How Real Estate Valuation Can Kill Companies (LA 1078)

How Real Estate Valuation Can Kill Companies (LA 1078)

Transcript:

Steve Butala:                      Steve and Jill here.

Jill DeWit:                            Good day.

Steve Butala:                      Welcome to the Land Academy Show, entertaining land investment talk. I’m Steven Jack Butala.

Jill DeWit:                            And Jill DeWit, broadcasting from sunny Southern California.

Steve Butala:                      Today Jill and I talk about how real estate valuation, valuing property, can kill companies. And yes, I intentionally included the word kill in the title for effect.

Jill DeWit:                            Point taken. Do you soften the titles often?

Steve Butala:                      No, I guess I don’t.

Jill DeWit:                            All right. I’m like, “Really?” I’m like, “What am I missing here?”

Steve Butala:                      Real estate valuation on both sides, on the acquisition and the sale. If you listened to yesterday’s episode, we were really clear about how we feel about it. It’s really … we probably don’t spend enough time on this topic. Well, we will now. We’ll clarify it at all.

Jill DeWit:                            Oh, totally.

Steve Butala:                      … on why it’s so important.

Jill DeWit:                            I just would like to add, though, sometimes I think you hold back. And I’m here to tell you, Steven, now I know you’ve been really skipping along the top, holding back. I’m being totally sarcastic, obviously.

Steve Butala:                      Jill and I started this show in, I think it was 2015. It was 1100 episodes ago. I just looked back on that stuff, and how different … you’re pretty much the same, but how different I was. I was just really a curmudgeon, and …

Jill DeWit:                            You think so?

Steve Butala:                      Yeah, because that’s how … because really, honestly, this is the truth. I really think to get stuff done in business, I think there’s a place for being positive, but I really think that you have to just tell yourself the truth. Tell the people that you’re doing business with, whether they’re partners or are … but this really ties into the show actually, ties into this episode. Exactly how … just be a straight shooter and call it like it is. And some deals are, even though with the great deals financially, they’re just going to blow up for a bunch of valuation reasons and a lot of it. So I didn’t think this show would become as popular as it is. So I honestly tried to be a little bit more upbeat.

Jill DeWit:                            Oh, back then or now?

Steve Butala:                      Now.

Jill DeWit:                            Oh, okay. Got it.

Steve Butala:                      I never thought we’d get to a thousand episodes. I figured it would be a once a week thing that faded away after a few months. So I changed my attitude a little bit just to make it a little bit more interesting. But the truth of it is, and it’ll come out on this episode because I’ve just opened that door for myself, you got to just be an honest, straight person and to get real deals done.

Jill DeWit:                            That’s very true.

Steve Butala:                      And you need to be fair, fair with everybody involved, both on the buy side and the sell side. And that’s what this show is about.

Jill DeWit:                            That’s what I wrote down too. Good.

Steve Butala:                      Before we get into it, let’s take a question posted by one of our members on the landinvestors.com online community. It’s free.

Jill DeWit:                            John S. asks, “How do sellers say that they only use their title company that they’ve dealt with before, even going as far to say as they pay for them if needed?” Well, I’d take them up on that one, that’s for sure. “It seems strange to me that they’d be willing to foot the bill to use a title company on the sell side. Anything you should be concerned with?” No, I think they’re comfortable with them. They know Sally Smith, they’ve always worked with Sally Smith. Sally Smith lives around the corner. Maybe Sally Smith goes to church with them. I don’t know. They think Sally Smith is going to make sure that everything’s done correctly and they’re getting a good deal and you’re legit. Something like that. I have no red flags.

Steve Butala:                      This is very, very, very common. It’s extremely common in commercial real estate and here’s why. The person that you’re probably dealing with is either, one, has some family in the business, somebody like a sister. It’s basically their sister, which is fine. Jill’s right, it’s fine no matter what. Or, and this has been my experience, especially in commercial real estate, they’ve had so many bad title agents. Usually commercial real estate people are from block X to block Y. They don’t go jump states to state like we do. They’re going to have one local MSA. They might not even jump county lines. And so they’ve been dealing with Sally Smith at First American Commercial for 22 years, and they’re just, they have a telepathic understanding. And so, no, it’s not going to, especially if they’re going to pay for it. They-

Jill DeWit:                            Yeah, I love it.

Steve Butala:                      I think they just did half the work, but I don’t-

Jill DeWit:                            I’d say done and done.

Steve Butala:                      That’s what I think too.

Jill DeWit:                            Yeah. Great. Here, let me know … it’s almost like, even as the buyer, let me know where to show up and sign. Love it. You got this?

Steve Butala:                      I mean, if they wanted you to pay for it and then it ended up being $2,500 instead of $1200, then that’s a different story. But the Green light there is, they’re going to pay for it all.

Jill DeWit:                            Well, and I’ve had this situation. If I had some … if I had a title agent with a prenegotiated rate and it was a good rate, and then somebody else said, and it was an agent involved in this one, “No, we want to use this one.” I said, “Fine. I don’t care, but they have to match my rate.” And that’s money. That’s easy to say. So he went to that agent and they just said, “I can’t match that rate.” So they came back to mine.

Steve Butala:                      Yeah. They chose that agent that they love after 42 failures with other agents. And I mean, escrow agent, not title agent, I mean, a real estate agent. Today’s topic, how real estate valuation, the property itself, valuating it, can kill companies. This is the meat of the show.

Jill DeWit:                            I can sum this up in one sentence.

Steve Butala:                      I really want to hear it.

Jill DeWit:                            You ready?

Steve Butala:                      Yeah.

Jill DeWit:                            Okay. What kind of reputation do you want? That’s it. Done, end of show.

Steve Butala:                      Here’s what’s worked for Jill. Here’s the business model that’s worked for Jill forever. Tens of millions of dollars we’ve created an equity for ourselves, and if that means we’ve created tens of millions for ourselves as wholesalers, triple that for the people who buy the property from us and then go resell it. And that’s our business model. We’re going to buy a property. Let’s say the property is probably worth $50,000. We typically buy it for $10,000 or $15,000. We resell it to somebody for 30. We try to double our money. They couldn’t thank us more. And then they maybe either go improve it. Maybe they just go and sell it for $50,000 after they’re 30,000 into it. That’s fine too. Maybe they sell it on terms. They do a bunch of stuff with it, and that’s not our … and so that has been our business model forever.

Steve Butala:                      Now, we could buy that same property that’s worth 50,000 for 15, like I just said, and mark it up to 60 and then do a bunch of smoke and mirrors about why it’s 60. And by the way, we’ve been doing this since the 90s, so everybody trusts us. So we could take advantage of that and say, “Well, here’s why it’s actually where it’s 68.” If it’s got a $50,000 valuation, I get it. But it’s worth 60 when it’s not. We just want to get as much juice out of the whole property as we can. This really bugs me, this topic.

Jill DeWit:                            I know, I know. It’s okay. Hold on, hold on. Breathe.

Steve Butala:                      Maximizing value, especially on the sell side, is the fastest way to not be a successful real estate investor.

Jill DeWit:                            Again, what kind of reputation do you want? Think about the guy that I love. In example A, buy for 15, sell for 30. It’s worth 50. Okay. The guy who bought it for 30, it’s worth 50 is jumping up and down. He’s happy with you. He loves you. He can’t wait to get more. He’s coming back to you and go, “What else do you have? What else do you have? What else do you have?” That’s what you want. Not like what you just said. Buy for 15, sell for 60, and the guy is feeling sick to his stomach, going, “Doggone it. I over paid. What kind of people are those guys?” Man, that’s just … he’s not happy now. “I got to do this to make … I got to try to make sure I get my money out of it. I overspent on this one. What am I going to do?”

Steve Butala:                      Well, he’s never going to buy anything from me again.

Jill DeWit:                            Exactly.

Steve Butala:                      Versus the first way, he’s going to buy the rest of his properties from you.

Jill DeWit:                            Exactly.

Steve Butala:                      Probably exclusively.

Jill DeWit:                            Yep. And no questions asked. He knows how you roll.

Steve Butala:                      On the acquisition side, so the vast majority of the properties that we buy, people call us and say, “Oh my gosh, I got your letter. I would love to sell this property for $15,000. I know it’s worth more, but I’m in a life circumstance and maybe I’m not even … I’m getting older, and I just don’t care.” And it’s a garage sale mentality. I know that all this stuff in my garage is probably worth … I probably paid 10 grand for it, but I’m willing to let it go for 800 bucks today because I just want to clean my garage out and I’m going to go to work on Monday.

Steve Butala:                      So that’s the same reason that people choose to sell real estate to us. They’re just, it’s a convenience factor. Could Jill go in on that $15,000 property, knowing that it’s a garage sale, and say, “I’m sorry, Mrs. Smith. I know I sent you a purchase agreement for $15,000. We’re only willing to spend seven now.” And the vast majority of the time, they’re going to say, “Yep.” We just had a deal like this, Jill and I, and it wasn’t our decision. It was the person that is working with us on the deal. I thought it would be a good idea to do this, and they seller said yes, for much higher numbers than I’m describing now. And so that’s why I’m writing this topic because we had a personal situation with a partner that we’re doing to deal with that went into this, reduced the acquisition of a house by $20,000, and the person immediately said yes. They’re just totally taking advantage of the situation, our person is, our partner.

Jill DeWit:                            We’ve had it happen to us too. This is a thing too of what you don’t want to do. I hate it when this happens, and it makes me so mad, and I’ll never do it. We all know who I’m talking about. This individual, when I explained the situations, he did it to us twice, I think. We had negotiated a multiunit sale, and two days before closing day, he changes what … you know what I’m talking about.

Steve Butala:                      Two days?

Jill DeWit:                            Okay. Not even that. It was at the last hour.

Steve Butala:                      It was 30 minutes before it was getting funded.

Jill DeWit:                            God.

Steve Butala:                      I’m going to send … and we were on the sell side. I’m getting ready to do this wire transfer, and I just looked at this again, and I can only pay X.

Jill DeWit:                            And you’re that far in. You’re done. And what are you going to do?

Steve Butala:                      Yep. The deals done, everything’s done.

Jill DeWit:                            Yeah. What kind of person is that?

Steve Butala:                      The last was a-

Jill DeWit:                            Maybe we should say his name. Can I just get it out?

Steve Butala:                      No, because he’s not in business anymore, I checked, at all.

Jill DeWit:                            Well, no kidding? No, gee, I wonder why? Because I’m sure if he did it to us, he did to other people too. And that’s the thing you don’t want to do also.

Steve Butala:                      This is a huge deal.

Jill DeWit:                            I will never do that. And that’s the thing that we tell people on the phone, and this is the transparency I’m talking about, and this is what our buyers know and expect of us, which is, I send an offer letter out, you sign it and send it back. It says on there, that’s the amount net to you. I’m not going to tell … I’m going to pay the fees. I want to pay the closing costs. I’m going to do all that. And it really is true. And I’m sure I half the time they’re going, “Wow. I really did get a check and 32 cents, as they said on the offer letter. That’s really what I got.” Yeah. I didn’t change it last minute. I’m not going to be that person.

Jill DeWit:                            And even … you know what? I’m going to take this a step further because this happens to us. It happens to us. Not very often, but more than once it’s happened, and this is how we roll. We have gone into [inaudible 00:11:13] situations and gone, “Aw, shoot. I didn’t realize there was this much back taxes. Oh, shoot. I didn’t realize that, man, there’s an HOA and I got to catch that up.” But you know what? I promised this lady this, I know I still have enough skin in the game. It’s going to work. I’m not going to get as much out of it as I did, but it’s the right thing to do. And that’s how we roll. So I don’t tell … I don’t know if we even tell them that. I just know. This is what goes on behind the scenes. I’m like “Shucks.” Usually for me, it’s a learning moment with my team that, “Hey, guys, we got to be sure we always check this stuff because we’re not going to get as much on this deal.” But, hey, we promised we have to follow through.

Steve Butala:                      So I’m going to flip this whole thing. I’m going to play devil’s advocate. I’m going to flip it all 180 degrees. And here’s some comments I’ve gotten over the years. If you had any integrity at all, you would pay this person the retail value of the property. I’ve had that comments from many, many, many people. And they just they’re very, very unaware of what goes on in real estate. So some of you may be listening to this saying that exact sentence, “Well, get off your horse. Get off your high horse. You’re paying people 25% of the value of this property.” Yeah, we’re doing them a favor. And they say that. We’re doing them a … constantly in our acquisition process, are saying, “Yeah, we know this is cheaper. We know this is cheaper, and we know.” If you don’t want it then sell it to us.

Jill DeWit:                            Yeah, say, “No, it doesn’t matter.”

Steve Butala:                      If you want to sell it to us and you want to go hire a real estate agent … I’ve heard Jill. Jill’s got a million lines like this.

Jill DeWit:                            Yeah, and I mean it.

Steve Butala:                      We wish you the best and you know what I’ve seen her do, actually? In a lot of cases, these properties come to us because the actual owner of record’s passed away. So there’s a lot of legal stuff that’s got to be undone. And so they don’t realize that. They just look at the property and they think it’s worth 150 grand or whatever, some number. But they don’t take into fact that if they went out to a lawyer and tried to undo the whole estate thing that didn’t get done right and all of that, there’s thousands and thousands of dollars, which by the way we do for free for the purchase of the price. So they end up coming back to us. So we’ve been around the block 50 times, and it’s not a lack of integrity issue or taking advantage of anybody or any of that.

Steve Butala:                      I would say to that person, the next time you go to a garage sale, if there’s a microwave there that’s been used for four years and their purchase prices was $200, I think you should give them $200 for that microwave.

Jill DeWit:                            I agree, because it still works.

Steve Butala:                      Not the $10. And if you go to a … who goes to a garage sale and says “That’s got a $10 sticker on it, here’s $10?” No, you say, “I’ll give you five, and give me all this other stuff, and I’m loading the car up, and in fact, I’ll give you $150 for all of it.”

Jill DeWit:                            Right, exactly. It’s like I want to say, “And you always pay full price, right? When you’re ringing up your items at the store, you always say, I don’t want the sell price. I want the full retail value.”

Steve Butala:                      I haven’t said my milk analogy lately, but when you go buy milk, you have three places, three choices to buy a gallon of milk today. You can go to the convenience store right over here. Costs about probably $8 now. You can go to a you can go to the grocery store, probably cost four to six I don’t know, milk prices. Or you can go to Walmart or Costco or something like that where it’s really cheap like cost plus 10%, 15%, so that’s $3 or $4. But you don’t take it up to the counter and say, “This is an outrage. This price is an outrage.”

Jill DeWit:                            Could you imagine?

Steve Butala:                      And then if you do, then you check out.

Jill DeWit:                            Could you imagine? I’m going to do this. How many go to Circle K? I’m going to buy a gallon of milk. I’m going to put it on the counter, and I’m going to say, “Do you price match Costco?” Could you imagine? They would laugh at me like, “No.”

Steve Butala:                      We’re spending a lot of time on this topic, and we’re throwing a lot of humor at it. But the fact is, it’ll kill your company.

Jill DeWit:                            You don’t want be that way.

Steve Butala:                      Maximizing price on the sell side and minimizing price or valuation on the buy side will kill your company. It’ll kill it in less than a year.

Jill DeWit:                            Word will get out. You don’t want to be that person. Do the right thing.

Steve Butala:                      There’s some properties that are in our system. I just thought, I’ve never seen anything like this. Again, we have some new people, and their prices are listed for 109 … This is what they negotiated, $192 a property. And so that, I mean, that just hit me in the face. I mean, somebody’s getting-

Jill DeWit:                            I haven’t seen that one yet.

Steve Butala:                      Some seller’s getting taken advantage of, and I’m going to go undo this. It’s not often that I get involved in these deals in our companies. And I understand that when people are new and they’ve been trained their whole life to just barter and get stuff cheap as you can, and kind of like maximized value in that deal. And it’s just not, that’s not how we do this. It’s hard to convey that to somebody who’s been doing it forever.

Jill DeWit:                            That’s true. Thank you.

Steve Butala:                      Join us next time for another interesting episode.

Jill DeWit:                            Yeah. We answer your questions, posted on our online community found at landinvestors.com. It is free.

Steve Butala:                      You are not alone in your real estate ambition. Silence, Jill.

Jill DeWit:                            I know, I was waiting for you. I thought, you often have a lot to say here and I’m waiting for you in the after show.

Steve Butala:                      I actually ranted enough.

Jill DeWit:                            Oh, you got it all out. Is that possible?

Steve Butala:                      This topic.

Jill DeWit:                            Are you going to be quiet the rest of the day? You got it all out.

Steve Butala:                      That’s a woman’s dream.

Jill DeWit:                            Could you imagine?

Steve Butala:                      Yeah, he hasn’t said anything in two days. This is great.

Jill DeWit:                            Yeah. I’m good with that. We’re both good with that. We’re actually unusual people.

Steve Butala:                      Actually, we are.

Jill DeWit:                            I don’t want to say a lot, and you don’t want to say a lot. It’s perfect.

Steve Butala:                      Jill and I were hanging out after work two days ago, and it’s like we hadn’t hadn’t … I looked at her and said, “I don’t think we said anything for two hours.” She’s like, “Yeah, that’s awesome.”

Jill DeWit:                            Isn’t that great? It’s perfect. The Land Academy daily show remains commercial-free for you, our loyal listener. So wherever you are listening or wherever you are watching, please subscribe and rate us there. We are Steve and Jill.

Steve Butala:                      We are Steve and Jill. Information …

Jill DeWit:                            And inspiration.

Steve Butala:                      … to buy undervalued property.

 

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