“If you can’t get the deal flow coming in, everything comes to a grinding halt.”
Sean Katona is based in California and Washington states, so he can tell you about “Competitive Markets.”
You’re in two different states, both Washington state and California. Those are also very competitive markets. Can you talk a little about that?
I’m originally from Seattle. I took a job with Microsoft coming out of college and like many folks who get jobs with Microsoft, they moved me down to Southern California.
I had started my business while I was in Southern California, and one of my first projects happened to be in Seattle while I was living in LA. It was a pretty quick project. We ended up renovating the house over just a couple weeks and got it back on the market. But after that, I started doing more projects in my backyard, in Southern California.
We’ve learned how to do “Remote Rehabbing.” We have unique telephone numbers for each market and I feel pretty comfortable with both markets. I lived in both places for a while I have boots on the ground in both places. I’ve got family in Seattle. My mom is out visiting one of our job sites today, checking in on contractors to make sure they are doing okay. And meanwhile, we’re talking to motivated sellers down here in Southern California and buying up properties in my own backyard. So that’s how we’ve come to be in two markets, which is kind of unique.
[KG: I like how he mentioned that for him it is a “Family Business.” My father is my “Gopher.” He does whatever I need him to do. He goes above and beyond. He’ll go to a property that is closing in a week and put in some new topsoil. In my case, my father is an investor in some of my properties as well. So he has a vested interest.]
How has life changed for you since you moved out of the “9-5 Grind” and into real estate full-time?
My journey started at Microsoft, coming out of school. I actually ended up in a really fun position, [which was] media and advertising sales to the Fortune 500 marketers. [These] are some of the biggest marketers in the world and we were doing in-game advertising integrations on the Xbox platform. So I didn’t have a really rough go in the beginning. I was making good money, I had strong credit. I started this business when I had a nice nest egg saved up, and when I had a few rentals in my portfolio.
In corporate America, I was having fun, but I wasn’t fulfilling all the skills that I thought that I had. It became pretty monotonous or similar after doing that for almost 8 years. So I wanted to get out and do something entrepreneurial. I had all sorts of startup ideas that never got off the ground. [I found out] this could actually be a full-time business, not just doing it on the side. People do this full time and I got one of those deals done. I looked at that payday, and thought: “A couple of these a year and I could displace my pretty good income, not to mention have tons of freedom and tons of time.”
So leaving that stability, that comfort, was a really scary thing. [It was] something that I actually needed my wife to give me a little “Kick in the ass” on. She was seeing me get excited about real estate and lose passion for my day job.
She said: “Why don’t you go ahead and go at this full time and see what you can do?”
Things went from being kind of “Onesy-twosey” to starting to look like a lot more of a real business. We got a steady stream of leads coming in. [We were] building a machine and an infrastructure to go around those deals. So this thing wasn’t just reliant on me like it was in the beginning.
[KG: When I was a Clinical Therapist, I quit on a Thursday and I literally bought a house on that following Monday. That was my “Jump into the river.” I realized that it was something that I wanted to do. I loved the process and the creativity of it. I was passionate about it, I wanted to continue to grow it.]
Talk about your typical flip. You’re in Southern California and Washington. I know the MLS is SO competitive.
[Last year] we got overloaded with construction, so we couldn’t find enough quality contractors. We [bought] five deals in a one week span last year. [The contractors] thought that they could handle the volume, and they couldn’t.
That was a big lesson from for me to learn. It was something that put a kink in the in the process. I didn’t realize how much it would impact not just those deals, but spiral out to some of your others. It starts to take up a lot of our valuable time that can be spent vetting deals and writing offers and taking projects down, versus solving construction problems. That is not the highest and best use of my time anymore, that’s for sure.
We find a lot of stuff off the MLS. Last year probably made up at least around half of our volume. Most of that comes through relationships. We’re spending a lot of time reaching out to folks who are interested in working with us. Now we have a resume and a track record. We’ve got a handful of deals going at any given time. So we can point to those, and we’ve got proof of funds. So now we can say: “We’re a serious buyer. You can see that that we do what we say.”
Those realtor relationships bring in a steady flow. We do some things where we talk about [The realtor] representing us on the buy side, and potentially getting listings back as long as there’s enough margin in the deals. I will reach out to a lot of listing brokers and ask them to represent us on the buy side. That works as well in Washington as it does in California. It is a technique that I see frequently. Almost everyone has to go to, to stay competitive.
If you’ve got a realtor who is making half the commission versus if [they] represent the other investor, with pretty much the same offer, [they will] make double the commission. You’ve kind of got an unfair advantage. [The realtor] is not supposed to be playing favorites with you, but think for a second if you were in that position?
So MLS is a steady stream and then [We] make a lot of relationships with folks who do wholesaling and bird dogs. We want to be part of our community. For folks that are getting started, we’re a resource for training to some degree. But also [We have] a resume and a proof of funds. When [They] are trying to do their first deal, that can really be a missing link to that equation.
We also do a healthy amount of direct marketing. Everything from outdoor ads, to direct mail, to online marketing. We try to put some great content together, were doing online advertising. I’m starting to do some more experimentation on Facebook.
The idea is to have a lot of lines in the water, so that we’ve got you a lot of “At-bats.” We can write a bunch of offers up and we pass on a lot of deals that don’t make a ton of sense. This lets us select just the best deals that you come in from all that activity.
[KG: The key here is to have “A lot of lines in the water.” So many investors get so hung up on one acquisition strategy. You have to have multiple streams of deals coming in so you can pick the ones that make the most money. Sean is not doing deals that are only going to make him 4,5, or $6,000. That is sometimes strange for other investors to hear: “You won’t take $5,000?”
If it takes too much time, the hourly rate doesn’t pan out, so it doesn’t make sense.]
Who are you marketing to for deals?
Over the years, I have hit most of the big lists. I have experimented with probate down in Southern California. I sent probably thousands of letters. I’m actually just starting to do that again. I love the inherited property listed just because there’s a lot of factors there that make a ton of sense. [There is] tons of equity, typically older owners, typically older homes, and often times a life event were they’re looking to liquidate that real estate quickly. Sometimes, working with a cash buyer investor makes a lot more sense for folks than going the listing route with the realtor, the speed of closing, the uncertainty, the open houses, having to do repairs. We can do that with inherited properties for sure.
Door-knocking pre-foreclosures: I don’t spend my time personally doing that anymore, but I think that’s an interesting avenue. You’ve got folks with a deadline coming up that is real, and potentially a lot of equity at risk if they don’t take action. Our big thing is, can we find folks who are motivated or have a problem and can we solve that problem, and add tremendous value in their life?
If we’re doing that, and working with the right people, we can get some pretty tremendous paydays for it. That’s really one of our guiding lights: Let’s find people that we can help and who really do need us. If it’s just a creampuff, nice house, it should be a listing. We refer it out to some of our top realtor partners to help them get top dollar. But if that’s not the solution that makes most sense for them, that’s when we come in and do most of our deals.
[KG: This is this is a relationship business, as I always say. Making money, for us, is a byproduct of what we do. We’re looking to benefit that other party, whatever it may be. I don’t think there is any better business out there, I help somebody and then make money doing it as well too. This is relationship business. It’s not about the numbers. I think too many investors lose focus of that and it just becomes about the dollar signs for them. They don’t relate to the people, and so the people are not going to work with them.]
What is your typical acquisition price?
I like playing with the median and maybe slightly below median price point, just because if something goes wrong, I could potentially keep it as a rental. You have the largest buyer pool there on the back end. I like to create bidding wars and a good product that a lot of people are interested in buying to try and maximize the resale value of the property.
In Seattle, a rehab will range from 40 to $60,000 and we have some older inventory up there. In LA, the numbers aren’t unlike that of an average. I’ve done paint and carpet deals and I’ve done new construction. One interesting number in terms of values that might help some folks is when looking at a cosmetic rehab, you are probably at $25/foot (plus or minus) into the house. New construction you’re maybe at about $125 or $250/foot. That makes sense sometimes. If you do additions in Southern California, we can build for about $125 and sell for $5-$600/ft., that’s a pretty good business ROI.
What is the best deal you ever did?
One of them is best because of my earnings per hour. It was a wholesale deal down in Southern California. I had a connection with another good friend of mine, a wholesaler who had a stronger buyers list. We were able to generate a $48,000 wholesale fee on that. That was probably six hours worth of work: Meeting with the homeowner, a call, and a subsequent meeting to do an inspection, and then getting the paperwork together. When you look at my earnings per hour, it trumps almost anything else I had done in the business.
On the rehab side, we did a full gut job on a duplex in LA, and also a new construction duplex in front of that. That was something that we bought really rough, off the MLS for about $400,000. We ended up putting a good $400,000 or so into it with the new construction and the gut job. That sold for about 1.4 million. That ended up being an excess of $300,000 in profit on a deal that we did inside of 12 months.
How are you funding these deals?
I started out with a little bit of everything (Hard money and investors). Over the years, it’s kind of stayed that same way. I certainly have some great hard money relationships. My hard money lender in Seattle loves me. When you do the volume that we do, you can start to ask for discounts on points and little favors here and there if your projects are running long. I really hit the ground running raising private money as well very early on. What started with a couple friends and family turned into one referral after another.
They’d say: “Sean is a stand-up guy, we’ve done two or three deals and would like to introduce you to my brother or my uncle and other family.”
I’ve got a couple of dozen of investors now, standing on the sidelines waiting to park capital into our next deals. That’s no longer the bottleneck for my business anymore. We just want more deals to put that capital to work on.
Can you talk about a bad deal you did?
Try not to think of it as failing. We’re learning as we go. Each little hiccup creates a better tweak that we can make.
I’ve got one going on right now that is fresh in my mind where we thought we were buying a septic system that was working right. The owner signed off and we’ve come to find out a couple months later that we’re going to be spending almost $30,000 installing a septic system.
I’ll probably be going after that guy for some damages. That was just blatant lying. That’s one thing we learned the hard way, unfortunately. You do your test on your septic system and you scope out the sewers. One of the things that we started doing as a best practice to try and minimize our surprises is having an inspector actually go through and document all the things in the house that need to get done in order for us to be able to turn around and sell it to a retail buyer. A lot like a retail buyer would on the back, we’re doing that upfront. Sometimes even on the backend.
So we can say: “Alright, Mr. Contractor, you blew through this area in an hour coming up with the scope of work. But my inspector, Randy, found out 15 more things that you didn’t. By the way, these are $25,000 worth of repairs.”
This helps us generate a really complete scope of work, and minimizes as many surprises as we can.
[KG: Get an inspection. It allows you to a sell property better if you can say that an inspection has already been done. You can say that the house has already been inspected. It gives buyers a piece of mind, knowing that they’ll get a good, quality product.]
You do a lot of staging. What does your typical staging cost?
I negotiate that because I’ve got two or three stagers in Seattle right now that all bid on each of my projects. Sometimes it will fluctuate as much as 300 bucks from one stager to another. I probably spend $1500 to $2000, depending on the size of the house. In LA, I run into a lot of folks who like to price it by the foot. $1.75-$2.00/ft. is investor pricing. There is a wide variance, depending on the quality of their stuff. [The furniture] can elevate the perceived value of the property, or the actual value. Plus, it’s some good marketing to put back on your website with videos and photos.
One other little ninja idea on staging: On one of my rental properties – instead of doing staging, we decided to spend around $150-$200 on nice towels in the house. We left them with the house and sold them to the homeowner included. It was less money than I would have spent on staging, and [The buyers] get something of value. That’s an interesting way to do it as well.
[KG: We’ve spent about $800 on furniture that we rotate from house to house for staging. It looks really nice online, and helps the property sell faster. It helps when a buyer can visualize what their house would look like. You don’t have to go “Wall-to-wall.” Just a table and chairs in the kitchen, a couple of “Knick-knacks,” or some simple towels. The before-and-after photos can be a great thing for your website when you are showing samples of homes you have rehabbed.]
What is the best advice for someone who is new to Real Estate Investing?
Focus at least 3/4 of your time on deal flow and lead generation. The reason that I’m such a stickler about that is that you can have all the private money in the world, you can have the best contractors in the world, and you have a machine set up to do 30, 40, or 50 flips a year. But if you can’t get the deal flow coming in, everything comes to a grinding halt. Nothing else really matters, especially in the beginning. You can always wholesale a deal. You can typically raise money if you’ve got a great project. Folks are excited to get into our business. [The problem is] not cash so much as it is finding good, quality deals to invest capital into. So the fastest way to a payday is to have a deal under control. So get in contact with the homeowner, ideally. Make an introduction to someone like me who can help come in and negotiate a price that makes sense. But if you don’t have a deal, it’s a lot harder to get a payday.
What if someone has no budget for marketing?
There are a bunch of things that I did in the beginning. You can knock doors. There might be someone in pre-foreclosure. You can leave sticky notes on those doors. You can put Craigslist posts up. You can do a pretty cheap postcard campaign. Maybe it’s not a ton of houses, but at 40 cents a pop, you can afford some of those. I’ve known folks who put bandit signs up and take them down during the week so that the code folks don’t take them down. There are things you can do to generate deal flow, but to do things like that without a budget takes a lot of time. I work with a lot of leverage right now. So spend money on marketing so you spend less of your valuable time.
If you don’t have the capital, you trade time for dollars. You’re going to spend more time on the phone and spend more time knocking doors. Think about the way that realtors generate listings: They’re grinding, they’re making calls, they’re knocking doors, or put flyers out. Deals will not fall on your lap and if it’s something that is widely available to everyone else, it’s probably been passed on by a professional. So you have to drum it up yourself, so you can get your big payday and better margins. If you’ve got a direct relationship with the homeowner, there is an opportunity there to create some rapport.
What do you guys typically spend per month on marketing?
It grew from a $500/month budget in the beginning (Because I had enough money coming in from my day job that I wanted to fund that as fast as possible). The more that you can spend efficiently, the more leads you get in, and the faster you can get to that deal. Create a budget that you know you can sustain for six months. Sometimes it takes that long.
Today, we spend in excess of 10 times that [$500/month value] across our marketing. That is just the direct marketing side of the business, on top of the realtor relationships and the wholesaler relationships. [We have] a lot of output with that capital to be bringing in steady deal flow.
Do you ever mail to your lists multiple times? Or do you just give up on those properties if they don’t work?
We do a pretty good job of tracking our responses and keeping really methodical metrics. If we’ve got a direct mail campaign going out, we will look at exactly how many touches [We receive]. I can tell you on my last commercial mailer, I targeted 500 buildings and I’ve talked to 50 of those owners. So that was a 10% response rate. It took me three touches. I think the first one was 5% response, and then 7%, and then 10% with that third touch. It’s starting to slow down a little bit and so maybe I’ll [mail to] them 2 more times, maybe not. Maybe most the juice is out of that list. So absolutely, we can get some deals on our first touch. But a lot of folks that have done direct mail for a long time say they’ve really started seeing the best returns on the fourth, fifth, sixth, and even seventh touch.
Hit the right person, with the right message, at the right time.
So if someone’s going through a tough week and they get the great letter, and it’s the great person, they just might not be in the mindset. Maybe they’re more receptive to postcards than yellow letters. Maybe they need more professional letters versus handwritten.
[KG: This is a REAL thing with direct mailing. Don’t quit after 1. Don’t quit after 2. Continue to track and change up your message. Monitor it, and see what is effective. Even a change of picture works. It pays to know your marketing inside and out.
People are going to sell on THEIR TIME, not yours. No one is going to look at just 1 piece of direct mail and say: “I wasn’t even thinking about selling my house, but now I am going to sell it.”
It takes multiple touches and is on THEIR TIME. Maybe something bad happens that week…Maybe the roof leaks. If the roof leaks, the person will feel the need to just get rid of the house and the pain the house is causing them. And then, when they get the post card or direct mail from you, the time will be right. You have to put your name in front of them so they will contact you when they are ready to sell.]
– Kyle Garifo
Head Coach, Strategic Real Estate Coach
Sean Katona lives in Southern California and invests in both the Washington State and Southern California markets.