Rehabbing to Maximize Profit

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And now, let’s get started with today’s show.
Hey, it’s Mike Hambright at flipnerd.com. Welcome back for another exciting VIP interview, where I interview successful real estate investing experts and entrepreneurs across our industry to help you learn and grow.
Today, I’m joined by our friend, Jacob Ash, who is a co-founder of Gentry Real Estate, which is a very large Arizona brokerage that is probably the largest buyer of homes at auction in the state of Arizona. They bought thousands and thousands of houses. Jacob and his team have not only bought thousands of houses, they have a tremendous amount of experience rehabbing and reselling properties. And today, that’s what we’re going to talk about, what it takes to put out a great rehab that you can sell and maximize your profit. Given that a lot his background is in auctions, making sure that you don’t overpay for it, and that you buy it right to allow you to rehab it right and still make a profit.
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Hey, Jacob. Welcome to the show.

Jacob: Hey, Mike. Glad to be here.

Mike: Yeah, yeah, good to see you again.

Jacob: You too.

Mike: So, yeah, we had your partner on, Spencer, a while back, talking about buying houses at auction. And you guys have done just a ton of volume, right? Share a little bit of your background with us and kind of tell us what you guys have accomplished at the auction.

Jacob: Sure. So Spencer and I have been business partners for about nine years together. We actually worked together at a different firm, a property management company, where the company had 1,500 homes they managed and we were on the sales team there. We had always worked with investors and it had always kind of been our niche, but we also felt the need to branch off and start our own company. So, we started Gentry Real Estate Group, like I said, about nine years ago.
Before the auction craze took off, we were just working directly with builders, going to builders and saying, “Hey, sell us a percentage of your sub-division for a discounted price.” And they would do that, so we were working with some of the big builders for that.

Then we kind of just fell into the auctions because one of my good friends contacted me about a property selling. So we bought that, and actually, the funny thing is, we had just purchased a property from the builder for, I think, $80,000 and then that same week, he gave us the same property in the same sub-division at $65,000 he had just bought at auction. So we said, “Wait a sec, we’re missing something here. We need to be buying the stuff up at trustee sales.”

So it was actually before the crazy increase and influx in properties that we have. But we have been buying down there aggressively for about seven years and we’ve purchased a little over 10,000 properties down there at trustee sales, on behalf of investors and clients.

Mike: That’s incredible. And some of those are for you and some of them are on the behalf of other buyers. I mean, you guys run an operation where you’re buying for other people as well, right?

Jacob: Correct. Yes, the majority is for other clients and investors.

Mike: Yeah, yeah. And for a lot of folks that don’t know, you guys have auctions Monday through Friday, every day of the business week, right?

Jacob: Monday through Friday, and I mean we’ve been in several counties. Not only is it Monday through Friday, but you have auctions at 9 a.m., 10 a.m., 11 a.m., 12 p.m. and 2 p.m., so it’s throughout the day, as well.

Mike: That’s crazy. I actually don’t know a whole lot about the auction scene, other than in Texas it’s once a month and a lot of states it’s once a month. You’ve got to run a major ground operation to be able to vet properties and be prepared every day to go to the auction, right?

Jacob: Absolutely. We have a crew of about 20 or 30 guys and gals that it takes to put the whole thing together and make sure it runs smoothly.

Mike: So in Arizona you’ve seen a lot of ups and downs and as we talked about a little bit beforehand, pretty much every place right now we’re entering much more of a seller’s market than what we’ve seen in many years. I know my strategy with rehabbing and exit strategies have changed with different markets. I know you have a lot of experience. I know we’re going to dive into this a lot deeper, but how do you differentiate how you rehab houses today versus when you had to be the nicest house on the street a few years ago?

Jacob: Sure. You still want to make sure you stand out, obviously. You’re buying these houses at trustee sales, so the houses have been neglected, some have been vacant for years. So you want to make sure that you purchase it and turn it into something amazing. The difference is, in today’s market it’s all about turning properties. The more properties you turn, the better return on your money you can get. So it’s really just a turn game. You want to move your inventory as quickly as possible.

Mike: Yeah. Well, before we get into kind of some tips and stuff on rehabbing and what to do or make sure you do, talk a little bit about how you buy at the auction, which many times are sight-unseen, you have to make some assumptions about what’s going on on the inside with the blinds closed and all the games you guys play to figure out how to get access, or to make assumptions. But talk about, this seems scary to me, I mean you know my background of going in to look at houses and things like that. We really understand what we’re getting into. Therefore, you can properly assess how much you’re going to spend on the house and you can feel comfortable with the offer that you make.
But you guys are going in, at least half-blind a lot of times, how do you know what your maximum allowable offer is going to be, to be able to do what you need to do on a house when you can’t even see it most of the time?

Jacob: Sure. It’s one of those things, like you said, you do the best you can do with the amount of information that you have. What we provide for our clients is we actually have a team of seven or eight drivers that head out every morning at 5:00 a.m., crack of dawn they get up, and they’ll drive all the properties. We’re covering obviously quite a few counties. We buy in Pinal County, Maricopa County, Pima County and Navajo Country in Arizona, the four most-populated counties in Arizona.
They’ll head out, they’ll drive all the properties, and they’re taking pictures. Our drivers are like ninjas. They’ll climb through windows they’ll do whatever they can as long as it’s vacant and they’ll get permission from neighbors and things like that so everyone knows what’s going on. They do the best they can.

Obviously there are some times, like you said, the blinds are closed, the doors are locked, there’s no way to determine. In that case, you just have to make sure you pad your bid saying, “All right. Worst case, the kitchen is going to be gone or the piping is going to be stolen,” which happens very, very rarely. But you just have to pad your bid to be able to adjust, if need be.

Mike: Yeah, how do you balance between kind of padding your bid like that and just the general challenge of the auction? It’s easy to get out-bid and you want to win and it’s the winner’s curse. “We need to win that deal.” I assume sometimes in your head, or your clients’ heads that you’re buying for, they start to say when they’ve made their offer, “This is how much I’m going to pay,” and they say it’s based on some assumptions of, “Well, the bathrooms probably need to be re-done,” for example, “and the kitchen probably needs to be redone.”
And then in their head, psychologically, they start to think, “Well, maybe the bathrooms don’t need to be done,” or they start to justify how to pay more, which is what the auction is all about, right? But how do you balance between padding and being safe, just making assumptions that a lot more needs to be done than maybe it likely does, and still being able to get the deal?

Jacob: Well, you’re dealing in large amounts of money. It’s thousands. I mean you’re buying a house it’s not like you’re buying something at Target or something. A lot of discipline is needed. We have a ton of investors and each kind of have their own strategy. I have one investor, he’s so funny, because he’ll call me and he’ll say, “I’ll bid $80,000 on this property,” and I’ll say, “No problem.” And we always get our clients on the phone so they actually can hear the property going live. And without fail, whenever he gets on the phone, he’ll go just $15,000, $20,000 higher than what he told me previously.
I’m just like, “Hey, are you sure you want to keep going?” And he says, “Oh, yeah, yeah, I’m good.” So he knows how he bids, so he obviously is prepared, “All right, I’ll bid $80,000 but really I’m going to go $95,000 or $90,000,” or whatever it is.
I have other clients, they work the number down to the penny. They know exactly what their profit is going to be and they have a little bit of miscellaneous price they need to take into account and then they write down that number and they say, “All right. It’s firm, and you have $500 over this. At the most, go $500 over if we think we’re close to being the successful bidder.” So there are different strategies, but it comes down to discipline. Making sure you can walk away and say, “You know what? It’s better that I didn’t get it.” There’s always another deal out there.

Mike: Right, right. Yeah, good. Lets talk about rehabs. You’ve done a lot of them and your customers have done a lot of them. Let’s talk a little bit about different strategies of how you can be successful. For me personally, my strategy has changed over the years. Where in the past, we used to have to knock everything out. We want granite in everything, stainless in everything. We didn’t keep much that was there. We had a lot of pride in putting out a great product. Which, I think up until maybe a year or so ago, was important to kind of standout.
Now as we’re kind of a seller’s market, at least where I’m at in the Dallas-Fort Worth area, is we find ourselves often being able to do what I call “wholetailing” so we kind of clean it up and sell it. I guess my experience is, just to give a hypothetical example, is that sometimes we could put $25,000 into a house and make the same profit as if we had put $5,000 into the house and sold it for $20,000 less, effectively, passing on a deal or fixer-upper to the next person. There is some psychology there in terms of people who want to buy a fixer-upper and put some sweat equity into it. Talk a little bit about your experience with what it takes to successfully rehab a house and do it right.

Jacob: So, there are a million different ways to skin a cat. We have investors that do full-on remodels, even in today’s market when they are getting offers pretty quickly on their properties. We have clients that they just feel better. They want to sell a quality product. So they’ll go and if it’s linoleum, they’ll replace it with tile. If it’s Formica, they’ll replace it with granite. But they do the full remodels and they’ll actually even stage the properties at the end.
It all depends on your turn time with regard to that. If you have some really good rehab crews, for example, one of my largest investors, he has three different crews. So he purchases a property at trustee sale and he’s the kind who likes to go all-out, regardless of the market. He’ll have three crews. They go out, they bid it. He always uses whoever gives him the best bid, obviously. It keeps them honest. It keeps them competitive. And then, within two or three days, he has the quotes in and he has them working on the property. He’ll usually have it all redone and remodeled, even the professional way with the granite and tile and staging and all that, within three weeks or a month, if it’s a larger rehab.

And what he likes to do, because he has a quality product he puts on the MLS, and he’s gotten to the point, interestingly enough, where people recognize it just by the pictures. So the little sayings on the picture like, “Welcome home, honey”, “You’ve found your home,” he loves those. But, at the same time, he’ll have agents that have either worked with him or just know his work that are actually calling him saying, “Hey, let me know when you have something that comes up in this area. I have a client looking. They love your property.” So that’s a strategy that works for him. He has a list of buyers that are ready and willing to purchase his stuff, his models, just because of the quality of work he does.
Then on the other end, one of my other largest investors, it’s all about just putting some lipstick on it and putting it back on the market right away. Like you said, he’s not putting $10,000, $15,000, $20,000 into it. He’s not spending that three weeks or a month to rehab the property. He’s just throwing it back up on the market. I have seen that it is most successful still when you can do that full-on remodel and turn it into a very quality product because it’s always going to sell faster than your competitors in the same street or the same sub-division.

Mike: Yeah, and the key, of course, is making sure you buy it right to be able to do the type of work that you want to do to it, right?

Jacob: Absolutely. It’s all about your return on investment. So another investor, he only buys properties that have a yard big enough for a pool because we’re in Arizona, where it gets to be 115, 120 degrees. He’ll buy these homes at auction that have bigger yards and he’ll put a pool in every single one because he knows that’s what people in Arizona want. He has it down to a science. He can build a very nice quality pool for $3,000 and it will give him a $30,000 increase in price. So just by purchasing a property, putting that lipstick on it but adding a pool and nothing else, he’s making a $12,000 spread just on the pool investment.

Mike: Wow. That’s great. So I guess talk a little bit about what are some trends that you’re seeing in terms of rehabbbing and remodeling. At least in Arizona, and I know it’s different in every market, but what are some trends that you’re seeing with the market shifting here? Anything that’s different from the past?

Jacob: No. There are a lot of investors in the market right now. It seems like it kind of died down towards the end of 2014. But even since January 1, it’s really been picking up. As we know, Fannie and Freddie have been dumping some really cool loan programs into the system with 0% down and 5% down. So there’s going to be an increase in buyers. Then also, you have the people who have that timeline that need to expire the ceasing on foreclosures and things like that when it happened in 2008. Those are finally expiring so you have an influx of first-time buyers and second-home buyers coming into the market to pick up the inventory. It seems like it’s really been picking up just since January 1st.

Mike: Okay, okay. At Gentry, you have a large property management company as well, right?

Jacob: Correct. We manage about 700 homes. Ninety percent of them are homes that our investors have purchased at auction through us and they used us to manage them.

Mike: Yeah. Talk a little bit about the difference that you guys often see between rehabbing for a retail sale and rehabbing for rental-grade.

Jacob: Sure. In rental properties, as we know, it’s all about your cap rate. When we purchase a home at auction you’re looking for a completely different model. When you’re flipping a property, it’s all about the spread. You want to be buying as cheaply as possible and get that big spread and your cap rate, what kind of return you’re going to get on your monthly. The rents aren’t going to be that significant regardless if there’s granite or Formica.
Our investors that only focus on rentals here in Arizona, they’re doing the bare minimum. They want to get in, and like you said earlier, they’re putting a couple grand in the property, replacing the carpet, painting and fixing the roof that needs to be fixed. They’ll maybe throw desert landscaping down. Do they even have desert landscaping in Texas?

Mike: No, tell us what it is. I think I know. I mean I come out to Phoenix once in a while.

Jacob: I had a friend come down and visit me from Utah and we were looking at a house and he’s like, “What’s all this rock in your backyard? What’s this?” And I’m like, “This is desert landscaping. You’ve never heard of it?” And he’s like, “No.” It was a new idea, a new concept. But in Arizona because of the water savings and things like that, we’ll usually just throw rock in the backyard and the front yard with little plants, a couple trees and that’s it. But very little grass. We kind of got made fun of by one of our investors who came down. He said, “You’re the only state where the people actually just paint their rocks green in their front and backyard to make it look like grass.”

Mike: Yeah. Do they actually do that?

Jacob: There are some people that do. I don’t.

Mike: That’s funny.

Jacob: It is funny. They’ll throw down desert landscapes. So it’s just rocks and some shrubs. It’s very cheap. It’s inexpensive. It’s very low-maintenance. You have to go out once every couple of weeks and pick a couple weeds. You’re not having to mow the yard or water it or things like that. It’s perfect for tenants. Usually the tenant won’t treat the property the same way that an owner will, unfortunately. So you want to make sure you’re just doing the bare minimum so that when you do have to replace it down the line, it’s going to be cheap.
The only difference with the rentals is if you’re going to replace the carpet, if you have to replace it anyway, it’s always best to put tile throughout the whole thing. That way, when you have the tenant turnover, obviously you’re not having to replace the carpet every couple of years. It’s just tile. It’s going to be there forever.

Mike: Yeah. We’re doing more and more of that. For a while, when we were putting in carpet, we actually were putting in a more expensive carpet into a C-Class rental than we were putting into a B, B+ Class retail. It was because it was a lot more durable. It literally would absorb stains. It was long-term, it cost more upfront, but obviously the theory was it would cost less over time. I think that’s a myth that a lot of landlords figure out over time, that if you use higher-quality materials for certain things, then they’ll be more durable over the long-haul and it’s going to end up saving you money over time.

Jacob: Absolutely. More expensive carpet or tile versus your just kind of your cheap, standard carpet, it’s going to cost more but it’s an ROI that you’ll get back.

Mike: Especially with some plumbing fixtures and stuff like that, that are just the “Made in China” stuff that there’s no replacement parts for and things like that. The material is cheaper but the labor to have to do it twice is going to kill you.

Jacob: Absolutely. I have another investor, he buys flips and rentals, kind of a combination. Regardless, he’ll buy a property, do a full-on gut remodel and he’ll do the nice granite, the nice tile, the nice landscaping. He’ll go all-out. He actually lists it for sale or for rent. He always goes for the less expensive homes. He’s going for homes, they’re a little bit older, usually under $50,000 that still have strong spreads if he was wanting to flip them. Worst case, if he wanted to rent them out, he would be able to get a solid return on that.
So he’ll actually do a lot more than just lipstick. He’ll do a full-on remodel because he knows that he’s marketing it himself, he can also push rent because it’s a nicer quality home, which isn’t always the case, obviously. He’ll do a lease-purchase in those instances. He’ll let them fall in love with the home, which he does a fantastic job, and then turn them into lease-purchases. Kind of the best of both worlds.

Mike: So since you guys do so much at the auction, let’s talk a bit more about that. Where do you see things going at the auctions? Does it feel like things are slowing down for you with inventory? Where do you think things are going over the next year or so?

Jacob: You know what? It’s not nearly as crazy down there like it was in 2011 or 2012. There’s also a lot more competition down there. In Maricopa County, for example, there were like 30 people who would show up and it was just a melee of craziness. In Pinal County, for example, there were eight or nine guys down there that were bidding.
Now, it’s a completely different market. There’s a lot less inventory, like you said. A lot of these kinds of smaller bid companies have kind of fallen by the wayside. It hasn’t affected us. We still buy several a day. We bought six properties yesterday down there. We bought, I think, four properties last Friday. We’re usually three or four a day, still. Whereas, 2011 and 2012 we were probably more eight or nine.

The difference is that there are better spreads because there’s less competition. I think that we’re actually still sub the going rate at auctions. They’ve cleared out inventory and they’re also holding back on some, so I expect it to go up. Even as it is now, buying four or five a day, we’re thrilled with that, obviously. But I see it as increasing over this year.

In fact, an article just came out about Arizona that foreclosures are on the rise again. I see it increasing over the next several months and over the next year or two. But it’s still strong. Even in a normal foreclosure rate. I mean Maricopa County, the counties in Arizona are very large. I mean Maricopa County holds Phoenix, Gilbert and Glendale and Tempe. They’re very big cities. Just in a normal foreclosure market there’s still going to be foreclosures every day. There are still going to be people, unfortunately, who have to lose their house.

Mike: Your brokerage is huge, right? You guys really have to have your ear to the ground with what’s going on in the retail market. Tell us about your brokerage in terms of the volume that you guys do, the number of agents, the volume of transactions and stuff. And maybe share some of your insights you might have recently about what’s going on with the retail market.

Jacob: Sure. So we’re in a lucky spot because we work mainly with investors. Because of the amount of inventory we use, we’re kind of the go-to brokerage in Arizona with investors. There are a lot of investors out there who have their real estate license, too. We have about 250 agents with our brokerage. We’re not a Keller Williams by any means that are national, but at the same time, we’re one of the larger privately owned ones in the state of Arizona, as well. We have about 250 agents and most of them are investors themselves who buy at auction with us or have their own pool of investors that are purchasing. We close about 100 transactions per month or so through the brokerage. Just because a lot of these agents find stuff themselves or a couple of the agents have two or three in the pipeline themselves that they’re always just kind of turning.

With regards to the market, there’s still a little bit of inventory backlog. It’s starting to pick up in January, but there’s about three months of inventory on the market right now from what we’ve seen. The typical turnaround for an investor purchasing a trustee sale is you want to plan on about four months from acquisition to close of escrow and actually getting your money back on that. The ideal timeline is you purchase the home today, you get your guys in there right away, giving you quotes and deciding what it’s going to be to rehab. Then you don’t want the rehab to take longer than three or four weeks. Then you’ll want to list the property right away, obviously. The name of the game is turning.

The only time when it could take longer is if the property has been occupied. I would say about 20-30% of the properties we buy at auction are actually occupied. Usually not even by the homeowner, they’re by tenants. Probably about 15% are by the homeowner. Usually by the time it goes to auction, the person who has lost the home has been aware of it for months and they have been able to make other arrangements to move into. The only time that would affect your timeline is if you have to go through the eviction process. Which, thank goodness, in Arizona, is a very fast process. It takes about 25 days from the delivery of the five-day eviction notice to them actually moving out through the court system.

Mike: Great, great. Well, Jacob, with just a couple minutes left here, any kind of advice or tips to share with people on keeping an eye on the market as it shifts? Or as we move forward here, how to make sure if they’re rehabbing they’re making good decisions and doing things in the most profitable way possible. Any final words of wisdom to share with us?

Jacob: Sure. What I advise my new investors coming in to buy with us is that you’re buying a house. There can be a lot of money to be made but also, if you buy incorrectly, you can lose money too. It’s always smart when you’re buying in a new market to really know it first. Our investors that are most successful, they will stick to certain markets, certain areas. They’ll get their niche and they’ll stick to that niche. You don’t want to say, “Well, I want to start buying a property in Arizona or in Dallas” and say, “I’m going to open up to the whole field.” You want to say, “All right. I’m going to concentrate on this area, this ZIP code, this part of the city,” and know that key demographic well. Get to know the sells, the closes, how long it stays on market, everything. Know that area like the back of your hand so you’re the expert.
When we have investors that come in, we say, “Know what area you want to buy in, put together a game plan for it.” As they’re preparing, you want to do some dry runs. Say, “This is what I would bid on the property.” Then put in a fake bid with us, make sure that we know it’s a fake bid, then go through the process. See if you would have gotten it. If you didn’t get it, you can say, “Where do I need to adjust?” If you were going to get it you can say, “Great. All right. Now what would be the next step?” Going through those dry runs and really making sure you know the market well is going to give you the best key to be the most successful.

Mike: Great, great. Good advice. Well, hey, Jacob, thanks again for joining us today. I appreciate you being here.

Jacob: Thank you, Mike. Appreciate it.

Mike: All right, buddy. Stay in touch. We’ll talk to you soon.
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