The real estate market is a four out of five star market for buy and hold with plenty of deals out there. With that, there are a lot of flip deals that are making sense from wholesalers. Wholesale liaison Charles Schuhmann talks with Robert Orfino about flipping and wholesaling. They share their insights on doing millions of dollars’ worth of flip, going for buy and holds, and having an appetite for wholesaling. Letting us in on their experiences, Charles and Robert engage in a fun and insightful conversation about their properties and shares some great lessons they got along their way on flips, wholesaling, and buying and holding.
Listen to the podcast here:
Flipping And Wholesaling with Guest Charles Schuhmann and Co-Host Robert Orfino
I did a little video. I did a little 5:00 real estate shoutout and I’ve been trying to frame this conversation that Chris started on Facebook and Jason had picked up about people getting stuck. We see it around it. They pay us good money for memberships. They’ll pay in the past for big game hunting stuff and they get stuck. Sometimes maybe we nitpick a little too much, we’re like, “The house that you live in, with the kitchen that you have with you and your husband making $200,000 a year is not the same kitchen we’re going to put into a rental property.” All the features and ups in your house, we’re not going to put into a rental property. I talked to Jerry. He’ll tell you things we never put into a rental property because they constantly break so you’re going to have to keep going in there and fix that up.
We thought maybe that was the gap. Maybe people living in A, A-minus houses that are having a struggle putting a C or a C-plus on the market. I have been thinking about it in my free time when I got a couple of hours of windshield time. I think what it comes down to is we’re doing our whole thing. We are blowing it up and we’re enjoying everything we do. We’re having a good time about it. We’ve got knowledge so we’re okay. We don’t have 100% on all this stuff, but we have some of it. There are people out there that get stuck because they want to know everything before they get started. They want to know every step in the title, every step about making the offer, all the rules, every cost and every little thing about rehab. I was a contractor for many years and the worst customer is a homeowner because they don’t understand construction.
If you’re flipping, it’s much easier to go back to your investor and say, “We measured out sixteen feet of lowers, but it came out to fifteen-eight,” and someone will ask you why. It’s like, “We had to move this over and then with the plug for this thing, we had to put a spacer in here where the outlet came out and hooked up for the dishwasher. We lost two inches over there. We put a HardieBacker board instead of this drywall and we did the tile. We’re off by about three and a half inches. We’re going to go ahead and put some spacers in there and everything will look fine.” Your investors will be like, “Yes, go ahead do it.” Sometimes you don’t even make them aware. You do it because you’re at that level where you’re just going to get it done.
The homeowner, that would freak them out, “What do you mean? We measured out sixteen feet. How do we miss it by four inches? What happened?” You’d have to sit there and explain it over and over and then I’ll make you stop the work and then you can’t move forward on the work until there’s been a big decision. We’ve got to wait for the husband to come home or for the wife to come home. We’ve got to come back. Everything stops. You send your crew off to another job and then you won’t get back to that job for two weeks. Because once you have two or three good crews as a contractor, you keep them busy. Never should there be an idle day.
If the customer says, “Timeout, I’ve got to go and discuss this to my wife. We’re going to have to look at these things. You can’t even measure cabinets right.” It’s like, “No, it’s not that we didn’t measure the cabinets right, it’s just that this plug lined up a little bit different over here. You want it to move the dishwasher from the left side to the right side from where it was. Now we’ve got to figure out how to get the electric and there’s a stud here. We don’t want to open a wall and drill through the stud to move the outlet over. We want to make it a little bit easier by adding three and a half inches of the spacer.” It becomes this whole big thing because they expect it to be perfect. They think that once you take the tape measure out, everything becomes perfect. It doesn’t.
I’ve been on big construction. The largest construction project that I was a part of was 7 World Trade. I had a very tiny role there, but I sat in on those planning meetings. I did lots of office buildings, schools, fire stations, police stations, libraries and I sat in all those meetings. Every week something is wrong. There were expensive architects, engineers, mechanical engineers and site engineers that would all come together and they’d have to fix things regularly. If you’re driving down the highway and you see a crane somewhere or you see some construction netting or construction fence going up there, within the next ten days on that project, there is a problem. I don’t know what it is and it will stop until everyone gets in that trailer and figures out how to fix it.
That’s how construction works and certainly everything on flipping. Why companies like Elijah and Jeff over there of Fast Track, they’ve come across a lot of problems and they know how to fix it? They probably don’t even make you aware 90% of the stuff that’s going on because they understand how to roll with it, but you’re an investor. If you’re a homeowner, people freak out. I think people who haven’t made that transition in that mindset where they’re able to say, “I have to be able to roll with it.” I get it. We’re going to strive for perfection. We got all those gurus and everyone out there saying, “Be perfect and be better.” I get it all. I want to be better. I want to have a better relationship. I want to have a better business. I want to have better health, but the king bed hasn’t come yet and the pullout sofa is not coming for another month. I’ve got to cancel that order and buy three pullout sofas.
It’s not perfect and my plan has fallen apart here at the end because of the furniture holdup. There are some people who can’t move into this buy-and-hold space, even the flipping space without everything being planned out perfectly. Some of you are engineers and you’re in that science world and you can take a 5% adjustment. Maybe you haven’t quantified it to be 5% but somewhere in your mind you know, “If there was a 5% variable, I could live with it.” The problem with real estate, it’s usually 10% to 20%. You don’t know what you don’t know and you’re scared to move forward.The luxury market is booming in a sense that there are people selling luxury houses. Click To Tweet
Based on these conversations that Jason and Chris had posted on Facebook and what other people have been talking about, the difference between the people that are getting it done in a bigger way and the people that are struggling to get started is that people that are moving forward are okay. They’re willing to learn on the job versus the people who need to learn everything before they start the job. Yes, you’re going to go home. You’re going to take your dog for a walk on a Friday night. You’re going to find an old pallet laying on the ground. You’re going to take that pallet back to your workshop. You’re going to measure everything out, plan it, design it, cut it up, sand it, make it all beautiful and you’ll have a beautiful sign. That’s fun that you take your time and you’re all good on that.
That’s not how real estate works. You don’t have the opportunity to sit there and plan it. We are in a very good market. I’m calling this market four out of five stars for buy and hold. It’s probably three on flips or maybe two on flips. It’s getting harder to find flips. It’s very good. It’s not excellent. I think we’ve got a year and eighteen months while we’re in a very good stage. When it gets too good like what’s happening on the flips, you have no time to think. You have to run those numbers fast, react and make a commitment. That’s why some of you are struggling to work with wholesalers. That’s why some the wholesalers have got the wrong buyers because they’re not working with people that can make quick decisions and they’re losing deals on both sides.
We have another little event and we brought our wholesale liaison. Charles, we talked about this market. I firmly believe that on the five-star scale that this is a four-star market for buy and hold and there are still plenty of buy and hold deals out there every day. They’re right on the MLS. You got to do a little negotiating, you got to figure it out, but for sure there are some great buy and hold deals. I don’t think there’s a lot of flip deals that are making a lot of sense from wholesalers or even on MLS.
We’re seeing a lot more viable buy and hold deals. I know me personally, I put an offer on a personal flip. I’m trying to get it at 56% minus repairs. This is going to be a new construction deal. You’ve got to be getting these things low. 70% minus repairs is not an impossibility, but it’s almost like fantasy anymore.
Most of the flippers in this town that are flipping have their acquisitions. There’s no wholesaler.
There are wholesalers still trying to sell to flippers and we’ve got to have wholesalers that are still focusing on the flippers. The fact of the matter is there are flippers that don’t want to do the marketing, and I get it. It’s not their forte. It’s not what they do. We’ve got to have that aspect, but it’s becoming a smaller and thinner margin as we move forward.
I’ve had the benefit of watching three different markets. I’ve seen the trend. The flippers that are doing very well is a guy like Curtis up in the Heights who’s doing add value. He’s buying a 1,200. He’s scraping it except for one wall. He goes through two months of permit clearance and then it takes him a year to build out. He goes from 1,200 square feet to 3,000 square feet. He’s going to crush it up there because the numbers are going to hold $250 to $300 a square foot. He buys something almost retail, $350 in the Heights for a 1,200 square feet house. It’s got a decent size lot. He knows what to do with it. He does 3,000 square feet of construction. I don’t know his numbers but I would guess he’s at $100 a square foot. It’s $300,000 plus $650. If he’s got 3,000 square feet that he pushes out at $300 a square foot, that’s $900,000. That’s a decent spread. That’s 73%, 74% deal, but it’s so fat at $900,000. He’s making a lot of money. We can find those deals.
That’s a win. On that kind of deal, you just make sure that you’ve got to have a big enough lot to do that type of addition. That’s a hard thing within the Heights areas to get that lot. That’s big enough to do things like that. If you can, that’s a win all day long.
You start looking at secondary markets. We don’t want to go to River Oaks. I am not a believer in the $2 million, $3 million flips. We have a mutual friend who’s doing three or four of those and I pray that he’s okay. Here’s why, to buy a $1.5 million, $2 million, $2.2 million or $2.3 million, these are all the houses he’s working on is such a small segment of the market. First of all, there’s no conventional financing. It’s all jumbo loans. Even over $1.5 million, it might be interest only. There’s no equity. You’re just paying a lease when it comes to that. If you want a $2 million or $2.5 million home, you can go out and get a 7% interest-only loan on it, which is how you afford it.
At that point, it’s maybe $12,000 a month and $14,000 a month. A little bit higher with taxes. There’s no 30-year am at that level and those jumbo loans are very hard. There’s such a small percentage of the market that buys it. I don’t want to flip anymore, but the ones that we keep looking at are, I can buy it at $100,000, I can put $45,000 in and I can sell it at $230,000 or $240,000. As long as I’m in that 70% number, I love the starter and the step-ups.
Those are your ideal and that’s your bread and butter right there.
I thought there were plenty of those. Maybe we’re missing out somewhere, but I’m not seeing a lot of that stuff.
The luxury market is booming in the sense that there are people selling luxury houses. That’s a small percentage of buyers. You got to look at days of the market. It’s very important in that.
You’re in for $1 million on a 12% loan. That’s a lot of money. That’s $144,000 a year. Some of that stuff takes time.
I think that more and more people are going towards buy and hold. That’s where things are going. People are going to multifamily and small apartments.
If you’re a buy and holder for sure you’re going to be able to work with bigger wholesalers in this market, even though we’re not big fans of them. These guys are just hanging out. Every Tuesday morning at Quest there’s someone there that says, “I have a wholesale deal and I think it’s a good buy and hold.” People are there to borrow. There’s not a big taste for buy and hold in that room. What happens sometimes is that people have the wrong buying list or they’re going for the wrong places for the buyers. If you agree with me that this market was a five out of five stars for single-family and step up flips and for buying and holding. We’re probably at four out of five stars for the buy and hold and three on the flips, then you’re going to have to start working a little bit harder to start finding some of these deals. We’re still mostly focused on the buy and hold. The one or two flips that come in, we do take a look at it. We’d like to get some flips just to keep our agents busy. You will not see a lot of those from us.
If you believe what we believe that everything was at a five out of five in this market and we believe the flips have slipped to a three out of five. A lot of people also got burned on those flood houses. I know we did. We’ve got the last one, we’re selling it within 30 days and I’ll be able to pull a bunch of money out. I owe some investors some money, so I’ll be able to take care of that. We got our butt kicked on those flood houses. Not that we didn’t do a good job, not that we didn’t have people interested. Before the flood, the house was worth $429 ARV, after the flood $305.
That market has come back. We were taking off up to 25% on ARVs on floods, but I’ve been noticing in the market that it’s starting to come back, so we’re not pushing too much off the ARV anymore on floods.You got to have an appetite for wholesaling. There's no way you can come into this without taking risks. Click To Tweet
You’re saying you got in there when it was still in there.
I was in California and I was here the day before the hurricane. I had flown out two days before. I remember I dropped off all the light fixtures and everything was in the house. For sure the granite guy was coming down on Friday to put granite in. All my electric fixtures are on the ground and I get a phone call on Friday. It was like, “The granite guy’s not going to make it. He called out because of the rain.” I was like, “You guys are always so weird about the rain. It’s just rain. Why you can’t put granite in? It’s inside.” I didn’t understand. I didn’t think about it. On Sunday morning, there’s the guy on CNN in a rowboat and it says, “Dickinson Texas.” I can see the roof of our house from the TV and I’m like, “We’re dead.”
Did you saw your house on the TV?
I remember one of my partners down here texted me and said, “Turn on CNN.” I turned on and there it is. People are in the streets in Dickinson on wave runners, powerboats and people are up to their waist and like, “Do you need help, sir?” The guy is like, “No, what can you do?” Ours is a street right on the bayou and we’re on the opposite side of the street. The other houses took on eight feet of water. We took on six feet of water. Everything had to be redone. We had insurance and we had a hard money lender who was willing to work with us and it was Jet Lending. We love Jet Lending guys. Johnny, Eddie, all those guys over there. Call my friend Michael Bailey over there. He’ll be able to help you out. They worked with us. We got it through. We did a little refi. We’ve had to put it into a separate LLC and hold it for a little bit. I can get all our money back out in about three years. The investors don’t want to hear that. We didn’t lose the property. We have the asset. The other asset we’re selling so that will make everyone happy who helped us out on those.
How long from start to finish was that project?
It’s almost two years.
You got to be prepared. You talk about having reserves.
Don’t mention that around Kathryn because our reserves were our retirement fund. We pulled money out of our retirement to keep that project going. I had to. I could not let my investors lose. That would’ve been it. I would’ve been done, even though a lot of people walked from these things. We know a lot of foreclosures. I refuse to do it. Month after month, a little more came out. We had to do what we had to do. We still have that property. We have that asset. The asset will be sold in a couple of years. I can make my money back at least. The bigger thing for the flood was that I had a house in the Heights. It didn’t flood. Everything goes perfect.
I had a contractor two weeks after the flood call me up and say, “I quit what?” I said, “Give me my money back.” He said, “No.” He ran off and he just did flood houses because he knew he could make insurance money. He left me stranded there. I had to hire. The only contractor that was available was not a good contractor. I had a lame contractor there for six, seven months. That was a nightmare. Finally, Sam Craven came over and bailed me out. He helped me out and finish that one. It’s beautiful. We’ve got it under contract. We’re moving it from one LLC to the other. It’ll be our office up in the Heights. We are selling it pretty close to retail. You see the market recover on that. For sure buy and holds are easier to find than flips. Would you agree?
110%, when you’re looking at talking to the sellers directly, which is what I do a lot. Even with talk partnering with other wholesalers, you’re seeing more people going for the buy and holds. The buyer’s list is becoming like the buy and hold the buyer’s list.
If you want to get on our list because Charles is out there looking and he’s finding deals. Three-unit, four-units, seven-unit and six-unit is the stuff we all discussed. We had one we thought we might flip. It became a little tough, but if we shave a little bit more off, it’s a buy and hold. We have it at $115,000 and we think $25,000 to bring it up to the market so that’s $140,000. If we could clear that thing at $130,000, we could make $1,400 there. For sure you’re working hard in getting all this stuff. We’ve got a big couple of big paydays coming up for you. We’re excited about that as well. As a wholesaler, it’s lonely. It can be discouraging when you go seven, ten, twelve days without any action.
There are a lot of slumps. There are some good too, but when you’re in that slump, you want to have people around you that would say, “I relate to that slump.”
This is not coaching. This is not selling properties. If you’re a buyer, you’re not welcome. It’s an hour of coffee clutch, just a little talk around the water cooler.
We are strategizing too with wholesalers. We’re talking about strategies. We’re talking about what’s working and not working for you and how can we benefit each other. That’s what we’re trying to do in there.
We appreciate it if you’re a wholesaler and you want to get together. I beat up on you a lot, but I’m mostly having fun. I was there so I know it. I know that it’s lonely. I know that it can suck hard sometimes. We were trying to provide a little outlet twice a month. One hour, a little coffee break in the Heights, come on over and sit down with some other wholesalers and talk about your craft.
I feel like sometimes when we talk about this, it’s this drowning, gloomy thing, but no, there’s a lot of fun in wholesaling too. You got to have an appetite for it. There’s no way that you can come into this without taking risks. You’ve got to be someone willing to risk it and pretty much risk it all, but there is such a great reward too in it. There’s some downtime, but I don’t want to discourage you either. The market needs good wholesalers. I don’t know how many times I have to say that. ARV, repairs, we need to start understanding how to estimate repairs as wholesalers. That’s key because our buyers depend on us in different ways. Yes, they’re going to do their own due diligence, but when your first numbers out to a buyer are your representation, that’s who you are to them.
If you can’t guess, because we keep going out to these things and we’re told buy a house for $25,000. I’m like, “That’s for the outside. How about the inside?” I would rather meet someone come to me and says, “It’s $125,000 for the purchase. You figure out how much can it cost for repairs.” I would rather have that and run there and send a guy out or I know how to do it. Maybe I’ll come in. I’ll teach you to teach them. I know if it’s in bad shape, it’s $20 a square foot for a rental. There’s the roof, the foundation, windows, domestic hot water, the air conditioning, the electrical and there are galvanized pipes. Those are the seven things that can throw everything off. Other than that, $20 a square foot gets it done. If the roof needs to be done, then we’re going to add $6,000. If it needs a recipe, we add $4,000.
I think about it because I see wholesalers do it in different ways. I’ve seen most wholesalers will put the repairs on there. I’ve wondered this for a little bit, do buyers like the fact that you put your repairs on it or do they respect that you’re like, “I’m not even going to try to put a number on this thing.”The market needs good wholesalers. Click To Tweet
I’d rather have it conditioned. I rather you tell me full rehab, light rehab, the roof needs work. I’d rather you gave me a condition report than a number because I know your number isn’t real. I think what happens, Charles is as a wholesaler when you put that number down, you allow a buyer to negotiate against you using that number. I wouldn’t put it there at all. I would say, “Rent-ready.” To me, rent-ready is $5,000 to $10,000, light rehab $20,000, full rehab $40,000 to $60,000. I know it. It needs work. Rough shape? Now, I’m thinking $100,000, but I’m not afraid of any of that as a buyer.
That’s good advice. I hope wholesalers are reading this too because that’s something I’ve wrestled with. I caught myself like, “There’s $17,500 in rehab. Let me put on there, $17,500 to $19,800.”
I would rather have it conditioned. There’s a wholesaler in this town who does exactly that. She gives you lots of pictures. You give me enough pictures. I can do the rehab. I can figure it out quick. I’m within 10%, or on the other way is we do have some project managers that are free from time to time that will run through and give us the other way to do it. I’ll tell you the other way to do it as a wholesaler is I would team up with a contractor and I’d have that contractor go out and give me a bid and then I would guarantee the rehab because we had one. The rehab is $9,600 guaranteed. The only guarantee is you have to use that contractor because I have got a bid for it.
That’s a good way to do it.
You can do it that way or no number at all.
I’m not going to shoot myself in the foot on that stuff. As a buyer myself too sometimes, I don’t blame it.
Do we close on that Rosenberg one yet?
No, we’re still waiting on that. It’s been an absolute nightmare.
I’m going to go down there and see if that guy put windows in or not. The guy negotiates it down on us to fix the windows. There better be windows in that house. I’ll call them out, “What happened to the windows? $4,200 on the windows. What happened, my friend?” When you give those numbers, you let people negotiate against you. You had a house at a good number. We should not have put any repair numbers in there and said, “Buy it or don’t buy it.”
You’re right. That’s the new model. I’m done with that whole, “You said it’s $30,000 to $35,000 but I went over there and it’s going to be more like $20,000, so here’s your negative $10,000.”
No one’s giving you any money back when that has in less, “Charles, this is only $27,000. Charge me $8,000 more.” That’s the thing. It’s like, “Could I get this job done for $25,000?” Yes, it would be the worst rehab in the world. I certainly wouldn’t even qualify for Section 8. They would shut me down in a heartbeat. Why even play with those numbers? I think you give us condition.
I have a funny story. We went on the bus tour. We had some buyers out there. I had one of my properties on the tour. Right where I’m getting off the bus I’m saying, “It’s about 40,000 rehab.” I meant to say $140,000. They come out and they’re like, “$40,000?” The whole thing is hugely trashed. I was like, “I meant to say $140,000.” They’re like, “You are a liar.”
That’s right, don’t do it. Just say, “Needs major rehab.” Everyone’s got in their head what a major rehab is or rent-ready is. That’s a much better way for wholesalers to do it. It’s something that I started practicing when I was doing some light wholesaling in New Jersey. I just said, “Bad shape.”
You’re hurting the buyers on this Rob.
That’s the one negotiating point, but here’s what I’ve learned. The guy who nickels and dimes you is not the guy you want to work with. This is for wholesalers that want to talk a little shop and talk a little strategy, commiserate a little bit, celebrate some victories. Go around and ask the people who had some victories. Sometimes it’s doom and gloom. Find the winners in that room and applaud them. We’re not interested if you’re coming in as a buyer. If you’re one of the big three in this city, you know who you are. We’re not interested in you coming in saying, “Sell your properties to us.”
The whole reason we started Mr. Texas Real Estate and have a real estate team with Keller Williams is that we went to those guys and we said, “You should sponsor our meetings and sponsor our radio show because we know we’re going to get deals. We’ll pass them off to you and it’ll be worth it.” Dr. Nose turned up by three big names in this town. They’re still in my phone and they’re like, “We do enough clubs. We’re not going to do clubs.” I’m like, “We’re a little bit different. We’re not just going to leave you in the hallway in a table. We are working, pushing and moving projects around.” They said no. They weren’t going to sponsor it.
I had one room in California and I passed on at least three deals to New Western out there. For sure that person made $100,000 from me, off a tiny little sponsorship. I said, “I’m not going to let that happen here.” Thank you very much big three for turning me down because we have a thriving real estate business. This has been a fun episode. Some lessons learned here. You’ll pass them on. I wouldn’t give the rehab number. I would give the conditions. Charles, thanks for coming in. I appreciate it. If you want to give us a little help, go ahead and not hit us up on Facebook and you know the number. Take care everyone.
About Charles Schuhmann
Charles Schuhmann is a realtor for Trillionaire Realty and a wholesaler with the American Real Estate Meetup.