Burn Your Ships Like Cortes

What I am about to say, will offend some of my wholesaling friends. Please keep in mind that the following is just my opinion and I may be wrong (but I am sticking with it).

One thing that I learned after losing everything in the 2000 stock market crash, is that you can never follow the herd mentality of public thinking. You can never believe in the “conventional wisdom” of the day, because as Warren Buffet says “conventional wisdom is always wrong”. Going against conventional wisdom can make you pretty unpopular if you often disagree with what most people believe to be true.

But thinking unconventionally can also make you millions of dollars (if you are right). The Financial Crisis of 2008 was the first time in my life that I not only thought independently but actually acted on it. I stepped away from conventional wisdom and purchased real estate at the market bottom and I made millions of dollars because of it. I was not smart. I was lucky. But going against the conventional wisdom and what everyone else believed at the time allowed me to buy multiple 3 bedroom 2 bathroom homes for just $35,000 in March of 2009. Those houses that I purchased in just one month at the bottom of the market are now worth $200,000. That decision to buy made me well over a million dollars. And I purchased those houses by borrowing 100% of the money from private lenders.

When those houses doubled in value and went up to $70,000 by 2010, the media was still telling everyone how bad real estate was. In 2011, when those houses were over $110,000 and had TRIPLED in price the media said that real estate was “recovering”. I was reading the Wall Street Journal article about the housing recovery and when it would hit bottom and I was thinking to myself are you kidding me? Here is the article if you want to read it

And what happened since then? We had the biggest boom in real estate history. In February of 2012 Warren Buffet went on CNBC and said “I would buy up a couple of hundred thousand single family homes if I could”. You can see that CNBC interview here

Wall Street noticed what the Oracle of Omaha said. And later that year Wall Street and Private Equity started buying up billions of dollars worth of single family homes. Why is that important? Because when the market dips, expect these funds to be buying in droves absorbing up all of the supply as it comes on the market. They are ready for it. Some of them are building their largest distressed real estate funds ever. See this Wall Street Journal article that discusses that.

Conventional wisdom at the end of 2008 was that banks would never recover from the financial crisis and that real estate would never recover (because banks would never lend again). In 2008, I had friends that actually went to the bank and took all of their money out (in cash). I know people that stockpiled rice and other goods and were prepared for doomsday scenarios. But real estate recovered just fine.

The reality is that real estate always comes back. All you need to do is spend a few hours researching history and seeing how real estate has performed through prior crisis situations like the Great Depression, Both World Wars, Vietnam, etc. Real estate always recovers and prices move up primarily because of inflation.

The reality is that if you can buy a property with a mortgage and the mortgage rate is equivalent to the inflation rate then that is simply the best investment you can ever make. Why? Because it will keep pace with inflation, you will have a place to live and you will own it free and clear when the mortgage is paid off. If you buy rental properties then you can magnify this effect by having other people pay your mortgage (your tenants) and you can own the properties free and clear and create a lifetime of future cash flow.

So real estate is good long term. But may dip short term. The only real question is when will real estate recover? When will things return to normal. This is a question that is more of a concern for wholesalers than it is for long term investors who are adding to their rental portfolios. Long term investors think long term, and use pricing dips to buy more rental properties.

But wholesalers are often slow to react to change.

Wholesalers that were making millions of dollars wholesaling houses over the past few years when prices were going up, are now struggling to keep their businesses afloat. There have even been a few large wholesaling companies that are rumored to have shut down their doors over the past few weeks. These companies were simply burning too much cash and not bringing in enough revenue to survive. If your business model flips 50 houses a month at a net profit of $10,000 per house then your gross profit is $500,000 per month (or 6 million per year). With these kinds of numbers you would be running one of the biggest wholesaling operations in the U.S. But if your overhead is $300,000 a month and then buyers stop buying completely then you are losing almost 1 million dollars every 3 months.

Compare that to a wholesaler that has been wholesaling for almost 20 years and has almost zero overhead. Maybe that wholesaler only flips 3 to 4 houses a week (around 160 houses a year) and makes only $3,000 to $5,000 profit per flip. But that wholesaler has almost zero overhead. In fact that wholesaler flips other wholesalers deals because he/she has a really good cash buyer’s list.

And other wholesalers don’t mind paying $3,000 to $5,000 to get their deal sold. This wholesaler does not need to send out direct mail, buy mailing lists, hire cold callers, run Facebook Ads, Pay Per Click Ads and Text Marketing campaigns. All they need to do is have other wholesalers bring them deals to market to their cash buyers. And if you are not greedy and you let the wholesaler that found the deal keep most of the money – many of them will want to work with you.

When you operate this way you are stacking cash. Making on average $4,000 per deal x 160 deals per year is $640,000 per year. And if that wholesaler works from home and has no payroll and no employees, their expenses are almost zero.

Which of these two wholesalers survives this market? I think you know the answer to that question. You need to learn how to get lean and mean and you need to do it now.

Wholesalers that are struggling now are not adapting to the change fast enough. In times like this survival is key and the easiest way to survive is to slash expenses immediately. Unfortunately that means that you have to lay people off.

And some of those people are good people that are part of your team. But what you have to ask yourself is this: How long can you keep paying everyone with less profits coming in before the viability of your business as a going concern becomes an issue? Your family depends on you. Your employees depend on you. Their families depend on you.

You cannot let the ship sink because if it does then you fail all of them.

So you have to make sacrifices and unfortunately that means that you need to trim the fat. You need to get rid of every single person in your organization that is not generating revenue. That means that you as the business owner will need to get back in the trenches and do things you have not done for years (like speak to cash buyers and motivated sellers and other wholesalers). This is no time to be proud. Pick up the phone and get back to your roots. You will actually enjoy it if you do.

Everything has changed.

When prices are rising, and buyers are looking for their next fix and flip then there are always many cash buyers to buy your houses that you have under contract. So in that environment, the more houses you have under contract, the more money you make. And the game for the “A Players” becomes how to get more houses under contract to make as much money as possible by leveraging systems, technology, people and processes.

But when the market changes and your cash buyers disappear (like they are now) then you will need to adapt. The first thing you will need to do is learn how to find new cash buyers. Your best buyers in this new market will be new investors that have not been burned and want to take advantage of the opportunity. Think anyone with a job and decent credit that has ever thought about purchasing a rental property. Market to that person. There are no shortage of these people. It’s literally anyone that has a job and has decent credit. A lot of them have been scared out of the stock market because of the volatility and they are looking for somewhere to invest. Their financial planner will not be suggesting single family rentals. So you have no competition. Show then a single family home in a decent area that is a positive cash flow rental property that can make them money that they can buy with a conventional mortgage. If you find these opportunities, there is no reason why they will not buy it.

Another buyer that will soon be coming into your market is the foreign buyer. They are worried about their money and like the safety haven of U.S real estate denominated in U.S dollars. This is especially true if you operate on the West or East Coast in cities that are popular with foreign investors.

Florida is the number one State for foreign investors. So if you are a real estate investor in Florida, foreign buyers will soon become your best buyers. Finding good cash flowing single family homes in Florida is easy if you already live and operate in Florida. But you may have to go out of your comfort zone to areas you have not been to before where prices are cheaper and cash flows are better.

Learn how to market to these new buyers and learn how to talk to them. You will need to be more patient. They will need more hand holding. You will need to explain things to them like why single family homes make sense for their long term financial future. They will need more reassurance.

With interest rates at record lows, buying turn key rental properties or buying any rental property is really a very easy sell. Focus on the bread and butter rental properties like 3 bedroom 2 bathroom homes with 2 car garages in decent neighborhoods. Focus on selling those homes to these buyers. And focus on finding these homes.

Many companies are operating exactly like they did before the crisis. This is a mistake. A huge mistake.

They are still mailing the same amount of direct mail, and they are still paying all of their acquisitions managers, dispositions managers and lead managers like they always have. Many of them are being encouraged and egged on by “industry leaders” who are telling them that now is the time to “mail more”. But the problem is that the one crucial element that their business needs to survive is cash buyers.

And that is what is missing. And that is what you need to focus on NOW. You need more buyers now!

Without those cash buyers, it will be hard to move inventory, which means profits will plummet (I am sure they already have). If your expenses are the same, and your profits are plummeting then that is a recipe for burning through all of your cash very quickly.

Cash buyers are scared to buy right now. And with good reason. They are worried that prices will decline. They are concerned about catching a falling knife by buying a property today that may be worth a lot less in 6 months. I have personally backed out of multiple contracts over the past 30 days because prices are being reset by at least 15% to 20% in my markets. This means that I need to be buying at price levels that are 20% less than where I was buying just a month ago.

This is a hard pill to swallow for sellers and it’s difficult for wholesalers that have houses under contract that they cannot sell. They don’t want to believe it. But it’s the truth. Deals that I would have purchased just a month ago I won’t touch now – because I need to factor in the pricing reset. I need to assume that retail prices will eventually follow wholesale prices and that everything will be reset to lower levels. I am anticipating 20% to 30% at worst with 20% being a realistic number (for now).

In this environment, many cash buyers are going to stop buying completely, or they are going to wait for prices to come down and reset before they start buying again. I call it the “Corona Effect” or the “Great Pricing Reset of 2020”. If you have properties that you wanted to sell you should do it now before the pricing reset really takes hold in 6 to 9 months.

Exacerbating the situation for wholesalers, is the fact that many of the largest private lenders that lend to cash buyers have stopped lending. So even if your buyer’s wanted to buy, they don’t have the cash and their lenders are not lending them the money. Or their lenders are raising loan to value and loan to cost requirements and are raising points, fees and interest rates.

Some of the larger institutional private lenders are stuck with huge warehouse lines that need to be sold before they can start lending again. And right now there are no buyers for those loans. There is a bottleneck. No one wants to take the risk of buying loans that have a greater likelihood of defaulting because of prices being reset or people being unemployed. In the capital markets, these loans are selling at a discount of around 80% to 85% on the dollar which implies that from the lenders perspectives prices are down (or could go down) by at least that much. And this is only the first month! What about all of those unemployed people?

How many of them will not be hired back and how many of them own houses? Will that translate into another housing crisis? Will there be many foreclosures, short sales and bank owned properties? I think there will be. But it will be temporary because the big buyers, the hedge funds and private equity funds will scoop up these houses and absorb this inventory.

So how does a wholesaler who is burning cash stay alive to operate and fight another day?

You need to go back to the basics.

Can you remember back when you first learned about wholesaling? Do you remember the first house that you wholesaled and flipped for a profit and how excited you were? How about cashing that first check from that first wholesale flip? Or the countless hours that you spent going to seminars, watching videos, reading books and learning how to wholesale. Why did you do it? So that you could quit your job and be free right?

Back then you didn’t have any lead managers, acquisitions managers or dispositions managers. You didn’t have huge payroll expenses and you were not mailing out millions of postcards. It was just you and your cell phone. It was you talking to buyers and sellers.

You need to go back to the basics. You need to layoff everyone that is not 100% essential for the survival of your business. You need to get back in the trenches and get on the phone and start talking to sellers, buyers and other wholesalers.

You need to fight. Failure is not an option.

You need to burn your ships like Cortes did when he arrived in Mexico with an army of 600 men intent on defeating an empire that had never been defeated. After Cortes ordered his ships to be burned, his men knew that there was no option to retreat. They knew that they needed to defeat the enemy or that they would die. And because of that, they won and Spain conquered Mexico. They had no other choice.

Be like Cortes. Fight like your life depends upon it (because it does). You will need to adapt to this new marketplace.

Learn how to buy foreclosures, short sales, REO’s. Learn how to buy bank owned properties from online auction sites like Hubzu.com, Auction.Com, and Xome.com. Get your real estate license and learn how to buy properties from HUD, Fannie Mae and Freddie Mac.

If you want a good introduction to real estate wholesaling and wholesaling bank owned properties read my book “Wholesaling Bank Owned Properties”. You can find it on Amazon here or you can download a free copy on the home page of this website.

It’s easy to fall into the trap of thinking that the sky is falling. That calamity awaits us all. This pricing reset is temporary. Real estate will recover. This is the greatest country in the world and everyone wants to move here. That will never change. There will always be a housing shortage. People will always need houses to rent. It won’t take long before the hedge funds and private equity start buying up houses. They are going to emerge very soon. And when they do, they will need wholesalers like you to deliver them inventory.

Position yourself to be one of those people. You cannot be one of those wholesalers if your business operation is in jeopardy. Trim the fat. Reduce expenses. Get in the trenches and work!

If you are a newbie reading this, you have a great opportunity before you. The challenge for you is that you will need to fight too!

You will need to learn as quickly as possible how to find wholesale deals so that you can start wholesaling and flipping these houses to other investors for a profit. If you still have a good job and decent credit consider yourself lucky and buy a few rental properties on this dip.

These are the lowest interest rates ever in U.S History. Take advantage of this fact and borrow money at less than the inflation rate. You will thank me 15 years from now when that mortgage is paid off and you own the property free and clear.

It’s going to get worse before it gets better. But residential real estate (especially single family homes) in the U.S. is the greatest investment ever created. You cannot live in a bond or a stock or a mutual fund. Everyone needs shelter and a place to live. If you can borrow money at less than the rate of inflation to buy something that you will own free and clear in the future then do so. And do it now.

Think about the long game.

Don’t wait to buy real estate. Buy real estate and wait!