Free Investor Video & Transcription
1031 Property Exchange FAQ - Real Estate Investor Panel Discussion
Total Watch Time: 43 Minutes and 6 Seconds
1031 Property Exchange FAQ – Real Estate Investor Panel Discussion
What You’ll Learn in this Video
In this video you’ll hear from four expert real estate investors who have used Section 1031 Exchange to avoid paying capital gains tax when selling investment property. Topics discussed in this detailed video include:
- 1031 exchange options for investment property owners
- Time frame to identify replacement property
- Pros and cons of using this strategy
- Financial benefits for investors
- And more!
Kathy: This is our wonderful panel of people who have done 1031 exchanges, so we’re just going to start and have each person introduce who they are and what they did. [laughs] The 1031 that they did. Actually, Missy is our– have you done the 1031 yourself?
Missy: I have.
Kathy: Okay, good. She is our facilitator and made one of them, just like our speaker leader for Houston. We have about six teams across the country that are really able to assist people with the 1031 exchange, and Missy’s one of them, and Shawn who is going to speak later is one of them. It could be a pretty intense process. To have a team who just works like clockwork and is able to acquire a lot of homes at once, they have the financing.
They’re able to get these properties updated and renovated and rented in time. You need a company that can operate like a machine, and so, they’ve been able to do that, but it’s good to know you also have personal experience with it. My very first entree into real estate was a 1031 exchange. My dad had owned an apartment. He invested as a partner in an apartment building in Marin, and that didn’t go well. The management didn’t take care of it, and they sold it, but they didn’t actually tell the partners. They’d owned it for years.
My dad had been depreciating it for years, and all he got was a letter in the mail. By the time he got the letter in the mail, it was two weeks left or something that he had to identify, maybe less. He was freaking out because at that point, the amount he had depreciated, he would have had to pay several hundred thousand in capital gains. He didn’t have it. That was the retirement. I said, “Well, what do you need to do?” He said, “I need to find a replacement property.” I’m like, “Really? That’s it?” “How about I find that for you?” I did! I found my dream house, and I’m like, “I found it. How about I also be your tenant?” [laughs]
That’s how it worked. I found the replacement property and Rich and I moved in. It was the first house we lived in when we got married – and it was big, a six-bedroom house. We got our dream house, and dad didn’t have to worry about paying capital gains. When my father passed away, we inherited the house and that was how I got into the business.
Also, buying that big house was what got us through our very difficult time when Rich got cancer because, when you buy a really big house like that, have a whole lot of rooms you can rent out. It was also the house that helped me become a first-time landlord. It got me into business. I’m a big fan of 1031 exchanges. Paul, tell us about your experience and what you did that got you into a 1031.
Paul: Okay. We had a property in Arizona in ’91. We had it for about 10 years, and I wanted to get a beach house. 1031 into the infamous beach house in North Carolina. It was rigged. It had the depreciation recapture from there that I don’t know. I also did one where I didn’t do it, and I thought I’d love to share that because I learned from that. Talked to a gentleman before the meeting, and I had bought one house at a time, but to buy four at once, I was just so nervous. I just wasn’t comfortable. I had just gotten into real wealth network.
I just didn’t get the program, and so I did not do a 1031 because, I didn’t think I’d could pick out four homes and pay for them in 180 days. But, I did have some capital gains loss of $180,000 to write off, so in my mind, I wanted to use that up. But if I had to do it over today, I would feel comfortable buying four homes from Missy and getting it all done, but not like this gentleman here. I think you did it in like 21 days. [laughter]
You know what I mean? Dan said, “Buying that first home can be really nervous.” But this group has taught me how to analyze it in your mind so you can go ahead and pull that 1031 off.
Kathy: Very good, thank you, yes, absolutely.
Richard: A good but more of a long explanation of what we did and why we did is probably better. We actually owned a rental property in Marin, and we were lucky to buy a foreclosure in 2012. It basically doubled the value and so given what might double up translates Kathy’s new podcast and the story is if you have a California rental today, you should get out at the peak, beyond the peak and swap for lower-priced properties in diverse markets and increase your rental deals. That’s the equation. We did that. We sold a Marin property that had doubled in less than three years. We started from nine houses. Fortunately, we actually went through and bought 12 houses before that.
We kind of knew the markets. Missy, notwithstanding, the two markets that I really chose to actually get this done was Houston and Jacksonville because, Sean, at the back of the room and Brian in Jacksonville, I knew they could execute. I sold the house, got over asking in Marin. It was about six weeks to escrow close.I had six weeks to plan and execute on what I wanted to do. As we count on to this thing we’re like, “Well, there’s a 200% rule. There’s the one, three properties now is another clause. 45 days went in today.” It was just so complicated. I’m, like, “No.” I don’t deal with the hassle, frankly. Between myself, Sean, Brian in Jacksonville, Adam, but as the exchange companies we talked about, we hatched this plan to get this closed in 45 days. My goal was to not have to notify, but it was actually, just to remove all the risk for the entire transaction.
The 45 days up to the close date, we identified properties, we got rolling on deposits and timing for it. And such, by the time I closed on the marine sale, I was two-thirds going down the path. Frankly, as to the exchange, it came to a fantastic, simple paperwork at the front end and the property got closed. We closed all nine properties purchases within 41 days, at the close of the sale. We went from one property overpriced, single tenant, lower rent, to nine properties, two diversified markets. Doubled the rental income across the properties and it worked out wonderfully. [applause]
Missy: My 1031 experience was challenging because, I actually did one because, a home I had sold at an exchange to one of our customers here, was a new construction. Lessons learned, new construction doesn’t always happen in 120 or 190 days. [laughter] The good news was, I’ve learned that things happen in exchanges. When a customer comes to us and they’re doing an exchange, I have about eight properties that are mine that, if you’re using the 200% rule, you can use those as filler. If something does happen, you have a filler to fill in.
The good news was, I got to do a 1031 exchange because, the new construction wasn’t done. I got to buy the new construction and our customer got one of my favorite houses. That was my experience with the 1031 exchange, personally.
I’ve done about 75 homes this year with real wealth network customers, exchanging them. I’ve learned a lot of the pitfalls and the timing. I think what you did was probably one of the key steps you have to take doing a 1031 exchange, is don’t wait until the day of closing before you start this process. Be planning before you put the property on the market, which means get pre-qualified with your lender if you’re going to finance. Identify how many houses you can buy with that financing because, remember, there’s limits with Freddie Mac about how many loans you can have, and with the volume of exchanges here, sometimes you’ll exceed those limitations. Have your homes identified as much as you can before you go to that closing, exactly like you did because that removes the stress. Waiting to the 44th day to identify makes this a very painful process.
Understand that there are things that can go wrong in the process. Many of the people that have exchanged, have found that they went out of the network, the house that they were going to buy didn’t close to the other seller. There are problems that can happen. So, make sure you have something in your back pocket that can save you if a house falls out.
Geraldine: Hi, I’m Geraldine Berry. We have an international panel here today. I’m from Ireland originally but, I’m an investor. In 2005, Kathy and I talked and we were both like, “Wow, this economy is about to encounter a big change, a big turn.” Real estate cycles happen. I exchanged the properties that I had purchased in Stockton, California [00:10:00] and small multi-units, not single families. But, I had borrowed some money to buy those, leveraged to some degree that I’ve not taken any money out and they doubled in value. So, in 2005, we said, “Hey, it’s time to take our chips off the table, and timing is everything and it’s very significant when it comes to real estate.”
I sold the properties in Stockton, 1031 exchange into Dallas. Got that done. The reason I got it done effectively, was because I had a community of people that knew how to do it and could help me as I executed out of that. It wasn’t a huge deal. I bought several houses but– I don’t know, I just had to do it. When I have to do something, I put my head down and I do it. I call someone if I have a question and I get the resources together. That’s the wonderful thing about this network, you have those pieces together for you. But, sold those properties and bought in Texas and then I was looking at where my house was located in San Jose and I thought, “This area could be hit if the market turns.”
So, I sold my house and because I knew what was on the horizon, I sold my house to somebody who put 30% down. We made a lot of money on that house, and we just– I said, “Okay, I’m going to rent for a year or two and then buy back into the market.” That was 2005-2006 time frame. I thought it’d be a year or two, it was 2010 when we bought back into the market. I rented for four or five years and so there’s a lot of people who would not be willing to do that but I just felt like, I knew the potential. I knew what was happening and it made the most sense for us and our family to go ahead and do that.
I have no regrets, I got a lovely home, put $100,000 into it, and I’m happy as a child, very low payments, lots of equity there. We could sell again now but I’ve elected not to. It’s a decision and you look at the strategy and I did that last cycle. This cycle is impending, it’s on the horizon, but I definitely I’m not going to sell my house now. But, maybe the other properties. I have other properties that we purchased in the East Bay and so we’ll just look at those but I feel like I did do a huge thing when I got rid of the properties and stopped and executed by getting properties in Texas. We’ve had those for several years now.
The biggest thing you have to look for when you exit a market like this and you turn to 1031 exchange, is that you have to have the people in place on the ground to help you secure properties in the right areas. Then, the number one reason that investors sell is because of bad management. That’s a key piece to this and that’s the one thing that people need to understand as they do that. Having a network and being part of a network is a key piece in terms of executing and then maintaining your investment. Then, understanding that it’s a business and taking care of it like a business: reviewing, managing the property managers, reviewing your monthly statements, all of those things are important.
Sometimes, we spend more time analyzing what can we buy? When you buy a house, if you have people in place that can help you and execute and you can get cash flow on potential appreciation, just buy one house a year and your strategy is golden and it’s really not rocket science.
Kathy: Great, thank you. Anybody visited the San Jose area before? SJREI? Okay, of course. Geraldine founded the SJREI and helped so many people understand the market timing band. We didn’t quite know each other that well then, but I was doing the same thing from my end at Real Wealth Network and listening to a lot of what you were teaching over there because, you led the way on letting people know it was time. So, it’s interesting– I guess let’s just ask that, how do you feel today compares to that time?
Geraldine: Well, one of the reasons I like Kathy is, because I think she has a practical, pragmatic, logical approach. When you look at the economy today and you look at what’s happening with quantitative leasing, with the government and how they’re kind of executing in terms of keeping the economy afloat. We have, on the horizon, another downturn that I believe is going to happen. I was just saying outside to Kathy, what would we do different next time and I would just shout louder from the hilltops, “Yes! It’s time to consider selling.” Just look at your portfolio and say, “Am I in for the long haul because rents have hit incredible rates and that cannot continue.”
House prices have increased exponentially. Everything is cyclical. We have to be aware of what the cycle is doing, where we are in the cycle. I think that, once we’re aware, and we can incorporate that into our strategy, it’s very difficult to be contrarian.
I was shaking in my shoes when I was doing because, people were saying, “Are you high? You don’t owe that much in those properties in Stockton.” The properties in Stockton were low-income properties. I managed them myself. They were high maintenance. My tenants had big screen TVs, and my kids when they came up with me to clean the properties, they would be sneaking into their units to look at them. These were people who were low income, watching a lot of TV. Don’t watch too much TV people. [laughter]
There was a reason I got out. I wanted to upgrade my portfolio. When you have very high cash flow, it’s generally labor intensive in terms of management. I decided to get out, and I think I did the right thing. I think, Kathy, you understand that being contrarian is going against the crowd. When people are beginning to say, “Now, am I losing out in this market? I should be buying a home.” No you shouldn’t. You should just sit in the sideline. There will be opportunities. Now at the peak, is not the time to buy in, but there are cash flowing opportunities throughout the country.
Those are the ones you should look at because, if you look at, say the weather, across the United States — this is an analogy that we use. In Alaska, it’s very cold, it’s freezing. In Miami, it’s sunny. Then, you have a national housing average price. Well, it doesn’t work that way because, every market is different. Every metropolitan statistical area has its own economic drivers and things that you need to be aware of. Is Houston all about oil? No, I don’t think so. It has six million people. People will say that, “Well, Houston learned from the last downturn that they needed to really diversify.” People were very impacted by it. What we want to do as Real Wealth Network is protect and help people to secure their futures. We love, love, love to help women secure their futures because, when you take that power into your own hand and you just take charge of your future and you just buy one house.
Here, we have engineers. We have all kinds of people in the audience, and you can put away that money just buy one house a year in a cash flow market. We’ve done– Kathy has presentations that demonstrate how effective and successful that is. It doesn’t have to be real completed, real risky, but it is a business and you have to take care of that and have results and do all the things that help you, and where they’re helping that in terms of developing that strategy. Okay, I forget there’s someone else talk now.
Kathy: So, I think I’ll pick on you Richard. Let’s talk about stress. Would you have done anything different in this process or was it stressful or not?
Richard: No, I wouldn’t have changed it. To Geraldine’s point, I think the network that you provide, and the people in it. So is concession banned? Do I want to do an exchange? Can I add top of the market? What do I do? Well, access exchange company. They work brilliant frankly. You are only recommending providers who can execute. Shawn, in the back of the room, I chatted with for a minute. I knew every property I bought been prior to that. He said here’s the property, here’s the details, here’s the rehab dates, here’s what’s going to close, and he was within a week in every single property we closed. It’s a proven multiple, but tend to keep a lot of that. I always turn to Missy.
Richard: I think really, it wasn’t stressful, because I knew that even if I failed in the 45 days, I have 180 after that. So, my goal was to surpass my expectations, and I was like, if I manage it correct, but no biggie.Two might drop off after the 45 days and obviously I send a letter. Frankly, everybody performed as planned. The experts at first we got through the network, the providers was exactly on. It’s just amazing. I didn’t find it stressful at all. Helen may have found it stressful. That’s another story. That’s what exchange company means. Adam was the guy who was helping me, the founder. 10:00 PM, I have a question and I send an email to Adam for the next morning. He would reply in three minutes. The whole experience actually was a pleasure, frankly.
Kathy: If you had found a different route and gone– Maybe if you didn’t know about Real Wealth Network, do you think it would have been as easy? This isn’t a self-promotion. [laughter] I’m curious because if you went through an agent, you were making offers and you were trying and you were getting outbid and so forth. It would have been a different experience, right?
Richard: Yes, it would. The moral to my story is I knew nothing about investing six months earlier. Think about that. We bought a foreclosure behind our house by happenstance. I was biking with a buddy. He said he’d overextend himself. It was foreclosed and reported just because we thought it’d be a good idea. I didn’t know anything about real estate. It wasn’t until last July, August that I started listening to the podcasts. I read your book and I listened to some more podcasts. We closed 21 properties including 1031 in the last three, four months.
Could I have done that? Could any sane individual have done that without this network? Absolutely not. You would have died. [laughter] I’ve seen friends die. I checked out two or three other networks and I worked with them in parallel.
The advice I got from Real Wealth was solid, consistent, and executable. I was being offered properties that no one should buy from some of the other networks. I did my due diligence. I networked in with the leaders of the other networks. I networked with their teams. I won’t give names but I had one very successful network leader. I said, “Who does he use with his law firm? Who’s the CPA? Where does he mainly buy?”
I really went deep into all his networks. Frankly, time and time again, the information was right. There was no unbiased. The business model was correct. It was with Real Wealth. I think about it, is that I like it because, the turnkey developers buy their own properties. Your incentives are all aligned. I have people in certain networks who are offering properties that they wouldn’t buy themselves. The turnkey providers weren’t buying their own properties. They were just flipping stuff trying to make a profit. Whereas I know a person that– Sean buys a few properties every month that he sells to us. This makes it more of a complete circle in terms of incentives and risk-taking. We’re all in this together. That’s really why I think it has been successful for us and I trusted it, the more I got into it. So use the network. It’s here. It’s all the successful people in this room. Even today, three or four faces in this crowd were with me at a seminar six months ago, where I knew nothing. I was like a deer in headlights.
I chatted with somebody who sat next to me. I’m like, “I’m thinking of buying a property.” They explained what they’ve done and I took their formula and replicated it. Chat with people sat next to you. A lot of people have been very successful here. I quit my job six weeks ago. I retired. [applause]
I’m very fortunate to have stumbled upon Kathy’s podcast. I’ve done what I’ve done. I hope you too can find that fortune and get forward. We have a couple of disciples here today. Leo, how old are you, Leo? 27? 26 years old. [applause]
I wish I bought my first property 20 years ago. Spread the message. Get them in young because it will make their lives a lot less hustle later.
Kathy: Absolutely. That’s fantastic. I’m glad you’re here. I’m trying to get my daughter.
Geraldine: I have a question for Richard concerning that– We have some properties but I have heard that we can only buy 10 properties. You said you bought 21.
Richard: I exchanged nine for one that we bought separately because we used the 10 mortgage slots. Now that’s 10, plus paid cash cash for another three.
Kathy: So you didn’t get any of the specialty ones?
Richard: No, I went to Fannie Mae for the nine slots outside the prime residence, cash for companies in Pittsburg because they were low price. You couldn’t get a mortgage for a $51,000, $55,000 house. The rest were the 1031. It was very efficient.
Kathy: Great. Yesterday, we had somebody else on the panel who couldn’t make it today. She did the specialty financing and she tested it. We’ve not done it. That was a little scary. She says she probably wouldn’t have done what she did had she known. She did three exchanges almost all at once. It was about 24 properties in a very short amount of time but needed financing.
For those of you new to Fannie Mae, you get a max of 10. If you’re married and you’re both working and both qualified, you can each get 10. That’s really important. Something that people aren’t told all the time is, don’t both apply for a loan, apply separately because then you both get more. You could just put your spouse on title of that closing so you’re not out of that but, you just don’t get on the loan. That gives you 20 but she is a stay-at-home mom, so she couldn’t. They maxed their 10 but they were in the middle of an exchange and they needed 14 more or something. It was crazy. It was crazy that she had– Like you said, she hadn’t really thought that one through.
But we had these specialties for private lending thing that hadn’t been tested but one of our mortgage lenders was like, “I think I can do this.” It took 104 days. You were part of that.
Missy: Yes, and Shawn was also.
Kathy: Shawn was a part of that. That was highly stressful so we don’t recommend that. The way it is with– You heard it earlier, I take same amount of financing on the exchange or else you pay the difference in capital gain. She had to get those loans in order to not have to pay. She also ran out of specialty loan. She said she met with her family and they came up with a list of 50 different ways to get money and they did. They ended up going to a family member and saying, “How would you like to lend to me?” Which is a fantastic thing to do and I think we’re going to do another event on that to really explain how you’d do that. They ended up opening up a whole new world for her, which I hope will open up for you, which is to realize that getting the money isn’t the hard part. Once you know how, there are– Who knows how many trillions in self retirement funds?
Geraldine: A huge amount.
Kathy: It’s just a huge amount. It is like 18 trillion or something. It’s the same as our national debt, which is one of the reasons I worry about that. I think it’s like 18 trillion dollars in their retirement funds. A lot of people, if you’ve invested in the DOW or the S&P last year, you lost money. If you have elderly family members who are really scared to have their money anywhere, so it’s in bonds, they’re making nothing.
You can go to them like she did and say, “I’ll pay you 6½%. Your money will be secured to my property in first name position at 70% LTV. You’re totally safe. How does that sound?” They’re like, “It sounds great.” They did it. I think they did sign something on a napkin and did it. She said it was real messy but it worked. The next day, the family members were like, “I got a whole bunch of friends who want to do it.” Don’t ever limit yourself. There are so many possibilities out there. All right, let’s talk about what you’re doing now. You actually– Well, that might be not 1031 related. I don’t know.
Paul: Back to the beach house. What that did, that gave us a chunk of money. I meant to add the 1031 from Arizona to North Carolina. The house doubled in value in 10 years, tripled in value. That gave us a chunk of money. I didn’t have a business to sell like my friends here. I don’t have a 401(k). That’s all I had. That money gave us– able to buy six homes in Ohio. Basically, half my retirement plan is done. Now, I just have to do the other half.
For those in the room that don’t have 401(k), this is– I went from zero, in 2012, a retirement to $3,500 a month, every month comes in like clockwork. I just want to add that in for them. I’m here with Kathy to make up the other half.
Kathy: We’ve got some questions. Maybe, if you would talk about your experience with Missy since she’s here and how that process has been in terms of property management because that is the key. The exchange is just the beginning.
Paul: Like I was talking earlier is, I was used to buying one house and I could handle it. To buy four at once, I was really nervous. I educated myself. I met with Missy. It went so smooth that it was a little scary. In four years, nothing has happened. Pipes didn’t break, the roof didn’t cave in. They’ve checked under the mail every time. It has just been amazing. I worked at first Houston because Houston was my number two of choice. Anyway, I went to max out my 10, with Missy and then I’ll branch out. Missy calls it cheating on her but, I’m not cheating on her. [laughter]
It’s funny, four years ago. It was like, “You better hurry up because things are going to change.” Well, four years went by and it’s still the same thing. Things could change the next election. I still feel there’s a narrow time period where the interest rates are low, affordability is still good in certain areas. Now is the time still.
Kathy: Great. Yesterday we talked a little bit about rent controls, all the things that are happening here. Does anybody here own property in areas that have rent control? You do. Okay. If you own property in the Bay Area, you might have to deal with that sooner than later because, rents have gone up so much that cities are indeed looking at rent control. San Jose passed it. Birmingham and San Carlos are talking about it. It’s one of the all-time worst things that legislature can do, that a municipality can do to ruin the availability of property because, as a property owner and as a landlord and as an apartment owner, your value of your property is based on rents. When your rent is capped, your value of your property caps. Who wants to do that? What builder wants to come in and build apartments when there’s a cap on the value of what that apartment could be with the rent control?
It’s a terrible decision but, a lot of the politicians aren’t educated in economics and finance, so they don’t know that. They think they’re doing a good thing and it’s not a good thing. What happens when those pass is that, as soon as landlords hear about it, they want to sell. It’s starting to happen. That’s another reason why you want to beat that before it happens because, you could end up having to compete with a whole bunch of other property owners trying to sell at the same time. All right, any rent control in Ohio?
Missy: No. No rent control.
Kathy: We were talking about market cycles and how back in 2005, you bought in Texas, I bought in Texas, I was getting out of California. At the time, we knew that Texas was the place to buy because there was so much job growth, so much population growth. Prices, it was 26% undervalued there while California was peaking. It was just an example of how markets do not cycle at the same time at all. They fluctuate. Usually, when the Coasts go up, the Midwest is down and when costs start to stall, the Midwest goes up.
This week’s housing numbers, if you’ve listen to the Real Estate News show, it shows that pending home sales, existing home sales, new home sales, plunged in the West and soared in the Midwest. Soared, it was like, up 18% or something in the Midwest. Back then, when we were choosing to Dallas, I don’t know about you but did people laugh at you?
Geraldine: Yes because they would live there. If you’ve been to Dallas in July, it’s like you just melt before you get out of your car. But, there’s a lot of people that live in Dallas and want to live in Dallas. It’s a business-friendly state. The economy is thriving. There’s no income tax. There’s a lot of reasons why Texas is appealing. When the affordability goes haywire here and people can’t buy a house, they look for markets where they can afford and where you can buy a single-family home for a reasonable price.
If you look at U-Haul and you examine those numbers or where people are going, they’re usually going to Texas from California peaking because they want to get out. We had people come back in here over the last four or five years but, everything is cyclical. It’s normal to have cycles, they just should happen. If they’re artificially impacted by the government, that really can change the dynamic and we don’t know what the outcome will be. That’s the frightening part. Kathy, I don’t know if you guys are listening to the podcast. She has a radio. She writes so much about this. She interviewed the chief economist for Fannie Mae this week. He’s an incredible guy. You were both in line with your thinking. I think that you’re in a room that is privy to information that is not available to everybody because they don’t want to hear it or they’re not looking in the right places or they’re not listening to the right people. When you align with a company like this, that’s what you get. I’m very experienced as a real estate investor and I’m ashamed sometimes of the people that are in this industry.
The reason I came to work with Kathy is because of the integrity. She’ll just tell you the truth. That’s how I roll. To be aligned with such a great company, at the risk of sounding like I’m just here self-serving Kathy, [00:36:00] but I think that Real Wealth Network is one of the few companies in the industry that are setting standards for real wealth. There are real standards that you’ve all heard about that we expect of our providers and they’re real people. That’s why I’m here because they’re not faking it. They’re not trying to sell you a bill of goods.
We want to do business long-term with people and that’s the way I operate. This is still a people business, despite the Internet and everything that is going on online. It’s still a people business and you feel comfortable with certain people and that’s what drives you.
Kathy: Let me make a comment about that. You’ll take it on. It is probably more important to be a people business than ever because, we were one of the first to do this thing and educate people to get out and buy somewhere else and we can help you not think it’s so hard and so forth. We’ll find the property managers and streamline it and find the team for you. We started to see a lot of other people who want to copy our success and that’s great. We all do that. That’s how businesses are born and created.
The total turnkey model, that was something new that came as a result of the foreclosure crisis where so many companies were going and buy the foreclosures and want to sell them to rich Californians. Now, you’ve got all these companies trying to model what we’ve done and what some certain successful companies have done. They’ll just put the word turnkey in front of their company name and that’s all. There’s nothing different about the property than if you just went and bought the property yourself.
We have a vetting team that we’ve made even more strict, and Ben could talk to you all about that because, he’s part of that vetting team and will go out to see if what these people are promoting on the internet is what’s real and it’s usually not even close. How many do we vet and turn down versus accept?
Ben: We vet about like two out of every three. The numbers don’t work or they’re in mediocre neighborhoods or you can just tell they’re just trying to cover up stuff. It’s like, “No, you need to actually do what we say in our real standards.”
Kathy: Just be aware of that. Don’t think that just because we’re getting you all excited about this, you can go on the internet and find somebody who says they’re turnkey and expect that to be the case. I went to visit a company of young 20-somethings that were excellent marketers online. They made their properties look amazing and I went to see them myself. They were like, “Here’s our finished product.” I was like, “Is this before or after renovation?”
I seriously didn’t know. I’m not kidding. It was awful. It was awful. I can’t imagine anyone living there. I said, “This doesn’t meet our standards at all. Who buys this from you?” He goes, “We have wait a list of California investors,” who never ever bother to go out and see what they’re getting. Yes, your time.
Letty: Well, I’d like to address that actually. We are not rich Californians, I can assure you. I certainly would sign up for that roll though. We have bought property stands and didn’t and hasn’t always been excellent. In our experience with Missy Harbor was, we did finally go out and visit the properties that we purchased from her. I want to address especially what Kathy was just talking about. That’s the event that they do for us. It was, for me, especially, it was key that Missy had a property that she was the property management company that not only did she purchase the properties, foreclosures, and that sort of thing. Did the remodels and then had them available for buyers, but that she follows through with everything. She has a team in place that is bar none.
Not only does she have a team in place right now but she also has the future of her company in place. That if something were to happen to her investment, that her people are going to step right in and take care of us, investors. We have not always had property management company people like that. We’ve been in a position where we’ve invested our money in properties that they just walked away with our income like the gentleman that was just doing the 1031 exchange you talked about. We’ve been through all that.
Kathy: Thank you. In the beginning, we didn’t always get it right either because in 2009-2010, it was the Wild Wild West. There was craziness. It was crazy. Some companies just grew too quickly because there’s so many of you and one of them. We had a guy in Cleveland who had 90 people on his waitlist at all times from our network. He couldn’t keep up with demand and so he hired somebody. The person he hired ended up ripping him off and taking the investor money and not doing the work.
There’s been things that have happened over the years during the time when this whole turnkey thing was being figured out that has made our real turnkey standards what they are, where. Even just two days ago, we had a meeting and Ben said, “I want to take four companies off the list. I’m not pleased with their results.” We haven’t really even gotten complaints on those that much but he just didn’t feel they met the standards. Shows that we are really, really strict about who is able to come into this room. Still working out? I have a way of turning this one off. Ben has come up with a whole system to help make this 1031 exchange process easier and more streamlined by warning our providers that, “I just met with so-and-so, who wants to do three $1 million exchanges. That’s 30 properties. Get ready.” She’s got to go out and find the money and she’s got to go buy the homes. She doesn’t want to buy too many because now if that exchange doesn’t go through, now she’s stuck with 30 properties. It’s a real balancing act.
Kathy: Ben has created this system where he meets with you, he finds out what you’re trying to do before you do it so that we can have the teams ready for you. Those properties are just sitting there waiting and that there’s more of them than you’ll need so that you can identify more than you need so that if something falls out, you’re okay.
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