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Erik Saengerhausen has been developing his owner financing real estate investment company for over 6 years. He and his business partner, Mike Arch, run Alamo Home Source. They buy houses, fix them up and sell them with owner financing. Then, they sell the notes to investors for incredible returns.
They currently flip more than 75 houses a year and are working up to 100 houses. That’s a lot of fixing up of houses! They know a thing or two about finding and working with the right contractors to be able to do that kind of volume consistently.
In this episode, we cover the definition of the “right” contractor for the typical real estate investor. We also talk about what negative aspects to look for when trying to find the “right” contractor.
Erik has a different model for paying contractors than I do. He has guys that he pays on a weekly basis rather than per job. I hire on a per job basis so that the contractor is paid per job rather than for the amount of hours worked.
That’s an important thing to keep in mind — there isn’t simply one correct way to work with contractors. There are lots of strategies for how to work with contractors and you should find the one that works best for you and your contractors.
Many times these discussions will focus on the point of view of the investor and not on what it means for the contractors. We discuss how important it is to make sure you see things from the contractor’s point of view as finding and keeping the right contractors working for you can mean the difference between success and failure in this business.
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Coming soon: Stop Flipping, Stop Renting by Erik Saengerhausen and Mike Arch
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Danny Johnson: This is Flipping Junkie podcast episode 27. [music] Welcome to the Flipping Junkie podcast. My name is Danny Johnson; former software developer turned house flipper, flipping hundreds of houses. Each week, we bring you interviews, strategies, stories, and motivation to help you get started flipping houses and on your way to becoming your own boss and achieving financial freedom. Thanks for spending time with me today. Now, let’s get to it.
Hey, everybody. Welcome back. Hope you had a great week. This is the Flipping Junkie podcast. And today, I’ve got a really good friend of in San Antonio, and I’m glad that he was able to take time to be on the show. His name is Erik Saengerhausen. And over the last six years, he’s been developing and building an owner financing real estate investment company starting from scratch, and he had to figure out the best way to create and sell real estate notes.
Now, he currently flips about 75+ houses and notes a year, and they’re shooting for 100. He’s been in real estate for over 15 years and has done a little bit of every kind of investing. His passion is and will always be in the creation of real estate notes because he says it affects the most people. He enjoys it because he’s helping the seller to buy their house from them. And then, he’s helping improve the neighborhoods by rehabbing those houses and then the end buyer for offering owner finance and investor he’s helping by creating a good quality real estate note.
So he’s touching a lot of people there. He’s helping the people that need to sell houses, helping the neighborhood by fixing up the houses. And whenever he sells the house in owner financing, he’s helping that end buyer be able to get a loan to buy the house. Whereas sometimes through a traditional conventional lender, they wouldn’t be able to. So he’s helping there, too. And after they create that note, they’re then selling that to an investor. So he’s creating value there for that person. So it’s pretty cool how many people benefit from transactions like that. And Erik has been working on that for a long time.
So being that they do rehab the houses, he deals with contractors and that’s what I want to have for the topic of this episode, is: how to find and work with the right contractors. It seems to be a big issue with a lot of people that get into this business. So after they’ve overcome the difficulty of finding a good deal, putting it under contract, and buying, then they’ve got to fix it up. And many run into the problem of hiring the wrong contractor, getting screwed out thousands of dollars and ending up having major problems in this business. And what I’ve always said in the past is whenever we’re doing really well in this business and things are running really smooth, it’s almost always because we have great contractors at the moment. And these times that we don’t have contractors is when everything seems to be a headache, a hassle, and a pain in the butt. So this is a very, very important episode, and I’m glad to have Erik on the show to talk about it.
And also, the show notes for this episode can be found at flippingjunkie.com/27. And Erik was great enough to share a chapter from their new book, the chapter that covers hiring contractors and how much repair to put into a house. It’s a great chapter from the book, and you can download that on that show notes page for free. Check it out. It’s at flippingjunkie.com/27 [music].
All right. So hey, Erik. Are you there?
Erik Saengerhausen: Yeah, I’m here.
Danny Johnson: Hey, Erik. Thanks for being on the show.
Erik Saengerhausen: Yeah. Thanks for inviting me finally.
Danny Johnson: It’s only been 26 episodes. This is 27.
Erik Saengerhausen: Yeah. I appreciate that.
Danny Johnson: I was waiting until we had a big enough audience to warrant having you on the show.
Erik Saengerhausen: I appreciate that. Yeah.
Danny Johnson: So it was like before the show we talked a little bit. I told Erik that I was going to surprise him by… whenever I do the intro and start talking like a radio… Like my whole personality and voice changes. “Hey, Erik! Welcome to the Flipping Junkie podcast.” It’s completely out of character for me.
Erik Saengerhausen: And then, you just hear a dial tone. I hang up on you.
Danny Johnson: But seriously, thanks for being on the show. We’ve known each other for a long time. I respect you as an investor, as a person, and everything. Erik has been on several trips with me as well because he’s interested in flying in airplanes and stuff. So we’ve gone to some of the air shows in Florida and Illinois or in Wisconsin. So we drove to the one in Florida. So how long a drive was that?
Erik Saengerhausen: That was 23 hours of us talking business and listening to Jim Rohn, and I think that lasted about two hours. And then, we just kind of ran out of things to talk about for the rest.
Danny Johnson: Yeah, we just listened to Jim Rohn over and over again. All right. So if you want to maybe tell people… I always like to start with people getting to know you and where you’re coming from. So how you got interested in real estate investing and how you got your start.
Erik Saengerhausen: I thought about that. Before obviously the show, I was thinking that you’re going to ask that. And I don’t really know an exact time. I was probably late teen to early 20s. I went to real estate school in Austin. And for some reason, I just always enjoyed real estate. I scraped up some money and bought Ron LeGrand’s Three-Course Deal and read that front to back and listened to all the audio tapes and just went out and started doing it. It took about 10 years doing it on the side off and on before I really got serious with it. And then, I met Mike and then we started Home Source. It has kind of always just been something. I’ve always been intrigued by the real estate industry and investing.
Danny Johnson: All right. So when you got started, did you start with flips like buy and fix them, retail them? Or what was your start?
Erik Saengerhausen: No, I didn’t have any money. So when I first started, it was all creative financing. I always liked real estate for the passive side of it. I always thought I’m always going to get enough rental properties and enough passive income where I don’t have to work anymore. That was always a goal.
So like my first deal was a 5-plex in Seguin that I assumed the note and then they carried back a second. So I had, I think, just closing cost out of pocket and I had these five Section 8 houses over there. And that was pretty much my start in real estate.
And then, I did another house that someone owner financed to me. And then, I found a backer. We started doing some… That was back whenever you can take mobile homes, put them on land, surrender the title, put an FHA foundation on it, and triple your money. I did a little bit of that. But now, mainly just passive income type stuff.
Danny Johnson: Great. And these days for the last six years that I mentioned in the intro, you’ve been dealing with notes mainly, right? So could you explain a little bit about what you guys do?
Erik Saengerhausen: Yeah. So we started flipping and the market kind of crashed on us. And I had worked for a company for a little bit that was creating notes and selling them on the secondary market. So I kind of knew a little bit about it but not a lot. I think we had two houses that we just couldn’t get rid of.
So I talked to Mike and I said, “Let’s try to owner finance these.” And we didn’t know what we were doing. No idea. So we stumbled through it. We created our first note. As we have this note, I was like, “Now, what do we do with it? Yeah, it’s creating us passive income, but we need some cash.” So I started trying to sell it, started talking to people. “Hey, would you be interested in buying a note?” And that’s kind of how the business evolved.
But yeah, basically what we do is we go out. We buy a house. We rehab it. We sell it with owner financing and then we sell that note to private investors, retired people, and things like that.
Danny Johnson: All right. It’s just a way for them to invest their money and get a better return with a secure asset backing.
Erik Saengerhausen: Yeah. It’s like a rental property without all the headaches. We manage it for them. They’re getting 10% to 12% return of their money without having to deal with anything. They have a note, so they’re dealing with the home owner resident and renter. It’s just a win-win for everyone. I had a guy who labeled it as like a triple bottom line. The home owner wins because they get owner financing. The investor wins because now they’re getting a better return than what the stock market or IRA can get them. And then obviously, the neighborhood wins because they’re getting a house that’s not remodeled and brings up the neighborhood instead of a rental property that’s dragging it down.
Danny Johnson: Right. Yeah. And then, the investors are not having to deal with calls for clogged up toilets and shelves and stuff falling down the closet.
Erik Saengerhausen: Exactly.
Danny Johnson: Like kind of crazy stuff. Yeah. That’s great. And you guys actually are in the process of finishing your book, right?
Erik Saengerhausen: Yeah, it’s been about a three-year project. It started off as just kind of a joke between Mike and I. Mike is my business partner, by the way. We wrote it on our goals list. And every year, I just kept moving into the next year, moving into the next year. And finally, I got tired of rewriting it on my new goals list. So we went to work writing it. And three years later of multiple revisions and just making sure it’s perfect, I’m sitting here, in front of me is pretty much the final version, and we’re happy with it. We think it’s a great book. It touches on a lot of philosophy. Not just a real estate book per se. Like most of your real estate books are going to be nuts and bolts. This kind of encompasses everything, but it touches a lot on the owner finance business model as well.
Danny Johnson: That’s great. And the name of the book is Stop Flipping, Stop Renting: Seller Finance Your Way to Financial Freedom. I like that.
Erik Saengerhausen: Yeah. It’s cool.
Danny Johnson: All right. So when do you expect that to be hitting the shelves?
Erik Saengerhausen: It should be on Amazon, I’d say, within 30 days. Right now, it’s just a matter of just signing off on everything that’s been done and then getting everything set up on the website and on Amazon and getting all the backend stuff, accepting payments and things like that. So it’s almost there.
Danny Johnson: Great. Yeah, I’ve seen it. It’s a great book. And I recommend everybody get that as soon as it comes out, and I’ll probably make an announcement through email, if you’re a subscriber to Flipping Junkie. You can do that on flippingjunkie.com to subscribe and then I’ll send an email out when that book comes out to let everybody know about it. And you actually sent over by email before this, you sent over a chapter of the book, right?
Erik Saengerhausen: Yeah. It’s How To Turn A Duck Into An Eagle.
Danny Johnson: I like that.
Erik Saengerhausen: And it basically encompasses rehab. It’s a short chapter. It touches on rehab and dealing with contractors and some horror stories that we’ve had dealing with contractors. But yeah, I thought it would be a great complement to this podcast.
Danny Johnson: Great. Yeah. And so, people can download that at flippingjunkie.com/27. There’ll be a link on there to click to download that in PDF format so you can check it out and get an idea of a little bit about the book that Erik and Mike are releasing soon.
So with your business model obviously, you’re having to rehab a lot of houses, right? You guys are doing 75+ houses.
Erik Saengerhausen: Yes. We do 75 to 80. We’re trying to shoot for 100 this year. We’ve got full time guys, contractors that work for us pretty much full time. So some of it is a little different than the guy doing one or two or three or four a year where their contractors are going to be working on their house and then leaving then coming back, where most of our guys are just from house to house to house to house to house.
Danny Johnson: Right. But you don’t employ them, right? It’s not like they’re employees.
Erik Saengerhausen: They’re 1099, but they pretty much work exclusively for us. I’m sure they’re doing stuff on the side on the weekends and things like that, but we keep them busy.
Danny Johnson: Yeah. All right. So you know as well as I do that there’s right and wrong contractors for real estate investors. How would you best describe the right type of contractors that you were looking for? If you were looking for a new contracting crew, what would you look for in those people?
Erik Saengerhausen: You’re going to have to go through some. That’s just inevitable. I would say where we ran into problems is trying to find the guy that can do everything rather than the specialist. So whenever we try to find the tile guy to paint the house or the painter to do the tile, that’s where we really ran into problems. Or the guy that has the crew. He’s just the guy that runs the crew. That tends to give us problems because then he’s trying to get three or four other jobs at the same time and he’s pulling guys off.
So we’re looking for the guy in the little pickup truck that’s self-employed that does painting. And then, I’m looking for the guy in a pickup truck that does flooring. We just have all the specialists come in. And that’s what we found… What’s that?
Danny Johnson: Oh, I was just going to say, do you find that the painter though typically becomes sort of a little bit of the general contractor and that he probably does drywall and some of the trim work and stuff like that? Or do you have a specialist for that as well?
Erik Saengerhausen: No, definitely the painter is usually going to do the drywall, trim, things like that. When it comes to big things, you don’t want the roofer doing the paint and stuff like that or like the electrician. I’ve got stories of the painter needing work. He’s like, “Oh yeah. I know how to do electrical stuff.” The next thing you know, I’ve got my electrician calling me going, “I don’t know what this guy was thinking,” and redoing the whole house. So yeah, just stay away from the do-it-all type people.
Danny Johnson: Yeah. It’s a jack of all trades, master of none thing.
Erik Saengerhausen: Yeah. There you go. And that goes in business itself. Whenever I try to do everything, I end up doing everything very badly. When I focus on one thing and build a team around me, I seem to be more successful like that.
Danny Johnson: That’s hard for some people to do sometimes and especially when you’re starting out and you just want to get going on that flip. You want to get somebody in there to rehab it. And when you don’t have much experience, if somebody seems decent, of course a lot of people are going to sell themselves whenever they’re trying to get the work and you’re going to say, “Well, I’ve talked to two people, and I’m tired of doing this. I don’t really enjoy meeting with contractors. I don’t know what to ask of them, so I’m just going to hire them and see how it goes.” And that can just become a nightmare.
Erik Saengerhausen: Yeah. And if you do stuff like that… whenever we bring in a new contractor, we always start them on a little bitty job and I mean little like, “Hey, here’s $200. Go put flooring in the bathroom.” And then, “Okay. That worked good. Here’s another house. Hey, go do the kitchen.” And then so on and so forth. And then slowly because over time, time either promotes you or exposes you. And you can only hide behind your sales tactics for so long. So we try to slowly bring them in that way rather than saying, “Oh yeah. You seem like a nice guy. Here’s a $20,000 rehab. How about it?”
Danny Johnson: Right. And we’ll get into in a little bit further down the interview here, we’ll talk about setting up trial schedules and things like that. For finding for those right contractors, is there a way to find those guys, those people that are specialists that work well with investors?
Erik Saengerhausen: We’ve always had the best luck with referrals, and it’s usually referrals from our contractors that we already have. So the painter says, “Hey, my cousin does flooring.” Stuff like that. I would say most of our contractors, the ones that have been with us for over five years have come from referrals. So talk to other investors. Talk to other contractors. If you have worked with a contractor, go to them first to see if they know anyone. Other than that, running into them at Home Depot; having their truck logo, newspaper, things like that but you’re going to have to do a lot more underwriting, if you will, before you start just unleashing them on a big project.
Danny Johnson: Right. Checking references and things like that. Doing your due diligence with them is very important, especially if you don’t know them. They didn’t come recommended by somebody else, especially the guys that you find at Home Depot. You want to check some references.
And I think going to the REIA meetings, the Real Estate Investor Association meetings and talking to other investors because there are other people that aren’t doing enough business, enough flips to keep contractors busy and they want to be the ones that keeps that contractor happy. So that whenever they do have another house, they’re there to work for them. And they do that by being able to refer work to them. And so, the contractors are happy with them because they’re finding them more work if they can’t keep them busy.
Erik Saengerhausen: Yeah. I’ve called you and asked you for a referral on electrician and vice versa. So I think just building a network of other investors and talking to them, “Hey, who do you use for this?” And most people will be happy to refer out their contractors.
Danny Johnson: Right. Yeah. So don’t feel like you’re going in to REIA meetings and then asking people about these different trades people and feeling like people are not going to want to tell you because a lot of them do freely tell you and share their contractors again because they get value out of it, because that contractor appreciates them giving them more work.
And then the other thing. I was going to say something else regarding finding the contractors. Oh, one thing—because I’ve just recently been doing this—is whenever I drive for dollars I’m always looking for the roll-off dumpster in driveways and then stopping and talking to the contractors working those jobs. Because then, it’s awesome because you’re going to be able to see the work they do. You’re seeing how they keep their jobsite which is always a big sign of what kind of people they are and how they work and seeing how friendly they are with you whenever it’s not. They’re not talking to you with the situation of you looking to hire somebody for a job. So if they’re friendly to you even though they don’t know that you have work for them, you’re going to find out what they’re really like. So I think it’s an awesome way to find contractors.
Erik Saengerhausen: You kind of go in covertly undercovering and just act like you’re a curious neighbor or something and see how they act. That’s a good idea.
Danny Johnson: Right. Yeah, and it’s kind of hard sometimes though because they’re going to be skeptical because they’re going to be wondering if you’re from the city, like checking to see if permits are pulled and all that kind of stuff. So there’s a little bit of trepidation at first, but I don’t know. So don’t be rolling up in some like city-looking car and—
Erik Saengerhausen: You may get shot.
Danny Johnson: They just won’t come to the door. You hear the music and them working, but they won’t answer the door. Anyway, that’s when you see too the guys that are drinking beer all day and stuff like that. It’s like you definitely don’t want to hire them.
Erik Saengerhausen: Yeah. No, definitely not. I walked into some guys and they’re napping. They’re taking a nap in the back room.
Danny Johnson: And sometimes that’s not so bad. But if it’s all of the time, that’s a problem, right? So with that said, what are some of the cues and some of the things over the years that you’ve learned to avoid like telltale signs that somebody wouldn’t be a good person to hire?
Erik Saengerhausen: Number one would be, “Hey, I’ll do the job for $2000.” Okay. It sounds fair. We agree on it. Shake hands. And then like two or three days later, they’re calling you wanting more money because of this or because of that. Sometimes, it’s legitimate. But I found that people like that are going to end up getting you in trouble. They’re always going to bid it low and they’re going to get in there. They’re going to realize they bid it low and then they’re just going to keep hitting you up for money, keep hitting you up for money, keep hitting you up for money. And it’s just a bad relationship from the start.
I’ve had that happen where I’ve had a guy go in. We’ll call him Frank. He started off on one house and just gave me a smoking deal. My greed took over and I was like, “Yeah. Let’s do it.” And then, he kind of got going on that. And then, he wanted to do something else on the inside and I was like, “Yeah. You gave me another smoking deal.” And before I knew it, I looked up and the guy was spread out over three of my houses and I had fronted him almost $10,000. And a couple of days later, he was gone.
Danny Johnson: Wow!
Erik Saengerhausen: So I learned a new lesson there. That brings up a good point. You always want to stay ahead of your contractors. Don’t ever let them get ahead of you. It’s a balance of power, but it just kind of keeps everyone honest. If the job is $2000 and they’ve been paid $1800 and they’re not even halfway through, sometimes they start thinking, “Well, I should’ve gotten paid more.” Or “I’ve got this other job coming up.” The quality of the work tends to go down very, very quickly rather than they’ve only been paid $1000 and now they want to finish this job and finish it well so that they can get the rest of their money. Anytime I’ve ever had problems, it’s either because I’ve paid them too much too fast and/or I’ve given them too much work at one time.
Danny Johnson: Yeah. I know. That’s a huge point to make as far as not letting them get ahead of themselves with the draws, especially people not familiar working with contractors. And a lot of times, you’ll hear home owners with some horrible stories. Nightmares stories about home owners giving $20,000 to somebody to start a job that’s going to cost like $30,000 or something. And they give them 20 grand upfront and they say they’ll only do the job if they get half upfront so they don’t have to wait to buy materials and all that kind of stuff. And they’ll sell it. They’ll say, “This is just how it goes.”
Erik Saengerhausen: They’re good at it, too.
Danny Johnson: And they almost always get burned. And really if you’re an investor, you got to be better than that and realize that it’s not how it always has to work. If somebody’s got a really good reputation, they’re a very reputable company, it’s been around for 30 years and they have a lot on the line, they might be able to do things like that and it’s going to work out. But when you have somebody else that’s not in that sort of position, they’re going to try to play that same thing. And from their point of view, a lot of times maybe it’s not intentional like they’re not looking to purposefully rip you off. But if they have that money upfront and something happens in their life, it’s a lot easier to go ahead and walk away, I guess. It’s what happens. I don’t know that it’s always intentional, but realizing—
Erik Saengerhausen: It’s human nature.
Danny Johnson: Right. Yeah. You’ve already been paid for something. It’s kind of hard to work for it after you’ve been paid for it. If you’re facing tough situations in your life and you’ve got to pay money to keep your house or you got to pay money to pay your rent to stay in your house and then you used that money that you paid them for the job and they “rob Peter to pay Paul” sort of thing. But realizing when people try to tell you they need that money upfront, go try to get a job somewhere. Go try to get a job for some big company and asking them to give you money the first day you start. Do you know what I mean? It’s like, “Give me my two weeks’ pay,” like on the first day that you’re there.
And I understand the whole materials thing. That’s got to be worked out, but I always break mine down into draws. And whenever I start with a new contractor, those draws are going to be pretty small like a thousand bucks or something or 1500, 2000 depending on the size of the job. And it’s always broken out. It’s spelled out when they sign the contract that we use, that the interior painting needs to be done, the flooring needs to be done before you get this draw. And it’s all like that. So it’s based on things being done rather than time.
Erik Saengerhausen: In the beginning, we were kind of like that. We’ve never had contracts. I feel that even with a contract they could probably screw you if they wanted to, but I would say it’s probably better to have one. It keeps everyone honest. But now that we’ve gotten to the point where we’re at, we’ve kind of gotten it set up a little differently. We’ve got guys that we pay by the day and then we have guys that we pay by the week. And then, we have one guy that kind of oversees everything and he runs around and buys all the materials. So we’ve got a little more control over everything rather than having to deal with withdrawals and how much the materials is going to cost.
So it’s a little different in our situation with the way that we have our contracting side set up. It could probably end up costing us a little bit more money, but we like it better than having to bid. Right now, we’ve got 10 houses going, right? So if I need to take Leroy off of one job and send him over to another house to fix a plumbing leak, I don’t want to have to worry about, “Hey, can you give me a bid for that?” “Hey, go over there and fix that then come back.” And it’s all part of the weekly or daily draw if you will. And then, obviously I’ve got the Home Depot credit card. Leroy is actually my guy that runs around and does all that, and he’s going around and just getting materials for all the other crews.
But yeah, if you’re doing the draw way and you’re dealing with one person, you always want to stay ahead of him. Don’t ever let them get ahead of you. And it’s so hard to because human nature is they come to you with a sob story or they need this or they need that. And you want to think that they’re going to do right. But there’s just something about once you get paid for work that’s not done yet, you lose the motivation to do that work.
Danny Johnson: Yeah, because it’s going to be easier to go and get another job that’s going to then give you more money to start and so you just built it up. And like we said, it’s usually probably not intentional. Sometimes it is, but it’s life’s circumstances that cause that to happen. And whenever it becomes something where people are trying to feed their family and pay their rent… They don’t see themselves as criminals, but they’re stealing money from you. And that’s sort of I think what happens. But you don’t want to be on that side of it where you’re paying the money and then they’re gone and you can’t get a hold of them.
Erik Saengerhausen: Yeah. That’s not a fun feeling.
Danny Johnson: Yeah. I’ve been there.
Erik Saengerhausen: Everyone’s been there.
Danny Johnson: Yeah. I remember one time. A guy was refinishing some hardwood floors. And I was trying to get these other tradespeople in after him to finish up some work. It was probably painting work or something. So we had to have him done first because I didn’t want to get all the dust and stuff from sanding the floors on everything. I paid him and he stopped showing up. I didn’t pay him everything, but I was trying to find him. I said, “I got to get this thing done.” So I’m calling, calling, and calling. He wouldn’t pick up. I was just like, “I’m driving over to his house.” So I look at his address on the contract order. I go to his house and I’m sitting there. I knocked on the door and nobody comes to the door. And I was like, “Something don’t feel right.” When I turned and looked, there’s a van that looks just like his on the other side of the street and like three houses down. So he gave me the wrong address. And I looked and I was like, “Well, he’s sitting in his van in the driveway.” And so I started driving past to make sure it was him. And as I did, he like went inside the house. And so, I stopped and I was knocking on the door. I was like, “Hey! I just need you to finish the job.” He was acting like he was—
Erik Saengerhausen: You could get yourself shot.
Danny Johnson: Yeah. Don’t ever do this. This was really stupid. So he’s acting like he’s not there and I was like, “I saw you get out of your van and go inside. I just need you to finish the job. What’s going on?” And he slips his paperwork under the door saying he was put in jail and that he just got out. So that was the problem. And I don’t know why he couldn’t just answer the phone and tell me that but maybe he was embarrassed by it. I’m sure he was.
But anyway, yeah. Don’t ever do that. It’s better just to try to find the right people, hire the right people. I don’t know where I was going with that story.
Erik Saengerhausen: It’s all right. It’s a good story. I was hoping you’re going to get shot in it, but you survived so that’s good. Now, you got your podcast going and life is good. I will say one thing about: When you do find a good contractor, take care of them. I’ve overpaid. Actually, I’d say a lot of our contractors now are paid very well but I don’t have to worry. Paid fully. “Hey, go paint this house.” I know it’s going to be done. I know their quality. I know that Felipe is looking after Alamo Home Source and making sure that everything is done to our standards. Whereas with new guys, you have to go and try to explain your company philosophy and why you do things the way you do things and why this needs to be done this way. It just takes so much energy that paying an extra couple $100 or throwing a bonus in here and there is worth much more than the amount of time it’s going to take you to retrain a new contractor to do things the way you want to be done.
Danny Johnson: Yeah, I know. The time investment. Once you’ve got the right people that make your life easy because it really does affect your whole business. If you’ve got bad contractors that are making your life miserable, the whole business seems like a pain in the butt.
Erik Saengerhausen: It will drive you nuts then you got to chase them down. Like you said, bang on the door and dodge bullets.
Danny Johnson: So I want to go back just a little bit in finding. So we found some good contractors. Let’s talk about maybe getting… See, I know you handle it a little bit differently, but you’ve got to start somewhere with even finding who the right people are that you’re going to maybe even pay by the week if you’re keeping them busy.
So you find some people and you have a small job for them to do. What is your process for them? Do you tell them what you’re willing to pay for the job? Or do you ask them what they would charge for? How does that work?
Erik Saengerhausen: Typically at this point in the game, we have the same house probably 400 times or maybe more, you know. Something we kind of know. It’s a 900-square foot pier and beam house. We know what this is going to cost, what’s it going to cost to refinish the wood floors, what’s it going to cost to paint it. We’ve done it hundreds of times.
So I will typically ask what they think it’s worth just to kind of get a ball part and then tell them what I’m willing to pay even if what they said is lower. Again, I don’t want them to say it’s a $1000 job when I know it’s a $2000 job. And then in five days, they’re having to buy more paint and mud and they’re coming back at me and wanting more money. Or instead of doing that, they start cutting corners and the paint job comes out looking like crap.
So I do that just to feel them out and see what kind of person they’re going to be. Are they going to be the lowball person? Or are they going to be the highball person? Or are they going to be kind of where they need to be? And you would be surprised that a lot of contractors – I’m not talking about like general contractors but like your specialist, the guy in the truck that does paint. A lot of these guys really don’t know how to bid that job. To be honest with you, they just don’t know.
So what I’ll do a lot of times with new guys is say, “Listen. Material cost aside, how many days do you think this is going to take?”
Danny Johnson: Yeah. Good way.
Erik Saengerhausen: “Four days.” “How much do you think you want to make a day? 200 bucks? 250? 150?” And you kind of back into it like that to help them understand the thought process and then what does paint and all that going to cost. About 500 or 600 bucks? And then, help them come to realize how they would get to the $2000 mark. So that’s kind of an education/interview rather with a new contractor, but usually I tell them what I’ll pay them and they either agree or they don’t agree.
Danny Johnson: And that comes with some time and experience of knowing what things typically cost. Now, for those if you’re listening out there that maybe don’t have a lot of idea what things cost, obviously things are different in different parts of the country. People in New York are probably going to pay more than we do in Texas for material and labor and stuff like that.
But for a general list of cost for general items to be repaired, I have already on Flipping Junkie and I can go ahead and add it to the show notes so you guys can download that as well by going to flippingjunkie.com/27. And along with the chapter from Erik’s book, I’ll include that typical cost of repairs. And you can use that as just like a general rule of thumb thing.
And what I would do is probably find some decent contractors that other investors are using or even talking to the investors themselves like Erik here. If I’d run that list by him and say, “What do you think about these numbers?” and have them adjusted up or down, and then you sort of have an idea of what you’re looking at cost-wise for a lot of those repairs. So you do have a little bit of knowledge of it whether you ask them to bid the job out or give them what you’re willing to pay for it. You have to have something to sort of back that up. Where are those numbers coming from? I think Ron Legrand always said it. His swag estimate, right? It was his some wild ass guess or something like that.
Erik Saengerhausen: Uh-huh. Yeah. He says 5, 10, 15, 20, keep it simple. That’s going to be $13,200 and that’s a $15,000 rehab.
Danny Johnson: Right. So tell people if they don’t know what that is, the 5k thing.
Erik Saengerhausen: Basically, just keeping things simple. When you walk in obviously in our market, it’s very competitive. The guys that have to go back and spend three hours trying to figure out exactly with a penny what it’s going to cost a rehab the house are probably never going to get that house. And if they do, they’re lucky. I’ve lost deals in 10 minutes because I drove around the block. Someone else pulled in and bought that house.
So you got to be able to walk in a house and just kind of walk through and go, “Okay. $3000 kitchen, $2000 bathroom, $3000 flooring, $3000 paint.” You start adding it up in your head when it may be $2500 for the bathroom and $1700 for the kitchen. You just got to have some sort of a basis. I can be pretty quick. I can walk through a house and in about two minutes, I’ll go, “It’s about a $15,000 rehab.” And that maybe plus or minus a thousand or two. That was just something that always stuck with me, was trying to keep it simple because I’m used to overwhelming. How am I going to know exactly how many gallons of paint and how many screws and what each fixture is going to cost me without going and getting all OCD and having some sort of a list with everything written out which isn’t my style. I just kind of come up with that, and I’ve kind of piggybacked off of him from hell—what was it—10 years ago or longer than that.
Danny Johnson: Yeah. And I use the same thing. So basically, yeah. If you go in and you sort of calculate those rough costs for those big items—the painting, the flooring, any drywall repair, kitchen, bathrooms, exterior, fence, landscaping, lights, roof, any foundation leveling, AC—those main items calculate all those cost. And like you said, if you end up at something like $22,000 or $300, just bump it up to the nearest five so then it’s $25,000.
Erik Saengerhausen: And throw in a couple thousand for miscellaneous because there’s always going to be something, always.
Danny Johnson: Yup, always. And even then, Melissa still gets mad at me because we’re always over budget.
Erik Saengerhausen: Yeah. Easy to do, man. The house I’m living, when I bought it, I said, “You know what?” I was telling the wife I was selling our own lot and we’re going to buy this house. And I said, “I could probably rehab the same for about 20 or 30 grand.” And here I am, I have rehabbed these thousand square foot houses on the south side of San Antonio for forever. And my brain is just… A $25,000 rehab is a brand new house, but this is a $2500 to $3000-square foot house, whatever it is. But I think it was like $90,000 later, and I was like, “Oh, this sucks.”
Danny Johnson: Yeah. I’ve been there.
Erik Saengerhausen: Because where I’m buying the $25 ceiling fan, the wife wants the $200 ceiling fan. For countertops, she wanted granite. So it also depends on what kind of house you’re rehabbing. And if you’re doing different kinds of houses or higher end houses, those are definitely going to be different.
Danny Johnson: Right. Yeah. So you’ll have different levels depending on your sort of niche or what you tend to focus on, lower and middle road and then higher end properties. And one way to tell what kind of fixtures to put on in the houses if you don’t know the type of level, look in the neighborhood for any other ones for sale to see what your competition is going to be when you do go to sell the house. And you can see what they have fixtures and finishes-wise so that you can have nicer than they have so that house sells faster.
All right. So let’s say you got the bid now and you’ve agreed on a price, and I like to do a contract for every job. So I spell out the scope of work which says everything that I want done exactly including skews and materials so that I know which light fixtures are going to be used, all that kind of stuff. And then, I have the timeframe spelled out and then the draws and when those draws are going to be paid out. Now, you do things a little bit differently with how you run it by paying people by the week and you have your guy that goes around and gets materials for everybody. But let’s talk about the typical timeframes for a lot of these jobs.
So you said you’ve rehabbed the same house over and over. It seems like because you’re doing the same rehabs in all these houses. What’s the typical timeframe for the type of work that’s done in these flipped houses?
Erik Saengerhausen: A complete rehab, and that’s top to bottom. A lot of times, we’re just kind of putting lipstick on a pig on some of these. But most of the time, we are taking them all the way. I would say 30 days max. If we’re over 30 days, then I know that something has been going on. But on some of the bigger flips that we do like the traditional stuff, it’s taken two or three months. So I guess it all depends on the size of the house, on the detail of the rehab. Ours, you’re going in there. You’re refinishing wood floors. You’re doing paint and texture, bathrooms, kitchen, and maybe redoing the AC and that’s it. And that typically doesn’t take very long. You got a week for paint. You got about four or five days for the wood floors to be refinished just because of dry time. And everything else another week or so. And they should be out on their own on the next one.
Danny Johnson: So like a month is a general average, and that’s quite a bit of stuff being done at the houses, too.
Erik Saengerhausen: Our guys are pretty efficient. That’s why I said when it comes to the specialist, they know when they come in there. Their job is to knock out the paint and get out of the way for the guy to come in behind them.
Danny Johnson: All right. Yeah. And because sometimes if you’ve got somebody trying to justify if you’re new to this and have a contractor saying, “It’s going to cost this much because it’s going to take me three months,” you should have warning bells going off like, Hey, this isn’t right. They can take the time. They’re not going to be there for a week or two at a time which is a part of the things that I put in my contracts, is that there’s a deadline and that’s something that they’ve come up with the timeframe for the job. So it wasn’t something I said that was nonrealistic or unrealistic but something they have agreed to that they felt like it was a good amount of time and that deadline is on there. And then, I have a penalty for if they go over that and I don’t know what it was, like $50 a day or something.
But really, I don’t know. I’ve never actually had to use that like I’ve never had to deduct. Well, maybe once, I think. I tell the contractors the main reason why I have that in there is just because I don’t want the jobsite to become a ghost town. I don’t want to go over there and not have people there for a week or two where nobody is there doing it because they’re working some other job. If you have some other job, tell me about it and let’s schedule it all so I know what’s going on. But that’s a good way to keep that from happening.
And really if they have nothing left but the exterior painting to do and it’s raining for a week, I’m not going to deduct them some of the cost because of something that was out of their control.
Erik Saengerhausen: Yeah. You’re a lot stricter than I am on stuff like that, but you’re doing different rehabs. I would say that if I was doing more of the higher end rehabs where I had those kind of contractors, I would definitely want some sort of timeframe. We did that for a little bit where we would ask, “Hey, how long do you think this will take?” And we would give them another week on top of that. We never had any contract, but we tried that and it worked really well.
Danny Johnson: Yeah. And it’s good to hear from your point of view too because this is all about finding what works for you, right? With who you find and what works for you. It doesn’t always have to be one way. Just because I do something in a certain way doesn’t mean that’s the way it has to be done for everybody. You find what works well for you. So this is awesome because people are getting two different perspectives or two different ways to do the same thing.
Man, I really wanted to say something else about that and I’m trying to remember what it was. You had mentioned something about most of the time you’re putting lipstick on pig. It’s funny to say, but some people think that it was like, “Oh, he just like going in and painting over all these rotten wood and stuff like that.” But it’s definitely not like that because Erik’s rehabs are very nice. I’m actually really amazed when I see them as opposed to what some other guys do with some of the lower end houses. You guys do a really good rehab on all those houses.
Erik Saengerhausen: I think in the owner finance world, we’re probably the best in the area at rehabbing. Most people at owner finance feel that just because they’re offering owner financing they shouldn’t have to touch the house. So most of them aren’t touched at all. We’re going in there and doing complete remodels on 98% of our houses and then also selling them at realistic values, too. Whereas most of our competitors are jacking up the prices, but that’s a whole another discussion.
Lipsticking on the pig, it was more of just being funny rather than [crosstalk 00:46:19]. So on some of these houses in order to keep the prices low, I say we have a bunch of $90,000 to $100,000 houses which in some parts of the country you’re probably giggling. But in this area, that’s a pretty decent house. And we want some $70,000 and $80,000 houses. We may buy grandma’s house that’s in perfect condition but just needs a cleaning and a paint job. Now, I could argue. I could take that house all the way up and sell it for $100,000 but why not just clean it, put a paint job on it, keep the price low, and pass on the savings to the home owner? So that’s my lipstick on a pig.
Danny Johnson: I have these notes here for the show and I was thinking through some of those cues again for what to stay from. Over time, I’ve had some experiences with trying to hire new contractors and having like warning bells go off and some that weren’t there first. But after having to experience, it became warning bells the next time I was trying to hire somebody. And we’ve been working with the same guy for years now, so it’s kind of even… But we need more because we’ve been ramping up the business. So I’m going to be going through all this again.
But some of those cues are sometimes seem obvious to people, but it’s amazing if you enjoy going out and getting deals, making out from some houses and buying them, like hiring another contractor or something and you just want to get out of the way. You want to mark it off your to-do list so you tend to overlook some of these things or just have a different opinion of them. But I’ve had times where guys would come to meet me at like 8:30 or 9 o’clock in the morning to look at the job and they wreak of alcohol. Sorry to say, you don’t want to hire these guys.
Erik Saengerhausen: That was a lot more than you think, too.
Danny Johnson: Right. You could feel sorry for him or think, “Oh well. It’s just something like just a drink last night or something.” But just be careful with that kind of thing. And then the other thing is if somebody is talking, talking, talking, talking and telling you how good of a contractor they are and how awesome they are and they don’t stop and they just keep going. You can’t get a word, and edgewise don’t hire them.
Erik Saengerhausen: No. Run.
Danny Johnson: Run. Almost every single time I’ve hired somebody like that. It’s the exact opposite of what you’re being told and it’s because they know that they’re not all that. And so, they’re trying to convince you that they are when they…
Erik Saengerhausen: To go back on your alcohol breath, that’s actually a good… If you’re going to be hiring a new guy, have them meet you there 7:30 in the morning.
Danny Johnson: Right.
Erik Saengerhausen: They’re going to have to be serious about what they do and be on time. Make sure they’re on. They don’t smell like alcohol. I don’t know what though. I’m trying to reach for the word. I keep on using the word “underwriting” because I underwrite for a living, but anyways.
Danny Johnson: Yes. It’s just a litmus test or whatever.
Erik Saengerhausen: Yeah. There you go.
Danny Johnson: Yeah. And then the other thing is like whenever I’m driving for dollars and I’m looking for contractors at the same time, a lot of times I think it’s great to be going at 4 o’clock in the afternoon even 3:30 or 4 o’clock. Because if they’re still working on a job, it’s a good sign. Because if you go and it’s like 3 o’clock and they’re gone. Because that happened yesterday. I stopped to talk to one and everybody was gone. It was only like I think 3 o’clock or 2:30 even in the afternoon. Obviously, they could’ve gone to buy materials or something. But usually, they’ll leave somebody on the crew that are working still. So it’s kind of a bad sign, not always.
Erik Saengerhausen: Yeah. You get there at 10:00 and leave at 2:00. That’s how your jobs take 60 days to complete instead of 30.
Danny Johnson: Right. And some of the other horror stories, too. I think I’ve talked to somebody where somebody is asking for a lot of money before they’ve done all of the work. Sometimes what you’ll find is you’ll have a house that needs a lot of stuff. And you hire somebody and you don’t give them a big draw. So you’re good about that. You set it up to where they’re not supposed to… They’re not starting with a lot of money. They’ve got to do some work and then get paid and build up your trust for them. And obviously, they’re having to trust you as well. Always remember that. It’s not just one sided, but they’ve got to trust that you’re going to be able to pay them as well whenever they’re due to be paid.
But what I’ve heard and what I’ve seen sometimes is like a contractor will go in. There’s a bunch of stuff that needs to be done like doing all the demo and reframing and stuff like that. But instead for whatever reason, they go through with the paint sprayer and spray the whole house. And you know why, right? Because it looks like a lot of work was done. And then, it’s like, “Well, I’ve done half of the work, so give me half of the money for the job.” If you see that happening, the order in which items are being done in the job, that’s a very important thing when people are doing things in the wrong order.
Erik Saengerhausen: It’s actually really good. I’m laughing because I’ve had that happen numerous amount of times. I actually had a guy that I fired and he just pulled up probably about three or four days ago. He went on work and he was that guy. He wasn’t one of my full time kind of guys. He was just like an overflow. We had too many houses at one time, and he just came in to help. He bid the job at whatever it was, $6000. I gave him a draw and he went in there and sprayed the whole house, cleaned it all up, ripped off the floors, demoed it. It was like, “Look. I’m almost done. All I got to do is just put this and that. I’ll be done in a week.” And in your brain, you’re going, “Yeah. He’s right. I can see the whole house is painted. It’s great.” And sure enough, “Oh yeah. Here you go. Here’s another $1000. Here’s another $2000.” And then, the job just goes to a freaking standstill because now he’s been paid three quarters of what his whole job is. He lost his motivation to work, and he goes to the next job or maybe he’s robbing Peter to pay Paul. That happens all the time. They’re behind of another job. They start your job. Get the draw to pay for the other job and they just kind of keep going and going and going.
So on stuff like that, you just kind of get out. I ended up paying the guy probably a thousand or two more than what we had agreed on just to get him to finish it and then just kind of send him on his way. But you got to look out for things like that. You can be told, “This is exactly what you need to do. This is exactly how to avoid this. This is exactly how to avoid that.” But you’re always going to run into issues. You just want to try to minimize them as much as possible, and I think that’s what we’re trying to help everyone with. You’re never going to have a perfect contract. You’re going to run across some of these problems, but just always make sure that you’re not the one taking a big hit.
Danny Johnson: So with the good guys, obviously you’re going to want to keep them busy. Do have where they’re wanting to do the work for you but they want to know that they’re going to be getting more work? How does that work out?
Erik Saengerhausen: Yeah. That happens all the time. Most of our guys, they do it for so long if they just know that there’s always going to be something for them. Even if they’re sitting on their hands, we’re going to pay them because we don’t want them to go somewhere else. But with your new guys, that’s kind of a warning sign for me, too. They’ll get halfway into the job and they’re wanting to go ahead and look at the next job. And then you go ahead, “I got my painter. He’s done. Let me get him over there to start on that one.” Or “I can start doing the prep work on the weekends.” They’ll really try to sell you on why you should give them the next job and then that’s how you end up with like the Frank story where you’re sitting on three jobs and $9000 of your money and then disappears. So it’s going to be hard to do but just say, “Hey, finish this job and then we’ll move to the next one.”
Danny Johnson: And it’s like what we’re saying is a lot of times it’s not intentional, and I think sometimes these guys want to grow their business. They see you doing a lot of business. They see the opportunity that they’re going to be able to grow their business as well because you’re going to be able to give them that amount of work. And so, the tendency is to think that, “Well, they can handle and I don’t want to have to go find out another contractor. So yeah, I’ll put them on that job, too,” the second job at the same time even though they’ve never finished one for you or maybe they only finished one.
And most of ones that I’ve used before aren’t good at doing more than one job at a time and they want to try it. But if they don’t have really good subs working for them, it’s going to be a problem. And then, they’re spending their time trying to go and do things away from their workers and they’ll find that when they’re not there, their workers aren’t really working very hard.
Erik Saengerhausen: That’s where you run into, “Oh, my guy burned me. I need some more money.” And that’s why I said earlier I really don’t deal with general contractor guys anymore. I focus mainly on specialists. So the painter is actually here painting. It’s not a painter who has a painter.
Now, in some of my bigger jobs in different areas where my guys can’t go, I’ve got one or two other people. Like if I’m doing a job in Seguin or McQueeney, I’ve got a guy named Darren. He’s a general but I know the guy went to school with him and he sends his guys over there because my guys aren’t going to drive an hour from San Antonio to go over there and paint a house. It just doesn’t make sense for any one.
So if you are going to use a general contractor type, just be real careful. First off, you’re paying more than you need to. And second off, you’re hoping that he does a good job, weeding off bad stuffs of his own.
Danny Johnson: All right. So with your specialists that you hire, what are all the people that you sort of use on a regular basis like the roofer or the flooring guy?
Erik Saengerhausen: Yeah. I’ve got one flooring guy that does all our floors. I’ve got one roofer. I’ve got two electricians. I’ve got like five or six just daily guys, just a little bit of… They’re not really specialists on anything. They just kind of are helpers rather. And then, I’ve got four specialists that are either going to be painting, plumbing, and like carpentry-type stuff. So I fully pay. He’s my painter and carpenter guy. Leroy does plumbing and then he oversees a couple of the daily guys that are good at doing demo and things like that, minor carpentry type stuff. And I’ve got Felipe that does a lot of the flooring, things like that.
Like I said, mine is a little bit different than what most people are. If you’re doing one big flip, you’re probably going to deal with more of the general guy but try to over time find your own subs in stuff that could save a lot of money to have more control over your jobsite.
Danny Johnson: Great. Well, I think we’ve covered a lot of stuff in this interview, and it really, really helps out a lot for people getting started and not knowing that next step for once they… Being prepared for that because that’s a big thing. Once you get that house under contract, it’s going to be the “Oh, crap” moment of “I’ve really got to get this thing fixed now. So how am I going to do it?”
And I never recommend doing things yourself. Do you ever recommend an investor work on their properties?
Erik Saengerhausen: No. I guess it depends on what you’re investing. If you’re working a full-time job and investing is more passive and just for fun and you are a carpenter, maybe like if you are in the construction business and you’re doing it just as a side job. But if you’re wanting to be a professional real estate investor, focus on building the business. Focus on buying the houses. Let someone else do the day-to-day grind of the rehabs.
Danny Johnson: All right. Awesome. Well, thanks Erik for being on the show again. And if people want to reach out to you and talk to you, is there a way that they can contact you?
Erik Saengerhausen: Yeah. You got the website. I think you’ve got my email address. Hopefully, you can add that somewhere. I’m more than welcome to shoot me an email, and I can set up a time to talk to you.
Danny Johnson: Do you want to give the URL for people listening for The Note Factory?
Erik Saengerhausen: Yeah. It’s thenotefactory.com. And then, the book is stopflipping.com.
Danny Johnson: Stopflipping.com. Cool. All right. And I’ll have links to those on the show notes page as well as the download for the chapter from the book and then also estimating the typical repair cost at flippingjunkie.com/27. So awesome. Well, thanks, Erik.
Erik Saengerhausen: Hey, thanks for the invite, man. I appreciate it. It was fun.
Danny Johnson: Yeah. Thanks. Have a good day. Bye.
Erik Saengerhausen: Right. Bye.
Danny Johnson: [music] All right. Thanks for listening. That was a great episode, talking about finding and working with the right contractors. Thanks a lot for listening and be sure to subscribe on iTunes if you haven’t and then also to subscribe with your email address on flippingjunkie.com. And I’ll let you know when Erik’s book is being released. And be sure to check out the show notes at flippingjunkie.com/27. Be sure to listen in. Some great episodes coming up for how to find good attorneys, title companies, real estate agents, working with realtors, working with wholesalers, and even using virtual assistant. So we’ve got some great episodes coming up in the near future. So be sure to subscribe on iTunes and have a great week.