BiggerPockets Podcast 010 with J. Scott Transcript

Link to show: BP Podcast 010: Flipping Houses 101 with J. Scott

Josh: You’re listening to the BiggerPockets Podcast show number 10, The Flipping Episode.

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Josh: Welcome to the BiggerPockets Podcast. I’m your host Josh Dorkin and this is my cohost Brandon Turner. What’s new Brandon?

Brandon: Aw. Life is great Josh. What’s going on with you?

Josh: Aw man. Actually, this week is kind of crazy. I’m actually out of town scoping out locations for a potential upcoming 2013 BiggerPockets Summit.

Brandon: Nice.

Josh: Yeah man. This week is really, really important. It’s kind of exciting. I’m not going to reveal details yet until things are set in stone, but hopefully if all goes well when I get back by the time the show airs we’ll have some more information about where this event might be happening.

Brandon: Cool. That’s awesome. I’m looking forward to it.

Josh: I think a lot of people are, but enough about me and the potential event that is to come. Before we get into it and introduce today’s guest, let’s do the BiggerPockets Quick Tip if that’s cool and I promise this time I will actually keep it very quick.

I just invite you guys to come introduce yourself to the BiggerPockets Community in the new member introduction forum and let us know who you are, where you’re from, and a little bit about where you want to go with your investing. The community at BiggerPockets is really tight and we want to help you succeed so again, come on over to the new member introductions forum and introduce yourself.

Brandon: Actually, if I can also mention, if you’re a regular forum user already. Definitely keep an eye on that forum. You can actually subscribe to the category and whenever a new person introduces themselves, you can jump in and just say hello so it’s an awesome way just to get to know people, make the community even stronger.

Josh: Build your network.

Brandon: Yeah. Definitely.

Josh: Yeah and of course we’ll have a link to that in today’s show notes, which you can access at BiggerPockets.com/Show10. All right, so let’s get into this thing cause I know we’ve got a ton to talk about today with one of BiggerPockets most active members, J Scott.

J Scott runs a very successful house flipping business and documents his deals in incredible details in his blog 123flip.com. J is also an active moderator in BiggerPockets on the forums and he answers questions all the time for beginners and professionals, so with that let’s welcome our guest to the show. Welcome to the show J.

J: Thanks guys. Pleasure to be here. Thanks for having me.

Brandon: Thank you.

Josh: Thank you--Thank you. All right man, well, let’s get started so how did you start flipping houses, basic question, get on it.

J: Yeah. I think I started the way a lot of people started in this business. My wife was watching too much HGTV and all the flipping shows. I guess step back a little bit, my wife and I were in the corporate world for a long time, living in California.

We decided to get married and said, “Hey. Let’s quit our jobs, move back east. Start a family. Figure out something new to do.” We came back to the east coast. We took the summer off, preparing for our wedding, and one morning, my wife was literally sitting on the couch watching HGTV, some episode of Flip This House or Flip That House or Flip Some House, and she said, “Hey! Let’s give that a try!” I said, “Okay.” She said, “No. I’m serious. Let’s flip a house. It’ll give us something to do for the summer.”

Josh: Your wife is the impetus of the whole thing? Usually, it’s the other way around.

J: She was. We talked a little bit about real estate previously, but we had talked about getting maybe into rental properties or apartment buildings or something else. We hadn’t really given it a whole ton of thought, but she said, “Let’s flip a house. Give us something to do for the summer. Just a fun little project.” Next thing I knew, I was jumping on BiggerPockets, learning a little bit about flipping houses and couple months later we bought our first house.

Josh: Wow. Wow. Wow. Wow. You know, I try not to make this too promotional, but BP then definitely played some kind of role in your getting your feet off the ground.

J: I think BP was the first site I found when I jumped on the web and started to do some research into flipping houses and it was definitely the biggest driver of my education early on.

Josh: Cool.

J: I’m not just saying that just to be nice. That’s the honest to God’s truth.

Josh: Well we know you’re not nice so it’s all good. Cool so you guys decided to flip houses. It’s summer. You know your wife is all excited. Let’s do this. How did it go? Tell us about that first flip.

J: Oh. It did not go well. Imagine the ugliest, ‘70s style, raised ranch you’ve ever seen, unfinished basement. The basement was filled with graffiti, the powder blue vinyl siding. I mean this was about as ugly of a house as you can possibly imagine and we’d seen maybe a hundred, a hundred and fifty houses at this point. We were working with this wholesaler who was just pushing us to buy, pushing us to buy, pushing us to buy, and we had analysis paralysis just like most people do in this business.

We had seen this house and like “no this isn’t the one.” My wife looks at me, again she gets all the credit, and said, “Hey let’s buy this house.” I was like well, “This house is really not the house I want to start with. She said, “We’ve been pushing this off for six months now. Let’s just buy something we’ll figure it out. Worst case, we’ll break even, maybe we’ll lose a little bit of money, but it’s better to just go do something than to keep looking at houses for another six months and never do anything.” She was right.

Josh: Yeah.

J: We ended up buying this house with this wholesaler and we made pretty much every mistake every a rehabber can make. First, we paid too much so we knew we were paying about 5,000 more than we wanted, we tried negotiating him down. We didn’t do a very good job for that so we over paid a little bit for the house. Then we spent about 10,000 more on the rehab than we anticipated so we over paid for the rehab.

Then we gave up trying to sell it after about six weeks, middle of winter, we didn’t know what we were doing. Six weeks into trying to sell it, we got spooked and said, “Hey, this isn’t working. We’ve got to figure out a plan b.” We ended up lease optioning this house for two and half years. Two and half years later, our tenants pick up in the middle of the night and leave town. I think it was a week later that we realized they were gone.

Josh: Nice.

J: We didn’t a second rehab on the house. At this point we had done 25-30 others so we knew what we were doing. We did a quick rehab, got it on the market, sold it in a couple of weeks, but we sold it 10K less than we were originally planning to sell it for two years, three years earlier. Looking back on this project, we spent too much money. We spent too much on the rehab. We held it for about two and half years longer than we anticipated and then we sold it for about 10K less than what we had expected to sell it for. Literally, we pretty much made every mistake you can make on a project.

Josh: Alright man, so apparently, you know your first flip wasn’t quite the get rich quick flip that you might see on one of those TV shows on two and half years.

J: Two and half years, three years by the time we were done. On the bright side, we made a little bit of money. We actually made about $3,000 on the project.

Josh: Nice.

J: I think that’s probably the first tip I would give to any want to be rehabber. You have got to be conservative in your numbers and luckily, we we’re pretty conservative going in so we knew that even if we made a bunch of mistakes, which clearly, we did, we still had some room for profit and we made a little bit there.

Josh: I think the other thing that I noticed was you actually had other exit strategies available, I mean, so you know, a typical flipper who is new at the game may not know that they can go and do a lease option. That was great you had this other option available and you were prepared for it.

J: That is a great point so we knew going in that if the flip didn’t work out we can make money as a rental, hold it for as long as we needed to hold it. We can make money as a lease option, which we ultimately did and it basically taught us that if we’re going to do this, we always need to have a secondary, and even better yet, a third and fourth exit strategy that would work if the flip doesn’t work. We’ve been lucky so far, I mean in the 50 flips we’ve done since then, we haven’t had to rent or do a secondary exit strategy yet, but it’s always nice to have that as a back up.

Brandon: You know that’s the lesson I learned on my first flip as well because I have a very similar story. We tried to flip one. We had it on the market for six or seven months and that’s right when the collapse was happening and so we turned ours into a rental. I still own it today. Technically, that was my second flip, but the first one was an accidental flip because it was my own house.

That’s great. I want to go back real quickly. I have two questions for you. First of all, when was that time frame? Was that prior to the collapse or was that during the collapse? Also, you talked about wholesalers, you bought your first one from a wholesaler so I’m just curious on how you found that wholesaler or did the wholesaler find you?

J: Yeah so, timeframe, that was 2008 so this was pretty much the bottom of the market in our area. Things had pretty much collapsed. We didn’t expect they’d be getting much worse and luckily we were right, they didn’t get much worse after that in terms of the wholesaler. I don’t remember how we found him, but once we found him, he kind of latched onto us.

He decided he was going to sell us our first deal come hell or high water and he did. He spent about six months, and I give the credit. He was sort of a shady guy, in retrospect; his deals weren’t really that good and he didn’t really care if he was selling us a good deal or a bad deal. He just wanted to make some money, but I have to actually give him a lot of credit for sticking with us for 6 months and ultimately pushing us to buy that first property. I mean there’s a really good chance that we could have been like the other 60, 70, 80 percent of investors out there who get excited about doing a deal and then never do a deal because they just can’t pull a trigger on their first project. As shady as this guy was I have to give him a lot of credit for helping us get started in this business.

Josh: Nice. Nice. Nice. Well, so you made some money. You squeaked by on that one. Have you lost any money on a flip?

J: We have not yet lost money on a flip. That was about as close as we’ve come and again, I am pretty conservative and if you ask my wife, she would actually tell you I am way too conservative. There have problem been 30, 40 deals we’ve passed up over the past five years that would’ve made really good deals, but because I was so averse to losing money on anything. I passed them. In retrospect, not losing money has probably been a negative thing for us. I probably should have taken more chances and even if I would have lost some money on a couple of projects here and there, we would have probably picked up a lot of projects that ended up being good projects that we passed on just because we were risk averse.

Josh: Got you.

Brandon: Well, I don’t know get your emails J like your updates from your website and every single, like one, I’m blown away at how well you do. I always call my wife and my mom and I’m like oh look at what J just did. He just made this much on a flip, this much on a flip so I credit that to you being conservative. That’s awesome. I mean you’ve done a really, really good job. Like you’ve kind of been my guy for the last couple of years on what a good flip is.

J: I really appreciate that. I think we’ve gotten really good at hitting the singles, hitting the doubles. We don’t go too much for the homeruns too often. I think part of that is a factor of where we live. Atlanta, there is a lot of lower priced inventory. There’s a lot of first time home buyers especially the suburbs that I’m targeting so we don’t do a lot of projects that are over a hundred, a hundred fifty or $200,000 so there’s not a whole lot of room for us to be hitting homeruns on our deals, but you know, we’ve been really good at consistently hitting those singles and doubles, making 15, 20, 25, 30,000 dollars per project, which is kind of the bread and butter in this game. If we can continue to do that, we’re pretty happy. We don’t really need to hit those homeruns to be doing a good job in this business.

Brandon: That’s true.

Josh: It’s true. Hey so you know, how do you go about deciding how much you’re going to pay for a flip? This is kind of our 101 rehabbing podcast here so let’s talk about that a little bit. Do you have a formula? What is it? How does it work?

J: I have a formula that I use. I call it my “flip formula” and don’t get caught up in the name. It’s not rocket science. It’s nothing that I’ve trademarked or patented. It’s actually a formula that a lot of people in this business use and the simple formula is the most you can pay for a property is what you can sell it for, minus how much it costs to rehab, minus all your fixed costs, minus your desired profit. Again your maximum purchase price is the amount you can sell it for, minus your rehab costs, minus your fixed cost, minus your profit. That tells you how much you can pay for a property.

Now, when I say fixed costs, I know a lot of people think fixed costs meaning holding costs and they forget to add in things like commissions. You’re going to have to pay your realtor to sell your house; you’re going to have to pay your buyer’s realtor when you sell your house. Closing costs, you’re going to have closing costs on the purchase side and you’re going to have closing costs on the resell side.

In a lot of areas, in the country, when you sell a house, your buyer’s going to ask you to pay part of their closing cost. They’re going to ask you to pay for a home warranty. They’re going to ask to pay for furniture, stuff like that. These are things we call concessions.

When I talk about fixed cost, it’s important for people to realize that we’re not just talking about taxes, insurance, utilities. We’re talking about all the costs that go into a project and what I found with my typical projects, I’ll typically spend about 16,17,18 thousand dollars or about 10 percent of the resale value of the project in fixed costs.

I’ve noticed a lot rehabbers these days, a lot of new rehabbers don’t think about all those costs that go into the project. Think of it it this way if I’m spending 14, 15, 16, 17, 18 thousand dollars in fixed costs and I’m expecting my profits to be somewhere in the 15, 16, 17, 18 thousand dollar range, if I forget to add in those fixed costs, they basically threw my entire profit. That’s where I see a lot of new rehabbers do. They forget to add in those costs and that eats up all their profits. In the end, when they’re making nothing on the project and they’ve wasted or not wasted, but they’ve spent all that time for no return, they look back and they realize wow there are a lot of costs there I never thought about.

Josh: How does that formula then result differently than the 70 percent error V that we hear thrown around all the time?

J: Sure, so nothing wrong with the 70 percent rule. I’ve actually used it myself on occasion. Basically, that rule says if you take the resell value of the house, you multiply it by 70 percent and then you subtract out the rehab cost, that’s how much you can pay. Basically, what that formula is doing is, it’s bundling the fixed cost and the profit into the other 30 percent. You have 70 percent of the resale value is your purchase and your rehab. The other 30 percent is your fixed cost and your desired profit.

The problem that I have with that formula is that when you lump your fixed cost and your profit together all into one number, what it does is it makes, it either artificially shrinks or grows your profit based on what your fixed costs are. Some rehabbers are going to have substantially different fixed costs than other rehabbers. If you’re using hard money, you’re going to pay a whole lot of loan costs that other people are not going to pay. If you are paying cash, you are obviously not going to have to pay any of those loan costs.

Likewise, if you are in a high tax area, you could be spending a lot of money to hold your property in taxes, insurance, and even things like utilities. Whereas if you are in a lower tax area or a lower cost insurance area, well, your fixed costs might be lower because you are spending less on taxes, insurance, and that sort of thing. Instead of lumping in the fixed cost and the profit all into one number, and then allowing your profit to just be whatever’s leftover after your fixed costs. I actually prefer to define what my profit target is on the deal into my formula so that way, if I’m happy to make 10K on the deal, I can factor that in specifically. If I’m happy to make 30K or if I need to make 30K, I can factor that in independent of all the other costs on the project.

Josh: How do you choose that? Is that just a number you just pull out of the air or where do you get the 10 or 30 or whatever number you determine?

J: Yeah. The rule of thumb I’ve used the past couple of years and again, everybody’s going to be different, a lot of it is going to depend on your area. I know guys in California who can make 20-30 percent on a high price flip. In my area, it’s pretty tough to do that because things are pretty low priced so our margins are a little bit more condensed than other areas of the country so what we tend to find is we can pretty easily make about 15 percent of the resale value in profit. If we’re going to sell, if we’re going to resell a project for about a hundred thousand dollars, we’re looking to make about $15,000 in profit. If we can resell that same project for 200,000, we’d be looking to make about $30,000 in profit. That’s the general rule of thumb we use, 15 percent of resale value. To extrapolate that a little further, what that means is if our typical project lasts about four months, we can do three of those projects in a year. If we’re getting 15 percent return for each one, that’s a total of annual return of about 45 percent. That’s kind of where we’d been tracking for the last couple of years and so that’s kind of our minimum profit target on any particular flip.

Brandon: J how do you figure out how much the resale value is going to be? If there’s one area I’ve struggled with in my flipping, it’s taking the wrong guess at what it’s going to be worth because it’s not a guess. It’s a formula. What is it? What do you do?

J: Well, here’s a nice thing. After you’ve been doing this for awhile and I’ll go back to the question, but what you’ll find after you’ve done 10 or 20 or 30 or 40 or 50 flips, especially, if you’re focused in one area, what we’re finding is a lot of the comps the appraisers are using for our sales are houses that we’ve previously sold.

The best comps for our sales these days tend to be houses that we sold a month ago or three months ago or six months ago so we have a really good idea of what our houses are going to sell for because it’s based on the other houses we’ve done in the same area recently. That’s one of the reasons we like to stick in the same small area we flip houses in. I know a lot of investors that are happy to go to different parts of the city, different parts of the state, even different parts of the country.

There are a lot of advantages to sticking close to home and that’s one of them. You can kind of set your own comps. Now stepping back a little bit, when you’re first starting out, yeah, I agree with you.

Figuring out what the house is going to be worth, especially in a market that’s declining or accelerating, figuring out what the property is going to be worth when you are done with it can be really, really difficult so I recommend to people one of two things. One, either you have to find a really, really great real estate agent, treat that agent really well and rely and trust that agent when it comes to figuring out your resale value or get your license yourself. I’m a really big fan of people getting their real estate license and one of the biggest reasons for that is access to the MLS.

Once you have access to the MLS, you have access to all the data you need to figure out what a house is going to resell for. Sure, it takes practice, it takes time to learn the methodology, but you have the data at your fingertips and it’s always nice to be able to fall back on the data as opposed of having to trust or rely on somebody else to tell you what your house is going to be worth.

Brandon: I think that’s great. I wish I actually took the real estate exam class back a couple years ago, probably three years ago now, I got all the way through the class, I think it was 40 hours and then I never took the test. I kick myself to this day, like at the time I bought the house, I was like I’m just going to be a flipper instead, but now looking back I wish I had my license. I have to retake the class now and now it’s 80 hours in my state and additionally, you know we have a lot of rentals ourselves and we manage all our own property. I would love to have a property management company underneath me because as long as I have a system for my own stuff why not include others, but I can’t because in my state you have to be a real estate agent for two years before you can be a property manager. Now, you know, yeah, if I could advise somebody, don’t do what I did. If you are going to take the class, take the test.

J: Well, let me tell you something, I, from an MLS standpoint, having your license is valuable, but I would say there’s even better reasons to have your real estate license. For us, and I say this a lot, the best reason to have your real estate license is control of your deals. By having your license, you have the ability; one you can show yourself houses. You don’t have to wait for your agent to show up to let you into the house. You have a realtor key; you can see where and when you want. I mean it’s great.

We’re driving through a neighborhood--we're looking at a house, we’re driving through a neighborhood, and we see three other houses that are for sale we want to see what our competition is. Instead of having to call a real estate agent and say, “Hey can you show me these three houses that you’re never going to get a commission on cause we’re not even considering buying them,” we can just drive up to the house, call the agent and say, “Hey we’re standing in front of your house, do you mind if we let ourselves in?” We can see those three houses before we ever leave the neighborhood.

Second, when you have your license, you have access to the other party’s agent so you’re not translating everything through your agent, to their agent, down to your buyer or to your seller. You’re working directly with the buyer or the seller’s agent so you know exactly what’s being said; you know exactly what’s going on. A lot of times, there’s stuff that agents don’t communicate to you, not because they’re trying to deceive you, but just because they’re trying to make communication simpler and more efficient. There are things they don’t tell you, there’s--there’s--there’s little things they don’t think is important that if you were part of the conversation with your buyer’s agent or with your seller’s agent, you might think were important. You have that flow of conversation that you don’t have when you’re working with when you’re working through a real estate agent.

Third, by having your license, you get access to the appraiser that’s going to show up to your house. You have access to the buyer’s inspector when you’re selling a house. You have access to your buyer’s mortgage broker. You have access to the closing attorney. These people are happy to talk to you because you’re technically the agent on your side of the deal. They may not want to talk to you if you’re the buyer or the seller, but now you’re the agent on your side of the deal, the appraiser, the inspector, the mortgage broker, or closing the attorney all these people are going to talk to you. If you have questions, you don’t have to rely on a wait for your agent to get those questions answered. You can do it yourself.

Brandon: That’s great. That’s great.

J: For me, control is the biggest reason to have your real estate license.

Brandon: You convinced me.

Josh: Yeah--yeah--yeah for sure, well, so all right man. How then, you know, we’ve got all these cool, these tips, this knowledge, this is awesome. I want to go, I want to find houses to flip. Where do I go? How do I find these deals?

J: For everybody, it’s going to be different. There are a lot of different types of deals out there and when you’re trying to decide what types of houses you’re going to flip so for some people it’s foreclosure. Just REOs. They want to buy right off the MLS. For some people they want to go to trustee sales so these are foreclosure options, houses sold right on the court house steps. Other people want to work directly with buyers or with sellers. They want to send out letters and say we saw your house, give me a call, or they want to put bandit signs or they might even want to knock on doors.

There are all different ways of buying houses these days, but you need to do what is going to suit your personality. Personally, I’m not a really big people person so. It’s true. I’m pretty introverted. It doesn’t always come out when people are talking to me, but I don’t like having conversations with people I don’t know. The thought of knocking on people’s door and asking them if I can buy their house or even the thought of sending letters and having phone calls come in that’s always scared me a little bit.

Now the idea of being able to go onto the MLS, write up an offer, negotiate with a nameless, faceless, entity, like a big bank. That’s always been appealing to me. Don’t have to talk to anybody. Don’t have to deal with somebody’s struggles, issues, or problems. It’s basically a robotic type negotiation between me and a bank. When I started working in this business, I started just focusing on REOs, focusing on stuff right off the MLS and it served us well for several years.

I think we bought our first 30-35 properties right off the MLS with the exception of the first deal, which was a wholesale and one other pro-bait deal that just happened to land on our lap. I think 28 of our first 30 deals were REOs that we purchased right off the MLS. That was great. I’d have done that forever if I could. Unfortunately, about a year ago, inventory in our areas started drying up. New investors were coming out of the woodwork and so there wasn’t much left on the MLS. Stuff that was there was getting bid up too high and there just wasn’t a lot of inventory being released. We said to ourselves, “Okay, time to learn something new.”

Talking to people on BiggerPockets mostly, Michael Quarles was actually a great resource for us on BiggerPockets. He’s a big fan and K Marie Poe was another one. They’re big fans of Yellow Letters so we said, “Okay, let’s give this Yellow Letter thing a try.” We spent a good six months in 2012, honing our Yellow Letter Marketing, creating different, well, not just Yellow Letters, but White Letters also. Basically creating different marketing pieces, using different envelops, using different fonts, using different messages, basically lots of testing over about six months to see what kind of seller response we could get.

Ultimately, what we realized was, in our market, the bulk of the motivated sellers were people that were underwater on their mortgages. For the last year, we’ve spent most of our marketing time and effort on creating Yellow Letters or White Letters that try and get people who are underwater on their mortgage to call us and do a short sale with us. We can actually buy the property as a short sale. I’d say of our last 15 or 20 properties, 80 percent of them have been short sales so that’s the other thing people have to realize on this business.

You’re going to have to be able to zig and zag. You’re going to have to be flexible because when the market changes, when the demographic of your buyer so your sellers change, when your competition changes, if you can’t change with them, what you were doing yesterday, may not work today or tomorrow.

Brandon: Hey, that’s awesome advice J and just a reminder to everyone. All the terms and all the links that we’re talking about today, you can actually find them on our show notes at BiggerPockets.com/Show10 so definitely head over there. You can also leave a comment on that page and interact with J or me and Josh. Right now or after the show, head over there and check out.

J, I actually want to get back to something you talked about a little bit earlier about you know you have your realtor, I know your wife works with you on your stuff and I’d like to talk about that too, but what else. What comprises your team? What makes up? Who do you have working with you because obviously you’re on BiggerPockets a lot and we love seeing you there so you’re not plumbing all day so what do you got going on? How do you run your business?

J: Yeah. I probably should have mentioned this earlier because it really is so important to my particular business. I surround myself with a lot of tremendous people. I had never been in construction. I didn’t buy my first house until five years ago, which was my personal residence. I pretty much can’t still change a light bulb, maybe I could, but my wife won’t let me try. For the most part, the reason we’ve been successful is that I’ve been really good at finding people who are a whole lot smarter and more talented than I am and trusting them to kind of take hold of different pieces of the business.

For the most part, our business is controlled by three people, there’s myself, my wife, Carol, and we have a project who basically controls the day-to-day rehab stuff. We like to think that our business is broken up into three pieces, there’s the acquisition piece, there’s the rehab piece, and then there’s the selling marketing piece. Each of the three of us basically controls a different piece of that. I’m in charge of acquisition; I’m the numbers guy. I’m the one that kind of does longer-term strategy, figuring out where we want to be and when and what types of houses we want to buy.

My project manager, he focuses on the day-to-day rehab tasks. He introduces contractors, he puts together scope of work, he negotiates and hires contractors. He’s the guy that’s out there everyday, making sure that the work is getting done on schedule, on budget, high quality, and then there’s my wife who is the marketing genius who really has been the one that’s been most instrumental in the business. She does all of our staging.

She has networked with pretty much networked with every realtor in 20 square mile radius of here that has any buyers. Every realtor in this area knows her, knows our product, thanks to the marketing she’s done and the networking she’s done. We owe a lot of our success to the fact that she can put our house on the market and have it sold within, our average days on the market is 17 and that takes into account the two or three that sat for six or seven months.

It’s not uncommon that we get a sale on the first weekend even before we listed on the MLS, basically, thanks to my wife and her ability to network with the people that are actually purchasing houses in our area.

Josh: Well, so in order to sell something that quickly I mean you really have to nail the pricing down. Maybe you can talk about that pricing strategy a little bit because I think and then we could go back to the team a little bit more, but pricing is just essential. Most rehabbers can’t say 17 days is their average turnover time over 20, 30, 50 flips.

J: Pricing a property right is definitely key. Looking back to our metrics, we have sold at an average of 96.5 percent of the original list price. The list price that we market day one, we ultimately sell for 96.5 percent of that price. Part of it is probably that we’re pricing our houses a little bit low, but that’s strategic for us. We’ve kind of built a brand in our small area of high quality, reasonable priced, focused on first time home buyers, easy transactions, and part of that is selling houses that aren’t over market value, that are competitive with some of the stuff in our area that is not fully rehabbed. When you look at our houses, the competition for our houses, the price point competition for our houses tend to be stuff that isn’t nearly as nice so by under pricing the market a little bit or I’d say perfectly pricing the market, we’ve done a good job of keeping our days on the market really, really low and that’s helped us build a really good brand and really have people--I mean one of the things I like to say is that, it’s something like 12 agents that we’ve worked with of the 50 houses that we’ve sold have brought us more than one buyer.

When you have agents that are constantly bringing buyers, it says they like working with you, they like your product, they trust you because they’re recommending your product to their buyers. Yeah, pricing right is definitely a big part of it and we maybe even be leaving a little money on the table now and again, but the quick turnover means that we can put that money again quickly on another project. It also means that we’re building a loyal following of buyers and agents.

Josh: Well and I think the other nice thing about that is, you are walking away with that profit margin that you are setting up front, that 15 percent, and in order to price competitively, you’re definitely buying these things at the right price. I think that’s probably the most important thing that I would glean out of this as a potential new investor, I mean, if you’re buying it right and you’re getting your numbers right, you’re going to walk out with a nice profit, and you don’t have to over charge for it. You know, you price it right, people will come in and scoop it up and move on to the next one.

J: Exactly.

Josh: That’s great. Hey so, back to the team, I just wanted to ask about, you mentioned your project manager.

J: Yeah.

Josh: You know a lot of folks will start out. They’re going to want to get their hands dirty and they’re going to go in and they’re going to probably end up trying to do it on their own. They might want to have a project manager, but they may not know how to get one or how to kind of get that going. How did you find yours? How did you that end up happening? Are they partners with you? How does that work?

J: Yeah, when I started in this business, like I said, I didn’t know how to change a light bulb so I pretty much don’t. I’m not a construction guy. I like to think I have some business experience so when I run this business, I don’t run it much differently than if I were running a business buying and selling anything other than houses. I could be buying and selling shoes, I could be buying and selling furniture, I could be buying and selling hamburgers, basically, I focus on the business side of things because I don’t know the construction side. When we first started in this business, I realized that, without knowing the construction side, there’s a lot of risks, there’s a lot of places where I could make major missteps and the business could go down the tubes.

One of my first priorities was to bring in somebody that did know the real estate side, and that did know the construction side, that did know the contracting side. I had a family member who was between jobs who was looking to move across the country. He actually lived on the east coast, was getting ready to move to the west coast and he knew the real estate business, he’d done some contracting, he’d been in the mortgage business, and I convinced him instead of moving to the west coast to come and move down here to Atlanta and give me a hand for a few months, well, five years later, he’s pretty much our most trusted employee. Again, he runs the day-to-day part of the business.

He’s not officially a partner, he’s an employee, but he does get paid a commission. He gets paid a percentage of every deal that we do. He gets a percentage of the profits. The reason I like that is because it aligns his financial incentives with our financial incentives. He makes the most money when we make the most money and we make the most money when projects are done on schedule, on budget, and high quality. If he wants to make the most money, his job is to get things done quickly, on budget, and with the highest quality possible.

This is a little bit different than a typical contractor or general contractor. General contractor is going to make his money by doing the most work. Certainly, they want the project to get done high quality, and they want the project done quickly, but that’s secondary to doing the most work possible. The more work that they do, the more money they make. Well, unfortunately, the work that they do, the less money we make so that’s why having a project manager is really nice because his goals are the same as ours and he knows that we need to keep cost down, we need to keep on schedule, and we need to do high quality work so we make the most money and he make the most money.

Brandon: You know, one time in the BiggerPockets forums, I saw a response; somebody asked a question on how do you find a good contractor. Your response I thought was perfect. I had never heard it before, but I thought it was so great. You said, “Go to a Home Depot or Lowes at seven in the morning on a weekday.” I thought that was just perfect because in my town that would define who are the good contractors, who are the good guys to work with.

J: Absolutely, the guys that are showing up at 10 or 11 in the morning, that tells you a few things. That says, either they’re sleeping in or they’re not real serious about doing their job. They came earlier, forgot to buy stuff and now they’re taking time away from the job site to come back to Home Depot or they just don’t take their job very seriously. Yeah, the guys that are there 6:30 or 7:00 AM, those are the guys that are taking their job seriously. They’re getting an early start and they’re trying to spend as much time prepping before in the job site so they don’t have to leave the job site to get materials and things like that.

Brandon: I love that.

Josh: I think that was actually one of people’s favorite tips from the 2012 BiggerPockets Summit so you know you got a lot of comments and I remember at the boot camp that you did with Marty Boardman that was really one of people’s absolute favorites.

J: That’s great to hear.

Brandon: Speaking of Marty Boardman, on the very first BiggerPockets Podcast, he had talked about his four flipping boxes, which everyone can go listen to Podcast number one, which is BiggerPockets.com/Show1. He talked about the four flipping boxes which is kind of what you talked about a minute ago where there’s the acquisition, there’s the rehab, there’s selling I think, and there’s the fourth box which you haven’t talked about yet which is the money. How do you do that? How do you pay for your flips? How did you start out doing it and how do you do it now?

J: Yeah. I’m not going to lie, we were lucky, coming from a corporate background, and working for some big companies. We had a little bit of cash saved up when we started so we are able to buy some of our properties with our own cash. That said, over the past five years, I’ve bought properties with conventional financing, I’ve used portfolio lenders, small banks that loan their own money. I’ve used private lenders. I’ve even used hard money so as we scale, having a lot of cash, we were eventually going to scale above and beyond what you can afford to finance yourself with your own cash. Even for those who are starting out with a little bit of cash we were eventually going to figure out the financing piece.

We realized early that we wanted to get big enough that we would quickly outgrow our cash reserves so we’ve been working with all different types of lenders over the past five years. These days, our preferred method of financing is working with private lenders so we find guys who are doctors, lawyers, professionals of some sort who have money sitting around in their retirement funds who are looking to get better returns than in the stock market or from the bonds they’re putting their retirement funds into. We’re offering eight, night,10 percent to invest the money with us, fully secured by our business, fully secured by our personal assets and they’re thrilled to do it. If they can make eight, nine, 10 percent consistently on retirement funds, that’s certainly better to them than taking a shot in the stock market maybe making two or three percent, maybe losing money so for the most part, the way we’re financing--a lot of our deals these days is we’re working with these private lenders who are happy to lend us extra money they have sitting around from their retirement.

Josh: And how do you find those guys?

J: You start out within your own network so for me, the first person that ever did it was an in law so it was a family member’s wife’s father. Once he realized the value of his investment and the consistency of the return he was getting, he recommended us to some of his friends. I’ve gotten investors from BiggerPockets. I had a guy last week who has been following my blog, following me on BiggerPockets for several years, he sent me an email and said, “Hey, I have some money I want to invest. How can we do this?” We signed some papers yesterday and he’s going to be lending us money from his retirement fund for us to do our flips. Networking is key.

Being involved, I mean the blog helped me tremendously because it gives us some credibility. People see our blog and they realize and that we’re really doing what we say we’re doing. I’ve gotten a lot of people who have contacted me from BiggerPockets to talk about financing whether they want to borrow money, whether they want to lend money, whether they have questions. These are all opportunities to build relationships that are eventually allow you to either borrow money, or you have money to lend money, but real estate is a small club. You need to get to know the other people that are doing this because they know people, and they know people, and they know people. If you focus on the networking, the money will come to you.

Brandon: One thing I like about real estate is that it’s kind of a cool thing you know like, I mean people even older people like to be cool and because flipping is on TV and stuff it’s a cool activity. That’s one thing I’ve always used kind of, I guess, in my business is connecting with other people because it’s cool. They want to be involved in real estate, but they’ve got a full time job, they can’t do it, so they’ll work with me because it’s a way for them to be in a cool club without having to actually do it.

J: Absolutely. I think one of the things you’ll find is people think real estate investors are always borrowing money, but I know a lot of real estate investors who have also money to lend. I’m actually one of them so I have a bunch of money in retirement that I love to lend to other real estate investors, maybe I just opened myself up to a bunch of emails.

Josh: Can I have some money J?

J: I’m not atypical, there are a lot of other investors who have money sitting around in retirement funds or from some other place that they would love to get eight, nine, 10, 11, 12 percent return so the best place to start is start with other investors. Start with people you know, start with people in this business because you might be surprised. The money might be in front of you and you don’t even realize it. Let me tell you something. Here’s something I learned from Marty Boardman, Marty is a genius and I don’t just say that because I’m partnering with him on a bunch of stuff. I mean he has truly taught me a whole lot in this business, but one of the things I learned from him is you don’t get money if you don’t ask and he’s a really good fundraiser. He’s got a partner in Phoenix who’s a really good fundraiser and just watching him has made me realize that raising money is about getting out there and talking to people and asking. It’s not rocket science. It’s just hard work.

Brandon: That’s great.

Josh: That’s great. Definitely. Definitely. Hey let’s really quickly get to the idea of flipping houses while working a full time job and you know there’s a lot of talk, especially on BiggerPockets where you know most folks say listen flipping is a job. You know, flipping houses is not like a passive activity where you can sit down around and just collect the checks. You actually have to be out there doing things. Can you talk about that a little bit?

J: Absolutely. Flipping is definitely a job, but it doesn’t mean you have to be working long hours. It doesn’t even mean you have to be working hard and I’d love to come back at some point and maybe we can talk about this, but we’ve worked really hard to automate our business. We’ve worked really hard to figure out, my wife and I left our corporate jobs because we didn’t like our 80-hour weeks. We didn’t like all the travel.

We wanted to start a family and be able to focus on our family. We now have two little kids and our number one priority is our kids and so that comes before work and we’ve had to figure out ways that we could automate this business so that we can go to the zoo, so we can go to the aquarium, so that we can take trips for a week at a time.

Basically, so we can raise our kids while we are still earning enough money to raise our kids and so hat we’ve realized is, if you can put processes in place. If you can delegate, if you can prioritize correctly, it’s not very tough to automate this business. It takes work. It takes a lot of up front preparation, but we’ve basically gotten to the point where our goal is for my wife and I to work less than 10-15 hours a week on this business. We don’t always achieve that and to be honest, I always have my phone with me, 24-7 I’m getting calls, but I’m getting calls when I’m at the zoo or I’m getting calls when I’m up in New York visiting my in laws or I get calls when I’m in the movie theater.

I mean yes, I’m certainly working hard. We’re all working hard, but we’ve kind of put parameters on what kind of stuff we do and what kind of stuff we delegate and farm out. For us the types of stuff we delegate and farm out is the stuff that would otherwise be taking us away from our family and our kids so a full time flipper, there’s nothing that’s stopping somebody from basically building a business the same way we did. Instead of spending their days like at the zoo, spending their days at their full time job or if they’re better than I am at it, they can be spending their days at the beach somewhere and really making the business passive. We haven’t quite figured that part out yet, but I know there’s some smarter people than we are that have. Yes, you can certainly be doing this with a full time job.

Brandon: No, that’s great. My wife and I have been trying to automate our business as well so I’m definitely looking forward to another podcast with you some time where we can talk more about that because, yeah, I mean, yeah, that’s huge, just being able to step away and just letting your business grow so. I want to step back kind of. I know we have to wrap up here in a minute, but what exactly, what is your advice for a first time house flipper? Getting started, if somebody were to ask you, you know, “Hey J, how do I get started with this? I’m a newbie, I don’t have a lot of money. What do I do?”

J: Sure. I’m a big fan of writing things down, putting together a plan and what I tell anybody that wants to get into this business, jot down a plan. It doesn’t have to be formal, it’s not something you need to present to investors, it’s not something that anybody else ever needs to be, but jotting down a plan will serve several functions. First, it will let you figure out do you even really want to be doing this. I remember about five years ago I wrote a business plan for building a real large-scale rental business where I could buy like two or three or four or five hundred units over several years.

By the time I got done writing that plan, I wanted to throw up. Seriously, I realized, that’s not the type of business for me because the type of work that would be required to build that type of business doesn’t suit my personality. Just writing it down was enough to convince me that this isn’t something that I should be spending a lot of time on. I think a lot of people when they start writing things down, they’ll realize what they want to do, what they don’t want to do, what they’re good at, what they’re not good at.

Second, writing things down will force you to figure out one of the hardest parts of this business and that’s the money piece. It’ll force you to figure out, where is the money going to come from? Are you going to have to partner with other people? Are you going to have to borrow the money? Do you have the money yourself or maybe some combination thereof. You certainly don’t need cash to start in this business, but if you don’t have it, you need to have a plan. Sitting down and putting that plan on paper will definitely go a long way towards getting you towards that first flip, especially if you don’t have the cash.

Then third, writing things down will help you figure out where you gaps of knowledge are. If you can’t fully articulate a plan on paper, you probably can’t carry out that plan in real life. Start writing it down and realize, hey, I don’t know how to do the marketing stuff. I don’t even know where to start on the marketing stuff. Great. Jump of BiggerPockets and do some research and figure out the marketing stuff.

I don’t know how to find a real estate agent and that paragraph on my business plan is blank. Okay great. Jump on BiggerPockets and figure out how to find a real estate agent so putting together a plan onto paper will really help you figure out where your gaps of knowledge are and will force you to go and fill those gaps before you actually get out there and start risking your own money. My biggest piece of advice to any new investor would be, jot down your plan. It doesn’t have to be formal. It doesn’t have to be real long. You know even if it’s just a page or two, just get it down on paper. What you want to do, how you want to do it, and what you need to accomplish it.

Josh: Treat your business, like a business.

J: Absolutely. Absolutely.

Josh: That’s great advice and that’s something we really harped upon, we actually just recently put out the BiggerPockets Ultimate Beginner’s Guide to Real Estate Investing at BiggerPockets.com/ubg and there’s going to be a link in the show notes, but speaking of getting your plan together and getting things organized, you know, there’s more than meets the eye to this podcast and you know, the transformer reference is referring to the announcement that we’re making that BiggerPockets has actually partnered with J on something really exciting. Two books, we’ve got two books that are coming out. These books were both were written by J and are really an incredible resource. Not just for house flippers, but for any real estate investor. Now, the first book is called The Book on Flipping Houses and the second book that comes with it is called The Book on Estimating Rehab Cost and it’s really awesome so J why don’t you tell us a little bit about how these books came about.

J: Sure. Sure so as a lot of people know, I’ve been writing in my blog for about five years now and it’s kind of been a labor of love. It’s been my baby and I get feedback constantly from people reading my blog and the two biggest pieces of feedback I’ve gotten over the years are one, “This is great. I wish your blog were more organized so I could learn step by step how to flip houses as opposed to having to read five years’ worth of semi daily blog posts and lots articles so can you organize this data and can you fill in all the holes that have been left in the blogs the last few years.”

Secondly, I’ve been asked, “Hey, how do you estimate rehab costs.” That is by far the hardest part of this business a lot of people believe. They see that I’ve been pretty good--we’ve been pretty good, I don’t take a lot of the credit. I think my project manager gets most of the credit, at accurately estimating what the costs are to our projects so having gotten those questions over and over the for five years, I started writing about a year, a year and a half ago and I’ve finished off two books.

One is basically a step by step guide to flipping houses that basically organizes everything I’ve been thinking of writing the last few years as well as adds about 16 percent new content that fills in all the gaps. Secondly, I’ve written a guide to estimating rehab costs that basically will walk a new investor, even a seasoned investor, through the methodology of putting together a scope of work on the property and estimating the costs associated with carrying out that scope of work. We’ve written these two books, a total of about 600 pages, 150,000 words so it was quite an undertaking and it did take me a year and a half and I’m thrilled that we had the opportunity to partner with you guys to be bringing that out to the masses.

Brandon: You know the thing that got me really excited about these books is how it fits so closely with the core belief of BiggerPockets. You know that real estate investing education shouldn’t cost more than a college education and of course, there shouldn’t be any secrets. That’s what I love about these books. You know J you really just didn’t hold anything back. Everything is there everything is there that a person would need to know to either flip a house or just to remodel or a rental so really good job J.

Of course, anyone listening who wants to pick up a copy of the book, you can get both the book on flipping houses and the book on estimating rehab costs in ebook version for just 29 bucks. Or you can get the ebook version and the physical paperback versions, both books shipped to you for 49 bucks and as an extra bonus, J actually included a whole lot of extra additional materials as well with either the ebook or the physical book, including a rehab analysis spreadsheet, I believe an appraisal package, an inspection checklist, a sample flipping chart of accounts file for Quickbooks which is really, really awesome so definitely, you want to check that out and of course, a whole lot more. If you want to order your own copy or you just want to learn more head over to BiggerPockets.com/flippingbook and check it out. Again, that’s BiggerPockets.com/flippingbook. Once again, thank you J so much for putting that together. I know it’s really going to help a lot of people find their way to success.

J: Thanks guys.

Josh: Awesome. Awesome. Speaking of books, as we’re wrapping this thing up, let’s get to these final questions we love to ask everybody and we’re definitely going to have J back on the show. We’re going to talk more about advanced flipping so hold your breath. We will have him back, but J speaking of real estate books, what is your favorite real estate book other than the two you’ve spent a year and a half putting together.

J: I’m a numbers guy. I have to say, my favorite book is a book by a guy named Steve Burgess, it’s called The Complete Guide to Real Estate Finance for Investors and it basically is all about real estate financing and the numbers associated with that. I’m a big believer that if you’re going to be in the investment business, you at least have to have a rudimentary understanding of the numbers and the finance and the ability to do financial analysis on basic projects. That book wasn’t too complicated. Again, I’m not--I’m far from a genius and I could understand it so I would highly recommend that to anybody that’s interested in more of the finance and numbers side of things.

Brandon: What about your favorite business book non real estate?

J: My favorite business book? Probably The 4 Hour Work Week by Tim Ferriss.

Brandon: Yeah.

J: He kind of opened my eyes a few years ago to all the possibilities for automating and basically, putting your business on autopilot and I’ve taken a lot of what he’s written to heart. I’d say that’s been the biggest influence for me the past few years.

Josh: Cool. Cool. What about hobbies? Outside of your kids of course, which are probably extremely important. Well, I know are very important for you. What’s your hobby and are there any special skills that you have that people might not know about.

J: I know how to juggle. Let’s see, I think the one that a lot of people probably know because it’s been mentioned before, but I used to be a professional poker player so I’d say poker is still definitely a hobby of mine. Don’t get to play nearly as much as I used to, but…

Josh: We should play J.

J: I would love to. I would love to maybe the next BiggerPockets Summit we could do a poker tour…

Brandon: Great idea.

J: A BiggerPockets tournament.

Josh: Okay. Okay, we’ve got it. Excellent so yeah and other than that these days it’s basically trying to figure out how to raise two kids. That’s a full time job.

Josh: That’s great.

Brandon: Yes it is. Last question J, I ask this to everyone. What do you see as setting apart the top performers in our industry. The guys that are actually making money and building a business what do you see sets them apart from those who jump in and jump out so quickly.

J: Again, going back to the same theme I’ve touched on a number of times I think it’s those that do best in this industry are those that have the ability to focus on their business as opposed to just in their business. The people that can think about bigger things than swinging a hammer. They can think about their long term strategy.

They can think about how they scale the business. They can think about cash flow and raising money. They can think about being more efficient in their business. These are the ones that tend to do the best because they are not so short sighted and so focused on getting the next house on the market. They think about where their business is going to be six months, 12 months, five years from now and can guide their business as opposed to letting their business guide them.

Josh: That’s great.

Brandon: That’s awesome.

Josh: That’s very good advice. All right J, so people can find more about you on your site 123Flip. They can catch you there, they can catch you on BiggerPockets, BiggerPockets.com/users/JasonScott and what other places? Are you on Facebook, Twitter, G+, are you everywhere? How else can people get in touch?

J: Don’t do a whole lot of social media stuff, but we are on Facebook so Facebook slash what are we? I think we’re 123FlipRealestate?

Brandon: We’ll find you and we’ll put you on the show notes.

J: I appreciate that, but like I tell everybody I try and be as available as I possibly can I’m pretty busy with the family thing, but over the past five years I don’t think there have been more than a handful of emails I haven’t answered. There have been some stuff that have slipped through the cracks because I’m not always as organized as I’d like to be so basically anybody can always send me an email. I’m always happy to help whenever I can and always available on BiggerPockets and on my blog.

Josh: Yes and J is always available on BP. He’s amazing at helping people out so definitely if you want to learn from him, go through his stuff on his site, go through—he actually wrote for us on the BiggerPockets blog. There’s a ton of great articles in there that J has written. My favorite actually, two being one on analysis and the other being on negotiation and we’ll link to those from the show notes.

Otherwise, check him out, go to his profile, and you can look at his forum posts. They’re deep. They’re awesome so check it out. J, it’s been a pleasure man. Thank you so much for being on the show. We’re pumped about the book so everybody, definitely check out the books, the two new books and we’ll definitely have you back.

J: Thanks guys. Glad to be here. This was great. Can’t wait to be here again.

Brandon: Awesome. Thanks J.

Josh: All right everyone. That was our show with fixing, flipper J Scott from 123Flip. I hope you guys were able to pick up a lot of great information from J and can apply it to make your business even better. Remember you can check out more information about the book on flipping houses and the book on estimating rehab costs on BiggerPockets.com/flippingbook and finally, just to thank everyone who is listening to the show. We’ve had over 65,000, that’s 65,000 listens to the BiggerPockets Podcast since starting out just a couple months ago, which is really, really awesome guys. Also, we’re now up to a 145 five star reviews on iTunes, so if you haven’t yet left us a review on your iTunes player or on your devices, please be sure to do so, we’d really appreciate it. Also, be sure to subscribe to the show, that’s it everyone. Until next time, this is Josh Dorkin signing off.

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