JF1558: Championship Level Rehabs For Better Returns #SituationSaturday with Michael Jordan

Best Ever Tweet:

Michael Jordan Real Estate Background:

• Entrepreneur since 1999, over $100,000,000 in total business transactions
• Has successfully done multiple different real estate strategies including: renovations, building homes, buy and hold rentals, turkey provider, buying NPN’s, property management, wholesaling, and more
• Based in Detroit, MI
• Say hi to him at http://strategyproperties.com/

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

First off, I hope you’re having a best ever weekend. Because today is Saturday we’ve got a special segment for you called Situation Saturday, and here’s the situation – you’ve got a single-family house or you’re looking at a single-family house, and you need to renovate that puppy. Today our Best Ever guest, Michael Jordan, is gonna talk about the keys to successful renovations. First off, how are you doing, Michael?

Michael Jordan: I’m very well, thank you, Joe… And thank you for having me on your wonderful podcast.

Joe Fairless: Well, it’s my pleasure, and looking forward to our conversation. Michael has been an entrepreneur since 1999, he’s got over 100 million dollars in total business transactions, he has successfully done multiple real estate strategies, including renovations, building homes, buying and holding rentals, he’s a turnkey provider, non-performing notes, property management, wholesaling and a bunch more… Based in Detroit, Michigan.

I’ve met Michael a couple years ago at our conference (BestEverConference.com) in Denver, stayed in touch, and he is certainly an active player in the real estate world. Today we’re gonna be talking about the keys to successful renovations. First though, Michael, do you wanna give the Best Ever listeners just a little bit of context about your background and your experience within the renovation world?

Michael Jordan: Yeah, absolutely. I started out in 1999 and I was a contractor; I basically was running a contracting company, doing sales to property management companies, and handling their renovations. From there, it evolved into me being a real estate investor. I became an accidental landlord, and from there it was something that I loved, the real estate world and the investing world, and I put in my construction knowledge into the real estate investing world, and it paired very well for me.

That’s a little bit of background on my construction… I have roughly 19 years in that industry, and it’s something that there has been a lot of ups and downs, that maybe at some point today or at some other time I can share with you guys, as far as dealing with contractors and projects… But that is my experience in the construction world.

Joe Fairless: We’ll talk about keys to a successful renovation on a single-family house. What is the type of single-family house that you typically renovate? Can you describe it?

Michael Jordan: The typical single-family home that I would renovate is one that I buy as a REO from a bank, or a vacant home, that really needs to be renovated from A to Z – roof, windows, kitchen, bathroom, update electrical, update the plumbing, HVAC… So you’re doing the whole nine years. And when you’re in a project like that, it’s very important as a real estate investor to assess the project properly, from the standpoint of knowing what you do and don’t have to do in that home, and understanding the pricing, the timeframe… Everything is a key component in being successful in that renovation, and it all starts out by doing what we call “a pre-scope of work.” We call it “pre-purchase scope of work” because we go in there and we assess what needs to be done, and we can’t spend too much time on that, because we don’t know if we’re gonna get the home as a real estate investor or not. So we’re gonna be in there for 15 minutes and we’re gonna have a rough budget. Our rough budget should eventually be very close – within 10% – of our actual scope of work, which is a detailed scope of work. Hopefully that answers your question, but that is something that is a very important part of any project – knowing what needs to be done and have an accurate cost.

Joe Fairless: Before you enter the property to do the 15-minute walkthrough, what work (if any) is completed prior to that walkthrough?

Michael Jordan: I would say prior to that walkthrough we just know about the location-location-location. That’s what we’re going off of. We know that our average interior renovation is gonna cost approximately $25-$30 a square foot. That’s our approximate price to renovate a home from A to Z, and that’s what we’re working off of. Now, if we go in there and we find that there is a lot less work than we expected – there’s hardwood floors that look great, and there is a new kitchen that was put in there, which is very doubtful, obviously that number comes down. But when we’re looking at a home, we’re always gonna write an estimate, and we’re looking at it from, “Okay, let’s start off with that $25-$30/square foot number, and let’s either come down or possibly go up from there.”

We’ve been into homes where the walls have been gutted and there was no drywall up or installation, and it’s like almost a complete new home when we’re done.

Joe Fairless: That $25-$30/square foot – does that include your labor costs?

Michael Jordan: Yeah, that does. What we do is we are constantly — one of the biggest challenges that I think most real estate investors have is finding the right crews to do their work. What we do is we’re constantly recruiting, and we have to recruit crews that not only do good quality work, but that can meet our pricing. That is a challenge. So we really have to always be on the hunt for new contractors, and contractors that can work with us. And just the nature of our business – we’re gonna lose 10% of our contractors every month or so, just because that’s the nature of the business. They’ve got another bigger job, or they dropped off because they don’t have enough workers now… That’s what happens.

But we find that a way to combat that is to constantly recruit, and also to have in-house direct labor, labor that works for us on an hourly basis, or a salary basis. That’s a way that we combat getting hurt by crews that leave us or that don’t perform.

Joe Fairless: So you’ll know the location very well prior to doing the 15-minute walkthrough… How does that influence what your actual scope of work cost is, knowing the location?

Michael Jordan: We’re gonna look at comparables in the area – what’s the market going for? How much is the rental rate? What are the taxes? What are the trends in the area? Is it an inclining area? Is it an area that is stabilized out, where there’s not growth nor decline? Is it an area where there’s a lot of development going on, where we expect there to be appreciation on the value of the home and on the rent? That’s the homework that we do prior to getting to the home, and understanding the rough costs of a renovation.

Dependent on the area… Some areas call for — for example Royal Oak, Michigan, which is a very popular area… That area calls for more of — there’s finishes that are more desirable in that area, that we feel that more homeowners and renters like, so that’ll affect material prices, and then that also might affect our scope writing and our cost of the project.

Joe Fairless: You’ve done your research on the location, and now you have just pulled up to the subject property, and you’re about to do your 15-minute walkthrough… Walk us through what you’re looking for in a house, and your thought process, and where you’re writing it down, in just as much detail as possible, please.

Michael Jordan: Well, I would say what we’re looking for in a house is 1) we’re going in there and we’re taking a look at the cosmetics. We’re looking at the floors, the walls; can we move any walls to make it more of an open concept, or give a better layout there? Two of the main items that we look at are the kitchen and the bathrooms. We’re seeing “Okay, what can we do to make this look nicer, increase the size, make a better layout?” And then we’re going into the mechanicals – electrical, the plumbing, the HVAC.

Once we get through cosmetics – the floor, the walls, the kitchen, the bathroom, the electrical, mechanical and plumbing, then we’re taking a look at the windows, the roof, the driveway, and then safety and structure. Because we wanna make sure that every home that we complete compliance with the city code and ordinance, so we can get a city certificate of occupancy.

Joe Fairless: How do you do that in 15 minutes, and what part of what you’ve just talked about takes up the most amount of time?

Michael Jordan: I would say how we do that in 15 minutes is training, training and training. To me, I love it when people actually do a walkthrough with me. When I say 15 minutes, it might be 20 minutes. I’m just giving you a roundabout timeline. Just being so used to have in your eye, look at the main items that you’re looking for.

We also have assessment sheets, which help us go through it line by line what needs to be checked off or inputted into that sheet, to make sure we cover everything from A to Z.

I would say the scariest factor that anyone around the country can come across in a house is a foundation issue. Everything could be fixed; a kitchen could be changed out, cabinets can be changed out… All that good stuff that’s not going to be tremendously costly versus what [unintelligible [00:11:53].28] but if you miss a foundation issue – you miss a bowing wall, you miss a crack in the foundation that is really having the foundation sink… Those are major, major items.

I don’t wanna be going away from your question too much, but to answer your question, it’s really having that experience. I’ve probably been through maybe 5,000-6,000 houses, if not more, myself; my team has been through thousands of houses. We’ve been through so many of these things, and we knew where we’ve gotten bit in the past. My biggest losses have been from foundation issues that we’ve had to cure.

Going back to your question about how could it be so quick – well, first of all, we have to make it quick, because if we’re gonna buy homes, then we’re gonna take a look at 15-20 homes a day that we’re offering on, and scoping on, and doing all that stuff. We have to be time efficient, and it just comes with experience.

It’s not that someone that hasn’t done that that many times can’t learn – they can; that’s where I always tell real estate investors that wanna get into flipping… Some wholesalers wanna get into flipping, they wanna maximize their money there, and I tell them “You really first have to start off by you being an expert on pricing.” And don’t just count on the contractor, because you can take  a contractor out there, that you can rely on, but that contractor can disappear after a week, a month, a year or whatever it may be.

You have to be the pricing expert. You have to have more than one contractor to be able to come out there and finish the job. That’s why I look at educating oneself on how to write a scope of work and the proper pricing as one of the most crucial elements in becoming a good flipper and a good single-family home real estate investor.

Joe Fairless: The categories of cosmetics is one, kitchen bathrooms, two; mechanicals, three; miscellaneous stuff like windows, roof, driveway, four, and safety and structure, five. With those five categories, which one of those you look at it and you’re like “Pf, whatever. Let’s move on. I got this. I can handle really anything that comes my way.”

You mentioned foundation is the big one, that you don’t wanna mess up on, but which one of those five is like “Pf, whatever… Let’s do this. Easy.”

Michael Jordan: Painting and flooring. So easy.

Joe Fairless: Cosmetics?

Michael Jordan: Yeah, cosmetics. I think that I can bid the cosmetics off of a picture. Someone might say, “Well, you might have missed a hole in the wall.” It’s drywall, it’s not a big deal. It can be patched. It’s an item that’s gonna take you an hour to fix. So that’s the easiest one right there.

Joe Fairless: Well, within cosmetics, you mentioned “Can we move walls to make it a more open concept?”, how do you determine that?

Michael Jordan: Well, first of all, you wanna make sure that the wall is not load-bearing. And to do that, you wanna have some experience to know where the beams are placed, and to make sure that you can move those walls. That’s number one.

Number two, you’ve gotta have a vision from the standpoint of understanding what the benefits are to opening up those walls, because to do demo on a wall does take much time. But if you demo a wall and it shouldn’t have been demo-ed, you could also mess up the layout. So it really has to be someone that has that good vision, that quick vision.

I walked into a home with a wholesaler, probably around six or eight months ago, and I walked in and I told him — the home was around $250,000 potential ARV, and he was looking to wholesale it for $70,000 or $80,000… But there was a lot more work than our typical home. And the first thing when I walked in there, I’m like “Yeah, I would knock this wall out”, and he said “Man, how did you know that so quick?” I said, “Because there’s no purpose of this wall here. It actually gives you the vision of a smaller home. It gives you a more compressed look. It doesn’t benefit the layout in any factor, whereas if you took this wall out, you’ve got a more open floor plan, you’ve got a visual that is just much more appealing to anyone. And why it was placed here in the first place? I don’t know.” Maybe in the ’50s, ’60s, ’70s there was more [unintelligible [00:16:04].16] I don’t know, but for me, I just look at it from the standpoint of “What are the majority of people going to like? What are the majority of owners that are gonna buy this home going to like? What are the majority of tenants going to like?” That’s where I learned what they liked, and I kind of go off with that.

Joe Fairless: Going back to “know where the beams are placed, to determine if it’s a load-bearing wall or not”, how do you know that?

Michael Jordan: There’s tools; you could bring tools along to see if it’s a load-bearing beam, and if you can remove that wall. If you’re that good, you could pretty much knock on that wall and see if it’s hallow or if there’s a beam in there. That’s just also experience too, but there’s ways that we teach people to take a look if it’s a load-bearing beam or not and determine that.

Joe Fairless: Anything else as it relates to keys to successful renovation that we haven’t talked about, that you think we should?

Michael Jordan: Sure, absolutely. I would say that the keys to successful renovations also comes with a couple other parts. Number one is knowing the materials you’re gonna use and the costs of the materials you’re gonna use. A lot of people get started with the renovation and they actually finish the renovation, but they end up realizing that they weren’t as profitable as they should have been, because they maybe went overboard on materials, maybe they didn’t buy the materials at the right stores, where they could have got better discounts, they didn’t scope out the proper materials, that would give the same results as the more expensive materials, and they didn’t know how to color-coordinate things properly, and the home sold for less because they used the wrong color coordinations.

So materials is a huge factor in flipping homes, and I tell any investors that are out there – I know that everyone has watched the HGTV shows and whatnot, with them going through materials and whatnot… There is big reality to that. I would say that color-matching, proper materials are very important, but know your area, know your comps, know what your home is gonna sell for, and know what you can afford from the get-go with your materials. That’s one of the two other items I was gonna speak about.

The second item, which I spoke about earlier, is having the right contractor on your site. The right contractor doing a renovation means someone that you’ve seen their work, you have referrals from them, you know that they’re someone that can abide by a contract that is very reasonable for them to complete a home, and someone that their pricing is very competitive. I don’t recommend using contractors that don’t do work with their own hands, because that will defeat the purpose of what we as real estate investors are trying to do, and that is to be as profitable as possible.

I feel that that contractor that is a company, and has an office, and [unintelligible [00:19:11].19] eats into the profit by 30%-40% higher prices on the construction. So I recommend having smaller crews – you have your electrician, your plumber, your HVAC guy, your painter, your flooring guy… And just cut up the job.

Sometimes people feel that they just have to hire a contractor that does everything. Sure, that’s possible, you can do that, but cutting up the job also works really well if you plan it the right way.

Joe Fairless: You’ve done renovations for a long time… What is one mistake that you’ve made recently that you can share with us, on a renovation?

Michael Jordan: One mistake that I’ve made recently on a renovation I would say would be not saving hardwood floors because we thought the stains were just that bad on them… Because sometimes over the years people have pets, and there’s urine stains and whatnot that the pets create on the floor, and us going through there and figuring out another flooring option… Whereas now we realize throughout time – and I don’t think this was even recent; this was maybe something like last year. We realize over time that imperfections on floors are sometimes beautiful, so you can use different color stains to hide some of those imperfections and make it look like it’s part of the age of the floor, or going with a solid color, not stained, but pain that sits on top of it and looks wonderful. So I think one of the bigger mistakes that I’ve seen in the last year or so was us sometimes reverting to alternate flooring when we already have great flooring there.

Joe Fairless: How can the Best Ever listeners get in touch with you and learn more about what you’ve got going on?

Michael Jordan: Well, my name is Michael Jordan, I’m with Strategy Properties. You can visit us on my website, at StrategyProperties.com. You could also reach us at 734-224-5454. We’d be more than happy to give advice. We’ve been doing some training on renovations and how to handle renovations from A to Z, and teaming up with some people to do simulation renovations for them to go through a project with us, for them to learn the ins and outs of it before they go out on their own and do it in whatever state they’re in… So I hope that we’ve provided some good information to people, they could use it in their renovation projects to be successful, and that’s our goal on this podcast today.

Joe Fairless: Yeah, that would be a fun and worthwhile experience to go through for anyone who’s in the value-add business, so… That sounds really good.

Thank you so much for being on the show, talking about your approach, your pre-purchase scope of work, what you do, then the 15-minute walkthrough, the different categories of items that you look for… The one that could bite you real hard – the foundation – and other stuff that is just easy to address, like cosmetics… As well as talking about how you wanna make sure — what materials you’re using, what the cost is of those materials, and then getting deeper there. We didn’t have time to get into too many details there, but you went through that, as well as having the right contractor on your site, and having a backup option… And ultimately being an expert on pricing, so that when – not if, but when – a contractor does leave in the middle of the night, with the project halfway done, you know how to take it from there.

Thanks for being on the show. I hope you have a best ever weekend. I enjoyed it, and we’ll talk to you soon.

Michael Jordan: Thank you, Joe. I appreciate you having me on the show, and have a great weekend. Thank you.