JF1026: How to Make Money in a HOTTT Market
Mark and his team quit buying rentals in the Denver market and have 16 flips going on right now! From poor project managers to bad floor plans, hear Mark’s story of how he made it to where he is today. He also has a massive 250,000 sq. ft. project going on now, listen in for this one!
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Mark Ferguson Real Estate Background:
-Founder of Invest Four More, one of the top real estate blogs with over 100,000 visitors a month
-Over the last three years his real estate company has sold over 500 homes
-Avid Real Estate Investor, does 10-15 fix and flips a year and owns 15 long-term rentals
-Runs the Ferguson Team at Pro Realty, which has a team of 10
-Based in Greeley, Colorado
-Say hi to him at https://investfourmore.com/
Listen to last interview where he gave 6 tips to manage contractors successfully: https://joefairless.com/podcast/jf480-6-tips-to-manage-contractors-successfully-situationsaturday/
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Joe Fairless: Best Ever listeners, 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 fluff. I hope you’re having a best ever weekend.
Because it is Saturday, we’ve got a special segment for you call Situation Saturday, and here’s a situation… Our best ever guest is in a hot, hot market, therefore he has decided not to buy any more rentals and he’s focusing the majority of his efforts on flips. In fact, he has 16 flips going on right now. We’re gonna talk about that.
How are you doing, Mark Ferguson?
Mark Ferguson: I’m doing great. Thank you for having me on the show, Joe. I’m looking forward to it.
Joe Fairless: Yeah, my pleasure. Nice to have you back. A little bit about Mark… Holy cow, he was on episode — get ready for this… Episode 57! We’re in the thousands now. Man, I love my titles, but I think I was — maybe I had a couple beers after I wrote this title, but the title of your original episode was “Peek-a-Boo I See You: Overlooked Costs on Fix and Flips.” Wow… Then we interviewed you on episode 480: “Six Tips To Manage Contractors Successfully”, and today we’re gonna be talking about how to approach living in a hot market.
A little bit about Mark – he is the founder of Invest Four More, one of the top real estate blogs. He gets over 100,000 visitors a month. In the last three years his company sold over 500 homes. He is an avid real estate investor and he is based in Greeley, Colorado, which is just North of Denver, Colorado. With that being said, Mark, do you wanna give the Best Ever listeners a little bit more about your background and your focus?
Mark Ferguson: Right now, like I said, flipping is my focus. I started flipping in 2001 with my father, right after college. I think I’ve completed over 120 flips. I’ve got 14 rentals now. I sold a couple this last year, but I’ve bought 16 in total. I have a real estate team with six licensed agents.
My focus in real estate as an agent was REO and HUDS selling foreclosures, but those are gone in Colorado, so mostly I invest and my team sells houses. I love writing, I’ve published a few books… I keep myself busy, but always looking to do new things and keep things exciting.
Joe Fairless: A recent book that just came out is a book that you wrote with Jay Scott. What’s it called?
Mark Ferguson: It’s the book on negotiating real estate – Expert Strategies For Getting The Best Deals When Buying And Selling Investment Property. We wrote this book together; Jay si an awesome writer, awesome flipper and it’s just all about how to negotiate, how to get a great deal on real estate, and really negotiating anything.
Joe Fairless: One of the things I like about the book – I endorsed it and they said “Hey, we’ll mail you a copy” and I said “No, I wanna buy my own copy and I wanna support your cause”, because I love what you guys are doing; they gave me a sneak preview of the book with the manuscript. So I read through that, endorsed the book, and then I bought it, I’ve got it. Since then I’ve read through some of it, not all of it. One of the things I really like about that book are the real world stories that you two have put in there from your experiences as fix and flippers and real estate investors. I highly recommend going to get that book, Best Ever listeners.
Now let’s talk about living in a hot market and how you focus on now fix and flips. You just said that you’ve sold a couple of your rentals… Does that tie into the hot market thing?
Mark Ferguson: Yeah, for sure. I have a goal that I wrote out to buy 100 rentals in 10 years, starting a few years ago, and… Things change. You set these goals… I was not expecting the market to take off like it has. In 2011 our median price in my town was 110k, and now it’s approaching 280k. It is crazy. In the past, you could buy a house for 100k, put 20k of repairs into it, rent it for $1,200-$1,300. Our taxes are super low, which is nice here, but rents have not kept up with prices. Now you can buy a house for 200k, put 20k into it, and it might rent for $1,600. The cashflow does not make sense for rentals anymore here.
Joe Fairless: And out of the homes in your portfolio, why did you choose to sell those specific homes?
Mark Ferguson: When the market was getting tougher – in 2015 was when I bought my last rental, and the last few I bought I started to really stretch my criteria. I love single-family homes just below the median price range. I bought a college rental, I bought another property that had a really weird floor plan, it was really hard to rent, so since the market was doing so well, I’m like “Hey, I’ll sell a couple of my worst-performing rentals and the ones that I don’t like as well, and I’ll just keep the ones I really like, and I’ll use that money from the rentals I sold to just buy more flips and improve the flipping business.”
Joe Fairless: And the last question on that, and then we’ll focus on the flipping stuff… The weird floor plan – what did you learn from that that you can share with us so that we don’t do the same thing?
Mark Ferguson: It was a really good deal, I bought it for $88,000 in 2012, but it had no dining room. It had a really small living room, but no dining room. There wasn’t really a place to eat in the kitchen, and it took us like three months to rent the house in a market where it should have taken five days. It also had a weird addition where you had to walk through one bedroom to get to another bedroom… So it was sort of a four-bedroom, but not really; more like a three-bedroom. There were just some weird quirks about it where — I didn’t think about it at the time I bought it; I’m like, “Hey, it’s a great market for rentals… People will just rent it”, but it really caused some problems, and it caused a few problems trying to sell it, too.
That’s one thing I always look at now – when I buy a house, when I buy a rental, there must be some kind of place to sit down and eat, because if there’s not, it can cause some problems.
Joe Fairless: Now let’s talk about your focus… You’ve got 16 flips going on right now. You’re not buying any rentals… Are you doing these in Denver?
Mark Ferguson: They are all within about 35-40 miles of Greeley, where I’m from. I’m about 50 miles North of Denver, so I’m just outside the Denver market; I don’t quite get in there. And yeah, we’ve been anywhere from 15 to 19 flips at once so far in 2017.
Joe Fairless: Let’s talk about — how are you managing 16 flips right now, and how far away are they from driving distance from where you currently live, just to give us an idea?
Mark Ferguson: Most of them are within 10 miles of me, but there’s a few that are 30. But I would say 75% of the ones I have are within 10-15 miles, not too far away.
I hired a project manager a couple years ago to help me with my flips… Failed miserably.
Joe Fairless: Why?
Mark Ferguson: He was an ex-contractor, I thought he’d be perfect for the job, I liked him, but he just did not work. He would not do what I asked him, he would do his own thing, and we had some problems. I didn’t keep a good enough track managing him and making sure he’s doing things, so for a while there I took them over myself again, and then at the start of last year I hired Nicky, who’d worked with me for six years doing REO work to manage them, and she has been awesome. So she’s my project manager; she manages the contractors, finds new contractors, keeps track of expenses… There’s no way I could do this many flips on my own.
We kind of take turns driving around, looking at properties, and we also picked up a new program called Realty Pilot this year to manage everything: pictures, notes, bids, invoices… It’s all online in one place, and we’re not chasing down text messages and e-mails from six months ago to figure out what’s going on.
Joe Fairless: Who created that software program?
Mark Ferguson: It was a John Murray who was one of the best real estate agents in the country; he sold over 1,000 in a year a couple times. He created it with some other guys to help with REO listings for banks to manage foreclosures, and then he’s kind of opened it up to other investors too that manage their properties on it.
Joe Fairless: What are your main responsibilities right now? You’ve got Nicky, who — I love how you said Nicky, because it’s like “Oh, Nicky!” Well, I’ve never met Nicky, I don’t know who Nicky is, but okay, so we’ve got Nicky, who’s your project manager. What are you doing?
Mark Ferguson: I’m trying to focus on the things that I really love to do. I always say I’m addicted to buying houses, so I’m still out there driving, looking at deals if I’m buying it from a wholesaler or the MLS… Kind of managing some of our direct marketing stuff we’re trying to implement, and I love to be out in the field and get out of the office. So I’m really hands-on with buying properties. That’s what I love to do.
I’ll also go out there and shoot videos of them before and after to put on the blog, and different things. And I like writing, too. I’ll write all the articles still on my site, I like creating the books… My main focus now is buying houses, high-level management over the team, and the writing side of it.
Joe Fairless: You switched from buying properties to fixing and flipping the properties… What indicators – and you mentioned the median home prices – are you keeping track of so that you know when to switch back to buying properties for rentals?
Mark Ferguson: Whenever I bought rentals, I’ve always looked at cashflow first. I’ve always wanted to make at least 15% cash-on-cash return after paying all the expenses – maintenance, vacancies and all of those allowances. So when I couldn’t get that anymore, I started to take a really hard look at my market and if I wanted to buy rentals here. Prices have shot up since then even too, and I don’t know if we’re ever gonna get back to that really, in my market. So what I’ve done instead of kind of sitting around waiting for this market to change is I have looked at other markets like Florida, and I’ve also looked at different property classes here, like commercial.
Multifamily is crazy expensive here for residential, but there’s some opportunity here on commercial, like true industrial properties, warehouses, and I actually have a 2.4 million dollar property under contract right now… I just got it yesterday.
Joe Fairless: Congratulations!
Mark Ferguson: Yeah… It’s a bit out of my comfort zone. That will be my project for the next couple months here.
Joe Fairless: What can you tell us about it?
Mark Ferguson: It’s a 250,000 square foot old Hewlett Packard manufacturing plant…
Joe Fairless: Oh my gosh, you’re going all in on the stretching your comfort zone…
Mark Ferguson: It’s been vacant for 12 years, but it’s right in the path of growth, and my plan is to get a few investors in it with me, split it up into smaller spaces and lease out 5,000-10,000 square foot spaces to individual businesses, and kind of revitalize the property. They’re building a new McDonald’s, new banks, new health centers all around it. It’s a big project, but it should be fun.
Joe Fairless: How do you plan on getting financing for that?
Mark Ferguson: I’ve talked to some banks. Some banks are willing to do a part of it, and then I have one partner already and I’m hoping to get maybe two or three other partners to chip in. It’s gonna need probably almost two million dollars in repairs and renovation. So that’s the challenge right now – I wanted to get it under contract before I open my mouth up too much about it around town, and now that I’ve got it under contract, it’s time to get to work.
Joe Fairless: A couple questions… How long do you have until you need to close, and do you have an out clause so that if doomsday happens and you aren’t able to get bank financing or equity partners, then you can escape out without losing a lot of money.
Mark Ferguson: I have 85 days for my inspection and due diligence, and it’s 50k in earnest money. So I can get that back… Basically, I have three months to figure it all out. I have an extension clause too, where I can pay another $50,000 for another 90 days, but then that is non-refundable. So I’ve got about three months to figure it all out.
Joe Fairless: And your 50k earnest money is refundable within those 85 days?
Mark Ferguson: Correct.
Joe Fairless: So why not, right? [laughs] I’m used to putting offers in Texas where the day I put the offer in and it gets accepted it’s non-refundable, like six-figure style, so that’s where I’m like, “Well, shoot…!” [laughs]
Mark Ferguson: A little stressful…
Joe Fairless: Yeah, exactly. Okay, good stuff. And what do you think — after you put in two million… So you’ll be all-in roughly 4.4 million, what will it be worth?
Mark Ferguson: If you get it fully leased out, it sounds crazy, but it’s probably a 12-17 million dollar building. Cap rates here are super low for commercial. It would bring in close to two million gross a year before expenses, and probably a million after, being conservative on those numbers. There’s no space for lease here, that’s the thing… There’s so little space for lease…
Joe Fairless: How long do you expect the project to take to get to that point?
Mark Ferguson: At least two years probably to get all the way there… Maybe longer. But I figured if you start small and start building one space at a time, you can get it partially leased maybe six months, and then kind of slowly lease it out over the next year or two.
Joe Fairless: That’s gonna be a major focus of yours.
Mark Ferguson: Oh, yes. [laughter]
Joe Fairless: What do you see for your role and your other equity partners’ role in the deal?
Mark Ferguson: I wanna set it up so that I have complete control. I’m a bit of a control freak and I think in a project like this one of the biggest dangers is having too many cooks in the kitchen and people not agreeing. I wanna set it up where I have complete control, I have the majority of the equity and then maybe two or three partners have between 30%-45% of the equity together, in that range… Depending on how much investment they have. So that’s my plan right now.
Joe Fairless: What about this project — is this the largest transaction for your personally to spearhead?
Mark Ferguson: By like five times.
Joe Fairless: By five times, okay. What gave you the confidence to go five times larger than what you’ve previously done?
Mark Ferguson: I’ve been looking at commercial for a year and a half now just because there was no residential for me. I knew nothing about commercial before I started looking at it, and when I saw some of these properties, there was another one I was interested in at 2.5 million which was in much better shape, half the size, but I saw it was under rented and half the space was vacant. It’s kind of like the apartment building that you, where if it’s mismanaged there’s so much potential to increase value and increase rents, and I saw that potential in these commercial places, and I’m like “Man, I really wanna look into this more.” So I just kept looking for a few properties…
Most of this stuff was so expensive it just didn’t make sense, but then there’s a couple properties that need work, and this one is actually off market; it wasn’t listed. So there was just a huge opportunity there that I think is pretty rare to find.
Joe Fairless: Why wasn’t it listed if it’s completely vacant?
Mark Ferguson: It’s got a crazy story. Hewlett Packard left in 2001. They sold it to a group of investors; at that time it was 145 acres with this building, and those investors paid 8 million for it. They lost a ton of money, ended up selling it to another investor in a couple years for like 6 million… So it got a really bad stigma about it being a losing deal.
The new investors went through, split up the land, sold off the land, one acre to McDonald’s, one acre to a car wash, one acre to a bank… To get a subdivision for multifamily, another one for single-family… They made all their money back just selling off this land, so they’ve been concentrating on that for like the last five years and just left this property sitting there. Everyone who’s owned it has wanted to put one big, giant user in there, and I think that was their big mistake. There’s not many people who want 250,000 square feet in a dilapidated building [unintelligible [00:18:06].16]
I think splitting it up is gonna make it so much more valuable and make it much easier to rent. And I don’t know why they didn’t list it. I would have…
Joe Fairless: How many acres?
Mark Ferguson: 19,5, and it comes with about $500,000 in water too with it.
Joe Fairless: What do you mean by that?
Mark Ferguson: 13 acre feet of water to water the land, and then a three-inch water tap. Water in Colorado is so expensive, so if you were to sell that water on its own, it would be worth probably around $400,000-$500,000.
Joe Fairless: You’re speaking in a language that I don’t know what you’re talking about… So you said it comes with $500,000 of water in it. Is that a reserve, or what is that?
Mark Ferguson: It’s just water that’s been allocated to that property. Water is so expensive in Colorado… If you wanna build a new house, you’re probably gonna pay $40,000 for a water tap, just for one single-family house. We’re kind of top of the mountain where there’s nobody above us where water comes; we’re in a very dry climate, so it’s very valuable. If you have water with land, you can sell that water separate from the land. If you have water rights to a certain ditch or to a lake, you can sell that water. Then if you build any kind of subdivision in the town, you have to have a certain amount of water allocated to it or buy water, so that you can have water available for the houses. It’s very complicated, I’m just learning all about it now, but you have to have water to be able to develop here, and it’s very expensive.
Joe Fairless: Now I’m understanding the parallels, because I am from Texas. When you say “water rights”, now I’m thinking of your oil or gas rights with your property, and that’s an apples to apples comparison. Now I get it.
Mark Ferguson: Yeah, very similar.
Joe Fairless: Okay, cool. Besides the equity and the debt partners, I imagine you’ve got an architect… Who are the team members that you need to fill out your team?
Mark Ferguson: Honestly, I have been very quiet about this. Because it wasn’t listed, it wasn’t on the market, I didn’t want to let anybody else sneak into it. So there are a couple huge, massive commercial contractors in my town: Roche Construction [unintelligible [00:20:12].23] are both headquartered here, so there’s a couple people I can talk to there. I’m actually building a charter school right next to this property where Roche Construction’s working on it, so there’s a couple contractors there I can talk to that I wanna get involved. I don’t have an architect yet… It was kind of a seat-of-the-pants, get it under contract, and now the time comes to run like crazy and figure everything else out.
Joe Fairless: Besides their names though, just like the actual titles or responsibilities – you need an architect, you need general contractors… Who else are the main team member roles?
Mark Ferguson: I’m an agent myself, but I used a commercial agent in town to do this deal for me, so he’s a big part of it, because I knew that wasn’t my specialty. He’s got a ton of connections; he’s kind of been a huge help on figuring out lease rates potential. So the commercial agent was huge. The lender, of course… There’s a couple of banks in town I’ve discussed this with and they’re both like “Well, get it under contract and we can talk more.” So banks are huge, the contractor, as you say, is gonna be huge… Those are the main players: the banks, the contractor, the agent, and the architect, designer… It’s not gonna be crazy complicated for designing, so I don’t think that’ll be a huge problem, but a big thing will be the electric, the heat, getting all that working and set up right.
Joe Fairless: When doing an inspection — and again, not the actual person’s name, but how do you find the right inspectors?
Mark Ferguson: I think on something like this I would go to the contractor, because there aren’t exactly inspectors out there who specialize in buildings like these, especially in this area. But I think I would have the contractor go through it with me, and then I actually have a contact for the person who used to manage all the maintenance on this property for 20 years, so I can get some inside information from him on the pros, cons of the building and what to look out for.
Joe Fairless: Yeah, for better or worse you know that person, because considering the state that it’s in now… Alright. Well, this has been a conversation that took a couple of twists and turns that I didn’t anticipate, but I’m glad that they did. What else, if anything, would you like to share as it relates to either your approach now as an investor in a hot market – which really the 2.4 million dollar property ties into that… So anything else that you’d like to discuss as it relates to being in a hot market and shifting your focus?
Mark Ferguson: I would just say we’re focusing on the flips now, but I see a lot of investors who in a hot market kind of pay higher prices, assuming the market will continue to get hotter and hotter; I’ve never liked that philosophy, I think that can get you into trouble. When we are flipping, I’m still looking at the current market’s prices for my ARV. I’m not assuming it’s gonna go up; I’m still very conservative, very careful to protect myself, because you never know how long that market’s gonna be hot, and things can cool down in a hurry.
Joe Fairless: Well, thank you for being on the show, Mark. This has truly been a lesson in how to shift our focus when we live or are investing in a hot market; instead of buying buy and hold properties, you are fixing and flipping, taking that cash… I assume you’re probably putting a decent chunk of it in this 2.4 million dollar property, but then also the shift in the focus as you talked about earlier with this 2.4 million dollar property. This is gonna be a major project for you. It sounds like it’s got some incredible potential, and I’m glad that you walked us through the thought process for why you got it under contract and now what you’re gonna be doing moving forward to asses out the situation and qualify it while you have the 85 days of due diligence.
Thanks for being on the show. I hope you have a best ever weekend, Mark, and we’ll talk to you soon.
Mark Ferguson: Sounds great. Thanks for having me, Joe.
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