Jack Shea explains how he sets up an agreement with tradesmen who haven’t been paid in full, to get their money to them at a percentage. Without much work, Jack can have letters sent requesting the funds for the tradesmen and if he gets the money, a portion goes to him and the majority goes back to the tradesmen.
This works well with smaller vendors who you know and have worked with before. When they aren’t paid in full, you’re able to step in and help them receive their owed payment.
Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Jack: Hi, my name is Jack Shea and I’m pleased to be right here in the Flipnerd educational platform. And I have a topic that I would like to share with you today that I have done, and I do, and you could do it too in your account. And that is buying receivables from trades.
Mike: This show was sponsored by passiverental.com.
Jack: Pretty much all of us, especially if you’re a rehabber or a rental owner or a multi . . . whatever kind of real estate you own, it requires maintenance. And if you’re a rehabber, it requires a lot of tradesmen doing the bulk colors and varieties and roofers and plumbers and electricians. My typical renovation rehabs were not major, major, although I have gotten, unfortunately, into a few $50,000 and up rehabs. Which I, well, wish I hadn’t.
Anyway, so I know these tradesmen personally. I’ve been dealing with some for 20, 25 years. And the ones that I deal with are the A/C guy, the plumber, the roofer that’s not a large company that has a fleet of trucks and an office staff that does collecting and sends out billing. They’re typically a guy and maybe a helper, and his wife sends out bills to the clients when she gets a chance between the kids and her job or whatever. And these people have receivables where they don’t get fully paid. If a roofer gets $4,000 down on an $8,000 roof, he has to collect the other $4,000. And sometimes, they have trouble doing that.
Typically, the AC guys that I know, a small central system installation is $4,000. They go buy that compressor, they go buy stuff, the ductwork, they put the unit, install it, do all that work, and sometimes they don’t get paid. So the people string them along and the wife sends a letter or two or makes a call or two. So for these fellows, I ask them if they have some receivables and some of them have several. They’ve tried a little bit, but they’re busy every day. They’re out on the streets doing work and they don’t go back and knock on doors.
So I would say, “That $4,000 central air job, I’ll pay you $3,000 when I collect it. Is that fair?” It’s been 90 days since you did it and you’re not getting them. And the guy said, “It’s fair enough” because they paid for the compressor, they paid for stuff, and if he gets $3,000, he’ll get his cost of the material back and some of his labor and not a lot of profit. Same with the roofer, plumber. So they’d rather clean that off their books than have it sit idle. The longer it sits, the worse it gets.
But I don’t buy the receivables from the people. I can give them $3,000 and I hope to collect. I’m going to option his receivables and that’s what other people haven’t done. So I’m going to give him a $500 check to option $50,000 on these receivables. So he gives me the list and I give him $500. If I never collect a dollar, he gets $500 and really nothing to lose.
So after I option $50,000, I hire some Odesk people or teenagers or something. They have a series of collection letters. You’ve got them or everybody gets them or something. The first letter says, “I’ve acquired an interest in your receivable. And if you will pay in the next 14 days or by the 30th of the month, I can offer you a $200 discount,” or some small discount. And just leave it at that. “Thank you. I’ll settle up with you. And in the spirit of cooperation, I can offer you a small discount.”
And so sometimes, people are a little bit embarrassed that this has been sold to somebody else and I have some kind of federal, national funding or something, kind of make up something, a scary name, but just some financial capital or somebody like that.
Anyway, sometimes they respond. And by the way, you can find these sample letters in Google. Just Google “collection letters.” You get a whole pile, different ones. So you get their Word document. I doctor them and adjust them a little bit to your style. So the second letter is a little more firm, “We haven’t heard from you in 14 days and now we’re advising you that the full amount is due and payable.” Let me back up for a second.
In the first letter, I said, “Please advise me if the work was not done completely or is unsatisfactory or if you have made some partial payments.” And I know these guys, but some people say, “Well, I made a few payments,” or, “They didn’t come back and service.” So you don’t want to get in the middle of that discussion with the tradesman and the client. But if they don’t have any offsets or complaints, which they rarely do, I want to clear that up first.
So the next one is, “We haven’t heard from you.” With the second letter, then they get the third letter. And the third letter is, “You must pay this by,” like 20 days or some date. “Or if not, legal action may be commenced.” And it is. And that’s the typical chain of letters that people do in various time periods. But remember, these tradesmen, this roofer and this A/C guy, they have lien rights on that property and they can lien the property. And we’d end up saying . . . we kind of remind them, “Do you have a job? Or do you have a car? We could get a judgment.” And this is implied. And I’ll say, “I know a guy. I know this attorney that he goes and tows people’s cars away after he gets a judgment. So it wouldn’t be me, but it kind of gives them a wake up call.
So if some $5 an hour people or a teenager are doing this, you’ll not spend a few minutes doing that. And if you make a $1,000 on a [treat], then you can collect $4,000 and give the guy $3,000. So you made $3,000. So you can do this. You probably know these tradesmen. I see them at meetings all the time and so I have a list of the guys. So this is something you could do and you do this with your IRA money. This is your Roth IRA. That $500 gets $1,000, and it may get $5,000 or $10,000. And that’s legal and it’s honest, and it’s according to the rules that this few hundred dollars, the best place to come from is your RIA. And this is another way that you should be turbo charging your IRA. So, you can see me at jackshearealestate.com and with this, and happy investing.
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