Scaling A Real Estate Business In The Distressed Residential Space

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Today s guest is TJ Kosen TJ has been in Real Estate since 2006 first cutting his teeth before the crash with 200 multi-family units in Tennessee He has done deals in Texas California and Tennessee Show Description In this podcast episode TJ shares his experience in the real estate industry and how he has successfully scaled his business in the distressed residential space TJ discusses his strategies for beating the competition which include understanding the motivations of distressed sellers and offering tailored solutions He emphasizes the importance of treating the single-family business like a commercial operation and hiring specialized individuals TJ also talks about the balancing act between motivation and urgency when dealing with distressed sellers and how his company focuses on understanding the seller s needs to provide the best offer He explains how his company sets itself apart by focusing on margin rather than volume and crafting solutions that address the seller s underlying problems TJ also discusses the challenges of systemizing projects in the real estate business and the need to build a fund for sustainability and cash flow He predicts an increase in distressed residential inventory and shares his confidence in their competitive advantage ————————————————————– Intro 00 00 00 Scaling a residential real estate business 00 01 53 Negotiating with distressed sellers 00 07 32 The offer is more than just money 00 10 53 Outsourcing and specialization in business 00 13 01 Challenges in systemizing property projects 00 15 38 The forecast on distressed residential inventory 00 20 42 Evaluation of dispo strategies 00 22 15 Closing 00 23 39 ————————————————————– Connect with TJ Facebook https www facebook com tkosen Instagram https www instagram com tjkosen Twitter https twitter com kosentrade Linkedin https www linkedin com in tj-kosen-a944382b Web http www tjkosen com Connect with Sam I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns Facebook https www facebook com HowtoscaleCRE LinkedIn https www linkedin com in samwilsonhowtoscalecre Email me sam brickeninvestmentgroup com SUBSCRIBE and LEAVE A RATING Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts https podcasts apple com us podcast how-to-scale-commercial-real-estate id1539979234 Spotify https open spotify com show 4m0NWYzSvznEIjRBFtCgEL si e10d8e039b99475f ————————————————————– Want to read the full show notes of the episode Check it out below TJ Kosen 00 00 00 – We often beat our competition by 30 to I think our record in the past two months is 60 000 below our our competitor s offers by discussing this with the seller And so you re not dealing with an uneducated seller you re dealing with a seller that isn t served by a higher offer because they re not actually solving the fundamental problem Whereas most people you know 80 minus repairs we re like well let s let s see what the seller actually wants and let s hit it from the other direction instead Sam Wilson 00 00 23 – Welcome to the How to Scale Commercial Real Estate show Whether you are an active or passive investor we ll teach you how to scale your real estate investing business into something big DJ has been investing in real estate since 2006 first cutting his teeth before the crash with a 200 unit plus multifamily property in Tennessee He has done deals in Texas California Tennessee TJ Welcome to the show TJ Kosen 00 00 49 – Hey thanks for having me on Sam I m excited to share some insight Sam Wilson 00 00 52 – Absolutely The pleasure is mine Sam Wilson 00 00 54 – There are three questions to ask every guest who comes on the show in 90s or less Can you tell me where did you start Where are you now and how did you get there TJ Kosen 00 01 02 – 90s are lost I don t know about that I m from San Diego My first deal was 112 units in your hometown Memphis Tennessee It was a lot of fun 2006 Let s see where I started where I went to and where I am now In Dallas Texas we move a high volume of distressed mostly single family direct seller residential properties in our North Texas market also in Houston some in Tennessee and some in Florida Right now we re doing some marketing down there We have a pretty good sized team and we really specialize on the direct to seller marketing and we specialize in the optimizing our exit strategy based on the fundamentals of both seller s requirements and the deals specifically Sam Wilson 00 01 40 – Okay I m excited here to dig in today I know this show of course is a commercial real estate show but I think any time you can take a business like what you re doing you ve figured out how to scale it Sam Wilson 00 01 53 – I would say that what you re doing is probably more complex than buying a 200 unit multifamily You know say a B class multifamily property in Dallas I would rather I would think it would have fewer moving parts than what it is that you re doing Would you agree with that or not TJ Kosen 00 02 08 – Oh yeah One of my biggest hurdles really from transitioning from multifamily in the in the crash back in the day to more single family was how much more specialized and individualized the product had to be at least on a like a 1 to 1 basis So the way that I kind of overcame that fundamental issue with the business model is treating the single family business more like a commercial kind of operation where now we re we re hiring specialized people to do specialized tasks same as you do in multifamily You re going to hire you know a manager to do a specific thing You re going to hire a maintenance guy to do a specific thing or whatever it is So we did the same basically the same type of model the same type of mindset with residential distressed stuff even down to rehab TJ Kosen 00 02 47 – So I said we optimize our exit strategy based on the property but if we re doing for example a renovation we try to keep the renovation very simplistic in terms of we re doing the same thing over and over and over again as a cookie cutter type model And again from the commercial perspective we even looked at the loans the loans the debt we get is very much commercial based you know debt service or hard money depending on the type of loan So it is fundamentally a commercial mindset I think for a residential type of business or type of product Sam Wilson 00 03 17 – Yeah absolutely So I mean you correct a lot of things here because I know I know I ve got some flaws in my thinking Probably more than TJ Kosen 00 03 26 – That You might be smarter than me Sam Wilson 00 03 27 – I don t know Probably more than we have time here for you to solve but maybe specifically about your business You re in the distressed residential space Deal flow I would imagine has become constrained especially in the last five or so years Sam Wilson 00 03 43 – True TJ Kosen 00 03 47 – False but only if you re better than the competition And fortunately there s a lot of competition so it s easy to be better than a lot of them And what I mean by that is you have to treat it like a business really where if you re going to do a volume you have to treat the fundamental business is the lead generation and the negotiations on the front end to generate a top of the funnel volume sufficient enough to keep the business operational Right From a strictly sales perspective if you re trading a new sales guy in roofing we have a roofing company for example or you know loan officer back in the day is where I started like way back in 2005 You re always training the sales guy like always be originating always be originating because you have to have the deal I was like Oh I had a great month I could coast Well yeah but you know you burn through that really quick And as you scale up in a business it actually becomes easier after you hit probably a certain threshold of deal flow TJ Kosen 00 04 37 – Maybe cash flow management becomes more difficult But in terms of like consistency of outcome it becomes easier to actually keep a consistent pipeline of deals going because now there s so much stuff going on that okay if something goes south it s not that big a deal because you got ten more things that are going like not South And that s that s how we ve been able to overcome it We focus on lead gen we focus on negotiation on the acquisition side and then everything else I don t want to say it works that self out because actually that s fundamentally my problem I m the I m the I m the problem solving department So I actually don t generate the revenue I make sure we cover our tail on the back end But that s that s what we ve been able to overcome that Sam Wilson 00 05 14 – Got it That s really interesting What would you say when looking at the When looking at the distressed seller types are there any themes to it that you re seeing right now TJ Kosen 00 05 27 – More or less So there s always a there s always a balancing act between motivation of the seller itself and the stressing factors that the seller is dealing with TJ Kosen 00 05 38 – So I like to call it a like a scale between motivation and urgency is what we have with the seller So for example for years during Covid obviously we wouldn t have foreclosures because they just weren t happening really Right So a foreclosure typical traditional foreclosure is highly urgent because there s a foreclosure date where they re going to lose the property by and after I mean you can kick the can down the road a couple of times but eventually it s going to happen But that buyer profile might be very unmotivated because they tend to want to ignore their problems just from what we ve noticed from dealing with them So then we have to negotiate one way with that type of seller where I think I said buyer a second ago anyway we have to negotiate one way with that type of seller where we stress the actual urgency of the situation and then that elevates their motivation So that s one type of seller profile The other type of seller profile would be a more traditional distressed seller that just has a problem with a kind of junky house that they don t want to deal with and it s very seldom that they don t know what the property is worth or anything like that TJ Kosen 00 06 41 – Often we ll tell them and we ll walk through the whole process and talk about the options But maybe they have a hoarder house and they just have three feet of stuff in the house they don t want to deal with Maybe they inherited a house and they don t want to deal with the emotional trauma of dealing with the stuff We like to say when negotiating money is always a motivating factor but it s very seldom the fundamental motivating factor As investors we often project our expectations on the seller So my expectation is I want to make a lot of money Therefore obviously the seller being a reasonable person wants to make a lot of money on their house That s not necessarily the case They usually have an emotional trauma or an emotional issue with the House That s their primary motivating factor So if we can figure out what that is and solve that problem then we re not only in a better position to profit ourselves and our company but we re actually in a better position to solve their problems Um not to not to monologue too long TJ Kosen 00 07 32 – But for example we often beat our competition by 30 to I think our record in the past two months is 60 000 below our our competitor s offers by discussing this with the seller And so you re not dealing with an uneducated seller you re dealing with a seller that isn t served by a higher offer because they re not actually solving the fundamental problem Whereas most people you know 80 minus repairs we re like well let s let s see what the seller actually wants and let s hit it from the other direction instead Sam Wilson 00 07 56 – What how do you do that Like that That that sounds Too good to be true Like how do you discover the the motivations for selling and then offer them 50 000 less and get them to say Yeah that sounds good TJ Kosen 00 08 14 – Um Well you need to make it good don t you So Sam Wilson 00 08 16 – Yes TJ Kosen 00 08 17 – So take a traditional cold call lead I suppose which a lot of our competition does And cold calling is our um worst performing lead source in our company because we re not as good at the long term follow up as some of the guys are TJ Kosen 00 08 29 – But fundamentally a lot of those types of lead origination mindsets deal with the property because they re burning through a lot of data a lot of data points a lot of lists or whatever And then just in the nature of that lead they re going to want to disqualify the urgency of the seller Whereas if we have an inbound lead if we have a PPC lead a mailer lead even a bandit sign lead we ve closed a couple of those It s kind of weird right Um then not only is the seller contacting us but now we re not trying to disqualify the seller We re trying to find out the actual underlying need that they contacted us And we do that by having a long conversation with the seller about the actual situation that they re involved in Um again it s going to depend a lot on the seller So a pre foreclosure is going to be a lot more urgent and maybe even on our part a little more aggressive negotiation technique than someone that has a hoarder house that they don t want to deal with trauma of the stuff TJ Kosen 00 09 27 – But we re going to find out what the trauma situation is and then we re going to find out how we can solve that problem for the for the other person We re not going to be qualifying the property to speak of in the initial conversations So where our competition is going to say well tell me about the house We don t care about the house Like there s a dollar amount that the house makes sense for us I think probably for like anything like we ll do seller finance we ll buy a house for a dollar even if it s a complete whatever and sell it to someone So there s always a dollar amount that overcomes whatever problem there is on the house And we re going to verify that once we actually go on an appointment or send pictures or whatever So we always verify the house That s not the problem The problem is the seller because that s the person that we re trying to solve the problem for So the better we re able to do that the better we re able to have long conversations Our average talk time for qualified lead is probably 30 to 45 minutes whereas our competition is probably 5 to 25 minutes TJ Kosen 00 10 19 – Um and that s that sets us apart maybe not in terms of volume although we do a significant volume but it sets us apart in terms of margin Sam Wilson 00 10 27 – Yeah that s And what are you Obviously you re establishing rapport with the seller things like that But let s let s assume that you diagnose what the trauma is I don t know You can probably make something up but we don t necessarily have to But you diagnose what that is is is your secret sauce and then crafting a solution to that trauma Yes And then making them an offer kind of independent of that TJ Kosen 00 10 53 – Yeah absolutely The offer isn t money The offer is money s a component but the offer is okay You need 100 000 But what do you need 100 000 for Because I know I can only give you 50 grand or whatever it is Right Well I need 100 000 because I want it because of X Y and Z Okay well if we can get you to X Y and Z then is the offer going to be reasonable if I can get you where you need to be is that going to be okay if I can make it so I mean pre foreclosure probably a good example TJ Kosen 00 11 22 – I need 100 grand because I need 100 grand Okay You re going to lose your house on Tuesday You re screwed It s Friday Like we can do this But we re pretty much the only ones that can because you re all just partial because you don t have time So now we have to say like okay if I can get you you know this much here s where here s where you need to be What else can I do to help alleviate your situation Well I m going to need some time to move Okay No problem We ll do a lease back We ll do a hold back for the lease back So we re covered But now we re competing Now we re beating the competition on the wholesale side where the wholesalers they re going to see a lease back is something that there is cutting into their profit For us we close on 75 of our deals anyway so it doesn t hurt us that much in terms of that And we just factor in the carrying cost and the risk in like a decreased price or a lease back hold back TJ Kosen 00 12 10 – Oh don t want to do all the stuff in the house You know what No problem You think you need ten grand a dumpster fees Just leave the stuff there Don t worry about it Automatically dropping our offer by ten grand Right Or whatever it is in their mind So that s that s where we alleviate the emotional trauma for the sellers and and other people can do that It s just they re not as good at having the conversations about how to do that Sam Wilson 00 12 32 – Yeah How long is it taking you to craft that script or that kind of process I mean it s it s a TJ Kosen 00 12 38 – It s a work in progress I m not the best acquisitions guy My motivating factor of building this entire monstrosity that I have is I just don t like talking to sellers They bummed me out They got a junky house It smells funny It s got stuff in it They haven t fixed the roof for 30 years and they know what they have I don t want to talk to that person I ve talked to that person a hundred times at the same exact house TJ Kosen 00 13 01 – It just happens to be in a different address I d rather hire someone and that s where the kind of commercial mindset comes in in terms of like building the business I d rather hire someone where that s their binary task and that s what they do all day long and they enjoy doing it and they re paid well to do it And honestly they re better at me than doing it because I m going to be I m going to be a nice guy I know I can give you five K more and then you re going to think that I m an amazing person Whereas if I send someone else out oh I got to check with my boss Like there s that psychological hurdle that they have to overcome They know what they can pay but they re going to know that now they have to come back and justify what they paid for And I m going to say well could you gotten cheaper Well no absolutely not I couldn t have gotten cheaper All right Awesome Good job Could you have gotten cheaper like TJ Kosen 00 13 44 – Yeah probably Well okay You made 80 grand You should have made 90 You know whatever the situation is Sam Wilson 00 13 51 – Right No I like that I like that a lot That s It s always good finding people that are better at it That the name of the game as a business I think so Finding finding people surround yourself with everyone who is better at everything than you is kind of one of my own mantras Like Oh I can only hire you if you re better at it than me because I don t want to be the best at it TJ Kosen 00 14 13 – That s a big that s a big misnomer in the entrepreneurial space right Everyone says like Oh I m never going to find someone to do X Y Z as good as me Like that s absolutely not true because first of all you re probably not as good as you think you are And second of all if you re doing X Y Z and ABC and a bunch of stuff in the middle too you re not doing the critical stuff all the time as well as you can at your max capacity because you re doing all this other stuff right So if you hire someone that s honestly more intelligent and pay them better they re going to have a holistic picture so they know where the thing fits in the entire holistic process of the business TJ Kosen 00 14 46 – But they re going to be sophisticated enough to know that their job is to do this one piece of the job to fit it into the bigger picture And they re going to be able to do that piece of the job better than you 100 of the time right Sam Wilson 00 14 57 – Yeah Specialization man that s that s that s imperative I have a question probably more from a personal standpoint because they did a whole lot of house flipping all the way through In wholesaling through 2018 One thing I could never overcome in this space tell me how you ve done this is that every property was completely different And so even with project managers even with the theoretically people on the bus that knew what they were doing it somehow seemed like we could never get projects done as quickly or as well or because there was never I know you mentioned cookie cutter and we got to that to where it was like Hey here s the finished schedule here s the paint schedule It s the same bloomin color every single time on every single wall Sam Wilson 00 15 38 – Here s your trim type here s your But even with that project still vary Oh there s foundation issues here Oh there s you know there s that over there I mean it s a constant problem solving thing And each each project has its own unique problems How have you found a way to systemize that TJ Kosen 00 15 58 – Uh I mean the short answer they haven t The longer answer is we try to again we try to make the product look relatively the same We try to use consistent crews that we ve used over and over and over again in a lot of times And in this market actually it s kind of annoying Flips are probably our lowest margin product especially when you take into account turnover ratio cash conversion cycle My personal headache of going out and seeing these things So that s the part that It s a little tougher to outsource to be honest with you It s almost it s easier to outsource a good sales guy well in office but it s easier to train that and have that as a thing as opposed to someone that has you know getting into real estate in oh six that many years of construction experience where I can walk through a house in five minutes and know more about it than most people can in an hour right I still walk TJ Kosen 00 16 47 – I still walk construction sites Yeah I do Um fortunately we re not doing we re only doing six rehabs now out of 30 deals So about 20 of our deals are rehabs So it s not that overwhelming And we try to we try to have a good schedule of what needs to get done day one and then trust the crews to do it and then empower them to be able to do it and then touch base with them I talked to some of our contractors twice a day even now Um but that means that we made 35 Yesterday I think on a wholesale that I don t know anything about Right So that s that s the part of the business that yeah I m still very more active probably in that part than I really want to be Um but I m not sure the best way to not be as active as I am in that Right Sam Wilson 00 17 28 – Yeah that that was a challenge that certainly I faced and say you re doing better at it than I was because I never really doing it this that you guys are Sam Wilson 00 17 36 – But let s let s let me ask you this So six of the 36 of those are rehab What are you doing the other 24 TJ Kosen 00 17 42 – It depends So that s where we re merging a exit strategy with the entrance strategy on the front end Um I don t know specifically because I don t even know all the addresses but our our exit strategies range from pure wholesale so I mean that s awesome Who doesn t want to make a bunch of money without any work Correct Um I mean it takes work but that s a lot more systematized work with the acquisitions guys and the dispositions guys do the work That s good It s probably 20 maybe 25 I m not sure Yeah we hold tail some so in that we ll take it down Like for a strictly perspective we would we would we would generally call a wholesale anything that we actually close on Um with some things where there s a leaseback or there s some stuff in it we ll probably it s probably technically mostly still a wholesale even if we buy it for like a week TJ Kosen 00 18 30 – We ve had we ve had hotels that we ve owned for maybe 7 to 10 days and just either put it on the market or have it pre-sold but for some reason like a leaseback or stuff in the house we need to own it personally for a little while And there s risk to that Obviously there s transactional cost and there s transactional risk just with having the property but we try to do that for the most part We have a couple like that right now I think um we do a lot of seller financing so we do a lot of deals where we will buy a property for a good example really is buy a property for 100 000 Maybe it s ARV is 200 000 but we re able to offer seller financing and sell it relatively as is for 140 to 150 And then we ll either turn out the note or offer financing on a shorter term deal and we attract a different um probably buyer profile than that than a full like retail type buyer So those are the those are the primary exit strategies we employ I think Sam Wilson 00 19 25 – How do you handle on the seller finance side of things I mean it takes a lot of money to hold those and then create those notes and then you know how do you keep that cash TJ Kosen 00 19 37 – Yeah well we just got rid of guys that help us with that Yeah Um we have some good note buyers That s actually the next part of our commercial thing We re in the process of building a fund to warehouse those notes because generally they re 20 or 30 year fully amortized But the rates are really really good We re selling stuff with 12 to 13 5 interest rates right now with a 30 year product So it s very appealing to a note buyer It s very appealing to a cash flow owner that doesn t want the headaches of the actual ownership aspect of the property that are very low default because we collect 10 to 20 down on all those deals The buyers are generally as well as you can relatively well qualified for the properties and they just they simply don t want to say they don t default but they don t really default TJ Kosen 00 20 25 – So it s a good product We re in the process of building a fund because obviously we re going to run out of money like we even if we have 10 million we re going to run out of money ourselves relatively quickly doing that So we re going to build a fund and stick a bunch of notes in there and cash flow for some investors cash flow for us and everyone makes more money It s going to be exciting Sam Wilson 00 20 42 – Absolutely What are your forecasts on the distressed residential inventory Do you see that going up You see it down What are you forecasting TJ Kosen 00 20 53 – I mean so Probably up probably up a little bit Think it s a little bit easier now than it was when there was a lot of the i buyers just really soaking up all the inventory I know there s still somewhat active but they re not nearly as active as they were two years ago Like any non conventional lending the IE buyers all operate on short term interest rates to maximize their whatever and as interest rates go up they get pinched TJ Kosen 00 21 17 – We saw that obviously with the non space with our take out financing on rentals You see it in the commercial space with apartments that kind of thing So I think the more our level of buyers are probably going to be at a competitive advantage over a lot of those people We beat the buyers a lot just in terms of picking apart their offer and explaining differentiating our process from their process So I think on the retail side I think we re going to continue to see low inventory because partially because so many people are locked into a low interest rate loan they re not going to want to quadruple their payment by doubling their house size So they re like you know what I m just I m fine where I am So I think that s going to artificially deflate inventory And it s going to have an inflating aspect in terms of keeping the retail market up And I think people that are needing to sell that have a junky house I don t know many retail buyers that want to buy a house that needs 200 K worth of work when they re going to have to come out of pocket 200 K even if they can conventionally finance the acquisition of that property TJ Kosen 00 22 15 – So I think I think overall I think we re in a good position to be in We reevaluate probably every quarter in terms of the Dispo strategies that were that are most profitable and that we have to do And we re having fun Sam Wilson 00 22 31 – That s fantastic TJ thank you for taking the time to come on the show today This has been a blast having you on I ve learned a ton from you I love what you re doing and how you guys have done it how you ve learned how to scale this the systems you ve put in place the teams you ve put in place I think it s really impressive because there s very few I think that have figured out I know you said maybe you haven t figured it out but you know you have a lot more than a lot of other people have there in the residential space Taking that and scaling this This business is really cool I love what you re doing If our listeners want to get in touch with you and learn more about you what is the best way to do that TJ Kosen 00 23 04 – Well I m all over the place online TJ Kosen 00 23 06 – I m super easy to find Very creative too So TJ on Facebook and Instagram really easy TJ kills and I mean again a creative guy and our what do you call it Oh our kind of company like our looking marketing page is ry af real estate investing and I m not really sure what AF stands for but it sounded cool when I put it up there Sam Wilson 00 23 28 – Fantastic TJ Coziness cozy in for those of you who are listening and want to look up TJ Com TJ thanks again for coming on the show today I do appreciate it TJ Kosen 00 23 38 – Thanks so much Sam Sam Wilson 00 23 39 – Hey thanks for listening to the How to Scale Commercial Real Estate podcast If you can do me a favor and subscribe and leave us a review on Apple Podcasts Spotify Google Podcasts whatever platform it is you use to listen If you can do that for us that would be a fantastic help to the show It helps us both attract new listeners as well as rank higher on those directories So appreciate you listening Sam Wilson 00 24 01 – Thanks so much and hope to catch you on the next episode Click here to visit this podcast episode