Seth: Hey folks, how's it going? This is Seth Williams. You're listening to the REtipster podcast. This is episode 188.

Today, I'm really excited because I get to talk to Marco Santarelli. Marco is someone I really look up to in the real estate industry. This guy has been in the business for a long time. He's seen a lot of things. He's done some big deals. I've heard Marco present a couple of times at REWBCON and every time he talks, I walk away with some big aha moments that help me understand the real estate market better. This guy is like a walking encyclopedia of knowledge.

And Marco is an investor, an author, a two-time Inc. 1000 entrepreneur. He runs Norada Real Estate Investments, a company that helps investors achieve financial freedom through smart turnkey real estate opportunities. And today, he's going to share his wisdom and experience with us.

Marco, thanks so much for being here. How are you doing?

Marco: I'm good, Seth. How are you?

Seth: I'm very good. So yeah, I wasn't joking when I said I was excited to talk to you because I've watched you and respected you for a long time. And I think people are going to learn a lot from whatever we talk about here. So maybe we can just kind of start where a lot of these conversations start.

If somebody has not heard of you, tell me a little bit about your journey. Like when did you get into real estate investing? How long have you been at it? What drew you into the niche of real estate that you're currently in?

Marco: Well, the short story is basically this. I fell in love with investing in real estate when I was a teenager. It's a weird thing to say, but I just looked around and I realized I wanted to be financially free. I called it being “rich” back then, but not really understanding what rich meant and what being wealthy meant and all that kind of stuff.

But ultimately, I just wanted to live life on my own terms and have time freedom. So for me, that was just being rich.

But today I look back and I realize, okay, I just want to be financially free. And that gives me the time freedom. But I discovered that as a teenager. And then, when I turned 18, I bought my first rental property. And it's a pretty young age for becoming a real estate investor. But I knew what I wanted. I just had to wait till I could qualify for financing.

So I had to be an adult. And that means I had to be 18. So I started when I was 18 years old. But yeah, that's how I got started in real estate. Slow at first. Then I bought a second property. I got my real estate license and started selling real estate to better understand it and to make money because every real estate agent thinks that they can make a lot of money through real estate commissions. So that was kind of the path I was taking at the time.

And that didn't last for too long because I hated being a chauffeur and carting people around in the backseat of my car, showing them houses. But I've always had a love for business, entrepreneurship, and investing. And everything I've done since then through an interesting winding journey of successes and failures have been through businesses, entrepreneurship, investing in anything and everything from oil and gas to crypto to cannabis to real estate, you name it. I just found out over the years where my strengths and interests lie. And I just started to focus more and more on that.

And so I love business. I love real estate. I love technology and technology-based businesses. And I love passive income and something that real estate is great for in terms of providing us passive income, tax benefits, and the ability to not only preserve our wealth, but to grow it over time. And that's why I focus on those two things.

And really, if you step back and you look at my journey, it was all about building businesses, scalable and viable businesses to generate income and take that income and invest it into income-producing assets and business, other business ventures. So you just kind of stack on your successes and leverage the income and the profit you make from your businesses into growing it into more profitable business ventures.

And that’s what I’ve done over the years. It’s just building on one success after another. Not all of them are successes. I've had failures too.

Seth: You've had failures. No way. That's impossible.

Marco: If you don't have failures. I don't see how you could be successful.

Seth: Yeah. I think, Seth Godin said if failure isn't an option, then neither is success. Something to that effect.

Marco: Yeah. I think it's something to that effect. I've heard it said that you can learn at least 10 times more from a failure than you can from a success.

Seth: Yeah.

Marco: There's not a lot you can get from a success other than just knowing exactly what you should be repeating and continuing to keep having that success. But when you have a failure, you can look at everything that has gone wrong and what was going right and learn how to change what you're doing, your systems, your processes, whatever it may be, your marketing, your operations and do things better.

So there's far more to be learned by a failure. In fact, if you have a failure and you walk away, not learning anything from it, you've actually completely failed. Because a failure can be a success by learning lessons from the failure in order to know what to do and what not to do the next time.

Seth: Well, I appreciate you talking about that and just mentioning failures because that's something that I feel like nobody talks about in these interviews. So I'm curious, what is an example of a failure you've had and what happened to make it fall apart? What were some of the lessons you learned from whatever that was?

Marco: Well, there's probably many. The first one that popped into my mind was back in the dot-com days. So let's just talk about that. It's not necessarily real estate-related, but it's just being an entrepreneur and wanting to build something and make money or be profitable or be rich.

So back in the late 1990s, in the dot-com era, when everybody was trying to make a fortune with the dawn of the internet and where that was going, that was the new frontier. Two business partners and I got together to form a dot-com business. It was actually the offshoot of a brick-and-mortar business, an online business, a publishing business. And so we wanted to create the Costco for the club industry.

When I say club, I mean golf clubs, country clubs, even city clubs and whatnot. They buy everything from toilet paper to tractors, food and beverage, you name it. Like, if you go to a country club or any kind of golf club, anything and everything that's there is something that they have to purchase.

And so my cousin, he had this media business and he published a magazine to the industry. And so we decided to launch a dot-com business. So we started raising capital from venture capital lenders or investors in Northern California, we ultimately raised a total of $9.5 million. And we built this company up to 105 employees.

And operationally, it was doing well. But from a marketing and sales perspective, it was failing. We weren't generating enough revenue and profit to keep the business going, to sustain it for a long period of time. Which was typically not a problem back in those days. Because if you had essentially a dot-com business, venture capitalists would continue to fund your ventures until you got profitable or you went public or you had some sort of exit or liquidity event, which made it profitable for everybody.

Well, that's the path we were on. We were on the path to an IPO, to taking the company public, and then everybody would have an exit. Long story short, the stock market crashed. And at that point, everybody got cold feet. So all the investors, as in the venture or capital investors, they basically put brakes on providing any more funding. And so we had no more funding. We had a burn rate of over $100,000 a month and we didn't have the capital to keep going and sustain the business.

So, ultimately, we just had to fold the business. We had to close shop and we laid off all 105 people. I was the third employee. I was the partner and I was the third last to leave. So it was kind of a sad last few months, if you will, just having to let everybody go.

Anyway, that's a failure, but it was a good idea. It was just too early. It was too much, too soon, too early. And if we had started six months earlier, we probably would have gotten to that publicly traded level of having an IPO and offering, and just been sitting on a whole bunch of cash because of the liquidity event from that. Or at least in part, because you can't sell all your shares right away.

But it was a failure, not because of something we did wrong. It's a failure because of poor timing, a stock market crash, and maybe it was a great idea, but just too soon.

Seth: Yeah. So it seems llike,in terms of like a lesson, it's almost like there was no lesson because you couldn't have known that, it wasn't really your fault. It's not like you made a mistake. Is that the universe was not working well with you at that point in time, right? Or was there something you could have done differently with the limited knowledge you had back then?

Marco: Well, there's always something to learn if you dig deep enough.

Number one, the importance of timing. If you have a good idea, you have to make sure that you're entering the market and executing on your marketing plan and whatever your strategic plan is at the right time and executing fast enough and hitting your milestones soon enough.

Because if you don't do that, that six months’ difference, from starting six months earlier and being able to hit our milestones, our target dates for taking the company public six months sooner, made all the difference from making no money and losing money to having made millions of dollars. Timing is so critical in a lot of ventures.

Two, it makes you look at the importance of revenue and the importance of profitability. If you have revenue but no profit, you don't have a sustainable business. You won't be able to survive for very long because you're going to be burning whatever you have in your coffers, your bank account. So you have to consider revenue, but you have to consider profitability. You have to consider your expenses. You have to consider what your profit margins are and how soon you can get to profitability.

Because if you don't have a profitable business, it's not sustainable. If it's not sustainable, you'll never get to a viable business where you have all the systems and operations and procedures in place to continue running that business and actually walk away with it and let the business keep running without you being there.

So you start to look at these things in terms of timelines.

Seth: Yeah, that's the tricky balance with business. On one extreme, you could say, I just want to do good for the world and money doesn't matter. But you can't do that. You got to think about the revenue and the profitability.

But, I don't know, it's kind of like it loses its soul when you don't actually have a greater purpose or mission behind it. But finding that sweet spot where you're doing good for the world and you're making good money from it, that's kind of like the Holy Grail everybody's looking for. It's not always easy to find that.

Marco: No, it's true. And you're talking about purpose, and it's good to have purpose in a business.

Today, with the business ventures that I'm involved in and with several of my business partners, purpose is a central focus. We give back. In some of our companies, some of our businesses, we give back 10%. We contribute or donate 10% of the profit to charitable nonprofit ventures.

And the one specifically that my partners are building that I'm involved in is called Impact Others. And it actually has a website called impactothers.com. And we have people making donations as little as $25.

But what we're doing is we have projects all around the world where we're providing communities, needy communities, with clean, drinkable water, often from wells that they don't have. Like they just don't have water. You know, water is a struggle, basic thing. But clean, drinkable water, food on a daily basis, training the locals in entrepreneurship so they can be self-sustaining, learn how to run a small solopreneur business and be sustainable. So now they can feed themselves and their families. Schooling, like education for the children in the community and make that a sustainable part of it.

And so these projects can be anywhere from $20,000 to $100,000. And so, the donations that we bring in just go to funding those projects. And we put each project on the website so they can see, oh, here, this one's in Ghana or this one's in Pakistan or in India. And this is a $50,000 project. And here's what we're building out. So that's the purpose. Like, that's the give back part of it all.

Seth: It's awesome. I'll link to impactothers.com in the show notes, retipster.com/188, if anybody wants to check that out.

So Marco, the things that you've talked about the past couple of years at REWBCON is why you are bullish on real estate. And in other words, like things are looking up. It's going well. It's going to keep going well.

I'm curious why, because that's something I think I needed to hear a lot last year. And you gave really good sound reasons for that. It's something a lot of people are constantly wondering about. Like, is the bottom going to fall out next year? Is it all going to go horribly wrong? So what are your reasons for why things are looking up?

Marco: Well, there's a lot to say about that.

Seth: Try to summarize in 30 seconds if you can.

Marco: Yeah.

Seth: I'm just kidding.

Marco: Yeah, I'll try not to be long-winded, but we can kind of do a little bit of a deep dive in two or three of those areas.

Basically, it's this. It's if you consider what Jon Gray said, who's the president of Blackstone, very smart guy. I mean, he's the guy who started Invitation Homes back in 2012. And they've just been one of the largest, if not the largest purchaser of single-family homes in and around the United States for the longest time. Very, very smart guy. He's probably got a net worth of $7 billion, according to Bloomberg. So he's not a schlep. He's a very successful person.

And Blackstone, as a company, brings in between $100 and $200 billion of capital a year, if not more. They bring in a lot of money. So they put that money to work. And a lot of what they've been focused on is residential real estate And back in January of 2022, in the Wall Street Journal, he said, never in his 30-year career has he seen real estate fundamentals as strong as they were two years ago, like two years ago around this time. And that's pretty much still true to this day.

So Jon, at the Blackstone earnings call they had in late January of this year, he basically said that the overall backdrop in the U.S. is a housing shortage. And that's namely in the single-family space, like the residential but single-family space. And that's the area that they've been focused on for a long, long time. And these guys spend lots of time and they put a lot of resources and people and money into doing research around the country and figuring out what the heck is going on.

So this kind of spills over into the multifamily space like duplexes, triplexes, fourplexes and even small-to medium-sized apartment buildings, which is kind of where Blackstone is moving towards. It's not just single-family homes, but in the duplex, fourplex and small apartment space, because there's such a lack of inventory for residential real estate. That kind of sets the stage of what is going on.

But at the core of it, it's really about fundamentals, like the macroeconomics of it. And that's just supply and demand, economics 101. When you look at our existing housing supply, what inventory is available, the inventory that's available right now is floating somewhere around 1 to 1.1 million units.

Now, that sounds like a lot, but that is actually almost at the historic low. Because if you go back to 1982, the historical average of our existing housing supply is about 2.2 million units. That's how many units we need per year to supply the existing demand for sales and new households, new household formations in the country because of organic growth and immigration.

And if we don't have 2.2 million units, and you'll see different numbers on this, you'll see 2.5, 2.7. The point is still the same. If we don't have that number of household units per year, then we're in a deficit. And that just means that each and every year we are getting further and further behind in terms of how much housing we actually need.

So this is a perpetual problem where we have housing demand exceeding the existing supply. Now, granted, it's improved over the last two, three years, because builders have just hit the gas pedal and started to create more and more new housing construction, like new housing units, which is great. It's helped.

But if you look at housing inventory from the oversupply or undersupply perspective, and you look at what's for sale, what's for rent, how many permits are being pulled versus how much new housing stock is actually being built by builders, you actually get a more interesting number. You will see that housing is actually undersupplied right now by about 2.1 million units.

So that is a pretty serious problem. Having higher mortgage rates as of late over the last year adds fuel to that fire, that problem, because it lowers affordability. Fewer people can qualify for housing to buy their own place. They're forced into the rental pool, which is not a bad problem if you are a real estate investor and you own a portfolio or you're building a portfolio, great. That pushes rental prices up, which lowers affordability for renters.

But it's good for you as an investor because it means more rent, more revenue, more profit from your real estate portfolio. It also pushes real estate prices up, which is price appreciation, which means your properties are actually valued at larger amounts, like larger dollars. So when you're on that side of the fence or on that side of the equation, it's better for you, but it still creates a problem.

So with these higher mortgage rates, they've been squeezing the market and squeezing people out of the buying pool and into the rental pool, which means that it's helpful because it lowers demand for housing, which is already constrained. But we're still seeing a downward trend in terms of housing inventory. That's a bad thing.

But that is turning around. Mortgage rates are coming down. They will continue to come down slowly over time. We will ultimately see this problem resolve itself based on current trends by about 2030. So we're still about six to eight years away before we see an equalization or normalization in the market. But that's subject to change too. There's a lot of factors that can come into play in terms of mortgage rates, people's credit, the amount of debt they carry, meaning how affordable, how well they can afford housing.

But the point of all that is this, lack of supply, strong demand, it's creating constraint in the market. So if you're a real estate investor, it's great for you. And this is why I'm bullish because we do have a lot of opportunity in the housing space, whether you're a builder, an investor, a flipper, whatever it might be.

So I can pause there. There's a couple other reasons I'm bullish, but fundamentally speaking, that's the big one.

Seth: So on that, a lot of people in our audience are land investors and many of them, the way that they work with land is they buy larger parcels of land and then subdivide them to create more parcels that they can then be built upon. It kind of goes hand in hand with the housing market and how much building is going on.

But I'm curious for like developers and subdividers and people like this who help create new inventory, what would be some warning signs to see on the horizon, whether it's one year or five years or 10 years from now? Like, what can we be looking at to say, this may be coming to an end pretty soon. Maybe we should slow up or we should stop working so hard as trying to create new inventory. Any ideas what the warning signs would be?

Marco: Are they subdividing the land to create buildable lots?

Seth: Usually, yeah.

Marco: So this is for residential?

Seth: Yeah. I mean, sometimes it's a major subdivide, where they take a big parcel and turn it into hundreds of smaller ones. Other ttimes,it's taking like a 40-acre parcel and turning it into four 10-acre parcels. But usually the idea is that something will be built there in the near future.

Marco: The best thing you could do as a real estate investor in general (it doesn't matter whether you're involved in land or not; it's irrelevant) but stay focused on housing trends.

In fact, that is so important to me. I actually spent five figures for the domain name housingtrends.com. That's how important it is to me. I'm actually building a site that's going to help land developers, land investors, residential investors. I'm building a tool. There'll be free content, but it's subscription-based tool that provide all kinds of data and analytics for people looking at what's going on in a state, a metro area, a subdivision, a zip code or a street. So you can see where supply and demand sits and pricing trends and all that kind of stuff.

So what I'm trying to say is you've got to stay focused on trends. If you stay focused on trends, you'll know what's going on. And trends can be price trends, sales trends, and a good one for land investors, land speculators, land flippers, or land developers are the number of permits being pulled by builders in an area.

If builders are not pulling permits or making permit applications, that's telling you that demand is waning or demand has gone away. But if builders are moving in into an area and they're pulling permits and they're wanting to build, they're planning to build in the next 6 to 12 months because they're pulling permits, that's a good sign. It just means that there's going to be demand for land and buildable lots and whatnot.

And you could position yourself to potentially sell that land to more of the smaller boutique builders, not just the D.R. Hortons or the Stanley Martins of the world. But you can look at the custom home builders or the small boutique builders because they don't want to buy land and put it on their books. They want to build a house on a parcel of land that's either pre-sold to a buyer or that they're going to buy at the last minute to build a house that they just sold to a buyer that wants to build it in the area.

So now they've got the buyer, they've got the deposit, they've got everything they need. They just have to lock down the land that they're going to be building on. So that's kind of a strategy.

Seth: I remember when I was building my storage facility, that was one thing I looked at kind of for a different purpose, but just to make sure there's no competitors being built at the same time I was building mine. I called the township and asked to see any permits they might have. And it was kind of a process. I'd put in a FOIA request and pay money and all this stuff.

So, how do you do that at scale? And is there some website that shows you all the permits being pulled and how much does that cost and how much is too much or not enough?

And even just in general, like your REWBCON presentation, there's so much information you look at to stay on top of these trends. Like, where do you even begin? What do you look at and how do you make sense of these trends?

Marco: Permanent information, it depends on the county. I mean, it's county by county. A lot of it is available at the county level. Sometimes it requires manual work, but that type of information is free.

But there are content aggregators. I can't name one off the top of my head. The data I buy is kind of from a private institution. It's very expensive data but they already aggregated the information from other sources. I don't know what all the other sources are, but I will say this: you could do a Google search and find information about permits being pulled.

I’m not sure what you would type in, like new building permit applications, new building permit trends, you'll probably go down a rabbit hole. You'll probably start to find some some websites and articles that provide that type of information. I think Zillow or Redfin or maybe Realtor.com has that information or had it at one time. They actually published existing home inventory and new home inventory. And then tied to that, they had building permit applications.

I will say this. I know the information is out there and it's available and it's probably available from multiple sites. It's just a matter of some Google searches to find it. But that information is available. I know I've seen it on many websites.

Seth: I know on Land ID, you can see where the developments are and who the developers are. I don't know if that's like building permits per se, but you can at least get an idea of, like, who's building in what areas of the city, that kind of thing.

Marco: Yeah. I know that information is available because the data service that I subscribe to, which is over $3,000 a month (it's not cheap), provides that information on a community basis, like down to the community level. So you can see who's pulling the permits and how many are being pulled, right down to the community level.

So that information exists. I know it's out there. It's just how it's presented or packaged.

Seth: So this other data that you look at for your REWBCON presentation, like understanding the current inventory throughout the country. How much stuff have you looked at to come up with that? Is there some website you're following or something, or does it just take you hundreds of hours to pull that information together?

Marco: No, there's all kinds of websites out there.

And again, it goes back to doing Google searches, but every website out there has similar information, but also different information. And sometimes it's the same data, but they present it differently.

Like Neighborhood Scout is a website that I helped shape. I have no interest in it. I'm not an owner. It got bought out by CoreLogic. So Neighborhood Scout is one. Then there are chunks of information available from Zillow, Redfin, Realtor.com. They aggregate a bunch of information. John Burns Real Estate Consulting has some information on their social media platform.

Seth: I'm linking to all this stuff in the show notes again for all the listeners out there.

Marco: Yeah, Altos, A-L-T-O-S. Altos Research is also a good site. They have a lot of good information and they pull from all the MLS sources around the country.

Seth: Nice.

Marco: Not the actual data. Well, they pull data, but they pull the trends from that data. The government websites aggregates all the statistics.

Datausa.io is another one. The National Association of Realtors has tons of information. Harvard. It publishes a lot of great information as well.

Seth: So that's the kind of stuff you look at when you're trying to make sense of what's going on nationwide?

Marco: Yeah, that's some of it. Believe me, there's tons of it. ApartmentLlist.com used to publish rent-based data. U.S. Bureau of Labor Statistics. That's the one I was thinking of. So U.S. Bureau of Labor Statistics has mountains, mountains of data. So it takes a little effort to kind of weed through it. That's another one. So that's BLS.gov, the Bureau of Labor Statistics.

Statista is kind of a mess of information, but you can find some very interesting research and insight there.

The Milken Institute used to publish information. I don't know if they still do, but they used to publish a lot of information. There are so many others.

Like, I mean, Google's almost your best friend. And just typing in search phrases that are clear and specific, and it'll just take you to a whole bunch of places that you can go down rapidly.

Seth: Yeah, I've heard of some of those. I have not heard of all of them, but that's great info to start with.

That's a funny thing with the Google. It's almost kind of like a forum sometimes where it's like, this is good info, but like, how do you really know when it's the best or the right info or if that person really knows what they're talking about? So it's helpful to hear from you the specific places you check out.

Marco: Yeah, those are many of them.

And then there's a bunch of them that are paid subscriptions. Like you won't get any kind of information, but they’re warehouses of massive data, like they have an unbelievable amount of data on every single property in the country. It's just a crazy aggregate.

And those are the people that I'm talking to in order to build the website. I ultimately want to build that housingtrends.com. I'm going to license the data and then use that data to create the maps and analytics and trends and reporting and stuff that I want to provide to real investors, ultimately.

I mean, that's more of a pet project for me. It's not something I need to do. I just don't have the time for it.

Seth: No, that sounds super valuable.

Marco: I want to do it just as a pet project.

Seth: Man, that's awesome.

So like, are there any particular challenges you see investors facing today or that they will face in the next few years? And how do you think they're going to overcome those?

Marco: Yeah. One challenge is just the lack of available inventory.

If you roll back to pre-COVID, it wasn't that difficult. It was getting more difficult to find inventory, but it wasn't that difficult. But then things got tighter and tighter and inventory kept dropping while demand continued to increase. So one challenge is finding enough inventory for your purposes.

But as I mentioned to you before, and something I said in my keynote presentation at the conference, is when I get asked the question, “Is now a good time to be buying real estate?” And my answer to that is yes, it's always a good time to be buying real estate.

And it's not because it's not a question of when; it's a question of where. There are always opportunities. The United States is made up of over 500 metropolitan statistical areas, and they're all broken up into sub-markets and then areas and then neighborhoods and communities and whatnot. So there's something going on everywhere all the time.

And so there are always opportunities. It's just a matter of, where is their inventory? Where do the numbers make sense? And where can you find a deal that will make sense—carry itself, has positive cash flow, has growth potential, is in a market that has stability, is in a market that has jobs and ideally job growth, and a market that has population growth. If you have those two things, you've really licked 70% of your decisions.

And then as long as you're in a good community, like a neighborhood, like what I'll classify as a B, B-plus, A-minus type of neighborhood, you've probably mitigated 80% of your investment risk. When you you have those factors in play, don't start with the property. Start with the market and the neighborhood.

The market is the most important deciding factor in where to look. The neighborhood is where you mitigate your risk because you want a strong rental pool. You want high desirability in that neighborhood. You want the numbers to make sense. You want it to be, relatively speaking, low crime, a desirable area. And then you look at the property, the condition of the property, and the numbers on the property. A lot of investors actually do it backwards.

They start with the property and then really kind of neglect the neighborhood or don't pay a lot of attention to the neighborhood. And the market is kind of an afterthought. So top-down approach.

Seth: That makes a ton of sense. So if you were talking to 18-year-old Marco today, if he were to come into the future and sit in your office right now, are there like top one or two or three markets you would tell yourself to go look at right now?

And why is that? Like, are there any specific places that you know off the top of your head? Yeah, this is a good market because of this. And this is how I know that because I went to this website and it told me this.

Marco: If you're asking me about the best markets or the top markets to invest in, first of all, you have to understand that my company, Norada Real Estate Investments, is in 25 markets. So when I try to narrow those 25 markets down to three, I can pick any three and they're all fine. They're all good, but for different reasons. Some are more prone to appreciation potential. Some markets are better suited for cash flow and cash-on-cash return.

And so when we're talking to an investor or when an investor is talking to an investment counselor at our company, we're going to ask questions and figure out what's most important to them. Is it the cash flow? Is it the immediate returns, cash-on-cash? Or is it price growth or appreciation potential in the years to come? Are they short-term, long-term investors? We'll kind of figure out where their head's at and what their investment goals are.

So I can answer that question basically in different ways, depending on what you're looking for.

Seth: Is your housing trends software going to do that? Like ask questions? Like, do you care more about appreciation or cash flow? And based on those answers, here you go, look at these markets. Is that kind of where that would be going?

Marco: It won't ask you the questions, but it'll answer the questions. That's part of the reason why I want to do it is just to help people zero in on starting with this country that's massive, that has 500 MSAs, and then zero down on markets that make sense.

So when we look at the markets right now, you can look at the top markets in the country and about 80% or 81% of them, we would rank as either in normal home market conditions, like supply and demand and sales are normal. It's basically normal inventory, normal sales cycle, normal everything. They're either normal, strong, or very strong.

Most markets today are back into the normal state. They used to be strong or very strong in terms of sales, the number of sales, sales briskness, the lack of inventory, price appreciation trends. That's what we saw for years, especially over COVID.

Like COVID, 2020 and 2021 were crazy years. We saw an average of about 20% appreciation on a nationwide basis, two years in a row. And that's just unsustainable and crazy when you stop to think about it. Things have normalized since then, obviously. But today, most of the markets, about 80% of them, are what we would classify normal or strong.

And so right now, from a sales perspective, like market conditions, Charlotte, is what we would call a strong market. Although I don't recommend anything in California, LA and Riverside are relatively strong in terms of property sales, but most of the country has a normal market. And a lot of the markets that we've been focused on are the Midwest, pockets of the Northeast, a good portion of the Southeast, heavily into Florida. To a lesser degree now, Texas, just because prices have appreciated so much relative to rents.

But the Midwest, Indianapolis is a perennial market. Kansas City, Missouri is a perennial market for us and great for investors. We've been in Kansas City for almost 20 years straight now. It's just a perennial market for us.

We're in many markets within Florida, in and out of markets like Jacksonville, Cape Coral, that whole southwestern corridor. To a lesser degree, Orlando. Can't get anything in Atlanta right now. Memphis, Tennessee is a strong market for us as well; we have a lot of inventory so we've we're in and out of that market when we get inventory. But we're always bullish for the Memphis area.

Seth: When you're deciding on these markets, do you have a checklist of, “We got to get answers to these 10 questions and this will tell us yes or no to this market because of this.” Do you have something like that?

Marco: It's basically this. Is there inventory in the market? Do the numbers make sense in the market? A lot of people refer to it as the price, like the rent-to-value ratio or the price to rent ratio. If you can't buy, San Francisco won't make sense. Why buy a one-bedroom place for a million dollars that you can only rent for about $4,000? That 0.4% rent ratio, it's not going to work. It won't cash flow. Like you'll be upside down.

And then you also have kind of higher risk of downside side price declines rather than upside. If you look at a market like Kansas City, Missouri, or Memphis, or some of the Ohio markets that we're in, you can get $150,000 property. Like a single-family, three-bedroom detached home for, I'm talking between 100,000 and 200,000, but call it 150,000, that will rent for $1,300 or $1,400 a month. The numbers work. It will cash flow. It will carry itself. It's in a good neighborhood. It's in a relatively strong market. It's not like a great market for strong price appreciation looking into the future, but it's a market that will do well. It'll carry itself.

So we look for good markets. Where there's inventory, the numbers make sense at the metro level. There's job stability, ideally job growth, population growth, ideally. If it's a flat market, that's fine because you're going to be in a desirable neighborhood.

You want a property that is either new, like- new construction, or like new, meaning there's no deferred maintenance. It's what we call turnkey inventory, turnkey real estate. So it's new or like-new. So no deferred maintenance.

Like I said before, the numbers make sense. It's got a rate of return. Turn it's in a good area good neighborhood. That's a very important thing. I would say a B-plus type of neighborhood, bread and butter, it's a cross between white collar and blue collar employees, large rental pool, low crime, good not great but good schools.

That's kind of your middle of the bell curve type of area, so the bread and butter communities, which are, for me, B, B-plus, A-minus graded neighborhoods. They don't have to be premium areas, luxury areas, and they don't have to be in war zones. You want to stay away from that.

I'm not a big fan of like the low, lower-middle income areas like the C-class neighborhoods. They look good on paper and they can do well, it's just I find that, over time, they can be expensive because of the high cost of the turnovers and the damage that could be done or left behind by by tenants. It's just you're dealing with a different demographic, a different class of tenants, so for me I like being in those B-class neighborhoods. So that's kind of the checklist.

And then of course, if you're not self-managing, having a great full service professional property management company—not an individual, but a professional company, a management company that manages your properties. You could self-manage. It's not a problem. You can do that.

So that would be the checklist. And that's exactly what we walk investors through.

Seth: Yeah. So when you sell a turnkey rental, do you have a property manager picked out already that kind of meets that criteria? Because I know that's a common issue I hear from a lot of people, and I’ve experienced it myself, where some property managers are terrible. So how do you make sure you get a good one?

Marco: Yeah. So being a turnkey property provider, we provide everything for the investor and, at no cost, we don't charge for our service.

So we've got an inventory of properties in 25 markets. The management is tied in with it, but you don't have to use that property manager. You can use any property manager you want. You can self-manage it if you want. We just provide it for you, someone or a company that we work with, that we've vetted, that we know we can provide the financing and everything else.

But with the property management company, again, like I emphasize, full-service professional management, a lot of property management companies go off of reputation, meaning that you want to look into their track record and reputation. And that's not that hard to find. You'll find all kinds of information online as well as reviews. You can also ask them for references. Of course, they're going to give you their best references, but nonetheless, it's good to know.

Talk to the team, talk to more than one person, interview more than one person from the company. Talk to the owner if you can, talk to the leasing agent, talk to the maintenance coordinator. Just get a feel for how their systems and operations are and what kind of operating procedures they have in place. Because it's kind of like a marriage, they want to work with you ideally and you want to work with them, but you want to make sure it's the right fit, and you want to understand how they work, what they can and can't do.

Seth: And just one last question. So I heard you say a few times, you got to make sure that there's inventory in the market. So what do you mean by that? What is enough inventory? Is there a certain ratio or number you're looking for to be like, okay, that is officially enough. Now I can go there versus that's not enough.

Marco: It's not a number, exactly. It's really just if that market checks the boxes in terms of the rent-to-price ratio, meaning that there are areas within that market where the numbers will work.

You can't get something that will make sense. Cash flow has a positive cap rate, the cash-on-cash return. You want to make sure that there's enough available inventory for sale that you can actually pick something or find something. Because if something goes on for sale in that market, in the bread and butter communities, and there are five offers the day it's listed, you're going to have a hell of a time getting a property there. It’s a numbers game. You'll ultimately get something.

But if you're competing, if inventory is low, there's not a lot for sale and you're competing against a lot of people who are wanting to buy whatever comes up for sale, it's going to be a difficult market to try and get something with the numbers that you want to get them at. You may be forced to pay over the fair market value, and that's only okay if the number still makes sense and it's a market that presents strong appreciation potential. Because if you have to pay a little bit over market, that market will quickly catch up to what you've overpaid if you're paying over fair market value.

So it's not necessarily a bad thing, but it's easier to work in a market where there is lots of available inventory, which is why we like places like Memphis, Tennessee, Kansas City, Missouri, Indianapolis, pockets in the Northeast, for example, some of the secondary markets in Pennsylvania, the Ohio markets like Cleveland, Cincinnati, to a much lesser degree, Akron and Toledo. But there's definitely inventory in those markets.

Seth: Yeah. Like you said earlier, it's not like you're getting on Zillow, looking in Cleveland and say, okay, good. There's 400 properties. I'm all set. It's more about, I'm going to crunch the numbers on a number of properties, see if the numbers work. If they work, if I can actually get this property, that's how I know there's inventory. It's not necessarily about the number of properties on the market. Is that accurate?

Marco: Yeah. Another way of saying that is if I can't find properties that make sense for me, the numbers work, it's in the right areas, it's available for sale, I can make an offer and I have a good chance of getting it or buying it, or if it's new construction, of course, getting it from a builder, then yeah, then inventory is going to be tight.

And there are degrees of tightness. How difficult is it going to be to get that ideal property that you want to add to your portfolio?

Seth: That's a good distinction to make. Because in the land business, a lot of parallels there in terms of choosing market and figuring out what is the sold to for sale ratio and how many days on the market are these properties there.

But in order to even go there, you need to already have some assumptions made about how much am I going to be offering for these properties? What's my plan for them? Am I going to be improving them in some way or not? Because that totally can change the course of what's acceptable for you or not. So it's kind of a holistic thing that you gotta take several different things into account.

But I want to switch gears just a little bit, talk about kind of your personal experience and advice for investors. Cause I know you've been in this business for a long time. You've seen a lot of things, you've talked to a lot of people and I know you've even done these kind of interviews quite a bit on podcasts and you've got your own podcast.

And I'm curious, when you get interviewed like this, or when you listen to other interviews and conversations about this business, what's something you think people talk about too much? And what's one thing you think they don't talk about enough?

Marco: Oh, wow. Never been asked that before. That's an interesting question.

What do they talk too much about? I don't know if there's any one thing that's too much, but a common question is like, what are the hot markets?

Seth: That seems to be what I asked you about.

Marco: Yeah. People who are not really well-seasoned will always ask, well, what's the hot market? My response is, how do you define a hot market? What's hot to you? Is it price growth, rent growth, sales activity, available inventory?

The thing that all the investors are talking about what's hot today in terms of investor interest, what are they tweeting about versus something else. Define a hot market? Hot in terms of cash flow, hot in terms of appreciation, that can mean different things to different people. And so I see that being kicked around a lot.

Sometimes people refer to it as best, not necessarily the hot market, but what's the best market. That's what's talked about a lot because obviously that's what people are interested in. Where should I be investing? What's the best market that I should be investing in right now?

Seth: I've heard it said that for every complex question, there is an answer that is clear, simple, and wrong. So I think maybe that's what's going on is people just don't want to think too hard about it. They want you to just give them an easy button and they'll realize the complexity involved and understand some of this stuff.

Marco: A hundred percent. Yeah, everybody wants the easy button. That's probably the thing, I think, has been talked about the most or too much. What was the other part of your question?

Seth: What's one thing you don't think they talk about enough?

Marco: Maybe it's some of the things we talked about, just the fundamentals and the principles, like what should I focus on? What is my checklist? How should I be approaching real estate investing?

Like, for me I have all these rules like, and one of them is like taking a top-down approach. Don't be presented a whole bunch of properties and evaluate the property. And then look at other factors around it, more big picture, start with the market. I call it the funnel approach. Start with the metro area, the markets within it, the neighborhoods, and then the property. And then you build your team around you, your property manager, your lender, etc.

Taking that top-down approach will assure that you have a high degree of success.

Seth: What is something that you hear novice real estate investors or critics of real estate investing complain about that makes you roll your eyes?

Marco: Damn, that's a good question. I wish I had known these questions beforehand.

Seth: My goal was to stump you.

Marco: I think the biggest thing that makes me cringe is what I call real estate speculators. They think they're investors, but they're not. They're gamblers. And they speculate on the market. And that’s their sole focus.

My pseudo-cousin is an example of this. He's just been lucky or fortunate because he's been in markets that have just been experiencing hypergrowth. So he's done well from an equity perspective, but not from a cash flow perspective. And it's just investing in the so-called hot markets, markets that are experiencing strong growth and price appreciation.

But if that's your sole focus and you've got blinders on, you're not considering all the other factors that you should be considering, then I refer to you as a real estate speculator, not a real estate investor.

A real estate investor is focused on sustainability and cash flow. So they've got the cash flow. They've got cash flow to carry the property in the short term and forever, but they know that they're in markets that have growth and appreciation potential. So they're going to make out well in the years to come.

That's investing smart and strategically rather than just focused on rolling the dice at a craps table and saying, “Yeah, you know what, I should be able to flip this house in a year and make 50 grand on it,” or something like that if they wanted to sell it.

So that's a mistake a lot of investors make, but especially made in the early 2000s, like leading up to 2006 and the housing crash. That's where a lot of mistakes were made and a lot of investors were left with their shorts down when the water went down because they couldn't carry the property. They bought a property, went up fast in value, and then the market turned and then that equity disappeared and dried. Then they were upside down. They owed more than the house was worth, what they could sell it for, and they couldn't carry it.

If they were able to keep that property and carry it for the next three, four years, they would have made out okay. They would have come out on the other side whole and then would have made gains in terms of appreciation from that point forward. But because they had negative cash flow, they couldn't afford to keep it. They couldn't carry it. And they were forced to sell, liquidate, foreclose, or file bankruptcy.

Seth: Now that you've gotten this far in your business and your career, you're successful. I don't know what your PFS looks like, but I presume you've made plenty of money in your career. You're in a place where a lot of people would dream of being.

And now that you're on this side of the fence, what's something that really is everything you thought it would be? And then, what are some dreams that you had early on that turned out to be maybe false hopes or just harsh realities of the business?

Marco: Well, I guess the more success you gain and the more financial freedom you have, the more things you can do that are more fun projects.

Like we were talking about this before with with Broadway, it just gives you the freedom and flexibility to do other things. Some of them being passion projects or investments that are beyond what you started with. For me, it was business and real estate. And then that ventured out into me creating Norada Capital.

Norada Capital Management is my private equity firm, but it's an investment fund. So investors are investing every day, but certainly every week, to make 12% and 15% gains. And we arbitrage that capital and I can build things, build business ventures and projects and whatnot that I want to do. Not that I need to do, but that I enjoy, understand, have fun and can make more money and then contribute back to impact others, for example, or other purpose-based projects or purpose-based endeavors.

I think the first goal for a lot of people probably should be to be financially independent, which means that you've got your monthly expenses covered. And beyond that when you 2-5x that income, if you need $5,000 a month to live and cover everything and be okay, like completely sustainable, then you should look at at least 2x-ing that, get to $10,000 a month. Now you're financially free.

When you're 2x or 3x, you're financially free. When you cover your nut at $5,000 a month, you're financially independent. You can get to 2x to 3x that. That's financial freedom. And if you get 5x to 10x that, that's when I consider a person to be truly wealthy. Now you shouldn't have very many concerns at all.

And you have a lot of time freedom to be able to do what you want, when you want, with who you want, how you want. And you can make a real difference. You can do things that can change the world, impact the world.

Which is like what we're doing with our Aspire tour events every month in different cities around the country. We bring in up to 4,000 or more people at each event. It's crazy. We're just providing people with all kinds of incredible content and education to build themselves personally, financially, and otherwise.

Seth: You've got a lot going on. You do all kinds of stuff, don't you? How do you juggle all this? How do you keep it all straight in your head?

Marco: A team. You can't just do it all by yourself. You have to hire the right people to help. You have to have the right partners and then the right team of people to help you execute and build.

You come up with the ideas and the vision. You build the right team around you to make it happen. And then you bring on the team, whether they're employees or contractors or outside staff or whatever it may be. You bring in the people that can execute and fulfill that vision.

Seth: How much of this stuff would you say runs without you? Like you could literally die tomorrow and this stuff would keep going without you. Is any of it like that? Or do you have to like kind of check in every week or every month or something? How much involvement is required from you at this point?

Marco: I'd say 80% of it is sustainable. The other 20%, either I need to be involved or I choose to be involved. And it's usually both. Usually those are tied together.

I don't want to let go completely. I don't want to be a control freak. I want to have some level of control and I want to know what's going on and be able to conduct and direct what's going on. So I want to feel that I have some level of impact and control over it, but I don't want to be micromanaging or a control freak and directing everything because then there's no point in having a team.

Seth: Yeah. To some extent, it's almost like if you don't want to play any role in it, then why is it there at all, you know? Like, why don't you shut the whole thing down? So there kind of has to be that balance of, you're sort of there but it doesn't need you necessarily to exist.

Marco: That, actually, is ideal. Building a real estate portfolio is a great example of this. If you can build a real estate portfolio that is profitable, cash flows, is sustainable, and doesn't require your time and attention on a daily weekly or monthly basis (especially if you have a manager managing it like a management company), then you can go on a vacation for a year. You can disappear for a year and come back a year later and everything should be running smoothly.

You might have someone as a backup in case your team or your property managers need to contact someone and you choose to make yourself not available. At least give someone the knowledge and authority to make decisions on your behalf while you're away. And under that scenario, theoretically, you could disappear for an entire year and come back and everything should be just as good, if not better, than when you left.

Seth: So this is kind of a random thing, but I noticed as I was preparing for this interview, I saw you had posted something on LinkedIn or Twitter or something. There was this quote that said, “You don't have to be extreme. You just have to be consistent.”

And I think I know why you feel this way. The statement makes perfect sense to me, but I'm curious if there are any situations in life where you do have to be extreme or when your life or career really does boil down to one key moment.

If so, what situations do you think that would be true?

Marco: You need to be extreme when you are required to hustle to get something launched.

I like to use the analogy of a rocket getting off the launch pad. When you first launch a rocket, it requires a lot of fuel and energy to get it moving. When you watch a rocket lift off, it moves up slowly off that launch pad. It looks like it's almost not even moving, but you're burning the most amount of fuel at that point in time to get it off the launch pad.

And then slowly, as you keep pushing it and burning that fuel and putting a lot of energy into it, it starts to move and accelerate faster and faster, until you ultimately are going hundreds of miles an hour. And then ultimately, you get into orbit, where it requires the least amount of energy. But now you're in orbit and you've built this thing. You've launched the rocket. You've got this thing going.

So that's when you have to be really aggressive and be hard and strong.

You know, it makes me think of David Goggins. He would say… He's one of the guys we have at our events each month at Aspire.

Seth: Oh, cool.

Marco: He just broke his leg. Well, not on purpose, but I was just looking at his cast.

Seth; Are you sure he didn't do it on purpose? Seems like he would do that kind of thing.

Marco: Well, it was a choice, but he had to get his leg fixed and they had to break his bone in order to fix it. So the pictures weren't pretty. But the guy’s a machine.

Seth: Does this stem from his experience in the Navy SEALs when he messed up his knee and had to tread water or something like that? Any correlation?

Marco: Yeah. He's had knee damage for a long time.

But one thing I like quoting him on is he would say, “Stay hard, mother*****r.” You can finish that sentence. But you do in the beginning. You need to stay hard and aggressive and not let up. You need to push with all your might and energy to get that rocket off the launch pad, because if you can do that, then the longer you go, the easier it becomes, the more sustainable and profitable your ventures are.

The first property you buy is going to be the hardest one. It’s got the steepest learning curve. It's going to be the most unnerving and stressful. The second one will be a little bit less. So the third one will be much easier. The fourth one will be even easier than that.

So you've got to push hard and build that momentum. And then, as you go, you'll realize, oh, damn, this wasn't so hard. You know, when you look back, it shouldn't have been as stressful as I'd let it be.

Seth: So this is the Aspire Tour. Is that right? I think I found that on Instagram.

Marco: Well, the website is Aspire with an A, AspireTour.com. A-S-P-I-R-E, Aspire. You know, like I aspire to be something bigger, better, greater than I am.

Seth: Yeah. Got that. Sweet. Yeah. I'll put that in the show notes too. It sounds fascinating.

Marco: So we usually post two or three months in advance on the website. Like we'll always add cities. We might have four or five of them there. The closest we just finished was Denver two days ago. It was Dallas before that. LA and then Dallas before that. The next one closest to you is probably New York.

Seth: Okay.

Marco: Maybe there's another closer market. But we just signed the agreement about a month ago for Madison Square Garden for July 20th.

Seth: Wow. Wait, what role do you play in this? Did you start this or are you a co-founder?

Marco: Yeah, I'm a co-founder. I'm essentially a one-third partner. So I have two partners building out Aspire and our money is mastermind and our real estate mastermind, which is called Level Up Real Estate.

The Aspire event is really to get 2,000, 3,000, 4,000, 5,000 people in a room and just feed them tons of great information, content, value, personal development, business development, entrepreneurship, real estate education, and entertainment all in one full day. And then from there, if they love what they learn, they love what they see, we give them the opportunity to attend our master classes, our mastermind. They can go further down the rabbit hole with us, but they're going to get a ton of value and entertainment at the Aspire event.

Seth: Yeah, that's awesome. I'm looking at it now, there's a lot of big names that have been involved with that, so that sounds pretty cool. I'd have to check that out.

Marco: Yeah, if you, as my friend, want to attend any of them, just let me know. I'll give you VIP access as my guest.

Seth: I appreciate that. It's very, very kind of you. Yeah. I'll let you know if I'm ever able to fit that in.

I know we're coming up on our time limit here. One last thing I just wanted to mention, this is something a lot of people might not know about you. I know we kind of mentioned a little bit earlier, but you are a Broadway producer and co-producer, right? Your productions include, correct me if I'm wrong, A Beautiful Noise, Broadway Vacation, Harmony, Joy, The Devil Wears Prada, and Here Lies Love, among others. Is that right? And how did you get into that work and why?

Marco: Yeah, those are six of them. I think I'm involved in about 11 or 12 of them. We just had opening night last month for The Notebook, based on the movie and the book, which was phenomenal. I highly recommend The Notebook. It's such a great production.

And then if you remember the band The Who with Pete Townsend, so they have all kinds of great songs. But Tommy was one of the characters in one of their songs that you remember, Pinball. But anyway, we just opened up Tommy a couple of weeks ago. We had opening night for that. And that's a great, great production as well.

Seth: And you actually like one of the financiers of this, like you invest in the production and pay for it to get up and running. Is that right?

Marco: Yeah. I'm one of the co-producers. So, you have three levels, if you want, from an investment perspective in Broadway productions. And I'm talking in general terms, generally speaking, you have the lead producers, who are typically the general partners. Like if you had a real estate syndication, you have the GPs and LPs. So the GPs are typically the lead producers that could be one person or two or three individuals. And they're usually the ones that bring it all together, make the story come together, bring in the initial team to get that production off the ground.

Then they will bring in the investment capital needed through co-producers, which are often associates and people that they know in the industry and whatnot. And so the co-producers typically come in with bigger numbers as an investment and they're usually the people listed above the title. So you'll have the title like, Sister Act is another production that I’m in. You'll see Sister Act or Broadway Vacation, or The Devil Wears Prada, and above that you'll see a small batch of names. Those are the co-producers. And then, right above the co-producers you'll see one two or three names and those are the lead producers.

And then anybody else that could potentially be making an investment or just simply referred to as investors, they don't show up anywhere, but they've got a piece of the production in terms of an investment perspective.

Seth: So how much does it cost to, for you to do that kind of thing? Like per production? And what kind of return would you normally expect out of that kind of thing?

Marco: Well, it's an interesting question. You're actually asking me two fun fact questions. To invest in Broadway, it depends on the production, the amount of capital being raised, and the lead producers.

Some Broadway productions, off Broadway or smaller productions, can be $3-5 million total capital raise. Most of them are between $10 and $20 million. The larger ones, like the much larger expensive ones, can be $30 million-plus, but most of the productions I'm involved in are like $15 to $25 million.

The investment will depend on, again, the lead producer in the production, but the minimum investment is typically between $50,000 and $100,000. And then there's often no cap. It's just until they fulfill their capital raise. But I don't go in for $50,000. Like if I'm going to be involved, it'll be six figures. My largest one was seven figures as an investment.

So it took me a while to get my head wrapped around that years ago. Because if you're coming from the real estate space, an investment in a film or a Broadway or theatrical production does not make sense to you if you've got the mindset of a real estate investor. Because you don't get returns right away.

Your first goal, first of all, if you're going to write a check, you write the check as if you're never going to see that check again. The risk is pretty high, like about seven out of 10 productions will lose money. You won't recoup your investment. You'll lose money on it. Two out of 10, you should recoup your investment and maybe make some money.

And then it's to be determined how long you're going to make a return because it really comes down to how long that production's running. And then about one out of 10 will be like a Wicked or Hamilton or Phantom of the Opera or something like that, where it'll just run for years until you just want to shut it down. And those are big moneymakers. So those could be astronomical, like they'll just print money for years.

But it is a high level of risk. And you have to know that going in not every production makes money, a lot of them will lose money. But the rates of return can be anywhere from negative to zero to 10% to 30% on your money. And then the ones that run for years on end can be a lot more than that; they can 2x, 3x, 4x, 5x your initial investment.

Seth: So like, what's your track record? I don't know if you're open to sharing that, but like, do you lose money a lot? And if so, why do you keep doing this? Is it just fun for you?

Marco: Well, it is fun. It's sexy. It's entertaining. I like the arts. I support the arts. I love theater. I fell in love with musicals and theater long, long ago when I first saw Phantom of the Opera almost 30 years ago.

Seth: Did you see it in Toronto?

Marco: No, good guess, though. But it was actually in Calgary. The first time I saw it was Calgary, Canada. And then I saw it again in New York. And then I saw it again in Orange County, California.

I know one of the Phantom singers who played at the opera. We had him sing at Aspire actually a few times as entertainment right after lunch as people were coming back from their lunch. Yeah.

So it's a fun industry. You definitely will have your losses and successes. You should never invest in theatrical productions or Broadway if you're only planning to invest in one production because odds are stacked against you to not recoup your investment. So you have to go wide, not just deep in one.

Seth: Marco, thank you again so much for spending your time with me. I know we're at our time limit here. If people want to work with you in any way, I know you've got several websites. I'll link to all of them in the show notes. Again, retipster.com/188. But if there's one particular place you would drive them to, where would that be?

Marco: Probably just my personal website because I link to Norada Real Estate. I link to Norada Capital. I link to all the things I'm doing from there. So it's just my name, MarcoSantarelli.com. Just my full name, MarcoSantarelli.com.

And just as a side note, my Instagram, I couldn't get Marco Santarelli, so it had to be MarcoGSantarelli, my middle initial. But yeah, you can follow me on Instagram as well at MarcoGSantarelli.

Seth: Thanks again, Marco. Appreciate it. And hopefully we'll talk again soon.

Marco: Thank you so much, Seth. This has been fun. I appreciate your time today.

Seth: Hey folks, how's it going? Seth Williams here. You're listening to the REtipster podcast. Today, I'm talking with my friend, Chris Duff from Serious Land Capital.

So I first met Chris at the Land Unconference Inner Circle this past fall. He's been a great guy to know in this business, extremely knowledgeable and very well connected with other folks throughout the land business. Today, I wanted to sit down and really get to know how his business works.

So Chris and and his partners are land funders. But it wasn't always that way. We're going to hear about how he discovered the land business and what his experience was like as a land operator and how and why he decided to pivot into the funding space.

And in that funding space, there's all kinds of things we're going to talk about, like the types of projects he works on, the different pros and cons of being a funder, the unique challenges of this kind of business, and where he thinks the future of this niche, the land space, is headed.

So, Chris, welcome to the show. How are you doing?

Chris: Doing well, Seth. So lucky and honored to be here. I've been listening to your podcast and following your teachings really since my partners and I got into the space.

So, glad to be here and be able to share some of the knowledge that my partners and I have gained accordingly with your audience and help keep this industry moving forward.

Seth: So glad to have you following along over the years and glad to talk to you in this format too. So maybe you just start off with your story. So what were you doing before you discovered the land business? And how did you get into land? And what led you to this funding space that you're in now?

Chris: Yeah, definitely.

Seth: So it's kind of three questions in one there. Sorry about that.

Chris: Fortunately, it's one I've been able to answer before here. And when everybody, anybody who might be considering entrepreneurship and so forth, asking, hey, what's the history and everything.

And yes, some folks have a really smooth pathway. They just find their niche right away and off to the races. I'd say that's probably the minority of folks that I know that have tried to pursue their own businesses and so forth.

And mine was definitely the opposite. I'm a physician by training, a medical doctor. That type of pathway didn't really fit with me from dealing with the hierarchies and not controlling your own schedule and so forth and dealing with unruly patients and everything.

And so I tried coming out of medical school to start a med device company with another friend and colleague at that time. That crashed and burned kind of spectacularly. And then I was left at a reckoning, okay, coming out with a medical degree here, this business didn't work out, what other skills can I build up?

So I started learning more in the internet marketing space, eventually joined a company that was doing crowdfunding marketing agency out in San Diego for Kickstarter and Indiegogo campaigns. So I was working for them as a while, polishing up some of my marketing skills and also tried to start a couple other businesses with other friends on the side there, including one where I was attempting to sell backyard chicken coops.

So still to this day, my friends will still joke, hey, you traded away a path along having a medical degree to go sell backyard chicken coops. So it was definitely a turn from the original direction that I was headed. And that one ended up not having quite the right market fit there.

So eventually, as I kept working at that marketing agency, then got poached away to a healthcare venture capital fund out in New York that one of my friends was a co-founder at.

And you'll hear kind of a common refrain that most of the opportunities I've found, I've tried to work with closer friends of mine. That's always been a passion and goal from even high school days. And you'll see how that lends into the land business.

But yeah, I worked in VC for a while, gained a lot more experience there, both on the marketing side as well as how to underwrite some of these larger, more complex biotech, med device, health tech deals.

And then heading into 2019, after doing that for a few years, one of my other closest friends who had been working in Wall Street for a time, was planning on leaving that industry. We're close high school friends and had always intended to work together. The timing was right. So I decided to leave VC then as he was leaving his position.

And so we started exploring a whole bunch of different companies. We had a big spreadsheet just trying to outline what are the best opportunities to go from a monetary upside perspective to room for growth in the market, how much freedom would it afford us.

And so we looked at all kinds of things from like dog walking business, pet insurance. We looked at multifamily investments as a limited partner, for instance. My friends and I had been in crypto for a long time, close to 10 years or so at this current period in time.

And so we looked at, could we do Bitcoin mining, guys? We'd moved down to Texas and doing like flare gas operations. So a whole grab bag of different opportunities that we looked at, but ultimately settled on land in late 2019 as we were introduced to this individual that was running about a million-dollar business in Florida. Mostly off tax auctions, back when you could actually find margin on tax auctions.

I know it's almost impossible nowadays that the markets are so efficient, but he was making a good living there. So we started investing in him, picking up some skills. Ultimately, we decided to build our own business within the land space, not focusing on tax auctions.

So this is where RETipster came in and getting out the direct mail and getting a couple buy for $1,000, sell for $5,000 deals under our belt and realizing, hey, there's really something there. And so we started pursuing this business. And I should mention that this was with a partner from Wall Street, as well as another high school friend.

So we three are kind of the core partners here. Those two had run a single-family residence rental business prior, so already had some real estate experience. I came in as more of the operator here. And so we just started developing kind of the whole standard land flipping business.

Fortunately, we came in during late 2019 through 2020, 2021. Those type of markets might not never come again, where it was very easy to buy, very easy to sell, you get a lot of mistakes out of the way. Hindsight's always 20/20, probably could have earned a lot more money with the experience we have now.

But, you know, at the same time, it was great downside protection, because we got out a lot of rookie mistakes compared to today's market where it's far less forgiving, and you have to be a lot more careful with your your investments.

So, you know, we did that for a few years, but ultimately, as this industry has continued to grow and you get a lot more capable individuals who pursue deeper and deeper niches and more specific marketing techniques, I think, like the Callans and the Ajays and so forth.

And, you know, my partners and I were kind of looking at ourselves like, this is not really our primary benefit that we can bring to the industry. Like we're not the the best marketers out there. We're not the best at talking to sellers. But what we do know is we know how to structure capital.

Fortunately, we have a fair amount of capital to work with to put into deals. So this was at the time when a lot of the coaches in the space were advocating for people to use OPM, other people's money, try to scale up your business by going after bigger deals, even if you have to share some profits with funders.

And so ultimately, just about a a year ago, a little over that, we decided to completely stop marketing out on our own and just start advertising ourselves as funders. And it was much better kind of service market fit. And we've grown tremendously since then as we've settled into this.

Seth: Yeah, that's really interesting to hear about your journey, man. Sounds like after the whole like medical device thing, it's almost like you were trying to do anything but become a medical doctor. I mean, you listed off a lot of different things.

It's actually funny, though. I hear from time to time, from active medical doctors and surgeons and stuff like that who are trying to get into the land business. Just kind of goes to show, being a doctor with all the work it takes, all the money and time and all this stuff, it's kind of portrayed as like this glamorous, like this is the epitome of existence. Like this is what everybody wants, but like, “not really.” It has plenty of drawbacks and hidden costs and not hidden costs that go along with that, too.

So it's interesting to see how that works.

Chris: Yeah, absolutely. And even my friends and colleagues still in the medical space, you know, some who really, really love medicine, just gung-ho, do it in their spare time and everything.

I mean, most of them are pretty burnt out working, you know, even less than 10 years out of school here. So I mean, that's a whole other discussion podcast we could have.

I know there's a lot of other folks discussing that and the issues of the healthcare system and paperwork and yeah, the burnout and so forth. But you got to take the pros and cons of different paths in life.

But I knew this one would work out better for me. And even with the ups and downs, because during that journey, there were plenty of times where things were going better. And then you're not so good. Like we had a really rough 2022 and nearly didn't make it out of that. Had a buckle down and kind of consider, hey, like, is this even a viable business for us anymore?

And ultimately, sometimes you just need to stick with it long enough, stay in the market and be able to pivot accordingly. And once we found out that, hey, our niche is really becoming a funder in the space, that's when we were able to start accelerating again and build up our revenue and profits.

It's also interesting when the moment came, when you realize like this land flipping thing, like this isn't for us, like we're going to let go of this dream to pursue a different dream.

Seth: So I think that's something a lot of people understandably have a really hard time with is knowing, when do you call it quits? At what point do you just say, you know what? I tried it. I don't get it. It's not working for me. Or maybe it used to work for me, but it's not working anymore.

How do you know when to pull the plug? Because it's kind of like the opposite of this glamorous thing that everybody likes to talk about. Is it like, I succeeded and I hit this home run. We're talking about the opposite of that. Like I'm hitting a low point. I'm at the end of my rope. I can't cut it.

I feel like it's not talked about enough. It's like, how do you know when to abandon an idea and just go in a different direction? It sounds like, I don't know if it's easy or not, but you guys had a different direction you could pivot in somewhat easily because of your background with underwriting and venture capital and all this stuff. Like you kind kind of got that world. And also the market was sort of headed in that direction anyway.

Was it difficult for you to say, well, you know, we're not going to do land flipping anymore. We're going to totally hit the reset button and do this thing instead. Like, was that a long, difficult process to get there? Or was it a pretty natural, like you figured it out pretty quick because you just knew what else you could do and be useful to the market?

Chris: Yeah. Great question here, Seth. Fortunately, this particular pivot was more of the latter where it was more of kind of a natural growth within an industry that we had already developed. A few years’ worth of experience and had already reached success and previously funded internally using friends and family capital and so forth. And then have already underwritten hundreds of deals at that point. So it was a little easier for us to pivot there.

But yeah, your question about when to potentially eventually quit or move in a different direction? I mean, that's kind of the age-old and golden question here.

I know Seth Godin's written a book about it called The Dip, for instance. I read that in the past during other transitions in my entrepreneurial journey.

The only thing that I really try to keep in mind, and again, I've failed at plenty of things, probably will fail at many others over the course of my career. And when you look at the stats, don't feel too bad that about it when you look at the rates of business success in the U.S., because I think the stats now for like finding a business that at least succeeds for at least a year, you have to on average start at least seven businesses.

So like, I think I'm on like number seven or eight. So I'm right in the middle of the pack there. So just just keep that in mind.

But to me, the kind of analogy to keep in mind here is that when you're starting the business, even a lot of the times, I wouldn't even worry about setting up your LLC or the branding or so forth. Just try to find somebody who's willing to buy your product or your service.

Don't worry about all the legalese, anything like that. Just see if you can get some product market fit first off, and then fill in all those details later.

And what it should feel like when you're on the right pathway is like if you're driving down a street and you're just hitting green lights, I guess just, oh, I'm kind of just getting on a roll here. And there's not really any blockers that I'm feeling that it's kind of an instinctual feel that you'll develop over time.

But that's what I really look for in any type of venture that I'm going after. And again, speaking from experience, where I was just routinely hitting yellow, red lights, dead-end walls, all of that. Whereas, you know, when we were able to pivot to the funding model, that again, was already an industry that we had developed a bit more experience, but it was just pivoting into something that was, frankly, more exciting for us. Removing parts of the business that, like I mentioned, we weren't that good at that, was a big kind of depressor for energy. And yeah, I really don't like talking to sellers or doing the marketing and so forth.

So an energizing feeling to go into something that I knew we were more suited to and luckily started hitting those green lights almost immediately within the first couple of weeks. So affection, kind of luck there as well as seizing the opportunity.

Seth: Yeah. I like that analogy, hitting the green lights. It's well-put. Sometimes, given what you said about it takes, what is it? Six or seven or eight tries before you find one that works? It makes me wonder, I don't know if that's the answer, but it's like, if I know I have to do all these tries and a bunch of them aren't going to work. How do you do this in such a way that each failure isn't catastrophic, ike it doesn't just completely wipe you out financially?

Do you set aside, I'm going to put 10 grand into this business and I'm just setting aside that money to burn. If I don't make money by the time I'm out of that, then I'm done.

Because you just kind of think through it that methodically. I'm sure it depends a lot on the business itself and your financial position and all this. But when I think about how I go after a business, like if I believe in it, I'm going to kind of wipe myself out financially until I decide that it's not going to work. But I wonder how I could protect myself and safeguard myself so I don't do that, you know?

Chris: Yeah, different risk tolerances, different personal situations. You know, some folks, they might've already accumulated a pile of money from their W-2 that they have set aside to start a business. Others are earlier in their career and don't have that opportunity.

So, you might have to start like a lower cost business, like consulting or freelancing, for instance, where there's almost no startup costs.

And yeah, I'd count land as one of those. I've seen the influx of people joining this industry over the past few years, especially since 2020. I mean, you only need a couple thousand dollars to start some cold calls and some mailers. You have to take some real focus and staying power to last.

But fortunately, it's a pretty low-cost entry business, especially if you utilize funding partners and so forth for going after bigger deals and able to keep costs lower accordingly and not trying to hit massive growth trajectories. So that's how I would kind of think about it from a strategic side.

But yeah, I've known some folks who wanted to start a new shoe company and order $250,000 worth of inventory before they'd even sold like a couple pairs. So, that to me is like, man, you're really setting yourself up for disaster without having found that fit. So to me, it's all about doing low-cost experiments first.

Is somebody willing to open up their wallet to pay you for something? That is the hardest thing to do. It's the nature of business, right? But as soon as you find them, start gradually increasing the amount of expenses into growing accordingly.

And yeah, whether that is bootstrapped, slower build, or do you need investment from outside partners? How fast are you trying to grow? I mean, those are whole other questions to look in. Largely dependent on certain industries as well. It's not like you can start a biotech company totally bootstrapped.

So you just have to kind of pick a pathway that might be the best fit for you.

Chris: You mentioned there's three people total on your team. Is it yourself, Vivek, and Omar? Do I have that right?

Chris: Everett is the other core partner. So Omar is another closer friend of ours, but he has had a background working at Blackstone.

Also, yeah, more institutional background, he’s done a lot of real estate underwriting, especially in the commercial space. And so he serves as a consultant for us to assist with our full spreadsheet due diligence pathway for late-stage funding opportunities. So we were able to kind of triangulate across multiple different input and underwriting sources for our deals.

Seth: Okay. So we've got Chris, we've got Vivek, we've got Everett, we've got Omar.

Chris: That's right. That's the core equity partners.

Seth: Okay. And do you each own like 25% or something? How is that broken up?

Chris: Yeah. Sorry for that. So Omar is not an equity partner in the business. He's just serving as a consultant. So we'll just pay him on a per-deal basis based on the diligence he's providing.

But in terms of the actual DBA, Serious Land Capital, Seeking Land is our LLC. It's just three equity partners split evenly. So all the money going into the business equally split from an inbound perspective.

But because we might each do different work, I'm more of the front-facing day-to-day operator. So I have more upside from a profit perspective in the business, but that's able to change over time as we continue to grow and responsibilities increase and decrease.

Seth: So Chris, Vivek, Everett, you're all 33.3% owners or partners in this. You all put in equal amount of money when a capital infusion is needed. What are each of your roles? Like what specifically does Chris do? What specifically does Vivek do and what does Everett do?

And why is it set up that way? Like, how did you decide Vivek is going to sit in this seat and do these things? Like, is he good at certain stuff or have some history in that part of the business?

Chris: Yeah, certainly. So this is, again, another thing that's changed over time since we started the business, especially transitioned into this funding model.

But, you know, like I alluded to, me as kind of the primary day-to-day operator. So, definitely more of the the face of the business, like a lot of the inbound people looking to chat about deals they want to bring or get to understand our funding model and so forth.

I'll be the primary person that that's going to speak to them for the various in-person events. I'm usually the designated person to go, though, as we've continued to grow, like for instance, you met Vivek a few weeks ago. And so we're trying to increase our presence there accordingly as our outfit grows.

Underwriting the deals, that's my primary role within the company. Fielding offers with realtors, ultimately deciding on buy price and so forth, that largely falls to me as well, as well as working with the clients, bringing us deals, developing marketing strategies for our firm.

So it's a mix of kind of a CEO, COO type role within the company, or even a chief investment officer. Yeah, more of that kind of CIO role. I've never really cared about what those labels are. But you know, some people can kind of orient what they might mean within a similar type of company. So that's largely where where I sit.

And then I have a Philippine virtual assistant, who's our only core VA who works with us. And then we just have hundreds of various contractors that we're dealing with, other consultants, realtors, and so forth that we consider part of our business, but you know, not directly part of of our payroll.

And then, yeah, still on that partnership level. So Vivek, he kind of has the best connections within the capital industry. I mean, he had been on Wall Street and lived on the East Coast for over 10 years. He's still there, currently planning to move back to Texas here shortly.

But a lot of the mentors and folks that he knows, really large bank roles. And so, you know, as we continue to grow, he's able to keep those connections warm and have pretty ready influx for capital as needed for us.

And that's definitely a luxury compared to a lot of other operators or fund managers to be able to reach the folks who are worth in the single high seven figures at minimum to the eight to nine figures and so forth. Oftentimes, they have a lot of gates in place to be able to reach them, let alone develop a relationship where they're willing to inject capital into your business. Especially in a more difficult macro environment, high interest rates and so forth, where capital markets are tighter. That's a highly valuable skill to be able to pull capital as needed.

So he helps out a lot from that perspective. And even if it's not as readily utilized as we are currently growing, it becomes more and more advantageous as we grow larger and need larger check sizes in order to keep our company rolling.

Plus, he's just kind of accounting and math genius. You know, he was like valedictorian at our high school and everything. So I'm not really a math guy, so I can send all these other, you know, spreadsheet questions and so forth to Vivek and Everett and be able to not have to feel that on my own. So, yeah, it helps out a lot from the numbers perspective and capital structuring.

And then Everett is… he didn't go to law school, but he basically serves as an in-house attorney. He works at a hedge fund in New York currently, but handles a lot of underwriting and the legalese for our deals.

So we were able to in-house our LLC agreements or a number of our funding legal documents and so forth, things that might cost tens of thousands of dollars from hiring another attorney. We were able to do all this in-house so that helps a lot.

Plus, he just manages our books extremely well. We operate across the country, so tax burden should theoretically be pretty high. But because our books are so tight and we're able to display the net asset value of our company or the exact multiple uninvested capital across all these various deals, every single cash influx and efflux out of the business, it keeps our tax burden very low.

And we're able to present that to potential capital partners into our business since we have such kind of a tight understanding of our financials, which is very difficult to do. I couldn't do it on my own.

So again, this is kind of demonstrating how we're able to differentiate roles within the business.

And Everett is also, we have kind of the Goldilocks mix within our company. Like Everett is more the Papa Bear saying no to almost everything and a harsher underwriter for deals. Vivek's more of the Mama Bear kind of softie within the business. Hey, let's go for it. I'm kind of in between on both sides there.

So it gives us a good balance across risk tolerance between partners, which allows us to be more conservative on average across things, but not fully overlooking opportunities for growth as well. So that served us well too. Too.

Seth: And the way you found these people, are you just past friends with them? Is that kind of how you knew them? Like, is it kind of a luck thing? Cause not, I mean, I've got friends too, but they're not necessarily like business geniuses. So how did that come together?

Chris: Again, this is just super lucky for being high school friends. Vivek and I met our senior year in high school and really just hit it off. We've been best friends ever since. You know, we're in our mid-thirties, so it’s coming up into like 20 years or so of friendship.

Everett was one year below us, but you know, he had always been friends since high school as well. And I just think, some of the people you hang out with, you start figuring, hey, what's our real interest? Chris, what are we talking about outside of school or hanging out?

And a lot of times it would focus on general macro or microeconomic items going on in the news or like, hey, we're considering, look at this new business model, this new tech firm that came out. How are they growing accordingly?

So, you know, a lot of our conversations were heading that direction anyway, or you always think, how could we monetize this idea accordingly? And so always more business-oriented.

But that's one thing. Obviously, the next step of actually building a business together is a whole other animal. And it's definitely not for the weak of heart. You got to have a strong stomach for it. We've had some very difficult discussions, to put it lightly.

Again, that could be a whole other podcast in and of itself about how to work with healthy partnerships and also being friends, too, and how to mix that. Not take things personally when things get difficult and so forth. I've made probably every mistake in the book so far. Deep, deep scars from mistakes having been made. But fortunately, we've been strong enough to make it through all the hurdles so far.

But yeah, I wouldn't have it any other way. Personally, I think when you can succeed with friends in a business, there's almost no greater feeling. And being able to provide other opportunities for other friends and family and help grow their wealth too, it's just so exciting for us.

Seth: Yeah, I know. I haven't had a ton of experiences like working in a business context with friends, but I have had some and you're right. It's inevitably those hard conversations come up. And I think if you've got maturity on both sides, like you can get through just about anything.

And it's actually kind of feel good to get through that and realize like we had this hard conversation. We both came out of this better. It's kind of like building a strong marriage, you know, like it's inevitable that you're going to have these moments of tension and conflict, for lack of a better word, but it's not all bad.

And I think everybody kind of grows in maturity when you can get through that stuff. So yeah, that's cool, man.

Chris: Absolutely. Yeah. Like you mentioned the marriage part. I mean, I think we had talked about before picking a partner for a spouse is probably the most important decision in your life, at least I would say so.

So picking business partners would be a close second there. I mean, arguably, even more than my wife, I'm more intertwined financially with Vivek and Everett, just such deep roots and tendrils that, yeah, pulling that apart would be a multi-year journey at the very least.

So before you get deep in with somebody, you really have to understand what's at stake.

Seth: So it sounds like when you guys get a new deal, all three of you look at it with your underwriting glasses on. Is that correct? And if so, how crucial is that to have all three of you looking at it? Like, say if it was just you, for example, how much harder do you think that would be? Or like, do you think you would have made worse decisions if it was just you looking at stuff?

Chris: Yeah. So that's been another part that's evolved within our business because primarily it is just me doing the initial underwriting. So I was trying to have my VA put this together in time, but the data was a bit more complex than I thought, but I was trying to figure out, okay, how many deals deals? Am I actually saying no to over a period of time? Has that grown or decreased over the last year?

And off a rough estimate, and I think I'd mentioned this to you the other time, I'm on average probably saying no to 90% to 95% of deals coming our way. Most of that's related to pricing or just it's not a quality property. So that initial cut is pretty much all me at that point.

And then if it actually makes it to that next stage where we're going to do deeper diligence, set up a whole spreadsheet, start the realtor conversations. Figure out the utility situation and any other kind of key diligence, which I'm sure we'll get into. That type of stuff would only happen after that first cut.

And generally that is where I'm going to have my VA set up the initial diligence spreadsheet. Then I'm actually going to have our consultant and friend Omar fill in that whole spreadsheet. And then, so he's going to assign a value of what he thinks it's worth. I'm going to review that and then ultimately decide what I think it's worth as well. And usually by that point, we'll also have a local realtor's opinion.

So it's kind of a triangulated process from an underwriting pricing perspective.

And we also have historical analysis of where all of our properties have sold in relation to what we expected them to be, especially according to what the realtor mentioned. Because oftentimes, hey, it's just part of the business. like the realtors are more optimistic for what they anticipate selling a property as, but most of the time we're selling at a bit of a discount from what they mentioned to us.

So we have that all built into our spreadsheets based on all the historical analysis of our deals, whatever a realtor tells us, do we have to take off 7.5%, 8% based on what we've sold it before. So we have that built in with Omar's valuation, with my valuation.

And so then all of that is present on a final dashboard, where me, Vivek, and Everett will then have an investment committee, usually every Friday, where we go over, where I present, hey, this deal is basically all set for funding. Here's all the diligence, according to what we've gathered so far. Here are the risks here. Are they worth taking?

And ultimately, at that step is where we'll decide as a team, are we going to go ahead with this purchase or not?

So multiple fail-safes built in and multiple different folks providing opinions there. And this has really been refined over time because I've made mistakes in the past, Omar's made mistakes in the past. Relying on realtors too much has been an issue. Or if things get too busy and I'm pushing deals ahead without consulting Everett and Vivek on it, we've just missed something.

Those haven't been the best deals either. So that this has been a continuing evolving process after making many mistakes along the way.

Seth: So where do your deals come from? Like, do people hear about you through your daily due diligence thing you do on Facebook or you have a website or are you advertising somewhere? How does that work?

Chris: That's another thing that's changed over time. So when we first decided to be funders, we weren't known within the industry there. So that required a lot more on the ground work to get our brand out there.

Seth: What did that look like? What is this on the ground work you had to do? Like, did you reach out to people specifically?

Chris: Exactly, yeah. It was just almost grassroots marketing at its core there. I actually had my VA at the time go through every land community. Most of them are on Facebook, some are on other platforms, Discord and school, for instance.

And so I would have him go on and then look, just try to search for certain keywords, like funding or land funder, capital needed for a deal, for instance. And I'd search the entire history of that Facebook group. And then we would log all of that into a Google Sheet, what they had asked for.

And it didn't matter to me when they had asked for funding, even if they had, a lot of these Facebook groups, again, the industry's grown by like 2019, 2020. So there wasn't a lot prior to that. But even if folks had been asking for funding three years ago at the time, like back in 2020, I would still reach out and say, “Hey, not sure if you're still in the industry. Obviously, I'm super late here, but I just wanted to let you know, my company's providing funding.”

So we were able to get leads that way. There was no barrier in so far as reaching out. It was just a lot of focus and how do we get our name out there and direct communication, direct messaging.

There's a lot of other folks, frankly, I think are a little bit more lazy. If folks say, hey, I'm looking for funding on a deal, and then they'll just say, okay, DM me as a comment. That's not really building a connection with somebody. So I put in the extra effort to send over our whole website, had the whole FAQ built out. Here's our criteria, everything like that.

So that helped us stand out, I think, as a bit more of a serious operator within the funding space.

So that's how we initially started. And then, you know, there were a couple areas, Fund My Land, which I know is a pretty basic website we’ll get into. What we're trying to build is one that is a bit easier to use from a user experience perspective. But we got on there, so we were able to get some leads from people reaching out accordingly there.

And then, yeah, there was just some kind of word of mouth over time as we started to work with some folks.

But it was really a lot of that initial hustle of just anytime somebody posted something about funding, we were immediately on top of it, trying to follow up and seeing if we could work together.

Seth: Yeah, I will say, I admire that approach, not just posting some, Hey, looking for a funder. Because can't stand that when people do that. And I remove them every time I see it because it's basically spam.

But that whole idea of actually looking for people who are talking about relevant stuff and reaching out to them personally, showing that you're actually putting thought into their situation, these are totally different things. But back when I was starting my self-storage construction project, I had posted a couple of things in some self-storage communities, just kind of asking questions about getting started.

And there was a consultant that reached out to me very similar to the way that sounds like you did. And he just said, “Hey, Seth, I noticed you're starting this construction project. Do you need help with getting things started? Need a second set of eyes or anything?”

I ended up paying them like $25,000 in consulting starting up just because they took the time to reach out.

So I would definitely recommend that whatever you're looking for, whether you need funding or you're offering funding or something completely different, don't just do these mindless posts all over the place.

I know it's tempting because it feels like free advertising, but it's extremely annoying and not that helpful to the community when you're not really getting to the point and not actually showing that you understand somebody's situation and care about it.

So, and also say regarding that funding thing you're putting together. So I'll just plug it for you. It's landfunding.partners and it's pretty well put together. If you go and check it out, I'm actually linking to it as one of our five current directories. Go to retipster.com/directory, you'll find some directories that I've put together to find accountants and realtors and attorneys and CPAs and drone pilots and all this stuff.

And one of them I was going to put together was land funders. But then I heard about what Chris was doing. It's like, man, you're doing this way better than I can or want to do. So I'm just linking directly to his. So go check out landfunding.partners and you can kind of get a quick look at, I don't know if it's like literally every land funder in existence, but it's pretty much all the notable, more well-known ones.

And it's just a well put together site if you need help with funding.

Chris: Very grateful to you for that, Seth. And yeah, we tried to put together every known land funder.

You know, it's hard to find all of them because some of them are just under wraps where they might only have like a Gmail associated or hey, like DM me. And, you know, they somehow have capital put together for deals.

But, you know, even since you had linked that on your site, some other funders who weren't already on had already reached out to be added. So, you know, your REtipster reach is already helping to fill out the directory even more than it had already been put together.

And yeah, so just to remark on that briefly, too, as the industry has grown and a lot more funders have entered the space, you know, that there wasn't, in our opinion, kind of a well put together directory for funders and being able to kind of sort,, I'm looking for equity funder like

Serious Land Capital, or I'm looking for hard money lending, debt funding. I’m a more experienced land operator and can take more personal risk that way. Or, hey, I'm just looking for transactional funding.

So this tool helps you sort out those types of funders that are specific to your needs much easier. And you're able to have a comparison table so you can look over kind of all the most basic questions everybody asks land funders: what's your deal requirements and purchase purchase price range, and so forth.

So you can just compare multiple funders at once, cross all of those different parameters, or look at all of them on a certain page if you just want to scroll through every single one, or there's just a page linking all of the contact info for the various funders.

Because yeah, we know some folks just like to grab every email and reach out. It's not the best way to start a relationship, but I can say that there have been some folks that we've worked with that just did kind of that spray-and-pray send out, as opposed to following up with some of those folks. So that's the type of approach that you want to take that's available for you on the site as well. So just try to hit all of those angles.

But yeah, just developing it as a tool for the community where we're not earning any money on it or anything. Obviously, our firm is pretty well featured on that site. But we feel like from a objective perspective, we can advocate for ourselves across any of those parameters. And it only helps us build a better business by knowing who the other funders are out there and what they're offering as well.

So yeah, appreciate that plug there.

Seth: So let's talk more about these deals that you guys fund. So when we're looking at the value of the property itself, or maybe the acquisition price or the sale price, whatever that is, help me figure out how big is too big for you guys and how small is too small. Like what is the size range of deals you guys fund?

Chris: Yeah. So even that has changed a bit more since we started. When we started, we were pretty much open to anything because it was reputational play. Even if we can do something smaller, we're only going to earn a $1,000, $2,000 bucks on it. But we could do larger deals down the line there and develop more of a track record and reputation within the industry.

But after we had quickly done that, we started ratcheting up the purchase price that we're going after. So we prefer going after deals that are between $50,000 and $500,000 in equity per deal. We'll not do anything below $20,000 at this point.

Seth: When you say an equity per deal, are you saying that is the purchase price or that's the equity that you're getting as a result of the purchase, like the spread between your purchase and the value? What do you mean by equity?

Chris: Yeah, so that would be the total cash injected into the deal at origination. So that allows us to go after larger deals. You know, like we could go after a $2 million subdivide if the seller is willing to hold debt on the deal. But if we're able to get it for like a 20% down payment, and then, you know, there's various other engineering, clearing costs, whatever that equal out or, you know, it doesn't have to be exactly 500,000, but around there, that'll make the deal far more attractive to us.

Because cutting a $2 million check, we could put that together, but the amount of risk that we're putting into one deal just doesn't make sense for the current size of our business. We try to diversify over a larger number of assets that are returning capital at different times to help keep our business moving. So that's how we're adjusting for risk currently.

And even within that $500,000-mark, things that are north of 275,000 or 300,000, we'll oftentimes look to syndicate that deal out with other internal capital partners. So we'll still be managing the deal as Serious Land Capital, but we might only inject like 100,000 ourselves and then just raise the remainder of that capital from other individuals or businesses and then split the profits on the back end. So that also gives us flexibility that doesn't come up as often as the lower range.

You know, there's a lot of folks who might bring us lower value deals, we prefer not doing anything below 20,000. The spreads are just too low there to motivate realtors to sell lower value properties, even if you're paying them a higher commission rate. It’s just not that much and your closing costs are going to eat into the relative exit value of the property as well.

So we just prefer not working with those lower value deals as much and save more of our available equity for higher value purchases, 50,000 plus.

Seth: So going back to the valuations that you were talking about earlier, when you or Everett or whoever looks at these things and figures out what do I think this thing is worth? Like, what is it likely to sell for? What are you looking at to get these valuations? Like, tell me all the sources, which ones are most important?

And then how often do you end up being wrong about those valuations for better or worse? Like, how accurate is it in the end?

Chris: Yeah, judgment is always the hardest thing to figure out as an investor, right?

I mean, it's something Naval Ravikant talks about often, and it can be such a long-term metric to check in on too, because you could have just gotten really lucky for six months to a year. And frankly, that was us. Anybody who was operating the land space in 2020, 2021, you might have thought you're like the best investor in the world.

And then, you know, the market turns into more of a buyer's market. It wasn't even really a buyer's market or a seller's market. It was hard to buy, hard to sell. And all of a sudden you're like, wow, I'm not nearly as good as I was, both from a valuation side and a selling side.

And you can kind of get punched in the face really quickly there. And all of a sudden, your judgment is not as good as you thought it was.

So I'm constantly thinking about that and, you know, trying to stay focused on the base principles. And, you know, it can be tough sometimes because now that I’ve become more of an authority in the space, you can start attributing a little bit more ego associated with it: “Hey, I've looked at a lot of these deals and kind of skip over some of these steps. And I know where this is going.” But that's a very easy way to trip yourself up.

I've made that mistake still to this day by not getting back to the raw fundamentals of underwriting, which is just critical, especially because this is not an easy market to operate in currently. And again, there's a lot more competition in the space, so it requires constant focus.

So I always have that warning going on internally and try to mention that to as many folks as possible. Number one rule in business, don't lose money. That's the name of the game here. So you just have to be conservative.

But when it comes into the actual business, strategy and tactics here. So there are multiple touch points whenever a deal is coming our way. So let's just, for instance, say somebody, I should mention, we get a large range of experience levels from investors sending us deals. So some might have only been operating for a couple of weeks. They send us, hey, here's an APN, the county, purchase price, anticipated closing date.

That's enough for us to get started. We'll advertise. We want to be simple to work with. We're not going to require written OPVs, opinions of value, or CMAs from realtors just to get started. Frankly, we think that's a little complex and not that necessary in our experience.

But let's just say I get that initial deal in with just the base amount of info. What I want to do first is just check the basic principles of that deal.

So I'm just going to pull up my Land ID, which every land investor should have at this point. I know when it was MapRight, it was more expensive, like $100 a month or more than that. Now I think the most basic Land ID is like less than $10 a month.

So really, everybody should have that since it brings in so many different key parameters for underwriting land deals, especially all the terrain maps and so forth.

So I'm always going to want to be checking that before anything else. So I might do an initial scroll out. Okay, how close am I to a larger city? just understanding how rural it is versus not. And that's not necessarily a critical piece for us, but it might give me an understanding of how hot the market might be or what the buyer pool might be, depending on how rural or suburban it might be, or even possibly urban.

But we'll invest in infill, rural, doesn't matter, feel comfortable with all of that. But that's my initial piece of that, like where am I in the country?

Because we invest nationally, right? So it's just, you have to be able to position yourselves and understand, there are different geographic considerations, depending where you're looking at in the country. And then I also might know how close am I to the coast or, you know, the ocean or mountains and so forth.

So then I already know what are some of the next steps I'm going to be looking at in regard to this deal. Do I expect there's likely going to be some flood zone or wetlands impact? And is that going to impact my decision making as much as it was in another part of the country?

So for instance, this property, when I zoom in on it, might be covered in flood zone, but if it's close to a coast and I see there's other improved properties around and maybe it's only in a 500-year floodplain instead of 100-year, there's no floodway with it, no core wetlands impacting it. Then that flood zone doesn't really matter to me.

But if I see it's in an area where there's significant flood zone impact, and I see all the surrounding properties within the flood zone don't have improvements on it, that's going to cue a red flag much quicker for me. And, you know, at that point, I might throw out the property entirely.

This is going to be high risk to build on, for instance, maybe if it's large enough, it can be considered for recreation, you know, hunting and so forth, depending where you are in the country. But even hunting properties, I want to make sure, hey, is there a possible creek area, or is it maybe connected with some state- or national-owned land where wildlife and game can come in that that's going to make it more viable?

So all of these different underwriting principles are going through my mind as I'm taking an initial look at the property just to consider the possible utility there and whether I'm going to kill the deal immediately or not.

So you know, that flood zone wetlands piece is always going to be a core visibility feature that I'm going to have on my Land ID pretty much anywhere I'm at. If it clouds your vision too much, once you already understand it, then you can turn those off.

But as far as my base ones that I have on, I have those on. I have the contour on, so I understand the elevation piece. And then oftentimes I'll have the soil map on initially just to understand, again, is there a higher risk for the property being able to perk if we're expecting septic to be installed, especially in a more rural area? Probably 85% of properties that get sent our way are going to have septic involvement compared to sewer.

So, you know, that's always something we're considering. And a quick rule of thumb on soil maps, having learned from some soil scientists before, almost anything can perk nowadays, but it just depends on what type of system you might be looking to install.

So if you're looking to install a conventional septic system, which might run, five-ish thousand dollars, depending where you are in the country, you want to be aware of clay-based soils or anything on Land ID that might say excess water on it. Sometimes that's not always a deal killer, but if there's a soil map portion that is along a strip of wetlands, for instance, and says excess water, and I can see that not that many people have built within that particular type of soil, then I want to be much more careful about investing in that property.

And if I am going to take it more seriously, going to want to make sure that perc test is done prior to purchasing, because yeah, you can be misled sometimes, you know, hey, there's no real wetlands involvement here, but my soil map is telling me that wetlands impact in terms of a perc test might expand more than what it's showing me on the map.

So that's another piece I'm keeping in mind. But even if you have clay-based soils, excess water, you might still be able to get those aerobic or mound-based septic systems. But that could cost the end buyer closer to $10,000, $30,000, depending where you are in the country. So you want to be baking that into your price.

And then how does that compare to other properties that are currently comps on the market in relation to what your total exit value is going to be? And were they able to get conventional systems or did they already have aerobic or mound based systems built into that anticipated exit price?

So these are all things going in there.

Seth: I actually learned an interesting trick on that from David Hansen, who you introduced me to, in episode 176 of the podcast. He was talking about wetlands and something I'm aware of is that a lot of times those of wetland maps, like just the map itself on a Land ID is not necessarily right. There's just a lot of flaws in that.

However, if you just call a wetlands consultant and have them do a desktop review, so they don't actually have to go there. They can just look at it with a more critical eye and understanding what they do. They can usually get a pretty accurate, 90% accurate look at that to confirm or deny the likelihood of actual wetlands, regardless of what that wetlands map says.

So when I heard him say that, I was like, oh yeah, that totally makes sense.

But in case anybody out there has never thought of that, just keep in mind, you can always just call a consultant and get their quick five-minute review. And I don't know if they charge for that or not, but it can at least give you more confidence on whether this is actually a wetland concern or not.

Chris: Precisely. Yeah. Leverage experts whenever you can.

Seth: Yeah. So I want to shift gears here, talk a little bit more specifically about how you partner with operators.

So question number one is what is the typical profit split between you and the operator? And when I say “operator,” I'm talking about the person who finds the deal, but doesn't have the money and they need the funding. So what is that typical profit split? Does it depend on like their level of experience or it doesn’t matter and it’s just the quality of the deal? What would impact that?

Chris: Yeah, so a mix of all of the above. We built out a lot of custom agreements for various deals here. But, you know, I'll just mention some standard parameters.

Let's just assume it's a vanilla deal across different purchase price ranges. So generally, if we're going to be purchasing below $100,000 purchase price here, net expected market value of the deal, we'll start at a 30-70 split, 70 in favor of you as the land investor.

For instance, and that will be a time-graded approach. So if we're able to close within 60 deals or 60 days, then you'll be able to get that split. And so that period of time starts when our money is wired into the title company up until the time the deal is closed and we receive the wire back.

Seth: Just clarify one thing. When you say you're able to close within 60 days, you're talking about closing on the sale price. So 60 days between you buy and sell, right? Which is a pretty fast turnaround.

Chris: I mean, it's really counting on finding a buyer within the first month. You're just anticipating, usually like a 30-day standard close. So you're really having to move there.

Seth: So if it goes beyond 60 days, then does it change in some way or what does that change to?

Chris: Yeah. So then the profit split will increase in our favor accordingly.

So then beyond 60 days, it'll go up to a 40-60 split still in your favor. That's up to 90 days. And then from 91 to 120 days, it will change from a 45-55 split still in your favor. And then beyond that 120-day four-month mark. That's when it will become a 50-50 just until the deal is sold there.

So that really incentivizes proper target purchase price as well as a conservative fast exit price. And even though we might earn higher profits by letting deals sit longer, it really pays for us to keep our capital moving because the sooner we can get things out, the more deals that we can do.

Plus, it helps our reputation. This is a marketing game as well here. So if somebody makes a claim about us on one of the land communities, hey, you know, Serious Land Capital, they really drag their feet closing deals, they could bring up bigger profits. It could be a death knell for our business. So we're never incentivized to act in that manner.

And, I know a lot of more experienced operators who, in this buyers market, might take on average four to six months to sell anyway. We're, on average, quicker than that. Out of the 25-plus deals that we've funded over the last year, I don't have this in front of me, but I think only two have gone beyond the four-month mark at this point.

So maybe three, as of the last month, a larger deal that we were expecting to take a bit longer to sell anyway. But we are very aggressive with getting properties moving. If I'm not getting a good response or serious interest within two weeks, oftentimes, we're ready to pull the trigger and do price cuts accordingly, oftentimes weekly.

And this is assuming all of our marketing is already set up, drone photos, et cetera, properly advertised across all different platforms. But assuming all that's taken care of, price is really the primary driver. And we'll just keep lowering until we find the market to move it.

Seth: Yeah. So what happens if this deal goes 6, 9, 12, 18, 24, 36, you know, just what if it just keeps going and going and this thing does not sell? Is there a point at which it's like, okay, operator, you're out. We're going to keep all the money and no matter what happens.

Or does it just stay 50-50 forever? Like, is there a consequence in the operator's shoes if something just takes forever to get sold?

Chris: Yeah. So technically, in our base boilerplate funding docs, we'll have a 12-month cutoff to where, if the property sells over this period of time, we're going to retain all the profits. That is really only built-in in the circumstances that the operator and the land investor bringing us the deal is handling the disposition of the property on the sell side.

So the vast majority of the time, I'd say 95%, 99% of the time, we're going to be working with a local realtor anyway. And because our company is holding title on the deal and the one signed the listing agreement, we're usually the direct liaison with the realtor.

So, again, we keep our realtors on a very tight leash. You know, we don't sign a 12-month agreement. We do max of six months. So everything is incentivized for a faster sale. If there was some you know catastrophic event where we just cannot figure out how to get this thing moved or maybe there was something that occurred on the underwriting, like some mineral rights issue or some environmental impact that just somehow slipped past diligence that we're gonna have to deal with to find a way to move this property, then we're totally fine with resetting the JV funding documentation to remove that 12-month.

Because it's not not the operator's fault. They're not the one out there trying to dispo and so forth. They shouldn't be punished for it accordingly.

So again, we haven't even gotten remotely close to that before. And again, we're very open to reworking that accordingly. So that's how we would handle that.

Seth: Yeah. And am I correct in assuming that you hold title to this property as the funder, not the operator?

Chris: That's right. Yeah.

Seth: As I hear you talking about getting these properties sold, it almost sounds like this is up to you to get the property sold. You're doing a lot of the work or working with realtors and that kind of thing.

Is that correct? Or does the operator have some responsibility? Like, it's on them to get this property sold?

Chris: Yeah. So that also can vary depending on the experience level of the operator bringing us the deal. You know, if it's somebody brand new in the industry, hey, they might've found a good deal where there's real upside there.

And because my partners and I, we have a full understanding of the land industry. So we're going to do all the diligence regardless because it's our capital at risk here. So it's always an alignment issue. You know, even if we have somebody very experienced, it's still on us to make sure that all our I's are dotted, T's are crossed because, if the deal goes kaput or we miss something, it's 100% of our capital that's on the line, not the operators there. So we're always going to be double checking that work regardless.

But sometimes we're able to defer some of the responsibilities. If we have a more experienced operator, they might have had a local realtor they've had good success with in the past. That makes our job a lot easier, not having to find one and chat about the deal, have them visit the property and so forth. That can be a bit more time-consuming. Or maybe the operator has already called the city and figured out the zoning, utilities, and so forth. That saves us some internal work as well.

And, occasionally, the operator, if they already have good experience with the realtor, might actually be fielding the conversations and offers coming in on the back end. Usually that defaults to us, but not always.

So we're quite flexible in that regard, where we can adjust to the level of experience that the land investor is bringing to our business. We prefer working with folks who are more experienced; that's less work for us, but we're not necessarily going to turn somebody away just because they don't have all the processes in place.

And we're here to help and grow the industry because our business is totally reliant on operators bringing us deals. So, you know, if folks are struggling in that arena, it collapses our business as well. So that's why we try to provide so much value in terms of helping with underwriting or providing feedback on why different deals didn't work out or, hey, here's how you talk to realtors to get them to respond to you and provide opinions of value and so forth.

That's what we're able to provide as a smart money funder.

Seth: So on the selling end, when we're trying to get this property sold, does the operator have any responsibility whatsoever or is it zero? Like it is 100% on Chris to find the agent and work with them until it gets sold? That's kind of what it sounds like, but maybe I'm misunderstanding it.

Chris: Yeah. Again, because it can range there. So finding the realtor is probably the hardest part to do. So that's great when an operator can bring us a solid local realtor. And we're pretty choosy with them and we'll bias ourselves to working with hyper-local realtors who ideally have sold a nearby comp within the lagging three, maybe six months.

So that's our primary target when it comes to realtors, versus somebody who might have three or four counties that they work with in the area. And we might've worked with them before, but they don't necessarily know the hyper-local area that we're looking at.

So to me, I'd be more focused on finding somebody who's hyper-local rather than somebody I already have a relationship with unless I know they can operate in a larger area.

So finding that realtor is the most critical piece. And we can do that or the operator can do that. And I should just mention an aside here, just because anybody doing bigger deals, you're oftentimes going to be working with local realtors there. I really like to get them on the phone and get a better understanding of how they're thinking about the property, compared to getting written CMAs or OPVs.

Because oftentimes I just don't find those that valuable. Certain infill areas where markets are very efficient. Yes, those numbers can be more reliable. But when you're looking in a lot of rural areas, those type of CMAs are oftentimes not telling me anything that I don't already know. Because by the time I'm chatting with a realtor, I've probably already comped out the property anyway. And so that's not necessarily helping me get a better understanding of whether to pursue this or not.

So I want to talk to somebody who has the on the ground knowledge. What are buyers looking for? Do they need surveys done? Are perk tests necessary? What's the build type of activity there? Is there seasonality in the market? How intelligent is this realtor speaking to me? Are they responding to my texts or my calls more often than not? Or is there a big lag time in between there?

If they're not really responding to me, they're probably not going to be the best from incoming buyers as well there. Or can they tell me much more detailed knowledge? For instance, we were looking at a property in Colorado where a lot of inventory on the market, but there was a lot of differentiation and variance in the type of properties.

And this realtor was able to tell me, hey, your property is actually positioned much better because the way the geography and terrain are oriented, an end buyer on this particular parcel is not going to get like 60 mile per hour gusts coming in in this direction.

So that's the type of info that I need to hear in order to make proper buying decisions that aren't necessarily going to be conveyed over a CMA or, you know, just kind of simple text or email conversations with realtors.

Seth: The reason I'm asking about this stuff in terms of whose responsibility is it to sell is because the way I've seen other funders do this is they put it totally on the operator. Like, “You are the operator. Get it sold. We don't care how, but get the thing sold.” And that's kind of the reason why there is that step down in the split as time goes on.

Like if it takes more than 60 days, now we're at 60-40. It's more than that, now it's a 50-50. It's almost like a motivator for that operator to like, hurry up, like get it sold, keep going.

But it sounds like you're kind of doing a lot of that. And in some situations, it sounds like it varies, but it just makes you wonder, like, It almost sounds like maybe a potential misalignment. If there is a change in the split as time goes on, then maybe it should be on them instead of on you.

Why are you doing that work? Or am I misunderstanding something? Or maybe it wouldn't change things in terms of how that's supposed to work.

Chris: The alignment… you can look at it in a couple different ways. And this is something my partner Everett will harp on more than anything.

In regards to the alignment, ultimately, we have to trust ourselves internally to get things to move, because it's 100% of our capital, right? Like it's all upside for the operator, assuming we're able to sell it profitably.

So even if their split might go down over time, it's still just pure profit, not necessarily impacting their day-to-day business. You know, maybe they need some of those funds to market out more, try to grow their business in other ways.

But for the most part, in our experience, you know, folks kind of hand off a deal. And they're not necessarily that interested in maintaining the dispo side of the business anyway.

And frankly, from a reliability perspective and incentive, we want to get our money out ASAP and also try to hit the profit margins that we're orienting to.

Seth: Is that in any way a conflict of interest? I'm not in any way saying you would do this, but in general, if a funder is in charge of the selling process and if the commission split goes more and more in their favor, the more time goes on, wouldn't that be an incentive for you to just kind of sit on it for a few months until it takes longer?

Whereas if it's the operator's job, it's like, no, I'm going to get this thing sold because I want the most money out of this thing. Do you think it's a thing or would that ever be a concern?

Or it's almost like if you were going to be in charge of selling it. Automatically you get more of the profit because you're doing a huge part of the job that they don't have to do.

Chris: Yeah, it is. And I mean, that's something we grapple with sometimes. I know some of the funders will operate in different ways depending on how much responsibility we're taking. You might change up the splits.

It's sometimes something that we’ll build into the agreements. Like, yeah, if we're especially taking a lower value deal, for instance, and we're having to do the whole ground up operation, we might ask for a 50-50 straight off the bat here. So there is some customization that can be built into specific circumstances.

But like I mentioned a bit earlier, it's really a reputational type of thing because there's plenty of funders out there. If we had a monopoly on the industry, then yeah, the alignment could be more set up in the funder's favor of like, well, people have to come to us anyway, so we can just sit on these deals and rack up as much profit as possible.

But that's also assuming you have enough capital to be able to turn over because that's the risk of the game. There's plenty of folks who have sent us over deals where they presented it to another funder and then the funder was maybe anticipating on another close happening and didn't. They don't have the capital to close.

So you could play that game, hold on to properties for longer, try to generate more profits. But if your business is growing at the same time and you don't have that replenishment or you can't just pull in more management equity to invest in the deals, you're playing a very dangerous game there that can also hit your reputation.

But again, on the flip side, if you somehow developed a nefarious reputation as a funder where people are thinking, okay, they're not fielding offers properly, or maybe there's not an ongoing dialogue, I feel like they're hiding something from me. And just to rack up more profits, then you're not going to get repeat business. They'll just go to another funder who might operate in a faster way.

So there's built-in checks and balances in the industry. And we feel over time that we've always acted in the best interest of our clients. Because the more business that they bring to us and word of mouth and everything is only helping us regardless of potentially lower profit splits coming to us if we move on properties faster.

So hopefully that answers a bit. It's never like a fully easy answer. But on average, we're always trying to move things ASAP, especially since we pursue cash sales.

Seth: And part of what I'm getting at with all these questions, or I guess just something to understand, is that this whole land funding profession is absolutely not an exact science. It's not an established thing where it's like, this is the way it's supposed to work.

Every funder I've talked to handles things a little bit differently. And it's kind of about figuring out, okay, what is the balance that works for us and that operator?

So that's kind of why I'm trying to figure out, Chris, like, what's working for you? And that whole thing about safeguarding against a bad reputation in the market—like, that's a very real thing. And I've heard stories from different operators who will say like, yeah, man, this funder totally screwed us out of our money. They took all the profit and didn't share their split with us. And digging deeper into it, what it really was, was the funder was just adhering to their partnership agreement or their JV agreement that they signed. Like they were just doing what they both agreed to, but the operator didn't really read it or didn't understand it.

And what it comes back to is sort of like this line of communication between the funder and the operator. So like there's a deadline coming up. If something's about to change, that shouldn't be a mystery. It shouldn't be a surprise to anybody. Just because it's in the contract doesn't mean that the other person is going to perceive you as doing things aboveboard.

I just think it's an important thing for everybody out there who is either a funder or trying to use a funder to like really understand that contract. Like both parties should get it. And when there's something on the horizon, it was like, Hey, we're coming up against 60 days here. Things are about to change.

There ought to be some kind of communication and conversation about that. Just so that no one's in the dark.If we're coming up on, I think you said it was a year in your case, Chris, where it's like, Hey, now the funder keeps a hundred percent. Like people should be seeing that coming from miles away so that if it finally happens, it's not like, oh, we're yanking the rug off for money. You're not getting any money.

And that's, I would imagine that's probably how you safeguard your reputation in this business, right? Is just by being very transparent and clear with everybody. Is that accurate?

Chris: Yeah, absolutely. And yeah, it even becomes more granular than that because we're so busy day-to-day too. It's like across different deals. It's hard to pay. That's probably something we could build into our CRM, but like, yeah, okay. It's past like the 30-day mark and so forth.

And we do have that within one of our spreadsheet trackers, but with how much communication’s going on, usually the focus is on, hey, we just got this offer, just FYI, we're trying to counter to this. Let's see what comes back here. Here's a couple of the contingencies they're looking at. And so that'll just be our consistent follow-up there. And then, okay, yeah, this offer got accepted. Here's the anticipated closing date.

So we're always just trying to keep our operators in the loop accordingly. Some prefer more frequent updates than others. So it's a balancing game accordingly there. Some, if it's a very popular property, don't need to be mentioning every single offer. If it's really low ball that we're unlikely going to go after, then that's not worth remarking on oftentimes.

But anything that's real and we're positioning as strong consideration, that's always going to be a text follow-up.

And it's not always us maintaining that black box communication with the realtor. We have plenty of operators who might be in a group text thread with the broker in us or a group email thread, or again, they might be managing the communication themselves.

So we're not, we don't have hard and fast rules for those communication patterns. It really kind of depends on what the client prefers when they work with us.

Seth: In terms of that profit number, like say if you buy a property for 50 grand and sell it for 100 grand, how exactly is profit measured?

Because it's never that cut and dry. There's closing costs and there's holding costs, there's property taxes, there's insurance in some cases, if you're doing improvements or subdivides, there's all kinds of other stuff that comes into the fold.

So like, is there a simple equation you follow to say this minus this, that is the profit. And that is what we then use to split and disperse the money.

Chris: Yeah, precisely. So we follow more of the institutional paradigm of using waterfall documentation after the point of disposition.

So I partner Everett through along with some attorney help and just making sure that we're absolutely solid on all of our numbers. We'll make sure that the waterfall is conveyed properly within an Excel spreadsheet at the point that we're going to be wiring profits over to the operator that brought us the deal. And, you know, according to such and such amount of days, here's what the split's going to be.

And sometimes it might just be like a pure 50-50 too, like anything we do above 100,000 purchase price is usually going to start at 50-50 anyway. So depending on the risk of the deal and so forth, that's going to adjust accordingly.

But generally within the waterfall and any type of costs that we covered in the business are going to be paid back first. So that's going to be the purchase price of the property, any related costs, say marketing photos, like do we have to spend on anything on a drone or survey or perc test and so forth. All those costs are going to be funneled back to our firm first as having covered those.

We have a couple variable costs, rarely more than $1,000 per deal that might cover our due diligence that Omar does on the deal, really ensuring that all the numbers are aligning prior to us purchasing. If there's a little overhead covering some of the work that our VA does on the deal, for instance, or covering a little bit of the legal expertise that consult through Everett and a couple of our third-party attorneys that we work with to make sure all the JV docks and the waterfall is flowing properly, that would all get baked into the waterfall.

Again, we try to keep those costs as low as possible. From a reputational perspective, we don't want people reporting, hey, Serious Land charged me 10,000 in superfluous fees at the time of close. And that impacts our profits as well. So it's not like it's just coming purely from the profits that are allocated for the operator. That's just coming out of the total profit pool that we're both sharing.

So those are all going to be flowed out first. The realtor commission that's going to be taken care of, title company expenses, all of that gets paid out first as principal within the deal. And then after that is when the actual profit is calculated there.

So depending on what those splits look like, that's how we end up at that number.

Seth: So it sounds like you cover pretty much 100% of costs once the deal lands on your table in terms of due diligence, marketing to sell the thing, realtor commissions, all that stuff.

Who covers the costs on the front end with the acquisition? If somebody finds a deal with direct mail, you're not covering that, right? Is the operator paying for all that and you start covering costs once you enter the deal? Is that accurate? Or how's that work?

Chris: That's precisely right. Yeah, there are some funders who will engage in covering marketing costs for more of an exclusive relationship with an operator. Some folks have approached us about that. And we've looked at that. Ultimately it wasn't the best fit for us at that time that that's not necessarily saying it wouldn't be the best fit for us going forward.

But that's a whole another consideration. Because when we left the direct marketing space, that saves us a lot of variable costs and overhead within our business. But we're also taking a hit by having less profit margin on deals. So we have to do a higher volume as well as reduce overhead costs to account for the lower profit that we're taking on a deal-by-deal basis.

So that's something that we'd have to keep in mind before potentially funding, that doesn't necessarily have a guarantee of finding us more quality deals because there is no guarantee within in direct marketing there.

So it is an option, but I don't know that many funders who are handling the marketing side.

But if the originator or the operator, they might pay EMD on a property, or maybe they cover a couple other costs associated with the deal before we're brought in, then those would also get incorporated into the waterfall. So that would also get paid out back to their account prior to the profit split.

So ultimately, assuming the deal is profitable, which is not always the case, but we do everything we can to make it so everybody will get paid back first and then the profits will come into play.

Seth: So how often do these projects involve like subdividing or entitlements or improvements or like not just a straight flip, like there's extra costs in work required to do more to make the property worth more? What percentage of the time does that happen?

Chris: Not as often as we would like. We want to grow that part of our business more, but finding subdivides that really pencil out or entitlement deals, it's hard to find.

We are just in the midst of completing a minor subdivide project. I mean, this was very tiny. We were just splitting off one parcel of vacant land that was attached to another small parcel with a house on it. But I mean, we've been working on that deal since August of last year.

There was a partial lien release involved with mortgage on the property and dealing with the county and surveyors and having to get all their recorded documents done. Like that took a long time. And a lot of our costs are still baked into that. We probably have $6,000, almost $7,000 that's still been held at bay in that deal really since August, getting paid down before we even bought the property and have a chance to return funds on it.

So we're always a bit more cagey and conservative about going after deals that are going to have more inherent expenses and oftentimes longer sales timelines. Minor subdivides. Maybe you can move everything in six months, but oftentimes longer.

So we just have to bake all of that in accordingly. Same with entitlement deals.

Seth: And again, I don't know how many, if any, if you've ever done like an actual proper subdivide or like a platted subdivision or something like that. But when I think about those projects, they inherently require more work. Like somebody's got to find the surveyor and communicate with them and get stuff recorded and all this stuff.

Who handles that work? Is that the operator's job or is that that your job? Does Chris have to go and do that stuff?

Chris: Yeah. So that's where we can have some variance as well for some of those type of deals. Some folks who have brought subdivide opportunities are much more of the on-the-ground operators, they're out visiting the property. They might even be handling a lot of the dispo outside of realtors. They might be running Facebook ads or setting up a land buying expo, which can actually work well for subdivides. You just say, hey, we have a whole bunch of land to sell this weekend, come out here and you can sign some paperwork.

Works better for owner financing, but it's an option to offload some properties quickly, even before you close and survey out the child parcels. So you might have operators like that who are providing a lot more inherent value to the actual on-the-ground work.

Whereas some folks, yeah, they might bring the deal, but they're not necessarily local to the area, or the work required is just not as intensive. Even if you're finding a surveyor to head out there calling the water department to figure out what's the cost going to be to add a water line here, that's fine. And we encourage folks to help as much as possible on that end. But that's also something that we can handle in-house if needed.

So we're not necessarily going to be as inclined to give up more upside for circumstances like this, or like the latter case, where there's less expertise needed to both acquire, do the operational work and sell the property. So that might change up the terms on the final funding part of the deal.

And for these larger deals too, some of the operators, they might be looking to inject skin in the game into the property, which we always encourage for bigger properties where, yeah, there's going to be more of a trust and time requirement to sell this deal.

So yeah, if you can inject 50, a hundred grand, great. That helps us make sure that you're aligned more to see this project through and, you know, encourage more splits in your favor. But because of these various factors that might change the custom criteria in regard to what the final profit splits might be for those types of projects.

Seth: I'm sure you don't have a direct answer to this because it depends on so many different things, but like, say, say if I brought you a deal and I wanted you to fund it, it requires maybe 200 grand of funding to buy this thing, but I want to put my own a hundred thousand dollars into that too.

So like you put in a hundred grand, I put in a hundred grand. How would that change all of this stuff in terms of, who holds title? What's the profit split going to be? Who's in charge of what?

Like, I got to imagine you almost hit the reset button on everything, right? Because we both have our necks on the line in the same capacity. Have you ever dealt with that kind of thing?

Chris: Yeah, occasionally we get offers for that. And that $200,000 mark is right around where it gets interesting. You know, usually we'd only want to consider taking operator funds and skin in the game for those higher value deals where, yeah, we can spread the risk around for anything that's lower than right around that $200,000 mark.

And we have funded, self-funded deals north of $200,000 where we're the sole equity partner. So that's not the hard and fast distinction.

But the problem is, all of our documentation that we have currently is set up to where we're the sole equity in the business. So if we do something smaller than that, we're going to have to draft more documents. Probably some more attorney involvement there and costs associated with that, might have to set up a new LLC that's going to be serving as an SPV, special purpose vehicle, for that particular deal. So there are a lot more costs added on just to manage the basic operational groundwork of that deal.

So usually we try to refrain from pursuing those type of opportunities, again, unless they're larger deals where it makes sense to invest more money on the legal groundwork. Otherwise, yeah, it's just too much of a hassle to be splitting and having different roles and responsibilities and different types of title situations. Do we have to do like joint tenants and more complicated for the title company and everything?

So it's a whole another can of worms that you'd have to think carefully before engaging in.

Seth: I've gotten to about half of the questions I wanted to ask you, but I know we're going a long time here. I'm going to try to wrap this up relatively soon here.

But one of the questions, and this is something where I've heard conflict arise between operators and funders. And that is, who gets to decide what that listing and sales price is going to be. And at what point do we accept a lower offer versus not?

Maybe one party thinks, Hey, I think we can get higher if we hold out. The other part is like, no, we got to sell it now.

And also the issue of seller financing. Like, do you ever offer that as an option when you sell properties? And if so, how do people get paid? And when do they get paid?

I'm going to go out on a limb here and assume that you get to decide on all that stuff as a funder, since you're holding title. Correct me if I'm wrong, and then let me know, just elaborate on that. How does that get handled?

Chris: Yeah, certainly. So within our documents, ultimately, we have the final say-so on accepting an offer or not to sell a property. Again, this is where the alignment piece comes back in and where there could be potential reputational damage. Because the funder abuses that, takes an offer that they didn't consult the originator on or hadn't discussed prior. That's just gonna leave damage. You might lose a potential long-term JV partner on deals, or they might leave you a bad review in some of the various communities, or bad word of mouth. All those are disastrous to our business.

So I hammer in that point because, really, it’s the funders' advantage to be as open and communicative as possible in finding solutions and sales prices that best suit the needs of each partner in the deal.

That being said, prior to even listing a property or even before funding it, we're going to have a conversation with the operator. What we anticipate selling the property for and our anticipated strategy for price cuts and so forth, if we're not getting the interest that we're anticipating.

And we actually have built in within our documents, again, prior to even funding, a base clearing price indicating that if we get an offer that is at least this amount, and there's no crazy contingencies, you know, like a 90-day close or other random things some buyers might throw in as wrenches into a deal.

But let's just say, you know, kind of a standard 30-=day close, whatever this number, we're just going to accept that. So we're already have an understanding that, hey, that this is a threshold that's going to work for both of us here. Anything below that is going to be a discussion.

And while yeah, our firm is a title holder, we still ultimately could say, hey, no, like this is the best option to go for. It still gives us a an understanding of anything below this number, we're going to to be bringing to you, discussing it. Here's the pros and cons, why we think it'll be better to take this deal versus trying to stay on the market longer. Hey, wait, maybe we just misjudged this market entirely here.

This thing's been sitting for three months and secret, not so secret in the industry, but oftentimes you might get greedy off the bat where, you get an offer that's like not quite where you want right off the bat, but usually offers don't get better over time. They usually get worse, or at best, the same. So the market will tell you very quickly whether you're on track or not with your pricing.

And so, even if we get an offer that's a little bit below our clearing price threshold within the first couple days of listing the property, if it's a quick 30-day close, for instance, no crazy contingencies, usually we're going to take that, you know, we'll always try to counter. I know it goes against the Chris Foss Never Split the Difference. Splitting the difference is oftentimes just part of this industry.

And you don't oftentimes have that much negotiating power in a buyer's market here to just say, hey, I'm not going to accept this lower offer here. Usually I'll just throw out because buyers expect that anyway, and most of them will accept. So throw out your counter or maybe you want to counter on something within the document. Hey, I'm not going to cover your survey costs or I'll take like $1,000 off. So you cover the survey yourself. Or I want to cut down on the due diligence time period.

I'll always have something that you're going back to the buyer with and try to squeeze as much purchase prices as you can out of it. But that's always going to be our strategy. And if we can't extract anything more, yeah, we'll go back to the operator and say, yeah, this looks like it's going to be the best option for us. We did all we can here. And then we'll anticipate closing.

So again, it always comes back to the communication element.

And like you mentioned, in regard to possibly fielding seller financing offers. I mean, we're open to it for most funders, especially equity funders. It's not going to be a preference just because of the nature of our business. We need capital turnover.

And if we're growing, if we just have too many finance deals going on, we won't have the capital to put into more deals. So we are open to it, especially again, in this buyer's market where seller financing can bump up the buyer pool for particular properties.

But generally, we're going to be looking to sell the note after a short seasoning period, maybe three to six months at most. Ideally, you could table close the note as well. But we just have to keep that in mind is that if we're offering somebody to buy via seller financing, and we're going to be looking to offload the note, usually, you know, we're going to be taking 80 cents on the dollar. So that's going to be impacting our margin anyway.

That's not necessarily a terrible thing there. Because in this market, most of the properties that we're selling are probably at a 10% to 20% discount, even off our conservative listing price anyway. So, you could keep cutting from a cash perspective or potentially sell for a little bit higher finance, anticipating selling with a 20% discount after a period of time.

So, you just have to weigh that with your underwriting as well as what might be the best profit accordingly.

And usually for seller finance, in terms of profit splits, we'll get paid back all of our principal first and then 50-50 thereafter if it gets into payments, especially if a note buyer comes in there.

Seth: So this kind of going back to earlier with the due diligence side, like when you're doing deal intake, are there any ways that you've been able to screen out bad deals to avoid wasting your time with them?

What do you expect the operator to come to the table with to save you time on due diligence and ensure you're not looking at a junk deal? Are there certain things that you'll just automatically say no to and you say, hey, operator, before we even start talking, make sure you've answered these questions and check these boxes and then we'll start looking at it.

Or do people just dump all kinds of junk on your table and it's up to you to figure out if it's a good deal or not?

Chris: Yeah, unfortunately, it’s more of the latter than you would hope for in this industry.

And some folks learn that lesson quickly and realize, hey, yeah, this was bad criteria. I'm going to change that up. Some folks just don't learn and we might not prioritize trying to work with them as much going forward.

But yeah, I mean, it's so simple, right? For a lot of funders, you know, a lot of us have websites and basic FAQ or deal criteria. Just take 60 seconds to check that out really quickly. Yeah, it'll show you, hey, we're looking for, on average, between 50k to 500k purchase price, nothing below 20k. If you send us, you know, a $10,000 deal, that just tells me, hey, you probably weren't paying attention.

And even if you didn't check the website, oftentimes when I'm introducing myself to people or they ask criteria, hey, I'll just text over here some of our base stuff. So, usually that info is it's very easy to get a handle on.

But, yeah, even beyond that, I mean, if you're sending something over that's just landlocked or you haven't done the basic diligence, you send something over where you might have already spent like two hours on the deal, comping it all out. But then I pull it up on Land ID, and it's covered entirely in wetlands. And that's just kind of embarrassing on that side. And hopefully, they’ll learn the lesson afterward to do a little bit more upfront work.

But yeah, just making sure you know, those key red flags are dealt with.

And then the pricing side is more difficult. That's why I run that Land Daily Diligence Facebook group, because most of the errors made in underwriting is from a pricing perspective, not necessarily from a geography or terrain perspective, for instance.

So pricing, it's really, really hard to do well in land. It requires constant practice. There's an art to it. It's not just a pure science. Even me doing your underwriting, virtually every day or every business day, looking at hundreds, thousands of deals at this point, like I'm still learning new tactics to utilize in this space.

And especially when you're trying to invest nationally or across different geographies, like there's just almost an infinite amount of material that you can learn there. And again, kind of requires constant work. Even when I took a break over the holidays, Christmas, New Year's and so forth, I was rusty coming back to it.

So it's just something that requires hours and hours and hours of practice to find those right pricing mechanisms. And sometimes there's not a key answer. You might have to go to a local realtor and just kind of throw your hands up and say, you know, can you visit this or check out some of these key issues here? Because it's just impossible to tell based on the lack of comps or the aerials, what might be going on with the property.

So, you know, the pricing piece, yeah, you can send deals our way on that Land Daily Diligence. I'll try to provide as much info as I can help you become a better underwriter. But don't hang your head too much if you're off on that, because most investors in the land space, it takes years to get better at that particular piece.

And even though my like deal requirements might say, hey, like, I want 50% of market value, just like most funders, my 50% is probably going to be different than your 50%. So don't don't get too hung up on that precise pricing there. Just send some deals our way. We'll provide feedback and what will help you center in on how we evaluate deals more. So then you can bring us one that's going to be a better fit in the future.

Seth: For people to be featured on this Land Daily Diligence Facebook group, do they basically just go to Serious Land Capital and submit their property there? And is that how they end up with you reviewing it that way?

Chris: You can do that. Or you can just email directly to me or Facebook Messenger. Any of those paradigms is fine. You can text me a deal too with my direct business line number that's also on the website. So those are all options to do that.

Deals that come in, because the Land Daily Diligence is not necessarily just for deals submitted for funding. Even if you don't plan on working with us or you just want an extra pair of eyes or you haven't got a signed purchase contract yet, you're just trying to value the deal better before you interact with the seller. Because that's always a better option, right? Before settling in on a purchase agreement. Then it's easy for me as the funder to say, yeah, this is way overpriced. Now you have to go renegotiate. That's a really hard conversation.

So if you can settle in on your price prior to setting expectations with the seller, that's always going to be a preferred option as well. So you can definitely send any deal that way.

And even if you submit on our website for funding and so forth, I'm always going to be double checking with you before featuring the deal on the live Facebook. Because I know some people would prefer to keep their deals more private.

I provide as many safeguards as possible. I'll never mention what the precise purchase price you have it under contract for, trying to keep some of the key details back with the expectation, hey, we're trying to build a trusted industry here folks, don't go trying to poach deals and so forth from each other. That's always going to come back to bite you in the end.

But nevertheless, I try to provide those safeguards accordingly. So then you can still get the full value from the service being provided there. But yeah, rest assured, you won't be featured unless you've given explicit permission.

Seth: Well, Chris, totally appreciate your time and pulling back the curtain a little bit about how your business works. If people want to learn more or work with you, is it just seriousland.capital? Is there some other place they should go to connect with you?

Chris: Yeah, that's our base funding website. So yeah, you can reach out there, submit a deal there. My email, chris@seriousland.capital, is there, as well as my number. Or join the Land Daily Diligence group on Facebook. It’s free to join, free to get any help on that. That's always going to be a free resource.

And like we mentioned before, the landfunding.partners is also our community resource for providing all the other funders out there because there's almost an infinite number of deals. We can't fund them all. There are plenty of other high value funders out there who might be better at certain types of properties, or maybe they can provide splits that are a better fit for your company. Maybe they're debt lenders instead of equity lenders.

So take a stab at working with different funders. Find somebody who's a better fit or maybe work with multiple. Some folks are are a little bit tapped out at a certain time. And so you can rely on different funders depending on the time of year and what type of deal that you're looking at. That's really our intention of building out that resource.

And yeah, just looking forward to interacting with many of you going forward. I know we've been going on for a while here, Seth.

And like you mentioned, I feel like we could probably do another like two or three podcasts worth on additional underwriting questions here. But I just wanted to express my gratitude so much for the opportunity to be on here, my partners and I, even with the success we found in this space, we really owe you a debt of gratitude.

We wouldn't have been in this land space operating without all the expertise you provided across our REtipster and all your various resources. I mean, yeah, back in the day, getting started on this, just reading every single article you had posted, every single comment back when the comment section was still available on your site and everything, but buying the postcard templates and so forth. Just immense value provided to us.

And, you know, I’m so grateful to have gotten to know you more over the past several months as well.

Seth: That's awesome. Appreciate the kind words and really glad you've been able to find help there and be part of the community for so long. And it's really cool to see what you're doing for the land space today. So thanks again for the great conversation, Chris.

And all the listeners out there. If you want to connect with Chris, now you know where to go and how to do that. If you want to check out the show notes for this episode, it's retipster.com/187. This is episode 187. You'll find links to Chris's website and Land Daily Diligence and all this stuff that we mentioned.

Again, Chris, thanks a lot. And hopefully, we'll talk again soon.

Chris: Absolutely, Seth. All right.

Seth: Hey folks, how's it going? This is Seth Williams. You're listening to the REtipster podcast, and this is episode 186. Show notes for today's episode can be found at retipster.com/186.

Today, I'm talking with Paul do Campo. Paul is a professional copywriter and real estate investor. He helps real estate investors with their follow-up marketing. Today, we're going to discuss using the right words in our communication, the importance of follow-up, how to implement follow-up, and how Paul has figured out how to use the right blend of communication to win repeatedly as a real estate investor.

I'll just say before we get started, the conversation you're about to hear was recorded on a day when my voice was pretty bad. So I apologize in advance for that.

Also, the audio quality was lacking just a little bit. I think you'll be able to hear everything we say, but just want to give you a warning ahead of time. Sorry about that. We'll try to do better next time.

With that all out of the way, Paul, welcome to the show. How are you doing?

Paul: Thank you, man. I appreciate being on. We haven't spoken in a while. It was way back when I had you on my show. Things have changed quite a bit. Went from land to copywriting, and that was mainly of necessity to quit my W-2 and get into something that can support myself month for month.

Now, what do I do for investing? I actually sold off all my land notes. I'm actually working on selling one more off. We're hypothecating it out. I'm just kind of shifting gears here, pivoting my money into other sources.

And what I do today is just OmniDrip. I mentioned it. So that's a company I set up. We help investors with their actual follow-up, meaning like drip sequences, their automation, the copy, the content that goes into long-term follow-up because most investors we deal with, they're not really sure what to say besides, are you still interested in selling? They follow up infrequently.

A lot of my clients, they're winning over deals after three, four months. That's three to six months. It's kind of a typical range for these long-term sellers that just aren't ready yet. They're winning them over with 50, 60, 70 touches of follow-up.

So we have to be a little more creative about what we say. It's not just repeating the same direct question, “Are you still interested in selling?” It's being a little more creative and bringing more value upfront, building up credibility, driving them back to the website, driving them to articles, sending them follow-up mail, and sending emails of course.

Seth: You've got experience with houses, with land, and with notes, right? Of those three, how would you segment, this percentage of my experience is with houses and this percent is with land. How much time have you spent in each one of those different realms?

Paul: Yeah, I'd say more so in land. I probably spent a lot more in land. And my journey back in 2016, like everybody else, I jumped into wholesaling. A lot of land flippers, they start that way. and difficulty of it and sending lots of mail, cold calling, door knocking, all that, shifting over to mobile homes like Lonnie deals.

Seth: Lonnie deals? What is that?

Paul: Like the trailers or the mobile homes that you flip? You don't own the land and you sell them on owner, just like land, you sell them into notes.

Seth: Okay. Just out of curiosity. Did you say Lonnie deals? Am I hearing that right? What does that mean? I've never heard of that.

Paul: That's what I think the terminology for it. There's a guy named Lonnie Scruggs. He wrote a book on it back in the 70s called Deals on Wheels. It's just basically land, but with mobile homes. You don't own the land. It's in a mobile home park.

A really good return on those, but I just didn't like the rehabbing part of it. I didn't like chasing sellers, chasing buyers too, because there's chasing on both ends.

And then transitioning into land, which I love, because there was no chasing at all, except for the selling part of it. There's a little more intensity to actually get that property sold.

And then, from there, I had to make a decision because I needed to quit my W-2. I was doing copywriting gigs as well. And I made a decision to just go full-time in a copy because I already had clients, and it was exceeding the income I was making in my W-2. So I decided to quit my W-2 and just focus on copy for two years.

Seth: So when you say copywriting gigs, so were you doing copywriting for your W-2 job as well? And you had copywriting gigs for various companies on the side? Tell me more about that.

Paul: No, my W-2 job, I was actually a pipeline welder. I was a pipeline welder and foreman for the natural gas utility back in Southern California. It was actually a good job in terms of benefits and pay. I just wanted the freedom.

Seth: So how did the copywriting thing come into your life? Like, when did you even become aware that that was a profession? And it's like, okay, I love it; I want to do that.

Paul: I discovered marketing copy out of necessity back in 2016, because I really sucked at this whole sales and marketing thing to get houses. I came from blue collar. And when you make that shift from blue collar, and that's all you've done your whole life, and you come from a blue collar family, you don't know anything about sales and marketing. Making that shift if you don't have that personality is really a struggle.

So I, by accident, became Investor Carrot's copywriter for about a year.

Seth: How did that happen by accident?

Paul: Well, I knew about copy. I kind of knew, like, I heard about it. I read a couple books on it. And Carrot had sent out an email to all their members. And I was a member at the time. I had my own Carrot site.

And they said, hey, we're looking for a copywriter. And I said, why not? So sent it out, did their application. They chose me. I don't even, I was so surprised. Like, you know, what the heck happened here? I'm not even trained. I don't even know what I'm doing here.

Seth: Did you submit examples of your work or something? Is that how they chose you?

Paul: I don't exactly remember the application process. I didn't have any work to submit. So maybe there are some examples that I just put together on the fly there.

But the funny story is they actually then got rid of me the first two months because I kept submitting work that had a bunch of errors and because I was just really bad at proofreading. It was kind of depressing at the time because I was like, man, I actually enjoyed doing that. It was a very high hourly pay for what you do just right.

And so a couple months went by and I reached out to the person, like Trevor's right hand gal at the time. She's not there anymore. But I said, hy, if proofreading was my only reason why you guys got rid of me, how about you guys give me another try? I'll go out and hire out of my own pocket somebody to proofread all my material, make sure everything goes through.

They're ecstatic about it because they really enjoyed what I did. They were excited that I'm trying to solve the problem. So I got back in with them as a contractor and hired my own proofreader to do all that. Got better at proofreading, got better and better at what I do. From there, gigs kind of just started happening.

I started… one of my clients was a land developer, a big land developer who entitles, he buys his large lots that can fit a hotel, can fit a large multifamily. And they were doing something unique. He hired one of the best list guys in the country who works with Dan Kennedy, Craig Simpson. So that was fun working alongside him. The idea was they entitled these large lots, they own these large lots, they get the planning in place, they get the architects to create the hotel, blueprints.

And one of them happened to be in Vegas, like not on the strip, but just one block away from the strip. And they sell these, they put these together into a direct mail package, and they send it off to the top investors in the U.S. or maybe the world. I don't know what their list was, but I put together the package, the copy on it. And that was really fun.

Craig and I both parted ways with them because they were just taking too long in between projects. They would finish it and they wouldn't even send it. It would take months and months to even send. And now that thing is outdated. The letter's outdated and the list is outdated. So we'd end up just naturally parting ways and being too busy to fulfill for them.

Seth: I'm curious about going back to your story of how you got into copywriting.

So it sounds like you were sort of self-taught. It's not like you went to school for this. You just read a few books and it resonated with you and you figured out how to write in a way that was compelling and got people to take action. Is that right?

And if so, what books were you reading that were so influential to get you into this?

Paul: Yeah, it's just self-taught. Most copywriters are self-taught. There's not like a course in university on copywriting. There might be now if you get into like the whole CMO world and marketing world.

Some of the books… I would say Gary Halbert was influential on me. He's long gone. Bring that name up and even investors sometimes know who that is.

Ben Settle, who's alive today, he's an email copywriter. He was very influential on me.

Joe Sugarman, who's long gone, and I own his book. And probably a really good book for investors. Joe Sugarman, he only has like two books published. So that's a really good book.

So I'd say that the idea of copy is taking the problems that exist in the market, the deep-rooted problems, and then bringing the solution in a way that fits the market today.

So let me tie this into land, okay, because I started practicing this with land, because I was buying lots, I was selling lots, and I decided to do something a little differently. I decided to take my pages that display any lots I have for sale. I started to write it in a way where I'm displaying what exactly this lot's going to do.

We talked about it before. You can sell land in one of two ways. And I'm not saying the other way is bad; it's still going to work.

But you can sell it as, here's my half acre lot in the desert. Here's the coordinates. Basically selling it as a commodity, right? And when you boil it down to those roots, you're selling it as a commodity.

Now, I'm not saying that doesn't work. And a lot of investors became very successful doing it that way.

To optimize it a little bit more, I decided to sell it like, what am I actually solving here? And what's the actual use case of this land?

Most of the time, I was selling mountain lots. So after about a handful of sales, I already kind of understood my market. My market where people, city folks, because there was only one mountain range in that area, and the city folks were buying it because they dreamed of having this cabin in the woods.

Okay, so rest and relaxation, getting away from the city folks, making the city the enemy. All that I was really bringing into the front fold of the copy. And I did this with emails too.

Actually, I really liked what was happening with emails because most of the time people are doing, hey, here's our deal of the week. Instead, I decided to shift gears. And go more into being a brand that people enjoy reading, not for the sake of, oh, let's check out their deal, let's check out what he has to say today. I would be on the lookout for stories that really sell the lot that we have for sale.

So for example, I remember hearing about the story in the news that happened in the area where nurses and doctors were caught in this specific hospital having certain relations with the clients who were in comas. And it was a true story in the news. And there's other stories, like finding maggots underneath their bandages because they weren't cleaning them.

So I think my subject line was maggot-infested cities or something like that. I talked about that story. And then I pivoted into the call to action, which was our mountain lot, which was to get away from all these city people, to get fresh air, to be away from the millions, population, and et cetera.

So I just brought the problem up, brought up the solution with the real reason why they want to actually buy the land. And what I started seeing is that people on my buyers list, people I've never spoken to at all, would email me out of the blue and say, hey, I've been on your list for three months now, ready to buy. And it'd be one of the easiest sales I can make.

So it wasn't hardly any chasing. That's what I started seeing because I realized, and this is nothing new, by the way. You see this done in coaching. You see this done selling software. And in my OmniDrip brand, you see this. You develop a relationship with your actual buyers list.

Seth: How much work is it to be on the lookout for these stories to create this newsletter and all this stuff to entertain people with the end goal of, “I hope you'll buy something from me at some point”? How do you make the connection between, “I'm here to entertain you,” and connect the dots all the way to, “Okay, now buy this from me.”

Paul: Yeah. It's more of an art than a science. The more you do, the more writing begets writing or ideas beget ideas.

So, when somebody who has never done this before, it's like, I can never do this. Yeah, you haven't really done it before. And then, and when you start doing it, when you start looking out for stuff, in time, I mean, this is what you're supposed to kind of do as a salesperson is connect problems with solutions, right? And you're either doing it face-to-face, digging for information, really asking the situational, the problem questions of the salesperson. Whereas a marketer, you're doing it where you already know the market well enough. And you're choosing the biggest pain points.

And that could be through analogies. That could be the stories you've heard. It just comes from doing it enough to where, oh, this is a really cool analogy to show my audience.

So being entertaining is far more, and I've sent over at the time of this recording, I've probably had like 2,000 email blasts, not like 2,000 individual emails, but like 2,000 blasts, lists of 5,000 people to 60,000 people. My bread and butter today, I'd say, is like if anybody asks, hey, can And can you work one-on-one with me? My one-on-one package is email marketing. So every month we're talking to the list. We're creating relationships with that list. We're selling something to that list.

I would say after all that, the least valuable method of communication is education. It's just education. Just like, here's the three ways to do this. Here are the five ways to do that. It works to some degree. What I've realized is people tune out of that after so much. And people tune more into when there's even a subtle or slight entertainment factor to what you do, whether it be podcasts, whether it be articles, whatever it is, there's something in how you communicate that's actually somewhat entertaining.

If you don't believe me, look at the highest paid people in the world, they're all entertainers. Look at Donald Trump. He's kind of entertaining. So people do keep coming back because there is a slight entertainment factor to what you do.

Seth: Yeah, that's interesting. So like, what makes education entertaining? I don't know if you know who Ramit Sethi is, but he is a phenomenally good verbal communicator. Every time I hear him talk at all, I'm just kind of captivated by whatever he's saying. And I think what's going on there is he knows how to use the right words, but also vocal tonality and inflection and stuff just to make him not sound monotone. It's just very entertaining to listen to.

So is that what it is? It's just surprising people at what you do? Or what makes anything entertaining versus boring?

Paul: Yeah, that's a really good question. Ramit Sethi is hard to understand if he actually went out of his way to learn all that or if he actually does that already naturally.

So one aspect to that is bringing personality into the fold. Everybody has a personality, everybody has something that they can share. For emails, specifically, it's personality-driven. You look at Russell Brunson, he almost does the opposite of what is taught, which is slow down, be professional. The guy is a fast talker.

The key, and he mentions this, to what makes him wildly successful (in webinars specifically, because his pivotal moment is when you learn how to do webinars and sell via webinars) is he is an extremely good storyteller. And he ties it in and he brings up another story and ties it into what he's teaching. That is one aspect of doing it.

Telling stories, tying it into what you're teaching or selling that grows a relationship with something. People become friends because they like the other person. They like their personality. And that's kind of what you're doing with an email list as well.

I mean, back to what I do with OmniDrip with, you know, flippers, and we have some land guys that are clients as well with their acquisition side with their follow-up. If you come in with your follow, you know, everyone has drip sequences, but those are the dry, boring, direct questions of, hey, are you still looking to sell? Hey, are you still looking to buy? Those direct questions are 100% self-serving. They don't do anything for the other person. You’re an annoying pest at that point.

So what we bring in is we add a little more creativity. So what does that mean? That means that we're talking about what the cash offer actually brings the table. I'm bringing humor messages too. We have humor messages, like if somebody hasn't responded for a long time, I'm putting in humor messages into it. We're driving them back to an article. So for example, if the seller says, hey, I'm going to be fixing the house ourselves, we're driving them to an article that talks about the five top rehab items, the best bang for your buck.

And that has its own purpose for authority building, making us the experts in that field.

Seth: Can you give me an example? What is one of these humor messages? What are you talking about when you say that?

Paul: We'll send a text message out. We have different variations of all kinds of that. I'll say, hey, we haven't spoken in a while. “Press one if you've been swallowed by a gator. Press two if you actually did reach out to sell your property. Press three if you actually want me to be eaten by a gator. And this was all a mistake. You never wanted to sell your house.” That produces a lot of LOLs, but it's at least a response back, right?

So driving a response back to start that communication. Because that's the bottom line of follow-up is we want to move them. We want to start a conversation again, move them along the pipeline. If they haven't booked a call with us, that's the next step. We want to move them in our pipeline.

Seth: You brought up OmniDrip. What is OmniDrip?

Paul: Yeah, it's a brand I created by leveraging everything, all this copywriting experience I just talked about, and helping investors with it.

So what can a copywriter do with investors? People think it's writing your letter, your direct mail, which is all fine. But for me, the highest use and the best value I can bring for an investor, the ones actually doing lots of volume, is boosting their follow-up marketing.

So that all the leads that they're getting now, because they're only going to convert, you know, maybe 10% or less of those leads that come in (10% would actually be really good organization, if you can do that, I'm talking about single-family). And making sure that we are increasing that by having better follow-up long-term, better SMS, better email, better tasks, voicemail scripts, better articles, all following the seller or the lead, I should say. To either find out if it was all a mistake, that's always a good goal, right? If the lead was actually not selling one or moving out of our system.

Or two, when they're finally all ready, because this happens a lot, they ghost you, they're ignoring you. They actually are a lead. They actually are a really net quality lead. They're actually going to sell at one point. It's just that life gets in the way. There's more priorities.

Seth: Yeah. So when you say help with follow-up, so does that mean just writing the copy for them? Or is this like a CRM system that manages the follow-up? Or is it like the initial outreach? Is it that too? Like what specifically does OmniDrip do?

Paul: Yeah. So that's a good question. I don't sell a CRM and I purposely do that. I'm not planning on ever selling a CRM. We utilize whatever CRM the investor uses, you know, so they don't have to switch a CRM. That's a pain. Switching a CRM is a pain.

So we utilize whatever you have. Most CRMs have automations already, meaning like you can activate a sequence for a lead and then, and it sends out a sequence of emails, SMS, et cetera.

And so we plug, I have content already. We have hundreds and hundreds of variations of it for different types of investors. And we make it so it's semi-custom. We plug them into the CRM for a single family investor.

Right now, it's like 24 sequences for land flippers. It's cut in half or less.

Seth: Is this email? Because usually when I think of copywriting, that's kind of the default that I go to. But it sounds like this is like direct mail. This is texting. What communication mediums are being used here?

Paul: Everything. Because if you narrow down to one communication medium, you're really minimizing the pool of what you can do because people are going to unsubscribe. You're going to hit reply to stop. And then if you're only utilizing one way of communication, you've just eliminated any communication from that lead.

Seth: If somebody comes to you off the street, what would be the top three you would recommend?

Paul: Top three sequences?

Seth: The top three communication mediums. Is it like direct mail, texting, and something else? Or what would you need?

Paul: Okay, I say manual tasks to call, right? We still need to make those calls. So that'd be one. Two would be SMS and three would be mail as well. So follow-up mail.

So follow-up mail is what we add in, which is very different from the typical mail.

If somebody comes into my world and they know who I am, they opted in, they want a cash offer, whatever it is. And they already know me somewhat that we've already kind of spoken, or they went through my portal or my website. So it makes no sense for me to send out a letter that says, Hey, I want to buy your house. Makes more sense for me to send out, for example, a greeting card that says, Hey, I appreciate you trusting us and taking the next step.

Or if they said no to my offer, it makes sense for me to send out a greeting card that says, Hey, we understand that our offer doesn't work for you, but we're here if anything changes.

So that type of mail that goes out, if we haven't heard from them and they fill out a form and it's been 30 days and no response, I send out like a pattern disruptive type of postcard, like a dog. And it says, Hey, what in the world just happened? Get them to read it and says, hey, you fill out a form from our website here. Just want to make sure that you actually have the intention to sell? Let's connect again. We have your cash offer waiting.

Seth: You're saying that you recommend people start with a cold call, right? Cold call first, have some kind of conversation.

Paul: The cadence, you're asking about like, what's the cadence of all this?

Seth: Like, what's the order?

Paul: It depends on the sequence. I mean, okay, this is for people who have already inquired, right? So this is the big opportunity. You know, everyone's focused on lead gen, which is hugely important. Everybody needs those leads. But a lot of people who've been doing this for a little while who already have that lead generation in place, they know how to do it.

The next opportunity to optimize their business is actually the leads that are already in their CRM. The leads who have already said yes to them at one point, but they sell with someone else.

Seth: When you say yes, does that just mean responding in some way?

Paul: You sent a mailer out, they called back, they said they'd like to get an offer, right? You sent out a mailer saying, you know, I'd like to buy your property. They called back about that. And then that lead disappears. It happens all the time. That lead falls through the cracks. Maybe you got them an offer and then that falls through the cracks.

So there's all kinds of breaking points in your pipeline after a lead comes in.

Seth: And correct me if I'm wrong, but... So it sounds like when people come to you, they already have a big list of people that have already responded in some way. You just help them squeeze more value out of those people, essentially?

Paul: Yeah, exactly. It's not so much about cold outreach. We focus on the leads that they already have, and we focus on their continuous stream of leads that are coming in. If they're going to continue doing business, they're going to continue having leads come in and optimizing those leads to make sure we're squeezing as much as we can from it.

Because most investors operate in a very low conversion rate. Their KPIs are really low because they're only focusing on the leads that you needed to sell yesterday. Their hair is on fire and they forget the ones that are still on the fence. They don't seem to have any intention right now, but they actually do have, they're going to sell. It's just a matter of time. It's a matter of fixing whatever things they have going on and they're just ignoring your text, which has nothing to do with you.

And then they end up selling with someone else just because they forgot who you are. They're going to forget who you are if you're not following up intentionally and building your credibility and your brand with them.

Seth: So what does a good follow-up sequence look like? How many times are we following up? What are we seeing? How are we communicating with them? What order? And at what point do you stop? At what point is like, okay, I've kicked this thing enough and it's not going to work.

Paul: Yeah, that's really a question. And so, we're always improving to see what works. And it's hard to say it in audio right now, instead of having a visual infographic. But whenever it's ours, I have this infographic of an actual pipeline. That's what I used to do as I weld. And so there's all these little gates. There's about three or four gates that you have to open that a lead flows through until you finally have a deal closed.

So when a lead comes into your system, you send out a mailer. They said, oh yeah, we're interested in selling our property. You gave them a cold call and they said, oh yeah, actually we're selling our property.

That lead is now in your pipeline. Now there's all these steps along the way.

So I would say that our first sequence that we have is when a lead is fresh, they enter into the top of funnel. They said yes right away means they have a hot inquiry to move along with you, but for some reason they're not responding. That happens a lot. Actually people who buy leads from other vendors or PPC leads, even SEO leads. Those are a little less often.

Seth: Just gonna stop you there. So you said they said yes, but they're not responding. So how did they say yes? Does it mean they did respond?

Paul: They did respond, but then the communication stops.

Seth: Okay. So they responded one time in some way. Maybe they didn't say, yes, I want to sell, but they said something, but then they are not continuing to respond after the second contact?

Paul: Yeah. It happens a lot with single-family businesses. So they see an ad about selling your house. They fill out the form. So that's the initial inquiry. That's the saying, yes, I'm interested.

And then communication stops. Like you're trying to call them back. They're not answering. You're sending them text, manual text, hey, let's get an appointment so we can talk about your property so we can get you an offer. Communication stops.

So going back to my pipeline, that is the first opportunity then. That's the first opportunity we can optimize those types of leads.

So with those, I'm highly aggressive, meaning I probably have like three or four auto text messages that go on the first day, a task to call, two emails that are sent on the first day alone and a mailer that's on the first day alone. Because the whole idea is to we need to get them back on the phone with us. We want to move them now into the next stage of our pipeline, which is the appointment.

Seth: Yeah. So in that situation, when somebody has said yes once, but then they're unresponsive, it sounds like the most effective way to break through that and actually start the conversation again is just to hammer them from every angle until something happens. And how often does that still not work?

Paul: So that particular sequence right there only lasts for about 30 days. So most of the time they get in contact probably midway or before that, actually,

Seth: Did you say three days or 30 days?

Paul: 30 days.

Let me clarify. It's not 30 days of every day we're sending them. Different steps. It tapers out. So it's hammer on first, then we start tapering like maybe three days, then five days, and 15 days. So it's about 30 days long with that sequence.

And then there's a task that gets sent out to whoever is, you know, the lead manager, whoever owns the lead to go ahead and put them in a different sequence. That's a lot less aggressive. And it's about a year long. Maybe it starts off a 15-day follow-up, and then tapers out to 30 days, maybe even 45 days towards the end of the year.

So that would be the cadence of it. Early on in the funnel, yeah, we're hammering hard. And you have to hammer with some intention of bringing value. It’s not just sending three messages in one day asking, “Are you still interested in selling?”

Again, I'm going back to that, because that's what I see often, that stuff gets ignored. If they're not in the moment right now, if they haven't prioritized selling their house, that stuff gets ignored. And then it also gets unsubscribed. And so you're creating a bigger chance of getting unsubscribed and stopping that communication from them.

So again, the intention is still hammering, but we still do it with value because we want to get them back on the phone. If we got an offer from them and they again ghost you, you put them in a different sequence that's maybe less aggressive like that because they moved down our pipeline.

Does that make sense?

Seth: I think so. But I guess a couple of things I'm wondering, And first thing is, do you have any kind of measurable, quantifiable way to tell when we do this stuff with OmniDrip, the result is this, we get this many deals. When we don't, when it's just that one and done, then we get this many deals.

Like how much of a difference does this make to go through all this stuff to keep trying to get ahold of these people?

Paul: Yeah. So I have anecdotal, not quantifiable, like stats. And if I told you, I'd probably be lying because nobody has enough stats to give you a true figure.

But when my clients do implement this, I mean, I have a review on my website. He's a single-family house flipper wholesaler. And he said it's added a hundred thousand to his bottom line. He's doing at least a deal, two deals per month.

I have other people that give actual measurements of, Hey, this is added X amount.

So I don't have like, if you do this, it's going to increase it by X percentage because the truth is that's really hard to measure with the CRM.

I've reached out to clients after we plugged everything in, ask them, Hey, how are things going? I want to make sure things are working. If it's not working, then I’ll try to fix it.

I've had clients say, you know, I haven't really noticed anything yet.

And I dive into their CRM and then say, we'll go into deals closed, see their inventory of deals closed. I'll dive into it and say, Hey, this was actually in a drip sequence. I see the activity here.

They responded after that. And it looks like you closed the deal two weeks later. And they're like, Oh yeah, that's right.

When you have a system like this, you tend to forget where the source came from. So that's another layer of complexity of measuring this stuff.

Seth: I will say, like you said, there's no way to really know what might've been because it's just, you just can't know that, but I'm pretty sure it makes a massive difference just by my own experience.

Something that I am pretty bad at is, uh, I don't like to annoy people. Like I don't like doing email campaigns to people saying basically the exact same thing seven times over again. I don't want to be a pain. I don't want people to unsubscribe, all this stuff.

But there have been a handful of experiences in my years of blogging where I've been pushed pretty hard by people to promote their thing. For example, you know, whenever I attend a conference, certain conferences, the person that runs that conference wants me to send out emails to my audience, tell them to show up there to meet me and hang out at the conference. And my default would be to send out one email and that's it. And if they don't come, they don't come.

But I'm being pushed to send out seven emails like once a month over the next five months or whatever it is. And I'll tell you, every single time, there is somebody who, not somebody, several people that respond, like the second email who didn't respond to the first one, and then the third one that didn't respond to the second one, and then fourth and fifth. Every single one gets results.

Whereas if I just did one, I would be losing a ton. So I'm sure this follow-up makes a big difference.

Paul: This is not theory. This goes across all industries where you're doing a lot of marketing on the front end and the back end.

And so going back to what I said, I've done about 2,000 email blasts. So that comes out to an email blast a day for five and a half years. For other companies, for myself, the more emails I send out for some kind of promotion, for example, the more money we make. That I know for a fact.And that's my peers who have sent out more emails than me, who are more involved with email copywriting than I am. They say the same exact thing. You still have to be a little more intentional about what you say. The stronger the relationship you have with that audience, the more money you're going to make and the more it's welcomed to send out more.

I haven't talked about this, but this is warm marketing. We have to think there's a lot of things that get mixed up when you're talking about cold lead generation versus warm conversion, warm communication with somebody you already know.

Very different rules, cold marketing and lead generation. Investors get this all mixed up and that's a whole different ballpark.

We're talking about converting people who already know you. There's this old ad guy named Leo Burnett, ad guy in the fifties. And he coined this term called “friendly familiarity.” And that's where that is the component element that really sells. It's not so much like, oh, this headline pulled you in, all of a sudden you wanted to buy. Most people are skeptical.

In direct response marketing, the guys that make a lot of money selling financial newsletters, they make a lot of money on the small percentage of the population who are called hyper buyers or hyper clickers, whatever you want. The people who are just like, oh my God, that sounds amazing when you buy it right now and they buy it and they don't ever use the product.

That only encompasses 5% of the population. The rest of the market, they're very much more skeptical and very much slower to make a decision. So the people who capitalize on that by creating a relationship in the long run come out a lot further.

Seth: So friendly familiarity. I mean, that sounds like a big deal to grasp what that means. Does that just mean like building rapport with them over time through your writing or something? Or what is that?

Paul: Yeah. Leo Burnett actually put this in analogy. You think about the insurance salesperson who sells insurance and this is in the fifties. So you see him on the bus every day. You know who he is. You know, he sells insurance. He's told you before. He's kind of pitched you before that, but every day you see him on the bus. Maybe he tells a story. Maybe you just shoot the hay with about different things going on in life.

Then when that person, something happens in that person's life that then says, you know, see somebody die in the family and the family doesn't have any way of ensuring that, decides I better call whatever his name is that I see every day.

That is an example of friendly familiarity, always showing up, and just showing up with value too. That is like the key to long-term email marketing with your warm list, not cold email lead generation, which I've done, different story. People show up to your show because they know who you are. You're the friendly familiarity. You're consistent in showing up.

People like consistency. So I've been on cash buyers lists that wholesalers reach out to. Hey, can I put you on my cash buyers? Sure. That's fine. Never hear from that person ever. Three months later, I get an email. I don't even know who the person is. Three months later, it's like, I have a deal here. I have no idea who this person is.

If I don't know the person who shows up in my email inbox, I tend to hit spam because I think it's a cold outreach. So I hit spam every single time. I'm not the only person that does that.

Anyone who's growing a buyer's list, don't only show up even days later. Show up immediately in their inbox because the meetup, the meeting is fresh in their mind. And so you want to continue that as time goes by. People buy things or end up selling things to people they trust and they like.

Like, trust is one of the biggest factors in actually moving a transaction down the line.

Seth: Do you know who James Clear is?

Paul: I've seen his content, but I don't know much about what he does.

Seth: Yeah, he wrote the book Atomic Habits, and it's been like a huge bestseller. I don't know how many millions of copies it's sold.

He's got this newsletter. It's kind of funny. Like, I get tons of different newsletters, some of which I've signed up for, some of which I haven't. There are certain ones that I just instinctively, I literally don't even see what they say. They just get deleted.

And James Clear is one that, I don't always read it, but I never delete them because when I see them, they're really clear and simple and to the point. It's not like a wall of text. There's actually not much text at all. It's just like a handful of valuable things and it's always really good stuff.

And it seems like that's kind of what we ought to be going for, right?

Paul: It depends on the market. I'm not going to say that the short form is better than long form.

The most successful email copywriter I know, he sells courses. He sells in the copywriting space and niche. There's different markets, different niches. Real estate investing is a whole other niche. And within it, you have land investing. And so you have all these hot people who are looking for more information.

Well, copywriting is one of them. It's a whole other world where you have people just diving into copywriting.

And so the most successful person I know in that niche who does very well, he uses very long form, very story-driven emails, and he sells really well doing it. Story-driven emails about him. “Hey, I was sitting at the bus stop one day…” I mean, they're, they're entertaining and it's not just a story for the sake of a story. Sometimes it is, but he's one of the most well-known. His name is Dan Kennedy. You could look him up is you'll see his email. There's long stories. Companies, copywriters eat it up because they want to learn how to do what he does.

So it depends on the market. And if I'm selling to CEOs who have very little time, I might be more brief, more to the point. Ben Settle is one of them. Ben Settle is one of these that sells to business owners. His stuff is very short to the point. They're not long drawn out and some of them are.

The point of it is, at the end of the day, what I'm looking for every email I send out is did I increase or decrease a relationship with my list? Most people are looking at what's my open rates and what's my clicks. That has seen absolutely no correlation with revenue, with more opens equals more clicks equals more revenue. I've never seen that. And my peers will say the same exact thing.

Seth: So if that stuff doesn't matter, then how do you know if you've deepened your relationship with your audience?

Paul: That's really a question. And that comes from revenue, right? Revenue is the number one metric, but also the engagement you're getting. You're still getting replies back. You're getting replies back from people. The metric that I watch, most people don't watch this, but I watch email revenue per contact.

So if I'm writing for a software company, for example, and they're trying, they have the same goals of mine, create a relationship with that list, be a personality-driven brand rather than just a box brand that nobody cares about. We're going to drive that principle in. And then we're going to look at what's our email list, how much revenue is attributed to that email list. We want to look at that every single month and see if it's sustaining, if it's growing, et cetera.

So that's probably the number one KPI I'll be looking at.

Seth: I guess in order to use that as a measurement stick, that means each email needs to have some kind of a revenue generating objective to it, right?

Paul: Yeah. That's a good question. I don't look at per email because, and here's why. The common idea is like, oh, let's take the best performing email and throw it into our drip sequence. Okay.

I've done that plenty of times, you know, recycle it back, we get the best one, I've done multiple metrics, open rates, clicks, and revenue, put it back into it and recycle it, send it months later.

I've seen it where it did okay, it did the same, and I've seen it a lot of times where it actually was the worst performing one.

So here's a really great way to see what your relationship is with your list is to start split-testing subject lines. Put a really bad subject line in, put a really good subject line that you think would do great, and then you experiment with all this.

If you see not much difference between the two when it comes to opens, that means people are opening your email because of who you are, because of the sender name, rather than the line. If you're getting a huge fluctuation of people opening because of the really sexy direct response type of subject line, it means you have more people opening because of the subject line rather than the sender name.

And that's the objective. I want people to open because they see that name come in. You know, here's a really good example that ties into SMS marketing.

I'm a subscriber to J. Peterman catalog. They sell clothing, high-end clothing. And I get a message every single day from them. A lot of times I'm not into buying clothing. I'm not even into it, but I'm still on their list and I still open it up just to check out what they have. And what they sell, it's usually a new offer about some type of new jacket, some kind of bomber jacket, whatever.

I'm still on their list, even though I get hammered every single day by them. And they're wildly successful in this industry of selling clothing. And so they know what they're doing. They're sending it every single day. Without skipping a beat.

Seth: What is it they're saying that's keeping you from saying stop?

Paul: Because the idea in the back of my head is like, you know, one day I want to buy something from them. One day I will. So I'm going to keep them on because they're always sending value in the form of an offer and a new jacket, whatever it is.

It's not like I go and open up each one. I'm not like, I see it, sometimes I don't open it. Most of the time I don't open it. I still allow it because they've built that trust. Again, going back to trust. They built that trust with me that I still want to keep there in the loop to make sure I don't miss out on anything.

So tying it all back, it's all about the trust and relationship you have with your list.

Seth: It sounds like we're talking about newsletter-ish stuff, which I think is pretty relevant. Earlier in our conversation, you were talking about selling properties and getting people to be interested in the properties you're selling.

And again, correct me if I'm wrong, but that's kind of when this newsletter-type thing makes sense. And I guess you'd have to have a lot of properties in your inventory continually to justify all the work it takes to keep entertaining people and all this stuff.

But when we're talking about the acquisition side of things, where OmniDrip comes in, do you say, OK, Seth, we're going to take all your existing leads who have responded to you and we're going to start saying this specific message to this person on this day through this medium. The next day, we're going to say this thing through this medium.

Like, is that kind of what you do? Like, say exactly what to say and through what means we say it?

Paul: Yeah. After a client is done with us and on a drip.

So here's the before. Before, they might have maybe two or three drips. They kind of use it. The whole operation is, yeah, a lead comes in and I'll set a manual task to call. If they don't answer, I'll set another manual task. If they don't answer, I'll set another manual task.

So that is the “system” of follow-up. After we're done with them, they're going to have 20 different sequences.

So let's put this in a scenario. Now, after they're done with this, with us, a lead comes into their system. It's a landlord lead. They got done talking with them. He's interested in selling this property. He's got tenants in place. You give them an offer and then all of a sudden communication stops.

So what do you do with that? Before, they would just… most people would just call it dead after three or four or five manual tasks, or you can drop them into one of the sequences, which in this case would be the offer to low landlord sequence, drop them into that, let it work in the background for you. It's just going to send out the text messages automatically. If your CRM does that, it's going to send out the emails automatically. It's going to send out tasks for you to call back. It's not going to be every day.

This sequence right here I'm talking about is not an everyday sequence, far from it. It's going to send out emails that drive it to an article, SMS to drive you to an article. It might send a couple of direct mail pieces, not a whole lot, one or two. It's going to send you a task for a Loom video to send a personal Loom video to this person.

It's no different than a text message. You'll get a task notification that says, hey, follow up with this lead, send them a Loom video. Here's how to do it. Here's what you should say. It's a landlord lead. That lead now, whatever happened, we want to get them back on the phone to either text reply, Hey, I actually sold my house already.

That's a good thing. Get them off your list. You don't need them on your list anymore. If they sold it already.

Seth: When you talk about, “it's going to send all this stuff automatically,” and so that makes me think there's a CRM involved that's actually executing this stuff for you. But you said you don't work with a specific one, like you just work with whatever they have.

So are you like setting this up for them? Or are you saying, here, Seth, take this stuff, you set it up. This is what you're going to do.

Paul: No, we set it up in their CRM because a lot of investors don't quite understand how to set these things up. So I don't just give it to them.

And plus, they see more value in us doing it for them. If I just handed somebody, here's the templates. Well, for one, it's not made to their business because if a client comes in, I want to make sure if they do face-to-face appointments, we make sure that the messaging matches that. We don't want to send something that sounds like you're a 100% virtual investor. Hey, let's get on the phone to get details.

If you'd rather do face-to-face, we want to make sure everything matches to your business. So we put your URLs in place. We create articles for you, put it on your website.

Yeah, so if we hand out a template to people, they're never going to do it. And so I'm interested in getting people results at the end of the day. So we want to make sure that everything is in properly, that they're using it, they understand how to use it.

And because I've done the template thing and nobody ever really… Like you get back to them like, oh, you know, I don't know if it's working.

I don't know. Did you install it all? I installed about half of it.

I'll tell you the amount of content we input into their CRM, I've done it before. I have a team that does it. It's taken me like 8 to 10 hours to input into the CRM. So if I just hand them that template, they're going to be overwhelmed and they're just not going to do it.

Seth: Yeah. I think I heard you say somewhere that it's shown that it takes over 70 touches to convert those long-term leads.

When I hear this, it almost melts my brain because I don't want to follow up 70 times. That just sounds terrible. But the way that you do this is it happens automatically, right? And then does it stop after 80 times or something? Or when do you call it quits?

Paul: So to go back to that, to give some context to that, I know that from diving into clients, CRMs, and some CRMs, not a whole lot do this, but they'll tell you like, what's the average amount of touches it took before this person turned into a deal, right? They'll tell you that.

I keep seeing 70. I saw 180 there a day with a deal, 180 touches.

Now, that's total touches. That means they came into your CRM, they opted in, they filled out your form or they called in, and then you're just manual tasks, your call attempts, voicemails left. After they get in contact, transaction coordinators talking with them. So that takes into account too.

I'm seeing that number, these high numbers of 60, 70, 180 touches on average to see for these deals to convert. So what does that look like in the whole big picture? That's not like manual tasks. That's not you picking up the phone and making 180 calls. That is a combination. The manual, final calls are probably a small, probably a quarter of that or less. The rest of it are emails and SMS.

Okay, I'm going to tie this back. Going back, it's about friendly familiarity again, right? So I am trying to get touches in place. So I'm breaking these tactics down to the very minute detail, meaning if I send out a task for you, Seth, to call somebody to follow up with them, my task is going to tell you, call that lead. If the lead doesn't answer, leave this voicemail and I give you the whole framework on what to say.

And that task will then say, manually text them and paste this, then send this text their way after you leave the voicemail. And that text usually says, “Hey, I just called you about our offer. Do I have the wrong property?” So that's three touches.

So in reality, that's three touches, friendly familiarity. They're getting the missed call notification, the voicemail notification. If they have voicemail set up, they're getting the text, the manual text. And driving them also to an article on the website, that's a fourth touch. And if you want to get geeky about it, if you have a pixel set up now, you have ads being put in front of now, you're getting more touches.

So the point of this, again, is driving back home to this friendly familiarity, getting that and awareness up.

Seth: I don't know how much you track this, but when a lead is finally converted into a deal and closed, is there any common denominator you notice that's making that happen? Like, was it because the investor used a certain marketing medium, said a certain thing, offered a higher price or something else?

Like, what buttons should a person be pushing to increase their chances of closing?

Paul: That's a question I don't have an answer to because every investor I come across operates in a different way. They run a team of acquisition managers, or it's just the solo, like he's the owner and he might have a lead manager or an assistant, but he runs the appointments. And so he has a wildly better conversion rate than the other guys.

And they all use sequences differently. Not wildly differently, but I know an investor who loves how aggressive our form-filled sequences are. That's what I was describing to you, where it's like seven touches in the first day. He's using that even for leads that aren't even in that part of the stage yet. Maybe it's a lead that he gave an offer, but they dropped out of nowhere.He'll plug into that one. He loves doing it. He gets a response out of it.

And a lot of them have different lead sources. That plays a big role because your cold calling lead is far different from a guy who throws out a form. So that one calling the lead takes far longer to convert versus a PPC lead.

Seth: Yeah. So when it comes to something like texting or email, when somebody can say stop or unsubscribe and basically just kill that line of communication, what are some examples of things you say that actually get people to react and respond the right way without saying stop?

Or maybe another way to say that is, when people do say stop or unsubscribe, are there any common themes in terms of like, what was said in that email or text when they did that? What are the things that are making people opt out versus stay on the line with you?

Paul: In a 10,000-foot view of everything, because that's hard to measure. Again, because I don't really look at unsubscribes. I have a peer that looks more at this. And he actually says, he says this, the more opt-outs I get, the more money I make on a promo. So the more emails you send, yeah, the more opt-outs you're going to get.

Seth: Is that person in real estate or some other business?

Paul: Another business.

Seth: Okay. So that's one thing just to be aware of. I mean, it's could be a different type of recipient.

Paul: Yeah. Obviously different personality, different industry, different product.

But it's not like I, with real estate investors, we don't plug in daily emails in that way. Like a daily email might come in the first three days. And then after that, it tapers, there are emails like, you know, in a year span, that person's lead is probably getting 11 emails. So it's not a whole lot. So we're not sending a whole plethora of emails like that.

I don't have anything in real estate. I don't have anything to say as far as what is the good number. But I think a lot of people are scared of the unsubscribes. So that's why they tone down the frequency.

When I say everything I've seen outside of real estate, inside of real estate, everything I've seen is the more we send, the better outcome you have.

Seth: Yeah. So I guess your big discovery is like opt-outs and unsubscribes are not something we should be afraid of. Almost like lean into that. Say what you're going to say. If people want to leave, they'll leave. Don't worry about it. Is that your thought?

Paul: Yeah, absolutely. Because, again, we're plugging in multiple mediums, right? So if we do get unsubscribed, which is a natural part of all this marketing, it's not a bad thing to have unsubscribed. They come back later. We see they come back later anyway, right?

So they're not ready yet. They're still searching for a solution later down the road. And they fill out another form if you stop consistent marketing, right? And they come back later back into your SMS list.

But yeah, I'm not afraid of unsubscribes. Unless it's a huge, this is a caveat to that, understand what is an exorbitant amount, huge amount for unsubscribes rate. So in email, I'm looking at like half percent. So are we under half percent? Okay, we're at a healthy unsubscribe rate.

If you're getting 2%, 3% unsubscribe rate on email, don't remember what the SMS one is (SMS is higher than email; it's natural to get a higher unsubscribe rate in SMS than it is in email). But if I'm getting a huge amount, you're doing something wrong, either lead quality is completely off or (maybe this, I've seen this happen with people) merge fields are broken. So the dynamic fields, like you send out some emails, and it’s supposed to say, “Hey, John,” but instead it says, “Hey, first name.”

And so, all the merge fields are broken. And so people are like, yeah, this is garbage, and they unsubscribe.

So that's typically when you have a high unsubscribe rate, there's something technically wrong or wrong with your lead source.

Seth: Yep. Sometimes I like to ask questions like what I'm about to ask. It's kind of a ridiculous question. I know it's going to be hard for you to answer, but I just ask it anyway, just to get your thoughts on it.

So I know you said you recommend multiple different communication mediums like texting and email and calls and mail and all this stuff. So if a land investor could only use one marketing medium, they're not allowed anything else. What would you recommend?

Paul: I would say calls. Still continue to call because now you're eliminating automation. Now you're eliminating everything I do, which is fine.

I'm not going to say and hide behind, oh, email is the best way. I don't think so. Email works for real estate investors. Email works because it's an added layer with SMS. I recommend email last (this is for acquisitions, by the way), because you don't get a whole lot of replies back.

And that's a mistake I hear people say like, well, I don't get a whole lot of replies back from email, so I'm going to eliminate it. It's a terrible reason to eliminate a medium because marketing is not isolated from one another. It's not like they only see your SMS and your email is a completely different world.

No, everything connects with each other. They just read your email about some kind of scam going on in the market today. They relate that, again, friendly familiarity. They're relating that back to you and your brand. They see your text messages. They're going to respond to their most comfortable medium, which is usually text messages.

But it still adds to the story. It still leverages problems and pains. It still brings up your brand.

So going back, though, if you had no no other means of doing it, I'd say call.

Seth: And when you say that, are you thinking like hire a cold calling agency to reach out to people or just do this follow-up? Or are you thinking like, no, you Seth, you do the call.

Paul: So you're talking about cold lead generation. Again, so we want to mix the two.

Now cold lead generation is different. If I'm talking about warm follow-up, like actually following up with the person who came in already, who said yes to you already, calling would be the number one, I'd say. That's why I still keep calls in my automation.

Seth: With that in mind, again, is that me personally calling or is it like you can hire a cold calling or I'm sorry, just a calling agency to do it?

Paul: Yeah, either one. You, as a business owner, typically have a higher conversion rate than somebody who you hire. That's across the board; I've seen it in other organizations I've worked in.

It doesn't matter. It doesn't matter if it's you or somebody else, but calling is probably the better means. Because the SMS you have, again, going back to the unsubscribe, the SMS is going to have a chance of getting unsubscribed. Same with email. mail. Once that stops, it stops.

But calling is a little different. Until they call back, tell you to get me off your list. But then we want that call back. Then that creates a conversation point with them. We're getting face-to-face with them.

Seth: It's interesting how you're saying it doesn't matter. Because I know, I mean, maybe it depends on the quality of whatever agency you hire, whoever the person is doing it. Because I've heard some recorded calls that are just awful. I mean, it still works because there's not many other people doing it, but it's still not good as opposed to like, if I'm doing it and I care and I have better communication like that, that makes a huge difference.

Is it more about following the right script then in that case?

Paul: Yeah, I said that assuming that the other person doing it is doing a somewhat decent enough job, right? That's assuming that, right? And that rule goes into play for anything. If you have somebody who builds out drip sequences and emails, they don't know what they're doing. They're going to do a far less job if you're just going to do it yourself. So that goes to anything.

But assuming that calling, if you're going to use somebody else, obviously hire somebody. I mean, I hire somebody that knows what they're doing and you've vetted them, et cetera. So yeah, I think that goes without saying.

Seth: And if somebody could use two marketing mediums for follow-up specifically, would it be calling and what else?

Paul: Call and text message. If you're going to use auto text message just to use text message. Yeah.

That's the higher responsive medium that does get more responsive than any other medium. It doesn't mean you shouldn't use the others because it's cheap to send an email. It doesn't take any extra effort except building it up front to send that auto email.

But if you only had two, I'd say call and text message and do a cadence of either one. Calling, text message, calling, text message, a kind of repeated cadence like that.

Seth: So it sounds like texting gets more responses, but calling is more effective at actually closing deals?

Paul: Well, I mean, closing a deal means you're getting on the phone with them over the year. I mean, unless you're assuming closing it via 100% virtual, you're not even talking with them?

Seth: It happens less frequently, but it can happen. I've had that before.

Paul: Yeah, I've had that in land, especially. Funny enough, I had that happen more often with email than any other, like than text, for example.

But I mean, you get contracts in the mail too. So that's mail, I guess. That's the contactless medium. Mail can be one of them too, right? That was my mode of operation: just get the contracts in the mailbox. I've never talked to him at all. Then send him an email about the whole process, right? Send him a check.

And so it's kind of hard to say which one is best. Obviously, we just went through like each scenario is different, right? So some people might take that out of context where I just said, and then say, oh, that means for lead generation, cold calling is best. And then text messages.

Not necessarily. I mean, I didn't do that when I started in land, I was just sending mail out and I'd have a pretty high conversion rate on contracts.

Seth: Well, it's kind of interesting. Even when we started this conversation, I was kind of coming into this with certain assumptions, and I think you were too.

And it's important for people to recognize that because I think for land investors, this is definitely changing, but historically over the past 10-plus years, there used to be literally zero follow-up. People just didn't do it. You send one letter and that's it. You move on.

And we're in this world now where follow-up is way more important now and can be much more effective. And a lot of these things we're talking about are like my questions are framed in the context of almost like cold outreach. But that's not what you're talking about. You're talking about, no, these people have already responded in some way.

And that's just a different conversation when you already have some kind of connection with somebody versus not.

Paul: It's optimizing a different part of your business. All businesses, if you look at just the factory, you're putting them down a conveyor belt. I'm just talking about one part of that and optimizing that part. And there are other parts to optimize. One is lead generation. The other, selling the property. That's another part to optimize.

So yeah, it's just a different mode. I mean, depending on where you're at in your stage. Like you said, it's changed, right? From when I flipped land, I wasn't worried. And on the acquisition side of things, I wasn't worried about follow-up. Didn't really need to be. And if I was, I'd have too much property. I'd have a bottleneck in my conveyor belt, right? Which is a good problem to have, but it can be a really bad problem.

Seth: I did wonder about that whole conversation of following up more versus just doing more cold outreach to new people. I don't know if you have any cost comparisons on this, but like, what does it cost to implement this follow-up stuff versus, no, no, let's not do that.

Let's just keep reaching out to new people. Like what is more expensive, do you think?

Paul: That is a really good question. So, okay, I can relate this more to single-family because wholesalers and flippers have this problem more, right? It's land flipping.

Seth: The land is going that direction now. So it's a relevant thing to talk about.

Paul: So I'll say this. You're familiar with Dan Kennedy, right?

Seth: Oh, yeah, for sure.

Paul: Everybody knows Dan. He's not the only one that said this. He talks a lot about this in his newsletters, things like that.

And so in his books, people spend a huge amount of resources on the lead generation, and then they spend very little money on the follow-up, and that's the least expensive marketing avenue.

So this is a cost comparison. A lead, a call that comes in for a flipper, comes in, it's going to cost maybe $150, $180. Maybe on the high side, it's going to cost $300 per lead. So if you're buying leads from a vendor, those can cost $250, $300 a pop, okay? Very expensive lead.

So you can then, if you decide, I'm going to just do more lead generation, understand you are moving a lot of money into that front end to produce the same results or a slightly better result. While if you implement some sort of follow-up, especially if it's automated in a sense, let's take follow-up mail. The follow-up mail we implement, it'll probably cost you per lead an extra 10 bucks per month.

So maybe per lead, it costs you 10 bucks. So you're adding 10 bucks into that $310. It's fractional to follow up, especially if you have some automation in place right now. If you don't have automation in place, you have to hire somebody to do the follow-up for you. That adds on to your costs.

It's still not as much as buying that lead because we're all buying leads. We're doing, we're buying leads through your time, with your money. And that is a huge amount of resources to get that lead.

Seth: Yeah. And I'm wondering, if somebody responds, under what conditions would you say we should not follow up with this person? Like, is it only if they say, I hate you, don't ever talk to me again and then you don't do it? Or like, if it sounds like they're 90% on no, but there's just a tiny little piece that's like, well, maybe. How do you know when to disqualify them versus continuing to follow up?

Paul: I would say for me personally, I would do it until they unsubscribe, right? I'm going to say every lead that comes in is a viable lead until they say no. That's my modus operandi.

Seth: So like on the phone call side of things, if you're emailing them, texting them and calling them, if they unsubscribe from the email and the text, does that mean you shouldn't call them anymore? Or do they have to cuss you out on the phone and that's the unsubscribe?

Paul: Yeah. Most investors operate this way, which is fine. An SMS unsubscribe. That's one channel they didn't subscribe from. There's still the email. So different channels.

I'm not a lawyer. So like if an attorney tells you no, that no means from all channels. I don't know if that answers your question, but everyone's going to feel it differently. For me, it's a no from each channel.

Seth: Well, Paul, I appreciate your time. If people want to work with you or talk to you more about how this stuff works and pick your brain more, what's the best way to get ahold of you?

Paul: Yeah. They can go to my site, reiomniadrip.com and easily contact me there. There's no salespeople behind it. They can just reach out to me. They can call me at my phone number on my site as well.

Seth: Sweet. Yeah. I will include a link to that, along with a lot of other stuff we talked about here at retipster.com/186. That's the show notes for this episode.

Paul, thanks again. It's great to talk to you and hopefully we'll talk again soon.

Paul: Likewise, man. Appreciate it.

Seth: Hey everybody, how's it going? This is Seth Williams and Ajay Sharma, and you're listening to the REtipster podcast. This is episode 185.

Show notes for today can be found at retipster.com/185.

Today, we're interviewing two sisters who have built a thriving land business while one of them has been working from the other side of the world. These sister investors are truly opposites, and that's part of the secret to their optimized approach to doing big deals with a very lean operation.

One of these sisters is the life of the party. The other is a super nerd.

One of them is dyslexic. The other prefers books to people.

One of them lives in Denver. The other one lives in the Philippines.

One is a night owl who thrives in chaos. The other is an early bird with time blocks and meal plans.

And if you've hung out in any of the land Facebook groups, you might recognize the name Mary Ann Danielson and think that it's one person, but it's actually two people working as a single online presence. And together, they work their land business 24 hours a day.

So Mary and Ann, welcome to the show. How are you doing?

Ann: Doing well. Thank you, Seth. Yeah, we're the 7-Eleven.

Seth: So I'm going to make a guess here and guess which one of you is the outgoing one, which one of you is the introverted one. Ann, are you the extrovert? And Mary, are you the introvert? I had that right?

No? Seriously? So I got it totally wrong then, huh?

Mary: It's the glasses and because I'm frustrated right now, right?

Seth: No, no, not at all. Okay, I stand corrected then.

Ann: Mary has all the people skills and she's the one that you want to invite to the party.

Seth: Okay. Well, why don't I just start from the very beginning, the way we usually do with these land investor interviews.

How did land investing come into your lives? How did this come into your world and what made you decide to give it a shot?

Ann: As you just mentioned, I'm in the Philippines. I'm the one in the Philippines, Ann. And we had a very, very severe lockdown. And it was so severe that just one person was allowed to leave the house at a time for outdoor exercise. And you could walk on the block immediately in front of your house. And there were actually guards on either side that would send you back if you went too far.

So as someone who likes to exercise, that was driving me crazy. And I was just walking back and back, back and forth, back and forth on my street and consuming a million podcasts. At that time, they were all about real estate and single-family pretty much, because that's something I'm familiar with from before.

And then like all of us, we end up in some rabbit hole that leads from one podcast to another and then a guest that leads you to another. And then that's when I heard about land investing. And then, as soon as I heard it, I could click back to our childhood in our family and think, yep, this is the fit for us.

So I pretty much was obsessed with it. And I had nothing else to do and nowhere to go. And so I consumed all I could. And then as soon as I thought, yep, this can work, I presented the idea to Mary and just said, I think we should do this, right? Or should we do this? Or I like this idea. What do you think? And she just said, okay.

Seth: Well, I'm curious, what made you become obsessed with this from the outside? Like, was there something about it that clicked in a way that other things hadn't in the past? Or was there some special quality about the land idea that stuck out to you?

Ann: Yeah. I mean, it was actually almost everything that stood out to me because I'm already a a landlord, we own a home. And so, like the whole tenants and termites and toilets, all of that is a major stress for us, especially being overseas when we, you know, wake up to go to the bathroom in the middle of the night and we get the text saying that, you know, they think that the pipes are frozen. It's just, you feel so helpless.

Mary: And then I get the text, can you call a plumber?

Ann: Exactly. And so that was a big thing for sure. And then, along with that, is just how much simpler the model is.

So again, working remotely, that I can do everything on my computer and then be able to talk to Mary in real time for her to navigate whatever phone calls need to be made. But really that it was just so simple.

And plus, we grew up with a family that really leaned on land in terms of we had a really middle-class, basic, happy, normal childhood. But really our family always knew that our land was there when we needed it. And so if we had a life event, a wedding, or college, my dad would selectively timber our land to pay for it because there was an extra.

And so I guess that probably also just was like a little bit of a glimmer there too. Like, oh yeah, this actually makes a lot of sense for us.

Seth: How much land did your father own?

Ann: It was 80 acres, right, Mare?

Mary: Yep. We had 80 acres and then he had some there.

Ann: Yeah. A little bit.

Seth: Was there some reason for that? Or like, why did he own land at all?

Ann: It had been in our family and handed down from his father.

I mean, to hear him talk about it, it was the most valuable asset in the world, right? And so, and he made us…

Mary: He could go hunting, but it was also valuable otherwise.

Ann: Yeah. And he made us walk it and work it. And so we always thought it was so valuable. And now, looking back, we realized that the roads that we took were logging roads, they were actually landlocked. It was a handshake easement from a neighbor, which was how we accessed it.

The reason that it had value, which he always told us too, was that there was a lot of silica sand underneath it. So when the time came, don't sell to any Tom, Dick, and Harry, you got to sell to the right people.

And he kind of had also educated us as a family too, to say, when I'm dead and gone, make sure that you get the right price for the land. So I'm sure that that was also a connection that both of us made for why we understood the value of land and the importance of knowing its true value.

Seth: Yeah. Random question. What's so special about silica sand? Is it useful for building roads or something? Or do you sell it to somebody who mines out of the ground?

Mary: We actually did sell it. The silica mine was actually right behind us and they had approached my dad for years about buying our land and he's like, nope, nope, nope. And then we knew he was close to selling it because they were reaching retirement and going to maybe relocate and buy some other land.

But to be honest, I don't really know what silica is used for.

Seth: Well, I guess I'll ask ChatGPT after this.

Mary: Yeah. Let us know.

Seth: Yeah. Cool. All right.

So the two of you work together. It sounds like you're both opposites in a lot of ways. So I'm assuming that's played to your advantage. Like, you're both able to maybe fill in where the other person isn't the strongest. Is that accurate? And if so, how have you delegated responsibilities? Who does what and why is it set up that way?

Ann: Yeah, actually from the very beginning, we started just with a Google Doc and then whatever the agenda item is a column running down the middle. And then the left is Mary and the right is Ann.

And then with that agenda item, who's doing what is yellow. And when you do it, you turn it green and then it's like a running record. So we always have the newest items at the top of that record. And if it's important, like do it before you go to bed, we use a fire emoji.

Seth: Okay. So for example, Mary, what do you do and why do you do it?

Mary: I take care of everything, obviously stateside. So county calls and call all of the sellers or potential sellers. I like to talk to people. I like to hear their story for the most part.

And Ann would definitely be more like, okay, do you want to sell it or not? Whereas I'm a little bit more patient and like, okay, how can we use this, whatever their story might be, to our advantage or to figure out how we might offer. Or I call them back and try to remember their story and build a relationship with them.

So I guess I like to build relationships. I like people a lot and Ann not so much. So she looks at the data.

What else do I do? I take care of the unfortunate tax stuff.

Seth: Unfortunate tax stuff being like a delinquent tax property or like when you have to pay property taxes?

Mary: Yeah, just setting up our own for our business, setting up our taxes and dealing with the bookkeeper, dealing with the CPA as best I can anyway.

And then, yeah, other than that, basically just all the calls, calling realtors, and a lot of the emailing because she doesn't have to actually talk to them. And she's just better at that. For me, I would be like one liner. If it came to email, I would one-line. If we're talking, I can talk all day.

So I guess that's where we're very opposite.

Seth: And then, Ann, what kind of stuff do you do beyond what Mary just mentioned? Anything in particular that you shine at doing this?

Ann: Well, I wouldn't say that I shine, but I'm in charge of anything that's data, research, online communication, anything that is like chats in terms of groups, or we have a very limited social profile.

I would say we don't engage that much. But when you do, it's usually me. Anything asynchronous that can be done outside of office hours and on a computer is my turf.

Seth: So, if one of you two were to disappear all of a sudden from this business, Like, do you think it would suffer a lot? Like, would it continue to operate, but just like be limping along? Or how would that work?

Ann: It would implode within 24 hours, I would say.

Seth: Really? Wow.

Mary: I mean, I can use zero data. I can figure it out, but it would take me a year and a half to get started again.

Seth: Yeah. It makes me think about a lot of people. I mean, really, most people don't necessarily have a partner in this. Like, it's just them and they got to figure all of it out. And inevitably, they're going to not be very good at everything.

And it just makes me wonder, like, I wonder if everybody out there were to find a partner, maybe that's what they ought to do to have somebody who's their opposite to shoulder that workload. I think I would have a hard time with that because I don't just trust anybody with that kind of thing. It sounds like you two have natural trust system built in.

Ann: And you know, it's funny that you say that, Seth, because just last week, Mary and I were saying, imagine if you were doing this alone, right?

Because there are so many forks in the road or decisions that you're up against that you think it could be this, but I could be a genius or I could be a fool. Are we heading down the right path here? And we can always ping ideas off of each other.

Even when we're looking at a property together, we spend one of our meetings every week is looking and reviewing our properties and the things that we spot in the way that we see things. I just can’t imagine not having Mary's set of eyes.

And I also, just for like the loneliness of it, I really appreciate that we can laugh our way through all the Larry's and the Cherry’s and the Gary's in that.

Mary: We always have a set of names that run together. But yeah, I agree. Like at the end of the day, I can be like, oh my God, you don't even know who I talked to today.

And if you don't have a partner, I mean, obviously a lot of people don't, but maybe find one because it does help to talk to somebody. Our husbands do not want to talk to us about it. They don't care who I talked to today or how funny the story is, no matter how funny it is. I guess to Ann and I, that's where we do come together. We have the same sense of humor.

So anyway, that part of it is great.

Ajay: There are some stories that need to be shared though, right?

We had a property just a few months ago. We were doing a double close. So we had this property under contract, buyer lined up, and we're pretty much ready to go. And we call up the seller and we find out we're missing a survey and the seller's in Mexico.

So we're like, well, there's two issues going on right now. And we'd already pushed back the buyer side twice and they were about to cut the cord. And so I kind of came in and steamrolled. It was so funny.

We came in, I was like, what's the bottleneck with the surveyor? Why do we not have this done?

He was like, well, he doesn't feel comfortable walking onto the property because there's a fence.

I was like, tear it down. They're like, there's not even a lock on it. I said, I don't care. We're buying it. We're selling it. Tear it down.

We posted an ad on Craigslist and had it torn down within like an hour for 150 bucks. A surveyor calls us and says, I have a business partner, his name's Ben and they call Ben and they say, Hey Ben, fence is down. But quick question, what are you doing about the cow on the property?

Mary: Oh, my gosh.

Ajay: This is a quarter-acre lot in southern Texas. Maybe smaller—7,000 square feet. And now I'm like, Did we just let a cow loose? And whose cow is this? Because the sellers never said anything about a cow.

Well, I'll condense it and keep it short here. It was the neighbor's cow and they were keeping it on this property.

But it's one of those stories where you're like, did that really just happen? In this business, stuff like that happens all the time. You need somebody to talk to you about that stuff or else you will go crazy. You can't make these stories up. So it's great that you do have each other to talk through that stuff.

Seth: Yeah.

Mary: It's true.

Ann: So what happened? What was that, what is this, a cliffhanger? What happened to the cow?

Ajay: Yeah, I mean, we got the cow off the property. The surveyor got on the the property, we got the deal done, old girl came back from Mexico. All was good. So I think we made maybe five or six grand on it. It was a small deal.

Seth: Did the neighbor come and get their cow?

Ajay: There was a cow on the property and when we closed there was no longer a cow on the property. For about six hours, what happened in between, I'm not too worried.

Seth: Yeah. Well, even aside from that, like, just basic business decisions, like understanding what a property is worth, what you should offer on it, and what it'll probably sell for.

I second guess myself every time. There's never a time when I'm just a hundred percent confident and I don't need anybody's input. So just having somebody else, even if you're both wrong, at least you're not crazy. There's somebody else you can bounce ideas off of. That goes a long way.

Ann: And I think we also have times that we're emotional about different ones.

Like, for some reason, there's this one I just love so much on this river. And I can imagine it's just so beautiful. And this one’s like, no, cut the cord.

Mary: I mean, we should buy it for ourselves. It's wonderful. But I don't think that. I mean, I feel like it might sit for a while, but we'll figure it out.

She's the boss. If she wants it, she wants it. We can have it.

Ann: I'll steamroll it.

Mary: Yeah.

Seth: Right. So how do you two hold title to these properties? Do you jointly own one LLC that owns everything? Is that how it works?

Ann: Yeah, we do. We have a joint LLC and then we've just formed or elected a separate S-Corps between us so that we can allocate funds as needed.

Because, obviously, we have really different financial stories with me being an expat and then with me having teenagers that can work in the business and things. So we've just kind of done some new elections that way.

Sethj: So it's like an LLC owned by two separate S-corps, and then you each decide how you want that money to flow once it hits your accounts or something?

Ann: Yeah.

Seth: All right. Okay. So, I guess, when you own a property and when documents need to be signed to sell the thing, is that what you do, Mary, because you're right here in the U.S.?

Mary: Yup, I'll do all the notary stuff and then, yeah, sign it.

Ann: And Mary's lucky because her neighbor is a notary and he likes really expensive beer. So we can thank him properly. And then we just file a corporate resolution every time. So even though it's a partnership, Mary and I, we just have a quick document for that. And she can sign for the two of us.

Seth: When I see examples like the two of you that work together and your family, I mean, sometimes I'll hear about husband and wife teams and that kind of stuff. I mean, I got to imagine this happens when any two people partner together, where they occasionally get on each other's nerves or there's like disagreements on things.

And it's one of the reasons why I wouldn't intentionally go out of my way to work with family just because they're family. Because I need to be able to fire this person or I need to be able to make hard decisions and have hard conversations.

So does that ever happen with you? Like, how do you guys deal with conflict? Or maybe that never happens, but is that ever a thing?

Ann: The fact that we literally stay in our lanes, like our column, that's the only time that there's a disagreement or confusion. Sometimes I'll actually overstep and I'll realize, oh, it's in the middle of the night. These people have email. I can send this email.

And then I realize, you know what, there was a communication that Mary had had on the phone and I've just undone her work. And that's happened a couple of times. And right away, I'm just like, I need to stay in my lane.

So if anybody is changing lanes without a blinker, it would definitely be me. And I think I've gotten better about that. Mary's a super good communicator and she updates the docs or whatever before she hits the sack. So sometimes I just really want to be super efficient and that's my issue. Yeah.

Mary: Yeah. You like to use your open windows of time, which is great. I mean, and sometimes I'm like, sure, go for it.

But I mean, for the most part, we really don't have a lot of disagreements because, truly, we do stay in our lane. And sometimes we're even sharing our stories about what we did for the day. And then she’s like, wait, you don't need to hear about that. I don't even know what she's talking about.

Quite honestly, mine is obviously a little bit simpler, but I'm like, I really did do a lot, but it felt like nothing.

And I feel like I have to share it. And then I'm like, actually, nevermind. We're wasting our time talking about it. So I mean, truthfully, we stay in our lane.

Seth: Well, that's interesting. I hear “stay in your lane.” Does that mean like, you're not even allowed to look at the other lane? You can't even question that person. Like it's their thing that they own and you have no business even talking to them about it.

But how much overlap is there? Can you l make observations and be like, so Mary, I don't know about that decision. I mean, I'm not going to make it for you, but I kind of think maybe you should go this way. Do you ever do that? Or what does “stay in your lane” mean?

Ann: I mean, we talk every single day. WhatsApp is great because we can do voice texts and send them back and forth and texting and all of that. We're always talking. And we do all of our problem-solving, putting our heads together during the day.

But by “stay in our lane,” it's just sort of that we know exactly. Like, I know my job with the maps and how I add them to the CRM. I know my job for all of the data stuff. I know my job—we have one VA—and I understand that's my territory.

And then anything, I don't know what the title lady, what kind of donuts she likes or which realtor is the nice one and which one's the one you have to tiptoe around. So I think that's probably what we mean with “the lane.”

With the property, we definitely share ownership. But in terms of how we get the job done and who takes care of what, it's very, very clearly defined in terms of who does what.

Mary: Yeah, I mean, sometimes, we might be figuring out how we go about making an offer and sometimes we'll talk about it. And then I'll just let her know, no, no, no, you don't talk to the seller. I know when I need to approach them.

Sometimes I might need a little shove because I'm like, should we or shouldn't we? Or, when is the best time, because I don't want to bombard them because I feel like I have a pretty good ability to read people, read their story, understand it, and know what they need or maybe want.

Of course, I'm not always right. But for the most part, I'm like, no, no, no, Ann, I'm waiting two days because they asked for two days. Or, you know, I'm going to give them an extra day because I know they really were stressed with their family.

So I don't know, things like that… Yes, we talk about it, but really, ultimately, I'll make my choice and she'll make hers and, and we're pretty much okay with it.

Seth: Do you ever disagree on property values or anything like that? I feel like that's something that, if I were in one of your shoes, I would potentially disagree with people because I'm very conservative. I tend to underestimate property values. And when I see somebody give me a big number, I'm like, no, I don't believe that. And that's kind of a big deal. Cause if that number is right or wrong, everything hinges on that.

But are there ever situations where you just fundamentally disagree or it's a showstopper? Sounds like that doesn't really happen, right?

Ann: I wouldn't say so. I would say I'm very conservative as well. When I'm underwriting the deal, I'm always thinking about whatever the value-add is. I'm rounding up. I'm figuring, I know that the realtor, the broker said no brush clearing, but I'm just going to put the two grand in there.

I'm also very conservative, but I think Mary, when it comes to numbers or number-crunching or saying, yes, it's a deal or it's not, I think Mary definitely is flexible. And she will go with my direction based on the fact that she knows that I'm super thorough and I've looked at all of the comps and I'm not going to have rose-tinted glasses, even if it's in a really cute river.

Mary: Even if I'm a little more conservative than you. Just kidding.

But yeah, for the most part, Ann takes the lead as far as comping properties. I usually look at it quickly because a lot of times I'm trying to get a quick reference just to make the call and then I kind of like, hey ,you look at the comps. Because she's a lot more more thorough on it and she's not in a rush so much to get to the next lead and get ahold of them.

So kind of, I mean… whatever she says, great.

Ann: And it's kind of the beauty of our time zone, because when she goes to sleep, I'm working. And then, I mean, it really is 7-11, right? So it's kind of like passing off the torch. I do what I need to do asynchronously. She makes the calls in the morning. I have the answer and I know what I'm doing.

So yeah, in that way, I like the dance.

Seth: What do some of your typical deals look like? And when I say that, I mean, what's the buy price? What's the sell price? Are you doing anything to improve them in the meantime? Is direct mail your main thing? Are you using other marketing mediums?

Tell us about that.

Ann: Well, I think we have two types of deals.

We know the ones that we are snipers for that we want to have. And then we know the deals that come along that are the bread and butter and we do them. Especially if they're nice and clean. And actually, right now, we have two of those exact same things going on.

So we prefer subdivides, especially now because we've been really honed in on our niche and our region. So we just do one state. And now we know if we're in this region, it's this broker, it's this surveyor, it's this perk guy. We’re like, is it Randy? Is it Ryan? Blah, blah, blah. So it's just like this, you know?

So we do prefer subdivides, but when something's a tidy split or a tidy flip, then we go for it, especially if we just need to turn the capital a little bit quicker.

Up until now, we've funded all of our own deals and we funded two other people's deals as well a few times, but more and more, well, now we're looking at some bigger deals where we really can't.

You asked about the price of where we're at. Our first deal was our smallest, and I think it was a buy for 22, sell for 27. It was terrible. That's the only deal we've had so far. But we still love it. It was fun; we just had to learn and we had to do it.

Seth: Yeah, I bet you learned some stuff from that deal.

Ann: We did. And luckily it wasn't a long novel or anything, but that's the only deal that we haven't had a broker walk in advance. And he was the first one that said, ladies, you got to get boots.

And we're like, yeah, we do. But well, we don't have boots, but we'll use your boots. Thank you.

From then on, I would say, our average buy is somewhere between 60 and 150. And, let's see… for subdivides, the most recent subdivide we had was a really good deal. It was buy for 67, maybe by the time we paid. She had like some back taxes. So I think it was around 67. And we got out at 300.

Seth: Wow. That's awesome.

Ajay: That's a great deal.

Ann: Yeah. Our value-add there was a survey and two rounds of brush hogging because we had another season in there. Brush was fast to grow. And so, yeah, that was, 11 months, I think, start to finish.

Seth: So all you did was a survey and brush hogging?

Mary: Yes.

Seth: Did you say you subdivided that one or no? You just bought it?

Ann: Yep, that one was a subdivide. It was 33 acres yeah and we split it and we kept all the parcels different sizes to just appeal to a different market.

Seth: You split in half or how many new parcels were there?

Ann: Four or five.

Mary: Four.

Ann: Yeah, I think we had two that were close to five, and then two that were a little bit larger.

Mary: Or something like that.

Ann: Yep. The one that we're on now, we're funding it for a fella, and that is just a 20-acre. And it's going to come out at four or fives. And it's actually in the same county—

Mary: it's the same area.

Ann: Same cast of characters, yeah. So yeah, we feel good about it.

Mary: It's gonna go so much better than our first one because we learned so much from the first one. So that's why we're like, all right, this is it. We love it.

Seth: Yeah. So any particular lessons stand out in your mind, like things that you've learned? Like, if I see this attribute or characteristic about a property, no, we're not doing it. Or like, I'm going to specifically seek out this type of property for this reason. Anything come to mind with that?

Ann: It does. Things that have sat the longest on the market for us have been ridiculous topography. So things that are on the side of a mountain and it really isn't about access. It's really just about topography.

And for things that we're seeking out earlier, I said, we're kind of taking a little bit more of a sniper approach and we have our one VA and that is his job. He is scrubbing maps and looking for ample—we have two columns, ample and decent, I think, are our road access columns. And then from there, he makes sure no flood, no wet, no transmission line. And then if all is a go, he turns on the topography for the final green light.

So once that runs through—it takes him a minute, a record—that's a massive amount of information in terms of who we really want to put our time, energy, and marketing money into.

Seth: Yeah, that topography stuff is a pretty big deal and it's kind of hard to quantify, especially if you're not planning to do anything to it yourself but the next person is. It's easy to just put that on the next person.

But like, the example that comes to mind, the self-storage property that I bought, I got what I thought was a good deal on it. And it was, I paid 69,000 for it, but there were… It wasn't even terrible topography, but it was going to take a lot of work, basically $400,000 of excavation to level it out.

So there were a lot of hidden costs in there. And what I learned is that I would have gladly paid three times more for the same property if it had just been flat and didn't need so much work. It's hard to see that from a land flipper's perspective, if you're not really looking at topography and understanding like, what would a person have to do to get this thing ready to build on?

So it's one of the many little tricky hidden issues that can kind of fly under the radar sometimes.

Ann: Yeah. And it's also relative, right? Too, because like Mary's in Colorado, so she will come back from Aspen and be like, no, it's fine.

Mary: Look at this house up here! It’ll cost millions just to get it…

Ann: We do look at the neighbors and say, you know, are people building? And then is it just they need enough to drop a mobile on it, or do we actually need enough that we can run electricity to it on a decent road? And all of those things.

Mary: I would say we look at the neighbors a lot and just turn on the topo lines on MapRight and like, okay, they did it and the road's not that far up. Because I think sometimes we're like, oh we can put a road in, okay, well, how far are we going? And how much does that actually cost? So the neighbors are huge.

Ann: Yeah. And you know, the price reports are not so useful in terms of the price, but they do have a topography report on there that says the buildability of the property. And so sometimes that's really helpful too, I think, to go back to the seller and be like, well, it's 7% buildable and the buildable part is on the other side of the the mountain.

So that's tricky, right?

Mary: To get to the other side of the mountain, too.

Ann: Yeah, we appreciate that. And we use the 3D maps all the time. I really like turning on the 3D and rotating everything, and Mary really likes the topography lines. So between the two of us, we just make up an answer that we think is right.

Mary: And then we get boots on the ground.

Ann: And then we get boots on the ground, and he tells us we're crazy.

Seth: Well, that's interesting, the topo lines thing. So like the property I was just telling you about, like I'm looking at it on Land ID right now. It doesn't look that bad. I mean, it looks fairly mild. But when I got the actual topo survey, it was way worse than what Land ID led me to believe.

Which I don't know what the answer is to this other than to get a topo survey on everything, which isn't really feasible, especially on the cheaper properties. But it's just one of those things like it's not that simple. I mean, there's a lot of software out there that tries to make it as simple as possible, but you still just don't know until you really dig into that stuff.

Ajay: They really don't realize how useful boots on the ground are until you either lose money or you're not sure if you're going to.

We had a property, it's a beautiful 40-acre in Northern Florida. In Florida, it rains a lot. I don't know if you guys knew that, but it rains a lot in Florida, and because of that, things grow really, really fast.

So we had a guy go out and do some clearing again, post on Craigslist. This is where we do a lot of odd jobs and stuff. Had our realtor go back out to install some trail cams, you know, see if we can catch any deer on the property and get some new pictures. Cause now we've got this huge trail.

He gets out there and he's like, guys, there was no clearing done. I'm like, really? He sends us a picture. Very different than the picture we had our contractor send us. So either our contractor cleared a different property or scammed us. I'm not sure which yet.

This is pretty new information, but it's one of those things where you're like, man, didn't realize how useful boots on the ground might've been on something like this. And it was only 1300 bucks. Like it wasn't, you know, wasn't anything super crazy, but it's enough money to be like, gosh, I really wish we had some boots on the ground that were managing this as we were doing it, versus just Craigslist, send her out, let's go!

Ann: Absolutely. We just had a realtor too. We were looking at a a 50-acre that we were splitting and it had beautiful road access on two and a half sides.

And one of the roads had a lot less traffic. So it made sense to put all of the smaller parcels right along the driveways. And then, as soon as she went out there, she's like, it does make sense.

However, it doesn't show up on the topo map at all because it's such a small amount, but it's like a, not even a ravine, but just a ditch that's so severe. And so she said, just flip it, everything, and you're fine.

And I was like, okay, well, that's an easy fix on the computer now, but there's literally no way to see it on any of the computers. Just like your example, Seth, it's just, you really need somebody in real life to walk it.

Seth: Another random question. That example you were talking about, I think you said it was the 30-ish acre parcel where you split it and did the brush hogging twice. So I don't know if you can quantify this, but how much of that increase in value was because of the brush hogging and how much of that increase was because of the subdividing?

Could you have just not brush hogged it at all and still had most of that money? Any guesses on that?

Ann: This particular property was a very old farm and it had been timbered like 15 or 20 years ago. And so it really was just brush, but the brush was like brambles and things. One of the realtors even said, I took my dog and I was picking out burrs for days or something like that. One of those kinds of stories.

There are people who couldn't get on the property at all, and so we needed someone to take a trip around and then cut to the middle of the property. And I think by then our surveyor didn't ask for it, but we had kind of done enough, I think, in areas where he could clearly cut the lines and then people could walk and see, oh this is the parcel or the tract.

So that was definitely a price point thing in this area where everybody wants a five-acre mini farm, and it's affordable for them. And if it's unrestricted, you know, done deal. But definitely, I don't think we could have sold the properties nearly as quickly because no one can park their car, get out and walk, and see what they have.

Mary: We could have sold it to the guy down the road, for sure. Who was also doing subdivides, but we wouldn't have made nearly as much money.

Seth: What if you had not subdivided it and just brush hogged it? Could it be that that's all you had to do? I mean, probably not. I'm just asking the question to figure out what percentage of the value was the one versus the other?

Ann: Well, let's just say this ship has sailed. We don't really want to think about this property ever again.

Mary: Let's revisit.

Ann: Well, the issue here is that we did have a realtor who had done a subdivide that was very similar just down the street, which is how we chose him. Because we said, oh, this guy is selling five acres like a mile away, not realizing that he was a little bit shady… did you say choose my word carefully?

Mary: Yeah.

Ann: He did a lot of like, “little lady”-ing to us, but then he also buried our listing until he had sold his subdivide with his partner. And so that is why also we needed the second round of brush hogging because we had to wait out his contract and then move on with another agent, which we've never had to do. We've never had any issues. Like we've been really lucky with the people we work with, but he was definitely a bad seed, I suppose you could say.

Seth: When you say “little lady”-ing, is that like talking down to you?

Ann: Yeah.

Seth: Okay. Does that happen a lot? Being women in this business? What's it like? Any thoughts?

Ann: We don't really like to play like a gender card or like, oh, we're just little ladies in this big boys’ world.

That's not really who we are, but there are definitely moments I think where you can feel that somebody maybe knows that you don't own boots and you're not walking it yourself. which I think we just have to be really true and authentic and say, yeah, we're not. My buddy is going to go out there or a member of our team is going to go out there.

But just as many times, I think it actually works in our favor because we're approachable and very straightforward and honest. And I think as a woman, that kind of helps too, that people do see a couple of sisters. I mean, we're just snowballing our little properties one after another. That's all we're doing.

And that's the truth. And I think it's easy for people to see that that's just who we are, as a couple of “little ladies.”

Seth: Sometimes, when people do that, like it's a very material issue. Like in your case, they're lying to you. They're burying your listing. It actually hurts you when they do that.

Other times it's more just like, I'm kind of annoyed that you're talking to me this way. It doesn't really matter. I'm just kind of annoyed by it.

But I mean, would you say when this does come up, is it more just an annoyance or is it an actual material problem?

Ann: I think that was the only time that it was a material problem. And Mary had to deal with him on the phone. So she was really good at navigating him or waiting him out or setting down the phone and making dinner while he was going on and on and teaching her all the ways of all the things he knew.

Whereas then I was more straightforward and I said, well, I don't know what you're looking at, but here's what my data shows. Here are the photos. Here's this. Here's why it doesn't come up as this search and sending him the screenshots, which he did not appreciate or respond to.

So I think that was the only time that we really felt, I think, a jerk in general.

Seth: Yeah.

Ann: He probably would be a jerk to you.

Mary: Yeah, and maybe. And that's just it. Like you said, we aren't trying to play the female card, but he’s definitely like, “Well, it's listed under farm. Anybody looking for land, unless they're looking for a farm, is not going to find our property. And we've asked you to change so many things so many times. And like, it's very important to not be.

Ann: We had the filters set so that they had to put in the exact acreage, farm, and the street name to even find it at all. Yeah.

Seth: That's helpful.

Mary: But other than that, I think sometimes, too, for some people, it's an endearing thing to little lady. Like they're taking care of you in some way, shape, or form.

Seth: Yeah. I can see how they could kind of go both ways. It's kind of like how a lot of people, when they send out mail, they'll put a female name at the bottom or something like that, or use a female voice on. There are probably ways it is an asset too.

Mary: So we have had almost, I would say, maybe 5% hate. A lot of people call us just to chat, I think, because we do have our picture on there and I feel like they just want to hear our story. So I think our letter in and of itself has helped us, from what I hear.

40 of these letters and I'm calling you guys because X, Y, Z, you know, whatever, maybe it's our letter. And I hear that a lot, like at least 50% of the time, well, I'm calling you because I like your picture. Which one are you?

But okay, you called me. Now I'm talking to you. So we'll take it.

Ann: Which one do you want me to be? Right. Which one do you like better?

Seth: Well, it's really interesting. That may not be what you're going for, but it is a competitive edge in a way that most guys in this business don't have.

Ajay: So our team currently is 100% women aside from myself and Ben, because we have found the male bravado tends to be more alpha male and a male-to-male negotiation.

And so what's really interesting is I do hear the defenses kind of go down when they're speaking to women.

Again, this is a blanket statement, right? Not applicable to all situations, but a lot of times I feel like the perception is that women are trying to be helpful, which is really great because it helps you lower your guard in a business sense.

And so, yeah, I agree. I think there are some folks that like, if I get on the phone with, and we get into a price negotiation, if I'm not tactful about it, it can turn into ego and testosterone very, very quickly. But yeah, that's all I had. Sorry.

Ann: Me too, Ajay. That's why I need to stay off the phone.

Mary: You will go toe-to-toe all day long. Sometimes I probably could be more aggressive too.

Seth: Have you guys read the book Pitch Anything? Ever heard of that book at all? It was a pretty big book, like 10 years ago. It's by a guy named Oren Klaff, but I thought it was pretty, brilliant from my standpoint.

I wouldn't say I'm super strong interpersonally, if anything, it's kind of a handicap for me sometimes. But in that book, it's all about how to basically pitch anything, like how to do a sales pitch. A lot of it comes down to interpersonal communication. Like in any dialogue between two people, there's somebody who's kind of up here and then somebody who's down here.

And it may not be that obvious, but essentially, that's what's happening. Like one person is sort of talking down to the other person. Like one person is the authority and the other person is the submissive person.

And the example he gives is like, if there is a doctor driving down the road and the doctor gets pulled over by a cop, that cop is the person in authority talking down to the doctor. But if they're in the operating room, that doctor is in authority and the cop is down here. And there are all kinds of little creative ways that you can respond to certain things and phrase certain things that puts you in that authoritative position.

Another example he gives is say, you're walking into a meeting and the person's like, “Hey, I’ve got 10 minutes, so we got to make this quick.” So just by saying that, they're implying that my time is more valuable than yours. And you can respond by saying, “Okay, good. I've only got five minutes. So let's make this really quick.” So you almost kind of like one up them.

But I wonder if there's a way when these weird things come up, when people talk down to any of us in life, when we can just sort of reframe things a little bit by having these little magic phrases or something.

I don't know what they are, but that was an interesting thing to think about.

Ajay: So fun thing we're working on.

I do a lot of sales training with my team and it's something I'm pretty passionate about. And something we're we're working on right now are negotiation talk tracks.

So when somebody says no to your offer, right, you know, there's a bunch of pre framing you need to do. And we're really big on shifting blame with kind of our initial offer, because you know, as land investors, especially in the flip game, a lot of times you're making offers between 30% and 50% of market value, there's not a lot of logical reasons as to why somebody would say yes, you need to appeal more to the emotional side.

That being said, in our first offer, something we'll say if I were talking to Mary, I'd say, “Mary, you know, I'm seeing other investors are paying $30,000 to $50,000 for property like yours. If another investor were to make you an offer in that range, what would you say to them?”

So you see how I just made the offer, but it's not me making the offer. “Well, I think if they were on the higher end of the range, I might, you know.”

“Okay, great.”

Now we know how to have that conversation versus if they're like, “Hey, pound sand, that's horrible.” Whoa, whoa. I didn't say that was our offer!

The longer you can keep them on the phone, like we equate talk time to rapport in a lot of ways, you know, under the assumption that the seller's doing the talking, not us. And so if we can extend that talk time, the probability of that lead doing business with us goes up over time.

Now, full circle here, what we were just talking about, Seth, is negotiation talk tracks. When somebody says no, in that light of power dynamics that I think you're addressing, one of our go-tos is, well, Mary, if nobody were to buy your property at that price, what are you going to do then? If nobody gives you that price, what are you going to do? because they hold the power in the sense that they have the property, right?

So you can sort of remove that authority by stating, what if you never get that price?

Well, it'll probably go to my kids. Okay. God, like if something were to happen to you tomorrow, have you already set that up so that they know they're getting that? And do they know the responsibilities that come with the property?

You're really trying to get them to think about next steps.

We see that go one of two ways. Number one is they're like, no, but thank you. I need to call my attorney and adjust my will.

So, you know, even though it's part of our negotiation talk track, we're genuinely helping people. Like that's the goal here, right? We are salespeople trying to help and the more information you give me, the more the opportunities I have to help you. Because us guys as investors, we know a lot of stuff. And even if we can't help them, we can make a lot of introductions and serve them in different ways.

But in that, yeah, the whole point here is just kind of removing that power that you were referring to, Seth, and kind of reframing in the negotiations of how do I get them to think differently. Sometimes it works, sometimes it doesn't. But they've already said no to your price, you've got nothing to lose, you know, you might as well kind of go for it.

Seth: I love that. That's awesome, man.

Ann: You know, my daughter has a term for this and she calls it social currency. Like in your situation, what is your social currency? I was like, oh, that is kind of scary that you're using this. But when she explained it, I thought that's exactly what it is, right? Who am I in this situation? And what do I have to use here?

Along those lines, this is a big shift that Mary and I are making as well in terms of some of these larger properties that are coming our way. And working with sellers is looking at, we understand that you want top dollar. We understand your land is beautiful. Like you have a premium property. So let's see what it's going to take to get you that top dollar.

And here's what we can bring. We have the surveyor. We have the perk guy. We have all these things in place. So do you want to partner with us? Because we do have the teams in place, but also we would rather partner with a seller than to get funding that isn't ideal. And we can't really work with banks if we're wanting to flip quickly.

And that is a huge value for that landowner to think, I have this land, I know I want the most for it, and I don't know what it takes to get there. And so for us, that feels really good because we can picture too, like our dad, going back to that story, had the skill and had done the research to know what the land was worth.

And so we always kind of see our avatar as our dad. So this guy needs help. He wants his best price. Can we help him get there? And can we profit too? Because that is a win-win and it feels good.

Seth: I'm wondering, other than what we've already talked about, is there anything else unique about how you two are running your land business compared to what other land investors are doing?

I know you've talked about doing subdivides. I mean, that's somewhat unique. Not everybody's doing that. And it was interesting, your direct mail template. I have got your picture of both of you on there. It sounds like that's a unique advantage that not everybody does.

But anything else come to mind about like, Like, yeah, we're doing this and we don't see anybody else doing that.

Ann: One thing that everyone told us we were crazy to do, but it hasn't been bad, is that Mary from the beginning said, I'm answering the phone. And I think we had PATLive for like a month and she said, just let me do it.

And I was very reluctant because I didn't want to blow up her world. And I know that she has, you know, an actual life and I didn't want her to have to shoulder the hate and things. But for some reason, we don't get a lot of hateful feedback.

And it has worked for Mary to be able to take the calls or to be able to call back quickly. If it goes to voicemail when she's in the hockey rink, you know, she can go out to her truck and call. So I think that part of it is different.

And that's actually part of our marketing as well. It says if you are on the computer, you are talking to Ann. If you're on the phone, you're talking to Mary. Like full stop. And I think that that actually, in a lot of ways, it does limit us in terms of our scalability, but we don't really care because our scalability isn't really about more deals; it's just the size and the quality of our deals.

So we prefer to stay how we are as a, you know, operation or whatever, because we found a way to make it our brand. Our brand is that it's the two of us.

Mary: And less can be more. We don't need 75 deals. We need five really good ones and we're happy.

Ajay: I think there's something so interesting in this, just like a really good lesson that we're seeing a lot kind of in the social media world with branding is that you guys are being super authentic, right? It's, hey, if you're on the phone, you're talking to Mary. If you're on the computer, you're talking to Ann, right?

It's that authenticity piece and that take off the mask piece that I think a lot of investors are missing.

Like you hear the expression, fake it till you make it, right? And there's some validity in that, especially when you're new and sort of coming up, but after you've been in this business for a couple of years, I find that there's just… you need to go back to your roots of just like being a human. And people forget that a lot of times.

It's so funny when you hear investors on the phone the first couple of times and like, Oh, we're this investment company that's doing X, Y, and Z.

I had a deal that almost blew up recently. It's a $70,000 double close.

Seth: When you say blew up, you mean like it almost got killed or like it was going to be a huge deal?

Ajay: The deal almost got killed. Yes.

Seth: Okay. Gotcha.

Ajay: So yeah, not any, not any people that I'm aware of, thankfully, the deal was at risk essentially. We were double closing it, and it was it was an odd one because normally it didn't go through our normal double close process, we got it under contract. And then sometimes we'll just call some neighbors to sort of test the area and see if there's any neighbors that are interested, and one was. And we got full asking for it. And so had a buyer and seller lined up.

And then two weeks before close, the seller reached out and said hey, actually, we are thinking about changing our minds. Can we get out of this? And we were like, we're kind of into this. And we spent a few thousand bucks on due diligence and already kind of have money lined up. Like, no?

It was all over text. And three days later, we get a letter from an attorney that says your contract's not enforceable. You can't do anything, blah, blah, blah.

So and I first reached out to a couple of people in my network. Hey, you guys been through something like this? What do you do?

Best advice I got was from one of my buddies. She called me up and was like, hey, dude, just get on the phone with him. Talk to him like a person. I promise it'll fix more than you think.

Everybody else, you know, saying you can file this lawsuit, do this memorandum, this, that, and the other. All that stuff in the background that you think about, how do I protect myself to get this deal done?

I followed up for a couple of weeks and finally get on the phone with him in the third week of ouble dialing him on my personal cell phone for a long time. And… no joke. I mean, we get on the phone, and I'll change this guy's name to Elliot to protect his identity, “Hey, Elliot, my name is Ajay. I'm the owner of Assets for Acres, or one of the owners of Assets for Acres. We're doing this deal, we're buying your 20 acre in XYZ County.”

And he was like, “I don't think we should be on the phone,” is how he started that.

So you know when any call begins that way, probably gonna end super well, right? Now I use, thankfully, you guys read Never Split the Difference by Chris Voss?

Ann: Yeah.

Ajay: Yeah. Fantastic book, right? I used some of that technique, I forget what it's called, but it was kind of like, “Oh, you probably think I'm a terrible person.” “No, no, I don't think you're terrible.” And now we're into it.

And so, we get into it and I'm like, “Hey, Elliot, listen, man, what I want you to understand is like, we're a small company. It's me and my business partner. We've got six on our staff. I've got payroll, but we're just, we buy and sell land. That's what we do. This is very simple. Last I knew, we were under contract.”

And then I got, “We got this letter from your attorney. Can you help me understand what happened in between?”

And like, I'm not joking, by the end of this call, he was giving me marriage advice.

It is crazy what happens when you just talk to people like people. What had happened is it got lost in translation over text and email over time. And when you lose that authenticity and that human touch, things go wrong in the business.

And so I think that's something that could go over really quickly that people might not catch from the two of you is y'all are doing something right with that, right? Like the authenticity shows and the fact that Mary's willing to still hop on the phone with sellers, after you've made hundreds of thousands, if not millions of dollars, after you've been doing this for years and you can easily hire this out or use PATLive or do those things, there is something to be said. There's a huge, huge lesson in authenticity there.

So I just want to praise you for that because it's unique and not a lot of people are willing to do that now. And clearly, it's had benefits for your business.

Mary: Yes, thank you.

Ann: Thank you.

Seth: So with everything you two have done so far, is there anything that's still really hard for you? Is there anything about this business that's like, man, this almost makes you want to quit. This is really annoying. This is a problem. Anything come to mind or do you pretty much have it all figured out?

Ann: I don't think anything makes us want to quit. But what you said, is there any part of this business? It's the business part of the business.

So just the dealing with the taxes and the strategies and that kind of thing, it isn't why we're doing this and it isn't our strength. So I have two master's degrees, but I'm an art teacher. Like, so there's no part of me that is in business and same for Mary. We're just not business people.

Seth: When you say business, do you mean like accounting stuff? Is that what you're getting at?

Mary: Well, yes, that. And for me, sometimes negotiating, I'm like, ah, what's this, “Pitch Anything?” Okay. I'll start that today.

Just because it's not like we need to go to school for that. But I just kind of try to use our natural ability, but sometimes it falls short for sure. And some days I'm like, all right, you gotta listen to Seth’s podcast to get yourself like, hey, you can do this, get on the phone and do it.

But it's hard. You know, some days… I don't want to quit over it; I would rather succeed more than fail. But is it me or is it the person? I don't know. I just keep trying, I guess.

Seth: Yeah, actually I'm learning the more of life that I live, the more I'm realizing how unnecessary school is. I don't mean to like down talk higher education. I've also got a couple of college degrees. I believe in all this stuff, but I'm also finding that anything I really want to learn, I can figure out. Like, I don't need college to enable me to do that.

There are some careers that still kind of force you down that path, but for the most part, there are a lot of things you can figure out just if you have the will to learn it. And a lot of things that college just frankly doesn't teach, period. Like sales, for example I don't think there's hardly any colleges that teach sales, even though it's like one of the most important things you could ever know in business.

Mary: And how many people are actually in sales that didn't go to school a lot and they're doing very well?

Seth: Yeah, for sure. And I think what they're getting at is like, how do you do like a sales presentation? That kind of thing. I mean, there's probably some interpersonal communication in there too, but sales is really, I think, a lot about just human connection and being real. I kind of like what Ajay was talking about being authentic. And it's hard to teach that in a classroom environment.

Ann: And there's YouTube University, right?

Seth: I mean, that's huge.

Ann: If you don't know, look it up. It's almost all there. I don't know why so many people make so much content, but I'm very, very thankful.

Seth: So do you guys have any kind of like long-term business plan of where you want this to go? Like in five years, where do you think things will look like or what do you want them to look like?

Ann: Our first goal was to get Mary out of her job and we did that quickly, which is great. And then our next goal is to get me out of mine, which is a little bit more complicated.

And, right now, my life, my visa, and my kids' tuitions and everything is tied to my contract. So I pretty much just have to get them graduated and out the door. But that's like two years out. Well, we'd like to just be both full time.

And I would say that our goal is to do bigger deals. I mean, the thing that we looked at this week, or maybe yesterday, gosh, is 170 acres. And we know what we want to do with it. But our broker is saying this is meant to be a whole development. And this is meant to have this, you know, these rolling hills and and these roads, and whatever, all of the infrastructure.

So I think probably, ultimately, if we could go that route and do one of those deals a year and just put our heart and soul into it, particularly if we're a little bit closer to where we're working, that would be also part of our goal, I think.

Seth: So Ann, do you think you're going to stay in the Philippines long-term, or do you want to come back to the U.S. once your kids are done with school?

Ann: Well, we're in the U.S. every summer. I always say that. I still live in America every summer. But when you're from Wisconsin, the summer is enough because I just don't want to shovel. I just don't want to. We've been overseas 23 years now, so I think we'll probably stay overseas, but closer. I definitely want to be in the same time zone.

My husband and I will probably live in an area with a lower cost of living that's U.S.-adjacent, I suppose. That's the closest that we would get.

Ann: Really quickly here, I know in some of the notes you had sent me ahead of time, I think it was you, Ann. You mentioned stuff that nobody else is talking about in the land business right now. One of them is easements by necessity and systematized ways to file for them in states that have legislation for landlocked properties.

Is this something that you're actively doing or just kind of an idea you had?

Ann: I think it's something you should find somebody to teach us.

Maybe that's your next guess. I mean, it comes up so often, right? Like our one VA is there to make sure that we're just not wasting time on mailing or hearing back from people who have landlocked properties because we haven't found the key to unlocking them. And I think that there definitely are ways.

And so how do we, could we be the people who figure it out and then make sense of it?

Seth: Do any of you know a way in any of the data services to specifically filter properties by the ones that are landlocked and only get those on your list? Or do you have to look at them through a parcel map to verify that?

Ann: There's property access IO.

Seth: That's where they're basically manually looking at it, right?

Ann: It isn't manual. It's based on the GIS and it filters by, I'm not exactly spot-on on this, but I think it breaks it into: there's no access, there's likely not, there's probably not, and there's maybe. So you can decide your risk.

So I suppose if you use that, you could filter for landlocked. If you're interested, we have a whole column in our CRM.

Mary: That can keep you busy for a while. There was somebody that was like, that was his niche.

Seth: If you guys heard the Logan Fullmer interview, he does that in Texas specifically. I think that's the only place he really works for the most part. But I know Texas has those laws in place where you can do that, but it's finding the other states that have that as well.

In his example that he shared on Instagram, he bought a property for five grand and then spent $150,000 getting the access and actually building a road and then sold it for $500,000.

So even when you can do it, it doesn't mean it's cheap to do it. There are still costs involved in doing that and actually making it happen.

But I agree. I mean, I also find that fascinating. I'd love to learn more about where can you do it and how you actually make a systematizable way to do it over and over again.

Ann: Yeah. I mean, there's so much there.

Seth: You'd also mentioned something about alternative septics for properties that don't perc? Is this like an elevated bed septic system you had in mind?

Ann: Well, now we've had two deals that have fallen through due to failed percs. And I mean, if it's 50 acres and it's a failed perc on a 50-acre property, that is quite significant.

Seth: There were no places at all in the whole 50 acres they could find?

Mary: I think after a certain amount of pokes, they stopped.

Ann: Yeah. And this area is known for its bedrock. The location is so desirable. It's really near a huge metropolitan area and it's great. I mean, it's beautiful and there are a lot of reasons that people would want to build there, but not if you can't have a toilet.

And so this area also has a lot of rules against mound and different types of alternate septic. And so we did go the route of, because we were like so disheartened, how can it be 50 acres with no perc?

And so we thought, you know, this is the one we should die on this hill and figure it out.

And we didn't figure it out. And then just this week, there's a young, hungry broker that we just threw some of our old little deals that we got from a wholesaler a long time ago. But he's just eager and awesome. And so he said, wait a second, I got a guy. And so he's like, tell me.

So he's now he's digging into it again. So, again, I thought the ship had sailed, but we're back into the outhouse.

Seth: That is a pretty fascinating topic. I should look into that because I think there are totally situations that weren't that. The only question is, will the local health department allow that? Or what is the cost to implement it?

Even the house that I live in right here, we have a lot of clay in this area. And I wasn't there when the septic system was installed, but I'm pretty sure what they did was dig out a lot of what was there and just replace it with better soil that actually drains.

And like in 50 years, it has to be totally redone. But, there are ways around that. It's just a question of how much does it cost and what can you get away with and that kind of thing.

But a 50-acre property like that, I mean, it probably justifies a lot of money to make that thing work if it's doable.

Ann: Absolutely. We even looked into shared drainage fields and there's a drainage easement that you can get from the neighbor and then the neighbor didn't live there. But then we just, well, we didn't die on the hill. Well, we did die on the hill.

Mary: We're going back. We're going to figure it out.

Ann: Yeah, we might.

Seth: You also had a note here about online surveyors and who is using them and what are they?

What are they? Is it like a surveyor that doesn't actually go to the property or what does that mean?

Ann: Yes. And how amazing would that be, right? We had a property that the county had it as 74 acres and Land ID and Regrid, everything else had it as 44. Well, that's a significant difference. And the seller had inherited the property, but it was in a super rural county. So there aren't a lot of surveyors and, you know, we weren't looking to subdivide it. We were just looking to see how big is it really and what can we offer?

And so then, that's when we went down this other research rabbit hole of finding out about these desktop surveyors or people who are able to use satellite measurements and do things. And if they have certain metes and bounds on an existing deed, then they can.

Well, in this case, it was not that at all. It was like, go to Sarah's farm booth or something like that. It wasn't going to happen.

Mary: Like a little telephone call is what they used to share.

Ann: And to get a surveyor out there was nine months or something.

Mary: Yeah, you're right. That one was hard. It was crazy.

Ann: So we were just thinking, gosh, there has to be a way in some of these rural areas to find another method.

Seth: That's interesting. I don't know how you could actually do a legit survey without somebody actually being there, like the whole idea of putting stakes at the corners and that kind of thing. I mean, there's literal GPS tools involved with this and you have to be there to do it.

I could see how maybe you could like, guess if it's all online, but to really know for sure, I don't know how that'd be feasible. But maybe I'm wrong.

Ann: Yeah, I want to keep reading about it because there's definitely places that it's recognized.

Mary: Maybe. Let's find out. We want more of them that are faster.

Ann: I mean, some people read books for enjoyment but we just read about septics and surveys.

Seth: I'll put that stuff on my massive list of content to put together because I'm sure that would be pretty fascinating to figure out. It'd be cool to do a video about one of those elevated bed septic systems, just to see, what does that even look like? Like, how do you make that? When is it allowed or not allowed? When does it make sense to do? Lots of stuff about that.

Ann: I agree. Fascinating.

Seth: Mary and Ann, thanks so much for talking to us. It was great to get to know you and hear more about your business. You don't have to share anything, but do you want to share anything? If people want to get ahold of you or ask questions or anything like that?

Ann: I think you can find us on Facebook. We're Mary Ann Danielson.

Seth: Awesome. Any final parting advice you would have for new investors who are getting into the land business? If somebody's just getting started and what would you tell them?

Ann: Listen to Seth.

Mary: Listen to the podcast and use the community would be mine.

Ann: Yeah. And not get too distracted. You know, there's a new camp, I think, of investors that are very like, bro, you know, you need this and all these automations. And I think it doesn't really have to be that complicated. And so at least for us, we just zoned in on what we wanted to do and stuck to it. And I think that that's why now we're about three years in and we haven't really had a lot of doubts.

But I think the people who get a little bit lost or overwhelmed, it's because they're trying to do too much too fast or trying to compete with the bros or whatever it is. And so ,I think keeping it simple and and just putting your head down and working really hard.

Seth: Have you two ever gotten sidetracked or had moments where you felt like you like wasted a lot of time on something that was leading nowhere? And if so, like, what was that?

Ann: We wasted time on deals for sure. We have spent, you know, a really long time on deals that then ended up falling through or had title problems or something like that. But I don't think we've chased a market or a bell or whistle. No squirrel syndrome here.

Mary: I mean, we're definitely guilty of getting overexcited for a deal and then, but whatever, it was fun. And we probably learned something somewhere.

Seth: You know, I don't really see that the same way in terms of wasting time. That's just kind of an honest thing that is going to happen to everybody. I mean, you can't know everything about a deal until you get into it. So, but it's definitely easy to get sidetracked by shiny objects.

And anyway, thanks again for your input. It was great to talk with both of you. People out there want to check out the show notes, they'll find links to a lot of the stuff we talked about. see the video of this conversation, go to retipster.com/185. This is episode 185.

Thank you again, Ann and Mary, it was great to talk to you.

Ann: Thanks, guys.

Seth: Hey, everybody, how's it going? This is Seth Williams. You're listening to the REtipster podcast. And today I'm talking with Dan Lewkowicz.

Dan is a seasoned real estate veteran with over 15 years of experience in many facets of the industry. And currently, Dan is the Senior Director of Encore Real Estate Investment Services and specializes in shopping centers, medical office buildings, pharmacies, quick quick service restaurants, that kind of thing.

And I wanted to get Dan on the podcast because he's an expert in an investing strategy that I think is just fascinating. It's something I've had on my short list of strategies to pursue, and it's triple net lease properties.

And I've actually got a video and a couple of blog posts I spent a bunch of time putting together explaining what this is all about. I'll be sure to link to those in the show notes for this episode at retipster.com/184, so be sure to check that out.

But in this conversation, Dan and I are going to do a deep dive into this strategy to help you understand all the benefits and some of the drawbacks associated with it, how to find these deals, how to know when you've got a good one, and a lot more.

So Dan, welcome to the show. How are you doing?

Dan: I'm great. Thanks for having me. I appreciated getting to know you in the meantime and kind of the build up for this. So I'm excited to be here and hope to add as much value as possible.

Seth: Yeah, absolutely.

So for those who aren't going to go to the show notes and watch the video I put together, what is triple net lease investing or just the net lease in general?

Dan: Yeah, great question. So net lease, I would do my best at describing net lease, not by telling you what it is, but telling you what it isn't.

A lot of people are familiar with multifamily investing. So I'll often make the juxtaposition between a multifamily deal and a net lease deal just to show you how different they are and illustrate some points that you get a good understanding of what net lease really is.

So for our example, let's say we've got a small apartment building, okay? It's, again, just making it up, keeping it simple. Small apartment building, got 10 apartments in this apartment building. Each one is paying $12,500 a year, I should say, so a little over a grand a month. So the gross collected rents, the gross income, the top line number on the balance sheet, is going to be $125,000, right? 10 times $12,500.

Now, you take another building. This is now a Wendy's building, okay? This Wendy's building also brings in $125,000 in base rent. So the number at the top of the line is $125,000. They look exactly the same right now.

However, if we go back to the multifamily building, you'll know that in multifamily, you have to pay for things. There's a lot of expenses, right? As the owner of the property, you have to pay the taxes, you have to pay the insurance, you have to pay for any maintenance. You have to pay for interior maintenance, you got to pay to shovel the snow outside, you got to pay for the landscaping to cut the grass. You got to pay for things like roof and structure, windows. You got to pay for a property manager, bookkeeper, all these different things.

You'll be lucky at the end of the day if your $125,000 isn't $65,000 or $60,000, maybe half of what the gross collected rents were. And by the way, those expenses, most of them are not fixed. They go up. Well, they don't normally go down, but they go up. If gasoline goes up, if salt goes up, boom, your snow plowing is more expensive. Cost of construction goes up, your roof replacement is more expensive.

Now, flashback over to the Wendy's property. Again, $125,000 gross collected rent. Let's look at the numbers below the line. Let's look at the expenses.

So you may be surprised to learn that in the Wendy's property, which is known as an absolute triple net property, which we'll define in a minute, you have no expenses because the tenant pays for your taxes. The tenant pays for your insurance. The tenant pays for things like roof, structure, parking, landscaping, grass cutting, snow plowing, management, et cetera.

So at the end of the day, whereas in your multifamily property, your $125,000 of gross collected rent became maybe $60,000, $65,000 in net operating income, in your absolute triple net Wendy's property, your $125,000 of gross collected rent, your base rent is your net operating income.

So these properties are very predictable. You know exactly what you're going to be collecting. And in fact, the leases have, when there is a rental escalation built into the lease—it's spelled out in the lease—you know not only what your NOI is going to be today, but you know it's going to be in five years, in 10 years, in 15 years, in 20 years.

So in a nutshell, that's what net lease is.

We described an absolute triple net lease because there's three ends here. Your taxes and insurance are your first end. We said those are paid for by the tenant. Then you've got your common area maintenance, again, paid for by the tenant. And then you've got things like roof structure and parking.

That's an absolute triple net lease. Those are all paid for by the tenant. Landlord has zero responsibilities.

Now, you do have kind of a step down from there, which is called a double net lease. Still the same thing. Tenant takes care of taxes, insurance, and common area maintenance. However, they don't take care of things like roof and structure, and in some cases, parking lot.

Most of the deals we deal with are absolute triple net. Some are double net. There are other types of leases, like a gross modified, where the tenant—very similar to the multifamily—isn't paying any expenses (or maybe just a few), and the landlord is absorbing those. Much less common.

We try to stay away from those and we try to steer our clients to modify their leases to be more like double net or absolute triple net leases.

Seth: And just to make sure we're clear on this, the reason that people invest in these type of properties is because they're very hands-off, right? I mean, is this essentially a passive stream of income or is there any work that the property owner has to do on an ongoing basis to manage anything?

Dan: Up until now, we've talked only about single tenant net lease assets, right? One tenant, one building. I also specialize in shopping centers, as you and I were discussing before. Ironically, the majority of my shopping centers that I sell are actually in your backyard, relatively speaking.

So for shopping centers, okay, you're going to have things like management. You need a property manager. That could be yourself or for 3% to 4%, that could be somebody else. Highly recommend it being somebody else.

Depending on how the leases are structured. In some shopping centers, the leases are structured as gross leases where the tenant pays rent and then you have to pay for all the expenses. I don't like that. I advise against it whenever the owner has an opportunity to negotiate the lease. I like triple net leases with what is called CAM reimbursements, which stands for Common Area Maintenance.

So in these leases, for example, a tenant might pay, let's say, $12.50 a square foot for their base rent. But they're also going to pay a specific amount for those CAM charges. And at the end of the year, the owner is going to go through and see how much he or she spent on things like management, administrative, (if it's in the lease) parking lot, sweeping and shoveling, grass mowing, and different expenditures.

And they're going to make sure and do reconciliation, make sure that they're whole. If not, they're going to bill it back to the tenant so that at the end of the day—it doesn't always work perfectly, but in theory, the landlord has no expenses.

Now, that type of an asset to your question is going to have a certain level of, you know, hands-on experience if you're the one managing it. Now, I've got clients that buy shopping centers. They live on the other side of the country. I help them up with a local manager or they maybe visit the property once every year or two, but they're not hands-on at all.

Now that's the most potentially hands-on type of product that we really deal with. With the absolute triple net lease, they're 100% hands-off. They're what's known as a “coupon clipper.”

As an aside, I will give some advice on this and I'll give an example. I recently sold a CVS. It was at the end of CVS's term and we knew that they were not gonna be renewing. The buyer knew that as well and was gonna be redeveloping the property. The owner actually lived local, but hadn't visited the property in over 20 years. This had been in the family since 1997. So you're talking about what? Almost 30 years.

So unfortunately what happened was we got to due diligence and the buyer had an inspector go and do a property condition assessment. And he came back with $275,000 of items that needed repair. And the seller really had no choice but to do a price reduction.

So what I tell all of my clients is every year, every two years, every three years, if you want to stretch it to every five years, is spend the $750 or $1,000, get a property condition assessment. Because even if it's CVS's responsibility to repair that parking lot, who says they are? Even if it's CVS's responsibility to repair that roof or replace it, who says they are? If you get that property condition assessment, you don't have to go there. You can pay somebody to go there.

And you see that there are problems. Well, guess what? A simple one-page letter from your attorney saying that per this section of the lease, you, the tenant, are responsible for X, Y, and Z. Here's a report showing you're not doing your job. Get it done. You got 30 days. That could save you so much money when it comes to sell the property or if the tenant vacates.

So that's just a little aside. They are a hundred percent hands-off and passive. However, I just like to give people that advice because it's so simple, so cost-effective, and it can save you so much money.

Seth: So what if the attorney sends that demand letter or whatever it's called saying, hey, tenant, fix this thing. And then the tenant doesn't do it. Like, does the property owner have any hammers that they can use to say, hey, you better do it or this is going to happen? How does that work?

Dan: Yeah, great question. So they are then in default of the lease, which is in the contract, right? So if you and I sign a contract that I'm gonna do X and you're gonna provide Y or vice versa, and I don't do that, or you don't do that, we're in breach of contract.

So it becomes a more serious matter because now not only have they just kind of shirked their responsibility, but they're in breach of contract. And, you know, it's been pointed out they were given 30 days to cure. They didn't. It's definitely a lawsuit waiting to happen. I'm not an attorney, but I think that in situations like that, you may even be able to recoup some of your legal fees.

Again, I'm not an attorney, but I’ve really never seen it get to that. A notice is enough. No tenant wants to be sued by their landlord and no landlord really wants to be suing their tenant, frankly.

Seth: Now, you live in Detroit, but you deal with a lot of properties over here in Grand Rapids, which is like three hours away from Detroit.

And somebody on your team, you mentioned it did something in Sun Prairie, Wisconsin. It makes you wonder, like, how far of a footprint do you cover? It’s clearly not just the eastern part of Michigan, right?

Dan: I am a national net lease broker. So as we speak, I've got a Wendy's, a former Wendy's for sale or lease in Kennett, Missouri. I've got a Walgreens in St. Louis, Missouri. I've got a Walgreens in Fulham v. Arkansas. I've got a CVS for lease in Southgate, Michigan. I've got a few shopping centers that are coming to market in Grand Rapids, Michigan. I've got a medical office building in Iowa. I did close a deal recently in Texas, a couple of deals in Texas, two deals in Virginia. So yeah, we're all over the country.

What we do doesn't require us necessarily to ever visit the buildings, because, if you think about it, I'm not a residential realtor. I don't have to make sure that you like the color of pink that's in the bathroom, right? It doesn't work like that. People are not buying these properties because they think they're pretty. They're buying them for the income stream. And the income stream is defined in the lease, right?

Obviously, they want things like good demographics, strong population density, high average household income, strong traffic counts, good visibility, good ingress, good egress, easy to get in and out of those things. But, you know, they might want to go there, but for me to analyze an underrated property, I can do it all from the comfort of my office. If need be, obviously, I'll go and visit a property or meet a client.

But ironically enough, the majority of what I do is definitely not face-to-face at this time.

Seth: That's really fascinating because normally, as a land investor, that's one thing I always kind of figured was sort of unique about land is that a lot of the information you need, you never have to leave your office for. At the most, you could send somebody to drive by and get some pictures or maybe do a wetland delineation or something. But I don't ever have to go there personally if I don't want to.

And it sounds like that's kind of how your business works too.

Dan: Yeah.

Seth: It almost reminds me of… I've got a few friends who are pilots and as part of their pilot training, they have to be able to take off and land the plane without ever looking out the window.

And it almost kind of reminds me of that. Is this the kind of thing where it's similar, where, like, if you just have the right stuff on your computer screen, you don't really have to use your eyes to ever go see that property?

Dan: Yeah. I mean, there's so much… Look, there's a value to being at an intersection and seeing the energy, seeing the cars, seeing the visibility. I can go online and I can see, oh, wow, 53,000 vehicles. I know what that feels like because I've been in a 53,000 intersection, you know, in other properties.

I'm not going to try to completely sugarcoat it and say that there's things that are missed because being in person at a property does give you a better feel. And whenever possible, we will go to the property, right?

However, the vast majority? First of all, what's going on with this asset isn't really the property. It's the lease, right? That's the first thing we're looking at.

And then the other factors, like I said, like traffic counts, we can get down to one vehicle per day, knowing how many are going across on average. We order drone photos. We get a good feel of what's going on in the area. You know, put a drone in the sky and you're going to see more than I would see on my feet or in my car, right?

So there's a lot of technology today. Even something as simple as Google Maps makes our job, it just gives us a lot more information. Which is really what we're doing is, when I'm putting together, the first thing I do when I get a property that I'm working on for a client, whether they just want to know what it's worth, or they say, “Dan, sell this thing,” I'm trying to grab as much data as possible and put that together into a compelling story for why this is a good investment.

So we have so much data at our fingertips. And some of this is not at the general public's fingertips, right? It's proprietary information. It's information we spend tons of money every year paying for. But nonetheless, it's information that allows us to help the market see whether this is in fact a good investment or not.

Seth: Yeah. So maybe the commercial world works differently than the residential world, but how does that work where you can work all over the country? Do you have to get licensed in each of the states where you work, or is there some super license you can get where it authorizes you to do stuff everywhere?

Dan: It's a great question. I get it a lot. So we have built a network of what's called broker of records. So essentially, what we do is, as an agent, I need a broker to be on my listing. So what we do is we partner with a broker of record in a specific state.

So, for example, let's go with Virginia. And we actually, so to speak, in a certain sense, are kind of co-brokering this listing together. They're using their license. We're using our license and they get paid a fee out of closing for what they do, which enables us to transact in a space that without them, we wouldn't be able to.

Seth: So curious, just looking at this from, maybe somebody who's a new investor in commercial, maybe they've done rental properties for years, or maybe they've been a land investor for a long time and they want to get into this commercial space and start with a triple net lease type property, is there a minimum amount of cash they should have ready to go?

What is the least expensive commercial building that would make sense for this? Where it's like, basically, don't even think about doing this until you have this amount of money ready to go.

Dan: It's a good question, because my background is actually in single-family house flipping here in Metro Detroit, which, especially when I was doing it during the last recession, did not require a huge amount of capital to get into.

As it pertains to your question about net lease, so typically, if you're using leverage right now, I mean, you may be able to find 70% loan-to-value. But just to keep things round and conservative, I like to just divide it into thirds and say that in order to determine how much cash you need, we have to look at what you want to buy.

So if you want to buy a shopping center, there are shopping centers out there under a million bucks. I've sold shopping centers for as little as 500 grand in your neighborhoods. Now, they may or may not have their issues, right? It's important to look into that.

So a million-dollar property, you'd need roughly $300,000, $350,000 for down payment. If you're looking at a half-million property would be half that. The shopping center space really opens up more after $1,250,000 or $1.5 million. If you can get to $2 million, now you've got even more products. $2.5 million, it's just really opening up.

So at $2 million, you need about $600,000 roughly. For a single tenant deal, you could get a low rent ground lease, really great credit, corporate credit, Valvoline or something like that. If they're paying $55,000 at a five and a half cap, you might be in right around a million bucks, million-and-one, something like that. I'd have to pull out a calculator.

But a low rent deal, let's say, $55,000 at a five and a half cap, that's a million bucks on the nose. There you go. So if you did that, that's an opportunity.

You can get great terms. Now, the problem there is that if you leverage a deal like that at a five and a half cap today with today's interest rates at like six and a quarter, six and a half, six, seven, five, you're going to have some negative leverage. It's a whole other discussion.

If you want to go into the dollar store space, it starts around a million bucks. So similar answer. That's all if you want to have sole ownership of this property, right? There's a whole ‘nother world of syndications and joint ventures where you can contribute small amounts of capital, usually about $50,000 as a minimum. I've seen people take 20 or 25.

I'll give you a great example. This isn't exactly what you're talking about because it's not ownership of a property, but I'm involved in a joint venture in Ohio. It's very interesting. I'm self-employed, so I have a SEP IRA that I can contribute to.So I decided that I wanted to take some of the money in my SEP IRA and invest it in this joint venture.

Now, this joint venture is a group of people, a group of investors, who have decided to give a bridge loan to an individual who owns an office building and some land in a great corridor in Ohio and is working with Starbucks to develop a Starbucks on that site. So we have a very low loan-to-value, like under 30%. And we're secured by a building that's cash flowing significantly, as well as this new construction that's going up and the lease that's already signed by Starbucks.

So that's not ownership. That's me being a private lender. But it allows me to have a higher return and feel comfortable knowing that I'm investing my money in a smart way.

Aside from that, there are the syndications that I mentioned where you could contribute $20,000, $50,000, $100,000 and have ownership. I've got a client, for example, that has a fund where he does exactly that. He solicits capital from people. I'd be happy to make an introduction.

He then takes that money, puts it into a fund, talks to me. We go buy shopping centers for his fund. You can have fractional ownership of a shopping center where you participate in the upside. You get distributions, all those things. So there are definitely opportunities even if you don't have that, you know, $300,000, $500,000 for a down payment for actual ownership.

Seth: So, like, it's interesting, that idea of, you know, working with Starbucks. Starbucks makes me wonder if I wanted to build to lease a single tenant building that something like Starbucks would go into, how do you find those kinds of tenants who want to do that? And how much money would I want to have together? Is it similar, like maybe half a million or more than that, since I'm building something new?

Dan: Well, so there's two ways to do it. I mean, I was involved in exactly what you're referring to in a different state at the end of last year, where a former quick service restaurant—that was vacant—was being purchased.

And the purchaser, it was kind of complicated, but he had hired leasing agents to go to all the tenants and their broker representatives to see if they would want to lease the property. And Starbucks’s broker, on behalf of Starbucks, presented a letter of intent.

And there was some negotiation going forward about taking the existing QSR, quick service service restaurant, doing some modifications, moving the drive-through and converting it to a Starbucks.

Now on that deal. I mean, I could go through all the specifics, but I think for the purpose of our discussion, Starbucks is willing to pay $153,000 in good rent.

Seth: Is that per year?

Dan: Yep. And that deal probably would have traded at about a 575 cap, maybe a six cap conservatively. If I bring out my calculator and I try to be conservative, which I've learned to do in this business, $153,000 at a six cap, $2,550,000. So that's easy to remember.

So Starbucks was actually requiring this guy to contribute, not upfront, but after Starbucks did the renovations, $800,000 of what's called TI, tenant improvement. That's a big number, but they were also going to put in another 1.2 million of their own money into the building itself. So they'd be in for 2 million with a 10-year lease.

The deal made a lot of sense, but in the end, Starbucks kind of went sideways on us because they said that in order to make make it work with the number of cars they need in their stack, right in their drive-thru, they would need to demolish the entire building. This owner would have to rebuild them something from scratch. Wouldn't make sense.

The reason I'm bringing this up as an example is because it shows you that this guy was under contract to buy the building for under a million bucks. He would have to put in about $800,000. He'd have costs. He'd have brokerage fees, but he'd clearly be in for under $2 million. He'd have a building that's worth $2.55 million. Good deal.

Now, when Starbucks said, I'm sorry, we're going a different direction, you have to scrape the building and build this new one, that would have cost him at least $3 million in addition to the million bucks that he was spending to buy the actual property.

So a lot of times, the retrofits can be a lot cheaper. If you're going to build something ground up, I mean, I was joking with somebody earlier today, because if you look at all the quick service restaurant companies out there, they've pretty much over the last three to five years, all gone toward a smaller footprint.

And I was joking, like, who do you think benefits from that the most? And the answer is the developers, right? Because the developers can still sell for about the same price because the price of the asset is not really based on the square footage, it's based on the rent.

Okay. So same rent. Rent's not going down, but their cost of construction is going down because they're building a 2,200-square-foot building instead of a 3,750-square-foot building.

So, I think that you have to make sure the numbers really work. If you've got a tenant paying big rent and your cap rate is low, it'll often work. If those factors are in the other directions, you may not be able to make the deal pencil out.

Seth: How much of a return should I expect from, say, a triple-night lease investment in a single-tenant building?

And I know this probably ranges depending on the location, the market, and all this stuff. But if I'm looking at a deal like this, how do I ascertain if this is a good deal or a bad deal? How much income should I be making based on the dollars I'm investing in it?

Dan: So first, right off the bat, we're not going to be able to determine if it's a good deal or bad deal just based on the cap rate because there are so many other variables.

So I would say you determine whether it's a good deal or a bad deal through experience. Just like anything, the more deals you underwrite, the more you're going to be an expert. In the beginning, reach out to someone like me who can give you a second set of eyes, maybe show you a few things that you might have missed. That's very important.

But in terms of the actual cap rates, what to expect, we can start at the bottom and go to the top. So starting at the bottom, I mean, one might argue this is the top, but the bottom cap rate number-wise, maybe the most trophy assets are going to be your trophy. Generational, like a Chick-fil-A. That's in a major market, in a major corner, and they're just going to be destroying it in business. They're making $8 million a year in sales. They're never leaving. It's a gold standard, just A+ real estate. You're looking in the forest still, believe it or not, four, four and a quarter. These used to be three, seven, five deals, but now they're more like four, four and a quarter, maybe four and a half.

If you kind of move back from that, and you look at like your quick service restaurant deals that are on incredible corners, high traffic counts, they're doing very high sales volume, their rent to sales ratio is below, let's say 7%. Very important, their lease is guaranteed by their operator who is either corporate that has thousands of locations, or a huge operator with 2,000, 3,000, 4,000 locations.

Because, keep in mind, as an aside, not all Wendy's are created equal, right? Some of them are paying higher rent, some of them have more terms left, some of them have better sales. Some of them have a guarantor that has three units, very weak guarantor. Some have a guarantor that's 300 units, much stronger.

So if you have a very strong guarantor and all the other factors I mentioned, and you've got a brand new 20- or 25-year lease, you're probably in the low fives, five, five and a quarter, maybe five and a half. As that term gets burned off, maybe you're at 15 years or 12 years, you might get closer to six.

There is some QSR, good QSRs are available in the high fives, low sixes. It kind of trails off from there. Once you're in the sevens, there's usually some issues, shorter term lease, or there's clauses in the lease that can make the rent variable because it's based on the percentage of sales, things like that.

Dollar stores, which were trading at their height, brand new dollar store in a tertiary market, 15-year deal, built a suit, was trading at around five and a quarter cap. Today, it's probably six and a quarter, six and a half. If there's some term burned off, it's going to be in the sevens maybe seven and a half depending on how much term is burned off.

Pharmacies today are all over the board. We've had a massive shakeup in the pharmacy space. Anything from mid fives, if it's the best of the best, most of the product is six and a quarter to eight cap today. A lot more eight cap deals in the pharmacy space than there were before.

If we were to switch over to shopping centers, again, you've got trophy A+ real estate at five, seven, five, six, six and a quarter, but that's kind of like the outliers.

If you take those out of the equation, most of the shopping center space right now trades between six and a half and eight and a half cap.

I have clients that I am constantly fishing for. They're looking specifically in the seven to nine cap space. There's a lot of stuff available. And in that case, it makes a lot of sense to leverage because you can still get interest rates significantly below what your cap rate is.

Seth: Now, just to make sure I understand, I know people in the land business, we don't deal with cap rates that often because usually it's just a different type of business and we're not borrowing a lot of time for the properties that we're buying, at least in the land flipping space.

And just to make sure I understand, so the reason a person would invest in a lower cap rate property is because it's more of a guaranteed-ish source of income, right? Like, it's less risky. Whereas the higher cap rate properties might come with more risk or uncertainty about the lease, the property, or the market. Is that accurate?

Dan: That would be exactly what it is. High risk, high return; low risk, low return. That's 100% what it boils down to.

Seth: In the self-storage industry, I've heard this thing like, if you buy a property that's kind of out in the boonies, where there's lots of other vacant lots around, it'd be very easy for somebody else to build up a new property next door and kind of change the dynamics of the market. So those kinds of properties would have a higher cap rate.

Whereas, if you buy a huge multi-story place in downtown Chicago or something and no other competitors are going to come in at any point, it's just a much more certain thing in terms of what you can expect. And that might have a much lower cap rate, but you know what you're getting and it's probably not going to change anytime soon.

Dan: Exactly. Yeah. And that can go for location or tenant, right? If there's a tenant in bankruptcy or potentially in bankruptcy, there's higher risk, higher return. But it can also go for lease term, right?

So if I have, let's say, a Taco Bell that has 20 years left on the lease, that's pretty much a guaranteed income stream for 20 years. Obviously, if that tenant files bankruptcy, I could lose that. That's why it's important to have a very strong guarantor on the lease.

But that deal has significantly less risk than if there's six months left on the lease or 12 months left on the lease, because I could be left with an empty building. In fact, oftentimes, when we're pricing very short term deals, I don't price it as a cap rate. Like, normally, I'm looking at a deal and I'm like, okay, based on the comps and information and my knowledge, this is a six and a quarter cap, right? Let's take the rent, put it at six and a quarter cap. That's the price.

For a lot of short-term deals, what I'm doing is I'm saying, okay, this tenant is paying $125,000 a year. There's one year left on the lease. We have no indication whether or not they will renew. If they renew, that's great, but we have to assume they're not renewing. This building is worth a million bucks. Let's take it and price it at $1,125,000, right? The person's going to collect that 125,000 income stream, then they've got a million-dollar-building.

That's one way to price it because I can't really put a cap rate on that. The level of uncertainty is so high that it's not really fair to put a value, put a cap rate, on a property like that.

Seth: It's interesting hearing you talk about guarantors for leases. In my past life, I used to do SBA 504 loans and we always had to get unsecured, unconditional guarantees on the borrowers personally.

And so, in my mind, I think of a guarantee in association with a commercial loan or something like that. But a lease is almost like a loan alternative, where the difference is that at the end of the term of the lease, you don't own anything, you just pay for your time?

But if that lease, you know, if something happens to it, there's a guarantor standing behind it to support those payments, right?

Dan: Yeah. I mean, it's like leasing a vehicle, right? You know, at the end of the day, you're responsible, you're signing the dotted line.

You know, balance sheets, in terms of how things have been reported in the quick service restaurant industry, have changed in a way that's kind of odd. But some people prefer to take their lease liabilities off of their balance sheet, because if you're a large operator, a lease liability on a 20-year lease, even at 100 grand, that's two million bucks, right? So, if you've got 100 of those, that's $200 million on your balance sheet.

The reason I bring that up is that the lease is a liability for the tenant. It's something that they're obligated to pay until it's over. And if not, you know, people can go after them.

And that's why that guarantor is so important because, you know, don't put it past corporations. You might think you're buying a CVS with a corporate guarantee, but maybe… I've seen guarantees on that CVS I mentioned earlier in our show. So the guarantor was, I think it was like CVS Metro Detroit. So they might have taken their three worst performing stores in Metro Detroit, put them in this entity, sign these leases, and then now that they're doing poorly, they can say, okay, you know what? Big deal. We're going to bankrupt the entity. We're not bankrupting the corporation. We're bankrupting the entity.

That's why it's so important to know who your guarantor is.

Seth: Sure. Is the guarantor always the same as the tenant? Or could the guarantor be some other party for some reason?

Dan: Well, I'll give you an example. Wendy's is a national chain, right? That's the name on the building. But the guarantor on the lease is going to be the franchisee or corporate. It could be corporate. But in the case of Meritage, they're a large franchisee I've worked with over and over again.

Seth: That's Wendy's, right?

Dan: They’re not Wendy’s, they’re a franchisee of Wendy’s. They’re actually located in, headquartered in, Grand Rapids. They have about 345 locations, so they’re a very strong guarantor.

So the tenant, Is it Wendy's? Is it Meritage? It's a little bit of both. Wendy's is the corporation that's operating there, but the real tenant is Meritage.

So yeah, the answer is that sometimes yes, sometimes no. I mean, you could have a corporate Walgreens where Walgreens has the name on the sign and Walgreens, the tenant and Walgreens is signing, right? You know, and then it can go different ways. It can even go in a better direction.

You can have like The Learning Care Group signs on their leases and they've got like seven or or eight different children companies that they're the parent of, but oddly enough, they're signing. So the guarantee is the whole company, which is that's what you want, right? You want as big of a guarantee as possible.

Even though the other direction as well, I've got a medical office that the name on the sign is the largest healthcare system in the state, but the guarantor is a sub-entity, right? So they want to protect their assets, which as a broker, I don't want that. I want the most assets possible on the line to secure that property and that lease for the owner.

Seth: So a little while back, we were talking about that Starbucks example, how they were coming to the table, investing a bunch of money, I think 800,000 or something like that.

Dan: They were going to put a $1,200,000, but the owner would have had to put $800,000 as a reimbursement.

Seth: So that makes me wonder, what condition does the empty building need to be in to find a new tenant? Like, if the tenant is going to come and do their own stuff, make their own leasehold improvements, what are they going to expect to have in place when they show up to do that? If I just have a completely trashed out building, but the walls on the roof are there, is that enough? Or does it have to meet some minimum threshold to be leaseable?

Dan: Listen, even for commercial real estate professionals, I think it still applies.

I believe that, you know, perception and psychology is very important. The moment you walk into a trashed building, you know, it just hits you in a way that you can never really erase. So definitely spend the money to do a trash out and clean it up.

But this particular building was your classic 1998, you know, green roof, green tile Burger King. It needed a lot of work. It had the four walls. The roof was in decent condition. It was relatively clean. But it was old. It was very, very old.

And, you know, unfortunately, in the quick service restaurant space, we're seeing that all over. I mean, Restaurant Brands International, the parent company of Burger King, announced last week that they're going to spend a billion dollars buying their largest franchisee, which is Carol's. Carol's has a thousand units.

And one of the reasons they're doing it, they feel that Carol's can't handle remodeling all these units that need to be remodeled. So they're breaking them up, giving them to other franchisees and having them be remodeled. So, I mean...

It's a big issue because these quick service restaurants, if they get behind on the remodel, their sales usually go down, right? Because as humans, we are magnetically attracted to something nicer, newer, and shinier. And we'd rather go to the nicer, newer, shinier alternative next door than the tired, old-looking one.

So if they get behind on that remodel, then the sales start going a little lower. Then they can't justify the remodel. And then they're in this very bad cycle. So that is a problem that a lot of large restaurants are trying to avoid. I think that Burger King is doing everything that they can to keep that brand alive.

Here's a scenario for you. Let's say I wake up tomorrow morning and I own a single tenant, Starbucks-like building in a decent location, but it's empty. What should be my first step to find a good tenant to occupy that?

I realize I could hire somebody like you to do it for me, but if I was trying to do this by myself, where would I even start looking to find these people? Am I calling up corporate offices or something? Is there some website where I can advertise this or what would you do?

I mean, I definitely would not do it myself. First of all, as much as, you know, I'm an investment sales broker, so I sell buildings and I help investors buy buildings.

Listen, I've got a bunch of deals on the market right now that are for lease. Most of them are for sale or for lease. But if you've got a building and it's not in my market, I'm going to be doing you a disservice. And I'm going to be honest with you about that. I'll find you the right person who's the local person in your market, and I will highly or strongly advise you not to do it yourself.

What they're going to do, first of all, is they already have the relationships. They already know who's where. They already know how far away the locations are from their next closest locations. They have the software. They've got the team that can make the cold calls. They can be out there doing the property showings. I would never, even me personally, I wouldn't do it myself. I would hire somebody to do it. They're going to run what's called a void analysis or a a gap analysis to see what tenants are the most likely fit in that location.

And they're going to start shopping your space around. Eventually, you know, those tenants are going to start presenting LOIs through their, you know, brokers to let you know, like, what can be done.

But the leasing process is a long process. You need to figure at least a year, at least. If you do it in a year, good for you. That's amazing. But at least a year, it's so important because people can get drowned in the carrying costs for properties like this.

So it's important to keep in mind. And then keep in mind also that you're going to get a variety of different offers. I mean, you might get an offer of $100,000 a square foot. I'm sorry, $100,000 a year from a tenant. But they might ask you for $500,000 in tenant improvement allowance. You might get an offer for $89,000 a year with no tenant improvement allowance. You got to run your numbers and know that it's not as straightforward as typical sales are. are.

Seth: So like if I were to hire you to find this tenant for me and you find one, is there some fee you take from that or how much does it cost for me to get your help to do that?

Dan: Yeah. So there is no fee to get the help. And again, if it was, unless it was in my market or there was some extenuating circumstance, I would refer you to the best person locally. Leasing brokers usually have to be local.

But the way that it works, it's similar to a sale. So, you'll sign as, let's say, let's just make an example. So you were hiring me and you're saying, we're going to agree for, I would say a year, 18 months, maybe to represent you and find you a tenant.

So the way that it works is that there's a certain percentage of commission that's agreed upon upfront. Normally it's 5% or 6%. And it's for the entire duration of the lease.

So for example, if it's a hundred thousand dollars a year rent at 10 years, right? That's $60,000 at 6%. And that commission, I would split with if there there was a broker that came in and brought the tenant, which is very likely because a lot of these tenants have their own in-house brokers and then those are the only ones they'll use.

Now, if it was a 20-year lease, $100,000, 20 years, 2 mil, that'd be $120,000 that we would somehow split. So, you know, that's how it would look in terms of the arrangement. You know, as a broker, I'm going to want to get paid at least execution as a seller.

You're probably going to say, Dan, I'll give you half at least execution and half when they start occupying the property. You know, it's all a negotiation, but that's really how it would work.

Seth: So, you mentioned that you kind of work all over the country. So it sounds like there's really no reason I need to be worried about geographic location as long as there is a property that fits what I'm looking for.

Or like, I want to see at least this much income. It should cost this much. Just kind of give you the profile of what I'm looking for and say, go, Dan, and you can find it. It doesn't necessarily need to be anywhere near me as long as I can send out a person every so often to check on the status of it.

Is that accurate? Or like, would you say, no, Seth, we're going to start in Michigan for some reason? Or is that not really how it works? As long as you know the specifics I'm looking for, you can go anywhere?

Dan: I mean, it's going to be to your comfort. First of all, experienced investors invest all over the country, but they also invest invest in markets that they like.

If it's an absolute triple net deal, unless you want to get the pleasure of driving by it, I don't really see any difference at all. Because you're not responsible for anything. If it's a shopping center and you're managing it, yeah, it gotta be close. But again, I wouldn't recommend you to manage it.

So shopping centers maybe would be a little more reason to be close to you. You know, just in case, because shopping centers are a lot more owner hands-on. That's not necessarily your hands, but the hands of whoever you're hiring. So that might make more sense.

But again, I have clients that are buying shopping centers all over the country, even though they're not there and they really never visit. So I don't think you have to be constrained to your own, you know, farm market, so to speak.

Seth: So I've got a really oversimplified question here, but I'm just going to ask it anyway.

So if I want a hundred thousand dollars of annual net income from triple not lease properties like this, how much do I need to buy in real estate?

Dan: You said $100,000 of income?

Seth: Yeah.

Dan: Well, that's very simple. Because if we say that the cap rate you're going to be targeting is 6%, okay? Right? So if I want to have $100,000 of income, all I need to know is what price of property is going to get me $100,000 annual income at a 6% return.

And the answer is $1.666 million.

Seth: Okay. So I just have to… and to do that, say if I needed, is it like a 20% down payment or more than that?

Dan: I mean, no, typically you're looking in today's market. They want to see like 30%+.

Seth: Okay. So 30% of 1.666 million, whatever that is. I need that amount of cash. And then the banks that are willing to work with me, essentially.

Dan: Yeah. And I find that a lot of my clients have success with local community credit unions and local community banks in the area that the property is in.

Now, if you're in the area and the property's in the area, it's going to be maybe even a little easier to get a loan. But I wouldn't say that that's a deal breaker if it's a property outside of your farm area. But I definitely would go with a local lender.

Seth: And in terms of what lenders are looking for, I know when I did SBA 504 loans, it was always owner-occupied small businesses, which is kind of different from what we're talking about. This is like, I'm not occupying it. I'm not the small business running the place. Somebody else is doing that.

So, what do banks want to see in terms of, what should my personal financial situation be like? Does it matter what my annual income is from whatever that source is? Or are they just looking at the property itself and using that as the basis to approve the deal?

Dan: You know, I would say that (I can answer this to my understanding, but being that I'm not not in the underwriter's seat at the bank, because that's not what I do), I can't give you full certainty on this.

But from what I've seen, they like to see your personal financial statements. Well, not like, typically they need to. They want to see some liquidity, some experience, some real estate holdings. That's all helpful.

At the end of the day, what's important for the lender is a few things. Obviously, your debt-to-income ratio is very important. It has to be on the side of a certain threshold. You know, typically they're looking at, they don't want to loan more than 70% of the value of the property. Which, by the way, in the future, if you refinance, the property goes down in value, that could potentially be a problem.

Now, the other thing is what's called the DSCR, the debt service coverage ratio, which is essentially the ratio between what income the property brings in after all expenses and what the debt service is.

So if the property brings in $125,000 of NOI, net operating income, and the debt service is 100 grand, you now have a 1.25% DSCR, debt service coverage ratio, which is pretty healthy.

Depends on the deal, depends on the lender, but I've seen them go as low as 1.1, which is kind of crazy, or 1.08 for certain deals. But you want to make sure that you're able to cover your debt service.

Seth: Yeah, it's probably a conversation I have to have directly with a lender. But I appreciate you sharing what you kind of have ascertained from your time working with this stuff.

Dan: Sure.

Seth: It almost sounded like you were saying triple net lease and absolute net lease interchangeably. But I had thought that there was a difference where like the absolute net lease is where the parking lot and the roof and that kind of stuff is the tenant's responsibility. Whereas the triple net lease, that stuff is more of the property owner's responsibility.

Is there a difference between those two?

Dan: So I don't know who did this, who put this little nomenclature change, because this is exactly why I said it the way that I did.

In certain parts of the country, primarily in the western side of the country, sometimes brokers and investors, mostly brokers, will say absolute triple net lease, which is zero landlord responsibilities, and then triple net lease means the landlord is responsible for roof and structure. That is wrong. So that's what we call a double net lease.

So for me, in order to avoid that ambiguity, because some people call a triple net lease what I would call an absolute triple net lease (meaning no landlord responsibilities), and some people call that a double net lease, meaning roof and structure is a landlord responsibility, so to avoid that ambiguity, I just take that out of my lexicon.

And I say, absolute triple net lease: landlord responsible for nothing; double net lease: landlord responsible for roof and structure, or sometimes parking lot as well.

Seth: And I know like with the single and double net lease stuff, how like some of it's on the landlord, some of it's on the tenant. Does that ever change? Say, if I were to just say single net lease, are you jumping to the conclusion that, okay, we're talking about property taxes. That's what's the tenant's problem. Or is it?

Dan: First of all, it's not very common. Like double net lease is, really, in terms of that word, that's it goes in most cases from a double net lease, which again, roof structure and maybe parking lot on the landlord, everything everything else on the tenant, to a modified gross lease, which can be anything you want it to be. It just means that you get a gross rent and then the expenses are divided however they are.

Single net lease, that term almost never comes up, but typically that does refer to taxes and insurance being paid by the tenant or at least taxes. But again, it's not very common.

It won't change unless there's an amendment. Right now, Rite-Aid is going through bankruptcy. One of the things they're doing is they're reaching out to their owners and they're saying, we want to slash your rent. We want a couple months free rent, and we want to go from a double net lease or whatever we were, an absolute triple net lease to a gross lease where you pay for the taxes, insurance, and maintenance, which is like, that's a crazy expense hit.

But that is a very rare situation. It's because they're in bankruptcy. Were they not to be in bankruptcy, they wouldn't even be able to do that or propose that unless a new lease amendment was signed.

Seth: And you mentioned earlier how there is some property management involved, say if there's like a shopping center or a strip mall or something like that.

Dan: Yeah.

Seth: So I'm wondering, what is that? What is involved with that kind of management? And how much does that cost to hire a property manager to do that stuff?

Dan: Yeah, great question. So typically, when I underwrite a deal, I always put in a management fee, even if it's being seller-managed, because I don't assume that the new buyer is going to owner manage it. And furthermore, even if they are, they should get paid for that, so to speak.

So I'm typically underwriting 4%, unless it's some huge number, but 4% typically of the gross income. So that includes the the base rent, as well as any CAM charges or triple net reimbursements that the owner is receiving.

So the owner might get 200 grand in base rent and 100 grand in expense reimbursements. My 4% is off of the 300,000, so that would be 12 grand a year.

So they're responsible for managing everything in the plaza. They're responsible for getting the grass cut. They're responsible for getting the parking lot swept and sealed and fixed and replaced and all that stuff. They're responsible for plowing the snow and doing the landscaping. They're responsible for roof repairs and anything that goes wrong with the sewer or plumbing or any tenant complaints like that. So that's really what they're doing.

Now, in addition, you may have another expense which people often overlook, which is lease up expenses. So if you've got 10 tenants in a center, it's very uncommon for them to be 100% occupied forever. So anytime you have a vacancy, you now have to have a leasing broker, unless you do it yourself, lease that space out, which is going to cost you money in brokerage commissions.

Not a lot, because normally in shopping centers, the annual rent is a lot lower. But you also potentially have what's called “fit out expenses” or “tenant improvement allowance expenses.”

So you might sign a tenant who says, I'll stay here for 10 years. But in exchange, I need you to either give me a rent abatement, get rid of my rent for a few months, or credit me some rent or diminish my rent. Or I'm going to put $60,000 into this space to build it out and make it the way I want. I want you to contribute half of that.

So those expenses are real expenses that come up for shopping center owners once they purchase a property.

Seth: You had mentioned a little bit earlier, this idea of it can take a year for a property to lease up and find a tenant. It makes me think, how much cash should I have set aside for holding costs when a property goes vacant?

I realize it probably doesn't happen that often if you have like a 15-year lease or something, but when that day comes, assuming it's going to take a year, maybe longer, is there like a rule of thumb, like whatever the property's worth or whatever your normal lease payment is, have this much set aside, ready to go? Any thoughts on that?

Dan: It's a little different for shopping centers, multi-tenant properties versus single tenant. Because with shopping centers, it's like multifamily versus single family. Single family, vacancy, it's zero income and some expenses. Multifamily, there's one vacancy, you still have income.

So same thing with multi-tenant, right? If one of your tenants or two tenants leave, you still have that income stream.

Now, obviously, you have to keep in mind that sometimes your debt service might be a certain amount and you need to be at a certain occupancy even just to pay your bills, right? That's important.

So the answer to your question is there's not really a rule of thumb. I will say that with single tenant deals, your know, your expenses are going to be taxes, insurance, as well as the cost to maintain the property. Because if that was an absolute triple net property, you never had that expense, right? That was always on the tenant.

So, you know, I can tell you this, you know, taxes, pretty easy to look up. Insurance on a vacant building can be high. So you have to factor that and insurance costs have gone up. And then, you know, typically, in general, we tell people to to put away a replacement reserve. This is not exactly for your question, but it would help.

So we tell people to put away a replacement reserve, depending on the condition of their building or their center, anywhere between 10 and 35 cents a foot, just take that out of your income and put it in an account.

Now, if you have a roof, for example, that's on its way out, has five years left, you can do the math pretty easily on how much it will cost to replace the roof, divide that by five, put that in that replacement reserve account, pull that out every every month, that's really important.

You can help offset your vacancy costs in terms of your improvement of the building or repair, replacement of the building by having that vacancy, that repair allowance, so to speak. So that's important.

I can't give you a rule of thumb as to how much money you're going to need to have, but for a year of a Walgreens sitting vacant, you're going to need a year of taxes, a year of insurance, and you're going to need enough money to keep the property in good repair for the entire time that it's vacant.

So, you know, I know it's not exactly a cut-and-dry answer, but I think pretty easily you can calculate taxes and insurance and then I can help you put aside a certain amount of money per square foot, depending on the condition of the building, to help account for any of those repairs that might happen.

Seth: Do you have any examples off the top of your head? Like, yeah, we dealt with the Walgreens or a Starbucks or this or that, and it was this amount. Realizing, like, this is not a cut-and-paste answer for everything, but just to get a vague idea of what it might be.

Dan: Yeah, listen, you could be looking at it depends. It really depends on municipality. But I've seen quick service restaurants that have taxes as low as $10,000 or $15,000 a year, right? And insurance could be three to five grand a year. So you know, you might be looking at $20,000 to $25,000 in taxes and insurance.

I've helped my clients secure an individual who would be paid about 200 to 500 hours a month to cut the grass and plow the snow and you know, secure the building. And do showings and make sure people can get in and get out and winterize it and de-winterize it and all that stuff.

Most of the time, when people have vacant buildings, they don't really continue to repair them at the same level that they would. And they just kind of let things go a little bit. So in that example of a small Burger King, you're looking at, I don't know, I would say 30 to 40 grand a year to have just to keep it the way that it is.

If it's a larger, 15,000-square-foot former pharmacy, that number could easily be $80,000 to $100,000 in a worst case scenario, let's say.

Seth: I'm curious, is there any particular way to find motivated sellers or below market deals on this type of property? I mean, I know how to do this with land. It's not particularly difficult, but when I started getting into self-storage, I found it was a completely different world in terms of just the way everybody thinks about these things and finding motivated sellers and that kind of stuff.

But off the top of your head, if I wanted to find a below market deal on a commercial building that could be used for this, like, is there even a way to do that? And if so, like, how would you find those people?

Dan: I mean, the best way to do it is to network with great brokers. You can do what I do if you want. It's not a lot of fun and not easy, but I mean, the way to do it is to get on the phone and make 300, 400 cold calls a week and tell people what you're willing to pay for their building. But you might as well just be on a broker shortlist and get those great deals before they hit market and let them or their team be the ones that are looking for the motivated sellers.

You can do it if you want, but I just think it's not an efficient usage of your time.

Seth: Yeah. Well on that, say if you're going to do cold calls and tell people what you're willing to pay for their building, is there a quick back of the napkin way to come up with an emotion-free data-driven number that you could offer for people?

I'm dealing with a number of self-storage facilities right now where, not surprisingly, the sellers want more than they're worth. And it's kind of interesting. I've talked to a number of people about, like, how do you come up with a number that's just objectively what the property is worth? Doesn’t matter what the seller is asking, like, you need it to cash flow on day one and it just needs to be a no-brainer decision. Even if they say no to it, that's fine. At least you need your objective way to do this.

So how do you do it? Do you just figure out, okay, when is the lease coming in? And what are the most likely expenses with this property, property taxes and all that stuff, and then do it that way? Or I don't know. How would you do it?

Dan: There really is no accurate back of the napkin if I'm sitting with you and you give me the a napkin and you want it back in the same sitting, right? I mean, I can pretty quickly, I already know relatively what it's worth.

But if somebody wants back of a napkin now, it's a mistake. Because why don't you let me use my tools to see what's really going on so that I can tell you what it's worth?

But essentially, you know, what we do is we get a copy of the lease or leases if it's a shopping center. If it's a shopping center, we also need the rent roll and the profit and loss report. So we then will go through that. We're going to alter it because there's almost not Not always.

In most cases, there's going to be things on there that don't belong on there or things that are not on there that do belong on there. So we're going to do that. We're going to create an accurate rent roll, an accurate income and expense report. And then we're going to do our demographic research, look at traffic counts, look at nearby national and local retailers. We're going to look at the market, look at trends like demographics, population density, average household income.

I think I already mentioned traffic counts, ingress, egress, visibility, tenant profile, duration of leases. All of these are variables. Annual increases in leases, if they are, how many options do they have? What's the condition of the center? What's the historical occupancy been here? here.

And then based on that, we're going to look at some comps. We're going to come up with a cap rate number, apply that to the price, and it's going to be pretty darn accurate.

Now, a single tenant, it's a lot easier because single tenant, I just need the lease. I don't need the profit and loss report. Rent roll, there isn't one of those, right? It's all profit. There's no loss, especially with an absolute triple net deal.

But I'm going to do the same things. Traffic counts, ingress, egress, national retailers. How's this corporation doing? What's the guarantor like? How are they doing? How many units do they have? Is there a personal guarantee? What's their net worth? What kind of real estate holdings do they have? I'm going to look at the area just like I did with the shopping center.

And again, pretty quickly, I can give full report that is pretty accurate as to what the real value of the property is.

Seth: Going back to this issue of a tenant vacating a property and the property sits vacant for a while, does this ever happen where a property sits vacant for years and years on end or the tenant unexpectedly leaves?

And if so, how do do you avoid that situation? How could you just buy a property that won't sit vacant for that long? Is it just a matter of looking for those lower cap rate properties where they're going to fill up faster? Or is there any trick to make sure you don't get in a bad position?

Dan: Yeah, absolutely. It essentially boils down to the fact that, you know, we listed a property last year, it was a former gas station that was vacant for 20 years. It had some environmental concerns and it just was completely dilapidated. We weren't able to move it at the price that the seller had asked.

But something like that, it was in a little bit of a remote area, it had the potential environmental issue, just things that would scare buyers away. So that was, I'd say an anomaly.

Normally, properties go dark for a long time, because there's a problem, maybe there's an environmental problem, maybe there's a problem with the ownership, maybe there's a problem with the real estate.

But the answer to your question in terms of how do you find properties that are not going to go vacant. Yeah, cap rate is part of the play, right? Because lower cap rate is lower risk. But really, at the end of the day, you want to look at the fundamentals of the underlying real estate. Because if the fundamentals of the underlying real estate are good, then even if your tenant leaves, you can backfill with another tenant.

Now, another very, very important part of this is market rents. So what I mean by that is, you know, if you're you're looking at a tenant that's paying $40 a square foot, but the market is $18, that's not a deal I like because if they leave, you're going to put an $18 tenant in there.

And that means if you have a loan, you're not going to meet your debt service coverage ratios, and you're not going to meet your loan to value, and you're going to be in big trouble, which is not something that we want.

So that's very important. You want to look at the underlying fundamentals of the real estate, but you also want to make sure that they have replaceable rent. That's very, very important.

Seth: No, that's great. It makes me think of some of the gotchas and things that people might not think about, especially if it's their first triple net lease property that they're getting into.

Can you think of any other gotchas or risks associated with these deals or maybe examples of people who got into this and then it was like, oh, shoot, I didn't realize this was going to happen, and they ended up in a bad spot?

Dan: Yeah, here's an obscure one.

There's a guy that I was working with that had a PetSmart. And he had just bought it not too long ago for a certain cap rate. And his broker didn't really show him the lease. He never really went through it. And he was considering selling it. And I was underwriting it. And I uncovered what we call a wrinkle in the lease, right?

Which, for anybody who doesn't know what that means, it's metaphorically speaking, let's say the lease had a wrinkle. It covered up this little part. Nobody saw it. Opened it up. Uh-oh, there was a wrinkle in the lease.

So, this wrinkle in the lease was what's called a co-tenancy clause. And what that is, is that in this case, this PetSmart was part of a shopping center that had, I believe, a Lowe's in it. A co-tenancy clause said that if at any point Lowe's went dark or vacated, PetSmart could immediately reduce their rent by 50% and vacate at any point.

So had this guy not had this clause, his property would have been worth X. But that co-tenancy clause cost him close to a million dollars in value. So that was definitely a big oops.

I advise him not to sell because it just didn't make sense. And he's held on to it. I check in with him every now and then. And I drive by the PetSmart because it's not too far from me. And he's lucky. The Lowe's is still there. But it's just, it was unnecessary.

And had he had a better broker or had he had his reading glasses on, so to speak, maybe he would have come across that wrinkle in the lease. That, I think, is a good example.

I sold a shopping center to an individual in your neck of the woods. He was in a 1031 exchange from California. And he struck me as someone who was a little bit cheap.

So he decided to self-manage the property from California, even though the property was in Grand Rapids. I kept in touch with him. You know, he looked at some of my other deals that I was selling. And within two or three years, you know, we were on the phone and he, I asked him to see his rent roll, and he was at 50% occupancy. I sold him a 100% occupied center, and he had mismanaged it all the way down to 50%.

So, you know, thankfully, I was able to help him get it back to full occupancy, and I'm actually going to be listing it for sale again. But that's a good example.

I mean, it wasn’t worth it, right? He could have spent thousands of dollars a year to save himself 50% of his income stream indefinitely.

Seth: Well, I'm curious, what kind of property would you look at and just say, no, don't do it. This is a bad deal. What would be the cause for you to say something like that? Is it a bad location or the bad building or a bad tenant or the bad lease or what kind of problems aren't fixable about a deal?

Dan: Good question. So a wrinkle in the lease like like that is not fixable about the deal. That's for sure.

This is something that's overlooked, but ingress and egress. I had a deal I sold where the city just put one, like pedestrian islands, so you don't have to cross the whole street. You just cross half the street, stand there, wait for the traffic and then go.

So they put this pedestrian Island legitimately right in front of my client's drive-through. And we were both talking and we're like, this isn’t good. This property is going to go downhill. and he ended up selling it. We found a buyer who didn't care, but that was an issue that wasn't going to change. And that was very important. So a wrinkle in the lease, ingress, egress.

Seth: I've seen the weird stuff from my days in the 504 world, where there might be a strip center or something like that, and Subway is a tenant in one of those local units. And something in the lease says like landlord you can't have any other restaurants here.

Dan: Oh, that's very common.

Seth: Really? Wow. You would never know that unless you knew to look for it or had seen it before.

Dan: Very common in shopping centers that there's restrictions without question. It's very important to look into that.

I would not buy a property today that I couldn't replace the rent. I'm not interested in buying, unless there's some extenuating circumstance, but I'm not interested in buying something, like I said, that is paying $450,000 in rent and I can replace it with a dollar store at $125,000. So that would definitely be, for me, a deal breaker.

And then, occasionally I come across these multi-tenant properties that were like clearly flipped and put together in a sloppy way with like, tenants signing weird leases or it just looks like somebody grabbed something that was garbage and then like put a bunch of band-aids all over it and then said, here, it's worth more.

So those things I stay away from because those are definitely problems. And I mean, yeah, everything's going to be on a case-by-case basis, obviously. I think that if you're, pharmacies without drive-thrus, Starbucks without drive-thrus, those I would definitely, I'd second guess without question.

Seth: Yeah, what you're saying kind of reminds me of, I was talking with my friend, Eric Scharaga, who is a note investor for vacant land. And you're saying kind of a similar thing. Like I can buy a note where the property was sold for way more than it's worth. And then the loan is way higher than the property's value.

But, if I ever have to repossess that thing, I can't assume I'm going to resell it for that high price again. Like it's got to make sense for what it's actually worth.

Dan: Oh yeah, exactly. Yeah, that makes sense.

Seth: Does seller financing ever get involved in these kind of deals? And if so, and if you're involved, how would you get paid your commission if it's a seller financing deal? Does the borrower just basically have to cough up enough cash to cover that and the seller's down payment requirement?

Dan: So it's not that common. I would say some of the funds, they're doing this thing recently where they make an offer and they say, we want to ask the seller to lower the price by 20% and then we'll give them 20% equity in this particular fund. Most of my sellers don't go for that. They don't want to jump in bed with somebody that they don't know.

One of the benefits of selling these properties is you're selling to somebody and you're cutting ties, right ? So that's a form, I guess, of seller financing.

It comes up, some people offer it, you know, it's not as common. In the event that there would be seller financing, my brokerage commission would be paid exactly the same.

The seller is still selling the building, right? Let's just make up numbers, selling it for $10 million. There's a million dollar seller hold. So the $10 million purchase price is what the commission is based off of. Yeah, he's lending this guy money, but it's independent in a certain sense of the transaction.

Actually, in fact, I did do a rather large, almost $50 million transaction that had a $5 million seller financing component in it. They were carrying a second mortgage behind the bank and it was paid off. I think it was a five- or seven-year mortgage. But that was because we needed to make the deal work because the borrower couldn't get enough from the bank based on his cash position.

Seth: Yeah. I've seen that in the past if the property doesn't appraise high enough, but the buyer still wants it. And so they come up with a under the table deal or something, not really under the table, but just something to make the deal work.

Dan: So yeah, this was… this was a hundred percent over the table. It just was that the seller, the buyer needed to contribute extra equity. This offer was contingent and this was a huge deal for all parties. So they felt that if they could execute and provide that seller financing, that the deal would go through. And it did. And everyone was happy, including me.

Seth: Now, when interest rates go up, as they have over the past year, does that have a direct impact on the property value and what these properties can sell for? Should it have a direct value on that?

Dan: It does. You would think it would have more of an impact because, you know, we saw a 550 roughly basis point swing in about 17 or 18 months in the federal funds rate.

And the asset class within net lease that was hit the hardest was probably dollar stores because they had been churning out for a decade and the cap rates kept going lower and lower. But they were only affected by like 100, 125 basis points, quick service restaurant, most of them 50 basis points.

So yeah, they were affected, but net lease is sticky. That's another value of net lease is that it's the cap rates and the values are sticky and they don't change much or quickly.

And even though we had this incredible, huge surge in interest rates, the cap rates didn't go up that much, which by the way, made my job a lot harder and made buying deals a lot harder because, you know, if I look at one variable, there's really two variables I think that are most impactful in what I do and in the net lease market.

Number one is the VX, right? The volatility index. The more volatility there is, the more transactions there are, the better it is for a broker and just the more volume there is.

But in addition, the spread, the delta, if you will, between borrowing costs and cap rate, that's the biggest driver in net lease volume and transactional volume. And that has gotten squeezed tremendously to a point where it's very difficult to transact on a lot of properties.

We are hopeful that as interest rates are relaxed over the next 12 to 36 months, that spread is going to increase and that velocity in the market is going to come back.

Seth: Now, suppose a property owner signs a 15- to 20-year lease with the tenant and it includes a rent escalation clause so the rent automatically goes up each year. But then if the rate resets on the property owner, their interest rate or inflation goes crazy or both.

Is it feasible that that rent escalation isn't enough to cover it and the property owner ends up in the red anyway? Does that ever happen?

Dan: When you say the rate resets or the property owner isn't able to cover it, give me more context as to what you mean.

Seth: Yeah. So say if I bought a property four years ago and my rate was like 3.5% or something like that. And then at five years it renews and now my rate is 8% or something crazy like that. And inflation is going nuts and the increasing rent isn't enough to make it okay. Does it ever ever happen?

Dan: Yeah. So first of all, some leases have rental increases that are tied to CPI, the consumer pricing index. So maybe with a floor or with a ceiling, you know, or maybe they'll say 3% or CPI, whichever is lower, things like that.

You're bringing up a very interesting point. So as this cascade of people who need to refinance, that starts happening. Because in commercial, most commercial loans have a five-, seven-, maybe 10-year balloon, right? So those people that got those great rates in 18, 19, 20, they're starting to have to think about refinancing.

And, you know, I mentioned those two factors earlier—loan-to-value and debt service coverage ratio.

Well, when your lender goes to refinance you, he or she is going to be looking at exactly those figures and the loan-to-value might not work because if they reappraise your building and it's worth less. And now you're refinancing, you might not be able to take out as much of a loan. And if your loan payment is going up, which it will because interest rates went up, now your debt service coverage ratio is not going to work.

So there's a lot of issues there. And that's why a lot of people are faced with the predicament of having to either do what we would call a cash-in refi. You have to bring cash to closing or just selling the property. And it's definitely motivating a lot of our transactions right now without question.

Seth: Yeah, I know that even in the storage industry, that's a big way that people look for deals is try to figure out, okay, who got a loan like four and a half years ago and it's about to reset now? Because they're probably going to want to sell because their rate is higher and just targeting those people specifically. So interesting.

Dan: Yeah, exactly. In your experience of dealing with people who buy these types of properties, what kind of person should not be investing in this type of strategy? Is there a type of person who thinks it's a good idea, but it's not really because of their situation or how much money they have or what they're trying to get out of their investment portfolio?

Dan: Well, if you're not able to cover those things, like I said, like if you're buying a shopping center and you're not able to put away some replacement reserves, that's a problem. You're going to get hosed.

If you're buying the first deal or a few deals you see, that's a problem. You could get hosed, right? You want to sharpen that muscle and see as many deals as you can.

I just did a presentation on underwriting shopping centers on Friday that I can share with people. There's so much resources out there. Reach out to someone like me who can help and help you train yourself to be able to underwrite because it's not as simple as it looks. So that's that for sure.

Again, somebody who thinks, oh, I don't care, $450,000 rent, I'll take it. It's a great cap rate. And they don't realize that or they're closing their eyes to the fact that your only replacement tenants are paying you $150,000 or less, right?

That's someone who shouldn't do it. So I mean, these are all examples of people that I think are looking at things in a short-sighted manner. And I think that's why it's so important to network, reach out to me or someone like me who can help you.

And even if you have an outside deal, even if it's not mine, I'm happy to put some eyes on it and tell you, oh, wait a second, you got to look at this. And the next time you're going to say, oh, wait a minute, I remember that. I have to look for that.

So that's what it is. It's about training yourself. And you only do that by being around good people and doing those, exercising those muscles.

Seth: Yeah, it's interesting.

So you kind of mentioned earlier this idea of, what if you get a tenant who's paying over market rent? That's not necessarily a good thing because if you have to release it, you can't get that same price.

But if you go the other way, say if you have a tenant that's paying significantly under market rent, would it make sense to intentionally buy that kind of property if you know the lease is coming up in a year? Because maybe based on the rent today, it's not worth that much, but I know it's going to be.

Dan: When I'm marketing a property, one of the things that, if it's true, I put in an offering memorandum is below market rents. Because, this is going to appeal to an investor who says, okay, today, seven and a half cap, but 18 months from now, when two tenants roll, I can make this into a nine cap.

And I love checking with my clients who are like, Dan, this is amazing, because I was able to, you know, turn this property into a significant cash cow. That's awesome. I love that. So, yeah, without a question, buying under market rent is great.

And in many cases, in these deals, you know, people are just, you know, they're collecting their money and just waiting for the tenant to leave. That that's what they want.

Seth: I know people who are in like the residential real estate space and flip houses and have rental properties. They'll have plenty of horror stories from tenants they've dealt with.

I'm curious, do those horror stories ever happen with triple net lease properties or are they less common? And if they do happen, do you have any fun stories or interesting examples to talk about there?

Dan: So you can have shopping centers that have, essentially, have a declaration that basically is like the bylaws of the shopping center. And you can have out parcels like small, like freestanding single tenant deals. And everyone's under the bylaws.

So the bylaws might say, for example, you can't build a restaurant more than 2,500 square feet or two stories without the permission of Family Dollar, as an example, right?

So there's all kinds of things like that. Very important as a broker to know those, especially if you're dealing with somebody who's trying to redevelop something.

There's also a clause in this declaration for the CAM charges of what's called the egress and ingress parcel. So what that means, loosely, is that the shopping center has a huge parking lot and everyone benefits from the parking lot, not just the shopping center owner.

Because keep in mind, in this example, the shopping center is owned by one person. The out parcels are owned by two different people.

So what this clause says is that every quarter, the shopping center owner can reconcile and take all of the bills specifically from the parking lot and ingress, egress, landscaping, all that, and divvy it up as follows:

80% to the shopping center owner, 10% to parcel A, 10% to parcel B.

Parcel A had an absolute triple net fast food restaurant on it. So the tenant actually was responsible for those charges, the 10%, right?

Really, it's the landlord, but in the landlord's lease, it says the tenant pays for everything. So for years, for decades, that's exactly how this went on.

Shopping center billed the tenant. They never even sent the bill to the landlord. Tenant paid it because it was their passed down responsibility. Landlord didn't even think about it. Everything's great.

So what happens is five years ago, tenant decides not to pay it anymore. Shopping center doesn't do anything about it. Then tenant files for bankruptcy.

Then parcel A owner calls Dan, says, I've got a vacant former restaurant. I need you to sell it. We get it on the market, tons of offers, get it sold. Before we got it sold, I reached out to the a shopping center owner. And I said, hey, I need what's called an estoppel certificate, very common in our transactions.

And they said, well, wait a minute. Do you know who owns that property? And I said, yeah, of course I know. It's my client. They said, send them this bill. It's for about 15 grand, not a ton of money, but not a small amount.

I sent it to them and they're like, what do you mean? This is not our responsibility. We've never seen this. We didn't know about it. They were responsible, but it was going to their tenant.

Shopping center owner kept sending it to the tenant. Tenant stopped paying. Landlord didn't know about it. Now tenant, the shopping center owner, wants to get paid. That's how it went. Transaction proceeded, it was unclear how this $15,000 was going to get paid. Would it get paid before closing? Would it be paid in through escrow? Would it be paid after who knows?

Long story short, title company did not take an escrow for this. Seller didn't pay it. It never got paid.

Fast forward a couple months, buyer who I worked with directly is reaching out to me saying the shopping center owner wants the money. I said, well, you're the buyer. He says, I don't know what to tell you.

Next step, I call my clients. My clients don't want to pay it. It's going back and forth. Now we're at a point where the shopping center owner is ready to sue the buyer and my client. So I'm telling my client, hey, just pay the money, don't get sued by two people and have to pay the money.

So, you know, for me, I hate having to deal with things post-closing because the deal's already done. To me, I mean, that's a horror story I'm dealing with right now. It doesn't really have to do with investors, but it does. The lesson there is like, you need to know what's going on. Just because a bill is going to your tenant it’s not your responsibility. If it's your responsibility, you should make sure it's getting paid.

That's the lesson.

Seth: Yeah, for sure.

Well, Dan, thank you you so much for talking with me. It's been fascinating.

People want to get ahold of you or work with you in some way. What's the best way to do that?

Dan: So first of all, you can catch me on LinkedIn. I'm very active there. I put out content every single day of the week. My first name is Dan. My last name is Lewkowicz.

Also, if you want to reach out, if you have property, you want to sell property, you want to know what it's worth, you want to talk real estate, you've got a deal you want to look at, whatever, you can give me a call directly on my cell phone. That's 248-943-2838. Again, 248-943-2838.

If there's anything I can do to be of assistance, it would be my pleasure.

Seth: I will also have links to all of Dan's stuff in the show notes, retipster.com/184. So be sure to check that out and hopefully we'll talk again soon.

Dan: My pleasure. Thanks so much for having me.

Seth: Everybody, how's it going? This is Seth Williams, and you're listening to the REtipster podcast.

And today I'm talking with my friend, Chuck Dreison. So I met Chuck this past year when I was looking for people in our community who had experience doing subdivisions because I wanted to learn from them firsthand about how the subdividing process works in their market. And Chuck was one of the few people who raised his hand.

And he and I have spent a fair amount of time together, as he's shown me the ropes of how subdivisions work in his market, which actually has a lot of differences from how I've seen it work in other markets around the U.S. This may or may not come as a surprise, but there can actually be some huge differences in what's required, the costs involved, and what the municipality will allow. And a lot of the most important due diligence issues that you'll have to look at from one state to another.

One of the biggest things I've learned from job-shadowing subdividers around the country is that having a lot of experience subdividing in one state doesn't necessarily make you an expert in how to do it in the next state over, even in the next county over, in some cases.

So Chuck has just been an invaluable relationship for me as he's taught me a lot of great stuff. And I wanted to get him on the podcast so we could talk more about his story, how his subdividing business works.

And I also want to talk a little bit more about partnering with other land investors, either as an operator or even doing the funding for the deal if you're providing the capital. Chuck and I have talked quite a bit about this as well. It's a topic that goes hand in hand with subdividing in a lot of ways because a lot of subdivides are naturally bigger deals that require a lot more money to acquire and do the work of subdividing.

And as I've been trying to come up with a solid framework for how I fund deals for other land investors, he's given me some great feedback about what he's seen in the industry and what he wants to see from the operator's side. And he's just given me a lot of good things to think about on that whole subject.

So I'm excited to get into this and I hope you are too.

Chuck, welcome to the show. How are you doing?

Chuck: Thanks for having me. I appreciate the intro.

Seth: Yeah, absolutely.

So I had a great conversation with you that was recorded and it's in the Land Elite Masterclass. I mean, you just blew my mind over the course of an hour, just teaching me so many things about subdividing. I don't know that we'll get into all that because that was like a really deep dive, but maybe we'll just start by having you rehash your story. So how did you get into land investing?

Chuck: Sure. I started my career in another field. So I was fortunate enough to start my career as a U.S. Marine. I worked as a reconnaissance Marine and had the opportunity to work under a number of great leaders.

I've worn a few hats since then. So I've been fortunate enough to work as a philosophy professor as well and segued into land investing about five years or so ago.

Seth: I didn't know you were a philosophy professor. At what school?

Chuck: California State University, Los Angeles.

Seth: Wow. Man, one of my college roommates was a philosophy major and I had an intro to philosophy course when I was in college. So I'm probably not as smart as you are in that realm, but I've had a lot of interesting conversations about all that stuff.

Chuck: Yeah. It can be fun to get into. And some of the some of the decision matrices help in business and whatnot as well.

Seth: How long were you working as a normal land flipper before you decided to start exploring the subdividing game? Like, what motivated you to go down this new path? And how long did it take you to reach expert status at it?

Chuck: I appreciate you saying that. For me, it's always a process of experimentation. And so, especially when working with investors and working with their funds, it's looking at different opportunities to be able to win deals.

So I started five years or so ago, but my first subdivision was about four years ago. And that was one subdivision that year. And so it was looking into it. It was vetting providers and taking a step forward with it.

And then, in terms of “expert status,” I appreciate you saying that, but this expert status, as you mentioned in your intro, is, I think, a product of where you're working too. And, as you and I have kind of been working together, it's accumulating knowledge in a particular county, accumulating more knowledge in a particular jurisdiction. And then once you have that, it's really being able to step on the gas in that jurisdiction.

Seth: So that first one that you did, I think you said you did that one in the entire year. Did everything kind of go as planned? How do you even start with that? Did you have to learn from somebody or do you just start diving in and start Googling for the answers to your questions? Or do you just have to embrace the discomfort of what you don't know and just jump into it? How did you manage that?

Chuck: So, for me, it really is a three-fold process.

One is digging into the paperwork that the county has. So these counties have a set number of regulations and a set process to that. And that can differ amongst counties, right? And there can also be some unknowns there for some particular subdivisions. At the end of that set process, there can be a county review board, in which case you have some unknowns. But for a majority of the minor land divisions, there's a set process. And so digging in and reading those, getting familiar with exactly what's going on.

And second, from there, calling some folks at the county to ensure that what you're reading actually jives with their local knowledge and their work processes and whatnot.

And then the third thing would be talking with those land surveyors, those civil engineering firms, and figuring out if you can get a provider on board to actually help you with this process, especially if you're working on a project that's out of state or a little bit farther away from you.

Seth: Yeah, I think that was one of my biggest surprises working with you is just the importance of that surveyor. I mean, I knew they were important, but the fact that you might not even be able to find one. Like, you got to make sure that person exists at all, who can do the work, the costs are in line to make sense, and they can do it fast enough. And a lot of stuff hinges on that, which was one of my big takeaways from working with you.

Chuck: And there's enough of them there in the environment. I mean, as we've talked about before, when there's some competition there for surveyors, you can find an appropriate provider, you can find someone who's communicative that works with you well, that works with your processes.

Whereas if you're talking about a very far-flung locale where there might be one or two providers that might not be necessarily as motivated to get the work done, or there might not be as much competition, that process can extend for a long period of time.

I mean, for example, to put that into concrete terms, we've had a subdivision take as little as two weeks and as long as right up to 13 months. And that's a huge contrast when you're talking about hold periods and trying to get returns.

Seth: Yeah, it is interesting, the lack of competition for those professions in certain areas. It seems to happen, at least I've noticed it a lot in very rural areas. The only time I've ever been yelled at by a title company or a surveyor is when working in these super rural desert areas where like there's nobody else. Like I'm a slave to them. them. If they don't do it for me, I can't do the deal.

It's just funny. If I were working in a big populated city, I'm sure there would be dozens of surveyors and title companies to choose from. And they're all kind of fighting for your business. But when you're in those areas where it's like you need them, they're not as polite.

Chuck: Exactly right. Yeah.

Seth: So how many states have you worked in your land business as a whole?

Chuck: Six states across the board.

Seth: And what's the state where you do the most subdividing?

Chuck: I do the most subdividing in Arizona.

Seth: Okay. And you don't live in Arizona, right? You're in California?

Chuck: Correct.

Seth: To those who've never flipped land before, maybe you're not aware, but it's not a huge challenge to flip land remotely in other states (and never really see the properties you're dealing with in person), because you can always find photographers and agents to do a lot of this groundwork for you.

But when you're talking about something like subdividing, which is a little bit more involved, is that ever a challenge or is it pretty much the same thing where it's like, you've never really had to be on-site to see anything, like any of the information you need to get, you could get from a drone photographer or a surveyor? Does that ever create challenges to not be there in the market where you're subdividing?

Chuck: For the subdivision itself, there are no challenges. When it comes to the actual paper subdivision itself. As long as there's that appropriate provider that you can work with.

I would say some challenges come into play when you're talking about improving a property outside of the paper development. So being able to, say, write in an easement on paper, but then actually get someone to put in a road there, whether it's a dirt road or what have you for a rural property. That's where some additional connections in that locale, if you've been working there for a while, can be helpful.

But generally, if you can reach out and touch people with email or phone or whatnot, you can get a lot done.

I found, too, that especially working with a realtor in the area, can help a lot. We have some areas where we work with a core group of realtors. And we bring tens of thousands of dollars to that realtor's family every year.

And so they're happy to introduce us to the local guy that will put in a road that will make it easier for them to sell the property to and generate income for themselves and their photographer or their title company. It just creates a kind of nice, well-rounded relationship that benefits everyone, which is nice.

Seth: You've worked in six states and all your subdivides are in Arizona. Why are they all in Arizona? Like, why not do this in all the states you work in? Is there something about Arizona that makes it easier? Or do you just kind of know that area better than most for some reason?

Chuck: Part of the reason that I do subdivisions and part of the strategy behind the business is seller financing properties.

And so it's ensuring that we work with our attorney to work in a jurisdiction where we are set up to appropriately lend in that jurisdiction, which can help us offset risk and mitigate risk.

So for example, one of the reasons why I appreciate subdivision so much is in one case, if we're buying a property, and we're doing a simple repositioning and flip, we have a hundred percent of our cost basis tied up in that property for the entirety of the hold period until it sells.

Whereas with a subdivision, what we can do is we can start selling off those child parcels in a manner that reduces our cost basis in that in a stepwise fashion.

And so that's helpful to do both from a cash perspective, but then also from a terms perspective, right? You could imagine if you split a parent parcel into five child parcels. You have 20% of your cost basis, let's say, in each of the child parcels.

And then a cash sale, and then perhaps a 25% down payment on each of those other parcels. Depending on your sales price to your actual investment in the property, you can make up your full cost basis fairly in a stepwise fashion that you can't do with a simple repositioning.

And so to kind of circle back to your question, it's ensuring that both our business strategy aligns with kind of the regulatory environment in which we're working.

Seth: What does a typical deal look like when you're acquiring it, doing a minor subdivide and then selling it off? What is the typical cash outlay? How long does it take? How much does it cost to do the work? Is it selling like six months later? 12 months later? Two months later? If you had to average it out or look at a typical deal, what does that usually look like?

Chuck: Typical acquisition costs are between $25,000 and $100,000 for the property itself.

And then in terms of the cost to actually subdivide the property, depends on the location again. But we could generally say somewhere between $2,500 and $4,000 or $5,000 to go through the whole process. Depending on if there's how many parcels we're creating, if there's county approval that applies in this situation.

There are some nuances there, but generally, if we're putting in a little more physical improvements and there would obviously be the cost for that, like putting in a road or what have you, but generally around that, and splitting it up in a way that makes sense for end buyers.

And then in terms of the actual sales process itself, we average right at about four and a half months on a weighted cost basis for sales right now.

Seth: You mentioned physical improvements, like putting a road in and that kind of thing. How often does that get involved? I know a lot of subdividers, they don't touch it. It's just a paper subdivide. Maybe they'll put an invisible line down the properties and carve them up that way, but it sounds like sometimes you'll maybe put a road in or something else.

How expensive is that? How difficult is that? Is it a super-involved process or is it straightforward?

Chuck: A lot of the properties that we work with are off of dirt roads. And so there will be a dirt road to, say, that larger parent parcel, but not necessarily to all the children parcels that we split up on paper.

And so we want to make sure that everyone has access to their property. We don't want to create children parcels that are that are unusable to folks or what have you. So that could mean an easement, or it could mean utilizing existing easements if perhaps there are some on the periphery of the parent parcel and then potentially putting in a road.

So we've done this a few times, and typically we won't do it right at the outset. But if we are having, if our realtor is giving us feedback that folks are having a hard time envisioning being able to get to this property or what have you, then we've worked with him before to get his local provider to put in a road.

And that helps a lot. I mean, it's nice to be able to drive up to your property rather than have to put in that road yourself, right? It’s already done for.

Seth: One of the big contrasting things that I noticed when talking with you versus when I was talking with Neil Clements, who does kind of a similar thing in Texas, is that in Texas, water is a huge deal and it's like a big potential obstacle to getting that thing sold. If you can't get water, whether it's drilling a well or getting a utility line in there—and I would imagine in the desert, it's probably even more of an issue.

So like, what do you do about water? Like, do you have to make sure it's there or do you just assume there's no water and people have to figure that out on their own, or just not plan on getting water there? What kind of an obstacle is that? And how do you get past that?

Chuck: Yeah. So, there's like a couple of different subdivisions in Arizona, there's what's called a major subdivision and then a minor land division.

For major subdivisions, this is six or more lots. And in those cases, the developer needs to prove that there's a 100-year water table there, in addition to potential traffic engineering studies and environmental impact studies and what have you. And so there's a lot of infrastructure there, a lot of work there that wouldn't necessarily be economically feasible for a six-lot subdivision but could very well be feasible for a 150-lot subdivision.

It's not what we're doing currently. We're doing minor land divisions. And so this is five or fewer lots. And minor land divisions do not require that proving of that 100-year water table.

And so for rural properties, folks will tend to do a couple of different things. There are a lot of water delivery services in Arizona that are very, very reasonable. And so it's something like around two and a half to five cents a gallon to actually have water delivered and put in someone's cistern right there on the property.

And so a lot of times folks will invest in this 1500-gallon cistern and they'll have water delivered to it. And that can be delivered typically every couple of months. And they're A-OK

And then, you know, they might, if they're going to move out to the property or make it something more permanent, they might consider doing a well. And wells can be tens of thousands of dollars, but that can also feed into the cistern and then feed the house.

So they can kind of work their way into the water in that same kind of stepwise fashion as well.

Seth: I know you said you typically do minor subdivisions. Have you ever done a major subdivision or only the minor ones?

Chuck: I don’t. Only minor land divisions.

In Arizona, there is a component to major land divisions where there is a county board or county supervisor hearing and approval process. And that introduces a lot of risk to projects.

I know, before, you interviewed a guy who's doing a lot of major subdivisions and tends to try to stay away from those jurisdictions just because it turns into a lot of local politicking and trying to work on getting this approved before the actual approval itself, which tends to be a very localized game.

And again, with being away from Arizona, I'm looking for more of those buy-write jurisdictions where we can check these boxes, we can mitigate risk for investors, and get the project done.

Seth: And in terms of how you split these things up, my understanding is you basically decide how you want to do it and you tell the surveyor, and then they do that. But how do you know how to do it? Is it just, okay, there's road access on this one side, so we're going to split it up so that each parcel has road access?

You actually wrote a great blog post for us where you kind of illustrated some of the topographical issues that can come into play. Like, if there's a big valley running kitty-corner across the property, you might want to carve it up so that it kind of flows with the land instead of just cutting right through that.

So, how difficult is that? Do you just have to be able to see the contour lines of the land and be able to understand what are the consequences of me putting a line here versus there? How do you think through that?

Chuck: When you think about splitting up the land, it's combining two aspects: it's looking at the zoning and the CC&Rs of the land in concert with the topography.

And so imagine the zoning, for instance. Imagine we're looking at a 10-acre parcel and we're interested in splitting it up and making child parcels for particular end buyers. We could have zoning that's, say, residential 10, which only allows a minimum of 10-acre parcels in that area, in which case our hands are tied. That's going to be that parcel forevermore.

Now, there are folks who, somehow, get subdivisions through and create massive issues for end buyers because they will subdivide these properties into inappropriate zoning areas. And then their end buyers aren't able to secure building permits. So don't do that. Stay away.

But then we could imagine we have perhaps an R2 zoning or an R1 zoning, where parcels are two-acre minimum parcels or one-acre minimum parcels. And if we're looking at Arizona where we could do five parcels in a split, we could take that 10-acre parcel and we could split it into five two-acre parcels in accordance with the zoning.

Now, one of the additional considerations that we'd want to think through is, do the CC&Rs allow for this? And then from from just a financial perspective, what is the impact of those CC&Rs?

We've seen some of these communities where there's an $800 exit fee from the parent parcel and then an $800 entry fee for each of the subsequent child parcels. So we're talking about eight hundred times six. We're talking about what, $4,800 dollars to simply do the split, irrespective of the surveying and all the other costs.

So one consideration there as well, but then also looking at zoning. Because if we have, say, an R1 property and we have minimum one-acre parcels, we could also split that 10-acre parcel up into five two-acre parcels, right? We're A-OK.

But we really want to consider the topography in concert with that actual zoning. So I'll give you an example. Let's have a 10-acre parcel and half of the parcel is sloped and has a draw in a manner that wouldn't be appropriate for a building site. And the other half is nice flat building sites.

If we have that R2 zoning on paper, just looking at zoning and CC&Rs, great, we can split it up into five two-acre parcels. But what we find when we do that, if we don't look at topography, is that we have two parcels that are on a terrible slope that are unusable for end buyers. We have one parcel that's half on a slope and half with a building site, and then two appropriate parcels. So in essence, what we have is three parcels that are sellable and two that are worthless, right?

Whereas if we have that same topography and a slightly different type of zoning, both on paper, we can create five lots.

But if we have an R1 zoning, then in reality, we could create a six-acre parcel out of half of it. So one parcel will have a one-acre building zone and then five acres of kind of sloping land that might be beautiful to look at, but they're not going to necessarily build on. And then the other four parcels have build sites.

So, again, based on the zoning and the topography, you can get very different results. In one of those cases, you have five nice lots to be able to sell to end buyers, whereas in the other zoning situation, you have three. So looking at those both in concert is very important.

Seth: How do you gauge the demand for these child parcels after they're carved up? How do you know that they're going to sell fast enough once the work is done?

Chuck: In the same manner that investors look at properties. Right now it's doing your due diligence for subdivisions, but doing it twice over.

So if we are just marketing for properties that we're going to flip and reposition and market and sell, we might just be doing due diligence for one-acre parcels, two-acre parcels, or what have you, and looking at what they're being, what folks are paying for those, what they're exiting at, what the proportion of cash to term sales is and getting a sense of that market. Whereas if we're going to be doing a subdivision, our due diligence doubles, right?

Now there are benefits to that, but we're going to be also looking at the cost of 10-acre parcels with respect to the cost of one-acre parcels or two-acre parcels and seeing if there's a match there that actually makes sense.

Seth: If I remember right, you said the acquisition cost is between like $25 to $100K. Is that right?

Chuck: Yep.

Seth: So what is the disposition price? Like what is the gross profit on the back end of these things when you sell them all?

Chuck: It depends on terms versus cash. It depends on locale and what have you. But I would generally say it's 2 to 2.5 to 3.

Seth: I think you'd mentioned there was a case where you had to wait like 13 months for this all to happen versus like maybe a couple of months.

What would make it take so long? Did something go wrong or what happened there that delayed it so much?

Chuck: Two things went wrong.

One is there was a service provider. There was one service provider in that area. Through trial and error, I found that they were not overly motivated. And it wasn't necessarily their fault. I think it's important for folks who are considering doing this to think about what type of business they're engaging with as well. And this has been a lesson learned along the way.

The only firm in that particular area was a large engineering firm. And I am providing them with a $3,000 or $4,000 job. And they, as a business, need to balance that with the large construction companies that they work with that are bringing them consistent six-figure engineering work every year.

So I am a very small fish in that business's pond. And we're also talking about a rural subdivision, and we're talking about a county that has an extended approval process. So those were situations that exacerbated it.

But in looking at other counties and other areas, one of the things I've found that's helpful is to look at surveying firms as opposed to engineering firms.

So you have a surveying firm whose bread and butter might be doing $1,000 lot surveys for folks buying a home in that area. And so now when you come in with a $4,000 project, you're in essence a big fish to them as a small surveying firm.

And if you can bring that in consistently month after month, then you can start establishing a very nice relationship with that firm. Whereas, again, if you're bringing in $3,000 or $4,000 to that civil engineering firm, they're not going to bend over backwards for you. They're going to bend over backwards for their very important clients.

Seth: So given these acquisition prices, I mean, these aren't really like cheap properties necessarily. It's going to take some capital. So are you always using your own cash or like how often do you have to get bank financing or land funders or even like buying them with seller financing? Does that ever happen?

Chuck: So we have investors in the fund. So we have equity investors that help with funding deals. And then we also use debt to fund some some of the deals. Now that's not bank debt, but that's typically through seller financing properties.

So it's a combination of full equity financing and then some debt with the seller carrying back a portion of it.

Seth: So do you ever just use your own cash and you pretty much always go to this fund that you've created to get the money for it?

Chuck: It's been a process throughout the last five years. I started using all of my own capital and then I'd say four years or so ago, close friends and family were interested in investing. And so what I created, unbeknownst to me at the time, was a misstep, but was a series of different entities in which each of those investors was involved. And so be doing deals in each of those entities with each of those investors.

And as you can imagine, that only scales to a certain amount, right? Once we have of four or five different entities all doing deals there, there comes a point where bringing on other investors and creating other entities and scaling in kind of a parallel fashion would be problematic and be overburdened in terms of infrastructure.

And so it was then a process of consolidating that into one fund where investors could come in.

Seth: So if I understand this right, you had an individual entity per property, and there were different owners tied up in each one? Or is that not how it worked?

Chuck: An individual entity per investor, and then properties would be underneath that certain entity.

Seth: So that entity per investor, did you have any ownership in that or was that just totally them?

Chuck: Yeah. We would add joint ownership in that entity and we would do business and the investor would receive disbursements from it.

Seth: Okay. So would that mean that you would like both have to sign off on everything? Like, would you have the authority to make decisions on behalf of the whole LLC? How did that part work?

Chuck: It was set up as a manager-managed LLC. So there was also a management entity over top of those kinds of parallel entities. And so the management entity would make decisions for the fund. So the investor, for all intents and purposes, was a silent investor.

Seth: So were you the owner of that management entity?

Chuck: Yes.

Seth: So given how your business works now, how crucial is access to this funding? Like, would your business work if you hadn't figured this out, like how to get money from other sources?

Chuck: It's helpful to grow and it's helpful to help other investors.

So it's interesting to be able to do these subdivision deals and these seller financing deals and these deals where investors come in to finance a portion of the equity because it's just looking at trying to help a number of people in a number of different ways, right?

The investors are looking for solid, consistent returns on their equity. We have folks who are interested in buying properties and being able to do so with a reasonable down payment and be able to become a landowner. We have folks on the flip side of that, who are interested in buying secured notes.

So we're helping them out with their investments. And so it's looking at kind of combining these factors to try to help out a number of different parties in a way that suits everyone.

Seth: The way that it originally worked was you would create this new LLC per investor, that you had partial ownership in, but that's not really how it works anymore, right? Now you have this fund and you take from that fund to pay for deals?

Chuck: Correct. It's one blind pool fund. So there's one fund that investors come into and then that fund does business within that fund. So it invests in a number of properties. When the investor comes in, they understand our business model, our strategy, and that we're going to be doing these types of deals and these types of areas and this type of business.

And so they'll come in with an ownership interest in the entity, and then we'll do our business and then investors receive disbursements from that.

Seth: Do these investors need to be accredited in order to participate in this? Or how does that work?

Chuck: They do. They do need to be accredited. So it's a private fund. Accreditation standards are generally $200,000 of income for an individual, $300,000 for a couple, or a million dollars of net worth outside of their primary residence.

Seth: And once they put the money in this fund, they kind of just trust you, right? They're not looking over your shoulder every day and ask, “So how's it going, Chuck? What's going on with my property?” Because there's not one property tied to their dollars, right?

Chuck: A lot of properties. So there's a very specialized strategy, but a lot of properties across that strategy.

And yeah, there's a lot of communication with investors as well. I think it's important to communicate where we are and what we're doing, what we're seeing, what we're achieving. There's constant communication with investors.

But yes, investors are our limited partners in the fund. They're coming into it with the expectation that they're going to be able to achieve this return with this specialization, right? And investors that are accredited, you know, typically have investments across the board.

And so they are looking for some specialization, right? They already have the S&P, they already have the index funds, they already have the bond funds. And so they're trying to seek out, you know, specialized investments that will provide them with more upside.

Seth: So you've got this fund. Say if I come in and I put $100,000 in there, does that mean I get like a percentage of ownership in the LLC that buys the properties or… Is that not really how it works?

Chuck: Yes.

Seth: Okay.

Chuck: And then a preferred return based on how the fund does.

Seth: Is there some kind of expectation that people should have when they go into this? Like, if I put these dollars in, I should get this kind of return back within this time frame?

Chuck: I'll preface this with there are a couple of different funds. There are a couple of different exemptions to funds. There are 506B funds and 506C funds.

506C funds could market on Facebook ads or Google or to whomever. Whereas 506B funds, someone needs to know the operator and have a relationship and then can discuss particulars.

And we have a 506B fund. So I certainly don't want to step into the 506C territory.

But broadly speaking, we have a preferred return for investors. And then we also have kickers on top of that, depending on fund performance. And so for a preferred return, management wouldn't earn a penny until all of the limited partners earn a 10% preferred return. And then there are additional kickers on top of that.

Seth: Explain kickers to me. What does that mean?

Chuck: There is an additional return that investors can achieve based on the fund's performance as well above 10%.

Seth: And how do they get that?

Chuck: Based on the fund's IRR. But the setup is, if the fund does very well, the investors do very well as well.

Seth: The person investing in this kind of fund, do they have any security? I mean, I guess they would have the portion of ownership in the LLC that owns the properties, right? But it's not like collateral or something.

Just trying to differentiate between this and like what a bank would get where they get a collateral position on the property.

If I invest money with you and, say if something went horribly wrong, or if you disappeared off the face of the earth, I'm not saying that would ever happen, but… Just trying to think of worst-case scenarios for that investor. What kind of security do they have?

Basically, they shouldn't be doing this unless they really trust you.

Chuck: That's absolutely correct. They should not be investing in a private fund unless they trust the operator running that private fund. That is for sure.

And then it's also important for investors to look at the waterfall of funds, right? Both when things go well and if things went awry. So looking at how the payouts are structured, right? And who gets paid first.

And paying particular attention to the fees involved there. So whether things go well or go awry, who gets paid first? And if there's an acquisition or if there's a disposition or what have you, are there additional fees tacked on to each of those before limited partners would get their fees?

So it's really important when looking at an operator, looking through the fund's paperwork to determine and talk with that operator to figure out who's placed first in this order.

Seth: On that whole thing, what is the standard? Like, what should they expect to see? Like, if someone gets paid first before everybody else, how much is normal? Like, if you see, uh-oh, this person's getting paid this percentage or this amount before anybody else, at what point is it officially a problem?

And I know you can't give financial advice. I'm just trying to figure out, like, if somebody has never done this before, like, how would they even know when something's a red flag or not? How do they make sense of, okay, I should watch out for this specific issue? Any thoughts on that?

Chuck: It's not atypical. So I suppose first with a management fee, it's not atypical for funds to have a management fee and that management fee would be used to offset their fixed costs in doing business. There are also a number of funds that don't have a management fee that is only paid if the fund is successful.

And then I would say one thing to perhaps be cautious about is looking at additional fees, if that fund has a management fee, looking at additional fees outside of that management fee. So if there's an additional fee tacked on every time a property is bought, if there's an additional fee tacked on every time a property is subdivided, if there's an additional fee tacked on every time a property is sold—those can add up quickly and start eating into limited profits in a way that might be detrimental to them.

Seth: So does yours have a management fee?

Chuck: We don't have a management fee, and we don't have the additional fees.

Seth: Any reason why not?

Chuck: Well, we do well, and we have a track record of doing well. And I really value consistent performance over all else. So being able to achieve those consistent returns is something that we've done.

And I want to make it a fund in which I and management only do well when investors do well. So we are second. And I think overall that respects the investor's capital in a much better fashion.

Seth: How common is that where there is no management fee? Seems like that might be kind of uncommon, but I don't really know. I haven't looked at enough to know.

Chuck: It depends on the size of the fund. We are a specialized small fund, and we have a specialized process and strategy and work with investors that we know and that we've built relationships with.

Contrast that with a large fund that has significant fixed costs; it very well might make sense for them to introduce a 1% or a 1.5% management fee, which will ultimately be for the investor's benefit because they can take care of those fixed costs in a way that stabilizes the business, but also does really well by the investors.

And so certainly not a death knell to have a management fee. I think perhaps the fees that kind of pick off returns here, and there might be something to look at more. But on the positive side, it can also stabilize an investment fund as well.

Seth: So as the manager of this fund and the person who was doing all the hands-on work to buy these properties and subdivide them and sell them, are all the decisions pretty much up to you in terms of like, what is the sale price going to be? And if we get an offer with seller financing, do we take that or do we go with the cash offer?

I'm assuming nobody else really gets their hands on that, right? It's just up to you to decide what's best.

Chuck: The limited partners aren't involved in the day-to-day. The idea is that they're working with a manager who has the specialized skill in order to get them those returns that come with that specialization, but they don't necessarily want to become a specialist in this particular investment area.

Seth: So like if a property takes longer than expected to sell or the sale price ends up being lower than expected or something like that, they're kind of just like, okay, like we trust that you've done everything you can and that's fine. Is that kind of the position they have to take?

Chuck: I think investors are not necessarily, in my experience, interested in the metrics behind specific property A, B, or C. They're interested in the output of the portfolio of the properties. And so different properties can offset other properties, different note sales can offset. They're looking at our portfolio at large, our returns at large, and then tracking that with whether we’re providing their preferred return and we are providing the upside in addition to that.

Seth: How often are you selling these properties with owner financing versus for cash? Is there a ratio you try to stick to or is it just all cash?

Chuck: Typically, we are at about, in terms of term sales and then cash that we get at acquisition, it's about 60-40.

So we'll carry about 60% of the sale price, and then 40% will come in through cash or through down payments or some combination thereof.

And then it's looking at staying liquid enough and again, being able to help out note investors as well and be able to sell them seasoned secured notes that work with their investment strategy. Which for us is a way to gain liquidity back and rinse and repeat.

Seth: How often do you end up selling those notes? Is that usually what you try to do or do you just kind of let them ride out for the full term?

Chuck: It depends on where we are and how much capital we have to deploy, right? A note earning a nice yield is not something that we necessarily want to sell unless we have other opportunities to do better than it.

And so it's looking at the opportunities that we have coming in. And then, what notes are yielding on the sales side as well, in terms of looking at a discount to UPP (unpaid principal balance) and then what would make sense in terms of our investors.

Seth: Of all the properties you buy with this fund, what percentage of them end up being subdivided in Arizona versus a normal land flip in some other state?

Chuck: I certainly don't want to make subdivides sound like the be-all and end-all, right? They're certainly not. We do a lot of repositionings and remarketings as well.

Subdivisions also take time. And so they may or may not make sense depending on where someone is, even in terms of seasonality. We do a lot of subdivisions, but we want to make sure that it works for our strategy.

So, for example, if we were to acquire a nice 40-acre parcel or 10-acre parcel that we were considering subdividing, and we brought it in, say, July or August. And perhaps we do it in an area with elevation, in a northern area where there's going to be a lot of snow in the winter or what have you. It might make sense to look at that as a simple repositioning, rather than adding an additional four months of the subdivision time, the hold costs, and the provider costs. And then having a set of products that we have available in the winter, where it's really going to take to the spring to be able to get a lot of traction on the on the sales side.

So it makes sense, but it makes sense in certain situations as well.

Seth: For people out there who have cash, and they want to get into funding other people's deals, maybe in this kind of setup where they're investing in a fund rather than like on one-off deals, one at a time, what are the best ways to find people like you and basically be able to trust them to put this capital to good use?

I mean, how do you vet someone like yourself to make sure they're going to do what they say they're going to do?

Chuck: I would look for someone who does a lot of business first and foremost. I'd look for someone who has a specialization. I'd look for someone who effectively manages risk. And then I'd look for someone who can provide consistency.

So in terms of specialization, again, with accredited investors, they can and oftentimes do have a lot of breadth and diversity in their investments. And so oftentimes they are looking for that specialization.

And so if you have an operator that's a jack of all trades, you can get the jack of all trades with investing in an index fund or more broadly speaking. And so perhaps someone with a specialization can achieve an outsized return.

Risk management is very important to us, especially, again, with the subdivision process, with being able to recoup cost basis in a stepwise fashion. That's critical for me and really the reason why we went into subdivisions. So I know a lot of folks talk about subdivisions as a way to be able to take one property and create more properties and, in essence, get more out of that, get a higher return.

For us, there is that benefit, but it was done for a completely different reason. Again, it's done for the reason of being able to when each child parcel sells, we have reduced risk, reduced risk, reduced risk. And ultimately, that's that's for the benefit of investors.

And then I'd say consistency. You know, some folks, a nice example, are looking for large, large wins. And they're going to take a lot of swings and a lot of misses. And when they connect, if they can connect on a big win, that can be beneficial.

I certainly agree with that. Our strategy is that consistent wins over time are the best way to achieve wealth.

So look at a strategy that works for that particular investor and that particular investor's investment strategy.

Seth: From the operator's perspective. So if I'm trying to find somebody like you either to invest in a fund like this or even just do a one-off deal with them, where should I be searching for that? Like, do I need to Google something? Do I ask ChatGPT? Do I get into a certain Facebook group?

Like, how do you go about finding people like you who know what they're doing and they can put this kind of capital to good use?

Chuck: Looking around to try to find folks who are doing a lot of business is helpful.

So for instance, someone could call up a real estate brokerage and ask them, “Hey, are there any investors that you guys work with that are doing a lot of deals in the area?”

Call up a surveyor. “Hey, are there any investors that you're working with that are doing a lot of deals and are successful in this area?”

But then importantly, or perhaps seeing someone on an interview or hearing someone through you. But then importantly, going back and looking and determining if that track record is actually correct. And the beauty of real real estate is that everything is recorded, right?

So finding out from that operator, “Could you tell me those entities that you're investing with?” And then simply popping onto a recorder's website with those entities’ names and figuring out, Hey, is this operator actually doing this business that they say they're doing? And guess what? It's, it's all there in the public record.

So it's a nice way to confirm that an operator is actually doing what they're saying.

Seth: Yeah, no, it is actually, I think it's a little easier in some states than others. I think, if I remember right, in Arizona, you can search for business entities based on the person's personal name. Maybe you know better than I do, but in other states, you can't. You have to know the entity name in order to do that search.

But even once you know the entity name, it's pretty easy in DataTree even just to see every property that that entity owns nationwide. Kind of knowing your way around those systems, it's pretty easy to verify and cross-check stuff.

Chuck: Absolutely, yeah. And a limited partner that's not necessarily a real estate operator might not have DataTree or whatnot, which is why I suggested the recorder's office, but you're absolutely correct. If you have a service like DataTree, very, very easy to find.

Seth: I know this kind of fund is not a new thing, especially in apartment syndications. And I think of Fundrise or RealtyMogul, where they have people invest in these big pools of funds that go all over the place, buying hundreds of properties.

So, what are the benefits or the pros and cons of doing this with a land fund? like what you've got going on versus something like these other more well-known established conventional types of real estate funds?

Chuck: I think it's important to look at all funds through their pros and cons, right? And a land fund doesn't necessarily have everything that every investor wants, but it also has a lot of what investors want.

So one of the things that's super-beneficial about apartment deals, or these large-scale deals where you have improvements, is the depreciation. Investors can come into those funds and they can come in as limited partners and they can enjoy depreciation through their investment, and perhaps that operator can also work in some additional bonus depreciation depending on their strategy. Which is really beneficial in offsetting the gains to that investor.

Now, there are additional things to think about with those investments, right? That investor is probably going to try to exit that investment three to five years from there. You know, that's highly dependent. The actual, the profit, that the limited partners are going to realize is highly dependent on the cap rate that they're going to be able to exit at, which is highly correlated to where interest rates are.

And so if it's the case that they can exit at a much lower cap rate, well, then everyone does really, really well. Limited partners do well. There are also some of those gains that are offset by that depreciation and things go very well.

There's not necessarily a series of significant cash flows throughout that investment. The large kind of equity or the large kind of profit chunk is at the end.

And so what we found is that a lot of investors that are invested in other funds that have depreciation benefits can really benefit from a fund that kicks off, that is more set up to kick off cash flow to investors on a quarterly basis. And they're utilizing that depreciation that they're getting off of this type of investment to offset the actual cash that they're getting from a cash-flowing land fund.

And so I would say neither is better. But if you look at funds that kind of have a long tail with potential equity and then depreciation benefits to them and combining those in concert with a fund that can kick off cash flow that can be depreciated from a tax perspective, there can be a lot of synergy and a lot of benefits there.

Seth: So if somebody invests in a fund like yours, what kind of extra work is there at tax time? Like, is there a lot of extra accounting expenses or movement required to file and report everything correctly?

Chuck: There are K-1s that are issued by the fund. And this is something that private investors in private funds are very familiar with. So it's simply a K-1 that they'll receive from the fund and then pass to their CPA.

Seth: That basically just says how much that person made that year?

Chuck: Exactly. Any depreciation, their capital account, exactly.

Seth: So is there any kind of licensure that you need to have as a fund if you're selling properties with owner financing? Is that more complicated than if you just owned it outright and sold it with seller financing?

Chuck: There is a lot of licensure involved in lending, which I think is, from my perspective, one of the problems that I see in the land space. One that would be great to correct, but one that I think, with respect to an investor looking at and evaluating an operator, is something to be very careful about from a risk management perspective. Because there are a lot of different lending laws that take place in various states and different jurisdictions that apply to folks who are lending on properties.

And so if an operator is engaged in seller financing, it is important to ensure that they work with the right folks to ensure that they have licensure.

So for example, it is very expensive, but it's also beneficial to go through a securities firm that also has a specialization in lending. And so in setting up our fund, we set up our fund through one of those specific niche securities attorneys firms, which give us guidance on not only the securities aspects but also the lending laws and where we can go and what we can do based on the absolute nitty-gritty of our business and our strategy.

And it can differ and shift in terms of licensure based on acreage, cost, approach, jurisdiction. And that's a way where folks can face a lot of repercussions.

Seth: Yeah. So as somebody like yourself who is managing a fund, is it ever stressful? Like when I think about buying deals with my own money, that carries its own amount of stress with it.

But if I've got somebody else's money where they're giving it to me and I have this expectation that I make them a certain amount in a certain amount of time. And I don't know, it feels like it would stress me out. Does it ever stress you out or do you just kind of think about it differently?

Chuck: There's a weight and a respect to it from my perspective. And I think the setup of the fund can do a lot for that, right? Determining and putting investors first and structuring that in the actual fund, I think can alleviate a lot of that because if an operator is consistently successful and they put their investors first, oftentimes those investors will do well.

And the person who may or may not face those repercussions could be the operator who's second in line. Again, with that respect and putting folks first, I think is the right.

Seth: Yeah, that's a great point, though. I mean, from the outside investor's perspective, I mean, even if I'm not happy with what's happening, what I wouldn't want to see is you're doing great, but I'm suffering as the investor.

But if it's kind of on equal ground, it just says something, you know, it probably motivates you as well to like, just realize like, Hey, I got to do this for me just as much as for them.

Chuck: I agree with that. And what's beneficial, from a limited perspective, is an operator that is doing well. Because you want an operator, you want to do well as a limited partner, but then you also want a firm, a fund that's also doing well because then they can provide these consistent returns for you.

Again, it's not this one grand slam followed by this strikeout. It's trying to construct those consistent wins so that it's sustainable for everyone.

Seth: Do you want to do our final three questions or is there anything else you want to talk about?

Chuck: I think we've covered it all. It's been fun. Yeah, let's fire away with the questions.

Seth: Cool. So what is your biggest fear?

Chuck: It is the fear of failure. It is the fear, of disappointing people that I love and care about.

I would not say that that drives me. What drives me is more about doing well for the people that I know and care and love about. But that would be a fear that would not put me in a good place.

Seth: Why is that such a problem? Because failure is how we learn a lot of stuff. A lot of things we just don't learn unless we're failing.

You heard it was like the Native Americans, they didn't even have the word failure in their vocabulary. They would always use the word learn there instead of fail.

Why is it such a terrible thing to fail? Maybe it's just like we sort of internalize it or we let it define us as people or something. I know I could kind of see myself doing that.

Chuck: Yeah. I get that. Failures on my part that affect me, I think, can be nice learning experiences. Failures that have lasting ripples and repercussions for others, don't sit well with me because I don't want to let other people down.

Seth: Yep. I gotcha. So, what are you most proud of?

Chuck: My daughter and my son for sure. I remember when my daughter was born, my wife had a C-section and they passed my daughter to me and I held her, and the world just absolutely melted away to the point where the nurse had to come smack me on the shoulder and say, “Hey, stupid, bring your baby over to your wife.”

But I'm very proud of them. They're happy and fun.

Seth: How old are you kids now?

Chuck: Eight and one.

Seth: Yeah. I remember hearing these kinds of stories from people all the time before I had kids. And I was like, yeah, okay, great. Good for you, kind of thing.

But like when I had my kids, like I had a very similar experience and, yeah, it changes everything. It kind of changes who you live for, what you do, and your motivations and I can relate.

Chuck: It is. Yeah.

Seth: So let's pretend you just got a hundred million dollars wired to your bank account and you're not allowed to keep investing in land or doing anything you're currently doing on your current career path, but you can do anything else you want for the rest of your life. What would you do?

Chuck: Maybe I'd spend my time… half, maybe I'd go back into philosophy a bit and spend a little time in philosophy. Maybe I would spend half my time investing in another area.

It's tremendously fun in a way that I didn't envision when I started to be able to achieve again with that kind of ripple effect that we were talking about. It's amazingly fun to be able to achieve success for other families and other folks and and their children.

That's it's just tremendously rewarding to be able to create that.

Seth: Yeah. You know, I actually had a moment earlier this week where I had a couple of property tax bills on my desk that I had to take care of. And, you know, initially, it was kind of just an annoyance, like, great, another thing I got to do.

But then I was like, man, like I own land. At all. Like, that's just crazy that I own something like that. A lot of people can't even dream of owning real estate, let alone owning dozens of properties all over the country. I don't know. It's a pretty huge privilege to be able to do that and have the skillset it takes to know how to find these properties and make money from them.

And I think sometimes like, I forget that. I forget just how amazing that is that I have the means and the ability to do that. And it's a huge privilege.

Chuck: For sure, yeah. And even for folks that aren't working with investors, being able to sell a property quickly under market value and create landowners in that family or seller finance something and have a family become landowners for a reasonable down payment that works for them. It's fun. It's rewarding.

Seth: Yeah, for sure. So if you certainly don't have to share anything here anymore, Chuck, but if people want to find out more about you, is there any particular place you recommend they go to do that?

Chuck: Yeah, website is meridianrei.com. And then I'm also on LinkedIn and happy to connect. So Chuck Dreison on there. Happy to chat with anyone who has any questions. Feel free to reach out.

Seth: I'll include links to all that stuff in the show notes for this episode. That's retipster.com/183 because this is episode 183.

Chuck, thanks again for coming on. It's awesome to talk to you. It's great to know you. And I hope we can talk again soon.

Chuck: Yeah, look forward to it. Thanks for having me, Seth.

Seth: How much is farmland per acre? Like what would be a normal average price to pay?

Why is land so expensive in places like Iowa and Illinois that are just sort of known as like some of the best places in the world for crops and that kind of thing?

Pat: Nobody wants to spend $4 million on a farm to buy somebody else's environmental issue.

Commodity prices are just kind of are what they are today versus the last number of years. We've seen prices go up, but we haven't seen the commodity prices just racing out of sight. If I've got like $50,000 and I want to buy a piece of farmland just to get my feet wet, is that enough money?

Seth: Like what is the smallest piece of farmland I could get with financing from a bank?

Like if you were to buy a piece of farmland, what kind of yield would you want to see to say, yes, this is a good deal?

Pat: What I would want to see, I guess, is…

—

Seth: Hey, everybody, how's it going? This is Seth Williams. You're listening to the REtipster podcast. And today I'm talking with my friend, Pat Porter.

So this is my second interview with Pat. The first time I talked with him was back in episode 153, where he gave us a ton of great insight into the life of a land broker, how to find a great one, and even what the profession is like and what kind of person is best suited for that line of work. But something you didn't hear in that episode was some of the expertise that Pat has about farmland.

And I didn't even realize this the first time we talked, but after I stopped recording, Pat and I continued to talk casually about farmland for about a half hour or so. And I learned so much from the guy about how farmland really works.

And that was when it hit me that I needed to get back on the podcast at some point so we could have a whole separate conversation about farmland. Because there's a lot you need to know if you ever want to buy this kind of land. And Pat is going to give us kind of a crash course, a lot of that information in this conversation.

And just before we hit record here, I was asking Pat, so like, how authoritative of a figure are you in farmland investing? And he was saying, not really, like I'm not the authority on it, but he was saying that maybe one in five of the deals that he works with are farmland in some way, shape, or form. And that's a whole lot more experience than most people in the REtipser audience. So while he may not know everything, I think he still knows a lot. And so we're going to glean as much as we can from him right now.

So Pat, welcome back. How are you doing?

Pat: Hey, Seth. Good, man. Good to see you. Good to be on your show again.

Seth: Appreciate it. So we already kind of heard your backstory in episode 153. If anybody wants to go back and hear how Pat got into the business of being a land broker, they're welcome to listen to that earlier conversation.

So I'm just going to jump right into the farmland stuff. And was I right in saying that maybe 20%, 25% of your deals are farmland? Does that sound about right?

Pat: Yeah. And again, I just pulled that number out of my ear a minute ago. I don't keep hard metrics on all that, but it's the smallest overall piece of what we do. But when you do several farms a year and some of them small, some of them big, I guess it does weigh in there, they're maybe one-in-five or one-in-six deals.

Seth: Sure, gotcha. So you live and work in Louisiana, right? So are most of the deals that you work on in that state? Or how often do you work on these kinds of deals in other states in that area?

Pat: Ah, well, RecLand, my company, is in a number of states. I think we're in seven states, but most of the farm deals that we do are here in what we call the Delta—Louisiana, Arkansas, Mississippi—are most of our farmland deals.

Seth: So if somebody is kind of agnostic about which markets they work in, like if I want to go out there and buy farmland, I don't really care where it is, I just want it to be in the U.S. I want it to give me some kind of yield. I mean, do you have an idea? Like what are the top three to five states they should be looking at?

I don't know if you know that, given where you work, but does anything come to mind? Like, yeah, check out this, this, and this state.

Pat: Well, I'm really partial to our part of the universe down here, you know? I really am. But, you know, just like you, I see a lot of action taking place in the Midwest, where farmland prices are just exorbitant, ridiculous, absurd, through the roof, you pick your adjective. And so those things always jump off the page when I see that.

But my expertise—what little bit I do know—is down here in our part of the world. And I guess I'm biased to the Delta area down here.

Seth: Yeah. That makes sense. Well, and when you say the prices are through the roof, what does that mean? Like how much per acre are we talking about, in your book, means this kind of ridiculous? And what's a more normal, reasonable price for farmland?

Pat: Well, again, that's my way. And that's all just a matter of perspective from your vantage point, you know, because we'll sell farms down here for 3,000, 4,000, 5,000 an acre.

And then I see deals that are going off at 6,500, 7,500, 8,500, even 10,500 an acre in Illinois, Iowa, and parts of the Midwest. Double what we're doing down here.

And I know everything is not exactly apples to apples, but still, you just look at those comparative numbers and you go, wow, when you look at that, a $10,000 an acre deal in the Midwest somewhere versus a $4,500 an acre deal down here. I mean, it's just, wow.

Seth: Now, why is land that expensive? Like, is that inflated? Like, are people actually getting a return to justify that? Or is there some other weird reason why people are overpaying for farmland? Any ideas on that?

Path: You and I discussed that back at the end of episode 153 a little bit. I actually talked to one of my agents yesterday. His family is a generational, second-generation farmer, and he sold a number of farm tracts himself. Very knowledgeable guy.

And he kind of reached back into the '90s when Alan Greenspan used the phrase “irrational exuberance,” I believe was the phrase he used. He wasn't talking about farmland, but he was talking about just how our irrational exuberance, I believe is the Greenspan phrase, where he and I are just scratching our heads going, in our little peanut brains, we can't figure out how to make the economics work on some of these numbers.

So I don't really know how the economics work on some of those Midwest deals. I've got my opinion, my hunch, but I don't necessarily know for sure how they're making those things work.

Seth: Gotcha. Maybe more of a fundamental question is why buy farmland at all? Like if I'm a, I don't know, a newer land investor, I've got a bunch of money laying around. I want to park it somewhere.

What is the appeal of farmland? Is it just because it's easy? You don't have to do anything, like zero maintenance. Is that why people do it? Or is there some other, I mean, I guess if you were a farmer yourself and you were working the land, that would probably make a lot of sense. But aside from that, is there any other reason why you would go out of your way to buy farmland?

Pat: Well, as an investor, renting your farmland is relatively easy in this day and time. If I've got a strip center, just to pull the commercial piece, for example, I've always had turnover in tenants. I've always had issues.

And not that there's anything wrong with commercial investment at all. I know people do it. Everybody does. A lot of people do it well. It's just what you prefer.

In my opinion, farmland is probably a touch easier than something like that. It's a lot more hands-off. You've got an operator there, the farmer, who's got a deeply vested interest in making it work. And so they are watching all the little pieces, all the components of it. And so, you can be a little more removed from it on the investment side.

As of now, it's always in demand. You look at some of the bumper sticker phrases, you know, the world's not getting any bigger, but the population is growing. And so people have to eat and farmland is always going to be in demand.

Seth: I don't have any hard statistics on this or anything, but it seems like more and more agricultural land is going out of production every year, at least when I look around my market. I mean, it seems like every year I see a new parcel of farmland that is no longer being farmed. It's being developed into a residential subdivision or something like that.

Is that accurate? That we're losing farmland every year? So it's sort of an asset base that's getting smaller and smaller every year?

Pat: I would guess… my guess is that we are losing some actual tillable acres. My guess is that, because not only does some of it go into a higher and better use for, say, development, but also a lot of it, you know, you've got the USDA programs. You know, WRP, WRA, CRP, all the different programs that people are putting their farmland into. And so those acres are coming out.

However, we also sell a good number of tracts of CRP that are being put back into production. So, I don't know the exact data like you, but my guess is we're losing some acres, but we might not be because stuff is going out of production, but there's also stuff going into production as well or back into production.

So that's a great question, I'd love to see some hard numbers to know the actual acreage. Is it increasing or decreasing?

Seth: And when you say CRP, what does that mean?

Pat: Conservation Reserve Program. It's a USDA program similar to WRP where farmland is taken out of production and put into wildlife habitats. Depending on what part of the country it's in, it may go into trees, it may go into grassland, but just put into a conservation program for wildlife habitat.

The Department of Agriculture pays an annual rental rate to the landowner for the right to be able to keep that land in a conservation program. So it's income to the landowner without having to lease it out to farming.

Seth: Is that subsidy that they're getting, is that about what they would be making if they were leasing it out to a farmer? Is it less, do you think? Or do you know anything about that?

Pat: Yeah, it's... As soon as I say this, there's going to be somebody out there who's going to raise the exception flag and go, “No, you're wrong because I know a place!” Okay, there are probably some exceptions.

I know, in general, in our part of the world, what the CRP rental rate is. And when you compare that to cash rent for farmland, it's a little less, but it's also guaranteed. It's hands-off. You never have to do anything. Never have to touch it. It's a check that comes annually, once a year. You don't do anything to the property.

So yeah, if it's a little less, there's some trade-off in that you're not having to be hands-on anymore with your property. You literally can put it in a program, walk away, and forget about it.

Seth: Do you know why that's a thing? Why is the government paying people to not do anything? I'm sure there's some rationale behind that. Do you know what that is?

Pat: I don't want to mislead anybody… Those USDA programs—WRP, CRP, those types of conservation programs—are not the government just giving you money to leave your land alone. There is a purpose there. It's taking substandard, according to somebody's definition, farm ground, taking it out of production and putting it back into either wetland habitat, wildlife habitat, trees, and grasses.

So there's some value to that. It's not a straight, “We'll give you money just not to farm your land.” You do have those types of programs that farmers will understand better than I do, where you lay out land and you're paid a little bit not to farm it. But those CRP, WRP, those types programs, in my opinion, are not exactly that.

Seth: So, you might've already said this, but I know the answer to this question is going to vary a lot by state. But when you look at your neck of the woods in Louisiana and the surrounding states, how much is farmland per acre? What would be the normal average price to pay?

Pat: Just ballpark figures ahead, this part of the country down here, the last dry farm I sold down here not long ago was $3,900 an acre, which is a little bit strong for dry farm ground, at least compared to what it has been.

And then irrigated ground, $4,800 to $5,500 an acre. Now, there are some exceptions. There are a few unicorns out there that we've seen sell for like 65, which is, you know, down here in our part of the world, it seems unheard of. In fact, when I heard it, I was going, wow, I can't believe it sold for that. But again, that's not anywhere near some of the numbers we see in the Midwest.

But the dry ground, ballpark, high threes, low fours. Good, irrigated farms, now high fours, fives, and even into the sneaking into the low sixes an acre.

Seth: Correct me if I'm wrong about any of this stuff, but my understanding in terms of, why is land so expensive in places like Iowa and Illinois that are just sort of known as being some of the best places in the world for crops and that kind of thing?

And I think it has a lot to do with annual rainfall. Like, if you just don't have an irrigated farm and you just rely on nature to water your crops, is it going to happen? Or are they going to dry out and you're going to lose everything? So it's that kind of thing.

There's also the soil type. There's also the type of crops that can be grown because certain crops may be worth more than others.

And there's a lot of stuff beyond that. I actually have a blog post where I looked pretty deep into this, and looked at over seven different nationwide maps that kind of point out these areas are good because of this reason. And it's obviously not just one thing you'd look at, but a lot of different factors.

But am I on the right track? Is there other stuff that influences the value of land beyond that?

Pat: Well, those are excellent points. Because, generally in the Midwest, you've got, across the board, a little bit of different soil types to grow grains, the rainfall that you mentioned. So there's a little bit less irrigation cost.

But still, you know, the cost of diesel is the same across the country. The cost of nitrogen is the same. “Inputs” is a phrase you'll hear farmers use a lot, what it costs to put a crop in the ground, the input cost. Those input costs are still as strong up there for the most part as they are down here in the Delta, but the prices are double in the Midwest than they are down here.

But the part where I scratch my head is good as the soils are, say, just use Iowa for example, Iowa, Illinois, those places, they're not growing 600 bushels an acre corn. We grow some strong corn down here. We may be in the low mid-200s a bushel an acre.

And then you go, okay, everything being equal, that means I should be growing about 400 bushels an acre in Iowa. They're not. The yield doesn't keep up with the ratio and yield increase doesn't keep up with the ratio and the land increase.

And that's the part where we kind of scratch our heads a little bit and go, how are they making this work? The commodity prices are the same there as they are here. And the yields are not that much greater. They are greater on average, but not double and triple.

So these other factors that you mentioned, they do cut into it a little bit in terms of being able to make the return stronger. But I'm mumbling a little bit because again, I keep bumping my head against the wall going, how do they make $8,500 an acre of land work? How do they pencil that out with the cost of growing that crop?

Seth: I'm also speaking a little bit out of ignorance here. I don't know, but I do have a cousin-in-law, husband of my cousin, who is a pig farmer in Iowa, kind of over by South Dakota, and he owns a lot of land.

He was telling me something about how—and this was like 10-plus years ago—apparently a lot of farmland owners from California will buy up land in Iowa and drive the prices way up, way higher than they should be. And I don't know what the play on that is. I don't know if they just have a ton of extra cash and they're just trying to park it somewhere.

I'm not really sure, but I think you're right in terms of whatever financial yield you get from that. I don't know that it makes sense, but if you have millions just sitting around and you don't know what else to do with it, and you happen to be in the farming business, why not buy farmland? Maybe there's something going on there is my only guess.

Pat: Let me tell you, and maybe some of your listeners will be able to make some comment when this is released down the road and give us some insight because you got a smart audience and they're a lot smarter than I am. So let me give you my theory on why that works up there.

And I'm probably so far off-base that everybody's going to laugh, but it's the only thing I can make make sense in my mind.

You've got these generational farmers that own their land. They own it outright and they've been multi-generational farmers. You hand it down and they've got, say, 2,000, 3,000, 5,000 acres, whatever.

A farm comes up for sale that either joins them or nearby in their footprint, so to speak, that they can then roll that into their operation without it being burdensome. And they can then pay, just for conversation's sake, say $8,000 an acre. Crazy number in my opinion, but they can pay $8,000, $9,000 an acre for an 80-, 90-, 200-acre tract that comes up for sale.

Well, they paid that crazy amount. They roll it into their existing footprint that really doesn't have any debt, so to speak, in terms of their land cost. And so they've taken that seven, eight, nine thousand dollars an acre for a couple of hundred acres, spread it out into their whole operation.

And they've diluted the cost of that land down greatly just by rolling it into their existing operation. And it becomes very manageable at that point. That's the only thing that I can see how that works.

But then you throw a wrench into it when you talk about these outside investors who don't have that existing footprint leverage, so to speak, that they can just roll something into and dilute the cost out.

They're coming in. Now they've got a big debt nut to service in addition to all the normal costs and expenses of owning ground or farming land; how they make that work, Seth, I don't know. But my little humble theory of how owner-operators just roll it into their existing farm footprint, I can see how that works because that makes economic sense to me. I can do the math on that. I'm not a smart guy, but I can do that little bit of math. I can go, yeah, I can make that work.

Seth: Absolutely. No, it totally makes sense. Say, if you're already farming a bunch of ground and there's like a parcel right across the street, it could make a lot more sense for you to do that than for some other person who has to travel 20 miles to get there to do it. Maybe there's some economies of scale there too.

Pat: The economies of scale is a very good phrase for it to kind of boil it down. But that's exactly, that's the only thing I can understand. I hope some of your listeners will have some insight will jump in here in a month or so or whenever this is released, a couple of months and go, no, hey guys, here's what's going on. And we'll both learn something.

Seth: Yeah. I know. I love it when that stuff happens.

Actually, I should probably have a conversation with my friends at AcreTrader because they probably deal with a lot more of this macroeconomic stuff in terms of, you know, farmland markets as a whole and all this stuff.

But I totally appreciate your insight into where you're coming from as just kind of like the hands-on, down-to-earth, like you're dealing directly with people buying individual farms like this.

But I'm wondering, again, if you don't know the answers to any of this stuff, no worries. I'm just trying to pull out anything you might be confident about.

Pat: It's not just us. It's not like we're the only two, forgive me, only two dummies out here that don't understand how the economics of it work.

I've got a pretty good client we have sold some farms to over the last decade and a half. He lives up in your part of the world. He doesn't buy farms up there. He buys them down here because he can make the numbers work better. This conversation I've had with him multiple times.

He owns farms in three states down here, and some of them substantial farms, large farms. He doesn't buy them up there. He buys them down here. He's a long way away. He gets good operators and he does very well, but he's also scratching his head and he lives up there. He prefers our economics a lot better than the economics in the Midwest.

Seth: Well, that's a great point. I mean, there's really no reason why you couldn't do that as a farmland investor: buy land in some other state that you never really see. You just need to know that the fundamentals make sense and that it's a good piece of farm ground and you can find a good farmer to lease it from you and that kind of thing.

It leads me to another question I've got. So just like any land investment, there are different hot button issues that can kind of make a big difference in terms of whether or not a farmland investment is good or bad based on the geography and what different factors might affect it.

For example, like wetlands and flood zones and soil types and all this stuff. So this varies a lot depending on what state you're working in. For example, if I'm trying to buy a piece of farmland in Louisiana and I've never been to that area, how important is it that I personally go and physically inspect that property myself? Or what kind of tests or due diligence should I make sure I'm doing to make sure this is a good piece of land that I'm not buying something that's going to be really difficult to make money from in the future?

Pat: That's a heck of a good question. That comes into play a lot of what we do. I'm thinking of a little small farm I sold for a gentleman several years ago, but the guy in California, he's an IT guy. He's never done that his whole life. He never leaves the screen.

He bought it as an investment. And he asked me just for a checklist of things. “Hey, Pat, what do I need to make sure, what boxes do I need to check, due diligence-wise to check this farm out? Because I'm not going to fly out there and look at it. I don't know what I'm looking at if I do, but what do I need to do?”

And I gave him several things to look at. And as the farm size increases, this list will get a little bigger and we'll get a little more involved. But I said, hey man, just look at the soils and of course the soil types are easy to determine. In our CS we can do it right now on the internet. We need to make sure that the wells are operational, all the irrigation pieces, the risers and all of that, any reservoir capture areas, all the irrigation is in good shape. We need to make sure there's decent infrastructure in place for the market. The crops have to go somewhere and have to go there in an efficient manner.

Is there a good base for tenants? Sure, you've always got somebody clamoring to lease it from you today, but is he a good long-term guy? Or if he goes away, something happens and do I have people in line that I can easily rent my farm to going forward?

The soils, the wells, the infrastructure are huge deals. Knowing that they can rent it out and what those kind of area rental rates are, knowing those things are very important.

If it's a larger farm, you're going to find people who are going to have environmental studies done to make sure that there's no chemical seepage, massive fuel spills, anything eroding into creeks, streams, and rivers to cause them any environmental issues.

Phase one environmental studies are getting pretty common these days, to make sure at least that's done. Nobody wants to spend $4 million on a farm to buy somebody else's environmental issue. That's become kind of the top of the list for a lot of buyers to make sure that there are no environmental issues, problems in place.

Irrigation systems, if it's an aboveground irrigate, you know, pivot systems, those things are becoming less and less desirable in our world. People want to get away from the pivots and use underground systems or polypipe, aboveground, movable irrigation structure.

Those are just a handful of big items right there.

Seth: When you mentioned soil types, I don't know if you know this granular level of information, but what kind of soil type do you want to see and what do you not want to see? What's a problem when you go to the USDA soil maps and see what's there on the property?

Pat: You know, there are a lot of people who know a lot more about soils than I do. I use the data and I use it routinely when I'm looking at farm ground.

And also, you know, a big part of our business is timberland. I use the same NRCS website to look at site index for here in our part of the world, loblolly pine. Same data. It's just a different crop, you know, pine tree versus soybeans, corn or milo, that kind of deal.

Soils are called different things in different places. Class one soils in your world are going to have a different name than class one, class two soils in my world. You start learning those names of those different soil types and what to look for. So I couldn't throw out any names because they're going to be different with every one of your listeners in different places.

But typically you want to learn the good silty loams versus the heavy clays. You want to know the difference in those because that matters based on the type of crop that is the predominant crop in that area or the mainstay that somebody that's going to be farming your place is going to be growing.

Here in our part of the world, we've got here in northeast Louisiana, specifically up and down along the river, we've got some real heavy clays. And those heavy clays are tough sometimes when it comes to irrigation.

Seth: Is it because it doesn't drain well. Is that the problem?

Pat: Exactly. Yeah. Then we've got the silty, loamy type soils are what most guys are looking for because they do drain well.

So learning the names of the soils for the silty loams and the heavy clays in your area is what's important in my mind.

Seth: Well, as you were talking there, Pat, I just asked ChatGPT, the ultimate authority of all truth, what kind of soil types farmers would or wouldn't want to see. And it basically just matched what you said. Said good soils for farming would be loam, sandy loam, silt loam. And the worst soil types would be like heavy clay, sandy soil, and rocky soil. So I don't know, whatever that's worth.

Pat: The rocky soil, yeah. See, that's something that here in our part of the world never comes to mind.

But, you know, we sell a lot of land. We're licensed in Missouri. And, you know, in my mind, Missouri is all rock, you know. But, yeah, so that's a good point, rocky ground.

Seth: Do you ever see people who buy raw land? Maybe it's like a forest or something and they develop it into farmland? Does that ever happen? So, what does that cost per acre to do that? Any idea?

Pat: It's not going to be a one-size-fits-all, but it's going to be… I’ll give you an example.

I have a very good friend, lifetime friend in Arkansas. I'm in Louisiana. He's in Arkansas, South Arkansas. He's an hour and a half, two hours away. He buys these types of tracts and will go in and clear them. So he'll have all the timber cut and then he'll have it completely stumped. All the stumps removed, piled, burned. Then he'll go in and have it land formed and irrigated.

Now he can do a lot of his own work because he's got heavy equipment. He's got guys that can run it. So he's got some economies in place that your average bear doesn't have.

But ballpark and acre, he's looking at, you know, $1,000 an acre to get water on it. He's looking at $200 to $500 an acre to stump it, rake it, and burn it. And that's at his numbers. It's going to be a bit higher at ours.

So, ballpark, but using his example, it's $2,000 an acre is what it's going to take him plus the time. And so you got the cost of money, but without getting into that part of the equation, a couple thousand dollars an acre.

So, he's looking at, okay, if I do this improvement, I've got ground that's now worth 4,500 to 5,000 an acre. So if he can get in it for a couple of thousand an acre, let's say for round numbers, do that work, couple of thousand, he's got, for conversation, 4,000 an acre in it. He's got something that he can then farm himself—because they farm several thousand acres—a good irrigated piece of ground that he created himself for a little bit less than he could have bought it for.

But the problem is, you can't just go out. It's not on the shelf. You can't just go out and buy it, you know, in your footprint. So he had to go kind of make it. So he's created a valuable piece of ground for him for, say, five hundred to a thousand dollars an acre cheaper than he could have bought it for if he could have found it.

And it's where he wanted it because he chose the tract. It's in his footprint. He did the work. He made it work himself. And so he's kind of like a custom land developer for his own farm.

$2,000 an acre is his number. And that's him being able to shave costs or shave some money because he can do a lot of the work himself.

Seth: That's a great example. I had had this conversation with a farmland broker about five years ago, and he told me very similar numbers to that.

But to your point, the question I asked you was like impossible to answer because there's so many different, like what if there's no trees on it? What if it's already perfectly flat? What if, you know, there's ravines and all this stuff? It just depends totally on that property.

And also it sounds like this guy had a really nice competitive advantage in that he could do a lot of work himself. I mean, that's, I would never be able to do that. So if I had to pay somebody else to do the exact same thing, I'd probably be paying, I don't know, I don't know if it's 3,000 bucks an acre or what it would be.

But it's a really interesting thing to think about because I know a lot of land flippers in our audience are always looking for new ways that they can add value to properties, whether it's subdividing them or putting some kind of improvement on it.

And this is something I don't think a lot of us have really thought about in terms of, what if I could buy a piece of land? And what if it costs me, say, $1,000 to convert this to farmland that I could then sell for four thousand dollars an acre? I mean, it would definitely be a very much more involved project and there would be a lot of costs up front to do that, but I haven't heard anybody who's done that and I'm sure there's opportunity like that out there.

Pat: It's a very niche thing to do because the capital outlay for to do that is huge. We're talking about, even at my buddy's number, a couple thousand bucks an acre, that's real money. And over time, it's a good while before he starts getting any returns.

So he's got his neck out there until he gets this thing, a crop on it and starts getting a little bit of return. But they're third generational farmers. They know what they're doing. It's not their first rodeo, you know, so it's a lot less risk when you know what you're doing and you've done it in the past and you've kind of been there, done that. It takes some of the sting out of the risk.

They also (in our part of the country, this doesn't work everywhere), use the example of it's got trees on it. They also buy catfish pond, ground that's been in catfish ponds, and just convert the ponds back into tillable acres.

That's the same scenario, but just a bird of a different color, so to speak. Instead of taking down trees, you're taking down levees and forming the ground for irrigation based on that. So that's popular down here too, but it's hard to find those tracts. But when you can find them, they really make some pretty good farms.

Seth: Do you know what is a normal financial yield? Not crop yield, but like… What kind of ROI should a person reasonably expect if they invest in a piece of farmland? Like, is it 3% or 5%?

And I know this, again, this depends totally on the person and all this stuff. But if you were to buy a piece of farmland, what kind of yield would you want to see to say, yes, this is a good deal?

Pat: What I would want to see, I guess, is, of course, I'd want to see double digits. You know, OK, great. Fine. Knock yourself out. You go buy all those up you can.

But in the real world, to use my Midwest guy who buys farms down here in the Delta, and he's a heavy hitter. Now, he doesn't buy 10s and 20s. He buys several hundred, several thousand acre-big farms, multiple farms. He has to have, if it's not 3.5, he won't even entertain it.

So he's 3.5 and up. 3.5 to 5.5 is his sweet spot. If he can find something over five and a half sign him up as quick as he can because he understands that it's just difficult to buy an established farm that's ready to go day one that he can get an operator on immediately. Four and five percent he's in there all day long sign him up.

I'm sure that you've got some listeners that they've got some spots and places you know they may be in the six, seven percent. That's great. That's a strong return for farm ground because that's an ROI on the ground.

But then you've also got the asset that's appreciating right now, at least pretty rapidly. So you're doing well on two sides of the of the equation, assets appreciating and you're getting, you know, ROI for your cash.

To answer your question. 4% or 5% is kind of where most folks want to be from my experience in our part of the world.

Seth: It's really good to know because just so people kind of understand what they're signing up for, what they're chasing after if they try to buy a piece of farmland, that's kind of the average or the normal range of what some people go after.

And when I hear that, it doesn't get me terribly excited. That's not a huge yield. But to your point, the appreciation is there. It's a very easy investment. It doesn't require a whole lot of effort for the landowner to do anything, provided they have a good tenant who will lease it up again and again.

So is that mainly is the fact that there is some return on it? Maybe not huge, but there's something, but also just the ease of it.

And then also the appreciation of those kind of the reasons why people do this instead of investing in, say, a hotel or a self-storage facility. Like why go after farmland when there's stuff that makes more money out there?

Pat: Yeah. Tomato, tomato. Everybody's got looks at it differently. They may call the same thing. I don't know. Everybody's just different.

Also, to the stage of your life. You know, if you got a guy that's like my buddy, I keep talking about in the Midwest, you know, he's in his late 60s. Heck, he may be in his early 70s now. He doesn't want a high-risk situation. He He wants steady, dependable, rock solid, a reasonably easy asset to handle estate-wise, you know, because, I mean, he's in the fourth quarter.

You know, you probably have some buddies, maybe some, you know, I've got some investment friends that, you know, hey, it's early in the first quarter for them, early second quarter in life. You know, they're wide open. They got a lot of time to correct some mistakes if they mess up.

So it probably just has to do with season of life, ease of investment. If you're dealing with a real turnkey developed farm down here in the Delta or probably just about anywhere, you're dealing with the tenant a couple of times a year. You may talk to him a few times just to check on things. You get a check from him once or twice a year. You get a certificate of insurance, additional insured from him once a year.

You know, the management of something like that is just a few minutes of your time versus a multi residential, a multi resident unit, a hotel, a commercial building. That's every day, all day, nonstop, late at night, 2 a.m., you know, toilet overflow. You've got so many different things going on.

And you just, you got folks that just don't want that hassle. They've got cash. They park it in a good asset. They get the return they're anticipating. The money's in the bank. The details are taken care of. No muss, no fuss. It's just easy. And the risk is tiny.

Seth: Now, you mentioned that farmland is appreciating right now. So why is that? What all affects farmland values? Is it like commodity prices? I've heard in my conversations with different farmland experts that like, it's not really tied to the housing market at all. Housing values can be plummeting while farmland values are going way up. So, what is causing that?

Pat: Demand. You have something that's happened. And again, I'm 59 years old. I haven't seen everything. I don't know everything. My understanding is based on my history and time.

We've had so much foreign investment that's come into farmland and funds. There are a lot of, I've sold farms to large funds that go out and they make these big purchases and they drive the demand.

You know, the supply gets a little tighter because you've got foreign investors or you've got big funds that are buying up massive chunks. And so your demand is there, but the supply is almost finite, it's limited. And so that's going to drive the prices up.

Commodity prices drive the prices up, but that's a double-edged sword. My buddy and I were talking yesterday. One of my agents is a farmer. Commodity prices are just kind of are what they are today versus the last number of years. We've seen prices go up, but we haven't seen the commodity prices just racing out of sight. So that's a head scratcher. But that does drive it, commodity prices.

I guess, like I said, the outside demand and the commodity prices and the limited supply, and I say limited supply because you and I both talked about just a few minutes ago, we wonder, are tillable acres increasing or decreasing? I personally think they may be decreasing a little bit. So that supply is pretty flat or maybe even decreasing, in my opinion. It could be going up, but it's not a massive supply of farm ground.

So that's all got to factor into it.

Seth: If I've got like $50,000 and I want to buy a piece of farmland just to get my feet wet, is that enough money? What is the smallest piece of farmland I could get with financing from a bank and it would still make sense? Is that small of a parcel even exist out there? Are there 10-acre parcels of farmland or is 40 the minimum? How much cash would I need? How small would a parcel need to be before I could really feasibly get that thing?

Pat: I would get a lot of pushback from your folks because everybody's got a different strategy and different perspective, and I respect that.

But from my point of view, an investor buying farm ground in this day and time doesn't want to use a lender. And just think about right now, if you went and bought a piece of ground, you bought a farm, just what the interest would be just with the banks you use, what's the interest rates?

And you look at your return and you're going, golly, my return might not service the note. It might not, depending on your mathematics there and depending on how much cash you put into it.

So I would think it would need to be a cash investor who's buying an asset that they're going to just lease out and not own or operate. And so with that in mind, it's got to be a straight-up cash deal to find a good tenant in our part of the world.

Yeah. 40-acre farms, people lease them all the time, but it's got to be in a good spot. It's got to be in a footprint that there are a lot of good operators so that you can always keep those 40 acres rented.

Because 40 is small, especially if you're wanting to irrigate it. You know, 40 acres is a pretty small tract of ground to irrigate. There are a lot of them out there. Don't get me wrong. They're out there.

But sometimes economics get out of whack on a small piece because the cost is the cost and you don't have as many acres to spread it across. I go put down a well, it's a flat fee. I mean, it's a number, one well to service 40 acres. I can't put down a half a well or a quarter of a well. I got to put down THE well and I could put down that same well and maybe service 120 acres, 200 acres, just depending. So I can spread that cost out over more acres. And that makes sense to you and all your listeners.

But if it's a small piece, it's got to be in a great footprint because it's hard for a good operator who's 45 minutes away to put equipment on the road and employees on the road to go and work a 40-acre tract somewhere because you lost a tenant and you got to lease it to this other guy.

So you got to have people all around those smaller tracts to keep it leased out. Does that make sense?

Seth: Oh, for sure.

Pat: If it's a large farm, it's a lot easier, but a small farm is tougher.

Seth: And that was one of those kind of light bulb moments I had. It's actually like a very obvious thing you're saying here, but it just never occurred to me until we talked about this last time when you mentioned location matters in terms of, there's got to be sort of an existing farmer economy in that area. Don't just develop a 40-acre piece of farmland, you know, a hundred miles from the nearest farm. Like, it's going to be a lot harder for you that that way.

Pat: I'll tell you how I learned that, Seth. I don't mean to interrupt you, but I'll tell you how I learned that. It's not like I came into this with all this knowledge and information.

I was helping a Louisiana guy who is a farmer and an investor and a real estate agent, a land agent. Helping him look at a farm probably five hours away from us in north central Arkansas. And it was a great price and it was a beautiful farm. I mean, it was all there. And you just pluck it out. You look at that farm. You go, oh, wow, this is great. What a deal.

But the more we dug into it. And again, I'm listening to him a lot because he is the farmer. He is the guy. He's going, “I can't farm this. This is six hours from my operation. I've got to find tenants up here.”

And then we started looking at the market around it, the infrastructure around it. Just to haul the grain to elevators was a long, long way. There were very few large farmers in the area that he could lease to.

We ended up passing on the deal. The numbers were really good, and he passed on it. And he's an aggressive buyer, but he passed on it because there was a limited number of tenants available.

And the infrastructure in that greater area around that farm was so insignificant that he's saying, man, I'd have to buy it for $1,000 an acre, less than what they're asking, feasibly make it work. And that's when I realized, wow, just because it's a beautiful farm, it seems like it has everything.

These are two big factors that made the difference for this guy. And he is a pro. I've sold him lots of ground. And so that started getting my attention when I saw him react that way. And I'm going, those are important factors. You take that same farm, you pluck it out, and you come put it anywhere in my part of the world down here, 5,000, 6,000 an acre.

But up there, he passed on it for a lot less money just because he couldn't make it work.

Seth: So this idea of buying a piece of farmland that's not irrigated and then irrigating it. And just by doing that, it makes the property's value go up significantly ecause now it's irrigated and the farmer can kind of have more of a guarantee that their crop is actually going to turn out well.

So it almost kind of reminds me of flipping a house where you buy something that's worth less, you make an improvement and it's very clearly worth more as a result of that. Maybe you wonder, like, how does that work in terms of like, what does it cost to buy, use this 40-acre example that's not irrigated and then, drill the well, add the irrigation equipment.

I don't know if you have any examples in Louisiana there, just in terms of the cost of that. Like I know to drill a well in Texas would probably be a lot more than it would be in Louisiana, for example. But just think and do that kind of project on paper. Like if I wanted to buy a parcel of farmland, add the irrigation, sell it for more. Does that ever make sense? Like do the numbers work out?

Pat: Oh, absolutely. Yeah, absolutely. One little point to add in, since we're talking about irrigation specifically, again, you'll have folks that will go, hey, I know I know a different exception.

Many, I don't want to use the word most because I don't know, but I do know many lenders whose business is crop loans for farmers, for operators. They're requiring the ground to be irrigated to loan on it because they know that it greatly protects their investment. You get a better chance of a better yield on irrigated ground.

And so a lot of lenders are going, “Hey, if it's not irrigated, we're not going to be able to help you on your crop loan like we used to or like we've done in the past.”

So irrigation is getting more and more important other than just making sure my corn is getting the proper inches of, you know, moisture every year.

But to answer your question, yeah. Just ballpark, we put a well down, you know, there's 10,000 right there. And then you've got the infrastructure. If you've got underground piping. Again, all that's going to depend on the distance and the degree of work.

Most farmers down in our part of the world now are using risers with polypipe because poly pipe has gotten so easy to use. It's pretty inexpensive. Polypipe, you know what I mean? And I'm sure your readers do or your listeners do, too.

Seth: Why don't you tell us what that is, just in case we don't know what that is.

Pat: Polypipe is a 12 inch diameter white plastic tubes you've seen laying on the ground.

Seth: PVC?

Pat: Yeah, that's poly pipe and it's hooked up to risers. Risers are a solid piece that come out of the ground that the well pushes water through pipes to the riser. It's called a riser because it rises out of ground, hook the poly pipe to it, water fills the pipe and they lay that pipe down out along the row.

So it runs down the row furrows and then they'll pierce the pipe. It doesn't come with holes in it. It's a solid piece. but you just go in and puncture it in each furrow and to let the water out and it runs down the rows. It’s a really easy, efficient way to water these days. Anyway, you got the well, 10,000, you got your infrastructure of the underground piping, the risers.

That's one thing, but the major cost outside the well, is you've got to make sure your ground is to grade so that that the water will run the rate you want it to run, the direction you want it to run. Because if the ground's not properly leveled and set to grade, it will flow a certain direction at a certain pace, then it really becomes useless.

And a lot of people don't think about it. I'll put a well down. Well, yeah, but that ground is all like this and crazy. You know, it's got to be leveled. And we use the word “level,” but the ground's not level. It's set to grade. It's actually at an angle, very small angle, but set to a grade.

And the cost of that runs the gamut depending on how much work it takes to cut that ground down, to grade. There's some ground it's easy to cut because it's just gently rolling. They don't have to cut much and it's already sort of rolling the direction that makes sense for the shape of the tract.

So cutting it to grade can be very expensive. It can be several hundred dollars an acre, no matter what, but it can really get more substantial depending depending on how much it takes to put that property to grade.

So each one of them is going to be different, but you're looking at, again, I use my Arkansas buddy as an example. He roughly says, hey, if I buy a piece of ground to get water on, it's going to cost me anywhere from $1,000 to $1,500 an acre. Just sort of his rule of thumb in his universe.

Seth: Is there like an industry professional, like if I'm trying to do a Google search for whoever can help me figure out what those costs are going to be, is there like a certain type of contractor that does all of that? Or do I have to contact one person for the irrigation equipment and then find an excavator who can move the earth around?

How do I figure out and put those numbers together to figure out the real cost for that?

Pat: Typically, you got two different folks there. You got your irrigation people and then you've got your dirt guys.

And there are companies out there that landform and will cut a piece of property to grade. And it's just, I don't know how to tell you who to use anywhere. I mean, I know who I'd use down here because I'm local. But it's just going to be finding those people online.

It's going to be very easy. Somebody's in a farming community. There's going to be a handful of irrigation companies. They're a farming universe. They're probably going to know irrigation companies just by name, even if they've never used them. They've heard of this company, that company, because they, you know, they're the ones that put down wells and not just for farm ground. They put down wells for WRP, you know, for duck impoundments, for catfish ponds. They put down wells for ruled home sites. They're the company that does it. So they're the easy guys to find.

And then you've got to shop around just a little bit for the landformers.

Seth: Awesome. Pat, thanks so much. I'm very grateful to have the chance to talk to you about this stuff.

If people want to learn more about you or check out farmland properties you've got for sale, what's the best place to go for that?

Pat: RecLand.net is our main website.

And of course, I'm easy to find on social media. Don't look for Pat Porter. You won't find much of that. But if you search RecLand, RecLand Realty, or RecLand Talks on any of the social platforms, you'll find us. But RecLand.net is our main site.

Seth: I'll be sure to include links to all that stuff in the show notes for retipster.com/182.

Pat: Back in episode 153 that we did, you put a link in there that if any of your listeners wanted to email me for a copy of one of my books. And I had really a ton of responses. People email and ask questions. I sent them there. Be glad to do that again for your listeners. You got a great audience out there.

So it doesn't cost anything. There's no tricks, gimmicks. You don't get put on a mailing list. You just simply email me at office@recland.net. Ask for one of our land books and be sure to put your address in there. I'm not a mind reader.

Seth, if you want to put that in your show notes, I'd be glad to honor that again. I'm happy to take care of your people.

Seth: You bet. office@recland.net. I'll include that in the show notes as well. Again, retipster.com/182.

And again, thanks a lot, Pat. It's great to know you. Great to talk to you about this stuff. and hopefully we can talk again soon.

Pat: Seth, my pleasure, buddy. Take care, man.

Seth: Hey everybody, how's it going? This is Seth Williams and you're listening to the REtipster podcast. This is episode 181 and today, I'm talking with Steve Hodgdon.

So over the past year, I've heard Steve's name quite a bit in the different land investor circles I run in. And Steve runs an online lending platform called the Finance Land Sales or FLS.

I wanted to talk to Steve for a while because of his expertise in the funding and note buying space of the land business where it's actually kind of a small playing field in terms of the number of people who really know what they're doing. And there's a lot of people out there who do seller financing with land, but not all those people really know how to do it well and have it down to a science.

Not long ago in the REtipster Facebook group, somebody had posted their recent experience where they had sort of been gut-punched because they partnered with a land funder to fund their deal and the property didn't sell fast enough. Too much time went by and they basically were cut out of the deal and lost all the time that they had put into it. And it kind of took them by surprise.

And when I saw this, it occurred to me that while any astute funder has plenty of ways to evaluate the land investing operators they're working with, it should kind of go both ways, where the operator needs to have ways to evaluate the funders that they're going to work with to ensure their interests are represented as well.

And Steve also saw this post in our Facebook group, and he chimed in from the standpoint of another funder, and he wanted to give his take on it.

So I thought this would be a great opportunity to talk with Steve about how he thinks through deals like this. And I'm just excited to learn everything we can from this guy.

So Steve, welcome. How are you doing?

Steve: Thanks for having me on. I've been a big fan for a long time. We got to have breakfast a year ago up in Minneapolis at Dave Denniston's event. Which I signed up for again this year.

Seth: Yeah, awesome.

Steve: It was at the Unconference. It was a good room. You covered basically most of my history. As you can tell, there's a bunch of gray hair. I was in the room when credit scoring was created. That's how far back I go.

Seth: Wow.

Steve: Yeah. So in 1989, I bought a medical collection company, built that into an accounts receivable management firm, not just doing delinquent accounts, but also doing traditional, like loan servicing. I made it bigger than I thought I could manage and sold it after I was 50.

And I decided I was going to go to the country club, found out quickly that I didn't like golf that much. And what I really liked was building businesses and so I wandered over to property management and bought some commercial, bought some rentals, did that for a bit and then wound up running a new lending business down in southern California. There, I started doing some seconds for home flippers.

Seth: What does that mean, seconds?

Steve: So they've got a primary loan from a hard money or a bank and they're doing rehab on a house and they're short.

And so I was doing up to about $100,000 transactions covering the bridge financing to get you from the beginning to the end. Then I was buying lots for builders. So I'd buy a lot, sell it to a builder on terms, and then he would get his construction loan and I would subordinate the second position and get paid out when the house sold.

Then I decided I'd buy some mortgages. So I bought bought three quarters of a million dollars worth of small dollar mortgages around the country. Not a great idea, but it was, I learned a lot. And all of that got me turned to land.

And I came to land. This is maybe six years ago. I went to a land academy training that did down in Redondo Beach and said, oh, I can help this group. They need a place to monetize their notes.

And so I thought I was going to build a note-buying business and bought some notes. But from there, people said, well, I don't have a note to sell. I need money to buy the property.

And then here I am in the JV business. And I started where everybody started at 50-50. So we'll go into those terms in a minute. But let's back up and talk about the Facebook post.

So she said in the post that she did not read her contract. One of the things that you do when you have a podcast with Seth is there's, I don't know, 100 questions on this list you gave me?

Seth: I will say I've got more questions for you than I usually do because I've got so much I want to know. But yes, go ahead. Proceed.

Seth: Okay. So I'm going to try to stop wandering around with my stories like I usually do and try to—if she had come to me and she put an application, put the property into the Finance Land Sales website, we would have a little AI tool pull comps, do some stuff, look at our underwriting, which I'll get to.

But if it was approved, she would have gotten a contract. And the contract would say that typically it's a six-month term. And so you have, from the day my money goes to the title company to the day my money comes back from the title company, we have six months.

So that's really tight. And people will say, well, I need nine months. And being a smart guy, I'll go and say, well, come to me in three months and then we'll do it. Get an extension, get an assignment, do something.

Our target in our business is to turn our money at least twice a year, sometimes three times. So if I can make a 25% return on a deal, and I can do that three times in a year, I've grossed 75% on our money.

When I came into the space, it was all 50-50 deals. And that's what I had been doing in traditional fix and flip. And it struck me that there were two things. I wanted to buy my way into the space and have people know I was here.

But I also thought that the cost of money was too high, depending on the deal, right? Depending on the deal. If it's really tiny, if you're really new, if there's problems, if it's a little desert square that may take a year, yeah, it's going to be 50-50. But if it's good property that's got a lot of juice in it, then you shouldn't pay me $50,000 for parking my money for 60 days.

So I came out, I saw what people were doing, and I bought market share by doing an 80-20 split. And immediately people started doing, we had this race to the bottom on splits. So we wrote our contract to be 80-20 month 1, 70-30 month 2, 60-40 month 3, 50-50 months 4, 5, 6.

We have done things in contracts to allow partners to buy extensions. You know we've got a deal we're almost to closing. We might have an offer, sure we'll extend two weeks or a month. Oh, we found that there's a flaw with the real estate? And when we get around to talk about risk, we'll talk about underwriting and things you can't find in a virtual underwriting.

And so our average revenue share has come down from 50-50 to more like 35. I think that's about what we average. We averaged maybe a couple of points over 35%. And that seems okay, right? If the deal size is right.

The contract's written to make us as passive as possible and the partner as active as possible. Because we don't always put these in our parent organization. Our C-Corp is modern asset management. But we also have several other entities. There's trusts. There's IRAs, 401ks. Occasionally, we've done a... We have not done a deal split on our side yet, but I think that's going to come.

So if you're lending money out of an IRA, you cannot have any activity at all. Nothing. And that would be a whole other podcast and how we set up another corporation to manage our 401k.

Seth: So you're actually holding title to these properties in your entity? Is that right?

Steve: Yeah. So we're holding title to the property.

So one of the things she talked about in the post was she talked about partners. And there's a difference between a partner and a money partner or just a funder or the bank—”we have one transaction. It's going to be over and done in six months. I'm never going to see you again.” That's not a partnership.

In the couple of hundred transactions that we've done, I've done more than 50 with one partner. And we've turned a couple of million dollars with him. Those are almost all note sales. And we have a revenue share on the note sales side. And there's a whole bunch of math that goes into that.

So a partner is somebody who, what Simon Sinek says, leaders eat last. Well, my partners eat first. We try to make sure that everybody comes away with a win because I'm not interested in one transaction. I've got out of the 50 or so people, maybe it's about 50 that we funded. There's five or six that I've done 10 deals with. This one person, I've done more than 50.

But even on the one-off, it's okay. At some point, you should outgrow needing this capital. You should have enough wherewithal that you can get a bank line. There's other ways to raise money.

Seth: On that whole thing when you said you're not interested in doing like a one-off transaction? What if you'd make half a millio?

Steve:I do, I do. But that's not the partner, that's not the person that comes into our little mastermind. So we have this little group called mastermind where the partners have gotten to know each other and talk. And there's lots of communication in this network in the land world way more than I see in other markets. I mean, you guys, you're all young, you're all completely digital, and you talk shop pretty freely and that's remarkable.

Seth: Yeah.

Steve: It’s remarkable that I immediately blurted out my rates. Which you can't do in other worlds. If I’m selling whatever, I can't tell you what my net revenue is. Well, my net revenue, absent the person with the 50 deals, of the other ones we funded, we spent $5 million. The net collection was $7.5 million.

Seth: When you say spent, you mean like you actually used that to buy the properties?

Steve: We bought $5 million worth of real estate.

Seth: Okay, gotcha.

Steve: We sold for 7.5 million. Not bad. Not as advertised, that people say you're going to triple your money. Not all the time. And of that $2.5 million in profit, our partners got $1.5 million and we got $1 million gross. We had expenses, carry costs, blah, blah. But that's what our little experiment in financing land has done. “I'm here because I like you, but I'm here to say we're going to try to get serious. We're going to try to be an institution kind of in the space.”

My partner, Nick, comes from the distressed asset world, dealing with banks, doing big transactions. We love this hands-on, getting our hands dirty stuff. But we think that with our tools and how we've learned to do this enough, we've been experimenting, we've been practicing for now a couple of years, we can make a real business.

The other half of our business is this unsecured or this other more traditional lending platform. And like you said in the beginning, I take a thousand payments a month. When I was running the business that I sold, I was taking 10,000 payments a month. That business generated $30 million the year that I sold it.

So right now we're playing with our own chips. We're not beholden to anybody. This is all our money that's in and out. Um, I've got about $2 million of our cash on market right now in a variety of deals, good and bad.

So maybe we should jump to what happens when a deal goes bad.

Seth: Well, that, but also like, how do you even define what bad is? For example, the property doesn't sell in six months. What then? Does the other person get cut out of the deal or do you take over, or do you extend it? Or what happens then?

Steve: Any number of things can happen. So, it's a definition of bad and slow. I've got a very nice lot, and I think this fits into one of the things she said [in the Facebook post], is one of the deals somebody brought an offer that was low. So we don't know how low, we don't know if it was something I've gotten offers for under what I’ve paid, and I turn those down so I’ve gotten offers for a tiny little bit over.

And I'm like, well, you said this was going to sell for $100,000, and this offer is $65,000. No. Right? Why? Well, because it wasn't really worth $100,000. Well, Mr. Partner, you said it was worth $100,000. We believed your underwriting. Sometimes, let's just say people are optimistic, like realtors.

“Oh I can sell your house for a million dollars!” When they know they can only sell it for 800. They're just trying to get the listing. That's a very common thing in that world and let's just say people are enthusiastic and hopeful and they're not intending to lie. The people that lie in these transactions are the sellers. Sellers do not disclose their problems.

Seth: You're talking about the original motivated sellers?

Steve: The original motivated sellers. So the 29 acres that I bought, so what happens when something goes bad? 29 acres in North Houston rural. And I purchased it for $200,000. The partner believed that it would sell for 450.

We were told that there were, you know, boots on the ground that looked at it and this and that, and here's what a couple of our issues are. And what we found out was that this is landlocked and that the access was washed away a couple of years ago in storms. There was a bridge that was wiped out. There's a mile-long dirt road that has been destroyed because of the weather. You can't get on here unless you've got a serious CJ, unless you've got the right machinery.

Seth: Did nobody do a visual inspection of this thing before they bought it?

Steve: Well, I was told it was done.

Seth: Yeah. I'm just asking to figure out what could be done to resolve that kind of problem. What could be done to resolve it?

Steve: What could be done to resolve it? We'll go into how I underwrite in a little bit.

So anyway, I had a misunderstanding or misrepresentation. It doesn't matter. I have a property that I spent $200,000 on. This is one of the biggest deals we've done. I think we just passed 500 days. At that point, no, maybe it's over a year. It's been well over a year.

It doesn't have $200,000 in value. The county where it's in. Reassessed it for $600,000. So I've got a $1,000 a month tax bill. The partner has gone on. The partner is a coach. The partner came with lots of experience. It should be great. Talk to me next year and I'll tell you how it turned out or if I still own it.

I'm thinking about, I know somebody where I can get some cattle. So that's the extreme. So that partner relationship isn't a partner relationship right? They were using my money, making a bet and the best bet turned out bad.

So when I think I'm investing, I'm probably speculating. When I think I'm speculating, I'm probably gambling, and when I'm gambling, I'm a terrible gambler. I'm a pretty good investor, so I try to be an investor as much as I can. And so people out there looking for money from me have to keep that in mind is we want to do good deals. We want to do lots of deals.

I've got a kid who, and he's a kid, he's probably 45. He runs an auto body shop in Southern California and he trades in two counties in South Carolina. That's his hunting ground. And we've done a dozen transactions. Some of them are only like buy for five, sell for ten. But we've done these again and again. My underwriting with him is, “Oh, it's from Victor. Go.”

And he's basically selling mobile home lots, rural mobile home lots in central, south Carolina. That's what I'm looking for is 20 guys like him and I don't need to do anything else.

So she [Facebook poster] had a transaction that ran too long. She had an offer that she bought that may have been below break even if the investor was borrowing money from somebody else at 12%, which is pretty common. There's all kinds of things.

So there's seasonality. I've got a piece of property that we just got in Georgia, and this is a really nice property, but the weather there has been awful. Nobody's buying, selling anything, and a buyer agent trying to get the rent paid brings a really lowball offer that's presented.

I turn it down because I know in January, in the middle of a snowstorm, $70,000 is probably right, but I know when the sun comes out shining, it's $100,000.

Seth: Just the weather, you think, has that big of an impact on the value?

Steve: This was ice storms. If you look at when homes are sold, there's a significant dip. People don't move in January. And again, the intrinsic value of this property is way more. I'm in it for, I think, $65,000. So no, I'm going to say no to $70,000.

Seth: It almost makes me wonder, if that's a real thing, and I'm sure it probably is to some extent, why don't professional appraisers have like a seasonality approach in addition to the sales comparison approach? I mean, if it really makes that big of a difference in what time of year the offer comes in at, that's just really interesting.

Steve: My wife's family, her mother was an appraiser, her sister's an appraiser, her niece is an appraiser. They've been in Sonoma County, California doing appraisals for 50 years.

But no, they're not going to make any changes other than the statistical, backwards-looking math that they're trained to do. They're not going to make anything subjective about those things at all. They're doing what the law tells them they need to do.

Seth: Well, and I guess this is a really interesting topic because on this whole thing of, you know, say both you and the operator thought the property was going to sell for, I don't know, $200,000 or whatever the number is. And an offer comes in $20,000 below that. Who gets to make the decision about whether or not it gets sold?

Or, in that same vein, I don't know if you guys sell with seller financing, but say if you get a cash offer and a seller financing offer. And who gets to decide which one to take on that end? Like, does it all rest with you at the end of the day?

Steve: Yes. So back up to the beginning of that, we average over these couple of hundred transactions, we average 85% of what the original intent was. And we've had a couple that have gone way over.

Somebody we've done a dozen deals with, great kid, we bought two lots, two 20-acre parcels in upstate Michigan that had been dormant for years. There was supposed to be a developer in Southern California that was just dumping them because the city said, "Oh, you can't put that development there, never mind.” They retracted their approval.

It was all overgrown. We sold one and now we're even, when we sold one for what we paid for both. When we and the realtor walked into the woods where the second property was, they found a 10-year-old mobile home that had never been used. So they walked out of the property and found $100,000.

So that skews my numbers. So maybe we're really 80% of value because we bought that for $20,000 and sold it for $120,000. So that's the one, which offsets the Texas no-access property. But I'm probably going to learn how to build a bridge, by the way.

Seth: Yeah, sounds like it might be worth it.

Steve: So that was the first part. Who makes the decision? It's my money. It's my decision. But it's a we-decision. If we come into a property and we find out, oh, it won't perk. You can't get power to it. We made a mistake. Let's move on. Let's get our capital back. Let's just get out.

In other instances, we'll put money in to improve the property enough to make it sellable. We've drilled wells. We've gotten septic approval. I've got a second guy going out and looking at one now because I got a bad report from the county that you can't put a septic here. Now we're coming out and getting another professional to come out and give us another opinion. So do I get an engineered system? What can be done? So we're going to spend another thousand dollars to see if we can get that back.

But now I'm gambling. I'm certainly speculating, and I'm probably gambling. I stopped being an investor. I want to give you money, and I want to look at my watch and say, go. That's it. I want you to get paid out of the HUD at closing. I want you to get your money. I want to get my money. I want to say, that was great, go do it again.

Fortunately or unfortunately, again, a lot of gray hair, a lot of mistakes, hundreds of transactions. We can help somebody who's done a couple and is learning, is trying to go to another market, is trying to make a business instead of being a once-in-a-while wholesaler. And we can help. Sometimes that probably can overhelp.

So I don't know when I'm talking to people whether you've got as much experience with me or this is your first deal. I often don't know that as we're moving along. And I've offended a couple of people by talking down to them.

So I'm like, okay, I can't do that. So she [Facebook poster] had a deal. Timeline was too short. She didn't read her contract. And she's blaming the partner for that. If she had come to me and said, “Oh my God, I didn't know,” and her $50,000 is in jeopardy and blah, blah, blah, you know, all this stuff. “The only offer I have is a thousand dollars over.” I'm like, well, let's reassess, re-underwrite.

And if you want to stay in, offset some of my risk and put some money in as a partner. Come to my side of the table. And so if it's $50,000 and you want to get an extension for another six months, well, put 20 in. Now we'll ride to the end together. And you get my share of the money that you put in.

That's typically the first option that you'll also have to explore. Explore fire sale, dump it, go, move on.

I've done a lot of car financing. The minute you finance the car, it's worth less than you paid for it. We've done a hundred and some Teslas. Lately, we built a product for a company called EV Life. If you want to buy it, you want to finance a Tesla in California, Colorado, EV Life is the place to go.

Seth: So on the whole thing of fire sale or dump it or do something else, why haven't you done that on this landlocked property in Texas? What's making you hold that? Is it just because there's so much sunk into it and you don't want to take such a big haircut?

Seth: We're going to really go off on a tangent here.

Because the prior owner has filed a lawsuit against her children claiming they got a power of attorney illegally. That she did not know what she was signing so I just got along with this. I got named in a million-dollar lawsuit.

That week, I was going to close. I've spent 200, I was going to close that Friday at 360. I pulled out of that, gave him back the earnest money, and now I sit for months waiting to see if my title company is defending me. I got another lawyer to look over their shoulder to make sure that I'm not going to owe a million dollars because I'm a victim here too, right? I'm going to wind up suing my seller, because not only did I need a mile-long road, I needed to build a bridge and I need to make grandma happy. That is not passive investing.

That kind of stuff doesn't get talked about. Everybody's talking about happy days. Nobody's talking about loss mitigation and solving problems.

So do I want cash or do I want terms? I always want cash because it's hard to pay you when I don't have the money to pay you yet.

Seth: I guess this kind of like, I think part of what's helpful about this conversation, is, at least from your perspective, in your opinion, which is certainly worth a lot, when you're looking at what the land operator is going into, where they're expecting somebody like you to pay for everything, and you're holding title to the property, what should they expect their role to be?

It sounds like if somebody is going to partner with you, their expectations should be, I don't really get to make the decision on when it sells and for what price it sells. That's up to the guy who has all the money into it. I don't really get to decide if this thing goes past the six-month window. What's going to happen next?

And I guess if that does happen, if you do decide to fire a sale or you do something else, does that operator still get a cut of whatever profit there is, if any? Or at what point are they just cut out of the deal because they didn't do their part?

Steve: The contract says you can buy in for 20% and get an extension. You can adjust the price down 10% without asking me at all. Anything below 10%, we have to have a conversation. You have to tell me why.

Seth: So this operator, are they working with an agent to sell it, or are they trying to sell it on their own?

Steve: Typically, it's listed with an agent. I have mixed feelings about the flat fee listing services. I've had mixed experience with flat fee.

So I look for the busiest white-tail agent if we're selling on hunting land. We've got a guy in Indiana that has been selling property for us there. And all of his pictures are of him with some dead animal. He's my guy. And if he walked it and he likes it, then it's okay.

But sometimes the agent didn't get out there. Sometimes they do a desktop evaluation. They cut corners because they're only paid on commission. And sometimes I wind up buying things that have too much slope. Not anymore.

Seth: And why not anymore? What are you doing different?

Steve: One of the metrics we measure is slope.

Seth: And when you say we, do you mean like you personally, or is somebody in your team doing this, or how do you know? How can you be confident in that?

Steve: The AI's name is UV. So UV looks first, and UV looks at slope, pulls Redfin and Zillow comps, looks at distance to the nearest power pole. It has six metrics that it goes and does, and it presents those on a screen, and every property gets its own card and is a project, and it presents those there.

With a press of a button, it can pull local information from the census and that kind of stuff, like what's going on in this town. Oh, this town's got super high unemployment and poverty levels; that's not for us, maybe for some people. I've done seven projects in a very poor town in Louisiana because I've got the right partner, but generally, I want something, a secondary or tertiary market that has reasonable sell-through rates.

I look at three, the computer looks at three-month, six-month, one-year sell-through rates. We look at the neighborhood, the zip code, and the county, because you can be, some places, say, Tennessee, and there'll be one sale in the neighborhood but five sales in the county in three months. All right, there are people, they're buying and selling.

I don't like the theory of I want to go where people aren't you know there's 3,000 counties in the country and some of them, there aren't any people. I don't understand the desert square game. I don't understand. People do great. Some people just do fantastic.

I don't understand the zero-down, $99 a month, no credit check game, unless you are in the loan-to-own business, which is an old car dealership term. When I was younger, not at 67 years old. When I write a seller finance note, I want to stick it in my 401k. I want to sell it to another investor. I want to do something with it that maximizes its return.

And I just want to set it and forget it. And like I said, we take a thousand payments a month. I don't know how long ago was the last time I actually posted a payment. Now it's probably coming up on a year.

So, but back to, you know, we underwrite. I don't like properties that are built like this. I don't like properties that are underwater. I don't like wet. I don't like dry. I like trees. I like trees and I like Walmart not being very far away. That's how I would look at a house.

Seth: On this whole due diligence conversation. How much money are you willing to spend or how much money do you typically spend on due diligence? Like, are you paying for surveys or perc tests or wetland delineations?

Because it sounds like when you get to these big properties, it becomes more and more worth it to do that because you don't want to like, oh, we actually can't do anything with this property. So do you usually spend money on due diligence or how does that work?

Steve: This has been part of our experiment. We've been growing up into bigger deals. We now won't take anything under 20,000, but I still get, I get weird at 200,000. So if somebody had a million-dollar transaction, maybe we take a piece.

I just did that with somebody who was around Land Academy at the very beginning. And I put some money into one of his deals because he had a partner that it was going to take too long and they wanted it out. So I substituted in because I want to learn. They're developing, they've got a developer in hand who wants to put a senior living center on this property. And I want to see how that goes.

Seth: In situations like that, where you're only funding a part of it, are you taking like a secondary mortgage position or are you a co-owner? How does that work?

Steve: In that, the property's in a trust. I substituted for one of the other trustors. And so I own, I think, a one-sixth share. So the cost of underwriting, it's a tiny, lean business.

Nick Curry is my partner. Greg Hodgdon came on board a couple of years ago. I had a TIA [transient ischemic attack], I had a mini-stroke. And when he came up, he came up from Tucson to make sure I behaved. And he saw how much fun I was having, and he went home and started writing code.

So he based all this on Airtable, and it's moving over to a SaaS platform of some sort. And I don't know. I see him writing in Python and JavaScript. And I look over his shoulder. That stuff was way back at the beginning of my career. I was doing key punch cards.

A computer programming or any kind of data analysis background is really good for this business. If you like figuring out puzzles, this is the place to be. So what do we do? So we look at a piece of property, we try to figure out what's wrong with it. Often there's something wrong.

So I've got Greg, all the people that are doing this are all 35 years old, it's cute. So there's Nick and Greg, and then in the Philippines, there's a young man named Joaquin and a couple of admins over there. I wasn’t being a little cheap, I wanted to save some money. I didn't want to hire another $50 an hour person like I would pay in the United States. But his mother was my admin for eight years. And he had a good chunk of his education in the United States and worked for a big real estate firm in Orange County. So he's perfect for us because he is naturally pessimistic and careful.

And I'm completely a cowboy, right? So that little team does all this.

If we're doing the same transaction every time, I can ask UV, my non-paid employee, “Give me some comps on five acres in this county, and how does it compare to this property?”

Seth: When you say UV, is this something any of us can go out and start using, or is this a proprietary AI software that you have?

Steve: It's our proprietary Large Language Model built inside our Airtable.

Seth: So there's no point in me trying to Google UV, however that's spelled.

Steve: No, no, no. It's my kid naming stuff. stuff. The software, the platform he built, he called Wiggle. And the CRM that he built, he called Wobble.

Seth: Okay, sure.

Steve: Makes them happy. Yeah, because we wiggle and wobble in transactions. It makes them chuckle, right? So it's good, we should laugh, right? I forget that. I keep coming back to this. I'm old. I forget to laugh.

Seth: Me too. I get that all the time.

Steve: Yeah. So here's the takeaway from today. Have a good time.

Seth: I got to write that on my wall some days.

Steve: Right. Yeah. I mean, we're getting to help people. We're giving people with it. We're helping somebody who's got something they don't want anymore and helping somebody get something that they think is a good deal, better than what they paid for. We sell property, like I said, about 80% of what is listed of what market rate should have been.

So people are getting something. If they don't have the money, well, Steve knows how to lend money. So I already said that I don't like the zero-down, no credit check, all that stuff because I bought some of those and half of them go bad, right? You want some desert land in Oregon? I've got a couple of lots. They're just not for me.

Seth: I've had a similar experience and I don't know why people do it. I think it's just because they don't know any better. They don't know exactly how to underwrite or how to offset it by getting a higher down payment. They just don't have the metrics figured out yet. But I agree. I mean, it's a huge racket.

Steve: Discount solves the lack of underwriting. So let's work that through.

I paid $100,000 and I'm going to sell it for $500,000. If things go bad half the time, well, I made $250,000 and I still have that $100,000 to go and do again.

Seth: I suppose, if you consistently do that.

Steve: And if you build those things, and that's what I do. I buy paper and I have bought paper at a discount for decades. And I've paid basis points for paper. I've bought 10-year-old credit card accounts for half a penny. So that's one end.

By the millions upon millions of face value for tens of thousands of dollars. And all you need is five people out of the thousand to pay and you hit a home run. So that's the extreme of this. And that's a very big business. That's a very big, robust world.

So here we are. We have somebody who wants to create a seller finance note. I'm going to use the same kinds of rules that you would use if you were using a registered mortgage loan originator. If you were going to use somebody who's going to sell you a house, somebody who can qualify you for a home mortgage. I need a credit score above 640. I need proof of income that the monthly payment for this raw land that you have no utility for is no more than 10% of your pay. So if you make $5,000 a month, you can't have a $700 a month payment.

I want to price things to people. And the less you make, the lower that percentage has to be because everybody has the same basic $3,000 a month cost of living, right? If I'm going to sell to you on terms, I'm going 10% minimum, 20% makes me happy. I'm going to want a better than 640 FICO, no serious derogatory.

What I've done my whole life, right? No bankruptcies, no judgments, no criminal acts. I'm going to want to know that you have at least an active credit card that you're making a monthly payment on and your phone bill, and you know how to pay a bill.

You have to sign up for ACH. I have to have an automatic withdrawal. If you cancel your automatic withdrawal, now you're in default, the rate goes up, all that kind of stuff.

So say we have a $100,000 note that was in this drawer over here next to me. There are several. I will have bought that note for like $65,000. I'll have bought a 10-year note. The one that popped into my head was 20 years. 15 acres in northeast Tucson, a place called Marana.

And speaking of desert squares—but I understood the utility. She's going to make it a horse farm. There's a horse farm next door. It's fine. She can make $1,000 a month payment or $860 a month payment because she's a registered nurse. And her story is she is retiring from Maryland, moving to Tucson. And at that point, they will build their ranch and she will refinance me out.

So I did 20-year term, 12% interest with a balloon in five years. So I'm collecting $860 a month on a $65,000 investment for the next five years.

How did the partner get paid? That's the other question. There was a $25,000 down payment. I gave the partner 20. So the partner ate out of the down payment.

The partner had a choice. The partner could say, I want to stay in for my 50% for the whole thing. And I'm fine doing that.

Seth: Is that all spelled out in your partnership agreement in terms of when and how are you going to start taking profits? Like, does it have to be determined upfront?

Steve: It is. The base contract says all cash. The base contract, you can extend with a down payment. You can limit the price. You have to manage market.

You have to do all this work for your half. And it's one page, two pages. So we had a simple one page that we cribbed from another source. And now this, there's more that needs to be disclosed. And again, the ability to buy in if you believe in the deal or walk away, no loss.

But then when we go to a payment arrangement where you're going to ride in the whole way, the last one of those I did was 35% to them and 65% to us. Because it was going to be a 10-year note.

Seth: One quick question there. I've heard you say a few times the operator can buy into the deal to extend the timeframe. So how much is it getting extended? Is it like another six months? And like, is there a certain percentage they have to buy into? Or what is the number they have to kick in for you to do that?

Steve: We're all making this up as we go, right? I've been offering 20%. You put in 20, you reduce my risk by 20%. We'll extend this another six months.

And again, you're not handing me $20,000 or whatever. You're investing $20,000 in this deal, and you will ride along with me the same way. If you believe in this property and everything turns out okay, you'll get that money back and then some.

So this idea we have, I want to be as aligned with you as I can. The more we are on the same side of the table, the more transactions we'll do, the better things will be, the more fun we'll have. We'll see you with this exotic car thing. Somebody had to pay for that, right?

I love going places and talking shop. I want you on my side of the table until at some point you don't need me anymore. Or you need me for, you want to be 50-50 in deals. And I have people that do that. It's like, hey, I'm short 50 grand. I'll put up 50. You put up 50. Off we go.

Seth: I hear you talking about the importance of alignment with the partner, which makes total sense. It makes you wonder, under what circumstances would you not fund a deal or not work with somebody?

I understand you mentioned the deal needs to be over 20 grand. So like there's one thing, or maybe it doesn't go over 200,000. So that kind of helps us understand the size. But is there something about the person or anything else that would be a red flag?

So you'd be saying, no, like, I don't want to do this. I don't trust you. I don't like you. Anything come to mind?

Steve: I want to know where you learned. I want to know what you've done. I want some history.

My guy, who's the mechanic is like, how did he get from that to that? Right. And we were funding little fives and tens for him.

And he grew up, you know, and but I think for every one of those, there's how many people go to a school, buy a mentorship, join a $25,000 mastermind, and then don't do anything or try and fail. I think most people try and fail in whatever endeavor, most people are told they can't.

So they believe they can't, you and I, when somebody says you can't, we go, Oh, yeah, watch this. And we are the exceptions. So I want to know that you're honest. I used to run background checks. I'm not doing that lately. I'm not saying credit reports, but again, in the world that I come from, it's very easy to get public record access.

I had such a nice little transaction that I was going to do. And then I said, you want this much money, I'm going to go get a credit report. Because they were looking for a third mortgage on a house.

And I said, I'm going to look at a credit report. And she says, does it matter that I went bankrupt five years ago?

And I said, yeah, it does. Well, you know, things were different. No, no. You know, when the going gets tough, you fold. We're not aligned.

I owned a shopping center. I bought a shopping center. My biggest bet of my life. I bought a shopping center in Denver in December of 2006 for $5.5 million. In March of 2008, it was worth $2.5 million. Everybody around me was going bankrupt, right? We had the great financial crisis.

I fed that $100,000 a year for eight years. Man, did that ever turn around? I finally turned it around. I sold it for six and a half. I broke even.

Seth: Good for you. That sounds like a terrible storm to ride out.

Steve: Oh, and it destroyed me emotionally.

Seth: Oh, I'm sure. That would totally wreck me.

Steve: So here I was. I had built this business for 17 years. I cashed out. I had all this money and decided that I was going to be a real estate investor.

And guess what? I was a real estate gambler. And I'm a terrible gambler. So that stuff, you know, I used to ask people years ago, well, what'd you do in the crash? But now all of you guys, you guys were all in your 30s. You were in high school, right?

Seth: I got started in the crash and it really messed me up. To this day, I kind of carry that baggage with me and the decisions I make. It feels like baggage now, but if things crash again, it'll be a huge asset, I'm sure.

Steve: Oh, yeah. Yeah. So I'm not the right partner for everybody. I'm looking for sensible people who'll watch my back too.

Seth: I don't know if this has ever happened, and if it has, maybe you can help me understand without revealing any personal information. But have you ever worked with an operator where the relationship went sour or you just wouldn't work with them again? And if so, what happened and how could that be avoided?

Steve: By not lying to me on the way in.

Seth: It's all detailed.

Steve: You know, simple as that. I'll be polite and say it's overzealous optimism. I see a lot of that. And again, you've been around a little bit. I've been around a little longer. People that are selling stuff aren't going to tell you the bad news. And if I'm selling you my deal so you give me money.

So how do I underwrite? I underwrite differently than everybody else in my team. They all go numbers, numbers, this, that, and the other, all this.

I take my KML from Prycd. I take my Google Earth KML, and I take the little man, and I drop him down on the street in front of the property. And I look around the neighborhood. I go up and down the street.

I've seen too many things. So this last one that I said no, the deal partner, the person looking for the money, sent in their Google Earth pictures, and they showed this, that, and the other.

And their pitch was that the end user was going to be somebody who's going to want to develop some houses and make long-term appreciation and have this whole story. It was really cute, probably written by ChatGPT, and so you zoom out a little bit and you look at the neighborhood and you go a little bit to the left and you drop down and it's mobile homes from the 60s, it's boarded up houses. This is not like the hood, like Cleveland, but it's the hood of Arkansas. It's the backwoods.

Behind, on a private road, so not even a real access, is this locked parcel that somebody's trying to get rid of. And so, oh, I'm going to build nice houses there. No, you're not. So somebody has an infill lot lot and the neighborhood won't support a $400,000 house or a $350,000 house, what are you going to sell the lot for? You have to give the builder a deal.

So if the builder is going to build a $350,000 house, it's going to cost him $250,000 to do it. And so maybe he can pay $25,000 for the lot. So if you're buying the lot for $30,000, you're going to try to sell it for $50,000 and the builder can't afford to buy it.

Seth: Well, I hear what you're saying. And I think what you're getting at is the devil is in the details. And usually, if there's going to be problems with a property, it's going to be something that's not right in your face. You kind of have to look around for it a little bit.

And I think the idea of using AI to do due diligence is pretty awesome. And I feel like that's going to continue to develop. But how much can AI really do? Maybe just a first pass, but you really can't rely on that for a final decision, right?

Steve: What it can do is, what it's doing for us, is it's saving me all the selective manpower.

Seth: Yeah. 80-20 lever?

Steve: Yeah. It runs off to Zillow and gets me my sold in 30-60-90 counts it goes and it knows, go look at within a mile, go look within the zip code, go look within the county, a minute later what would have taken somebody 45 minutes is done.

And it's smart enough because it's now done enough transactions that it can pretty much tell the difference between a house, and a property that is listed as land but has improvements on it, and the Prycd model doesn't do that. When you go look at Prycd, there's a page that says, here are the comps that we use. And you'll see the same comp for Realtor, Redfin, and Zillow. They've counted it three times. And when you go look, and why is this one 100 and this one is 20? You go look and say, oh, there's a barn. There's a this, there's a that.

When I talk to the Prycd guys, I listen to them talk and I chat with them a little bit after. The data that is out there is dirty. It's just not perfect. County records or county records, listings or whatever they're what they are. I can exclude bad slope, wet, no access without having anybody touch it.

Seth: Yeah, I was actually just talking to Max from Prycd yesterday. We were talking about that exact same thing, about how like the data just isn't perfect. You know you can't trust it implicitly.

Steve: So it [AI] does half of the work and as it learns it does more and more. We're having the machine vote now.

Seth: So in terms of once it does half the work and you have to fill on the rest of the gaps, whether it's getting on Google Street View and looking around or like doing an actual perk test or a wetland study or anything like that, are you typically spending money? Like, how do you know when you have enough information to be confident enough that there's not going to be some “Gotcha!” that comes out of nowhere?

Steve: We do an over and under $50,000 and over and under $100,000. And so the more we're putting out, the more detail that we want.

If it's over $100,000, I'd like to talk to the agent while he's standing on the property with his phone and going around and showing me. That's my happy place.

Seth: And how do you know you have a good agent?

Steve: Well, because they took the time to drive out to the property and look. And I'm going to look him or her up already to make sure that they're active in their market or that the brokerage is a solid brokerage.

I've been lazy and just using Whitetail for rural rec land, but not every Whitetail branch is the same. I got a slope problem that's coming up on two years that I don't know how we're ever going to get rid of, just sitting on the balance sheet.

The agent said, “Oh yeah, this should sell based on price per acre.” Well, the thing is just a cliff, you know, and it's not hunting land because deer are not going to walk up a hill that steep.

Seth: You should check out my blog post called Slope Savvy that explains all the different things you can do with super-steep properties.

Yeah. Oh, the one you posted today, the one you posted today about the cheapest places to buy land?

Seth: Yeah.

Steve: That's not me. I mean, that's not my world. But again, if you're going to run that kind of machine, our core business collects now, like I said, a thousand payments a month, two hundred dollars a payment. A bank's not interested in that, that's kind of boring. Dull, dirty work.

So that's the same kind of thing as doing five-acre parcels. I already have a machine doing that. The idea of going to land was to start working in a better asset class than unsecured subprime loans.

Seth: When you fund these land deals, how often do they involve some kind of improvement of subdividing or improving or rezoning or anything like that? Is it just a straight flip or do they ever do stuff to it to make it worth more?

Steve: It is most, 90-plus percent, have been straight flips. And our goal for the next several years, we actually did a little discussion and planning is to move up and look at value-add solutions.

We're also going to start doing our own mailing. And those are specifically for properties that we can, at least on paper, improve.

I've got some experience in home rehabs and experience in mobile homes. And so I'm a good buyer of discounted mobile home-friendly lots because I've got the pieces in place to go get a house on it real quick. That may be something that we explore.

Paper subdivides would be the next step for us. And I've got one working in mid outside of Lansing right now. We're cutting and 10 acres and three.

Seth: So do you mean you are doing the subdivide or you're funding somebody who's doing that?

Steve: I'm funding the subdivide.

Seth: Okay.

Now, I saw you mentioned something in our Facebook group. I thought it was you, where you mentioned this concept of, you know, there comes a point when we all run out of capital and this even happens to funders when like you run out of capital.

Has that ever happened? Or if it ever did, what would you do then? Like, do you just stop for a while or is there some other place you go to get money?

Steve: It's coming. Like I said, we've got $2 million sitting on market, and some of it's going to sit there a while. Some of it just needs to wait until things warm up, you know, so the weather is better. We have deals closing every week. I will need to borrow money if I'm going to move up. And in my world, that cost of capital to me is 12 and points.

So it's how do I, how do I do that? You know, do I joint vent? Do I look to joint venture, my joint ventures, but do I shift to developing my own sourcing and then find money partners from my deals?

And we're going to run down that. We're going to look, we're going to look to move to the other side of the table. I think I'm compelling to other funders because I've got all this track record now. I think I can get 30% split money.

It's okay. I don't want to start a fund. That's a whole another job. It's just not something that I want to do. If we do a fund, the kids, my young partner can do that. I'm not going to be around long enough to... I think I'm going to be useless in 10 years. I don't think I'm going to have much to bring to the table.

So yeah, I'm open to the right people for money, but they're not going to be in this podcast. They're going to be, these are the operators that you're talking to. They're going to be people my age. They're going to be self-directed IRA investors, family funds, family office kind of.

Seth: Out of curiosity, do you ever pay for a land investor's marketing costs? I'm assuming not, but what you said earlier about how you're sending out your own mail, like, do you ever participate on that level where you're paying for them to do the mail and then you fund the deal?

Steve: We didn't. We've done two experiments with that, maybe three. We bought a bunch of DataTree credits and spun a list for two new people to see what happens. Not enough came out of it to get something really, really going.

I took my partner. I guess you can call hem my partner. LaDasha is my partner. In Alexandria, Louisiana, where I've done seven projects with her. Home rehabs, fixed rent projects. And I mailed, we did a micro-mailing for looking for a specific landlord.

We were looking for, you know, the tired landlord list. We were looking for me, right? People that own things a long time. And we got several opportunities out of, I think, I mailed 700. Just here's this little sample. She's a contractor, she got some contracting work, she got a couple of listings. She's also a broker and she got a couple of people that wanted retail.

The way things used to be, you know, she got like a 10% return, she got like a bunch of phone calls. We did our first test mailing in northern Alabama, around the Huntsville area. I mailed 10,000 pieces of mail and nothing came of it. So there's some value in this micro stuff and that fits more with where I come from. My experience is before all this automation.

Seth: Yeah, it kind of seems like, for the funder to be paying for the operators’ direct mail costs or whatever it is, it almost kind of seems like the funder isn't staying in their lane. Like, it's not really their business how that happens or how good they are at doing that.

And especially if we're working with a new person, it's it's almost likely that they'll screw it up and waste money.

Steve: Well, and that's why I want to know where you learned how to do it. Did you come out of Land Geeks? Did you go somewhere and learn it or did you just watch five YouTube videos?

The success we've had from wholesalers has been strong. People that are used to working for a $5,000 prize, now working for a 50, they're motivated. They keep people on the phone. That's a skill. I could go to several services that will pick my county, do my mail, do everything A to Z, but it's the inbound or outbound phone call that matters. It’s can I keep somebody on the phone long enough that we can get away from the us-and-them and talk about, if they have a problem, maybe I can fix it.

Seth: That whole thing about what education camp you came from, I totally understand that question. But part of me is almost like, I don't know if that's even really enough information to draw a conclusion. Because I know a lot of people who may have gone through a course, but they didn't even watch that part of the course.

Or they did, but they kind of made their own judgment call on how to pull a list, whether it be right or wrong. So I don't know. It's really tough to get to the bottom of that without having some track record to look at.

But one last question, Steve. I know you got to go pretty soon, but I don't know how often you've seen what other funders do and what their agreements and contracts look like. But when you sort of sit on the other side of the table and try to look at this from an operator's perspective or the active flipper, you know, buying and doing the deals and all that, can you think of any “Gotcha!” things that they should watch out for in a partnership agreement? Like ways that the funder could take advantage of them or do something unusual that I'd watch out for that.

Or is there no such thing? Like if it's written in the contract, read the contract and then you'll know. Put your stance on that.

Steve: That's really it, read the contract. And if the contract is too complicated, that might tell you something right there.

I've signed some really bad contracts over the years now because I didn't read pages 7 to 14. I got, “Oh yeah, I trust these people.” So a couple or three pages is probably really all it needs. A good contract is just memorizing what we've already discussed and who does what. Who does what, when you need to do things by.

So if I say, if I put in the contract that I want a for sale by owner sign on the property within seven days of closing, evidenced by a picture, that's what it is. And I will sometimes get that granular.

But I say all marketing solutions, including listings, Facebook, for sale, neighbor letters, all of that stuff. And the smart people come back and say, I can't list it with the agent because I'm just mailing. I'm mailing the neighbor letters first. I need two weeks. And my response then is, how about a phone call?

If people are adverse to the telephone, they're not going to be successful unless they're going to run a giant machine.

I don't have to talk to people anymore. I don't know really how much I really add in value. I just like talking to people.

Seth: Well, Steve, again, thank you so much. I'm very grateful for your time and going through all this stuff with me here.

If people want to learn more about you or connect with you in some way, Is there a place you recommend they go to do that?

Steve: So the people that I stay friends with and in contact with and learn together are people that I'm engaged with in money. Put a deal into financelandsales.com, fill it out, put it in, the team will do it, and magically you'll hear from me to find out your story.

I want to know Seth's story. I don't go to these conferences to learn at the conference. I go to make friends and find deal partners. There's so many more places that we could take this conversation we can talk about. Hypothecating notes, we can talk about leveraging your existing book, I've got people that I lend money against their platform, against their loan, their payment stream. In fifty thousand dollar increments, they just they're a little short, they got deals going yeah, give me half your payments in the next six months, done. You know, that kind of stuff.

But anyway, financelandsales.com is where you put a deal in. There's an email address there. And if you write there to hello@financelandsales.com, they'll filter it and give me things like, oh, Steve, they said they wanted to talk to Steve.

Seth: And I actually had a whole bunch of questions about notes that we didn't even really get to. So maybe we'll have to do a whole separate conversation at some point, Steve.

Steve: So let's work up a list for notes and that I'd like to do some screen share and say, this is how you calculate yields. And this is why, this is that.

Seth: Yeah. That'd be awesome.

Steve: FinanceLandSales.com. I've enjoyed this and I thank you very much. I hope we get to do it again. I'll see you in May in Minneapolis, if not before.

Seth: You got it. I look forward to that. Thanks, Steve.

Steve: Okay. All right. Take care.