Todd Bayer is the host of one of the biggest REI clubs in Southern California, and runs a hard money lending company, a flipping operation, and now a tiny home manufactured. He’s the “money guy” and serial entrepreneur who’s going to reveal in today’s show, how he’s bought hundreds of properties on the MLS and from other agents. For more audios and articles on finding deals, and expert knowledge of real estate investing, go to RealEstateAudios.com
- Why “Faking it until you make it” doesn’t work – Tips and tactics to how to TRUTHFULLY and PROFITABLY deal with agents
- If you have a good deal… the one place where you’re almost guaranteed to find private money to fund it
- You can be an investor that goes direct to sellers, or one that never talks to sellers…. Find out how Todd has bought hundreds of properties and has only spoken to 2 sellers directly
- How to add $500 of cash flow a month to your rental.
- What do to on the MLS, every day, to get yourself a deal (even in one day)
- Whether or not you should continue to buy investments – contrarian advice from all the hype
- His story on his first deal.
- Easy tips to get attention for your MLS offers
- Why Earnest Money Deposits can be dangerous for some
INTRO: You might just be some guy that’s trying to wholesale the property, and if you’re trying to wholesale deals on the MLS, you’re probably never going to get one.
PAUL DOCAMPO: Hi! Welcome to the Deals Today Podcast, and I’m your host, Paul doCampo with RealEstateAudios.com where we interview real life, in-the-trenches guys and gals to show you what’s actually working today, what is their “secret sauce” to making success in their life and in their business.
Today we’re going to be interviewing Todd Bayer. He’s a local but quiet giant out here in southern California. He runs one of the biggest RA clubs in southern California. He’s the guy that kind of pulls the strings in the background. His partner may not like that comment, but he runs a hard money lending company. He’s done a flipping company. He started and runs a tiny home business. They foresaw a movement in the market here in southern California, and they capitalized on it. And they created a tiny home company called Back Porch Homes where they build for landlords mainly, but for anybody, tiny homes to put in your backyard and to capitalize on the cashflow opportunity there. So he’s going to be talking about that actually how, if you’re a landlord, you can capitalize on their product and create an extra stream of income from your existing properties.
And he’s going to go into a lot of things. He’s going to touch base about his story, about how he got started, about his persistence in showing up every single day until he got a deal. It took him a while, but he showed up every single day to the auction, and interestingly enough, he’s not a boots-on-the-ground, knocking on doors, cold calling sellers. He’s bought many, I want to say hundreds of properties, and he’s only spoken to two sellers ever directly. So his model is a little different, and he built his business to what he likes, to his attributes, and his lifestyle.
So let’s tune into that, and before you do that, please go to RealEstateAudios.com where I have tons of information there. You can subscribe to my daily email newsletter where I give out tidbits and food for thought every single day to keep you going as a real estate investor. And don’t forget to subscribe to the Deals Today Podcast. All right, let’s get to the interview.
TODD BAYER: To go all the way back, I was going to college. I’d done a study abroad program over in Oxford, England, for a little while through the local community college here. Then I decided when I got back I was going to follow a girl and move out to the beach and started going to school out that way. And while I’m going there..and I’d always kind of felt this way because I’d read Rich Dad, Poor Dad, I’d always kind of studied being an entrepreneur. I’d always had a business of my own. Even in elementary school I used to sell candy out of my backpack, and going back to when I was 13, I started a computer business where I would build computers for people. So a lot of my friends’ parents I would sell them a computer, and then I would go back and service that computer, and I did that until I was like 25. I’m still kind of a computer nerd.
But I was going to school. I was still doing that business, so I was kind of paying my way doing that. And then I was like, “You know what? I just want to get into the world and start doing something.” You know, work to learn, right? That’s what Robert Kyosaki says. So in 2006, my mom’s mom had passed away, and she was left with a little bit of inheritance, and she was like, “I’ve always wanted to invest in real estate.” My dad would never let her do it, so she was like, “I’m doing this. This is my money. This is my inheritance. I’m going to do with it what I want.” So she decides let’s invest in real estate.
So I started looking into how to buy property basically, and the quickest way I found if you have cash was to go to the public auction where you can just buy..it used to be at the courthouse steps right here in Riverside. So I was like, “Okay, just go to the trustee sale and start buying property.” It was the easiest way to do it it seemed because every single day they’d have an auction. You just got to show up at 10 o’clock in the morning, and there you go. So yeah, basically every single day my day would be looking at the new list of all the properties that were going to be going to auction the next day. I would go drive by all those houses, kind of write down a rough estimate of what I think the repair cost would be, and then come up with a final bid which was basically a very simple formula of 75 percent of ARV minus rehab, and that was what my maximum bid price would be. And yeah, was going every single day. I would go to the bank in the morning, take out cashier’s checks so I’d have enough money to pay for any deal I bought that day, and I would go. So I went every single day for six months before I was able to actually buy something because all the guys at the auction would bid the price up and up and up just to bid you out and get you out of the place because they don’t want you there.
PDC: How many offers do you think you made before you bought your first deal in that six months?
TB: Every single day I probably bid on at least five houses for six months going five days a week or four days a week, whatever it was at that time. I mean, hundreds.
PDC: Auctions..is that something you continue doing, or did you just transition to some other way to find deals?
TB: I continued doing that until I was able to actually get my first one. One of the guys that had been going for a long time to the auction..I went up to him one day and was like, “Hey man, let me get one. That’s all I want. I just want one deal. I’m not going to be here every day. Once I buy it, I’m going to be off working on that property, and then I’ll come back maybe in six months and buy another one. But just let me get one.” He was like, “All right, what are you looking at?” So we kind of compared our lists together of what we’re going to bid on that day. I had a property that I was actually going to be buying a second Deed of Trust. He was like, “You know, I don’t really want that one. I have to bid on it, but I don’t really want it. So let me make the opening bid, and then you can just make a bid a dollar more than that and get it.” So that’s what happened. He made the opening bid. I bid a dollar more or whatever it was and ended up getting that property that day.
PDC: So after a few months of doing this, do you feel like giving up? Do you feel like, “Man, this is ridiculous. These guys are outbidding me. I’m never going to buy a deal.” And you just kind of crawl to this guy kind of begging for a little leeway here?
TB: Yeah, I mean what else was I going to do? That was the way to buy property. I ended up getting the property. The people were still living it. I had to go and kick the people out. Not kick them out but negotiate with them terms on leaving. I offered them cash for keys, all stuff that I’d read about before. Basically, yeah, I said, “I’ll give you $2,500 to move out.” They agreed to do it, but they were actually a day late so I took $100 off. So I only gave them $2,400 to move out. Yeah, got started on the property, made a ton of mistakes, and took six months to get rid of it. Finally closed escrow on the sale in January of 2007. That was pretty much it. I wasn’t able to get another deal. And then in April we started seeing all the fallout coming from all the mortgage meltdown. So I was kind of lucky in the sense that I wasn’t good at finding deals prior to the crash, so I didn’t lose anything. But after the crash happened in December of 2007, I was getting all these emails for these upcoming REO auctions, so I was like, “All right, maybe I should go check these out,” since I had tried going to the trustee sale, but there was like 500 new houses hitting the trustee sale every single day, and like 95 percent of those would get postponed. So they weren’t actually selling at the auction. So I was like, “Okay, this is a lot of research I’m doing, and it’s not fruitful at all.” There was only like three people that were bidding at that time because everyone had gotten wiped out. So I tried that for a little bit, and it wasn’t really proving fruitful. So I got this auction thing for the REOs, and I figured, “Okay, well, I’m just negotiating with the bank at this point, so maybe that will be easier.” So I went to this auction in December of 2007. I remember a lot of the big players I knew about were there at that same time. Bruce Norris was there, a couple other people that I knew were buyers at that time. I’m in the front row, and I’m bidding on..I think I looked at 200 and something houses in Moreno Valley alone beforehand and was up there in the front with Stephen, my mom, and myself all bidding on these houses. We ended up winning the bid on three of them. Then we go to the back, and you have to pay some kind of fee because..it was basically the broker’s commission. You had to pay their commission up front. But these were all contingent. I didn’t know going into it this was a reserve auction so they could not accept your bid and basically you don’t get the property. On two of them, that’s what happened. They didn’t accept our bid, and we didn’t win it, which was funny because those houses ended up selling for half what I offered a few months later. But they never came back to me which was weird. You figure I was buyer then at $100 and something, why didn’t they come back to me when they sold it for $80. We ended up buying one. It was a house across the street from Moreno Valley High School in Moreno Valley. It was a third of an acre. We ended up rehabbing it, spending like $25,000 on a rehab, and then put a tenant in there and started buying rentals basically. The plan was to sort of do the BRRRR Method, which I didn’t know that was what it was called. I actually didn’t know that’s what it was called until eight months ago. I just thought it was you buy a house, you renovate it, you put a tenant in it, and you refinance, and then you do it again. That’s what I called it. But we ran into a wall. I didn’t realize going into that method that there was a limitation on the number of mortgages you could have. Prior to the crash, it was ten, but once the crash happened, most banks limited it to four. So you could only have four mortgages at one time, and that kind of screwed up my plan.
PDC: Is that still true today with the mortgage?
TB: Yeah, you can still do ten, and most banks will do ten. They extended it past the four that it was.
PDC: But from what I know, you’re not a landlord today, and you kind of..did you get rid of all those properties?
TB: Yeah, I did. Flash forward a little while, I had started doing a triplex that I bought for nothing because it kept falling out of escrow, and Stephen being the genius he is, he told the agents that we could close on this deal because it had fallen out of escrow like three times prior to, so we got an amazing deal because we told them we could actually close. It was because we just knew how to bond around the existing city lien that was basically a fix-it ticket. You had to do all this work before you could sell this house. Well, it had a huge hole in the roof. I mean, nobody is going to be fixing this place before they sell it. That’s the reason why they’re selling it is because they couldn’t afford to fix it. So we closed on that one. Started doing the deal. I originally got a loan through the Norris Group, and my contractor’s bid just kept going up and up and up. So I went to the Norris Group and tried to get my terms extended or something because I needed to borrow more money to finish out the rehab, and they weren’t going to do it. I ended up having to find a private investor that had some money, that knew some things about construction. I kind of got lucky. I called my corporate registered agent, and I said, “Hey, do you know anybody with money that would lend in real estate?” He said, “You know what? Here, call this guy. He has an office right by here.” I called that guy and said what I was doing. After talking to him for a little while, he finally said he would. So my experience with private investors was you just call one person and that’s it, you get the deal. I ended up doing the deal, and I closed it on that one. Then we refinanced it and kept it as a rental for a little while. But that dude that financed that deal, I’m like, “Hey, maybe we should do some more deals together, kind of joint venture a little bit.” So we bought a property together out in Baldwin Park, and we did that one. But that one became a huge nightmare. It was rat infested, and the city shut us down. We ended up having to change our entire plan. We got bigger and bigger. He kind of convinced me in 2011..he was like, “Hey, I just went to this conference about becoming a hard money lender. You ever thought about lending money instead of flipping?” and I’m like, “No, I never thought about it. Don’t really want to,” but he was like, “Come to this thing with me,” because they were doing another seminar in Vegas. So we went to this seminar in August of 2011, and I was like, “Yeah, okay, this sounds like an easy way to invest in real estate I guess,” because if you’ve got money, there’s plenty of people out there that need money. So easy enough, let’s do it.
I put together a whole plan of how to run this company, how to find the deals, how to find all the investors, and all this stuff, and he had like $4 million of his own money that he was going to lend out, so we started the company and started lending. Pretty much within about a month and a half I had all of his money lent out.
PDC: Are you still doing that today? Hard money lending?
TB: Not with him. We had done it for a little while, and then it got to the point where I had lent so much of his money out that he didn’t want to bring on additional capital. I was telling him we should bring on some of your friends, some family, get some more money into this because I’m turning away all these loans. I turned away like $13 million worth of loans over the course of like three months. So to me, I’m looking at it like that’s a lot of commission I’m not getting now because he doesn’t want to take on additional capital. So I decided to start my own company. So I started Rehab Loan Group in July 2013, and basically my plan there was to just raise private capital. It was so easy finding him I figured there’s probably a thousand guys just like him that want to lend private money. It wasn’t as easy finding those guys. Initially I figured I’d be the initial investor so I had to sell all the rental properties. So I started selling them all in 2013, finished selling them in 2014. That was supposed to be the initial capital to start lending out. Turned out that just ended up being the money to start the company and do advertising and bring some people on. I did that for a little while. We were lending money, and things were going pretty good. We had a good program. But finding the investors was really, really hard because we tried to do a very aggressive loan program that was high LTV, high interest, but it was pretty much like anybody with no experience could borrow from us and we would sort of hold their hand through the process and help them do their deals. Things were basically going pretty good with that program. We had plenty of people that wanted to borrow. We just didn’t have enough investors to invest. It was getting really tight. We started the investment club around the same time in 2014. We had more investors coming forward because we were more public, I guess, so more investors were coming in but still not enough to really fill the demand.
Then one day Stephen and I were sitting in the office, and we were like, “Let’s look at what our maximum output could possibly be if we were to do all these loans, based upon the average loan size in the Inland Empire, how much money could we actually make a year?” So we were like, “It looks like we’re going to make about 1.2 million is the maximum we could really make working the amount of hours we wanted to work.” Between Stephen and I, we were like, “Do we really want to work this hard for that much money when we could just flip houses?” And we were looking at making almost ten times that amount for the same amount of effort. We were like, “All right, let’s start a flipping company instead.” So we put Rehab Loan Group on pause for a little bit, started Community Restoration Group, and started flipping and doing joint ventures with people in the club. That was going really, really well until we tried to hire somebody on to be a CEO which kind of slowed us down a little bit plus we ended up suing a contractor which really screwed us over because suing somebody cost a lot of money. Yeah, we basically had to stop flipping because it just wasn’t making sense for us anymore after that lawsuit. We ran out of capital, and we were just scraping to get by. That’s when we started Back Porch Homes, and Back Porch Homes is building the tiny homes. So far that’s going really good, but this coronavirus thing isn’t helping at all. We had an investor that was going to put in the rest of the capital we needed to start the company and really get us going for the couple of years, and just this week he was telling us that until this coronavirus thing calms down, he’s not going to be writing any checks. So that was our bad news we got this week. He still really wants to do it. He’s just kind of uncertain of what the market is going to do right now. I don’t share his pessimism at the moment. I think we’re going to rebound back from this just fine. But you can’t convince everybody.
PDC: So with the whole coronavirus thing, there’s a lot of people that are kind of hesitant about buying right now. What’s your advice for those people? Do you tell them to stop buying? Do you tell them to keep doing what they’re doing?
TB: I say keep doing what you’re doing. I think there are some good deals to be made right now. There are definitely people out there that need the cash because they might be in a cash-strapped situation and they might have some equity in their home. So if they’ve got a house that needs a little bit of work, I think it’s a good time to buy because I don’t think housing is going to get really affected by this. I know there’s talk of people not paying their mortgages, and if 25 percent of people don’t pay their mortgage then it’s going to completely collapse the entire mortgage system. But I really think the government is stepping in on this one to bail everybody out in the event of any kind of market downturn because this is something new that we’re all facing, and they can afford to kind of pick up the tab a little bit on this one. So I think they’ll will. They’re supposed to strike a deal today I guess, but we’ll find out how that all goes.
PDC: Are there any shifts you think operators should be making right now with this change?
TB: Well, it’s tough. If you’re a hard money lender, most of them have shut down because the secondary market isn’t buying right now. That’ll come back, but for right now, we’ve actually kind of reopened the doors to Rehab Loan Group because..and we’ve had it going for..Ryan Raven has been running it for me for a little while now. He’s been doing just basic loan brokering. So right now, we have some cash investors that have some very simple, basic programs for flippers. They’ve come back saying, “Hey, I’d love some deals right now.” So we’re one of the few hard money lenders that are currently operating. Just before we got on the call, I was talking to Ryan because we have another deal that needs funding. For anybody out there that’s unsure, there are lots of guys that are still buying flips right now, especially right now. They’ve kind of ramped up a little bit because there’s more opportunity all of a sudden. There are a lot of different reasons people have motivation to sell right now. So there are deals. I’d definitely say go out there and look for them.
PDC: Is there any fear of selling, of finding buyers on the retail market since nobody is going out to see houses supposedly?
TB: Well, if you’re selling today..right now the open house thing on the MLS is shut down, so you can’t post an open house on the MLS, but that doesn’t mean people aren’t going to go show your property. If it’s vacant, they should have no fear of going to see a property, and some of the realtors I’ve been talking to, there’s been plenty of demand for homes still right now.
PDC: So no change in there. Okay. This was a question from an audience member. Any suggestions for finding buyers? The spring/summer is the most active time for home sells on MLS, and this virus seems to be lasting a long time. Any suggestions to get buyers out of their house to see the houses?
TB: Well, if you’re vacant, I think that’s a good excuse. You might actually have a better chance of selling because you’re home is vacant. If you’re trying to sell your home and you’re living in it right now, definitely don’t be home during that time. If somebody wants to come by and see it, just say you won’t be home. Give people the little booty things to put on their feet or something when they walk through your home. Just play into the paranoia a little bit might help. I don’t know. But there are quite a few people out there that are just sort of taking this whole thing in stride, and they’re not buying into the pandemonium and they hysteria so much. There are still plenty of people out there. Those are probably the people that are actively looking to buy a house right now is probably the people that aren’t buying into this scary anyway.
PDC: Yeah, yeah. It’s kind of blown up on..I walk outside and everyone is just doing just fine going to Home Depot. Would you recommend people changing up their formula right now of buying? You know, the 70 percent rule, the 75 percent rule, whatever it is. How would you recommend somebody change that up, if so?
TB: I’d probably add another 30 days on just out of an abundance of caution for myself. But I was just talking Ryan Raven earlier because we’re also looking to buy a house right now, and I was telling him the same thing. I don’t want to be tight with our numbers. I want to make sure our numbers are pretty good. I don’t want to do a deal where we’re possibly just giving them a little $500 or something like that. I don’t want to do that right now. We’re not giving any kind of extra concessions. Let’s stick to the straight math and go from there because, if we start a project now, we’re not going to get it on the market for at least another 45 days, and hopefully by then, we’ll have the stay-at-home order and all that stuff lifted. So by that time, we shouldn’t have an issue selling, and it’ll also be the end of the spring buying season, which will probably be more like the beginning of the spring buying season. I think our timing is right to be buying right now because we’re going to be selling it right at the right time.
PDC: You did a lot of auctions at the beginning. Did you stop doing the auctions?
TB: Yeah, I stopped doing auctions because, for me, it became more about boots on the ground, and there are a lot of people out there that are constantly looking for deals. I still don’t think I’m very good at finding deals personally. I’m not a good person to do that for you because I’ve never really done it. I’ve only spoken to a couple homeowners directly in my entire time of doing this. I’m better off working with a realtor or a wholesaler. I let them do all the negotiations, and they go find the deals and they bring them to me. I just have to let them know that I’m a buyer. As long as I’m a buyer, they bring deals. That’s how it’s kind of been ever since I started buying really. I’d get plenty of stuff sent to me. Whether it was a deal or not was anybody’s guess.
PDC: Do you think auctions are going to be something that will come back where it’s a good place to buy again?
TB: It’s always a good place to buy. You got to be really tight on your margins. You got to really know what you’re doing I would say to buy successfully at the public auctions. If you’re talking about the private auctions where it’s like they do the bidding on the bond of the property or they do it at like a convention center or something like that. I’ve never known anybody to buy a deal at one of those, and I’ve met plenty of people that have bought properties at those auctions. I just never knew anybody that bought a deal that actually made money at one. So I don’t think it’s a great place to buy them. I’ve definitely never heard of anybody buying a deal online, and I’ve never even heard of anybody even buying one online.
PDC: Oh, the online auctions that..okay, yeah.
TB: Yeah, like Auction.com, formerly REDC. Yeah, I’ve never heard of anybody actually buying stuff from those and certainly not a deal. So I don’t recommend them. I still think the deals are out there. You’ve got to get away from your computer.
PDC: Hey, let me interrupt you to tell you about the free video you can get called 40 Ways To Find A Deal. It’s a presentation done by a local expert out here in southern California. His name is Stephen. He’s a flipper. He was a hard money lender. He’s now building tiny homes for landlords. He’s been immersed in the real estate business, and he gave a presentation a couple years ago on 40 plus ways to find deals out here, especially in southern California, which is a competitive market. It’s things he’s done, things that his acquisitions team has done, and you can get that for free at RealEstateAudios.com/flipping. Depending on when you’re listening to this, you also get some free bonus PDFs that I give away, and you’ll be subscribed to my daily email newsletter where I talk about some principles of marketing business, real estate, mindset, everything in between. So head on over to RealEstateAudios.com/flipping to get those.
You guys today..well, you guys aren’t really buying, but in the last year or two it’s mainly been realtors you guys have been buying from? That’s your new source of deals?
TB: Yeah, that and we have a system for finding deals on the MLS, something Stephen and I..Stephen more developed it over the years. It’s just a way to kind of narrow down everything in the MLS to just a small list of houses that we can call on. That’s the method we’ve used. As one of the prizes at the Inland Empire Christmas party, Steve and I would work for the person that won for a day. The idea was to try and actually get them a deal in one day. We started the day out on the MLS where we put in all of our parameters and narrowed it all down. I think we had about 20 houses or so that we were going to go look at that day. Ended up looking at about six of them, maybe seven of them that we could actually get into that were vacant. We wrote offers basically on all of those. We didn’t get any, but the idea is that’s what you do. If you just do that every single day, you’re going to get a deal eventually. The math kind of works out to be about one in 100.
PDC: One in 100 offers made?
TB: One in 100 offers made, yeah.
PDC: Now, everybody says, Todd, that you can’t find deals on MLS today. So you guys have obviously proven that long for the last, what, five years?
TB: Yeah, we’ve always found deals on the MLS. That’s how we’ve always done it. I’ve actually never sent out a mail order. I’ve never done anything like that. There’s people I know that have done mailers and I’ve bought deals from them, so that definitely works. But I’ve never bought anything that wasn’t bought from somebody else except for one time. One time I bought a deal directly because they were a friend of mind getting a divorce.
PDC: Then what are your tips for people dealing with realtors, dealing with making offers on the MLS. I’m sure people will come in here and say, “I’ve made offers on MLS. There’s no deals there. I can’t find them. There’s no motivated sellers on MLS.” What do you say to that?
TB: It comes down to education. Make sure your realtor understands. And we don’t write an offer on every single deal. If you write an offer on every deal, your realtors going to get extremely tired of doing that. The best way to do it is to really check the temperature of the seller with a phone call first. Call them and say, “Hey, we want to make an offer. It’s going to be a cash offer, and this is how much we’re willing to offer. Is that something we should even bother writing an offer on?” If they say no, then don’t. Don’t bother with it. It’s a great way to save your time because writing offers takes a long time. It takes a lot less time than it used to, but it’s still a pain in the butt to do. I say making verbal offers is the fastest way to get to a yes because some agents will say, “Yeah, write it.” Like I’m presenting to the agent next week. And if you get a name out there eventually, the agent knows you’re for real because they’ve seen your name a bunch of times. They’re going to say, “Oh, Todd is writing this offer. This is coming from Stephen and Todd. Okay, yeah. I know they’re real buyers. They’re going to actually close,” because that becomes the concern for a lot of them is that you might just be some guy that’s trying to wholesale the property. And if you’re trying to wholesale deals on the MLS, you’re probably never going to get one.
PDC: So how do you communicate that with the..I’m sure realtors get that all the time out here in southern California. They get people coming in saying they’re all-cash buyers. It’s kind of like, yeah, sure, whatever buddy. How do you communicate that you actually are going to close on this deal.
TB: It’s tough. That’s really the hard thing is convincing the seller that you’re going to actually be able to close. If you’re new, putting down a big EMD usually helps. So the bigger your earnest money deposit the better. We always try to do a zero money EMD because we don’t like putting a bunch of money out. You figure if we have ten deals locked up and we have $5,000 committed to ten deals, that’s fifty grand we’ve got sitting out there, which is a lot of money not doing anything. So we always try to do zero money EMDs and just tell them, “We can send you the EMD, but we’re going to take another day to close. If you want, we’ll just close much faster if we just do our inspection and then we’ll just wire you the money. I mean, it’s that simple.” But obviously, we have that luxury. We’ve got a lot of investors that have worked with us for years and are confident that we know what we’re doing. When you’re new, it’s a lot harder to convince somebody that you can actually close. Working with a known hard money lenders, because hard money lenders aren’t going to do a deal that doesn’t make sense, so if you’re working with a good hard money lender, that helps for a new buyer. That hard money lender hopefully gives you a proof of funds or some kind of a funding letter that says they can actually close for you. The more clout that lender has the better, especially if that agent is familiar with them. I think that’s important. That’s why we focused a lot of our time working with realtors. That’s why Ryan is out at real estate agents’ offices all the time getting to know the agents out there because, if they know they’ve heard of us, then it looks better when an offer comes through with our name on it.
PDC: And in a crowded market, would you recommend a brand new guy searching the MLS looking for deals, making offers to go about that proposition that you do, zero earnest money deposit and maybe offer a little more incentive to go with them?
TB: No, I’d put down a much bigger EMD, and if they’re confident they can close..I mean, I would never do it myself, but if you’re confident you’re going to close on this deal, I would say it’s a nonrefundable EMD because that would make the seller super confident. You’ve got a $10,000 EMD sitting there, and if you don’t close they get to keep the ten grand no questions asked? I mean, that’s pretty strong. I might be willing to accept a lower offer because somebody is that committed to doing the deal because worst-case scenario is I lose a couple weeks and I get ten grand if they don’t close on it. So that’s really one way to do it. Shortening your duration of time that you’re going to close. So if people are writing a 30 or 45-day closing, narrowing that down to a 10-day or a 5-day, even better, then, your lender will probably hate you if you’re trying to do a loan in five days. You probably really won’t get it done, but writing those down. And then taking out all your requests. Like you don’t care about getting a termite report from the seller. You don’t care about doing a home inspection from a home inspector. You’re going to do your own, have your contractor go. Just narrowing down the things you’re asking them to do. You don’t need a home warranty. There are a bunch of things you don’t really need, so waiving as many of your contingencies as possible is going to be good.
PDC: Has finding private money ever been a concern for you?
TB: Yeah, it’s always a concern, but if you have a good deal, there’s plenty of people, even at the Inland Empire Real Estate Investment Club, that will fund that deal. We’ve worked with people there almost exclusively for the last five years where we’ve done deals with almost exclusively people from the club. There are some investors we have that are out of the area, but we met them at another club somewhere whether it be at Pasadena or one of the LA ones or one of the Orange County ones. We even have an investor that’s out of the Coachella one. So they’re everywhere, but they come to our meeting too.
PDC: A brand new guy coming in looking for deals on MLS, talking with realtors, he doesn’t have a source of private money because he’s brand new. So how does he go about having the confidence and say, “Yeah, I’ll close on this. I’m an all-cash buyer,” when he doesn’t have the proof yet.
TB: If he doesn’t have cash, then he’s not an all-cash buyer, so he needs to be honest. I think that’s a big one too. People are trying to sort of fake it until they make it a little bit, and I think it’s important to be honest and tell the agent what they can actually expect. So if you tell them, “Hey, look, I’m new. This will be my first deal that I’m buying. I’m willing to put $10,000 down as a nonrefundable EMD,” you’re really coming off as a strong potential buyer there. If you say also, “I’m working with Rehab Loan Group to close the deal,” or something like that and you get a letter from us that says we looked at the deal on 123 Main Street and we’re prepared to fund this amount, you can make your offer look a lot stronger. If you also want to joint venture with somebody who might have some more experience in this space..I’m doing a joint venture right now. I have a deal with somebody going out in Fall Brook. So I’m still willing to do it to some degree. It’s just got to be a good deal. If the numbers make sense, most flippers I know will do the deal with you, and they might even be able to bring their funding source. They might even be able to bring their clout a little bit with you because new people get the worst financing. The people with experience get the best financing. So right now, I could probably borrow better than anybody I know. Well, not better than anybody I know but better than any new person could for sure.
PDC: And what about tips for finding good contractors then when you’re starting out? How do you do that? Contractors for me have always been a headache, so how do you deal with it?
TB: Contractors are tough. That’s always one of the harder things, and right now it’s even harder because some of them are concerned about actually going to work. Some of their wives won’t let them go out and work right now because they don’t want them going out and getting the coronavirus and bringing it home. We still have some projects going too, and our main contractor has a few guys whose wives won’t let them out of the house right now. So things are slowed down a little bit.
But finding a good contractor is hard. They’re out there. They exist. The key, I think, with a contractor is to take them at their word but fire quickly. You have to pay attention to a new contractor very closely. Go out there day 1, and if anything seems off, you kind of give them one warning and then if you see like one more thing, you say, “I don’t think this is going to work out. You’ve gotta go.” Pay them for the day and then move on because, if you go too far down the road with a bad contractor, you’re just going to regret it the entire time. I’ve been down that path, and it sucks. So hire quickly and fire quickly.
PDC: Yeah, definitely.Going back to the deal finding, do you think that things are going to shift right now? As far as MLS goes, do you think there’s going to be more opportunity in the MLS than there was maybe a year ago? How do you think people are going to be finding deals? Is there going to be a lot of opportunity in the next two years? A bubble is going to burst, prices are going to drop?
TB: I don’t think it’s going to change. I think at least the next year is going to be fine. I think 2020 is going to be a good year for real estate. This whole virus thing might even push it into being 2021 is a good year for real estate. It’s anybody’s guess really, and I don’t have a crystal ball just like nobody else does. But nothing in the economy was scary to me prior to this virus outbreak, so I’m not really too concerned. Markets tend to crash when things are going really, really crazy. It’s like how the stock market crashed recently because it was already pretty pumped up in value. There was already probably a stock market bubble as it was, and then this thing broke out and that was everybody’s excuse to pull out. Like the end of the world is coming, but what are we looking at today? The market has kind of rebounded a little bit. The Dow Jones almost hit 18,000 yesterday, and it’s back up today.
So it’s kind of tough to call that market, but real estate is slow and steady. Things are affordable, and with mortgage rates kind of going down right now anyway, that just brings back more buying power. I think we’ve extended it a little bit longer until the Fed decides to raise rates again.
PDC: Wasn’t that why you guys shifted to tiny homes..well, at least one of the reasons why? You mentioned you kind of shut the doors on that business, but wasn’t it also because there was kind of a height in the real estate market right now?
TB: We kind of took the Seinfeld approach. We wanted to kind of get out while the getting was good. Plus we were struggling. After that lawsuit, we were struggling. We’ve had four deals that our investors are losing money on. It’s not good. It’s not comfortable for us. They kind of came to us thinking that we’re the security, we’re the safety, we’re the guys that were going to see these deals through and they were going to make money. They probably thought it was guaranteed, but the reality is we’re not infallible. Things can happen. That lawsuit was a bad decision. We probably shouldn’t have sued the person because we ended up settling and ended up losing a ton of money. So the investors, unfortunately, are taking part of the hit on that, and that sucks for them and for us. We’ve had a horrible time dealing with it, but it doesn’t mean we don’t know what we’re doing. It’s just we’re not litigators apparently.
PDC: Did you guys lose..oh, you guys settled, so you basically…
TB: Yeah, we settled. We would’ve won. We had it in the bag. We would’ve won. We just didn’t have the money to continue paying the attorney, and our attorney wasn’t going to do it on contingency. So before you enter a lawsuit, make sure you find an attorney that will do it..make sure they believe in the case that much that they’re actually going to put their own money behind their mouth because our attorney, while we like the people, we feel like we got had a little bit. They kind of took us for a ride. We told them in the beginning we didn’t have the money to do this, and they still let us go down that path. So we got taken by an attorney, and I’ll admit that. It’s our fault that we let them kind of sell us, but we felt we had a really strong case and we did. But the other guy just had more money than we did to sustain it longer.
PDC: He was a contractor you were suing?
TB: Yeah, a contractor, a well-known guy. A lot of people know him. He’s out in the Orange County area, very active out in that area through the clubs and stuff like that. If anybody ever wants to deal with a contractor out in the Orange County area, call me or Stephen first and ask us if he’s a contractor we recommend or not.
PDC: Was that a case of using a bad contractor repeatedly? You gave that tip earlier to just keep away from those bad contractors, just fire them. Was this a case..how do you keep away from that situation?
TB: There was a lot more to that deal, and the reason why we sued him had..well, it all kind of tied together. He was a lender and a contractor, so he put in money on that deal also. Really it came down to the fact that he just stopped as a contractor doing what he was supposed to do because he, as a lender, stood to make more money by extending out the term of the loan, which come to find out is called tortious interference of a contract where he, as the contractor, was going to make more money as a lender because he could make the project go along. Then he decided to foreclose on us because that would make him even more money. Ultimately, it was fraud or breach of contract, tortious interference of a contract. We had him on so many different counts. We had evidence. We had all kinds of stuff, and we could have nailed him. We probably could have turned the case over to the DA, and he probably could have gone to jail. In fact, I’m like 90 percent certain he would have gone to jail for fraud, but we didn’t know that going into it. We kind of had this belief that we’re these club leaders. We’ve got to fight for the everyman out there. We should take this guy down. Never file a lawsuit on principle. File it because it actually makes financial sense, and this one didn’t make financial sense.
PDC: Basically, stay away from any contractors that are also your lender then, right?
TB: Yeah, or if you do, put them behind you. File a lien ahead of them. Our mistake was that we had a third on that deal, and he was a first and second. We should have had him as a first and third, not a first and second. If he was a third, this probably wouldn’t have gone down so smoothly for him because he wouldn’t have had the incentive to do what he did.
PDC: With tiny homes now, there are a couple questions for the tiny homes since you guys are..have you guys rolled that out now? It’s the end of March 2020, have you guys rolled that product out yet?
TB: Yeah, we have our companion. The studio model is done. We have plans. We’re accepting orders right now. We just did a big show at the beginning of the month down in Delmar at a show called TinyFest. We have another big show coming up in June called The Great American Tiny House Show or something like that. Of course, everybody is going to hear all about it pretty soon. We just got signed up with them to do that show. We have the model. We’re ready to go. We’re basically just waiting for our first 20 orders to come in, and then we’re going to push it out.
PDC: How many orders do you guys have so far?
TB: We have seven. We’re waiting on another 13, and once we have those, the factory is ready to start making them. They told us yesterday actually..they said, “Please,” because they’re shut down right now. They’re shut down because of the virus. They’re an RV manufacturer, and there is no RV building going on right now.
PDC: Are you guys shipping out across country or just California?
TB: We can. We can go anywhere in the country, but we’re primarily sticking to southern California for right now just because there’s a huge enough demand here. Unless you want to pay the extra delivery cost, it’s about $1.55 a mile if you want to go anywhere. So if we wanted to go to Texas or Utah or whatever, just figure $1.55 a mile for your transportation cost.
PDC: Is that becoming a crowded market for you guys? Are there a lot of tiny home manufacturers right now in the country?
TB: No, it’s extremely open. If anybody wanted to become a tiny home builder, now is the time to do it because we still need another 100 or 200 tiny home builders in this country to even make a dent in the affordable housing market for tiny homes. We see it as a very possible option for people to put in their backyard as an extra unit to help solve the affordability issue.
PDC: Explain how that works. Who is your end buyer and how does it work for them?
TB: Most of the buyers are going to be people that own a home and have the space in their yard to put a unit, and they’re either going to rent it out to an adult child, a parent of theirs, or like a college student or single mother, something like that. They’re looking at it as either additional square footage they can add to their property, or they’re looking at it as an additional source of income to help them pay their mortgage. In some people’s cases, they’ll buy the unit, move into the tiny home, and then rent their main home out because they don’t need all that space anymore. We’ve actually met quite a few people that that was their plan when we were down at the Delmar show. We were very surprised to find out that most of the people didn’t want it for extra square footage. We were actually surprised at how many people are really looking at it as an additional income.
PDC: So definitely it’s a good investment for a landlord with a big lot, has extra space in the back. Is that some of the people you’re talking to and potential buyers?
TB: Yeah, actually most of the buyers, I would say, are real estate investors in some capacity. They’re the people that see it because you can put this thing in your backyard, and if you’re here in Riverside, for example, you could easily get $1,000 a month for that unit. You figure with financing, they’re paying less than $400 a month for it. They’re cash flowing probably more than they would cash flow on the main home. So if they already have a rental property and it has the space for an additional unit, you have this rental and you put this thing back there, you’ve probably doubled your yield on that property.
PDC: This is a question from the audience. Who are the top three tiny home manufacturers and designers right now in the country? Are you guys one of them?
TB: As far as usability and how good the units are, we’re number one. That goes without saying. Tumbleweed is probably the biggest one. They’re out of Colorado. They’re probably building about 50-100 units a year, maybe as many as 200. But they’ve been around a long time, and they’re very set in their ways. They do customs, which is not something we’re doing. We’re not going down the custom road. We’re building them like Ford Model T. We’ll get you a usable house and then, if you want to do any customizations, you can do that on your own. There are a couple other builders out there, and most of them focus on customizations. There’s nobody really doing our model which is, like I said, Model T. Nobody is really going that route. They all have like 28 different floor plans and you can do all these different customizations, different configurations of those 28 floor plans. So they’re building one-offs. That’s who we met at the tiny home show in Delmar. There wasn’t anybody that was doing them as a factory thing except for some of the mobile home builders, but they’re not building tiny homes. They’re building park models and really just mobile homes. They’re just building mobile homes and calling them tiny homes.
PDC: The advantage of dong the Model T for you guys, does it drive down costs?
TB: Yeah, it drives down the costs so we can keep the cost low. We hardly found any seller that was selling their unit for under $100 grand, and here we are priced at $60,000. And it’s built like a brick house. I mean, it’s built like a home. Everything in it is residential grade. It’s built like you would build a regular house. So it’s durable. It’s built to a 60-year construction standard. So these things are built to last. When you look at the mobile home builder ones, they’re still doing the typical tricks that they do on mobile homes. They’re not doing 2×4’s. They’re doing 1×3’s. They’re spacing the gaps out a little bit further, and they’re using cheaper materials. It’s kind of the same old story with them, so if they last 30 years, great. But we’re building ours to international building code. We’re compliant in all 50 states as far as our construction code goes.
PDC: I’ve heard of Tumbleweed. When I was in the land business I was looking into those guys. But I would imagine they’re not for the investor like you’re focusing on, right? Are most of them just..because it’s all customization, right? That’s too expensive for an investor. Are you guys one of the only ones that are focused on the landlord?
TB: I think we are. I think we’re probably the only one, at least that I know about. There is supposedly a company in LA, but I don’t even know their name. Again, we could take another 200 companies building tiny homes designed for investors, and there still wouldn’t be a crowded marketplace. This is a huge industry that’s currently wide open for business. The idea of affordable housing here in California and really in any coastal state is huge. There’s nowhere you can go buy a $60,000 home that has everything you need and you can still put it in a really decent part of town. If you go to rent a really cheap apartment, like $800 a month, here in Riverside that’s going to get you very limited options and you’re probably going to be in a pretty rough neighborhood. So if you can rent this thing for $1,000 a month and be near the college or be in Canyon Crest or one of the better areas in town, I think people would much rather have that as an option.
PDC: What’s the initial investment that a landlord would have to make to buy one of these?
TB: With us, you have to put a $500 deposit down. That just shows to us that you’re a real buyer and that puts you in line. That’s important because down the road we’re going to have a huge line of people that want to buy these things. So the quicker you get in line the better because the sooner you’re going to get a unit. It only takes us about six weeks to build one. We’re going to get that down to about a one-week period pretty soon because once we can really spool up the factory and get a bunch of workers working on it, we can build these things really quickly. So getting in line is important.
So it’s $500. The unit itself costs $60,000, and the cost to get it installed is the only other cost aside from tax and title, which you have to pay to the state. The delivery cost and the installation is going to be somewhere around $3,500 to $5,000 depending on the property you’re putting it on. Not every property has a wide enough side yard for us to be able to back it in, so we’d have to bring a crane out, and that costs like $2 grand. So costs vary. And it depends on how far we have to run utilities to get from the existing meters to the unit itself. That’s about it.
PDC: You guys have an amazing, unique selling proposition. There’s nobody targeting landlords for this, and there are tons of landlords, especially out here in California. A lot of guys who are building a second structure in the back to add on the value, add on the income, and tiny homes, I imagine, would be cheaper to go that route, right?
TB: Absolutely, yeah. And faster too. You figure to get an ADU permit to add on to an existing structure, you’re looking at probably, right now, at least nine months before you’re going to be anywhere close to done, at least, and probably even closer to 18 months before you’re finished with your ADU build. With us, we get on and fill out..it’s an over-the-counter permit to get an RV stand. We go and do our semi-permanent foundation system, keeps it a trailer but it’s just on a semi-permanent. We take the axles off, drop the unit down, and you’ve got a one-and-a-half foot step to get into the unit itself. We’re probably installing in three weeks and you’re done. So you have an extra unit way faster and probably way cheaper too. An ADU build right now you’re still looking at paying probably $200 a square foot in most places to build it whereas, with ours, it’s cheaper. It’s not as big, but that’s..if you’ve seen our unit, you’re going to go in and say, ‘What do I really need all the extra space for? Do I really need hallways? Do I really need all the extra space that’s eaten up in square footage of a home?
PDC: Todd, I appreciate you being on the show, man. You gave a lot of wise words here for flippers and landlords and guys getting started too. I really appreciate you being on here, man. How can people find you?
TB: You can go to BackPorchHomes.com. Look us up there. You can go to IEREIC.org and find us there. Go to Meetup.com and look up the Inland Empire Real Estate Investment Club. You can go to RehabLoanGroup.com. Or you can give us a call. Our phone number for Back Porch Homes is 951-394-1844. You can write me, Todd, at BackPorchHomes.com.
PDC: All right. Awesome, Todd! Thank you very much.
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