S4 E14 - 9 Types of Houses NOT to Buy Part 1

If you want to know how to get started in real estate but don't even know how to make an offer on a house, I have got the formula for you. And also nine types of houses not to buy. Stay tuned.

Brittany, for those who are watching on YouTube. You haven't mentioned the shirt.

The shirt's amazing. I am very proud that you're wearing the shirt. This is my symbol. The end of every GeForce call where I say, go. And may the false for good be with you all. Yes. Yes.

It's me as Yoda, Brittany Yoda. And in GeForce, one of the things that you're known for, one of the reasons that it's slammed all of the time is because people come for the real estate tips.

Oh, yes.

And they are fire. They're always hot. They're always worth millions.

I mean, I have people text me every week. They're like, I just made $60,000 on that one tip.

Yeah.

And I'm like, all right, well, don't worry. I got another one coming next month for you.

Boom. And I know that people are spending tons of money to listen to these podcasts that we're doing right now.

I just am worried that while you saying that all the time that people are actually, like, gonna be thrown off.

They might be. Yeah, they might be thrown off.

Please don't be thrown off. We're not actually charging for this podcast right now.

Still free.

But you should be charged for this because it's valuable stuff and it's about.

To become really valuable. You promised us some real estate tips.

I did.

Hit us. What are we sharing with today? We're talking about.

Well, big thing. We're gonna classify which sector we're talking about. Because when you say, I wanna get into real estate, it's kind of like saying, I wanna be a doctor.

There's a lot of ways to be a doctor. What kind of doctor? What's your specialty? How are you going to practice and learn? I like that analogy, all that stuff. Yeah. You can't be a brain surgeon and a foot fungus doctor. Like, they're different things. And you study when you say, I want to get into real estate investing. There is, like, a million ways to become a real estate investor. So we're going to specifically talk about rehabbing houses. And one of the big tips that people don't know what to do this actually with new construction as well. This one specific tip is called the Mayo formula. People don't know how to run their numbers, and so they just look at it and they're like, oh, this looks like a crappy house. I think I could get it discounted. And then they buy it, and then they actually start working on it and they lose their money. If you didn't know, it's like 82% of people who try to flip houses lose money. It is not like the TV show.

Whoa.

Yeah.

Okay. I did not expect that.

It's very high. And after you lose money, because the stakes can be big. I mean, they don't lose like three grand. You lose like 50 grand.

Sure.

So a lot of people can't survive that, and I want to make sure you win. So this is a four formula that pretty much all rehabbers know. But it was taught to me by my mentor, Polly Kazanowski, who is. He lives and dies by numbers. My gosh, he's amazing. So the Mayo formula. Mayo. I don't normally like acronyms, but just gonna share the formula as it was taught to me. It's maximum allowable offer. So you start with what is the after repair value? So once this house is fixed up, what will it be worth? So if it's all the way nice with all the finishes that you're planning on putting in, let's say it's worth $300,000.

Okay.

So you've got the after repair value, and then you multiply that by 0.7, so it's 70%. Why do you want to start at 70%? Because in that 30% is your profit, your agent commissions, what you have to pay a lender to even do the house at all. It's important. Again, you're not going to net 30%, but let's say that's just our starting point. So you're going to start out at $210,000. So if the house was perfect and ready to go, the. The most you can offer is $210,000. It seems like quite the discount, but it's really not. And so after you've got that after repair value times 0.7, the next thing you have to do is subtract your rehab costs. So if your rehab cost is $55,000, then the most you can offer on that house is.

145,155.

Very close. $155,000. And people are like, wait a minute. For a house that's worth 300, when I'm done with it, the spend is 155. Yes. Now, we used to do the formula on times 0.65, so 65%. But as the market has gotten really hot, it's Almost impossible to get deals. But do not go over that 0.7, because you will be just eating it. So it's a big deal.

Yeah. There's a lot of numbers in there, too. I mean, like, so the rehab cost, you got to figure that out. That's very. And the after repair value arv, you're probably doing comparables.

Yes, I guess. Yeah. So in order to figure out your after repair value, you've got to do comparables and see what's on the market. And that also helps you understand what your design needs to be like. Your design is going to follow, not, oh, Jeremy Newsom's, like, favorite color is neon blue. And so you've got neon blue tile everywhere, because you just love that color. It doesn't matter what you like. What does the market want? Unless this is your personal home that you're going to keep forever. If this is a flip for the market, you want to open up to the biggest buyer pool. So what is the market demanding in order to get a $300,000 sale price over here? Well, is it granite countertops? Is it real tile? Is it crown molding? What is that? So that will affect your renovation budget, but, yeah, you're going to have to learn how to run numbers. And in the meantime, you can use a contractor. But again, you have to have your specs on in order to get this. I want to have the appliances be stainless steel at this specific brand, and I want to have the granite count. So you have to tell that contractor the level of finish in which you plan on putting in that house before they can tell you what that budget will be if you don't know how to run the numbers yourself.

Sure.

So that formula is huge.

Yeah.

And in future episodes, based on all these requests we keep having get sent in. Is Bernie. How do I start from zero? I have nothing. But I really want to get into investing in real estate. Where do you start? How did you do it? I'm going to teach that in a future episode. How to get started with nothing, building cash. And how to get started with something, building wealth.

Let's go. All right, I got a question for you.

Yes.

Which home prices should people focus on flipping? I think there's pros and cons to each. 300,000 or less. 300 to a million or a million and above.

Mm. There's always pros and cons.

Yeah.

Starter homes. So especially when you're new, starter homes has the biggest buyer pool. Always will. It's the safest for you. It is the safest to make sure you know to sell, and it is you borrowing the least amount of money, which, again, that interest when you're new is gonna be super high because you don't know what you're doing. And it's gonna take a lot for people to believe in you. So you wanna start with starter homes. So if starter homes in your community are 120,000, that's what it is. If they're a million because you're in California somewhere, then maybe they're a million. But the answer is starter homes.

Oh, interesting. Okay, well, what's. Is there another classification for the other three then? Is there other names for those? Or is it.

Again, it's not necessarily price range because it. Location, location, location. So their starter home. And then you know what intermediate is, and you know what luxury homes are in yours. Luxury homes obviously have a huge return you can make. I just made $600,000 on one house in Nashville that I would classify as, like, upper, not quite luxury, but, like, it was still freaking nice. Yeah, I know you can make big swings in that. Some people can make millions of dollars, but it's also the first one to get hit whenever the market gets tight. Only so many people qualify for it. Guess what? That buyer gets to be really freaking picky. So you better have dang good subs. That finish has to be really good, and your design has to be on point because those people want what they want because they're paying for it.

So it sounds like then you could hire different contractors for those different types of houses.

You have to.

You have to.

The same contractor that's going to do your $150,000 rental property is not the same contractor to do your $2 million luxury spec home. No, not even close.

That is a pro tip.

Yeah.

Yeah. Seems so simple, but, yeah, for sure it is simple.

I will tell you, you do not always get what you pay for. It's not about. You do not always get, like, oh, if I spend more money. I had the same. When I was rehabbing my office, I had the same scope of work, which I always make the scope of work, and I hand it to them, and I'd say bid this exact scope of work. If not, then you're getting. You're trying to compare apples to oranges. So I had five different builders do the same exact scope of work, and the lowest price for that Exact thing was $44,000, and the highest was $244,000. Same exact scope. So I do want to warn you that you really need to go see their Product, hear their reviews, ask for testimonials, make sure that they have a good reputation on the bbb. Again, meet people that they've worked with. Never give people more than one job at a time. Never ever. Never ever, ever. Because they may crush it for the first 80% of that project. Nobody ever wants to finish a house. I don't know why. They just don't. So they might take like months to wrap up the first project before they even start the second one. And then you're screwed because you've got them going on both. And anyway, you want to see them finish a house, you want to see them deal with warranty issues before you go, oh, I like this guy. Let me give you all seven that I've got working. No. So you want to have them compare apples to apples. You want to see their work. Because again, just because they're higher price does not actually mean they're higher quality.

Interesting. In the beginning, you're dropping some serious bombs, by the way. Yeah. See their products.

Yes.

How would you do that?

You literally go ask to walk through their houses and you see their pictures and you understand. So if I said, jeremy, you own this construction company, let me see your work. And everything I saw that you did was $150,000 house, and it's good, I'd know you'd do that. But just because you can do that one doesn't mean you can do a $2 million house if you've never done it. Assume they don't know what they're doing and you don't want to be their test subject. You really don't. Because again, that level of finish and even the way you do the drywall, there's like a five level finish you can do on drywall. And a $300,000 house is going to have a two level finish. Like, it's just totally different standard and the buyers notice it because they have that level of quality that they're paying for and they'll see it and they're just not going to. They're not going to put up with it. So your house is going to sit there and sit there and sit there.

How did you learn about five layer drywall? You know, it's the first time I've ever heard that phrase in my life.

Hey, hang out with the right people. Five level. Five level. Yeah.

Whoa.

Level five. There's different paints. You know, some people you have to make sure that subs in your contract don't water down your paint. You have to actually write it in there. Yeah. If not, they all do it. Yeah. And then your fate. Your paint starts to fade on your brand new house, and you're like, what is going on? Oh, yeah. Well, that you paid them turnkey to buy the paint, and they just bought half as much as they need to. Filled the rest with water.

Whoa.

Last six months.

Now, see, this is why you're here.

Sponsored by Pain.

This is why I'm listening to this random question then. Do you have a favorite paint brand?

I've always used Sherwin Williams.

Okay. Ticker symbol S H, W. You know what's on the market?

Very familiar with them.

Yeah. So you have to write it into the contract. Do not water down the paint.

That it has to be a certain grade, and if it's not, literally, you can sue them later.

That's wild.

So many painters do it.

Yeah.

It's crazy, but they know you don't know.

Sure. So they're doing that just to save costs, I'm assuming.

Yeah. Well, they have to buy the paint and do the work.

Right, right, right.

It's better when they buy the paint because they measure correctly versus just buying an extra millions of gallons. But again, you want to make sure those ceiling white that they use in every house doesn't walk off to the next job site.

Mm. So do people do things when they're doing this process? You mentioned the blue tile. So let me. Let's just talk about the paint for just a second. I know that doesn't seem relevant. It seems easy to you, but everyone listening is gonna be blown away by this. Are there colors that people should absolutely avoid? And are there colors that is always a win?

Oh, yeah. Well, always a win, meaning every season, they change. So when I first started rehabbing houses, the color tan was super in. Everybody loved this tan color. It was like a. A very light clay. And then if you wanted to do an accent wall, you'd do a dark clay. And then it went from tan to gray, and then it went from gray to. Now it's white. So everybody loves white right now. Now there's a million versions of white, if you didn't know that. And there's some things with, like, yellow hints and orange hints and blue hints and cold versus warm and all the things. So I like Sherwin Williams pure white. That's a good one. That's a really good color. And then ceiling white is ceiling white. Um, but, you know, the thing to stay away from is getting crazy custom. You know, your style. If it's too specific, if it's super specific, people are Just gonna say, I don't like it. I don't like it. Now, if it's your personal home, you can do whatever you want. Just mentally prepare to change it later. And don't think because you went wild with purple, green, and blue and anyone else is ever gonna like it, like, they probably won't. And I just toured a $20 million house the other day with you, and this a Swedish, very custom home.

Wow.

And it was very beautiful on the outside and the inside. It's like a living in a cartoon fairy tale book. It was weird.

That was wild.

It was weird. And I can tell you, to build that house here, they spent an extra couple million to have those custom features that the next buyer is going to pay money to rip out. Oh, for sure they're going to pay money to rip it out.

What was your favorite part about that house? Was it the doorknobs?

Oh, I like the roof line. The roof line was cool. That was one I actually liked. Yeah, I liked the roof line. It was just this beautiful. It was almost like Asian, but it was Swedish. Cool.

Look on it for the listeners. There was a greenhouse inside of the house.

Yeah, that was fun. An adult dollhouse inside the master bedroom. Yeah, yeah.

And that bathroom was stained glass. Wild.

Everything about it was wild. It was wild. It was so custom, and they spent so much money.

Pink, yellow, green tile.

Have it that custom. So you just can't do it.

It was like an Alice in the Wonderland bathroom.

Yeah, yeah.

That's what the color was.

It's just sitting there on the market.

Alice in Wonderland.

Alice in Wonderland. Pink bathroom for the master.

Sure.

Just eliminated all your male buyers now.

Something like that, in that example. So $20 million home, it's vacant. Just since we're talking about it, how would you make an offer? Is there anything creative to the seller?

Good question. So offer what you want to offer.

Okay.

Look at the comps.

Okay.

Don't look at what they're asking. Look at what the house is actually valued at and ask, do they actually have a basis for what they're wanting? Because that house is probably worth $10 million now. It comes with 20 acres. So are they valuing it as land and house, or are they valuing as just house that needs to be renovated but they don't know needs to be renovated? Are they thinking all these custom things make it, you know, stand above all the rest?

Sure.

And so I would have done the comps always before you make an offer and then made an offer specific to what I know and believe the value truly is based on that Mayo formula I just gave you. And so I would do all those numbers and then offer. And you never know. I mean, if you offer $10 million less than somebody's asking, it's a long shot, but you never know. You really don't. I've done that several times. Not necessarily 10 million, but I've. You know, people are wanting 400,000. It's crazy. They're just making up a number based on their personal attachment to the home. But then that house sits there for nine months. So I got to tell you, the nine types of houses not to buy.

Sure.

This is, this is too important for my newbies out there.

Okay.

We're going to stick with that rehab zone that I'm talking to you guys about, because again, new construction, urban new construction, all that stuff, there's different rules. So I've broken all these rules when it comes to new construction. But for renovating houses, number one house not to buy is homes in a war zone. A war zone means very unsafe neighborhood. There's police tape around, constant shootings. Anything dangerous, your house is going to sit there on the market. Now, after I got really good, I became a pioneer, and I know how to deal with a war zone. That's a whole nother lesson, a whole nother day. But when you are new and you're renovating houses, you need it to feel like a nice, safe neighborhood. Should I go on? Should I keep going?

Yeah, I'm here, too. I'm down. Let's do two.

All right. A house on a busy street. A street could be on the front, back side, any of that. People are worried about danger to their children, danger to their pets, noise, traffic, all that stuff. Your house will just sit there, sit there and sit there and sit there. People are worried about parking their cars in the front, too, because it might get sideswiped and all that stuff. But lights in your windows, just public. Public.

So a main thoroughfare, essentially. Like if it's a big road, any.

Kind of a busy street. Yeah, lots of traffic. Doesn't have to be a highway. It could just be just really busy all the time. Like even Shelby Avenue in Nashville. I've done one house on Shelby Avenue. I couldn't help was. I couldn't help it. I broke the rule and it sat there. Man, it was tough. Yeah. And it's still just a two lane.

Road because a lot of those are good. Like, they're good deals.

All of these that I'm telling you are going to show up on the Market as the best deal. Ah, see, it's going to look like the best deal, but there's our reason it's discounted. Now, if you choose to not listen to me and you're in a really hot market and you still buy one of these, again, slow market, don't do it, don't do it. But in a hot market, sometimes you can get away with these things. Just be prepared that your house will still have to be discounted on the back end. So your comps of everything around there is worth 300,000, but yours is the one on the busy street. You're gonna have to be 275 or 250 on the back end.

Now, since we're just getting absolute knowledge bombs, do you have a way to qualify or quantify the busy street? Like, is there like a website you can go to or a service or some type of like, radars or something?

I mean, you can pretty much see it from Google maps, but you could probably. I think there's some traffic websites as well that tell you that. Sure. All right, number three, hit me. Similar to busy street, any house next to a freeway. People hate the noise, even if there's one of those big walls there. So if you think about the logic of everything I'm telling you, and I'm going to keep telling you, what does a home mean? Think about, like, even 1950s explanation of home and family and kids and playing in the yard and safety and like, quiet. It's a peaceful place. All these rules break that anything from I don't want to get murdered to I don't want my kid to get run over to I don't feel like listening to all the semis or trucks that flip over. All these things are breaking what feels like home. So naturally humans are going to be less inclined to purchase hair. All right, makes a lot of sense. Next one. Still same thing. House next to train tracks. Man, I remember learning this one painfully. Felt such a good deal. It's like, Paulie, back when I was finding him deals, I was like, paulie, this is the best deal ever. And he's like, oh, my gosh, this is crazy. We bought this house.

How much did you buy it for?

Remember, $52,000 exactly. And we're like, this is. I cannot believe what a great deal. Bought it. No contingencies or contracted it. No contingencies. Closed on it with cash. And then this weird noise started coming from behind the brush. Freaking train tracks. Train tracks. And they blew their whistle behind it.

No way.

But you could not see the train tracks behind this tree line.

Sure.

I was like, no. That house sat and sat and sat and sat and sat. And it's really hard to get them to switch where they blow their horn. Like, per the maps. It's almost impossible. So don't buy a house hoping you can change that. Oh, Paulie was mad at me for not seeing that. I should have seen it on the maps and I didn't see it.

How much did you end up selling it for?

Like $179,900.

Okay. But it was there forever.

Yeah. And that's really hard because when you use private money for your flips, like, you have a very tight window for getting that house done. Yeah, a very tight window. And I think. I think we're out of time. I think I'm going to have to do the rest in another episode.

Well, I'll see you there. I'll be there taking notes.

Follow along if you're still interested.

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