Ep 90 – The Wrong Way to Look at Buying a Flip

Most of the world doesn’t look at real estate and see a way to make money. Nearly everyone looks at it solely as a place to find a primary residence. We sometimes miss that since we’ve been surrounding ourselves with like minded people.

Adam Schroeder explores what some major media outlets are asking about home buying, and why you should never think like they do.

CBS Source for Clip – How Home Flipping is Affecting the Housing Market


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Transcript:

Adam 
Hey, Rent to Retires, it’s Adam Schroeder here for another episode. And today I want to talk about what the rest of the world is thinking whenever they look at the housing market. Because I think it is so easy to get wrapped up in our real estate bubble world, and not think about how other people are viewing the housing market. Because you go on websites, like BiggerPockets, for example, you listen to podcasts, like this one, you watch YouTube channels, hopefully, like ours, hopefully ours, let’s be honest. And you hear about real estate investors, you hear about the deals that they’re making, you hear about, you know, the numbers that are going on, you hear about the markets that people are investing in, and that starts to become your world. That is the part that people are looking at, and you’re thinking to yourself, Okay, people are investing here and making money here. And people are doing this, and people are evaluating based on this. And you start to think that everybody is thinking like that, because everybody around you, that you’re surrounding yourself with is doing that is thinking that and that’s a good thing. By the way, that’s a great thing. You need to surround yourself with like-minded people who are accomplishing the things that you want to accomplish.

But you also have to remember what the rest of the world is thinking. And the rest of the world does not have that investors mindset. The rest of the world is looking at housing, and not seen investment. They’re just seeing a place to live. They’re not looking at it like we are as a way to make wealth and get us where we want to go. And how do I know that? I know that for a very simple reason. You know, I was watching some videos online, and I saw one that talks about home flipping. And they talked about how home flipping recently has gone up to 9.6% of the homes being sold are being sold by flippers and how flippers, profit margins are being squeezed because of rising interest rates. And I listened to the interview with one of Axios as kind of home specialists, home experts. But I was listening more closely to what the CBS News people were asking her. Because they’re the people who don’t know, real estate investing. They’re the people who aren’t necessarily our competition. But they’re the other people. They’re the majority of people in the world and in the country. And there was a question that they asked her, that blew my mind. A question that when I heard it, I thought, are you kidding me? What kind of a question is that? And yet, it’s also a question I sometimes hear not that exact way, but in a variation from other investors. So let me play the clip for you right now of what was asked. And then we’ll touch on it here in just a second.

CBS CLIP
Really quickly, before we let you go. I’m curious, you say that the flipping happens really quickly. Obviously, that’s, you know, to the benefit of the person selling to the new person, but say you’re a buyer, and you can look at the history of the home that you’re interested in. And you see that it’s been bought by a flipper, doesn’t that turn you off of that property? Because you think, hey, you know what, somebody just bought this property a few months ago for far less, don’t people not want to pay as much, because you saw that they paid less lately?

Adam
Let me tell you something, let me remind you something. Who cares what the flipper bought it for? They were the ones who went out and found the deal. They were the ones who put the money into the property, who found the right people to work with who made this house, the investment that it could be, and they’re the ones selling it, they took the risk, they get the reward. It doesn’t matter if they bought the home for $100,000 or $1. They took a distressed asset and turned it into something that you can utilize to make money for yourself. That’s what they did. So, what does it matter what they paid for it? But that’s the mindset that some people have is if they paid this much for it back then why would I pay that much more for it now? Well, guess what? Because they didn’t just buy it and sell it straight to you. They took out a hard money loan probably. They took the time to find the deal. They took the time to close the deal. They had had to go through it and make up a scope of work for what they were going to do, then they had to actually do the work, they had to make sure the work was good. Then they had to go out and find a buyer. And then they had to put it under contract and get through the inspection, the appraisal, all of those things, making sure that the buyer was going to be happy with the finished product. And then they finally get to hand it off to you, after having the holding costs, after having the risks that they’ve taken. It’s not just a simple, we bought it for $70,000, we’re selling it to you for 140.

What do you do it just ignore the $30,000 that they put into the property because that doesn’t count, ignore the $40,000, let me tell you something, it does not take much to get a home to a price point that makes a lot more sense. I have a rental property, we’re in the process of selling that we put $13,000 into, to make it ready to sell. If we hadn’t spent that $13,000, we probably only could have gotten 60 $65,000 for the home. Even though in general it was in you know the bones of it were in good shape. We put 13 grand and we’re selling it for 120. It does not take a ton to get it up just to resale value, let alone to the point where you know, an investor can come in and have all that life left on the system that they need to make it worth their time. But don’t just look at what they paid for it recently. And think that that is some justification for you not paying the value of the property actually is. Remember, there’s a lot more to it, if they bought it for 30. And now they’re selling it to you for 150. They probably put a ton of money into that property. I mean, that property probably has 60 $70,000 worth maybe even more worth of rehab that was done to it. This is a property that they bought it two, three months ago, you would have walked right by it and thought, oh my goodness, what is that home. But they’ve taken that home. They’ve taken the risk. They’ve done the work. And now it’s a home that you stop and look at and go, well, dang, I wouldn’t mind living there or, Hey, that’s a good looking home, I would invest in that home.

That’s what they’ve done. That’s the part that when people look at this, they’re missing so many people are missing it is the fact is, it doesn’t matter what somebody else paid for the home that doesn’t involve you look at it from where you get involved. When you get involved does the deal make sense? When you get involved is this property going to cash flow for you and get you to where you’re going in your investing journey. Everything that happened before you put this property under contract is superfluous. It doesn’t matter. You should be happy to be getting a good deal. You should be happy that the flipper is making money so they will do more deals. So, you can buy more down the road. Real estate is a thing that everybody can win at. I’ve told this many times. It is a win win win win win win win situation, the original seller won because they needed to get out from under the house. The rehabber wins, because they bought the home, they do the fixing up, they sell and make a profit, you win because you are getting a good quality asset that is going to make you cashflow. Your lender wins because they are able to do the deal to get the and get paid for their work. The property manager wins because now they’ve got another door under management that they can make money off of with the tenant and their management fees and all of that your tenant wins because now they have a good quality home to live in. And the neighborhood wins. Because now that blight that was on the neighborhood is no longer a blight.

Now it’s a nice home inside the neighborhood. So, it’s making the whole place better, everybody can win. But if you go in there and think I’m going to stick it to this person, because they didn’t pay a whole lot there. And now I think, you know, they don’t deserve to make, you know the profit that they’re going to make. If I buy this home from them. That is the wrong mindset to have going in. You need to be going in there thinking, I’m going to pay a certain amount of money for this property, we’re going to make sure that it’s worth that amount of money I fully support and say that that needs to be done. And you’re going to get an appraisal and make sure that it’s worth roughly what you’re paying for it maybe a little bit more, maybe a little bit less. You know, if it’s less you can figure out a sales price that makes sense. And then from there, you make sure that it still works for you. But hearing this question just it sparks something to me drove me a little bit nuts. I’ll be completely honest when I heard it, because you’ve got to step out of that mindset. You’ve got to step away from it and not worry about the other parts of the deal that have already had happen, focus on you. And if you can do that, if you can focus on the deal, if you can stay in it, and worry about what happens from this point forward, that’s where you’re going to succeed. Look at this as a business, and you are buying the asset. And the asset is worth what the asset will generate, what?

And does that get you where you want to go, you don’t see, you know, Walmart going in there and saying, Well, you bought a sheet of plastic for $5. And now you made this toy, and you’re selling to us for $20. So that we can sell it to somebody else for you know, 25 Well, but the original sheet you bought was only $5, we’re only going to give you $7. That’s not how it works. They took the sheet, they molded it, they made what they were going to make another selling it. That’s the part that’s missed, you skipped over yada yada, yada did the good part. Little Seinfeld reference for those old enough to watch that show, but you can’t yatta yatta those things they happened, you didn’t have to be involved. That’s the beauty of being a passive investor is you don’t have to be involved in that process. It’s like, if you have somebody come to repair something in your home, and you agree that it’s going to, you’re going to pay him $300 for it. Who cares if it takes them an hour, if it takes them three days, you’re paying them for their expertise, you’re paying them so that you don’t have to do it. If it’s a choice between me paying him $300 for an hour or three days, and the same job gets done. I’d rather pay him for an hour. So, they get out and I can get on with what I want to do. So don’t think like that. Think about it. As I’m going to pay people for what they’ve done. Let them make their profit. Because I’m still in a position where it makes sense for me, and it’s still getting me to my goals. That’s how you need to be thinking. Think about it in terms of where we are today.

And where we’re going tomorrow. So that you can be a successful investor, and that everybody else can have success too. Because don’t try to make it a win lose situation. It can be a win, win, win, win, win win win win situation. And it should be that because if you’re going to sit there and wait for the flipper, who will sell it to you for a breakeven or a 5% profit. It’s never going to happen. You’re going to become that flipper, you’re going to have to get in there and do the work, which some people want to do not me, but some people want to do. And that’s fine. Do it, go for it. Fantastic. If that’s your real estate journey, take that real estate journey. But don’t expect people to do the work for free or barely making a profit. They took the risk, they get the reward, you still get a hard one asset that you can make money off of. So, I hope it’s been helpful. And just above got me. Maybe, maybe you want to talk about this because it’s a mindset I’ve seen a few times in clients, but whenever I see it on a CBS News story, it drives me a little bit nuts because I know that these anchors aren’t the only ones thinking.

Anyway, that’s what I got for today. Thank you so much for listening. Everybody head on over to rent to retirement.com to see what all we have going on to see these homes that the flippers have and the builders have that are ready for you that you can start making your cash flow in. That’s at rent to retirement.com. If you’ve got any questions, email us podcast at rent to retirement.com. That’s podcast at rent to retirement.com. we’d greatly appreciate a review on whatever podcast platform you use. So, head on over there and leave us a review helps us a lot helps other people see that we’re a podcast worth listening to. Again, thank you so much for joining me today. Talk to you on the next episode.

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