Alex Osenenko and Steve Rozenberg are joined by Chris Clothier from Memphis Invest at the Bigger Pockets Convention 2019 in Nashville and talk about the right investor for turnkey properties.

Watch the Podcast Here

Transcript

Alex Osenenko: Boys and girls. Alex here and Steve, the Mindful Investor Podcast show is on for episode number… I think we have official song. This wasn’t the song. This is [inaudible 00:00:11].

Steve Rozenberg: This was not the song, that was just your voice.

Alex Osenenko: This is the next episode and we’re still on tour in Nashville with BiggerPockets crowd, amazing conference, amazing show. We had some real, real talented people. We got a chance to interview. Today we’re going to introduce an amazing interview of Chris Clothier. What’d you learn from Chris?

Steve Rozenberg: Man, I’ll tell you what, Chris Clothier, he’s a co-founder of Memphis Invest, turnkey operation for people that don’t know. And if you don’t know the guy, you gotta look him up. Amazing guy, a true gentlemen. But basically what we learned is they basically are the people that, I’m going to say they’re kind of the godfathers of bringing the turnkey operation to the masses.

Alex Osenenko: And the turnkey is essentially, you just put the money down and they got-

Steve Rozenberg: It’s that, they have the house for you-

Alex Osenenko: All redone, remodeled. And what we found out is like, my courses were like, who is it for? Why isn’t everybody getting a turnkey? It turns out-

Steve Rozenberg: It’s not for everyone.

Alex Osenenko: … it fits a particular category of customers, and he knows his customers so intimately. And it’s very interesting, he talks about red flags. How do like if… Turnkey and turnkey could be different depending who’s who’s providing the service.

Steve Rozenberg: Absolutely. Reputation.

Alex Osenenko: Man, the information I got in this show is amazing. Why don’t we let you guys in on it. Let’s get into the show.

Steve Rozenberg: Hi everyone. So we’re here at BiggerPockets’ 2019, and there has been really some amazing people. One of the gentlemen that’s most amazing is right here with us. Pretty cool guy that we’ve gotten to know from your conference. And then, obviously amazing how paths cross.

Alex Osenenko: They do. And so Chris Clothier is a VP of sales and marketing. He’s also the owner of a company called Memphis Invest. I think you what? Top 5,500 units?

Chris Clothier: Yeah. We’ll end the year about 5,800.

Alex Osenenko: 58. And so one of the most spectacular family owned companies in this sphere of real estate investing. I think if you have never heard their name, you really haven’t been in real estate that long. Like you have probably come across and I think-

Steve Rozenberg: They may not have known that it was their company.

Alex Osenenko: This is like, I think of Memphis Invest as a spearhead for this whole kind of turnkey investment movement. And so a lot of people in your wake. But what I want to talk about today is some of the more harder questions that you may be getting, because I know a lot of investors, a lot of my friends are investors. Even conversations today, people seem to think that turnkey is for the beginners, turnkey is for the, somebody who just kind of really does not want to take the time to learn and have somebody else-

Steve Rozenberg: The lazy investor.

Alex Osenenko: … assume all the work. Right. The lazy investor. Like how do you combat that, Chris?

Chris Clothier: Well it’s, I guess, the easiest way to combat it is to look at our investor profile. The investors that we’ve worked with, and certainly some of them are new to the real estate game. They have a lack of depth when it comes to really deep understanding about how to invest-

Steve Rozenberg: Experience.

Chris Clothier: Yeah. Well, and they may not even necessarily always be experienced. They could be experienced with real estate and investing. It’s just the whole idea of-

Steve Rozenberg: Sure.

Chris Clothier: … doing it passively. They just don’t have a real deep knowledge of. But at the same time, many of our investors, especially with our company, they are experienced in life. These are not people that aren’t inquisitive. These aren’t people that are looking for an easy way out. They’re not people that say, I don’t understand this or I’m just going to go, dump my money into some poor man’s investment that it has a low chance of being successful. So this idea that these are new investors always and that they’re unsophisticated and they don’t know what they’re doing, so it’s the dummy’s investment that’s-

Steve Rozenberg: Not true.

Chris Clothier: It couldn’t be further from the truth. But those are the investors that say that are the investors that wouldn’t work with a company like [inaudible 00:04:26].

Steve Rozenberg: They’re not your profile.

Chris Clothier: Not even close.

Alex Osenenko: So let’s talk about the industry as a whole, because I don’t think anybody said that particularly about Memphis Invest, but people say that in general to the category. So the question is like, is Memphis Invest, are your customers different or do you think it’s a category kind of selection?

Chris Clothier: I think that us in particular, our particular client is different. Now there are, so as with any investment, not even with investment, with any business. There are those that choose it because it’s the easy path and it’s a lazy path. It’s the path of least resistance for them getting started. They’re also the ones that tend to go for a low price investment. So they’re looking for kind of their loss aversion. They don’t want to lose money, and they don’t want to learn either something to buy this really low pricing, inexpensive property. And there’s a lot of people that had been and will continue to be taken advantage of. And it’s interesting.

Steve Rozenberg: And that’s kind of to me, like people that do that. Like I think what’s great about in my opinion about turnkey is two things. Number one, people that value their time and they say, you know what, I don’t have the time to deal with this. I’d rather put people in place that know what they’re doing and they can do that. So it’s a time value. And number two, it’s a location value. So let’s say you’re in San Francisco and they’re in Memphis and Memphis is a better market for your goals. It’s easy, right? You don’t have to go there and find the contractors. You don’t have to go there and figure everything out. It’s in place.

Alex Osenenko: But you do pay the markup for people who do. Right?

Chris Clothier: Well, of course. And-

Steve Rozenberg: What’s your time worth?

Chris Clothier: Well, and it’s the age old question. And I will say that the investors that are the most successful at this particular strategy, that look, let’s be clear, it’s simply passive investing, is what it is. So it’s just investors that are passively investing. Turnkey becomes the marketing catch all word. So it catches the good and the bad.

Steve Rozenberg: Sure.

Chris Clothier: It catches the ones that are going to be successful and the ones that are going to fail. It catches all of the investors in the companies that are in that passive mode, if that makes sense. That it’s, you’re going to own the deed, you’re going to own the property, we’re going to do the work for you. But everyone uses the same word, turnkey to market their service. It’s the investor that spends the time that gets to know who they are investing with.

Steve Rozenberg: Absolutely.

Chris Clothier: And that really gets to know themselves because there’s two types of investors that you say don’t have time. The ones that have the time and they’re just… They’re not going to put it into it. They’re going to be busy doing maybe not even more productive things.

Steve Rozenberg: It’s just busy stuff.

Chris Clothier: Yeah. I’m not going to learn real estate. So I’m just going to go do this. And those that know that the value of my time and money is to leverage someone else’s knowledge and their time to [inaudible 00:07:14].

Steve Rozenberg: And they’re willing to pay for that.

Chris Clothier: You’re exactly right.

Alex Osenenko: Going back to unique abilities like, we had, Kara and Brit on the show-

Steve Rozenberg: Brittney.

Alex Osenenko: … and then these two wonderful ladies they’re doing their own fix and flips and they’re in there, they’re painting, they figured out the construction management. Like they actually are doing it, they’re loving it and they’re passionate about it. But like that’s their unique ability. They really wanted to do this and now they using Instagram as a vehicle to sort of promote that and really getting more successful.

Chris Clothier: Of course.

Alex Osenenko: But like for example, I’m a very busy executive. He’s a pilot. Presumably if you wanted to you can take more routes and just be like real estate wouldn’t be top of mind for you. So what you’re saying is turnkey sort of attracts this level of a professional who knows they need to invest their time if they’re to be successful, but they don’t just choose not to in real estate. They choose their time because-

Chris Clothier: You got it. You nailed it. They’re choosing to where they’re investing their time is what they do best, their unique ability. And then they’re taking whatever their revenues, whatever their money is, their investments, and they’re finding those that are best at their unique ability, which is building a portfolio and managing it properly and delivering, executing for that investor on the return and the investment that they want.

Steve Rozenberg: It’s like if you said, hey, I want to start buying real estate and I think I want to buy something, the numbers in the Midwest or in Tennessee look good. Would you have the time to go to Tennessee, find the deal, source the deal, find the vendors and the contractors, set it all up, get the flow going, or like you talked to Chris and go, hey, Chris goes, I got a deal. It’s ready to go. It’s turnkey and you’re going, you know what? I don’t have the time. Do it. Done. That’s who it’s for.

Alex Osenenko: So that’s very, very interesting.

Steve Rozenberg: Is that correct?

Chris Clothier: Absolutely. And those are the investors that are finding success. Those are the investors that kind of laugh behind the scenes when someone says, turnkey is for the beginners because they’re like… In your case, you’re not a beginner.

Steve Rozenberg: Right.

Chris Clothier: You know you’re a business builder, you’re an entrepreneur. You by no means would look at yourself in the mirror and say, I’m just this beginner. No. Not even close.

Alex Osenenko: But I wouldn’t, like I’ll be honest with you right now on the show and I want to make this admission like, I have no interest per se to dig and understand every single aspect about every single house that I’m about to sort of put money into-

Chris Clothier: Correct.

Alex Osenenko: … and try to get partners to do stuff with me-

Steve Rozenberg: Nor should you.

Alex Osenenko: … or for me or me trying to fly and like I have my kids, I have my job which I love, but it demands all of me. All of me. If I don’t give it all, it’s like, why bother? So for me it works. For me it works. For you maybe not as much, because you know your stuff, like you’ve done this.

Steve Rozenberg: But a perfect example, like I’m talking to some guys about doing something with some mobile home parks. Some guys here at BiggerPockets, and investing with them. I don’t want to learn mobile home parks, but I like the returns and I’m willing to go in on with them. So I’m just saying, I don’t have the time, but I’m willing to put the money into this thing. But I do have a question. What kind of… And you’re big into education, because you’re huge with BiggerPockets and everything.

Chris Clothier: Sure.

Steve Rozenberg: What kind of education do you give or do you suggest people take before getting into a turnkey? And do you have some kind of, not a curriculum, but is there something like setting expectations with them prior?

Chris Clothier: So with us, we try and be deliberate and we try and be, purposely slow. So we want to spend time getting to know the investor on the other side. And the very first thing that we want to get to know is, do they know the reason that they are investing in the first place? Why did they call us? Why are they looking for-

Steve Rozenberg: What’s their why?

Chris Clothier: That’s right. What’s this passive investment that they are looking for? We will oftentimes uncover that being a passive investor is not for them. And that’s what we want to do.

Steve Rozenberg: Absolutely.

Chris Clothier: We’re looking to-

Alex Osenenko: Proper discovery to qualify or disqualify.

Chris Clothier: Exactly. It has nothing to do with us. Everything to do with them.

Alex Osenenko: Can I ask a qualifying question there? Can we keep that thread? Just remember this thread. I do want to have because running a business-

Chris Clothier: Sure.

Alex Osenenko: … you have salespeople.

Chris Clothier: Sure.

Alex Osenenko: Salespeople are typically compensated on performance.

Chris Clothier: Right.

Alex Osenenko: So how do you deal with this balance where your job is to disqualify potentially a customer? How do you train Salesforce?

Chris Clothier: Well, because-

Alex Osenenko: This is a selfish question from me.

Chris Clothier: No. With us, so our repeat client, the client that comes back and is going to continue to build their portfolio. We know and we track this for going on at least five years at this point, that roughly 62% of our monthly sales go to an existing client building their portfolio. And so should you fail to qualify a purchaser on the front end and they do not continue to purchase down the line, you’ve taken money out of your own pocket. You’ve made your life more difficult and-

Steve Rozenberg: You got to go pay some more.

Alex Osenenko: So you pay your sales team on repeat transactions?

Chris Clothier: Of course. We continue-

Alex Osenenko: So it’s they’re recurrent, they’re building a book of business.

Chris Clothier: Their job is to continue to touch base with and discuss performance. How is the portfolio doing for you? When would you like to do a review? Would you like to speak again? What else have you been doing out there in your investment world? Are you ready to continue to build?

Alex Osenenko: They’re consultants. They’re not really salespeople.

Chris Clothier: No, absolutely.

Alex Osenenko: [inaudible 00:12:39].

Chris Clothier: Absolutely. They’re consultants. And now they are licensed real estate agents. So there’s no other licensing. They’re not giving any other financial advice.

Steve Rozenberg: They’re not CPAs or financial planner?

Chris Clothier: Not at all. Nor do they pretend to be.

Steve Rozenberg: They do more strategy sessions of saying, hey, you know you… And I love that because, whenever I talk to investors, I’m always like, “Look, nobody gets into real estate to own one property.” Never. You work for multiples, but what happens is it about number two to maybe three life starts happening and you slow down and you get busy and you lose sight of why you even got into it.

Chris Clothier: Well, you mentioned earlier that, and we do, we grabbed the mantle of being the leader of this industry with both hands. That’s what we set out to do. We take that seriously and we-

Steve Rozenberg: And you are.

Chris Clothier: We lead that way. One of the things that we’ve done is we will not sell an investor of one property. An investor comes in and says, “I’m ready to go. I’ll love your company. I’ve read everything, whatever. I’m ready to buy a house.” But they only have the ability to purchase one property. That is a losing proposition for them and us. What we found is that, that investor, and we’ve done that through the years, but we ended the practice because that investor that does not continue to build a portfolio, they put themselves on a roller coaster.

That when the property is occupied and they’re getting their monthly call from our customer service team, they’re happy. Everything’s great. But when a maintenance issue occurs, when there is a move out and we have a turnover and they’re not receiving the full rent, suddenly they go from being perfectly satisfied to, this is the worst investment I’ve ever made, because I just had to write a check for my mortgage and I didn’t have any income.

Steve Rozenberg: And they’re making it based on emotions because they’re emotionally tied to that.

Alex Osenenko: How is building a portfolio? Isn’t that so that I imagine there’s a piece for the diversification that, your four houses are rented, one is not, it’s not that big of a difference. Right? So you have a little bit of a cashflow-

Chris Clothier: Sure.

Alex Osenenko: … cushion, right?

Chris Clothier: Sure.

Alex Osenenko: But beyond that isn’t like you just getting from like isn’t getting worse with more houses? Like explain that to us.

Chris Clothier: Which part of it getting worse?

Alex Osenenko: Well, just the whole like you said-

Steve Rozenberg: If you have a dip.

Alex Osenenko: … you won’t let him buy one house. Like what’s the difference if I have six?

Chris Clothier: So the difference is the mentality of the investor on the front end. Number one, we simply choose to deal with investors that can and desire to build a portfolio. That’s a business decision. That’s a side that we know it makes it easier for us. We know that it builds in longevity. If you have a client that’s going to build a six property portfolio over the next three years, you have transactions built into your beginners.

Steve Rozenberg: You’d be customers.

Chris Clothier: So it’s a business decision number one that comes with size and ability. We’re able to make that decision. But number two, for the investor themselves, when you’re building a longterm relationship, which passive investing should be longterm, especially when you’re buying out-of-state, and you’re speaking with us like on a monthly basis, when there are issues that come up, two vacancies at the same time, three vacancies at the same time. A property is vacant and three other ones have maintenance issues. You built a relationship, you built a certain level of trust. If that occurs in month 39 down the road and you’ve got 38 months of-

Steve Rozenberg: Goodwill.

Chris Clothier: … how you build trust, then it’s an understanding that hey, this does happen. But we are going to take care of this for you. There’s a certain level of, again, ability to be able to step in and say, we’re going to handle this at cost. There’ll be no markup. Or we’re going to cover the price of that particular issue or we’re going to not charge you for the next resident if they didn’t fulfill their full lease. It gives you a lot of… I guess success gives you a lot of freedom to build and make those decisions and do those things.

When you have an investor that has six properties and you can say, these all six I’ve done perfect over time. You had a little issue here, a little issue there. Now we have this big hiccup, we have the ability to say, look, this is what we’ve already earned. We’ll get it back on track and get you back in that lane and-

Alex Osenenko: Got you. So Chris, to me it sounds like, there’s really distinctly like two, I’d say the biggest scattered two types of investors. There’s people who are like scrapping and they don’t really have… like we just had a medical doctor on the show, like the last show right. Now he’s definitely, because different income levels, different kind of a motivation for investing. It’s a lifestyle choice. It’s not a desperation.

So I guess what I’m hearing is like, a turnkey is really for some professionals who make significant income to be able to, well, let me just finish this statement. To be able to invest in real estate without dedicating their time, but having the ability to take care of any problems if the problems arise because real estate is not like a, it’s not just this flat line. As you say, there’s issues that come up. Like tenants move. Like it’s people in houses. And so you need wealthy people basically to work with you. You can’t have-

Steve Rozenberg: Well, that’s their target.

Alex Osenenko: You can’t have a college student that basic just scraped up the money for the down payment and they’re coming to you and say, here, Chris, take care of it now. Now I’m rich.

Chris Clothier: That is not what we’re built for you. You’ve nailed the concept of us as a company. That’s not what we’re built for. We want to help that particular college student invest his money in what we would call a wiser way. So possibly close to home, possibly something that he’s actively doing some other way to build a larger ability in a portfolio. So now you can actually, because one property far from home, is an expensive headache.

Steve Rozenberg: Absolutely.

Chris Clothier: It’s not, can it be an investment? Sure. But in our opinion [inaudible 00:18:21].

Steve Rozenberg: It’s not scalable.

Chris Clothier: No.

Steve Rozenberg: I think what he does with what I’m hearing is, is they’re very big on building the relationships with them, with the client. And I think the difference is from your person to their target is, is they’re explaining to the person, correct me if I’m wrong, basically they’re running a business. And in that business you’re going to have ups and downs, hills and valleys. And in that part of your business model is you’re going to have vacancies, you’re going to have maintenance. But because they’re building the relationship with the client on the front end is, they’ve got that Goodwill in the bank so that when that phone call does happen, and what I liked about what you said is every month you do like a check in.

Chris Clothier: Yes.

Steve Rozenberg: So every time, normally every time a phone call goes to a owner, it’s bad news. Well, now it’s peppered in with good news in the relationship building. So now it’s like, hey, how’s it going? Hey, we’ve got a challenge. We’re going to work through it. Just like you know, this is part of the business. This is part of the gig. My other question though is though, is that correct?

Chris Clothier: Yeah. And it’s often before you get that question it’s often peppered with, last time we talked, you said your grandson was coming to visit. How did that go? Was it good?

Steve Rozenberg: It’s relationship.

Chris Clothier: Or your wife was getting ready to start a new job and she enjoyed it. How’s that going? That’s great. We’ll call you next month and check in again. Let us know if we do anything for you. The vast majority of phone calls are, I have nothing to tell you. But I’m here, you’re there, your investments are good. Your money it’s just that-

Steve Rozenberg: The news is, there’s no news.

Chris Clothier: Yeah. The news is, there’s no news, but you can sleep well tonight because you know.

Steve Rozenberg: Absolutely.

Chris Clothier: Rather than being, there’s no phone call. I haven’t heard from my manager in six months. I think everything is good. Now it’s a case of every month, they’re there-

Steve Rozenberg: That’s great.

Chris Clothier: … everything’s good. And so when an issue occurs, it is much easier to let them know that, hey, this has occurred, but we haven’t handled.

Steve Rozenberg: Absolutely. Now my second question on a business marketing, was that a strategy to bring your client acquisition cost down? Because if you’re paying to get the client, but now the repeat business of them six times, now your acquisition cost goes down tremendously. Right?

Alex Osenenko: Well, the acquisition cost, I think the lifetime value of a client goes up and compare to it, the customer acquisition cost is probably, a lot smaller percentage. That’s how it works. But you guys spend a lot of time and effort, which are on education like I’m super passionate about.

Steve Rozenberg: They invest.

Alex Osenenko: So you have a huge, huge top of the funnel that people eventually trickle down into. And those on top of the funnel, you just help. Like if they never trickle down, you just help them.

Chris Clothier: I really want every person that comes into our funnel makes contact with us to say, I had a good conversation. I didn’t buy from them, but the conversation was helpful. They’re good people. They truly care. When and if someone ever says that I was completely sold by them, they just sold me from start to finish, that’ll be the day that whoever that was gets a readjustment on our side and possibly even out the door, because we are not here to sell anything. This is, we-

Alex Osenenko: And yet you are massively successful. Maybe that’s a lesson. There’s a lesson there’s somewhere.

Chris Clothier: Well, and many people would say that in actuality we’re selling constantly, and sure here at this event we’re selling, we’re selling our family. We’re selling the idea that-

Steve Rozenberg: The concept.

Chris Clothier: Yes, the concept of what we’re doing. The homes, the properties themselves are not the product. The product is the care and comfort that you will receive.

Alex Osenenko: The relationship [inaudible 00:21:55].

Steve Rozenberg: And the why in helping them find their why. Because look at the end of the day, four walls and a roof does nothing for you. It’s the business running in that four walls and the roof that actually is going to make or break your business and your future.

Chris Clothier: That is correct.

Steve Rozenberg: So they’re doing a great job building the relationships and the education and on BiggerPockets. And you said this at PM Grow and I looked after you said that, whenever they talk about Memphis Invest on BiggerPockets just as a reference, it’s all good because they’re there as an educate.

Alex Osenenko: [inaudible 00:22:28].

Steve Rozenberg: Because when you educate it’s about them, when you sell it’s about me. So they do such a good job of pushing that model out there. I mean-

Chris Clothier: I want to give, I’m going to take a moment here to make sure I get proper credit. That I do have partners. I’ve got, a brother, a younger brother. I’ve got an older brother that’s not, a partner in the business, but he certainly has been very influential on helping us develop the company. And then of course I’ve got my dad. Every business that my dad has ever started has been predicated on customer service. The experience that the client has. And every business. We’ve been in multiple different industries, but they’ve all been predicated on the experience that the client has because they will come back and they will tell others. And so-

Alex Osenenko: But so easy to say, it’s so hard to do. [inaudible 00:23:16] we’re trying to scale this property management thing and it’s like there’s so many hidden facets. You know the business intimately. But people who are listening, like there’s so many facets to property management, there’s so many different client types. There’s so many different housing types, like it’s crazy complicated.

And to deliver on that promise like the saying, it’s like, we’re a customer service company. Everybody says, but you guys have been delivering and which is fascinating to me. I’ll be honest with you. But I do want to poke at something. Not poke at something. But I want to understand, and maybe our listeners have this takeaway. I want you to be honest and talk about good turnkey and bad turnkey, because we see a lot of not so successful turnkey relationships, not with your company, but there’s a bunch of others. Can you give us a guideline or like how do people decide, like if it’s not Memphis Invest, let’s just say they have no appetite in Tennessee and Texas, wherever you are, four states, right?

Chris Clothier: Right.

Alex Osenenko: Let’s say they want to do Ohio.

Chris Clothier: Sure. I think there are red flags. And so-

Alex Osenenko: Let’s go through them.

Chris Clothier: Let’s touch the red flags. Number one. One of the issues that we all know is that, oftentimes it’s the sand states. It’s California, it’s New York or these places where wealth exists, that you see companies go to. And it’s a constant battle that you’re always promoting to the California investor to come invest in the heart land. And so you’re taking advantage.

Alex Osenenko: So those free seminars that we get advertised all the time.

Chris Clothier: Yes.

Alex Osenenko: Okay. Got it.

Chris Clothier: And so one of the things that happens is that when you are from an area where the cost of housing, the median price home might be four or $500,000 and it’s a three bedroom, two bath home, or one bath. It depends on where you’re at.

Steve Rozenberg: Depends on where you’re at.

Chris Clothier: There may not be a garage. There may not even be, just a sliver of yard that you have.

Alex Osenenko: You’re just describing my life.

Chris Clothier: All right, so there you are. So when you are presented with a very pretty picture of a three bedroom, two bath, fenced in yard, two car garage, beautiful little bungalow in wherever, middle America-

Alex Osenenko: Wherever.

Chris Clothier: … that costs $79,000 to get in, it automatically looks like a deal.

Alex Osenenko: It is to me like you painted the picture and I’m salivating right now because that’s-

Chris Clothier: It’s how quickly can I get started. And so I try and show people all the time that, that $79,000 deal to the investor that we just described, it looks like I need to get going and I need about 12 of these today. Where in reality that property, the real value of it, where it is might be $37,000 because there’s 27 more on the streets and half of them are boarded up or-

Alex Osenenko: Wasn’t that in your book? I read exactly [inaudible 00:26:07].

Steve Rozenberg: That’s story of my life. That was my life.

Alex Osenenko: If you guys want to read Steve’s book, he describes exactly what Chris did.

Chris Clothier: I love it. Well, that’s the issue that, to use the word turnkey, it’s easy. You can use the word turnkey. I made this very turnkey and easy. When in reality, as I talked yesterday on stage that, the red flags are that cheap is relative. Don’t buy cheap.

Alex Osenenko: So low priced, overpriced. That’s something to look into.

Chris Clothier: So it’s to aware of. So the house that costs $79,000 today, understand in middle America five years ago costs 29,000. And eight years ago it could be picked up for 4,000. In many scenarios.

Alex Osenenko: I can’t believe numbers like that existed. But keep going.

Chris Clothier: Well, you might have a company. I try to explain all the time that we’ve done real estate before. They’re just the economy. Economics doesn’t work with these low prices. It’s very difficult to make it work-

Steve Rozenberg: It’s tough.

Chris Clothier: … in this low cost properties in that it has been purchased, it has been renovated properly, with all the codes, all up to standards and proper, and that it’s going to function as a ongoing investment the way a passive investors should want, meaning headache free. I’m not going to have a lot of issues with these homes. And then at the same time to put profit in for the whoever is selling it and who did all the work and took the risk. I mean, there’s a lot of hands in that particular. And so the lower the price is, you got to start [inaudible 00:27:43]. There’s things that have been cut and no one’s going to do anything for free. So what’s been cut, it’s been the work.

Alex Osenenko: The quality.

Steve Rozenberg: The quality.

Chris Clothier: And then if you, let’s say the quality of the work hasn’t been cut but the price. So then the purchase price of whoever picked it up had to be cut. Well, not if you’re buying homes for four, $5,000. An investor has to think, why? Why was that home sold that inexpensive? Is there a lack of demand? Is there a lack of interest? There’s a lack of something, and who’s going to pay the price for that? Me. I’m owning the property in the backend. So really, really cheap is something that I think investors have to avoid. And price is all relative. Just because it’s way lower than what you’re accustomed to seeing where you live, that doesn’t mean it’s probably price for where it is.

Steve Rozenberg: The one thing I’ve always learned is, and someone taught this to me long time ago [inaudible 00:28:27] ever forget. The reason people fail is laziness or greed. And what you just said was the greed. You sit there and you say, you know what? I’m getting something and they’re not looking at it logically. They’re not doing their homework.

Alex Osenenko: It’s both. Laziness and not doing their homework. And you’re thinking, gosh, I could get-

Steve Rozenberg: [inaudible 00:28:44].

Alex Osenenko: … rich quick.

Chris Clothier: And here’s the third. I’ll offer a third to it. It’s loss aversion. If somebody comes in and says, this is too good to be true. So I’m probably going to lose money. But if I’m going to lose money, I’d rather lose a little bit. So I’m going to buy the thing that’s too good to be true because then my loss won’t be very big. Rather than buy say $150,000 a turnkey property, that is absolutely going to-

Steve Rozenberg: Man, that was my life.

Chris Clothier: … succeed.

Alex Osenenko: Perform.

Steve Rozenberg: You just described my life when I first got involved in investing.

Alex Osenenko: It’s fascinating.

Steve Rozenberg: That was it.

Chris Clothier: No, I don’t know if you mean that that’s what you bought.

Steve Rozenberg: That’s what I did.

Chris Clothier: I did.

Steve Rozenberg: That’s what I did.

Chris Clothier: I have 26 of them.

Steve Rozenberg: We had like 30 something, but same thing. We bought these low income properties and they killed us.

Chris Clothier: Yes. Before I understood that these basics, I made the same mistakes. I imagine you and I are the same way in that at this point I’m trying to operate, our family is trying to operate in a way that says, I don’t want other people to have these same mistakes-

Steve Rozenberg: Absolutely.

Chris Clothier: … nor do I want manage-

Steve Rozenberg: Exactly.

Chris Clothier: … those mistakes. So that’s number one. The other things to look for-

Alex Osenenko: So red flag number one is low price-

Steve Rozenberg: Too good to be true.

Alex Osenenko: … be aware.

Chris Clothier: Yes.

Alex Osenenko: Too good to be true. Be aware.

Chris Clothier: Yeah. Understand the economics. I mean, it’s hard to make low price properties actually operate the way you expect. Number two, this is a big one for me. It’s really length of time in business. You’re looking for a little gray hair. I told the story yesterday about the pilot. I don’t know if you heard it, where my father is really funny. If he gets on an airplane, he’s not turning right and walk into his seat, before he gets the chance to stick his head in the cockpit and just say hello to the pilots.

Steve Rozenberg: I didn’t hear that.

Chris Clothier: And he says, he’s like, “I’m looking for a little gray hair. I’m looking for the knowledge as I go sit down and I’m fine at 500 miles an hour or 30,000 feet that, should there be an issue, the person in front has the time and the wisdom and they’ve dealt with issues that they’re going to be able to safely handle whatever comes my way.” The same thing is true in real estate that if you’re dealing with a company, and you’re dealing with someone who says, “I’ve been extremely successful, I’ve had seven properties that I’ve owned and managed myself. Now I’ve decided to sell them to other investors. I’m managing 27 different properties now, so trust me, I know what I’m doing.”

You have to question that, when there is a correction, when there is some form of economic crisis or should there be another 2008, how are they going to handle my investment properties? Do they have the knowledge in business, not necessarily just in real estate, but in business in general? Have they been around the block a few times to know how to handle it when things get really hairy? And there’s just not enough.

Steve Rozenberg: And it’s funny is when I was doing a lot of the sales and stuff, I would tell people, I’d say, “That’s like going to a doctor that also does dry cleaning and he’s having a 50% off sale for surgeries today. What’d you go to that doctor? No.” So why would you trust your investment money, your life savings to go the cheapest way possible? Like does that make any sense?

Alex Osenenko: But people do that all the time.

Steve Rozenberg: They do it all the time.

Chris Clothier: And you just, you have to make sure and do a little investigation of who am I doing business with?

Steve Rozenberg: Laziness and greed.

Chris Clothier: What’s your background? Tell me what your successes have been. Ask the question. What’s going to happen if suddenly 50% of the portfolio that you’re managing goes vacant? How are we going to handle it? Have you ever been there before? And when there’s, don’t worry about that, that’s never going to happen. It’s never happened. Walk. I mean, because it has happened.

Steve Rozenberg: Well, and more importantly, my opinion is, is when you ask those questions, if they don’t know their numbers. What is your vacancy rate? What is your eviction rate? Those things like, what is your average rent price? If you have a property that’s $5,000 a month and they manage properties that are $800 a month, maybe not the quality you want.

Alex Osenenko: I have an idea. Do you guys have a document somewhere on how to interview a turnkey?

Chris Clothier: Yeah. I’ve published that multiple times.

Alex Osenenko: Can we please-

Chris Clothier: Of course.

Alex Osenenko: Can you please send us [crosstalk 00:32:37]. We’ll actually link it in the show notes-

Steve Rozenberg: That’d be good.

Alex Osenenko: … and have people because there’s probably a lot of different things.

Chris Clothier: I’m happy to do that. Happy to do that.

Alex Osenenko: Appreciate that.

Chris Clothier: I’ll give you two last red flags [crosstalk 00:32:47].

Alex Osenenko: So we have low price, length of time in business. So experience.

Steve Rozenberg: Gray hair.

Chris Clothier: Experience. Yes.

Alex Osenenko: Gray hair.

Chris Clothier: If you cannot purchase this property using the lender, if you must pay cash for a turnkey property, that is a major red flag.

Steve Rozenberg: Now, are you talking hard money too or?

Chris Clothier: I’m talking if the company says-

Steve Rozenberg: Cash only.

Chris Clothier: … you must pay cash.

Steve Rozenberg: Got it.

Chris Clothier: So they don’t care where the cash comes from, but you have to pay cash. Now what the typical explanation is that we’re moving too quickly. We don’t have time to wait on lenders. There’s high demand for what we do. So this has to go. It’s generally in my experience, a couple of things that you really have to have your red flag up for. It doesn’t mean it’s all bad. It doesn’t mean that there’s not somebody out there that operates that way that’s on the up and up. It just raises your risk as an investor because it generally means that the property, that there’s no opportunity for comparable sales. So it’s, I picked a price, a bank is going to say it’s worthless, but-

Steve Rozenberg: Were an encumbered title.

Chris Clothier: There could be-

Steve Rozenberg: You know.

Chris Clothier: There could be [inaudible 00:34:00]. I’ll say there can be good people doing this. [crosstalk 00:34:04].

Steve Rozenberg: I mean those are the things that you go, okay, I mean-

Chris Clothier: Why?

Steve Rozenberg: … why?

Chris Clothier: You lose the opportunity to have a disinterested third party that-

Steve Rozenberg: Look at this.

Chris Clothier: That is protecting their interest, review it for you to make sure that everything is-

Steve Rozenberg: Absolutely.

Chris Clothier: … proper. So that’s number one. The other thing about the cash transaction is that, it generally means it’s a low price property and so banks wouldn’t finance it anyway. So now you’re back to what we talked about earlier in price.

Alex Osenenko: Number one.

Chris Clothier: Now you’re back to, if there’s just reasons that a bank says no, we’re not touching that, maybe I as an investor should slow down. Because again, what we’re talking about here is risk. Is not necessarily good or bad, it’s that the more risk I have, certainly the worst, or the longer time I should spend before I make this mess.

Steve Rozenberg: And this is also barn that you, if you’re an out of state, now you don’t know the area. So you’re two dimensional basically because you’re not there.

Chris Clothier: Well, the vast majority of people that do purchase turnkey, they’re not local to the property themselves.

Steve Rozenberg: Correct.

Chris Clothier: And it’s that there’s various reasons for that. Some of them are absolutely personal and the investor just doesn’t want to see it. I don’t want to go and look at the property. I just want to make my investment.

Steve Rozenberg: It’s a mathematical equation.

Chris Clothier: Which is fine. Yes, exactly. But being that is the case, that is a big one. And the fourth one, the last red flag is just as big because we’re seeing more and more companies do this, where you can hire a third party inspection either. It comes with our certified-

Steve Rozenberg: Guaranteed.

Chris Clothier: … in the box, guaranteed. This is perfectly packaged up. We’ve done all the work for you. It’s almost like putting a big sign on that says trust us. And I say this all the time. I tell people about my own company. You can take nothing on faith.

Steve Rozenberg: Absolutely.

Chris Clothier: Make Memphis Invest earn-

Steve Rozenberg: Trust the verifier.

Chris Clothier: … the right for you to trust us. Exactly. And here’s the big thing about that. So we encourage the third party inspection and we use it as a check and balance against our own team, because we’re human. Our team makes mistakes every single day. When you’re doing 100 properties a month, we want to be perfect, but we’re not always perfect. There’s a certain number of properties every single month that we grade, the home inspections as average at best. And that’s not good enough. So we get these home [inaudible 00:36:32] back and we bring it back to our team as a number one, we fix everything. But number two it’s, how did we miss this?

Alex Osenenko: [crosstalk 00:36:40]. Is that [inaudible 00:36:40]?

Chris Clothier: 100%. That how we grade our team. They know that when you bring in a perfect home inspection where, and we’ve had these, when the inspector says, “I literally can’t find anything. The home is ready to go, there’s nothing that needs to be fixed.” I mean, you’re popping champagne in a party. That’s big for our team.

Alex Osenenko: [inaudible 00:37:00].

Chris Clothier: It’s rare. But like for us it might be, you’re talking about 1%, less than 1%. I mean, it is rare because they are really going through the home.

Steve Rozenberg: They’re looking for things. Their job is to find-

Chris Clothier: That’s right.

Steve Rozenberg: … what’s wrong.

Chris Clothier: So what is more likely is, here’s some very minor things that we found. And even though those are great and we reward our team for those, it’s still minor things had been found. We want to train our team up to be the inspector themselves. So when you are denied the ability to do a home inspection, that’s a-

Steve Rozenberg: Like, don’t look behind this wall. There’s nothing to see here.

Chris Clothier: That’s a major red flag. And I won’t put through this very much, but I will just say that, there are more and more, we’ll call them I buy companies. I think that’s what they’re calling themselves where you can buy across the internet and it’s dangerous. It’s dangerous when the company says, “You can’t inspect this property, that we began. We’ve done all the inspection for you, so you can’t look at the property,” and they’re using the word turnkey to [crosstalk 00:38:04].

So now this is going back to the turnkey is a marketing word, but I’m going to create a scenario where it’s been fully certified by me and you can’t look behind the curtains to see how it looks. These are things that, it’s a newer trend and it’s one of the reasons why I bring it up as a red flag. These are things that the investor has to watch out for and really kind of demand for their own good that we’re able to do this third party inspection, this disinterested in the sale. They’re just coming in to sure that, because even if the property has a few issues and on the front end, whoever’s selling it says look, “It’s as is.” At least now as an investor, you know.

Steve Rozenberg: You make those decisions.

Chris Clothier: So I have some CAPEX decisions that are down the road. This is minor, but without the ability to know that, you really are flying blind.

Steve Rozenberg: Now I have a question for people that are learning about the turnkey. You do all this stuff on the front end. Now the management side, is that part of it where it… because you do things where you’ll sell the property and not manage them or do you always manage them?

Chris Clothier: So it’s completely separate. That’s a good, it’s not really necessarily a red flag, but it’s a good point to bring up and understand. Are you able? Is it your property? Are you able to hire your own management company? Because if you’re not, there’s [inaudible 00:39:21].

Steve Rozenberg: There’s another chance.

Chris Clothier: There’s a problem somewhere. There’s a reason why you must use our management in order for it to perform and us to give you guarantees you have to use us. Well, that’s a red flag. I guess that’s another one [inaudible 00:39:33].

Steve Rozenberg: That’s another one.

Chris Clothier: So like on our side, you don’t have to use our property manager. These are two separate contracts. You purchase and then you hire a manager.

Steve Rozenberg: Then you want to earn their business as a management company.

Chris Clothier: In a vast majority. I’m talking as close to 100% they use our management company-

Steve Rozenberg: Absolutely.

Chris Clothier: … on the front end due to our experience and longevity. But it’s not required.

Steve Rozenberg: Got you.

Chris Clothier: What is required for performance.

Steve Rozenberg: I had a situation, in Houston, there was a lady reach out to me, she was in San Francisco and she says, “Can you help me? My parents live in Hong Kong and they bought this house and they haven’t gotten rent for nine months from the management company.” I’m like, “Yeah.” So I started doing some homework on it. I look up the tax records and basically the whole subdivision was people in China that owned the properties and bought it from a turnkey and basically they weren’t giving them the rent money.

Had been like two years on some people. They had not gotten any money. And they were in China and they didn’t know who to call or contact. And they went over there and did a dog and pony show over there in China. They placed their funds over here and it was a turn key.

Alex Osenenko: That’s a really bad apple though.

Steve Rozenberg: Absolutely.

Alex Osenenko: So let’s kind of, I think, let’s sort of wrap this up and say, look, if you want to learn more about Memphis Invest or at least how they do it, Chris, where would they go?

Chris Clothier: Right to our website, memphisinvest.com is probably the easiest and simplest way. There’s what I’m not sure what they’re called, buttons on the side where they can go and they can learn more about our company or they can learn more about turnkey in general, to be educated first. But they can schedule a, what we call a one to one consultation where one of our team members will take the time to sit down with them and get to know the investors, see if we’re the right fit for them and they’re the right fit for us.

Alex Osenenko: Sounds good. Well, I hope this was educational and helpful. It was for me. I think I have a good understanding how to at least look into it, and what is turnkey and the right way to do this. Chris, thank you very much for your time.

Chris Clothier: My pleasure. Absolutely.

Alex Osenenko: We appreciate it very much.

Steve Rozenberg: All right guys, we’ll see you next time. Thank you.