Top 10 Takeaways - Podcast 10 Flipping Houses 101 with J. Scott

BP Podcast 010: Flipping Houses 101 with J. Scott

Edited by Brandon Accomando

1. How a TV show got J started with flipping

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.” 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.

1. How J made every mistake possible on his first flip…but still made money

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. We ended up buying this house with this wholesaler and we made pretty much every mistake 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 overpaid a little bit for the house. Then we spent about 10,000 more on the rehab than we anticipated so we overpaid 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. 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. 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.

1. Multiple exit strategies for flippers

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 backup.

1. The “flip formula” and how to use it to estimate your profit

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 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.

1. How to determine the “after repair value” of your property

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.

1. Why you should get your real estate license

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 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.

1. Why having a construction background might not be great when flipping

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.

1. How J’s got his days-on-market down to a 17 day average

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. 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 underpricing 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. 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.

1. How to find private lenders to fund your deals

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.

1. Automating you flipping business to flip while holding a full-time job

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.