As rehabbers feel the pressure of finding more and more deals, some of found a way to avoid competition. Leo Clark joins us today to talk about how he transitioned from rehabbing to new builds on infill lots and raw land. You likely don’t notice the open, build able lots all around you…but they’re there. Check out this FlipNerd.com Expert Interview to learn more about this often overlooked opportunity.
Mike: Hey, it’s Mike Hambright with flipnerd.com. Welcome back for another exciting expert interview. We’re interviewing a successful interviewing experts and entrepreneurs in our industry. Today I’m joined by Leo Clark. He’s a full time real estate investor and educator. Leo left the corporate world after 28 years to start in real estate investing back in 2010, and has evolved from primarily being focused on rehabbing to now focusing on new construction where he sees a huge opportunity. So Leo’s had great success in building, whether it’s infill lots or new development. And today he’s going to share with us how to transition from rehabbing to new construction. He sees a huge opportunity here for rehabbers to move into the space and he’s going to share his story with us. So before we get started with Leo though, let’s take a moment to recognize our featured sponsors.
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Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of flipnerd.com or any of its partners, advertisers, or affiliates. Please consult professionals before making any investments or tax decisions, as real estate investing can be risky.
Hey Leo, welcome to the show.
Leo: Hey Mike, good to see you.
Mike: Yeah, yeah. Thanks for being here. So this is really exciting to talk about, because I told you beforehand, for years when we get phone calls of someone saying, a lead, “Hey we have a lot for sale,” we’re like, nah. We’re not interested. We don’t buy lots. We don’t buy mobile homes. We don’t buy multifamily. We’ve just basically been totally blinders on to single family homes. But it sounds like we might have been missing out here. So I’m excited to talk about it today.
Leo: Yes, you are.
Mike: Yeah, Yeah, Well hey, before we get started, why don’t you tell us your background because I’m a corporate refugee as well? I wasn’t anywhere for 28 years, but I think a lot of our listeners are people that can identify working for somebody else, and then going into business for themselves. So maybe share your background.
Leo: Yeah, I was in the corporate world for 28 years. My last position was very, very multi-faceted. I worked for a large worldwide corporation and I had a lot of responsibility. They had a lot of demands on me and I just didn’t want to be that guy at 49, turning 50. I just didn’t want to be that go to guy anymore. So I basically said, “No, I don’t want to be doing what you are asking me to be doing.” So they kind of forced me to retire back in 2009, October. So I didn’t have a plan. I literally left the corporate world at the height of unemployment with no plan, no resume. Because I never had to build a resume, I was always head hunted, so I never had to go interview and build a resume, put my name out there, constantly be looking for a job, per se. So I left with no plan in 2009, took a two-month vacation, and then January 2010, ran across one of our massive amount of infomercial gurus , went to an event, and took the course, and just started progressing from there.
Mike: You were kind of hooked. Had you had any interest in all that 28 years in the corporate world? Either doing your own thing, or real estate investing at all?
Leo: One of my responsibilities was leases, and building stores and taking down stores, closing them and so on and so on. So I was around it, and I liked it. But when I left the corporate world, I had no plan of being in real estate.
Leo: So I really didn’t know where my passion lied at that time. My wife and I went on multiple two week vacations for two months. And kind of found out what my passion was, what I really and truly liked to do.
Mike: Yeah, what is that though? I mean, at that point you had rediscovered real estate.
Leo: Yeah, I love creating. Taking something, whether it was in the corporate world and building a store or whether it was hiring an employee and building him up to be a certain level of a manager. Creating that is what I really enjoyed creating.
Mike: Yeah, yeah, that’s great. Awesome. So you went to some boot camps. Got some training. And got hooked huh?
Leo: Yeah. I got hooked. As they say, when you jump into, I jumped all in, 100%. I was working 105 hours per week, week in and week out. So I knew if I just focused that 100 hours or more a week, I could be successful at whatever I wanted to do. So I invested about 80-90 hours a week when I first started, and I went everywhere. I networked, I got educated. I went and learned as much as I could. And from January 2010 all the way to September was before I got my first deal. So I didn’t get my first deal for basically nine months.
Leo: And I just kept pushing and pushing and get educating and I went to Arizona, Oregon, Florida, Utah. I went everywhere to learn this business. And rehabbing, rehabbing was our objective, not wholesaling. So I got into it and began to realize that it wasn’t about what you know. It was about who you know. So I began collaborating and that’s when we began to build our business fast. So for the first three years I started collaborating with other guys out there. And between the three of us, we did over 200 deals in three years. So I knew I wasn’t going to be rehabbing forever. Because I knew just off of what I came out of, that it’s all about the numbers and it’s all about the demand. So I knew rehabbing wasn’t going to be around forever, for me in southern California. I knew I wanted to be building. I just didn’t know how fast I was going to be able to get to that point of building new homes.
Mike: Yeah, So talk a little about that nine months it took you to get your first deal. It’s funny, there are a lot of things you do in life where it takes you a long time, and when you look back it’s like, okay, now I can start the presses. Like, it’s just when something clicks where you’re like, okay, now I get it. What kind of advice? If people listening now . . . because most people think, well I’m going to make the decision to start today. And then in a week or two I’ll have a deal. It took me four months to get my first deal. We had built a team. We’re spending money on advertising, and all sorts of stuff. But I kind of talk a little about the lessons learned during that period of time and how you could advise somebody to climb that curve maybe faster.
Leo: Collaboration. It is truly about who you know. We are not only a cyclical industry. We are also a relation-based industry. So you got to really be in it to know people and if you’re a recluse, if you’re very, very withdrawn from meeting people, engaging, interacting, working, collaborating, it’ll be real tough. So you got to get out of that comfort zone or out of that fear factor, if you will, and get into knowing people, meeting people, and being around people that are doing what you want to be doing.
Mike: Yeah, I agree with that. Yeah. Talk a little about you transition. So you started rehabbing, and when did the building, did an opportunity kind of pop up? Was there an aha moment? What happened?
Leo: I was a forecaster. I still am. So I came out of the numbers of what you do next. Numbers will tell you what to do if you just pay attention. So I knew with the dropping of inventory and the climbing of people coming into the business, it was out of balance. So if you have a three month stockpile of inventory, and you’ve got an excess amount of competitors at a high percentage, sooner or later that stockpile is going to go away very fast. So I knew that sooner or later I was going to start looking at land. Because I wanted to stay in real estate, in your cycle of real estate, what is your next strategy? What is your next thing you should be paying attention to?
So in San Diego, southern California, I just started paying attention to land in 2012. I told several agents I was interested and by the end of 2012 we had our first land deal. So I started to learn how to analyze land. I started to learn how to build. Because in the rehabbing world, everybody who is listening who is a rehabber, you’re rehabbing at a dollar per square foot. So you’re building at a dollar per square foot. So all you got to do is just transition the knowledge of the remodel into the structure of bringing something out of the ground at a dollar per square foot. Because that’s the world I stay in, I stay in the dollar per square foot. Everybody talks about ARV, well my ARV is still the same acronym, but it’s Appraise Retail Value. So with the end in mind, what is that house going to appraise for? So I work with that and I work with what it costs at a dollar per square foot to go vertical.
Mike: Yeah. I guess that first deal you did or when you started off, was it more of an infill lot, like there’s an opportunity to build there?
Mike: Okay, and then that probably evolved to, “Hey we could buy some land and develop several properties on there or something.”
Mike: Yeah. So kind of talk about that general transition, because at the end of the day, I know from me, because we have a lot of houses, I’ve never picked up a hammer, I don’t do any of the work myself. And at that point it’s just a matter of, can I find the right people to do the right thing and is it cost effective? Can I make money doing it? But I know it’s not as simple as that. Talk a little about that transition and that mindset you have to have.
Leo: Like you, I’ve never had a license, I’ve never gotten into learning to be a contractor, and I’m the orchestrator, if you will. I’m the guy who goes and hires the people that are licensed to be doing what I need them to do. Whether it’s my civil engineer, structural, architect, soils testing guy, I mean just whoever they are, I hire them. So they’re all subcontracted.
When I was rehabbing, you’re hiring a contractor, you should be hiring a general contractor, licensed, or you’re hiring these handy men, if you will, and you’re just controlling what they do. Well, from the flip side of that, the contractors I’m hiring already know what they have to do, because they get a set of the plans. So the set of plans come to them and it is in black and white what you have to do. So that is your scope of work, if you will. And then they run with what they know to do. They submit the bid to me.
You know, on the rehabbing side, you’re having to submit a scope of work and budget and on and on, and you’re kind of trying to organize this stuff you want done for a certain dollar amount. And most of them are very good at it and a lot of people have a lot of issues in meeting that budget and before you know it, they’re $5000, $10,000 over and it cuts into the profits. Well, when I have a set of plans and the bid is submitted to me, it’s in black and white and stone, that’s coming up out of the ground or horizontal work, that’s getting done at that dollar amount and that’s it. So I deal with a lot of factual stuff. Where in the rehabbing world, you’re kind of in that iffy world of, “Oh I hope we don’t open a wall and we got wood rot or termite damage.
Mike: Yeah, there is a lot of unknowns. Yeah.
Leo: Yeah. So my world is a lot of knowns. You know what you’re getting into. As long as you buy at the right price, build at the right cost, sell at the right price, you will have a profit margin that is already put in place.
Mike: Yeah, that’s great. Now, this is going to be different in every market, but in your experience, is the permitting and all the planning phase easier for a new build? Or how is it different than a rehab?
Leo: Yeah, it depends on the city. Certain things that I deal with are time consuming things, if you will. Whether it’s the architect taking several weeks to do the design or whether it’s the city planner approving you plans. But I’m always prepared for that. So yes, it will be a longer process. No doubt about that. But the thing about it is, you fill your pipeline. Like for me, I’ve got 11 projects going right now. That’s 11 single family homes. And in my pipeline, there’s 77. So if I wanted to buy everything today, I could if I had all the money in the world and I’d go buy 77 of these projects today. So my pipeline is always filling. Coming in and going out.
Even in the rehab world, you should always have a good pipeline. I always had four or five going on at one time. You know, two or three coming in, and two or three going out. And that center piece is always liquid, where you’re managing fur, five, six projects at one time. So your pipeline is really important, as well as your contacts, as well as your collaborations, as well as getting into knowing what you know to be true. In the rehabbing world, it’s really hard to nail down what you know to be true. Even off of a home inspection. Where I get a soils report off a lot that I’m going to buy, I know that to be true, so I know is I can build or not.
Mike: Yep. So talk a little about some of the challenges that you see people facing that are trying to go from being a rehabber, or fixing and flipping houses, to moving into building. What are some of the challenges that people face?
Leo: Knowledge is number one. It’s not hard to get educated into doing what I do. I had no intentions of becoming a contractor, so get that out of the way. I didn’t want to be a general contractor. So all I did was get educated on how these developers out there were structuring their deals. Whether it was who they hired or how they got the financing. Whatever it was, you learn how to structure the deal. And then I just started to hire the right people and build the right team.
Just like in the rehabbing world, you got to have the right team. If you don’t have the right people around you, you will get hurt. No doubt about it. I hear every single week, even at the REIA meetings. Yeah, this happened to me or this happened to me. And I’m like, well, how did you let that happen? So one of the things I got really good at, because in the world I was in before, I was hiring and firing people every week. So I got really good at interviewing when I was in that world, so I just transitioned that into interviewing the right contractors, the right people. The interview process is like, hire slowly, fire quickly. And one of the things I did for myself was put the right people on my team. And that is what every rehabber, even if you are never ever going to do another thing today, learn how to interview and learn how to hire the right people. Because, once you get that skill down, you can hire anybody for anything.
Mike: Right, right. So in this space with the new build, do you have a general contractor type person who is managing most of the subcontractors? You’re still doing that, okay.
Leo: Yes. I have three general contractors. They’re the project manager. All of them are responsible for the budget because they’ve already submitted their bid to me. They had all their subcontractors submit their bids to him and he submits his bid to me. So that GC is responsible for that project.
Mike: Okay, okay. And then you kind of alluded to this, but talk about, for folks that may be fearful that they don’t have experience doing those things.
Leo: Right, even in the rehabbing world, you and I were talking about this a little while ago. If you think back to the very first second or minute you were thinking about what you were deciding to do what you wanted to do, and you didn’t have that knowledge, there was possibly a level of fear, or a level of apprehension. One of the two. So once you get exposed and you gained the knowledge, everything just became a little easier as you went along.
So one thing about this is, if you’re going to transition your business from rehabbing to new development, you can look at it in multiple facets or multiple steps, if you will. I’m rehabbing today, so what would be my next step? Well, your next project may be you buy something where you add square footage. So you get used to knowing the permit process and the architect and design process, structural engineer process. You do that aspect first, where you add 500 square feet, because if you’re selling at $200 or $300 square feet on a home, and you can add that value at $100 to $120 per square foot, why wouldn’t you do it?
Leo: As long as the sales are there. If the sales are there, if you’ve got a market where the demand for 1800, 2000, 2500 square foot homes are there, why not take that 1000 square foot home and increase the value? So you add value at the right cost, which then impacts your profit margin. Because if you’re approaching it from a standpoint of, let’s rehab, dump $40,000 into it, and sell it, and make $25-30K. While if you add value to it, if you add square footage, and you go and sell at a higher dollar price point, you could possibly double or triple your net very easily. That profit could be very, very well rewarded.
Mike: Yeah, that’s a hot topic right now in terms of adding space and adding on. Especially in markets that are selling for well above the build price.
Leo: Yeah. It’s in any market. That is very doable for any rehabber out there. I see so many rehabbers approach it from two standpoints. Wholesale it if I can get 10K, or rehab it if I can get 30K. So why go that route? Why not look at it from another third or fourth standpoint of, if I add value, what can I get?
Mike: Right, Yeah, Absolutely. It’s interesting in terms of the transition. I think that anybody that has rehabbed, you can’t have just done one, but if you’ve done a lot. So for example I’ve had people ask me in the past, because I’ve done a bunch of houses, so they just assume I know everything, which I don’t. I don’t know. You start to realize what you don’t know versus what you do know. It’s not that I know everything, but you just start to have this confidence of, when people say, “well, what did you do when this happened to you?” and I can say, “that’s never happened to me, but this is what I’d do.” You just get this confidence of, hey, I’m a problem solver.
Mike: So I think in terms of people who may have some concern about transitioning may, if you have rehabbed enough, you solved, you know, the same thing doesn’t happen to you twice. It’s like every time it’s got to be a new experience.
Leo: Yeah. There’s always something new happening.
Mike: Yeah, yeah. Talk about kind of markets where this is possible because we were talking before the show here in some markets where houses are selling for below build price, there’s not really an opportunity there like there is in other parts. But just kind of talk about where this opportunity comes up, and maybe take a second and talk about infill lots and how does that even happen?
Leo: There’s multiple ways things are happening out there with dirt. One of the biggest ways, is a subdivision was built, and the guy didn’t have enough money to finish out the subdivision. There could have been a plan for 650 homes and he left 30, 40, 50, 60 of them unfinished and just bailed. Those are out there. Those are everywhere out there. Infill is something that is being repurposed. It could already have a structure, meaning it could have a 100 year old home on it and you’re going to go buy that, scrape it, and add value to the land and add value to the neighborhood via building a brand new 2500 square foot home.
So infill exists in multiple ways. One of the things that any market right now . . . anybody who’s listening right now to this needs to understand that you got to get really, really good at analyzing. And that way when somebody gives you something in a zip code, you know that zip code inside and out. Because even though a lot of markets don’t have this, they do have it. You just don’t realize it because inside of your market are micro-markets. Those micro-pockets can either be a home where you can add value, a tear down, or there’s an existing infill lot. One of those three. Those three areas just alone can really be beneficial to someone who is in rehabbing today and really knows their neighborhoods per zip code let’s say. And you understand what’s going on in that zip code.
So if the zip code is a really, really hot zip code, find the home that can be added on or scraped or subdivided. That’s another approach. So there’s a lot of things that are happening in a lot of markets that in our cycle that we’re in that will enable you to build brand new and be very profitable. But also within those markets, there’s micro-markets that may not be at that level of a dollar per square foot sale, but instead of $200 per square foot, it’s selling at $150. So even at $150, if you’re buying at $90 a square foot, and adding value, it’s still there. Inside the market are always micro-markets. You got to get really good at analyzing those. Even though the zip code may have a vast area of coverage still within that zip code there will be little markets that can literally help you determine how to go forward and be profitable on a project.
Mike: The timing is funny on this because this past week we received a notice from the City of Carrolton, which is a suburb of Dallas, has some infill lot building project and I have a rental property, and apparently you could vote on this. I don’t know who would vote against this, but they wanted to do infill building around where I have this rental property. There was a few block area where they were kind of announcing it. And my first thought was, well, where are there vacant lots there? And then they showed a map, and there are a ton of them. I just never even noticed them because it’s not something that I ever, you know.
Leo: It’s that reticular activator. You know how you want to buy a, I don’t know, blue Nissan and no one is driving a blue Nissan Maxima today, but boy, you buy that one and everyone’s got one around you. It’s that reticular activator that takes effect. Once you’re exposed to where the land is, because I guarantee, everybody who’s listening, you’re driving by it today, and you don’t even know it. The one thing that land or lots or infill lots, or however you want to label them, the one thing that is truly going on is that there is no competition, really. So transitioning out of rehabbing into being the developer that I am today, I started ignoring the rehabs that were coming at me because the margins were shrinking. I started focusing my laser focus on land around me. So I really began to see all these lots that were there. I was like well, holy cow. How do I go about buying that? So yeah, they’re there.
Mike: I can see there being a lot less competition because even the traditional builders, they generally don’t want to do infill projects. They want to go build hundreds of houses somewhere on track to laying, right.
Leo: Yep. Exactly.
Mike: So talk about the money side of this. I think with real estate investors, anybody who has been in this business for a while, you had to figure out where to get money at. How does it differ for new builds?
Leo: Well, every rehabber, or wholesaler, or real estate investor that is always the key factor in their success that I’ve seen. A lot of people approach this business from the standpoint of “find the right deal. Find the right deal. Find the right deal.” Well, why would you be trying to find the right deal and not find the right money? Because there’s good money and there’s bad money. You’ve got to decide how you’re going to go forward with any project out there and how you’re going to put that money in place.
For me, I got really good and that’s something I did right out of the gate, because I was dealing with a lot of money. Got to keep in mind that my mindset back in 2009 and backwards, I was all around money. I mean I had $44 million in control of just me alone. So I knew going into any business, money is going to be your key aspect of your success or not. If you don’t have the money, you don’t have the project, flat out. You can’t do this business without having the money.
I got really good at networking for money. I came out of the gate looking for money, hunting and literally going after every little circle I could and learned who was in that circle and learning whether or not they wanted to invest in real estate. And a lot of my circles began to develop around the IRA world. So the IRA funder is really big with me right now. All of my private lenders have an IRA and it’s self-directed, and it’s at certain levels, might be $50,000, might be almost a million. They fund my projects with their IRA. So I got really good at networking with IRA holders. They are all around. Everywhere you go, usually there is somebody around with an IRA.
So the money aspect for me, I’ve dealt with hard money lenders. I’ve dealt with gap funders. I’ve dealt with banks, still am. I’ve dealt with all sorts of what you call brokers. Whether it’s a credit line broker or whether it’s broker who’s trying to connect two people and receive a finder’s fee. So I’ve dealt with money at all different levels. And what’s been working for me, is the IRA holder. You can find that IRA holder very easily just by networking with the custodial people whether it’s you direct or anybody else out there. These people can connect you, they can’t recommend you, but they can connect you. That’s what I got really good at.
Mike: And so just to clarify though, the traditional lender that folks might be used to, whether is a hard money lender or a private money lender, they are, would you say the hard money lenders are typically going to lend on building deals, right?
Leo: They do here now. When I started three years ago here they weren’t. Nobody from a hard money standpoint wanted to lend me the money. Until one guy stepped up and decided to start dabbling in it three years ago. Now I’ve got about five hard money lenders, always, always pitching me on what they will loan. They weren’t there for me back three years ago, yet my IRA investors were, so I’m very loyal to me IRA investors. So I haven’t had a hard money loan for over three years.
Mike: Wow, I guess all the lenders have had to . . .
Leo: They’ve had to adjust.
Mike: They’ve had to evolve or adjust. There’s just so much competition in that space now.
Leo: And I knew it too. If you look at it from a standpoint of demand and competition and if the inventory is dropping the competition is climbing, one thing surely is going to happen. The loan count is going to drop for the hard money lender. It’s going to drop. So if they are dropping in loan count, if they’re dropping in volume, then what do they do? Well, they got to start developing other products. Could be a buy it whole product. Could be an interest rate product. Or, they can transition in to new construction because they can finance new construction. If you bring the land free and clear to them, they can finance it if they want to. They just don’t have it under their descriptions of what they do under the regulations. So they can get their descriptions changed and be in the new construction arena, if they want.
Mike: Right, Sure. Yep. Yep. All right, awesome. Well Leo, any kind of words of wisdom here you want to share with people that are maybe rehabbing now and might want to kind of transition into this space?
Leo: If anyone out there is thinking about it, they can email me Clark11@cox.net. I’m real easy to get a hold of. I’m on Facebook very heavily. That’s my platform. I don’t have a website. I choose not to have a website. I go the route of social media as well as what the market demands. A lot of people want to be networking 24/7 almost it seems. So to find me is really easy on Facebook. It’s either my name on Facebook, Leo Clark, or it’s Crest Investment Group, which is my business page. And we can network and I can guide anyone out there and tell them what they should start thinking about.
Because one thing for sure, you’ve got to get educated in it. Anything you do, the five, five and a half years almost I’ve been doing this, and I’ve dumped a lot of money into my education. And I’m proud to do it and I continuously do it. Everybody should always be getting educated by any means possible. That is one thing that kind of propelled me into being an educator and to help people understand what they truly need to do. Because if this is a business that you want to do, and that’s the biggest determining factor, do people really want to do this? Because it is not easy. We all know it’s not easy. But if you want to do this, then you got to get educated. You got to invest in yourself.
And then once you’ve done that, you’ve got to develop a business plan and approach it from a standpoint of a corporation, because you’re a CEO of a corporation you’ve developed and bought your LLC, S Corp or C Corp. You’ve labeled yourself the president or the CEO. You need to treat it like a corporation. That’s the biggest mistake I see out there happening. They don’t treat it like a corporation. And yet they are a corporate officer. So you got to look at it from that standpoint.
And then once you start to treat this like a corporate business, certain things will begin to change. One of the things that will change, are the people that come into your world because they see you treating it differently. So my biggest tip is, decide if you want to do it, if you’re going to do it, invest in yourself, and then treat it like a business. And literally go forward, whatever you’re going to do, go forward with a plan.
So yeah, if you’re going to be in this, decide to be in this in whatever fashion that is, whatever you’re going to do, decide, make the decision. You have a choice. So once you’ve made that choice treat it like a corporation, because you’ve started your LLC or S Corp and made that decision to be a corporation, so treat it like that. You’re a corporate officer, CEO or president or whatever you may be, treat it like a corporation and your world will start to change and who comes into your world. Because they will know you are serious about taking this business that you’ve developed to another level. So that’d be my biggest tip is go forward treating this like a corporation and never stop networking ever.
Mike: Great, great, Leo, Thanks for joining us today. We’re going to add links for all your contact information down below here for those that want to find you. Appreciate your time and we definitely wish you all the best.
Leo: Well, thank you. I appreciate all the time with you, Mike.
Mike: Yeah, yeah, good to see you.
Leo: I love what you do too. I love the heck out of FlipNerd. Love what you do.
Mike: Well, I appreciate it. Thank you very much.
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