Episode #39 – Plan B is Always Necessary in Real Estate
Welcome to another episode of EarlToms podcast.
Today I want to talk about relationships, how they can benefit you, and how you’re how you’re planning directly affects some of your successes and some of your failures. Because it’s, it’s something that, you know, we don’t really think about in terms of the ways that we need to think about them. I’ll give you some examples, in this episode of, of what can happen, if we don’t plan accordingly, how to avoid them. So, to start with, let’s let’s think about relationships. A lot of people think about the relationship. So you know, they’re buyers. And that’s, that’s not a, that’s not a bad, bad way to think about it. Because your buyers are the ones that, you know, provide you the ability to pay your bills every month, you know, keep the doors open, and give you the opportunity to have a successful business. The the issue that a lot of people have, and I’ve been guilty of this, I’m still guilty of it. But it’s you can’t get a tunnel vision, when you get a get a buyer that you know will basically buy anything that you give them. The buyer that becomes the the easiest one to sell things, you find yourself getting a little lazy, instead of nurturing the other relationships. You just keep going towards that one buyer. But you know if anything over the past year and a half has taught us something, it’s that nothing is certain. So what would happen if that buyer became you know, they something in the office happened? They had to shut down? They didn’t buy as many Where’s your income gonna, gonna come from if that happened?
I learned this lesson, years ago, it was 2008 to 2010. And I don’t remember the exact year, but I was appraising at the time. And I was, you know, flipping a house here there. It wasn’t my main source of income. But when I was appraising, we were hit. We were going through the foreclosure crisis. And there were a lot of banks and mortgage companies going out of business consolidating, being taken over. And I remember one morning going to the office and getting a call from someone that worked at at a company called Ameriquest. While I was doing pretty much every appraisal that that Ameriquest would send in my market. I think I was doing somewhere between 20 and 25 residential appraisals for them every month. So it it was a large chunk of my money. And I had it basically so good that they could call and say hey, I need this back tomorrow. And I’d say okay, here’s $150 rush fee, or whatever I wanted to put on top of it to get it back to them tomorrow because I had to put others you know, I had to push those back. And I wound what will wound up happening was is when the market collapsed, basically a sheriff in every city that Ameriquest operated in showed up to their offices and told them to leave. They couldn’t take anything with them. They couldn’t do anything all their part they had to come back for their personal belongings. They were actually just being shut down with no prior notice whatsoever. And Ameriquest was about 75% of my residential business. So when I get this phone call that says hey, I don’t know what’s going on. But we were just escorted out of the office by the sheriff. You start calling around you start hearing you know certain things. So what wound up happening is as Ameriquest goes out of business, they get sued for predatory lending. A lot of the people that work for Ameriquest go to jail because they were doing things you know falsifying documents pay stubs, this amount to get loans to go through. And once this happened, I mean, in a blink of an eye, like I said 75% of my appraisal business is is out of the window and this pretty much accounted for about $10,000 a month worth of business that I was doing. So I went from basically making between 15 total $1,000 a month, appraising down to, you know, five to $10,000. So I mean, it took a decent chunk out of out of my business, I still had a little bit of the commercial, you know, that I was doing.
So the income wound up being, you know, 50 to 75%. But the overall residential side of it was, you know, like I said, around 75%. So, I went from, you know, good money every single month, to now kind of in a in a panic anxiety, thinking, What am I going to wind up doing now? I basically had to go back to those clients that I didn’t serve, as well, because of the business. Ameriquest was sending and rebuild those relationships, basically walk in, you know, no leverage whatsoever. I’m sorry. You know, can you ever forgive me type scenario, and it wasn’t a very pleasant time. But it was a very humbling time. Because they all you always hear don’t put all your eggs in one basket. And that is true in any business, they always say diversify. So that you’re covered, you know, I’m not saying have multiple streams of income or you know, things like that. But you have to diversify your ways of doing business.
And when you come in, as far as wholesaling, you look at things like, let’s, like I said, before, you have this one buyer that will basically buy everything that you know that that you send them, but let’s just say that, for some reason, they made terrible investments and their money stream their source that they were getting their money from dried up. And you may experience some of that, you know, in the near future, if banks consolidate, you know, don’t do something similar to what happened back in the foreclosure crisis. So this, this buyer, let’s say, is, is used to be unable to just run out to Corvettes, for example, and get whatever money they want, whatever they want, they don’t have to worry about it. But now all of a sudden values have started to go down, the return on the investment started to go down, their books don’t look as good. So now they have to scrutinize every single loan that they do again, and it’s not, you know, passing out money as freely to all of their investors. So does this investor go from, you know, for example, saying I have a million dollar line of credit, to now only have $500,000, because I was just borrowing to buy or I wasn’t buying the right way, or I wasn’t doing this. Because you’re going if when the market starts to go down, you’re going to see this because there’s a lot of investors out there that have been buying just to buy. So what a lot of people think is, as far as this eviction moratorium is concerned, they’re trying to blame BlackRock and everyone else, you know, the hedge funds about this. But what they what they’re not actually thinking about, is even companies like BlackRock have gone without rent on some of their properties.
So when they can actually evict these, these tenants, they’ve had this miss money that from the tenants that didn’t pay, so now they actually have to go in and renovate these houses to get them rented again. But when the market starts to go down, let’s say that they were renting the house for $1,500. But now that house only rents for $1,000. So they have the money that they missed, that they were basically counting on, to be able to go through so when a tenant moves out, you know, they’ve got that, that income, they can just turn around and use it for the renovation to get another tenant in. So now the money that they were counting on some of these properties or not, is not going to be there. So they’re gonna have a higher expense, versus their revenue because the money they missed, now they have to give more money out of pocket to be able to renovate these houses, and then wind up taking less in rent, to be able to get these rented. So they’re less, you know, less say that their overall debt to income, things like that were, you know, they were showing a 15% net return a 10%. net return, whatever that may be. So depending on how their overall portfolio looks and how many tenants that they didn’t have pay, versus how much money they’re gonna have to spend out of pocket. And then even the current houses if a tenant says I’m paying $1,500 but there’s a rental this basically a street over I can go get for $1,000 you’re gonna wind up seeing a mass exodus, because we’re gonna wind up being in a race to the bottom. Because a lot of people are gonna think to themselves, I can get the exact same house, or something very similar for $500 less, so why am I gonna stay? That winds up being $6,000 a year that somebody can save. So if they pay a moving company to $3,000, they still save three or $4,000.
So it always go back to the principle of substitution. So what I want you to everyone to understand is, is it’s okay to have that main client, sin that main client, you know, the the deals that you get, but never get lazy enough to where that’s all that goes through your mind. Because you’re gonna wind up getting caught, if something happened, and I’m not saying something is gonna happen. But in the event, something does happen. Where are you going to look to get your income, because now you’ve got to go back in those those relationships that you should have been nurturing the ones that were actually buying the properties, right, and you may have not made as much money off of your deals. They’re still out barn because they bought right not just a bar, and overpay. So now they’re still able, you know, say what the core vest example again, corvis looks at them and goes, and you’re solid, you can still have as much money as you want to. But another investor that was just buying to buy goes, Yeah, you were you were kind of making some, some questionable decisions with what you were buying. So we need to see you build this back up and get it get it back to the way it should be before we give you that full amount again, so it’s going to wind up hurting your business.
What’s happening now? And one reason that I say that it is, you know, it’s definitely a possibility is with everything that’s going on now in the world. Because you like right now, I’ve got one of my main clients that I’ve worked with for years. And I pretty much I can just pick the phone up and call them and say, hey, I’ve got a deal. You know, do you want to you want to fund this? Or do you want to buy it? They do either or. And he’s sitting there right now with the virus. So what happens business wise, if that situation changes. Now, I’m doing everything in my power. I’m praying every day, every night, because this is actually a very, very respectable a guy of integrity, that, you know, he comes out of this virus, you know, unscathed. But it’s a possibility. He’s 68 years old. So he’s in an at risk group. And even yesterday, my aunt that was 80 years 80, something years old, was fully vaccinated, but she wound up getting it and passing away. So right now, there’s just an uncertainty. With everything in the world, you look at what’s going on overseas, there’s an uncertainty and nervous feeling. So what I want everyone to kind of do is just re evaluate your standing where your business is, if, if this client was unable to buy tomorrow, what would your business look like? What would you do? If, say, this company?
Take yellow letters HQ, for example. They’re raising the postage, if they want going out of business, because they have to charge too much for the postcards. Where do you turn for your marketing? Do you you know, go and test out another company? Where is your next revenue stream coming from? Is it protected? Is it insulated from these outside forces that you cannot control? And how are you planning for it? So you always have the plan A, and you have the plan B. Sometimes you actually even need a plan C. So you have to you have to actually think about it in terms of what is best for me. We all get in this business and we make friends. We have very close acquaintances. And there’s nothing wrong with that. But you always have to sit there and think of business first, when that’s the actual relationship. You can if you’ve got someone in your life that you do business with, but outside if y’all never did business again, you would be friends go you know, share beers barbecues, you name watch watch sports, that’s fine. But in some ways, you’re counting on that business, that revenue from that that person. So what happens if that’s no longer there? That’s all I’m trying to get across to everyone because it can happen. It happened to me when I was appraising. And I learned, right there never to repeat it, you don’t put your eggs in one basket, because when that basket drops, how are you going to pay your bills, you have to go, but it’s not a scenario of Okay, well, I’ll just move back over to these clients and this and that’s not how it works. So don’t in any ways think that I’ve had clients before, in real estate, that, you know, Hey, I know, I’m gonna be able to sell this property to them, or five properties to them, whatever it may be. And then all of a sudden, they can’t buy for whatever the reason, that’s happened to every single one of us when you’ve been in this business long enough, but you have to be able to, to get rid of your product, when your product is the service provider providing houses, you have to be able to move from one to the other without missing a beat. So it, it may seem like the right thing to do. But it’s short sighted, if all you’re doing is sending your properties and your deals to specific buyers, sometimes it’s good to take a hit and send it to a client, you know, a buyer that doesn’t always buy everything some they’ve backed out on or whatever it may be. But you’ve got to be able to build that relationship, because one of the reasons that they that they may back out is because they don’t feel a loyalty to you.
So the only way that you can overcome that is to build that relationship. Because if they get to the point to where they don’t want to let you down, they’re going to work harder to get that deal from you, if they put it under contract, they’re going to work harder to go ahead and keep their word and get that deal from you. Because they don’t want to let you down. Because they you you’ve established that relationship with them. And in all honesty, who cares if your main buyer doesn’t get a deal or two every now and then. Because it’s it’s good to have Plan B. And sometimes Plan C, you never get away from your bread and butter. But you’ve also got to be able to have your eggs and everything else. It’s just a way of doing business. When you look at this past year and a half. The reason that these big corporations succeeded is because they had the ability to transition into a more own line or whatever, whatever they did. But when you look at these, you know, the local restaurants, for example, they weren’t prepared to make the transition, to be able to keep their doors open. They were stuck. And they’ve had a lot of they’ve had a lot of them go out of business, because they didn’t plan for the unexpected. It’s not their fault, don’t in any ways think I’m saying it’s their fault. It’s just one of those things that being good at business. You’re not always looking at the here and now you’re looking a month enough in the future six months, a year, five years, you have to be able to see what’s just ahead, to be able to kind of guide your business, that’s the vision that you have to have for your business. Or it’s not gonna work.
It’s hard to do, because life is uncertain. We don’t know what you know, is gonna happen tomorrow. You know, a lot of people will laugh, they say, you know, if you want to make God laugh, tell him your plans. I mean, and that whether you believe or not, is not the not the issue, but it’s just a sign that a lot of people have have heard over the years. They also have that graph, that they’ll show the picture to where what someone thinks, you know, an entrepreneur or business owners life looks like to get to success. It’s basically just a chart going straight up. And then they say this is what it really looks like and it’s a bunch of circles the whole way through. That’s just true. But what everyone is missing Out of that picture that’s got a bunch of circles in it, is the simple fact that there’s still an arrow that’s coming out of all of those circles. And it’s higher than where it was before it entered any of those circles. The reason that it’s higher, and it’s still there is because that person had a plan B, a Plan C, a plan D, ever how many plans it had, they had to have, they had them, and they’re still going. But the people that don’t plan like that are the people that wind up going out of business. Whether it was something they can control or not, not a single one of us could control what’s happened over the last year and a half. That’s, that’s just a fact. There’s no reason, you know, to look at anybody like that, but what it does is it provides opportunities, you can sit there, especially in real estate, you know, it doesn’t really matter what, what it is right now. It’s a lot of it’s about to be for sale, because you can’t keep going. And then once the market kind of starts consolidating, as far as the lending that’s available, government starts taking back some of the programs. So the the money is not freely flowing like it was, you’re going to find out who had who had the plan B’s and C’s, and who just had a plan A because when it dries up, it’s over for them. It so it’s going to create opportunities in real estate. And you’re going to see a lot of a lot of properties available.
I actually had a conversation with someone the other day, that basically told me they were fixing to start looking in to like farm land, because of everything that that this last year and a half has shown. As far as you know, the supply chain issues, being able to get, you know, checking me, whatever it may be, they said then that something inside of them told them it’s it’s, it’s better to become more of self sufficient, and be able to provide that as a business to a local community or something like that. And when they were the one, they were telling me this, it made a lot of sense. And you see, you know, even Bill Gates, for example, I think he owns 140 – 150,000 acres of farmland, there’s, you know, whether you say that’s, that’s coming or not, it’s an idea to think about, you don’t want to necessarily be the one that that doesn’t do it. But, you know, if if we’re gonna be in this situation for you know, another six months, another five years, where is your ability to provide for yourself going to come from? And it’s in, it’s almost a situation when they were telling me about this farmland that, you know, if I have to go to the store, and I see a state that used to be $10 is now $25 does it make sense for me to go and keep buying the $25 steak, or go buy some land and have some cows, you have to weigh what’s what’s better what’s coming kind of predict the future, do what’s best for you. So it’s, there’s a lot of things that are that are involved. But having the having just the plan A is not going to get you very far. It’s difficult to overcome because you’ve got a buyer out there that is going to basically buy everything that you show him. It’s hard to pull back from that because you sit there and you think, Oh, I can make this money, I can do this, I can do this. And it and it, it just gives the wrong projection for your business. In the event something happens.
So what I want everyone to take from this episode is make sure that you’re planning accordingly. For what you your own opinion, right and wrong. Whether I agree or disagree doesn’t matter. Whatever your opinion of what is going to come in the next six months, a year, five years. You need to do that for yourself, to be able to survive, have a successful business and keep a roof over your head with the doors to your business plan because something is going to change. It’s the old saying change is inevitable. The only thing that’s constant is every one of us is going to die at some point. So you have to look at it right now in if we know, change is inevitable, what’s the change going to look like in the short term, and in the long term, how is what’s going on right now going to shape that future. So have that plan A, Plan B. And at this point, because of so much uncertainty, it’s probably not a bad idea to even have a plan z, it could get to that point. So it’s important to actually cover all of your bases and have a contingency plan across the board. But make sure right now you’re nurturing those relationships. Because if the market does start to fall, you’re going to have a lot more supply in the market. So you’re going to need to have additional buyers and clients that will help make you money. So if you take it right now to start nurturing those relationships that you haven’t been for a little while, when the market starts to go down, that’ll actually benefits you then.
So with this episode, like I said, make sure that you’re taking from it have as many plans and contingencies as you can come up with to know where your business is gonna go if this happens. So you’re not stuck and and you’re not having to go out there and basically start all over again, and rebuild your business because you didn’t have a contingency in case this happened.
With that, we’re going to draw this episode to a close up, even enjoyed listening.
We’ll see you again in a couple of weeks.