Success Path a Flip or a Flop for Clients?

[Nicholas Varner]

Today, the Holton Wise sales team visited a speaking engagement presented by Success Path. I knew nothing about Success Path before I went to this speaking engagement. I made some notes on the presentation, which I will report on and offer my commentary as well.

Success Path is a hard money lender that offers perspective clients, or "partners", education for $2,000 for a three-day training course. Clients need not have any real estate experience, no credit score is too low, nor is any job is necessary. "We're looking for serious people, not tire kickers," said the presenter Mike. Thus, this kick off presentation was meant to weed out the bad clients from the "good clients".

The front men to Success Path are Tarek El Mousa and Christina El Mousa. They have an entertaining show on HGTV called "Flip or Flop". 

My wife and I enjoy the show from time to time. If you've never seen the show, the married couple is based out of Orange County, California and they flip houses on the show. On every show you can look forward to three things happening: 

1. Tarek will appear to be doing some form of manual labor briefly in flip flops. 

2. Christina will pick out countertops and floor colors and proclaim "they look awesome!" 3. They will make a $90,000 profit on each home.

From what I can tell, it seems that Tarek and Christina own Success Path and administer the secret sauce in their educational process with perspective clients. They promise a money-back guarantee if you don't make $6,000 in six months. Success Path, I suspect, may be a front for loan shark lenders to use a vehicle to target naive clients or it may operate in good faith.

Here's some highlights from the Success Path presentation:

• They charge 1-9% on each loan
• They offer all the hard money to buy each property for you, 1-3 day loans for wholesalers at 1-2%, 30-90 days funding at 1-3% per month
• Bridge loans at .5-1% per month
• $1997 in education fees for their three day course before you can have access to funds
• Success Path claims to evaluate properties not the client/partner. 

They further differentiated themselves with this formula that they convey to clients:  1. Have cash buyers lined up before you purchase  2. Find right deals  3. Do right math  4. Make right offer.

They estimate that if you make ten offers that you will get one accepted using their techniques. A couple of anecdotes that were relayed to the room of 100 people or so was that "we buy properties using a lot of 'subject toe'", targeting banks that are going out of business and having fire sales, and asking for price reductions based on contractor feedbacks and the banks rolling over. He gave an example of a time in Florida where a contractor found a wall full of mold and he estimated the costs of the repairs were $1800 (not sure how it would ever cost that much) and he went to the bank and asked for $20,000 in price reduction and the bank rolled over and said "ok, you win". Portraying banks as stupid to a room full of people played well to the crowd. Certainly there were many in the audience enamored with these ideas.

Several troubling issues came up during the presentation. First, no questions were allowed. Mike did not want to take any questions on anything. Red flag. Second, Mike lied using statistics over and over again. Given that you are targeting folks with no job, no credit, and no real estate experience, it felt fairly predatory talking about how just by paying us 2 grand that you can make $40,000 in a month off buying distressed assets and immediately painting and cleaning them and selling them. This is best, best, best case scenario and highly unlikely to occur.

To be specific, Mike said the cash that Success Path provides for short term deals yields an average gross profit of $75,990. How that is calculated was not disclosed. Was that Final sales price - Original Sales Price, or were all other costs included, I wondered? That's across the entire United States. In local news he said in Cuyahoga county the average REO sells for $31,000 and sells when flipped for $87,000. He called this $56,000 in profit. The crowd roared.

Very few people in this room had any experience in real estate from the responses in the room. In their mind, they really believe that Success Path (after paying 2K for their education course) will give them the money for $31,000 in cash and then provide the funds to rehab the property, and then when you sell the property you will pay back that loan plus 1-9% interest on the loan amount that they will after all that still make bags and bags of money. Flipping is highly risky. You are banking on a lot of factors to go your way including: macro factors totally out of your control, the process going to plan (which it rarely does), your time input will be greater than you ever could imagine before you've done a flip, carrying costs that are often ignored, cities and inspectors getting involved, utilities screwing up, and making mistakes along the way.

Other areas of concern, they encouraged newbies to put in 25 offers post education course. Each offer would take one hour to complete. They never mentioned working with a local professional realtor. They never outlined the worst case scenario. In my mind, the worst case scenario is the most likely scenario for clients. You take people with no job, no income, no experience and you make them pay 2 grand to educate themselves. They then invest time into making offers using the fourteen techniques Tarek and Christina lay out for them in the three day class. In theory then an offer is accepted, and potentially the money is provided for the purchase price, perhaps not. If the money is there, my guess is that money will not cover inspections, appraisals, closing costs, taxes, insurance, title work, realtor fees, etc. although with the no questions allowed presentation format it's tough to tell. If the clients get that far, they now are put in charge of a house flip where they either flip or flop. The smart money is on the latter. The clients will now have to coordinate the efforts making a lot of calls to contractors, municipalities, utility companies, buyers, realtors, title companies, and so on. They will then have to ensure that the contractors that they hire know what they are doing or do the work themselves. The numbers do NOT work for flips in general! You can get lucky, but there's not a business model that will be profitable for the general public as Success Path advocates using their special techniques. For professional crews, yes, flipping can be profitable. For the general public, no.

Let's try using their numbers in Cuyahoga county. Let's say you buy a property in Cuyahoga county that is distressed for $31,000 and you are going to sell that property for $87,000 in 1-3 months as they profess. So in this case Parma, Ohio is a very good example. You can conceivably buy distressed real estate in Parma, Ohio that is $31,000 and sell nice homes in Parma for $87,000.

In a three month flip, here's a guess at what the numbers would look like:

Success Path's Proposed Profit: $56,000

Here are some likely costs:

Realtor commissions, title, closing costs: $3,500 for the initial purchase

Taxes for three months: $750

Insurance: $300

Utilities for three months (fees for turning on services): $1000

Materials for 2000 square foot house: $10,000

Plumber: $10,000

Permits/Inspections: $1000

Electrician: $6,000

Reroof: $6,000

Labor/time for three months: 15,000

Realtor commissions on final sale: $6500

Total input costs listed here: $60,050

True, these are guesses on a made up project. It will be better, it will be worse depending on the project on each aspect. Maybe you won't have to do the roof or some other large expense area. However, here's the one cost I didn't factor into that analysis: Success Path is getting anywhere from 3-9% depending on the credit risk on the loan amount if you sell in 90 days. Let's assume most loans are going to be around 9% from Success Path. If it's 9% on the total input costs, clients would owe Success Path $8,194.50 or if you come up with the cash to remodel the property yourself and you get the 31K and pay all the closing costs, you are paying Success Path $2,790. That is if you can get the property sold in 90 days. Remember each month is 3% more in interest and other carrying costs.

Success Path's presentation is built off of a number of faulty premises. Let me start my own argument using a premise that I think is actually true. The first time you try anything will not be your best result. Newbie real estate investor should not be flipping, but if they do want to flip, they shouldn't do it having to pay 36% annual interest rates. When business are targeting people with no jobs, no credit, the most probable outcome is that an occasional success story will emerge, which will make it into the marketing brochure. However, the vast majority of these folks will fail in this endeavor. Even with all the cash to pay for the home, the administrative costs, fees, contractors, materials, utilities, and so on. It amounts to clients doing all the leg work in the hopes of big returns with the reality being far more bleak. The margins are not as good as they let on as they do not ever price out for you how to get from Point A (a horrible house) to Point B (a mint property). Clients will most likely at some point finish the project if Success Path does not hang them out to dry during the process. However, they will almost always run over their budget and run up a huge bill with 3% monthly interest or 36% annually. Tarek and Christina run over budget on their show almost every time. This is if everything goes to plan and you can buy the property, complete the repairs, and sell the property. What happens if the property does not sell in the first few months, which is common? 3% monthly interest charges keep coming. The most likely result is a short sale or a foreclosure with Success Path taking over interest on the property.

In conclusion, Success Path makes misleading claims by minimizing the importance of repairs, minimizing the budget needed to remodel properties, minimizing how difficult the process is, minimizing all the time and effort it takes to get from start to finish, and are either running or facilitating and profiting from a loan shark operation with 36% annual interest by targeting desperate, greedy, misinformed, poor people. But damn, they look great doing it! 

The path Tarek and Christina are advising their clients to take is not a successful path for anyone, except the lenders and themselves.

Finally, if you are beginner in real estate there is a ton of information for free. There are many experts in the field that will teach you pointers for free or you can pay a small commission for someone to show you pitfalls to avoid on each transaction. That is a realtor's job. However, paying for classes for 2K, 10K, or 40K is a total rip off. You would be far better off investing in a SFH starter house and learn by doing, while seeking out free counsel available in many places. Flipping is a volume business and you need a competitive advantage and experience to succeed. Happy investing! (If you enjoyed the article, please share on Facebook, twitter, and social media.)