If you watch HGTV, you see plenty of people making money flipping homes. Have you ever wondered if it’s as easy as it looks on TV? In this interview with expert house flipper Joseph Smith, we find out the real story on flipping homes.
Interview 1 – House Flipping: An Insider’s Interview with Joseph Smith
Dan F.: Welcome to the first episode of our interviews. There’s been a lot of interesting talk lately about home flippers and the profit they can generate, which has caused a lot of boomers and seniors to investigate house flipping to know if there is a possible solution for increasing their income.
So, we decided to get in there.
There are a lot of house flipping seminars you can go that are real “rah-rah sessions” that tell you all the good things about flipping homes and how you can generate millions of dollars.
What we decided to do was to take another look at it and get down to the nitty-gritty of the industry. It turns out, a lot of home flippers decided that they really don’t want to get involved in the actual details of interviewing a seller, then negotiating a house, and putting it into contract.
Many people, instead, choose what they cleverly to call “ a buyer,” and today we’ve got of one the best buyers in the country. His name is Joseph Smith, and he has worked for as many as 5 flippers at a time buying homes. He’s going to talk to you today about the nuts and bolts of this industry.
Hey Joseph! How are you?
Joseph S: I’m doing well. Thanks, Dan.
Dan F.: Good, good. Do me a favor and give us a little bit of a background on what you’ve done about buying and flipping homes in the past.
Joseph S.: Okay! Looking at the past 12 months, I put on a contract on about 21 homes at an average of about 70 percent of their retail value—less than whatever it costs to get to that retail value, which we call “the estimated cost of rehab.”
Dan F: So when you say that you went out and bought 21 homes at 70 percent of the retail value, what is the retail value? Is it sort of an AVR or ARV?
Joseph S.: Yeah! We call that an “after-repair value” or an “after-rehab value.”
What we do is go into a market and determine the value of the home, based on the comparable homes in the area, in the same year, property size, square footage, bedrooms, and bathrooms. We look at what it will take to bring that home back to fully rehab value.
To get that number, for example, I looked at a 3 bedroom, 2 bath house that’s 2,000 square feet recently sold for $400,000, in San Diego. We are talking with somebody who has same size of house, probably the same plan, probably same builder back in 1970. That house needs $40,000 to $50,000 extra to get to that $400,000 number. So when I say 70 percent less rehab, it means 70 percent less than that $40,000 to $50,000 it took to get to $400,000. Does that make sense?
Dan F.: Okay, yeah sure. We will talk about that more in a minute. But before then, let’s talk about how you get these prospects. How do you find people who have homes that are less than market-worthy and that you can buy at discount?
Joseph S.: Well, the franchise owner spends a lot of money with their respective franchise groups in developing these leads. They use primarily direct mail campaigns and target people who probably have lot of debt, people who have a good loan to value rate so they have the equity in the home. They take homes within a median range of value. I’m not exactly sure how they do it, but they spend a lot of money doing it. They buy bus back [advertising], or ads on benches, and in some markets, they buy TV spots. They do that a lot now. They even buy billboard campaigns. So all those leads go into a system that eventually makes my phone ring.
Dan F.: Okay! So basically what you are telling me is that you work for a group of people who are part of a national franchise, as opposed to individuals going out to do their own thing. In these franchises and groups, they have a kind of marketing provision, leading generation provision. They drop direct mail; they put things at the back of buses and maybe billboards or things like that to actually drive a phone call to you, is that right?
Joseph S.: Right!
Dan F.: Okay! Is that normal? Is that how majority of the people do it, or is that unusual?
Joseph S.: I don’t think the majority of the people can do it because of the overwhelming cost. I mean, the cost-per-lead is almost $1,000, and you can get that over many franchises.
Dan F.: So! Just getting that phone call—because of all the advertising that’s involved—costs $1,000? Correct?
Joseph S.: No! Not just the phone call. The phone call itself is probably $400-$500.
Dan F.: You and I talked prior to the phone call, and you mentioned that in addition to those types of leads that are generated by the franchising company, they are also expected to generate about 50 percent of their leads on their own. Is that right?
Joseph S.: Right! Right! The individual franchises are expected to go out and generate their own leads. They call them, well I don’t know what they call them, but they do it by going out there, finding homes that they believe are not in the best shape. I always thought that to be kind of insulting: Knocking on a person’s door and saying, “Maybe I can fix your home and take a discount on the sale price.”
They are expected knock on doors, and have relationships with relators, brokers, and other investors. A lot of times, investors will buy from other investors.
Dan F.: So, basically what you are saying is that they are home-grown leads that maybe run around their neighborhoods seeing homes that needs to be repaired, maybe knocking on their doors and saying, “Hey! You need to sell your house to me at a discount,” correct?
Joseph S.: For example, when I’m going on appointment for some franchises, I am required to go round 10 or 15 houses and hang door hangers on the homes that I thought might be the kind to explore for this process.
Dan F.: So I’m getting the indication that generating these leads can be really tough and pretty expensive.
Joseph S.: Yeah, it can be very expensive if you don’t do it right.
Dan F.: So in your case, you are working primarily in California. On average, what was the cost of an actual sale if you took $400-$500 per lead? What was your close rate?
Joseph S.: Well, that depended on the market, really. I primarily worked in San Bernardino in Riverside county markets. I did some in San Diego and Orange County. Now, the more expensive the home, then more expensive the cost per deal was. So, on Riverside County, you can count on an average of $6,000 per deal transaction, but if you are in San Diego or Orange County where the houses are twice the price that they are in Riverside County, you could well expect the cost of acquisition to be $12,000 to $15,000.
Dan F.: Okay! So right after that you have to cost $5,000 to $15,000 just to acquire a single customer, right?
Joseph S.: That doesn’t even involve all the other costs included, like franchising fees, paying me, and closing on the deal, if that’s the route they chose to go.
Dan F.: Okay! The reason why I’m really trying to home in on this is those “rah-rah sessions” on the weekends that make it look like they buy the house for $300,000, they sell it for $500,000 and they pack up $200,000. It’s far from that, correct?
Joseph S.: Right! And I love the franchises I work for. They hire me additionally because they don’t know anything about the business. They just signed up and so the smart thing to do is to hire someone that has done it a couple times.
DAN F.: So again, we want to get to the outline/anatomy of an actual transaction in a minute. But take me through the process. Once you get that lead, how do you actually make that appointment? What do you do to make the person to allow you to come out, look at his house, and give him an offer that you know is lower than what he is expecting?
JOSEPH S.: Well! From the start, when my phone rings, I have someone on my team whose job is to answer the phone. He is ready from the script provided by the franchise that basically says that we are discount buyers, that we don’t pay for retail but we’re going to offer them cash now. Pretty much anybody with a heartbeat, we will try to go out and see so we have a really good success rate. Once we’ve gone out to the home, we sit with the homeowner for an hour or so and just try to figure out why they called you. There are some reasons they will take a discounted rate, instead of going to the realtor, or renting out the property, or waiting to sell it for full price and fix it up themselves. Nobody wants to lose money so there is a reason why they called us and our job is to try to figure that out.
Then we will walk through the property to figure out what it will cost us (if maybe their roof was leaking or maybe their kitchen needed a rehab) in order to get to that ARV number we were talking about. I’ll need to show them pictures of other houses on their street and why they sold for $400,000. I’ll need to show them more like, “Look at this kitchen and look at your kitchen. This is what we have to do in order to get that number.” Then we can tell them it’s easier you do it yourself or this is the number we can get to you. It’s always shocking to them when you sit across the couch and say, “Your house needs $75,000, in rehab costs in other to get to the number.” They already thought the house is worth more. It’s a bit of a shock and a lot of times they don’t take it well. They can be a little tender at times.
DAN F.: So! How would you get that presentation without literally getting you another house?
JOSEPH S.: Well it comes with that first hour when you are sitting there building rapport with the customer. When you ask them why they are selling it with us and listing their options and being honest with them. I tell them, “You can sell this house on the real estate now probably for much less, you can sell it to me, or you can spend the money to rehab it to get the maximum value out of it.”
I get to know why they are selling it. A lot of times, it’s an emergency situation like they are leaving town. They needed the cash for one reason or the other. This isn’t the same situation that every homeowner is going to be in. It can be some kind of need that they need to get the cash now. So you sit there talking with them for about an hour building that rapport/relationship with them so when you do drop that price on them—which is sometimes half of what they are thinking—you’ve hopefully built up enough rapport to get you another house.
DAN F.: So I’m getting the sense that there is really a lot of selling going on in this presentation. I mean it’s a lot more than just walking into the house and determining that it needs $30,000, of work and that the normal house in that area would sell for $300,000 if the work was already done. So you have to offer the $30,000 less for the repairs, then you are going to make a profit because you are going to offer them even less.
So it’s not like you are going to say, “Well, there’s $30,000 worth of repairs so I’m going to give you $300,000.” At some point, you are going to offer them close to $250,000. At that point, how many people on average accept your offer? How many appointments do you have to go through before you finally get someone who says yes, or goes and signs the bottom line?
JOSEPH S.: Well! I can cover a really large area. Sometimes I can have 20 appointments without getting anybody to sign a contract. But on average, the 200 appointments I’ve gone on, I gotten somebody to sign about 1 in 12 appointments. So it took me a dozen people to get one deal.
DAN F.: So you went out and essentially sat through this process 12 times just to get one deal?
JOSEPH S.: Right! And I thought that’s really better than the company average. If you talk to many people, they went through a hundred appointments before they got one. I know a guy that went through 50 appointments before he got one. I was really fortunate.
DAN F.: The reason I want to emphasize on this point is because this is what they really never talk about at these seminars. They just say, “Go find houses and either buy them yourself and flip them or turn them over to a wholesaler.”
They never talk about what it really takes to do one of these transactions. So you’ve got to be willing and good at it to get 12 of these calls before you actually get one. Then if you are not good at it, it can take you a lot more than that. If it’s taken you more than that, then your cost for each transaction is increasing like crazy, isn’t that right?
JOSEPH S.: Right! It’s far beyond coming over to one house and saying, “Look, that house over there was sold for $400,000. Here’s what I think the rehab’s going to be.”
Click Here to continue with Part 2: House Flipping: An Insider’s Interview with Joseph Smith