Chas Carrier – Scaling Your Real Estate Investing Business

Mike: Welcome to the FlipNerd.com podcast. This is your host Mike Hambright, and on the show I will introduce you to VIPs in the real estate investing industry as well as other interesting entrepreneurs whose stories and experiences can help you take your business to the next level.

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So, without further ado, let’s get started.

Hey, it’s Mike Hambright. Welcome back for another FlipNerd VIP interview show. Today I have with me a good friend of mine, Chas Carrier. He’s a fellow HomeVestors franchisee, and he’s bought and sold a ton of houses. He’s one of the top guys in the franchise system, year after year, and buys 100 plus houses a year, has really build a model that’s been scaled up. So, we’re going to talk to Chas and learn about some of the secrets of building a successful real estate investing business and scaling that out.

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Mike: Hey, Chas, welcome to the show.

Chas: Oh, thank you Mike. I appreciate it. It’s a new experience for me, so I’m excited about it.

Mike: Yes. Good. Good. Well, you’re somebody that I’ve known for a long time. We’re obviously in the same system, the HomeVestor system, and you’re obviously very highly respected in the franchise system and really the investor community. It’s interesting how a lot of independent real estate investors are not known, let’s say, outside of our system, because there’s really no kind of national consortium of successful real estate investors or anything like that.

But why don’t you introduce yourself. I mean, I obviously know you well, but tell us a little bit about your background and maybe how you kind of fell into real estate investing, because you came from, like myself, a nontraditional path, kind of a corporate refugee.

Chas: Yes. Sure Mike. My background is corporate America. I originally was a chemical engineer, but I always figured that I’d go back and get an MBA. So, I did that after a couple years and worked for big oil, worked on Wall Street for a while, had a pretty long run with Pepsi and then ended up running a medical equipment company for a Swedish parent. So, my experience was totally corporate, and I figured . . .

It wasn’t what I . . . Sometimes was good to me, but it wasn’t really what I had envisioned when I was younger. It just sometimes stick your head up, 10 or 15 years later, and there you are, kind of with career momentum, and I always wanted to do something on my own, and real estate was something I always had a passion about, but I honestly thought that ship had kind of sailed.

Mike: Yes.

Chas: I ended up, actually, chasing, you’re chasing the corporate dream, and so you’re zigzagging, you’re changing companies, you’re zigzagging through corporations. You’re moving different places, not living anywhere very long, and I found myself up in Rochester, New York, and I was in a business that… well, in a medical equipment business that I had not been in that industry before. I wasn’t terribly passionate about it. I wasn’t crazy about working for the Swedes, and I was living in Rochester, New York and freezing all winter.

Mike: Yes.

Chas: So, I just decided I wanted to do something different. So, I had a three-year contract with them, and when that expired, I decided I was going to change jobs and probably go do something else in the corporate world. But I kind of ran upon the ugly house sign and just said, “Hey, I’m going to call those guys.” I just always was a little intrigued by the sign, and when I called them I was a franchise operation and I had been with Pepsi for a while, had been on the other side of franchising.

So, I kind of knew a good franchisor when I saw one, and I thought they had a model that would help me scale up. I would have never done it on my own, just because I . . .

Mike: Right.

Chas: My corporate path was good enough that it wouldn’t have made a lot of sense to go out on my own, but I thought I could get there a lot faster with the franchise system. So, I ended up signing up, back in 2006, and here I am, eight years later, probably have bought around 7 to 800 houses at this point.

Last year was our biggest year. We did 125.

Mike: Yes. That’s amazing.

Chas: So, quite a bit. That’s a lot of transactions. Takes [inaudible 00:05:02].

Mike: Yes. So, talk about . . . I know we have a lot of similarities in the sense that in the corporate world you find yourself probably a lot like me, where you’re always working hard. I mean, I’ve always been a workaholic. Whatever I do, I’m working hard, and you have these realizations every once in a while that you’re working really hard for somebody else.

Of course, there’s opportunities to get promoted and things like that. Some of my realizations were where the path, I seemed to be the golden boy, and the path was well laid out, and then something was, the rug was ripped out from under me, because of somebody I was connected to that you know, I was their guy, or because something happened in the company where they were flying high and now they’re hitting hard times, or whatever, that just impacts you. And I think the realization of, that you really have, in a lot of major companies, you really have very little control over your destiny.

Chas: Yes. I think, in today’s world, it’s not like it used to be one our fathers were growing up. In today’s world, I think, you’re only security is your skills in corporate America. And you have to accept that, like you said, if there’s a change in regime or something like that, no matter how good you are, you’re probably going to be going out with the old regime . .
.

Mike: Yes.

Chas: . . . and you’re probably going to have to try to connect with somebody else in the industry or else go change industries, and that’s what makes this a little bit different.

You have to go out and set up your own business, and you control it all. And that’s one thing I know that’s completely different for me, Mike, is I realize now, when I was in corporate America, the corporation was the bank. So, you really had no sense of cash flow and treasury functions and stuff like that, and now, all of a sudden, you run your own little business and, every functional area, you have to have at least a marginal level of proficiency, in order to run it.

So, you’ve got to know how to raise capital. You’ve got to manager cash flow. You’ve got to, you know, you’re filing all your various tax returns and making sure you’re complying on regulatory basis. So, it’s very different.

Mike: You’re doing it all. Yes. You can’t just go to HR and say, “I need to hire somebody.” It doesn’t work that way. Chief bottle washer.

So, talk a little bit about, you know, one of the things that separates you from most other people is just the fact that you’re running a high-volume shop, and, my biggest years, we probably did 65, 70 houses. But this is a difficult business to scale. I know there’s a lot of gurus and folks at talk about they do massive volume, but I think that they’re shuffling paper around and making a couple of thousand dollars here and there a little deals.

But to really run a ship or you’re looking at houses, you’re touching them, you’re owning them, turning them around; this is a difficult business to scale. So, talk a little bit about your thoughts on building a team and some of the challenges with scaling a high-volume real estate business.

Chas: Yes. It is challenging, because, even though we’re relatively high-
volume, you still don’t have a lot of redundancy in each position. I’ve got a couple buyers, one person who probably only does my wholesale operations. Of course, you can leverage the industry for doing retailing, and you’ve got to set up a pretty good structure for your rehab. And, for me, it’s basically, I guess the linchpin there is a construction manager, and then everything else’s kind of an outsource, you know, ship them around.

You’ve got to have great partners in some of the key functional areas. You’ve got to have a great admin staff. The admin staff ends up becoming really key, because that’s the linchpin. A lot of functions come and go. You will have a buyer sometimes who says, “Well, you know, I’m doing this for Chas, but maybe I can go do this for myself.”

Mike: Right.

Chas: I think the very nature of the people who get into this business, they are entrepreneurial, and they aren’t corporate people, probably, for a reason. They don’t play quite as well with others as . . . And they’re not really very political. So, they’re probably always looking for an opportunity to do things on their own.

But it’s really your admins who form the foundation, because they don’t tend to be that way. They tend to hang around and be loyal, just like the admin’s you had in the corporate world. So, if you can get that part of the operation really stable, I think that ends up being something that you can really kind of rotate around, and, as long as you keep a good network out there a buyer leads, you can find a buyer. If a construction manager needs to be changed out, you can go do that.

Mike: Right. Why don’t you talk a little bit about your kind of exit strategy. I know you’re primarily, first and foremost, still assigning and wholesaling. Is that right?

Chas: Yes. We are, and running multiple [inaudible 00:09:35] strategies is essential, but it’s hard to be great on it all of them.

Mike: Right.

Chas: We started out, I think, being very good at wholesaling and assigning properties and pretty pedestrian in retailing, and I think we’ve gotten better at retailing, over time. But one of the challenges still is, once you find that you’re good at a couple exit strategies, is deciding which way you want to go and why, to make that decision early on in the game.

You’ve always been a retail first, and I actually think I like that model a little bit better, because, if you’re wholesale first, you pretty much means that your best properties are going to get taken up, unless you really price them a. Maybe you end up saying, “I will only sell this property if I get an offer that’s too good to refuse,” and, in today’s market, occasionally you are getting that offer . . .

Mike: Right.

Chas: . . . but, if you’re willing to just take a nice assignment, what ends up happening is all your good retail properties go to somebody else and then you sit around and say, “Are some of these ones left over, do I end up rehabbing them or do I hand up turning them into rentals or something like that?”

So, I think you have to be real careful. There is a saying in this business but you should, you know, “Don’t enter until you know your exit,” and I think you at least have to have a sense . . . I think, with every property, you certainly have a strong, number-one strategy that you plan on doing with it, coming out of the gate. And then, of course, you’ve got to have the ability to call an audible if you misread the market a little bit or if something unusual happens.

Mike: Right. Right. So, why don’t you talk a little bit about, we were talking kind of the importance of the team and everything. One of the things that I’ve found is, I still personally try to look at every house that we buy, because my money’s on the line or, at least, money that I’m responsible for, and just some of the natural kind of bottleneck stuff that, as an owner, as the person who’s on the hook, that you can’t replicate yourself.

Talk a little bit about that situation of . . . I think, and a lot of other businesses, it’s easier to find a manager or somebody who can make decisions for you, because they’re smaller-dollar items, but, in the real estate business, one bad buy can really hurt you for a while. So, talk a little bit about your thoughts on how, as the owner, you tend to become kind of the natural bottleneck, in terms of some of the things.

Chas: Yes. That’s fantastic point, Mike, and that is the case. I think that you really have to be a good delegator, and I probably don’t delegate as much as I should, and I need to continue to do more. Of course, certain things you can’t delegate. Like you said, unless you plan on taking on a fair amount of risk, you’ve got to get out [inaudible 00:12:17] all the houses that I’ve bought, certainly less than ten percent have happened without me looking at it.

Mike: Yes.

Chas: So, that’s really important.

But you do have to try to figure out what are the things are that could really burn you that you have to stay involved with and what are the things that you can delegate to somebody, providing that you develop a [inaudible 00:12:47] being proficient at it.

Mike: Right. Right. So, what do you think about, talk a little bit about, I guess, how you made the jump from having some . . . It was the same way for me. I had an interest in real estate investing. I don’t really know why. Maybe from growing up watching This Old House. I guess my dad was very handy and fix things up himself. Of course, I do nothing now. I don’t do anything myself. But there was always an interest there in it, and it wasn’t all about . . .

I guess, in the early years, for me, it wasn’t about the financial freedom or flexibility with my time or things like that. It was more of the transformation from taking a house that was ugly to making it look nice. I guess my early interest wasn’t necessarily about the money.

Then, of course, is you get older and you start to realize your opportunity cost of doing this or something else, you have to think about it from an opportunity standpoint, relative to leaving a job or something like that. But I think there’s a ton of people who are like you and me, or are like you and me, where they haven’t done anything yet. They haven’t made that leap, but they have an interest in real estate investing. Talk a little bit about that kind of phenomenon and maybe what more people should do or how they kind of make that leap.

Chas: Yes. There is an opportunity cost, and I think, traditionally, this business hasn’t been loaded up with MBAs and stuff like that. But I think it is changing, that there’s more sophisticated people getting in and doing it, and we’re seeing, I mean, we are seeing some big companies come in, hedge funds come in, in doing things that were never done before. So, there’s definitely some of that now, and, probably, there’s someplace for people to go into those kind of opportunities, should they choose to.

But I think it’s so gets down to somebody who is pretty creative and who is certainly willing to work hard, particularly at the beginning, to get the business set up, and then somebody who really is able to effectively evaluate people and make sure that you can retain them.

I think, for me, it was . . . I always was interested in houses. Don’t know why. I was one of those guys who would walk around on the weekends and stick my head into houses and things like that, and I had never really swung hammers much, and I certainly haven’t in this business. It’s really one of the things that I dislike is that out some functional level I don’t know the business as well I wish I did sometimes, and I don’t have the time anymore to kind of hang out for a day and watch the rehab take place.

But I certainly know it conceptually, but, in terms of some of the fine points of it, it would be fun to know it, and I’m kind of jealous of the people who kind of grew up in the business and do know it. But it’s trying to figure out, I think, what you’re good at and leveraging that and then finding a way to delegate or outsource the things that you either don’t find particularly interesting or you’re not very good at.

Mike: Yes. Yes. So we talked a little about, you mentioned hedge funds and some of the folks coming in, which, at this point in time, are causing a lot of pressure on folks trying to buy houses and even folks trying to, traditional homeowners are, people who are looking to buy houses, even at the owner-occupant level, it’s pushing prices up and things like that.

What do you think is going to happen over the next year or two, in terms of
. . . Inventories are obviously at record lows. Days on market are low. But that’s putting, the fact that hedge funds are coming in and paying prices way above what we traditionally pay, they’re kind of shifting the entire supply chain. So, what you think is going to happen over the next year or two in terms of those pressures?

Chas: Yes. That’s a great question, Mike, and it really is hard to say.

Mike: You don’t know the exact answer of what’s going to happen?

Chas: Yes. Property management in this business is tough, and you burn up a lot of money doing it effectively, and, while I respect some of the bigger property management companies, I’ve yet to see, really, execution, in those kinds of companies, that I’ve seen, like back when I was corporate world, which just says it’s tough to do. Even Buffett said that when he said,
“Hey, I’d own billions of dollars worth of it if I could figure out exactly how to manage it,” and I’m not sure the hedge funds have totally figured out how to manage it yet.

Mike: No.

Chas: Hedge funds have a way of not really showing exactly what the results are for a while, and then they also have a way of positioning the results with restructuring costs and reserves and stuff like that. So, sometimes they, the results end up looking better than they really are. So, I think the report card has yet to be written on what the hedge funds are really making the returns that they say that they’re going to make.

But they are changing the marketplace, and it’s hard to find houses that used to be. You can definitely sell them at a higher price when you find them, but you’re always little bit worried, is there some sort of a bubble there if any of them chose to exit?

I think the good news is, now, the bubble that really caused big problems back in 2008, 2009 was really a financing-driven bubble. It was driven by easy credit and just, effectively demand was artificially increased by too many people having access to capital.

Mike: That’s kind of what’s happening now, with the hedge funds, right? I mean, they’re borrowing money at four percent and they’re paying premium prices, especially in markets throughout the Midwest and Southeast, maybe the Southwest little bit, just in the lower price markets where, you know, if you have four percent patient money, you could probably pay full retail price for houses and turn them into rentals, as long as you can manage them effectively and make that make sense relative to investing on Wall Street.

Chas: Yes, and I don’t know what they’re promoting as their rate of return, but I’m sure it’s not four percent. Now, they’ve obviously got some leveraging techniques and stuff like that to bring that up, but you’re right. On the wholesale side, stuff is being artificially bid up, and it probably has some ripple effect over to retail.

But I guess what I was saying is it was really the easy financing on the retail side that drove the whole market before, drove way too much house construction and all that kind of stuff, and I don’t see that happening yet, but it is happening a layer beneath it, and it will be interesting to see what does happen there.

Mike: Yes. Yes. It’s interesting. It will be interesting to see what the hedge, it’s a broad brush to say “the hedge funds,” because they’re all different, but that some of these folks, they tend to create bubbles, right? So, they’re going to traditionally package these up and sell them to somebody else who may be doesn’t know what’s in the bag until sometime down the road, and then there, presumably, will be, the bubble will burst in the real estate market and some markets and create more opportunities for guys like us who are independent investors. But do you think what they’re doing right now is sustainable?

Chas: I don’t think so. There’s a reason why it stayed the way it did for a long time. And you and I find it’s a difficult business to scale, even at our level. These guys are trying to scale it in a huge way, and I haven’t had a chance to really observe how good their property management is and things like that, because it better be good.

Again, the good news is you can get a decent return. You can create a pretty good cap rate even with some reasonably high level of vacancy and maintenance. If you’re buying them at discount, you can certainly deliver seven percent, eight percent, nine percent pretty easily.

But, for these guys, you hear them talk about 10 percent, 12 percent cap rates, you know, rates that they’re going to return to their investors, and they better property manage pretty well to do that or else they may have some leverage strategy that I’m not aware of, underneath those funds, but I’m not sure.

Mike: Yes. Yes. So, in terms of traditional, it’s different every market. You obviously operate in the DFW area, but what are some of the pressures you see that are on the real estate market right now, with the reduced inventories, the fact that the builders were, for all intents and purposes, in a lot of markets, pretty much gone for a few years, and they’re coming back now. But that’s putting pressure on preowned homes, because I don’t think they can keep up with supply of new homes.

Chas: Yes. They say that is still – that financing is still pretty tight for builders, and even though it’s bounced back, when it drops 70 percent or 80 percent . . . It’s funny how you say, if the rate was . . . In the Dallas area . . . I can’t think of the numbers off the top of my head, but if it was at 100,000 and it went down to 30 and then people say, “Well, it’s doubled,” that’s only back to 60. So, you’re still 40 percent down from what it originally was.

And, in a place like Texas where the demographics are good, I don’t think they’re going to be able to keep up. So, you are going to have, I think, good, potentially, appreciation opportunities on single-family that you maybe haven’t seen in markets like this before.

Some of that, of course, ends up being dependent on economy and interest rates. Interest rates are always the key in this business, and if they go up a couple points, it does change the game.

Mike: Yes. And they’ve got to go up at some point.

Chas: Yes. And it’s just like anything else, Mike, you’ve got . . . Right now there’s probably too many participants out there, probably too many investors chasing too few properties, because the industry kind of got build up based on all that foreclosure pipeline that was there, and once I got cut in half or so, then you’ve got, again, more people scrapping around for less properties.

Right now, they’re selling at very good prices, so you can still make, you can still do well. But there’s challenges there, and it’s like every other industry, the strong will end up surviving and some will fall by the wayside.

Mike: Right. Right. So, what you think, just generally speaking . . .
Obviously, it’s a very competitive market right now. There seem to be a lot of new people coming in, because money is a little bit easier than it has been in years past. Some folks are acting as feeders to these hedge funds, and stuff like that, are somewhere along the supply chain. So, there’s some opportunity for them to come in and buy houses.

We had a retail house that we just put on the market last week and got a full-price offer. In fact, we ended up selling it above asking price, to an actual owner-occupant, but a full-price offer from somebody who’s . . . It was a full market value house, completely rehabbed, that was feeding into a hedge fund.

But what about opportunities for folks to kind of come into the market, across the country? Any advice on kind of how to get started in the industry or how to get their career started?

Chas: Yes. You definitely have to hook up with some people who know what they’re doing, at this point. It’s so competitive right now that, I think, coming in and just doing it on your own is a bit of a challenge. So, I think you’ve got to hook up with some people who know what they’re doing and that you can know and trust, because, as you know, in this business there’s a fair amount of hype and kind of big talk that really isn’t always substantial. So . . .

Mike: Right.

Chas: . . . you’ve got to hook up with somebody that you know and trust, and it all starts with finding properties. I think that that’s always been the biggest beating in the industry, and it remains that. You’re trying to find properties that you can buy at the right prices, so that you can move them on.

We’ve seen both buy-side models and sell-side models. HomeVestors is more of a buy-side model. We’ve seen some of the other people in the markets who are, you definitely work more to build huge investor lists and are more of a sell-side model.

Mike: Yes. Great. Great. Great. Also, Chas, well, hey, thanks for joining us today. I’m glad we could pick your brain a little bit on how to build a team and what’s going on in the industry and, obviously, to learn a little bit more about your background.

Chas: Thank you, Mike. Great speaking with you.

Mike: All right. Take care.

Chas: See you.

Mike: Thanks for joining us on today’s FlipNerd.com podcast. To listen to more of our shows and hear from incredible guests, please access all of our podcasts in the iTunes store. You can also watch the video versions of our shows by visiting us at FlipNerd.com.