There are many ways to thrive in the real estate market, and one of them is property rehabbing. And according to our guest, this venture is fulfilling in both profits and purpose! In this episode, Don Costa is joined by realtor Diego Herra, who transitioned from being a real estate agent who helps investors acquire deals to becoming a full-time rehabber who makes his own transactions. They discuss what flipping and rehabbing properties is all about, the excitement of the process amid the changing market trends, how to kickstart your first project, and more! Join us to learn crucial real estate lessons and turn yourself into a master rehabber!

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Why You Should Transition To Property Rehabbing And How To Do It Right With Diego Herra

I have a really cool guest. Before I get into the introduction of my friend here, I want to talk to you about some amazing things we have going on. We have an incredible mastermind community. I want to make sure that those of you who are active real estate investors are looking to be a part of something cool with a community of people that are your peers that are going to be able to help you get where you want to go. Make sure you check out BeInThisRoom.com and see what we have the offer as a mastermind community. I’m sure you won’t regret it. With that said, I’m going to introduce my guest. Diego, how are you doing?

I’m great. Thank you so much for having me.

I appreciate you being on. Before we get into your story, we met back in September. You came out to Fresno and did a three-day with us. We spent a little time hanging out. You come over to my house for dinner, come by my office, and stuff like that. Tell me about how you found out who I was, what made you come to that three-day, and then what you get out of that.

I got an email from you. I have no idea. I’m sure I was on some investor lists. I’ve been wanting to go to a class that I thought was worth it. I get emails from tons of different people. I YouTube stalked you and I’m like, “This guy has some good stuff and he’s local to our market. He’s going to have very similar results. It sounds like he’s done it.” I made a point to get my whole team going there, but it was from your Flip Talk. It was from some of the YouTube videos I saw you on. I Google stalked you and then found out that you were the real deal.

This is a total shameless plug and I’m diverting from the interview with you for a minute, but what did you think about the three-day that we did?

It was amazing. For the three-day, you provided so much value. The type of content that you give to people, three days with someone like Steve Trang is going to be 3 or 4 times the cost. You’ve given the secret sauce away. There’s no secret in hard work. In our business, we learn by paying money to do stuff. If it doesn’t work, we stop doing it. You give people the shortcut for that.

There was value in it.

There’s value in it. It’s something like, “Don, should I spend $15,000 on a billboard in the middle of Highway 99?” You’ll say, “No. I don’t get it, but here are the returns I’ve heard from that.” It’s good to have someone to bounce ideas from.

Having people around you that understand you is important. Let’s talk about you. You are in the Bay Area of California. You do deals all the way up in California. We’re going to get into California and some of the dynamics of it, whether or not you should do business in it. Before we do that, how did you get started in flipping homes?

I started as a real estate agent. I’ve had my real estate license for eighteen years. Some of my clients were investors. I went through the highs and lows. I already went through a market crash. During the market crash, I started buying at the courthouse for different investors, helped them flip properties, and now I’m doing it with my own team.

What made you do that transition? You’re doing it for other people and saw that they were making money. At what point did you make your own transition and what was that looks like?

It was hard to do for me because when you have another team, you have fewer responsibilities. It’s less on your plate. I was also doing real estate at the same time, so I had a couple of different focuses.

You transitioned from an agent helping other investors acquire deals to doing your own type of deals. I’m assuming you got into rehabbing right away because that’s been our conversation. You get into rehabbing right away. Why didn’t you go into wholesale or some other avenue? Why go straight to flipping and rehabbing properties?

I went to focus on what I thought I would be best at.

That was rehabbing?

Yes.

What were some of the challenges right out the gate, being a brand-new rehabber you ran into?

Unless you have a coach or someone to guide you, off the bat, you want to do HGTV. You want to do that $50,000 kitchen which doesn’t make sense in your $200,000 ARV market. I thought it was exciting. It’s exciting to see something go from a piece of crap house to something gorgeous.

On the first handful of deals, was it exciting or was it exciting and painful at the same time?

It was painful. You learned quick lessons on where to not spend money and where to spend money. You learn that you’re not going to move in it through yourself. You’re selling this for someone else.

That’s incredible advice in the sense that we want an HGTV for these houses. We want to make them something we want to live in and that’s not what they are. We want to rehab to whatever that particular neighborhood dictates. Years ago, somebody made a comment that stuck with me. They said, “You either have an ego or you have a bank account, but you can’t have both.” A lot of us coming into this want to have an ego and over-rehab these houses. That always presents a challenge.

The funniest thing in our business, I’ve heard this a couple of times from people that thought they knew how to flip properties. It’s like, “This is an open checkbook remodel.” I’m like, “That doesn’t exist in my verbiage.”

No, it doesn’t. That’s the fastest way to trouble, especially right now when the market is on fire and people think they can’t do anything wrong. You’re a very detailed guest. You gave me a list to talk about and over-rehabbing was one of those topics. I think that’s very important. When it comes to determining the level of rehab on a property when you’re getting ready to do a project, what are some of the things that you utilize to make your decision on what you should do and shouldn’t do to the property?

Everyone talks about comps, but a lot of people don’t put the detail into it. When I look at comps, I’m looking at square footage and bedroom count, but I’m also looking at the finishes of those houses. If I see the standard finish for those houses are granite countertops or quartz countertops, that’s what I’m going to do with my rehab. When you get to quartz, if it’s a very specific quartz, it’s going to be $4,000 a slab. I’m not going to go there. I’m going to go where the comps are at. Let’s dive a little bit deeper here. If the house is built in the ’90s and there are already dual pane windows on there, I’m not going to change it up to something brand-new because they’re not white vinyl windows unless the market and the comps tell me to do that.

 

That’s very important. You’re not moving walls if the other properties don’t have moved walls and that kind of thing.

I’m not moving walls. I’m looking at where the comps are at. The other thing too is I want to see what the highest priced home was and what style of home they were. Now, the highest-priced homes in the Bay Area market are farmhouse-style homes. I went from gray tones houses and now we’re switching up to everything bright white homes inside with black appliances, doorknobs, and hinges. The reason we made that move is because the comps showed us that those farmhouse style homes, not only are they getting the highest amount, but it’s saving me money by doing a dual paint color from doing one color. Those houses have been extremely hot for us.

An important takeaway for the audience, look at what the other property is selling for and what they need. If all your comparable properties are selling for top dollar and have tile countertops, leave the tile countertops. This is about making money, not making our ego feel better. You mentioned underdoing rehabs as well. It’s also important that we want to make sure that we’re fixing things that need to be fixed. I don’t think we need to touch too much on that, but speculating is something that is very important. I was born into the investing space in 2003, 2004 and 2005, which is very similar to today’s market, and speculation was running rampant. For an audience member who’s brand new and doesn’t understand speculating in your terms, what is speculating mean to you?

Speculating is like, “The market is hot now. By the time we’re done with this remodel, it’s going to go up at least another 5%.” People in our industry that have other teams that do this, that’s how they’re operating right now. It’s very dangerous to do that. I go on, “What’s today’s price?” I don’t go, “What’s today’s price? This is the highest comp that ever sold in the neighborhood so I’m going to use that.” I’m going, “What’s a conservative comp but still good for a fully improved house?” Our prices are sticky. Meaning that once a particular price is in that area, it’ll take a while for it to reduce, but I’m not going for that one-off comp. I got $50,000 more than the immediate neighborhood. It’s great if I get it. It’s buying the sky, but where I’m seeing my purchase numbers is off strong comps.

If you’re going to put money or invest in a property, or if you are going to rehab it and do the work, it is important to understand that the numbers are the numbers. You don’t want to bet on the future because the future changes. It’s unpredictable. None of us has a crystal ball. I love that. Not all comps are created equal. That was one that caught out to me. What do you mean when you say not all comps are created equal?

Zillow is terrible for one reason. It uses just the numbers. In the Bay Area marker, we have to be concerned about what the view looks like in this house and what the style of the home is. If I get a craftsman-style home, which is one of the most popular in the Bay Area, I know I’m going to get top dollar, but if I have a ranch-style home, I’m not going to get the same value as a craftsman home.

Even if it’s built in the same timeframe, make sure you go into the details. Does the property have a view? Are you looking to buy a house on a busy street compared to the one that was listed in the court? Is it a whole different builder at that time? I look to see, “Is this the same builder that built these homes?” I look to see if the address that I’m looking at is a big wide street. The comp better be a big wide street or something equal to that. I don’t think we do a good enough job. We’ve been spoiled by having an increase in appreciation that we’re not doing a good job with our comps.

 

It’s important to understand that because there are a lot of things that affect comps. If you have a property that’s in an inside neighborhood and the house is on a busy street, that’s going to have an impact on price. If the property doesn’t have a garage and your comp has a garage, that’s going to have an impact on the price. If your property is on an inner street and has a garage and the comp is on a busy street with no garage, that impacts the price. They’re not apples to apples in all ways. That stood out to me. I’m going to argue with you a little about staging. One of the things you put on your list was not staging a home. You say stage, right?

Absolutely.

I say it depends on what market you’re in and what the demand is. If you’re in a market like Central Valley and you’re in a median entry-level first-time buyer or second-time buyer house and you’re in a decently hot market, you’re throwing away money staging. If you’re in the Bay or you’re in a more competitive market where it’s more of a buyer’s market than a seller’s market, then I say for those reasons, you stage because you want to make the home more appealing. That’s my opinion. I don’t know if you argue with that or not.

I’m going to argue with that.

That’s fair.

A lot of times it’s not just the fact that I want the photos to look better, sometimes you get a funky house. You look at a big area in a room and you’re like, “Crap, what is that area used for?” I’ve had stagers come in and I didn’t know what that area was for. They’re like, “We’re going to put a little kitchen nook there or that’s a family room.” They help identify funky spaces and improve the actual house for that buyer. If I have weird awkward floor plans, and we all get those, a stager could identify what that is for, and make it a lot more attractive to that buyer.

I don’t disagree with that. In a funky property where you want to help the homeowners have a vision of how to best use the space, absolutely, re-staging is a phenomenal way of doing that. My opinion is my opinion. You don’t want to over-rehab and that’s the subject of opinion. You don’t want to spend money where you don’t need to spend money on other things. I do agree with you wholeheartedly that if you have a funky property, you have a higher-end property, and there’s more demand in the market, then 100%

The crazy thing about this business is we fundamentally share ideas and then we choose what ideas work best for each of our businesses and make our business successful. There is no perfect way. There are a lot of ways that we protect ourselves, but there’s no absolute perfect way to always do everything. Not knowing your local market, hit that.

I have about 5 or 6 different cities and for each of them, you have to list them a certain way. I’m going to give you an example. If I’m going to list a house in Alameda and I don’t price it $100,000 less than what I want for it, people are going to think that I’m overpriced. The spread is about 20%. If you get a house, you’re going to list it 20% under the market. That’s very common for that particular market. Depending on where I am in Oakland, it might only be a 5% difference in what I want from the list price to the actual price.

Break that down. You’re saying to list it under what you want. Why would you do that? If you want $1 million for that property, why would you list it for $900,000?

It’s because everyone in that market has been trained to know that they usually get 20% higher. All the buyers and all the buyer’s agents already trained that it’s going to go about 20% higher than what the list price was. It sounds insane, but the list price doesn’t matter for that particular market. At the same time, I have markets that are a five-minute drive away. You want to list pretty close to what you want to sell for.

We’re talking about a five-minute drive, two different markets. If you don’t do an open house and don’t invite some of the local agents, they might blackball you and might not show that house to your client. You want to be friendly to all the locals in that market. I always try to invite whoever the top agents are to take a look or preview my properties.

That’s important to understand the market and also the conditions of the market. In the Central Valley, we have periods of time where we need to underprice properties in order to get bid up. We have times when we absolutely should be pricing it exactly where we want with it. It’s not necessarily the neighborhood per se, but it’s the market condition. You got to keep your finger on the pulse of that. Knowing the market that you’re in, but also knowing the market cycle is important to strategy as well.

That’s extremely important. It’s not bad to call people in that market. If am I moving into a new market, I’m going to call whoever the top agent is and say, “Can I pick your brain for a second? We’re getting ready to list the property. Is there anything you could tell me that is common in this area?” If you’re ever in the San Francisco market, it’s very rare that you look at offers the first weekend. In that market, you have to wait for the second weekend and do all your inspections up front. If you come into that market and you didn’t know that, you might miss a lot of buyers that expect it to be two weekends before the offers are presented. You need to do your due diligence on whatever market you’re working in.

 

If you’re rehabbing, you need to do your due diligence. Bark is your best friend. What’s funny is you are not wrong. I hate bark. Bark is messy. Bark and mulch are two things that can make a property look incredible. Why do you say that?

It’s cheap. For $80, I can transform a front yard dramatically. Especially if I’m tied on numbers, “Let’s add some bark.” It gives a good contrast in photos and most buyers don’t hate it.

When the bark is fresh, it looks amazing. Mulch is a little bit different so it looks amazing. We always say adding color, which is getting some inexpensive colorful flowers and strategically planning them in a flower bed or various parts of the property. It adds some curb appeal at a very cheap price. First impression matters and curb appeal matters. Talk to us about that a little bit.

The details matter to me. I see a lot of houses. The whole house is supposed to be remodeled and as I walk to the house, I see a faded old light. I’m thinking as a buyer, “They cut corners on this house.” For $30 they could have put a brand-new light instead of this one that’s completely faded. Who knows if it works or not? The front door wasn’t even painted. They changed the carpets and painted the inside of the house, but they forgot all those little details. I’ve seen a house that is missing outlet covers. Those little things make me question the integrity of the whole house.

Those could be things where they rushed to list it and didn’t quite have the rehab buttoned up.

Absolutely.

That’s a fatal flaw. I’ve done that where I’ve wanted to list by a certain date and I’ve had some things not completely tied in, and we went ahead and list it. It was a death nail on that property. We ended up having to take a lot longer to get what we wanted out of it. We ended up taking less, to be honest with you, because we didn’t wait an extra week basically to list it. That cost us more than a week.

I’ve had that and learned that lesson, but I still see that as a very common thing those other flippers try to do. A lot of times they won’t paint the front door, but they threw a bathtub with jets in the master bathroom. They overspent in one area and under-spent in the other.

It makes no sense. No rhyme or reason. Next is contact the experts.

For everything that I do, if I don’t know something, I’m going to find the person that has the answer to it. To give you an example, I had a property that had some type of oil heater for the house in the concrete. I’ve never run into that in my life. I had a call about 30 different people to find out someone who deals with that. Apparently, it worked. I had a guy test all the systems and after I had him fix the radiant heat, I found out it’s something like $30,000 to $50,000 to install a new system like that. There is a value in that house that I didn’t even realize.

If you don't know something, find the person who can give you the right answer. Click To Tweet

People who don’t understand where radiant heat is, it’s generally where they have pipes through the flooring and they’re running water or heated water whatever through that piping unit and they’re heating the house through the floor. I don’t think they heat the whole home, but they warm the floor, which is great in the winter time so you’re not getting cold tile or cold wood flooring. It is an upgrade and adds a lot of value to the property. Next is be a coach, not a player.

I stole something from you. This is pure Don Costa, but I’ve been using this. Everyone that you bring on is part of your team. Your photographer, agents, flooring guy, and granite guy are part of the team that you work with. As a coach, even if you know how to do it, you can’t do everything yourself. You’re going to have to find people that you can trust and coach them on how you work.

You can't do everything yourself. You need to find people you can trust, and you have to coach them on how you work. Click To Tweet

My biggest pet peeve is if one of my contractors tells me something that’s not true. They say, “Diego, it’s done,” and I show up there and it’s not done, I’m either going to stop working with them or they’re going to hear from me. It changes the playbook that I’m trying to put out there. I train everyone up fast that if they tell me something that’s not true, they’re either not going to get business from me or we’re going to have a big conversation about it. You got to train your players. You got to coach them up. That’s the Don-ism.

There are a few Don-ism out there. Apparently, hanging out with me late at night can get you Costa Don-ism. We’ll get into that in a different conversation. I love you say this, “If you’re building a brand, be nice to everyone.” That’s pretty cool.

Right now, everyone is on their high horse. I’ve seen rehabbers, “If they don’t do this then we’re not going to accept their offer.” This is a long game. I’ve been doing this for eighteen years. I know that rehabbers or flippers are being complete assholes to agents. When the market gets thin or gets tough, everyone has a long memory. You want to be nice to everyone. You want to work with as many people as you want. Sometimes you have two identical houses on the market. They’re going to go with Don’s house because he’s great to work with, not the guy that’s going to be tougher to work with.

The other thing is, in our area, we’ve created a brand. I have agents that call me and say, “Diego, I saw your house come up on the market. I know you do amazing rehabs.” They haven’t even seen photos yet of it, but they’re already getting their clients to go there because they know what my investor’s brand is. They know we’re not going to do certain things. It’s going to be a quality product that they can show their clients. It’s not just once that I’ve had this happen. I’ll have people reach out to me, “Diego, what do you have coming up in this area?” It’s because they’ve sold a house of ours before and they like our product.

That’s very important that you hit on that. People forget that market cycles change and you either have an ego or you have a bank account. There’s so much arrogance in a hot market from rehabbers when they can be complete pricks to everybody, not just agents. It goes back to your team. They’ll treat contractors, photographers, and real estate agents like crap. They wonder why they can’t get anybody to work for them down the road. They can’t get anybody to show their property or things are falling apart.

I’ve seen that happen so many times. That’s fantastic advice. The last thing I want to hit on here while I have you is something that you hit the nail on the head, and it’s buy the home right and stick to your proforma. Let’s talk about that a little bit. What are you saying there? It’s an important thing to be said.

Every time in my past that I ever tried to get a deal to work, the term would be trying to put a square peg in a round hole, but it doesn’t work. You like the house, but you’re paying too much for it and trying to squeeze the numbers at work. You’re like, “It doesn’t need the roof. We won’t do the roof. We don’t have to remodel the kitchen.” You start taking things off that affect your remodel or the saleability of it. It doesn’t work. If it’s $1,000 off, it’s $1,000 off. It doesn’t work. If the numbers don’t make sense, don’t change your business to make a deal work.

Don't change your business just to make a deal work. Click To Tweet

I agree 100%. Numbers are numbers. You can’t fudge the rehab or RV. Great markets hide bad businesses. I say it all the time, “Great markets will make an idiot look like a genius,” I know because I was an idiot that looked like a genius in a great market. It’s one of those things that you have to understand. The fundamentals of the business and numbers are important. I love that you had that in there. Any last things you want to share with the audience? Any advice you would give somebody starting out or maybe trying to get past some struggles in their business?

Every market is a good market to make money. I’ve been doing this for eighteen years. I’ve seen it go down and a lot of people made money going up. Right now, we’re shifting away from major rehabs. We were talking about 6 to 8-month projects and focusing on things that we can turn around quickly, but everyone can make money in any market. It doesn’t matter. You could start flipping now. You could make money flipping when the market is going down as long as you’re buying it right going in.

I agree 100%. The last question I’m going to ask you is I sold you a property in Sacramento and finished it a while back. It looked beautiful and amazing. How did you guys do on that property?

We did great.

Tell me you did better than expected. I love it when I sell something to somebody and they did better than expected.

We did way better than expected. It turned out beautiful.

I appreciate having you on. For anybody who’s reading this, make sure you’re liking, sharing, subscribing, and getting the word out. We get a lot of excitement about what we do when it comes to spreading the word and being able to impact people through these conversations. Make sure that you are letting people know about the show.

If you are interested in being part of a community or you’re interested in attending one of our three-day events, we’re doing a three-day event. If you’re reading this after May, we may or may not have one again, but we will be posting if we do. Go to BeInThisRoom.com for the mastermind if you want to apply. If you want to know more about what we’re doing with the events and some of the stuff we have going on, go to FlipTalk.com. With that said, Diego, thank you for being on with me and I appreciate your time.

 

Important Links

• Diego Herra
• Fliptalk.com/grow
• BeInThisRoom.com