Ross Said - Pivot..Pivot.....Pivot!!!

In this episode EarlToms discusses what is actually going on in the Real Estate market. Ignore the smoke and mirrors. This is where EarlToms is putting his money.

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https://earltoms.com/earltoms_blog/episode-33-ross-said-pivot-pivot-pivot/

Transcript

0:00  
Welcome to another episode of EarlToms podcast, we, we took the last episode off, we needed to kind of re energize ourselves, we've got a lot going on. But I think we're about to not really slow down, but get to the point of just kind of getting a little bit more stable right now with everything that's going on. So, what I'm going to basically title this episode is if you've ever seen the TV show friends, and yes, I'm telling you how old I am. There's a famous line where, you know, they're they're moving accounts and Ross is saying pivot, pivot pivot. So that's what we're gonna call this episode, and what we need to actually be doing right now. 

0:59  
I'll get to why, as we go through, but one thing you've probably noticed is the buyers that that you're typically used to selling to our pulling back, you're gonna have different levels of what they're doing. But you know, say a lot of them they would go to, you know, what people would refer to as a B to C neighborhood. Now, they're dipping into more of the areas where, you know, you've got section eight rentals and things like that they're getting more into kind of inner city. Some are just not buying as much. And some have pretty much just stopped buying. And there's a lot of reasons that's happening. And it's what I've basically been leading this entire time to, but I think we've we've finally gotten to the race to the bottom now. I went into Home Depot the other day to look to look for something. And whenever I'm in in these type stores, always just go over to the lumber because it's easy to figure out where the prices are headed. And in February, a sheet of three quarter inch plywood was around about $30. In March, it was about $40. Now when I went in the other day, that same sheet of plywood that was $40 last month is now $95 so you are effectively pricing out any renovation that is going to happen to a to a house. There it was probably three weeks ago a month ago, I went into Home Depot and bought a pallet of flooring to finish up a renovation and I don't know how many of you do renovations But typically, you know just say hey I want this pallet and they you know pull out the forklift and they go loaded on the truck or the trailer and towards you further. Whatever is on that pallet, they legitimately charge me $15 for that pallet, just the wood. The just the power they charged me $15 extra dollars just for the power. And I went in to try to get a stove the other day as well too. Because we had a tenant moving in and they said it was gonna take three weeks to get the get the stove. So I had to go over to to Lowe's because I had like a day or two to be able to get the get the stove in before the tenant moved in. And Lowe's only had one stove and and stop that was acceptable for what we were looking for. And so I had to take it just on the spot and I wound up paying I think it was like $150 more than what I would typically pay for a stove. Just because what a lot of these these places are doing. Once they get a get an order from someone they're calling the manufacturer whether it be Whirlpool, GE whoever it is and saying hey we need a stove, this kind of refrigerator this time and then they actually manufacture it then and send it over. So a lot of stuff that that you need to be able to do a renovation. Right now is just not available. And if it is available, it's $95 for a sheet of plywood that was $40 last month. So these renovations that, you know, you typically plan for a lot of times now you can't plan for it, because let's say that I go in right now. And then I decided, Okay, it's gonna cost me $30,000 to renovate this. Well, by the time I get through that renovation three weeks a month from now, the prices of materials have been have gone up so that $30,000 now turns into $40,000, $50,000, or $60,000. It's just not smart business for a lot of these, these investors to go out and buy these renovations. So what I'm doing, and I don't know how many other, you know, investors are going to do this. 

5:56  
Right now, I'm looking, I'm taking the risk, because the risk is still cheaper than going in and doing a renovation on the house. You've got the the foreclosure foreclosure moratorium that got extended to June the 30th. That's great and wonderful, but you cannot keep putting a bandaid on this. And hope it's good hope it goes away. When when you had all of these people lose their jobs or get behind with their bills and things like that, when we have to shut down the economy because of the virus. Now the sudden things are starting to try to get back a little bit to normal. And then you go in. And even something as simple as a gallon of milk has essentially doubled since last year. So when people are trying to come back to life and get back active and you know, jobs or people are going back to work, things like that. Now, every day items are double in price. So you already had people that were behind. And now you're basically just going to stick it to them and say hey, we're gonna double the price. Now, if you go back to when the the supply chain got interrupted a year ago, even if you go back and look at it six months ago, yeah, prices went up just a little bit. But they didn't go up to this extent. And the reason that they didn't go up to this extent is because the the stimulus that was given prior to January was actually needed. It was it was to balance everything out. The stimulus that was just passed, was basically just printing money, and it caused the balance to get messed up. So now the dollar is worth less. So that's why everything is going up. This past stimulus wasn't needed. All it did was hurt the economy. And once it got past, inflation went through the roof. So it was counterproductive. It was it was good lip service for policy for politicians. But it was counterproductive to average everyday people. 

8:19  
So what I'm doing now is instead of going in and buying a house that needs a full renovation is I'm going in and I'm looking at either one of two scenarios, I'm looking at either a light rehab, something that I know I can get my hands on at Home Depot or Lowe's to be able to finish that renovation if it you know when I say like rehab, I'm talking about replacing flooring painting, things like that. I'm not getting into major construction, electrical, plumbing, $95 sheets of plywood roofing, you can't find you can find shingles right now, unless it's the low end because those have the highest profit margins for these manufacturers. So that's what they're that's what they're making. They're not making the dimensional shingle or anything like that. So when you go out and you try to even find a single right now it's difficult I mean, we went by a lumber yard the other day, so four or five pallets of single sitting out there so we just stopped in shingles don't belong in a lumber yard. So we stopped and just to see what was going on. And the check prices on their lumber as well. And we asked the guy you know, hey, we could use these would you would you be willing to sell them he said they're already sold. I'm just waiting on the guy to come pick them up. So even lumber yards if they can find materials, they're buying them when it's not even in their in their business arena. Because I can make $1 off of them because the supplies and is in such a shortage that they know if I can get my hands on something I can make dollar off of it, because right now somebody is not coming in, in my lumber yard, and given me $95 for a sheet of plywood. So I've got to survive. So now I'm changing what I'm doing to be able to make money and keep my doors open. So the light rehab is something that I'm looking at right now. And I'm also very slowly getting myself into houses that already have tenants. And the reason that I'm doing that is because the house that already has tenants in it is a house that's not going to need a lot of renovation. Maybe that tenant can't pay immediately, maybe that tenant can't pay what is actually on their lease. So if they're if their lease says, I need $1,000, you know, maybe they can only afford $800 right now. So I'm looking at it in a way of, I can give that investor that wants to sell X number of dollars, I'm not giving him what he normally would have gotten, because I'm about to have to take a decrease in what that tenant can pay. So what I'm what I'm looking at is, let's say that, like I said that tenant can pay $800, but the lease says 1000? Well, if I bought a house based on an $800 payment, then I have to factor in, okay, well, are they going to be able to pay this rent for you know this long. So I'm looking at it as though today, they may be able to pay $800, 6 months from now, when inflation continues to go up, because we just kept printing money when it wasn't needed. Can they only afford $600, then because by the time they go and buy, you know, $4 gas or $10 gallons of milk or whatever it may be, that's going to crunch their monthly income. So they might not be able to afford $800 in six months. But even getting $600 is a lot cheaper, and a lot more cost effective than going in and this month, a sheet of plywood is $95. And next month, that's $120. You can't forecast how much these individual materials are going to be. Because they're going up so fast right now that if I tried to go in and say okay, Mister investor, or miss homeowner, I'm going to give you $100,000 for your house. And I'm planning on spending $30,000 for the renovation, I think the house is worth $160,000. And then by the time I get through that renovation that $30,000 for the cost has turned into $50,000. So now I'm at I've got a $10,000 worth of equity in the house. But if I go another move past that, then does the does the inflation and the cost of consumer goods, reduce the amount of house somebody can afford? Or the amount of rent somebody can afford? So does that house that was $160,000 Now turn into being worth $140,000. So if that's the case, then now I'm upside down. But if you go in and you look at these houses, to where the safe bet, is going in and barn and section eight house, because no matter what happens in the economy, you're going to get paid. You're not dealing with a job or you know, anything like that. 

13:42  
Now there's a lot of there's a lot of tenants that have jobs that that pay a monthly portion and things like that. I know this year already, we've had to forgive multiple houses just on their monthly portion. We had one girl that was paying $14 a month. And somehow they cut her hours at work, but they gave her $1 increase for her pay. So the Housing Authority raised her portion from $14 to $192. Basically overnight, so she got her even though she got $1 increase, they reduced her her hours that she was working. So she wasn't actually making as much money. But she now had to pay $178 more a month out of her pocket than what she was expecting. So we gave her two months. Just said look, put your mind back. Try to save it. Prepare for it. Where you know don't Don't worry. You're not gonna get in trouble or anything like that because it's a good tip. We don't we've never had a problem out ever. She's very calm. You know, she she tries she keeps the house clean. So we extended that courtesy to her, because those are the kind of tenants that we want. 

15:06  
But when you're looking now, and you're trying to get these houses under contract, you have to be able to predict how much inflation is going to affect not only the material cost, but also the amount of house, someone can afford to buy or amount of rent someone can afford to pay. Because it's it is it's like when gas, disposable goods, all these things start going up, no one realizes that you sit there and at the end of the month, what you're used to see it in your bank account is not the same thing. Because you know, I would probably say 90% of America lives, check the check, or has just a little bit in savings or something like that. So let's say that someone is used to making $5,000 a month, and at the end of every month, they've got $500 - $1,000 left over well now, because everything is going up, they may have $250 extra, this leftover, so in six months, are they going to be at a break even point to where it cost them $5,000 a month to you know, have their kids play sports, pay their bills, buy their groceries, pay their cars, or is the pricer of the of the houses going to start going down to reflect what everything, what's happening with everything, and give you a downturn in the market. I personally believe that there is a downturn in the market on the way you can't keep printing money to be able to think, hey, everything's gonna be alright, we're not really worried that, you know, milk is $8 now, or a sheet of plywood is $95 or two by four is $11. We're not concerned with all that we're just, you know, gonna say, hey, you need help, we're gonna give you this. But effectively what they're doing is everything they're giving you is worthless, because they're, let's say the dollar is worth $1 on paper. But when you go in and you start looking at buying something $1 doesn't go as far as it once did. So if we look at even milk from a year ago, four or $5. So that would have been $1 for easy math. Now, if we're sitting at $8 $10, depending on where you are. Now that dollar is essentially worth 50 cents. So they have essentially with this last stimulus that they passed, given everybody half so if you got $1,200. Really what you got is $600, you didn't get the full $1,200 because everything costs more so it doesn't go as far it's all a scenario of, hey, let's you know, run some PR campaign to make everybody believe that, you know, we're trying to help and this amount, instead of addressing the actual problem, getting people back to work. Leaving it alone, letting it play itself out, instead of continually putting a bandaid on something that's making it worse and not allowing it to heal. That's what effectively is going on right now. 

18:41  
So another avenue that I'm that I'm actually taking. And I've been I've been watching on for about the last month or two the the stock prices of Lowe's and Home Depot. Because one thing I do know is when you have Home Builders and Contractors and investors, when they look and see a two by four being $11, or, you know, a sheet of plywood being $95 they can't afford that the cost is too much to be able to continually renovate, buy or build. So they're going to stop buying. When you look at these homeowners that go in, you know, say hey, I want to put down some new floor or I want to buy a new refrigerator, something like that. If they have to pay more for it. Now, a lot of them are gonna say you know what, I'm just gonna have to live with what I've got right now. I've got to wait until I can afford it. I've got to save up more money. I've got to wait for the prices to come down whatever it may be. So what I'm gonna wind up doing is I'm gonna wind up shorting Home Depot and Lowe's. The easiest way to do it is to just go buy Option contracts, because you don't lose as much money or you don't risk as much money if it doesn't hit. But right now I think Home Depot stock is at $320 something dollars and low stock is at $200, little over $200. So if I was to go in and buy, you know, say 100 shares of Lowe's stock, then you know, Hey, I just spent $20,000, or I can go buy an option contract with 100 shares and spend, you know, $500 - $1,000 on it, and watch it go down. So effectively shorting it that way, with a lot less money out to be able to make money, because it's not necessarily their fault. 

20:48  
One thing that you have to learn to do is when the when the government gives you a problem, they're giving you a problem so that they can play the hero and give you a solution. But not one single thing the government ever touches actually works out, the government will mess up more than you have ever known in your entire life. So anytime that they pass something, always look at the alternative to see what's actually going to wind up happening. And you can take all the different loans that are passing, things like that. It's just the nature of government, they can mess up anything that you doesn't matter what party it is, they can mess it up. And in a split second. So they printed paper on the money part of it. So now, all of your stores like the Home Depot, Lowe's, you know, even your hedge funds that have been going around and buying houses all over the country, when the moratoriums are lifted, and you have to actually accept reality, they're going to go through and start evicting people, their returns, their shareholder returns are going to look like trash. So their stock is gonna wind up going down as well. So while it's as high as it is right now, before it actually kind of corrects itself, is what I'm looking at it because while it's going up until we have the next earnings report, or even, like the the shorts that I'm looking at, the options that I'm looking at are October, November, December and January. So I'm looking at it six months in advance, because I need two to three different earnings reports to watch that stock get beat up, I'm not going in and saying hey, I need to go and you know, buy next week's contract to watch it short. 

22:48  
So the the pivot part of what's fixing to happen and what is actually occurring is right now, if you look all over the all over the country, you have a very limited supply. People always say why is that there's a very simple rule. And you can actually check this for yourself. If you go back and you look at historical numbers, you will see new construction houses that are being built or houses that were just built and are now on the market for sale. Those houses are not there anymore, because builders cannot buy the materials to get a house sold for what the market will allow it to be sold for. So your new construction is effectively going right now. And everybody who's trying to say, you know, hey, prices are up this and that that's that is an absolute fact, prices are up because inventory is so low. But what happens when you don't have the economies of scale sitting under you to keep you propped up as you fall off a cliff. Because when those happen when those when that supply runs its course and you don't have any new supply to balance out the demand. You either run the prices up so high to where they can't be afforded anymore. Or you get to the point to where the new construction is that you can't build houses anymore. So now you have a limited supply. So you're running it to the point to where it falls off the cliff. That's the only solution to what's coming is falling off the cliff. So when you're looking at how you're getting your deals right now, the places that I'm getting them and that I'm focused on are the investors that I know are not the large investors. I'm focused on sending them or getting into in sending them postcards or getting in contact with them. 

25:04  
Those are probably the the landlords, they're basically like, here's the keys, I don't want to deal with this anymore, the tenant hasn't paid, take the take the hassle from the get, I want this headache going. I'm also looking at people that are getting a divorce right now. Because you've got a lot of people that, you know had to be together a lot more than they typically were used to. So across the country, you've got a lot more divorce going on right now than you had a year ago, two years ago. So you've got a lot of frustrated people, the virus has taken its toll on a lot of people. And you've also got a lot coming for probate now. Because it wants the courthouses closed, you couldn't file a probate for all of the the people that unfortunately lost their life, because of the virus. Now it's working its way through the courts. And you're seeing the ability of these these estates to be able to actually sell the houses for the people that passed away. So that's where your pivot is right now. Because you most times when you when you have people to pass away, a lot of times are elderly, things like that. So it's not going to be in a terrible condition, it's basically going to be a cosmetic renovation. Because older people are generally more clean, then, you know, younger people, people might, and you've got the divorces. So you're not you're getting in houses where they're lived in currently, or recently, you're not going for a house that's been sitting there for a while, you're not going for a house that needs an immediate renovation, that's going to be substantial. And that is going to be what is actually the way that the investors are turning. Because I've had a lot of my institutional investors tell me you know, those those full rehabs, they can't do it anymore. They're looking for light rehab only right now. And unfortunately, they're, they're looking for the exact same thing that I am right now. So the only thing that that I'm that I'm selling them are things that don't fit in my model, or that I think are a little bit too risky for me. So I'll just pass them on to them. Because you know, they have a lot more money than I do. But But be careful when you're putting these houses under contract right now. Because a lot of people are upside down whether they know it or not. And then when you go when you look at your investor and say, hey, I've got this house under contract for $100,000. And your investor comes back to you and says I'll give you $70,000 for it. Don't don't get your feelings hurt, because that investor has been out there spending money buying $95 sheets of plywood. So they are understanding that right now there is there's no there's no end in sight to how far this is going to go up. So everyone is pulling back on these four rehabs or rehabs that need substantial electrical power, you know, plumbing, plywood, roof, anything that is going to take a lot of material. They're pulling back home, if it's a light rehab, like I said, paint flooring, you know, something like that, then maybe, maybe they're they're moving, you know towards that and focusing on that now. 

28:37  
But be sure when you're going out there and you're putting these houses under contract to kind of predict the future again, because that's part of your job. And look and and I would actually recommend you going into Home Depot and Lowe's and saying, hey, I need to stove and let them come back and tell you it's going to be two weeks, three weeks a month. Let them tell you how difficult it is to even get materials. Go in and check the prices of flooring of lumber of you know electrical wire, things like that. So you know what you're facing. So instead of going in and saying, Oh, this rehab is $20,000. Once you go in and you get a better idea of what things are actually costing right now you may sit there and go, Well, this should be a $20,000 rehab, but this is really a $40,000 or a $50,000 rehab now. So if you're not putting them under contract for what it's actually going to cost to renovate it, and even be able to leave a little bit of room for the cost of renovating it by the time the renovation actually happens, then you're not going to get a lot of houses sold right now. This is where the cream of the crop is going to rise. Because you're gonna it's going to test your ability in this business, your knowledge of this business and how you're playing it out. 

29:56  
So right now, there's a lot of there's a lot of gurus out there that said, Put everything under contract that you can full price, this America, right now, I wouldn't touch that with a 10 foot pole, it's not gonna benefit you, you're gonna have a hard time selling them. Even if you got something that's an owner finance contract for 100% of it this amount, how are you gonna pay for it, because when your tenant can't pay you, how are you gonna pay for it, you're gonna have to pay that owner. But if your tenants not paying you, how you gonna pay it. Be very, very careful how you proceed into the summer right now. Because for six months a year, I've told you, I don't believe this is going to be good for anybody because I was appraising during the foreclosure crisis. And the warning signs for this. We're exponentially greater than what they were for the foreclosure crisis. So once the once these Band Aid start really getting pulled off, hold on tight, because it's going to hurt. You may want to go and try to drive for Uber or Lyft, or something like that, just to get you a little extra money right now get a little bit ahead of of what is coming. But do not in any ways expect for this market to continue this way through the summer, there's there unless the cost of materials comes back down. This market is about to shut down. And this is going to be the second selling season. If it's if it shuts down. This will be the second selling season of real estate that we effectively missed. Because last year, the virus was just getting started, everybody was panicking. People weren't doing renovations because they didn't want to be around everybody. People aren't going out buying new furniture, new cars, things like that. So if that happens again this year, because it costs too much to do it. You're gonna have two selling seasons in a row that you missed. And there is not an economy on this planet that can sustain that. Because the selling season of real estate is more important than Christmas ever thought about being. Yes, you have a lot of families that celebrate Christmas buy presents, things like that. But real estate is the selling season. Milk, furniture, cars, building materials, you name it, it goes in house, Clorox. I don't I mean, every single disposable good that is produced goes in the house. So if you take that away two years in a row, it's it's it's going to look terrible. 

32:54  
So make sure as Ross said, you are going through right now and you are pivoting and being smart about what you're putting on the contract. So that you can actually survive, get deals close pay your bills, because if you keep the same mentality that you had prior, you're gonna get caught and you're gonna you're not gonna get these deals close, because you're not paying attention to what's actually around you. Be smart about this, be a little bit conservative with your offers, how many of these houses you're putting under contract and go for the deals where you know, you can get them sold, instead of the ones that are iffy, the ifis right now are probably going to get your call it's leave that room for inflation for problems for investors being weary to buy just leave you some room almost make it as too good to pass up. Even if it turned sideways they can still survive off of whatever deal that you're that you're sending them and with that we're gonna bring it to a close hopefully you've understood what I've what I've said but you know it is it is very important to pivot right now. 

34:15  
If you need some more information, we got all the podcasts on our website, EarlToms.com, we've got more information that you know can help you grow your business as well. So head over there, read, Listen, you know we're on YouTube as well. So make sure that you're that you're getting enough information to where you know what what's about to happen, so that you can plan for it and be successful, even when the market goes down. Because one thing about wholesaling is if you plan and you do business the right way when you have a down market is when you will make more money than you did before because when you have a down market you have an excess in supply and Prices start going down. So you wind up having more options and in that way you can increase your your profit spreads on your assignment fees and make more money. But make sure that you're that you're preparing for what's coming so that you can maximize the money that you're that you're able to make when this market really starts correcting itself. 

35:26  
But again, head over to EarlToms.com and check it out, listen to the podcast episodes or YouTube or read more. You know information about how you can grow your business. And with that will draw to a close and have another episode for you in a couple weeks. 

35:45  
Thanks for listening