We’re In The Arithmetic Business
“I’m not in the real estate business, I’m in the arithmetic business.”
It was like a lightning strike hit me right between my eyes. I was in my early 40s and this 60 — something gentleman (we’ll call him “Frank the Flipper”) decided to impart some hard-fought wisdom on the young whipper-snapper (me) standing before him. He’d flipped hundreds of properties. He owned more rental units than I could count. Frank had made it.
Me? I was flailing, failing and losing heart rapidly. Fortunately, Frank took pity on me.
When I first began my real estate career the grand plan was a pretty common one. I read Rich Dad, Poor Dad. I had my plan. I would flip a couple of houses, take the proceeds and buy a multi-family. Get a little passive cashflow. Rinse and repeat. Get to 100 units and retire on a mountain of passive income. Easy.
My rehabs were beautiful…works of art. But I wasn’t getting the premium dollars and they were taking way longer to sell. I couldn’t figure out why someone wouldn’t pay $250,000 for the nicest house in a $200,000 to $225,000 neighborhood. I should have been killing it.
In reality, I was barely making it. I didn’t lose money on my first few flips. I made a few thousand on each of them. I expected to make $35,000+. I was making below minimum wage. That’s a lot of effort and a big miss, financially.
I’m a numbers guy. So figuring the financial model out was not the issue. Buy the property well (65% of ARV max) minus rehab and carry costs. Make my offers. Get them under contract. Finalize my financing. Close on the deal. Execute my rehab plan. Make the house the nicest in the neighborhood. Hand the property to our realtor (Ali). Then, sit back, wait for Ali to sell it, and count our money.
What I didn’t get was making the house a trophy…a place fit for a king…wasn’t necessarily the goal.
The goal was to bring these properties back to life, inline or a little better than the neighborhood.
My properties were over-rehabbed and over-priced. My carrying costs were more than expected. Ali told me right from the start. I didn’t believe her. Only until I dropped the price in line with the market, did they sell. Ali was my saving grace.
She consistently sold my properties at or near the top of the market. The properties also stayed on the market 30+ days longer than the market averages, because I demanded a premium over the market..against Ali’s advice.
My ego got in the way of doing business. Of course buyers would love my babies (properties) as much as I did.
Not so much.
Some people (most buyers?) didn’t care about fine Italian tile, hardwood floors throughout, professionally landscaped front/back/side yards, fancy baseboard, and trim, high-end kitchen cabinets, or marble countertops. Our houses were nice…really, really nice. But the buyers didn’t care. They simply wanted a nice, well-appointed, clean and safe place to call home.
I needed to change my approach. I needed to make investments that brought the property up to local market standards and do a little extra to make them stand out. If I decided to invest a little more, it needed to be tied to selling the property faster, not necessarily for more money.
Carpet in the bedrooms was OK. Solid, all wood cabinets are fine. I didn’t need to spend a ton of money on landscaping the entire yard. Upgrading the curb appeal, was enough.
I’ve been in sales and marketing my entire professional life. You’d think I would have remembered the most important factor in that relationship…
Know Thy Customer.
Talk with your real estate agent about what their customers are looking for. Pay close attention to the neighboring houses. Introduce yourself to the neighbors and even ask their opinions.
We’ve grown to flip 20+ homes a year, in addition to new construction projects and our commercial multi-family properties, but the bottom line is the same. When you are running the numbers, know your target customer, build and execute your plan to hit that target.
Frank was right. We’re all in the arithmetic business.