Mike Hambright is a Real Estate Entrepreneur and real estate network expert that has purchased hundreds of houses over the last 8 years. He’s a professional rehabber, wholesaler, and owns a single family rental portfolio. As a national mentor and coach, his students have purchased nearly 3,500 properties in the last 7 years.
Mike is also the founder of FlipNerd.com, the leading social platform for real estate investors in America (over 60,000 subscribers and hundreds of training videos). In addition, he is the founder of PassiveRental.com, which helps people find, finance, and buy rental property portfolios as passively as possible, in several of the nation’s hottest rental markets.
What you’ll learn about in this episode:
- Mike’s favorite interviews at FlipNerd and what he’s learned while hosting that podcast
- Why Mike is exploring other real estate markets — and why he believes you should start in your own market
- Why you need to work on a niche before expanding out
- Why you need to build a real estate network — and why you need to know exactly what everyone in your network does
- How Mike built his network — and why he used his podcast to aid in that process
- Why — if you want to talk to someone — you should make it an interview
- Mike’s upcoming personal mentorship programs
Mitch: This is Mitch Stephen and am here with Mike Hambright of Flipnerd.com and the ugly houses investors’ franchisee. He has rehabbed over 200 houses in the last few years and we’ll gonna talk about the art of successful rehabbing, which an art in itself, isn’t it, Mike? How are you doing?
Mike: Am great. Am great, Mitch. How are you?
Mitch: Am doing good. So, did I get it right? You’re a HomeVestors’ franchisee for how many years now?
Mike: You know my wife and I became a franchise of HomeVestors’ about 6 years ago. So, it’s hard to believe it’s been that long, but it’s been about 6 years.
Mitch: Okay. And Mike is very involved in introducing people to the prospect of owning a franchise, so you are interested in that, you wanna click on some links here, next to the interview. But, what we wanna talk today is successful rehabbing. And it is not easy as it seems, does it Mike?
Mike: No. I mean, you know, some of the TV shows and stuff have made it seem a lot more glamorous than it is. But, it is a great business. I mean, real estate investing is a great business. But, it is a business, it is not —
Mitch: Not a TV show.
Mike: Yeah. It is not a TV show. That’s right.
Mitch: Everyone’s heard of the euphemism, you make your money when you buy, right? Have you heard that?
Mike: Yeah. Sure, yeah.
Mitch: I added a tagline to that. I don’t– there’s not many original Mitch Stephen things in the world but this is an original. My bumper sticker reads” You make your money when you buy and you lose it in the rehab”.
Mike: Yeah. I will say that I’ve been very fortunate, we probably bought around 300 houses in the past 5– 51/2 years and I’ve actually lost money on maybe 3 04 4 deals, and that’s going through 2008 -2009, so kind of I saw the down times, but, in terms of making it when you buy, that’s why it has help through for us, because we tend to pass on a lot of deals that probably a lot of investors would do, just because it was a little tight for us, it felt tight. So, am sure for us, that’s meant that we missed some deals that we could have done otherwise, maybe instead of 300, we could have done another 50 0r 60 but, if it meant we lost money on some of those, because we were a little too risky, we just tended to stay safe. So that, you know, I could argue it either way, that we missed deals, and maybe we shouldn’t have, but I didn’t know we stayed safe and–
Mitch: I think you keep going your way, because those ones that are go over budget and you lose money, they are very stressful. And I think they have the weight of several houses, they are not just 1 house anymore, since they have the weight of several houses, so I would stay there. So–
Mike: It helps us to have better night.
Mitch: You got about half an hour. What is the type of this proposition, how to do a successful rehab, what’s the first category? What’s the first step here?
Mike: One thing I wanna kind of clarify, is that a lot of people, back in the TV shows, I mean, heck a lot of those shows, too. I know, several of those guys now. You know, it took me a while really to understand this. That, a successful rehab, or being good at rehabbing does not mean you put out the best product in the neighborhood always. I used to pride myself on how big the transformation our rehab projects made, ‘because we buy ugly houses, folks, that’s what [INAUDIBLE] I wear, so we tend to buy houses that are really distressed, and I can make this awesome transformation and make this as the nicest house in the neighborhood and it would sell to the full price to the first person who looked at it. And that’s great. I mean, it was great, for a long time I pride myself on that, pretty now a good product always, but then, I guess about 18 months ago when we started to get more into a seller’s market, we kind of made that transition. Then, I started to have some experiences where I’ve realized that I don’t have to totally knock it out. Like, it depends on the house, and the situation. It could be a neighborhood where, it is more of a first time homebuyer, that is the type of person that values sweat equity, and maybe if I, potentially I could, let me give you an example. You see a $100,000 house, I could do a full rehab that costs $25,000, and sell it for a $100,000 or I could do a really light rehab that costs me $5,000 and sell it for $80,000. So, the net to me is essentially the same. And so, that started to make sense and the difference there is, if you are selling a house to a first time home buyer, and you know in a working class neighborhood, where people are changing their own oil, or mowing their own grass, and value sweat equity. Then, they often don’t look at the cost of labor for rehabbing the house. And they might not even look at the full cost of the materials. Because, they may have decided well, “We’ll fix it up in the next couple of years. So, we’ve got a couple of weeks, weekend projects, and that’s that, I can get paint from my brother, because he got lots of leftover paint”. People started to justify how they are getting a good deal because, they’re gonna do the work themselves. And that’s Middle America and I appreciate that. That’s– go ahead.
Mitch: I really like it when people go over budget on their remodels, and I really don’t like it when I go over budget on mine. So, that’s to me.
Mitch: Now, everyone thinks we can rehab a house for $5,000 or $6,000 or even $7,000, you know, everyone is about 50% short. And I don’t know if it is because, they’re just living in the fantasy world or they just really don’t know expensive labor and materials have gotten in the last 5 years.
Mike: Yeah. I think a lot of people just– especially newer folks, kind of get a name with the deal, and they try to justify, why they should do that deal, because they wanna do a deal. So, you gotta be careful there. And another thing, that you really only kind of realized after you have done a fair number of rehabs, is just kind of domino effect of everything. So, if you see wallpaper, it is not just peeling the wallpaper, then it is re texturing and repainting for example and when you are in the process of texturing, it’s gonna cost more labor to mask off all the baseboard and the door jams, and stuff like that and maybe in the process, something happens where you screw some baseboard, so now, the baseboard doesn’t match that room with the rest of the house, and the next thing you knew, you are putting a new baseboard in all house. So, there’s a lot of things that a rehabber to–where they have a domino effect, that just kind of roll through. You fix the foundation, then you may screw up the roof, you might screw up the plumbing. And you know, just things that lead to other problem that you really kind of need to anticipate.
Mitch: Yeah. I know, that a few well, I fixed a lot of foundations that, concrete foundations that jacked up the plumbing too high and broke the plumbing. Yeah, I know about that.
Mike: Yup. So, Mitch, what I come up with is really kind of forming areas to cover, and it kind of help a general guideline on how to be successful in rehabbing. And I kind of tell you what those are. To be good in all of these things, really understanding how to analyze comps, sales comparables and there’s a number of things that I’ll talk about inside of there. Properly evaluation repairs, and so, I [INAUDIBLE] a little bit by kind of telling you about some of the things that we could domino effect, but there are some more things that we can talk about in that context. How to manage contractors, it is really important. It can cost you to– wanna tear your hair out, if you don’t have that figured it out, and am fortunate to have the same contractor, probably rehabbed almost 150 houses for us and we’ve had–we broken up and gotten back together, and we’ve gone through issues but, it was because we did something right, and continue that relationship. We’ll talk about that a little bit. And I just have some tips on how to sell to maximize my [INAUDIBLE], I really don’t have just a couple of little tips that would probably help people make an extra, you know, thousand or two thousand bucks on the average rehabbing. These are the tips that really simple things that probably few people do, ’cause [INAUDIBLE]. So, am gonna jump in, talking about comps.
Mitch: You are evaluating your property right?
Mike: Sure. Sure. Not throwing the wholesalers into the bust, but if you are buying from other wholesalers, you really need to not use their numbers and kind of do your own homework, because they tend–you know, like when people are selling, even if it’s conscious or subconscious, they are trying to prove a case, for how they can make a certain amount of money that they wanna make. And they’ll sometimes, pull in comps that really aren’t comparable, they’re across a major thoroughfare, or are not really an apples an apples comparison. And you wanna make sure, even yourself, if you are newer especially, you’ll gonna have a tendency to try to find a way to make that deal work and so, “Well, if I stand on my left leg and squint my eye, and that comp makes sense” And that of brings up the value of what–the house that you are looking at is worth the subject house, and therefore, what you might wanna be going to pay for it. So, I would say [INAUDIBLE] will always be conservative, but some of the thing that you are looking for that are better than not are, make sure they are close. Close sales and recent, so that best comp that you are ever gonna get and you wanna try to get 3 or 5 comps, the best comps that you’re ever gonna get is the house next door, that was built the same exact moment, that sold yesterday and was kind of public records. So, you can see all the information, identical in sizes and square footage. And now, that almost never happens. So, you are not gonna get something that close, so now, it’s like, “How do I make something equivalent”? How do I compare them an apples-an-apples basis when you start with apples and oranges”? It is really important to do that, so stay close, stay recent and we’ll talk about how to kind of normalize some of the things in just a second. You wanna look at what we called “white elephants” so that things that are really a big deal, but they are not, they kind of camouflage a little bit, like you don’t wanna buy a house and realized that it backs up to a power station, or a commercial property something that you didn’t know, because it has an 8 foot hall fence and now– actually, it happened to me, fairly recently. I am giving you an advice, this actually happened to me. I have a house that is backed up to a huge power station, and at the back of my house, they were trees, it was very dense trees, it wasn’t bamboo, but it was a tree almost like a screen, you can’t almost see the other side of what was there. And I just didn’t paid close attention to it. And I had some folks that I mentored, that I sent over there to kind of use to as a property to analyze. And somebody pulled it up on Google Maps and they pulled up of the earth view of [INAUDIBLE], so they saw– they could see this huge power, it wasn’t like a nuclear power plant, but it was like one of those points where all the electrical wires all come together, and something that was probably like an acre, you know, that has all the power lines coming in. And they said, “What do you think that detracts a lot from the value”? And I said, “I didn’t even know that it was there”. So we ended up doing okay with that house. But, shame on me for not really digging up a little bit more.
Mitch: I can tell from my personal experience. I just had a house that backed up to a mall. And I had an 8 foot 6 concrete fence between the mall and the back yard. And people will not buy that house because they are afraid of people coming over the walls from the mall. I don’t– I never thought about that being a problem. The other one that was a big one is, rail road tracks.
Mitch: There’s a raid road tracks behind your house, where you can hear the train that deters a lot of people. You really need to compensate for that, if you really wanna buy the house. I’ve got where I just do it.
Mike: Yeah. And to kind of elaborate on those things. Those things have a bigger impact, generally speaking, the higher the value of the house. To said another way, if it is a $60,000 house market value house, in a lower end C class neighborhood, that’s backing up to a strips in a mall, like Mitch has mentioned. It is a problem, but it is not a big of a deal, if it’s half a million dollar house backing up to it, because people are probably less likely to tolerate that. But, yeah, things like that are things you need to consider and what I mean by that, in terms of making your comparison to comps in area apples to apples, so if yours back up to that, and you are using a comp that is 2 blocks over it, it is kind of inside of a neighborhood doesn’t back up to those things, you are not really comparing apples to apples, all that sequel house–the other house should be more valuable more than yours so, you wanna put it some discount factor, whether your house is–once you calculate what you think the value is, without that white elephant issue, then maybe back off 10 or some even 20 %, because it kind of detract from the value when it comes to time to sell it.
You wanna look days in the market and the neighborhood where you at and so, this stuff you’ll gonna see through your comps, through the MLS. You can see how many days in the market are typical, not just for the neighborhood but when you are looking at your comparables, I always look at the specific comps that we use. So, I have– the people that worked for me, that are essentially salespeople. They go out and work these leads for me, so when they get the deal and come back, I analyze how they come to that conclusion, how they came up to that offer, when we get the deal. And if they say, “These are the 3 comps that I use”. And, I’ll see that 1 of them has–first off when they have really low days on the market, that’s a good thing for me, that’s like raises the green flag, if you will, so because, that means my holding cost will probably be lower on this house, because houses are moving quickly in the good part of town, whatever it may be. The red flag side is, when the days are really long. Now, sometimes, if we use 3 comps and 2 of them, may seem fine– normal, and then if we use comps that seems like it is sold for a kind of high price, and it took a long time to sell, it just raises the red flag. Like, why– how do they get that full price eventually? Why was it on the market for 6 months? They never lower the price and then somehow they miraculously sold it for that price after 6 months, like something is wrong here. And sometimes, it could be that ultimately, they decided to offer seller financing and provide financing for that deal, that’s why they got them usually on a high price, not unless you are offer seller financing like Mitch does, then that is not a real comp, you are not gonna be able to sell for a kind of above market values, if you are not offering, seller financing, generally speaking. So, one last thing I’ll say about comps, is typically, we are taught to look at sold comps, that’s what actually happened. You know, typically, people would say, don’t look at active comps, because they haven’t sold yet so you don’t know what’s gonna happen. But, I encourage you to look at comps, because essentially, most likely your competition especially, if the market is moving up or down. That’s kind of indication where things are going. You wanna look at houses that are currently for sale, because those are your competitors. You can also–inside of, like active comps, you can use all the breakout for pending, so they are active but they haven’t sold yet, but they are pending. So, you can get an idea of how fast they went pending from the time they were listed, and it will give you a leading indicator of what might happen with your house. I am not saying to, put all your eggs in that basket, but all those little factors need to come together to give you a general confidence level with buying all over. So, that’s what I got for comps, any questions Mitch? Or You wanna add anything there?
Mitch: I guess a lot of people make a lot of mistake of going to look at the tax and the tax rolls, and see what the taxes has been, and that not just even remotely reliable at all.
Mike: That’s a worthless number, yeah. One thing I wanna say about tax information now, this is gonna be different across the country, but we found regularly, now am actually getting houses measured because of the tax per square footage is very often incorrect, so we get a professional appraiser to measure them and it is very cost effective. Sometimes, if they find an extra couple of square feet it will pay for itself, but, we found– and what the appraiser that I use, that does the measurements, he claims that, he thinks a lot of people when they measure for tax purposes, are rounding every measurement, so in general, maybe rounding it down or maybe rounding it up or down based on where it lies, but if you were to take off, if you had a 60 or 70 foot stretch of house and the side run, if they shaved off 6 inches, you are cutting off, I wanna screw myself on the Math here, Mitch. But, you cut off, 30 or 40 square feet and you do it a few times, and the next thing you know, the house maybe a 100 or 200 square feet larger than what the tax records say, because someone got sloppy when it was built 30 years ago. And nobody ever caught it, and so, that is something interesting to consider when you are looking at potential deals.
Mitch: So, when you measure houses, you measure from inside walls to inside walls, right?
Mike: You know, typically, we do outside to outside.
Mitch: Really. So, you can just go on a house some brick, from the edge of one brick to the edge of another brick and that would be the measurement?
Mike: I think so. And yes, the house is a little more complicated if the house is a perfect rectangle but, yeah–
Mitch: They go from outside to outside or inside to inside, because that would make a lot of difference.
Mike: Yeah. That will add up quickly. Yeah. Am not gonna answer that, Mitch, because I don’t want to say the wrong thing but, if you work with somebody that they do that for a living, they know for sure.
Mitch: That’s good, am gonna find the answer to that. What’s the next step– evaluating repairs?
Mike: Evaluating repairs. So, we talked a little bit about making sure that you understand the domino effect of things, but one of the thing, I kind of want to elaborate on that is, and you need to remember the small stuff. There’s a lot of little things that a lot of newer investors, tend to just say, “Oh, that’s not just a big deal”, but, it is a big deal. Like, it all adds up. You need to consider, the cost of all those things. So, let me give you a couple of examples, baseboard is a real common one. So, you know, if you gonna go in and paint a house that hasn’t been painted in 10 or more years. There’s stuff that really gonna stand out, if you don’t replace it, baseboard is pretty common, especially if the house is 30 or 40 years old, that used a bunch of really thin skimpy little baseboard that just doesn’t look good after you repainted the house in this day. Things like switches, wall plates or outlets, so they may have looked okay when they have that tan of 10 or 15 year old paint, but when you put fresh paint on there, and then you realized how yellowed those things white are, you know, it is not just the covers that are relatively cheap but it is actually–then, you don’t wanna put a white cover on a yellowed switch or outlet ’cause that looks crap. So, basically, we tend to replace all the switches, all the outlets and everything, because they really pop out if you don’t after you paint the house and put your new carpet in, and this starts to look like a brand new house except if you got these old, you know, switches, outlets, and base boards and a number of other things like that. So, the small stuff is really important, then you need to consider it.
Mitch: I don’t know why more people don’t do it. But, I always replaces all the switches and the plugs, and the outlet covers, because it is not that expensive and it is an easy thing to pop, just like replacing all the light fixtures and bring them to a modern look, like you wanna go rustic look, that they have now, the brownish trends.
Mike: Yeah, like the over browns. Yeah.
Mitch: Yeah, whatever. I mean, they are like $15 for 3 of them down on Home Depot, they don’t cost anything, you know. It cost more than if you have someone installed then just buy them and but– they make a lot of difference. They kind of bring older houses into the day, you know.
Mitch: It is money well spent.
Mike: Just one thing I’ll say is, you know, I actually have. I think, you’ll gonna add a link, Mitch to this, I’ve got a [INAUDIBLE] part series on successful rehabbing, and inside of that, it’s free, and Mitch will have a link for that. I actually included a worksheet that I actually bought over 300 houses using this worksheet, now we use a fancy IPad app now when we buy houses, but after we have done how many houses and all, I started essentially being able to deal pack of a napkin, it gets a lot easier, but, I am literally including the worksheet that’s very similar to the one that I used to buy 300 houses, kind of evaluate the comps and repairs, you know, based on a lot of square footage and so, that’s included in this free training but, I would say even on the sheet that we have, there’s a lot of spaces to add numbers and calculate what the repairs are, there’s always things that are missing, like tear down a shed or just kind of random stuff that you know, you don’t do all that often. And so, newer people tend to hang up on, “What is that cost. That is not on my sheet. I don’t know what it cost”. Usually, I just make educated guess and throw money at it, usually in the chunks of $500,000 bucks. So, I have no idea what it cost to tear out a shed, you may not know that, but you’ll just say, “well, I’ll just throw a thousand bucks at it, because at 500 bucks– I don’t know what it gonna cost but that will get it done”. And see you wanna account for it, and so, you don’t wanna get hung up on a lot of little things, but you do wanna account for them, because what you’ll see is, maybe that shed is just 200 bucks to tear down but you totally missed that, the fence is falling down behind the shed. So, now you need money for that. There’s always gonna be stuff that you will missed, and as long as you’re conservative when you are evaluating your repairs, then you’ll see that it is pretty common that individual numbers are– itemized numbers may have been weigh off on a couple of things, some good some bad, but across the whole project, it tends to net out as long as you are conservative with it.
Mitch: Yeah. I like that idea of picking things in $500 increment. I do it all the time when am running to a house trying to do some nail sketch of what it’s gonna take, you know, am looking at the kitchen going, cabinets and counter tops and sink, you know, 500 bucks, no. Thousand bucks, Nah–no. Fifteen hundred bucks, yeah, that’s more like it. You know, I just go on $500 increment just like you said. And in always air on the high side, not the long side, because like you said, there’s always be something that you didn’t count on and it will lead that to the extra you thought that you’ll gonna save there in the end.
Mike: Yup. Yup. And there’s some general things that we kind of talked about, just make sure that you don’t under rehab or over rehab. Some people tend to get carried away or they tend to make everything really nice, but they leave something that just doesn’t fit because they didn’t have enough budget. And so, just make sure that you know the house looks consistent and its upgrade. Kind of by that, you don’t wanna go in and have always nice appliances, and you refinished the cabinets, but you left this kind of junkie old looking counter tops in there, because it wasn’t in your budget. And so, you just don’t wanna mix and match quality levels if you can help it, so.
Mitch: Mike, what is the most important room in the house to be done right.
Mike: You know, we’ve definitely focus on the old adage which is the kitchen and bathrooms. We tried those nice for sure.
Mitch: Yeah. Am with you on that. Between the choice between the kitchen and the bathroom, which one?
Mike: I try not to put myself in the position where I have to choose, you know, but we like to make the kitchen nice.
Mitch: That’s what I always said, the kitchen and the bathrooms and you know, if you got 3 a 3 bedroom 2 bath, 1 kitchen and 2 bath to make nice, if you can make those both look nice and rest of paint and carpet pretty much, you know, so.
Mike: Yeah. Bathrooms aren’t– you know, it kind of level the house. The bathroom is really, such a small space to work with relatively speaking, it is hard–I’ve never been really big on moving walls and doing things structurally, some of it is because of the market, I mean the Dallas Fort Worth market, where I primarily operate, most of the houses that we buy are under the build price, so it is hard to justify putting a lot of money, if you are probably a typical, I mean our typical ARV prices are, you know, generally speaking, well under $100 a square foot. So, if you happen to be on a cost and you [INAUDIBLE] and you are in California, or Boston or somewhere it makes sense to add on and pop a top on a house for another level and stuff like that, what am saying right now is not really for you. But, you know, we try not to do a lot of structural stuffs just because, I don’t see from investment standpoint, a great return on that investment if you will.
Mitch: But, we are not in building, we are in the flipping business. So, we try to keep it kind of separate. Look, we have to move along, there’s a tag here. So, let’s hit these contractors.
Mitch: How you make the contractors? And then let’s give that about that in 5 minutes
Mike: Sure. Sure.
Mitch: And move on to maximizing profit.
Mike: Yeah. So, we’ll talk about a couple of things that are really important to contractors. A lot of these guys are–we are talking how to find, and so I would say, generally speaking, you really wanna try to work with people, somebody else that you know, or somebody that you respect recommends to you. You can find people on Craig’s List and stuff like that, but they are unknown quantity. Do you want to be–use your dime to basically feel this people out? I’ve done it before. But, it is not the right way to do it. I would say generally you wanna try to find people that somebody else’s use them before and recommends them. And so, that’s the word of the mouth. I will tell you we got some great tools coming out, we are about to relaunch the new
, it is coming out. We actually have an Angie’s list type tool for real estate investors that people in your market have used and rate and ranked, so it’s gonna be–that’s gonna solved that problem, ’cause that’s always been an issue that I know real estate investors face, so. But a couple of things that are really important to contractors are payments. Payments and communications are the 2 big things that I wanna talk about in the next couple of minutes.
So, a lot of contractors live check to check. These are not usually wealthy guys, and they may have gotten burned before by working with investors, and so they’ll be very loyal to you if you pay them like clockwork. Now, you really need to set up a process. And I’ll tell you what that process is. We have– I have a book keeper in my business that handles all bookkeeping. As long as we get a check, by the end of the day on Wednesday, and it could come in at midnight it doesn’t really matter, my book keeper cuts checks on Thursdays. And that’s it, so.
Mitch: You said, as long as you make a check, you meant as long as you get an invoice.
Mike: An invoice, yeah. She comes in roughly 8 am on Thursday morning and prints out all the invoices that we received in the past week and writes checks and you know, she may have to bounce off from me or some bills to my office to say, “Is this–should we pay this”? If it’s approved. But, effectively we write checks once a month, and before we did that, when we first started out our first few houses, people want us to come evaluate their work, and bring a check book to the job, and the next thing you know, you are driving all over town just to pay people, that’s not just sense, so. Everyone wants to get paid quickly when the job is done but, if you set that presented that,”Hey, we pay like clockwork”, it will never waiver from that, but it’s on Thursday and after that. Then people will get that, that’s your rule, that’s your policy and just stick to it. Something like that, you don’t have to necessarily do exactly what I have done. But, the people will send you an invoice on Wednesday or Tuesday and the next thing you’ll know its Friday, and they can’t get hold of you, and you are not returning their calls, and you didn’t get your checks cut out that week because you are busy that day. That’s where things start to get, you know, screwy, because you have just proven yourself as an unreliable, so. However, you pay people, do what you say you’re gonna do and be consistent a 100% of the time. Because, a lot of contractors need that money especially if they were fronting materials and things like that. So, just don’t mess with pain people, it’s kind like sales guys, you don’t wanna mess with their commission structure too much, or they’re just gonna get up and go.
So, communication is critical too. So, what I found out that a lot of contractors over time, I’ve worked with a lot of contractors is, you need to control the communications and make sure that they understand what’s going on. So, if you walk through a house and the contractor, and they are not taking a lot of notes, then you should be suspect that person is on the same page as you ’cause probably they are not. And you don’t wanna find out halfway through the job that, you know “Oh, I didn’t include that in there”. It’s gonna be a problem that will frustrate both sides. So, what I tend to do is, I actually walk through a house before I go with my contractor. And I am a little bit different situation because, I have a contractor working for a long time. But, I literally use my phone or my IPad, when I walk through a house, and say, “Master bedroom”, and I walk through and say you know, “The whole house were doing new texture work and painting and new baseboard” and stuff like that, I don’t have to read it off but, I’ll specifically say, “Line item, everything that I wanna do in each room of the house”, and I’ll ultimately email that to my contractor and get him to approve it. “Yes, I approve. This is my bid for that and I approve it”. And it is in writing, there’s a lot of difference that you can do, you can get as fancy as you want to here, but you need something that is in writing, so that they don’t come back and say, “Oh, I didn’t include new appliances in my bid”. Well, “I quote you right here that I need a new appliances and some of the details”. So, you just don’t want that kind of stuff to come back to bite you, because that really causes problems in relationships. So, communication is really a key. And I think, you can do a few things. I have such a trusted relationship with my contractor that I really don’t do this anymore. But, you can have your contractor say, “Hey, every 3 days, I want you to send me pictures, take out your cellphone and send me a link of whatever. But, I want you to take pictures of the progress of what’s going on there, and I want you to tell me if you run into any issues, and are we still on track for time”. And so, just kind of setting that expectation that you have a clear process for how to communicate and stay on top of people so that you make sure that they don’t go over on time, which is also gonna cost you money.
Mitch: I find that–am a lot better and a lot happier when everything is in writing, there’s a deadline and after that deadline, they tell me it’s gonna take 2 weeks, that’s 14 days, I go ahead and say, “Okay, am gonna give you 17 days. But, on the 18th day, you owe me a $100 for every day after that”. So, that will keep people from moving around to another jobs and pulling off your job and starting– some of these guys are chronic job starters and they never finish. So, you know, you can go ahead and not finish my job, for everyday that is not finish, you take a $100 off your bill and pretty soon, I don’t owe you anymore for what you did.
Mitch: So, I find it to be really effective, they don’t like to sign it, I say, “Well, if you don’t wanna sign it, then I don’t wanna do it”. Other thing is, I don’t [INAUDIBLE] for the job, if the guys is so broke, that he can’t work 5 days and get paid, then he is not your guy. I understand, that he doesn’t have materials, so I [INAUDIBLE] I just– I have an account with Home Depot, I send him to Home Depot. Home Depot knows me very well, they call me, and say, “We got so and so here. You know, you got $450 for the stuff for the house on 123 Main St”. And I’ll give him my credit card. And they email me the bill, but I also write down that house number and that date in my phone and in my notes. Because, sometimes, you don’t get those bills, and when the credit card comes, I need to know where that money went. So, I use my notepad and every time I put a charge on my notepad, I email it to my wife. And the notepad just gets longer and longer and longer so that at the middle of the year, we say, “Okay, print this out and put it in the file. Am clearing my notes and am starting over”.
Mitch: So, does this sound familiar, Mike?
Mike: Yeah. The key is, you know, whatever process works for you, just have a process, and the people that are involved, the book keepers that make you payments or your spouse that’s approving payments, or whatever. Just make sure that everybody knows your process. And hold yourself accountable to it, then things will work out just like your comment about contractors it starts to cost them money at some point and they spend time looking for jobs. You know, it’s a little tricky when you are a small time investor, and you just rehabbing a house here and there to be important to another contractor because, you know, you haven’t earned the right for them to be dedicated to you, because you are not keeping them busy, but as you get started busier, you know, things started to get easier for the contractor if you keep them busy and you pay them like clockwork,and they never have to think about getting paid on time or finding more work then it just makes everything a lot easier. That thing can be accomplished with, you know, I wanna throw out too crazy of an idea here, kind of like a co-op, but if you have other investors in your market that you work with, then you find ways to share those resources or you share different contractors and then they start to become loyal to you collectively and they won’t want to screw one of your because they know they’ve screwed all of you.
So, here are some ways that you can, almost build almost kind of like a co-op there if you will.
Mitch: Right, man. We are moving now to how to sell and maximize profits.
Mike: Yeah. So, I wanna do this really quickly. So, here’s I’d say, “Run the comps again”. So, from the time you bought the house to the time that you sold it. It’s probably gonna be the time that you got under contract, the time you made your offer to then get it approved to then close, to then rehab it, give it back under contract again and wait for FHA [INAUDIBLE] whatever it may be, it is very likely been a couple of months anyway before you get used to point towards time to list it. So, look at the comps again. Things change, where there’s some new sales that occur that will cost you to improve– or maybe the prices has gone up and possibly it has gone down. So, you just wanna know what’s the current snap shot right now on the battle list, who’s my current competition and how do I beat them. And so, that’s really it’s a snapshot. Right now, this is my competition, here’s how I am gonna beat them. So, look at your comps again.
Mike: There’s a lot of new people. Say it again?
Mitch: I said, that’s a good advice.
Mike: Yeah. There’s a lot of new people that tend to say, “Well, i’m just gonna sell it by owner, so that I can save on realtor’s commission”. I would not advise doing that ever. If you have a system set up, if you are seller financing, like you do, Mitch, that’s a different thing but, when you try to attract an owner occupant that’s gonna use traditional financing, you’re just– every realtor in town is gonna walk right passed your house, or drive passed and somebody’s gonna say, “Oh, what’s that one”. Like, “I don’t know, I don’t wanna look at it”. Because, I am not gonna paid on it, and they don’t wanna waste their time with somebody that’s doing For Sale by Owner. So, I think your time– if you are thinking about how to save a realtor’s commission, you probably missing the bigger picture, your time is better spent finding more deals and that running around time to show houses to somebody on a Saturday afternoon, when you should be with your family or doing something else. So, you gonna cost opportunity of your time and it’s probably not best spend if you’re doing For Sale by Owner. By the way, most markets around the country now, you can do–get find somebody to find deal, fluffy listing for you know, as low as a couple of hundred bucks in other market.
Mitch: And the other thing is, if your house hangs around for extra 30 or 60 days, then you didn’t saved anything. So, you don’t have the ability to reach people like the MLS, I mean as an individual, we can’t reach that many people as the MLS system can reach.
Mike: Yeah, the fact that they are represented by a real estate agent, it is not always the case but, most real estate agents that are worth you know, anything now, are not working with clients that are not already pre-approved, and they are not showing houses to people that can’t buy a house. I mean, so– you don’t have to worry about somebody calling you, that lives down the street, that’s never talked to anybody about being pre-approved, and doesn’t understand the process, and it is not just a matter of your time to go and show them houses, all the handful that you gonna have to do for that point forward and it is not just worth of your time.
Mitch: Let’s cut the chase on this topic. If you wanna sell houses, go get your real estate license, and become a realtor and go sell all the houses that you wanted. If you wanna be on a house finding business, go find houses, that’s what you do. You find houses.
Mike: That’s right. Sure too sweet, Mitch. That’s awesome. When you list your houses, spend your time, writing the description, like a sales description. I mean, and take some good pictures, you can hire– we tend to do this in house but, because we actually Photoshop the pictures, Photoshop it’s not like we’re you know, adding landscaping that doesn’t exist in the photo or anything like that [LAUGHTER] but I mean, we can brighten them up, and just try to make them look as good as possible, we don’t make anything up but, when you go take pictures sometimes, it looked cloudy out and it doesn’t look as good as it would, if you could brighten up and so, you make cut out somebody that has a reflection of themselves at the bathroom mirror, something like that. So, just consider those things, but take time to write a description that sounds like you are trying to sell something. So many people just write some blah blah blah blah, like who’s gonna get excited? There’s so many people that they are buying houses these days that understand that they can look online like Zillow, Realtor.com, so there used to be a time when people rely on their realtor that comes, “These are the 10 houses in the neighborhood that you wanted to look at” And am telling you now, that most people that know what neighborhood they wanna buy in, they’re going to the realtors saying, “These are the ones that I wanna look at” because they already researched it online. So, you wanna put your best foot forward with the description, and pictures and really look good, because, that’s what gonna get eyeballs prospects in the door to look at your houses or to make offer on. Okay. Let me get you a couple of tips now. These are just a couple of little tips on how to make more money when you do deals. These are not necessarily specific to rehabbing but primarily, if you were just kind of do like a whole [INAUDIBLE] if you take ownership, here’s another way that you save money there as well. So, the first one is, when you buy the house, if you are buying a house from somebody that doesn’t live in it, like they inherited the house, or it is not their homestead. Now, all the states and even at the country levels are different on this, where am at, if I buy a house from somebody and it still has a homestead exemption meaning, the person that is living there, now when I go to sell the house, the title company’s gonna removed the exemption and there basically gonna charge me taxes for the full year without the exemption removed. So, imagine if that’s in the back half of the year, I am paying that higher level of taxes for the time that I didn’t even own it because they removed that exemption for the full year. If you are buying the house and somebody didn’t actually lived there, like they didn’t lived there but their mother lived there, but she’s been dead for 8 months, and they still have that homestead exemption on there, then that needs to be removed from the time that you buy it, so that you are getting credit on your taxes for that exemption being removed from the time that you didn’t own it. So, I got a little complex explain quickly on a call like this, Mitch, but you follow me there?
Mitch: I absolutely follow you. Some people make the mistake of thinking they’re not gonna say anything about the homestead exemption but it does catch up on you and it will pay all of it. Just get right to it and get it solved. And like you said, try to get it solved when you are buying the house so that the seller has to cover his share the cost.
Mike: Yeah. It is not the homestead, it could be the Veteran’s exemption and a whole bunch of exemption that could be on there, and handicapped exemption there’s a lot of stuff. If you are not buying from the actual seller that those things applied to, then those should be removed from the time that you buy it. Therefore, you actually get more credit in terms of dollars to apply towards the eventual tax bill. So, that sounds little but it could actually add up. I wish I have more time to kind of explain an example one time that actually cost the person that was selling it to us like $20,000 because a senior exemption wasn’t lifted off the house 10 years earlier, and regained the tax benefit for like 10 years and it came back to buy them when it was time to sell the house, so. But, the second thing is, if you are selling FHA, and a lot of us that listen to this call, doing first time home buyer houses with FHA loans. What’s gonna happen is, there’s an FHA guideline that says the buyer, and the prospective buyer cannot pay for 2 appraisals. Now, a lot of real estate agents and their lenders are gonna come to you and say, “Well, you have to pay for the second appraisal”.
The FHA’s gonna require an appraisal if you are paying more than 20% of what you purchased before, which real estate investors if you put any money into it at all, you are typically way over that. So, they’re gonna require second appraisal, it happens every time I sell FHA deal. Now, the guideline does not say that the seller has to pay for it. It just say that the buyer can’t pay for two. So, what we do is, we have kind of crafted a letter that is written up, specifically for FHA deals and when they get passed their option period, so a lot of people we get a house under contract, they have FHA financing, they have a 10-day option period, where they gonna do inspections, and you know, get to their financing show up, or whatever it is and come back, they can even terminate the contract or continue with it. Once, they get passed that period and technically, they shouldn’t have the right to terminate the contract, we send a kind of boilerplate message to their lender that says, “Thank you for working with so and so, to help fund this house, we’re the seller just want you to understand that we are real estate investor, I understand that there’s an FHA guideline that says that, a second appraisal might be approved in this sense, because I purchased this house for significantly less than 20% but, here’s why i’m a real estate investor, we buy houses and prices have nothing to do with their ultimate value, because we provide a kind of quick solution for somebody that need to sell fast”. And on and on about,” You know, why we buy at discount and the value that the person added to us. By the way, we spend $30,000 rehabbing this house, here’s a copy of all our receipts”. We just do that upfront now, ’cause they usually ask for it. And then we say, “I understand that there’s a guideline that you know, may require a second appraisal, if you do, please understand that we did not require this person to use FHA financing and we had no choice in their lender, and so therefore, we shouldn’t be penalized for paying for second appraisal, and therefore, we won’t”.
And so, nobody ever asked us anymore, we used to wait and see what happen or the day before closing, they will come out of nowhere and say, “OH, we didn’t know you were flipping the house. Well, there’s guidelines that you need to follow”. So, now we are just proactive, you know 2 1/2 or 3 weeks before we have to close, we are telling them this upfront, so it doesn’t delay our closings anymore like it used to when we didn’t do it. And we put right up front that, “It is great that you are funding this person, but your lending guidelines are really have nothing to do with me and therefore I shouldn’t be penalized for it”. So, that will save 350 bucks or so.
Mitch: Well, that’s a good tip right there, too.
Mike: So, the last one is, hey, in our listings when we sell our houses and every listing agreement when we put the house in MLS, which we list on the MLS, we pay 3% to the buyer’s agent, 3% of the net. So, if you are selling a $100,000 house, and they negotiated in $3,000 of seller’s concessions, basically asking for credit back from us. You are really selling that house for $97,000, so we pay commissions on $97,000 not $100,000. So, if I am giving them a relay back or helping them pay for their closing cost, then I should be paying commissions on that, because the net to me is the same as if there were no seller concessions at all. And we agree on $97,000.
Mitch: Oh, that’s a great tip. That will stop those realtors from finding to load you up.
Mike: Well, but it is fair though. It’s like, “Give me back my credit back”. So, am always selling less for the sales price, because am giving them a relay back by the way.
Mitch: I understand. Makes sense to me. I am for it.
Mike: That’s all I got, Mitch.
Mitch: Hey, as if it wasn’t good enough. You know when a guy has done as many flips as you have, it’s always gonna be, we could probably talk for hours and hours and hours. I know, you’ve got things to do, so we kind of end of abruptly here but, I appreciate you being on the call, Mike. You guys check out
, this guy’s has a wealth whole library of interviews that he has done over there. I mean– it I was there once, it was a privilege, I have the distinct privilege of being the only person to get a segment two, so we did segment one, we have a lot of fun. So, they decided to give me to be continued in the segment two, so I thought that was really nice. We were on a roll there. I know you got things to do, Mike. I’m gonna let you go. Thank you so much, we’ll gonna have links to everything, Mike Hambright. So, there’ll be links there to summit, so just click right by where this interview was posted. Talk to you soon, Mike.
Mike: Mitch, thank you for the opportunity. Good luck, everybody.