After an introduction to this course, we dive into the difference between retail and wholesaling costs, and how having a network of rehabbers can save you TONS of money and mean bigger profits on your deals.
Jack: All right. Hello, everyone. This is Jack Bosch speaking, and welcome to the Wholesaling Houses course. This session is about how to negotiate and lock up a deal. So, again, this is the Wholesaling Houses master course, and today’s session is about how to negotiate and lock up a deal.
Now, we talked in the last session quite a bit about that too, but it’s time to wrap this subject up because this is really where you make your money in that part. Now, my name is Jack Bosch. I’m the co-founder of My Open Path. And today, we also are having as a guest Mr. Mike McKenzie. Mike, are you on the line?
Mike: I am.
Jack: All right, wonderful. I’m glad to hear you. Your sound is very clear and that’s very exciting. So, without further delay, let’s get started. By the way, if you have not ever heard of Mike McKenzie, Mike is one of our other contributors at My Open Path. And not only that, he is also a professional wholesaler, rehabber [SP], house-flipper and has, in his career, already done the incredible amount of 400 houses and pieces of real estate that he has flipped.
So, therefore, I’m very excited to have him on the line here. We’re going to do a little back and forth. The first half, I’m going to dominate a little bit. Mike is going to talk a little bit more the second half. He’s going to guide us a little bit more through it.
What you will learn today, today you will learn how to understand the difference between retail and wholesale costs. I know we talked about them the last session about that too, but this is a focus of today. We’re literally going to give you a roster of different rehab costs and what they are retailing versus wholesale in addition to what we already did in the last session.
We’re also going to round in some of the numbers of the deal. Plus, we’re putting together a compelling offer, and we’re going to talk about the name of the game is speed and professionalism. And last but not least, we’re going to talk about understanding the contract and the agreement. So, we’re going to go through some of the most popular, most commonly used agreements and what is important and the important pieces about what you need to make sure you have covered and what you need to make sure you complete in those contracts.
All right, so, with that, let’s get started. In module number one, we’re going to start talking about the difference between retail and wholesale costs. One of the biggest bargaining points, or actually, negotiation points in the negotiation process is the contrast between what it will cost the owner to sell a property themselves on the market and what it will cost a professional.
So, I told that story before. For example, I flipped a whole bunch of houses, flipped over 3,000 pieces of real estate in my career, and when I bought the house that I’m living in right now, we rehabbed the kitchen. We had to change the kitchen counter tops. As a matter of fact, in all five bathrooms of the house I’m living in, we changed all the kitchen counter tops. And we were able to do that for under $5,000, something like $4,500, including installation. And that is an incredible amount, considering if you see the size of the kitchen with the island and things around.
It’s a pretty incredible number. Probably somebody else would have paid, easy, $12,000 for the same job, if not more. But because we know where to go as an experienced, somewhat experienced re-habber, all experienced re-habbers, they know where to go where they find the material, the granite for half price, where they find the labor for half price and installation for half price. So, as a result, they’re paying only half price.
Also, the part of the difference between retail and wholesale costs is the second biggest leverage point you have…or it’s actually the biggest leverage point. The second biggest leverage point that you have is the time that it will take for the owner to sell the property on the open market. So, really, those are two pieces that you want to play with when you’re negotiating with the deal. Mike, you can talk about that a little bit, how you use that in your day to day life, for example.
Mike: Exactly. That’s a big thing we [inaudible 00:04:37] to potential sellers, is we’re here right now. We’re ready to make a deal with you, close it quickly. We’re going to close this as-is. We’re not going to ask you to do repairs. There’s no more money out of your pocket. We give you a check. We’re not asking you to spend a dime. And we move fast. And most sellers, that’s very attractive to them.
Jack: Right, exactly. So, even that plays a role for me myself again, if I can bring up another example. I have a portfolio of rental properties, and one of them is just this proverbial nightmare property. There’s always one of them, right? You have properties that I own for eight years that I’ve never had an issue with. I have properties that I own for 15 years that I literally never had an issue with. I’ve had the same tenants in there for about probably six years now. And the rent increases. They keep the house clean. Everything is perfect.
This house is just the opposite. The tenants turn over every year. They leave the property vandalized. And every year, my positive cash flow is being eaten up by the repairs I have to make. So I’m kind of like sick and tired of that. And while I repair it, somebody breaks into the house. Now, needless to say, this house is in a different neighborhood than the other one I just talked about. But at the same time, I just want to get rid of that house. I am a tired landlord on that house.
Now, outside of that house, I love landlording [SP]. I love the fact that somebody else pays money to live in a house that I own and writes me a check every month. I love mailbox money. But this house, I just want to get rid of. So, what we did, the last tenant moved out a couple months ago, we decided to no longer have this house, to have it, to fix it up. So, we fixed it up. We let it sit there over Christmas. We had squatters inside.
We had people living inside. We had to kick them out. This was a nightmare. And now the rehab process happened and literally we’ve now listed it with a real estate agent in here. And the real estate agent basically told us, “You can list it. It’s a low-end house. You can list it for $120,000 and it’s probably going to sell in less than 30 days. You can list it for $130,000 and it might probably sit there for three months.”
Now, I want to get to the extra $10,000. But is the extra $10,000 worth me holding onto the property for two more months and running the risk that somebody vandalizes it again and I have to spend an extra $7,000 repairing it, just to perhaps make the extra $10,000? Probably not. So what I’ll probably do, and I’ll make the decision tomorrow, is I’ll probably just agree to the $119,900 as the listing price to get a contract on that property, like, next week.
So, it’s the same thing. I want to get rid of that thing. I don’t want to wait another three months to get rid of it. I want to get rid of it now, even though I can rehab it at a fairly reasonable cost. So, it applies even to professional real estate people, that they have a property where there’s just too much going on and they just don’t want to have that anymore.
So, good. So now, let’s look at selling the properties and what it costs a seller to sell a property themselves versus the re-habber cost, the wholesale cost. So, the retail cost is on the left; the wholesale/re-habber cost is on the right. So you look at these numbers, and in certain areas, there’s not much difference because the sheer fact is just that a roof has a lot of material and there’s a lot of labor going in.
It doesn’t take very long but it’s a crew of multiple people spending a full day putting that roof up there. So, it costs a little bit of money in labor, and the shingles cost what the shingles cost. If you have a tar roof, tar shingled roof, it will cost you. The difference might only be $1,000 or $2,000 on that.
If you want to enclose the garage though, now the difference could be potentially a little bit bigger. Because as a rule of thumb, you can basically say the more time that it takes to do something, the more spread there is to be billed because if a professional company that has a bunch of expensive trucks, a call center, and eight people that they pay $30 an hour, if they spend two weeks doing on something, that can get very expensive.
However, if they charge $50 an hour, that can be very expensive. At the same time, if you have a crew of four guys that work for $20 an hour and basically are really, really hard workers and you don’t have any crew and you don’t have a call center and so on and so forth, basically the labor cost is literally cut into a third by that job being done. For example, enclosing a garage doesn’t require that much material but it requires more labor. So therefore, a retail cost is higher and the re-habber cost is lower. Is that fairly accurate, Mike? Mike, would you agree with that?
Mike: Absolutely, yes. Again, the cheaper labor is where you really can make up for that.
Jack: Right. Because the thing is, in the case of really luxury items, as a re-habber, you can find the same luxury item much, much cheaper. But if it’s a basic rehab, you can buy the tile for $0.89 at Home Depot. And if you go to a re-habber, they might charge you $1.00 or $1.50. For a retail shop, they might charge you $1.50 per square foot. Over 1,000 square foot house, that’s only going to make a difference of $500. Just for the materials. But the labor, that’s where really the difference comes.
Repairing a pool is probably going to cost the same because even a re-habber is going to use a professional pool company so that it’s warranted and so on and so forth. There is specific material, specific knowledge in order to do this, so most re-habbers that I know don’t go and refurnish or refurbish a pool themselves. They bring in the professionals in, and therefore, the price is the same.
And a bathroom, now here we’re talking a big difference. Now, when you see here $7,000 versus $5,000, you think it’s only a $2,000 difference but this is the minimum difference that we’re showing here. So a bathroom can easily cost $10,000 if it’s in the bigger sized bathroom and if you have to tile a shower and if you have to tile a bathtub and tile the floors and do a few fancy things. And in that case, that’s in bathrooms. Somebody else can do that for $5,000.
I’ve seen a bathroom where just the backsplash for a shower, just basically flip the ceiling tile in the shower, just the back side of the shower is making these tiny quarter-inch tiles that have melted color and have a shine to them. Just the material on the back end there costs $1,500 for the back end of that shower. So, you can add, easily, $10,000 into a shower. But the re-habber is going to know how to use a material that costs less and still looks amazing, and they’re going to know – again, the labor comes in – how to get the labor lower.
So the re-habber might be able to get the bathroom done for $3,000. That same bathroom costs a retail $8,000 or $9,000 or $10,000. So now you see big, big spreads there. In the kitchen, the same thing. The kitchen is huge. Kitchens sell properties. So you want to make sure that certain aspects are really, really looking good.
So, a retailer would go and would sell a homeowner a brand new kitchen with new cabinets, new counter tops and everything. And a re-habber might go in and actually polish and paint the kitchen because he has cheap labor, and then just instead spend a little extra money on super-nice counter tops. Now you’ve got a really nice combination that looks beautiful and people are attracted to it. So, again, this is an area where the kitchen might cost you $10,000. You can do it for $5,000 or the re-habber can do it for $5,000.
Foundation, again, there are certain things that foundation companies give investors, specific massive discounts on their deals. So, foundation issued to a retailer. At the same time, they pad, they increase the amount in the retail stores and retail sales. So therefore, again, that’s another $5,000 or more in difference.
And the carpet, again, we talked about them the last session. The re-habber cost might be $2.50 per square foot, installed. In the retail, it might start at $4.00 per square foot, installed. Now, Mike, I’m sure you have done, in your many, many rehabs. Perhaps you can illustrate one example where you got a particularly good bargain deal done on a bathroom, kitchen, whatever it was.
Mike: I do. I actually have one, again, in that I used my personal house [inaudible 00:13:43] did a lot of rehabbing on that. And one of them is when it came to the bathroom. We obviously wanted the tiled shower and all that. We were with our contractor at a store, at the tile store, and I was picking out…we wanted a specific design, and I found that particular tile. It’s in very small pieces. They were very thin. So I started putting this on the cart and my contractor came up and asked, “What’s your vision?”
And I said, “I’d like this line here and this line here using this type of tile with this design.” He said, “You need to put all that back.” And I was a little confused. I looked at him and said, “I want this design. I want it, and I don’t mind spending a little bit extra.” He says, “Mike, you don’t have to.” What he did is, he took those larger tiles that we used in my house and he literally cut them down to size to recreate that same thing. It literally saved me several thousand dollars just because of his know-how of how to do tile work without having to buy something that’s already pre-made. It saved at least $3,000 to $4,000 dollars [inaudible 00:15:04].
Jack: Yeah. Do you think a general contractor walking you through the house with a seller that is frustrated is going to give them that option?
Mike: No way.
Jack: No way. Go ahead.
Mike: They’re going to see an opportunity to make the money.
Jack: Exactly. Here’s something I discovered that not everyone might know, that’s listening to this course. Actually, as a general contractor, you get a massive discount at the tile store. You get a 40% discount just for being a general contractor. So, is that general contractor going to pass that bargain on? No way. They’re going to make that money themselves. So the more material they can use in a retail rehab, the more money they make.
So, that’s another key point here. And tile stores, if the homeowner walks in, they don’t show two prices. They only show the higher price. They might show a tile where the tile costs $6 a square foot, if it’s a really high end Travertine tile or something like that. But then the re-habber gets it for $4 or $3.50 actually even. So therefore, just on the tile, they save by just being a general contractor. And right there is a bunch of savings. So, very good point, Mike.
So that’s that point. In summarizing this, a professional re-habber can actually get property market-ready and sold faster, cheaper than the owner can. You are the middle-man between the homeowner and a professional re-habber, so what you do is, you calculate to the homeowner in retail price because that’s what the homeowner actually has to pay. It’s not deceiving them because the homeowner doesn’t have access to the wholesale prices. And then you market to the wholesaler, and of course, the wholesaler knows what his wholesale prices are.
So therefore, you want to have multiple re-habbers or cash prices in your Rolodex, to ensure you get the deal done. And we’re going to talk about that in the next few sessions on there, about all the selling parts. So, one re-habber might actually be busy or low on cash, so you need to always have backups on them.
If the homeowner wants to find a re-habber themselves, they usually can’t because they don’t know where to find them. And they won’t have the relationship with multiple re-habbers like you have, and that’s what’s part of what you bring to the table. You’re literally the solution for that re-habber. All right, cool. So, with that, unless you have any kind of additions to make, let’s move on.
