I have a friend in Colorado Springs who owns a bank. Several years ago I complimented him on his employee retention. My banker and I both understand that his most important assets walk out of his bank each night to go to their respective homes and that his job is to get them to come back each morning. His key to hiring great employees is to screen for proper job skills, attitude and moral code and then empower them to be the best that they can be.
Jim Collins states in his book, Good to Great that all great companies put the right people on the “bus” and that great people will know where to drive the bus. He is saying that great companies hire the best people that they can find and then let these people “drive” the company where it needs to go in order to make the company soar. Great employers do not micro-manage or hire for specific tasks as much as empower great people to grow into their potential and be great at what they do.
I believe that if landlords would take these examples and apply them to their rental business, then their success and bottom line profit would increase dramatically. Landlords expect tenants to do a job, but many have never defined the job description and few share their expectations with their tenants. If I were running an employment ad for tenants it would read something like: “WANTED – tenants with the skills, ability and willingness to maintain and improve properties, pay rent on time, get along with the neighbors and who will stay for at least 5 years. I want people who have integrity and who can be empowered to solve problems on their own. Over the years people have asked me how I can view tenants as employees since I am not paying them money. The answer is that I am paying them and the currency I am using is good housing.
In today’s market, it seems that many landlords are accepting the first people who apply, as long as they can pay one month’s rent and hopefully some portion of a security deposit. This happens in part because landlords are strapped financially and cannot afford vacancies or the time to show the property. I find it also happens because landlords are paranoid that they may be accused of violating federal, state or local Fair Housing laws if they don’t accept the first person that applies to rent their property. Landlords are afraid to screen for the best applicant and instead set a minimum standard accepting the first applicant who meets that standard. Can you imagine my banker friend hiring employees based upon a minimum standard? If he did his bank would not be the profitable bank that it is today. Discrimination by itself is not illegal or evil. There is nothing in the Fair Housing law that prevents us from accepting the best tenant we can find. We may not discriminate against a protected class and it makes no business sense to do so. We need to treat all applicants fairly and consistently and we need to advertise our properties rather than advertise for a specific type of applicant.
When you accept an applicant who does not meet your expectations you need to understand that it is your fault and not the applicant’s. You hired the wrong person for the job of becoming your tenant. He or she either didn’t have the skills that you needed, didn’t have the correct moral code or you didn’t communicate the job description. It’s your fault, move forward and resolve to do better the next time.
When I started wholesaling real estate around 15 years ago, I was exactly like you probably are today—scared to make lowball offers, uncertain that I’d be able to sell my deals, and perfectly willing to fritter every day away designing logos for my business rather than dong the scary work of making deals and selling them.
However, probably unlike you, I also didn’t have a job, Which meant, basically, that I had to wholesale or starve. Given that choice, I got up every morning (Ok, most mornings), put my big girl panties on, and did what I had to do to get those checks.
That, however, didn’t make me a great wholesaler—it just made me a wholesaler.
What made me a GREAT wholesaler was refusing to just accept what I was taught (which was basically “be a hardball negotiator” and “sell your deals for as much as you can no matter whether they’re good deals at the price or not”), and instead applying my own experience, personal ethics, and personality to my business.
When I say I’m a great wholesaler, I don’t mean that I’m all that. I don’t do more deals than anyone else: I know people—mostly bulk REO dealers—who literally sell thousands of deals a year. I don’t mean that I make more money than anyone else—there are probably a thousand wholesalers, especially in more expensive markets than mine, that make double what I do in a year.
What I mean by ‘great’ is that I leave my buyers and sellers feeling good about transacting business with me, and I know that I’ve done the absolute best I can for them. Oh, and I make a ton of money doing it, so it’s kind of the perfect arrangement for everyone involved.
I want you to make a lot of money and feel great about it too, so I thought I’d share what I do differently than some others, so that you can go to sleep at night thinking, “Wow. I have a great business.”
I always make the offer. 15 years ago, when I was looking for my first wholesale deals, I often walked away from properties frustrated that I’d spent the time to look at them but couldn’t make an offer that the seller would accept. I was so frustrated, in fact, that I created a mental rule: if I’ve taken the time to see a property, I’m going to make an offer on it even when I’m ‘sure’ it won’t be accepted.
The result of this policy has been threefold: first, I get offers accepted that I’m ‘sure’ the seller won’t take. I bet I’ve made a quarter of a million dollars in the last decade and a half on deals that I would have bet my bottom dollar the seller wouldn’t agree to—like the 3 condos I flipped at the end of last year. The seller had paid over $400,000 for them in 2007 and the agent already hated me, but I offered $68,000 anyway, and guess what? I made a $30,000 profit just in time for Christmas.
The second effect of this policy has been that I’ve discovered that ‘getting rejected’ by sellers doesn’t kill me. I say ‘getting rejected’ because that’s how it always felt to me at the beginning—as if it were I, rather than my offer, that was unacceptable to the seller. Now, despite my strong natural tendency to avoid rejection, I know that it’s really no big deal, and really not about me (or even my offer) at all. Sometimes, what I have to give just isn’t what the seller needs. Next.
Thirdly, by making every offer, I no longer live with that nagging questions about whether I walked away from a deal that might have worked. And I don’t get that unpleasant sinking feeling in my stomach when I later see that the property was sold for LESS than I would have offered to a competitor who was brave enough to say a number.
I never fool myself, or try to fool my buyers, about the numbers. I hate hate hate wholesalers who try to ‘oversell’ deals. And I see it all the time at my REIA association—people who claim a value of $90,000 in a neighborhood where that MIGHT have been the theoretical, I-can-get-it-if-i-carry-back-a-fake-2nd-mortgage value back in 2005. Oh, and then they say that a new roof, windows, plumbing, kitchen, bath, paint, and carpet will cost you around $10,000, and that the deal is therefore an awesome buy at $53,000.
Some of these wholesalers just don’t know any better—they don’t have the training to understand evaluation and cost estimating. Others operate under the “buyer beware” theory of wholesaling, and manage to sell these properties by working only with new investors who don’t know any better. And still others—probably the majority, in fact—are simply fooling themselves about the key numbers in a deal.
Here’s how it happens: the wholesaler talks to a seller who absolutely must have $47,000 for the house described above. Since he has no other leads, or needs a check this week, or whatever, he has this internal conversation with himself that goes, “Well, there are no fixed-up comparable sales in the areas, except that one that sold for $60,000, and I’m sure that seller was super-motivated because it sold in 45 days. All the other comps are in the 30s, but they don’t count because they’re bank-owned properties. The tax valuation on this one is $110,000, so, come on, it can’t be worth less than $90. And if the buyer did all the work himself, with secondhand materials, he could definitely do it for $10,000 or less. And it will probably end up being a rental property anyway, so the buyer won’t sell it, so does it really matter what it’s “worth”? So it IS a good deal at $53,000!”
I evaluate properties based on the most realistic case scenario, and you should, too. I assume that my investor WON’T do the work himself, and estimate repair costs based on materials AND labor. I would look at the example above and set the ARV at the $60,000 it actually is. That’s not to say that I never evaluate a property and decide it’s worth more than the comparable sales—sometimes, especially when there are no fixed-up sales, that’s the right thing to do.
But when I’m done with my evaluation, I always do a gut check, like this: would I, if I were the buyer, want this deal in this condition at this price? If the answer is no, I reevaluate my offer and make one that makes sense.
I have empathy with a lot of my sellers, but I also understand that I’m not a charity. Some of the people you deal with have serious, gut-wrenching issues in their lives. I’ve dealt with more than one seller whose main motivation was not just a death, but a murder in the family. And yes, I feel completely awful for these folks. I’ve sent food and gift certificates to sellers who were so financially strapped that they literally couldn’t buy groceries.
But at the same time, I know that it does them no good if, out of pity, I offer these sellers more money than I can a) sell the property for or b) pay for it myself, and have a profitable outcome. If I run my business based on charity instead of business, I’ll quickly be OUT of business and unable to help ANYONE, least of all myself.
I have been known to put deals under contract that I wasn’t sure I could sell and certainly didn’t want to own—but when I do, I’m very upfront with the seller about what’s going on. I tell them that I’ll do my best to sell it—and I do—but that if I can’t, I won’t buy it, either.
You can’t let a seller’s problems become your problems. Get rich running your business right, and give money to charities and individuals as you see fit. Don’t make your business a non-profit—it’s not good for you or anyone else.
I understand my place in the real estate world. What I do for a living is find motivated sellers and negotiate spectacular deals. I then offer those deals to investors who don’t have the time or inclination to find and negotiate them for themselves.
It’s not my job to sell properties to huge companies with well-oiled buying machines—they don’t need me, and there’s no reason to pay for my deals when they’re getting the same ones for themselves.
It’s not my role to beg people to buy my deals. They either recognize the value of the deal, for THEM, or they don’t. With each and every wholesale property, I have a valuable commodity to offer, and my job is to find the people who both agree that it’s valuable and have the cash to pay for it.
Not every buyer on my list wants every deal I have to offer. Some would even tell you that certain deals I’ve sent their way weren’t good ones, and they’re right…for one reason or another, the deal wasn’t right FOR THEM.
But every deal I offer is a great one for someone, based on their particular skills, resources, and preferences. When I find that person, we both make lots of money. That’s the business I’m in—not the business of being a desperate seller myself.
I’ve continued to learn, and I’ve applied my knowledge to my wholesaling business. I’m amazed at the number of pretty advanced wholesalers I meet who are completely ignorant about the rest of the real estate business. They do what they do, and they don’t bother to extend their education beyond what they need to know to assign a contract.
I’ve found my broader range of knowledge and constant continuing education helpful in a lot of ways: it helps me do creative deals that my competitors can’t; it keeps me abreast of changes in the market and in legislation that will affect my buyers (and therefore my ability to sell properties); and it keeps me from having that, “Duh, HUH?” reaction when a buyer asks me about some aspect of THEIR business (like, “What are the new EPA lead requirements going to do to the cost of rehab?”).
I don’t always know all the answers, but being educated over a broad spectrum of topics lets me relate to my buyers better and better understand how to “sell” the benefits of a deal.
I am certainly NOT espousing the “know everything before you do anything” philosophy of real estate, but I do strongly believe that the more you know, the more your real estate business will grow.