Welcome to The Accelerated Investor Podcast with Josh Cantwell, if you love entrepreneurship and investing in real estate then you are in the right place. Josh is the CEO of Freeland Ventures Real Estate Private Equity and has personally invested in well over 500 properties all across the country. He’s also made hundreds of private lender loans and owns over 1,000 units of apartments. Josh is an expert at raising private money for deals and he prides himself on never having had a boss in his entire adult life. Josh and his team also mentor investors and entrepreneurs from all over the world. He doesn’t dream about doing deals, he actually does them and so do his listeners and students. Now sit back, listen, learn, and accelerate your business, your life, and your investing with The Accelerated Investor Podcast.
Josh: Hey, everybody, what’s going on? Welcome back to Accelerated Investor. I’m so excited to be back again with you wherever you’re at today as things kind of unpack and unthaw from Corona virus. For the past couple of weeks, I’ve been telling people, hey, it’s great to great to talk to you while you’re in your home. Now everybody is able to get back to the gym. Gyms are opening up. The beaches are opening back up people are all going for walks working from home. Offices are open back where ever you catch this podcast. I’m excited that it took time to listen to it. And I could be part of your day. Today I have a special guest whose name is Lee Kearney. Lee and I have been friends going back probably over, known each other for over 10 years, really gotten to know each other much better just in the last actually year or two. I have some joint business partners and some deals that we’ve been involved in as partners.
Josh: And Lee is just an absolute stud investor. Let me give you a kind of a formal introduction. Lee is for sure one of the nation’s most active, busiest and most successful residential real estate investors. He’s done over 7000 transactions in the last 15 years, totaling over five hundred million dollars’ worth of real estate. He operates out of Florida, but does deals in multiple markets across the country. And he often will close as many as 30 to 50 deals in a single month. And when you have that kind of production line, that’s exactly what we need to talk about, is how do you create scale? How do you create business process and a production line to do 30 to 50 deals a month or over three hundred to six hundred deals a year? Again, his name is Lee Kearney. He’s an absolute genius. Lee, thanks for joining us today on an accelerated investor.
Lee: Well, thanks for having me on the show.
Josh: Yeah, we appreciate it. So, Lee, let’s talk for a second about understanding your particular business. I think anybody that listens to this and says, hey, man, this guy’s closing 30 to 50 deals a month, hundreds and hundreds of deals a year. What does it take to create something like that? You’ve obviously an expert at creating this. Well, we call production line. And so I’d love to talk about that today. I know that that’s been disrupted because of Covid. And we’ll talk a little bit about that. But talk a little bit more about what did your business look like just three or four months ago. Tell us about the process, how it was setup, how you were doing so many deals every month.
Lee: Sure. Basically, I view real estate like a production line, but also I believe there’s different areas in real estate. So in the area of the transactional area of real estate, the production line is you bring in deals and you process them. Now there’s different exits there, but ultimately you’ve got to generate a lead. You turn that lead into a contract. You either assign it or you close on it. And then you do one of typically three things in our case, you fix it up, rent it and then refi it, or you just wholesale it, or whole tail it, which is a very, very mild rehab, or you retail it and then say you fully rehab and retail it. So that’s really the transactional side. But then you’ve got the passive side, which is we’ll use some of that capital to either lend it out. That will be one passive area that we’re involved in. We also coordinate other investors’ capital lending to other investors. So that’s another arm of our business.
Lee: Then the other area for us that’s passive is going to be the long term holds. So that’s my business in a nutshell. But that production line at the beginning is what generates the revenue that allows us to do all these other things. So I look at separate businesses within a business because really when you look at the rental model where the buy and hold, completely different than flipping a house. And the area where they intersect is obviously the buy rehab, rent and then refi, that will be one area where they do intersect. But I realize there’s different levers that move each one of those businesses and you’ve got him not treat everything the same. You know, it’s for those who don’t know I’m in the cannabis business and people often say, well, cannabis and hemp the exact same. The plant might be the same, but they’re completely different businesses. Real estate’s like that in a lot of ways because you get into lending side of the business. Yes, the widgets a house, but you’re on the complete opposite side of that trade and the business model is different. The things that matter are different.
Lee: And I like real estate for that reason. But I’ve also recognize just because you’re good rehabbing a house, you might be a terrible wholesaler. Just because you’re a good wholesaler doesn’t mean you’re gonna be a good rehabber. And just because you’re good rehabberdoesn’t mean you’re gonna be a good landlord. And so and even then you start lending your capital. You may be a terrible lender. So the skill set that we acquire in one area of real estate. I have found unfortunately it doesn’t translate over. And so I almost treat each part of the business as a new learning curve and try to really prefect’s that craft and get really good at whatever area of real estate I’m going into because they’re just different.
Josh: Gotcha. Awesomely so talk a little bit about your team. You talk about doing all these transactions, bringing in deals, marketing for deals and then spinning them out the back end, including lending. Tell us about the team that it takes to build something like that. What do some of the people do? Who are some of the key players in your business that help you drive it forward?
Lee: Absolutely. Well, I will say this. Six years ago, when the hedge funds were buying, my team was up thirty-five people. So we had a massive team. I believe our biggest month was well over, transactions, about 250 transactions one month. Maybe. It was bananas. I mean, that was a big team. We had like several people just putting out signs. We had a team just changing locks. We had a team just taking pictures. I mean, that was very, very specialized and had multiple people, no specialized roles. Now we’ve reduced as we come to the end of the market cycle, we’ve tried to reduce our purchases, be more strategic in what we purchase. So we’re not buying duds. There’s no more appreciation left in the market. In fact, when we look at something we underwrite today, we look at downside risk. So we’re actually underwriting at 10 percent lower, higher rehab’s. And so for that reason, the volume has slowed down.
Lee: But I’ll talk about what’s going to happen the next couple of months. So the key players are really people in each part of the production line. So in the case where we bid at auctions, I’ve got someone scrubbing the auction list and underwriting them. And then I do final underwriting. I think in a case where we deal with sellers. We have to look at where we pull our list from, whether we scraped the list ourselves, where we buy the list, then it’s more most important whether you scrape it or buy it. It’s what you do with that list. So we take out all of our non-sellers because we realize when you buy directly from a seller that the secret sauce there is who identifying who is not your seller. And the reason that’s so important is because when you take a list this big, who is not your seller, it’s gonna be that much the list. And about that much of your list is actually going to be the avatar who’s actually can sell and will sell at a price that makes sense.
Lee:So we spend a lot of time understanding who our seller is. We realized this might sound funny because we’re on a real estate podcast, real estate, just a widget. It’s actually the least single most important component of the business. That’s just the widget that gets you from A to B for profit. But the seller is the most important thing again for non-option purchases. So we spend a lot of time in those systems and that way then we have a really small list, but we pound that list. And what I mean by that, we do four forms of skip tracing. So we spend a lot of time skip tracing. So that’s a big effort. Then we have an opening sequence which goes over the Philippines and those people, their only job is to build rapport. At that point, then we hand deliver really warm leads to our closer. And the only thing he does is close. He doesn’t even underwrite. He just closes.
Lee:So the way I’ve always done business is I like people to get really good at one thing as far as me being the owner and the people underneath me. They get really specialized. There’s two reasons I do that. One, you see massive efficiencies, which means you can have a smaller team pay those people more, which means you got really loyal people, but also you protect your IP. If you’ve got an entire production line, they know one section of it. There’s no business risk. There’s no risk of anybody leaving because they know how to underwrite. That’s it. That’s the only asset. But they’ve gotten really good. And believe me, when they leave this place, they can be the best underwriter because they’ve got underwrites thousands of deals at that point, tens of thousands of deals. So that’s generally the way our production line works.
Lee: And then after we get the contracts, there’s a processing team and then there’s a disposition team. And now overseeing all of this is an accounting team. Anything to do with money goes with my accounting team. In fact, they’re so good. They manage both the cannabis operations in Oklahoma. They manage the real estate education as well as real estate, as well as most multiple real estate portfolio. So it’s a really skilled team. They know how to process and that’s translated even across different industries. So that’s my team in a nutshell is my chief operating officer, which is Ken. General manager Aaron below that. And then we’ve got one to two people. Each department got an accounting department, pre acquisitions. We have processing, disposition that’s really it. The field service kind of transcends. One thing we did several years ago is we had our field service people do everything. So whether you’re putting out a sign, change a lock, minor repair, taking photos, inspection, writing a punch list. We cross- trained them to do everything.
Lee: And that’s one thing I would say to you when you got people in the team. So when you’ve got people outside the office. They should be able to do everything that the people in the office are a little bit different. But even then, we try to cross-train. So a big key component of my business. I make stuff simple. In 2013 when we did well over 2000 transactions and that one year while we did off of Google Doc. And actually, it was a series of Google Docs. People spend all this money in CRM and ERP. They think that that’s what’s gonna make money, right? The important thing in scaling a business is that having the right systems and processes, the right people and giving them the right tools. Now, that’s some one place I see a lot of business owners fail. They give their team a laptop and expect them to be processors. To process a huge amount of work. If you went around my office now, about half my teams here, half teams virtual. Still, we’re kind of going through a transition depending whether they got kids or not because of school closures. Sure. Everybody on my team has more screens. That might sound silly, but the investment of an extra 500 to a thousand dollars means I got rock-star processes. That’s an example of giving your team the right tool, right? 500 Meg internet so that they’re not held up with internet speed.
Lee: I mean everything, we try to really invest in things that produce in ROI and just the setup that I have here in the office. We probably get 50 percent or more productivity. You take a forty thousand dollar a year team member, right? That’s twenty thousand dollars ROI per year per person. My team, I could put them side by side by anyone else. They’ll get twice the amount of work done. I would say at least at least one and a half times amount of work in some cases, four times the amount of work because they’ve got the right tool. So don’t handicap your team. That’s what I would say to everybody. If you’ve got a rock star, set them up for success. Make the process as simple. That’s a great way to set your team up for success. Awesome. Business owners try to come up with these really convoluted systems because, you know, we get into all these algorithms, all this crazy stuff and you make a one step process, 12 steps and you have people do a bunch of busywork that doesn’t matter.
Lee: There is a time and a place for that. But I’ve tried to whittle things down to a very, very simple form and even a new CRM we developed for our closer. You can just slide off one status together and then the software automatically sorts who he should call first. It’s simple. It’s just simple. It’s just simple and it’s just go through this list and a lot of our workflows in a very simplistic fashion. They’re on Google Docs. They either go top to bottom or left to right. I don’t try to overcomplicate it. The more complicated you make your processes and your business, your systems, the less chance that you have of being done consistently. I would say that that’s a skill set for an owner to think simply and not to think complicated. It’s our job to be able to create that vision and have our chief operating officer. Now, if you don’t have one, you’re gonna be the CEO and the COO, and that’s fine. But ultimately, if you want to scale, it’s got to be simple. That way you can see what in that seat and it’ll get done.
Josh: That’s fantastic, Lee. So when you really started the scale. People are going to want to know, well, hey, how did Lee go from wherever he was to doing two thousand transactions a year? What would you pinpoint as maybe the one or two critical hires that allowed you to have a big impact on your scale? Was it acquisitions managers? Was it the CEO wasn’t an accounting team? Who were the one or two people that really made the difference?
Lee: Absolutely. The very first hire that’s going to make a big difference if you’re a solar printer. Let’s go to your executive assistant. And I would say that anywhere from forty to seventy-five thousand dollars makes sense for that position. And that might sound crazy when you’re listening to this. That’s gonna be your right-hand person. Mm hmm. And what I mean by that, if you look at all the things you do in a day, this is an exercise if you’re listening to this very simple exercise. I’ve done it. I continuously do it. And I continuously look for things that don’t check the box I’m about to talk about. So I only want to focus on things to make money. That’s it. Sowhat you need to do is be honest with yourself. It’ll probably take a week. So you need to do this for the entire week as you’re doing tasks. Just put them on a list. Don’t do anything else. Just put the task on the list after the weeks over. Look at the list and then put a dollar sign beside things that make money and then leave it blank. It makes no money. Now, people have different versions of this, but this is essentially what I did. I call it revenue. A non-revenue generating something magical is going to happen. You’re gonna look at this long list and realize about this. Much of the list makes money. You thought about your first hire. If that’s what your system does, everything that doesn’t make money is creating that as you’re creating that list of stuff for yourself.
Josh: You’re essentially creating a job description, right, for that person that you’re hiring that right and person, which is amazing. I’m going to keep this stuff over here and give her everything else this big pile of list over here. And of course, organize it, give them structure so they can be successful. You know, the people in our business that do the best have maybe two or three main things that they do, like my executive assistant, Jen. She primarily works on booking podcasts and working with our private investors. She’s got a few other things that she does on top of that. But those are the two main things that she knows that on a day where she has free time, on a day where she wakes up and is not sure what to do.
Josh: She knows that if she’s booking a podcast or she’s talking to an investor about investing in her deal or investing in her phone or an apartment, she’s winning. She’s going to get an A grade that day because that’s all she’s supposed to do. And then, of course, she’s got some other. She’s an operations person. So she’s got some other projects and one off projects for me, but it doesn’t interfere with her two main jobs. So that executive assistant is big. Is there another one, Lee, that you thought really helped you breakthrough?
Lee: Absolutely. My chief operating officer, Ken Stillwell, yeah, he cleans up everything after I created and so. Right. That’s really it. Because as I did a lot of these personality tests and without getting into detail, my Achilles heel, my particular Achilles heel is that I’m a visionary and an implementer. The reason that’s an Achilles heel is I want to create the vision and I want to implement it. So if I’m implementing, I’m not creating. And so I’ve had to really step back. And one of the core things I’ve done in my business is made sure that I’ve empowered every single person cause our team’s small now by 10 people. I’ve made sure that everybody knows that that they’re a business within a business.
Lee: And that’s a really good way of looking at it, because if you constantly tell your team that and empower them and don’t step in their way, don’t trip over them and let them actually manage that portion of the business. What you end up having is you as the entrepreneur, a bunch of intrapreneurs. But they’re also entrepreneurs, too, because they’re entrepreneurs of their section of the business, which happens to be an intrapreneur in your business. That that mindset shift for me where I want to jump in and answer the email. I want to call the person back. I just stay out of the way. So what happens is people realize, man, he’s got a rock star team. I don’t need to tattletale to Lee. I just need to talk to friend in accounting, because a lot of people where you set yourself up for failure and it even goes beyond yourself. You set up your team members for failure.
Lee: If you use your team members as blockers and you tell people one thing and they tell him something else. They know if they come back to you, they’ll get the answer they want. I refuse. It’s almost like parenting. You know, a mom and dad disagree. And I’m you know, my wife and I are separated. But we still when it comes to Max, we agree on everything. If mom says X, it’s X, I’m not going to stand in front of it. It’s the same way in your business. If you want to scale, you want to step out of things, don’t overstep your team, don’t do it because otherwise it’s like mom and dad. So the kid doesn’t get the answer from mom. He wants to go to dad. And I found that that’s been a game changer, because then things never come back to my radar. They never come to me cause they don’t have to. But my team, it will to do this, though, if there’s a problem. That’s one of my jobs. When you talk about primary jobs, my job is deals. So today’s revenue money, which is also related to today’s revenue. Strategic planning, which is tomorrow’s revenue and major problem solving.
Lee:So my team knows as long as it fits in the box, you never need to talk to me. But if it falls outside the box, my door’s open every single day for four major problems. I found that the company runs quite smooth with that because people feel like they own a part of the business. They’re there. They’re managing one entire section. It’s completely theirs. The e-mail comes to me. I forward to the person. Fran, please advise. I’m not getting the answer from Fran. Then going back to the person. And even something simple as that. E-mail management, just like top of my list, because I you know, if at this point five different e-mail addresses related to five different businesses and I’ve cut myself out of e-mail, so I’ll give you a couple of simple tips. My team knows that there’s not a question for me. Don’t send it to me. I don’t want to be cc’d on anything. I only want e-mails with my name and a question. And that’s cut down. And, you know, maybe not 90 percent, but at least 60, 70 percent of e-mails. And then on top of that, if I don’t want the person to reply to me, I don’t send e-mail. So if the person asked me a question, I just forwarded to my team member.
Lee: But we also have a standard. The standard is every email gets answered. So if you’re working with a team, where you’ve got to chase your team. Why are you hiring them? Hire someone else. You don’t have to chase a lot of these frustrations in our business. Our self-created. If we allow a standard down here, that’s a standard we’re gonna have. But it is a two-edged sword, because if your standard is very personal, it’s not up here that paper, people are going to match your standards.
Lee:So I try to lead from the front. I answer every single email. I keep myself accountable. When something’s on my calendar, I show up. And that’s exactly what I expect my team. And then the company runs really well. But there’s some core things that we can get really right or really wrong. But hopefully the couple of things I’ve said here will really help people narrow in on the things that are important. If you want to hire rock stars and you want to empower them. And you want to set them up for success. And that’s all the way from systems and processes through management and also through giving them the right tools. I see so many owners just not setting the team up for success for many of those reasons and then wonder why they’re failing and then beating people over the head for failing when they set them up for failure. If you don’t have money to pay a vendor. Don’t put your accountant in the way of telling people all you have the checks on its way, you know, stuff like that. That’s an example where people use their team and there’s no check on the way. And then the vendor doesn’t trust your accountant and doesn’t trust your company and you’ve actually just really discredited everybody.
Lee:So there’s things like that, where, you know, we saved your process, oh we’ll close on it. And you don’t have a buyer. Let’s just say you’re assigning it. Now you’re now you’ve set your processor up for failure and you’ve made your company look silly. So we try to just be consistent in our answers. Consistency is a real key point to running a good business because that way then people get a flavor for your team. And it’s not so much as important inside. But I’m looking for people outside my company and how they view the company, but also inside the company. If I have to answer vendors e-mail, if you’re on my team, Josh, you send me an email, I have to respond to you because I want our team to be accountable to each other. That’s a level of respect, really. High spin on the real estate company side. Respect is high and we’ve let people go on the spot for being disrespectful to someone else in the team because for us, as far as our core values to non-negotiable.
Josh: Yeah, love it. There’s a bunch of nuggets in their lead. Thank you so much for that. Let’s talk a little bit about the state of the market today. You know, understanding market cycles, you mentioned early earlier on we were getting to the top of a cycle and you know, certain areas. You’re in Florida. But you invest in a lot of different places. There’s boom-bust markets and then there’s price stable markets, likes things in the Midwest. And we got to the point where everybody knew where the top of a cycle and there was a recession coming sometime in the next six to 18 months anyway. Then COVID-19 hits. You actually contracted the virus and were in the hospital. And so that was a crazy experience.
Josh: You’ve lost about 25 pounds. You put 10 pounds back on. You’re healthy now, kind of on the mend. So I appreciate that. Glad you’re able to jump on now. But talk about your business has had a pretty significant amount of disruptions. We were talking about this getting ready, transactional business, a lot of deals coming in. A lot of things change, sellers backing out, buyers backing out, private lenders changing terms and lenders changing terms. So just talk to all the upheaval that you’ve seen recently. And then secondly, we’ll talk about what is this looks like on the back end of this. Now that things are starting to calm down, unfreeze, unpack, what does the next six months look like for your business? So just talk about the disruption part. Let’s go there first.
Lee: Well, so several things happened. Lenders, institutional lenders were canceling the day and the week of closing on revise and on purchases. So that cut off money. We had private lenders stopped lending new money that cut off new money. And then we had other private lenders reduced terms, which also cut back on cash flow. Then we had lenders for our buyers delay closing. So that cut off our revenue coming in.
Lee: And then we had sellers on our seller direct platform where there was a moratorium put on foreclosures and taxes. So you try if you have a list built around chasing people in foreclosure and everything just goes, I’m not getting kicked out. So where’s the distress, right? And there’s no good answer for that. So overnight we realize that every area of the transactional side of a business. Now rental business is different as long as you’re collecting ren. It’s good.
Josh: We’ve collected all of our rents for April and May. We’ve done well.
Lee:And I’ll get to that in a moment, because I know that those people getting hit. There’s people not getting hit. But I want to talk about this, that this actually exposes a weakness in your buy and hold so that this particular, everything that is going on. So on the transactional side, as I went through every part of that was hit. So now I had to work on new money. I had to work on renegotiating terms to figure out how do I short the revenue cycle. So now it’s more wholesale, less retail. So we’re still going through that transition. But that’s that 2 month gap cost my business at least a million bucks, at least a million dollars, because, you know, if you’ve got 30, 40 million dollars with the inventory that’s sitting there, you’re paying interest on. Sure. Do the math just on that. And then you add in contracts you would have normally got on the buy side that didn’t come through all that take. So this was a seven figure hit for my business. And top of that, I’m laying in a hospital where I’m one of my other businesses. It went down 80 percent in March and 60 percent of our team was let go while I was fighting for my life in hospital. Cause I had to hand over the reins. That was tough.
Josh: You say that’s tough, like so casually that what you just described is it’s hell, it’s business, hell and personal hell. It’s health hell all at the same time. So I’m super excited that you’re able to pop on the day and you and I could reconnect and talk about it. So now that your health is coming back, things are starting to unfreeze. Private lenders are coming back on platforms. The secondary market is starting to unfreeze for people making private lender loans, especially on crowdfunding platforms and selling them to the secondary market. Help me understand and help our audience understand the next three to six to nine months. What are you forecasting for your business? How do you think things are going to unfold?
Lee: Sure. I think the what we call the gap. So we’ve got to crawl our way out of the gap, which is probably going to take us. And the gap is really that point where nothing happened for March, most of April and even to early May. So now that we’ve identified that point in time, we want to make sure we get stuff sold so we can get that revenue cycle completed. We want to make sure we get new contracts. We can bring new revenue in and we want to sort out the issues of getting more capital. So I’m working on every, I look at each thing as a separate problem, because if you’ve got deals and no money, you’re dead in the water right now. Lots of money and no deals. There’s nothing come into your production line. So the team is stable. So I’ve got people, once we get deals that that part of production line is fine. What we’ve really done is focused on getting more deals and more money.
Lee:So on the deal side, we added two new sources of lists and we’ve been optimizing those lists. That that’s where I’ve spent a lot of my three to four weeks. So the projects that I work on, where I spend my day is is optimizing what I look at Florida as one market. So people look at Tampa, Florida, and say, well, I’m a Tampa guy. I’m a Florida guy. So we pulled statewide lists and we’ve been working on optimizing those. And I’ve actually 3x the list. So once the moratorium gets lifted and with everything that’s happening that we predict in the next 30 to 60 days, our list and we use this time wisely. So although revenue got hit, we built a a system that’s going to spit out three to four times the amount of money. So I’m really proud of the time that me and my partners and my programmers spent because we use that downtime to build a rocket ship and confident we have we have a platform that can do at least 100 hundred deals a month and they’re highly profitable that I’ve never seen greater wholesale deals than I have the last 90, 120 days, because now instead of most wholesalers used to make 5, 10 grand, we’re getting 20, 30, 40, 50 thousand dollar hits regularly.
Lee:So you see different versions of this on social media. You know, everybody. Everything’s great on social media right now. Not very few people have a bad day or really broadcast that. But we use the downtime to build big systems. And that goes back to my original point. You want to know how you scale. You build a really good system and you build really good processes. We got our CRM completed that’s now going through beta testing. I couldn’t make sense of polio or anything else. The way my business model works with big bulk lists coming in. So we built custom system that now suits our needs and it allows that production line. We can pour in thousands of leads a week and every that’s fantastic. Nothing falls through the cracks. So I just try to really think strategically now. But it was tough. You talk about the end of mid mid-March to mid-April. I was basically in bed, so I didn’t broadcast that and tell a lot of people that I was doing, you know, Zoom calls from my bed. Just turn the video off. I was sleeping 14, 16 hours a day.
Lee: So, yeah. This is a huge kick both for the business and was frustrating. Imagine being in bed while you probably know this, actually. Sure. I read one of the few people that might know right the minute that there’s no worse feeling as a business owner watching a problem and you physically can’t do anything because your body’s just saying no. Yeah, that to me was the mental thing I had to get over. But now I’m in problem solving mode. New revenue like my mentor told me before he passed away. This was back in 2008. Remember, we went through something similar. And he said, you can do nothing or you can sell your way out of it. So we.
Josh: Well Lee, the thing the thing that we’re seeing, too, is and I just did a call with the vice president of market economics for Auction dot com last week, and you might know Darren. He used to be at… Blomquist. Yeah, he’s a great guy. And. But what he was explaining is, you know, supply is down about fifty five percent if you look at what’s coming out of the MLS and the National Association of Realtors. And so but demand is only down about 20 percent. And they measured that by new buyers going on tours with realtors. That was a stat that came out of Redfin. So supply was already tight. Now you have supply even less, which means prices actually went up in the last six to eight to 10 weeks.
Josh: And so if you’re a wholesaler at your volume and you’re providing supply to the market, you’re doing the extra work of going through the lists, vetting the lists to calling the sellers, getting them under contract, bringing those products to the market. You now have less competition because a lot of people are out of the market, but you have a lot of people still wanting properties and a lot less supply to choose from. So that’s where your spreads getting bigger makes absolute sense. I don’t even have to see your checks to know that that makes absolute sense, to see the economics, the supply and demand adds up that those spreads would get larger because people have less to pick from and prices are going up. It’s really a unique situation to be in. So we want more short term, right? Short term. So what happens over the next three to six months? Because that’s really short term. There’s going to be things that start to unpack. What are you seeing in your business? How are things being impacted for the next couple of months or so?
Lee: Common sense would dictate as I look at the last cycle, we’re in a judicial state here in Florida. Evictions haven’t started. But it takes a while for it to wind up. So right now, people got a free lunch with forbearances, three to six months. So the situation you describe will probably be the rest of this year. But the party is going to get started in 2021e. And the front line of that is less pendants being filed. So foreclosure filings. Right now, they’re down at a point in the entire state of Florida. I think that was. Don’t quote me on this in case someone is going to fact check this. But based on the data was given to me by my programmer in the entire state of Florida ready for this, there was about 80 foreclosures filed last week. That’s it. That’s it. Now, that’s normally thousands. Just to give you an idea. So that moratorium is, basically stop that. But here’s what’s coming. What’s coming is as soon as the moratorium is lifted and orders on the judge’s desk, this high of new sale dates that need to be set.
Lee:So what’s going to happen? The good news is we’re in real estate. It’s not like the stock market. We have time to prepare. So what you’re seeing is a short term uptick, but there’s going to be. So we had a bottoming out where there was a freeze. So if you were if you wanted to sell something on April 1st, guess what? You yet to give it away because there was no buyers. No sellers. Nobody’s leaving the home. So basically, it had to be an absolute steal for them to buy it. Now we’re seeing buyers come back in the market. We’re seeing a lack of supply. So we’ve got a short term uptick. We’ve got crazy low rates. But what’s coming in the background? The storm’s brewing is the supply of institutional inventory. And the institutional inventory is going to be short sales. It’s going to be stuck at auction and it’s going to be REOs after the auction. That’s going to take a while for that engine to wind up. And even as a states starts to hit the market, like you said, there’s a shortage of supply. So there’s going to be a period of time where that inventory is going to absorb really quickly.
Lee: But at a certain point, when operators go out of business and homeowners stop paying, the supply goes, sorry, that demand goes down. Supply goes up. That’s when prices go down. This is coming out and better one. But that’s probably not going to happen until 2021. But it’s going to be a slow grind down because in a judicial state, you got people to fight. A lot of people fight a little. Which means the foreclosures just get drug out for years. It’s not like in California where you’ve got a trustee, you know, you don’t pay 90 days. Have a nice day. You’re out.
Lee: And actually, California’s a unique situation where through legislation they’re trying to bypass a very simplistic process of getting someone out of a house. And now it’s going to turn into a four course meal. So but generally speaking, a trustee is going to move quicker. When we talk about a market disintegrating, the trustee states are going to fall first because the process is quicker. They essentially just rip off the Band-Aid. So that’s what I predict is going to happen. And you’re right. If you’re front and center of controlling distressed inventory, you’re in a great place because you got lots of buyers, got pent up demand and you’re going to sell stuff for top dollar. But what’s going to happen is the market’s going to start to disintegrate. And what’s going to cause the disintegration is high supply, lower demand and both things are going to happen, which creates that gap.
Lee: Also, our primary seller today is a distressed seller. Why? Because there’s equity. Let’s talk about what happens when people went to foreclosure. Their debt goes up because they’ve stopped paying and prices are coming down. That’s why you see people go underwater because you’ve two things working against each other. Eventually they may meet in the middle. But there’s no equity. And then the debt keeps going up and the price keeps going down. And that’s when you see the shift of people. Those percentages, they talk about a market of people underwater nationally. So all that stuff is getting started. But it’s like an end. It’s got to wind up. It’s going to take awhile. And we need to be position as investors to change our strategy. So.
Josh: Lee, it feels like, you know, you and I were both in the market in 2006 and 2007. And really the peak was mostly what I know this wasn’t 2008. Everybody talks about 2008. That’s when that’s when all the foreclosures actually reared its ugly head and it became public knowledge. Well, you’re talking about a 2020, it feels a lot like 2006 because the peak of that thing was really in July, maybe August of ’06. And then you got into ’07. And that’s when Bear Stearns went bankrupt and that’s when Lehman Brothers went bankrupt. And really nobody saw it until the Great Recession began in ’08. What you’re talking about is where we are now is really like in ’06 ish kind of timeframe.
Josh: And then in twenty twenty one will be kind of like ’07 when people are starting to see, oh, here’s a bunch of cracks are happening. Supply is going up. Demand is going down. You get all these people on unemployment, a lot of those people won’t be able to qualify for mortgages, so they’re going to be out of the buyer pool, which is gonna be even less demand. And so 2021 and then 2022 is going to feel like the ’08, ’09 where there’s a lot less buyers, a lot of property to buy, a lot of things to scoop up. That’s going to be the time and kind of 2022 to 2023 to begin then buying and holding again buying in that because now you’re gonna be at the back end of the bust and back on the market cycle of things going back up.
Lee: Man, a lot of good thoughts. A couple of key things came to mind there. Number one, the difference this cycle, there’s two major differences I see. Number one, you’ve got qualified buyers that want to pay but can’t pay. That’s a big difference from ’08. They’re very qualified buyers, but they physically like they don’t have the means to pay in a way. It was a bunch of ghost loans and stuff. There were people who have never owned ten homes. They shouldn’t have even owned one home.
Lee: So that’s a big, big difference. Number two, Wall Street has institutionalized single family as an asset class. That didn’t exist last cycle. So I’m very interested to see. I think it’s going to be very bifurcated. Even within, you take Cleveland, there’s gonna be one area the market’s gonnatank like normal, as can be other areas that’s going to be held up because you’ve got institutional money, which is going to pop was is going to provide a support level. It’s going to be higher than what you and I would pay because they got a lower cost of capital. So I’m very interested to see. But what we’re betting on is our bread and butter. And I’ll just let everybody in a secret. My bread and butter, where I’ve made all of my appreciation. The best yields buy and hold is buying in C, C plus neighborhoods on financeable assets. Why?
Lee: Because at the end of the cycle, they got pulled up in value by the higher priced assets that nobody can afford. And they’re still like decent areas that people want to live in. Also at the bottom, the market you can buy and cheap. They’re financeable, you sell them at the peak high and the yield on your cash flow is really high. During the whole period I’ve had I’ve played around with A, B, C. And for me and single family, a good working-class neighborhood. And by the way, Street A and Street B can be completely different. You can have one with mowed and edge lawns and one next door, where it’s all rentals. So we try to sprinkle our rentals on those nice working class streets. We got massive appreciation. This may shock people, but timing the market is key. We made 250 to 300 percent appreciation of most of our buying holds because we bought them low and sold them high. And as my mentor said, it’s not important to call the top but it’s important to call the bottom.
Lee: Sorry, it’s not important to call the bottom because you’re typically going to bounce off the bottom for two or three years. But once you see that peak coming, don’t get greedy. Unload those assets. And that’s how you maximize your rate of return, because people right now buying rentals at the top of the market. It’s risky. And I see people bragging about taking 80 percent of a peak value out on a loan. Just because the bank will loan it to you, it doesn’t mean you should borrow it. So I got my butt kicked 12 years ago. I don’t want to do it again. So I’m trying to look at this a little bit more conservatively. And I will this may or may not be politically correct, but a dollar in refi proceeds is not the same as a dollar in profit. Right. And to pay it back, you’ve just taken a loan. So that that’s where I just don’t necessarily agree with, you know, certain people the way they would view that. I want to be borrowing under 70 percent, maybe sixty five percent. I want to make sure that I’ve got the ability to cover debt. I’ve got actual equity. And I haven’t stripped all the equity because appraised value in a down market is way different than the market value weighing it out.
Josh: No doubt, because you’ve got all the all the old appraisals, the numbers from sales from three months ago, six months ago that the appraiser can pull in and those no longer hold up. So you got a value that’s way up here and appraised value in ARV value from six months ago versus what it will sell for today.
Lee: They’re looking back on what stuff sold for. It’s what it sells for today. Different values there. So I’m interested to see what’s going to happen. But there is definitely a couple of anomalies that are different, but there’s also things that are similar. If you’ve got investment neighborhoods where lots of investors buy. I believe it’s going to go through the normal cycle. Wall Street is going to be a wrinkle. And I don’t know where that support level is going to be and how much the market is going to drop.
Lee: And I think the banks are going to take a different approach with the borrowers that want to pay are qualified buyers went through this period of time where they couldn’t pay. It doesn’t make sense for a bank to foreclose on those people. So they’re going to have to really look at this on a borrower basis and not have a one size fits all where everybody goes down the foreclosure production line because ultimately they’re going to shoot themselves in the foot.
Josh: Yeah, because a lot of people that wanted their house that can afford it just can’t afford it today. But when they get their job back, they’ve got to find a way to maybe tack the forbearance on the back into the loan or something. Lee, listen, this has just been phenomenal. Had a blast visiting with you today, sharing a ton of amazing ideas if some of our audience wants to connect with you. I know you guys run a coaching program. You know, investors, people bring you deals. Just reach out to you and connect with you. What’s the best place for them to connect?
Lee: Sure. For me personally, it’s Real Lee Kearney@IG. And if you want to go to our Web site is real advisors dot com. So that’s two ways you can reach out to me. So I look forward to connecting with you if you want to learn about real estate. We can help you through Real Advisors. Be happy to do that.
Josh: That’s fantastic. Well, there you have it, Lee Kearney. Thanks so much for joining us today on Accelerated Investor.
Lee: Thanks for having me, Josh.
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Based out of Florida, Lee Kearney is one of the most successful and busiest real estate investors in the country. He’s done over 7,000 transactions in the last 15 years, totaling $500 million dollars in real estate. When you have that kind of scale, how do you create a business process that can handle that?
A place where Lee often sees business owners fail is by not giving the right people the right tools. Don’t handicap your team. If you’ve got a rockstar employee, set them up for success by giving them the right tools to help them become two, three, or even four times more productive. The way Lee’s always done business is by letting his employees get really, really good at one thing, and then he’s less worried about the learning curve.
Putting a rockstar team into place begins with the first hire, and Lee suggests you start with an executive assistant. Because of his hyper-focus on building a strong team, when he was diagnosed with COVID-19 this spring, the company could still run as he recovered in the hospital.
Some good news for you right now: we’re in real estate, and not the stock market. We have time to prepare for what’s coming. The current lack of supply isn’t going to last once the courts open back up and start processing foreclosures. Lee shares his thoughts on which states will fall first and how long we have to prepare.
While there are a few parallels to ‘06, there are some key differences too. Most of the sellers Lee currently sees are distressed sellers with equity. He talks about the strategies he’s putting into place to prepare for 2021-22.
- Identifying your seller avatar can help you simplify your lists.
- Uncomplicate your business systems and accomplish more.
- How intrapreneurs inside your business can help your entrepreneurship.
- Lee’s cut down on the emails he receives with these tips.
- Once you see that peak coming, don’t get greedy. Unload those assets.