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Notable! AMA: Rehabbing & Flipping - Ask Me Anything

Discussion in 'Real Estate Investing' started by JScott, Oct 7, 2013.

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  1. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    Given how often I still get contacted from people on this site, and given that I chronicled my very first real estate deal on this forum 5 years ago this month, I thought I'd take the time to come back and do an AMA (if anyone is interested, which they may not be :).

    A little bit about me and my real estate experience/background:


    • My wife and I "semi-retired" from the corporate world 5 years ago and accidentally fell into real estate investing.
    • In the past 5 years, we've done nearly 60 rehabs (and just finished our first spec build), have earned over $1M in income from flipping houses and have earned over $2M in income from all real estate investing activities.
    • I've self-published two books on flipping houses -- while it changes hourly, "The Book on Flipping Houses" is currently Top 5 on Amazon in the Real Estate Investing category and "The Book on Estimating Rehab Costs" is currently Top 20 on Amazon in the Real Estate Investing category. (Unexpectedly, writing books has been almost as lucrative as investing in real estate!)
    • We've invested in three states and are currently relocating to a fourth state, where we're building our personal residence and will likely start doing the bulk of our future investing.
    • I run a website/blog called 123Flip.com where I've chronicled all of my deals in gory detail for the past 5+ years.

    When I started my first project 5 years ago, my goal was to use systems and processes to create a mostly self-sustaining business flipping houses, where I wouldn't have to "get my hands dirty" doing rehab tasks or managing contractors. Many people (including some on this forum) said that it wasn't realistic, and that my lack of construction background and desire to be hands-off would ultimately not work out. These days, my wife and I work about 10 hours/week in our flipping business, and other than when we're breaking into new markets (which definitely takes a lot of time and hands-on effort), we are pretty much entirely hands-off of the actual day-to-day rehab work.

    So, it's definitely possible to build a "real" business flipping houses.

    Now, that said, based on my experience, I don't believe it's possible to be completely hands-off in this business, nor is it possible to create a passive income stream flipping houses (though it's possible that someone smarter than I am could figure it out). For me, at least, flipping houses will always be -- to some degree -- a job. But, if you don't mind working a few hours/week and are smart enough to roll your income into other investments that are more passive, you should be able to make enough money at this "job" to retire sooner rather than later.

    Anyway, that's the quick background on me...if anyone has any questions I might be able to answer, fire away. I've spent the past 5 years trying to help others be successful in this business, and always happy to help any way I can...
     
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  2. DeletedUser2
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    Guys,

    Jscott is a great opportunity, to get a kick ass AMA going here. PLEASE think your questions out, and no Whining

    GO GET EM TIGER

    Z
     
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  3. jon.a
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    jon.a Legendary Contributor Read The Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    J
    Thanks for coming back for this.

    How would you suggest that someone that might have put a few 100k together find and vet possible quality investor partners?
    No one wants to be on "American Greed" next year.

    Thanks again
    jon
     
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  4. Tony I
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    Tony I Bronze Contributor Read The Millionaire Fastlane Speedway Pass Summit Attendee

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    JScott,

    As a 19 year old with limited capital, where do you suggest I start in real estate? Is wholesaling a viable option?

    Also, in your opinion, what is the "Fastlane" in RE investing? Is it accumulating several multifamily properties and trading up to a commercial one, or is it buying rehabs and flipping them quick? Seems like the multifamily strategy is more of a long term thing.

    Any insight is appreciated.
     
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  5. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    Hey Jon,

    First, you need to decide if you're more interested in being a lender or being a partner. The two are very different in terms of returns and risk profile, and once you dig in, you may find that one is much more appealing than the other. For most people who don't want to be hands-on and want to minimize risk, lending (with first-lien position on the property) is the better choice.

    I'm a big fan of controlling my money as much as possible, so when I lend, I like to do it to people I already know and trust (and have good track records). This generally (but not always) means lending in my local area, as I tend to know the investors and I tend to know what a good deal looks like. Just as importantly, you want to vet the deal as much as possible. Don't trust the investor to tell you how much rehab is needed or what the ARV is -- ask to see the contractor bids and either do an appraisal or have a local agent do a BPO. While this will require some additional work on your part, it should help you sleep better at night.

    I'm also a big fan of ensuring that the rehabber has some skin in the game, especially for newer rehabbers. I want to know that if things go badly, the rehabber risks losing money as well, as this will ensure that he doesn't "give up" or start taking things less seriously -- if anything, he'll start taking things more seriously.

    Now, if you want to go the partnering route, that's a lot trickier, in my opinion. I've had a few partners, and what I repeatedly find is that they tend not to have the exact same values as I do (not saying they're bad people or anything, just different views on what's most important). For example, I've had partners that are happy cutting some corners to save money or always playing hardball with buyers, even when I think we should be making reasonable concessions. It's frustrating when both sides think they're doing the right thing and both sides also think the other side isn't doing the right thing. The best partnerships I've had are with other investors who have completely different strengths than I do, and where both sides agree that we are each in charge of the things we are better at.

    For example, I had a long partnership with someone who was really good at raising money and finding deals. He wasn't great at the rehabs. So, he had full control (veto power) over everything money and deal related. I had full control (veto power) over everything rehab related. If we disagreed, it was always clear who had final decision, and because we trusted each other in those areas, the decisions were generally very good.

    Hope all of that made sense and answered your question!
     
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  6. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    Hi Tony -

    First, I'm not a big fan of starting with wholesaling. 99% of wannabe wholesalers I know never do a deal, get discouraged and completely exit the real estate business, never having given themselves a chance at success. I know a lot of people think wholesaling is easy, I promise you it's not.

    To be a successful wholesaler, you need to be able to negotiate BETTER deals than if you were just rehabber or landlord. As a rehabber, I need to negotiate deals to a certain profit margin. If I wanted to wholesale that same exact property, I'd need to negotiate the price down to an even greater profit margin to accommodate the wholesaler's fee. Because of that, wholesalers will typically lose out to rehabbers or landlords when competing for the same properties. And even when wholesalers aren't competing with rehabbers and landlords for a property, they still need to convince the seller to sell at a greater discount than another investor (a rehabber or landlord) would require.

    In my experience, wholesaling is much more difficult than rehabbing, as wholesalers need to have pretty much the same set of skills as rehabbers, plus MORE skills that rehabbers don't need. So, no, I don't recommend starting with wholesaling.

    So, where do you start?

    There's always things like mobile homes, which is an inexpensive way to enter the business. But, buying and selling mobile homes is much different than buying and selling houses, and in my opinion, getting good at mobile homes won't necessarily teach you much about buying and seller real property. So, if you're going to start with mobile homes, you should consider it a opportunity to build your capital as opposed to an opportunity to learn about real estate investing.

    Here is my recommendation for a 5-step plan:

    1. Take advantage of all the free resources out there. Start with these forums and read through all the old threads. BiggerPockets.com is a great resource (full disclosure, I'm a mod over there). If you're interested in flipping, check out my website as well. If you're interested in other strategies, seek out others who specialize in those strategies and check out their websites. You'll find that 99% of the information you need to succeed is available without having to pay for it.

    2. Attend local REIA meetings and network with successful investors. Ask lots of questions (people like to talk about themselves, especially when they're successful) and if you can build a rapport, perhaps set up some lunches (you pay, of course).

    3. If you can build a relationship with a successful investor who specializes in rehabbing (or whatever strategy you're interested in), ask him if you can intern for him for 6 months. You work for free and he agrees to mentor you.

    4. Once you have some knowledge and practical experience, go out and find a great deal. Finding deals is the hardest part of this business for most investors, and if you can bring the deal, many successful investors are happy to partner with you on it and show you the ropes. I have a standing offer to any investors in my area -- bring me a great deal and I'll mentor you through it. If you pay 50% of the costs, I'll split the profits; if I pay all the costs, I'll still give you 20% of the profits (and my mentorship) for bringing the deal. Many investors are willing to do this if the deal is good enough.

    5. Once you've been paid a couple times for bringing deals, start asking the other investor if you can contribute some cash and partner on the deal. This will help you build your capital even faster, and after 3 or 4 deals, you will hopefully have the capital and experience to "go out on your own." Not only that, but because you have some experience, you should find that it's not too hard to find hard-money or private lenders will to help fund your projects. You might even find that your investor-mentor or investor-partners that you worked with earlier are happy to continue partnering or funding you.
     
  7. Tony I
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    Tony I Bronze Contributor Read The Millionaire Fastlane Speedway Pass Summit Attendee

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    Thank you for your suggestions- I will begin on them immediately.

    In terms of my other Q about what type of investing is "Fastlane", do you have any thoughts? Is flipping rehabs more Fastlane than multifamily investing?
     
  8. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    It really depends on how you define "fastlane"...in my opinion, that means being able to extract yourself from the business completely and turn it into something that is truly passive. Using that definition, there are some real estate business models that are fastlane -- the most obvious one is landlording. A good landlord can hire out all aspects of the business and essentially not have to be involved to any extent. Someone lending money or buying/selling notes can likely create a mostly passive business model.

    With rehabbing, I don't think it's possible to create something that is truly passive, though someone smarter than I am might be able to do it. And certainly I don't think wholesaling can be done passively. The problem is, business assets turn over so quickly that there is no barrier to entry for the person running your business to go out on his own. Unless you have tremendous scale, a valuable brand or some type of IP you can protect, someone running your rehabbing business can decide tomorrow to do the same thing for himself (or for someone else for a bigger piece of the pie).
     
  9. Mike.B
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    Mike.B Bronze Contributor Speedway Pass

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    I can attest to this. As an active wholesaler myself, I can tell you it's not easy. There are numerous things that the so called gurus don't tell you about this business. I had to learn a ton before I closed a deal. It gets easier with every deal though!

    Thanks JScott for doing this AMA! I'll be adding questions soon ...
     
  10. SBS.95
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    SBS.95 Gold Contributor Read The Millionaire Fastlane FASTLANE INSIDER Speedway Pass

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    Question is for my father.

    He bought two properties to make a little side income, the plan was simply to rent them out while he was still paying them off. One of them has been completely successful, profit coming in, wonderful tenant, smooth as planned. The other has been plagued with several horrible tenants (one of which went to prison), late payments, bills from the city because of tenants violating different laws, etc. When is the best way to cut ties and your recommend manner of going about doing it.

    He's been trying to find a good way out for a while now as it's just a headache and losing money. I'd like to pass along any advice you have.
     
  11. MMatt
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    MMatt Bronze Contributor Read The Millionaire Fastlane Speedway Pass

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    Would this also be your answer if I were to ask the best/easiest way to fund a first time rehab without any initial capital?

     
  12. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    I don't do a lot of landlording, and this is a situation where there is often no profitable solution, but here's my take:

    - If a rental property is in decent condition, it's generally easier to sell if it's vacant. If a rental property is in poor condition, it's generally easier to sell if it's occupied with a lease.

    - If this place is in decent condition, I would first determine if it's worth more being sold to an investor or to an owner occupant. A good real estate agent should be able to do a quick BPO and then you can determine the answer to that question. Then I would work to get the current tenant out of there (assuming you have grounds to do that), spruce it up a little bit and either list it publicly or start marketing it directly to local landlords (Craigslist, local REIA, call signs, etc).

    - If this place is in poor condition, I would do some cosmetic renovation and get the best tenant I possibly could in there, and while he's new (before he has a chance to do more damage to the place), I would start marketing it to other landlords.

    Sorry, but that's the best advice I can come up with for this scenario...good luck!
     
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  13. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    Yes. Unfortunately, starting in this business is very tough when you have no capital. Really, your only options are:

    - Wholesaling
    - Partnering
    - Subject-To or Mortgage Wrap
    - Buying and Selling Options

    The last two are tough strategies in this market, so the first two are where I'd recommend starting with no capital. And as I mentioned above, I'm not a fan of starting with wholesaling. So, find a successful investor, bring him some great deals and offer to partner with him on them (for a small percentage at first, and increasing as you can provide more value and as you provide more deals).
     
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  14. Mike Kavanagh
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    Mike Kavanagh Silver Contributor Read The Millionaire Fastlane Speedway Pass

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    Thanks for this AMA, definitely going to take a closer look at your site. Now on to the questions.

    -Were you mentored by anyone?
    -If so do you recommend being mentored?
    -How much skin did you have in the game on your first flip?
    -If that question is too personal, how much money do you recommend a first timer having in the bank?
    -Aside from your books, is there anyone else you recommend to read?
    -I read the blog post about your brother getting married up here in Maryland, what do you think about the market up here? Where do you recommend to look for a FTP? (First time property)

    Again thank you for taking the time to answer these questions.
     
  15. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    I've never had a real estate mentor. And this is something I like to reiterate to everyone who is interested in getting into real estate -- you don't need to spend a lot of money on gurus or coaches to be successful in this business.

    A mentor is someone who volunteers their time in order to help you be successful...they don't do it for the money. If you have someone like that, absolutely take advantage of it to the fullest. But, most "mentors" are really just paid coaches, and most of them spend the bulk of their time teaching and very little time actually doing deals. These aren't people I would recommend learning from, and I certainly wouldn't pay them.

    There are lots of great free (and near free) resources out there, and as I've proven myself, you can be successful without spending money on paid education.

     
  16. Mike Kavanagh
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    Thanks for the answers! What made ya'll choose Maryland?

    I ask because, from my experience, Maryland isn't pro-business.

    Howard County is probably the best area in Maryland to be imo. The county does have some serious entrepreneurial resources. Congrats on your wife getting licensed.
     
  17. Tony I
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    Tony I Bronze Contributor Read The Millionaire Fastlane Speedway Pass Summit Attendee

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    Fastlane in the sense that it can bring you Fast lane income (millions) in a short period of time (5-8yrs). The question is to whether accumulate multifamily properties and trade up to commercial, or just flip rehab homes.
     
  18. Silverhawk851
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    Silverhawk851 Platinum Contributor Speedway Pass

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    Thanks for the AMA, JScott, absolutely great information being said here, your time is valued and appreciated.

    1.What is your main marketing strategy for your business? What strategy works best for your acquisition of new deals?
    2.What is the criteria you look for in a property when looking to do a flip?
    3.What are the 3 most important things you look for in a deal that would not do without?
     
  19. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    We have two little kids who will be starting school in the next couple years, and Maryland has some of the best public schools in the country (especially Howard County). That was the big driving force, combined with the fact that I grew up not far from there, so I still have friends/family in the area.

    The real estate markets seem pretty vibrant in MD/VA/DC, so that's certainly a plus as well.
     
  20. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    If you're dedicated, work hard and smart, I think there are a lot of real estate avenues that can generate relatively quick cash. Rehabbing houses, repositioning multi-family/apartments, development/syndications, etc, all have this potential. Once you have cash (or as you accumulate it), notes and buy-and-hold are two great business models to generate good returns (10-25%) on your money as well.

    We did $1M in rehabbing in 5 years, part time. If I had known what I was doing at the start (and didn't require much of the 5 years learning) and had we had more time to dedicate, we likely could have made closer to $5M in that time (just a rough guess). So, it's certainly possible to do it via rehabbing, but not if you're starting from scratch...you'll want to have some experience and education first to achieve those types of numbers.

    Also, the market plays a huge role. It was a lot easier to make a lot of money rehabbing between 2008-2011 than it has been the past year or two, just because the market has improved and there is a lot more competition. Still possible to make good money, but it requires more work these days.
     
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  21. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    We are almost exclusively rehab/flip. Acquisition strategy really depends on the market -- we try to expend as little energy as possible to accumulate the most deals and different markets will require different levels of effort to acquire good deals.

    For most of 2008-2011, we were exclusively working in Atlanta buying REOs right off the MLS. This was cheap and easy, and didn't require any marketing time/effort/money. Around 2011, the market started to pick up and there suddenly was a lot of competition for publicly listed deals (anything on the MLS). So, we were forced to change our strategy and started going after off-market properties. We focused mostly on direct mail, sending thousands of letters per months to different demographics of potential sellers. We found that our preferred niche was sellers in pre-foreclosure, convincing them to short sale their house and sell it to us. This has worked pretty well for the past two years.

    Starting in the summer of 2012, we also expanded to a second market -- Milwaukee, WI. It's a much less competitive market (for rehabbers), and there are still tons of deals on the MLS, so in that market (where we've done about 15 deals this year), we're still just buying right off the MLS and haven't needed to do any direct marketing.

    There are lots of different ways to market and find deals, and different avenues will require different personality traits, different strengths, different amounts of time, different amounts of money, different amounts of effort, etc. -- you need to find what suits you and your situation best and focus on that. They all work if done correctly.

    In no particular order:

    - Located within 30 minutes of where one of my project managers lives;
    - Will generate at least 15% return on resale value;
    - Safe neighborhood where I don't generally have to worry about vandalism, theft, etc.;
    - Project isn't overly technical/complex, unless our potential profit is well above average.

    It's really that simple. And as you can see, all our criteria revolve around not having to put in a tremendous amount of excess effort (unless we're compensated for it).

    Probably those first three things above. That said, if we'd be appropriately compensated, we'd probably waive the requirements...but it would really have to be worth our time/effort. We often think in terms of opportunity cost and make decisions based on the highest and best use of our time. We very much value freedom and family time, and most of our business decisions boil down to, "Will this help us maximize our freedom and family time in the long run?"
     
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  22. Steve37
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    What was your average volume of direct mail each month? Did you outsource taking the calls to a 3rd party or do you and/or a team member handle that?
     
  23. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    We were averaging about 2000 letters per month. Not a ridiculous amount, but more than most of our competitors it would seem.

    With direct mail, the initial phone contact is key, and we didn't really trust anyone else to handle those, so my wife did it herself. She's a "people person" (not me! :)), so she loved it and was really good at it. Having someone like this on your team is definitely important if you'll be doing direct mail.
     
  24. Steve37
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    Steve37 Bronze Contributor Read The Millionaire Fastlane Speedway Pass

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    Are you no longer doing direct mail? Sounds like you're talking about it in the past tense? I'm only sending out 800-1000 per month and have noticed the effectiveness fall off a cliff the past 3 months. Hearing the same thing from guys who were doing 10k+ a month who have cut way back or stopped completely. Perhaps it's seasonal or competition.
     
  25. JScott
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    JScott Platinum Contributor FASTLANE INSIDER Speedway Pass

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    Our response rate has stayed strong since we started, but because we were focused on short sales, that model has been affected tremendously by the uptick in the market -- with house prices rising, banks are unwilling to take anywhere near the same discounts for short sales that they were willing to accept last year. So, until earlier this year, we were still getting deals under contract, but we couldn't get bank approval.

    Then we decided to relocate and decrease our focus on the Atlanta market (which was a good decision, as things there have gotten tremendously competitive over the past 8 months). At that point, we stopped our direct marketing, and started focusing on some new construction we were doing and focusing on the Milwaukee market, where we're still buying right off the MLS.

    In short, I've seen exactly what you and the other guys have seen -- direct mail is getting increasingly competitive and deals are drying up. I expect that we're currently at an inflection point in the market, and either things will ease off again (making it easier to find deals) or things will really pick up (making it easier to sell at a premium). We're sitting back and mostly waiting for one of these things to happen (while finishing up about a dozen projects we have going)...given our move, it's actually a good time for us to slow down.

    I have a feeling Spring will see a better market for investors who know what they're doing...
     
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