JF2491: Restrategizing After a $2M Loss with Lee Kearney
After accidentally making $30K on his first deal, Lee Kearney was immediately hooked and started researching his next investment. However, when 2007 hit, he realized the market wasn’t the problem and he started working on a new strategy. Lee discusses his strategy in-depth and how he came back from a $2M loss, what to look out for in the current market, and his biggest takeaways from working with a hedge fund.
Lee Kearney Real Estate Background:
- CEO of Southeast Property Investments Network (SPIN) & Real Advisors
- 16 years of real estate investing experience
- 7,000 single-family houses flipped
- Based in Tampa, FL
- Say hi to him at: http://www.spincompanies.com/
- Best Ever Book: Traction
Click here to know more about our sponsors:
Theo Hicks: Hello, Best Ever Listeners, and welcome to the Best Real Estate Investing Advice Ever Show. I’m Theo Hicks and today we’ll be speaking with Lee Kearney.
Lee, how are you doing today?
Lee Kearney: Doing great.
Theo Hicks: Thanks for joining us, looking forward to our conversation. A little bit about Lee—He is the CEO of Southeast Property Investments Network, aka SPIN, and Real Advisors. He has 16 years of real estate investing experience and he’s done 7,000 single-family flips. He is based in Tampa, Florida, and his website is https://www.spincompanies.com/.
So Lee, do you mind telling us some more about your background and what you’re focused on today?
Lee Kearney: Sure. I got involved in real estate actually by accident in 2003. I bought a condo back in Ireland, I moved into it, got broken into about a month later – I guess the kids were pushing all the buttons to see who is home, and then would break into the ones that didn’t answer.
So I just felt uncomfortable living there, I put the property on the market and actually made, after agent fees, about $30,000. This is back in Ireland. So I realized as I looked at my job and I looked at what I just sold, the property that I bought and sold it by accident, I’d made more money on the property. So that’s when the light bulb went off for me and I said, “There’s something to this real estate thing, I need to really explore this.”
So 2004, I moved out to California and coincidentally found a coach. What I would say to you and everybody else, just asked a lot of questions. So I talked to a guy at church, he rehabbed houses, I followed him around, helped him load up supplies. He showed me where to buy, what price point, what to rehab, what not to rehab, kind of how to fix up the house to maximize value and get curb appeal up.
So I followed the formula to a tee. It took me four months to find my first house, going to school by day, maybe some snowboarding by day, since Southern California, [unintelligible [00:02:24].16] there in Cal State San Bernardino. And so I bought my first property in San Bernardino, it took four months after really driving around and trying to find that perfect price point. Probate, I think about 35,000; that deal was sitting right outside my office. And it’s a reminder of my very first intentional deal.
Did a second deal on California, moved back to Florida while I was still rehabbing it and that was a mess, somehow stumbled through making a profit. Kind of like today, it was a forgiving market back then, so I still made a profit on that second intentional deal.
Moved to Tampa, started asking a bunch of questions, and my friend’s father was buying through foreclosure auction. So I said, “What is a foreclosure auction? What is the courthouse steps?” All the questions that now are dumb, but back then weren’t dumb at all. And I somehow stumbled into being an auction buyer, quickly realized I have a skill set for this and became one of the biggest buyers over the next two years in Hillsborough County, expanded into other counties. And stuff wasn’t online, so it was difficult; multiple headsets trying to control multiple bidders at multiple auctions, but did really, really well.
Then 2007 came, did not have a mentor, and hit the wall. I was overleveraged, my rentals were losing money, my flips were losing money, and I burned through a couple million bucks. I made and lost a couple million bucks, was back to zero, said, “Oh boy, what do I do?” It was a depressing time. I just got off my honeymoon at the time where — I was married to my wife, and I looked at her and I said, “We’re broke.” Got off the honeymoon and I said, “We’re absolutely broke.” So we did short sales on all of our rentals, liquidated the flips and essentially had to figure out what to do.
So I decided at that point I didn’t—I wasn’t going to make that mistake again, so I really sought out a couple mentors. My first mentor was my first lender, actually, in 2005. He was a good friend, he had referred this guy, he funded $100,000 no questions asked, literally in hours. And I said, “Who is this guy? This is incredible.”
So I found out really quickly that the market wasn’t the problem, it was my strategy. So what I was doing was using the wrong strategy at the wrong time, and you can’t beat the real estate market. The real estate market’s like a tidal wave, you’ve got to figure out how to go with it, and not try to fight it.
And I realized quickly that the strategy I should have been engaging in a risky market or even a downward market is wholesaling. You’re passing the risk 100% to the buyer. So I flipped very quickly to wholesaling. My other mentor just told me after I complained about losing a couple million bucks and how I was broke, he said, ”Just sell your way out”, and so I did. So I got all into wholesaling, figured out who the suppliers were at the time; it was the bank, because the homeowners were all underwater. And for the next couple of years I just really put the pedal down on wholesaling. In fact, my first year I did about a million bucks, solo operator, just wholesaling houses. It was a hustle, it was a grind, but it was fun. Money was just coming back to my bank account, I wasn’t investing in real estate per se, I was just tying up properties for small escrow deposits, and three, four, five, 10X-ing my money in some cases.
And so that was a very, very profitable model, it made a ton of sense at the time. Then I got back on my feet, I was able to get into rehabbing, became an operator for a hedge fund for about a year, I helped them buy tens of millions of dollars worth the property.
And so now as I look back, it’s several thousand deals, several hundred million dollars in real estate, and it’s just one of three companies that I run; so it has its place, I spend about 20 hours a week in real estate. I think right now we’re at an artificial high, so I’m not interested in buying holding today, but it’s a great flippers market.
Theo Hicks: So you mentioned that during the last recession you transitioned into wholesaling. I know technically, a recession started I think in February of 2020… So you kind of already hinted at this, but did you make a change then? And what was that? And how long did you plan on continuing to do that before you shift back to buying and holding?
Lee Kearney: So right now, I believe we would actually be in the next market cycle. But COVID came, government intervention came… So I’m really looking at today’s market, and I’ve sought out my mentors’ advice on this… And although we should have been at the end of the cycle, although affordability is out the window, low rates and lack of supply caused prices to continue to rise. It’s insane.
So what I’m looking at here is a situation where I have to watch and wait. There’s an element of watching waiting. “The party’s fun until the music stops” and that’s what my mentor told me. When the music stops, everybody’s scrambling for a chair, but it doesn’t look like the music’s going to stop for another couple of years.
But that still doesn’t change the fact that there’s millions of people seriously delinquent on their mortgage. It doesn’t change the fact that there is just serious problems. They’re serious problems. There’s 20% of renters — there’s this statistic I just looked up for a presentation; 20% of renters are not paying their mortgage. That’s an estimate. That’s not even counting the people they don’t know. But again, if you just took that 20%, there’s several million people in this country that are 90 day DQ on their mortgage.
So for me, it’s hard to imagine that all of this stuff is not going to catch up. We haven’t even talked about unemployment. We haven’t even talked about the stock market. We haven’t talked about inflation. There’s a lot of issues. It definitely appears that the bubble is going to burst.
But in real estate, if we just took real estate by itself, based on lack of supply and now pent-up demand, pricing should be stable for the next couple of years. But a shift in the stock market which we saw when COVID hit back in March, I saw that the market got chopped by a third, I also saw lending pulled off the table overnight.
So that’s why I say, “The party should continue.” That’s what the book says, but the data showed really, really clearly that we are at the top. Are we at the top-top? Is it going to go a little bit more? Maybe. Is it going to go down slightly? Maybe. But it’s nowhere near the bottom. We’ve had a tremendous climb in real estate since 2012, especially since single family has been institutionalized. And now it’s been securitized, it’s—not only does Wall Street own the paper, Wall Street owns the asset, too. So it’s a different ballgame, this cycle.
But I really believe the strategy is to get in and out of deals, it’s to stack cash, it’s to understand how to consistently buy below wholesale. I teach my students not only to buy at wholesale, how do you buy below wholesale? Because that way, you have an option in any market; you can wholesale it, you can wholetail it, you could do a light rehab, you can do a full-rehab, you can keep it as a rental and get you all your cash out. If you know how to buy below wholesale consistently, you can survive any market cycle.
Theo Hicks: Well, what are some tips on how we can buy below wholesale; ideally your secret sauce, but if not, maybe not so secret sauce.
Lee Kearney: It’s not so secret, I talk about this a lot. The key is to figure out who your seller is. And the seller that we want is the most distressed seller that’s able to sell their property. Now, just to kind of take a trip down memory lane, 2005 to 2007, that was the homeowner, while prices were still high. As soon as foreclosures started hitting and prices went the other way, the seller that could sell and needed to sell was the bank; then that continued for several years. And even with a lot of the states with foreclosures that drag out for years like Florida, that trend continued; then it shifted to auction platforms. So rather than buying at the auction, they shifted to auction platforms, because they wanted to not list the properties traditionally on the MLS, instead they wanted to list them on auction properties. So we bought a lot of properties from auction.com, Zillow, Hudson & Marshal, places like that.
Then prices start to decline, people get equity again, foreclosures are drying up… So then we shifted back to buying from the seller. So it’s funny, when I take that trip down memory lane, what it reminds me of right now is I’m back in 2005; I’m back buying from homeowners. I’m buying some auction properties. The difference, why we’re not buying a lot of auctions, the competition is fierce. There’s a really lack of supply and we can’t effectively compete and make the kind of margins we want. So we’re not buying at the auction, even though the resale price is strong, but we are buying from homeowners, because pricing is high, and we just trace the distressed homeowners. So we look for a homeowner that has some kind of distress – court enforcement, divorce, death, a trashed property, a tired landlord, foreclosure, tax deed; any of those kinds of issues, and then we look for leverage, we layer that leverage where we make sure that they’ve got 50% or more equity. So we go after high equity, high distress and that’s where we buy our properties.
Theo Hicks: Do you just find those if you buy a list, or driving for dollars, or wholesalers?
Lee Kearney: What we do is we actually create our own list. So I’ve got a team that scrapes the data out of India, that then gets passed over to Hawaii, where my IT manager then will consolidate that data and then send it to go get skip traced. And then it goes for openers in the Philippines. And then once we have a live lead, it gets transferred back to the US to my closers.
Theo Hicks: That’s a good strategy. So VA scrapes the list, IT manager consolidates the list, gets it skip traced and then sent back to the VAs to do the outreach?
Lee Kearney: Correct. And basically at that point, it goes into our CRM, which manages a dialing sequence, a texting sequence, and we make sure that everything follows a path. So we’ve mapped out the life of a lead and we’re very consistent with our follow-up. In fact, we had a deal just pop up that was in our system a year ago, then COVID hit, it tells us to go pound sand, and miraculously just came back up.
Theo Hicks: Nice.
Lee Kearney: And it’s not miraculous. It’s been in our system. We kept follow up and we were consistent with it, and now the seller is ready to sell.
Theo Hicks: Yes. Something else that you mentioned briefly was working with the hedge fund. So for people that are listening that haven’t scaled to the point where they’re working with hedge funds, walk us through how that relationship came to be, so that people who want to work with hedge fund, whether it’s selling them deals or having them invest in the deals, how they can go about doing that?
Lee Kearney: Sure. In this particular case, they needed to buy a lot of property quickly. This was about seven years ago. And because of my reputation as being a large auction buyer that could buy statewide in Florida, they hired me to research the properties, to buy the properties, and to actually rehab the properties and to get them stabilized with a tenant and then pass them over to their property management company. So that was my contract. And we, at some point, were buying 20 houses a day. It was nuts.
Theo Hicks: So they came to you? So your advice would be just get a strong reputation?
Lee Kearney: Yes, and hang out where institutions are hanging out. I’ll give you an example. IMN put on a lot of conventions nationwide; they’ve gone virtual, so I’ve stopped going temporarily until they open back up the physical event… But I found that the IMN convention’s a great place. You’ve got to go where the institutions hang out. And I like those conventions, because you have all the major lenders, you’ve got a lot of the major institutional players all at one spot for two or three days, and it’s a great place to mingle with people that are literally pushing buttons on billions of dollars.
Theo Hicks: Yeah. So that’s IMN?
Lee Kearney: Correct.
Theo Hicks: And there’s something else that you said a lot in your background story, was about mentorship. So you kind of mentioned who those mentors were and how you came across them, but — I know you’re obviously a coach too, and you’re people’s mentor, too… But people who are listening, what advice would you give to them on, not necessarily finding a mentor, but when I find a mentor that’s kind of a big-time player, how do I sell myself to them so that they take me on as a mentee, as opposed to maybe one of like a paid program? How can I get myself a mentor who’s high-level without having to buy their program?
Lee Kearney: I will say this, just like most things in life, a mentor is not just going to pop up in front of your face and say hi. Intentionality is really key here; you have to figure out where you want to go, first. That’s the first step for all of us, we have to figure out where you want to go. Then you need to figure out how you want to get there.
Once you figure out where you want to go, a mentor who specializes in where you want to go and has already gone there, and not only gone there, but gone way past where you even want to go, is the type of mentor you want. And then you can be intentional in looking for that person.
But you have to figure out your game plan and not expect the mentor to give it to you. A mentor will help you get there. A mentor will also tell you if there’s holes in your plan, but I think a lot of people just expect to just fall into the arms of a mentor and then the mentor fix all their problems, when there’s a base level of maybe work ethic, there’s a base level of goal setting, there’s a base level of efficiency [unintelligible [00:17:02].11]doesn’t exist, which means no mentor in the world can fix that. So fix yourself first, get your goal figured out, where you want to go, then go find a mentor would be my advice.
Theo Hicks: Perfect. Alright, Lee, what is your best real estate investing advice ever?
Lee Kearney: I’m going to rattle off a couple, because there are phrases that have been drilled into my head by my mentors. It’s not important to call the bottom of the market, but it’s important to call the top. That is profound. If you really think about that, when market slips the other way at the top, you can get caught and lose everything. But once the market hits the bottom, it’ll typically be in a trough for years, which is exactly what happened last cycle. So that’d be my first advice.
Second piece of advice along those lines, there’s always money in real estate, it’s just important to be on the right side of the trade. And I can’t express that enough. People want to blame the market, when it’s their strategy that’s gone wrong. So I’ll leave it at that. That’s my two pieces of advice. It not important to call the bottom, but it’s important to call the top, and there’s always money in real estate, but you have to be on the right side of the trade.
Theo Hicks: Alright, Lee, are you ready for the Best Ever Lightning Round?
Lee Kearney: Let’s go.
Theo Hicks: Alright. First, a quick word from our Best Ever sponsor.
Theo Hicks: Okay, Lee, what is the best ever book you’ve recently read?
Lee Kearney: Best Ever book I have read—in fact, let me look right now. I went back over Traction. I liked that book. I think managing three businesses, that’s been a game-changer. It provides a structure that you can create uniform across several companies. And really what’s happening now is ideally, I’m moving into the board in one company, and I would like to set a goal in the next two years to be sitting on the board of the other two companies.
Theo Hicks: If your business were to collapse today, what would you do next?
Lee Kearney: Go make money, [unintelligible [00:19:16].20] way out of it. I think with this skill set, with being in three different industries, I’m now blessed to take a business skill and make money in any industry. And I feel confident that I could jump into any industry tomorrow and figure out within a couple months how to excel at that and start making money… Because business is all the same, the widget’s different.
So just to kind of give you a quick overview. The widget in real estate is the house. In fact, with a seller direct model, it’s a sale. It’s all sales and marketing. And truly, the house is a lot less important than understanding how to talk to a seller. So if it’s actually a lot of data, it’s a lot of sales. That’s what our business is today in real estate. The house just happens to be the widget.
We’re licensed in Oklahoma in the cannabis space, so I’ve got two processing licenses out there; our widget’s a little bit different, but the same business fundamentals are there. It comes down to P&Ls and balance sheets, production and efficiency, and systems and processes. And then real estate education, our widget is air; we sell education. When you actually look at a physical product, a lot of its air. But being able to sell that and have success for your students, [unintelligible [00:20:22].07] measured in a little bit different way and we don’t have a physical product. But again, the systems, the processes, the P&Ls, the balance sheet, it’s all very, very similar. So I enjoy business, and I enjoy building particularly; that’s the thing, my unique ability. I love to build. So that’s really what I focused on. That’s what keeps me interested, is just building.
Theo Hicks: Can you tell us about a time that you lost money on a deal?
Lee Kearney: Oh, yeah.
Theo Hicks: How much you lost and what lessons you learned.
Lee Kearney: So the biggest loss was actually — I want to say it’s about a half a million dollars. Basically, we bought a property, kept rehabbing it, kept rehabbing it, kept getting ripped off by contractors, because it wasn’t in town, and got to a point that we had so much money in the property, but it was still a tear-down. I know it sounds shocking to say that, but that’s the short and sweet what happened. It was a big property, a really huge project… And we should have just burned down the house.
So I’ll even go a step further. The price we paid, we should have never bought the house. We should have paid a lot less, we should have paid land value and scrape the house. So I think the big lesson for me is these almost complete rebuilds, especially with a strong robust market like we have right now, either a) wholesale them, or b) scrape them and build something new. If the value doesn’t support that, don’t buy it.
Theo Hicks: What’s the best ever way you like to give it back?
Lee Kearney: For me, I like to just answer people’s questions. I’m on Clubhouse a lot lately and just helping people with no, I guess, agenda per se; you’re not trying to sell them something. I like answering the kind of questions that people answered me when I first started out in real estate. I’m very, very sensitive to those questions; they’re not dumb. Because I think about some of the questions I asked, they were really truly dumb questions, but they weren’t to me, because I just didn’t know.
Theo Hicks: And then lastly, what is the best ever place to reach you?
Lee Kearney: Sure. @realleekearney on IG. It’s a good spot to connect with me. And @realbysers, if you’re interested in our real estate education, that would be the best place to reach me personally and business-wise.
Theo Hicks: Perfect, Lee. Thank you so much for joining us today and providing us with your best ever advice; a lot of information. You went to a lot of detail on your background, from 2003 until today, and what you did each step along the way, and also some lessons you learned during that journey.
We dived in to what the strategy is now, kind of where we’re at, and then we also talk about your secret sauce for buying below wholesale, and it involves making sure you figure out who the seller is, who’s the most distressed seller at that given point in time.
Lee Kearney: That’s able to sell.
Theo Hicks: That’s able to sell, yes. And that varies from time to time. And right now you’re buying homeowners, you went into a lot of detail on what specific characteristics of those homeowners, and exactly how you are going from finding those people to closing on those deals.
You talked about how to work with hedge funds, you talked about what to do to find the right mentor, and then your two piece of best ever advice, which is it’s not important to call the bottom of the market, it’s important to call the top of the market, and then basically there’s always money to be made in real estate as long as you’re on the right side of the transaction. So is there anything else that you want mentioned before we sign off?
Lee Kearney: That was a great summary.
Theo Hicks: Oh, thank you.
Lee Kearney: I’m impressed.
Theo Hicks: Well, Lee, again, I really appreciate it. It was great talking to you. And Best Ever Listeners, as always, thank you for listening, have a best ever day and we’ll talk to you tomorrow.
Lee Kearney: Awesome. Thank you.
This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.
The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.
No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.
Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.
The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.Follow Me: