Magic Box with Guest Co-Host Robert Orfino

TRE 2 | Magic Boxes


When building our dreams, it’s comforting to have people who encourage us and who stay at our side no matter the circumstance. However, when do you know if your supporters’ good praises are not good for you anymore? Jason and Robert talk about Theranos, spill the truth on magic boxes and silver bullets in real estate, and discuss the dangers of surrounding yourself with “yes men.” They also have an insightful conversation about population decline, the aging population, and the next real estate bubble in Texas people should watch out for. Find out what happens next with Fannie Mae and Freddie Mac as Jason and Robert also delve into that.

Listen to the podcast here:

Magic Box with Guest Co-Host Robert Orfino

Theranos And Magic Boxes, Population Decline, And The Next Real Estate Bubble

We’re going to talk about a couple of things. I want to get us started on a topic that we ended with and that is Theranos. Theranos is a medical device company. Their value proposition is they wanted to build a magic box. They called it the Edison. It was a magic box and it was the size of a big computer or an old laser printer. Essentially, it would be able to do a very rapid assessment of your blood. It will give you all the things that your doctor looks for. Instead of sending it off to Core Lab or somebody else and get the results in 24 to 48 hours, this thing was going to be instant to a certain extent. Elizabeth Holmes had surrounded herself with a lot of yes men. They were really invested in her as the story and not producing the product. She surrounded herself with a handful of people and they built this negative feedback loop. The SEC has gotten involved because there’s been a little bit of fraud. When the Securities and Exchange Commission gets involved, I got to tell you out of all the federal organizations that I’ve ever had to deal with, the SEC is probably one of the scariest.

They typically don’t lose. They don’t bring a case against you unless they’re prepared to win.

They’re very good at what they do and it gets messy quick. Elon is trolling them on Twitter. They even took Elon down. It’s a very interesting organization and typically they get involved when you violate securities laws, which that’s what they’re investigating and that’s what she’s going to court for. Her bigger issue was she surrounded herself with a lot of folks that created this negative feedback loop, that got invested in her story instead of somebody in the room or on the board that said, “We can’t produce this product.”

I don’t think there was anyone on the board that even understood that. They are invested in the story. The folks that were around her that did say, “This couldn’t work,” the critical thinkers around her were pushed aside. That’s what we talked about, the dreamer doesn’t want to hear the negative things. They only want to hear the good things.

Here’s the problem. This is what I like to call the Hater Syndrome. They’re a bunch of haters thereafter. “Elizabeth, we can’t produce this tech. The technology doesn’t exist yet and we don’t have the capability of building it.”

TRE 2 | Magic Boxes
Magic Boxes: This business is not easy. You’re going to get kicked in the face a few times. Life is going to beat you up.


God bless her for coming up with the idea, but it’s unfortunate. She’s ruined it now for the next fifteen years.

You’ve got to be really careful if you are looking for the magic box or the silver bullet and that’s what this was. We’re looking for something that at least right now doesn’t exist. Will it exist in the future? Absolutely. You’ll go to the doctor, they’ll produce a blood sample, drop it into a little box and there you go. Here are all your results in minutes. That technology will exist. The problem is in life, I see a lot of folks looking for the magic box, the silver bullets, “I’m going to go to one more seminar and it’s going to make me a millionaire. I’m going to put $200,000 in and $10 million is going to come out.” I was at a seminar up in Dallas. A good guy, a good event but there was a little of that, “I just put money in and a pile of money comes out.” I’m sitting there, “Where is that box?”

A lot of these seminars is not a box. It’s a three-ring binder and it comes with a backpack or a secret database. When I used to do seminars, this guy walks up to me, I’ll never forget. I just finished a marketing presentation on how to market for real estate, single-family houses and small apartments. He grabbed me and said, “Jason, can you come over here to this corner?” There are 200 people in the room. I’m like, “Okay.” We walk over to the corner and he goes, “I’ve got something to talk to you about. What’s the real secret?” I said, “I just did it for two hours on stage.” He is like, “No, that’s what you told everybody but what’s the real secret?” I was like, “I don’t have any.” He was so bummed. He was angry at me that I did not share with him the secret. There’s no secret.

The secret is you’re going to get kicked in the face a few times. Life is going to beat you up and this business is not easy.

I have yet to see the inspirational quote that says building wealth is easy. You can say it, but it doesn’t mean it’s true. When I look at folks that are getting into real estate and we’ll be at one of the largest real estate networking events in the country here in Houston. There will be 1,000 investors air. Mark Dotzour is going to be in town. He is a very famous economist. Everyone’s looking for this magic box, the silver bullet. The sooner you realize that that doesn’t exist anywhere in life, the better your life will be.

The dreamer doesn't want to hear the negative things. They only want to hear the good things. Click To Tweet

Prior to real estate, I was a green consultant. I was an energy-efficient and material-efficient guy. I would go to hospitals and large manufacturing plants. I’d say, “There’s a way that we can recycle and move materials out of your waste stream and we can save you 50% to 60% on your garbage bill.” This is not a $400 bill. These are companies that had $20,000 to $30,000 a month bill. Then they would ask, “How’s it done?” “There’s this big green box and we put all the garbage in on one side and it sorts it out on the other side.” They’re like, “That’s amazing. Can I get that?” I’m like, “No, it doesn’t exist.” You have to train your employees. You have to teach people how to behave differently. It takes about eighteen months for that behavior to set in. After that, you will save $30,000 to $40,000 a quarter, $150,000 to $200,000 a year for some of our bigger clients like Coca Cola and Pepsi. They embraced it. They split up that way stream and saved lots of money because they understand the cost of everything. When they’re looking at that P&L, all those fixed costs and all of a sudden you can drop a fixed cost by 60%, that’s a good deal. Sure enough, everyone wants it, even smart professionals. I’m like, “There’s a magic box.” They’re like, “Can I get it?” “No, it doesn’t exist. You’ve got to do the work.”

There is no magic box and there never will be. They are like, “There’s this magic box in real estate.” We bought a gazillion doors in the last few months. I get people that send me this email, “Jason, where are you finding all these deals? Do you got a secret website?” “Yeah, it’s called MLS. It’s called Facebook.” I’m getting a lot of deals from Facebook. Folks are sending me all kinds of stuff. I’m negotiating two near Frenchtown. Even in Houston, I don’t expect you to know where that is. It’s North of the Saint Arnold’s Brewery off Alliance.

My wife and I are a little rough but we’re looking to buy something and rent it and I expect the gentrification to take place over the next ten or so years. Then we’re going to build something because that’s the side of town we want to live on. It’s close to the airport but in downtown. I’ve got a deal. A guy sends me a note saying, “Here’s a lot and a house. What do you think?” I said, “I don’t like it,” and he’s like, “What’s your offer?” “I don’t really work like that. What’s the number that works for you?” If it doesn’t work for you, then I’m not going to twist your arm on a number. This sounds arrogant, but I’ve got 900 other emails I’ve got to look at now. I don’t want to go back and forth 50 times.

We need a 45-second analysis in a win-win situation.

We looked at that 24 units and it took me all of about seven minutes when I opened up the Trailing Twelve and I looked at the address. I was like, “I’m a no go on this one.” Going back to the point here, you’ve got to surround yourself with the right people and it can’t be the yes men and yes women in your life. You need some sanity. You need that sanity check that says, “This is not a good idea or this is a good idea,” which is where reading this blog and going to some of our networking events is going to be huge. I’ll tell you the other thing, there’s no magic bullet. There’s no silver bullet, there’s no magic box, but there is a way to be successful in real estate and that’s what the show’s about.

TRE 2 | Magic Boxes
Magic Boxes: If your city or your state is failing financially, the one thing that can’t leave is the real estate.


We’re going to talk about population growth and population declines. Let’s talk about population growth. Let’s talk about something that drives economic value. We’re going to get a high level. I like doing that stuff. China has had this one-child policy up until the last few years. It’s an absolute disaster. One of the reasons the United States became so prosperous, especially during the Baby Boom is because we had a lot of people that were born all at once and a lot of great training. That started the last American expansion after the Industrialization Age in the United States. Everybody came back from war and started having babies. The technology was fantastic. We can build houses and we started to have computers, great food and all that stuff.

We definitely had an unfair advantage because the rest of the industrial world was bombed out. It took Europe ten to fifteen years before they are producing cars and Japan took forever to get back up. The Hondas and Toyotas in the 1970s, which started that decline of manufacturing in our country.

That’s a whole different story because that’s more regulatory-driven than anything else. The United States went to this huge population boom right at the same time where technology was advancing rapidly. There’s something called the BRIC Report and its BRIC countries. It basically says, “Emerging Markets,” these are markets that are going through their own Industrial Age. It was Goldman Sachs who produced a report called the BRIC Report. Brazil, Russia, India and China were supposed to be the next super economies. It was based off one big assumption and that is they’re all going through this population, at the same time they’re experiencing this rapid expansion in technology. China, when they introduced the one-child policy, it created a huge problem. Anybody who was thinking at the time said, “You’re going to have a huge problem here if you’re not even replacing your existing population.” If you have a decrease in population. It was in ‘79 when they introduced the one-child policy and it changed in 2015. You could imagine an entire generation where you’re only supposed to have one child.

That creates a huge economic issue big time. If you don’t believe me, look at Japan. They’re not exactly doing really well. Their population is decreasing in size and that’s a big problem. It’s a problem for retirement plans and pensions. It’s a problem for a whole host of reasons where you’ve got this aging population and at the same time, you have all of these expenses that are increasing because that population is aging. They’re not replacing the humans. There are not enough bodies in the system. One of the things that we know that lead economic growth is how many people are in a certain space. We talked a little bit about the Texaplex Plan and that Texas is growing and growing rapidly. I don’t even think we’ve really priced in, if you will, in real estate the changes to our tax system through the Trump tax plan in the past years.

All you’ve got to do is watch. I’ll distill all the economic data down to really one metric. For every two jobs created, one house is built. As this economy gets larger and larger, more robust and more people fly into Houston and Texas, it’s like a 747 flies into Harris County, drops all the people off from that 747 and flies out and doesn’t take anybody out. It flies out empty. That’s how many people are moving here every single day, day-in and day-out. What is that doing? First of all, why are people moving here? One is job prospects. It’s been like this for 50 years. That’s what everybody’s doing here.

There's no silver bullet, there's no magic box, but there is a way to be successful in real estate. Click To Tweet

We come here for the opportunity.

Whenever I do a seminar, whenever I’m in front of folks, I will ask the question, “How many of you all are native Texans?” It’s a handful of hands. Then I’ll say, “How many of you moved here in the last five years?” It might be 20% to 30% of the room. Everyone looks around because you don’t think in those terms. You look around the room and you go, “Where do they all come from?” At the end of the day, you need a growing population in order to support a growing economy for the most part, that’s not always 100% true, but it certainly helps. That’s why I keep telling folks, “If you think real estate’s expensive now, just wait.”

We’ve seen that in states that are no longer seeing population growth. New Jersey’s my home state where I grew up and it’s decreasing. People are exiting and it’s because of real estate prices. It’s because of tax rates. It’s because of the affordability to live in that state. You start pushing out folks that don’t want to live on $150,000 a year. They can’t do it anymore.

That $150,000 number is interesting. I want to say in San Francisco, that’s food stamp territory.

You can go to Roselle Park, New Jersey where the property tax is 11%.

TRE 2 | Magic Boxes
Magic Boxes: Everybody says there’s so much land in Texas, it’s going to be cheap to build. That’s not how it works. It’s getting more and more expensive.


The folks out in Katy are whining and complaining about 3.5%.

The tax rates go up and prices go up and that’s what happens in a lot of these states where people are leaving. We all come to Texas and we love it here. It’s the way it’s supposed to be.

Here’s a little food for thought. If your city, if your state is failing financially, the one thing that can’t leave is the real estate. They can tax that real estate into oblivion and there’s nothing you can do about it.

We are talking about the next bubble, the one that’s about 3,000 square feet.

People talk about real estate bubbles all the time. Although if you rewind, I don’t remember any of this bubble talk in ‘07, ‘08.

Surround yourself with the right people. It can't be the yes men and yes women in your life. Click To Tweet

We were still talking about the bubble being in tech. Can you believe Apple? I remember the price of Apple was so high in 2008. People were talking about that bubble.

I have a great real estate crash story because I was in business school at the time. I was working during the day. I was at business school and I was already in the finance program. There was a guy there that worked for one of the big bags. He was in the group that was packaging up those. He saw it a year before it crashed. He actually switched careers. He’s like, “Jason, something’s coming. It’s going to be bad.” I don’t really hear that but everyone’s running around, “There’s a big crash,” and a lot of folks do not know the difference. I understand why because the last one was so bad. They can’t tell the difference between a recession and a crash in a certain sector, a certain asset class. Technically what happened, the oil and gas industry a few years ago, that was a collapse. That was crash. It was brutal. For those of you here in Houston, you may still be living it but the rest of Houston, we hadn’t noticed it.

I think my neighborhood suffered from that. I’m out in the neighborhood and I realized how many vacant houses are in line. They’re all maintained, they all look good and there’s a front light down and the lawn is cut but there’s no one living there. You and I know when a house is vacant. I’ve got to say, there has been a massive explosion in houses up for sale in my neighborhood. I’m thinking, “Is it just spring season time to sell or is it people who waited out the winter? They had all got shifted up to The Midlands or Venezuela or China or somewhere else because of the energy industry.” I was shocked. We bought our house and my house is clearly a bubble. I couldn’t resist coming from California where it’s $500 to $600 a square foot. I ran out there and I’ve got a 3,100 square foot house with a pool and three car garages. I love it. I absolutely adore it.

It’s you, your wife, Catherine and Pops, the dog. You have 1,000 square feet each.

We looked at that square footage in and we bought it from someone who’s relocating for business. They were being sent up to The Midlands. If you’re a real estate agent, please don’t tell the buyers the motivated part of the seller’s story. It’s probably not the best thing. We negotiated in good faith. We’ve got a really good deal. We’re very happy. We got them to throw in the washer and dryer at the end. It’s a big house and I’m not moving. I’m a Gen X. I’m not a Baby Boomer. I like the big house. I’m not a hipster. I don’t want to live in 600 square feet. I’m not doing that. I don’t wear no wool caps. I don’t have a 600 square foot apartment. I want a big house. I want to pool. How could you not live in Houston without a pool?

TRE 2 | Magic Boxes
Magic Boxes: Shoot for single-family houses that are a single-storey. Our population is aging and people are shying away from two-storey houses.


I will tell you this. The house we’re in, we’ve got a pool and the pool during the summer, I’m not a fan. It gets all hot and we’ve tried all the different methods to keep the pool cool. Maybe we need to bring a pool guy on and he could explain to me how to cool that pool off. I like the hot tub during winter. It’s the best part. You’re in an area town I like to call, “Where the breeders are.” There are certain sections of town where if you’ve got kids, there’s not a whole lot of real estate activity that takes place inside the school year. We bought a 6,800 square foot house. It’s one of the few houses we lost money on. We did not do a good enough job scrutinizing the comps in and out of the school year. We found out that those houses don’t sell inside of the school year. You’ve got to wait. The breeders are only moving when they can move the kids at the same time.

One of the things I found fascinating is when you look at the size of houses. I’m technically on the borderline between Gen X and Millennials. They actually have a new sub-generation, they call us the lost generation or something. We were progressing through life at the same time the smartphones were coming out and the progression of the internet. We were in this middle ground here. I feel like our house with four of us in there, it’s 2,600 square feet with four bedrooms. I’m like, “This thing is gigantic,” and it’s not uncommon for me to buy houses that are bigger than the one I live in. When I look at going forward in the future what is the real expense is? It’s in that land cost and I think we’ve got a bubble in the size of houses.

There’s a great article on Zero Hedge called, ‘Too Big to Sell’ – Boomers Trapped In McMansions As Retirement Looms. I can’t tell you how many Baby Boomers I’ve talked to. Kids are out of college and they go, “Me and mama want to downsize.” They’re in a 4,000 square foot house in The Woodlands. Then they start looking around and they go, “I could downsize to 1,800, 2,000 square foot house, but it costs as much if not more than what we paid for our 4,000 square foot house, so I’m staying.” That tells me in a generation we’re going to have a glut of really nice big houses because consumer sentiment is changing in such a way that the generation behind them doesn’t want a really big house.

I’ve got mine for $90 a square foot.

That’s absolutely insane. You can’t build that house for $90 a foot with the pool and everything else. There’s no way. We’re talking about the next real estate bubble. I believe it’s in the size of the house. We were comparing numbers and we were talking about our neighbors that sweep up the pollen in the street and their front yards. Rob blows all of his stuff in the backyard into the pool and waits for the pool guy to come to clean it up. Some people ask him, “Why doesn’t your yard guy do it?” The yard guy doesn’t come every day.

The yard guy comes after the pool guy. That’s the whole point. It’s a disaster.

This is life in Houston, Texas. I need a Gantt chart to schedule the pool guy, the cleaning people and the housekeeper.

My pool is cold because I’ve got tons of tree coverage. Now, I suffer it because there are leaves and pollen.

We have a real problem where we’re at and trees are a big deal. We have a real problem where we’re at because the trees are so thick, we can’t grow the grass and the grass is dying. The problem is that the way our lot is situated that if you get too much erosion, you start ending up with foundation issues. Let’s talk about replacement costs per square foot. You had mentioned that 1,800 square feet are going to be the new magic number.

I think 1,600 to 1,800 is going to be that number, mostly because the FHA maximum loan here in Harris County is $329,000.

FHA maximum is $329,000 before you get into a jumbo loan. The requirements for a regular old Fannie Mae loan, a non-QM product. When you go into a jumbo loan, you’re going to have something called overlays and it’s going to be a little bit different mortgage product. Houses around that jumbo loan whether it is $300,000 or $350,000 it’s easier to sell those houses. For the new construction folks, it’s easy for them to sell those things.

Your buyer is going to be at 3.5% down. They’re going to get 4.5% to 5% interest rates. It’s going to be good. There will be a PMI on it but if you’re a first-time owner, you don’t even know what that is. You have a 1,800 square foot house for $100 for a foot to build. You’re going to be at $180,000 minus $329,000, which gives you $149,000 margin. That’s a deal. That’s what a developer is going to shoot for. He’s going to probably pay the land for $25,000 for the lot. The lots are going to get a lot smaller now. Even though there’s still plenty of land, they’re going to get tighter because we want to be able to put more production up on those lots.

I think that’s one of the big misnomers. Everybody says, “There’s so much land in Texas. It’s going to be cheap to build.” That’s not really how it works. It’s getting more and more expensive.

The land’s cheap where the highways are horrible.

If you want a little prediction, if you’re going to do a little speculating, start buying stuff up and down $290,000. Once that really gets finished, you’re going to see appreciation in the Cypress area that will rival Katy when they finished I-10. It’s going to be absolutely bananas.

There’s not much to complain about out here. The highways are great. You should go to New York City and try to get from Jersey to Queens. It’s a disaster. The highways are nice, you can’t go more than twenty miles an hour.

I was going to ask you what your highway experience was? It’s pretty easy. The thing that’s scary about Texas is it goes from 85 to 0 pretty quick. We’ll do a whole show on your first-year experience in Texas.

I did it. We had our little Meetup up in The Woodlands and I said, “Here’s the way I look at it. If you had a flat tire in Brooklyn, someone would help you fix that flat tire but they would complain and yell and totally cuss you out for ruining their day, but they would still do it. If you had a flat tire in LA, people would say, “Jason, you really need to get that flat tire fixed. I wonder if there’s anyone who can help you. We should really find someone to get that.” They would empathize with you, but not do the work. Here in Texas, you’ll get someone who’s in good spirits, will get out of the car and help you fix the flat. That’s what I say. That’s the difference between the three places I’ve lived in my life. For the most part, everyone I’ve met in Texas, is super nice, super friendly, amazing until they get in a car. Then it’s bad news. I am terrified. I’m seeing these trucks come and running down behind me. I pull over and it’s a grandma. It’s blue-haired old lady running me down in her 250. I’m like, “I can’t believe this.”

They got the F-250 or a Suburban Big Cadi. The other observation I make is the smallest women have the biggest vehicles. Here’s this 90-pound 5’2” gal and she’s driving a 10,000-pound truck. It’s the funniest thing and it’s a Texas thing. She’s got to have the running boards that come down because she’s got the heels on, but she’s not tall enough to get in the truck and it’s always so fun. The other thing is that’s a Texas thing too and I would love to look at the statistics. Men buy sports cars. You buy a Corvette. You go out and you buy it. I find that the wives or the girlfriends end up driving it because you need a truck for work. You’ve got your work truck, you buy this beautiful sports car, then who ends up driving it? She gets a hold of it one afternoon because, “I really like this. This is nice. It’s quick. I can really get on the freeway really fast.” You’ll never see your Shelby again.

I think the big issue in Texas is going to be in real estate across the country as the size of these houses. What are you going to do in retirement or community outside of Orlando or Tampa? It’s a 4,000 square foot house that they paid $700,000 for. Nobody’s going to buy that asset. I see consumer sentiment changing such that nobody wants a 4,000 square foot house. This is the stuff that I see, “How does consumer behavior change over time?” I’ll make a prediction. The two-storey house is on its way out. This will be the last generation for two-storey houses because as we age, we don’t want to go up and down the stairs. I talked to a designer at Ford. It’s a very interesting discussion I had with a designer over at Ford. This is where I think housing is going.

Jason wants to give us a quote. Why don’t you go ahead and explain what the Ford designer was talking about?

I was at a note seminar with Scott Carson and there was a guy there who was a designer at Ford. If you are following anything in the automotive industry, they are canceling four cars. Focus, Fiesta and some of their bigger cars. They’re getting rid of all of them. They are not doing them anymore. People say, “It’s profitability.” He said, “It’s not.” He said, “What we found is that there’s a critical dimension. It’s the hip-to-knee ratio. If the hip goes so many degrees or so many inches below the knees, people getting in and out of a vehicle don’t like it. Intuitively they know something’s not right. It doesn’t hurt. They’re saying, “I don’t like it.” We did this design research and he said it’s the hip-to-knee ratio in part in degrees between the two and then the delta between the knee joint and the hip joint. We got rid of those cars because we can’t design them in such a way that eliminates that issue. In part because of all the new crash protection standards and pedestrian impact and all that other nonsense.

The luxury house market will move away from two-storey homes in three-storey homes, unless it’s got an elevator and unless it’s in an urban area. If I’m thinking long-term and I’m in an urban area now, I would shoot for single-family houses that are a single-storey if I was going to hold something a little bit longer term. Our population is aging. We’re not talking about 60-year-old people. Folks in their 30s and 40s that are healthy. They’re fine. They get in and they go, “This isn’t as nice as the SUV.” That’s what they think. People are driving trucks because they’re easy to get in and out of and SUVs are the same way. I thought that was a fascinating anecdote and in the back of my mind I’m thinking, “This is why people are going to shy away from two-storey houses.” We’ll begin to see that decline in prices from two-storey houses because they go, “I’m tired of walking up the stairs.” Unless you’ve got kids, it’s a little bit different. I want to thank everybody for tuning in. We will see you in our next episode.


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