Good Acquisitions Cure All Other Mistakes (HA 74)

Transcript:

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 DeWit broadcasting from sunny southern California.
Steven Butala:
Today, Jill and I talk about how to structure partnerships so everybody wins. This is our number one topic that’s been request this week by everybody.
Jill DeWit:
Right.
Steven Butala:
Just the number one thing that gets run through our customer service machine.
Jill DeWit:
Right. Well, a lot of it … It’s because it’s a big deal right now there we’re … Here we are 2020, and we’re funding deals, and it’s not just us. I just this whole big investor list. I mean, I threw out a list of … Can’t remember what the number was, but it was 50 million? 50 million that we’re … I want to say-
Steven Butala:
Yeah. 50 mil for 40 [crosstalk 00:00:45]
Jill DeWit:
… that I scraped together. Just in one email, I scraped together about 50 million to fund members’ deals. And I know there’s way more than that that people didn’t weigh in yet to see how it goes first, and then they’re going to jump onboard. So people are asking about this because it’s … What it is, is we are funding each other’s deals. We are funding our members’ deals and/or even the general public. If you’ve got a great deal, it shouldn’t go to waste, period. I can’t care who you are. But I like my people because I know how you found it. I know you bought it right. I know you know how to market it. I know you know how to sell it. I know you know your stuff.
Steven Butala:
What’s important to understand about real estate in general, not just deals, is that whatever you make up and the other person agrees to, that’s the deal.
Jill DeWit:
Mm-hmm (affirmative).
Steven Butala:
So it’s very nebulous, and so I understand the popularity of this topic and the question like, “What do you mean?”
Jill DeWit:
It’s true.
Steven Butala:
Because I think people are used to parameters in real estate like, “I got to pay 6%,” but you really don’t have to pay 6%. Or, “I have to use a real estate agent.” No, you don’t.
Jill DeWit:
Right. You can do whatever you want.
Steven Butala:
There’s all these rumors or … What would you call them?
Jill DeWit:
Ideas, thoughts.
Steven Butala:
These …
Jill DeWit:
Preconceived rules, and they don’t exist.
Steven Butala:
Yes. They’re all-
Jill DeWit:
Well, I have one. Okay. I’ll tell you real quick, too.
Steven Butala:
[crosstalk 00:02:07] like a wives’ tale.
Jill DeWit:
Well, as a matter of fact, here’s what’s so funny. We have a deal funding right now, and the agent came back and said … Or not the agent. Excuse me. The manager of the deal came back and said, “All right. The title agent that we have wants to have a signed purchase agreement,” because we’re putting it in the name of a different entity, right, than who sent out the original offer. No big deal. He’s like, “They’re asking for purchase agreement that shows the name of that entity.”
Jill DeWit:
So my person was actually starting to type up a fancy formal thing to send it to him to send to the seller. I said, “No, no, no, no, no. This is something silly for the stupid title agent’s files. Just all you got to do, call the seller and said, ‘Hi, Seller. Do me a favor. Will you cross this off and write this name and initial it, and then send it to me?’ That’s all we need.” He’s like, “That’s all you need?” I said, “Yes. It’s a piece of paper for the person’s file.”
Steven Butala:
[inaudible 00:02:54]
Jill DeWit:
It’s an example of all this preconceived stuff that we think we have to do for whatever reason, and we don’t.
Steven Butala:
It’s all designed to make us believe we need all these people involved in our real estate deal.
Jill DeWit:
Exactly.
Steven Butala:
We need a lender. We need a real estate agent. We need … It’s all fiction.
Jill DeWit:
A bunch of foo-foo.
Steven Butala:
All of it.
Jill DeWit:
Thank you. Should we answer the question?
Steven Butala:
Before we get into it, let’s take a question posted by one of our members … I was just thinking about tragedy. Tragic historic real estate scenarios I’ve been involved in, where people kill deals because they want to feel needed.
Jill DeWit:
Oh, I believe it.
Steven Butala:
Let’s take a question on HouseAcademy.com online community. It’s free.
Jill DeWit:
Alison wrote, “So where’s the best place to buy and sell houses? I live in west Texas.”
Steven Butala:
I mean, I’ll tell you, this is a very simple question, but it’s a great one. I don’t know. I do know what to do to find out.
Jill DeWit:
True.
Steven Butala:
I go into, usually, Redfin data. There’s a lot of places you can grab data. Redfin happens to be free, which is why I recommend it to everybody. And I look at the ZIP code data scenario and see where the best place to buy and sell houses is. The data tells me. I don’t guess.
Jill DeWit:
I love it.
Steven Butala:
I go and I look at-
Jill DeWit:
We never guess. It’s funny we should … I don’t want to say that. There’s no guessing in our anything.
Steven Butala:
Really anything. In west Texas, it’s rural, so you may or may not have the best data set to work from, but find to where the data is that’s available. Pit those ZIP codes against each other. One of them’s going to smack you in the face. Between one and three or five ZIP codes against the other ones are going to say, “Wow. The days on markets are really low here. This is the price. There’s not a lot of property for sale. This seems like a good place to buy and sell houses.” Then, if you’re brand new, I would take a couple other steps, like maybe you have some conversations with a real estate agent or anybody that you can think of that knows a little bit about the market.
Jill DeWit:
Mm-hmm (affirmative).
Steven Butala:
But don’t guess.
Jill DeWit:
I love it. And it’s nothing that we can answer right here. “Oh, well, you should go here, here, here, and here.” If anybody does that … If anybody say, “Oh, well, then you should go this area, this area, this area,” don’t listen to them.
Steven Butala:
Yeah.
Jill DeWit:
Do not. Do you own homework and figure to the numbers for yourself.
Steven Butala:
And to take even Jill’s point a step further, it’s not like I can sit here and say, “Only send mail to ZIP codes that have days on market that are less than 30.” Why can’t I say that? Because maybe … I don’t know this. But maybe all the whole state of Texas, in the economy that it’s in right now, none of them have less than 30 days on market.
Jill DeWit:
Right. Maybe it’s 45.
Steven Butala:
Maybe it’s 45.
Jill DeWit:
And that’s okay.
Steven Butala:
Maybe it’s in a super slow economy, and it’s 105, but most of them are 210, but you found one at 105. That’s the one you want to be doing business in.
Jill DeWit:
Thank you.
Steven Butala:
It’s all relative.
Jill DeWit:
I appreciate that.
Steven Butala:
Today’s topic: How To Structure Partnerships So Everybody Wins. This is why you’re listening.
Steven Butala:
You send some mail out. Everything works the way it’s supposed to. A seller calls you back and says, “I would love to sell you my house for $180,000. And I really need to kind of get this deal done because I’m moving to Boston. Yeah, yeah, great, whatever. It’s worth 225, I know, but the basement’s a mess. I don’t have time to clean it.” This is a very real situation, by the way. “So can you just come on over and we can close this deal? And let’s say we get it done in 15 days or so.” And your answer is, “Absolutely. Yes. This is exactly why we sent you the letter.”
Steven Butala:
So that afternoon, you or your boots-on-the-ground go over to make sure the … Maybe, in a perfect world, meet an inspector that day. After you’ve confirmed that you actually want to buy the thing from a numbers standpoint, the inspector hands … Because he’s a perfect inspector … hands you a printout at the end of his little walk-through. You read it and say, “There’s no real problems,” and you shake the seller’s hand. He hands you a purchase agreement, and you open escrow. This is all before 6:00 that night.
Jill DeWit:
This is hilarious. This is a little … That is the dream scenario. I love it.
Steven Butala:
You get back in the car, drive two blocks, and then you get out of the car and do a little dance all around your car because about to make 50,000 bucks.
Jill DeWit:
Wait, wait. Don’t forget, you also stop 7-Eleven and you got the winning lottery tickets. Then when you go home, your wife’s waiting there in a negligee, and dinner is on the table.
Steven Butala:
Dinner’s on the table?
Jill DeWit:
And the kids are nowhere to be found. They’re gone for a week.
Steven Butala:
The kids are all grown up.
Jill DeWit:
Yeah. And paying for their own college. Let’s just keep it going. What else? What else [inaudible 00:07:48]
Steven Butala:
I love this little fantasy.
Jill DeWit:
Thank you.
Steven Butala:
They’re paying for their own college, and they’re gone forever.
Jill DeWit:
Exactly. This is all before 8:00 at night.
Steven Butala:
Each of their kids, they have extra money every month, so they send it to you.
Jill DeWit:
That’s right. “Because I want to pay you back, Dad.”
Steven Butala:
Mm-hmm (affirmative). Because they’re real appreciate of being in our family.
Jill DeWit:
And they call every morning to say, “Thank you for everything you’ve done.”
Steven Butala:
“God, you guys have been great parents. I just want to thank you again. Am I calling you too much to thank you? I don’t want to bug you.”
Jill DeWit:
I know. “If this is too much, let me know. I’ll change it because …”
Steven Butala:
Anyway. You’ve got this … I don’t remember my numbers now. You’re probably going to make 50,000 bucks, or so, on this house on the spread. You drive a couple of blocks away. You do a little dance. You jump out of the car because you don’t want to do it in front of the house.
Jill DeWit:
True.
Steven Butala:
The inspection looks good. Then it sinks in, “Where the heck am I going to get 200 grand?”
Jill DeWit:
Right.
Steven Butala:
This happens to everybody. Believe it or not, it happens to us because we can’t really completely control how many great deals we get in all at one time.
Jill DeWit:
True.
Steven Butala:
So we have a threshold of what we’re willing to send out, money-wise, for with deal funding and for us. And once in a while, we get such deals, then we have to bring on partners. What-
Jill DeWit:
Yeah. I even run out of acquisition money.
Steven Butala:
Yeah.
Jill DeWit:
It’s really funny, like, “Uh-oh, shoot. We got to buy this one, too.”
Steven Butala:
So what do we do? We like this type of structure in a transaction, in a partnership. It doesn’t mean you have to do it. I think it’s incredibly generous to the money partner, and the money partners stick around because of this. We ask them to put in 100% of all the costs of the deal to close it. So if there’s escrow costs and whatever, the house is … I don’t remember my numbers.
Jill DeWit:
200.
Steven Butala:
200,000 to purchase?
Jill DeWit:
It’s worth 250.
Steven Butala:
Okay. Let’s just say … I thought it was 180. Doesn’t matter.
Jill DeWit:
Whatever.
Steven Butala:
Purchase price is 200,000. Will probably cost 205,000 with fees and all that stuff. Our partner writes a check for 205,000 bucks, and we own the house together.
Jill DeWit:
Mm-hmm (affirmative).
Steven Butala:
We don’t put a dollar in. We do all the work. Whatever’s required, we go and sell the property. Go ahead.
Jill DeWit:
I was going to back up and say, though, too, but we put in like the initial sending out the mailer, the marketing, answering the phone.
Steven Butala:
Yeah. We don’t [crosstalk 00:10:22]
Jill DeWit:
We don’t charge for any of that. That was our cost going into it.
Steven Butala:
Right. Of course.
Jill DeWit:
Thank you.
Steven Butala:
Then we sell the property for $250,000. For sake of argument there’s, I don’t know, $40,000 of spread. It’s going to be a little bit less, but let’s just say it’s 40,000. The money person takes 20. We take 20. And we all move on our way, instead of us just making the 40. So that’s the way we handle it when it’s a partnership where we are the deal-maker.
Jill DeWit:
Right. Where we’re managing the property. We’re doing the work. We’re marketing it.
Steven Butala:
There’s a ton of other ways to do it. If you’re a landlord, maybe you need to raise capital, so you take on a partner, and that partner takes 10% for the use of his capital. There’s millions of ways, but this is how we do it. This is because we’re the deal-finder. If we’re the deal-funder, we’re obviously in the other partner’s shoes, so we require the same. We’re happy to fund the properties, in most cases, 100% if it’s a great deal, but we’re not going to do any work.
Jill DeWit:
Mm-hmm (affirmative). Ding, ding. Do you want to throw in boots-on-the-ground because some people, just in case … Or you don’t want to muddy it up with that?
Steven Butala:
I really didn’t want to.
Jill DeWit:
Okay. We don’t have to.
Steven Butala:
Sometimes there’s a third party. It’s okay. Sometimes there’s a third party … You probably heard us talk about it in the past … called boots on the ground. And they’re the people who do all the work. They meet with the inspector. They meet with the seller. They do the boots on the ground stuff. They look through asset. They …
Jill DeWit:
Take the pictures.
Steven Butala:
Right.
Jill DeWit:
They put the sign in the yard.
Steven Butala:
They do what-
Jill DeWit:
Maybe you have an open house.
Steven Butala:
… what a real estate agent is supposed to do.
Jill DeWit:
Right.
Steven Butala:
So for that, we usually pay them some percentage of the net, and we take it out of both sides. So if the money person’s 50%, we’re 50%, and there happens to be boots on the ground because we’re not in that market or we don’t want to do it ourselves from a time standpoint, we usually each give up 5%.
Jill DeWit:
Mm-hmm (affirmative). And no way’s right or wrong. I just want to hit this home, too. Whatever works for you.
Steven Butala:
Mm-hmm (affirmative).
Jill DeWit:
What if your person who’s your deal-funder say, “Look, I’ll fund 80%. You do the other 20”? I mean, because they want to get to know you and make sure you have some skin in the game. Whatever makes sense to you guys. And you don’t have to disclose this to the … This is one of the things I tell people, too, “Don’t muddy up transaction with your title agent with all this extra paperwork on the side. They don’t need to know. Just tell them, ‘Hey, we’re buying it together. Next.'”
Steven Butala:
That’s right.
Jill DeWit:
Thank you.
Steven Butala:
You don’t ever want to ask them questions about anything.
Jill DeWit:
Exactly. Don’t open up that door.
Steven Butala:
They don’t know. They don’t have any idea what deal you have.
Jill DeWit:
Don’t share with them the contract that you each sign on the side, or anything like that, because all it does is just confuse them. [crosstalk 00:12:58]
Steven Butala:
What you’re doing-
Jill DeWit:
You’re not doing anything wrong. You’re just confusing them. It’s going to make it a little harder for you.
Steven Butala:
Anybody in the partnership business assesses how they structure a deal based on risk. So our money people see us as very low risk and rightfully so. We’ve done a bajillion deals. We have this stupid show. We have company after company and example after example of proven track record of success. So it’s a very low risk … If they start to write that check, it’s very low-risk for them. When we’re in their shoes, we need to see the same thing. We need to see some people who are very responsible, who have a pretty good track record, who located a great asset, and they have a total exit plan on the asset. Now, we’re got our checkbook out saying, “This is going to be fun.” Not, “Holy Hell, I don’t know what’s going to happen here.”
Jill DeWit:
“I hope I don’t get stuck with it.”
Steven Butala:
Right.
Jill DeWit:
Or we don’t want to get stuck having to sell it ourselves. That’s the reality.
Steven Butala:
So it’s all risk with partnerships, right?
Jill DeWit:
Right.
Steven Butala:
Exactly. All about risk. There’s a million ways to slice up a partnership. But I’ll tell you, like the title say, it’ll be the first and last partnership you ever do if everybody doesn’t win. And I’ve seen people wreck their real estate careers because they were trying to negotiate the best deal for themselves without thinking of the other people involved, including the seller, the boots on the ground, or whatever role that you have. And it’s the last deal they ever do, and it’s very, very prevalent, this problem. This is one of the reasons I want to do this show, and this is one of the reasons I think it’s such a popular topic in our group right now. Because everybody has been hardwired, since they’re tiny little kids … I don’t know why … to negotiate themselves out of a deal. And just really … I don’t understand it.
Jill DeWit:
Yeah. Make it fair, make it good, and everybody will want to do-
Steven Butala:
And make it consistent.
Jill DeWit:
And people will want to do deals with you.
Steven Butala:
And then get on to the next deal.
Jill DeWit:
Exactly. Happy you could join us today. Every Tuesday and Thursday, we’re right here on The House Academy Show. Monday, Wednesday, Friday, we’re over on The Land Academy Show.
Steven Butala:
Tomorrow, the episode on The Land Academy Show is called Taking the First Step In Your Land Career. You are not alone in your real estate ambition.
Jill DeWit:
First step in land career. I’m trying to think what … Man, for me, it was just kind of following a transaction, understanding the mechanics of it. That’s all I needed to know.
Steven Butala:
So it’s a Friday show, and so as you know and no one else probably knows, those tend to be a little bit more philosophical for me.
Jill DeWit:
Okay.
Steven Butala:
So I think there’s, long before you even … It’s like a total Karate Kid thing.
Jill DeWit:
Right.
Steven Butala:
Long before you even start talking about real estate, there’s other things you got to get straightened out in your head.
Jill DeWit:
I’m sure you’re going to share more. Thank you.
Jill DeWit:
The House Academy Show remains commercial-free for you, our loyal listener, so wherever you’re watching, wherever you are listening, please subscribe and rate us there. We are Steve and Jill.
Steven Butala:
We are Steve and Jill. Information …
Jill DeWit:
… and inspiration …
Steven Butala:
… to buy undervalued property.