The Science of Flipping - Episode 8 – Creative ways to do Deals! | Real Estate Investing Podcast

Episode Date: October 11, 2013

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Welcome to the Science of Flipping Podcast. I'm your host, Justin Colby. Welcome to the Science of Flipping Podcast, Episode 8. I'm your host, Justin Colby, and I'm excited to be here with you guys today. I just got off the plane from a great mastermind that I did out in Denver with one of my colleagues, John Broken. So if you're listening to this, John, big shout out to you. That was an awesome mastermind. You had awesome investors in that room. And it gave me a lot of ideas to come back here in Phoenix and do some things here differently in

Phoenix. But it was a great mastermind. And so thank you very much. I do a bunch of masterminds around the nation. So if you want to get a hold of us and you'd like to be invited to a mastermind, make sure you get a hold of us at thescienceofflipping at gmail. Or you can go ahead and go over to our website, thescienceofflipping.com. You want to go there anyways, guys. We give away the best e-book there is on the market right now, it is the 15 most costly mistakes real estate investors are making across the nation. Doesn't matter if you're from New York to California. These mistakes happen to investors at all times,

whether they're rookies or experienced. These are the most costly mistakes real estate investors make. You've got to get to the website, thescienceofflipping.com. Download your e-book. Get it for free. And also go over there and let us know if you want to be a part of our masterminds. I do these masterminds across the country. This last one was in Denver with John Broken.

It was an awesome mastermind. So thank you very much for that, John. Thank you for putting that on for us. It was absolutely phenomenal. If any of you guys are also out there listening to me, you guys rocked. You guys were absolutely all-stars. You guys all knew what you were doing. So it was a very, very exciting weekend. Today's lesson, what I'm doing today about is how to get creative in this market. You know, last podcast, you heard podcast seven was talking about what's going on in this market and how inventory is up and homes aren't selling as quickly. And today's podcast, guys, comes primarily from being in that mastermind, putting on that mastermind with a group of very successful individuals and masterminding about how to get creative

in today's market. When the inventory is going up, when homes are sitting on the market longer than they normally would, how do we as investors, fix and flip investors, get creative to get deals done? So that's what we're going to be talking about today, guys. For those that are new, for those that have never heard our podcast before and you happen to land on it today, welcome. Our podcast, my podcast here, The Science of Flipping, is all about creating the business and lifestyle you want, guys. A lot of real estate investors go into this because there's a lot of money in real estate investing.

And why do we all want to make that type of money is to create the lifestyle that you want. Spend time with families, be able to travel, go on vacation, go to different countries. Well, the fix and flip business, a lot of people treat more like a job. They work in it all day, every day. They don't treat it like a normal business and create the system so that the systems can run without them. So what this podcast is about, guys, each and every week, I'm going to teach you guys systems on how to systemize your business so that you can be in a different country, in a different state, or even on the comfort of your own couch and flip homes.

You never have to walk the properties. You never have to do rehab checks because you have the systems implemented for you to do that from the comfort of your couch. That allows you to live the lifestyle you want, make the money you want, travel how you want and with you want. Guys, this is how we have set up our lives. Me and my business partner, Eddie Rosefield, we created our company with systems. Eddie works every day and I give him all the kudos because he works every day for little nuances in our business on how to systemize it. There's got to be a system

for each and everything and he works every single day trying to systemize each part of our business. And because of that, our business is to the point where we're buying and selling and rehabbing deals while we're on vacation, while we're not even here in the country. So that is why you want to listen each and every week, download each and every podcast is because we're going to teach you guys how to be fix and flippers and do it wherever you want to do it, living the lifestyle you want. If you guys don't know who I am or maybe heard a little bit about Eddie or myself, we started real estate investing here in Phoenix back in 2007. That was not an easy time to all of a sudden become a real

estate investor primarily because short sales were going on and the market was crashing and no one knew what was happening. But Eddie and I gave a vow to each other about we are going to make this work. We are going to make this happen. We will not quit. We will not give up. And we are going to be successful real estate investors. I personally sharpened my teeth in 2005 when I got into real estate with a good friend of mine in Northern California and started selling new homes. And things were good in 2005 until 2006 and 2007 came so it got a lot more difficult. Guys, I and Eddie have both sacrificed time and time again getting our business started. It took us nine months to get our first deal done. Nine months, guys.

That's a long time before your first paycheck. Now, I'm an adult and Eddie's an adult and I'm sleeping on a couch and we're not being able to pay our bills and we don't have any way of making any more money. So if you're out there and you're a rookie investor and you're getting frustrated and you want to give up at times or you wish you could be myself or Eddie or any of the other very successful real estate investors out there, here's my word of advice. Keep pushing forward. Never give up because it's right at that time that you're about to give up is when you are right about to strike gold. There's actually, now that I say that, there's a great book out there, Three Feet from Gold.

I forget the author, but it is an awesome book and it talks all about that. Now, you know, last year we did 96 flips. This year we've done about 50 as well as we have a 79 unit townhome project out in Mesa, Arizona. So now if you took a picture of our business, we have a beautiful office here in Scottsdale. We live in beautiful places. We have a wonderful life, but it wasn't always that easy. This is a moment in time that if you took a picture, you would say we were overnight successes, right? Just like any athlete or any musician that you say, well, where did they come from? Well, they fought long and hard just like we did to become successful. We surrounded ourselves with successful entrepreneurs, with successful real estate investors.

We went to masterminds like I just spoke about. We paid for masterminds to get into a network of individuals that could make us better so that we could learn from their mistakes, so that we could learn from what they are doing right but what they didn't do right. So that's our background, guys. I'm happy to be here. And let's just jump right into it because I'm kind of jacked up about how well this mastermind was in Denver and the fact that they're seeing very, very similar things to what I see out here in Phoenix, Arizona.

And the primary problem, and I hate that word, guys. I hate using the word problem. But the primary issue is it's getting harder and harder to not only find deals, but then also find deals with a large enough spread in them for you to actually want to buy it and fix and flip it, right? That is the number one problem that I heard in this mastermind endeavor. It's the number one problem we see here in Phoenix, right? So today, guys, today's all about getting creative, finding deals that you normally don't look for. I always use the term, you know, putting on a different set of glasses to go find those deals that have big enough spread that would give you enough profit to actually do, right?

So that is today, guys, what we are going to be focusing on. It's a hot subject. I'm going to be giving you everything that we're doing here in Phoenix. I'll give you some ideas that I saw there in Colorado. Colorado and Denver, it was my first time there. Very cool city. I didn't get to spend too much time there, but the architecture of the homes is very cool. It's a very old city. Very, very cool place to be.

So if you haven't been to Denver, absolutely go. And I'll probably be putting on another mastermind there with my good friend, John Broken, and we'll be rocking the house again there in Denver shortly. But let's just jump into, you know, one of the things that we do here in Phoenix, and obviously I saw actually a good amount there in Denver, is we go after properties that are going to be complete scrapes and rebuilds, tear down and rebuilds. Okay. So these are properties instead of buying them and rehabbing them and looking at that level about the comps and that level, if you're going to go buy a piece of land, tear down the home and do a brand new rebuild, you're no longer running the same comps, right? The years are different. You're now, you're now competing against new builds,

which usually get a higher dollar amount because everything is new, right? So now you're changing the scope of what you're actually getting the comps of. That is a huge thing that's going on here in Phoenix. We currently here are doing it at Phoenix Wealth Builders, as well as in Colorado, guys. One of the main things that I noticed, now in Denver, Colorado, it's a much older city than Phoenix. So one of the things that I noticed, now in Denver, Colorado, it's a much older city than Phoenix. So one of the things that I noticed was a lot of these residential communities would be built in the 1800s, 1890s, very early 1900s. And all of a sudden there'd be an old house, old house, old house, old house duplex, brand new duplex. Old house, old house, old house, brand new fourplex. And what these investors are doing out in Denver, and I had a very long conversation with an investor out there that lends private money, actually.

Has a huge private money lending. Well, I guess it'd be considered hard money, but has a lot of money to lend. And that's a lot of what he's lending on are these scrapes and new builds, but specifically new builds into a duplex, fourplex, eightplex, or larger, right? Now, that is something that is not necessarily happening as abundantly here in Phoenix as it is in Denver, but I thought it was a great idea.

So, what I'm doing coming back here this week is I'm going to be speaking to my city and talking to all the cities that I invest in and what the rules and regulations are for specific zip codes, specific communities, specific subdivisions. I want to know that because I personally am going to start going after areas that I know I can build a duplex in. If the lot is big enough, I'm building a duplex. I might even build a fourplex if I can get a big lot. Those are the opportunities that are going to separate yourself from the normal investor that's looking to buy a home, rehab it, and fix it, and dump it back on the retail market. Now you're in a whole another category. Now I will tell you, and I'm sure for all of you out there listening, there are so many people looking to buy duplexes and fourplexes, sixplexes, eightplexes. You can't sell them fast enough. They fly off the shelves. Every investor is looking for them, right? So why wouldn't you take that idea into your city? Go find a lot that can hold a duplex, fourplex, sixplex, eightplex.

You will probably have to hold it a little bit longer, right? Because if you're in a residential community, it changes things. You have to rezone it. You may have to hold it a little bit longer right because if you're in a residential community it changes things you have to rezone it you may have to build up which means you need to get it approved by the city to go two stories if it's only a one-story community there's a lot of work that you're going to have to do you may have to hold it a little bit longer now remember if you're going to hold it a lot longer or a little bit longer or longer at all you need to account for holding costs your cost of money cost of taxes cost of everything right make sure you're still a good deal but if you go in there and you find out whether you can build up with the duplex if you can build larger with the duplex or quadplex that is a huge thing that's

going on in denver i'm going to bring it here in Phoenix. It's nothing new. It's not like the newest thing that anyone's ever doing, but it got my mind thinking about what to be doing, what to be looking for. So I highly suggest looking into that, going down to the city and finding out the ordinance that you need to know so you guys can get the permits to do it the right way. Another idea that goes right along with that, which I was just talking about, are the pop-tops, right? Pop-tops meaning all you have to do is go into a community that traditionally are single-family homes and get a permit to build up. Get a permit to raise to a two-level home, add square footage, go vertical,

and get it done that way. Now, you have all that extra square footage. A lot of people do like multi-level homes, and now you've been able to change the whole home and the layout of the home. Of course, you need to adjust for building costs, right? So not only if you're scraping and building new, but you need to adjust because you're gonna take,

literally are gonna be taking off the roof and building another story to that home. So you're gonna have building costs. Out here, we're seeing anywhere from 65 to $75 a square foot to build. If you're in a traditional normal building or normal home, so to speak, or townhome. Obviously, if you're building a million dollar spec home, those costs can be much higher. So don't take my word for it because I'm here in Phoenix and everyone here always thinks I'm crazy when I tell them the dollar amount that we spend on building or materials. But think about pop tops.

Think about going into a single story home, taking off the roof and building up. Right? Again, another way to look at that. Very same home that you're telling yourself there's not enough value in that to buy it and fix and flip it. The traditional way. But what if you just take off the top and build up? Now does that add the square footage? Absolutely.

Does that create more value for you? Absolutely. Are you going to be putting in new materials? Absolutely. Take a look at that, guys. That is a way for you to create value. Guys, I was just given a deal from a wholesaler, actually, that it was a rather large lot. I mean, abnormally large here for Phoenix.

And the home itself, if we were to have, and we did look at it just to buy the home and do a rehab, it did not fit. It did not pencil. But we looked very long and hard about possibly dividing the lot. Breaking the lot up into two. Now, at that point, it penciled. The problem being is the wholesaler had to move it within like a day or two as wholesalers usually do. And so we didn't have enough time to figure out what our costs were going to be to permit it, to divide the lot, to new build, you know, the whole thing,

because we had a couple options there. We had an option where we could divide the lot, sell one entire lot raw, and then rehab the home or just simply sell the home. We didn't even have to touch the home, right? Just resell it, re-wholesale the home, and then sell the lot and the home without touching it. Or we could rehab the home, create a little bit of work for ourselves, made probably a very small paycheck, but all the money was in selling the other lot, which for sure would have profited us anywhere from $30,000 to $40,000. So we would, I think, bought the initial home we were going to buy somewhere around $90,000, and we would have made somewhere around $40,000 between reselling the home and reselling the new lot since we divided it. So when you're looking

at homes, not only just look at the home, but look at how big that lot is. If there's a pretty big lot, which is very hard to find here in Phoenix, but when that happens, see if you're going to be able to divide the lot and possibly either build on that lot and or sell the lot off to a builder. Sell the lot off to a builder who wants to build a spec home or whatever. So again, that home didn't pencil, but the lot penciled because we could divide it in two. We could break it up, get it permitted, and go through that. Now, the next thing that's said to that, and I brought this up before, guys, you always need to keep in mind a holding cost.

That is going to take a lot longer than our traditional rehab, right? We have to go through the city. We have to get the proper permits. We have to make sure all the paperwork's involved. We got to go through the bureaucracy of going through the city. So that being said, is now that going to affect our profit? Of course, right? Because we're going to have all these holding

costs. So we don't want to just say, oh, you don't want to just make a rash decision because the lot's super big. So you say, oh, I'm going to buy it so I can divide it. Find out more. The reason why we couldn't pull the trigger on that is primarily because we had to pull the trigger within, I think, two days. Well, that wasn't quite enough time for us to do our due diligence to get that deal done. So we passed on it. But that's another great opportunity for you as an investor that you look at the house and it doesn't pencil, but then you look at the lot and say, oh my gosh, that's a one and a half acre lot.

You could divide that up into 2.75 acres, right? So look at the lot, see if you can divide it and build. Now you could build, you could sell the lot. It really depends. You got to run those numbers, but there's a lot of activity in that if you find that right lot with the home on it. One of the things that my partner Eddie and I have been discussing is possibly, you know, here in the Phoenix market, you know, for my New York listeners and my California listeners and, you know, your real estate price point, your entry price point into real estate is much higher than it is here in Phoenix. One of the main reasons we started investing here in Phoenix was because of the entry point to get into real estate. It was very low relative to

California. Eddie and I are both from the San Francisco Bay Area. You can't buy a shack for less than $500,000. You just can't do it. So we jumped into Phoenix because you can buy a 1,500 square foot home, three bedroom, two bathroom for $100,000, right? So recently, over the last, not that recent, but over the last two and a half years, three years, we've had the hedge funds in town and they've been knocking us out of the auction. They've been buying up everything in that $100,000 price point. We can't find deals. There's no inventory, right?

Complain, complain, complain. point. We can't find deals. There's no inventory, right? Complain, complain, complain. Woe is me. Absolutely not. We never take that position. There's always a way to find a deal in a certain market. You just got to be creative and you got to be flexible to change your business model. So we might need to be going into a higher price point. No longer are we going to maybe be looking at the $100,000, $150,000 price point because the hedge funds buy them all. So maybe we need to be looking over the $500,000 price point. Now listen guys, here in Phoenix, $500,000 is a very nice home. I was just with some friends up in Northern California

and they just bought their home and don't get me wrong, it's a very nice home. I was just with some friends up in Northern California and they just bought their home. And don't get me wrong, it's a very nice home, but it was well over $500,000. And out here, I mean, you get top notch home, top notch for $500,000. So it's just a different market. There's no right or wrong in that. So we're looking at possibly going heavier into bigger, better deals rather than dealing with the masses of asses, right? That's what I like to call it when I'm fighting against everyone and their mother. It's like, okay, I'm having a lot of headache dealing and trying to find homes at the auction and find homes on the LMLS when there's no homes available and all these things. Well, I have the money to go into a higher price point, so why not jump into that higher price point? Do a little bit of research.

Figure out how many days on market the higher price points are in. Figure out how many actives are currently. Has there been an increase? We've talked about this in the last podcast. Has there been an increase in length of days on market? Has there been an increase? We've talked about this in the last podcast. Has there been an increase in length of days on market? Has there been an increase in inventory? Has there been an increase in buyers? You need to look at the numbers when you're thinking about going into a different, I don't want to say market as far as like a different city market, but a different market, a different price point market. You need to do your due diligence to figure out whether that would be a good deal.

Lastly, guys, I think a lot of investors are missing the boat. We just talked about possibly doing scrapes and building a duplex or a fourplex or a eightplex or something like that on a residential lot. But you also can go out and market, and I suggest doing direct mail. I'm a huge fan of direct mail, but you can go out and market to commercial owners. So most real estate investors, when they market, they traditionally go after some sort of single family home type marketing, right? We buy ugly houses, you know, 30, 60, 90 day lates. Typically it's a residential type

of marketing style, right? Craigslist ads. What a lot of investors are missing the boat on is if they are looking to find deals in this market, you might start thinking about sending direct mailers out to the commercial industry. Because in Phoenix, in Arizona, duplexes, fourplexes, sixplexes, eightplexes are all commercial. So now I'm going to find myself commercial properties. As a matter of fact, now that I think about that, it might actually be three plex or more. So don't quote me on the duplex. Do not quote me on the duplex,

but I think it's a three plex or more is considered a commercial property. And for those of you out there that do know the answer, then that is good, but I'll make sure I get you that answer. But you need to look at that in each and every city because it's always kind of different in what city, what your parameters are, what would be considered commercial. But guys, get creative. Go after those

type properties because I told you already, there are buyers. There's a ton of buyers out there. I know you've stuck to your single family home, fix and flip model, and you've been doing it for years. Or you might be a rookie and you might be thinking, oh, we see all these TV shows and they're flipping single family homes. So that's what we want to get into. Well, if you can't find any deals in that, no inventory in that market, then get creative. Go after something that others aren't going after. So I would say, send out to mailers so you can find those commercial properties. If you want to know more about what type of mailers I use and all that kind of stuff, go ahead and go to our website,

go to thescienceofflipping.com, register for the ebook, we'll get back out to you, we'll be able to email you. You can also email us at thescienceofflipping at gmail. We'll make sure to get those answers to you. Lastly, guys, I want to leave you with, if you guys are going to be making the decision to kind of push a deal through, right? It kind of pencils. It doesn't really pencil. It's almost okay to be good enough. You need to pimp that thing out to get top dollar. You need to make sure that there is so much curb of people peel. People buy it before they walk into the home. They love the front yard. They need to love the backyard. They need to love the kitchen and bathrooms, right?

You're traditional. Traditionally, you always want to focus on your bathroom and kitchens because that's what women buy. Well, if you really want to get top dollar, if you really want to make that deal pencil, make sure your yards look awesome. Spend the money. Sod the yard. Put in a pool. Whatever you need to do. Put in a basketball court if you have to. That is what's going to separate you from the rest of the rehabbers. The rest of the rehabbers are just making sure the interiors look nice. Who cares about the yard? They are resting on their laurels about what the market used to give away. We never used to have to do yards over the last 12 months. In the last six months,

we've started to have to do yards because the inventory is really tightening. We're holding properties longer than we want. So we said, okay, what's going to separate our homes? How are we going to be able to do this so that we don't have to hold it so long? Well, we're going to go pimp out the yards. And not only that, we're going to bring in an interior decorator, give her a couple thousand dollars, and then we're going to go, say, pick out the products for us. You don't need to be on the project the whole time and run the project. We're not going to spend a lot of money on you.

Make sure you pick out some really nice product for us. We'll spend a little bit more money with that. We'll pay you a little bit, and we'll make our homes nicer. So if you guys are going to be buying the deals that almost pencil, kind of pencil, but you could almost take a loss on it if something goes wrong, but you just need to move your money, make sure you are pimping it out. Make sure you are the best home on the block, period. Otherwise, guys, take my last seven or eight suggestions. This is good information.

I had a group of 10 very real, very experienced investors in Denver, and we spoke about this exact subject. Go after pop tops. Again, go after a single family home, tear the roof off, build up. Go after a single family home that you can tear down and rebuild a brand new home. Go after a single family home that you can rebuild a brand new duplex, fourplex, sixplex, eightplex, whatever. Divide lots. Go after a single family home that sits on a huge lot, an acre and a half at least, and divide the lot, sell off a lot, sell off the one lot with the home. Get creative, guys. Today's market is no different than any other market. There's always going to be some sort of speed bump. There's always going to be some sort of hurdle. There's always three pillars

that you have in any market. You have, and one of those pillars is always missing. You have buyers, inventory, and money. Those are the three pillars, right? Well, in any given market, one of those three pillars is missing. So you have to get creative. Right now, there's still plenty of buyers, but inventory is down. There's plenty of money. Banks are lending out money like crazy.

Plenty of money to go around. Not enough inventory. Well, that means you've got to get creative to find the inventory because if there's no inventory, that means prices are going up. Typical economics 101. So now you've got to get creative. So be creative when you're finding that inventory. Got to get it done, guys. You guys can tell I'm probably pretty jacked up. It was an awesome

mastermind. Great ideas came from that mastermind. But guys, get out there and get creative. Don't forget to get over to our website, thescienceofflipping.com. Get your e-book. Make sure you're not making mistakes. That e-book is for experienced investors who have been doing this for 20 years all the way down to someone who's just getting into it today. I'm your host, Justin Colby. It's been a blast being with you guys today, and I'll see you on the next podcast. Peace.