Last year CT Homes saw its most profitable year of real estate investing in company history and completed over 100 deals. In this new episode of the podcast, Jeff and JD sit down to talk about the major factors that allowed CT Homes to move quickly and take advantage of the 2021 real estate market. Tune in to find out how you can incorporate their strategies to add more properties to your pipeline and get great returns on your investments.
Listen to the Podcast here:
CT Homes Share Their ROI Tips For Your Best Year In Real Estate
Hey everyone, welcome to this week’s episode of the FortuneBuilders Real Estate Investing show. I am Jeff Rutkowski here with our co-host JD Esajian. It’s good to have you here man. It’s been a little while, but it’s good to see you in the booth again. I’m super excited about what we’re covering on this show and just happy to be here. Me too, man. Anytime we get JD in the booth, it’s hot off the press what’s happening in CT Homes.
Word of the Week
I cannot wait to get into what we’re about to talk about today, but first, let’s get into the Word of the Week. This week, our word of the week is our ARV, also known as ARV. ARV, baby. ARV is after repair value. That’s what it stands for, that’s what it represents. Whenever you’re evaluating a property as a real estate investor, whether you’re looking to wholesale that property, or flip that property, we really need to gather a lot of information prior. The biggest piece is what is it worth after we fix it up? Or, as a wholesaler, what will it be worth after our rehab buyer fixes it up? Then, we need to know the repair cost. And then we plug those numbers into a little tool that CT Homes uses (the deal analyzer) and then we know what offer to make or what not to make. ARV is really the as-is condition of a property, whatever somebody is willing to pay for. As an investor, we need to forecast and project what this thing is going to be worth after the improvements you plan on making are done. That’s how you formulate your offer. So enjoy the Word of the Week and enjoy the rest of the show.
Know the Market KPIs
I would say not the number one thing that makes us successful investors is understanding and knowing the market. How we do that, and what made 2021 so successful, is the market changed quickly (day to day). In certain times of the year, or, in different decades, the market doesn’t change as fast as it did this last year. Knowing what the market is doing – studying it, and knowing where it’s been, where it’s at now, where it’s going is vital.
The number one thing that we do at CT homes to make that possible, is on a daily basis, we look at some key indicators. Whether it’s by zip code, or whether it’s by county, we do both as we look at the overall available inventory. We look at how much available inventory is at any given time. We also want to look at our medium price point in those areas as well.
Other things that are important with market knowledge are how many days properties are sitting on the market. I think another key one to look at is the available months of inventory in a particular marketplace. Those are some of the big ones that we look at. I suggest investors look at those at least once a week. I would also encourage investors to look at it almost daily. It changes rapidly.
At a minimum, we want to look at those once a week. If we can forecast (and I’m not saying speculate, because there’s a difference). If you’re knowledgeable and you study a market that allows you to focus on your after repair value and know what that number is. It also allows you to understand if it is possible, what buyers are paying for properties to be able to do less work, or no work and put it back on the market.
The other thing is that if I look back at 2021 as I have, it allowed us to make offers on more properties. What I mean by that is it opened up more available inventory to us, whereas in previous years properties that needed maybe less work, we weren’t able to buy just because the values weren’t changing the way they are. It allowed us to look at zip codes in our county differently and be able to, in effect, open up more available inventory, even in a market like a lot of us are experiencing where there’s limited inventory.
NRV. I want to pause there for a minute. Somebody is gonna hear this and go write a book on NRV. We have the tape. He came up with it right here in February. I literally did as you were talking about the ARV and the Word of the Week. I haven’t analyzed it to the point of writing a system around it. It is interesting because the market is always competitive. I don’t care what type of market we’re in, there are always other people investing. What’s become very challenging is the buyers are getting priced out of the marketplace in a lot of cases because of the increase in values. What we started to look at is, well, “hey, if we do less work or no work, can we put it back on the market at a price that is more affordable for more people” Maybe we don’t sell it for the in value after we do all the work, we sell it for a lower number, but we’ve done less work, and we’ve held it for less time. Our return on investment can be equal or in some cases greater.
Amazing. You’re not buying because you’ve taught for years: you never buy hoping for appreciation forever. You’re not doing that, you’re just looking at it and saying, “alright, based on the way the market is appreciating, I have my ARV, we could rehab it, we could put 100 grand into it, or whatever the budget was, we can make this number, but we also can just stage it, clean it up and make close to that number”.
That’s what we’re talking about. And you’re not able to do that quickly and effectively if you’re not researching and studying your market every day. That can back you into doing that type of investment. Again, it’s not that we’re not saying “oh, I hope someone pays this”, we’re looking at “what did that pending down the street sell for? What was the condition of it?”, and then making that decision and putting the numbers back into the deal analyzer and saying, “oh, man, we can own this for 45 days and make a certain amount of money that’s equal to the ROI if we hold it for five months and spend 75 or $100,000”
That’s amazing. In one article I was reading I was sharing with JD, NAR came out with a report just wrapping up 2021. Two-thirds of all major metros across the United States, Southern California certainly being in that equation, had double-digit appreciation just in the month of December. And I believe it’s tracked the same way for January, I don’t know if those numbers came out, double-digit appreciation. So when you have your finger on the pulse like JD is talking about, you’re going to recognize those opportunities where other investors are going to spend five months on that deal, like you just said, to make the same on the property that you just made in 45 days.
I want to be clear with everyone watching and listening, we’re definitely not speculating. There is always an element of risk anytime we buy something, but we’re making sound decisions based on what the market is telling us with real-time data. If you look at what the value of the home is going to be when you’re making your buying decision, and then you have that after repair value, and you never look at it again until you go to sell the home, that number is going to change. If I back up to like when COVID took effect across the world, one of the key things we did is we hunkered down and really started to look at our numbers every day.
It puts us into a position to be able to make better decisions on the properties that we own, like “do we spend? Do we need to do a full-blown scope of work? Or can we reduce it? Or maybe we are in the middle of the rehab, and this one pending, goes sold? And they had these other features? And if we add that deck or we add that awesome sliding door because another property had it we might be able to push the value even more”. It is definitely the number one thing when I look at what has made us successful over the last year (really since we started) the best year on record for CT Home was having an in-depth, deeper knowledge of the market.
I love listening to your Monday morning reports on the market. Just to recap for the audience (and you can add if I’m missing something here) on that daily basis, you’re looking at the number of new listings, you’re looking at the amount of sold properties, the amount of pending property, you’re looking at lists to the sales price, ratio, you’re looking at days to market, and you’re looking at absorption, how much current or inventory anything I’m missing.
Now, those are the big ones. When we couple that against looking at national indicators, like the interest rates for borrowed money, because that affects supply and demand buyer interest, etc. The numbers that you broke down are the big ones because it tells us what’s supply has been available or is available now in relation to the buyer demand out there.
When you’re looking at that every day, and every week, you’ll see subtle changes that will ultimately relate to bigger changes down the road. For example, when you see a number of weeks where in your marketplace, the number of pending properties or properties that get an offer accepted is outpacing the number of new listings that come on. You have that variance and that gap. More people are going into a contract to buy a home, the new properties are coming on the market. If that’s happening over a couple of weeks, you’re probably gonna see a drop in inventory. That can give you those indicators before and as they’re happening.
To refresh everyone’s memory, what’s considered a balanced market would be six to seven months of inventory. When you have seven months or more of inventory, that would be officially a buyer’s market. Anything below six months of inventory is a seller’s market. I know in most of the zip codes around here, I mean, we’re minus a month of inventory. That’s a metric you want to know in your market. If there are three months of inventory or four months, that is a strong seller’s market. Inventory is low, demand is going to increase (as long as interest rates don’t do anything crazy a little tick up is okay) as long as nothing crazy happens prices are gonna go up.
It allows you to move quicker, be more nimble, faster with your offers, and more confident with your offers. So coming back to the intent of the show today is “how do we buy more houses? How do we put more properties into our pipeline, and it’s moving quicker?” Having that knowledge of the market allows you to do that.
Speed of implementation, baby. Tony Robbins did a massive survey years ago and asked hundreds of 1000s of business owners and salespeople “What’s the number one quality that makes you succeed?” It came back to the speed of implementation. You can’t move quickly if you don’t know what the markets are doing? That’s the key takeaway, right there, is if this is something that you’re not tracking on a regular basis, make this part of your daily routine in your business and your weekly routine. Get your finger on the pulse.
100%. Nothing we’re going to talk about on the rest of the show will be as impactful without knowing what your market is doing.
Totally true. We were joking before the show, but I just feel like I’m not even a hockey fan or even a Wayne Gretzky fan, but man, that guy has such a good quote. I think we’ll use two today probably:
“You don’t skate to where the puck is, you skate to where the puck is going”
That example you use with the no repair value, that’s exactly what you’re doing. You’re seeing where the puck is going and you’re just positioning yourself there. So that’s it, nothing magic here, folks, this is just education and this is just consistency. Let’s move on to the second point. Knowing your market KPIs, which we broke down, number one, and then number two would lead you to your company’s acquisitions and KPIs. So break that down for us.
Know Your Own KPIs
So you’ve obviously got market stats, market knowledge, etc. But then if you look micro at your business, you’ve got the numbers that you’re performing or not performing on. And so we as a company, we look at those every single day as well.
The first number to talk about is how many offers are we writing? We’re never gonna buy properties if we’re not writing offers. I know that. What a lot of people underestimate is how many offers it takes to buy a good deal. We talked to a lot of investors in our community, and I know you do the same thing. We asked, “how many offers did you write, and when that number is lower than we know it should be?” That’s one of the number one things we focus on. How many offers do we write I think it’s important that anytime we write an offer and go through the energy of doing that, we track that offer.
We see what happens, we follow up (which we’ll get to a little bit). That’s the number one thing: tracking how many offers you write. Over time, we can compare that against how many properties we buy. We can start to have that metric that you alluded to earlier as to how many properties on average, or how many offers on average, we need to write to buy one home. When you have those numbers tracked, you can start to look at “well, I wrote an offer, it didn’t get accepted”, and you can start to break down that and understand why that offer didn’t get accepted. Did it sell for more money? Then, you can double-check your repair, and you can start to do things and analyze and backtrack so that the next offer you write will be more accurate. That’s very important. That’s a very important number.
Closing the Offers
The other number that’s been very important for us over time is the number of properties that we lock up, versus what we actually close on. So as I said, lock up right under the contract, we get the offer accepted, comparing that to how many times we buy that home that we have gotten the offer accepted on and got out. In a perfect world, that number would be 100%, but it isn’t always the case. So when that isn’t 100%l, what was the reason we didn’t buy that property that we got the offer accepted on? What trends do you see there JD? For the ones that you don’t end up buying, is there any common factor that you know repeats itself?
I would say that the big picture answer is we missed the mark on a number somewhere. Not to say we made a mistake, but maybe we put the property under contract. We send a series of inspectors through and something pops up that we didn’t necessarily foresee. For example, the sewer line under the ground that we don’t have the ability to look at without being scoped out. Some change in the numbers.
What I’ve seen with other investors over time in common scenarios is that they don’t have all the pieces of the puzzle put together, meaning they’re not sure where their financing is gonna come from, so they’re not able to perform on the terms that they’ve offered because they’re financing. They haven’t locked it in, they’re not aware of how long it takes for their lender to short process the loan. Then they’re unsure of their numbers and unsure of their KPIs or the market KPIs.
Those are the main things I’ve seen why properties why people fall out of contract on a property that you spend the time locking up. Those are the two big ones that I would say. There’s a lot more that we look at, but in relation to buying more homes, it’s how many offers we write, and then having a metric and looking at how do we get a property under contract or an offer accepted and we don’t close on it? Those are the big ones.
When to Not Make an Offer
I always think of this business. This is how you’ve taught me over the years: it is a series of systems. Marketing is the system that kicks everything out. Marketing goes out, whether it’s MLS, whether it’s direct mail, whatever it is, a lead comes in, then you have a certain number of leads and ultimately you evaluate the property and you write offers. What would be some reasons, JD, where a lead comes in and you don’t write an offer on it. What would be the reasons that cause?
When a lead comes in and we don’t write an offer on it, the seller is completely unmotivated or unrealistic on where their price or where the home should sell for would be one thing that comes to mind. There is some underlying scenario with the property or the sellers or the trust that it’s being sold that doesn’t allow them to sell the property. There’s a cloud on the title that isn’t known by the seller that we uncovered through our analysis. In this market, or in any market, if you write an offer that has contingencies, it allows you to solve or figure out those scenarios. You can get through the ones that I just mentioned.
Those are the common reasons why a lead would come in, and we’d say, “well, it’s not worth our time, or it’s not beneficial because there’s a tenant in there and they are squatting”. The rules in my state are very favorable to tenants. And I could be in a scenario where we’re in a lawsuit or court for two years.
How did that deal ever work out? You had the son living upstairs, the mom downstairs, and restraining orders against each other?
It’s still playing. It’s still playing. The more that the attorneys (and there are multiple attorneys involved) have dug into it. From the mom’s attorney, the title company’s attorney, it appears on both sides that there was some foul play, meaning we don’t know for sure yet. So I’m making assumptions based on what attorneys are telling us but both sides have some fault here. And there may be an issue where the mother that sold the home, didn’t have the ability to do that. We don’t know for sure yet, with her son not signing off at the same time, it appears that son, unfortunately, might have done some things earlier on to get himself in a position to be able to be in the will when he shouldn’t have been able to. So long story short there’s a lot more discovery and we’re working on it.
I think backing up to what will make that deal successful, is that we bought it with the worst-case scenario, the longest hold time. Those worst-case financials with regards to the attorneys needing to handle it. So I’ll get back to you when we do. It’s just the gift that keeps on giving. At the San Diego boot camp a few weeks ago, whatever happened to that deal you talked about on the show?
We’re gonna have to make sure that we stay on top of that one. The bottom line is we’re writing offers on as many properties as you can write if there’s a highly unmotivated seller. We discover that through a series of questions, then we’re not going to waste our time and look at the properties. Definitely don’t talk yourself out of writing offers.
The first point that we talked about is that our market knowledge allows us, as I mentioned, to be in a position to write offers on more properties because we understand what that market or that neighborhood or that county is doing. It has allowed us to make offers on properties, as I mentioned that in previous years wouldn’t have worked because of the values at that time or the way the market had been shifting. It will open up more doors to be able to write more offers. Wayne Gretzky again.
“You miss 100% of the shots you don’t take”
We were talking before the show, actually a deal recently that you guys locked up that you were the only one talking about that. Well like that quote from Wayne Gretzky, we’re gonna miss every shot that you don’t take. We can guarantee everyone listening or watching, if you don’t ever write an offer on a property, you’re never gonna buy that home.
This actually happens a lot. The story that I was telling you earlier was last week, or excuse me at the end of last year (and it’s happened this year too). The price of the home that the seller wanted or was listed for was really high, like way higher than we’d be able to buy the home for sure. Some people might look at that and say, “well, the seller is never going to accept my price because it’s way lower than they want for the home”. We don’t focus on what the seller is asking for the home, we focus on what we can pay for the home.
Know Your Offer System
Let’s get into number three, JD. So your offer system? On a daily basis, we’re tracking, we’re staying on top of what the market is doing? Yes, we’re tracking all of our acquisition KPIs. And the whole thing with KPIs is if you can’t measure it, you can’t improve it. That’s the purpose of when you get all this data and you have maybe a month under your belt or a quarter then you’ve established a baseline. Then I know JD and CT Homes are looking to beat, that they’re looking to perform better.
Ultimately, it’s going to bring us to your offer system, that now you’ve known the market, you’ve evaluated the property you wrote the offer. What are you doing consistently to get so many offers accepted? That’s a great question. And we’ve refined it over 18 plus years, but what we boiled it down to are five things that we focus on and I wrote them down just so I make sure I hit them in order.
It’s finding (or filtering) if you’re looking on the MLS and finding what you’re going to offer. Maybe your offer area is your whole county or your whole ZIP code. It’s understanding how to find and filter the leads that you’re going to offer, then we have a process of getting information and we have broken that down.
Calling the Seller
Step two is calling the seller or calling the agent and getting information. Then we actually analyze the property. We get information from the seller or the agent in terms of seller motivation. Why someone’s selling? Are there any special terms/things that we’ve talked about? In the past, we understood what the person is trying to accomplish and what the seller is trying to accomplish. We use that data to analyze the mark data. We go check the repairs, verify, get inspections in there, and then we call back and actually submit the offer. We’re not calling immediately and throwing a number in front of someone. We’re gathering information that we need to analyze.
Writing the Offer
Step four is actually writing the offer, and then five (and this happens a lot) we don’t get an offer accepted. We have a series of following up and staying in front of the seller, staying in front of the agent (depending on what kind of property it is) to put ourselves in a position to buy that home in the immediate future or not immediate future, depending on what their needs are. There’s a rhythm to it. There’s a reason why we order it that way. We’ve tested and measured things over the years. By structuring your offer system that way, it allows you to put yourself in a position to get to buy more homes. Use the market data that we’ve already talked about. Use your acquisitions, KPIs.
I’d love to be able to say that’s the number one thing that’s allowed us to buy more homes this last year, but it’s coupled with our statistics and KPIs for our business, and then for the market. When you have those things, and you formalize your offer system this way, you put yourself in the driver’s seat 100%. Those are the five steps that we go through in that, and the order that we go through them is as important as all five of them.
I love learning from you, man. I just appreciate your time and just appreciate what you guys are doing CT Homes. You’re just always pushing the limits and passing them.
I love coming on the show and bringing in up-to-date information about what we’re doing in real-time. Literally, before the show, I was upstairs in the CT Homes office talking about some offers using the systems that we just went over. I thought it’d be cool if we filter in a case study here or there and have actual deals from start, acquisition, covering the systems we talked about, to rehab, to sales. Do one of those a month. I think that would be a great way to continue to add value whether people are listening or watching.
I think that’s cool. If that’s something that would interest you guys, let us know. We think you want it but we want to be sure we’re gonna get there once a month and show the actual case from start to finish: how the deal was sourced, how it was placed under contract, what the renovations looked like. I think that’d be really cool. We’ll make that happen next week. Alright, brother, I appreciate you being here, and I’ll see you next week. See you guys next week as well on the FortuneBuilders Real Estate Investing Show. Take care.