3 keys to Successful real estate wealth – Southern CA Investor Peter Apostolos

Transcription

PAUL DOCAMPO: Welcome to another interview at the Deals Today Podcast. I’m your host, Paul, at RealEstateAudios.com, and today I’m interviewing Peter Apostolos who is not well known outside of California. But inside of California, he’s a local investor who’s very sought after by REI clubs. They want him to speak and engage with their audience because he has a lot of wisdom to say, but he doesn’t have a glamorous story. He doesn’t have a story where he started flipping and then he made millions in a year like all the YouTube gurus that are out there saying otherwise. It took him a long time to get to where he’s at. A lot of failing and figuring it out and seeing how things work. 

Today he’s a buy-and-hold investor. He always was a buy-and-hold investor. He’s going to talk a little bit about his story and how he lost some things during the crash, picked himself up after, learned how to actually invest in real estate after the crash, after he’s been flipping and holding onto a few properties. He is a type of guy who says he likes to buy houses slowly. Meaning he’s not out trying to do a volume game. He’s out hammering away with actual motivated sellers for the long run. He’s waiting for them to actually be ready, and he’s always following up with them. He deals with one house at a time. It’s a famous John Schaub book Building Wealth One House at a Time where he’s not playing the volume game. He’s just building his portfolio slowly, flipping a house here and there for the income now. 

So he’s going to reveal in this interview the three keys to doing this business successfully. Everybody talks about the one way to flip houses or whatever it is, but he says there are three keys that, if you don’t know these keys, you’re going to be lost throughout your real estate venture. Know these three keys, and he’s going to explain them thoroughly in this interview.

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PDC: Peter, tell us about what you’re doing today with real estate given COVID. Are you still out looking for deals, or are you sitting back right now?

PAUL APOSTOLOS: (0:02:30.6) I am still out looking for deals. It’s easy to get caught up in the news about COVID or impending political changes or not changes, but let me run this by you. Most of the deals that I do end up buying are not what you call a short sales cycle.

PDC: Explain that.

PA: (0:02:57.6) Well, let’s say in another business… I used to be in the technology solutions business, so a sales cycle might be 30 days or 40 days or 90 days. In real estate, things can take six months, 12 months, 24 months, or even longer. So just because I’m marketing for deals right now doesn’t mean that I’m going, “Oh wow, COVID is terrible. Let me stop looking for deals.” You never want to stop talking to potential sellers. What usually turns a potential seller into a seller is some kind of a change: change in their job, change in their location, change in their economics. Based on that, when has there been a better time to talk to sellers than right now? Because if you talk to them tomorrow, the likelihood of some kind of life change for them based on all the chaos we’ve got flying around in the next 12-24 months is probably higher than it’s ever been. A lot of that is a mindset type of a thing for myself, but when I look back historically, the really great things I bought took some time.

PDC: How long are we talking about here?

PA: (0:04:21.3) Well, it varies. I’ve talked to a seller and ended up buying from them. The last real good deal I bought on just a crazy margin, was about two and a half years from the day that I talked to the guy. He wasn’t ready yet. He wasn’t ready yet. Finally, he had some big changes in his life, and because I kind of stuck with him and followed up, and I didn’t even think I was doing that good of a job following up, but I did a good enough job following up that, when the day came, I got the first crack at it. In the meantime, two and a half years went by, and when the phone did ring, guess what? I was still ready to buy a good deal.

PDC: What did you do with that deal?

PA: (0:05:07.2) I put a long-term hard money loan on it at 6.9 percent from The Norris Group, who I highly recommend as a hard money lender. I’ve been borrowing from them for over 12 years. I had to do some repairs. Part of the reason I got a great deal was that the house had some open issues with the County of Los Angeles, and it’s a $1,500 rental with a $630 payment on it.

PDC: Do you hold onto all these deals, or… I know that you flip them. We’re looking at 50 percent you hold, 50 percent you flip them?

PA: (0:05:48.9) No, it’s not 50/50. It really has to do with what’s going on. At the end of the day, I like to hold whatever I can. If I can make those numbers work, then I would prefer to hold. 

PDC: You’re in southern California right now where everybody is saying in 2020 there’s no cash-flowing properties. They’ve been saying that for years. You’re still finding these cash-flowing properties and using a hard money lender to buy it. So explain how you could even get that.

PA: Well, the property needed a certain amount of work, so it was not financeable, so that’s one strike against it. It had open issues with billing and safety with the County of Los Angeles. That’s another strike against it. So I just bought it at a really good margin. When I did the monthly numbers on that loan, it worked out. 

PDC: What’s the buffer that you do that you have to have in there when you come to buying these properties you’re going to hold?

PA: Do you mean on an equity or a loan-to-value basis?

PDC: Sorry, no, no. I mean including your maintenance, property management fees, etc. per month.

PA: (0:07:00.0) It depends on the neighborhood. Anywhere from probably 60-70 percent. So a 30-40 percent expense ratio. A lot of it depends on the product type, the neighborhood.

PDC: Has that 30 percent expense… You’re paying per year 30 percent expense. That has been consistent, and you’ve been doing this for over 12 years you said?

PA: Yeah. I mean, at the end of the day, a bunch of experienced guys, and I told my friend the other day what I noticed is the older they are the higher the expense rate is. What does that mean? That means guys that have managed a ton of doors over a long period of time are pretty conservative. In the beginning, I was real optimistic, and it’s easy to be optimistic about expenses, vacancy rates, evictions until you actually get on the field of play and start getting your ass kicked a little bit.

PDC: How do you reconcile that 30 percent, your expense rate, from some of the older guys? Even John Schaub talks about he has a 50-60 percent expense rate.

PA:  (0:08:10.4) Well, the 30 percent was back when I was a lot more optimistic, and it also has to do with the neighborhood and the house itself. Some things just don’t lend themselves to staying occupied for a long time.

PDC:   Do you have some things that give you warning signs to keep out for that specific warning, having tenants that aren’t going to stay long in that neighborhood? What are some things that you do…

PA:  (0:08:34.3) How about a house that doesn’t have a garage? I’ve got one of those. The garage was converted to a big family room. Houses that are just a configuration are not so great. I’ve got a couple thousand-square-foot houses that the living room is kind of small and it just doesn’t lay out really well. Houses that are just in kind of tough neighborhoods. I’ve got one that sits on a cul-de-sac right now. I’ve got a really great tenant there, but when I look at the family across the street at the way they carry on, I go, “Aah.” You can experience turnover in those situations.

PDC:   If you don’t mind me asking, how many properties are you holding right now in your portfolio?

PA:  (0:09:15.6) I’ve got a couple dozen.

PDC:   And are they all cash flowing, or do you ever play the kind of negative cash flow game here in California?

PA:  Play the negative cash flow game. No, I don’t play that game. Is that a game show?

PDC:   Well, lack of better words. Here in southern California people bank and sit on the appreciation.

PA:  That’s not investing. That’s speculating. To answer that question, no, I have no properties like that. Would I ever do that? Sure, I would if I was able to capture a nice, huge slice of equity. So if I did my calculations and my maximum payment was $750… We did some problems like this in my class last night that if you can capture a lot of equity, you might go up a little bit on your monthly payment and take less cash flow. But I don’t own any properties that fit that criteria. All my properties have good cash flow and good equity.

PDC:   So it’s not always about… I mean, it’s always about cash flow, but it’s not always about cash flow. I guess what I’m getting at is that in Bigger Pockets, and we talked about this before we recorded… Bigger Pockets has a way of teaching, and one of the those rules of thumb that everybody talks about is the one- or two-percent rule. Do those rules apply to you ever, and if not, what is your…

PA:  (0:10:46.1) What’s the one- or two-percent rule? You mean the one-percent rule on cash flow? Is that what you mean?

PDC:   Yeah, yeah. One percent of the retail value.

PA:  Yeah, sure.

PDC:   Does that apply to you here in California?

PA:  It does to the properties that I hold. A lot of those properties I bought quite a while back. Some of them I didn’t. I think it’s a good rule. It’s something I was taught by the old-school guys when I first got in, and I kind of got that in my mind. In terms of California… Look, in terms of some of the laws and changes in laws and the way that landlords are viewed and treated, yes, California can be  a tough environment there. If you want to do some comparison there, I would suggest Bruce Norris and his website and his radio show, I guess which now you’d call a podcast. He’s done the research on the differences between California and some of the other states. But in terms of just adopting a mindset of you can’t do this in California. Let’s go to Indianapolis or wherever the boutique market is at the time, California is a big place. I’m still in LA County, but I’m in definitely a lower price range. But there are all kinds of places where you can be, and I think these things are obtainable by a number of different methods.

PDC:   Going back to what Bruce Norris said then, do you know the differences that he found between here and other states?

PA:  (0:12:23.8) Well, his specific example is Florida. His charts have indications for other places like Texas. I don’t have the numbers in front of me, but I believe it’s Florida, Texas, Oregon, Nevada, Arizona is where people are migrating to out of California. It’s just looking at we’ve got some things going on here like rent control and the discussion about Prop 13 being taken out of there. The last time I checked we voted twice on rent control. The people of California voted it down, and whatever magic happens up there in Sacramento, it just got enacted. That seems to be the direction that California is going politically. So that’s something that…I think the way Bruce terms it is the rules of engagement have changed. Some real hard and fast things that we could always count on about the dynamics of real estate have the possibility of being changed. Other states, like Florida, don’t have a state tax. A comparison of what it cost to get a house permitted in Florida and get a house permitted here in California or Texas, we’ve got some challenges here in California.

PDC:   Knowing all that, knowing that the legislation here is hammering down investors and made investors bad guys, evil guys, landlords evil, do you see yourself ever going out of California, buying property out of California?

PA:  (0:14:04.2) That’s a really good question, and the one thing I don’t feel confident about is going out of state and dealing with everything remotely. If I was to buy out of state, I would need to be in the market that I’m buying in for at least a week every month. I’m just not a big believer… I had rentals in Vegas before and used a property manager, so yes, I do think there could be some higher ground and really to diversify. I think that’s a lot of what The Norris Group talks about is not just sell everything California but maybe sell some things, maybe your lower properties, harder to manage properties, and exchange that into another market that carries some other benefits, like diversification play. Yeah, I could see myself doing that.

PDC:   I want to go back a little bit about your story in the beginning. I know you bought a property before you ever were declaring yourself as an investor and learning about all these things. Can we talk about some of the mistakes you made? I think there’s a big gap… People see you, Peter, and they think they want to be like you. But I want to talk about the big gap between when you started to where you are now, the mistakes you made. You quit your job pretty early on, right?

PA:  (0:15:30.3) Oh, yeah, sure.

PDC:   Was that a right choice for you?

PA:  Well, first of all, I don’t think people look at me and say they want to be like me, and if they do, please have them give me a call so I can straighten them out. I made a lot of mistakes. I made a lot of mistakes. Yes, I quit my corporate job in 2004 because basically I was a genius. The property I bought in 2001 had a whole heap of equity on it, and so I decided I’m not putting this tie on every morning and coming in and sitting here having meetings with these dumbbells. I’m gonna be a real estate investor.

PDC:   How many properties did you own at that time?

PA:  One.

PDC:   Okay, so you had some gusto there.

PA:  (0:16:19.2) Yeah. I think being positive and optimistic; I was gusto. It’s pretty interesting. How did I think that was going to work? I didn’t know enough to even be able to answer that question. Looking back, I don’t think I would’ve been able to get into the business and hold a full-time job. I didn’t see that. And I had all of this equity. At the time, I don’t know, probably a couple hundred thousand or more in equity, and I had low overhead so let’s do this. Let’s get this going. But that was 2004. I don’t have to probably tell anybody what happens between 2004 and 2008.

PDC:   So what did you do to scrape by? You quit your job. Were you flipping at the time?

PA:  (0:17:09.3) No, no. I bought whole properties in Vegas.

PDC:   And they cash flowed enough for you to live on.

PA:  No, they didn’t. I had a bunch of equity in the bank. Don’t forget. You’re trying to make this make sense, like something you can tell your wife. You’re going down the wrong road. This was reckless, uneducated moves, but they led me to a great place. Coincidentally, a lot of my mentors have stories where things didn’t go so well and their first go-round was a big challenge.

PDC:   Who are some of those mentors? Who are some of your great mentors?

PA:  (0:17:44.7) Well, Bruce Norris. Bruce has got… The beginning of his career was really helpful to me to hear his story. I’ve heard it a million times, and it never gets old to me. Mike Cantu is another guy that I met through Bruce Norris that had some challenges when the market changed. Tony Alvarez is another guy that some of his early challenges and kind of how he basically was just persistant. You fall down, and you get back up, figure out what you did wrong, and try to do better the next time. When you’re beginning, that’s really helpful. Hey, I screwed up too. You know, we got a lot in common. Some stories are more drastic than others. By the way, I didn’t know what I was doing. Some of these guys knew what they were doing and still had a bad run at some point. But they recovered from the bad run.

PDC:   Hey, real quick. I want to introduce you to my free daily newsletter where I give out free daily tips to real estate investing strategies, marketing, and sales techniques to keep you, the part-time investor, moving forward every day. Head on over to RealEstateAudios.com, and you’ll get a free report along with that free daily newsletter.

PDC:   After 2008, were you one of those that lost arms and legs and lost everything?

PA:  (0:19:07.5) I lost a lot. In terms of losing everything, I guess you could say that because I had refinanced my primary residence to make investments, and those investments didn’t go well. I was able to sell out of some of them right in the nick of time, but yeah, the books didn’t look good in 2008.

PDC:   Did you end up losing your primary residence?

PA:  (0:19:32.2) What I did was I did a short sale on it. I don’t really call that a loss. I made a decision… This may be helpful for some people too, but back in the day, everybody was, oh god, the bank is doing this to me and doing that. It’s real helpful to grow up and say, “You know what? I’m the one that signed up for this.” At one point, I had a $230,000 mortgage on a house that was worth $700,000. That house probably came down to $370 or $350, and it’s probably back up to a million at this point. But I sure the hell wouldn’t trade what I have now for that house. That house was part of my learning experience. I drive by there, and I have no emotional attachment to it. I could care less.

So, I did negotiate a short sale on that one. But subsequent to that is when I started to learn. I was lucky enough… I don’t try to promote any individuals here, but I was lucky enough to hear Bruce Norris speak, and that was a starting point for me because I heard truth. I could feel that the intent of this person… He didn’t have any stupid mentoring program. He wasn’t a slick, bullcrap guy. He was a straightforward old guy, straight up and down, straight shooter.

Fortunately enough, I started to create a vision of how I could do this. Before that, I was in the real estate business, but I just really didn’t have a direction. I wasn’t really sure what to do. You go to this seminar and that seminar, and this month they tell you to do tax lien sales and next month they tell you to do short sales and next month they tell you…and this guy has analyzed the market, analyzed the changes in the market, put together material telling you, hey, when the market does this, you do that. When the market changes and does this, now you should be doing something else. Okay, this is starting to make sense. 

All my troubles led me to that. So I never really focus back on all my troubles. I focus on, wow, I sure was fortunate. Whatever landed me there, I thank God. Because it’s not just that you collect assets or make money, you learn a skill set. You learn a trade. You have a career. And that’s good. That’s something to be proud of, and the people you run into, you treat them well and try to make sure other people have prosperity and make sure other people don’t get hurt. That’s what came out of that whole experience.

PDC:   It sounds like it took you a long time to figure it out then for yourself, right? It sounds like… You made it seem like it was years and years until finally… You made these mistakes, and you met Bruce Norris and things clicked.

PA:  (0:22:31.0) Exactly. And it was a long time. It really was a long time. But time goes by quickly, so in retrospect, it’s like, wow, that’s already 12 or more years ago.

PDC:   So you survived on that equity you had in your bank for that whole time? I’m just trying to put a picture on it because a lot of people…

PA:  Well, I sold some things too.

PDC:   So you were rolling around in money I guess.

PA:  Not at all. Not at all. I was in bad shape, man. I was in bad shape.

PDC:   Besides what Bruce Norris taught you about shifting with the market, what helped you just bounce back and start getting some traction? What are some key things?

PA:  (0:23:22.1) Well, I can’t remember the month, but I think November or December of 2008. Bruce Norris used to do a 3-day bootcamp, and I went to that bootcamp. In that bootcamp, I was taught some of the core skills you need to be a real estate investor. I think in the discussion we had before, you told me that in all this real estate education that you really hadn’t run across too many people talking about appraising. I said something like, “That’s like saying you’re going surfing, but you don’t know how to swim.” I was taught that at that seminar, and Bruce’s appraiser at the time, Rick Solis, did a really good presentation. Then I just bothered the hell out of the guy for about a year.

But if you don’t know how to evaluate a property, you don’t know how to appraise a property and assign value to it, then maybe somebody can teach me something but I don’t know how to operate in this business without that skill. I don’t know to operate in this business without being able to do repair estimates. When I started to put repetitions in on those skills, I started to gain confidence, and I went, “Oh!” This isn’t about your gut feeling, about speculating, oh god, if I buy this house, the bullet train is going to come through here some day. All that other bullcrap. 

Who assigns value to property? Banks send out appraisers to appraise property for their borrowers. That data is recorded in the MLS, and those sold properties and pending properties are evaluated and value gets determined by an appraiser. So wouldn’t it make sense that we kind of put the appraiser hat on.

PDC:   Somebody down the pipeline said that you value property better than these appraisers out there.

PA:  (0:25:26.8) I don’t know who said that, but I’m doing a different job than they’re doing. I’m looking at what they do because an appraiser gets sent out, they go, “Here’s $400 bucks. Here’s an address. Now come back with a value.” And they look at the market conditions, and they’re trying to find sales data that substantiates a number, a value. I’m doing the same thing because, if I sell my house, the value of my house on resale will be determined by that same method in most cases. 

But I’m also an investor, so I’m looking at some other things when I do an appraisal. I’m probably looking a lot more closely at the standard for repairs and the standard for finishes in a market. So I’m looking at all these comps, but I’m also looking very closely… If the range is 230-300, what’s the difference between the way a $300,000 sale looks in that market and how much a $230,000 sale looks? What kind of financing is used in this market? How long does it take to sell something? How much inventory is there? What’s active? What’s for sale today? I did an appraisal last night. There was one house available in a mile radius with a ton of sales activity. If there’s very little available, then… Obviously right now, we have a very low interest rate and very low inventory, so it is a super seller’s market.

PDC:   Going back to what you said real quick. You mentioned repair costs, and you have students. Repair costs is a big hangup I think. A lot of people don’t know how to do that when they first get started. They don’t know where to start. How do you instruct somebody to figure out a repair cost when they’re not a handyman, they’re not in construction?

PA:  (0:27:27.6) Let’s go back to when I started. I had no idea really what to do. Now again, I got some training at The Norris Group that was helpful. But what we just talked about, appraising and looking at what the higher comps sell for, the ones that sell fast, what they look like on the inside, that is what instructs me on how I’m going to fix my house. I look at the market standard. I look at what the market is raising their hand and saying, “We’ll take that house with that flooring and that countertop.” It’s not HGTV or I’m creative. It’s none of that.

In terms of telling somebody else, one real basic thing you can do is you can get online and just look at what flooring costs. Look at your market. Look at 50 sales in your market. By the way, that involves you determining what your market is, and that’s a step that some people can go years without making that commitment or decision. But look at 50 houses. Look at what stuff sells for. Look at what it looks like. If you’re looking to buy, fix, and sell houses aka flipping, you’re not really in the business of seeing what can I get away with here. You just want to do a nice repair job. You’ve got to make some decisions that are budgetary, and you’ve got to put the money in the right place, but get real familiar with what it costs to do a kitchen. You can go right on Home Depot or Lowe’s and put a kitchen together, bottom cabinets, upper cabinets, countertops, sink, appliances, and you can really start to get a good ballpark of what the parts cost.

PDC:   I like that. That’s a lot more than what people teach which is just do a rule of thumb. I’m following somebody else’s example like so many dollars per square foot. That’s what this guy pays. Instead you’re looking at what’s actually selling. People are paying this much for new countertops, new flooring, and knowing what’s needed inside the property you’re looking at.

PA:  (0:29:41.4) Yeah, yeah. Because even in my market I’ve had agents tell me, “Oh, you should do this, this, that, and the other thing.” I’m like, “Really? How much are you kicking in on that.” I’m just looking at the market. The comps are very clear about what the market standard is. Now, if you move up to 1.2 million, 1.5 million, you’ve got a different market. You’ve got different materials. You’ve got different finishes.

PDC: Now, are you talking about here flipping or is this all… When you’re going to hold onto the property, are you doing a different grade-level construction job for tenants?

PA: (0:30:21.1) There is a difference, and I will say in my early rentals I did a terrible job of fixing them, and I learned the hard way. I can get away with this. I can get away with that. I was trying to squeak these deals out and make them work. If I had it to do all over again… Bruce Norris even told me. At the time I think he was doing Moreno Valley, and he rehabs his rentals like they’re resales. Beautiful stuff. In my mind, I’m thinking, hey pal, I can’t afford that. 

So I did what I had to do. I cut all kinds of corners. I kept kitchen cabinets and just painted them instead of replacing them. I’m not proud to say that. I just painted the front of the house. You get curb appeal. Not side appeal and not back appeal; just curb appeal. I did all kinds of cheap crap, and as time goes on, you make a little more money and you live through the experience of going, wow, being a cheapskate is not a good trait in this business. I know sophisticated guys that are the biggest cheapskates in the world. I value my relationships with tradespeople, so if I’m always just trying to grind tradespeople to death… First of all, it’s just not a lifestyle I want to live. Second of all, the people that work for me know they’re going to get paid. They get ambitious sometimes. I’ve been working with the same contractor nine years.

PDC: Yeah, I can see how it can be a high turnover for people who just keep pestering down your prices.

PA: (0:31:51.2) I hate that. First of all, everybody around me has got to do good. I mean, the person that sold me the house, I want them to do good. I’m sure most people here would be mortified to find out that I insist that, if somebody brings me a deal and I resell it with them, they get three percent. I know that’s not the standard right now. I know that’s not the standard. But paying an extra 0.5 percent… To me, I just look at it as marketing dollars because if that person gets another deal, do you think they’re going to bring it to me or the genius investor that’s like, oh, I get it for two percent. At the end of the day, I just want everybody to be happy. 

Now, that being said, the contracting world is full of sharks, and that’s what happens. You get this atmosphere of mistrust. Investors are cheap bastards, and contractors are lowlifes. You’ve got to cultivate relationships. The only way I know of doing it… I guess you could look everybody up on Yelp or whatever stuff you want to, but I just hand somebody a project and say, “Well, do this.” I had a guy that did small jobs for me for a year, and I handed him a full rehab. I had to fire him within about 10 days. It didn’t work out. The money was not going to my project that I was giving him, and I know what that looks like. I drive by. I go, “We’re not getting anywhere here. I’m throwing money on it. It’s not going anywhere. The money is going somewhere else.” So I told him, “Get your tools and get the hell outta here.” That can be daunting to some people, but go ahead and get three different estimates and get a feel for people and take time to find out about people and what they do and what they’re trying to accomplish in their career and how you can help them., I think I can be real helpful to tradespeople, to escrow people, to title people, to agents. I’m always referring business. So the Home Depot thing is one thing to just get a really good idea of what materials cost, and then you can do some square footage stuff. A piece of granite is $300 for a nine-footer, and I’ve got to do the kitchen and both bathroom vanities. So I’m going to need three nine-footers or two nine-footers. You can get that number together and then you can just price out a sink, a garbage disposal. The cabinets are surprisingly easy to design that. Take measurements and then just look at your standard flooring and how much tile and how much laminate. Most people are going tile and laminate and maybe carpet in the bedrooms. You figure all that out. Oh, maybe you need windows, so start pricing that out. You don’t have to spend a lot of time to start to get a good feel about what the material costs. 

Then when it comes to the labor, you have to have people walk the house with you and find out what it is they’re proposing. Then you just have to manage the project. You don’t give them a whole bunch of money. You buy the materials yourself until you get a trust level with them and experience with them. Even my guy now, I don’t give him a lot of money upfront. He doesn’t even ask for it. When he gets halfway, he gets some bread, and you have milestones. If somebody is moving along, doing a good job, then keep the money flowing and keep it going. If they’re dragging, then you hold the money back.

PDC: Somebody mentioned that you do well with REOs, that was kind of your thing dealing with realtors, dealing with banks. What is the deal with that? Are you still getting REOs today?

PA: (0:35:31.2) No, no. When the market was giving a lot of REOs right after the crash, that was kind of my product of choice.

PDC: Why is that?

PA: Well, if you went on the MLS in 2009, ‘10, ‘11, especially early on, most of the market were bank-owned sales. That’s what was there. Now, there was a lot of competition for them as well, and my competition was a lot more experienced and a lot more well heeled than I was. But I still had a nice little run with REOs, but then I quickly switched over to buying short sales. When we had a lot of distressed inventory, there were a lot of short sales and REOs. REO is a bank-owned house. It’s a house that the bank took back in a foreclosure sale. Somebody owned the house and didn’t make their house payment. The foreclosure process commenced and went through it’s natural cycle and nobody bought the house at the auction steps so it ended up back in the bank’s inventory. Then the bank listed it with a real estate agent.

A short sale is a situation where the person is not making their payment or has not made their payment for a long time. Maybe the loan is $500,000, but the house is only worth $250. In a short sale, you basically negotiate with the bank and ask them to take short, or less, of the loan balance. I was able to do a lot of those successfully and continue to work on short sales. Not so much with bank inventories. Very little of it, and the competition for it pays a lot more for it than I would like to.

Part 2

PAUL DOCAMPO: So, let’s talk about then that ______ finding deals there. Today you’re not focusing on REOs. There’s not a lot of them out there. How are you focusing on finding deals? Where are you getting them? Are you still having relationships with realtors and they’re just coming from all over, or are you actually directly marketing to sellers?

PAUL APOSTOLOS: (0:00:16.9) Well, the answer is all of the above. Probably my #1 favorite source of leads is to get in the automobile and go drive the neighborhood where I want a deal, where I want to buy a house. You mentioned John Schaub, and I certainly would recommend. His books are really some of the best, along with the Norris Group’s online education. You just talk about almost free. It’s funny. You find that the really good people really don’t charge much for what they have to teach. 

But get out into a neighborhood and drive or walk or ride your bike and start looking around, and you’ll start to see houses that need work, houses that are abandoned, houses that look like they’ve got kind of an intense situation with a renter, people moving in and out or moving out. You’ll drive by and you’ll see a bunch of couches and busted projector TVs on the curb, and you go, “Wow, it looks like somebody’s leaving.” I would suggest that’s a good time to talk to the owner about selling.

PDC: You see that and you get out. What do you say to them?

PA: (0:01:31.3) Well, a lot of times, the stuff I really like, there is nobody there. So I write the address down and go do some research. On a good day, I get involved with the neighborhood and maybe ask some questions. I would suggest really good coverage is, if you find an abandoned house, leave some kind of a note or a letter. Leave one in the mailbox and one behind the screen door. Then maybe try to talk to the neighbor across the street and left and right. If they’re not home, have a letter for them too. I’m trying to contact the owner of the empty house next to you. I’d like to buy it and fix it up. My name is Peter. Here’s my info. Also leave a letter for the owner behind the screen door and in the mailbox. Then I go home..my favorite thing is just to go home, find out who the owner is, and look up his contact information and try to get him on the phone.

PDC: How many people do you talk to? How many vacant house owners do you talk to before you get some deals coming from that? Basically a conversion rate.

PA: (0:02:47.0) Let me answer that honestly because I always get asked this question and it’s usually by, no offense to you, by dweebs and real estate clubs. I would suggest to you, 1) I don’t keep those kind of statistics because everything is different. Every person you talk to is not the same. Those things really apply to if you’re just calling a crap list and weeding through it. I feel like I have really good leads. But let me give you the one conclusive piece of evidence that I give to people that want me to give them detailed statistics on how many calls it takes. When I stop making phone calls, I stop getting deals. When I start making phone calls, I start getting deals again. So I would say that’s everybody’s personal journey based on their lead quality, based on their level of research, based on their level of effort to find and contact the seller, based on their level of experience or how far they’ve developed what they’re saying to the seller, based on their follow-up and based on them being actually a decent person to deal with. But that number is going to be different for everybody. 

I talk to a lot of “investors.” They’ve got the worst attitude in the world. They think that the planets revolve around them. It’s got nothing to do with you. It has to do with you addressing the need of the seller and listening to them say, “Hey, this is what I’m trying to do.” Then you create a solution that fits what they want to do, what they need to do, first and foremost, and that also puts you in a safe position as the participant as the buyer.

So I don’t even try. I used to try. I used to try to track all those numbers for people. You know what? Go make a thousand phone calls and come back, and we can talk about that.

PDC: Yeah, you’ll figure it out. So you’re meeting with these sellers face to face when you finally get a hold of them. I mean, they do contact… I’m assuming these vacant homeowners do contact you, and you meet with them face to face. Is that right? You don’t do any…

PA: They don’t contact me. I contact them. Why do you think they’re contacting me?

PDC: Right, right. Okay, I assume because you left a letter and…

PA: (0:05:13.8) I’m very poor with letters. I’m terrible. I just want to pick the phone up. If you and I go hang out and I say, “Paul, let’s just go drive for an hour,” and you’re going to trip out. You’re going to be like there’s something wrong with this guy. I’m going to be like, “Dammit, look at that house. It’s vacant. It’s got boards on the windows.” The thing is, when you’re in the field, it creates excitement and motivation.

PDC: Are there any subtle clues to seeing a house that might have a motivational situation, besides the boarded-up house? I imagine boarded-up houses can be pretty competitive, can get a lot people calling them.

PA: (0:05:47.5) I don’t care about that. What do you mean competitive?

PDC: I mean, explain that. What are you doing that night…

PA: I don’t look at a boarded-up house and go, “Wow, it’s probably going to be competitive.” I don’t give a crap. Why did I take all these classes for? To have an inferiority complex about the competition? I don’t care about the competition. I don’t. I don’t. 

Look, in any business transaction, in any transaction between two people, different personality types work with different personality types. Somebody decides to do business with somebody other than me, who cares? On to the next one. But you can’t think that way. I mean, you can, but I’m optimistic, bordering delusional. So why in the hell, Paul, would that person not want to sell the house to me? 

Now, the only thing about the competition is they may be inexperienced and spending way too much, or they may have a money source that doesn’t give a damn, that can buy on the tightest of margins. I’m not in that business. I’m in the equity business. The way I got into the business is I went, “The Norris Group lends money to investors. If I figure out what they’re margins are and learn what they do, do you think I might be safe?” And that’s how I learned to be safe. So, I’m still looking for a house that’s 70 cents on the dollar minus repairs. All the whatever they are, Generation X, or whatever these crazy bastards are that are spending 90, 95 cents on the dollar, that’s a different business than the business I’m in. And that’s fine. They’re free to do that. It might not be the greatest time right now to overextend yourself into a property or in an investment.

The other thing you’ll get from The Norris Group is some macroeconomics and say where are we in history? Wow, we just had a big economic run-up and now we have a pandemic, and I don’t even know what to call all the other political mess or anything. So, is that an optimistic time? Is that a time where you go, “Oh no, I feel great. Let me go 10 percent above my margin here and hope that’ll work itself out.” Again, you’re getting into speculating, not investing. 

I would suggest to people don’t worry about the competition. I get overbid all the time. When COVID hit, I had to sit down and ask myself what can I pay for this stuff now. It totally screwed up my equation. By the way, some private lenders are completely out of the market, hard money lenders, and many of them have adjusted their parameters for their loans to be more conservative. There’s nothing wrong with getting outbid. You do the best you can do on coming up with a safe offer. The last thing you want to give a crap about is some agent saying, “Oh, that’s a lowball offer.” Really? You think I should make 20 grand more? Good. You want to be half partner on that deal? Let’s sit down with a calculator, and you show me how that deal works as an investment. As an investment.

I’m sorry I went on a tangent, but you’re just talking about looking at an abandoned house and worrying about the competition. You know, some of those people are hard to contact. I have a house I drive by all the time. I’ve been trying to contact the people for five years. I can’t find them. And you know, I can’t even tell myself I tried hard enough. I got to go back and try some more.

PDC: What’s your primary way of reaching out? It’s just finding their phone number and calling?

PA: (0:09:38.3) Yes, that’s it. That’s it because I can sit down in an afternoon for an hour and a half, two hours and call 20 sellers. By sales standards, oh, you’ve got to make a hundred calls a day. Listen, at some point, you want to get a refined list of good leads and not be working on this giant list. If you have a big, giant list that you still need to weed through that you get from some list company, then fine, go ahead and do that, but that’s very time consuming, and eventually, you’ll whittle that down to a list of whatever it is. I have a hundred. If you get five or seven good contacts out of there, then good. But if you sit down every night with a good 20 leads that you can call, it doesn’t take very much time. You’ll probably be done in a couple hours, and you can have some really good conversations that will move you forward towards buying a house. 

I think I told you before that, if there’s some way to find people that have their hair on fire that just need to sell you their house tomorrow..people have these divorce lists and all these other things. That’s fine, but at the end of the day, I think you’re better served having a number of good conversations with people, finding out where they’re at in the process, in the cycle. Maybe they say, “Maybe in two years.” Well, you call them back in six months. There’s a lot going on right now. Their plans can change. They can accelerate. They can decelerate. If you always have a group of sellers that you’re keeping in contact with… 

We talked about the abandoned, crappy-looking houses. I think you were about to ask me is there some attributes to driving around. Well, how about an old, crummy car that’s got a ton of cobwebs going from the car to the ground. How about a bunch of those door hanger pamphlets on the door. How about utility company notices on the door. How about you go out on trash day in the morning and you see everybody’s trashcans out but there’s no trashcans out on that house. How about strange window coverings in the windows, like blankets and things like that and just overall unkempt landscaping, newspapers in the driveway. You got to drive around. Your eyes start to acclimate to what a potentially abandoned house looks like.

PDC: With the sellers that just are pretty resistant when you finally get a hold of them… You ask them, “Hey, I’m just looking to see if you’re ever thinking of selling.” Do you ever throw those sellers in the trash? Say this guy is never going to sell.

PA: (0:12:29.4) No, never! Never! I really don’t call it resistance. If it’s where they live, that’s not resistance. If it’s an abandoned house that was a rental or something or other, there’s no resistance. They just have plans in life that don’t involve them selling me their house right now. That’s all. If they get upset, I never think they’re upset with me. It’s a little perturbing if you’ve got an empty house that’s not making any income, that has taxes and insurance and maybe the city has tagged you for this and that. It’s just a little irritating.

PDC: Do you see those problems? Those are the things you can solve to help close the deal. I was talking with Ellis, and that’s some things he does is that, hey, this guy has a huge lien and he’s going to pay this off for them. I’m not too sure exactly the process of different deals he was talking about here, but are you solving these deals creatively, paying off this thing here, putting a lien on this house?

PA: (0:13:39.8) Absolutely. Absolutely. And Ellis is absolutely the cream of the crop. Ellis San Jose, if anybody… I’m not sure how involved in teaching he is, but I’ve taken a few classes of his, and they were just phenomenal. So yes, yes! That’s what it’s about. Look, I’m not knocking anybody that is in the We Buy Houses tribe of, you know, we buy houses, cash, fast. That’s not the business that I’m in.

Let me tell you something straight up and down. I’ve been taken to task by this in a room full of investors. The day I find a really desperate person that needs money that has equity in their house, that might be the least likely day I am to make money because I genuinely would rather help them and make sure they get the most out of it. Obviously they’re in a lot more need than I am. That doesn’t mean I can’t strike a deal with them, but I’m not looking for desperate. If desperate comes across my desk, certainly that’s a deal that can be done. But the idea of having a business that is built on a bunch of desperate people is not all that appealing to me. I’d rather create mutually beneficial transactions with people where they get what they want and they come out really well, and I come out with what I want and I come out really well.

PDC: So that two-and-a-half-year deal that you mentioned earlier, what was the issue with that? What was the problem you were solving there?

PA: (0:15:12.3) Well, it’s a little complicated, but this gentleman owned a restaurant in..damn, I can’t remember the community. It’s maybe 70 or 80 miles away. He was selling the restaurant, but he had an open lawsuit with somebody that worked at the restaurant. I don’t know if they fell or what it was. So what he didn’t want to do was sell the restaurant and still have that open court case going. You know, it’s California. The guy’s lawyer is going to go, “Guess what?” And it was millions he was selling this business for. Guess what? The owner of that restaurant just sold it and has got a pile of money. So he was kind of laying in the weeds and selling off some smaller assets. Just a strange scenario, and he was well aware of the problems with the property. He did not want to deal with that because it required dumping money into it.

PDC: It was a vacant house?

PA: (0:16:12.6) Vacant house, man. I found it walking around my neighborhood. I called him. He said, “Call me back.” He said, “I don’t know where the key is,” and then we kind of lost contact. I called him again. Finally, one day he says, “Talk to my realtor,” and I’m thinking, oh boy, there’s the kiss of death. The realtor is going to want to crank me, get the highest amount. I knew this realtor. Cool lady, older lady. She said, “Oh, god, I don’t even live close by it.”

I said, “Don’t worry about it. I live right around the corner. You don’t even have to come out here.” So I go over there and do different things to the property for her and take pictures. She hated spiders. I cleaned all the spiderwebs out. And, man, this lady advocated for me like you wouldn’t believe, and I got a great deal. It was amazing. Beautiful.

PDC: So it took you two and a half years of just constantly calling him every month, and he kept just pushing it off? He was in no rush to sell it then obviously.

PA: (0:17:15.0) No rush. It wasn’t the right time. And that’s what I am suggesting to you. Is there something we can tell somebody to make them sell it right now? People, in general, are going to sell it when they’re ready to sell it. Maybe you could call them up and go, boohoo, the election is coming. But in general… I don’t know who says it, but they say time and circumstances change all sellers. If you’re frequently marketing to people,then every so often, if you’re following up or they remember you, then you’re going to be in the right place at the right time, and that’s what I think marketing to these type of opportunities is is just being consistent, following up, and when the time comes, they remember you. Or if they don’t remember you, just constantly reaching out. That’s the challenge, just consistent follow-up.

PDC: What was it that stirred him to just finally sell? What was the… Did you hear it over the phone? Was it a situation…

PA: (0:18:20.3) No, I was going through the realtor. He needed the bread. He needed the bread to take care of some other things. The guy was wealthy. The guy was about to get a huge paycheck on the sale of a business, but he wanted to settle this other lawsuit before then and he needed some cash. There was no magic, man. No magic.

PDC: People complain about dealing with realtors all the time.

PA: (0:18:48.2) Why? What are their complaints?

PDC: I don’t know. You said it there earlier. You said it was the kiss of death right there. Is there a problem dealing with realtors?

PA: (0:19:00.0) Well, no, but generally a realtor is tasked with getting a seller the highest price on the open market. So when I heard realtor, I go, oh crap, it’s going to hit the open market. I’d rather have an opportunity to negotiate with this guy before every optimistic dummy that took a real estate class is out there making offers on it. So no problem. 

As a group… I think really early in the bootcamp that I took from The Norris Group in 2008, he said, “If you’re going to base this business on what realtors tell you, you’re going to be out of here quick. They’ll say you can’t do that, you’re not going to get it that cheap, that offer is too low. Realtors, in general, to me, are like car salesmen. They sell the product. If you buy a car from a car salesman and you have problems with the fuel injection, I don’t think you go back to the car salesman. You’ll go back to somebody that knows the more intricate parts of it. 

Now, there are plenty of realtors that know investing really well, and they understand what we’re doing very well. Some of them don’t want to deal with us because a bad investor or an inexperienced investor is as big of a pain in the ass as an inexperienced realtor. What are investors famous for doing? What are they famous for doing? They go make an offer. They tie the property up. They don’t even know what it’s worth. They don’t even know what the repairs are. And then they cancel escrow. I’ve never canceled an escrow since I’ve been doing this. 

PDC: Yeah, it leaves a bad taste in a realtor’s mouth for investors, and if you can be a guy that displays confidence that you’re actually going to close, obviously that’s a big plus for these realtors.

PA: (0:20:48.0) Sure. Look, at some point I had to do my first deal. I didn’t have any references or anything, but I did communicate that I knew what I was doing, I knew what the property was worth, and I knew what the repairs were. If you can communicate that to somebody that you’re making an offer to and make them feel confident about it, great. Then when you close that deal, now you got one reference, don’t you? And I use my title and my escrow and agents and people I work with. I’ll put in an email with my offer, “Hey, if you’d like to check on my track records or my performance, call this person, that person, and the other person.”

PDC: Yeah, because that’s got to be one of the worst things for a realtor to go back and tell their client that this guy backed out. Nobody wants to deal with that.

PA: (0:21:37.3) Well, no. It’s a waste of time. They meet you at the property, blah, blah, blah, blah. They do all the paperwork. They get all that going, and it turns out you’re just a turkey. Just a turkey. That’s where the repair estimating and appraisal skills, I think what they do is they create confidence, and people can feel it. They can feel your confidence or lack of confidence, and it gives you a leg to stand on. From there on in, it’s just performing. If I ask for a deal at a certain number, I’m just going to close it; keep my mouth shut and close the escrow. Even if I go in the house and find out, oh wow. Now I’ve gone back in the house and there’s another $4,000 in repairs. Well, that’s my problem because the relationship is worth a lot more than $4,000. Do a good job, and depending on what type of an agent it is, some of these guys and ladies are hustlers and they’re on the phone and they’re out door knocking. Man, those are great allies to have. Right now, there’s a huge shortage of inventory.