talking like 20K profit a year and you are effectively getting that a month, so I’m mad. You’ve made Rob mad. Congratulations.
Jesse:
Well, listen, if it makes you feel better, I bought it and I was a sole owner, and then I’m currently only the minority owner. So that’s not all going to me.
Rob:
Okay, okay. That’s fine. I’m less mad.
David:
But yeah, that probably just means that you made a bunch of money selling ownership of the property. So it’s not cashflow, but it’s even better.
Jesse:
I feel like I had a really good deal.
Rob:
Cool.
Jesse:
I feel like I had a really good deal.
David:
Well, you officially turned my partner Robuilt into Robummed, and I’m curious to hear how you did that. Now, before we get into it, let’s hear about how you got into real estate. What were you doing before real estate?
Jesse:
Yeah, so I was working at a juvenile delinquent independent group home. Pretty toxic environment. I was ready to get out of it. I knew an individual that was in Pittsburgh, Pennsylvania that was flipping homes. So I moved two hours south from Erie, Pennsylvania and started working as a laborer, punchlist guy on this house the individual was flipping at 10 bucks an hour. I have a really interesting story about being there if I can share that with you.
David:
Yeah, let’s hear that.
Jesse:
So this is part of my story, I’ve told it many times, but at one point when I was working on this home, I was laying on my chest for a week straight on a pillow with a dental tool carving out grout lines that the agent had found three or four layers down in the kitchen. They wanted to keep this tile, so it was one inch by one inch tile. And so for a week straight, I’m carving out the grout lines because they’re so black and filled with different dirt and such. So we acid cleaned it and a couple of their options just didn’t work very well, so just scraping out these grout lines for a week at 10 bucks an hour. And I got to tell you, at one point, laying on my chest cold, because the tower was just so cold, I was like, “I think I made a mistake.” So yeah, that was the beginning.
Rob:
Did it make you want to go back to the previous job or no?
Jesse:
At times. Because the previous job, I became an assistant supervisor and you had the ability to sleep in the unit and get time and a half. You just needed a staff on site. So there was some perks about that job, but ultimately I decided, no, I’m going to stay in real estate and I’m ready to make some moves.
David:
This sounds like the beginning of a Disney movie where you’re working for free in an orphanage situation, and they’re like, “Okay, now get on your hands and knees and peel potatoes all day long,” and you’re like-
Jesse:
Similar.
David:
…. languishing away, crawling on your belly on tiles scraping it with a iron toothbrush, wondering like, “Someday my prince will come.” But you didn’t wait for your prince. You went out and made it happen. So this is a pretty cool way to start the hero’s journey. What did you do on your first deal as an investor? How did you get out of tile cleaner into real estate owner?
Jesse:
For sure, yeah, so that didn’t go very well either. However, the individual I was working for, I said, “Hey…” I was about six months in just construction, punchlist labor stuff for this guy, and I said, “Hey, I want to flip a house. What do I do?” And he’s like, “Find some private money. Find a house that needs work,” handful of different things. I started working with the real estate agent up in Erie, PA. That agent is now my wife, so I married my realtor.
Rob:
Oh? Wow.
Jesse:
Yep. Yep, interesting story there. So the first house I purchased, skipping a lot of details, I probably overpaid. I under budgeted. I didn’t know what I was doing. I didn’t calculate for property tax, for interest payments, for heating bills. Just lack of experience, just young and ready to make moves, right? My buddy and I flipped the house, did all the work from YouTube videos. And when that house did end up selling, I lost $43,000 in the first house I flipped.
Rob:
Okay, so let’s talk about that. People always talk about their losses and they’re always like, “Yeah, the first house I lost 60,000. I lost 43,000. Did you just have that chilling in your bank account? What happens when that happens?”
Jesse:
Man, what an interesting story. So at the time that I’m renovating this home, I am bar backing, so I’m not making money. When I needed to pay interest payments or property tax on the home, I was borrowing money from my friends. I borrowed a couple grand here. I borrowed four grand from my girlfriend at the time, now wife. So I just started borrowing money. I had no money at all. So the funding on that deal was a first position from a standard hard moneylender and then a second position of a smaller amount from a friend of mine that I connected with at a 20% interest rate, by the way. Just knowing nothing, I was like, “Hey, how about 20%?”
Rob:
That was your friend, this?
Jesse:
“That sounds good.”
Rob:
Your friend?
Jesse:
Yeah. Yeah.
Rob:
I don’t know if they were your friend, I’ll be honest.
Jesse:
Right? Well, he likes to make money. He’s a businessman.
Rob:
Okay. Okay.
Jesse:
You know what I mean?
Rob:
I can’t blame him.
Jesse:
So once I finished the house, I moved to Pittsburgh. But the house didn’t sell for about a year and a half later after it was finished. So probably six months in, nine months into sitting on the market, I’m like, “Wow, I’m going to lose money.” So I realized I’m going to lose money. I honestly had no money. When I moved to Pittsburgh, I moved in a very rough house intentionally to start saving money. I was starting to save money, trying to get caught back up, getting prepared. When the time came that the house was sold, and I was going to lose that $43,000, the first investor was going to be fully paid off, I believe, if I remember correctly, or very close to it. Full principle amount plus interest. And then that second investor, I went to him, I said, “You have to sign off on this loan. You have to satisfy the mortgage and I will pay you back.”
So when the time came, I was hustling. I had a little bit of money saved up. I sold my vehicle. It was a decent vehicle, it was a Chevy Tahoe, and got a little money from that. Bought a thousand dollars like Chevy Cavalier or something that I’m driving. I was able to come up with about $20,000. So I have that 43 grand I owe at the closing table. I was able to come up with an extra 20 grand, so I paid him. Now I’m down to broke, back to zero, and I told that investor, “Give me time. I’m hustling, I’m making moves. I got my real estate license. I’m down in Pittsburgh and I’ll pay you back.” It took me about a year and I was just grinding, hustling. Probably a year, a year and a half, and I paid him off.
Rob:
Wow, okay. And were they amendable to that or were they like, “Okay, this is our last deal moving on from here”? Or did they respect that you were able to make it happen?
Jesse:
I mean, I have a great relationship with them today. So yeah, I mean, I think they believed me. I made a mistake, but I’m a man of my word and there was zero question that I would make them whole and I did. And I didn’t just make them whole in their principal amount, I made them whole on the full interest. And that 20% continued to accrue during that time period.
Rob:
Cool.
Jesse:
So there was no adjustment whatsoever.
Rob:
Good for you. That’s really, really, really great.
Jesse:
Thank you.
Rob:
Yeah. Follow up question not as important or impactful, but when you say that the realtor was your now wife, did you meet said realtor for the first time on this project?
Jesse:
So I was introduced to said realtor by a friend of mine, and she said, “I’m getting my real estate license” and I said, “I’m looking for a flip.” She said, “Okay, I’ll help you out.” I said, “Perfect.”
Rob:
Okay. All right. So that’s a real ROI right there. You got a wife, congratulations.
Jesse:
Well, you know what I said? 100%. 100%. What I do want to say is that, yeah, my very first experience with my wife, I lost $43,000. So I give her a hard time. But no, I couldn’t be happier, couldn’t be happier. It was amazing.
David:
All right. So that was a pretty gnarly entry into flipping a house here. What got you back into investing after that?
Jesse:
For sure. So I mentioned earlier I got my real estate license and I moved to Pittsburgh while that house was still on the market waiting to sell as a flip. I got my real estate license and was just hustling as a real estate agent. And I knew I wanted to get back into investing, but there was a lot I had to learn. So when I was down here, I was just doing a lot of networking, connect with people, asking questions, learn as much as I could. And I had to make up for the 43 grand I lost, right? And so I gave myself a little bit of time and just understood real estate better and the real estate market in Pittsburgh and then kind of weighed my options of how can I get back into it and mitigate my risk a little bit from a financial standpoint.
David:
Do you remember what some of the things were that clicked in your mind during this period of learning real estate better? Was there specifics you can point to where you were like, “Oh, I thought it was this way, but I realized it was that way” or a pattern that you recognize? Anything for people that are in that same stage of, “I’m trying to learn real estate,” but they don’t know what that means?
Jesse:
The first thing that comes to mind, and I hope this answers your question here, but the first thing that comes to mind now is I very rarely do a deal now unless I feel like I have at least two exit strategies. When I went into that first flip, I didn’t know what a BRRRR was, right? It was like, purchase this, renovate it, sell it, right? And there was no backup options. But looking back, if I was in the same position, the amount of knowledge I have now, I would’ve refinanced. I would’ve made a couple adjustments and probably got out of that for little to no money out of pocket. But yeah, the biggest thing I would say is just having two exit strategies when you’re entering a deal.
David:
So you learned how to analyze a property for cash flow? You learn-
Jesse:
100%.
David:
Right? And that was before you just knew about flipping houses, which I think is where everyone starts, or at least the uneducated about real estate looking at it like, buy low, sell high, because we all understand that concept whether it’s stocks or whether you’re trying to buy a couch and sell a couch for more, you’re making money on Etsy. Buy low, sell high is something we all understand. And that was how you got into real estate with just that one track mind and then you started to learn what buy and hold real estate looked like.
Jesse:
For sure.
David:
Maybe what neighborhoods were better to have tenants in. You started to evaluate like if this property would cash flow or how much equity would have. Is that what you’re saying when you’re saying you learned how real estate worked?
Jesse:
Yeah, that’s accurate information. Yeah, you’re right. Underwriting the deal, understanding your options more. It was limited knowledge and in just one track mind. It’s the perfect way to put it.
David:
And where did you go to get this information at that time?
Jesse:
I had a mentor, the individual that was flipping houses that I started working with for. So when I say that, I ask them a handful of questions, but I just kind of… And this is good and bad about me, I just kind of make moves. I just pull the trigger and I get things done.
David:
You learn by doing is what you’re saying.
Jesse:
Yes. And so like I said, that’s good and bad about me. I work with a life coach and we establish very early on that I have an alter ego and his name is Kane. So we got Kane and Jesse. And it’s the way I operate. Kane kind of runs a show a lot of times. So we just pull the trigger and make moves, which is helpful and hurtful at times.
Rob:
I think it’s a good thing. I was actually just talking to a student last night who they’re like, “Yeah, I don’t know. It’s a bad habit. I just do things when…” I’m like, “No, I think that’s the most important skill you can have because you can figure it out on the back end. Whereas most people try to figure out on the front end and lose every deal that ever comes across the table.” So I think obviously you need to counteract how quickly you act after you take action and you need to make sure that your ducks are in a row, but I think acting quickly is the number one skill you can have as a real estate investor personally.
Jesse:
I couldn’t agree more. There’s no question whatsoever that the reason I’ve reached a level of success is because I take action.
David:
Yeah. And in general, if I had to pick between the person that carefully analyzes every step, my personality is probably more that way, which is why I end up being a pretty good educator because I have to understand every single piece of the engine before I trust to get in the car and drive it, versus the person like you that just jumps in and does it and figures it out as they go, your personality will ultimately learn faster and be more successful if they don’t quit. So I don’t want anyone to hear this and think like, “Oh, you’re being reckless.” The key to people like you is learning if you know you’re just going to jump in and do things, mitigating risk becomes incredibly important. You don’t want to put your whole nest egg into the first deal when you don’t know what you’re doing and you’re trying to figure it out, right?
Jesse:
For sure. For sure.
David:
It’s like learning how to know, “I’m going to make mistakes. It’s going to bleed money, but I’m going to learn quicker so I make sure that I don’t lose all my money or all my time or all my opportunity” is extra important. So getting back into moving forward for you, walk us through your strategy for how you’re increasing value and setting your own comps now that you understand real estate better.
Jesse:
Yeah, for sure. So after I moved to Pittsburgh, I moved to an area called Homestead, Munhall West Homestead. It’s three boroughs all kind of together here, literally across the river from Pittsburgh. I saw that there was a lot of opportunity here in real estate. To be very frank, the area is a little rough in sections, but there was a lot of opportunity based on location, some of the development that was already in the works right there on the waterfront. And so I realized that being an agent, I worked with a lot of buyers and so I can understand what is interesting or appealing to them. And so I realized there was an opportunity here to where if you can create a cool enough product, a trendy enough product, then you can kind of pull buyers to a certain area. You can get this house for 115,000 or 150,000, you know what I mean, after renovated.
And so what happened was, or what I do I should say, is the concept is fairly easy. I’ll buy five homes all in the same area, okay? All five of those houses I’ll renovate just as nice, except house number five might be on a street that’s a little bit nicer than those other four homes. In addition, I’ll put a little extra money into the house that I’m going to sell. The items that I put money into doesn’t necessarily make the home more valuable from an appraisal standpoint, it makes it more valuable from a… It’s like more sellable, right?
David:
Yeah, you’re going to sell it quicker.
Jesse:
That’s right. If a bedroom has an accent wall, it looks cooler, it’s trendier, but it’s not going to appraise for more, okay? And so what I do is I renovate all five. I place tenants in four of those homes. House number five, I put little more money into it and I sell it for as much as I can to create a comp and increase the value in the area. So from a flipping standpoint, I’m different than most people because all of my efforts are in one area. And so over the years, I’ve increased the comps to… And now when I say this, it doesn’t mean all the houses were the same criteria. Some were a three bed, some might be a four bed, but it can show you that general idea.
The first house that I flipped, purchased, renovated, the resale number was 115,000. That was a big deal for the area, okay? 115,000, 150,000, 190,000, 212,000, 270,000, 425,000. And so all of the homes that I own in this area are continuing to increase in value because of the comps that I’m creating. So I play a big impact in this market and I’ve been doing it for years now.
David:
This is why it is so important to have a good real estate agent selling your houses if you’re flipping homes, if you’re just selling anything because the point you made gets missed on so many people. Value can come in many different forms. Just when you think about how we determine what a property is worth, there is not one singular agreed upon metric for determining what it’s worth. There’s what an appraiser would say it’s worth. There’s what a different appraiser would say it’s worth. There’s what it’s worth from a cash flow perspective. There’s what it’s worth if you were to sell it the versus if you were to hold it. There’s what it’s worth to a buyer on the open market that really wants it.
Real estate, we talk about it as if it’s this objective numbers oriented entity, which you do have to approach it from that way if you’re trying to make money, but values are incredibly subjective. Your point really highlights that that an accent wall, to an appraiser, is worth nothing. They’re not going to give you the extra $12 of value for the paint that you put on it. But to the person who’s buying it, it might make them pay five grand more than a different house that had the same bedroom bathroom count because they want to make sure their offer gets accepted, not someone else’s.
Real estate agents who live in this space, we see this all the time. We see the people that come to us with a home and we know this is going to be hard to sell. It’s got outdated stuff. It looks ugly, it smells musky. But the person who owns it says, “It’s got the same bedroom and bathrooms as that house that sold for 270,000 why would mine only sell for 220,000? You’re ripping me off.” But we know that house had a landscaped yard, really pretty area, nice view, closer to the school. It got four offers, that’s why it sold for 270,000. Yours is going to get zero offers until it sits on the market for two months, and then we reduce the price.
Jesse:
Yeah, absolutely. It’s a very good point and very accurate. Because I mentioned this earlier, being an agent, I have good insight to what buyers are looking for. And the truth is, the vast majority of time, people are pulled or there’s heavy emotion involved in the home. And if it’s a really cool, really trendy house, people are willing to pay more. Period. So it is not a sure thing you’re going to get the appraisal, and there’s challenges with that every time, but that has worked for me so far and I’m continuing to do it well.
David:
Well, it’s tiny little piece of information that lead to big results. Rob, what do you think about this whole thing? Because you’re not a real estate agent, but you’re kind of a fly on the wall right now.
Rob:
So the thing that I’m looking for clarity on is when you were talking about the strategy, I thought you were saying that you were making one really nice so that you can sell it at a higher rate so that you could sell the other four basically. But it sounds like you just placed the tenants on there. So what is the purpose for making that fifth one nice and selling it at a higher one if it’s not necessarily benefiting like your next flip? Does that make sense?
Jesse:
I think I follow what you’re saying. So let me try to answer that for you. The idea here is that I’m not looking… And that’s the way I say I’m a little abnormal than other people. I’m not looking to make money on my flips. I’m looking to increase the value of the home in the area as much as I can because that will build my net worth from an equity standpoint on the four homes that I keep-
Rob:
Got it. Got it.
Jesse:
… the tenants are in place.
Rob:
Got it.
David:
So let’s say you break even on the flip and you bought it at a price where all the homes were valued around 200,000 and you’re able to sell it for 250,000, but you broke even for whatever reason. You have four other homes in that neighborhood that were valued at 200,000 that now get pulled much closer to 250,000. Theoretically speaking, if every one of them goes up by 50 grand, you have four of them, you just increased your net worth by $200,000 by breaking even on a flip.
Rob:
Oh, okay.
Jesse:
Exactly. And so that’s why I’m willing to… That’s where all my efforts are here and that’s where I’m focused on. I’m very long-term goal oriented and I’m working on building my net worth, not the quick buck on the flip, right? And so yeah, I’ve continued to build value in the area and build equity.
David:
Oh man, Jesse, I love this man.
Rob:
Yeah, I’m really glad I clarified that because that is genius because you basically made 200K on that flip.
Jesse:
That’s exactly right. And the truth is, there’s times, like one of my most recent flips, I mean we worked on it for 12 months. It was a very long project and I made 10 grand. When I say make 10 grand, if I work on a project for 12 months and I walk away with $10,000, I lost money.
Rob:
Right. Right.
Jesse:
But the increase in value of all the other properties. And what’s funny is that it’s a small community and there’s a lot of people that have lived here his whole life. And every time I list what I call my comp setters, people are like, “No way. There’s no way you’re selling that.” And I have every time. You know what I mean? I’m not saying that’s going to continue, but it’s worked.
David:
Here’s why I think this is incredibly important for everybody who’s trying to make money in today’s market. It is harder than I’ve ever seen, Rob, I think you probably agree, to cash flow and to make money in real estate right now. It’s possible to do as a house flipper, it’s getting close. I don’t want to say it’s impossible. It’s getting incredibly difficult to find a good cash on cash return on real estate because of the competition we have. And in order to thrive in the market we’re in right now, you have to break out of the cash flow microscope that you’re just looking at this one way to make money in real estate. You make money several ways in real estate.
And I’ve been talking about a better way to look at money rather than just cash in the bank is money is a store of energy. The store of energy that we call cash is when you keep money in your savings account or in your checking account. And flipping houses, if you do it well, can increase your energy in that storage vehicle. But it’s ineffective because you have capital gains taxes, you have risks that you’re throwing into this entire thing. You have market fluctuations where you can actually lose money. So you try to flip a house and lost $43,000 out of that specific storage.
Equity is a different way of storing energy. It’s stored inside of the asset. And your strategy, though it’s semi complicated, although it’s actually somewhat simple if you understand it, is a way of amplifying the energy that you are storing in the other properties that you have. It’s not being taxed. You have vehicles to get the energy out of it, a cash-out refinance, a HELOC if you want, a 1031 sale that’s going to be tax friendly, different methods. And though this might sound like it’s fancy, for lack a better phrase, it’s not at all. This is very fundamentally sound approach to real estate investing.
Jesse:
Yeah, absolutely. Absolutely. That’s what I tell people. I mean, it sounds like it could potentially be difficult, but all my efforts are in just one area. And I think most people don’t do that. I mean challenges, finding deals and things of that nature, but it’s worked for me and I’m continuing to do it. It’s essentially BRRRR-ing an area, an entire area, if you want to look at it that way.
David:
Well, it’s also how realtors tend to look at geographical locations. We look at them like farms, right? You want to send all your mailers, do all your door knocking, hold all your open houses ideally in the same neighborhood because you’re touching the same people, you’re building up your presence and your brand in that neighborhood. The same people are seeing your for sale signs on houses when they’re driving to work. You could sell 10 houses across the entire city of Pittsburgh or 10 houses in one location. And if you sell them in one location, that’s going to give you an amplified exponential return on people that come back to you to sell their house. So you’ve kind of taken that approach that realtors have and applied it to the world of real estate investing and you’ve seen similar results. Do you think that’s where you got it from?
Jesse:
No. No. It’s not where I got it from. To tell you the truth, where I got it from was I moved to this area specifically because I have pit bulls as we mentioned earlier. Okay, I’m a dog dad, right? I moved to this area specifically because it’s difficult to find a place to rent when you have pit bulls based on breed restrictions. So I had a friend that had a house that was really rough shape.
Anyways, I moved here. And after I moved here, I knew I could pick up real estate for very inexpensive. I mean, I bought a house for three grand. I bought a house for five grand. So very, very inexpensive. As you can imagine, it needs a lot of work, right? But once I was here, I thought, “I believe this house is worth X amount.” And it’s like but there’s nothing else saying it based on the comparables that it is, and I said, “How do comparables come about when a house sells?” And that just blows my mind. It’s like, “Okay, well I can make a big impact on this market by creating something that a buyer will be so emotional about that they’ll pull the trigger on if I can get over that appraisal hurdle.” So it was more about I was creating a cool product in an area that I wanted to focus on and I knew it could be worth more. And so I knew I just had to sell a house to create that comp. That’s what it was.
Rob:
And how long had you been outside the Pittsburgh area?
Jesse:
When I moved to Pittsburgh, I moved to this area, Homestead, Munhall West Homestead. I say that because they’re all connected, you’re interchanging. But I moved directly here. When I say across the river, I mean literally across the river. I could probably throw a baseball and hit Pittsburgh.
Rob:
Okay.
Jesse:
I’m not very good at baseball. I could probably throw something over there.
Rob:
A rock.
Jesse:
Yeah, a rock. A rock.
Rob:
So we’ve already established this is a really genius strategy. I mean, since going this route, setting your comp and everything like that, how has it been working for you on the grander scheme? Do you feel like… Is it one of those things? Because it seems like you sort of have to do it a few times before it really starts having an effect on a zip code or a neighborhood. How’s it actually panning out for you now?
Jesse:
For sure. I mean, when I first got back into real estate investing, I did one deal a year or two deals a year. So I’m not making an impact on the market. Skip ahead seven years and people start to catch on and see what’s happening, and someone’s like, “A home sold for 220,000? So a home sold for 270,000?” I’m like, “Yeah, yeah.” So the area starts gaining some traction, gaining momentum, and it’s not just me over here anymore. I feel like I was a little bit of a pioneer to an extent from a flipping standpoint, a renovating standpoint in the area and became fairly known in the area in a short amount of time for taking these risk and putting that type of money into these homes. But yeah, it’s a collective effort between multiple different investors in this area now and just the community in general. It’s just definitely getting stronger and there’s getting a lot more attention and it’s turning.
Rob:
That’s cool.
Jesse:
It’s definitely transitioning, revitalizing.
Rob:
You’ve earned somewhat of a moniker, like a nickname in the area, right?
Jesse:
There are a handful of people that call me the mayor of Munhall, yes.
Rob:
Very cool. Hey listen, it’s the titular title, unofficial mayor of Munhall. And David, do you remember what titular means from our last podcast?
David:
I remember it was looked up. Yes, it means significant in name only. Is that fair?
Rob:
Yeah. Yeah, pretty much. Look at you, Dave.
Jesse:
Well, I’m glad that you brought it out because I had no idea. I just nod and laughed.
David:
That’s the same thing that I asked Rob. “Why are you saying that? Do you even know what that means?”
Rob:
And I was like, “Basically.” And I gave the answer and you’re like, “That’s not what it means.” And then I gave a congruent answer that I think counted. Anyways, okay, so love this, love the answer to that. That’s really amazing. And I think it’s super smart to go about this way. It seems like it takes a little bit to build, but honestly, probably not as long as one would think. Tell me, so you said that you kind of moved right outside, whatever, that’s where you moved to. How long was it? Were you there before the school came along?
Jesse:
Yeah, so I’ve been in this area for probably six or seven years I would say. I purchased that school about three years ago. So I guess I was investing for about three years. I started to become known in the community. And so people were connecting me with deals, off market deals. Not even wholesalers. Just like I was known in the community because I live in the community and I invest in the community. And so people are like, “Hey, I know about this school, individual needs to get rid of it.” I’m like, “Yeah, I’d love to check it out,” you know? And so it was brought to me. And so I picked up in 2019. I think it’s important to say that when you buy a high school, the very first thing that you need to do is go buy some go-karts and a minibike and rip around the school on the go-karts and minibikes with your friends. So we already did that. So that was a blast.
Rob:
Perhaps the best advice ever given on BiggerPockets.
Jesse:
Yeah, yeah. If there’s anything you take away from today, it’s that.
Rob:
Honestly, that sounds pretty amazing. I’m jealous of that bucket list experience right there.
Jesse:
It was awesome.
Rob:
So someone brings you this high school and then you’re like, “I’m going to turn it into a giant house.” What did you even have in mind when it came across your desk at first?
Jesse:
So when I first got connected to it and you walked the building, it’s just like, “Wow, this structure is amazing.” Just the building itself is amazing structure, beautiful brick, huge windows, tall ceilings, terazzo floors are out, just huge auditorium, very cool gymnasium. When you walk into the building, it’s just a vibe. It’s a really cool space and it’s like, “Man, I want this. I want to be involved. I believe in this area. I think I can figure something out with it,” right?
And so we went under contract at a different number after I ran or did some inspections and things of that nature, phase one inspections and such. I was able to get him down from what we were under contract at of 175,000 to 100,000. So yeah, after I acquired it, first thing we did was grab the mini bikes and the go-karts. And after we mess around for a few weeks, I knew that I needed to connect with partners to get this deal done, whatever we were going to do, because of the size of the job and from the financial standpoint as well. It was just beyond my means.
And so I started asking around, talking to people, explaining that I had a think, brainstorm on different ideas of what I could do. I connected to an individual, his name’s Dan Spanovich. Dan and I went back and forth for a little while about partnering up. He had had experience converting a property before, like a conversion, school to… Or maybe it was a warehouse to apartments. So we started having that conversation, but the truth is like we couldn’t come to an agreement on evaluation of what he would buy in at. And so it kind of fizzled and I lost Dan, if you will, from a partner standpoint. We couldn’t come to an agreement.
So probably a month later or two months later, I was connected to another individual, a friend of mine, Adam Colucci, from New Jersey. We started talking. And after he walked the building, he was just like, “I want in. I want to be a part of this.” So we quickly came to an agreement on the valuation of the property and became 50/50 partners. After about maybe a year of us spinning our wheels, trying to figure things out, come up with a plan, we reconnected with Dan Spanovich and came to an agreement on the buy-in. And then he got back into the deal. And from that point forward, we knew we were going to do apartments. And so the truth is that Dan was the brains of this operation and we couldn’t have done it without him.
David:
This is a really good background into this very intriguing deal that neither Rob nor I or anyone else I know has ever heard of. We’re going to jump into this traditional deep dive style now that we have an idea of what this thing looks like. So how did you find this deal?
Jesse:
The deal was brought to me off market because I’m plugged into the community, the truth.
David:
Okay. So this is just people that know this guy buys real estate and they said, “Maybe he will buy this thing that we need to sell.’
Jesse:
Yep, that’s right. There was individuals in the community that really believe in the community becoming revitalized, transitioning. And so they’re bringing me deals because they know I’m taking action.
Rob:
Very cool. Yep, when you put yourself out there, I’ve been telling people to send me unique deals and stuff on Instagram lately, and people send them. They do, because a lot of people are too scared to take on a school or on a unique property or whatever, but they want to see it get done because they want to see it have new life, right? So very cool, man. How did you negotiate it?
Jesse:
So they were originally asking 225,000. I knew that the seller was in a tough spot and had to get rid of the property, so it was already kind of a fire sale. And after I put it under contract, I got it under contract for 175,000. Once I did my inspections phase one study and such, I’m not surprised, but we came across asbestos and a few other things. And after I got the remediation quote, it was 75,000. At this point, it was weeks into the deal and we were getting very close to the point in which the seller needed to sell. And so right or wrong, I knew that I kind of had the leverage here. And so I said, “Hey, I want 75,000 off for the asbestos remediation and I’m not moving forward.” And they said, “Okay, done.” And we closed a few weeks afterwards. So that’s how I was able to get it significantly cheaper than even they were asking.
Rob:
Did it end up actually costing 75K to get the asbestos remediation done?
Jesse:
I believe it may have been. Yeah, I believe it may have been. I mean, I think we may have got… I’m not 100% sure, but I think it was in that ballpark for sure.
David:
Okay. And how did you fund this deal?
Jesse:
Investors. Private investor. So I have experience with single families and small multi-units, I’ve been doing that for a while. It was a private individual that funded the deal.
Rob:
What did you end up doing with it? Was it flip? Rental? BRRRR?
Jesse:
Yeah, so we did a full conversion. We converted the school to 31 apartments and we’re keeping it as rentals.
David:
And more importantly, you rode go-karts all over the entire place to christen the purchase.
Rob:
The extra income is the go-kart track income that they produce in the gymnasium.
David:
Rob, we may need to do the same thing in Scottsdale.
Rob:
That would be really cool.
David:
Put a go-kart track.
Jesse:
And even more importantly, we got to talk about the details of that. In the gymnasium, there was a water leak. The gym floor had bowed so much that there was this big, we’ll say jump, we’ll say minibike jump. It was bowed so much that we would, we’d come ripping around through the cafeteria and hit this bump that was in the gymnasium floor to jump in. I mean, I got videos. That was a good time.
David:
That’s pretty awesome.
Rob:
That’s awesome.
David:
Okay, so what was the outcome after all was said and done?
Jesse:
Yeah. All in, we’re about 3.3 million into the school, and our most recent valuation was 4.7 million.
David:
Wow.
Rob:
That is not what I expected on any of that. That’s a lot.
David:
You could have paid the 250,000 and it probably wouldn’t have even barely made a dent in this deal. That’s funny.
Rob:
Right.
David:
I was not expecting numbers that big-
Rob:
No.
David:
… you were saying.
Rob:
You could have-
David:
You whittled them down to 100.
Jesse:
I know. And so with that being said, I think that my dad called this my golden goose. We all know that this was a killer deal. It very rare, if ever, come across deals that you’re going to be able to build that much equity and have that much cash flow. We purchased the school across the street and I can tell you, although a great investment, we would 100% do it, it’s not going to shake out to be the numbers that we have on the first one.
David:
Yeah, that’s the reality of real estate investing though. Sometimes everything goes your way, sometimes nothing goes your way. You kind of have to take the good with the bad. And people don’t like that because it’s easier to look at everything individually. That’s not the way that this world goes. Sometimes the city gets involved and makes your life hell. Sometimes they’re like, “Oh my God, you’re finally going to do something with this. Let’s help you.’ There’s so many variables that you can’t always lock down. It’s definitely part art and part science.
Rob:
What lessons did you learn from the deal? Anything in particular that you came out of this kind of like, “Oh man, okay, now I’m ready for the next one of these”?
Jesse:
For sure. Yeah, we definitely learned a lot. I mentioned this earlier, is that Dan, he was our savior man. He ran the show. He knows what he’s doing and he did a great job at GC and the whole project. And so there’s definitely a lot I learned, I have a lot more experience than I did previously. Things to look for such as the size of your utilities, like can the electrical withstand 31 apartment units? Microwaves and dishwashers and things of that nature. So what size of the electrical do you have run of the building? The size of your water line, can it support 31 apartments? Do you have a standpipe for sprinkler systems? You got ADA compliance. So there was a lot specific to larger apartment buildings that I wasn’t familiar with. And learning about sprinkler systems, learning about ADA compliance and the size of utilities that you need was just a very informative for sure.
Rob:
And I got to imagine if you’re buying something, I know a lot of times these older buildings come with tax benefits. What was that whole situation like with this school?
Jesse:
Yeah, so a huge piece there we didn’t even touch on yet is that we worked with the National Park Service and we were able to obtain historical tax credits maintaining a lot of the original character of the property itself, original windows, and auditorium, doors, certain things of that nature. So there was a huge tax benefit there. We were able to obtain close to three quarters of a million of historical tax credits.
David:
But I’m assuming these are credits that came from you buying a property in this specific area where the government said, “Because you revitalized this area that we really want to be rejuvenated, we’re going to give you tax credits moving forward”?
Jesse:
That is correct. Yes, we got both state and federal tax credits there. So we were in a, I guess, historical tax credit area and had the ability, so we went through an application process. It doesn’t mean you’re approved, but we got approved. And we’re actually getting approved for the school across the street. So as of now, it looks like we’re getting 630,000 on that property.
David:
This is another great point of how money comes in more than one way with real estate, and we can miss it when you just look at cash flow or buy low, sell high. They basically gave you 150 grand a year and in tax credits rather than giving that to you in cash, but it’s the same thing.
Jesse:
100%. It blew my mind. It blew my mind. It’s like, “Wow. More knowledge wrapped around this. It’s like I should buy one big building a year to obtain the historical tax credits if I can,” right? I won’t have a tax bill.
David:
Yeah, it’s certainly… We’ve often said it’s hard to find good deals, but you can make good deals. And I noticed a lot of people, they look for this home run deal. “I want to buy a place for 100 grand that’s going to be worth 4.2 million or whatever it was. I can’t find one of those. What am I supposed to do?” But when you add up a whole bunch of base hits into the same deal, you get the equivalent of a home run. It’s just looking for all those different angles like what you did.
Jesse:
Absolutely.
David:
All right. So what’s next for you? You’re doing another school across the street. Is this going to be your thing? You’re going to become the Pittsburgh school converter?
Jesse:
A few things I don’t want to go too deep into, but yes, we have a school across the street. I personally acquired a school a couple months ago, likely not going to convert it to apartments at this point. But another thing I’m focusing on, two partners of mine, we’re putting together real estate fund, so we’re looking to get a fund up and running soon. And then another item I’m working on, I’m working on a startup company, a property tech company called Viewing Time that will essentially allow tenants and buyers to view properties with a one-time code themselves after they become verified. So we’re currently talking to some VCs and get ready to hopefully launch that in the next month or two.
Rob:
Well, that’s awesome, man. I mean, I think there are a lot of good takeaways from today’s episode. The big one standing out to me is that you can be successful at something that you failed at on the very first go of it, right? You had this flip. You lost $43,000 at it. Most people would not continue on after that. And fast-forward to today, and you’re an extremely successful investor that owns one of the coolest properties in Pittsburgh. You got the tech component of your business too. You have no intention of slowing down. And it all comes from a failed flip. I mean, going back to that, would you ever really want to change the outcome of that flip?
Jesse:
No. You know what? This is what I always tell people, I am genuinely happy that I lost money on my first flip from the amount of stuff I’ve learned. I would have preferred it to be five or 10 grand, you know?
Rob:
Sure. Sure.
Jesse:
But no, I’m happy with what shook out because it put me in a place of where I am today.
Rob:
Yeah. So you hear that everyone? Go lose $43,000 on your first flip. No, I’m just kidding.
David:
Yeah. Now we found you by being featured on CNBC’s Make It. So shout out to them for putting your story out there. For people that want to learn more about this fascinating investor doing things differently than most people we interview, where can people find out more about you?
Jesse:
Sure. Yeah. You can connect them with me on Instagram at @jessewig, J-E-S-S-E-W-I-G, and I’m on TikTok as well. Same thing, @jessewig.
Rob:
Do you do all the funny dances and then you point and then the text shows up and then you’re like, “Five…”
Jesse:
No.
Rob:
No? Okay.
Jesse:
I literally don’t know about this. See, I guess I’ve been off for a little while.
David:
Jesse, it’s terrible. Okay. I want you to imagine a 49-year-old real estate agent with no social skills that is terrified to actually go on social media that gets talked into this by the 23-year old in her office. And so rather than talking on there, they do this little bounce thing where the music plays and there’s a little bubble that pops up that says like, “Do you think you need 20% down?” And then they point up here and they dance and it says, “Well, you don’t. You can do it for 3.5% down.” And then they point in another direction, “DM me for more info.” It is the cringiest, most horrible thing and it spread like wildfire, like just-
Jesse:
Yeah, no, well, I haven’t done that.
David:
Thank you.
Jesse:
And I haven’t even seen it actually. I need to get back on. Check it out.
David:
No, no, you don’t want to see it, man.
Jesse:
Okay.
David:
You don’t. That’s why I’m saying I’m like a groundhog. I poke my head out. I see that on TikTok. I go right back in my hole and I’m like, “I’m not looking at this anymore.”
Rob:
Cut to two months later and that’s all David’s feet is going to be.
Jesse:
Yeah, exactly.
Rob:
All right. Well you can find me on TikTok not doing any of that stuff also @robuilt, on Instagram @robuilt. I do a lot of reels. I do a lot of trends though. I bring the comedy on TikTok. They say I’m the Walmart of comedy in the world of real estate. You can also find me at YouTube @robuilt as well. What about you, David?
David:
Yeah, I highly recommend everyone to go follow Rob as well. He comes up with original stuff based on a background as a marketer. I know I’m getting serious right now and you are being funny. It’s really, really good. And he’s not just copying any trends. He sets trends and that’s why he’s my boy.
Rob:
Carry on. Keep going.
David:
You can find me at David-
Rob:
No, no, no. [inaudible 00:46:52].
David:
Oh, you want to hear more?
Rob:
Yeah, yeah, a little bit more.
Jesse:
Keep going.
David:
You can find me at davidgreene24.com or follow me on all of your social medias, LinkedIn, Instagram, Facebook, whatever you use, @davidgreene24, add the E at the end, and look for the blue check mark, which I have now, so you won’t be taken advantage of.
Jesse, this was a fantastic show, man. I love it. I mean, you gave a ton of value from flipping houses to set comps in the area that you’re investing in, to investing in all in on one market, to seeing opportunity in a property that other people miss, to partnering with different people to make it come to fruition. This has been fantastic, so thank you very much. We’re going to have to have you on again in the future to get an update-
Jesse:
Absolutely.
David:
… on where things are going. What’s one piece of advice you can leave our listeners with who are struggling in today’s market?
Jesse:
If it boils down to, I’ve thought about this, the reason that I’ve reached a level of success is I just take action. I just take action. It’s that simple as ask a question, go to a networking event, get online, read. Just make moves. Take action.
David:
Nike, just do it.
Jesse:
Just do it. Just do it.
David:
That’s it. And to our listeners, thank you so much for being with us here today. We really appreciate you all and we hope that you enjoyed this show as well. If you did, please consider leaving us a five star review wherever you listen to your podcast. Those help us a ton. And check out our YouTube channel as well.
Rob:
Don’t consider leaving us a five star review. Take action and leave the five star review.
David:
And do it.
Rob:
And just do it.
Jesse:
I love that. I love that.
David:
This is David Greene for Jesse, just do it, Wig, and Rob, the Walmart of comedy, Abasolo, signing off.
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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$42K/Month in Cash Flow By Buying a…High School?
You’ve heard cash flow stories before, but NOTHING like this. We’ve talked to hundreds of investors that have flipped houses, bought apartment complexes, storage facilities, and more. But a high school? A high school rental property? Surely this has to be a first. If you want to know the pioneer behind this absolutely insane passive income project, look no further than Jesse Wig, who turned a dilapidated high school into a thirty-one-unit apartment building.
But before Jesse went on a literal wild ride through this high school, he faced defeats that would stop most investors in their tracks. After making just ten dollars per hour working under a flipper, Jesse tried to do his first deal himself, but things didn’t go to plan. He walked away from his first real estate deal in debt with a massive loss but decided to try again. Jesse learned quickly from his mistakes and started buying rentals in an up-and-coming area right outside of Pittsburgh, Pennsylvania.
Through a brilliant investing tactic that we’ve never heard of before, Jesse was able to catapult and control his rental properties’ values, skyrocketing his personal wealth while bringing up an entire neighborhood with him. Soon after that, he found his off-market high school and, through some savvy partnerships and serious work, turned it into a cash cow unlike anything we’ve ever seen on the show. Jesse is about to school us on the right way to do real estate!
David:
This is the BiggerPockets Podcast show 776.
Jesse:
I think it’s important to say when you buy a high school, the very first thing that you need to do is go buy some go-karts and a minibike and rip around the school on the go-karts and minibikes with your friends.
Rob:
Perhaps the best advice ever given on BiggerPockets.
Jesse:
Yeah, yeah. If there’s anything you take away from the day, it’s that.
David:
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast here today with Robuilt, Rob Abasolo, my co-host, and a very cool episode for you. Today, Rob and I interview Jesse Wig, an investor in the Pittsburgh, Pennsylvania area who’s also a real estate broker and salesperson who does a lot of different things in real estate and has put together one of the most unique deals I’ve ever heard of, which I’m sure Rob must have had you pretty gassed up. You like a good, unique deal. Tell me what you liked about today’s show.
Rob:
Well, first of all, I agree that it was a very cool show. And when you said that, I thought you were going to say, “Rob, joining me here in a cool shirt,” because I am rocking, I think, a shirt that I could see you wearing yourself. What do you think?
David:
You know, I don’t know if in my personal evolutionary journey I’m at the point where I can wear a John Mayer shirt. Oh, it’s his whole body too. Even worse. I thought it was just his head and a guitar. This is the equivalent of one of what a 13-year-old girl would’ve put on her bedroom wall of Leonardo DiCaprio or Jonathan Taylor Thomas, and you’re wearing it on your person on purpose.
Rob:
That’s right. Well, for me, I am a Meyer head, if you will. And speaking of being a Meyer head, today we’re talking actually to the unofficial mayor of Munhall.
David:
Yes, we are. That is Jesse’s nickname. And if you have been trying to figure out ways to creatively find deals in today’s market, you stumbled across the perfect podcast. This is a guest that has a strategy that I’ve never heard of that absolutely crushed it. Rob’s jaws and I were collectively hanging on the floor as we were listening. And if that’s not enough, he also gets into a strategy he uses to raise the comps on all of the properties he owns in the same neighborhood while giving practical advice for what you can do to sell your homes for more when you’re flipping. All that and more in an awesome show we have for you today.
But before we bring in, Jesse, today’s quick tip is simple. Consider the ways real estate makes you money that you may be taking for granted or unaware of. Today’s guest, Jesse, has found several ways to create wealth that you may have never even considered, and this could open your eyes to possibilities that were right in front of you the whole time and you never even seen them, just like the love interest in a romantic comedy. Rob, anything you want to add?
Rob:
Just quick tip number two, buy the shirt at the concert. If you’ve been skipping out on t-shirts, I know they’re 50 bucks. And if you’ve gone to concerts for 10 years with the same artist, just buy it live. You only live once, David. As the millennials would say, YOLO.
David:
Yeah. So if you’re feeling really bad about how your real estate investing journey can turn out, just look at Rob wearing the shirt. You’ll immediately feel better about yourself. This is actually the feel-good episode of the year. Without further ado, let’s bring in Jesse.
Today’s guest, Jesse Wig, is an investor and broker. He lives and invests outside of Pittsburgh, Pennsylvania, the proud dad of two pit bulls and soon to be dad of a human. Jesse, welcome to the show.
Jesse:
Thank you very much for having me. I’m happy to be here.
David:
Yes. Now, first question, once you have a human child, does that mean you are going to stop referring to yourself as a dad because you have two dogs?
Jesse:
It’s like the hardest question in the beginning.
Rob:
Got him. I love this.
Jesse:
Yeah, the hardest one out of the gate.
Rob:
I love this. I don’t think we’ve ever stopped someone right out the gate, David.
Jesse:
I know. And I have to… Oh, no, I’m going to get sidetracked. I said, it’ll be easy. I’m going to talk about myself and I’m going to talk about real estate. Look, I’m looking forward to having a human baby. I’m looking forward to having a human baby.
Rob:
Nice.
David:
Wow. What a political answer. See, this is what’s happening. He doesn’t want to offend PETA by saying, “Yeah, I’m going to stop calling myself a dad” because of animals, but he also doesn’t want to offend all of the human race who’s like, “Why do we call people dads because they have dogs?” And that was not fair of me to start this thing off, but I’ve always wondered, it’s a trend right now to say that you’re a dad or a mom of animals. Everybody’s doing it. And I’m like, “But I don’t know anyone with kids that does that.” So I always wondered.
Jesse:
So I’d be like, I still have three kids now once I [inaudible 00:04:24].
David:
Yeah. No one does that. That’s what I mean.
Jesse:
Yeah, right.
David:
Once you have a human baby, no one says, “I’m a dog mom anymore.”
Rob:
Oh, I see. I see.
David:
They’re like, “Now you’re a real mom, right?” I just said real mom. I might have just offended PETA there. If you’re listening to this podcast and you’re an animal parent, please don’t complain. We love you. But yes, this is a tricky thing. So I’m curious, Jesse, how that’s going to work out. You’re going to have to let me know once the baby comes.
Jesse:
Oh, of course. Of course. Yeah. I made notes.
Rob:
And I’m curious about your real estate journey.
David:
Oh, yeah, I suppose. We could talk about that, I guess, if you guys want to be boring. So today we’re going to dive into an unusual but highly lucrative deal that you were a part of. A couple rapid fire questions to give us the quick stats on that before we get into your story. First off, what kind of property is this?
Jesse:
Sure. You’re talking about the school. Yeah. It’s a 55,000 square foot Catholic high school that myself and my partners purchased.
David:
Officially the first person that I’ve ever interviewed or even met that turned a school into housing. This is super cool.
Rob:
This is cool.
David:
What did you pay for this property?
Jesse:
$100,000.
David:
$100,000 for an entire school?
Jesse:
Yep. Yep.
David:
Okay. We’re going to have to figure out this thing. What’s the cash flow right now?
Jesse:
Let me say this, we probably generate close to 41,000, 42,000 a month gross income from the building.
Rob:
Wow.
Jesse:
I’m going to say that, yeah.
David:
Are we going to get the details later? Are you going to tell us what the net profit is?
Jesse:
We’re probably around the ballpark of netting low 20s a month.
Rob:
Yeah, I already knew I was going to be mad. Like you said, you bought at school and I was like, “Oh, I already want that.” And then you’re like, “We bought it for 100K,” and I’m like… To squeak out a decent return, we’re talking like 20K profit a year and you are effectively getting that a month, so I’m mad. You’ve made Rob mad. Congratulations.
Jesse:
Well, listen, if it makes you feel better, I bought it and I was a sole owner, and then I’m currently only the minority owner. So that’s not all going to me.
Rob:
Okay, okay. That’s fine. I’m less mad.
David:
But yeah, that probably just means that you made a bunch of money selling ownership of the property. So it’s not cashflow, but it’s even better.
Jesse:
I feel like I had a really good deal.
Rob:
Cool.
Jesse:
I feel like I had a really good deal.
David:
Well, you officially turned my partner Robuilt into Robummed, and I’m curious to hear how you did that. Now, before we get into it, let’s hear about how you got into real estate. What were you doing before real estate?
Jesse:
Yeah, so I was working at a juvenile delinquent independent group home. Pretty toxic environment. I was ready to get out of it. I knew an individual that was in Pittsburgh, Pennsylvania that was flipping homes. So I moved two hours south from Erie, Pennsylvania and started working as a laborer, punchlist guy on this house the individual was flipping at 10 bucks an hour. I have a really interesting story about being there if I can share that with you.
David:
Yeah, let’s hear that.
Jesse:
So this is part of my story, I’ve told it many times, but at one point when I was working on this home, I was laying on my chest for a week straight on a pillow with a dental tool carving out grout lines that the agent had found three or four layers down in the kitchen. They wanted to keep this tile, so it was one inch by one inch tile. And so for a week straight, I’m carving out the grout lines because they’re so black and filled with different dirt and such. So we acid cleaned it and a couple of their options just didn’t work very well, so just scraping out these grout lines for a week at 10 bucks an hour. And I got to tell you, at one point, laying on my chest cold, because the tower was just so cold, I was like, “I think I made a mistake.” So yeah, that was the beginning.
Rob:
Did it make you want to go back to the previous job or no?
Jesse:
At times. Because the previous job, I became an assistant supervisor and you had the ability to sleep in the unit and get time and a half. You just needed a staff on site. So there was some perks about that job, but ultimately I decided, no, I’m going to stay in real estate and I’m ready to make some moves.
David:
This sounds like the beginning of a Disney movie where you’re working for free in an orphanage situation, and they’re like, “Okay, now get on your hands and knees and peel potatoes all day long,” and you’re like-
Jesse:
Similar.
David:
…. languishing away, crawling on your belly on tiles scraping it with a iron toothbrush, wondering like, “Someday my prince will come.” But you didn’t wait for your prince. You went out and made it happen. So this is a pretty cool way to start the hero’s journey. What did you do on your first deal as an investor? How did you get out of tile cleaner into real estate owner?
Jesse:
For sure, yeah, so that didn’t go very well either. However, the individual I was working for, I said, “Hey…” I was about six months in just construction, punchlist labor stuff for this guy, and I said, “Hey, I want to flip a house. What do I do?” And he’s like, “Find some private money. Find a house that needs work,” handful of different things. I started working with the real estate agent up in Erie, PA. That agent is now my wife, so I married my realtor.
Rob:
Oh? Wow.
Jesse:
Yep. Yep, interesting story there. So the first house I purchased, skipping a lot of details, I probably overpaid. I under budgeted. I didn’t know what I was doing. I didn’t calculate for property tax, for interest payments, for heating bills. Just lack of experience, just young and ready to make moves, right? My buddy and I flipped the house, did all the work from YouTube videos. And when that house did end up selling, I lost $43,000 in the first house I flipped.
Rob:
Okay, so let’s talk about that. People always talk about their losses and they’re always like, “Yeah, the first house I lost 60,000. I lost 43,000. Did you just have that chilling in your bank account? What happens when that happens?”
Jesse:
Man, what an interesting story. So at the time that I’m renovating this home, I am bar backing, so I’m not making money. When I needed to pay interest payments or property tax on the home, I was borrowing money from my friends. I borrowed a couple grand here. I borrowed four grand from my girlfriend at the time, now wife. So I just started borrowing money. I had no money at all. So the funding on that deal was a first position from a standard hard moneylender and then a second position of a smaller amount from a friend of mine that I connected with at a 20% interest rate, by the way. Just knowing nothing, I was like, “Hey, how about 20%?”
Rob:
That was your friend, this?
Jesse:
“That sounds good.”
Rob:
Your friend?
Jesse:
Yeah. Yeah.
Rob:
I don’t know if they were your friend, I’ll be honest.
Jesse:
Right? Well, he likes to make money. He’s a businessman.
Rob:
Okay. Okay.
Jesse:
You know what I mean?
Rob:
I can’t blame him.
Jesse:
So once I finished the house, I moved to Pittsburgh. But the house didn’t sell for about a year and a half later after it was finished. So probably six months in, nine months into sitting on the market, I’m like, “Wow, I’m going to lose money.” So I realized I’m going to lose money. I honestly had no money. When I moved to Pittsburgh, I moved in a very rough house intentionally to start saving money. I was starting to save money, trying to get caught back up, getting prepared. When the time came that the house was sold, and I was going to lose that $43,000, the first investor was going to be fully paid off, I believe, if I remember correctly, or very close to it. Full principle amount plus interest. And then that second investor, I went to him, I said, “You have to sign off on this loan. You have to satisfy the mortgage and I will pay you back.”
So when the time came, I was hustling. I had a little bit of money saved up. I sold my vehicle. It was a decent vehicle, it was a Chevy Tahoe, and got a little money from that. Bought a thousand dollars like Chevy Cavalier or something that I’m driving. I was able to come up with about $20,000. So I have that 43 grand I owe at the closing table. I was able to come up with an extra 20 grand, so I paid him. Now I’m down to broke, back to zero, and I told that investor, “Give me time. I’m hustling, I’m making moves. I got my real estate license. I’m down in Pittsburgh and I’ll pay you back.” It took me about a year and I was just grinding, hustling. Probably a year, a year and a half, and I paid him off.
Rob:
Wow, okay. And were they amendable to that or were they like, “Okay, this is our last deal moving on from here”? Or did they respect that you were able to make it happen?
Jesse:
I mean, I have a great relationship with them today. So yeah, I mean, I think they believed me. I made a mistake, but I’m a man of my word and there was zero question that I would make them whole and I did. And I didn’t just make them whole in their principal amount, I made them whole on the full interest. And that 20% continued to accrue during that time period.
Rob:
Cool.
Jesse:
So there was no adjustment whatsoever.
Rob:
Good for you. That’s really, really, really great.
Jesse:
Thank you.
Rob:
Yeah. Follow up question not as important or impactful, but when you say that the realtor was your now wife, did you meet said realtor for the first time on this project?
Jesse:
So I was introduced to said realtor by a friend of mine, and she said, “I’m getting my real estate license” and I said, “I’m looking for a flip.” She said, “Okay, I’ll help you out.” I said, “Perfect.”
Rob:
Okay. All right. So that’s a real ROI right there. You got a wife, congratulations.
Jesse:
Well, you know what I said? 100%. 100%. What I do want to say is that, yeah, my very first experience with my wife, I lost $43,000. So I give her a hard time. But no, I couldn’t be happier, couldn’t be happier. It was amazing.
David:
All right. So that was a pretty gnarly entry into flipping a house here. What got you back into investing after that?
Jesse:
For sure. So I mentioned earlier I got my real estate license and I moved to Pittsburgh while that house was still on the market waiting to sell as a flip. I got my real estate license and was just hustling as a real estate agent. And I knew I wanted to get back into investing, but there was a lot I had to learn. So when I was down here, I was just doing a lot of networking, connect with people, asking questions, learn as much as I could. And I had to make up for the 43 grand I lost, right? And so I gave myself a little bit of time and just understood real estate better and the real estate market in Pittsburgh and then kind of weighed my options of how can I get back into it and mitigate my risk a little bit from a financial standpoint.
David:
Do you remember what some of the things were that clicked in your mind during this period of learning real estate better? Was there specifics you can point to where you were like, “Oh, I thought it was this way, but I realized it was that way” or a pattern that you recognize? Anything for people that are in that same stage of, “I’m trying to learn real estate,” but they don’t know what that means?
Jesse:
The first thing that comes to mind, and I hope this answers your question here, but the first thing that comes to mind now is I very rarely do a deal now unless I feel like I have at least two exit strategies. When I went into that first flip, I didn’t know what a BRRRR was, right? It was like, purchase this, renovate it, sell it, right? And there was no backup options. But looking back, if I was in the same position, the amount of knowledge I have now, I would’ve refinanced. I would’ve made a couple adjustments and probably got out of that for little to no money out of pocket. But yeah, the biggest thing I would say is just having two exit strategies when you’re entering a deal.
David:
So you learned how to analyze a property for cash flow? You learn-
Jesse:
100%.
David:
Right? And that was before you just knew about flipping houses, which I think is where everyone starts, or at least the uneducated about real estate looking at it like, buy low, sell high, because we all understand that concept whether it’s stocks or whether you’re trying to buy a couch and sell a couch for more, you’re making money on Etsy. Buy low, sell high is something we all understand. And that was how you got into real estate with just that one track mind and then you started to learn what buy and hold real estate looked like.
Jesse:
For sure.
David:
Maybe what neighborhoods were better to have tenants in. You started to evaluate like if this property would cash flow or how much equity would have. Is that what you’re saying when you’re saying you learned how real estate worked?
Jesse:
Yeah, that’s accurate information. Yeah, you’re right. Underwriting the deal, understanding your options more. It was limited knowledge and in just one track mind. It’s the perfect way to put it.
David:
And where did you go to get this information at that time?
Jesse:
I had a mentor, the individual that was flipping houses that I started working with for. So when I say that, I ask them a handful of questions, but I just kind of… And this is good and bad about me, I just kind of make moves. I just pull the trigger and I get things done.
David:
You learn by doing is what you’re saying.
Jesse:
Yes. And so like I said, that’s good and bad about me. I work with a life coach and we establish very early on that I have an alter ego and his name is Kane. So we got Kane and Jesse. And it’s the way I operate. Kane kind of runs a show a lot of times. So we just pull the trigger and make moves, which is helpful and hurtful at times.
Rob:
I think it’s a good thing. I was actually just talking to a student last night who they’re like, “Yeah, I don’t know. It’s a bad habit. I just do things when…” I’m like, “No, I think that’s the most important skill you can have because you can figure it out on the back end. Whereas most people try to figure out on the front end and lose every deal that ever comes across the table.” So I think obviously you need to counteract how quickly you act after you take action and you need to make sure that your ducks are in a row, but I think acting quickly is the number one skill you can have as a real estate investor personally.
Jesse:
I couldn’t agree more. There’s no question whatsoever that the reason I’ve reached a level of success is because I take action.
David:
Yeah. And in general, if I had to pick between the person that carefully analyzes every step, my personality is probably more that way, which is why I end up being a pretty good educator because I have to understand every single piece of the engine before I trust to get in the car and drive it, versus the person like you that just jumps in and does it and figures it out as they go, your personality will ultimately learn faster and be more successful if they don’t quit. So I don’t want anyone to hear this and think like, “Oh, you’re being reckless.” The key to people like you is learning if you know you’re just going to jump in and do things, mitigating risk becomes incredibly important. You don’t want to put your whole nest egg into the first deal when you don’t know what you’re doing and you’re trying to figure it out, right?
Jesse:
For sure. For sure.
David:
It’s like learning how to know, “I’m going to make mistakes. It’s going to bleed money, but I’m going to learn quicker so I make sure that I don’t lose all my money or all my time or all my opportunity” is extra important. So getting back into moving forward for you, walk us through your strategy for how you’re increasing value and setting your own comps now that you understand real estate better.
Jesse:
Yeah, for sure. So after I moved to Pittsburgh, I moved to an area called Homestead, Munhall West Homestead. It’s three boroughs all kind of together here, literally across the river from Pittsburgh. I saw that there was a lot of opportunity here in real estate. To be very frank, the area is a little rough in sections, but there was a lot of opportunity based on location, some of the development that was already in the works right there on the waterfront. And so I realized that being an agent, I worked with a lot of buyers and so I can understand what is interesting or appealing to them. And so I realized there was an opportunity here to where if you can create a cool enough product, a trendy enough product, then you can kind of pull buyers to a certain area. You can get this house for 115,000 or 150,000, you know what I mean, after renovated.
And so what happened was, or what I do I should say, is the concept is fairly easy. I’ll buy five homes all in the same area, okay? All five of those houses I’ll renovate just as nice, except house number five might be on a street that’s a little bit nicer than those other four homes. In addition, I’ll put a little extra money into the house that I’m going to sell. The items that I put money into doesn’t necessarily make the home more valuable from an appraisal standpoint, it makes it more valuable from a… It’s like more sellable, right?
David:
Yeah, you’re going to sell it quicker.
Jesse:
That’s right. If a bedroom has an accent wall, it looks cooler, it’s trendier, but it’s not going to appraise for more, okay? And so what I do is I renovate all five. I place tenants in four of those homes. House number five, I put little more money into it and I sell it for as much as I can to create a comp and increase the value in the area. So from a flipping standpoint, I’m different than most people because all of my efforts are in one area. And so over the years, I’ve increased the comps to… And now when I say this, it doesn’t mean all the houses were the same criteria. Some were a three bed, some might be a four bed, but it can show you that general idea.
The first house that I flipped, purchased, renovated, the resale number was 115,000. That was a big deal for the area, okay? 115,000, 150,000, 190,000, 212,000, 270,000, 425,000. And so all of the homes that I own in this area are continuing to increase in value because of the comps that I’m creating. So I play a big impact in this market and I’ve been doing it for years now.
David:
This is why it is so important to have a good real estate agent selling your houses if you’re flipping homes, if you’re just selling anything because the point you made gets missed on so many people. Value can come in many different forms. Just when you think about how we determine what a property is worth, there is not one singular agreed upon metric for determining what it’s worth. There’s what an appraiser would say it’s worth. There’s what a different appraiser would say it’s worth. There’s what it’s worth from a cash flow perspective. There’s what it’s worth if you were to sell it the versus if you were to hold it. There’s what it’s worth to a buyer on the open market that really wants it.
Real estate, we talk about it as if it’s this objective numbers oriented entity, which you do have to approach it from that way if you’re trying to make money, but values are incredibly subjective. Your point really highlights that that an accent wall, to an appraiser, is worth nothing. They’re not going to give you the extra $12 of value for the paint that you put on it. But to the person who’s buying it, it might make them pay five grand more than a different house that had the same bedroom bathroom count because they want to make sure their offer gets accepted, not someone else’s.
Real estate agents who live in this space, we see this all the time. We see the people that come to us with a home and we know this is going to be hard to sell. It’s got outdated stuff. It looks ugly, it smells musky. But the person who owns it says, “It’s got the same bedroom and bathrooms as that house that sold for 270,000 why would mine only sell for 220,000? You’re ripping me off.” But we know that house had a landscaped yard, really pretty area, nice view, closer to the school. It got four offers, that’s why it sold for 270,000. Yours is going to get zero offers until it sits on the market for two months, and then we reduce the price.
Jesse:
Yeah, absolutely. It’s a very good point and very accurate. Because I mentioned this earlier, being an agent, I have good insight to what buyers are looking for. And the truth is, the vast majority of time, people are pulled or there’s heavy emotion involved in the home. And if it’s a really cool, really trendy house, people are willing to pay more. Period. So it is not a sure thing you’re going to get the appraisal, and there’s challenges with that every time, but that has worked for me so far and I’m continuing to do it well.
David:
Well, it’s tiny little piece of information that lead to big results. Rob, what do you think about this whole thing? Because you’re not a real estate agent, but you’re kind of a fly on the wall right now.
Rob:
So the thing that I’m looking for clarity on is when you were talking about the strategy, I thought you were saying that you were making one really nice so that you can sell it at a higher rate so that you could sell the other four basically. But it sounds like you just placed the tenants on there. So what is the purpose for making that fifth one nice and selling it at a higher one if it’s not necessarily benefiting like your next flip? Does that make sense?
Jesse:
I think I follow what you’re saying. So let me try to answer that for you. The idea here is that I’m not looking… And that’s the way I say I’m a little abnormal than other people. I’m not looking to make money on my flips. I’m looking to increase the value of the home in the area as much as I can because that will build my net worth from an equity standpoint on the four homes that I keep-
Rob:
Got it. Got it.
Jesse:
… the tenants are in place.
Rob:
Got it.
David:
So let’s say you break even on the flip and you bought it at a price where all the homes were valued around 200,000 and you’re able to sell it for 250,000, but you broke even for whatever reason. You have four other homes in that neighborhood that were valued at 200,000 that now get pulled much closer to 250,000. Theoretically speaking, if every one of them goes up by 50 grand, you have four of them, you just increased your net worth by $200,000 by breaking even on a flip.
Rob:
Oh, okay.
Jesse:
Exactly. And so that’s why I’m willing to… That’s where all my efforts are here and that’s where I’m focused on. I’m very long-term goal oriented and I’m working on building my net worth, not the quick buck on the flip, right? And so yeah, I’ve continued to build value in the area and build equity.
David:
Oh man, Jesse, I love this man.
Rob:
Yeah, I’m really glad I clarified that because that is genius because you basically made 200K on that flip.
Jesse:
That’s exactly right. And the truth is, there’s times, like one of my most recent flips, I mean we worked on it for 12 months. It was a very long project and I made 10 grand. When I say make 10 grand, if I work on a project for 12 months and I walk away with $10,000, I lost money.
Rob:
Right. Right.
Jesse:
But the increase in value of all the other properties. And what’s funny is that it’s a small community and there’s a lot of people that have lived here his whole life. And every time I list what I call my comp setters, people are like, “No way. There’s no way you’re selling that.” And I have every time. You know what I mean? I’m not saying that’s going to continue, but it’s worked.
David:
Here’s why I think this is incredibly important for everybody who’s trying to make money in today’s market. It is harder than I’ve ever seen, Rob, I think you probably agree, to cash flow and to make money in real estate right now. It’s possible to do as a house flipper, it’s getting close. I don’t want to say it’s impossible. It’s getting incredibly difficult to find a good cash on cash return on real estate because of the competition we have. And in order to thrive in the market we’re in right now, you have to break out of the cash flow microscope that you’re just looking at this one way to make money in real estate. You make money several ways in real estate.
And I’ve been talking about a better way to look at money rather than just cash in the bank is money is a store of energy. The store of energy that we call cash is when you keep money in your savings account or in your checking account. And flipping houses, if you do it well, can increase your energy in that storage vehicle. But it’s ineffective because you have capital gains taxes, you have risks that you’re throwing into this entire thing. You have market fluctuations where you can actually lose money. So you try to flip a house and lost $43,000 out of that specific storage.
Equity is a different way of storing energy. It’s stored inside of the asset. And your strategy, though it’s semi complicated, although it’s actually somewhat simple if you understand it, is a way of amplifying the energy that you are storing in the other properties that you have. It’s not being taxed. You have vehicles to get the energy out of it, a cash-out refinance, a HELOC if you want, a 1031 sale that’s going to be tax friendly, different methods. And though this might sound like it’s fancy, for lack a better phrase, it’s not at all. This is very fundamentally sound approach to real estate investing.
Jesse:
Yeah, absolutely. Absolutely. That’s what I tell people. I mean, it sounds like it could potentially be difficult, but all my efforts are in just one area. And I think most people don’t do that. I mean challenges, finding deals and things of that nature, but it’s worked for me and I’m continuing to do it. It’s essentially BRRRR-ing an area, an entire area, if you want to look at it that way.
David:
Well, it’s also how realtors tend to look at geographical locations. We look at them like farms, right? You want to send all your mailers, do all your door knocking, hold all your open houses ideally in the same neighborhood because you’re touching the same people, you’re building up your presence and your brand in that neighborhood. The same people are seeing your for sale signs on houses when they’re driving to work. You could sell 10 houses across the entire city of Pittsburgh or 10 houses in one location. And if you sell them in one location, that’s going to give you an amplified exponential return on people that come back to you to sell their house. So you’ve kind of taken that approach that realtors have and applied it to the world of real estate investing and you’ve seen similar results. Do you think that’s where you got it from?
Jesse:
No. No. It’s not where I got it from. To tell you the truth, where I got it from was I moved to this area specifically because I have pit bulls as we mentioned earlier. Okay, I’m a dog dad, right? I moved to this area specifically because it’s difficult to find a place to rent when you have pit bulls based on breed restrictions. So I had a friend that had a house that was really rough shape.
Anyways, I moved here. And after I moved here, I knew I could pick up real estate for very inexpensive. I mean, I bought a house for three grand. I bought a house for five grand. So very, very inexpensive. As you can imagine, it needs a lot of work, right? But once I was here, I thought, “I believe this house is worth X amount.” And it’s like but there’s nothing else saying it based on the comparables that it is, and I said, “How do comparables come about when a house sells?” And that just blows my mind. It’s like, “Okay, well I can make a big impact on this market by creating something that a buyer will be so emotional about that they’ll pull the trigger on if I can get over that appraisal hurdle.” So it was more about I was creating a cool product in an area that I wanted to focus on and I knew it could be worth more. And so I knew I just had to sell a house to create that comp. That’s what it was.
Rob:
And how long had you been outside the Pittsburgh area?
Jesse:
When I moved to Pittsburgh, I moved to this area, Homestead, Munhall West Homestead. I say that because they’re all connected, you’re interchanging. But I moved directly here. When I say across the river, I mean literally across the river. I could probably throw a baseball and hit Pittsburgh.
Rob:
Okay.
Jesse:
I’m not very good at baseball. I could probably throw something over there.
Rob:
A rock.
Jesse:
Yeah, a rock. A rock.
Rob:
So we’ve already established this is a really genius strategy. I mean, since going this route, setting your comp and everything like that, how has it been working for you on the grander scheme? Do you feel like… Is it one of those things? Because it seems like you sort of have to do it a few times before it really starts having an effect on a zip code or a neighborhood. How’s it actually panning out for you now?
Jesse:
For sure. I mean, when I first got back into real estate investing, I did one deal a year or two deals a year. So I’m not making an impact on the market. Skip ahead seven years and people start to catch on and see what’s happening, and someone’s like, “A home sold for 220,000? So a home sold for 270,000?” I’m like, “Yeah, yeah.” So the area starts gaining some traction, gaining momentum, and it’s not just me over here anymore. I feel like I was a little bit of a pioneer to an extent from a flipping standpoint, a renovating standpoint in the area and became fairly known in the area in a short amount of time for taking these risk and putting that type of money into these homes. But yeah, it’s a collective effort between multiple different investors in this area now and just the community in general. It’s just definitely getting stronger and there’s getting a lot more attention and it’s turning.
Rob:
That’s cool.
Jesse:
It’s definitely transitioning, revitalizing.
Rob:
You’ve earned somewhat of a moniker, like a nickname in the area, right?
Jesse:
There are a handful of people that call me the mayor of Munhall, yes.
Rob:
Very cool. Hey listen, it’s the titular title, unofficial mayor of Munhall. And David, do you remember what titular means from our last podcast?
David:
I remember it was looked up. Yes, it means significant in name only. Is that fair?
Rob:
Yeah. Yeah, pretty much. Look at you, Dave.
Jesse:
Well, I’m glad that you brought it out because I had no idea. I just nod and laughed.
David:
That’s the same thing that I asked Rob. “Why are you saying that? Do you even know what that means?”
Rob:
And I was like, “Basically.” And I gave the answer and you’re like, “That’s not what it means.” And then I gave a congruent answer that I think counted. Anyways, okay, so love this, love the answer to that. That’s really amazing. And I think it’s super smart to go about this way. It seems like it takes a little bit to build, but honestly, probably not as long as one would think. Tell me, so you said that you kind of moved right outside, whatever, that’s where you moved to. How long was it? Were you there before the school came along?
Jesse:
Yeah, so I’ve been in this area for probably six or seven years I would say. I purchased that school about three years ago. So I guess I was investing for about three years. I started to become known in the community. And so people were connecting me with deals, off market deals. Not even wholesalers. Just like I was known in the community because I live in the community and I invest in the community. And so people are like, “Hey, I know about this school, individual needs to get rid of it.” I’m like, “Yeah, I’d love to check it out,” you know? And so it was brought to me. And so I picked up in 2019. I think it’s important to say that when you buy a high school, the very first thing that you need to do is go buy some go-karts and a minibike and rip around the school on the go-karts and minibikes with your friends. So we already did that. So that was a blast.
Rob:
Perhaps the best advice ever given on BiggerPockets.
Jesse:
Yeah, yeah. If there’s anything you take away from today, it’s that.
Rob:
Honestly, that sounds pretty amazing. I’m jealous of that bucket list experience right there.
Jesse:
It was awesome.
Rob:
So someone brings you this high school and then you’re like, “I’m going to turn it into a giant house.” What did you even have in mind when it came across your desk at first?
Jesse:
So when I first got connected to it and you walked the building, it’s just like, “Wow, this structure is amazing.” Just the building itself is amazing structure, beautiful brick, huge windows, tall ceilings, terazzo floors are out, just huge auditorium, very cool gymnasium. When you walk into the building, it’s just a vibe. It’s a really cool space and it’s like, “Man, I want this. I want to be involved. I believe in this area. I think I can figure something out with it,” right?
And so we went under contract at a different number after I ran or did some inspections and things of that nature, phase one inspections and such. I was able to get him down from what we were under contract at of 175,000 to 100,000. So yeah, after I acquired it, first thing we did was grab the mini bikes and the go-karts. And after we mess around for a few weeks, I knew that I needed to connect with partners to get this deal done, whatever we were going to do, because of the size of the job and from the financial standpoint as well. It was just beyond my means.
And so I started asking around, talking to people, explaining that I had a think, brainstorm on different ideas of what I could do. I connected to an individual, his name’s Dan Spanovich. Dan and I went back and forth for a little while about partnering up. He had had experience converting a property before, like a conversion, school to… Or maybe it was a warehouse to apartments. So we started having that conversation, but the truth is like we couldn’t come to an agreement on evaluation of what he would buy in at. And so it kind of fizzled and I lost Dan, if you will, from a partner standpoint. We couldn’t come to an agreement.
So probably a month later or two months later, I was connected to another individual, a friend of mine, Adam Colucci, from New Jersey. We started talking. And after he walked the building, he was just like, “I want in. I want to be a part of this.” So we quickly came to an agreement on the valuation of the property and became 50/50 partners. After about maybe a year of us spinning our wheels, trying to figure things out, come up with a plan, we reconnected with Dan Spanovich and came to an agreement on the buy-in. And then he got back into the deal. And from that point forward, we knew we were going to do apartments. And so the truth is that Dan was the brains of this operation and we couldn’t have done it without him.
David:
This is a really good background into this very intriguing deal that neither Rob nor I or anyone else I know has ever heard of. We’re going to jump into this traditional deep dive style now that we have an idea of what this thing looks like. So how did you find this deal?
Jesse:
The deal was brought to me off market because I’m plugged into the community, the truth.
David:
Okay. So this is just people that know this guy buys real estate and they said, “Maybe he will buy this thing that we need to sell.’
Jesse:
Yep, that’s right. There was individuals in the community that really believe in the community becoming revitalized, transitioning. And so they’re bringing me deals because they know I’m taking action.
Rob:
Very cool. Yep, when you put yourself out there, I’ve been telling people to send me unique deals and stuff on Instagram lately, and people send them. They do, because a lot of people are too scared to take on a school or on a unique property or whatever, but they want to see it get done because they want to see it have new life, right? So very cool, man. How did you negotiate it?
Jesse:
So they were originally asking 225,000. I knew that the seller was in a tough spot and had to get rid of the property, so it was already kind of a fire sale. And after I put it under contract, I got it under contract for 175,000. Once I did my inspections phase one study and such, I’m not surprised, but we came across asbestos and a few other things. And after I got the remediation quote, it was 75,000. At this point, it was weeks into the deal and we were getting very close to the point in which the seller needed to sell. And so right or wrong, I knew that I kind of had the leverage here. And so I said, “Hey, I want 75,000 off for the asbestos remediation and I’m not moving forward.” And they said, “Okay, done.” And we closed a few weeks afterwards. So that’s how I was able to get it significantly cheaper than even they were asking.
Rob:
Did it end up actually costing 75K to get the asbestos remediation done?
Jesse:
I believe it may have been. Yeah, I believe it may have been. I mean, I think we may have got… I’m not 100% sure, but I think it was in that ballpark for sure.
David:
Okay. And how did you fund this deal?
Jesse:
Investors. Private investor. So I have experience with single families and small multi-units, I’ve been doing that for a while. It was a private individual that funded the deal.
Rob:
What did you end up doing with it? Was it flip? Rental? BRRRR?
Jesse:
Yeah, so we did a full conversion. We converted the school to 31 apartments and we’re keeping it as rentals.
David:
And more importantly, you rode go-karts all over the entire place to christen the purchase.
Rob:
The extra income is the go-kart track income that they produce in the gymnasium.
David:
Rob, we may need to do the same thing in Scottsdale.
Rob:
That would be really cool.
David:
Put a go-kart track.
Jesse:
And even more importantly, we got to talk about the details of that. In the gymnasium, there was a water leak. The gym floor had bowed so much that there was this big, we’ll say jump, we’ll say minibike jump. It was bowed so much that we would, we’d come ripping around through the cafeteria and hit this bump that was in the gymnasium floor to jump in. I mean, I got videos. That was a good time.
David:
That’s pretty awesome.
Rob:
That’s awesome.
David:
Okay, so what was the outcome after all was said and done?
Jesse:
Yeah. All in, we’re about 3.3 million into the school, and our most recent valuation was 4.7 million.
David:
Wow.
Rob:
That is not what I expected on any of that. That’s a lot.
David:
You could have paid the 250,000 and it probably wouldn’t have even barely made a dent in this deal. That’s funny.
Rob:
Right.
David:
I was not expecting numbers that big-
Rob:
No.
David:
… you were saying.
Rob:
You could have-
David:
You whittled them down to 100.
Jesse:
I know. And so with that being said, I think that my dad called this my golden goose. We all know that this was a killer deal. It very rare, if ever, come across deals that you’re going to be able to build that much equity and have that much cash flow. We purchased the school across the street and I can tell you, although a great investment, we would 100% do it, it’s not going to shake out to be the numbers that we have on the first one.
David:
Yeah, that’s the reality of real estate investing though. Sometimes everything goes your way, sometimes nothing goes your way. You kind of have to take the good with the bad. And people don’t like that because it’s easier to look at everything individually. That’s not the way that this world goes. Sometimes the city gets involved and makes your life hell. Sometimes they’re like, “Oh my God, you’re finally going to do something with this. Let’s help you.’ There’s so many variables that you can’t always lock down. It’s definitely part art and part science.
Rob:
What lessons did you learn from the deal? Anything in particular that you came out of this kind of like, “Oh man, okay, now I’m ready for the next one of these”?
Jesse:
For sure. Yeah, we definitely learned a lot. I mentioned this earlier, is that Dan, he was our savior man. He ran the show. He knows what he’s doing and he did a great job at GC and the whole project. And so there’s definitely a lot I learned, I have a lot more experience than I did previously. Things to look for such as the size of your utilities, like can the electrical withstand 31 apartment units? Microwaves and dishwashers and things of that nature. So what size of the electrical do you have run of the building? The size of your water line, can it support 31 apartments? Do you have a standpipe for sprinkler systems? You got ADA compliance. So there was a lot specific to larger apartment buildings that I wasn’t familiar with. And learning about sprinkler systems, learning about ADA compliance and the size of utilities that you need was just a very informative for sure.
Rob:
And I got to imagine if you’re buying something, I know a lot of times these older buildings come with tax benefits. What was that whole situation like with this school?
Jesse:
Yeah, so a huge piece there we didn’t even touch on yet is that we worked with the National Park Service and we were able to obtain historical tax credits maintaining a lot of the original character of the property itself, original windows, and auditorium, doors, certain things of that nature. So there was a huge tax benefit there. We were able to obtain close to three quarters of a million of historical tax credits.
David:
But I’m assuming these are credits that came from you buying a property in this specific area where the government said, “Because you revitalized this area that we really want to be rejuvenated, we’re going to give you tax credits moving forward”?
Jesse:
That is correct. Yes, we got both state and federal tax credits there. So we were in a, I guess, historical tax credit area and had the ability, so we went through an application process. It doesn’t mean you’re approved, but we got approved. And we’re actually getting approved for the school across the street. So as of now, it looks like we’re getting 630,000 on that property.
David:
This is another great point of how money comes in more than one way with real estate, and we can miss it when you just look at cash flow or buy low, sell high. They basically gave you 150 grand a year and in tax credits rather than giving that to you in cash, but it’s the same thing.
Jesse:
100%. It blew my mind. It blew my mind. It’s like, “Wow. More knowledge wrapped around this. It’s like I should buy one big building a year to obtain the historical tax credits if I can,” right? I won’t have a tax bill.
David:
Yeah, it’s certainly… We’ve often said it’s hard to find good deals, but you can make good deals. And I noticed a lot of people, they look for this home run deal. “I want to buy a place for 100 grand that’s going to be worth 4.2 million or whatever it was. I can’t find one of those. What am I supposed to do?” But when you add up a whole bunch of base hits into the same deal, you get the equivalent of a home run. It’s just looking for all those different angles like what you did.
Jesse:
Absolutely.
David:
All right. So what’s next for you? You’re doing another school across the street. Is this going to be your thing? You’re going to become the Pittsburgh school converter?
Jesse:
A few things I don’t want to go too deep into, but yes, we have a school across the street. I personally acquired a school a couple months ago, likely not going to convert it to apartments at this point. But another thing I’m focusing on, two partners of mine, we’re putting together real estate fund, so we’re looking to get a fund up and running soon. And then another item I’m working on, I’m working on a startup company, a property tech company called Viewing Time that will essentially allow tenants and buyers to view properties with a one-time code themselves after they become verified. So we’re currently talking to some VCs and get ready to hopefully launch that in the next month or two.
Rob:
Well, that’s awesome, man. I mean, I think there are a lot of good takeaways from today’s episode. The big one standing out to me is that you can be successful at something that you failed at on the very first go of it, right? You had this flip. You lost $43,000 at it. Most people would not continue on after that. And fast-forward to today, and you’re an extremely successful investor that owns one of the coolest properties in Pittsburgh. You got the tech component of your business too. You have no intention of slowing down. And it all comes from a failed flip. I mean, going back to that, would you ever really want to change the outcome of that flip?
Jesse:
No. You know what? This is what I always tell people, I am genuinely happy that I lost money on my first flip from the amount of stuff I’ve learned. I would have preferred it to be five or 10 grand, you know?
Rob:
Sure. Sure.
Jesse:
But no, I’m happy with what shook out because it put me in a place of where I am today.
Rob:
Yeah. So you hear that everyone? Go lose $43,000 on your first flip. No, I’m just kidding.
David:
Yeah. Now we found you by being featured on CNBC’s Make It. So shout out to them for putting your story out there. For people that want to learn more about this fascinating investor doing things differently than most people we interview, where can people find out more about you?
Jesse:
Sure. Yeah. You can connect them with me on Instagram at @jessewig, J-E-S-S-E-W-I-G, and I’m on TikTok as well. Same thing, @jessewig.
Rob:
Do you do all the funny dances and then you point and then the text shows up and then you’re like, “Five…”
Jesse:
No.
Rob:
No? Okay.
Jesse:
I literally don’t know about this. See, I guess I’ve been off for a little while.
David:
Jesse, it’s terrible. Okay. I want you to imagine a 49-year-old real estate agent with no social skills that is terrified to actually go on social media that gets talked into this by the 23-year old in her office. And so rather than talking on there, they do this little bounce thing where the music plays and there’s a little bubble that pops up that says like, “Do you think you need 20% down?” And then they point up here and they dance and it says, “Well, you don’t. You can do it for 3.5% down.” And then they point in another direction, “DM me for more info.” It is the cringiest, most horrible thing and it spread like wildfire, like just-
Jesse:
Yeah, no, well, I haven’t done that.
David:
Thank you.
Jesse:
And I haven’t even seen it actually. I need to get back on. Check it out.
David:
No, no, you don’t want to see it, man.
Jesse:
Okay.
David:
You don’t. That’s why I’m saying I’m like a groundhog. I poke my head out. I see that on TikTok. I go right back in my hole and I’m like, “I’m not looking at this anymore.”
Rob:
Cut to two months later and that’s all David’s feet is going to be.
Jesse:
Yeah, exactly.
Rob:
All right. Well you can find me on TikTok not doing any of that stuff also @robuilt, on Instagram @robuilt. I do a lot of reels. I do a lot of trends though. I bring the comedy on TikTok. They say I’m the Walmart of comedy in the world of real estate. You can also find me at YouTube @robuilt as well. What about you, David?
David:
Yeah, I highly recommend everyone to go follow Rob as well. He comes up with original stuff based on a background as a marketer. I know I’m getting serious right now and you are being funny. It’s really, really good. And he’s not just copying any trends. He sets trends and that’s why he’s my boy.
Rob:
Carry on. Keep going.
David:
You can find me at David-
Rob:
No, no, no. [inaudible 00:46:52].
David:
Oh, you want to hear more?
Rob:
Yeah, yeah, a little bit more.
Jesse:
Keep going.
David:
You can find me at davidgreene24.com or follow me on all of your social medias, LinkedIn, Instagram, Facebook, whatever you use, @davidgreene24, add the E at the end, and look for the blue check mark, which I have now, so you won’t be taken advantage of.
Jesse, this was a fantastic show, man. I love it. I mean, you gave a ton of value from flipping houses to set comps in the area that you’re investing in, to investing in all in on one market, to seeing opportunity in a property that other people miss, to partnering with different people to make it come to fruition. This has been fantastic, so thank you very much. We’re going to have to have you on again in the future to get an update-
Jesse:
Absolutely.
David:
… on where things are going. What’s one piece of advice you can leave our listeners with who are struggling in today’s market?
Jesse:
If it boils down to, I’ve thought about this, the reason that I’ve reached a level of success is I just take action. I just take action. It’s that simple as ask a question, go to a networking event, get online, read. Just make moves. Take action.
David:
Nike, just do it.
Jesse:
Just do it. Just do it.
David:
That’s it. And to our listeners, thank you so much for being with us here today. We really appreciate you all and we hope that you enjoyed this show as well. If you did, please consider leaving us a five star review wherever you listen to your podcast. Those help us a ton. And check out our YouTube channel as well.
Rob:
Don’t consider leaving us a five star review. Take action and leave the five star review.
David:
And do it.
Rob:
And just do it.
Jesse:
I love that. I love that.
David:
This is David Greene for Jesse, just do it, Wig, and Rob, the Walmart of comedy, Abasolo, signing off.
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M&T RCC’s Christine Chandler nominated as MBA vice chair for 2024
The Mortgage Bankers Association (MBA) announced on Wednesday that Christine Chandler, the executive vice president, chief credit officer, and chief operating officer of M&T Realty Capital Corporation (RCC), has been nominated to serve as MBA’s vice chair for the 2024 membership year.
The installation of Chandler is expected to take place at the association’s 110th Annual Convention in Philadelphia later this month.
“Christine is a passionate and influential leader in real estate finance and is a terrific choice to lead MBA and its members through the challenges and opportunities our industry faces,” said Matt Rocco, the 2023 MBA chairman and president of Colliers Mortgage. “She is one of MBA’s most active members and is a strong advocate of ensuring sustainable homeownership and rental housing opportunities in communities nationwide. I congratulate her for this well-deserved honor of joining MBA’s leadership ladder.”
Chandler brings to the role more than 30 years of experience in commercial real estate finance, having been with M&T since 1991. In her current role, which she has held since 2018, Chandler has been responsible for making credit decisions for M&T RCC multifamily and healthcare transactions underwritten in the Fannie Mae and Freddie Mac and Federal Housing Administration (FHA) platforms.
She also oversees the management of the company’s operations, asset management group, and transformation team.
Prior to this role, Chandler served as the M&T RCC chief FHA underwriter, a role she held for 13 years. She also worked as a senior Fannie Mae DUS underwriter and held various roles managing the closing and delivery for FHA and Ginnie Mae transactions.
Additionally, Chandler has served as a relationship manager in the company’s commercial real estate division, focusing on construction and permanent portfolio lending.
Chandler’s commitment to the mortgage banking industry is evident through her active involvement in various committees and groups, according to a press release on the nomination. She is a voting member of MBA’s board of directors and currently serves as the 2023 chair of MBA’s Commercial Real Estate/Multifamily Finance Board of Governors (COMBOG).
In 2022, Chandler was appointed to MBA’s DEI Committee and joined the Audit Committee in 2021.
Outside of her professional responsibilities, Chandler serves as a board member for several not-for-profit entities. She is a director for the University System of Maryland Foundation (USMF), where she actively participates in the Governance Committee.
Furthermore, Chandler has been involved with Partners in Excellence (PIE), an organization affiliated with the Archdiocese of Baltimore, since her appointment to the Advisory Board by Archbishop Lori in 2017. Currently serving as Vice Chair, she remains passionate about the program after six years of dedicated service.
This content was generated using AI, and was edited and fact-checked by HousingWire’s editors.
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Residential real estate activity picks up despite low inventory
All 12 Federal Reserve districts have seen issues with a lack of housing inventory, which is largely due to existing homeowners holding back on listing their homes after previously locking in low mortgage rates.
Demand from the buyer side has remained steady or increased, however, and new home builders have responded to inventory shortages by increasing speculative inventory production, according to the Federal Reserve Beige Book, released Wednesday.
The Beige Book is a compilation of data and interviews with bank and branch directors, community organizations and economists from on or before May 22.
“Residential real estate activity picked up in most Districts despite continued low inventories of homes for sale,” the report states.
The Beige Book also notes that “home prices and rents rose slightly on balance in most Districts, after little growth in the prior period.”
In return, the lack of inventory of homes for sale pushed demand for rental properties in some areas — including New York, Chicago, St. Louis, Kansas City Federal Reserve districts.
Following are excerpts of statements on housing conditions from each of the 12 Federal Reserve districts.
***
Boston – Contacts around the District attribute the still-low sales numbers to low inventories more than to weak demand, as slightly lower mortgage rates have helped bring more buyers to the market.
House price appreciation has slowed on average but remains slightly positive, with the exception that home prices in Massachusetts (not including Boston) have experienced modest declines from a year earlier. The modest price growth in the Boston area marks a trend reversal from the preceding few months.
Contacts anticipate that, despite healthy buyer demand, home sales are likely to experience only a modest seasonal increase moving forward, owing to extremely low inventory levels.
New York – The residential sales market has been strong across the District. A New York City-area contact reports that the sales market in and around New York City has picked up strongly in recent weeks after a brief pause in early April, which was due to uncertainty in the banking sector.
After a slow start to the year, housing markets in upstate New York have also started to pick up, with bidding wars and multiple offers becoming more common. Inventory remains exceptionally low and is restraining sales activity in much of the District. A key factor suppressing new listings is the prevalence of homeowners with historically low interest rates on their existing mortgages, reducing the incentive to sell and move.
A strong economy and relatively high mortgage rates have pushed some movers to the rental market, boosting demand.
Philadelphia – High interest rates have continued to dissuade existing homeowners from listing their house and losing their low interest rate. Existing home sales have fallen moderately in this district, and prices have continued to rise as the market heats up again. New home builders have benefited from the unseasonably modest sales of existing homes as the resale market has slowed.
Cleveland – Demand for residential construction and real estate has stabilized in this District, and contacts attribute this stabilization to the arrival of spring and flattening interest rates.
Homebuilders have reported an increase in speculative construction projects in this District, as many buyers want to purchase and move into homes immediately, in part to avoid further rises in interest rates.
Richmond – Residential real estate respondents indicate in the report that the spring market is off to a good start, with sales prices continuing to appreciate, but not at the same pace as last year. For-sale inventory remains constrained due to fewer people putting their homes on the market, but buyer traffic has been steady while the days on market has increased slightly in the last month.
However, fluctuations in mortgage rates have caused buyers to pull back, with pending sales and closed sales both down in this District. Builders have been offering strong incentives to close deals.
Atlanta – Housing demand throughout the District has remained strong despite interest rate and home price volatility. Though home sales are down compared to a year ago, sales in many markets in this District have increased on a monthly basis, as buyer sentiment has modestly improved.
The supply of existing homes for sale has remained low as homeowners have showed increased hesitancy to list homes for sale, especially if they financed at a low interest rate. Home prices remain down from peak levels but have recently shown month-to-month improvement.
New home builders have responded to inventory shortages by increasing speculative inventory production, and some have begun to reduce buyer incentives.
Chicago – Residential construction activity has been down modestly in this District. Contacts report that high-interest rates have led some projects to be postponed or canceled and that while construction costs had fallen, the decline isn’t enough to offset higher financing costs.
Residential real estate activity has decreased modestly as well. Prices and rents have declined, and the low inventory of homes for sale has helped to prevent larger declines.
However, there have been reports of rising retail rents in some areas because of a lack of high-quality new construction.
St. Louis – Rental rates for residential real estate have increased slightly in this District. The number of new listings in residential real estate have dropped sharply in Louisville since our previous report, while new listings in the Memphis and Little Rock regions have remained unchanged. Seasonally adjusted home sales have remained unchanged since the previous report.
Minneapolis – Residential construction has remained subdued. Single-family permitting in April was more than 40 percent lower year over year in the Minneapolis-St. Paul region; most other large markets in the District saw even bigger declines. Discounts have started to appear for some speculative developments.
Closed (residential real estate) sales in April fell notably year over year across the District, with many larger markets seeing declines of 30 to 50 percent. Median sale prices have declined in western and central Montana and have been flat in several other markets.
Kansas City – Housing rental rate growth has remained elevated in several western District states, but the pace of increases has declined broadly and swiftly from the growth rate experienced during the past year.
Dallas – Housing demand broadly has held up in the Dallas District, though sales have continued to be weaker than a year ago. Contacts have noted a decent spring selling season, with prices largely stable, and builders have been able to raise prices slightly in selected areas.
Outlooks have been cautious, however, with some voicing concern about whether demand would hold up beyond the spring selling season.
San Francisco – Activity in residential real estate has slowed further in this District. Contacts across the District have reported stable demand for single-family homes, although high mortgage rates have restrained prices. Existing single-family inventory has been low, and owners appeared hesitant to forego their existing low-rate mortgages by listing their homes.
Despite reported improvement in the availability and cost of materials, construction of new homes has been flat-to-down as developers responded to higher financing costs.
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Take more time, ask better questions: How loan officers are getting clients in homes as rates soar
With rates around 6.9% and home prices still near record highs, homebuyers are demanding that their loan officers provide options to lower monthly mortgage payments as much as possible.
Michael J. Barnes, a branch manager at Mann Mortgage, recently had a client who planned to live in a new home for five years before selling it. The client requested a cost analysis to compare monthly payments on a mortgage at 7.5% versus a 6.5% mortgage rate with a permanent rate buydown.
His client would pay $4,000 to buy down the rate by one full percentage point (100 bps) and save $7,880 over the five-year period he planned to keep the home.
“In that client’s case, it made sense to pay to do a permanent buy down,” Barnes said. “There were too many things going against the client to do a temporary buydown, knowing that he’s going to keep it for a maximum of five years.”
To get the best product for the borrower, Barnes, like many LOs these days, has had to run different scenarios based on the client’s preferences, including the mortgage term, down payment and whether the purchase would be a primary residence versus investment, as that would affect the pricing of LLPA fees.
LOs across America are challenging clients to think about their financial situation several years down the line, asking about plans for kids, how much is being saved in IRAs/401Ks, and more. These days, there’s much more to the job than, “Here’s much you qualify for,” LOs said.
“What I’ve seen is that the really good mortgage advisors today are taking time to understand each borrower’s circumstance, short term goals, long term goals and put together a plan with them of how long are they going to be in the house, how much do we need to put down on that house, and understand not every loan is created equal for every person, depending on what their goals are,” said Brian Covey, executive vice president of Revolution Mortgage.
Understanding the borrower
Randy Kaufman, a senior loan originator at Notre Dame Federal Credit Union, offered his client the option to float his rate for a transaction that is set to close at the end of June.
When Kaufman’s client’s offer was accepted at the end of May, the client anticipated that the debt ceiling legislation would pass and that the Federal Reserve would pause hiking rates in the upcoming June FOMC meeting, which in turn would bring mortgage rates down.
“They didn’t want to lock it yet, they wanted to let it flow. So they’re saving themselves some money by letting it flow,” Kaufman said.
Being conservative never hurts and being strategic about the market is important, Jared Sawyer, a sales manager at loanDepot, said.
loanDepot offers borrowers the option to float rates but Sawyer sees the majority of his clients want predictability when it comes to rates – opting to go with a permanent rate buydown.
“I would say about 95% of first-time homebuyers want to know what their payment is going to be out of the gate. They don’t have to worry about that changing on them,” Sawyer said.
Especially when the seller is willing to give concessions, the buyer is able to get a credit for closing and contribute to buying down points.
Seller concessions are abundant in some of the markets that have cooled – including Oregon and Arizona – and his clients are able to take advantage of that, Sawyer noted.
“I let them know their options. These are the options you can do and here are the pros and cons of this (…) About 90% of the conversation we’re having, [I’m hearing] we don’t want to look at something temporary. We want to make sure we know what our payments are going to be,” Sawyer said.
Every scenario is different and he finds some of his experienced buyers – those who bought their first homes already are open to the option of a temporary buydown, according to Sawyer,
Temporary buydowns often make more sense for buyers planning to live in the home long term as they are more likely to have a refi opportunity during that time period, Barnes noted. Also, seller-funded temporary buydowns may not be available depending on how hot market conditions are.
A game of conversion for loan officers
“The knowledge of what the market is doing and knowing why it is happening is critical right now more than ever,” Jose Valenzuela, a loan officer at Motto Mortgage, said. “If you can paint a picture for the borrowers explaining potential scenarios both good and bad, it’s also critical.”
Valenzuela has been able to create a high pull-through closing after retaining pre-approved clients thanks in part due to weekly check-ins with his clients. Being a “trusted advisor” is important in an environment where buyers are trying to find their homes. It’s important to focus on what the buyer might be looking for, Valenzuela said.
For instance, having a nice yard for a borrower’s son could mean they can pass on to their child like their parents did for them, he noted. Some borrowers are focused on legacy to leave for their child’s future.
“Have a meaningful conversation about ways to focus on legacy like a living trust, a financial planner (…) This will keep you in the driver’s seat against almost any other loan officer,” he said.
Many loan officers are hoping for the market to turn, which in turn would bring back some refi business among homebuyers who locked in rates at close to 7% levels at the latter half of 2022.
“I would not hold my breath on that I would plan on this environment being consistent. You have to work three times as hard to make the same paycheck you did last year in this environment,” Sawyer said.
Ultimately, it’s a game of conversion. Loan officers need to take more time with borrowers and ask better questions to secure loans, Covey said.
“Even if you’re talking to fewer people, if you can convert at a higher percentage, you’re still getting the volume and velocity of applications and closings that you desire.”
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Top Producer Software launches social media lead product
Top Producer Software, a leading real estate software provider, announced on Monday the release of its first-ever social media lead product, Social Connect. This new product combines social media marketing with automated lead nurture to enable real estate agents to grow their database and convert more leads into clients.
“Social Connect is a game changer for our customers with the number of quality interactions being generated,” Kerm Foltz, senior vice president of operations at Top Producer, said.
Social media has become an indispensable tool for real estate agents to expand their networks and attract potential clients. According to industry data, more than 95% of home buyers utilize online tools during their home search.
To capitalize on this trend, Social Connect leverages social media advertising to reach a broader audience, targeting leads that the advertising algorithm identifies as more likely to make a home purchase.
Incoming leads from Social Connect are automatically sent to the customer relationship management (CRM) system, where they receive relevant content tailored to their needs. This includes branded market reports, infographics, and other educational materials aimed at engaging leads and converting them into clients.
Top Producer also has access to one of the largest multiple listing service (MLS) networks and utilizes live MLS data to create active and sold listing ads, which are then optimized by a team of advertising experts. Agents only need to select their target city and budget, leaving the rest to Top Producer Social Connect.
In addition to its other features, the system generates a high volume of affordable leads with accurate contact information while also utilizing Top Producer’s smart follow-up technology.
Top Producer tracks all the essential activities of leads in a centralized location within the CRM. This allows agents to provide exceptional service by accessing the communication history and saved property inquiries associated with each lead’s contact record.
“The lead nurture content is one of the big advantages of Top Producer Social Connect. Messages don’t sound canned, have a better personality than other lead generation follow-up systems and include nice infographics,” said real estate agent Marty Soller.
Top Producer Software has been a trusted provider of innovative real estate software solutions for over 40 years, assisting tens of thousands of real estate professionals in streamlining their businesses and maximizing their networks. The company is part of the Constellation Real Estate Group.
This content was generated using AI, and was edited and fact-checked by HousingWire’s editors.
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Bullish Homebuilders, Affordable Housing & Prices WON’T Move
The housing market REFUSES to slow down. Last year, homebuilders had a bleak outlook for 2023 home buying, but now, not even halfway through the year, they’ve reversed their sentiment with high hopes that demand stays red hot. How is this even happening? With mortgage rates higher than they’ve been in years and barely any inventory on the market, wouldn’t buyers take the hint and let their foot off the gas? We brought back John Burns from John Burns Research and Consulting to give us some answers.
John’s team has some of the freshest housing market data available. With over 1,000 research contracts a year, they’re constantly talking to homebuilders, buyers, flippers, and everyone in the home-buying process. John touches on household formation and why millennials are saying “no” to roommates, even as prices rise. He’ll also talk about where Americans are moving, what’s causing construction costs to come down (but also grow?), and why the Fed is failing to kill the housing market.
Also, if you want to give a hand to the generation helping young buyers the most, it seems that baby boomers are having an unexpectedly significant role in propping up the economy. We’ll also get into new affordable housing projects that could bring more starter homes on the market. Want to know John’s thoughts on what could happen in the housing market over the coming months? Stick around!
Dave:
Hey everyone, welcome to On the Market. I’m your host, Dave Meyer, and we have an excellent show for you today. I know I say that every time, but we really do. Today we have one of my favorite guests we’ve ever had coming back. His name is John Burns. You may know him. He is the Founder and CEO of a company called John Burns Research and Consulting.
They do some of the best original research into the housing market, construction, affordability, anywhere on the market. I love to look at data, but I am mostly looking at and examining other people’s data. John and his team are creating all new data sets to help us understand the housing market better, and we have a fascinating conversation with him where he shares what him and his team have uncovered about the housing market over the last three to six months.
And if you listen all the way through, which you should, you’ll probably hear John blow my mind several times where I’m sort of incredulous, where he has really unique, amazing data to share that I really don’t think you can get anywhere else. Super lucky and excited to have John Burns on the show today. We’re going to take a quick break and then we’ll bring him on.
John Burns, welcome back to On the Market. Thanks for joining us again.
John:
My pleasure, Dave. How are you doing?
Dave:
I’m doing great. Thank you. For our listeners who didn’t listen to your previous episode or appearance on this show, can you just tell us a little bit about yourself?
John:
Sure. I own a company called John Burns Research and Consulting. There’s about 130 of us. We try to figure out what’s going on in the housing market for basically big companies that build homes and invest in the market. A lot of hedge funds, private equity, building product companies, and we do about a thousand consulting assignments a year for them too. We’ve got a subscription research business and then a consulting business.
Dave:
That’s great. And amazing source of data. John’s also a great follow on Twitter if you want to follow some of the research there. One of the reasons I really enjoy speaking with you, John, is because you all do such great original research. We look at a lot of data here, but we’re not producing most of it ourselves. Just at a high level, what is your research showing you about the housing market right now in the broadest sense?
John:
As you said, the problem with doing so much research is then trying to summarize it all.
Dave:
We’ll take your top three points.
John:
Yeah, probably the top three would be household, formation, and migration. We saw actually a decline in households formation during the first year of COVID and then a rapid surge. And we ended up forming 300,000 more households across the country than we thought, than we thought during normal times, let alone a pandemic. We were concerned with all this construction coming, particularly in apartments, that it was going to empty up into a market. It’d be hard to lease up and in turn it was the exact opposite.
Dave:
Interesting.
John:
I know. That that was probably the most fascinating thing, and the data on that kind of lags, and that’s the challenge. But some of the apartment REITs were helping us out with that. Then we just released some migration data where we’ve now got how often people are moving domestically. We haven’t figured out international people coming here yet, and with only a two-month lag.
So the second part of this would be people are moving less. And so some of the migration even into some of the great areas like Phoenix and Texas and even I was really surprised, Orlando, have really slowed a lot. I mean, you go to Orlando and the hotels are all full and you’d be really stunned to see that, but that’s what’s happening. And our consultants on the ground are saying the exact same thing.
Dave:
Okay, great. Well, I have several follow-ups, so that was a good summary. Giving me plenty to talk to you about. First and foremost, before I ask my question, I just want to let everyone know what John is talking about when he talks about households is basically an independent group of people living together. It can be a single individual. It can be unrelated people living together like two roommates.
And it’s a good measurement because it basically measures the total demand for housing in the United States. Basically rentals and houses combined. You take the total number of households and that’s how many residential units that we need. And as John said, it fell a little bit during COVID. Makes sense during sort of lockdown periods, but exploded over the last couple of years. Has it slowed down considerably in the last year or so?
John:
Yeah, so I could tell you exactly. A million three is what we expect in a typical year, a million three households formed. During the first year of COVID, we fell to a million. During the second year we went to a million nine.
Dave:
Wow.
John:
Now we’re back reformed a million three over the last 12 months. I would say it’s returned to a normal level over the last 12 months, but it’s trending down again, so we’re keeping a close eye on it.
Dave:
And do you see that 1.9 was sort of a pull forward and therefore we should expect it to sort of decline in the future? Or do demographic trends support future household formation?
John:
I think there was a huge shift here to people living with fewer people. And we know this because some of the publicly traded apartment REITs have disclosed this, that the number of adults per apartment actually has fallen. People are saying two roommates are getting a three bedroom because they need one for an office, or somebody’s got an ability to work from home five days a week or two days a week, so they’re moving to a suburban location where they can afford more space and a place to live alone. I think some of this been pulled forward, Dave, but I think a lot of this is what I just mentioned. The other thing we’re doing more research on is a lot of tenants are getting help from their parents. There’s a baby boomer wealth effect here that is just, we’ve been talking about forever, but now the data I wish I had was how many people are leasing apartments and their parents are co-signing? Because I think that is trending up.
Dave:
Wow. I mean, you don’t have to disclose your sources, but how do you know that more people are getting help from their parents?
John:
That is more anecdotal, qualitative information, so that’s why I don’t quite have the data on that. But the big companies and a bunch of our clients at our conference last two days were sharing this too, the rent to income ratios have not increased despite the fact that they’ve raised rents like 25% in the last three years. I’m like, “How can that be? Are your tenants getting 25% raises?” They’re like, “No, with some of it, some of that relocation. And I think some of that is they’re including rental income in the application.”
Dave:
Oh, I see. Okay. When you consider RTI, like if someone’s co-signing, you count the parents’ income in that equation?
John:
Well, I’m not sure everybody does it the same way.
Dave:
Okay. So given that 1.3 household formation over the last 12 months, are the patterns holding where you would expect? Like the South, Southeast seeing the most household formation or how does that break down regionally?
John:
No, it’s still strong growth in the South, but I would say most of those markets, even the best ones are growing less than they were a year ago. There’s a couple, like Orlando has actually got negative migration right now of Americans. I think there’s people from other countries moving into Orlando. I think it’s positive, but it is fascinating to me some of these things that you think would be positive that are actually showing negative right now.
Dave:
You mentioned that people are moving less. Is that also sort of across the board?
John:
Well, you mentioned pull forward. I think if people were going to move, they kind of did it a year or two ago. There was some of that. Homeowners though, are stuck. I mean, one of my favorite questions to ask when I give a speech is, “How many of you own a home and how many of you’re looking to move?” And everybody’s hand comes down.
Dave:
No one raises their hand?
John:
Right, or at least they’re not going to admit it.
Dave:
Because then everyone will try and buy the house from them.
John:
Exactly. Exactly. The realtors are really struggling for that very reason right now, there’s just not that much on the market. Interestingly, it is a tremendous beneficiary to the home builders because typically they have about 12% of the homes available for sale are new homes. Right now it’s 32%.
Dave:
Oh, my God. Wow.
John:
So if you want to buy a home, you’re like, “I can’t find anything in the resale market, but the home builders got something” and so the new home market is doing pretty darn well.
Dave:
That is unbelievable. I do want to follow up on that, but I did want to ask you one other migration question. It seemed that during the pandemic people were moving across state lines a lot and that was was making a lot of headlines. But there was some other data I think from a few different sources that showed that people were moving intra-state as well, a lot of out outside from metro areas to suburban or rural areas. Is that pattern continuing?
John:
Well, we’re seeing it and I think it was the work from home trend. You didn’t want to live too far from work because the commute was hell, and then all of a sudden you were told you don’t have to commute or you only got to do it three days a week. “Hey, we can go get that house.” And I’ve been surprised that people are doing it not just to buy a house, but as we talked about, to rent. “Hey, I can rent a nicer place in a good school district. I only have to commute three days a week.” The wild card right now is that how many of them are going to be forced to come back in and how many days per week? That’s the raging debate right now that we haven’t completely put our arms around, but I know not all of them are going to be coming back in. I’m going to say that the rent growth and the home price appreciation in the suburban and ex-urban areas has definitely been more than the urban areas for that reason.
Dave:
Do you have a guess as to the work from home trend? Do you think it’s going to stick around or will it decline?
John:
Well, I think more people are being pushed back into the office, but that said, I’ll pick a number, say maybe 10% to 15% of people who used to have to come in every day are not going to have to come in more than one or two days a week. And that’s significant. And I’m talking about office workers here, people that clean hotels and manufacturing facilities, I’m just talking about office workers.
Dave:
All right. I want to get back to something you mentioned earlier, which was about multifamily construction. There’s been a lot of data pointing to that. I think Q2 this year was meant to be sort of the highest number of deliveries for new apartments across the country. But you said that those apartments are being absorbed at expected rates. Is that correct?
John:
They have been. And that’s been a surprise. I think these migration trends has got to change that conclusion though. I think a lot of these projects are going to open up and need to lease up. And I am hearing this particularly in Phoenix right now, that it’s quite competitive because of the new construction that’s coming online.
Dave:
It’s competitive to find tenants?
John:
Yeah. Rents are falling.
Dave:
There were some data that came out I guess probably last fall, like Q3 that was showing that apartment rents were coming down in some markets. But it seems that’s stabilized, right? On a national basis at least.
John:
Yeah, that’s kind of vintage. I mean, the fourth quarter was pretty crappy. I mean, it’s usually a slow quarter. It was slower than usual and then the first quarter came back stronger than usual. It’s usually a good quarter. And this was stronger than usual and I don’t really know why. I haven’t heard any good explanation for what was going on.
Dave:
Yeah, that’s interesting. I don’t know, but I guess maybe peak fear or something or recessions, I don’t know.
John:
It must have been a confidence thing would be my guess too.
Dave:
Then in terms of new construction of residential properties, single family homes and small multifamily properties, how would you describe what’s going on there? You just said that there’s a huge percentage of the existing inventory on the market is comprised of new homes. Homes about, what? Triple it is normally.
John:
Right.
Dave:
Is that something you think will continue and are builders picking up their construction rate given the climate right now?
John:
They absolutely are. And I’ve got a great data point on that. We survey 20% of the home builders every month and we asked them in November to predict what was going to happen in 2023 and they thought their sales would be down 9% in 2023. We just surveyed them last month and they think their sales are going to be up 7% this year.
Dave:
Wow.
John:
Their business plans have completely changed. And so if you’re running a business and you expect it to be down and now you expect it to be up, you’re starting a hell of a lot more homes. There’s a big bifurcation here. There’s the big companies with great balance sheets that are just killing it. I think there are small builders that have been struggling a little bit, their construction lender maybe isn’t as eager to finance them anymore. And so I think you’re going to see the big builders get bigger through all of this. The overall numbers may not go up at all this year, but I think market share for the big companies is going to go up.
Dave:
It’s so interesting just in the sort of a macroeconomic standpoint, because normally when you see a housing slowdown building goes down and you see a lot of layoffs, for example in the construction industry. But that sort of what you’re saying makes sense. When you look at jobs numbers you don’t see … Construction has been picking up jobs for a lot of the months in 2023.
John:
I think this is probably not making Jay Powell happy. I mean, it’s the housing market that he usually gooses when he needs it, thinks to go better and crushes when he thinks needs to slow down. He’s trying to crush the housing market and it’s not getting crushed.
Dave:
Yeah, that’s super interesting. Yeah, I mean, you wonder if inventory stays this low, if this will continue, it will be boom times for builders or at least single family builders in the next couple of years.
John:
Well, until something breaks in the economy, which Jay Powell seems determined to make that happen. Stay tuned.
Dave:
True, true. Well, you joked before we started filming that we would have to talk about the R word, the recession, but I’m going to wait on that because I do want to talk about something you posted, your team posted recently about construction costs and basically how they’ve been impacted over the last couple months. Can you tell us a little bit more about what you’ve been learning about construction, the trends for construction costs?
John:
Yeah, so the commodities, lumber being the biggest, which has come back down, and that goes for aluminum and a lot of other things that go into building materials. The building material companies are getting some relief on commodities, but their labor costs are still going up. And so they’re not planning on dropping price. In fact, they’re planning for more cost increases this year, but not as much as they charged last year, which is really disappointing to my construction clients. They were hoping to get some big cost relief and other than lumber, they’re really not getting it. I think the companies that made the most money in construction were the trade partners who were just able to charge whatever the heck they want and had a ton of profits. I’m hearing some of their profit margins are coming down. Maybe you go out to bid on something now and you’re getting a better bid than you did, but it’s not coming from the material side of things. It’s coming from the installer just saying, “Okay, I’ll go back to normal profit margins here.”
Dave:
Wow. Yeah, that’s wild. I mean, I guess in a lot of senses it would be good if costs could come down for everyone, but I guess that supports the idea if the builders can continue to pass along these costs to the consumer, which it sounds like they’re able to do, it doesn’t look like new home prices are going to come down anytime soon.
John:
Well, this is not widely known, but nationally the home builders have dropped prices about 12%.
Dave:
Oh, wow.
John:
Yeah. And it’s a combination of price declines and incentives. The biggest incentive is they’ve been buying down the mortgage rate, so they’ve been paying a significant number of points up front to get somebody’s mortgage rate down into the fives and they’re selling homes and their margins are still fine when they’re doing that, particularly because they’re getting some lumber cost relief too. They’re like, “Look, we found a payment here and we’re a better advantage than the resale market now because that hasn’t corrected very much,” and that’s one of the reasons why they’re doing so well.
Dave:
Wow, that’s pretty interesting. I’ve always wanted to get that data. People have asked me that question many times, how you factor in incentives in the decline of price, basically the effective price of a property. Do you just get that from your surveys of builders and figure out how they’re incentivizing people?
John:
Yeah, I mentioned those thousand consulting studies we do. A lot of them are going into new home communities and figuring out what’s going on and helping people price. We collect that data, but I’ll tell you if they want … The builders disclose that on their earnings calls. That’s publicly available information. They’ll tell you exactly what they’re doing. It’s a great data point.
Dave:
And how about the composition of new homes? There’s been a lot made that builders are building bigger houses, for example, there’s not a lot of inventory for “starter homes,” that sort of thing. Has that trend continued as well?
John:
No, their homes are definitely smaller. That we [inaudible 00:19:23] but to your point, they’re probably going from 2,500 to 2,400. I mean, they’re not getting too small, but what they’re trying to do for an affordability solution is build a smaller home. Ideally they can get one more home per acre or something like that and divide the land costs across more units. They’re been stripping costs out of the house now too, so houses are a little more bare bones than they were a year ago. Again, to get the payment down because mortgage rates have risen so much, they got to get the payment right.
Dave:
So it sounds like there has been a little bit of affordability relief for the new home sales market. Do you see it falling any further or given what you’re talking about, it’s probably going to stabilize?
John:
Define affordability relief. Mortgage rates have gone up, so that’s been affordability disaster. But they’ve been batting that with all these other things. I think on a payment standpoint though, Dave, it’s still more expensive than it was a year ago for somebody to buy a house.
Dave:
So you mentioned the recession and Jerome Powell. Why do you think despite the efforts of The Fed to cool the economy, the housing market is holding up as well as it is in terms of price? Volume is obviously down pretty significantly.
John:
When The Fed raises rates to cool the economy, it usually takes 12 to 18 months. We’re kind of in that place right now. It just takes a while to go through the system. I think it’s a lack of resale supply and I think it’s some of that baby boomer wealth I mentioned too. The Fed’s never done this right after the government distributed trillions of dollars all across America. I mean, there’s some real haves and have nots out there, but the haves are still spending and doing fine. And probably the biggest have is businesses whose balance sheets have never been better. Even look at the publicly traded companies, they’re in great shape. In fact, this last quarter they bought back more of their own stock than ever before. I mean, what’s a sign of having a great balance sheet more than that? He’s really fighting it uphill battle where he’s trying to slow the economy, but everybody’s in great shape. Not everybody.
Dave:
Yeah, but it’s difficult. What is your take about the recession? I have to ask.
John:
Well, we were planning on one in the back half of this year, and now it looks like if he’s going to get it, it’s probably going to be early next year. There’s lots of definitions of a recession, the negative real GDP, that could happen this year. But that could just mean the economy’s growing at 3% and inflation is four. That would technically be a recession. I mean, what we care about is unemployment going up and The Fed’s own forecast is saying, “We’re forecasting unemployment to go up a percent.” They’re trying to do that. Right now people that are getting laid off seem to be finding jobs right away. Unemployment really hasn’t moved much at all. And that’s why we pushed it off to next year is I think The Fed is really having a tough time getting the economy in check and bringing inflation back down, which they’re adamant about doing.
Dave:
That they are. They have been very clear about that. Do you think that there’s any possibility that the economy is less interest rate sensitive than it used to be?
John:
Well, if you’ve got a great balance sheet and interest rates go up, you can handle that. I think you can make that argument. Well, another argument would be that thanks to Dodd-Frank, everybody’s got a fixed rate mortgage. There’s hardly any adjustable rate mortgages out there. Rates are going up, but your house payment isn’t changing. And that was not the case before. Usually about a third of people had an adjustable rate mortgage. I think that could be the case. What makes me hesitant is consumer credit card debt and other things are near all time highs and they’re very interest rate sensitive. The auto industry is very interest rate sensitive. The housing industry is very interest rate sensitive and there’s not a lot of housing. I mean, a realtor or a title company, you’re really struggling. I think you may be correct, but I still think it’s interest rate sensitive.
Dave:
Yeah. Yeah. I’m just curious, I mean, it’s just interesting because you think about how housing being one of the most leveraged industries or asset classes and it’s holding up, but there are obviously other variables to that. But I’m curious if the tool, especially like you said, after distributing trillions of dollars, is the tool just not as effective as it’s been in other scenarios when they’ve raised interest rates to try and accomplish the same goal?
John:
So about 10 years ago, speaking about levered, there was about an equal number of debt and equity in America. There was about $9 trillion in debt on houses and about $9 trillion in equity. Today it’s 12 trillion in debt and 31 trillion in equity.
Dave:
Oh, my God. What?
John:
Exactly. Most people-
Dave:
Wow.
John:
… are not levered at all. In fact, a third of homeowners, Dave, don’t even have a mortgage.
Dave:
Wow.
John:
I mean, those are the primarily the baby boomers.
Dave:
That blew my mind. I had no idea where you were going with that. That’s incredible. I mean, I guess it makes sense that equity growth and property values has just been remarkable even before the pandemic, going back like 15 years now or 12 years.
John:
Yeah. I just looked at this, and I’m not going to get the math exactly right, but everybody refinanced too. I think there were nine million people who refinanced without pulling money out. And so they got their payment down an extra … I think it was 2,600 bucks a year people saved. Nine million homeowners saved 2,600 bucks a year, and then about another four million refinanced and pulled some money out and their payment went up an average of 1800 bucks a year. When you drill down into it, it’s like this was a great opportunity to reduce your house payment and then home prices go up 45% in three years too, and you’re sitting on that mortgage.
Dave:
That’s super interesting. Yeah, I didn’t realize how many rate and term refinances there were and saving all that money probably contributes to inflation too, and how people are holding up. It’s just $2,600 or more spending power that those homeowners have.
John:
That’s a great vacation every year.
Dave:
Yeah. Sounds nice. Well, John, I did want to ask you about something. One thing we’re starting to see here a little bit is some legislation coming into place to try and create more affordable housing. Are you familiar with the Live Local Act that was passed in Florida?
John:
Yeah, and our team in Florida … You mentioned Twitter. We also do a newsletter every Friday. We publish a lot of content for free, and our team in Florida wrote a piece on the Live Local Act about within a week after it being passed, so in April. They know more about it than I do.
Dave:
So from my understanding, it’s a policy that just went into place that will attribute $711 million for housing projects and assistance through a state entity there to create and build on housing programs. The bill goes into effect July 1. Your team has looked into this. What do they think the impact of … It seems like a big dollar amount. Do you think it will have an impact on affordability?
John:
It is a big dollar amount. Although developers of Florida are super excited about it. It’s for development, and you have to set aside, I think it’s 30 to 50% for affordable units, but affordable is 120% of the median income. It’s not that bad. It’s not like you have to go down to 50% of median income. And I was just talking to Leslie Deutch, who’s our team member who runs that in Florida. She said that you can do that and a $360,000 town home qualifies. I mean, you can get the subsidies. The bigger thing, Dave, though is they’re cramming down on the cities that you can’t stop the rezoning. If they want to scrape a Kmart and put apartments on it or put town homes on it, the city can’t stop it. It’s the state’s attempt to combat the NIMBYs.
That has nothing to do really with the $711 million, but that could be a huge construction boom because getting those approvals, as you know, is really challenging at the local level. They’re trying to mandate it. It’s piggybacking out what California did here a couple years ago with accessory dwelling units. They basically told the cities, “Hey, you can’t stop people putting accessory dwelling units in their backyard.” And we went from something like 1,680 units a year to 21,000.
Dave:
Wow.
John:
Here in California. The cities are still trying to fight it. But it’s interesting that these bigger entities, the state level are trying to solve the problem because the problem really is local.
Dave:
Yeah, it does seem that way, and I know Washington did something similar with the ADUs. Colorado I think is considering it, and it does seem like a lot of states are considering this approach and does seem like a reasonable way to improve the amount of affordable housing in the market.
John:
Yeah, and if Fannie and Freddie, they’ll allow you to include tenant income on some of these things, but right now it has to be backward looking. You can’t borrow for something you haven’t leased out yet. You got to show 12 months worth of history. If they would just look at it like typical apartment financing where they know that, “Hey, that’s going to be leased up at 1500 a month,” that could help a lot of people build an ADU.
Dave:
So is it similar to other lending requirements where you need two years of rent to be able to count it towards your income?
John:
Yeah, I had heard one, but you would know better than me.
Dave:
Okay. Yeah, yeah. I mean, I think it depends, but interesting. It sounds like these are interesting ideas. Obviously for the people who would get those affordable, let’s call more affordable housing, that would help, but do you think that will have any impact on broader prices? Let’s just continue with the Florida example here. Do you think it would actually have an impact on appreciation or home prices in that market?
John:
Well, it should. I mean, the more supply you put into a market, the more demand and supply come back into balance and you should see less price appreciation and less rent growth.
Dave:
Yeah. Well, I guess it’ll be an interesting case study to see here if it’s going into effect so soon to see what’s going on. Because obviously prices in Florida have gone up at some of, if not the fastest pace in the entire country.
John:
60% in three years across the [inaudible 00:30:45]-
Dave:
Wow.
John:
Yes.
Dave:
That’s unbelievable. Wow. That’s staggering number. You’re dropping a lot of good stats here, John. Well, John, as I shouted out, John’s a great follow on Twitter, but if any people want to learn more about your research, is there anywhere else they should do that?
John:
Yeah, we post even a lot more on LinkedIn, so just follow our company on LinkedIn and we have a newsletter. It’s JBREC.com, where there’s a ton of free content there. That’s our marketing is giving some stuff away for free, so I would recommend that. Then if some of your clients are flippers or maybe good sized landlords, we have a couple surveys where we survey flippers and landlords and if they want to participate in that, it’s just a couple minutes a month or even the flipper ones once a quarter, they get all the data associated with that as well.
Dave:
It’s a great offer, so definitely check that out if you’re interested. Again, it’s JBREC.com or check them out on Twitter or LinkedIn. John, thanks again for joining us. We really appreciate it.
John:
You bet, Dave. Thanks.
Dave:
Thanks again to John for joining us today. That was an incredible episode. I hope you guys enjoyed it. I think John is as good as it gets in terms of summarizing what is going on in the housing market and the housing industry in general in a really concise way. Hopefully this gives you a better sense of what is happening. I personally found that data about new home construction really fascinating. If you look at the history of recessions and housing, you see that tip. This is really unusual where there is an economic downturn or home sales volume declines, but builders are actually increasing their building and they’re doing really well. That was really interesting and something I’m definitely going to look more into. And I really enjoyed his commentary sort of about the policies that we discussed at the end about Florida and some of the efforts they’re initiating to try and improve affordability in the housing market.
It’s wild to hear that housing prices in Florida went up 60% in three years, and it’s good to see that … Who knows if these policies are going to be the exact right ones, but at least there is some effort to try and increase affordability in those markets. I would love to hear what you thought of this episode, and if you liked it, please give us a good review on either Spotify or Apple. We really appreciate good reviews and if you get value out of this episode or any episode of On the Market, we would appreciate you taking a couple of seconds to leave us a great review. Thanks again for listening and we’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer, and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media. Researched by Pooja Jindal, copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.
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Housing Market Tracker: Holiday impacts inventory
Last week we saw a noticeable slowdown in housing inventory growth that I hope has more to do with a holiday week than a trend. Mortgage rates fell last week after the debt ceiling issues were resolved, but the damage from higher rates took its toll on purchase application data again.
Here’s a quick rundown of the last week:
Weekly housing inventory
This year’s growth in active listing inventory has been so slow that I am willing to bet that a zombie from The Walking Dead could outrun it. However, I am grateful we even saw some traditional spring inventory growth this year because new listing data is trending at all-time lows.
It’s been such a different year for inventory from 2023 versus 2022 that we are heading toward an event that would have seemed impossible in earlier years: If the current inventory trend continues, we will see some negative year-over-year inventory data soon for the weekly single-family listing data.
the chart below shows the clear trend, which is why tracking inventory with rates higher now will be critical to see if there is any way to stop this reality.
One big reason for this lack of inventory growth has been new listing data, which has trended at all-time lows since the second half of 2022, continuing into 2023. We had another bad week, which I am hoping is due to the holiday. With so few new listings and stable housing demand, it’s been hard getting much of a kick in inventory growth.
Here are the number of new listings for this week over the last several years:
With higher mortgage rates, active inventory should be growing more. This week’s data includes a holiday, so I’m looking for better numbers next week.
Purchase application data
As mortgage rates surpassed 7%, purchase application data had its third straight negative week-to-week print. The only thing that surprised me this time was that I thought purchase application data would actually decline much more than what we saw in the past three weeks. Earlier in the year, the cumulative average of the weekly declines when rates first spiked to 7.10% was -10%. Over these last three weeks, the cumulative decline was -3.93%.
For the year, we are at a wash: after making some holiday adjustments, we have had 10 positive prints versus 10 negative prints. Since Nov. 9, 2020, we have had 17 positive and 10 negative prints. After the big existing home sales report in March, we haven’t had much going on with purchase applications and it will be interesting to see if we get a positive print this week.
Mortgage rates fell and this year purchase applications have traditionally come back with a positive print after a week where the 10-year yield fell, something I talked about earlier in the year on CNBC.
The 10-year yield and mortgage rates
We had a keystone cops week with the bond market and mortgage rates. After the debt ceiling drama ended, we saw a noticeable move lower in bond yields, and rates fell. After the jobs report, the yield increased on Friday, leading to higher mortgage rates.
In my 2023 forecast, I wrote that if the economy stays firm, the 10-year yield range should be between 3.21% and 4.25%, equating to mortgage rates between 5.75% and 7.25%. I have also stressed that the 10-year level between 3.37% and 3.42% would be hard to break lower. I call it the Gandalf line in the sand: “You shall not pass.”
So far in 2023, that line has held up, as the red line in the chart below shows. Mortgage rates have been in the range of 5.99%-7.14%. However, we do have some issues in the mortgage market.
Since the banking crisis started, the spreads between the 10-year yield and 30-year fixed mortgage rates have gotten worse, keeping mortgage rates higher than usual. This has been going on for some time, but the spreads were getting better before the banking crisis started and the Federal Reserve went into emergency clean-up mode.
Getting better spreads can send mortgage rates back to the low 6% level without any help from the bond market. However, there is no sign of that happening anytime soon.
Another aspect of my 2023 forecast was that if jobless claims break over 323,000 on the four-week moving average, the 10-year yield could break under 3.21% and head toward 2.73%. This would send mortgage rates significantly lower than we have seen in 2023 if the spreads improve.
From the St. Louis Fed: Initial claims for unemployment insurance benefits increased by 2,000 in the week ended May 27, to 232,000. The four-week moving average declined, to 229,500.
The week ahead: A light economic week
This week doesn’t have much economic news, just the traditional purchase application data and jobless claims with some ISM reports. However, we should have some exciting bond market auctions after the debt ceiling drama ended since the government was running on fumes and needed to issue bonds to pay the bills. Also, it will be interesting to see how the bond market reacts after the last labor report, which I wrote about here.
OPEC is making one of its occasional cuts in oil production because a few countries need oil prices to be above $83 a barrel to make the math work for their budgets. We’ll see how the market responds to that. However, outside of that, we will be tracking to see if the lower mortgage rates helped the weekly purchase application demand data, and, hopefully, inventory growth will pick up this week.
As we get closer and closer to July 4th, I will be keeping an eye on the new listing data, as we are getting closer to the time when we start the seasonal decline in new listing data since we are trending at all-time lows already. the last thing I want to see is this data line take another leg lower toward the end of the year.
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Pretium Partners to acquire 4,000 D.R. Horton rental homes in $1.5B deal
Real estate investment management firm Pretium Partners is acquiring thousands of homes from home construction company D.R. Horton Inc. in a $1.5 billion deal, as Bloomberg first reported.
The deal includes a combination of completed homes and homes that are not yet finished, according to the outlet, which cited people familiar with the transaction who asked not to be named.
Neither company commented to Bloomberg about the deal.
More than 4,000 homes are involved in the transaction, which are primarily located in high-demand markets in the Southeast and Southwest, the Wall Street Journal reported. The homes, planned as rentals, have already been leased.
The deal comes at a time when a lack of for-sale home inventory is boosting the appetite for homebuilders.
The transaction could also signal investors’ re-entry into the housing market after institutional investors shed properties at the end of 2022 following a drop in housing prices nationwide.
Founded in 2012, the Pretium platform capitalizes on investment and lending opportunities and has more than $50 billion of assets with real estate investments across 30 markets in the U.S, according to the firm.
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Jobs data shows the truth about the labor market
We’ve had some odd job reports over the years, but the key is to always follow the trend. That’s especially important with Friday’s data, which showed 339,000 jobs were created in May even while the unemployment rate increased.
As someone who wrote that we should get job openings toward 10 million in this expansion, I am always mindful of my other labor talking point. If COVID-19 didn’t happen, the total employment numbers in the U.S. today should be between 158 million and 159 million, or in a weaker labor market growth scenario, between 157 million and 158 million.
Today, we stand at 156,105,000, so I think we are still in make-up mode until we reach a range acceptable to a fast economic recovery.
That’s why the jobs data has beaten expectations 14 months in a row. What the U.S. has that other countries don’t is a massive young workforce. While population growth is slowing here, we have the demographic muscle that other countries don’t have — if we didn’t have that, our economic discussion would be different.
Now let’s look at the labor market on all fronts from the data we got this week to get a comprehensive view of the labor market today. On Friday the BLS reported job growth came in at 339,000, with positive revisions, while the unemployment rate went higher, as there was a drop in self-employed workers.
From BLS: Total nonfarm payroll employment increased by 339,000 in May, and the unemployment rate rose by 0.3 percentage point to 3.7 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in professional and business services, government, health care, construction, transportation and warehousing, and social assistance.
Hours worked have fallen in the last few months, and wage growth is slowing. The fear of 1970s-style inflation was that wages could grow out of control in a tight labor market. In theory, 2022 and 2023 are tight labor markets and wage growth is slowing down. This trend should continue for the next 12 months as well.
Here is a breakdown of that data for those aged 25 and older:
The noticeable data line here is that the unemployment rate for those without a high school education is up almost 1% from two months ago.
Here is the breakdown of the jobs created this month, another big month for the government, which typically doesn’t continue at this pace. Construction labor has held up very well, even though housing permits have been falling for some time. The backlog from COVID-19 has been a jobs program for the U.S. as we are still slowly growing the housing completion data.
So the BLS jobs report is still pushing along, while wage growth is slowing down. Jobs Friday is one piece of the labor pie — we have two other data lines that we always need to keep an eye on to know the health of the labor market: job openings and jobless claims.
As the only person on Earth who talked about job openings data getting to 10 million in this recovery, I am surprised that job openings data is still around that mark. But that is off the recent highs of 12 million.
At this point of the economic expansion, I am putting more weight on jobless claims data than job openings (JOLTS). For me, the Fed doesn’t pivot, or the 10-year yield doesn’t break under 3.21%, until jobless claims break over 323,000 on the four-week moving average, and that isn’t happening either.
As we can see below, the Gandalf line in the sand has held up the entire year, even though it was tested many times.
As we can see below, the jobless claims four-week moving average is still far from breaking over 323,000. I chose that number using many different variables as I think when we crack about that level, it will be noticeable to everyone — even the Fed — that the labor market has broken.
From the St. Louis Fed: Initial claims for unemployment insurance benefits increased by 2,000 in the week ended May 27, to 232,000. The four-week moving average declined, to 229,500.
It’s important to understand the labor dynamics of this economic expansion. We had such a shock in the economy with COVID-19 and a strong labor market recovery that the make-up labor demand, which doesn’t get talked about much, is a significant reason we still see healthy numbers.
Also, it’s essential to understand the demographic difference now and what we had to deal with after 2008. The Baby Boomers are leaving the labor market, and every month that happens, they need to be replaced if demand is growing. This is why having a healthy number of younger workers not only helps with that but also provides replacement consumers, as those who leave the labor market tend to consume a bit differently than younger workers.
At this stage of the economic cycle jobless claims is the data line that matters most. Once jobless claims break above 323,000, then and only then I believe we can talk about a Fed pivot — first in their language and then possibly with rate cuts.
The Federal Reserve is scared to death of the 1970s inflation, and they genuinely believe that breaking the labor market is the best way to prevent that type of inflation from happening. As a country, we are fighting against a group of people stuck in the wrong decade with their economic mindset on inflation.
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ESSA Bank to pay $3M to settle DOJ’s redlining allegations
The U.S. Department of Justice (DOJ) this week announced that it had secured a settlement of more than $3 million from Philadelphia, Penn.-based ESSA Bank & Trust over allegations that the company engaged in redlining majority Black and Hispanic communities from access to credit services around the Philadelphia area.
According to a complaint filed by DOJ in the U.S. District Court for the Eastern District of Pennsylvania, ESSA “failed to provide mortgage lending services and did not serve the credit needs of majority-Black and Hispanic neighborhoods in the Philadelphia metropolitan area” from 2017 to 2021.
“For too long, residents of communities of color have been unlawfully denied equal access to credit and shut out of economic opportunities,” said Assistant Attorney General Kristen Clarke of the DOJ Civil Rights Division in the DOJ announcement. “When banks engage in redlining, they perpetuate existing patterns of segregation and widen the racial wealth gap in our country. This resolution makes clear our commitment to holding banks and financial institutions accountable for modern-day redlining while ensuring access to fair lending in communities of color.”
Under a consent order still subject to court approval, ESSA has agreed to invest $2.92 million in a designated loan subsidy fund designed to increase access to credit for home mortgage, improvement and refinance loans, as well as home equity loans and lines of credit, in majority-Black and Hispanic neighborhoods within the bank’s lending area.
ESSA has also agreed to spend $125,000 on community partnerships and $250,000 on advertising, outreach, consumer financial education and credit counseling to the impacted communities specified in the complaint and consent order.
“The consent order also requires the bank to hire two new mortgage loan officers to serve its existing branches in West Philadelphia and conduct a research-based market study to help identify the needs for financial services in communities of color,” the DOJ added.
In a statement announcing the settlement, ESSA “categorically denies violating any fair lending laws or engaging in ‘redlining,’” according to a press release.
“ESSA and its Board of Directors believe this is a constructive resolution to a dispute that has lasted several years,” said Gary Olsen, ESSA’s president and CEO. “It is consistent with our guiding principles and longstanding commitment to provide equal lending opportunities to all of the communities we are privileged to serve. We plan on using these loan subsidy funds to expand opportunities for qualified borrowers who can benefit from this assistance. We’re happy and pleased to help families purchase homes. It is simply the right thing to do.”
Olsen added that during the the time period covered by the government’s complaint, “ESSA did not receive a single fair lending complaint from any customer or potential customer.” He also said that the company opened a branch and business center in downtown Allentown, “in a majority minority census tract.”
DOJ opened the investigation into ESSA after being referred by the Federal Deposit Insurance Corporation (FDIC).
“ESSA fully cooperated with the department’s investigation and worked expeditiously to resolve these allegations,” DOJ said.
ESSA’s redlining settlement agreement is the latest in a series of cases brought by the DOJ. In January, Los Angeles-headquartered City National Bank agreed to pay $31 million to settle a case that alleged it avoided providing mortgage services to majority Black and Hispanic neighborhoods between 2017 and 2020.
In July, the DOJ and the Consumer Financial Protection Bureau announced a $24.4 million consent order with Trident Mortgage Co., a subsidiary of Warren Buffet’s Berkshire Hathaway. In September, the DOJ also reached a $12 million-plus settlement with Lakeland Bank over claims the lender engaged in redlining in the Newark, New Jersey metropolitan area.
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