How You Can Fix And Flip Around Market Shifts And Why Local Flippers Are Crucial To Solving The Inventory Crisis With Kurt Carlton

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The state of our economy today is an open book and we see the hit everywhere. But how has it been in the real estate space? Specifically, how has it been in the fix and flip niche? In this episode, Kurt Carlton, President and co-founder of New Western, talks about market shifts and the several factors affecting the real estate market. He also shares insights on what the current inventory crisis is really looking like. Tune in and learn more about initiatives for fix and flip developers and how you can battle inflation and hustle your way to the top.

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How You Can Fix And Flip Around Market Shifts And Why Local Flippers Are Crucial To Solving The Inventory Crisis With Kurt Carlton

Welcome back to the show. Thanks for coming back. I am joined by a good friend, Kurt Carlton. Kurt, thanks for stopping by.

It is a pleasure.

Kurt, take a minute, say hello, and tell a little bit about you and New Western.

We operate a marketplace for investors to find houses to rehab. We do it in 20 states and we will be in probably 10 or 15 more. We are expanding rapidly. A lot has changed since 2008, but we have been doing this since 2009.

I remember when you started and it seemed like bad timing to me, but I am very impressed with what you have done and the marketplace you have developed. I want to get straight into some content here. The first segment is Bottom Line Upfront. What I do is I give each guest two minutes. When I was in the Marine Corps, I used to brief generals. I always said, “You do not bury the lead. You give the general the most important information up front in case mortar shells come in.”

What I am going to do is I am going to give you two minutes to talk to the readers and pontificate about what people should be thinking about, what they should be looking at, any data that is interesting to you that you are watching that you think people should watch. Things you think they should be doing or maybe some things that you have seen in the market that you think people should not do. Bottom Line Upfront, go.

There a couple of big things. It is getting exciting again. Inflation is the big one. That is what everybody is looking at. Nobody seems to share the opinion on how to measure it, but it is here and it is big. Warren Buffett famously said in 2012, “The biggest hedge against inflation is the 30-year Fannie Mae mortgage.” It is a perfect defense against inflation. Even though rates are higher, you can reset your mortgage rate if rates go down through a refinance, as long as your financial condition stays the same. You cannot repurchase a home again later, if the price increases. I do not think that there is a future where home price appreciation starts to go backward rapidly.

Inventory is at such an unhealthy low number. It would be unreasonable to think that you are going to lose home value. I think we will be just fine on homes. That is very much separate from a lot of the other concerns in the economy. I think what is different in this potential recession that we are going into now is, in the past, we did not have as much warning and the Fed did not do as well in giving us a warning ahead of time. They did not communicate as well.

When a recession or these issues were nigh upon us, they had to react. What they are doing a really good job of is communicating so that the market can understand where we are heading and can slow down before they need to raise rates. I think that is already happening. We are narrowly looking at a soft landing as opposed to a hard landing, but we will see. I would continue to buy real estate. I would certainly leverage fixed-rate mortgages and debt whenever you can. That would be my advice, given the lack of inventory we have now.

You brought up the dirty word, Fed. You said they are doing a good job. You may be the only person I have heard say that, but you are right. They have given us a heads up. Interest rates have doubled, but they have doubled from not even the bottom of the basement, like under the basement, under the foundation piers, down into the Earth’s crust. You brought the crystal ball segment of the show up earlier. Do you think that still rates could still go up?

The idea is that they will continue to increase. If you saw it in 2018, we had the same issue. Rates went up and then they reversed it. Who knows if that is going to happen? The inflationary pressure is different than what it was in 2018. Nobody knows where we are going to go, soft landing, hard landing. Your teeth are on the edge. If you push too far, it is like a chain reaction. Everybody goes. I listened to Ben Bernanke in 2008 about how that was potentially avoidable, which I am not sure I believe. It was right before he handed us a signed book and all that. Maybe he was trying to save us.

Everybody complained so much. They drove it to happen. Nobody knows, but what is different than it has been in the past is the Fed does a lot more forecasting about what they are going to do. That allows the market to react. It allows the slowdown that we need to slow down inflation and the labor costs that need to happen. I look at this more, real estate-wise, moving towards normalization and not moving towards a recession.

It is inserting stability into something that I feel like was starting to get unstable. I do not think the housing market was unstable at all yet, but a couple more years of these double-digit inclines and you get pretty unsustainable.

We are in an affordability crisis and will continue to be in an affordability crisis. Nothing is going to change that overnight. There are all these programs that mean to fix that like the GSE’s main mission was to make mortgages more affordable for lower-income buyers. How do you do that? You lower the fees. All you are doing is piling more demand into the lower end of the real estate market.

You are not addressing supply at all. You are arguably raising the cost of housing with these things. Nobody is addressing the supply side. In the Build Back Better Program, this tiny thing was much overlooked. It was basically a small act that was aimed at fix and flip developers, creating a tax-free environment for them if they flip houses as long as they meet certain criteria that deem them affordable. They have to find it at an affordable price range and they have to sell it to a buyer that meets income levels. I think it is 80% below the medium local income.

That would qualify all the proceeds on that flip to be tax-free. That was the only plan that I have seen that addresses the supply because, as you know, there are 16 million vacant homes in the United States. Some of them are vacant. You know how many homes there are. That is 12%, 15% of the inventory. Some of them are vacant because they are an Airbnb.

I heard a story from an individual at a dinner party. Years ago, she had inherited a rental house. It was kicking off rent. It was in Arkansas. She was in Texas. There was a fire. She did not know what to do with it after that. She was not equipped to figure out how to reposition that. She did not want to go to Arkansas and work on that. It was vacant for three years with fire damage. Who knows how that went with code enforcement and the neighborhood. Maybe Arkansas is a different thing than DFW.

It was three years until they decided to sell it. They sold it to a local investor. There are a lot of situations like that where houses are just vacant for no good reason. When you have an inventory and affordability crisis, having the local fix and flip, mom-and-pop operators that know the market and providing incentives like that for them to find those units and return them to market, a Net-Plus one housing unit.

The effect that that has on the local housing market is tremendous. It is the only thing that will work. You cannot build fast enough. The builders are so spooked by the rate environment that they are all slowing down. Land prices are insane. Lumber was crazy, now it is cut in half and it is starting to become sane again.

You will see some of that supply chain stuff work itself out. The builder environment has a lot of risk in that. You get that machine going. You cannot pull back when the market has changed. That is why in 2018, when rates rose, we lost 18 to 24 months of building inventory when they pulled back and they had to build back up.

The answer to housing inventory is the existing stock to finding these distressed houses. This is probably not going to be a mega institution that does this. Flipping houses is not scalable. The high buyers like Opendoor are not buying houses that have unpermitted additions, foundation damage, and burnouts. They are buying houses that have lipstick.

You have to lean on this local flipper that I am not sure if the market still views that person as somebody that is part of the problem or the solution. They are the solution. They are the hero. They are the people that are taking the personal risk, slaying the dragon. They deserve the gold. They are fixing the market for us. I do not think they get enough praise as far as how to engineer us out of this inventory crisis.

I was at a city council meeting in my hometown because I have this large 150-year-old house that I am repositioning. We are going to subdivide and build some more housing units. We are meeting some resistance from the historical board. I made that point. I said it at the meeting, “I am not the bad guy. As a matter of fact, my wife and I have invested over $2 million within a half a mile of downtown, taking the ugliest vacant houses in the neighborhood and making them the nicest houses in the neighborhood.” I am with you. All hail, the local flipper.

Kurt, you hit all of the top headlines for me, inventory, affordability, supply and demand. Somebody said, “Supply and demand is undefeated.” When you look at the decline in home building after 2008 and then the pullback in 2018, and then the pullback when materials and labor shot way up, if you look at home permits, it is pointing down. If you look at the population chart, it is pointing up.

Even with that thing that happened in 2020, it still points up. There are more humans that need housing than ever before. We are building less homes per capita than ever before. There are a lot of people living with their parents, but I like where you are going on this whole, “We need to go find the vacant units and get them activated.” That is smart stuff. How does the local flipper do that?

It is so challenging. This is an area of real estate where the data is so opaque. You can see all the square footage, your bill, if somebody has paid their taxes, all that from a top-down approach on real estate. Most of it is public information, but you cannot tell the subjectivity of the inside of the house whether it is distressed. So many of these situations like that burnout situation, they come and go.

In real estate data, there are not a lot of transactions that occur in any given neighborhood. The largest transaction in any major market in the world is real estate transactions. These are not tampons at Target, where you build a big data, machine learning algorithm to find these houses. It just does not work.

This is why the local home flipper is so important. You need a lot of boots on the ground, local decentralized experience. You can imagine if I am trying to flip a house nationwide with a big top-down company and I have got this big approach to find all these houses. Imagine how my rehab is going to different differ in the South side of Philadelphia versus the homogenous subdivision of a Phoenix. It is different. You need a local flipper in the South side of Philly and he needs a baseball bat. That is not scalable.

That is the reason the first time that any of these funds go into local markets. The first thing they do is go find a boots-on-the-ground entrepreneur that they can partner with because they do not have a baseball bat on Park Avenue. They need to know what neighborhoods they need when they expand to Tampa, Orlando, and all the other major markets. Do you think we will end up transitioning into a 40-year mortgage in America?

They offer a 40-year mortgage with FHA. This is largely due to COVID. They offer a modification for FHA loans. They are already pushing people into a 40-year mortgage. That is probably right. They need to reset a lot of that. The way they have handled the moratoriums and the forbearance has been pretty good. It has avoided a lot of heartache and damage. I think moving someone into a 40-year in that situation is probably good. I do not know that we will offer a 40-year, but probably. How much more unaffordable can houses get?

You have people that cannot afford houses, but you also have people that can afford houses. There are individuals graduating from college at TCU with a degree in Finance, getting married, $200,000, $250,000 combined income that cannot buy a house. Not because they cannot afford it. They cannot find one. They cannot take 40 hours off a week of work to make bids all day long to try to win.

Is the investor the problem? I read that the Dallas city council was considering limiting the number of homes that an investor could own or buy in the city. You read the articles about how the investors are pushing the homeowners out of the market. What is your take on that?

I think people get really upset when they cannot afford a house. Buying a home is a way it is the fastest and most reliable way to generate wealth for the average American. When you take that away, that is a problem. With all that is going on with the disparity, that is an issue. I think when people become angry, your local lawmakers look for solutions.

In California, that is rent control. Every economist on both sides of the aisle agrees that rent control is like carpet bombing your city. To say that we should not allow investors to buy houses is so broad. They have bad data. The data for Dallas-Fort Worth here was close to 40% in Dallas, almost 50% and close to 40% in Fort Worth investor purchases of all the homes on the market.

That is pretty crazy. Since then, all the funds have been put on pause because rates have increased. They have to securitize all this. They are waiting for cap rates to increase so that they do not get priced out too high. Maybe they will come back. It is going to be a problem. There is a lot of lobbying going on in DC because a lot of people are upset. We will have to work our way through that.

The answer is getting flippers that are finding houses that are not being used and repurposing them to be a Net-Plus one, they should fall in that basket. I am afraid they will. Some politician will come in with not enough data and will make some big sweeping thing that ends up being tremendously popular to their constituents. They push that out there and it gets them into a deeper hole than they are now.

I was on Twitter and I noticed a tweet from BlackRock. The tweet said, “Setting the record straight. BlackRock does not buy homes.” I was like, “They are promoting this?” I clicked on it. It talked about their investments in the paper. BlackRock does not buy. They buy the bonds from the securitizations. They are often confused with Blackstone. I found it very interesting that they are spending money and time to put out press releases, differentiating themselves from the ones that are buying.

I think there are a lot of misguided opinions in Washington and local. You know very well because of your background that mom-and-pops own the vast majority of the rentals in the United States. It is not the big mega-corps right. Just because the mega corps are going through this big acquisition does not mean you should shut the door on everybody. You are going to cause some damage where you are going to hurt the wrong target or not fix the right problem.

I use this house in Rockwall as an example. It will probably be worth $1.2 million to $1.5 million when we are done with it. We paid $550,000 for it. If there was anyone reading that was anti-investing, they would think that I was a crook and I ripped someone off, but that home had been for sale three times on the MLS. No one bought it. No one made an offer. We have spent almost $250,000 replacing all the plumbing, rewiring the entire house, digging the foundation out of the dirt. It is a 150-year-old Victorian house. It is a historical landmark in our town and it is important to me. I care about the community.

Here I am. I am taking it. I am the only person in the area with the skillset, knowledge, and willingness to invest my money to do that. There have been 4 or 5 other houses around there that we did that to. We turned them from the vacant house with a hole in the roof, with the tree lying down to the house to $100,000 later, everybody wants to buy it from me. I think drawing a differentiation is important, but I also think the free market has got to run. That is my opinion, though.

It is if we want to be America and have things like property rights that are respected, but that chaps my stick, what you just said. That is the one thing that drives me crazy. If you look at what these investors do, everyone says, “They are buying below market value.” They are not. They do not buy below market value on our marketplace. They buy at market value and they add value to the home. You see the creative things that these investors do to these houses. It takes a local creative person that is taking the financial risk to do and maybe marital risk because you flipped enough houses to know what goes into that.

It is stressful. One of the most stressful things you can do is flip a house. Some people like that and it gets easier over time. They are adding so much value by doing all these things, by improving the floor plan, doing things that homeowners cannot do. When a homeowner tries to rehab their own house, are they a professional designer? Do they have enough experience to know what sells? Are they going to do repairs that need to be redone when somebody buys it? A contractor is going to charge them a premium. Isn’t that what the profit is for an investor anyway?

They are just doing this thing the homeowner cannot do, should not do, and does not enjoy. They are taking all that away and they are adding value. What we are seeing in Seattle that has severe inventory issues is they are buying these houses and they are building these nanny pads in the back, taking one housing unit, turning it into two housing units. They are doing all these creative things that help the area. They should not be looked at as somebody that is just taking advantage of somebody and buying under market value and stealing equity.

It is hard. I do not want to drive that rabbit hole because I will start complaining about the city council. Before you know it, Kurt, we are going to be down the hall, drinking a beer. I am going to move on. We keep saying mom-and-pop. That was one of those things that was almost the way that Wall Street put down the local investor, but I feel like it is a differentiation that lends to the entrepreneurial spirit of the backbone of our industry and the people looking in your marketplace. Do you have any insight into some of the characteristics you may have seen over the years of what makes these mom-and-pops successful in running their businesses?

Arguably, the education side of the real estate industry is bigger than the real estate industry. There are certainly more opinions than deals, but sometimes people have the wrong expectations. This is more like baseball. You do not hit a home run every time. You have got to do a lot of deals. It is marathon. It is a career. You just get better with each one.

I think people that look at the long-term that this is a business. When you start a business, you have costs. Everything is not as efficient as it should be. The idea is to make it more efficient every year and to make your unit economics, your profit on each house more profitable every year. You have got to start somewhere. Over time, you have to improve it and you have to have realistic expectations around the time it is going to take and the money that you are going to need to invest over time to build out a real business.

The other thing that I think a lot of investors do not see is everybody thinks that you have to buy the deepest deal. In this market, you have to be efficient with everything and you need to be the guy who can pay the most. That means your business has to be efficient. You have got to have the right contractor management, the right suppliers, the right design choices, and all these things in order to pay the most and get inventory.

It is time for my favorite part of the show, the Money Minute. Imagine there is a young Kurt about to start New Western or maybe a couple of years into New Western or a young entrepreneur out there thinking about getting into real estate investing. There is someone out there reading this and this is the only 60 seconds of advice they are going to get all month. You have got one minute to talk to them about how to be more successful, how to make more money and how to live a better life. Get your best stuff together. Here we go, the Money Minute.

Just do a deal. People are successful because they take risks. Do a deal and understand that it is a risk. There are a lot of people that you can sit and you can dream about how the market works, how deals work, learn and take classes and do all these things or you can get in and see what the actual market is like. I think even if you do a deal unsuccessfully, you leave with knowledge. You leave with an understanding of reality of what you need to work on to improve.

As long as you are constantly improving, remember, this is a marathon. Just do a deal, learn, and do your next deal. We are lucky that if you can find a deal, you are going to move it. The hardest part of the job is finding a deal and being able to execute on it. If I had any piece of advice for somebody out there, I would say stop learning by not doing and start learning by doing. Do a deal.

I have no hesitation about doing deals. I tend to just like, “Sure. That will not work. We will buy it.” I will never forget the first time we bought this house for $3,000 and I was in Vegas at my buddy’s wedding. He came up to me and he was like, “We bought this house over off of Canada for $3,000. That lot is worth $100,000-something now.” I turned to him and I said, “Are you sure? That is a rough neighborhood?” He goes, “Tim, you just lost $3,000 in a roulette wheel.” I was like, “You are right. We should buy the house instead.”

You can waste a lot of money and a lot of time by not doing deals. I agree with you. Just do a deal. Kurt, I love levers. Every real estate transaction is a couple of things. It is what you pay for it. It is what you spend on it, what it ends up being worth on the rental or the sale market. The market influences what you pay for it. The labor market in relation will influence what you have to spend on it. Frankly, your other decisions earlier are going to depend on what the market will pay for it. There are other leverages you can throw, financing or cash and etc. Let’s talk about levers. Best piece of advice on deciding what to pay for a property.

That is going to be different from investor to investor. Some investors can pay a lot more. They have a better contract, a network of contractors. They know their neighborhoods. They know their design. I have been off all the time when I go in and I say, “This is worth $300,000,”  and some local rehabber says, “I will get $375,000 all day long for this.” I say, “You are dreaming.” They do it because they know what works in that neighborhood. They are experienced. They can take what is perceived as greater risks, but it is because they have the knowledge. There is a higher likelihood that they are going to move those things because know how to work that neighborhood.

If you are struggling with what to pay for a house, develop market-specific or even neighborhood-specific expertise or understanding.

You are only going to learn that by taking risks through experience. You have got to start somewhere.

I love baseball analogies. You used one earlier. You can never get better at batting without going to batting practice. You have to practice. What about contractors? I know a lot of people pick the cheapest contractor and then they get the cheapest work. The house sells for the cheapest sell in the neighborhood and then they are mad that it did not sell for whatever they thought it was going to sell for. Do you have any advice on selecting the right contractor?

First of all, you need to have a lot of contractors. They are going to shift. Contractors are contractors because they cannot get out of bed in the morning. They do not fit into the rules of society, so they go become contractors, which is great. There are different types and the world needs all different types. They are going to do their own thing and they will be with you, reliable, and then they will be gone.

You need a big network. What I found best with dealing with contractors is to put the work in ahead of time to have a really tight work plan of exactly what you want to do to the property. The design is so good upfront. It is just with anything, any project, software development. Spend all your time on the design and then when you turn over the contract, if you hand over a solid plan that has detailed everything you want to do, they cannot paint this big picture and say they are going to do that.

What happens when you get into it? If you put your details into your spec ahead of time, it is easy to get multiple bids. In some cases, if you got the floor plan and everything, they may not even need to visit the property. It depends on what they are doing, whether it is plumbing or cosmetics. You can rapidly get bids. When you put them in this competitive environment, you do not have to play the games where this is the contractor and you got to go with him because he is the only guy in town. You can span out and get a competitive environment.

We will say the market value on the backside, rent or a resell. What are some tips to maximize that?

It is an interesting study that came out of A&M where they looked at institutional landlords versus local and what they do as far as the amenities and how they are able to charge higher prices. You should google it and look it up. It was in the Dallas Business Journal. They are starting to crack that code because if you are a mom-and-pop, you are all over the place. You know the local environment as far as commanding rents. There is probably a lot of information in that document for some of the things you can do to follow those trends.

The same way you talked about the nanny pads in Seattle, you just tied it all together for me. If you have a good contractor that connects your plan and your plans based on local market knowledge, focus, and understanding, that will get you the most on the backend.

I am hesitant to answer that because it is so subjective. It is all over the place. Sometimes you will do a deal, you have done this deal and you do everything right and it just doesn’t sell. You will never know why. It just happens from time to time. You always second guess, “Why didn’t this work? It was just like the other three I did.”

It happens to me. I get the credit for those and my wife gets the credit for the other ones that work out. What’s the most you have ever made on a house?

I would rather not answer that. Not in this environment.

What’s the most you have ever lost on the house?

The first house we ever did was a subdivision of Dallas. It has an underground river running through it, Cottonwood Valley over there. Horrible foundation. I did not know anything about the Texas foundation. I just moved here. They fixed the foundation with a carjack underneath it, picked it up and dropped it.

It was a pier and beam house. It rained for three weeks. We could not do the foundation and then they started on it. As they were picking it up and dropping it, bricks were falling off the side of the house. It was a nightmare. The windows went from being some way straight to starting to look like a cartoon house. We had to replace all the windows. It was just a nightmare. That was a disaster, but it was certainly the largest emotional scar.

I respect that you do not want to say the win but are willing to share the loss. That is respectable. Kurt, as you look at the future, what is the biggest opportunity you see in the real estate investing market?

Anything that is affordable housing. There is all this news about all these people got priced out of being able to buy house, which is true because rates went up. However, rates will come back down. What is happening in the interim is all these people that could not get a house are now shifting into it. It is like this environment, I think, and I may be corrected. We are entering this space where you had 10 people bidding on a house and now you have 3. It is not normal yet, but a little bit easier. I think as you move down the affordability specter, the lower you can go, neighborhoods we never thought would ever be where you would go to invest are turning out to be some nice spots.

I remember when we used to say, “Wait 21 days, and then look at your pricing product presentation, make any changes if you need to lower the price. Wait another 21 days.” You had to give it a full 2 or 3-weekend cycle. Now it is, “Wait 21 hours.” It would not be nice to get closer to the median because that balances it out. I agree with you. Affordable housing is the play. Creating inventory, the Net-Plus one. I liked that, Kurt, because there are a lot of small-time “mom-and-pop” local investors that do stabilize neighborhoods and create inventory. I do not think they get enough credit for it. Parting thoughts, parting shots?

Things are going to probably get a little bit exciting again. As we had in ‘08, it will not as bad, but things were interesting. They were different and you are going to be able to talk about it in the future like, “Remember 2022, 2021?” It is a fun time to be in real estate

For the first time ever, I am playing the equities game because I feel like this cycle could be there too. I hear you. It is going to be an exciting time. If people want to know more about New Western and the marketplace you have created, which is the largest in the business, in my opinion, where do they go?

NewWestern.com. We need more people willing to fix houses.

Kurt, thanks for being here. Thank you for joining the show. Remember, your network is your net worth. Today, you have been growing both. We will see you next time. 

Important Links

• New Western

The following podcast program is furnished by RCN Capital LLC.  The information provided is for general educational purposes only and does not constitute any legal, tax, financial, investment or other professional advice. The views, thoughts, and opinions expressed of any speaker are the speaker’s own opinion and do not represent the views, thoughts, and opinions of RCN Capital LLC.   No information contained in this episode should be construed as financial, investment or legal advice from RCN or any individual, author, host or guest. You should always consult a financial advisor before investing.

• fix and flip
• Housing Inventory
• inflation
• Inventory Crisis
• Local Flipper
• real estate