LMSM 66 | Real Estate Business

 

Cava Companies acquires hundreds of properties annually and holds more than 300 rental units. To run a real estate machine of this magnitude, Frank Cava relies on a team of 50+ employees separated into multiple departments. It is a long way from the two condos in Charlottesville that formed the basis of his company.

In this episode, we pull back the curtains and look at how Frank generates leads, evaluates risk, makes acquisitions, and allocates capital.

Watch the episode here

Listen to the podcast here

 

How To Build A Real Estate Business

A Look Behind The Curtains At Frank Cava’s Empire

My boy Frankie started his business with two condos in Charlottesville and a lot of hustle. Now, he owns over 300 doors and flips several hundred real estate properties a year. This is a fun episode. We can peel back the curtain a little bit on Frank’s real estate empire. We talked about the staff that it takes to do that type of volume and how he manages that. If you are someone who is interested in building a real estate career, there are a few people that are more interesting than Frank to learn from. I hope you enjoy this one. If you are new to our show, hit subscribe, and if you have been around for a long time and haven’t given us a review, shame on you.

Frankie, we are in your wheelhouse. We have had a few people ask questions after the real estate bubble episode that we did about how we evaluate real estate. How we evaluate real estate is not as important. It’s more important how you evaluate real estate because I do it as an investment. You do it as your life and this is your core business. This episode required zero prep for my boy, Frankie.

I opened two documents and that was it.

We’ve got Frank ever does any goddamn prep for any of these episodes. He’s the diva of the show.

Two cool things happened. First of all, we had our first fan interlude. Someone came to the office because they are huge fans of Let Me Speak to A Manager. This is true. When they were here, I tell something was off in the office. I’m like, “What the hell is this?” They were like, “We want to lodge a formal complaint.” It had enough to do with the end where I’m like, “Come back here.” He didn’t know we are already on like, “Do you know about this?”

He immediately looks at me as if I’m one of his employees and I’m in trouble in some way. “Why do I have an investor in my office complaining? Did you raise this money?” That was great. It ended up being a prank from our boy packs and sending a couple of his peeps in from Indiana to jack Frank up. It was pretty funny.

We’ve got that out of the way in seriousness. One of the other things that happened that were interesting is he admit that he likes doing this with me because of the way that I think about things. Don’t let him fool you that I bring no value. What we are going to talk about is real estate investing. We did an episode not too long ago about, are we in a bubble? People find that interesting because we have a unique look at this.

What nobody ever tells you when you were a kid is life is like always walking on a sheet of ice. You are never sure if your next step is going to plunge you through the ice. You don’t know. You can get hit by a bus. Someone who’s incredibly dear to me on Friday walked in and they’ve got fired. Shit happens and it happens all the time. What you try and do is try and mitigate the downside. That’s the most important thing with any type of deal or investing as far as I can see. What we do, and it bears this out, is we go after attractive targets.

My entire business starts with finding people who are the right clients for us. We do this through postcards, phone calls, text messages, television ads, internet ads, and YouTube ads. We have a robust lead gen strategy. Once you find someone who has a need that you can satisfy and there’s a house behind it that needs to be solved, that’s when we start what we do. Where it starts is with our contract. How do we control the deal? What will we not allow to get into a deal or a contract? The process can then go from there. What we do with something is we might assign it in wholesale.

Frankie, on the front end, I still don’t 100% understand your business. You have 50 employees. How many of them work on the acquisition side?

More than half.

You have a marketing arm. You have a sales arm that is bringing in the leads that come in, evaluating it, and funneling it out. Their job is to understand what the company’s focus is and funneling out like, “That’s not a lead that we would take. That’s not something Cava would do.” That’s part of it. We are a little toppy in the market. It’s had a hard run. It doesn’t mean that we have hit the top. We have had a hard three-year run here of pricing.

Pretty fair to say that your business is set up where, with the number of employees you have, you have to keep acquiring. At some point, if you have to have a 50-person business you have to acquire, which means you have to be smarter. When everyone is piling into the market, it makes it harder for you. You have to be smarter about how you acquire your leads. You, as the owner, have to be disciplined because the bigger your team is, the more they are going to be screaming at you, “We need to do this deal,” because they want to make a commission.

This is absolutely critical to dive into. I’m going to explain what we do, then I’m going to explain how I mitigate risk or how we do deals. The most important thing is I need to keep generating revenue. If I stopped generating revenue, I can’t pay overhead, pay my staff, and pay the bills. We use a house. Sometimes it’s land. Sometimes it’s commercial buildings but the vast majority are homes.

What we do is, in or out of Richmond, we are known across the country as a single-family real estate investor. What a single-family real estate investor does is generate leads around people who are motivated to sell a house. They are not going to call Century21. They have some other need, want, and desire that a traditional real estate sale isn’t going to accomplish. That’s when they call us. That is a distinguisher first. Second, what do we do with them? We get under contract and we can assign it.

The thing you said is important. Warren Buffett talks about moats. What is the moat around your business? What insulates you from a competitor jumping in and doing the same thing you are doing? If I’m a little guy and I see Frank Cava and Cava Companies and I say, “Look at that big office. We will get there. Signs are everywhere. That guy is big. I want to be like Frank Cava. I see him on TV.” The reason I can’t immediately compete with you is that I don’t have a source of leads like you do.

Real Estate Business: A single family real estate investor generates leads around people who are motivated to sell a house.

 

I would have to go in and buy retail. I have to go on the MLS and see something someone was already listed. If it’s on MLS, there’s a good chance that it’s probably not priced right if it’s sitting there long enough for me to get it. If I were to try to go compete with you, I would either have to go door-to-door leaving pamphlets. The amount of money you spend to get people to respond back to you is incredible versus a little guy who wants to start this business. He has to go off of public information. That means he’s probably going to overpay and that’s everything in your world is what you pay for it.

On a Saturday night, I was doing this cool thing on a building. Ian and I are in the building together. I haven’t shown him yet what it is but I’m excited to show it. I spent the whole day on that Saturday at one of my buildings and I was there with the contractor doing the work and he handed me a beer. We took a bucket lift up. We watched the sun go down. There are people working on the building, had two beers nice, and went home. I had a second beer as my wife and I split an IPA. It’s like drinking a beer and a half. I’ve got a little bit of a buzz.

My wife is like, “A bottle of wine sounds nice.” I’m like, “Great.” I opened up a bottle of wine. I have had three cocktails, which when you are in your 40s and you have kids, three cocktails are a lot of cocktails, not like I’m going out to a happy hour. I’ve got a phone call from a phone number that I don’t recognize, which means it’s a spam call. It turns out it’s a virtual assistant who works for a local home buyer like me and they were calling me on my cell phone. I shouldn’t be on your list.

What I realized is this person’s virtual assistant is pretty good. They asked me a lot of good questions. They didn’t have the authority to ask me my price or make me an offer if they didn’t have that authority, which was stupid I thought but I was like, “Interesting. Good call. Good training.” I knew exactly what was happening. I like to feel that stuff out.

I mentioned drinking because I was probably a little bit more patient than I would have been because this is critical. “I shouldn’t be on your list. I’m not a distressed seller. I’m not going to sell to another wholesaler. If you are calling me, you are wasting your marketing dollar. I should be crossed off the list.” What I was talking to Ian about is, who’s on your list. The list provider that we work with is a company that has been valued at a significant number, big, into the multiple millions. What they do is they sift through data and tell people like me, “This is a target or this isn’t.” Where you start is huge.

Life is like always walking on a sheet of ice. You're never sure if your next step is going to plunge you through the ice. Click To Tweet

Can a little guy afford the organization that you work with that provides us leads? It makes me think of Glengarry Glen Ross. These are the Glengarry leads and you can’t have them. Everyone is screaming for them. Every salesperson in the world wants hot leads but hot leads cost more than crappy leads. You are a crappy lead clearly for what that person is doing. Their lead provider is not as good as yours is. Do you pay so much for those leads that a little guy couldn’t do it?

Maybe, but I was here first. I have the leads that this business is good at providing because I have had longevity and a relationship. This business that does the lead providing came to our office with 3 of their people for 2 full days. The reason they did that is they want to learn from us. We have an interactive relationship. They are getting better by understanding what we think isn’t a deal. I spent an entire day in the car with them, driving around looking at this as a deal. “This isn’t the deal. This is why. This is how I analyze this. This is how I think of it.”

Do they become smarter over the years, Frank, of knowing what leads they have sent you and which ones have converted? Which ones have turned into sales? What’s turned into closings?

Yes.

Do they know better like ZIP codes and various codes?

We have talked about this here. ZIP codes, your build. There are areas in Richmond like this, the segment areas like Area 10, 20 or 30. They know about those. They know who the demographic, the buyer, the seller is, and all of these things.

Have they got an algorithm that’s specific to Frank enrichment to Cava Companies?

He uses it across the country to find sellers, and then he tightens it upmarket by market and MSA by MSA. The other thing is, they have what’s called an API. It’s a communication between our database and their database. They can log in directly. They don’t have to log in. The API does talking but it talks back and forth. We use Salesforce, and Salesforce tells them, “This is an appointment, a deal, closing, a revenue event.” They then take that and say, “We want more of these, less of these.” We are super calibrated.

The question you asked is, “Can you afford it?” Sure. You can afford it. “Can you utilize it as well as I can?” No. I’m better than almost everybody who is not regional. What I mean by that is this. I’ve got a couple of friends in Florida. They do 1,500 deals a year. They are in four states. They are better than me. Their marketing is better. They are a little tighter. They’ve got a bigger staff. There are multiple layers between them.

There are only two between me and the salespeople because of the fact that they’ve got bigger outfits. I’ve got a friend that does 15,000 deals a year. He’s better now fractionally but that’s the difference between me and someone who’s not as good as me. Those are some of the things you can look at. We can control the market because we have access to the data. We can move faster and we know what to do and not to do in our market.

LMSM 66 | Real Estate Business

Real Estate Business: The Richmond MSA is like 1.2 million. There are like 400,000 rooftops in the Richmond MSA. Our data set is like 35,000 and it changes.

 

I’m still stuck on this. Your lead provider, how many leads a month are they providing to you or is it a database and you can even get to it like you could hire all?

No. We can see, touch, feel it, and everything. If you want this statistic, I can dig it up in a second. I’m doing this from memory. The Richmond MSA is 1.2 million. There are 400,000 rooftops in the Richmond MSA. Our data set is 35,000. It changes.

It changes because of people’s predicaments. They get behind on taxes. They were not a target in 2020. They are a target now. The ownership changed. Some have died in the family and they want to get rid of the house.

The greater economy can change in 2010, 2011 and 2012. We had 80,000 targets, so literally 80% divided by 40% is 20% of the targets. That’s a big number.

Unemployment was higher and people were like, “I shouldn’t be owning a house now. I need cash.”

That’s a big part of it. Those are some of the things that you look at, and then the data provider does this too. I have mentioned that call I took on Saturday. It’s a wasted opportunity. It costs money to put me on your list. It costs money to get me on the phone. It costs time because I was being a pain in the ass. It took twenty minutes to get that woman to get off the phone with me. I took twenty minutes of presumably her eight-hour day and I’m a non-seller. If you look at soft costs, there’s absolutely 100% cost associated with not having the right leads in front of you.

You’ve got this database of 35,000 in a given time. You have 25 people on an acquisition team. They are divvied out in some way. You have incoming all the time, so your phone rings. Someone’s got to get a phone with them in a couple of seconds. I imagine you’ve got these postcards here. What about your TV late ads? What if someone gets that TV late ad and calls the 800 number at 2:00 AM while they see Frank on TV?

We have someone live answering the phone 24/7.

Is this a VA in the Philippines somewhere who picks the phone up and the lead so someone calls him in the morning?

They are an American-based. We use an American-based phone answer service but most of the time, it runs through the office and this is fascinating.

You did play in the Philippines for a while. You tried VAs. Didn’t it work for you? Is it the language barrier or was it the organization?

It’s a combination of things. Maybe I’m a shitty manager for people who don’t live here. I didn’t get the area as much. I wasn’t as patient with letting them learn it. Our sellers didn’t connect with them. It’s a bunch of excuses. I don’t know. It didn’t work for me. What I realized is I like to have people answer the phone who understands us, our core values, and what we do.

The most important thing is to keep generating revenue. If you stop generating revenue, you can't pay overhead. You can't pay your staff. Click To Tweet

Where are these folks? Are these folks near you? Are they enrichment? Are these other places of the country?

COVID change the fact that I went away from all Richmond. I’ve got two lead gen people who are in California. I’ve got a lead gen woman who’s down in Southwest Virginia. I have only met her once. I have one in South Carolina. I’ve got one in Florida. We’ve got people all over.

California is fascinating because it’s the opposite of the Philippines. It’s the most expensive real estate in the world versus going to the Philippines because it’s a little cheaper. That’s an interesting thing you mentioned two California’s.

They are young people. They used to live in Virginia Beach. They knew of us. They tried to wholesale in the State of Virginia. They struggled to do it. They may want to become wholesalers at some point in the future but they want to learn from us. They are living with family and they were like, “We want to understand Virginia, so we will work with you.”

That person, a call comes in at 2:00 AM because you do have TV ads at 2:00 AM. They see it. If you are on TV barking, “Call this 800 number, Cava Companies. We buy your house,” so they call. They get someone because you have staff all the time. That phone gets picked up. What is the person who’s not one of your direct employees who’s handling the new calls? What are they skilled to do? Is that just, “Let me get your phone number and name,” and that’s it and they send it to the lead gen department?

I’m going to do something that’s going to blow your mind. People don’t call off the TV at 2:00 AM. People who call at 2:00 AM or noon are on the internet. They will fill out a web form or they will call the 800 number because they are on the internet. People don’t call if they need to. I know this because I have been doing this for many years. I know that almost 92% of my calls are from 8:00 AM to 8:00 PM, Monday through Friday.

Do you have people on shifts that will work until 8:00 PM in your office?

Yes. We do that. Ian, when you call someone and the business is closed, you get frustrated. When you call, in your experience, who’s done at the best? What did they make you? The business is closed but I feel good because my issue is going to be handled. Can you conjure a memory of where that was handled?

As you are saying it, I’m thinking of all the ones that frustrate me, like big hotel chains and airlines. When you want to call and do something, they say they only work from 8:00 to 5:00. That frustrates the shit out of me. They don’t do a good job of saying, “Here’s what we are going to do.” It’s like, “Call back during our hours.”

There are two that come to mind for me. One is an attorney and one was a doctor. I call the doctor. It’s 5:01, I don’t call the doctor anymore. LC does it for me. That’s a different story. Back when I used to, and this is important, at 5:01, “Hello. You called so and so. This is their answering service.” I know immediately that they are close. I know I have an answering service. I’m like, “Hi.” They are like, “What is your name?” I tell them. “Who are you calling for?” “I was calling for Dr. so and so.”

I’m like, “They are closed. They will open tomorrow at 9:00 AM. I have taken down your name. Is there a message?” “No, there’s no message. Have them call me back, please. This is the phone number I have to use.” Is that accurate?” “Yes, it is.” “Great.” “Again, this is the answering service. We will make sure your call is returned promptly tomorrow morning.”

When I get that type of treatment, I feel good. What we do on the phone is we say, “We are not someone who can analyze your property or the answering service. We are currently closed because it’s 2:00 AM. We will have someone call you tomorrow, and get back to you.” That’s how we handle it. If they have done absolutely nothing, we will get, “What’s your address? What’s the property you are thinking about selling?” We will ask a couple of those questions we can get into our CRM. As long as we can get your name, your phone number, and property address, we can follow up with you. That’s what we are trying to get. Those are the specific things that we are doing.

We have tons of people who answered the phone live. We have the service that answers, and then it goes from there. I wanted to lay that out for you as I want people to stop looking. If you are drunk and you are hungry, and you are looking to go to your phone, the first two places you try to order pizza from are close, you are going to a third, that’s who’s calling you at 2:00 AM. You need to understand, I need someone to tell them, “Your pizza is on the way.” That’s what we want to do.

Let’s say a lead comes in at 5:00 and you are staffed. The phone rings, someone calls, and most of these incoming are phone calls. Are a lot of them online, they type their stuff in and you call them?

We have an outbound dial, outbound text, inbound dial, so they call us. It’s cheaper. I know the list. I don’t know names. I have American onshore people go through the list, make phone calls outbound, and ask you if you are interested in selling. That’s the outbound dial. We’ve got a ton of outbound dial. It’s less expensive than blanketing out a bunch of postcards and we will go that way first. Text messages are fraught with a lot of problems. We no longer do it in-house. We have hired a consulting firm who does it for us. They take all the legal liability, and we pay them a portion of the deal. Those are two outbounds.

Real Estate Business: We want to stay in Virginia, so we’ll work with you.

 

If I can’t find you through text or email, I’ve got television where you might call in, and then I mail to you. In the old days, we used to mail to everybody. We send out 60,000 postcards a month. Instead of doing that, we dial in and send out telephonically. If we can’t get you on the phone through text or dial, then we use a postcard.

Lots of different ways I can get to you. If the person gets on the phone, what is your lead gen person trained to do? What information do they need to get before they will go to you? I’m sure you have trained them well of, “That was a bad lead. Here’s why it was a bad lead. Don’t bring these to me anymore. Here’s why.”

Phone rings. “Hello, how are you? Thanks for calling Cava Home Buyers. Who am I speaking with? This is Ian Matthews.” “Ian, thank you for calling. How can I help you?” Start like that. “I’ve got a property to sell,” something along those lines. Why do you call? They want to get those things. What they want to do is they want to verify, number one, who they are talking to. We’ve got caller ID. We know who should be there and we want to verify that. Second, if you have dialed in, we want to verify your phone number. Thirdly, and what’s important too, what’s the address of the property you are calling about.

If you get those three things, a name, a phone number, and an address. I would rank it as address 1st, phone 2nd, and name 3rd. If you get those three things on a phone, we are good. We’ve got you in our system, then we will follow up with you but there is a conversation. “Thank you for calling. Why are you calling?”

Your marketing is specific. Do you need to sell your house quickly? Do you need to sell it for cash? These are in your marketing. When you say good leads, there are some data points here. You changed hands, you are looking at specific ZIP codes, and you are looking for someone who might be late on their tax bills. You have a lot of different reasons why someone might need to sell urgently.

I would say two things that you will find interesting. First, we don’t advertise that we pay cash because most people who advertise pay cash, the consumer thinks that person is a scumbag and on the other end, you are trying to get something over on them. We don’t use that. We use fast and hassle-free or on your timeframe and hassle-free instead of cash. Two, the list is enormous. The items, the reasons, and the motivations are different. It could be everything that you mentioned. It could be way more niche than that. It could be, “We know you have had huge medical bills. We know you are not paying your water bill.” All of those things.

You have that data. All of the public indicators that might mean someone financially should not own a house and would do better with the money than they would be keeping owning the house. You have the indicators that would tell you, “This person has a higher chance of being in our world of a good person that might be a motivated seller.”

There was a prank played on me and there were some people that came in to play the prank. I didn’t want to go out there because it’s afraid someone is going to scream and yell at me. That’s usually what happens. Carla was in the office with me, and she was like, “It might be from so and so who lives in one of our rentals. He owes $4,000 on his water bill.” It’s a single-family home. He’s responsible for the water, not me.

What I can tell you is this. There are problems in that house. He sent me threat letters and told me I’m a scumbag. I’m not. I’m doing all the right things. He’s not paying his bills and he’s thrown Hail Marys. He’s trying to get me to write him a check so he can solve his problems. That’s as a renter. I know this because I own the property. They are telling me that there’s going to be a lien put against this property because he hasn’t paid his water bill like “I get it. I have dealt with this before,” but I own the property, so I know about it.

If you look at soft costs, there's absolutely 100% cost associated with not having the right leads in front of you. Click To Tweet

Let’s say I don’t own the property and there’s a $4,000 water bill. It’s really hard to live somewhere if you are not paying your freaking water bill but why live in the house if you can’t use the water? That’s an incredible thing to look at like, “Someone is owner-occupied in this address and they aren’t paying their water bill.” That’s a target I want to talk to you about.

How quickly can they get that? Let’s say I call in and I say, “My name is Ian. Here’s my phone number and my address.” As I’m talking to you, is your person on the phone with them able to pull up some of that data? I will be like, “Shit, this guy is not paying his water bill.” Could I find that out while I’m talking to you?

Yes and no. If you call me up and you don’t tell me you don’t have a water bill, I probably don’t know it. If you call me up, and then I cross-reference you in my system and realize, “This particular address is also on our water tax lien. Perfect.” Do we say, “I can see you are on this list. You haven’t paid your water bill?” No. What we do is we teach them skillfully how to ask for questions, for motivators, and what’s at the core.

When I get into this business, it’s a lot less buttoned-up, more professional than where I worked before. At Ryan Homes, we would send out a seven-color glossy mailer. It was beautiful. It costs $1.25 apiece to send this thing through the mail to credible. I sent out a $0.33 mailer. My friends over were like, “You went from over here and you are predatory.” I took that to heart. I was like, “Am I predatory?” I asked myself all these questions.

What we teach our staff is this. If you are on our list or we are reaching out to you, there’s a reason we have an incredibly well-cultivated list. If you say you don’t want us to work with you, don’t call me, email me or do anything else. We will take you off our list. No problem. If you have to jump through any hoops, you say it, we will take you off. What I encourage everyone to do is find out what’s the need? Why did you decide to call? What’s the reason and motivator? There’s some reason I get junk mail. I don’t call it. Why did you call? Why did you pick up the phone?

Let me tell you what makes us different than everybody else who wants to send you a postcard. We get into it. The thing that we want to get to immediately is you. “What’s the need? What do you have? What is it that we can do to help? How can Cava help?” We train everyone on that. What you realize is most people are driving at the dollars and the value of the discount. What we drive at is, “What is the emotional need that you have? How do we solve it?” I was in the car driving home with my wife, and my mother-in-law is on the phone. We are talking through Bluetooth.

My wife’s aunt’s health has gotten worse and her house is falling into disrepair. They were seeking my advice. We are in the car and let’s do the call. What was interesting was her mother told me the story and I was like, “These are some of the things we could do. We could help her move. We could help her fix the house. We could help her find a place to live. We could find a moving company.” We could do all of these things because that’s what we do. We find someone who has a need and we help them solve the need. In many instances, we paid for it. We will advance the money.

We want to get to more than, “Did you not pay your water bill? What pain is being caused in your life that we can solve?” You asked me what makes us different. I’ve got better fucking data. At the same time, I’m not desperate for a deal. It’s because I’m not desperate for a deal, I get to act with incredible conscience as a servant and someone who’s not chasing you but offering a service. If my services aren’t wanted, we will do it elsewhere. That is what makes us incredibly different.

The truth is because you are able to act fast and provide that convenience, you are going to pay a price that is less than the market and you have to. It’s like the Pawnshop Shows where people come in and be like, “I know this baseball card is worth $2,000.” You would be like, “Great. You want me to pay $2,000. Now I own it, how am I going to sell it if it’s worth $2,000? Now I’m stuck with something I can’t sell.”

He’s always great about that. It’s like, “Go sell it to someone for $2,000. You are in a pawnshop. My job is to sell what you are giving me at some margin that lets me keep the doors open. I can pay you $1,000 because I could probably charge $2,000. You don’t have the market I have of people that come through here. It’s worth something to me at $1,000. To you, if you can find someone for $2,000, great, but you are not a pawnshop. You don’t have traffic. You need me to pay something. My value is I own a store, I have employees, a brand, people come through, and I know how to get rid of this.” You know how to drive to a pawnshop.

What’s fascinating to me as you mentioned pawnshops is I thought of Trading Places when Dan Aykroyd holds up the watch and he’s like, “This tells time in all these places.” He goes, “In Philadelphia, it’s worth $100.” It was Bo Diddley that said that.

Your folks are trained to find out why they want to sell. Are they motivated? To get an idea, their job before it ever gets to you, “This is what we could buy this house for.” That’s their job to get to that.

The sales reps, what they do is they go through what we call champs qualifying. What champs is, what’s the situation? Are you talking to a decision-maker? Is there urgency? Those are the qualifying steps. I didn’t get into it specifically but it’s close enough. We go through that with everybody like, “Are you some dipshit who’s not on the title? I see your name is Ian Matthews but this is owned by Margaret Smith. What’s your relationship with her?” “She’s my aunt.” “Are you on the title? Can you approve it? I’m not going on an appointment if you can’t prove it.” Those are little things that we will do.

Are they able to quickly ascertain while they are on the phone what the market value is that Cava could put into it? How do they know what offer to make?

You don’t make an offer like that. We could. We know approximately. We will get at your value. We will look at your square foot. We can look at its estimate. We’ve got 100 different ways that we could do this. We have different APIs that can tell us, “This thing is worth this or this is what our max offer is.” What we are looking for more than anything on that initial call is, “Are you a decision-maker? Are you motivated? If you’ve got the right number, would you sell?” If the answer to those questions is yes, it’s my lead gen person’s job to set an appointment for my acquisition manager. A good lead gen person is going to set 25 appointments in a month. A good acquisition manager is going to go on something in the neighborhood of about twelve appointments a week.

How many acquisition managers do you have?

I’ve got 5 in Richmond and 2 in Virginia Beach.

These folks are a little more experienced than the lead gen folks because they know how to value a property and they have a better idea of what you would have to put into it and what you could buy it at to make a margin you are looking to make.

We also start people off answering the phones. You get answers on the phone, make calls, and get your real estate license.

You have a career path within the lead gen department. It gets to the acquisition manager and the acquisition manager does their homework and looks at the house. Cava-estimate is we could probably sell this for $130,000 if we put $10,000 into it. Let’s make an offer of $60,000.

There are a bunch of ways to do this. I’m going to jump in and tell you how we do it. We decided that this is a house worth going on an appointment. They set an appointment up for a guy you know, Rob. He is our best. He has been here the longest. He’s my longest-standing employee. He knows what he’s doing. Rob says, “So and so sent me this appointment. I’m going to go into the MLS and I’m going to look at this.”

The first thing is everyone on my staff has access to the MLS. I’m a licensed realtor. Most people in this job are not realtors and they don’t have MLS access. They are making decisions based on non-MLS data. MLS data is the best. We do it legally. I’m licensed. There are 5 or 6 people here who are licensed. If you are not licensed, you have to do it as one of my assistants, which is legal. You have to disclose it and it would cost me money. I give you access to the best data.

Rob goes in, looks at the house at 123 Main Street, “I know this neighborhood. I bought a bunch of houses here.” It’s X number of square feet. What Rob does is he understands the property, and then what Rob will do is he finds what he calls the dog. The dog is the ugliest fucking house that’s comparable to the one that he’s going to look at. In some instances, it’s a perfect comp, a real stretch. He looks at it and goes, “The max I’m going to pay for this is this.” He goes out on an appointment and he meets with them.

Real Estate Business: What’s the situation? Are you talking to a decision-maker? Is there urgency? Those are the qualifying steps.

 

Does he meet with everyone in person? Is it Zoom? How does COVID change that?

Almost everybody is in person. We can lock up over the phone. During COVID, we used Zoom. We did Zoom appointments. If they are willing to meet with us, people will wear masks, gloves or whatever to make people comfortable but we like to meet them in person.

Do they meet on the property?

If at all possible, we meet at the property.

He can see some things.

If you tell me you want $200,000 and it’s worth $120,000 and got a huge freakin hole in the roof, I’m going to use that to my advantage. It’s like, “I love to pay you $200,000.” Rob will do his research, understands his low-end comp, where he price anchors and works off of that. All that said, this is what’s critical. I teach my staff what to pay but everything is subjective because that’s how the market works.

Rob makes an offer and gets it under contract. The contract is the most important thing. The contract gives me an outcome intentionally. I usually have a 30-day study and a 60-day close. Rob doesn’t have to call me from the property six times and say, “This is what I’m thinking about.” We teach him how to make good decisions and comp. We say, “Rely on the contract. Bring it back to the office and we will study it.” If you fucked up, we are going to tell you, “You overpaid. Call them back. Tell them we overpaid and we need to get out.” We have solved it.

Rob is good. He doesn’t overpay. What he might do is lock it up, and then we will take it to market. If the market doesn’t respond, we need to go negotiate or get out of the contract. Those are the things that we do. We are going to get to the point of risk mitigation and purchase if we are going to buy a house and physically wholesale it, get it under contract, and charge a fee to somebody else. The contract helps us a ton and our price anchoring with the low price and then we pitch the dream of, “If you put X number of dollars into it, it could be worth this.” That’s where we sell a ton of our stuff on the wholesale market.

Your acquisition manager, especially someone like Rob, you have given him the ability that he can go out and make an offer, and even write a contract without you. At what point would you get involved in that deal? Are there any deals where you never even saw where someone was like, “We bought a house, we closed on it and we made $40,000 pretty cool?” You are like, “Great job.”

The word bought is where everything changes. What we have is Rob understands it. I have a sales manager. I have a team and they analyze the deals. They figure out how much the house is worth on the back end if we are going to wholesale it. If we buy this house, we are not making $100,000. I’m going to make the math easy. This market is way too competitive to make $100,000 on a house. You are not doing it. If someone tells you they are doing it, their fucking lying.

The point is I’m going to make $100,000 on 123 Main Street. I will take $50,000, half of what I can make if I fixed and flipped it, took it to the market, and wholesale it. Eddie and everybody on that side of the business know that. What they do is they blast it out like, “We can make $100,000 if we bought it and took it down ourselves. We are going to make 65% or 70% if we do not touch it.”

Assigning a contract, and someone else does the work. If that happens, I never see it. It never comes to me. It’s gone through the system. Rob has done it. I heard about it. I can spot-check it. I don’t know about it because we’ve got a system that’s incredibly well built based upon the metrics that we set in place. I have managers who I trust. I don’t micromanage.

The assignment takes none of your cash. It puts none of the risks of the title on you. You have no ownership. All you did was write a contract. Do you have to give any hand money on a contract?

We do. We have to give a deposit.

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It’s small enough where getting out of it is easy.

I have an agreement with my title company, where I keep enough money there and that I don’t have top ram checks every time. It covers it. My money is there, ahead of the need. It gets assigned and reassigned, and everything like that.

What percentage of the contracts that you write with customers ultimately get assigned and which percent do you buy?

This changes drastically depending on the market. Eighty-five percent of our staff is assigned.

That’s asset-light to the core. That’s the NVR in you right there. That’s pretty cool. You are putting no risk out. The risk is you carry a lot of overhead to go find those deals to get the contract. Fifteen employees are a lot of risks.

I don’t have inventory risk.

In a downturn, none of that hurts you. You get all those contracts. If the market overnight dropped 30%, all those contracts you have, you cut a check for a couple of grand earnest money deposit, “I’m out of the contract,” versus if you held all those houses, if you bought all of those, you own all of those assets, now the market dropped, you have taken a multimillion-dollar write-off.

This is where it gets serious. If we are not making enough money and I need to make enough money to cover my overhead with my wholesale fees, I look at my business and say, “I’m going to stay in business with wholesale fees.” If my overhead is a certain number, my wholesale feeds need to be above that. Fix and flip is the gravy on top, and then anything else we make is further into the gravy. That’s how I manage it. It’s a quick and easy look.

Here is where it gets serious. If we are going to buy something, I have to approve it. It’s my money. I sign the loan package. I am personally guaranteeing almost all this shit. I refuse to buy anything unless I looked at it. Sometimes I’m buying land. Sometimes I’m buying houses. There’s an expiration date and people will know, “We need Frank’s blessing on this before we are going to buy it.”

They brought me a lot and it was $25,000. I’m like, “Why didn’t I know about this?” They were like, “It’s a good deal.” I’m like, “The next time you bring me a good fucking deal and I don’t approve it, you are paying for your paycheck.” “Got it.” I sent the message. If I have to buy it, I want to look at it. It’s the same reason why I have an incredible staff. I look at all the selections on anything we are going to fix and sell on the market. I want to look at it. I want to feel it. I want to understand it. Ultimately, it comes to me. I missed the price and I’m going to drop it.

Those are little things that we check like the note. I can get in trouble on the wholesale, for sure but it’s hard. I’ve got a good contract, parameters and we follow that. If we go to the next level where it’s a rental. We’ve got parameters there. I can get hurt a lot less on a rental because of the purchase price and what I’m looking at, so I still approve it but I don’t have to necessarily look at the selection. They need to say, “I’m good.”

What are you looking at for a rental? Are you looking at, is someone in there now, what’s the lead or what the average lease might be?

My preference is to almost always buy a house vacant. If there is a renter in there, when does the lease expire? The most important thing to me is, how much money do I have to pay for it? How much money goes into repairing it? What will it rent for? That’s it.

Is there a ratio you are looking for? Are there rules of thumb that you use?

Hell yeah.

Give me a typical rule of thumb on a $100,000 house.

I will set the goals. A 3-bedroom, 1-bath house, normal, built 50 or 75 years ago. It’s built in 1950. We have a ton of them. We ask around for between $1,300 and $1,400 all day long. What I want on that is, I want to be at a debt service coverage ratio where after all my expenses, I can make at least $250 to $450 per month net per house. It becomes a formula. I’m going to do it this way. If I buy a house for $80,000, I put in $20,000. I take it down, buy it, and put in my $20,000. I’m into the whole thing including costs and carry for $105,000. My goal is for that house to be worth at least $135,000.

If it’s worth at least $135,000 at 75% loan-to-value, I can then get a permanent loan, get all of my money back and cashflow to the numbers that I was talking about. If I was going to have a $105,000 note with nowaday’s interest rates, that’s going to be principal interest, taxes, and insurance, plus all my overhead. That’s going to be $700 a month on that house. That house is going to rent for $1,300. I’m making $600 a month and I have none of my own money invested. That’s a smoke show. That is replicatable, doable, and that’s how I’ve got the 300 houses because I picked the right ones that I can hold, renovate, and get my money in and out, and get repetition.

Aside from the numbers and the accounting piece of it because all of it is fascinating, of the 300 that you have chosen, these are your chosen houses that you own and rent out, is there anything specific about the houses that you care about? Obviously, there are certain ZIP codes where you own a lot, you want to own more, and you are gobbling up neighborhoods. Is there anything about the actual structure of the house that makes it more enticing for a long-term hold for you?

We have talked on this show before that I don’t buy things that are wood and that are over a certain age because they get termites. What we look at more is neighborhood and who’s your back-end renter. We focus a lot on that. We are good on the affordable side. We accept vouchers and that’s what we are great at. That’s what we look at in a lot of instances.

As a landlord, why would you care about accepting vouchers? Explain that for people reading.

A lot of people don’t want vouchers because you are working with Section 8 and the tenants can be incredibly rough on the house. For me, I know how to build a house, so it has more longevity than the average person does and I focus on that with my deliverable. In addition to that, what I like about it, that this was great during the pandemic, the government is paying the majority of the rent.

Almost 75%, right?

75% to 100% depending on the person. For some people, it might be 25%. In our portfolio, close to 80% is paid directly by the government. Every month, 80% shows up in my bank account directly from Section 8.

Frank and I owned 75 homes going into the pandemic and it was fascinating to me of which more than half of those folks in those houses lost their job during the pandemic, were furloughed or could not pay their rent. Immediately, I thought, “We are in a lot of trouble.” Frank said, “Don’t assume that. Let’s see what happens.” 75% or 80% of the houses that we had acquired were Section 8 Housing, meaning we kept getting checks from the government on almost 100% of the rents even while those people weren’t working.

Real Estate Business: Once you own a bunch of properties, you get to have choices.

 

It was almost a perfect portfolio of rentals that we owned during the pandemic and that we continue to collect because the government was backstopping. You started getting into the extra programs, the Paycheck Protection Program, and the Housing Protection Programs. With all these different programs, 93% of our rents were coming in every month on 75 homes. During April and May 2020 of the pandemic, the scariest two months of the pandemic, we kept collecting rents.

One of the things we want to talk about is building them out. I am not a Section 8 guy. I don’t live in a Section 8 house. I never have. I tell the story not often but I do tell it. In the ‘70s, my dad collected unemployment for a short time because the economy sucked and he was unemployed. He was always thankful for that. My mom was a school teacher. We have talked about this, Ian and me. She’s influenced me. There’s a need for affordability.

I’m also a for-profit business. What I have learned is that I can provide things in this area because others aren’t as good at it. The inventory that I find works well with it. I’m secure because the Federal Government has a say in this if I get paid or not. The Federal Government has got a pretty good track record of paying their bills. That is what I chose when I’ve got into this line of work.

I don’t micromanage the under-contract and assignment piece. I’ve got a contract that manages the hell out of it and I don’t have to. When a house becomes a rental, I want to make sure the construction budget justifies the overall budget. I can buy a house for $10,000. If it needs $90,000 worth of work, I don’t care as long as on the back end and it has a certain value. I’m not going to say, “This house got a terrible roof or a bad foundation. We will buy it but we won’t fix it.” I’m not going to do that. I want to get the house to a certain standard, so it’s a good home that people are going to move into and stay. Those are the things you look at.

What I chose in 2009, I left NVR, they had $1 billion in cash in the bank at that time and I didn’t. I watched them tread their business apart because they did one thing and had to be super conservative. What I wanted to do was have a leg stool program. I will speculate on the flips. I will take my assignment fees and collect as much of those as I can. Am I guaranteed rents? I’m going to take that to the US government and provide a program where there’s a real need. Most people don’t want to participate. That’s how I looked at my business. I have a coach and he called me weird. I’m like, “I’m not weird. I’m strategic in what I have picked.”

I will mostly buy houses in the richest neighborhood in Richmond and that’s for a flip because they are the biggest margins and close to the office. I know the product and the buyers. These are things that I have gotten focused on, where if I’m going to take a shot, I’m going to take a shot on an $850,000 house because I can make $150,000 on an 850 house. If I had to liquidate that thing at $699,000 and get all my money back out and not take a hit, that’s a big discount. That’s a 20% discount on a house like that and I have a quick turn. Those are the things that I have strategically wanted to set myself up for.

How many deals do you have to review in a week on whether you are going to purchase?

In slow months, we might buy four. In big months, we might buy twenty. If I buy a whole package, I’m pretty involved in that. In the month of November, I’m going to wholesale 23. I’m purchasing two. I’m selling 3 and refinancing 50. I’ve got 23 that I’m going to wholesale and two on purchasing. It’s 2 out of 25 and 4% purchases.

How much is your decision to own as a rental, as a flip or a sign has to do with fluctuations of mortgage rates? If the inflation keeps getting uglier and true mortgage rates go up to 2%, does that mean you are going to be buying and holding as rentals last because the economics don’t work?

Yes. I’m doing this 100-house project where I’ve got 100 houses. I’m building them out of the ground. Everyone is like, “Why are you doing it now? It’s a terrible time. Plywood has gone up. You can’t get microwaves.” I know. The reason I’m doing it now is that the cost of capital has gotten lower. I’ve got 30-year fixed money at 3%, 3.8%, and 3.5% interest. Section 8 raised their rents by $250 per house because of inflation. Now I’m saving $200 to $300 per month on interest. I’m making $200 to $300 more over here. You can take that $400 or $500 and look at it and say, “This became cashflow positive where it wasn’t before. Now, it’s go-time.”

He’s right into that. If rents don’t go any higher, which they probably won’t in that case, you’ve now got a worse spread, so you are not adding to that.

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If interest rates tick up to 6%, I’m going to probably have to take these things and sell them because I can’t afford to refinance them anymore and I will probably stop. That’s why I have a huge construction department at the moment and we are flying. I’m trying to build twelve of these things a month because we have a finite window of time.

Is it now the time to quit your job and go all-in on residential real estate and start a business like Frank? Probably not. It’s a little late to be doing that. If someone has a job or they have a different business and they’ve got some money, how would you recommend that they dip their toe in residential real estate?

It depends on what you want. We wholesaled 23 houses. I see 3 names out of our 23 that are buying more than one. They are professional buyers. We’ve got a guy in our market who we probably sell twenty houses a year or two. He has a staffing agency with hundreds of employees and staff people. What we do with him is we partner up. He used to have a construction crew and I convinced him, “Don’t have your own construction crew. Have me do it.” I get the house, he calls and says that he’s interested. I know him by name. Someone says, “So and so is buying this.” I’m like, “See if he wants us to do the work.”

We do a profit share agreement. That’s a deal where he will go out and put in $120,000 through hard money or whatever. He will make $15,000 to $25,000 off of it. He keeps turning it. This is a guy who makes a ton of money already who will take some of his extra cash. He is smart. He vets deals. He brings them to us and we do the work. He makes more money on his money. We did a deal where I’ve got paid a $51,000 assignment fee. He made $18,000 and I made another $18,000 on the back end. I was like, “Are you happy with that?” He goes, “I’m thrilled. I didn’t touch it and I made $18,000. Let’s do it again.” That’s a strategy.

That same person owns roughly 50 to 75 single-families. Now he’s mostly flipping because he’s having a hard time finding the discounts deep enough. Frankly, if there’s a deep enough discount on a rental, I will keep it so I don’t bring it to market. He’s got those, called me up and he’s like, “I’m thinking about selling 50 of these things. Would you help me?” I said, “Sure. I will do whatever you need.” He goes, “I will talk back.” I go, “Cool.”

Three weeks went by and I called him up and said, “You never called me back.” He’s like, “The bank came back to me with 3.3% to 5% interest. I’m going to get $3 million out. I’m going to keep these.” Once you own a bunch of properties, you get to have choices. If you have a full-time job and you want to make a little bit of extra return, find someone like me and partner up. If you are reading this and you want to buy stuff, we could do that together.

It isn’t even an advertisement for Frank. I was thinking the same myself. I do have some residential exposure. Whenever I have residential exposure, it’s through Frank. The reason why is I’ve got a lot of shit going on. I’m doing this. I’ve got a consulting business. I’m involved in a tech startup. I have commercial real estate. I’m not an expert in RESI. I don’t have a construction team, a title team, the ability to vet deals, have the time, access to Frank’s leads, the ability to go fix it up or a property management team.

Let’s say I went and bought a $200,000 house somewhere and it was renting and I was like, “I’ve got some money. I wouldn’t put 90% debt on it and I had a little bit of a spread.” It would be such a pain in my ass. I wouldn’t know if I paid it right. If everything went wrong and I took a phone call, I would be pissed off that I bought that thing on my own. I would rather work with a good operator like Frank. Is it as profitable? No, it’s not. Let’s say Frank and I split it half and half whatever I go in with. Even then, it’s still a good return for me. It’s better than I could get in a bond or something different. I have exposure.

Also, I’m buying into Frank’s expertise and his team’s strength. They know how to buy right. He usually doesn’t buy poorly and they are good at executing. I don’t want to go out and learn the hard way how to buy real estate at the top of the market. I want to go partner with someone who already knows what they are doing. That’s why I invest for you.

Frank is not the only person out there that does this. If you know of someone who’s involved in residential real estate that’s good and has a team, ask the questions I would be asking. How do you acquire leads? What do you pay for those leads? What are their sources? How do you vet your deals? Tell me about your construction team and who you work with. Who’s your property management arm? How do you do that? What expertise do you have? The reason I invest with you is I know all of those things are covered and I will never have to deal with it.

If you are reading this and you want to invest with somebody, here’s the question you ask, “Show me a list of your last 50 properties.” “I have it up. I can show it to you in seconds.” If you are not a real operator, you are going to hear someone fumble around or they are going to give you a bunch of bullshit. “The only thing I might do is hide the profit column and I could send this to you in two minutes.” That’s a great question to ask.

Real Estate Business: Even in the down market, if you do this right, you can still make money.

 

You need to know like with any investment, what are you trying to do? My parents are 1031-ing something. My parents want a coupon. They want to know that every month, X number of dollars is going to show up in the bank. My dad wants to know. Every month, he shows up and goes, “Frank, what am I going to do with this?” I’m like, “Dad, buy it for me. I will manage it for you. I will make sure that money fucking gets there. If we run into problems, we will fix that.” He trusts me. It’s my parents. Ian and I have talked about this. His parents are in deals with us collectively and Ian. These are things you can do.

It’s a different asset class, Frank, but I have investors in all of the commercial properties that I’m in. We have talked about this and it happened by accident. People know that I’m already in the mix. When people invest with me, they want to return and they don’t want to spend a lot of time thinking about it. I send them a quarterly check and they know that I deal with every call from the tenant. I have a legal department that vetted it that underwrote the deal and that knows what they are talking about. I have a team that can go out and works on the property if I need to. I have the financials, the taxes, and all of that. All they’ve got to do is send me a check. They’ve got an equity piece.

When I sell that property down the road, they will get a chunk of it based on our agreement and get a percentage of the rent. I keep a percentage of the rent as a fee. They are okay with making less because they know that to make it all, they have to do all the shit I did, which is cold calling banks, finding deals, underwriting it, and spending a bunch of money to acquire the deal. They’ve got to deal with being the landlord and taking the phone calls from the tenant.

During COVID when they are all asking for a cut-off at the top, they don’t want to deal with that. They are okay with, “I will make 75% of what I can make doing all the stuff you did. I will let you have the other 25% because you are doing that.” They are happy. The investors that I have been happy with that return and the upside that real estate brings in the commercial.

Even in a down market, if you do this right, you can still make money. Ian and I were joking about how the rich keep getting richer. We are trying to join that crowd. I will call a friend that we do a bunch of deals over the year. He owns a staffing business. He has access to money. By simply looking at an email and then telling us, “I might be interested in this one.” He’s making an extra $300,000 or $400,000 a year. $300,000 or $400,000 a year is a ton of money. That puts you in the top 5% of salaries in the US. It’s very high. He’s doing that as a side hustle because he’s got access to money. He knows, “I could make more if I do this myself,” to Ian’s point. “I’m going to do fine keeping my eye on the ball over here and letting a pro do it over here.”

What is your time worth? If you love real estate and you want to go start, do it. If you want exposure to real estate, it’s a lot of time to do it yourself. It’s a lot of stress. It’s a lot on your shoulders. Is it worth it to make a little less and let someone else handle that stress and pressure that has a better organization? To me, the answer is yes. I learned a lot about how you look at it and how it would even get to the place where you say yes or no. The fact is we are frothy in the market and you are still finding great deals all over the place but you have a built-in advantage and that you have a solid and trained team.

I will close it out with this. I let the contract control the front end. I still control the back end if we are going to own something. The hard part about being an active investor and what you think is an otherwise frothy market is allowing your biases to tell you that something is not a deal. A good example of this is there’s a property on Bainbridge. It doesn’t matter. It’s a street. I bought something there for $17,000. It was a fallen down piece of crap. I resold it for $120,000 years later. I did nothing to it. I sold what I bought. Now things are on the corner going for $500,000.

The funny thing is at $500,000 with the right setup, it’s still papers. Even though it was $17,000 around the corner years ago, it’s still a good deal. If I could go back in 2009 and buy Apple, could I? Should I? Would I? I have a copy of the flux capacitor on my desk. I don’t have one except in a frame. What I have to look at now is, “Is it a good investment?” I can’t go backward. Amazon is still a good investment. Apple seems to be still a good investment. This particular house, although more expensive, is a good investment because in the right part of town, I know I can do these things with it. I know interest rates are low. It’s because I have all these things going for me, it’s a go.

I appreciate the insight into your empire, the empire of Cava Companies, Cava Worldwide, Cava Global.

It’s just Richmond.

It’s a great episode.

Thanks, Ian. It’s always a pleasure.

See you, Frankie.

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