How to Buy a House for Less Than its Worth (HA 1185)

Steven Butala:
Steve and Jill here.
Jill DeWit:
Hello.
Steven Butala:
Welcome to the House Academy Show this time. Entertaining real estate investment talk. I’m Steven Jack Butala.
Jill DeWit:
And I’m Jill Dewitt, broadcasting from sunny Southern California.
Steven Butala:
Today, Jill and I talk about how to buy a house for less than it’s worth and then obviously sell it for more.
Jill DeWit:
Isn’t that what everybody wants to do?
Steven Butala:
I don’t believe that everyone wants to do that, for some reason. I used to believe.
Jill DeWit:
Wait-
Steven Butala:
No, hold on. I used to believe that people were born understanding how to do a real estate deal and the value of it. And after we started House Academy and Land Academy, I don’t believe that’s the case anymore.
Jill DeWit:
That doesn’t mean that they… No, I hear you. We think that they should know how to do that and they don’t. We get that, but I would hope that they’d want to. It’s funny, everybody wants to go into these transactions and try to get it for the best price they can, the buy side. But then when they want to sell it, they’re ruthless and they want to reset the market and say, “I’m going to sell it for X.” And they brag about that. It doesn’t make any sense. How about-
Steven Butala:
There’s all kinds of crazy stuff.
Jill DeWit:
You buy it right and you sell it right and you feel good about it on both ends?
Steven Butala:
How about you establish a consistent and profitable way to buy and sell a specific product type in one or two or three maybe markets and retire young? Instead of trying to be a hero, like you just described.
Jill DeWit:
Oh, what do you mean? Like buying it right and selling it right? Which part’s the hero part?
Steven Butala:
Establish a procedure. Like “I typically buy houses for 30% less than what I actually think I can resell it for the next day. I don’t want to do a lot of work because I really enjoy sitting in front of computer.” And on and on and on, you establish a procedure-
Jill DeWit:
“And I’m going to sell it for 15% less than what it is in its current position.” That’s what I mean.
Steven Butala:
“I need to net 25,000 bucks.”
Jill DeWit:
That’s what I mean. Not, “I want to buy it for let’s say 20% less and I want to sell it for 20% more.” That’s what I feel like people walk around doing and that’s just no fun.
Steven Butala:
“I need to net 25,000 bucks. This year I want to do 12 of these things once a month, maybe because I have a full time job or some other stuff to do. But yeah, I’m very, very interested in making $200,000, $300,000 on the side.”
Jill DeWit:
I understand.
Steven Butala:
“And the next year maybe I do two a month, make half a million bucks and then I’m on my way.”
Jill DeWit:
That works for me.
Steven Butala:
So the question is, how do I do that with houses?
Jill DeWit:
We’ll talk about that in the show.
Steven Butala:
Before we get into it… We will answer that question, but let’s take a question posted by one of our members on thehouseacademy.com online community. It’s free.
Jill DeWit:
Billy wrote, “Trying to get my LLC/S Corp going and I’m trying to figure out which in general is the best structure for land investing.” I’m assuming we’re house investing here. Any recommendations?
Steven Butala:
There’s a tremendous amount of helpful feedback from the community on this. So, I’m just going to give you my advice, but if you’re at this point in your career, please go on to landinvestors.com and look this up. Look up LLC. Just keyword search it and you’ll see this come up. There’s probably 10 people that had a lot to say about it.
Steven Butala:
I’m going to reiterate what I say in all three or four of the education programs that we have out right now. Forget about your LLC for a while. Do a couple deals. Do them in your own name. Yeah, yeah, a lawyer’s going to say, “Oh my gosh, you’re exposing yourself legally.” An accountant’s going to say, “Wow. Then you’re going to have to file and schedule a Schedule C on your return and itemize everything.” Don’t listen to those people. And they’re both right, by the way. Yes, you are exposed and yes, you’re going to have to file a Schedule C or some version of that depending on where you live.
Steven Butala:
Who cares? It’s more important that you do a couple of deals. When you buy and sell a house that you live in, you’re just as exposed. When you do a tax return, one more schedule’s not going to kill you. It’s going to cost a couple of hundred dollars more to file it with your accountant than it would anyway. So don’t listen to all these people. Get your feet wet. See if you like the business. Then, I think what Billy’s really asking is, “What do I do now? Because I’m in it, I like it and I can see what’s going to happen here in my life.”
Steven Butala:
Get an LLC where you live, typically. Doesn’t have to be where you live, but it makes things a little bit easier, especially if you’re near California and do a sub S election. Why? Because you’re going to file a return and all of the LLCs that end up happening, you’re going to file a corporate return, are going to roll up to your personal return through a sub X election. And it makes a lot easier and a lot more efficient. And the laws change constantly about filing a corporate return and doing a sub S election. So check with your accountant, but that is the correct structure. It’s served us well. Since the 90s I’ve been doing it that way.
Jill DeWit:
Love it. I was going to add too, just so everybody listening knows that. So we have two online communities. There’s landinvestors.com.
Steven Butala:
Oh, darn, sorry.
Jill DeWit:
No, it’s okay. No, you did nothing wrong. And then there’s houseacademy.com, has its own online community. And there’s a lot of crossover in both of them. So I highly encourage you, if you’re looking, especially if you have a question, you need an answer. These online communities have been going for years and there are thousands and thousands and thousands of posts and people involved. And it’s free to the planet. So, go search.
Jill DeWit:
If you don’t find it in one community search the other community, you’ll probably find what you were looking for between one of the two. Thank you. And a lot of this stuff crosses over too and that’s why this S Corp, LLC Corp, doesn’t matter if it’s a house flipping or land flipping. This answer’s the same.
Steven Butala:
Today’s topic: how to buy a house for less than it’s worth.
Jill DeWit:
Oh, and one more thing. Just kidding.
Steven Butala:
Oh my god. I thought you were serious.
Jill DeWit:
I’m totally kidding.
Steven Butala:
It would have been three.
Jill DeWit:
I know, that’s why I did it. Just had to do that to you. I like to keep you on your toes, David.
Steven Butala:
Right. Thank you.
Jill DeWit:
You’re welcome.
Steven Butala:
This is why you’re listening. I have to say this to everybody. Jill is famous for, we have a little talk, I turn around on my heel, we’re all done with the conversation. I start to walk out the door, get maybe four or five steps out of the door in her office and she says, “Oh, and one more thing.”
Jill DeWit:
In my defense-
Steven Butala:
How do you defend that?
Jill DeWit:
I can tell you right now, you’re often leaving before I’m done. You’re done, I’m not done.
Steven Butala:
Oh…
Jill DeWit:
Yeah.
Steven Butala:
It all comes back to me.
Jill DeWit:
That happens in other situations too. You might be done, but I might not be done. Just pointing that out. So please don’t leave too soon.
Steven Butala:
In both of those-
Jill DeWit:
Don’t just assume-
Steven Butala:
In both of those situations.
Jill DeWit:
“I got what I needed.”
Steven Butala:
I turn back around and I finished what I started.
Jill DeWit:
Thank you. But it would sure be a lot easier if you hung in there for just another few more minutes. And the same goes for my meetings, the meetings we have in my office. Same thing applies there too.
Steven Butala:
Oh, man. All you parents with young children have a lot of explaining to do right now.
Jill DeWit:
All right, so what’s “How to buy a house for less than it’s worth”?
Steven Butala:
Yesterday we talked about this on the Land Academy show, how to buy land for less than it’s worth. And not surprisingly, the basic stuff is the same. I will say there are some huge caveats or huge differences in actually doing the deal. So to reiterate from yesterday, it’s all about reach. You have to reach the right number of homeowners in a predetermined market where you’ve done your research through blind offers and you have to get them out there. And a very predictable number of them are going to respond and you’re going to do a very predictable and consistent number of transactions. For us right now it’s about between 1800 and 3000 offers that we send out for an SFR. We ended up buying it on our terms. And our terms are not 80% of what it’s worth. It’s a lot less than that, closer to a 40 or 50.
Steven Butala:
So that’s the buy side. And it’s the same with land. The numbers are different. What’s the difference? The difference is you actually have to take into consideration what you’re buying. You have to look at a market and see what the average price is. With land, it’s so simple because you just know you’re going to sell it for more. There are some pretty serious caveats or very specific things that happen when it comes to houses. I’m not sure you should be horsing around in the market where the sale prices or their houses are changing hands for, let’s say, $125,000. It’s just too hard to make $25,000 or $30,000 on that deal. So there’s some things that are different and I can go explain that-
Jill DeWit:
But for some people they work.
Steven Butala:
Yeah. I mean if you only want to make $10,000 a deal, that’s fine.
Jill DeWit:
Let’s give some real figures. We’ll come in and say it’s a $300,000 house. I want to clear this up because I think we gave a really funky statistic of second ago. So really, let’s just say a $250,000 house, picking it up for $190,000 is not crazy. $100,000 you can’t do, $150,000 you can’t do. That’d be silly. But $190,000 to worth $250,000 in its current condition-
Steven Butala:
Oh, sure. I think that’s very realistic.
Jill DeWit:
Yeah. That’s what I’m saying. And then you mark it up or you’re making… So $190,000, maybe you’re marking up $40,000, selling it for $230,000 because it’s really worth $250,000 in it’s current condition. These are all good solid numbers that everybody can wrap their heads around.
Jill DeWit:
And it works, because think about who you’re selling or who you’re buying from. Gosh, we were talking about this in the day with somebody we were out to dinner with and he said years ago when he was just getting started as a broker, he put an ad in the paper, he’s been around for a long time, offering to buy things. He said, “I had this little old lady call me who had this home for 40 years. No mortgage. Her husband died and just wanted to sell it. And she had very specific terms about how she wanted to sell it. She didn’t want the neighbors to know. She wanted to keep it quiet. She was literally moving out in the middle of the night because the neighbors were horrible to her.” And anyway, he got a great price. Do you remember this story?
Steven Butala:
Yes, very specifically. This kind of stuff happens to us all the time.
Jill DeWit:
I know, this is the stuff that people are like, “That can’t be real”, but it is. So that’s part of our due diligence upfront. When I say we, I mean Steven. When you’re picking an area or looking at days on the market, you’re looking at the owners, you’re looking at making sure they have no mortgage, you’re looking at equity, you’re looking at do the numbers make sense in this area for us? All of those statistics, so when the letters really go out, it’s pretty easy. We know what’s going to happen when they call back.
Steven Butala:
Yeah, you just nailed it. And really, my finishing point here is that the big difference between houses and land, houses are way easier to buy and sell than land, and they’re more prevalent. They just require more capital. So the big difference is that we do something called a red, yellow, green test where we look at statistics in a zip code and we pit adjacent zip codes against each other to make sure that the statistics come out. The one that shows itself as the best market, we let the data decide. The one that shows itself top.
Jill DeWit:
The cream will rise to the top.
Steven Butala:
Yeah. And so invariably, you’re going to find one or two or three zip codes in any market where the days on market are very low. It’s got low inventory compared to how many houses are there, which is all code for there’s real high demand. People want to buy houses there. It could be for some weird strange reason, but usually it’s because they’re more affordable than other adjacent zip codes, I’ve found.
Steven Butala:
So, there’s no guessing. You don’t look at a county map and a state and say, “You know, that looks like a good county.” You let the data decide for you, number one. And number two, when you go to price it and you price land, you have to guess a little bit, not guess… Make a very educated guess. With houses, there’s nine, ten websites out there that tell you exactly what they think that house is worth that you’re about to send an offer out on. They have algorithms like Zillow and Trulia and Realtor, all of them. And they’re all different.
Steven Butala:
We make it very easy to take the average of those houses and price it correctly so that… Jill just nailed it. She just said the sentence, “You really know what’s going to happen after you buy it.”
Jill DeWit:
It’s true.
Steven Butala:
So the only variable what comes, when you buy the property, you need to make sure that the asset itself is going to be sellable. It can’t be falling down. Or, you need to buy it so cheap, even there it is falling down, the rehabber, or the person that you’re going to sell it to the landlord, can justify because it’s so darn cheap.
Jill DeWit:
Right. That all makes sense.
Steven Butala:
Those are two things in the house business, house wholesaling business, that you care about.
Jill DeWit:
Right.
Steven Butala:
Everything else is data-driven, mechanical.
Jill DeWit:
Right. You sit on an offer assuming, “It’s a good roof, it’s a good this, it’s a good that.” You get the inspection back, now you might adjust and everybody expects it.
Steven Butala:
So, houses are easier.
Jill DeWit:
I just love because we have comps, we have so much information. Land’s getting better, but I don’t think it’s ever going to be as good as houses-
Steven Butala:
The thing with land-
Jill DeWit:
Because it has to be the way that the reporting goes with houses is so different. And with a mortgage, it has to be reported.
Steven Butala:
Right. Yeah, that’s exactly right, Jill. The thing with land is that there’s a pretty obvious opportunity to hit a home run and you’re not typically going to do that with houses. You’re going to hit single after single after single after single.
Jill DeWit:
And sleep well.
Steven Butala:
Yeah. And if you’re an accountant or an aerospace engineer and you love consistency and you want to know exactly how much you’re going to make and “How much mail do I have to send out? Who’s going to answer my phone?” You can be in business in two or three weeks. “Oh, what? I just have to do this, this, this, this and this? And then maybe I hire a real estate agent instead of sell it myself? I can start this whole thing up really quickly? Yes.” That’s what House Academy is.
Jill DeWit:
Ding ding.
Steven Butala:
That is how you buy a house for less than it’s worth.
Jill DeWit:
Happy you could join us today. Every Monday, Wednesday and Friday, you can find us right next door over on the Land Academy show. Each Tuesday and Thursday right here on the House Academy show.
Steven Butala:
Speaking of home runs, tomorrow the episode on the Land Academy show is called “Commercial land.” You are not alone in your real estate ambition.
Steven Butala:
There is no better opportunity to hit a home run financially in the land business than, in my opinion, commercial real estate.
Jill DeWit:
I like commercial land. You can do so much with it.
Steven Butala:
And there’s very different types of commercial real estate. Some of it… my favorite type is when it’s got a very specific designation like hotel, cemetery, skyscraper, regional mall. I can go on and on. Longterm care facility-
Jill DeWit:
Gentleman’s club. Fast food.
Steven Butala:
Why not ladies?
Jill DeWit:
Ladies club. Oh, excuse me. You are right. I am wrong. The House Academy Show remains commercial free for you, our loyal listeners. So wherever you’re watching, wherever you are listening, please subscribe and rate us there.
Steven Butala:
We are Steve and Jill.
Jill DeWit:
We are Steve and Jill.
Steven Butala:
Information.
Jill DeWit:
And inspiration.
Steven Butala:
So buy undervalued property. Every single guy I know that goes to a gentleman’s club is not a gentleman at all.