The housing market is an unstable beast. As soon as you’ve got your footing in one strategy, it violently jerks you into another, often by force. This is how most investors felt during the great recession as flipping profits dried up, home sales fell off a cliff, and investors were faced with a tough question, “who’s going to buy these deals?” While many investors stood on the sidelines, hoping that someone would save them, Eric Brewer did something much different, and it’s a move that’s paid off heavily over ten years later.
Before the crash, Eric was a car salesman, but he wasn’t the type you’re imagining. His main strategy was “talk to everyone,” and it earned him salesman of the month almost every month. But selling cars didn’t make for a family-friendly schedule, so he pivoted into real estate investing and took the dealership’s owner with him. They were flipping hundreds of houses a year, making tenfold what they were used to when selling cars. But then the housing crash happened, and once again Eric needed to pivot.
Now, instead of just flipping, he’s doing wholesale deals, novation contracts (MUCH bigger profits than wholesale), turnkey rental sales, and more. As the housing market has changed, so has Eric’s mindset, never betting on one strategy to be the one that brings home the bacon. Eric has stayed ahead of the game, blatantly ignores the “expert advice” off-market investors like to peddle, and pivots as soon as the market shows signs of a move. In this flip-flop market we’ve experienced over the past two years, this is EXACTLY what investors need to hear.
David:This is the BiggerPockets Podcast Show 701.
Eric:That one point right there makes the decision much easier. If I would’ve just realized the tax implications in year one, I would’ve probably started out with a BRRRR model versus a fix and flip model, because once you cut the profit in half for Uncle Sam, it starts to make the $400 a month. I mean, in four years you’ll make that money back.
David:What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, the biggest, the best, the baddest real estate podcast in the world, here today with another fire episode with another flame co-host, Rob Abasolo. How are you today, Smokey?
Rob:Hello. Hello. They call me the baddy of the real estate world. So that’s interesting that you say we’re the baddest show. It all makes sense.
David:Yeah. In fact, I thought they called you Little Baddy, but maybe that’s just when you’re rowdy.
Rob:That’s my stage name. Yeah, exactly.
David:There you go. Today we have an amazing show for you with a person who runs a very successful real estate business. Eric Brewer shares tons of information, stuff that he learned from his career in the military and then his career selling cars, and now with this all inclusive business where he wholesales, he flips, he holds some rentals.He basically spends over a million dollars a year to generate leads, works them through a funnel, and then figures out which ones will be kept and sold and dispo’d, all kinds of creative ways that you can make money in real estate. Rob, what were some of your favorite parts of today’s show?
Rob:Man, so Eric is the master of the pivot, or as Ross Geller would say, the pivot!
Rob:Pivot! Dude, he’s pivoted. He walked us through his whole journey and every single time he sensed a change in the market or in the buyer sentiment, it seems like he was just super quick to get a read on it and pivot his business to still remain active and profitable and everything like that. So I think we could all take a page out of that book and understand how important it is to be able to be adaptable when the market is changing.
David:Absolutely. That’s one of the themes of today’s show, not just what the market’s doing, but what you can do differently in this market that will work that did not work before. To me, when I listen to a podcast, that’s the number one thing I’m looking for, tell me what’s happening right now, tell me what I can do differently or better that will work right now so I can keep an edge on my competition, and today’s episode definitely delivers.Before we bring in Eric, today’s quick tip is, remember that real estate is a relationship business and you need to be focused on the relationships, not just the deal. When we say something is transactional is where people put the value on the transaction, not the people in the transaction. Real estate does not work well, much like dating, when you treat somebody that way.So in anything that’s relationship based, remember to focus on the person, their goals, treat them the way that you would want to be treated, and you’ll find the money comes your way versus just focusing on the deal and treating them like a means to an end. Eric gives some very good examples of that in today’s show. And without any further ado, let’s bring in Eric.Eric Brewer, welcome to the BiggerPockets Podcast. How are you today?
Eric:I’m doing well. How are you?
David:I’m doing fantastic. Thank you for asking. So we’re excited to talk to you today. Before we get into it, can you give us a brief rundown of what your real estate business and your personal portfolio looks like?
Eric:Yeah. I’ve been investing in real estate since 2006. Currently, we are operating in two core markets here in South Central Pennsylvania, and we also run a market in Ohio. We do a balance of wholesaling, fix and flip, and turnkey.
David:Okay, so you got a lot of stuff going on.
Eric:We got quite a bit, yeah. 30% or so of our business is wholesale, 30% turnkey, 30% fix and flip. Then we have a portfolio of about 70 to 75 rentals. It was closer to a 100, and then at COVID decided to sell off some stuff. Regretting a little bit of that now, but at the onset of COVID with the uncertainty that was going on at the time, we sold off a few rentals.
David:Okay, and do you have business partners? Is that the we?
Eric:No, I just include everybody that works with me.
David:Oh, that’s interesting. We’re going to have to ask about how that’s structured. Before we get too deep into that though, tell me how did your journey into real estate look? What was going on in your life? What made you decide to get into real estate? It was clearly the best time in history. 2006 is notorious for being the best time to start a real estate investing career.
Eric:Before getting into the real estate business, I had spent about eight years in the automotive business. And at the tail end of my career in auto sales had just reached a tipping point where the hours had got to me. I was moving in the direction of having my first child and just really knew that I couldn’t be a great dad and a great car manager and had to make a decision.So obviously chose to hang up my car salesman shoes and took a few months off just doing some soul searching to figure out what my next move would be and made the selection it would be real estate and thought that it would be wise to start my journey in real estate on the finance side.So I looked into mortgage businesses and did a couple interviews and ended up … My first job in real estate was basically cold calling for refis in 2006, and did actually really well with it. I was surprised at how easy it was in comparison to me grinding out two and a half hour appointments with car buyers to make 300 bucks on a new car. I was literally spending 45 minutes on the phone calling someone and making a couple thousand dollars on a refi.And after doing that for, I don’t know, four months or so, my mentor from the car business reached out to me and said, “Hey, I’m thinking about getting into real estate, and I thought of you. Would you like to have lunch?” And we had lunch a couple days later and immediately following the lunch that we had, we made a decision to start flipping houses in February 2006.
Rob:So you decide to leave behind a somewhat lucrative but tedious business in the car world. You get into real estate, you say, I want to flip my first house. What was that house actually like? Did you know anything going into it about ARVs or comps or budgeting? Walk us through that journey a bit.
Eric:So the first house that we bought was a bank owned property. I walked the house. My partner had bought a couple rentals and had a real estate agent. And the real estate agent got us into the house, met me there, and we were talking about ARV. I don’t think we called it ARV. We said, what could it sell for after we fixed it up? I didn’t even know what ARV meant. And he gave me a number and we did the math.And he was really, really well spoken in Spanish and we met a contractor there. The number that I got was $12,000. So I did my math based on $12,000. We ended up negotiating, buying a house from the bank. I met the contractor back there three, four weeks later to tighten up our rehab budget, brought up the number of 12,000 and he said, “Yeah, what about materials?” And I said, “Well damn, I thought that was in the 12.” And he goes, “No, it’s never in that. That was a labor number.”So now I’m staring down the barrel of what I thought was a 12,000 rehab that’s more like 22. And we got the rehab done and ended up selling it and making a little bit of money, a little, maybe 3 or $4,000, and it was a good learning experience. I understood better on day two how to estimate a rental budget, but the first one I royally flubbed up.But it was a $90,000 house, so luckily for me in South Central Pennsylvania, $90,000 was very inexpensive. There was more buyers for that stuff than there was homes to buy. So we ended up selling our way out of it.
Rob:So you go into several flips after that. How long did it take before you started graduating to a little bit more expensive flips, or were you always in that $90,000 wheelhouse for a while?
Eric:So most of the time in the very beginning we stayed at or around the, and this is crazy to think, 80 to $125,000 property. Now back in 2006, I don’t know what the median was, but it was probably close to that, which if you think about it, it’s a smart decision, but definitely, I wasn’t smart about it back then. It just so happened that that was the stuff you had the best chance to buy on the MLS.There was less competition because in our area, that house was probably in the city where the taxes are higher, the schools maybe aren’t as nice as what someone might get in the suburbs, and some of the locations can be a little dicey. But for me, we would buy homes for 25, put 35 in them and sell them for 99. I mean, that’s the only place I can get inventory.And back then, when we first started, I was buying 90% or more of my deals on the market, on the MLS, and that’s where the available inventory was. There was more competition on the higher priced suburbia stuff that didn’t need a full rehab. So we really started on the MLS and buying less expensive stuff.And then coming from the car business background, I would say we actually sucked at buying homes. We sucked at renovating homes. What we were really good at is selling. So I didn’t sell much of my stuff on the MLS when we started. I would run, yes, I’m going to say newspaper. I was in the business when people still actually ran newspaper ads. We would take out a half page in the Sunday news with color ads and we advertised no money down, monthly payments, to generate a bunch of inquiries.We’d get 30, 40 leads a week. We’d send them over to a lender, have them pull credit, get them pre-approved and if we got three or four qualified buyers a week out of those 30 applications, that was a good week and then we would sell. Not long after our first full year in business, we did 150 flips. Did 70 some our first full year. Second full year, we were north of a 100.But we did a really good job of running ads. It’s the same thing I did in the car business. We’ll put a zero down payment on the windshield. People drive by and go, “Yeah, how do I get that Chevy Blazer down there for 299?” We literally took what worked in the car business and said, I think we should run these same type of ads for our house, and it worked.
Rob:Wow. Okay. So if I hear you correctly, you started off with a flip. You didn’t really know too much. You underestimated the reno in your first one. 365 days after that, you had completed 150 flips. Is that right?
Eric:It was the second full year.
Rob:Oh, the second. Okay.
Eric:So our first full year we did 70 couple, I don’t remember the exact number. It was north of 70. And then the second full year we were over a 100 plus. It was probably closer to 150. Then every year after that, we were right around 200. So by our third year we were doing 200 a year.
Rob:I’m always just super interested in this part of the story, and I think a lot of people at home, because I think we understand the general concept of going and buying a house. You fix it up, you sell it, you make a profit, you take that profit and then you use it to buy your second house. And then hopefully on your second house you make a little bit more profit and then you take that money and then you go and you buy a third and maybe even get a fourth one concurrently.But how does one actually get from, let’s say 3 to 5 to flip 50 because doesn’t that require some level of funds and funding and private lenders? That just seems impossible.
Eric:So it would be under normal circumstances. I was very blessed that my partner was the owner of the car dealership that I worked at, and we didn’t deal with private lenders. I had one private lender as my business partner.
Rob:Oh, I see. And so what was his role in all of this? Was he just like, hey-
Eric:We worked side by side. In the beginning, we were driving out to bank owned properties, kicking in back doors, crawling in windows because someone lost the key in the lockbox and walking through properties with flashlights, trudging through wet basements. I mean we did all the crappy stuff that you had to do to buy a property and we did it together.Literally for the first five years in business, I didn’t look at a budget, I didn’t look at cash flow, I didn’t look at any of that crap. I was blessed to have a partner that managed the backend business aspects, the finances, all of that stuff. All I had to do was go out and buy good deals, get them into construction, get them out of construction, and then work my face off to get them sold. So the hardest part about my job between 2006 and probably 2012 was I literally worked all the time.The big difference between real estate and the car business, I had more control over when I worked. I could check out for two hours to go pick my son up from school, take him to basketball practice, pat him on the butt, tell him to have a great practice and then go to the parking lot and make 30 phone calls. Where in the car business, you literally have to stand at the car dealership and wait for some sucker to come in to buy a car. With real estate at least you can work sort of from anywhere.Certain things, it was hard for me back then. I don’t know what the cell phone situation was in 2006. It certainly wasn’t like what we’re dealing with in … There was no Matterport. There was no FaceTime. I think the MLS capped you at six pictures. So you literally had to go to the house and look at it to make a decision about what you could pay.
Rob:I think I want to say that 2006 was right around when the iPhone came out, the first one, the very first iPhone that’s ever existed.
Eric:2006, I think I was straight up Nextel. Remember the little … the push to talk Nextels? So yeah, I mean my job, I didn’t worry about any of that stuff. I literally didn’t have to worry about it. And frankly, now I worry about that stuff every single day. We manage an inventory of, excluding rentals, at any given time we might have a pipeline of 45 to 60 properties. And cash flow is a really big influencing factor when we make a decision about will we wholesale something.I don’t mean to jump ahead, but what we’re noticing right now is there’s a bigger gap. For the last two years, if I looked at what I could wholesale something for versus if I took it down, fixed it, flipped it, there was not much different. I was getting close to my projected income on a fix and flip and I was wholesaling the property.So I’m like, you know what? I’m not going to go through the hassle of doing construction and funding this deal. I’ll wholesale it and make 25,000 bucks because if I fix and flip it, I stand to make 40. That to me is not … Normally, if it’s north than 50% of what I can make on a fix and flip, I’ll wholesale it.
David:Now I know Eric, you’ve done several things in life it sounds like that have led you to this point. We briefly touched on selling cars and you did mention some of the things you didn’t like about it, but certainly there were things you learned doing there that set you up for success in this world, like what you just said, I would go in the parking lot and make 30 calls.I’m a real estate agent, I own a mortgage company. I understand it is pulling teeth to get salespeople to contact possible clients for anything. It’s the hardest part of my job is someone comes to me and they say, “Hey, I want to be a real estate agent, David. Teach me everything.” And we say, “Okay, you’re only going to have to call five people a day.” And that’s like, you’ll maybe get five a month and then it’s like three of them is going to be their mom.I don’t know what it is that creates such fear of calling people and talking to them, but you didn’t have that and I think it probably played a big role in putting you in the position where you can have this wholesale business and this flipping business and this deal volume that you’re doing that everybody hears and they go, I want to have Eric’s life, but they don’t want to make those 30 calls.
Eric:Yeah, and there’s lot of other stuff that comes with it. I’ll give you a quick story about the car business. So the first two years I was there, I worked my way up through the service department. I started actually as a lot porter, which is a glorified term for park cars. And the whole reason I applied there is because it was a Mercedes and a Toyota new car franchise. I was like, I literally get paid to drive around Mercedes and brand new Toyotas all day, sign me up.So I worked my way up through the service department and then that was my first glimpse into sales. I didn’t realize it at the time, but when you take your car and you drop it off with what’s called a service manager or a service advisor, it’s a sales job.They’re going to compare your car in the mileage and the condition to what is the epitome of safe and then they’re going to make recommendations about, hey, you have 54,000 miles on your car, Dave. Have you considered getting a 60,000-mile service? This is what it includes. We could take care of it while you’re here. It would only cost an additional $448.By the way, we noticed that your back brakes are getting a little bit low. You could let it ride for a little bit and they may start to squeal. And when you notice that, make sure you call me or we could go ahead and take care of it while you’re here today.I’m sure that’s not how it sounded when I was doing it back in 1996, but I sold a lot of stuff and it’s only because the technician would come to me and go, “Hey man, these people ought to really get this stuff done.” I’d go, “Well, explain that to me. What is a timing belt?” And he’d tell me. I’d go, “Okay, I’m going to go call them.” And I would just call them and tell them that stuff and then say, “Do you want to get it done?” So I sold all this service and I got awards and stuff. I had no idea what I was doing. I was just following instructions.And eventually I caught the attention of the sales manager who ended up being my business partner in real estate, and he’s like, “Man, customers really like you. We’ve had a couple people wander out to the sales floor and say, ‘Hey, you guys do such a good job in service. Eric’s working on my car.’ Next thing I know we’re selling them a brand-new vehicle. You ever think about getting into sales?” And I was like, “Sales? I’m not doing sales. You pressure people into doing stuff. I’m not cut out for that.”So he kept working on me and June 17th, I don’t remember the year, was my first day in sales on the sales floor. So I transitioned from service to sales on June 17th. Typically, back then at this particular dealership, if you sold 20 cars in a given month, you would be salesman of the month or at least in competition.So I start June 17th, I don’t know the difference between a spark plug and a muffler. I don’t know how to do a great walk around. I don’t know how to do a test drive. I’m like, I’m just going to go talk to everybody. I didn’t know what a buyer looked like. I didn’t know what negative equity looked like. I didn’t know what kind of shoes you should be wearing if you were a good credit customer. All these other salespeople did, they’d go, “That guy can’t buy. They’re probably buried in their trade. They’re upside …” I just went and talked to people.I sold 21 cars between June 17th and June 30th and didn’t have a clue. So in my brain I went, all I did was talk to a bunch of people, I brought them inside, I got them excited about this Toyota Camry. And then I went and got a manager and said, “Hey, these people really like the car, can you close them?” And I was salesman of the month, sold 21 cars. And then every month after that, I never sold less than 20 cars. Most months I sold 30 cars and I was salesman of the month and made a crap ton of money at the age of 23.And I think what happened to your point is most people hate car salesmen. So there’s nothing more uncomfortable than walking up to a stranger that you know hates your guts and can’t wait to lie to you and ask them can you help them, because they’re going to tell you no, I’m just looking, and you know they’re not just looking.So you get this thick skin as a car salesman and when I showed up in real estate, making 30 calls to me was no big deal. So I think the car business, as a matter of fact, right now, it’s a big place we hire from.
David:I can see why. It makes so much sense.
Eric:It’s the resiliency that’s required to be in the car business. And frankly, other than the last two years, most car salesmen have to sell a crap ton of automobiles to make six figures.When I made that decision, I remember saying out loud to my business partner who was my mentor at that time, “Dude, we just made $20,000 on this house. We make $300 a car.” We were just shocked. I remember saying this that I can’t believe we did that for so long. He was in the car business for 20 years by the time he made the transition.
David:But there’s value that you got out of it that wasn’t just the money. So you learned about human psychology, you learned about working a system, you learned how to be different than other people. Every other salesman was pushy, you were not being pushy in a sense. You were probably listening much better. I can tell that’s something about you is that you listen to what other people are saying and then you have an intuitive nature to see what they really want and then you just offer it to them.It was brilliant when you said, hey, this could happen with your car. These are common issues with timing belts. Do you want us just to take care of it now? Because if you don’t know about cars, which no one does and you hear that, what you think in your mind, you didn’t create pressure Eric, but the question created pressure because you’re thinking, well, if I say no, am I actually leading myself to having a huge problem later? I don’t know enough about cars to trust that I can say no. Yeah, just go ahead and take care of it. It’s only $1,500, right?
David:Whereas if you didn’t bring it up, the pressure’s never there because they don’t even know that it’s a potential issue. That is a much smarter way of going about it that doesn’t make you feel slimy. And that’s what I’m noticing about you, just talking to you now, I’m not shocked that you have a sales based business that is doing good volume and you like yourself. You’re not the slimy wholesaler that everyone’s worried about.If we could take one more step back in your journey, I want to ask you about the army and what lessons you learned in the army that helped build the resiliency to be able to succeed in the car business that allowed you to have the fortitude to go succeed in real estate.
Eric:So at the time, here’s what was going through my head in 1994 when I went to Fort Knox for bootcamp. And at four in the morning I had just got a buzz cut, I had hair back then. They shaved my head, made me drop off anything that resembled the outside world, jammed me into a school bus, took me out to this building in the middle of nowhere with 50 other men.Just threw us in bunk beds, waited just long enough for everybody to fall asleep and then turned all the lights on and started screaming and yelling at us at five o’clock in the morning and dumped all of our beds, threw them out the window, made us go out in front of the building, stand in a formation when no one knew how to stand at a formation. And we did pushups until 75% of the people either quit or puked.And at the time I was like, what in the hell am I doing here? Literally last night, my mom made me a freaking peanut butter and jelly sandwich with chocolate milk and celery with more peanut butter on it and now I got some grown man that kills people for a living screaming at me. Why am I here? This is horrible. And you just got through it.And the next day it happened again. The third day it happened again. And really what they were doing now that I understand it, is they were tearing us down as individuals and everything that we did, we did together. We won together, we failed together, everything we did together.So now looking back on it, I understand what they were doing is they were stripping us of our personal identity and they were making us a group. They were making us a team and everybody counted on each other and we won and lost as a group. But at the time I didn’t know it, I tried to figure out a way to not be the guy that got the other 59 guys in trouble.
Eric:And I did a pretty good job of that. I was like, I know what you guys are doing. I’m going to fold my socks because literally, you’d have to fold your 12 pair of socks and they would come through and they checked everybody. Take 59 guys, four pairs of socks, so they’re inspecting 240 pairs of socks.And if one of those suckers wasn’t folded by the exact measurement, the whole 59 people were getting their socks dumped outside, January in Fort Knox, Kentucky, it’s flipping cold. And then you’d have to go outside and do pushups. And then they’d bring you back in, make you fold all your socks again and they’d inspect you again.So at the time what it taught me was the value of process, the value of the predictable outcome. Everybody does things the exact same way. You don’t say apple when you’re trying to spell out a letter, you say alpha. You don’t say Billy, you say bravo. Everybody speaks the same language. So there’s very efficient communication and there’s very minimal miscommunication in the military because there’s an SOP and a process for everything.
David:I can imagine your brain because what’s happening is, like you said, the way that you always approach life, your instincts, your habits, the literal neural pathways that tell you, oh this happened, you do this, most people are living without realizing it, a slave to habit in some form.That all gets torn apart and you’re rebuilt in a way that would make you a more effective soldier or person to be a part of that unit. And I think a lot of today’s culture looks at that as a negative. We throw words on it like abusive and toxic and stuff like that, but in a sense that keeps you alive and it makes everything run much smoother.And it actually sets you up for success in other team-oriented environments, which is where I’m going with this, because you’ve said many times today, we do this, we do that, even though you may be the leader or the brainchild or you may be playing a bigger role than some of the other people, maybe not, but my guess is whether you ever do or don’t, it’s always a we.Real estate’s freaking hard, man. Those of us that are doing it know this is very difficult and you need people on your team to win. You’re now in this position that you’ve built a business that is team oriented. Was that happenstance or do you think that some of the background of what you got in the army led to you having a brain that was rewired to succeed as a team?
Eric:It’s a really good question. And I would say that all of my life experiences have led me to the way that I behave now. So I had someone that was 24 years old, I was at a mastermind three months ago and he said, “All right, if you could go back to being 24 years old or 25 years old in real estate, what’s a piece of advice that you would give yourself?” And my knee-jerk reaction was none. And he said, “What do you mean none?” And I could almost hear what he was thinking. “You mean you haven’t learned anything from when you were 25 years old to now?”And my response was, is that if I were to change, and here’s where I knew I was old and he was young, I said, “It’s kind of like the movie Back to the Future.” And he looked at me and went, “I don’t know what that is.” And you remember Back to the Future, if he went back into history and he interrupted that interaction between his mother and Biff, that his dad would’ve never saved his mother from Biff and then she wouldn’t have fell in love.So I said, “Literally, I’d be concerned if I went back and gave myself a piece of advice about what to do at that particular age or when I was early in business, it would’ve changed my experience and my experience is what has led me to where I am today. So I wouldn’t change anything. I wouldn’t give myself any advice. I’d want me to go through …”Real estate is hard and I’m glad you said that because I think too often people don’t talk about that. I actually don’t love real estate. What I’ve realized I love is I love building meaningful relationships and then nourishing those relationships to get the most out of myself and to give the most to that relationship in exchange.It just so happens that if you do what I just said in real estate, you should have a pretty good experience. You should make pretty good money, you should be able to get people to come work for you, you should be able to get them to stay and work for you. And if you do it correctly, which I’m still working on, you should be able to create a lifestyle for yourself that requires far less work at some point than what you did in the beginning.So I think there’s a lot to be said, that real estate’s hard. We don’t talk about it as often as we should. I wish I could go back and keep 40% of the 4,000 deals I’ve done since 2016, I’d be in a much different position. But it required a different level of discipline for those 16 years to not flip that house, keep it as a rental, make a little bit of money each month, not make the $25,000 rip that I made flipping it and say, hey, I’m going to live with getting all my cash out and I’m going to make $400 a month. If I had the stuff that I bought between 2008 and 2012 and I kept 25 to 40% of that inventory, I’d be at peace right now, I think.
David:So this is such a good point, especially when we go back in time and hindsight’s 20-20. The problem is at the time you’re looking at it like, how do I want to describe … Real estate, it’s hard for us to imagine right now because it is such a competitive asset class, everyone wants it. We’re all fighting over houses. No one has a great deal. Even in a slow market like this where nobody takes it, we’re still scouring looking for the deal. They’re just harder to find because rates went up, so the cash flow has gone down.But at the time you were doing this, nobody wanted real estate like that. I don’t know how to describe it. It was not super popular. It’s trying to imagine a band that everybody cares about right now that in 10 years no one will even remember. It’s kind of like that, but in reverse. There wasn’t a big appeal to keeping properties.What you were doing was you were saying, okay, I could have 400 a month or I could have 25 right now. That sounds like a pretty simple decision to make. One of the things that I’ve done with myself, because we still have challenges like this where we don’t know what’s in the future and we don’t know what we should do is I’ve learned to look at money differently.Instead of seeing, okay, I can have 25,000 cash in the bank or I can have $400 a month in the bank, I say I can have $25,000 in the bank or I can have $25,000 in the property. Instead of calling it cash, I call it energy. If the energy’s in my bank account, we call it cash or money, if it’s in the property, we call it equity, but it’s the same thing.Now it works differently because when the market shifts, you lose equity in a property and when the market goes up you can gain equity in a property. So it’s more volatile in the property. In the bank, it’s more functional, you can use it for more things, but still it’s energy that behaves differently depending in the environment that you keep it in.And I think learning to look at it like that has made the decisions easier because I didn’t feel like I was losing on the 25,000 cash. In fact, I would see now, all right, $25,000 rip that’s going to be taxed at 50% for capital gains over the short term. That’s actually 12,500. Then I have to figure out where I’m going to go invest it.
Eric:That one point right there makes the decision much easier. If I would’ve just realized the tax implications in year one, I would’ve probably started out with a BRRRR model versus a fix and flip model, because once you cut the profit in half for Uncle Sam, it starts to make the $400 a month. I mean, in four years you’ll make that money back.
David:Even if the property didn’t appreciate. That’s right.
Eric:Correct. And then the equity only matters when you sell it. And if you’re not selling for 10 or 15 year cycles, you can time it much like a lot of people did. And I sold off a couple of my rentals just after COVID, because I looked at it and I was like, this is an abnormal set of circumstances. Property values are up 40% in one year. I’m cashing in.And seven months ago, I regretted that decision. Right now I’m not so upset with it because we’re seeing some of that 40% be given back. It’s market specific, but I was looking at a heat map the other day from realtor.com and the amount of inventory in certain places across the country is alarming. In Arizona, it’s up 145%. In Pennsylvania where I am, it’s up 2%.
Eric:Not much change in inventory here. So that’s one of the benefits of where I am. In 2006, people in Las Vegas, Phoenix, Arizona made a gazillion dollars. But then with the flip of a switch, anybody that had flips hanging out there were screwed. Literally the value changed.I had 10 or 12 flips in the pipeline. I remember the day, it was eerie. And buyers’ agents and lenders were calling me like, “Hey man, our deal’s falling apart.” I was like, “What’s up? Something with the inspection, the appraisal?” Like, “No, the bank is out of business. They literally closed their doors at three o’clock today. There’s no deal.” And I was like, “What do you mean they just closed? You can’t just close. What do you mean they’re closed?” Like, “Yeah. Yeah, they’re done. They’re out of business. Everybody’s fired and they went home for the day forever.”At some point we’ll probably talk about novations, but coming out of that in 2008, that’s how I discovered novations because prior to 2008, nobody was using FHA financing. It’s one of the things I’m seeing in the market right now. It’s funny knowing what I know now that every 10 or 15 to 20 years these cycles repeat themselves.So if I knew that, I think to your point, back then, real estate was a really well kept secret. There was only this small little circle of people that knew about it. It’s probably because someone in their family grew up that way. They taught them how to do rentals, here’s this tax code that nobody talks about. We don’t want to bring a lot of attention to it because if we do that, they might change it.
David:That is exactly right.
Eric:Which we’re seeing now, right? Once everybody finds out about it, you go, oh they’re exploiting it, we’re going to get rid of that.
David:Call it a loophole and call them a greedy and throw a millionaire on there and yep.
Eric:Yeah, once too many people make enough money and they see it that, that needs to be corrected, they’re going to change it, which they’re probably going to change-
David:Well, they’ve already changed bonus depreciation. That’s stepping down lots of things.
Eric:Yeah, that’s a big impact. There’s a lot of people that would make a decision to buy a property, maybe pay a little bit more than they wanted to, but the bonus depreciation would say, you know what? I’m getting all these tax advantages. I’ll go ahead and pay what you’re asking for it.I mean that’s the one thing, had I known that back then, I would’ve said it doesn’t matter what it’s worth in four years because I’m looking at a 20-year deal. What’s it worth in 20 years? And for the last 100 years, property values double every 20 years. So I know it’s going to be worth double. Whatever I pay now in 20 years it’s worth double.
Rob:So Eric, I mean you talked about you sold some of your portfolio here during COVID, but you had one really big pivot in your career and that was in that 2008 era where you were crushing it on your home flips and then all of a sudden maybe you weren’t crushing it as much and you completely changed the direction of your real estate career. Can you tell us about that pivot and why it came to be?
Eric:Yeah. So it’s happened a couple times. When we started, we were almost exclusively MLS. And then that, the tough part is in 2008, it got really hard to sell a house and predominantly because there was this flood of inventory coming, so there was a ton of competition. And the hardest thing to do in late 2008 was to get a stinking mortgage. There was this opposite reaction to the very forgiving, probably irresponsible lending that was happening for a couple years leading up to the recession that banks made a very corrective set of measures to get super tight. You had to have a 700 credit score and 15% down to get a mortgage unless you were using FHA in 2008.In 2010, I started doing installment sales agreements. I had people that would come to me in 2009 with a 640 credit score and $15,000 down getting declined by lenders. They didn’t have enough, maybe they couldn’t prove their overtime or they hadn’t been on their new job for two years. It was really, really hard to get a mortgage.So these people are coming to me, they got 15 grand down, they want to buy my house, they have the ability to pay, they have good income, we started doing installment sales agreements. I had over 140 installment sales agreements by the end of 2011.And I was getting 15 to $20,000 down on $150,000 property. They were paying me 8 to 10% interest and I was borrowing it from the bank at 5 to 6%, because again, fortunately I had a business partner that was able to leverage his wealth and go to the bank and say, hey, we’re going to structure these deals at 80% of appraised value. We already have basically a highly qualified tenant. So we don’t have any maintenance, we don’t have any of that stuff. And our advance was lower than 80% because we had their down payment plus the equity we already had booked into the property.So we did installment sales agreements. That was 30 to 40% of my sales for two years on the heels of the crash. In 2011 and ’12, there was more investor activity back in the market and I started to see it become more and more challenging to buy properties on the MLS. So I had to pivot to direct to seller between 2012 and 2015. Now my business is 90% direct to seller, virtually zero MLS activity.In 2000, about four years ago, I pivoted into turnkey. Got away from retail fix and flip, pivoted into turnkey because rates were coming down and there was a lot of investor activity. I think the Wall Street Journal calls them laptop landlords, people that buy turnkey across the United States. They find qualified rehabbers, good property management companies and they buy turnkey real estate. They leverage it and they utilize the Fannie and Freddie product up to 10 loans in their own name.And it’s the most desirable rental product you can get on the market. It’s 30 years. Typically, it’s at a discounted rate and you can get up to 10 properties in your own name. And now just in the last six months, that turnkey business has vaporized. So I’m back to pivoting again because the property that was cash flowing $300 a month for this out-of-state investor with the rates where they are, it’s negative cash flow. At an increased rent, the same price, the interest rate has had that big of an impact on cash flow and those buyers have stepped aside for now.So I’m back to, full circle, selling my properties retail to probably FHA. That’s the thing I was saying, right now for flippers, if you’re not selling your properties to FHA, VA borrowers that need 3 to 6% sellers help and have minimal down payment, you’re missing the highest paying buyer in the marketplace right now.
Rob:And why is that? Can you explain the math there a little bit, or why is that the uncovered niche?
Eric:So we all know the market the last two years, right?
Eric:Ridiculous. Probably the most lucrative real estate market we’ll ever see, ever. And if you were an FHA borrower that needed 6% sellers help and had a $500 deposit, you couldn’t probably find a real estate agent that would take you out and show you homes. There’s no way you could buy a house. Anything that qualified for FHA financing, they were getting either cash offers or conventional no sellers help, appraisal waivers, no inspections. As an FHA borrower, you were at a significant disadvantage.So those people now with rising interest rates, it’s created the opportunity for them to be able to buy a house. So they’re not comparing 7% to three and a half percent because they weren’t active at the three and a half percent rates. They were not an active buyer because the market would not allow them to purchase.
Rob:So Eric, basically, if I’m hearing you correctly, there’s a very large group of people in the United States, people who are just married or are trying to move, they’ve had no shot at entering the market over the past two years and now they actually have a chance. Interest rates are a little bit higher. Maybe they’re going to be getting something in the sixes versus in the fours, but they still really want the house.Whereas on the flip side of this, investors are paying 7 to 8%. The cashflow is a lot smaller now, they’re just not penciling out. So they’re not getting quite as competitive because they don’t know where this market’s going to go necessarily. Whereas maybe the homeowners are fine, they want to buy the house so they’re willing to take the risk a little bit more. Is that more or less what you’re describing?
Eric:Yes. There’s a window because what do you think is going to happen to investor activity the instant rates drop down in the fives?
Rob:Oh yeah, they’re going to be getting back at it.
Eric:It’s going to go bananas again, right?
Rob:I’m seeing a little bit of an opportunity here. It’s like I feel bad, all right. Maybe it’s like I shouldn’t feel bad, but the market has been so dang competitive. Sellers have been so very confident, so they’ve been raising those prices and now there’s terror lurking the streets. And I’m making some pretty aggressive offers like 3, 400K under asking. And I feel bad because I’m like, ugh, but it is genuinely the only way that these deals pencil out.And I’m actually fine with it. Even on some of these deals where I was used to getting a 20 plus return cash on cash, some of these deals I’m getting a 10 to 15 and I’m like, well, I’m actually fine with it because I think in a year or two when rates go back down, I’ll refi and then it’s going to be the greatest deal ever.
Eric:That was one of the pivotal moments for me as an investor is when I got less concerned about what I was paying in relation to asking price and what I was paying in relation to the value.
Eric:And it’s one of the things that gets in investors’ ways, I’m not paying over list. Well, who cares what list is, what’s the value of the property?
Eric:And can I make money out of it? Is it a reasonable deal? Does the deal make sense? I mean, it took me years to get past that where someone would say I need highest and best and I’m like, screw you.
David:You know what’s funny, Eric? That you’re saying it took years to get past that, but in the car world, nobody pays sticker price.
Eric:Well, the last two years they have. They’ve been charging 25 grand over sticker. Back in the day, 2018, you had to sell a house.
David:You had to work.
Eric:In order to be a list agent and get multiple offers, you had to price it really well. So I actually would get annoyed when people would put up, I had 17 offers in two days. It’s like, dude, you didn’t do that. Tell me what you did to negotiate those seven offers and find the one that delivered the most value to the seller and how you got it to close on time. Don’t tell me about the offers because none of that credit really belongs with us.
David:Or house sold in two days. That’s like yeah, it popped up on Zillow, everybody was looking for it. You didn’t do anything special.
Eric:We didn’t have anything to do with that. If you literally were active in real estate the last two years, you could make money in spite of yourself. It was really hard to get a deal, it was super easy to sell it. We’ve seen 180 degrees now. It’s getting easier already today to get a deal. I know when I go to sellers’ houses, it used to be I’m getting five other offers a year ago, now it’s like, I hope you guys can help me.But then once I get the deal, I got to work like a dog to go out and find somebody that’s crazy enough to buy it with interest rates at 7.5%, and it’s got to be a good deal. They’re going, you know what? If I brought it to Rob and I was like, Rob, you want to buy this? He’ll go, yeah, I’ll buy it. I don’t care what the rates are, but it better be a good deal.
Rob:Yeah, a hundred percent. I mean, it has to work, right?
Rob:So Eric, tell me this because I know that you said that you’re selling directly to sellers. How are you actually marketing to get sellers, A, into your system, and what is your deal flow process even looking like at the moment because I know there’s a lot changing right now?
Eric:Mail’s our number one. It’s the thing that we spend the most on. It generates the most leads. And my average profit per transaction is the highest off of television. Then direct mail, PPC. We stopped doing cold calling. I’ve been fighting that battle for three years. I just finally threw my hands up and said, no one likes to get a cold call, no one likes to do a cold call, we’re just going to stop it. But we have a fair amount of success with texting and we’ve been able to operate inside of compliance.So that’s generally where we spend the majority of our marketing dollars and we generate about 320 to 350, what I call net leads a month. Inside of our funnel, we expect to make same day contact or live answer with those people around 90%. 65% of those people, we expect to get an appointment with. 90% of those appointments we expect to confirm and show the day of the appointment. And then we look to achieve minimum of 25% contract at appointment. We do all in-person appointments.So that generally nets when you go through that funnel, would have net us, from net lead to contracts, about 10%. So our goal is to write about 40 contracts a month and I’ll close 32 to 35 of those. You’ll have some fallout, some title issues, seller change their mind, deals that don’t work for one reason or another and ends up getting released. So gross 40 contracts, close 32 to 35.
Rob:All right. So let me ask you a couple questions here because I think a lot of people are going to have … The way you’ve described it makes perfect sense, funnel marketing 101, but when you say you’re getting a lead at that very top of the funnel, what is the ideal scenario that happens with that lead? You put, let’s say a TV commercial, you do all the process you just talked about. That lead, what are they doing? Are they getting to you to buy one of your homes that you already have listed and ready to rock? Are you wholesaling it to them? What’s the final product that they’re getting when they connect to your company?
Eric:Sorry. Sellers or buyers?
Rob:Well, I mean just in regards to your specific business, what is the final output of your funnel?
Eric:Yeah, so now … And I learned this through some of the data aggregates that we work with. Shout out Audantic, they run a bunch of our data sets for us. You know who buys the most property as an investor in every market all across the country? What demographic of investor buys the most inventory? First time investor. It just so happens they pay the most.So the largest volume of homes are sold to a first time investor in every market and they actually pay the highest percentage of “value,” however you calculate that. They pay the most money and they buy the most. But what does everybody teach you about wholesale when you’re going to go out and try and sell the property? Pull a buyer’s list. Where does your buyer’s list come from? Someone that’s already bought a property in that area, in that zip code or in that school district in the last 12 months. Well, the guy that’s buying their first investment property is not on a list anywhere.
David:That’s true. You got to go find them.
Eric:Right? So you got to look at, what we found is, it’s called a DINK. Dual income, no kids between a certain age that makes a certain amount of income is the most logical person to buy their first investment property. And then on the back half of it, there’s people that are more between my age, 45 to 60, that are at the tail end of their professional career, are looking at their 401k and going, that’s not going to cut it.So now they’re looking to start to produce tax savings. They’re tired of paying Uncle Sam. So if they get a rental property and they depreciate it, it’s going to chip away at their tax bill. If they put enough of these properties at the age of 45 into a portfolio, 15 years from now they could have $2 million in equity that the tenant paid down for them.So what you have to do is get a data set for predictive analytics for potential investors because they’re going to buy the property at a high enough price that you can get it under contract with the seller and still exit that property and make a reasonable profit.The problem most people have is they’re locking up deals today at 2021 prices and buyers are paying 2023 prices or what they think they’re going to be. Sellers are still operating on the misconception that we’re still in a market that we were seven months ago, and buyers are forecasting how bad it can get six months down the road. So sellers still want a little bit too much, and buyers are willing to pay a little bit too little.
Rob:Well, we’re always willing to pay a little too little.
David:Well, that sums up the market in general, and it also has to do with understanding that in the business, you have to pivot. You cannot just copy a blueprint that you saw other people do and say it works when everything is going great. You learned this lesson when 2006 became 2008. You learned you had to pivot. Now what you’re describing are techniques that people have to use to pivot. It is easier to buy something than it was, it is harder to sell it the last, God, like eight years.If you’re a real estate agent, getting a listing was incredibly difficult. Finding a buyer client was incredibly easy. And then getting that buyer into contract was hell and selling your listing was the best thing ever. It’s changed. Sometimes now we’re like yeah, give me some buyers that are willing to buy something. I don’t want another listing because like you said, sellers have the idea in their head that their house is worth what it was at the peak. And with rates doubling or more than doubling in some places, buyers are not going to pay that.And there is a problem with communication between those two sides. And that’s how real estate works. And then we have this lag while sellers have to have their expectations adjusted and buyers aren’t going to budge. It gets to the point where the market will reset, we’ll have equilibrium and then boom, something will change, we’ll have another. This could go away very quickly, just rates drop. Imagine how fast all the stuff you’re talking about how, oh, I need five people on the dispo side.
Eric:Five and a half percent solves all of that crap.
Rob:Yeah. So Eric, tell us, because you’ve explained funnel marketing really great, I just wish we could do a whole episode on this. I’m very giddy about it because if people just understood the simple, I guess metaphor of hey, it’s a funnel, your customers go from top to bottom, the more you lead them to the bottom of the funnel, the more conversions you have on that final product. That could make so many millionaires out of the listeners if they can just master this.So now that you’ve talked us through your funnel, obviously you’re getting a lot of leads, can you tell us a little bit about your qualified leads, the distressed ones versus not? And can you explain this seesaw concept that I know that you’ve mastered as well?
Eric:Yeah. I hate the Q word, qualified. I think most people that do direct to seller have gotten so good at disqualifying sellers, they’re actually able to disqualify qualified sellers now. We’ve been so protective over what we think our version of motivation sounds like, that when a seller calls in, if they don’t say, I’ll take 60% of Zillow, I’m behind all my payments, the house is a wreck, I just want to be done with it in 30 … Literally, I talk to people and they’re like, “Yeah, if they’re not looking to sell in 60 days, we don’t even attend the appointment.”You know one of the problems with that? When you ask someone, are you looking to sell in the next 60 days? I think a fair amount of those people are actually answering a different question. What they’re answering is, am I ready to move out of this house? And they might be ready to sell today, but they’re not ready to move. Or they don’t know that they can move because you haven’t come out to the house and made them a reasonable offer and help put those pieces to the puzzle together.So too often we go through this. Here’s what someone has to qualify in order for us to go to an appointment. They’re a decision maker and they’re asking less than 200% of retail. So I could care less about what they ask for the property. I’m more interested in, are you a decision maker and are there any circumstances surrounding your situation that might contribute to you being willing to sell to someone like me at a price that might be a reasonable discount.And then again, even with that being said, people are like, well, you’re closing percentage might suck. No, we’re historically, year over year, north of 25%. In a whole year, I can’t achieve 30%. But we literally attend any lead that has a pulse and make an offer. Have you ever bought a property, Rob, that you didn’t make an offer on?
Eric:This goes back to the funnel, if you want to buy more homes, what should you do?
Rob:Make lots of offers.
Eric:So is turning a “unqualified seller” away contribute to us making more offers or take away from making more offers? It takes away.
Rob:Yeah, it takes away.
Eric:So every time you “disqualified” a seller … And I tell you, anybody that’s listening to this, go back and look at your pipeline from six months ago. Do a data scrub and look how many leads that you disqualified six months ago sold to someone at a price you would’ve gladly paid. I bet it’ll make your stomach turn upside down.So we have this little box of what we believe “motivation” looks like. I would tell you, particularly in higher price point properties, we’re solving first world problems. And I’ll use this analogy. I’ve had a pretty successful business career. Real estate has provided me with some amazing opportunities in regards to income. I barely graduated high school, didn’t go to college. It’s amazing, right?If I go to Chick-fil-A and I’m waiting in line for seven minutes, I’m in distress. If you came to the back of the line, you’re like, Eric, if you pay double, you can skip the seven-minute wait and we’ll get you your food right away, I’m paying double every time.But when we have someone that calls in with a property to sell, we look for are they behind on payments? Is it vacant? Do they have issues? When they might have a set of first world problems that we’re not even aware of. Convenience becomes a source of distress for people that aren’t in financial crisis, but we don’t look for that stuff. We disqualify someone if they don’t have visible signs of these five or six points of motivation that we think would historically drive someone to sell us a property.So to answer your question, the seller’s seesaw for me is, when you look at property conditions, so if on one side of the seesaw is condition and the other side’s motivation, as condition deteriorates, motivation and distress goes up.
Rob:Nice. Okay, cool.
Eric:The problem with qualified is we’re making a decision about qualified or unqualified normally after a five-minute phone call, and you’re asking a very high impact question, when do you want to move? What’s the least amount you would take? And we’ve had a very low impact relationship with the seller so far.So it’d be like the equivalent of going out to a bar or a nightclub walking up to a young lady, buying them one drink and asking them if they want to get married for the rest of their life.
Rob:It rarely happens.
Eric:That approach might work for some people, but that’s what it’s like getting a seller on the phone and saying, are you looking to move in the next 30 to 90 days, and what’s the least amount that you would take? You can’t look for high impact transparency from people until you’ve had a high impact conversation with them. And that doesn’t happen in five minutes over the phone when they called you off a postcard. It’s just not. You’re a stranger, they’re not going to be open and honest with you at that point.
Rob:Yeah, especially if you’re just calling them out of the blue or you’re texting them out of the blue. Why would they let down all their barriers and all their guards to someone that’s just trying to basically, in their mind, swindle them into selling their property. You got to build a little bit of trust.
Eric:Yeah. So that’s how I look at qualified versus unqualified. It’s just a bad set of terminology in our book because too often we’re … So the other thing I realized is when I started in this business, I did acquisitions and at some point I was managing acquiring properties, managing renovations, selling them. I started to become more selective about the seller appointments I would attend.So as the owner of the company, we start to become more and more selective about the seller appointments we’ll attend. And then once we hire people, we don’t go back and undo that process to say, hey, I got two acquisitions agents now, the best thing they can do every day is go to a seller’s house, make an offer, and ask them to make a decision.So we have this buy box for what qualified is, and we’re very strict about what we’ll go to and make an offer and I mean, quite frankly, it costs us tons of opportunities each and every month because we’re over qualifying.
Rob:So can I ask you this, where do novations fall into your seesaw strategy? Do you think you could just give us a brief explanation of what a novation is?
Eric:Yeah. So the novation is a wholesale style transaction, but we’re exiting at retail price. So by wholesale, what I’m saying is, we don’t have to put our cash in it, we’re not rehabbing it, we’re not closing on it. So that’s what makes it wholesale style. But we’re able to pay a good bit more for the property because we’re selling to retail buyers.So if you think about wholesale, I always say we’re looking for a needle in a haystack. It’s that 10% unbalanced seller seesaw. We’re looking for someone with high distress. That normally comes with a property that needs at least a little bit of work, and then once we buy it at a discount, we have to sell it to a cash buyer because an assignment’s not a financable transaction to a retail buyer. You can’t get an FHA loan on an assignment from a wholesaler. It won’t work. It’s not a financable, insurable transaction.So we have to sell to an investor cash buyer. So we’re buying one needle in a haystack and then we’re going out and trying to sell that needle to another needle in a different haystack. That’s a cash buyer that’s willing to do a bunch of work to a house and then hope that they make a couple bucks versus novations allow you to, now I can actually make something out of the haystack.How many people do you think call in an average funnel and they have a decent property that they would sell a little bit below retail? A lot.
Rob:Yeah, I was going to say more than getting the people that are willing to sell for a lot less.
Eric:And we turn those people away.
Eric:So basically novation means replacement. So general wholesale is I buy a property, I sign my interest in the property to a end user. Novation means replacement, so when we replace our agreement, we alleviate the seasoning, we alleviate the arms length transaction, and now it becomes a financable transaction to the end buyer because I’ve conditionally released my original A to B contract, which now makes it a financable transaction and I can sell it to an FHA, VA, Fannie Freddie borrower, and I can still make my spread in between.
Rob:Is it a little bit more of a micro, I don’t know, wholesale transaction? Whereas if you’re a typical wholesaler, you’re going to go and find, let’s say something a 100K under, you’re going to sell it to a flipper. They’ll put 50K into it so that they can make a $50,000 profit. Whereas with the novation, it sounds like you’re finding someone, just a regular person, house maybe needs a little bit work. You get a much smaller fee to sell it to another basically buyer, like a normal buyer, not a flipper, and they make a smaller fee.
Eric:So it’s actually, normally, the fees are more.
Eric:The average novations, we’ve taught it to … I think it’s just shy of 300 people that I’ve taught novations to, our average profit’s $26,000. If you look at normal wholesale profits across the country, most people are between 15 and 20K, because when you sell a property to an investor, they’re looking at how much is my rehab? How much can I sell it for? I got carrying cost. A retail buyer’s not looking at any of that. They’re going, can I afford it? Am I approved for it? How does it compare to the other two homes on the market? If you fit in that sweet spot, they’re going to buy your house.
Rob:And they may be willing to do some of that work and rehab over time. They’re not super worried about-
Eric:Yeah. So imagine this, and this is what really pumps up the numbers, is you can still get a deal at wholesale price. And if you understand novations and the contracts and the language and the scripting and the legality of it, you can buy it at wholesale price, get permission from the seller as long as you’ve disclosed your intentions and sell it retail without ever closing on it. You can’t do that in a standard assignment. You can only assign it to another cash buyer that’s going to pay their version of discounted price.Versus you can get a property under contract at a wholesale price that is in a financable condition and take it to the open market or the MLS and sell to a retail buyer. So now you’re buying it wholesale and exiting it retail. Those spreads are huge.
Eric:Then the other. So there’s two opportunities, you can lock up the same deals that you’re buying now at wholesale price, but rather than being handcuffed to a cash investor buyer, once you understand novations, you can take them to the open market and sell it to a retail buyer.The second way that you can positively impact your profit and your volume is the deals where the seller won’t take your MAO. But let’s imagine, on a house that’s worth 220, this is the value no one talks about in wholesaling. They talk about after repaired value, they talk about rehab, they talk about MAO. When do we ever say what’s it worth in its current condition to a retail buyer? Never, because as a wholesaler, we can’t get to that buyer unless I close on it. Now I need transactional funding. Now I got seasoning.Some people do wholetail, but wholetail requires you to pay for the property. If you have a property that’s worth 229 in its current condition and the seller will take 200, are any of you locking up that deal currently? Probably not. Because by the time I close on it, I clean it out, I do all that stuff, my $20,000 or $30,000 spread’s now 8 grand and I’ve tied up 200 grand. I’m not doing that.But with a novation, if it’s worth 230 in its current condition, you can lock it up with the seller for $200,000, which is well more than they’ve got offered by any other investor, take it to the MLS at 229, pay out 4 to 6% commission total, net 220, make a $20,000 profit and give the seller the 200 that they wanted when everybody else offered them probably 140 or 150.
Rob:Okay. I don’t know, it’s very interesting, it seems like there’s probably a lot less tension in these kind of conversations, whereas maybe sellers are used to, like you said, getting super low balled and then they’re just like, ugh, I’m tired of these low balls. If you come in with a reasonable offer, then they’re like, well, that’s actually not bad, I’ll do it.
Eric:Yeah, and it goes back to the balance, right? It’s like they’re kind of motivated, they’d prefer to sell this way or a little bit different than what they’re accustomed to with a real estate agent, but they’re going to say things like, Rob, this sounds good, but I’m not going to give it away. David, this sounds good, but I’m in no hurry. That should be a trigger for you to go, this sounds like a good novation opportunity for me.And if the property’s in good enough condition that you could sell to a retail buyer without a laundry list of inspection repairs, either on an FHA, VA appraisal or a home inspection, that is an ideal novation opportunity. It’s a property that’s in good wholetail condition that you can’t buy at wholesale price and you don’t have to close on it, go through seasoning, funding, all that stuff. You can take it to the retail market, sell to a finance buyer and never have to close on the property.I call it wholesale 2.0. This should be the new way of doing business. Again, we go out normal wholesale, you’re looking for a needle in a haystack and then you’re selling that needle to another needle in a different haystack. You got to find a super distressed seller that has a house that’s all messed up that’ll sell it to you for 50 cents on the dollar. Then you got to go out and find a cash buyer that’s willing to fix it up and make a couple hundred bucks a month cash flow or to make 25 grand flipping it.Now you can shop and when you take your deals to the MLS, which is what I mean by the open market, it’s the best buyer’s list in the world. Remember I told you about, if you go back and look, new investors pay the most for real estate. Think about me, the first deal I bought, what did I tell you today? I screwed up. I paid too much because I didn’t understand that there was materials that I had to add into the rehab budget that I got from my contractor.I was a first time investor. I paid too much because I wanted a deal so bad and I was trying to figure out a way to make it work, which is a bad situation to be in as a buyer, right? The best situation to be in is, it’s not for me. That’s when you get the best deal, when you’re okay saying no. So where do you think most first time real estate investors shop?
Eric:MLS. It’s the best buyers list in the world. So this gives you the ability to take your deals to the MLS.
Rob:I’m going to re-listen to this because there’s just so many nuggets throughout this episode from a masterclass on how to pivot when you’re detecting market changes to really just owning a new space like this or wholesale 2.0. I know the concept’s been around, but I like that you’re calling it 2.0, because with the market changing right now, it makes total sense that this could be a new path for people looking to get into the wholesaling business specifically, because if you’re trying to sell a property to a flipper right now, they’re probably being pretty cautious, is my guess. They’re probably not going to be taking the same deals they were three months ago, whereas going direct to seller, which is the greatest buying pool right now, it’s like yeah, it seems like a good opportunity.
David:And the seller hasn’t really had that come-to-Jesus moment where they recognize, oh, my house isn’t worth it.
Eric:I think it’s just now starting to sink in. We bought two homes this week in pre foreclosure. I haven’t bought another property in pre foreclosure in 18 months. They didn’t have to sell it to us. They could take it to the market, it would sell. They weren’t getting foreclosed on. You couldn’t even start foreclosures until, I don’t know, 6 or 12 months ago. You couldn’t even start the process because of COVID. Some of that’s catching up to people right now. The options have been reduced a little bit versus what they were six months ago. So we’re at the onset of sellers starting to come back to planet Earth.
David:And as long as rates stay somewhat stable, we’ll find this equilibrium. The problem is they freaking tinker with it so much that every time you start to think the kid’s ready for bed, somebody gives them sugar and then they’re bouncing off the walls again.
Eric:I think even if they just stop raising rates and everybody would just sink into the reality that 7% is a good number, you’d see buyer confidence go back up.
David:Yeah, we need stability. People don’t like when they don’t know, is the car going to be worth 50 grand or 20 grand? Nobody wants to buy when they don’t know what’s happening. It’s a great point, Eric.All right. Well, this has been a fantastic show. I’ve thoroughly enjoyed hearing your insights on what’s going on and more than just your insights, but practical applications of how to take this information about the changing market and apply it to the offers you’re writing, the way you’re having conversations with sellers, the people that you’re hiring, how you’re structuring your business, and how to pivot when these things hit.
Rob:Eric, if people want to learn more about you and your business and what you have to offer and all that good stuff, where can people learn more about you?
Eric:So the best place to find me, if you want to follow me on Instagram is Eric Brewer Invest on Instagram. If you want to learn more about novations, you can go to brewermethod.com.
Rob:Awesome, man. Thanks.
David:We’re going to let you get out of here because we would talk to you all day long and we could probably turn this into two or three shows. I thought it was a fantastic time. But thank you very much for sharing what’s going on in your world and your business.
Eric:I appreciate you having me.
David:This is David Greene for Rob Pivot, Pivot-
David:… Pivot Abasolo signing off.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.