Seth: Hey everybody, how's it going? This is Seth and Jaren, and you're listening to the REtipster podcast. Today I think our guest is going to amaze you because he amazed me. I discovered Doug Smith about a year ago when I heard his interview with Austin Peek on Millionaire Interviews. It's another podcast I can link to that interview in the show notes for this episode at retipster.com/135.

Doug's story is pretty fascinating because he has succeeded in multiple domains and in a big way, but it hasn't necessarily been easy for him. He's seen his share of peaks and valleys. And I just loved hearing the humanness in his story when I heard it for the first time. And I was even more fascinated when I heard that he started as a house flipper and then transitioned into an online business when he started myhousedeals.com, which he grew into a pretty huge thriving operation.

And now, he's a land investor who has bought and sold thousands of acres of land in Texas through his private equity firm, Hawthorne Capital, which we're going to talk about more in this conversation.

When I first heard about just the size and scope of this guy's land investing operation, I was blown away, and I have a feeling you probably will be too. So, before I share too much, I'm just going to let him talk. So, Doug, welcome to the show. How are you doing?

Doug Smith: Hey, Seth and Jaren. It's good to be here, and I'm happy to just share whatever I can to help the listeners. Whatever you guys want to ask me I'm happy to dive into as many details as possible, whatever will help the listeners, of course.

Seth: Sounds good. I appreciate you being here. So why don't we just kick this off. Who is Doug Smith? Maybe tell us your origin story, wherever you want to start, or maybe start with how did you get into real estate and what did the journey look like from where you began to where you are now? If you can summarize that in 10 seconds. Go.

Doug Smith: Oh my gosh. Well, who am I? I like to laugh, joke, have fun, eat Mexican food, drink margaritas. The origin story, I grew up on a cotton farm outside of Lubbock, Texas. I went to Texas Tech University, got a degree in management information systems. Moved to Houston to work as a software developer at ExxonMobil. Could not stand that. I thought flipping houses was the way out of it. It didn't, so I quit and started flipping houses. I did that for like three years full time.

I decided there was something better, which is creating a website that provides listings of properties. That was myhousedeals.com. Ran that for about 10 years, brought in a partner to run that. And then I took a year off, moved to Spain, came back, and then I decided to start flipping land. And then there are some other house deals in there in the process, but it's been purely land for the last four and a half years.

Jaren: When you say land, there's a lot that we can unpack there. There's lots of niches. “The riches are in the niches,” as they say. So, when you say land, what kind of land are you focusing on? Are you doing large tracks where you're subdividing primarily? Or are you just kind of doing a little bit of everything? What are you doing in land?

Doug Smith: Yeah. What's interesting is I listen to your podcast. I listen to some other land podcasts as well, and it seems like the typical land investor that comes on those shows is going out, they're sending direct mail and they're trying to buy land in a discount and that land can be located anywhere in the country. And then maybe sell that land for cash several times where they're buying it for or contracted for, or maybe sell it on owner financing. So, that seems to be the majority, right? And correct me if I'm wrong.

Seth: Yeah, you pretty much nailed it.

Doug Smith: Okay. And that's a really cool model. I've had a friend or two who came to me, they weren't happy with their jobs and they were wondering what they should do. And I suggested that they do that. Even though it just sounds so cool and people have done so well with it. And it seems like you can make a lot of money, but I've never done even one of those deals.

So, what my business partner or sort of JV partner and I were doing for several years in Houston is we were buying houses for cash and selling them on owner financing. And several years ago, we decided to try to do the same thing with some rural land outside of town. We were going to buy this land, and we did. We bought the land, subdivided it into maybe 30-acre or 40-acre parcels, and sold those parcels on owner financing. And then we made no improvements to the property, and we sold those notes a few months later to no buyers. And the numbers came back and they were phenomenal. And so, I've been a land investor ever since.

Jaren: Yeah. It's funny how a lot of people I talk to have a similar segue into land. They kind of stumble into it. A lot of the time they'll start with houses or other types of real estate, and then they'll just pick up a deal. I have a coaching student right now who literally is like, I've been doing development for like the last five, 10 years. And it's amazing. But looking in hindsight, the most money I ever made in one transaction was when I accidentally stumbled into a land deal. And then I started the process to develop it and then stopped halfway and just passed it off to a developer. He said he cleared I think $500,000 in that one deal. And then that was like, "Oh, wait a second. I made a lot of money with a whole lot less effort than I normally work. I should probably figure out how to make this a viable, consistent business."

Doug Smith: Yeah, exactly.

Jaren: I love land.

Doug Smith: Several advantages over single-family houses, in my opinion.

Seth: Maybe if we go back to the beginning. So, when you started getting into flipping houses, I think that's how a lot of people think they're supposed to start, because that's what all the TV shows are about. And I had the same thought and I luckily never got very far in that. I totally did not have the skillset to make any of that work. But it sounds like you had gotten ways into that. And I'm curious, with what you know now, when you look back at that house flipping experience, what was the hardest thing about it and what made you ultimately decide, “Nope, this isn't for me. I'm going to move on to the next thing”, which I think was myhousedeals.com, if I'm right.

Doug Smith: Yes. That was the next thing. Well, the hardest thing is finding a good deal. Obviously, if you go MLS and you're looking for a single-family house that's available at a discount, good luck. I mean, maybe you're going to get like a 15% discount or something, if you're lucky. And then by the time you do some repairs, some improvements to the property. And then you sell and there are holding costs, there are fees with the title company and the realtor. I mean, you don't make any money.
With houses, you really have to be sending your direct mail or doing your online ads and so forth. But it's just so competitive. There are all these other investors, especially these days doing the same thing. So, you have to somehow stand out above them. You have to be either smarter than they are in a lot of ways or hardworking. Those are just red, shark-infested waters.

And so, land is more in the category of a blue ocean strategy. And there was a book with that title that came out many years ago. But basically, you want to go out to where there's not as much competition and you can clean up. And so, that's the main difference I see between land and single-family houses. And you just have to work your tail off with a single-family for the most part to make a good amount of money. That was my experience anyway. It's also not very scalable. There were so many things that I could not hire someone to do very well in the single-family house business, like negotiating with sellers or managing contractors and so forth.

And the minute you had anyone that was going to be good at doing that, they would just go off on their own. But you'll notice, even the HomeVestors operations, the remodeling houses people, their offices don't tend to get very large. They don't tend to have a staff of 10 or 20 people. They don't tend to be buying and selling thousands of houses per year. If they're lucky, maybe it's like 100 houses in a year, which is an incredible amount of houses. But things just start to break very easily when you try to scale a single-family house investing business.

Seth: What was the year when you were in house flipping versus moving on to myhousedeals.com and then into land? Because I know that changes things a lot just in terms of the ease or difficulty at which it is to find deals and then get them sold. Out of curiosity, what timeframe was it when you got started and went through each of these different milestones?

Doug Smith: Well, I quit ExxonMobil on my 23rd birthday because I wanted to become a millionaire by the time I was 25 and I knew that was not going to happen making $50,000 a year at Exxon. I did not become a millionaire by the time of 25, by the way. It took quite a while longer. I thought I was going to. I was convinced by all these get-rich-quick books that I would. But that was 2003 and 2004 and 2005. I was a full-time real estate investor. And I mean, there was some overlap. With ExxonMobil, I was doing a part-time job there. And then there was a little bit of overlap. I was starting my house deals at the same time that I was still flipping houses.

I was working on my house deals for maybe one to two hours a day and the rest was trying to flip houses. But eventually, I quit marketing for new houses and I started spending more and more of my time with MyHouseDeals. I probably went full-time with myhousedeal.com in 2005/2006. And there was a boom actually in the market at that time. Nobody knew that the financial crisis and the big housing crash was around the corner. So, we were just riding this wave up. Anyway, MyHouseDeals crashed, by the way, in 2008. It wasn't all smooth sailing after creating the website.

Seth: Yeah. And that's probably because it suddenly got really easy to find house deals around that, right? People maybe didn't need a website as much to do them.

Doug Smith: Okay. People coming to our website were people who were interested in flipping houses and they would sign up for membership, and they still do. And so, there were all these shows on TV, like Flip This House. I mean I'm sure there were several. And so, everybody wanted to flip a house. There was no Uber back then, but if you got in a taxi, the taxi driver was talking to you about flipping houses. So that boded very well for our business.

Well, when the financial crisis hit, the Great Recession and all that, everybody knew you definitely didn't want to buy a house because if you buy that house for like $200,000. And then, like a month later, it's worth like $190,000. And then the next month, it's worth $180,000. Well, who in the heck would want to buy that?

So, we had a hard time convincing people to buy when there was sort of blood on the streets. We even had the headline on the website from Warren Buffet, like, “Be fearful when others are greedy and be greedy when others are fearful.” Well, we were really trying to hammer that down people's throats. But the average person just will not go along with that. In hindsight, it was a good time to buy because values came shooting up after that. And then continuing to this day, especially over the last two or three years.

Seth: Yeah. That is funny, isn't it? Because I echo that same quote in my head all the time, but it's still hard when you don't know the future and you don't know, “Is it going to come back? When is it going to come back? How much is it going to come back?” It's really hard to just trust that it's going to work out even though history tells you it probably will.

But on that myhousedeals.com though. So, let's dig into that a little bit. How did that website work? People bought memberships in. With a membership, they got something in return for that? Or what was the whole purpose of the site?

Doug Smith: Yeah. And they still do. If you go to myhousedeals.com, it's still there. We've got a team of 20 or 25 employees. There's a president running it, and he's part-owner. So, what we do is we aggregate the wholesale deals in some of the larger metropolitan areas in the US. So, people can post their wholesales for free but then if you're a rehabber or a landlord, you go there, and you can get a free account and view these deals, but there are a lot of restrictions, and then people can upgrade to a premium paid membership.

Seth: Basically, you're bringing the buyers and the sellers together in one place. And the people who pay for the membership are the buyers?

Doug Smith: The buyers. The buyers pay, either monthly or an annual membership, depending on what they sign up for. Back when I started the website, there was not one place where you could find these wholesale deals. You had to go to all the local real estate investment meetings and just figure out who these wholesalers were. But now you can skip all that and just sign up on the website and you get them sort of fed to you on your screen and through email.

Seth: That's actually a really smart idea even today. I know of a couple wholesalers in my area, but I absolutely don't know them all. And it would be awesome to have one place. I don't know if any of them are on your website or not, but man, if you could really get a lot of people that participate, there's a ton of value there to connect people in that way.

Doug Smith: Yeah. It's been pretty good for networking. When somebody is pursuing a deal, the conversation is not always just about that one deal. It's about that investor who's offering the deal for sale and says, “Oh, can I get on your email list? Or how can we be in contact so I can learn more about your deals, or even start sharing information on contractors and title companies and realtors and other service providers.”

Seth: And when you were starting that website, how many members did you have on an ongoing basis? Like in its infancy? Was it thrown off a lot of income for you? How profitable was that venture?

Doug Smith: It's done very well. It's had years where it's netted over a million dollars. In the beginning, we had a few dozen members and a few hundred, and then now today it's a few thousand paying members.

Seth: Could people use that for doing land deals? Do they use it for that?

Doug Smith: No, I would say probably 3% or less of the properties posted on there are land deals. That's just not what the average investor is really out there pursuing.

Seth: I was really curious about this when I first heard your story about when you were going to into land. I think you alluded to it earlier, but did you hear about the land investing opportunity from a guru or you just ran into some land deals and did them and they turned out well, and you said you go deeper into that? Tell me how you discovered this and explored it further.

Doug Smith: Yeah. I knew who a couple of the land gurus were, but I never consumed any of their information. That was just not on my radar.

Seth: Yeah. That wasn't your approach.

Doug Smith: And so, this was maybe in 2018. Basically, I was buying, selling houses. Then there was MyHouseDeals for a few years. Then I was also near the tail end of that. I was buying, selling houses again, but through a JV partner. We're buying houses for cash, selling them on owner financing. And one of the deals after, maybe say, a few years of that, one of the deals we experimented with was just some land that came up for sale outside of town. And we just decided to experiment with it. There weren't any sort of educational products or anything that gave us the knowledge to do that.

And in fact, we just sort of figured it out over time. The way we do deals now is not exactly like that first deal at all. We carve up the properties now into much smaller ranchettes. 10 acres, instead of say, 30 or 40 acres, because as you guys know, you can sell for more per acre if you're selling less acreage. So, we started improving the properties, bringing on water reels. Bringing water, bringing power, adding gates, culverts, driveways, fencing, sometimes the pond, sometimes going in with tractors, and cleaning up the land.

So, we started doing these things to make the land prettier and more attractive to someone who would want to go in and put in a manufactured home or build a home. And so, we really changed it up over time to be able to sell the land for a lot more per acre. That's what we've been doing now. And also, we no longer sell the notes. We hold the notes. So that's been another change. We borrow against the notes that we hold.

Jaren: I want to dive in a little bit on what you just said there, because the way all of us podcasters, we're notorious for this. We'll do a broad stroke over like a five, sometimes 10 years, sometimes multiple decade period. And the way that you just went by what you did, especially the level of sophistication that was involved in the types of deals that you're doing, I want to really unpack how you figured it out. Because it sounds like you were like, “Hey, here's an opportunity. Let's just go and experiment and see what happens.” But how did you know to call the county? How did you know to subdivide the lots and what size you could subdivide them for? And why did you start improving the property? How did you stumble into the nitty-gritty nuanced details that really made your strategy work?

Doug Smith: We just figured out day-by-day. And also, there for the first ones, basically, I was the money guy and the credit guy. And then I had a JV partner who was out there, boots on the ground, overseeing that and working with the counties. Nowadays, it's all in-house with my company. And there's a president who oversees that side of the company. Right now, I think there are 16 of us staff members, if you count me. I work all the time, so I guess I should be counted. So, there are 16 of us. We've got somebody on the staff, and that person is overseeing a lot of the buying and selling right now. And then he's got an assistant who's working with the counties. We have people on the team who are handling a lot of, I think, what you just asked about, but they basically figured it out as they went.

And also, yes, we do have to work with the counties, but we are subdividing into 10 acres or larger. For almost every county in the state of Texas, if you're above that amount, you do not have to go through the platting process. You survey it out. So, you hire a surveyor. Then when you sell, when you convey the deed, that survey is attached to the deed and it's specifying that they're getting a portion. It further surveys out their little ranchette. So, some of what maybe you were thinking we had to go through the counties for, we actually don't.

Jaren: Well, I brought up bringing the Collin County mostly, because that's like a part of the core process of analyzing deals for the land flipping business, let's say. I know your model is a little bit different, but really what I'm trying to get at with my question is like, let's say, take yourself back to when you first got started, even if you had some exposure and different types of house deals, taking yourself back to land because especially back when you got started, there wasn't the REtipster Land Investing Masterclass. There wasn't this podcast. There weren’t these resources available to really wrap your head around it and valuations and due diligence and making sure that you have access or that there are no issues with the legal description. There are no inherent limitations based on the title history and all that.

There's a lot to unpack when it comes to the land business. It feels like how you depict your stories. Like you just be like, hey, there's an opportunity let's go after and just figure it out day-by-day. But how did you do that? And maybe even if it really was just flying by the seat of your pants and just taking one step to the next step, to the next step until you came to completion, how did you, from a mindset perspective, not one, freak out and be overwhelmed with not knowing what you were doing? But second to that, how did you know to be self-taught or to solve problems to that degree? Because I think that's what a lot of beginners struggle with.

Doug Smith: Well, it wasn't like totally flying by the seat of our pants. We did bring in a realtor to help us with the purchase and the sales. And that realtor had done a lot of stuff with land. He was mostly commercial, but he had experience with land. So, that's one thing. And then nowadays, we do bring in a realtor for some of our deals and he's a certified land specialist. In fact, I think you can go and Google “Realtors Land Institute,” and you can find a lot of realtors who are experienced with working with land. So, you can bring in other people.

And plus, we had access to MLS. We could see on our own at certain properties that were smaller acreage, closer to 20 or 30 acres had sold for X dollars. And then, we had a good idea of what we could sell for, but it was fairly nebulous because every attractive land is different. But also, the fact that it wasn't super clear what our profits would be, I think kept other people away, which we saw as a good thing.

Hopefully, that helps a little bit to answer your question. But also, I never bet the house with any sort of investment. It wasn't like if this one deal was not a home run, then I'm going to go broke. I made sure that in a worst-case scenario, which would be probably that we sell the land for about what we had put into it, with the purchase price, because we didn't even do improvements, worst case scenario it's I would lose maybe a little bit of money or make a little bit of money, but it wouldn't be that big of a deal. It wouldn't swing my finances too much one way or the other. But I did know if this ended up being a home run, it would open up a whole new line of business. And that's what happened.

Seth: Yeah. Being in Texas, which is a non-disclosure state, it's harder to see. Well, I guess you probably had realtors though that could help you find sale prices and that kind of thing.

Doug Smith: Well, I am a realtor as well.

Seth: Oh, there you go. I guess that solves the problem.

Doug Smith: But I don't go around admitting that.

Seth: I wouldn't either. Well, that whole thing about finding a land-specialized realtor, that's a big deal as we've learned in recent years. And I remember when I was first getting started in land, I just called any old realtor who did houses and they were clueless about how to work with land. But it sounds like you mentioned the Realtor's Land Institute. Were there any other tricks of the trade in terms of how to find a good land-specialized agent in your experience?

Doug Smith: Well, we went on that website for the Realtors Land Institute and called two or three of them and just got a quick feel for who was really most passionate about land, who understood it the most, maybe even grew up in a rural environment, because some people just get that sort of certification just so they can make more commissions. But they've been living downtown for the last 20 years and have hardly even set foot on a real property. That's a lot of them.

So, once we found somebody that was really in the lifestyle, then we knew this person could help us. But before long, you know almost as much as they know, as far as what properties would meet our criteria, what to look for and so forth. It's kind of like if you hire a personal trainer to help you out of the gym, well, you don't need that trainer there three days a week for all year, unless you need them for motivation. But you're going to extract probably the information, the knowledge that you need to know from that trainer within maybe two, three weeks or something. And so, it was a similar deal with this realtor.

Seth: Yeah. I kind of back to what Jaren was getting at, I think maybe with trying to figure out how you learn this business. I'm really curious, how do you find deals? Are you following some model in terms of…?

Doug Smith: Oh, it's the dumbest way ever. You want to hear this dumb way we find deals?

Seth: I do. I mean, it seems to have worked, so let's hear it.

Doug Smith: We buy for retail off the MLS. Ain't that the worst?

Jaren: No, I actually really love that. I'd rather double down and figure out how to master strategies, where I can buy at retail, because then you have an unlimited amount of deals potentially.

Doug Smith: Well, basically 95% or more of the deals we look at don't fit our criteria because we need a lot of road frontage. We're not building our own roads. That's very cost-prohibitive. But basically, you know, in house flipping, you have to go and basically the money is made when you buy. You have to buy it for maybe 65, 70 cents on the dollar, whatever. Because you can only sell it for whatever the market dictates.

Well, we're going in and buying for what is basically retail for an ag property. But we're changing the use into basically residential. And so, we're going to sell for residential values. We're selling to a completely different buyer. We're going to live out there, maybe put in a manufactured home or build, and then we're making these improvements with the water and power and fencing and so forth. And then we're selling on terms. So, we attract a lot of buyers that way, that increases the amount we can sell for to some extent, for sure.

So yeah, we don't necessarily have to get a discount when we buy, but we're still selling for 2 - 2.5 times what we're all in these deals for. Just to give you an idea, nowadays, post-pandemic, we have to buy for about double what we used to buy for. We used to maybe buy something for $5,000 an acre. Well, now we're paying $10,000 an acre for it. And maybe it's about an hour outside of town. That's pretty common.

And so, we'll put in maybe $2,000 per acre in improvements and then sell it for about $25,000 an acre. Every deal is different. We've done 26 projects. On a typical project, that's kind of what it might look like. A typical project, maybe we buy the land for like a million dollars, we put $200,000 in improvements into it and then we sell up for $2.5 million on owner financing. And then we collect those notes.

Seth: You're selling to the individual end-users, right?

Doug Smith: Yes.

Seth: So, it's actually like a bunch of different transactions to get to that number.

Doug Smith: Yes. If we buy something for a million dollars or maybe on that example, maybe that was like 10 ranchettes. And if you do the math, we get paid $100,000 per ranchette. So, that's how it works. I need to look at it again, but we've sold, I don't know, over the last few years, 200-something ranchettes. We've sold $35 million worth of land. We sell $1 to $3 million worth of land a month. So, we kind of scaled it up there, but we sell to individuals who usually live in Houston, but actually nowadays, we're buying outside of Dallas. We bought one outside of Corpus Christi. We're looking in other areas, but they live in these bigger cities and they want a weekend place. Their goal is usually to spend maybe Saturdays and Sundays out there for a while and eventually be out there full-time.
We sell to people that are what we call “blue-collar plus.” And so, our sort of avatar is Larry, the cable guy. That's our typical buyer. They're blue-collar. They are hardworking. And they're actually making a really solid amount of money. We run all of these buyers through a RMLO, Residential Mortgage Loan Originator. And they qualify our buyers to make sure they can afford this land. You would be shocked at the incomes and net worths of some of these people. They might own the auto shop. They might own a landscaping company. They might drive a semi-truck. They might be a welder or own the welding company. You never know, it's all different. But that's sort of who we're selling to.

And they want the freedom of not being in the city. They want the freedom of doing whatever the heck they want to do out there. There are just a couple of restrictions that we put on them, deed restrictions, that can't have chicken houses and they can't have a feed lot because obviously that would have a negative impact on their neighbors. But they love the freedom. They just do whatever. So, they'll go out there and they'll get ATVs and they'll ride around. Maybe they'll get their dogs out there to run around. They'll maybe get some cows, some horses, some chicken, some goats, some pigs. Maybe they'll get a big old tractor out there and mow the grass. Maybe they'll park their big rig out there. Maybe they'll put in a barn. They might put in a pool, a fire pit. Every now and then, we'll fly over these in a helicopter with our investors. And you never know, like one it's like the whole thing, it’s like an equestrian setup for all their horses. So, you really never know.

Seth: Yeah. I guess this question's been lingering for a while now, since you started talking about doing improvements to these properties. How do you decide when to make improvements and what improvements to make? Is there a way to measure what the increase in value will be based on which improvements you make? Are there situations where you reserve the whole thing, you cut them up in 10-acre ranchettes, and that's it? You don't do anything else to touch it. No more infrastructure and you still sell them that way.

Doug Smith: We've done some that are minimal improvements. And normally that is because the land is farther out and because it's farther out from the city, we bought it for less per acre and we're going to sell it for less per acre. And doing certain improvements. Like for example, putting barbed-wire fence around each ranchette is going to add about $9,000 per ranchette to the cost and it's going to be cost-prohibitive. It's going to eat too much into our margins. On those, we just feel like it's not going to be able to bump up the sales price enough. So maybe we won't do bar fencing around those or we'll cut some of that stuff.

But after doing 70 projects, we have an idea of what we need to do, but that's the general rule. If we're buying for a lot and selling for a lot, then yes, we'll do almost every improvement possible. If we're buying for cheap and selling for cheap, then no, not all those improvements. We'll still do some basic ones. For example, you want to get the water wells in there and bring power, but we might cut corners in other areas.

Seth: So, it sounds like the due diligence required before you buy one of these things is to make sure there's actually water available. And does the zoning change? Does that happen before or after you take possession?

Doug Smith: We don't have to do a zoning change. When we're out in the country, we don't have to go through that process. It's all just broken up with a survey.

Seth: Oh, really?

Jaren: That's what I heard about in Texas. If you go outside of city limits, as long as it's north of 10 acres, you don't have to go through any kind of process really.

Doug Smith: It's like the wild west down here, baby. With our land, with our guns, you name it.

Seth: No kidding. Yeah. I mean, that's a huge deal. Because when you said that thing earlier about being over 10 acres, I thought you were talking about, you can carve them up without having to get anybody's approval, but that also applies to these zoning changes as well.

Doug Smith: Yeah. We don't have to deal with any of that. And that's like a little bit of a concern with us expanding to other states. It’s like, what are we going to have to deal with if we just cross the border into Louisiana or whatever? I mean, that would be a whole different animal. But luckily, Texas is so big and has such a large population that we're going to be fine doing it right here for quite some time.

And there's a lot more demand for these ranchettes that we're able to supply. Sometimes we have to really throttle back our marketing because we're getting too many calls or it's just more than we can really handle. But you would be shocked at how many people want to buy land out in the country. And that was true before the pandemic for sure, but it's definitely been true after the pandemic.

Seth: So, if there's so much demand, what would be a typical time range once you get it to subdivide it to get everything sold off? Has this happened within like a few months or a year?

Doug Smith: 6 to 12 months. If we totally mismanage a project and several things go wrong, it could take a year and a half. But 6 to 12 months is what we're seeing now.

Seth: I know you sort of alluded a little bit earlier about, you fly over the properties with your investors and that kind of thing. So that's like a whole other thing we haven't really touched on yet. You decided to go down this private equity model and I assume you probably did this pretty early on. When did you decide to start taking on other people's money and why?

Doug Smith: I just realized we started this land business in 2016, not 2018. So, 2016 was basically when I started doing with my money and my bank lines, bank loans and that would take you out. And then doing that for a while, we were doing very well in these deals, but some of them were taking a while to sell, which a “while” was maybe a year, which was fairly normal. I was running out of liquid capital, but there were still so many more deals we could be doing.

And so, at the same time, I had a lot of my wealthier friends wanting to place their money in a solid investment. And they knew I was doing land deals. They wanted to somehow invest with me. And so, I thought, “Okay, well, we can do more deals and these people can put their money to work. How do I structure that?”

I asked around and I found an attorney here locally who could set up a private equity fund for me. And so, I had 10 to 20 meetings in his office over the course of a few months and we really hashed out all the details. And it cost probably $75,000 ultimately, when all the dust settled to create that. But I had a structure in place where I could take on other people's money and properly deploy it and give them their returns and be SEC-compliant and all this kind of stuff. So, that was 2018 and it's been hashtag “no regrets.”

Seth: Yeah. It sounds like it's worked out.

Doug Smith: Yeah. Ever since then, we've been investing people's money for them and we paid everybody back from the first fund and we created a new fund with what I think is a superior structure. All of our investors now are lenders. They get first liens on the land that we buy and then they get first liens on the notes that we hold. A lien against the lien.
And so, what we've done on occasion is take investors out there in helicopter tours to see the properties from above, touchdown ride around on ATVs, eat barbecue, drink beer, hopefully drinking most of the beer after the ATV ride. Shoot and ski. Again, hopefully more beer after then. There may have been a little bit of overlap, though.

The last one we did was crazy. We even had beer on tap from this old antique car. The taps were on the side of the car. I don't know. We pulled out all the stops. It was pretty insane. And we had four helicopters running at the same time for the AM. Then we had another four for the PM, a different group, and then we did it another day. So, it was pretty wild.

Seth: Yeah. I was just going to say, it sounds like you've grown quite a bit since I heard your interview with Austin on Millionaire Interviews. The number sounds bigger. The number of helicopters sounds bigger.

Doug Smith: Yeah. We're onto the second or third sequel at this point of everything. Everything gets bigger and better. Oh, yeah. We've really scaled the business since I had that interview with Austin. Nowadays, we have, I think, we just crossed $21 million of investor capital under management. And I don't know, it depends how you count. Maybe we've got 100 investors, something like that. We've paid out over $3 million in returns. I think right now we're paying out $175,000 a month in returns to our investors. So yes, the numbers are bigger.

Seth: How many people are on your team now?

Doug Smith: 16, if you count me. We hire, it seems, like a new person every six to eight weeks is kind of what we're doing. And we have our own in-house sales team. Maybe five of those team members are just sales. They're out there selling the land.

Seth: I know you mentioned that when you sell these ranchettes, you sell them with seller financing. Do you always do that? Do you insist that they buy it with seller financing? If somebody has cash, can they do that too?

Doug Smith: Well, we're never going to turn down money, but we prefer to sell on owner financing, but that's really how people prefer to buy anyways. Tax-wise, it works out better. If, for example, you sell on owner financing, and then you borrow against that note, there's no tax repercussions from borrowed money. And then you'll pay taxes over time on that note as the money comes in. Versus if we sell for cash, well, all that's going to hit my ordinary income on day one. So, I prefer to sell on owner financing and borrow against the note.

Seth: Interesting. Going back to your equity investors. So how does that work? How much money would a person need to have to invest with you? What kind of returns should they expect? How often would they get a payout of some kind? How do you convince people to come on board and do this kind of thing?

Doug Smith: Yeah, what's interesting, right now, we're set up as a Rule 506(b) fund, that's friends and family. So, for me to give someone really the details about how the fund works, they have to be my friend because it's going to be kind of hard to make them my family. So, they need to be my friend. And I need to have known them for a certain amount of time. Some people say that's 30 days, although there's no real set rule.
I can give some details, but I want to let the listeners know that this is not a solicitation. I'm not trying to get your money. If you ever want to invest, we certainly have to establish a pre-existing relationship first, which you can do if you want to email me at doug@hawthornecapital.com, or you can go on our website and you can fill out the contact us form. Someone will be in touch with you and we'll establish a relationship.

I think I can get away with saying that the minimum has been $100,000 for our investors. And we're just deploying so much capital that just taking on $10,000 or $20,000 at the time isn't really going to move the needle for us. Because it seems like every month is different, but we're buying at least a million dollars’ worth of land a month.

Seth: I know from hearing your earlier interview with Austin, that it sounds like originally you were selling off these notes to some other party, but it sounds like now you are holding the notes instead of selling them. So, I guess two questions on that. First of all, when you used to sell the notes, who would you sell them to? And how much of a discount did you have to take on the balance to sell those things? Or I don't know, how did that work?

Doug Smith: Well, I was selling notes to either wealthy individuals or in one case, the guy who runs a bank. He was using bank money to buy the notes. Even like someone who's got a decent amount of money, but it's not crazy, they can even buy these notes and they can borrow from the bank when they buy them. So, let's say they're buying a note for, I don't know, $150,000. Well, they can borrow, let's say, $100,000 from the bank and that bank will have a lien against the note and they'll put in the other $50,000. So, you can do a leverage note purchase. We can take someone with a modest amount of capital and turn them into a note buyer. But we're not really selling them anymore.

Seth: Okay. I understand that. I'm more just out of curiosity for my own knowledge. I didn't realize how this worked. But if there was a note with, say $100,000 balance left to pay off on that, would you sell it for that $100,000 cash balance? Or is there some lower amount that the person is paying you?

Doug Smith: Yes. Yeah. That's the other part of your question, thank you. Well, it kind of depends on the quality of the note. Is it a brand-new note? If so, then maybe we can sell it for 85% of current principal balance. If it's a season note, then we're pushing it into the 90s. So, the quality of a note, there are several factors that go into it. But one of the main ones is how long has that borrower been paying on time?

Another thing that would help you sell a note for a lot more too is, if let's say I held a note for, let's say, a year and the ranchette buyer has now had time to build a house on that ranchette. Well, that note's worth even more. I could probably sell that one for high 90s, because the underlying collateral just got a lot better.

Seth: Yeah. Is the mobile home included in that collateral or is that like a separate thing that somebody else has a lean on?

Doug Smith: No, I don't think so. If somebody is going to put on a manufactured home, they're going to either buy that for cash. And if they're defaulting, they're going to probably hitch that up, roll it off. They're going to get that thing off there. So that would not be really attached to the property and then they're going to have their own, usually, lien against that. So, I don't know where they're going to buy these manufactured homes, but on the lot, I'm sure you can finance them. And so, they'll have two loans they have to pay. They have to pay one to my company, Hawthorne, for the land, and they're paying another on another note for the manufactured home.

Seth: Okay. Even though that manufactured home value, they could just take it off, but just by nature, the fact that they have a home on there that suddenly makes it worth more. Does it just show their commitment to the deal or something like that?

Doug Smith: Well, I think so because they're living there. It's more proof that they're living there, that they're established. But it really adds value if they actually build a home there. Let's say, a permanent structure because if you have to foreclose on them, now you not only get the land back, you get this structure. So, you're going to be in a much better place, ultimately.

Seth: Yeah. Are you doing any kind of, I don't know, credit underwriting, credit checks, background checks, like what a normal bank would do before they qualify for a borrower to buy land or not?

Doug Smith: Yes. We hand everything off to a RMLO, the Residential Mortgage Loan Originator. And they are really running these people to the ringer. They are looking at, specifically, like most importantly, they're looking at their debt-to-income ratio to make sure it's 44% or lower.
So, from my understanding, if somebody is making, let's say, $10,000 a month, and then they are spending $4,400 a month on their debt, whatever loans they've got in their monthly payments, then they're right there on that line. So, if they're spending $4,500 a month, but they're making $10,000, then they don't qualify. But a lot of our borrowers are well under that.

And we look at a lot of other things as well. We look at their credit. That needs to be decent. It doesn't have to be perfect. It needs to be decent and they need to not have any recent foreclosures. Definitely no recent bankruptcies, no recent evictions. They need to have money in their account that they can show that they can afford the mortgage payments for the next few months and even have money to put in improvements.
We look for pay stubs or however they're making their money, we want proof of that. Things along those lines. Basically just like a bank, but we're able to make exceptions that banks cannot. So, even if somebody is maybe like a year behind on their tax returns, we can overlook that. Well, a bank is not going to overlook that.

Seth: Got you. Yeah. That's interesting. Because a lot of the land flippers that I know when they're selling stuff on terms, a big difference with them is that they're doing no credit checks, zero. We don't care who you are. If you just have a pulse, then you're approved. And that obviously comes with a little more risk and it's a higher likelihood that people are going to stop paying and then they do stop paying.

Doug Smith: Yeah, here in Texas, back in the day, you could do a contract for deed. Now it's very perilous. You can really get yourself in trouble legally. Back then it was like, “Okay, well, if you pay me on time every month for 15 years, then after 15 years I'll give you the deed.” But if you're even a day late, it seems like it was just up to each seller and whatever the contract said, then you never get the deed. You were basically just like a tenant.

Now, if that contract for deed set up was still legal basically, and could be done, then sure, we might be willing to sell to just about anybody with a pulse, because it would be really easy to reclaim the property. But now it takes us maybe five months from the time they first miss a mortgage payment until we actually are able to foreclose and reclaim the property, that we definitely do not want to be selling to people who it looks like they cannot afford the property or who are going to give us trouble. Definitely not.

And we've had pretty good luck. We have very few borrowers who are late on their payments. Right now, it's maybe like 3% or 4% or something like that, that are late. Being late is not the end of the world either. A lot of times they catch up. So very rarely do we have to foreclose on someone, but it happens a certain small percent of the time. And it's not the end of the world. Because we just foreclose and then we get the ranchette and we sell the ranchette again. And with the way values have been increasing, we sell that ranchette a second time for a lot more than we sold it for the first time. And then we collect yet another down payment. We kept the money from the down payment from the first and now we get the second new buyer, we get their down payment.

Seth: What is that mortgage originator company that you guys are using? I'm thinking if I were to do seller financing and if I did want to do these kinds of background credit check underwriting things, but I don't want to do it myself, I want somebody else to just do that for me. Is there a company out there that will do this kind of thing? How could I find somebody like that?

Doug Smith: Yes. Texas Pride Lending. They're really good.

Seth: I wonder if that's like a state-specific thing. If my property is in Michigan, I got to find a Michigan equivalent of that kind of coming up.

Doug Smith: It could be, it could be. But they could probably refer you to someone for your state.

Seth: Yeah. Okay. Sweet. I appreciate sharing that. That's super helpful.

Doug Smith: Well, we had to start doing that when the Dodd-Frank Act was put in place after the housing crisis. If you're doing a certain number of deals, you definitely have to do that. But it's been good just for screening our buyers anyways. It costs about $1,300 for a buyer and our buyers are paying for that.

Seth: As we mentioned earlier, you're not selling these notes anymore. You're keeping them all in-house. What made you decide to make that change?

Doug Smith: Well, if we hold the notes, then we can allow our fund investors to lend against them and we pay the fund every month. It's all a lot more steady and predictable. Our investors can get paid based on steady predictable cash flow. Also, there are some tax reasons for doing that. Like I said, if you sell a note or land or whatever up front, then you might be looking at getting tax at ordinary income tax rates.

Well, with this setup, we're paying mostly capital gains taxes over 15 years instead of ordinary income taxes upfront. So, that's just kind of like a general rule. Seth, if you generate a note, instead of selling that note, if you were to borrow against it, depending on what the terms are of that loan, a lot of times the math shows that borrowing against it is a better thing for you long-term.

And plus, you can recapitalize that way and you also can get a nice spread monthly. So, you're collecting X dollars per month, which then you're paying a lesser amount of X dollars per month to your lender. And that lender could be a bank, which would be a lower interest rate in general than an individual, but they also can be a huge pain to deal with. Or you could borrow from an individual, pay a higher interest rate normally, but it could be really easy to do. And once they've done one or two, maybe they'd want to do a lot more.

Seth: And just to clarify, when you say borrowing against this note, does that mean you are borrowing money to fund the purchase of land and then you're selling the note? Just break it down for me in terms of what we're saying when we say that.

Doug Smith: The way it works is like if my entity, which is Hawthorne Land that goes out there and we're buying some land for a million dollars, the fund is structured in a way that it's going to lend against that entire purchase price with the understanding that we're buying at a much lower amount than we will ultimately sell for. We have numbers to show that that's what we're doing.

It's 100% loan to cost, but it's a really low loan to after improved value. It's like they're lending it maybe 50% or 55% of what ultimately we will sell this for. So, they get a lien. They have a dead or trust and a promissory note. The dead or trust is filed by the courthouse. So, if we don't pay them, then they get that land.

And then as we break it up and sell these ranchettes on owner financing, that portion of that loan tied to that ranchette is paid back to the fund. And then that fund issues a different loan against the note. So, the note for that is now the collateral. Does that kind of make sense? If I don't pay the fund for that note loan, they get my note. Now they're collecting from Joe, the ranchette buyer. And if Joe, the ranchette buyer doesn't pay them, then now they own that land. So, there's collateral in either case, what we feel is really solid collateral.

Seth: Yeah. You may have explained this and I just missed it and I was taking notes here. But when you say borrowing from the fund, what is the fund? That's your investors or is that a bank? Who is this original lender?

Doug Smith: It's Hawthorne Income Fund LLC. It's an entity that the investors put their money in. And there are all sorts of paperwork in that fund that outlines the rules for its lending against our assets. And so, if something meets the criteria, then it will lend against it. So, the criteria is, we have to be buying land. It'll lend up to 65% of the after improved value of whatever land we're buying. It's kind of like a short-term hard money lender in that case. And it specifies the minute we sell any little ranchette, that portion of the loan has to be paid off. And then there's some other criteria that it will lend against the notes that we own to where there's a certain amount of spread between what my entity is collecting on that note and versus what the fund is lending against that note.

So that if they have to foreclose on a note, they have a better note than they had with me. They're collecting from Joe, the ranchette buyer, but they're getting a higher interest rate and they're making more per month. In every situation where something goes wrong or if I default, they're better off. That's the idea. But default is highly unlikely. There's no real reason that I can think of that we would default.

Seth: So, the investors are making money two ways then, not only through the original fund that is being borrowed from to acquire the property, but also through Hawthorne Land, which is collecting the money from the buyers.

Doug Smith: They make money in one way. And that’s as a lender against either land or notes. And so, the fund makes interest income, period. A set amount of interest income. It's got two borrowers, either Hawthorne Land for the land to buy. And then there's an entity I own, Hawthorne Interest LLC, which holds the notes. And so, they make loans to that entity with the notes as collateral.

It sounds, I guess, a little bit complicated when you throw in the fund structure, but just imagine I'm going to go buy some land and I come to you individually, Seth, and I say, “Will you lend me up to 65% of whatever I'm going to sell this for, but you're not going to lend more than whatever I have in it.” So, if I'm buying it for 55%, your cap is going to be whatever I'm in it for. And as soon as I sell that land, I'm paying you back. That's the same structure.

And then, oh, well, hey, Seth, I've got this note that's paying me $3,000 a month. Here's the principle balance and so forth. I'm going to borrow from you. And here's our terms, and you're going to be making $2,700 a month. And this is going to be for example, for you a 10% return. But if I don't pay you, now, you get this note here. And which, if you did the math, it would be like, you're maybe getting like an 11% or whatever return on your money. So, you just stepped up. But the fund allows the investors to cut out all this complication of always going to different people and trying to fit them to land or have their money fit into this note. It all goes into a pool and it's deployed properly as needed.

Seth: Yeah. I can totally see that. It makes a lot of sense. How are you finding these individual investors who want to inject $100,000 or more a piece? I know there are different rules you have to abide by, but if somebody out there was trying to do this either for land or whatever else, how do you find these people? Is it word of mouth?

Doug Smith: Oh my gosh, there are so many ways you could really go about it. I can tell you how I've done it, but I can also tell you all the different ways. If you have a podcast, well, you're going to be out there, and people every now and then, one of your listeners will have a lot of money they're looking to deploy and they're probably going to contact you. So that's one way. You could be like a local expert. Maybe you're going to all the real estate meetings speaking. Maybe you are just a member at a country club and maybe you're golfing every day. And you're paired up with different people every day. And then slowly, a few people invest. And before you know it, everybody in the club knows about you and your investment because word of mouth is spread.

I'm a member of a health club here in Houston. I've gotten some contacts from there. People are investing in the fund. And then, I'm a member of Entrepreneurs Organization, EO. And it's a group for entrepreneurs whose businesses are grossing at least a million dollars per year. So, there's been a lot of my friends from that group who have invested.

Also, people from the real estate scene. I would say I’m super active in the local real estate investing scene for several years. And so, some of those people have known me 20 years and they've shown up now and they're investing with me. Just friends and family that you know from high school, college, whatever, they can start investing with you.

Depending on what your fund structure is, you can post on Facebook, just social media about what you're doing. The older, richer people are more on Facebook than Instagram. So, you always have to remember your audience. You could even become super active on LinkedIn and really build up a network there. There are really so many ways you could go about it. And what you can do too, is if someone's maybe just curious and not fully interested yet, you can put them on your email list. And so, you can email them and update every month or two until maybe two years later, they invest. There are so many ways to go about it.

Seth: But there are certain things you can't do. Like you can't just come on here and say, "Hey, give me your money. And well, let's do this." You have to be sneaky about it or something, like what can and can't you say. Do they have to approach you and then you start talking about it?

Doug Smith: If you have a Rule 506(c), which basically, it's just a little bit of wording there in the fund that changes it from a (b) to a (c), you can go and you can scream from the mountaintop about your investment opportunity. It's just that when someone invests with you, they have to prove that they are accredited, which means that their net worth is at least a million dollars outside of their homestead, or that if they're single, they're making at least $200,000 a year, or if they're married, they're making at least $300,000 a year. And there are some other things that allow someone to be accredited, but those are the main ones.

And if you're a 506(c) fund, you can even go to these conferences where you have a lot of institutions or family offices or RIAs. And in the crowd, you’ll be managing a lot of money and you can even speak at these conferences. You can have booths at these conferences. So, you could just go straight that route.

There is an unlimited amount of capital that can be raised if you have the right product, the right investment for people. And then to show to them that it's the right investment, you have to have a really solid PPM, which is your Private Placement Memorandum, which your attorney will create for you with your help. You'll have to have input as you're creating the fund. But then you also need a slide deck normally that explains the fund. And then maybe you need a video that explains the fund. Maybe you need some FAQs. There are several ways to go about it, but you have to get all this stuff put together. It's not easy.

It takes months or years to properly put a lot of these things in place. And even what really helps too is, before you do it, if you have a track record. Maybe it's your money, or maybe you bring in a partner or two, and you guys do this on your own before starting up a fund. Because when we launched the fund, we already had two years of a track record to show that this is what we're buying for. This is what we're selling for. It works. And we're just going to do a lot more of it with your help.

Seth: Yeah. I'm sure that made it way easier. So, you're a 506(b) or a 506(c)? Which one are you?

Doug Smith: We're (b), we're about to be a (c).

Seth: And you're switching to the (c) because you want to be able to advertise more freely?

Doug Smith: If an investment advisor calls me, for example, and they want to know more about our investment, because they've got a wealthy client, I want to actually be able to tell them about it. Right now, I can't say much of anything until I get to know them a lot better.

Seth: What does that mean, get to know them? Who decides when you know them well enough and what you have to know about them and that kind of thing?

Doug Smith: Oh my gosh. That's so weird. Every SEC attorney will tell you something different. Some people say you need to have known them for 30 days. Another attorney might say the three-touch rule. Maybe you have a call with them. Maybe you have a coffee with them, maybe whatever, over a certain period of time, and now you know them. And then also it helps if you ask them some questions about their personal finances so that you can become more confident that they're an accredited investor.

Seth: Yeah. And I got to imagine for the people you're working with, they're probably accredited anyway. If you had $100,000, if they're onto this, you're probably there already.

Doug Smith: Yes.

Seth: Do you have any thoughts on any issues with the coming recession later this year? I've heard a lot of people talking about this. I know the thing with land that all of us have seen is that values have just gone up and up and up. It’s been a crazy couple of years. I know back when I first heard your original interview with Austin, I think you said you were buying for 4,000 an acre and selling for 14,000 an acre, and now it's way higher than that.

Doug Smith: Yes, that sounds about right. Now it's maybe buying for 10,000, selling for 25,000.

Seth: Yeah. That's a big jump in a fairly short amount of time. And some people are wondering, is this like artificial value increase or not? And is it going to stop? Is it going to go backwards? I don't know. Do you have any thoughts on that? If we do have a recession, what would be a way to plan ahead for this? Is there a way to plan ahead for it?

Doug Smith: Well, in general, with what I'm doing, selling on owner financing is a recession strategy. So, I feel like we're already doing what we need to do. That's what happened after the housing crisis of 2008, is that a lot of investors who had fixed up these single-family houses, they could no longer sell them retail to a conventional buyer. They just weren't selling. So, they were either renting them out or they were selling them on owner financing. And that worked like gangbusters. I feel like we're already very well positioned for that anyways. And so, one thing that really affects a lot of buyers is when the financing rug gets pulled off from underneath them, then now a seller can't sell the buyer because the buyer can't get financing. But if you're already offering financing, you're fine.

Seth: Got you.

Doug Smith: Will there be like less demand for rural land? Probably, but we were doing fine very well with less demand for rural land pre-pandemic. We did not want or need the pandemic to succeed in this business. In fact, it was really a pain in the rear because, obviously we're paying more to buy, but we're selling for more as well. So that's kind of a wash there, but it's made it so much harder to find properties for sale. There's just such little inventory right now and everybody's fighting over it. So, I would love for the land market to sort of moderate to go closer back to what it was pre-pandemic. I would love that for it to soften. So, that's my take on it.

Interest rates are another thing. Interest rates are rising, obviously. So, when we sell, lately we're selling at 10.9% interest. That historically has scared some buyers because they were thinking, “Oh, I can go to a bank and get a 3% loan.” They're seeing these 3% mortgage rates or whatever, maybe into the twos. And the reality is if you're going to get a rural land loan, you were never going to get the 3%. You were maybe going to get 5% or whatever it was because it's a different product for a bank. But now as those interest rates are rising, the terms that we're offering are not as scary. So that's actually helping us to some extent with sales. People are not bulking as much of the 10.9%.

So, are we entering into a recession? It seems like it, but people are always having predictions on this kind of stuff that turn out to be false. And I'm no economist, but it seems like from what I'm hearing from some really smart people, the government and the federal reserve just don't have as many tools in the tool belt anymore to fight, to counter, a recession. In fact, they may have just kicked this last recession down the road a bit. They might have just punted it and now we're facing it.

So, we will continue to watch and see what's going on, but we're going to be careful. It seems like, in our opinion, we're very well-positioned to be just fine through a recession. Even in the early days of the pandemic, we were doing just fine. That was a huge recession. People hardly even remember it now, but for the first two months of the pandemic, in early 2020 before all the government money hit, there was a huge recession and we were doing very well. So, we already have an idea of what it's like from that. And we have an idea of what it's like from houses after the 2008 crash. So, we feel like we're very well-poised to power through it.
And in fact, it will help us because once we do get to the other side of what seems like it's going to be a recession, we will be able to let's say, fast forward three years and then we're showing our pitch deck to a huge investor. And their first question is going to be like, “Well, how did you do during the recession?” And we'll show that everything went extremely well. So that would just further allow us to scale this business. I'm looking forward to it in some ways, but obviously, you don't want to wish a recession upon a country or the world.

Seth: Yeah. I'm with you. This past couple of years have been really weird. I mean, not bad necessarily. Just it's shook everything up in terms of what I've always been used to and what people are accustomed to and how supply and demand work for land and pricing and all this stuff. And I'm with you. I kind of look forward to it, in a way. I mean, I don't know exactly what will happen, but…

Doug Smith: I would imagine like you could tell me more about it, but maybe a lot of your listeners are having a hard time finding land right now because inventory is so tight. I know you guys have a different way of approaching it with direct mail and so forth. But is that an issue right now?

Seth: Yeah, for sure. It's not undoable, but yours it's just a lot more of a bigger push required. The response rates, the acceptance rates. It used to be, you could send out, I don't know, a few hundred mailers and walk away with at least one or two solid deals. And now it takes thousands to do that. It varies depending on the market, some markets that may even still be feasible. But if you're talking about a hyper-competitive market, like Florida or something like that, then yeah, it's going to be a lot harder than it used to be.

Doug Smith: Yeah. Because I imagine all these owners of this land, they know that land has been hot, land is in high demand. They know that the value of that land has almost certainly been increasing. So, if the typical land owner thinks or knows that, it's not going to bode very well for you as a land buyer.

Seth: Do you get mailers from people who want to buy land? Is that a normal thing that you see?

Doug Smith: Well, I was going to say it would be great if land were uncool again, then we could all, I think even make more money. Do I get mailers? I don't handle our mails. So, I don't know. Somebody else in the office does. But actually, I have gotten some stuff in my house. And so, I'm just wondering, “How the heck did you get my home address?” So yes, I've gotten some stuff, but I don't know the extent of it because maybe most of it goes to the office.

Seth: So, mail to your house about buying your land.

Doug Smith: Yeah. I'm wondering how they got my home address because-

Seth: Yeah, that is weird.

Doug Smith: Yeah. Maybe it's one of your listeners, that's from pretty sophisticated stuff.

Seth: Yeah. I'm sure it's possible, but it seems like there would be at least a few steps involved in trying to figure out. That's weird. I don't know. I can't tell the answer on that, but it's interesting.

I know in your life, you've done a lot of different partnerships. You've worked with a lot of different partners on different things, hired people, had them motivate people. I'm just curious more of just a general question, how do you find a good partner? And what exactly are you looking for? How do you know that they're bringing the right things to the table? This is something that comes naturally to some people and not naturally to others. So, for people who struggle with that or need insight, how do you handle that?

Doug Smith: Well, how do I motivate people? First of all, I don't really. I try to either hire or partner with people who are self-motivated. I'm not going to be the rah-rah Tony Robbins. I don't even have the energy for that. They need to do that on their own.

Well, I just look for signs really that they're honest, ethical, hardworking. They do what they say they're going to do. Just the regular way you would size up a human being. And I think you sort of hone that craft over time. Even if I'm at a restaurant with someone, I'm paying attention to how they treat the waiter or waitress. If we're driving, are they cutting people off? Are they screaming? All those would be huge red flags. Do they insist on choosing the restaurant? Did they choose the table? Did they choose their seat? Basically, are they a good considerate person?
And then obviously you need to make sure if you're going to partner with somebody that they have experienced or some sort of background doing whatever you're trying to partner up on. And then it should almost never be like a partnership in the way that maybe you're thinking, or maybe somebody is thinking where you're both on the LLC together. You're like 50% owners of LLC.

When I'm talking about partnership, I'm talking about you own your LLC and they own their LLC. And those LLCs come together for some sort of joint venture. That's a lot cleaner and there's some sort of clear, ideally written agreement that outlines exactly what's going to happen and how this is all going to play out.

And as you're doing that, you have to think through every possible scenario. What happens if this guy gets some drug habit, gets on meth and is thrown in prison? How does that affect our partnership? You got to think through that. So, you got to have an out clause, where everything's not destroyed.

And then also you have to remember that in most cases, everything can be a test. I found a JD partner that was buying houses with my money for cash in Houston many years ago and selling those on owner financing. And what I did first is I called around, made sure that all the people that we had in common they both said positive things about him and they did. And I got a good vibe from him. And I also realized that, “Hey, we can experiment with one house. If it doesn't go well, big deal.” And the way the paperwork's written up, I can get out of it without too much damage.
But then that house went well. So, here's another house, here's another. Before you know it, we're doing dozens of houses. Everything can, not everything, but most things can be an experiment first.

So that's partners. And then I've got more to say about employees.

Seth: Yeah, go for it.

Doug Smith: Ultimately, at the end of the day, these are all just people you're working with. It could be a partner. It could be an employee. It could be some sort of vendor. But there's going to be an overlap between a lot of these. But for employees specifically, we have done a lot of testing. So, when they come in, they're having to solve some sort of problem in Excel. They're having to maybe write an essay. A lot of testing. Something that it's not exactly an IQ test, but we give them an abbreviated Wonderlic test.

I'm looking at their resume. If they went to college, how well did they do there? What is their work experience? And I'm also looking for typos on their resume. The whole grammar and typo thing, I'm going to be looking at more for sort of an administrative assistant. At least 50% of the people I've hired over the years have been some sort of administrative work. And so, I got better at hiring those people.

Salespeople, that's going to be a whole different way to hire for them, obviously. Who cares if they don't have good grammar? Can they sell? Again, with salespeople you can hire them. And if they don't work out, it's not that big of a deal because you can let them go after a couple of months if they're not selling and just replace them with a different salesperson. So that's not as big of a deal to be great at hiring on sales. You still want to screen them and do the best you can.

Hiring for executives. I've hired people to run a couple of companies before. That's a whole different animal with bringing in even a third-party expert to interview them for you and to ask some sort of interesting psychological questions to kind of get a feel for who they are. We use the predictive index these days, and that's something people could Google, predictive index, to give us an idea of whether the position matched up with the candidate. So, it's really important for a lot of positions to just screen the heck out of them before they come in, because the ramp up time is you're going to be training them for several weeks in certain positions and you don't want to waste that time, training someone who's just never going to get there.

And then having to manage them and put them on some sort of corrective action plan. Then ultimately fire them. Then go back to the drawing board recruit. You don't want to have that cycle. So, if you could just hire people correctly from the beginning, especially for certain roles, you want to do that. But again, in some other roles, you can just get a good feel for them and do a test like sales people. Every position's got a little bit of a tweak, a little different angle. But hopefully, with what I just said, it gives you an idea of some of the things I'm looking for.

Seth: It sounds like your gut intuition plays a pretty major role in this. If you see somebody you've run through these tests and they pass these tests with flying colours, but you just have this gut feeling that something's off, would you rely more on the tests or on your gut in making that decision?

Doug Smith: It's very rare that somebody would pass all these tests and then also me feel that something is off, because the tests basically prove, for the admin positions, that they are very detail-oriented. Part of the test though is, and it's not a test, but part of what I'm looking for is did they show up to the interview on time? Did they dress well? Did they send me an email afterwards thanking me or a thank you card? So, by the time they did or did not check all these boxes, I already know what I think of them. It's all built into the process.

Seth: Did they refer to me as your Highness or not?

Doug Smith: Yeah. There you go.

Seth: Well, just to kind of wrap this interview up, I appreciate again you talking. It's been awesome to have you on the show and hear from somebody like yourself with your kind of experience. It's not every day I meet people like you. So, I really appreciate it. But at the end of a lot of these interviews, what we'd like to do is ask three questions that aren't necessarily related to real estate or business, but just find a little bit more about who you are.

So, question number one is what is your biggest fear?

Doug Smith: Well, first of all, Seth, I'm not that special. All I am is a guy that's been getting up and working hard almost every day, except the years I took off. I took off two years. Minus those two years I've been getting up and working hard every day and I've been getting knocked down, but I've been getting back up. And so, there's nothing special. It's basically persistence over a long period of time. There are people with more charming personalities. There are people who are a lot smarter. You name it. There are people outdoing me in every area, but I am persistent. And I get the feeling that a lot of your listeners are persistent as well. And that's the main trait I think that you want to have. It’s to stick with it. You get knocked down, you get back up and you don't quit.

And so, that combined with being honest and ethical, you can do very well. If you're going to be dishonest or unethical, then you're not going to do well. You might last a year or two in whatever field before everybody finds out that you're not treating them right. So, combine those things. And I think you're very well positioned for success. And you had a question for me. You had a question about my fear.

Seth: Well, actually, as you were just talking that though, it made me realize we didn't really get into a lot of the peaks and valleys of your journey, which I don't know. We just didn't ask the right questions, I guess, but if you guys do want to hear more about Doug's backstory, I would encourage you to do that. I'm going to link to his interview with Austin Peek in the show notes, retipter.com/135. There's a lot of fascinating things about what Doug has gone through in his life that I think you'll find really interesting as well.

Doug Smith: Yeah. Thank you. So, yeah, I don't identify myself as a success. What resonates more with me is I am someone who will power through difficult situations. And sometimes those difficult situations last months or years, but I will keep getting up and I will keep moving forward. That's what I value more in myself. I see myself more as someone like that versus a successful person.

Success is not linear. Success is a roller coaster. And even you could become successful financially, but you find out tomorrow you've got cancer or something. You can really get blindsided by something else in life. In fact, once you have over a certain amount of money and some people on this call maybe understand this, adding more to it does not affect your happiness. It doesn't. So, it's more about the other aspects of your life, your health, your friends and family, et cetera.

Seth: Got you. But anyway, back to that question, what is your biggest fear?

Doug Smith: My biggest fear for many years of my business life was not becoming financially free because I felt like that was the main thing I needed to accomplish in order to really enjoy life, do the things I wanted to do, not have to have a job. That's important to me. I don't want a job. That doesn't work for me, my personality. But I've accomplished that, thankfully.

Now my biggest fear would be not living up to my potential. I feel like in the business world, I'm capable of some big things and I'm realizing that potential right now with Hawthorne Capital. Thanks in large part to our team. I mentioned to you, Seth, before this call, my bio looks pretty decent these days, but that's only because it's being supported by all of our team members. They are doing all these things that I get to slap it on my bio. Obviously, I'm involved, but it takes a lot of people.

My biggest fear would be not living up to my potential. That seems to be happening right now as long as I don't get in some sort of car wreck or whatever, I'll let that play out a little bit longer. And then after that, I don't think I would have to come up with a new fear, but I don't really go around fearing. I don't even think about these things on a regular basis that I just told you that would be my biggest fear. I don't go around thinking of that. I think about what do I need to accomplish this year? And more specifically, what do I need to accomplish today or in this moment? What's on my to-do list that's going to move the needle?

Seth: It sounds like a healthier way to live than going around just being afraid of stuff. So, thank you for that. What are you most proud of?

Doug Smith: I would say every time I've gotten knocked down, I got back up, even though it took months or years. I'm most proud of that. I'm more proud of that than any sort of financial success, that I'm still standing.

Seth: Good answer. Last question. I don't know how much you've ever thought about this, but let's pretend for a moment that you just got wired $100 million to your bank account in addition to the $100 million you already have there. And you're not allowed to stay on your current career path, but you can do anything else you want for the rest of your life. What would you do if real estate was out and you had to do something else?

Doug Smith: Well, first of all, I do not want money that I did not earn. That's not what money is to me. It's like, “Oh, just more in my account, the better.’ No, I want to know that I earned it, but if you're forcing me to accept the money, okay, fine.

Seth: Oh, we're forcing you. Yeah.

Doug Smith: Then I would invest that passively. But now you're forcing me. I would normally just want to keep doing this Hawthorne Capital thing, but now I'm being forced out of Hawthorne Capital.

Seth: Yeah. You can't, sorry. Yeah. That's really the point of this question is to figure out, what really matters to you underneath all of that? Like what's next?

Doug Smith: Well, I don't think I would work. I think I would just spend time with friends and family, all my favorite people. I would think I would play kickball. I would eat more of that Mexican food, drink more of those margaritas, skinny margaritas, got to watch the carbs. I would work out a lot, three to five days a week. I would meditate. I would probably take ice baths.

As you can probably notice, I've listened to a lot of Tim Ferris and Joe Rogan podcasts. I'm really all in on that sort of self-improvement biohacking stuff, but I don't have a lot of time for it right now with Hawthorne. I think I would practice Spanish. I would travel. I would organize my to-do list and my emails and all my files on my computer. Just the stuff that I feel like I've been neglecting mostly to some extent with Hawthorne.

Seth: If I remember, you actually went to Spain for over a year, right? To learn Spanish.

Doug Smith: Yeah. I was in Spain for 11 months, in Madrid in 2016. That's where the land business basically was started. I was doing it from my laptop and phone. And then Chile for two months at the end of that year in South America.

Seth: Wow, cool. Awesome. Which country did you like better between those two?

Doug Smith: Oh, pros and cons, pros and cons. So, Spain is beautiful. I mean, Madrid, my goodness. I'm not necessarily an art or architecture guy, but the architecture there is amazing. Just walking up and down the streets. They have such an incredible culture in Spain and Madrid. They've got these festivals for celebrating all these different things and they've got their special drinks and their special foods and just all these different customs. It's really cool.

And then in Chile, they didn't have as much of those things. It's a newer country. I mean, it's still old, but it's a newer country and yeah, it's just not evolved culturally like that. In Chile, the economy's pretty good because in, I guess the 1970s, a group of MBAs from America went down there and gave advice to their president about how to run an economy.

So, they saw this huge economic boom. The economy is really solid down there in Santiago, more so than maybe any place in Latin America. That was cool to see, just all the development there, but then the people were super friendly. That's just something throughout Latin America. I made a lot of friends in Chile and even in Spain when I was there, I made friends with all the Latin Americans. In general, Europeans are not big fans of Americans. They like us enough, but in Latin America, I found that they're much bigger fans and that much more connected to us culturally.

Seth: Interesting. Does Europe not like McDonald's and Walmart and all this stuff? Like the greatest things we've ever given to the world?

Doug Smith: No, I think if you were to ask the typical European what should happen with, let's say, McDonald's, they would say it should be burned to the ground.

Seth: Yeah. I don't know if I can really argue much with that.

Doug Smith: But they will eat there, but they want it to go away.

Seth: Talk out of all sides of the mouth, I see.

Doug Smith: Yeah. There were some Spaniards I made friends with as well in Spain, but it was a really good experience.

Seth: Yeah. We're sending both of my kids through a Spanish immersion program. So, from kindergarten through all schools really, they're going to have this, Spanish is going to be built into their vocabulary and all this stuff. But sometimes I joke around that the final exam, when they're getting ready to graduate, the way you graduate is they drop them off in an alley in Honduras and just say, “Get home, you're on your own.”

Doug Smith: There you go.

Seth: Yeah. That was a joke, though. I wasn't serious. Awesome. Well, if people want to find out more about you, where should they go? What's the best way to do that?

Doug Smith: Hawthornecapital.com. You can fill out the contact us test page there, and we can establish a pre-existing relationship, and hopefully work together someday. You can email me doug@hawthornecapital.com. You can email my assistant, although she's now the investment coordinator, her name is Ellen, ellen@hawthornecapital.com. So yeah, I would say those are the main ways.

Seth: Awesome. Sounds good. Thanks again, Doug. It was awesome to talk to you. We'll have to stay in touch and yeah, I will look forward to seeing the future of Hawthorne Capital and where that goes. It sounds like you have an awesome thing going.

Doug Smith: Yeah. Thank you so much. I've really enjoyed being here today. Thank you, Seth. Thank you, Jaren. Even, I guess, Jaren will hear this later.

Seth: For the listening out there, just so you understand why Jaren's been so quiet, his internet cut out like halfway through this interview. So, he's just kind of gone now, but sorry, Jaren.

Doug Smith: But hopefully, people got something from this and if they have any follow-up questions, again, I would like to establish a pre-existing relationship, feel free to reach out to me, for sure.

Seth: Sounds good. And again, if you guys want to see links to Hawthorne Capital and a lot of other stuff we talked, about go to retipster.com/135, and you'll find all that info there. Thanks again for listening.