BiggerPockets Podcast 024 with Michael LaCava Transcript

Link to show: BP Podcast 024: House Flipping and Deal Analysis with Michael LaCava

Josh: This is the BiggerPockets Podcast, Show 24.

You’re listening to BiggerPockets Radio. Simplifying real estate for investors large and small. If you’re here looking to learn about real estate investing without all the hype, you’re in the right place.

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Josh: What’s going on everybody, this is Josh Dorkin, founder of biggerpockets.com, and your host of the BiggerPockets podcast here with my co-host, Mr. Brandon Turner. What’s going on, Brandon?

Brandon: You know every time you introduce me, I always think of Home Improvement. Remember Tim the tool man Taylor?

Josh:I do.

Brandon: Yeah. I’m Al Borland, I guess.

Josh: You’re Al, and I’m Tim?

Brandon: Yep, you’re Tim.

Josh: So you’re calling me a tool?

Brandon: Yeah, actually, that was exactly my point. I’m glad you picked up on that; I’m clever like that.

Josh: Yes, yes, sure. Well what’s up, man? We have a good show; we’ve got some cool stuff coming on BiggerPockets. We’ve got this flipping calculator that should be out at or around the time of this show, if it’s not out. We’ll soon be announcing it, and everything is going great on the site.

Why don’t we just jump right in today? We have a great show ahead. Why don’t we do our Quick Tip?

Brandon: Nice. I’m taking this one today. Good ending.

Josh: Oh, you’re going to take the quick tip?

Brandon: I am going to take the quick tip, because this is something I do all the time. So today’s quick tip is a staging tip, and I know a lot of people that want to stage and pay a lot for staging companies, which is cool, but my tip is if you’re interested in staging on the cheap, head over to a Marshall’s or a Ross or a TJ Max and you can get curtains there for usually like three or four dollars, and you can get pictures to hang on the wall for dirt cheap. Knick-knacks and everything; you can stage a house for like 100 bucks using one of those discount stores. That’s my quick tip.

Josh: That’s a good quick tip. Now do make sure you change the pictures in the frame.

Brandon: No, you want the young family holding the little kid with a bar code going against their face.

Josh: Yeah, that’s great. Looks stylish.

Brandon: Yeah, nothing sells a house like a bar code.

Josh: Yes, nothing sells a house like a bar code. There you go. Well that is today’s quick tip. Fabulous, excellent, excellent. Really quick before we go into things, I want to thank everybody; we are now up to 292 five star reviews on iTunes and 189 written reviews. 292 five star ratings, I’m sorry, and 189 written reviews.

That’s fantastic; we’re really excited about it. We really appreciate you guys for taking the time to do that. We’re not at about 10,500 listens per show, which is amazing, meaning that a lot of you guys haven’t gone in or reviewed or anything. If you can, please do; it really helps us out. We do appreciate it. That’s pretty much it. That said, let’s get into the show.

On today’s episode, we have Mike Locova. Mike is actually a house flipper in southern Massachusetts. He’s tearing it up in the flipping world. He’s an active blogger on the BiggerPockets blog, shares loads of great information on our site, and he’s out there.

He does some coaching, and he’s a full time investor. He’s got some fantastic tips to come, I believe, so I’m looking forward to what he has to say. With that said, Mike, welcome to the show, how is it going?

Mike: Hey, thank you Josh. I appreciate for the opportunity.

Brandon: Yeah, hey Mike.

Mike: Hey, Brandon, how are you doing?

Brandon: I am well, how about yourself?

Mike: Very good, couldn’t be better.

Josh: He’s always well. I’m well. Alright let’s move on and talk about you instead of beating up one another here. So Mike, how is flipping Mike here? Let’s do it.

What did you do? You’re the house flipping guy, but you had something going on before that, right? How did you get started? What did you do before flipping houses?

Mike: Yeah, I sure did. I was in the flooring business basically my whole life. Grew up in it as a young child, helping my dad in the summers. I basically did that until five years ago when I started getting into the real estate business.

Basically with the flooring business, it’s always good. I did well in it; I just lost my passion for it. Tried to reinvent it, but just knew my calling was real estate, and now I’m doing it full time.

Brandon: Was there anybody who inspired you to get involved, or was it just the result of you working in the flooring business?

Mike: Just out of high school, 18, 19 years old, a friend of mine was going to one of those weekend real estate seminars in Florida. He was able to take a free guest; you guys know how that works. It was just a weekend trip, and it actually caught my interest.

I don’t think I was even 20; I might have been 19 when we did our first door knocking on a house that was going to go up for auction. I can still see it to this day, the guy screaming at us, telling us to get out. He might have threatened us. I’m like, I don’t know if the door knocking thing was any good.

Over the next 20 years, my interest for real estate was always there, but I had a business and I got married and had kids, but I never took action. It was always like you know some day I’m going to do this. Seeing the TV shows and things like that, watching the old houses get rehabbed, it inspired me. I knew it was something I always wanted to do.

Brandon: So what got you to finally take that step and jump in and start doing it?

Mike: I had a reality check with my life. Just talking about something doesn’t get it done, as you know. Back in 2006 I was mentioning it to a friend of mine, saying “man, look at all these selling houses, don’t even know much about it; they’re flipping them and making tons of money. I always say I wanted to do that, and I just haven’t done it”.

He told me he flipped a few houses and rentals; he said “if I find something, do you want to partner up?” I didn’t know anything. I was a floor guy. I didn’t know anything about real estate, but I said yes, and lo and behold few weeks later, he got a deal, and we partnered up on our first deal back in 2006.

Brandon: Back then did you do your own work because you were coming from the construction side of things?

Mike: We did about 80% of the work. Anything we could do, other than permitting stuff—plumbing, electrical, stuff like that. We were hands on in our very first project.

Josh: Let me ask you, because one of the big things every new investor on BiggerPockets always starts with is, “hey, I want a mentor, I want a mentor! What do I do?” You know, you’ve got this good friend of yours that’s doing it; you link up with him. How did that work out? Tell us about the relationship and about how financially and partner wise you guys worked out the details behind you?

Mike: By partnering with him, even though I knew nothing about the business, it gave me on some subconscious level… it took the fear out of it, took the unknown out of it. I was just going to partner up with him, and that’s the real reason I jumped in. I didn’t know anything about the business; I trusted him with his background and what he knew, but that didn’t mean it was alright.

I can explain to you in a minute about that, because back then I didn’t understand the mortgage industry, the real estate industry, buyers’ markets, sellers’ markets. All I knew was we had this flip, we were loving it, we were doing the hands-on renovations. Back then anyone could borrow money from the banks. You get a relationship with the mortgage guy real quick. He explained it to me, but I wasn’t really listening, the plan was to borrow the money, 100% financing.

Once we were about halfway through, we could retry out and pull our profits, and then once we were finished we could sell the house and make additional profits. We happened to get in at the high of the market, and as Warren Buffet says, when everyone’s in, it’s time to get out.

Brandon: Yep.

Mike: In 2006 all of a sudden we couldn’t be [inaudible][8:56] because that was when the sub-prime mortgage started to crash, and I didn’t know what that meant when he said we couldn’t [inaudible][9:01]. I got a little scared. I said alright, we have to finish quickly and sell quickly. Bottom line was when we sold it, we actually did sell it, we actually lost money on that first deal.

Brandon: Right on. Even though he didn’t know everything himself, what gave him the confidence to bring you on as somebody to work with beyond just your friendship?

Mike: I think the labor part of it, being able to do the work with him. Being that I owned my own flooring business, I had flexible hours. I had a well-run flooring business at the time, so I had the flexibility of running the contractors and helping with that aspect of it, while he handled the money and assisted in setting up the LLC and things like that.

We had good trust level there. We both put in, I believe it was around 10,000 dollars each to have a reserve. We ended up having to use it because we weren’t able to refi quickly, as I mentioned earlier.

Brandon: Right, and was that a 50-50 thing?

Mike: Right, it was 50-50. We split the profits, but there were no profits, so we split the loss.

Josh: I’ve been there. I know how that goes. You said when you got in this, you didn’t realize, and neither did he, really what the whole buyers-sellers’ market was, and I think most of us got caught up with that exact same thing.

Nobody really knew that the market was going to crash. I mean, there was probably some smart people around that knew it, but I don’t know, those of us who watch the flipping shows, we just got into it because it was cool. Here is my question for you: today, with the market today, do you see us repeating that right now?

Mike: That’s a great question. I wish I could look into the crystal ball, but what I can tell you is that there is some speculation that we might go down that road again, specifically with some of the hedge fund deals and the way they’re buying up all these bulk oreos.

I’ve been reading something saying that’s going to be the next crash. My personal feelings are that I don’t see these hedge funds managing thousands of single-family houses effectively, competitively. My feelings are that I believe on the buy and hold strategy, for single family rentals, it’s always been a local business and has been driven by the local landlords or owners to get the best return on your investment.

I don’t know if I’ll be right or wrong, but I’ll be there to clean up the mess if it does crash and try to make a profit down the road.

Josh: I just read an article and a video from Fox news or one of those news channels, and hedge funds are already starting to pull out in certain areas. I’m not sure if that’s beginning to happen or if that’s just—s

Mike: I think like any business branding, there are probably going to be good hedge funds and bad hedge funds, just like good investors and bad investors. Maybe some of the smarter, more savvy hedge funds that really understand the business can really make it work, and then you’ll see the ones that throw away money. They’re overpaying for properties; it’s obscene! I don’t see it being sustained. People that save their money for retirement and put money in their IRA and 401K are going to get rent in the end.

Brandon: If the market were to drop again, what are you guys doing as a flipping company to prevent that?

Mike: With any deal we go into, we like to have exit strategies. We want to understand what happens if we don’t sell it at this price or don’t sell it, and that’s what I’ve used since day one. Losing money on my first deal and learning the hard way taught me to prepare and have different way to go get out of deals if they don’t work.

With everything we buy we’re always running a reconservatives on our ARs, and we run them as often as we can. We try not to predict too much what’s going to happen in the future, but if the market is going up or going down, that’s going to affect how you buy.

An exit strategy would be what’s my drop bottom price before I want to go to the next exit strategy, meaning what do I have to sell this at in order to break even and move on. The next one would be what if I can’t sell it, then let’s consider doing a lease option. From there, just a straight out rental.

Brandon: That’s great. Really quickly ARV is?

Mike: Yes, after repair value price, s that’s basically what a house will sell for after you repair it. The best way to determine that is to talk to your special real estate folk in your area. Explain to them what you’re going to do to the house so they can have a good understanding of what they can actually sell it for.

Josh: Awesome, awesome. On the exit strategies, that’s great. That’s something I think that most new investors really screw up. They come in thinking, hey, I’m going to do this, but they don’t think of the what ifs. Right? You have to plan for that; that’s something we made sure to highlight in our Ultimate Beginners Guide, and we’ll link to that in the show notes at biggerpockets.com/show24, but yeah, when you’re going that, you need to know I’ve got option A, B, C, D, all the way down, because otherwise, if something goes wrong, then you’re in deep trouble.

Mike: Absolutely.

Josh: Yeah, yeah. Could we talk a little bit about the property types that you’re flipping? Are you doing single family, multis, what’s the focus?

Mike: Yeah. Primarily the flips are single family. Mostly that affordable first hand buyer market seems to be working well for us. Price ranges from $175,000 to $350,000; that’s been our average. $350,000, not necessarily that’s a high end-home, but it could be in a different market, different home, where that’s actually a starter home, a more affordable home in those markets. That’s sort of the cream of what we’re doing and it’s worked well for us.

We’re starting to explore some higher-end homes; we almost put together a two and a half million-dollar deal. It fell apart, but I learned an incredible amount about that, and we’re not afraid to go after some of the bigger deals, and I do see us going after some of the bigger deals down the road.

Josh: I do want to talk about your bread and butter stuff, but since you brought it up, can we dig in a little bit on that two and a half million-dollar deal that fell apart? Do you mind sharing some details?

Mike: Absolutely, not at all. It was actually in Nantucket and a lead was brought to me. Networking really does a lot for you. In the beginning, you have no deal flow, but as you continue to network and get yourself out there, you have a pile of stuff that comes your way. I didn’t say no to it; I jumped at the opportunity. I sometimes can react well when something’s thrown my way, so I didn’t plan on going for a two and a half million-dollar house.

What it comes down to is really just adding a few zeros to it. I got the lead, I went out to Nantucket, studied the market, hooked up with some good real estate people out there, got my contractor down there, and we raised the money for it. The deal just fell apart because there was a lawsuit against the seller for some environmental wetlands, and in the end they weren’t wetlands, he was right, but we couldn’t’ hang on any longer due to our investor’s money. I gave my investors the opportunity to pull out, go somewhere else or hang on, and they decided to pull out, so we moved on from that project.

Brandon: You know, I think that’s a great lesson for people. Clearly, you guys know what you’re doing; you’ve been doing this for a minute now. There are certainly still outside extraneous forces that can come in and put a stop to things and can ruin your timelines, your budgets, all sorts of stuff, no matter how well planned you are.

Mike: Absolutely. You just can’t control every aspect of this business, and that’s a hard reality for me because as much as we’re efficient and we want our deals to close quickly, you can’t control the attorneys in the deals, can’t control neighbors, can’t control a lot of things. That’s a good point.

Brandon: Cool. Yeah. Let’s go back really quick. Before we move on, there’s a few things you’ve been saying that actually popped into my head that I really want to talk to you about. Let’s go back to the bread and butter stuff, like Josh said. You said you’re going for single family homes, mostly 175 to 305. Now is that what you’re selling them for or is that what you’re buying them for?

Mike: No, that’s the sell price. They add the repair value to what we’re selling them for.

Josh:Okay. What do you typically buy them for. For example, if it’s $175,000.

Mike: Let me give you an example. If we had a $200,00 house that we sold. Typically, we’re applying a 70% formula to that, which is 70% times two, which is 140, and then we’re deducting our cost of repairs. In this case, say it was $50,000, then we’d be looking for a maximum allowed offer of 90, so we’ll pau up to 90. Sometimes more, sometimes less; it really depends on how our negotiations go.

Josh: Okay. Let’s actually dive into that a little bit deeper. You brought up the 70% rule, and that’s a really popular thing on BiggerPockets, and for a good reason because it’s great. Why don’t you explain again what exactly is the 70% rule?

Mike: Well, the 70% is a quick analysis to determine whether or not you can take a deal to the next level. There is a lot more details that go into number crunching, but basically it’s a simple formula. It’s like fifth grade math; I think we wrote a blog post on it called fifth grade math.

Brandon: We’ll like to that, by the way, in the notes.

Mike: Okay cool. Basically there are two very important things when considering how you’re going to make money on the deal. Quite honestly, you need to make money on the deal at the front end and understand the numbers before you get into it. With the seventy percent rule, the first most important thing you need to understand and determine is what you can sell that house for, also known as the ARV, the after repair value.

If you get that number wrong, you’re pedaling background from the start, so it’s very important that if you can’t determine that on your own—which I don’t suggest you do unless you’re a licensed real estate agent, in which case I still recommend you should talk to other real estate agents in the area—that you test those comps yourself and really understand and analyze them.

From there, you’re simply taking that dollar amount and multiply it by 70%, and that’s going to give you your starting point. In the example I just mentioned, if it’s $200,000, then you’re looking at buying that house for $140,000. Now in the real world, we’re not going to buy a house that’s in perfect condition for $140,000. What you need to look for is houses that are in bad quality, houses that nobody wants.

From there, you’re going to deduct your repair cost. If this house took $140,000 in repairs, then you’re looking at buying this house for $100,000.

How are we determining our profit based on that difference of the 70% from that 100%? Well of that 30%, rough gauge is 20% of that is our projected profits. If it’s $200,000, then we’re saying 20% of $200,000 is a projected profit of $40,000 if everything goes perfect.

The other ten percent, which a lot of new people forget about, is he carrying cost, the interest rate, the maintenance rate while you hold that property. 10% of that is $20,000, so that’s a lot of money. If you’re borrowing hard money, that 30% rule can apply differently. If you’re borrowing hard money and you’re paying 5 points in 15% interest, your carrying cost will be more than 10% if you carry that property for more than 90-120 days.

It’s just a rough gauge that works well for us, but you have to use it with caution. Don’t use it as an excuse to buy a house just based on that.

Josh: Does that seventy percent rule apply at all price levels? $50,000 for example, versus two million or two million?

Mike: That’s a great question, Josh.

Josh: That’s Brandon’s question. I’m just voicing it.

Mike: Great question, Brandon.

Josh: I’m a channel!

Mike: No, in my opinion, it shouldn’t, but it really depends on the individual. Let me give you an example.

If you use that 70% rule on a $50,000 house, your projected profit is going to be $10,000. If you use that example that I just mentioned with the 20%, so you need to determine what you want the minimum return investment to be, not the minimum return on your money, because you need to know how much you’ll make. If that $10,000 is not enough, then that 70% rule isn’t going to work. You might say I want a minimum profit of $20,000 on a property. You have to look at it differently.

The same way that goes with a two-million-dollar property; twenty percent of two million is $400,000. Well hey, if the numbers work and I can make $300,000, I would go after that two-million-dollar profit and maybe look at a 50% of ARV as opposed to a 20%. You look at the dollar value when you have the numbers skew high, or if the numbers skewed low, and you need to determine how much you actually want to make.

Josh: Maintenance too, with the cheaper ones. If you’re only going to make $50,000, that $10,000 can be eaten up like that, in a heartbeat. Oh, the heating system is bad? There goes my profit. It’s terrible.

Mike: Sure, sure. If you have a heating system go bad and you have to replace the boiler, there goes 30% of your profits out the window, right there.

Josh: Yeah. It seems that ultimately the risk level is going to be higher on these lower end properties, and it appears that there is a perfect range somewhere in the middle there.

Mike: Yes, I believe what you want to do is find your comfort zone and price point, especially in the beginning. I would never start out flipping a two-million-dollar house. I think what anybody starting out needs to understand is what’s comfortable for me. If you’re using the 70% formula on the $50,000 house, you need to understand that if you get your cost of repairs wrong, then you’re not going to make any money at all.

Josh: Yeah, that’s great. That’s great. You mentioned using good agents wherever you work. You talked about always finding these quality brokers and guys who can help you out, but a lot of real estate investors think they can work without agents. They think hey, I can save money, what do I need an agent for? Any feedback on that?

Mike: I think that’s a big mistake. I think relying on the experts, building on our team is so crucial to you being successful. Like I mentioned, the number one most important things in determining how you’re going to make money is ARV.

We never got two number two, which is cost of repairs, but if you don’t get that ARV… if you’re relying on Zillow and sites like that and you base your offer on that and they’re off 20, 30, $40,000? Rely on the experts, and you do that through networking and creating relationships.

Josh: Yeah, that makes sense. We didn’t talk on cost of repairs very much. We talked about ARV a lot, so let’s focus on the cost of repairs. How do you determine how much something costs?

Mike: Yes. In the beginning, I would have a contractor party. Every time I went and looked at a property, whoever I could get in there to give me pricing, because I didn’t have the experience to price things out accurately. That gets old quick because in the beginning you’re wearing these guys out and they’re to going to take you seriously.

All I can say is in the beginning, try to create those relationships, explain to them, be honest, and if they have patience to bear with you, then they will stick around for the benefits in the end. How we do it now is that I have a cost of repair sheet that I walk into a property with. It’s just a checklist, so I don’t forget anything.

At this point I’m able to walk into a property and evaluate it really without having to write anything down. That sounds crazy, but the checklist will start with the exterior and then into the interior. It mentions things to look for. A lot of people will look at the roof, but not the chimney. Well, does the chimney need to be repointed, how does the flashing look, how does the facing look, how do the shingles look?

Just really going through it step by step and then looking at the cost of repair sheet to what you have over there in your market, how much they cost. Again, if you’re not experienced with this, I would recommend you pair up with a general contractor or have him walk a property with you and learn from him. If he’s not willing to partner with you, then offer him lunch or whatever it takes to really get those numbers right, because if you get those numbers wrong, then you’ll be out before you even get started.

Josh: That is good feedback. Maybe even apprenticing under a good rehabber like yourself, who would give their time and energy in exchange for the ability to walk through and experience that stage of estimating, right? I think that would be a great way to go.

Mike: Absolutely, I think that is. Anytime somebody has an opportunity to learn from someone else and they can shadow them, go for it. Ask lots of questions.

Josh: My next door neighbor is a contractor. I just found out about that, and he and I have been talking a lot about that. Next time I find a deal, I want to walk with him through it and compare my thoughts and his thoughts. You know, I think I’m pretty good at estimating repair costs, but I’m excited to see exactly what the difference is.

Mike: Absolutely, and that’s great. We learn every day in this business. We get things wrong. I mean, we had a $1,700 allowance on an electrical work on a property that ended up $3,500, which is double what we budgeted. Now we may have made it up on some other things, but that’s no excuse.

We talk to our electrician and get a line-item price for every single thing we can. We want to make sure they don’t make that mistake and within 90% of what we’re estimating when we put our offers out there, because we’re not bringing contractors in now to make offers, so it’s critical that we get those numbers right.

Josh: Yeah, that’s really good. I had a plumbing problem the other day with one of my properties that I’m rehabbing write now. I called the plumber and he bid I think $2400 to fix it, and then I got another bid and it was $3400 to fix it, and then my next door neighbor is doing something with his plumber for $1200. That’s the thing; it can differ dramatically between different people.

Mike: Absolutely. You bring up a good point. If you get the best pricing, then I’m sure it’s going to get done, but don’t always go for the lowest price. You want to qualify your contractors, make sure they’re licensed, and check references, especially if they’re new. We had almost four or five thousand dollars’ difference on plumbing quotes on one of our project, but you need to qualify that lowest bidder in order to make sure they’re qualified for the job.

Josh: Even if you do that, it doesn’t necessarily mean that you’re going to get somebody to do the right job. I had that with a contract guy. The guy had stellar references, stellar everything, did a horrifying job, didn’t want to stand by it, and it was a battle. You just don’t know; sometimes you run into bad luck. It’s bound to happen.

Mike: I Can share one of those stories, for sure.

Josh: Maybe we’ll pick your brain on that one later on.

Mike: Okay.

Josh: You talked about your deals and deal flow. Why don’t we talk about that? How are you guys going about finding the property and deals that you’re working?

Mike: Sure. Let me tell you how we started and where we’re at now. In the beginning, networking—going to the real estate investment association meetings, also known as the Raters. You know, collecting business cards, reaching out, and letting everyone know what I do.

Realtors were always a good source for me. Brokers, too, who have licenses from banks to get foreclosures. Networking, networking, networking, and other events. You can also get deals from attorneys and deal brokers. One very important way I was getting deals was through wholesalers. They send out letters to pull in leads.

Brandon: Oh, bandit signs!

Mike: Yep, we could talk about those for like an hour! Just all sorts of things. I didn’t use some of those direct marketing techniques in the beginning. I didn’t understand who wholesalers were, but now I do and I do a lot of business with them.

Josh: Do you have any tips for the wholesalers that are listening? What do you look for in a good wholesaler and what kind of deals are they bringing you?

Mike: That’s another whole podcast, I think! I think there is an illusion that wholesaling is easy and that everyone can do it and that it’s a shortcut to rehabbing. It’s the farthest thing from the truth; there are no shortcuts to anything in life, as far as I’m concerned. The way I talk to anybody that’s thinking about wholesaling, I tell them it’s harder than flipping because you have to market aggressively, you have to know how to talk to sellers, you have to be honest and willing to help all parties, not just yourself.

Josh: Wait, you said something really quickly. You said you have to be honest? Is that what you said?

Mike: Yeah, can you imagine that?

Josh: Wait, honest? Holy smokes. I bring that up just because so many wholesalers start out and literally the first thing they start doing is lying about deals they have and all this bs and it’s like you guys, that’s just not the way to start out.

Mike: Josh, that’s great, and I’ll tell you, I think some of that is bad training.

Josh: I agree.

Mike: I don’t think they know better. There’s also the experienced wholesalers that do know better that you have to watch out for as well, because then they’re taking advantage of the new flippers and selling them stuff that aren’t deals, so you have to be careful on that. Just like there are bad flippers, there are good and bad wholesalers, good and bad investors. That’s a great point.

Josh: That’s why it’s really important to know the numbers yourself and never to rely on a wholesaler to tell you the numbers.

Mike: Absolutely.

Josh: I’ve seen a lot of wholesale deals come across BiggerPockets or whatever that I just look at and I’m just like that’s a terrible deal, a completely terrible deal, yet they’re telling everyone it’s the best in the world.

Brandon: We have a section of BiggerPockets on our forums where people can literally share a deal. If a wholesaler brings you a deal, you could literally share the numbers and you’ll have experienced guys just come in and they’re going to say this is good, watch out for this; they’ll ask you questions. It’s a beautiful thing, so hopefully people listening put that to use because it’s a great resource.

Mike: Yes, that’s a great point. I always say BiggerPockets is great for that and put whatever you can out there to find answers. Just to back up, you asked me how do I find deals. Relationship building has always been important to me, but to fast forward to where I am now, two of the wholesalers that I did business with through networking, one is now a full time acquisitions manager for me.

He’s a former wholesaler who had a dream of being a house flipper. We talked and I told him my company was growing, so he ended up joining forces with me. That’s Bill Robbins.

Also, John Forcetti, who was a great marketing guy. He was just a great wholesaler. He has now come in as a marketing director in order to continue to pull in leads. All of those things that wholesalers do will now be done in-house now.

Josh: That’s awesome, yeah. Is that the bulk of your team? I know you have Ralph, and now you have these two guys. What other team members do you guys have on board?

Mike: In house, like I mentioned John Forcetti just came on board. Bill Robbins is working for three or four months. Actually, my daughter is fresh out of her first year in college. She’s going to design school in Boston, and she’s working 20 hours a week as me temporarily until I can get a full-time office manager.

That’s the real estate side of my business; that’s where we make our money. The household thing is something that’s just sharing with individuals on our website how to flip houses and try to give back as much as we can. That’s where Ralph and Ryan and those guys, our marketing team, actually are working; they help me with my internet stuff, blogging, and getting myself out there. It’s just a great team of people that I have.

Josh: Let’s talk about that for a second because I think that’s an important thing. Brandon and I go back and forth a lot about web marketing for our investor, and you know it’s funny, every real estate agent has a blog. They all have one, they’re all doing it, they kind of get it.

Real estate investors, I think for the most part don’t necessarily fully grasp the power of blogging. You’re someone that’s successfully doing it. You have your own site, which we’ll like to in the show notes, and you blog for us on BiggerPockets, and as a result, you’re probably getting leads for your business, you’re building more relationships. Can you talk a little bit more about the blogging side of things, why it’s so effective, and why you think people should or shouldn’t do it?

Mike: Sure, sure. I mean this is all new to me. About a year ago is when we really started down this road, but one thing I’ve always realized in business is that my attitude is always like unless you can do something great yourself, I believe you should seek help by seeking out the experts in the business.

Now Ralph and Ryan from [inaudible][36:50] Enterprises, I met those guys through Business Networking International. That’s another business group that I belong to, where we meet weekly. We started meeting and he was asking questions about how I promote my business and things like that. One thing led to another, and I started doing some research, and I was like wow, there is a lot to this stuff. I just didn’t have the time to do it effectively, so that’s’ where creating your team…

We talk about this a lot, and I know that some of you listening may be thinking, well yeah, that takes money and it’s expensive to hire these guys, well, you can make all the excuses in the world that you want, but you have a choice. Either you get really good at doing it yourself and stop watching TV and stay up late at night and figure it out. Maybe you even consider bartering with someone, maybe you consider partnering with someone. How great would that be?

Josh: Yeah, that’s great. You’ve composed this team together and obviously somebody starting out won’t have an acquisitions manager or a marketing team, all that. At what point does that start to come together? At least for you, was it when you had the availability, when you had the cash to bring them in, you brought them in right away? What was the plan?

Mike: When you start out on a new business venture, I believe you need to create a business plan. I know many people don’t do it; they get overwhelmed by it. You could just have a one-page business plan. You need something; you need to have a road map because business plans chance. You go off track, you come on track.

To answer your question, no, this evolved to the point where last year I was averaging about nine to twelve properties. I had a decision to make; I either had to round it down because it was getting overwhelming, or I had to ramp it up. I knew if I ramped it up, I needed to add people to my business. I made the decision to ramp it up and we did, and now we’re at two properties per month now, and probably we’ll be going up to three to four over the next several months.

Brandon: That’s really good to hear. I feel like I’m at that exact spot that you just said. I have a decision to make; do I ramp it up or do I take it down? I can’t really sustain where I’m at right now. That’s really good. I need an acquisitions manager, that’s what I need.

Mike: We can talk offline any time, Brandon.

Josh: There you go! Relationships, relationships.

Mike: You got it.

Josh: You mentioned a little bit about new investors getting stuck. I want to talk about that because I know that’s a huge problem for a lot of people. Analysis, paralysis, not really ever doing anything, just learning. A lot of our listeners have probably been listening to the podcast from the beginning and have not done the deal yet, so what can you speak about on that?

Mike: Yeah, I think one of the biggest things is that new people, why they get stuck is that they get overwhelmed. There are so many ways to make money in real estate, and what I see just from going to weekend courses and buying programs and going to all these events, is that they get overwhelmed. There are so many different things and they buy so many different programs, you know wholesaling, flipping, buying and holding, mobile home pocks, storage facilities, notes, I mean the list goes on and on and on.

What they need to do is find a niche. Something in real estate that’s going to drive their passions, something they can get excited about. If buying notes doesn’t excite you, then don’t buy notes. If wholesaling excites you because you like talking to people and you want to help them out so they get out of a bad situation and in the meantime you make someone doing it, then do that. If buying a distressed, run down piece of junk property inspires to fix it up and help that neighborhood, then go after that. That’s definitely one.

The other big one is they have no plan. If you don’t have a plan or goals, then you’re not going to go anywhere; you have nothing to measure your success by, so you need to create a plan, you need to write it down, and you need to start taking action.

Brandon: That’s great. I want to reiterate one of your points. You mentioned wholesalers helping people out.

I make it part of my personal mission with what I do with BiggerPockets, the show, and everything else to kind of point out that real estate investors are not a bunch of scumbags. We are people that are rehabilitating neighborhoods, fixing things up, giving people a place to stay. There are bad people, we know it, and unfortunately that small percentage gives a bad name for everybody, but ultimately it’s a great thing. It’s a service, what investors do. We help save the housing market, right? Where would we be right now without investors?

Mike: I agree. Unfortunately, I don’t think the banks see it that way. They seem to want to make things more difficult for us to acquire properties. That’s another whole…

Josh: Oh yeah, we have lots of them, man.

Mike: I agree. I love what I do. It’s so gratifying when you’re fixing up a run-down property in a neighborhood; people walk up to you, and neighbors walk up to you. We were just looking at a property in Plymouth, Massachusetts the other day. A woman came up to us begging us to buy it. We located the owner, and a teenager was hanging out there; bad things were happening there, and it’s like we would love to be able to buy this property and make them even happier when we restore this property, so yeah, it’s a great thing.

Josh: It’s a beautiful thing. It’s a beautiful thing. Let’s talk about some of the other challenges. I know you mentioned some complexities and things that you’ve been through.

What would you say were your biggest challenges in building your business out to where it is today? Maybe some of the tough spots that you went through? I like to say people tend to learn well from other people’s mistakes, so maybe you could share some of those.

Mike: Yeah. A do as I say, not as I did kind of thing.

Josh: Exactly!

Mike: If I can save anybody from losing money, I’ll tell them what I did wrong and have them learn from it. I guess one of my biggest challenges was after twenty years talking about doing this and finally doing it, and then losing money on your first deal? It was like getting kicked in the stomach. It was not a good feeling; I was down, to be honest. I just couldn’t believe it happened.

Watching everyone making all sorts of money and finally doing it, so I had a choice. Either I don’t do it anymore or I make steps to learn from my mistakes, and there were many. That was a big a challenge, but I spent the next two years educating myself. I spent lots of money on education, and in the end I said what’s my ROI on all of this stuff I charged on my credit card?

It was going out there and actually doing a deal; it was the only way I was going to get my money back. I mean, talk about a challenge; I lost money on my first deal. My business was suffering because I was trying to build a real estate business while I was trying to run my flooring business. Those are some big challenges, but you have to keep moving forward in my opinion, and that’s what I did.

If you can keep moving forward every day and making small changes, you know like taking three steps forward and maybe one or two steps back, then it will happen. Finding deals in the beginning was a challenge, getting money, right? I mean let’s face it, that’s a challenge for everybody. You have to learn to find deals and get the money and overcome all of those fears and move forward.

Josh: Right on. Right on. That’s awesome. Cool.

Brandon: I want to do something a little different on this podcast episode that we have not done yet, and I want to call it the fire round.

Josh: Fire round!

Brandon: Fire round! These are all questions that came from the Bigger Pocket forums. These are just short, direct questions, so I just want to fire through these.

Mike: This could be hard, but I’ll try.

Brandon: Yeah, I just want to know your opinions.

Josh: Pop, pop, pop, pop, pop!

Brandon: Yeah, there we go. Me and Josh will alternate on these. I’ll start with asbestos; how do you deal with it?

Mike: Hire an asbestos company and don’t touch it yourself.

Josh: Yes, indeed. Appliances: high end, low end, used?

Mike: Relevant on what you’re selling the house for. On average, even with our starter homes, we go with medium-priced appliances and we go with stainless steel. It’s great looking in the kitchen; it’s worth the extra money to go for stainless steel over white or black.

Brandon: How do you decide how nice to make a flip?

Mike: That is based on our ARV and knowing the neighborhood. You never want to have your house to be the nicest house in the neighborhood; that means you spent too much money repairing it. You also don’t want it to be the least attractive house in the neighborhood, so we look at that very carefully.

Josh: That’s awesome. Do you offer incentives to your contractors?

Mike: Ooh! I’ve gone that contracting way so many different ways. Sometimes yes, and sometimes no. A suggestion would be depending on whether you’re hiring a general contractor or contracting it out yourself or if you’re hiring a property manager. There is nothing wrong with incentives, and if you’re going to offer an early incentive for getting done early, then you should also have a fee if they go over.

Brandon: Yeah, that’s what I’m talking about!

Mike: We’re working on some things like that too. I can share more with you later.

Brandon: We’ll see how much the contractors like that.

Mike: Yep!

Brandon: Maybe a blog post down the line.

Mike: That’s a good idea.

Brandon: Let’s say you’re driving around, Mike, and you find a vacant, ugly house. What do you do?

Mike: Right now, I take a picture, write down the address, and give it to my acquisitions manager.

Brandon: What would you have done back in the day? Don’t parse man, come on.

Mike: Back in the day I would write that address down and contact a local realtor in the area or wholesaler and have them do some research to see if they can find out what’s going with that property, and maybe offer a fee if it led to a sale.

Brandon: That’s a great idea, to call up a wholesaler and let them do the work for you.

Josh: For the wholesaler, I mean, they get the opportunity, they get the training. That’s awesome. Here is a good one, you ready?

Mike: Yep!

Brandon: Yeah, this was actually on the forum.

Josh: This is actually a question.

Mike: I know, I remember reading that.

Josh: Would you flip a house if a murder took place in it?

Mike: My quick answer on that is no.

Josh: Oh.

Brandon: I agree.

Mike: Do you want my reasons?

Josh: Yeah, share some reasons.

Mike: Well, number one I think it’s bad karma, knowing that. I don’t know if I would feel good about it. Number two would be the money end of it; obviously if you knew about it, then you would have to disclose it. I think…

Brandon: I actually don’t think you have to disclose it everywhere. I’m not certain of the laws, but…

Mike: It could be from state to state, whether you have to disclose it or not. I believe in this state you would have to; there may be a time parameter on how long ago it happened or a change of ownership. If there was a change of ownership once or twice, then I don’t believe you would have to disclose that on a form of ownership. I don’t know; knowing that, I don’t think I would want to do it.

Brandon: I think there are enough deals out there that you don’t have to go after the murder houses.

Mike: Yep, yep, exactly.

Brandon: How much do you stage?

Mike: We are staging 100% of our homes right now. We weren’t doing that a year ago, but now we have a staging partner in place where staging offers many benefits, and I would highly recommend it to anyone trying to sell a house.

Brandon: Yeah, that’s just to remain competitive, I think.

Josh: Do you do beds and everything?

Mike: No, we’re not staging bedrooms. We’re staging living rooms, dining rooms, kitchens, and accessorizing with curtains and towels and sometimes pictures and things like that.

Josh: Right on.

Brandon: Pictures of you?

Mike: No, definitely no. I would scare them away with this big Italian nose. My wife wouldn’t allow it anyway.

Brandon: Alright, so your next door neighbor to your flip has junk cars everywhere, all over the place, causing your house to not sell. What do you do?

Mike: The first advice I would give is know this before you buy the house.

Brandon: There you go!

Mike: I also bought houses, I guess I was blind to that. I think the very first house we bought had a boat sinking in the front yard. I don’t know how I didn’t see that boat when I bought the house.

Josh: It was sinking in the front yard?

Mike:Yeah, in the staging that was on the side of the house. It was probably there since 1980; that was a clue that the guy never finished the rehab. In the event you did buy it and didn’t notice it, you need to understand exit strategies and have a price reduction strategy to move that house. You know, like leasing it out or renting it out. That does happen; people don’t want to buy houses that their neighbors don’t look very friendly on.

Brandon: That, or you could hire one of those tow companies on the TV shows to come and steal the boat.

Mike: I think you have been spying on me, because we’re looking at a house in Middleville and the guy next door has a bunch of junk cars, so it’s kind of scary that you guys put that question in there.

Brandon: When you buy the ugliest house on the street, the one next door doesn’t look so bad, but as soon as you clean up the house you’re working on, all of a sudden you realize how bad that one is. I once offered to pay for a guy to clean up his yard and everything, and he shot me down.

Mike: I was going to say how did that go!

Brandon: He did go out and clean after that point. He realized it meant a lot to me.

Josh: Alright, so last question of the fire round.

Mike: Fire round, yes.

Brandon: What is your minimum profit that you personally aim for on a flip?

Mike: Minimum profit that we aim for is around $35,000, Brandon, and that’s really a product of the ARV. Most of our flips aren’t much lower than 175 now, so twenty percent of that is around $35,000. That’s our minimum projection. If we’re getting into a $130,000, $140,000 flip, we won’t project $35,000 and we won’t go for it.

Josh: Before we get to our last final questions, I do have one final question for you. How is this market today looking competitively? I hear a lot of investors talking about having a hard time finding deals, and I’m wondering if you feel that way as well.

Mike: It depends on what they’re doing to find deals. If you’re relying on MLS, which a lot of them do, very competitive, things are being outpriced, and I would say don’t break from your numbers, stay true to your price; otherwise, you may get burnt.

In that sense, yes it is definitely more competitive because it’s definitely a sellers’ market now. It’s heating up. We’re selling properties first day, second day on the market, but you have to find other ways to find deals and not just rely on MLS.

Josh: Great. Alright, so now officially we can jump to the famous four! That sounds so pathetic. Now, before we start with the famous four, man, we’re talking here, I’ve got Mike LoCova, I’ve got this guy from Massachusetts, so come on man, you have to say it! Don’t fart in the parked car. Come on, let’s hear it, baby!

Mike: Oh, come on! I can’t do that! Come on! Parked car in Harvard yard!

Josh: Hey, there it is! There it is. Beautiful, beautiful. Alright now that we’ve thoroughly embarrassed Brandon, let’s talk about your favorite real estate book. Are there any favorites?

Mike: Think and Grow Rich by Napoleon Hill was probably by far my favorite book of all time. I mean, it’s such a great book; it really got me thinking beyond more like what the secret book was all about, but it’s about positive mindset, reversing the negative thoughts in your brain, and making positive affirmations.

It’s just a great book; I read it like three times, and I would recommend it to anybody if you’re looking to succeed and need to change your mindset to do it.

Josh: I’m sitting here, watching Brandon crack up over something, and I’m still trying to figure it out.

Brandon: You were just mocking me earlier, not on the podcast, about being Mr. Negative today, so I just thought that was funny. I may have to read that one.

Josh: You should read it, Brandon! There you go. What about hobbies? I’m sure you do stuff outside of your real estate career. You’ve got the family; what do you like to do for fun?

Mike: You know, I love my business too much. I consider this fun every day I go to work. However, I try to spend as much time as I can with my kids and my wife. To me, success isn’t just about how much money you’re going to make; it’s about enjoying it along the way. I go golfing; I go mini-golfing with my kids. I love to golf, personally, I go once in a while with my buddies. Just hanging out by the pool and spending as much time as I can with my two girls is just everything to me in my life.

Josh: Right on, that’s awesome.

Brandon: You know, I didn’t understand golfing before until I went with some real estate guys a few months ago, and now I get it, why people golf, because it’s such a good networking thing! It was amazing. I built such good relationships with a bunch of realtors around time and an investor just by golfing, so.

Mike: It is awesome. Try doing some skins some day and play a dollar a hole on a game. I don’t want to promote gambling or anything like that, but!

Brandon: I would lose that money very, very quickly.

Josh: I believe golfing to not be awesome because any time I play, a club goes flying. If I’m doing it with somebody that I’m seriously trying to have a relationship with in business, it won’t look good.

Brandon: It’s a little embarrassing for Josh.

Josh: Yeah, just a little bit. Alright, so last question of the day. Why do you believe some house flippers and others just come and go and fail or never get started?

Mike: Well, I think whether it’s house flipping or any other business, really what it comes down to is passion within you. If you have that passion and you want it bad enough, you’ll find a way to make it work. I think what happens in this business is too many people get caught up in thinking this is some get rich quick scene, hit the easy button, I’m going to make a million bucks in 90 days, and that’s not the case.

I think they may prematurely get into a deal, and they may lose money on their first deal; a million things may go wrong, and they get discouraged. I think first and foremost is you want to educate yourself; get on BiggerPockets and ask questions. My goodness, I wish I knew BiggerPockets ten years ago, five years ago.

Brandon: I wish I knew it five years ago!

Mike: Yeah, exactly, because I had a lot of questions. You guys probably would have thrown me off the site because I asked too many stupid questions.

Brandon: Never! There is no such thing as a stupid question, Mike.

Mike: Create a plan, right? Create a plan, even if it’s one page, and have some goals. You know, what’s the saying? Goals with no actions are just dreams. You can dream about it, but if you don’t create goals and take actions to meet those goals, then you’re never going to get there.

Josh: That’s awesome, and quite quotable, Brandon.

Brandon: Yes, I may have to put that on tweetable topics on the show notes.

Josh: Awesome, awesome. Well listen, Mike, I have to tell you, lots of fantastic information. We definitely appreciate you coming on the show and taking the time. Thank you so much for participating with us on the site; we’ll certainly be linking to your profile in the show notes. Your website is houseflippingschool?

Mike: Yes, houseflippingschool.com

Josh: .com. You guys can find Mike over there, and listen, thanks for being here with us.

Mike: Thanks, Josh, and thanks for the opportunity.

Brandon: Yeah, thanks Mike.

Mike: Thanks, Brandon, and we’ll talk to you soon.

Josh: Alright everyone, that was Mike LoCova here on the BiggerPockets podcast; hopefully you guys got as much out of that interview as we did. It was really chalk-filled of lots of tips, lots of actionable content, so we definitely appreciate Mike coming on board.

Again, as we told you in the beginning of the show, we have lots of great reviews and ratings, so if you guys haven’t yet take the time to leave us one on iTunes, please do. Otherwise, make sure you’re hanging out with us on BiggerPockets; the more active you are, the more out there you are engaging with other people, the better your opportunities are for growth and for networking and expansion of your knowledge and your team are going to be, so definitely be out there and engage.

If you’re not following us on Facebook, follow us at facebook.com/biggerpockets Find us on YouTube, we have some cool stuff, great videos that Brandon has been putting together. Otherwise, come hang out and get back and listen to some of the other shows if you haven’t done so already. Again, I’m Josh Dorkin, signing off.

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