It was just over a decade ago that the housing market collapsed, but are we in for a repeat? CNBC’s Diana Olick joins ‘Squawk Box’ with the details.

Dave:
Hi, everyone and welcome to On The Market. I’m your host, Dave Meyer. This past week has been a really whirlwind and pretty important week for the economy. And as such, we have decided to do our first ever bonus episode where we’re going to be talking about the news that took place over the last couple of days. We’ll go into some history to provide some context about how we actually got here and, of course, we’ll talk about what you as an investor should be thinking about over the next couple of weeks and months as all of the crazy information that we’re getting about inflation and the economy starts to unfold. The focus of today’s episode is really going to be about inflation.
If you’ve been paying attention last Friday, the CPI data, the consumer price index, which is one of the most common measurements of inflation came out for May. And what we saw was much higher than most economists expected. We all know inflation is high, but this was way higher than even most people were thinking it would be. So, it’s really important for us to understand what this means and what is going on. So, today, we are going to talk about what this inflation report that came out on Friday and set off this cascade of events over the last couple of days, what it actually showed. We’re going to go into a background of what inflation even is and how we got here. We’ll talk about what the Fed is doing in response to this reflation and, of course, what might happen next.
Okay, so what actually happened this week? Last Friday, the consumer price index came out and showed that inflation, measured on a year-over-year basis, which basically means comparing May of 2022 to May of 2021, went up 8.6%. That is 8.6% year-over-year, which is an increase from April which was 8.3%. And so, that is an increase and, of course, that is concerning. But to me, the biggest news here was the month-over-month data. From April 2022 to May of 2022, prices across the United States went up 1%. And I know 1% does not sound like a lot, but 1% in just a month is a huge number. This is one of the largest monthly increases we’ve seen. Back in March, it was actually 1.2%, but a lot of that was fueled by the invasion of Ukraine.
And having this 1% month-over-month in May was a big, big shock. Most economists were expecting it to be about 0.7% which would have been about the average that we’ve seen over the last six months. But again, it was higher than we expected and it actually showed that it was accelerating. The month-over-month data in April was 0.3%, so having it go up to 1% was really big news. The other detail about the report that, I know not everyone looks at the details of the reports and looks at every single data piece, I do which is why I’m here talking to you about it, but what really stuck out to me is that prices in every single category rose. In most of the last couple months, there have been a few categories at least, while even though inflation was going up, pretty much across the board it was going up, but there were some categories of expenses that were going down.
New cars were starting to go down, some sectors of energy like electricity after spiking in March started to retract a little bit in April. But in May, every single category that is tracked by the consumer price index went up. And so, this was pretty shocking, right? It was much higher than we were expecting. Most economists believed, at least at the beginning of the year and even up until a couple of weeks ago, that inflation was going to peak soon. That doesn’t mean prices were going to go down, that doesn’t mean inflation was going to stop, but it means that we’re going to see the pace of inflation, the pace at which prices were going up at least start to slow. They would go up still, but they would go up slower. Instead, we saw them go up faster, which is why so much has happened in the economy and the stock market and everything else over the last couple weeks.
So, that’s just some analysis. Hopefully, that helps you understand what happened and why it’s sent a shock through a lot of the financial system over the last couple days is because we’re expecting it to be down and it was up. So, to understand what this all means, I think it’s helpful to just go back to the beginning and talk about what inflation even is, what contributes to inflation. Inflation in its simplest terms is the dollar losing its spending power. Basically, if you want to buy something, you’re going to have to spend more money to buy the same exact thing. Another way I like to look at this or that I’ve heard it described that I think makes a lot of sense is too much money chasing too few goods, right? So, there is a lot of money floating around in the economy, there’s not enough stuff to buy and that sends up prices.
So, inflation is a bad thing, right? We all know that inflation is bad, but why? Basically, it stretches people’s budget, right? If you have to spend more money to buy the same exact thing, you’re going to have less money for disposable income, or to pay rent, or to invest in a business at the end of the day because you’re using more of your income on the everyday expenses like gas, and food, and all the other stuff that you need. So, in addition to stretching budgets, it also eats away at your savings. If for example you had $10,000 saved up, which is a lot of money so congratulations, and over the last year you had 8.6% inflation, that money in terms of spending power is now worth only about $9,140 because inflation has reduced it. So, that sucks, right? You had all this money saved up and now it is worth less. So, that’s another reason inflation is bad.
And generally, it’s just damaging to society, right? It causes people to lose faith in the U.S. dollar, which is a problem for import, exports. It’s just a problem for our country in general. And so, inflation has to be brought under control. It is a huge problem and it is worth noting that it usually, disproportionately impacts people at the lower end of the economic spectrum. Because people who don’t have a lot of excess or disposable income when gas prices rise or when food prices rise, they don’t have as much cushion with which to make ends meet and this really impacts them a lot. Now, before we get on, go and talk about how we got here in the first place, I think it’s important to mention that a little bit of inflation is actually kind of good. The Fed targets, the Federal Reserve targets inflation at about 2%.
I know that’s confusing because I just said inflation was bad, but a little bit of inflation actually stimulates the economy. Think about it, right? If you thought prices were going to stay flat or go down, you might not choose to buy a car right now or make some big purchase. You would wait until prices might go down. But if there’s 2% inflation, which is not so much that it’s causing all of the negative impacts that I was just talking about, it’s incentivizes you to make a purchase. If you were going to buy a car and you knew that a year from now it was going to be 2% more expensive, maybe you just buy the car now and save yourself the 2%. So, that is why a little bit of inflation, first of all, it’s natural, it happens in a capitalist economy, but it is also generally seen as a positive thing for a little bit of inflation.
But obviously, above 2%, the area that we’re in, 8.5% right now is crazy. That’s not what we want, it’s way too much. But I just want to make sure that you understand that a lot of inflation’s bad, little inflation okay and kind of good. Let’s turn our attention to how we even got here and why inflation is so high right now. Like I said, one definition, the one I really like to use for inflation is too much money chasing too few goods. Or if you want to sort of respin that sentence into more traditional economic parlance, you would say it is too much demand and not enough supply, right? Everything in economics comes down to supply and demand. And when you have inflation, it is pretty much always caused by too much demand. People want a lot of stuff and not enough supply, there’s not enough stuff to buy, and that always pushes up prices.
So, let’s look at supply and demand as it exists today or at least over the last couple of months. So demand is up, in my opinion, for two reasons. The first is pent-up demand, right? We all were just locked down for two, two and a half years, didn’t get to spend money on a lot of the things that we wanted to like travel, or going out to restaurants, or bars, or the movie theater or whatever, right? And now that the economy has opened up, people want to do stuff and they want to go out and spend. And so, they’re doing that. They’re going to the movies. I don’t know if you about you, but if you try and get a reservation, you try and go out to dinner without a reservation in a major city, it’s super difficult. People are out and about. And that is natural, in my opinion, there is a lot of demand.
There’s also another major force pushing up demand, which in my opinion comes from increased monetary supply. And I know that sounds pretty wonky, but if you’ve heard that inflation is usually caused by the printing of money or more money entering an economy, that’s what I’m talking about here. Over the last several years, the Federal Reserve and Congress has introduced a lot of new money into the economy. This has come in the form of stimulus checks and actually printed cash. It’s also come in the form of the Federal Reserve buying mortgage-backed securities and U.S. Treasuries and increasing their balance sheet. That adds more monetary supply to the system.
And interest rates are super low, which means that banks are more willing to lend out the money that they have. And so, rather than money sitting in savings account earning interest, it’s getting lent out and circulating around the economy. And when all this money is circulating around the economy, people spend more, right? If it’s super easy to get a loan at a low rate, for example, maybe you will buy a car, maybe you’ll buy a house. Maybe if you’re a business, you’re willing to hire new people, expand it to new territory, buy some new equipment, right? There’s so much money out there that you’re willing to pay more and that drives up prices, right? That means demand is higher because people just have money, right?
If you are usually willing to, let’s say you had $100 to your name and you wanted to go buy something, a sandwich, and you’re willing to spend 10% of your net income on a sandwich, you’d pay $10 for that sandwich. But let’s just say there’s so much money flying around the economy all of a sudden that your net worth is sort of goes up to about $120. And now, at 10% of your budget, you’re now willing to spend 12% on that sandwich. And that’s just a simple, silly example of how increased monetary supply could drive up prices. Now, those are some ways where demand is going up. The other side of this, of course, is supply. And we’ve all heard that the supply chain is damaged and is where there’s not enough goods. I think most, every one of us has experienced this in some way, whether it’s food or chips for a car or whatever it is, we all know that COVID really damaged the supply chain.
Now, in addition to COVID, the Russia-Ukraine conflict also really contributed to the supply chain issues. Russia has been almost completely excluded from the global economy. They are big exporters of things like fertilizer and food and all sorts of other things that are basically just getting pulled out of the global supply chain. And so, that just reduces supply even more. They’ve also seized a lot of Ukrainian assets and supply, and that’s getting removed from the global economy as well. And so, that’s creating supply issues. And third, we have China’s COVID policies. They’re pursuing this no, zero-COVID policy which is leading them to lockdown, huge cities. And that is reducing manufacturing. It means a lot of the materials and goods that are produced in China and then shipped over to the United States are not getting here, further exacerbating the supply chain issues.
So, we’re sort of in this perfect storm for inflation. Remember I said that it is too much demand and not enough supply. We just talked about why demand is super high right now. There’s pent-up demand, there’s increased monetary supply. At the same time, we also have reductions in supply due to COVID and the Russian-Ukraine. This is the perfect storm for inflation. And now, a lot of different economists, a lot of different people have different opinions about what’s really contributing to inflation. Some people think it’s a lot of monetary supply and that other people think it’s mostly because of the supply chain. I don’t personally do my own statistical analysis on this so I can’t say who’s right. But I think whatever it is, inflation is super high from some mixture of these conditions.
And I think if anyone says it’s only because of increased monetary supply or it’s only from supply chains issues, that’s not true. It is a mixture of these things. How much of it is one factor versus the other? I don’t know, but it is definitely a mixture and convergence of all of these economic forces that are causing this high inflation. Now, how do we fix inflation, right? So, now we’ve talked about what it is, what’s happening, how we got here, how does inflation get fixed? Well, if inflation is too much demand and not enough supply, you have to level one of those things out. So, on the supply side, you could have more goods. And in a normal time, that’s what happens, right? If demand goes up and people want to spend normally, manufacturers just increase their output to the point where they can meet that demand. But right now, that can’t happen because of all the constraints on the supply chain that we are already talking about.
Now, when a lot of economists said that they were expecting inflation to peak at some point in 2022, it’s I believe mostly because they thought the supply chain issues would get solved. Right? The demand side is a little more complicated, but most people were thinking, “Okay, the economy is going to open back up. Almost every economy in the world has opened back up.” China is still having some lockdowns, but with that, the thinking was supply chain would sort itself out. But unfortunately, right when it was starting to just, things were starting to get better, Russia invaded Ukraine and cause all of these additional supply chain issues. And so, we’re not seeing that get better.
The other way you could do it is of course lowering demand. And that is really where the Fed is operating. If you’ve been paying attention over last week, the Fed just announced a huge interest rate hike, 75 basis points, which is basically, it is the largest single interest rate hike since 1994. And so, they’re really going after this. And the way, the reason they’re doing this is to try and lower demand. I know they’re not going to say that, that’s not exactly what’s trying to happen, but they’re going to try and lower the monetary supply. By increasing interest rates, that means it is less enticing for people and for businesses to borrow money. So, rather than borrowing money for a bank at a 3% interest rate so that you can build a new manufacturing plan or buy some new equipment, you’re not going to do that because it’s more expensive and it is not as attractive as a proposition.
Or in the consumer side, maybe you don’t buy a car, right, because interest rates are high, so you hold onto your car a little bit more. This reduction in monetary supply should lower demand. Generally, this works. It is kind of proven that rising interest rates reduces monetary supply and it can calm that inflation. The thing is that it takes time. And so, we’ve seen that the Fed is trying to do this slowly. They announced back in, I mean the end of 2021, I can’t remember exactly, that they were going to start reducing their purchases and mortgage-backed securities and treasuries, that they were going to raise interest rates. And they signaled this for a long time because they didn’t want the stock market to overreact. They didn’t want businesses to freak out and think like, “Oh my God, interest rates are going up so quickly. We got to lay people off.”
They were trying to engineer what they’ve called the soft landing. And the idea here is that they could raise what they wanted to do. What they want to do is raise interest rates slowly or at the right pace, let’s say not slowly but at the right pace, to reduce demand and inflation but not increase unemployment and not send the country into a recession. And so, for let’s say the last nine months, that’s basically what the Fed has been trying to do. But like I said at the top of the show, we just saw this inflation print and it just doesn’t look like it’s working. And there’s a lot of reasons for that, right? I just said that increased monetary supply is not the only reason why inflation is high, but it is kind of the only thing that the Fed can target. So, they’re not fixing supply chain issues by raising interest rates.
But overall, I do think, this is just my opinion, I do think what the Fed is doing is the right thing. They’re trying to control inflation and that needs to happen because inflation can really spiral out of control. Inflation is tricky to bring down and it’s important to nip it in the bud before it gets to hyperinflation to the point where we have this spiral and the dollar is really considerably getting devalued even worse than it is right now. So, that’s why the Fed yesterday came out and said, or that when by the time this show comes out it’ll be two days ago, this is coming out on Friday, on Wednesday, they said that they raised it 75 basis points, really big increase to try and stem inflation. And this is really meaningful for a few reasons.
And it’s not like this was totally unexpected. The Fed has been raising interest rates, they’ve said they’re being in raised interest rates. But it seems less and less likely, at least to me, that the Fed is even really acknowledging that this soft landing that they’ve been trying to engineer is even possible. They’re going to keep trying to do it but it looks increasingly difficult. If they’re raising interest rates at this rate, it seems very likely that we are going to go into a recession. They didn’t say that in their guidance, they still are projecting the economy to grow. But they are saying that employment is likely to go up. They did acknowledge that. So, that to me doesn’t really sound like a soft landing. And I think a lot of things have to go right even for their projections of unemployment to hit what they are.
And so, this increased hawkishness, this increased aggressiveness by the Fed to raise interest rates so much and get inflation under control is a major reason why the third thing that happened this past week where stocks and cryptocurrency are just tanking happened. It’s because there’s all this uncertainty and now, there’s a general feeling that a recession is very likely, that unemployment is likely going to go up and this could impact asset prices, right? So, stocks are valued based on future earnings. But if the dollar is following the value of those future earnings, if the dollar value is falling because of inflation, the value of those future earnings is reduced. People as such, investors who invest in the stock market, are basically trying to figure out what stocks are worth right now.
They were trading at super high P/E ratios which is just a way of valuing stock based on the price versus their earnings. And it was extremely high. It was about 37 for the S&P 500 about a year ago. It’s down to about 22, which I’m not a stock market expert, from my understanding is still above the historical average which is about 18% or 19%. And so, what we’re seeing is the stock market returned to much more normal valuation levels and investors are just generally seem like they want to get out of more speculative, risky assets. And so, that’s why we’re seeing, in my opinion, the stock market tank particularly hard in growth, what’s known as growth stocks, which are more based on future earnings and growth potential and less on current day revenue and earnings.
And again, that’s why we’re also probably seeing cryptocurrency take such a big beating, because it doesn’t actually produce any value. I know people say, “In the future, that it is going to produce value.” I invest in crypto and I do think that it’s a really interesting thing, but right now it’s not really used, it’s not producing value right now. And so, people fearing a recession, fearing higher unemployment, want to get their money either into raising cash or into less speculative stocks like energy stocks for example. And so, that to me is why the market has been tanking. We’re now in bear market territory. But to me, it’s really a reaction to inflation. Inflation went up, we saw that last Friday. The Fed raised rates super high.
And the stock market actually tanked even before Fed raised rates because they all know what’s going on. They knew the Fed was going to basically go hard after interest rates and to the point where a recession is increasingly likely. I saw some data from Bloomberg that said that a recession by the end of 2023 is now about 75% probability. So, everyone’s seeing the same data, right, these sophisticated investors, that’s what they’re seeing and that’s what they’re worried about. So, hopefully, that helps you understand what has gone on in this kind of confusing week. And let’s just talk a little bit about what could happen next. And of course, no one knows for sure. That’s the one thing we do know, is that no one knows for sure.
What I do think is a pretty safe bet is the Fed is going to keep raising rates aggressively. I think there’s a possibility we’ll see another 75 basis point hike at their next meeting. They are saying that interest rates for the Fed or a funds rate is going to hit about 3 3/8 by the end of the year. Right now, it’s only about 1.75. So, we’re going to see, seeing steep interest rates increases through the rest of the year. And I do believe that we will see a peak of inflation by the end of the year as supply-side issues start to moderate. And I know I said that the Russian invasion screwed that up and it did, but I think the world adapts. And over the next couple months as economies open up, I do think China’s manufacturing will open up, the world will adjust to the Ukraine-Russia conflict. Hopefully, it doesn’t get any worse. That could happen but hopefully it doesn’t.
And if so, I do think we will see inflation peak. I still don’t think we’re getting down anywhere close to the 2% target by the end of the year, but hopefully we’ll start to see it in the 5%, 6% year-over-year mark instead of 8%, 9%, or maybe even 10%. But that doesn’t mean it can’t get worse, it might get worse before it gets better. But I do think by the end of 2022, we’ll start to see it start to come down. So, I’m not a stock expert but to me, the stock market is going to remain volatile. I’m sure people can make money into that, but I do think it’s going to be volatile. And frankly, I just think we’re going to see inflation for the foreseeable future.
So, to me, I think there are some ways to protect yourself. And again, I’m sure there are people who are more knowledgeable about the stock market than I am who could tell you how to pick stocks that are inflation resistant. But to me, I think, yeah I’m biased, but rental property investing is generally considered not just by people who are investors, real estate investors like me, to be one of if not the best hedges against inflation. And I should say that doing nothing right now is kind of risky because you are losing that spending power. Of course, buying at the top, of a peak of a market has risks too, but both are risky. So, you have to decide for yourself what’s right for you.
But personally, I continue to look for specifically rental property investing because I think that long-term buy and hold rental property investing offers the best hedge against inflation, in my opinion, for three primary reasons. I’m just going to go through this quickly, I’ve talked about this in other YouTube videos that you can check out. But I’d say that one is that housing prices generally keep pace with inflation. We’ve seen that over time. Will that happen this time? I don’t know. That historically, what I’m saying though is that home prices tend to keep pace or slightly outpace inflation in the past. And so, that bodes well to me.
The number one thing that I think is really important about hedging against inflation using rental property investing is rent. Rent is dynamic, which means that as inflation drives down the value of the dollar and the value of the dollar changes, you can adjust your rent every single year. So, if your expenses are going up or you’re losing spending power, you can change your rent accordingly and hopefully be continuing to make the same amount of money. That’s unique in a lot of investments, you can’t do that in the stock market. Sure if you own a small business you could do something like that too, you can adjust your own pricing, but rental property investing is one of the places where you can dynamically adjust your income to hedge against a devalued dollar.
And the last and third thing, maybe this one’s actually more valuable, I really like this, is that as an investor, if you are leveraging, if you are using a mortgage to purchase a asset, you are locking in your biggest expense, right? So, if you have a fixed-rate mortgage and even if it’s at 5% or 6% like it might be right now, that money is locked in. That’s what you’re paying for 30 years. And it’s the most common mortgage, I know there’s other types of loans. But just generally speaking, if you get a 30-year fixed-rate mortgage, you are locking in that price. And so, even as the dollar gets devalued, you still pay the same amount and you’re paying it with a devalued dollar. So, that means relatively, you are actually paying less.
So, that ability to be able to lock in your biggest expense while increasing your rent is a huge asset that I don’t think is available in pretty much any type of investment class. And this is why people, including non-real estate investors, generally think that rental property investing, one of the best ways to hedge against inflation. Just generally speaking, my advice whether you’re investing in real estate, or stock, or crypto or whatever is focus on the long term. Right? Right now is not a great time to focus on short term profits. And long term, look at this as an opportunity as James and Jamil and some of our other hosts here On The Market have talked about.
There are buying opportunities right now. Does that mean that housing prices are going to skyrocket in the next year? I don’t know. But I think if you’re seeing buying opportunities and you believe in the long term value of the housing market like I do, there are good opportunities right now. And so, I’m still looking to invest. I’m sure someone more experienced in the stock market will tell you the same thing. Things are 50%, 70% off their highs. Like look at companies that you believe in their 10-year value right now. These are ways that you could hedge against inflation in the long term and find good buying opportunities. Personally, again, everyone has to make this own decision for themselves, but to me, sitting on the sidelines is more than risk because you know you’re losing value in your dollar.
There’s risk in investing, there’s always risk in investing. Right now, there is guaranteed risk in keeping your money unless you’re trying to keep some dry powder which maybe you should do as well. But to me, I’m still looking for buying opportunities, things that I think have really good long term value. Last thing before we go, what happens to all this with housing prices? I’ve talked about this a lot so I won’t get into this super amount of detail today. But as for the housing market, demand is dropping. We’re seeing mortgage purchase applications at a 22-year low. And with mortgage rates likely to keep rising as the 10-year interest, the yield on the 10-year bond goes up, is we will likely see more downward pressure on the market. Right?
As mortgage rates go up, growth is going to, demand is going to come down as affordability is impacted. And so, I do think we’re going to see less and less demand. That to me will cool the market. But of course, that downward pressure that is generated by decreased affordability is in many ways offset by super low inventory. Right? And we talk, I talk about this all the time on Instagram, on other videos, it’s this tug of war that’s happening in the housing market, right? Mortgage rates going up and decreased affordability puts downward pressure on the housing market. But super low inventory puts upward pressure on the housing market. This is supply and demand, right? And so, we are seeing this tug of war. Where it all comes out, I don’t know.
I think that the important thing here if you want to stay on top of this is to look at two key metrics, days on market and active inventory. Redfin is a great place to look at this. And keep an eye on these things because they are good measures of the balance between supply and demand. If they are low, which they are right now, inventory and days on market, that means it’s a seller’s market. If they start to go up gradually, I think that means the housing market is going to cool, it might flatten, maybe even go slightly negative, but it’s probably going to get relatively flat. If those two metrics start to go up really rapidly over the next couple of weeks or months, that’s when I do think we could start see price declines.
And of course, it’s going to be different in every market. Some markets might see big price declines, some markets might go up. No one really knows. But I think if you want to know what’s happening in the housing market, those two things, days of market, active inventory, really good things to keep an eye on as things are changing so rapidly in the economy. So, hopefully, this was helpful to you. This is our first attempt at a news update. So, let us know what you think. You can go on the YouTube comments, you can hit me up on Instagram, you can go on the On The Market forums on biggerpockets.com and let us know what you think. But hopefully, this is helpful. And of course, my opinions and thoughts on this are just my reading as of now.
Data is changing constantly. The economic conditions are changing really rapidly right now. And so, we’re going to keep updating you. My job here is to interpret the data and analyze it as it comes. And if the data really changes and that changes my whole opinion about the economy, I’m going to let you know that and we will keep doing that here On The Market. So, thank you all so much for listening, hope you enjoyed this episode. We will be back on Monday for our normally scheduled episode. On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, copywriting by Nate Weintraub and a very special thanks to the entire BiggerPockets team. The content on the show, On The Market, are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

KeyBanc Capital Markets’ Kenneth Zener joins ‘The Exchange’ to discuss homebuilder stocks as well as companies that sell home goods and furniture.

Making common rental application mistakes can cost your landlord business dearly. The rental application contains critical information you will need to screen tenants thoroughly. For example, employment information, previous landlords, income, and permission to run a credit check are all standard on rental application forms. Rental application mistakes could mean the difference between getting a good or bad tenant. 

Mistakes on rental applications range from not checking illegible handwriting to omitting crucial information. So, what are the top six application blunders to avoid at all costs? How can due process during the rental application process save you from evicting a bad tenant and protect your income? 

The Importance of the Rental Application Process

The rental application process is the first step to assessing if the prospective tenant will be a good match. The application form helps determine the applicant’s ability to pay rent on time, look after the rental unit, and avoid getting into serious debt. 

Of course, you can’t foresee the future. But the rental application process gives you insights into the tenant’s rental history. And this can give you an idea of how suitable they are. That is why it’s vital to analyze their employer and landlord references, pay stubs, bank statements, credit score, and identity. 

Rental applications typically take up to seven days to process. However, the processing time can be shorter. After receiving the application, you should verify employment details and call previous landlords. Additionally, the rental application should ask for permission to run a credit history check. 

Because there is so much riding on the application process, there is no need to rush it.

Rental Application Mistakes to Avoid 

The first mistake many landlords make is rushing the rental application process. Unfortunately, the desire to fill vacancies as fast as possible can lead to costly errors. 

It’s good to remember that signing the lease agreement is easy. However, starting an eviction process is challenging and costly because a delinquent tenant defaulted on rent or trashed the place.

Apart from rushing through due diligence when processing rental applications, there are several other mistakes you must avoid at all costs. Here are six.

1. The rental application is discriminatory

Most landlords and tenants are aware of the Fair Housing Act. This makes it illegal for landlords to refuse housing to anyone based on race, color, nationality, gender, religion, age, disability, or familial status. Therefore, it would be a massive mistake if the rental application had illegal questions or clauses. 

For example, illegal questions on a rental application form would include: 

• What is your national origin, or what country did you emigrate from?
• Do you have children, or are you planning to have children?
• Have you ever been arrested?

Although most states allow landlords to check criminal convictions, asking about being arrested is a mistake. This is because being arrested doesn’t make someone guilty of a crime. 

However, it’s not against the law to discriminate against a potential tenant based on smoking or pets. Therefore, these are valid reasons for sending the tenant a rental denial letter.

2. The rental application denial letter is discriminatory

It’s not a mistake in the rental application process to disqualify a tenant based on their income, references, or credit report. Also, if a tenant lies on the application, that is a valid reason to reject their application. However, the rental application denial letter can’t mention anything discriminatory. 

For example, the application rejection cannot be based on any protections offered by the Fair Housing Act. In addition, it’s a mistake to deny tenancy based on arbitrary reasons. For example, sending a rental application rejection letter because you noticed the applicant had tattoos. 

3. Ignoring the law on rental application fees 

Don’t make the common mistake of ignoring state and city laws on rental application fees during the rental process. It is usually possible to charge fees for the tenant screening process. However, some states don’t allow you to charge tenants fees. In addition, it may be required to refund fees if you deny the tenancy.

4. Charging too much for the security deposit

The rental application contains information on the security deposit, and it can be a costly mistake to ignore state laws on these. Many states have rent control laws that regulate security deposits. These regulations control how much you can collect, how to hold the money, and when to return it. 

In some cases, landlords can request an application or holding deposit to allow the tenant to secure the property while screening takes place. If the application is rejected, it’s important to refund the holding deposit. 

The security deposit is different from the application deposit because it’s used to pay for potential damages during the lease. It is usually only paid after the application has been approved and the lease signed.

5. Setting the wrong rental rate

One of the worst mistakes during the rental application process is to get the rental rate wrong. The amount you charge in rent directly impacts your revenue and vacancy rates. If the rent is set too high, you will have trouble attracting prospective tenants to apply. Even if you find a suitable tenant, they may not stay too long if they find cheaper accommodation. 

Of course, if the rental rate is too low, you will find it difficult to make a profit, cover unexpected costs, or make mortgage payments. For example, it may be challenging to keep up with maintenance, and the rental unit could fall into disrepair. And this is usually a reason for tenants to get their landlord into trouble. You may even attract the wrong type of renter if you underprice the rent. 

6. Accepting illegible or incomplete rental applications

It can be a costly mistake to ignore the warning signs of a sloppy application. For example, spelling mistakes or illegible writing could create confusion down the line. Also, it could make the screening process difficult if you can’t read the social security number or the previous landlord’s phone number. 

It is also necessary that tenants complete every section of the application. If a section doesn’t apply, then they should mark that appropriately. 

Many landlords use a property management app or request tenants complete a digital application to fill out rental applications properly. This way, you can ensure that only a properly completed application can be submitted.

Last week, the Bureau of Labor released data showing the Consumer Price Index (CPI)—the most commonly used measure of inflation—rose 8.6% higher in May 2022 compared to May 2021. This is up from an 8.3% reading in April and represents the highest year-over-year inflation figure in more than 40 years. 

Unfortunately, another high inflation figure shouldn’t be a huge surprise to anyone. We all know that inflation has skyrocketed. We see it daily at the gas pumps, the grocery stores, and just about everywhere we spend money. 

But even as we all have come to expect inflation, the details of this most recent report were particularly bad. It actually represents an acceleration in rising prices. 

As you can see in the table above, we saw monthly increases in the CPI average of around 0.7% for most of the last several months. Then, in March, it spiked to 1.2%, primarily due to the impact of the Russian invasion of Ukraine and the corresponding shock to the energy market. 

In April, things started to look up. While prices still rose, a monthly increase of 0.3% was the best print we saw in months and offered a glimmer of hope that inflation, while still increasing, was starting to approach a peak. 

Then May rained on that parade. While most economists believed inflation in May would grow around 0.7%, it was up 1%, which is a big step backward.

If you look at the chart, in most of the last several months, at least one or two categories saw lower prices on a month-over-month basis. Every category in May saw increased prices for the first time since November 2021. 

This was a discouraging CPI report, and inflation will likely be with us for a while. So, the question remains, how and when will inflation come under control? 

To answer that question, we need to briefly review what inflation is and how we got here. 

What is Inflation? 

Inflation is when the spending power of the U.S. dollar declines. In other words, prices rise, and you have to pay more to get the same goods or services. 

Inflation is a highly destructive force in an economy. It stretches the budgets of everyday Americans and makes it more difficult for people, especially those at the lower end of the socio-economic spectrum, to make ends meet. It also damages the U.S. in terms of international trade and can cause other societal issues. It’s crucial to contain inflation when it spikes like it’s doing right now.  

It’s worth noting that some modest inflation is considered a good thing, as it stimulates the economy. Because people know (in normal times) prices will continue to rise a bit each year, they are incentivized to spend their money now rather than wait. For example, why would you wait to buy a car if that same car will be 2% more expensive next year? 

The incentive to spend ensures businesses can continue to grow. This is why the Federal Reserve targets 2% annual inflation. 

What Causes Inflation? 

A variety of complex factors causes inflation, but as with most economic concepts, it can be traced back to supply and demand. When demand exceeds supply, which is where our current economy is, inflation occurs. 

Right now, demand is up for two primary reasons. 

First, people want to do stuff and spend money again! After a couple of years of restricted activity, people want to travel, go out to eat, buy cars, and experience life again. It’s as if all the pent-up demand from the last two years is being injected into the economy.

Second, a tremendous amount of money has been introduced into the economy. This is known as an increase in “monetary supply,” meaning more money is moving around the economy. People are willing to pay more for goods when there is more money in the economy. 

Just think about it, if you had only $1,000 to your name, your willingness to pay for a sandwich might max out at $10 (1% of your net worth). But if you suddenly had $1,200 to your name because more money is injected into the economy, perhaps your willingness to pay for that same sandwich goes up to $12 (still 1% of your net worth).

Overall, demand is high due to the easing of COVID-19 restrictions plus a rapid and dramatic increase in monetary supply. These are conditions that make it ripe for inflation. 

But on the supply side, we also have conditions primed for inflation. Typically, in a healthy market, when demand spikes, suppliers increase production to meet that demand. This keeps prices relatively stable and allows the suppliers to sell more goods and generate more revenue. 

But, given the global supply chain issues we’re facing, suppliers cannot scale up production to meet demand. Instead, the only way to moderate demand is to raise prices. 

Right now, we really do have the perfect storm of inflation—super high demand alongside constrained supply. 

What Happens Next? 

Many economists and analysts (myself included) expected inflation to peak (not stop or deflate, just slow down) sometime in the middle of 2022, mostly because supply constraints would moderate. The thinking was that as economies reopened, the supply chain would recover. While demand would likely remain high, suppliers could increase production to meet that demand, and inflation would cool off. 

Unfortunately, two major geopolitical events upended that hope. First, Russia invaded Ukraine, and dramatic sanctions were introduced. Removing Russia (and Ukraine in many ways) from the global economy is straining a supply chain that was already struggling. Secondly, China has continued to impose lockdowns to contain COVID, leading to lags in Chinese manufacturing and the production of goods. 

It seems that the May inflation report reflects this new reality. Demand has remained high, as most people expected, but the supply-side relief that was hoped for is not coming to fruition. As such, inflation is higher than its been in over 40 years.  

This is where the Fed comes in. The Fed’s primary tool to fight inflation is to raise interest rates. Raising interest rates reduces the monetary supply because fewer people want to borrow and spend money. As we discussed before, when the monetary supply decreases, so does demand. In short, the Fed is trying to curb demand through both businesses and consumers by tightening the monetary supply. 

This typically works, but it takes time and can have other negative economic consequences—namely, a recession. 

As interest rates rise, people borrow less money to make big-ticket purchases like a new car or home. That reduces revenue in those industries, leading to less spending and layoffs. 

As for businesses, they are also less likely to borrow money and, as such, will purchase less equipment, hire fewer people, expand into fewer markets, and often have to lay off employees. This, in theory, cools the economy to the point where demand shrinks to meet supply at equilibrium.

So that’s where we are. Inflation is unacceptably high, and the Fed is raising rates aggressively to stop it.

My Thoughts

While no one knows what will happen, here are my current thoughts. Remember, this is just my opinion based on the currently available data: 

As the Fed raises rates, many parts of the economy will be negatively impacted. We’ve already seen the stock market enter bear market territory this week (down more than 20% off its high), and Bitcoin is down more than 60% as of this writing. There are still roughly 10 million job openings in the U.S., but I expect the labor market to loosen in the coming months as layoffs pick up. With all these factors converging, I believe a recession will likely come in the next couple of months. 

That said, recessions come in many different forms. Right now, it’s very unclear if it will come, how long it will last, and how bad it could get. I think that depends on if and when inflation comes under control. 

As for housing prices, which I’m sure everyone here is curious about, I think there is a growing market risk. I’ve said for the last few months that I believe prices will moderate dramatically and could turn flat or modestly negative (on a national basis) in the coming year. Still, I think that by the end of 2023, housing prices will be +/- 10% of where they are today nationally. On a regional basis, I expect some markets to see dramatic drops (more than 10% declines) while others may keep climbing. 

What do you think the implications of this inflation data are? Let me know in the comments below. Be sure to also listen to the On the Market podcast, where we discuss the direction of the economy and the housing market in more detail.

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Ashley:
This is Real Estate Rookie episode 191.

David: I firmly believe if you’re looking for an agent, they are the one who should be driving the car because they understand this world. Now, if you’re an experienced investor, you know that market inside and out, you’re not looking for a person to drive, you are more looking for a chauffeur. You can tell them, “take me here, go do what I want, I’m gonna work at the back of my computer”, but most people listening to this podcast and most people working with agents are not in that position, they need to be driven. And so, you really want to look for the agent that is not afraid to tell you the hard truth, that isn’t afraid to say, “that’s a bad idea”, “that won’t work”, “I don’t think you should do it” and then hear them out on why.

Ashley:
My name is Ashley Kehr, and I’m here with my cohost, Tony Robinson.

Tony:
And welcome to the Real Estate Rookie podcast where every week, twice a week, we bring you the inspiration, information and amazing stories you need to hear to kickstart your real estate investing journey. I want to thank everyone, Ashley and I both want to thank everyone that’s left an honest rating or review for the podcast. Every review really does go a long way, it helps us reach more people that haven’t heard of the Real Estate Rookie brand yet.

Tony:
And if you think about how much it’s changed your life, think about how much might change someone else’s. So if you haven’t yet, do us a favor, leave an honest rating and review. But Ashley Kehr, my wonderful co-host, what’s new? What’s going on?

Ashley:
Well, I found out today that I am speaking at AJ Osborne’s event, the CRE Circle in Boise, Idaho. And actually I was looking at it and I’m going to be speaking there as this airs. That is when the avenda, is so everyone listening now, follow me along on Instagram @wealthfromrentals and check out the event. I’ll share everything that’s going on and you guys can get some information on all the great stuff that AJ Osborne puts out. It’s going to be a commercial real estate investing conference. So that’s something you’re interested in, definitely check out the CRE Circle that he puts on.

Tony:
Yeah. AJ is literally one of the smartest investors that I’ve ever met. He’s obviously built a massive business in the self storage space, but just the way he talks about the economy and just the level of detail he goes into about self storage I’ve only been lucky enough to meet him a few times, and every time I do it’s just a wealth of information.

Ashley:
I know. I could listen to him talk economics forever. Anytime in the car with him I’m like, “So what do you think about this?” I go on to a tangent. I love it. We also have another great investor on the show today. Tony, you want to make the introduction?

Tony:
Yeah. Today we’ve got someone you may have heard of, but we’ve got David Greene back on the podcast. I’m sure most of our Rookie audience has heard of David. But if you haven’t, David is the co-host of the BiggerPockets Real Estate podcast. So not our show, but the other show. And he’s here today to talk about his new book called Skill. So this book just came out about a week ago from the time of this air. So you guys are able to go out and get it now. We’re going to talk a lot about the book, but if you want to learn more about it, go to biggerpockets.com/skill, and you can buy the book there.

Ashley:
I love this interview with him because we had him on when he did his first book, Sold and now that’s getting started as an agent, and now it’s how to become the top producer. And this isn’t great just for agents, but also as an investor, learn how you can help your agent succeed, set them up for success so that you’re not failing as a team. So even if you are not an agent, this is still a great episode to listen to.

Tony:
And just what you should expect from a top performing agent. If your agent isn’t doing the things that David’s talking about in this episode, it could be a sign that maybe they’re not the right agent for you. I think one of my favorite parts was when he goes over his listing presentation and all the detail that goes into that. So this is super beneficial, both as an agent that’s looking to find more clients, and as the investors so you can set some expectations for your agent in terms of what you need from them.

Ashley:
David, welcome to the show. Thank you so much for coming back on with us. Last time we had you here, we talked about your book, Sold and now you have a new book coming out. Do you want to start off with maybe just telling everyone a little bit of about yourself in case for some reason they haven’t checked out the awesome BiggerPockets Real Estate podcast?

David:
Oh my gosh. Yes. I’m so nervous right now. I’m such a big fan of you guys. I can’t believe this is actually happening. BiggerPockets changed my life.

Ashley:
We’re not sure if it’s going to air, so contain your excitement. We’ll let you know.

David:
That’s exactly right. Okay, I’ll calm my nerves. Well, thank you guys. I remember the last time we did this, it was actually really fun. And so to be honest, I prefer being interviewed than being the interviewer. It’s easier. You guys have all the stress of, “Is he answering the question right? Did I ask the right question? I get to just run my mouth.”

David:
Since we were last on, so Sold, came out. Sold was a book written for real estate agents. When I got my real estate license, I had to learn every lesson the hard way. It took me years to figure out some form of, I wouldn’t say a system, but just a level of confidence that I could go tell people I’m a real estate agent with boldness that made them think, “Okay, you should be my agent.”

David:
And I think that is the key to success in anything. If you’re an investor, if you want to get into fitness, if you’re trying to have better friendships, people are drawn to confident people and you don’t ever get confident until you understand the fundamentals of whatever you’re trying to achieve. So I know Tony, you’re really hitting your stride with fitness. You’re competing for shows. I’m sure there’s a level of your nutrition and what you do at the gym that you’re like, “I got this locked in. I know what I’m doing,” and so you move faster.

David:
So the book is written to help new agents figure out how to make money quicker. This is all the stuff you’re going to take five years to figure out. So here it is right off the bat. This book, the sequel is about how you become what we call a top producer. So this is about how you become really good real estate agent. It’s if you want to make good money, which everyone does, they all get in the business thinking it’s HGTV and they’re going to be rich. This is the actual path that will take you to being good.

David:
So I think if you have your license and you’ve sold a couple homes and you’re trying to figure out, “Is this for me,” this is a really good book to read, because it will tell you this is the path. I can use an analogy of the fitness world. You two are both obviously pretty deeply into that. If somebody went on one of your workouts or saw your diet, they could quickly know, “Is that the road I want to take? I want to look like one of them, but do I really want it? Because I’d have to live like them.” This book will open up that door.

David:
Or if you’re already committed, like you’re in a position where, “I have to make money, I need to build some wealth. I want to buy more homes,” this book will basically be the blueprint of how you become a top producer.

Tony:
So David, Sold laid the foundation and this next book Skill is about how to really, really refine that. I love that you’re making this a sequential journey for folks because obviously a lot of people in the Rookie audience, they’re new to real estate investing, but we have a lot of folks that are new agents as well. Ash and I just had the Rookie bootcamp weekend. We just got back a couple of days ago and I was surprised at how many investors there were also agents. So we’re definitely filling, I think a big void there in the marketplace of how to become a good agent.

Tony:
One thing, I want to touch on this a little bit before we go into it. I know we spoke on this last time we interviewed you, but I feel like it’s worth repeating. Do you feel that it’s necessary for a rookie investor to get their license to be a good real estate investor? Do those two things have to go hand in hand with one another?

David:
No. I almost think it’s detrimental in most cases. So everyone gives different advice. My perspective is the only time you should get your real estate license is if you are 100% committed to making money as a real estate agent and you’re going to do whatever it takes. It’s not worth dipping your toe in the water, just see what happens.

David:
I can tell you what’s going to happen. You’re going to spend a lot of money on licensing. You’re going to have to spend a lot of money on office fees. You are going to get a business card and be very hesitant to tell people you sell houses, then your confidence is going to get lost and you’re going to carry around a never ending bucket of shame that you’re like, “I should be doing more, but I’m not.” And it’s horrible.

David:
So if you’re not wanting to represent people, wanting to really learn how to be good at this, don’t do it. You can buy houses with a real estate agent for free to you. And I think a lot of what we talk about today is going to be geared towards what an investor should be telling their agent, “This is what I’d like for you to do for me,” because most agents won’t have read this book and just won’t know.

Tony:
Dave, one followup question to that, do you think there’s value in nicheing down as an agent? I have a friend who he started and all he did was foreclosures. I have other agents where all they do is short term rentals. Do you feel that there’s value in doing that or are you maybe hurting yourself by reducing the size of people that you can work with?

David:
That’s a really good question. In a perfect market where supply and demand are very even and the only realtors that are in the business belong there and they’re good, your advice would be very applicable. The answer would be, yes, you should niche down.

David:
How it actually works is you go look for people who want something, more or less beg them to let you be their agent, work your butt off to try and help them, and then pray to God that it’s actually going to close and you’re going to get paid.

David:
So in a market like we have now, I think if you’re really good at short term rentals, you should say that all the time, “I know how to do short term rentals.” You should look for short term rental people. But if a foreclosure comes your way or a listing comes your way or a house hack that comes your way, it’s not a huge difference to learn how that works. If this was going from being a real estate agent to being a chef in a restaurant, I would say, no, it’s too much, but it’s very, very small variation. So you should look for how to do it for everyone. But when you are marketing, it helps if you say, “I do this thing.”

David:
One of the things that I look for, if I’m going to find an agent is I want to find an agent who owns the properties that I’m trying to buy. So if I’m looking to buy a luxury short term rental, I want to find an agent in that market who also owns luxury short term rentals. And so that’s where I think it really helps you is if you own that type of property, if you house hacked yourself, you are naturally going to be more confident working with people that are house hacking. They’re going to be able to tell when you speak, when you talk, but I wouldn’t say no to other opportunities. I just would go into it with the understanding that my bread and butter is probably going to be this thing.

Ashley:
To follow up on that, I think that whether you’re deciding to go with an agent who niches down or not is to look at what you actually need from an agent. If you’re like me and you’re just going to use an agent just to do the showings for you and do the paperwork, then you don’t need an agent that’s going to niche down. So maybe that’s not valuable to you.

Ashley:
But if you need help on maybe analyzing the market or what is actually going to produce income for a short term rental, then it would be helpful to find those agents that have niched down into that category or have that experience because they own it themselves. So I think that’s something too that goes back and forth, not only should I become an agent or should I hire an agent, but also, why do I need an agent first of all and what that value is from them. And looking at that when deciding if you need to find an investor friendly agent or not.

Ashley:
David, so with your Skill book, what is the criteria that you have laid out into it? Because in your book Sold, we talk about getting started as an agent. But now it’s, who wants to become the top dog, the top producer? Because as you said, it’s only worth it to get your license if you are going to go gung ho with us and not just have it as a little side hustle.

David:
Something that makes a top producer a top producer is actually very similar to what makes any form of salesperson good, and this would include an investor, is how many leads you can generate for yourself. This is what HGTV doesn’t show. What people typically think an agent is, is you get a phone call, someone who is very motivated and really wants to buy a house is asking if you will help them. You will get to feel good, because you’re helping someone and you’re getting paid. You’ll show them the houses that are available to buy. You will go look at them, you will share all of their emotion, their excitement, their nervousness, you’ll form this bond. Then you will pick the house that they like. You’ll write an offer and you’ll make a $10,000 commission. That’s how people look at it.

David:
That happens maybe 2% of the time, and it’s the last 1% of everything you do. The other 99% of the job is just frantically looking for the lead. Putting your name out there, getting rejected, constantly seeking after the person who wants to buy a house or sell a house. Then analyzing that lead like, “Are you serious? Are you motivated? Can you actually buy a house? Is this your money we’re spending or are your parents involved in this and they don’t want you to do it?” You got to qualify the lead.

David:
Then you have to convince them to work with you. Then they become your client, and then 98% of those people you work with don’t ever actually buy a house, but you spend your time, your money, your gas. That’s the reality of what we’re getting into. And that’s a lot like an investor. Nobody calls you and says, “Hey, I have a house I really want to sell. I’m looking to get rid of it at a discount. Do you think you’d want to buy it? You’d really be helping me out if you could do so.”

David:
We all know as real estate investors, we’re hunting. We’re telling people that we know, we buy homes and houses. We’re looking on the MLS. We’re analyzing them constantly, would this be the right property for me? Then if you decide that it is, you’re putting it in contract, in a sense that is when it becomes your client. And you’re trying to figure out, “Can I close on this thing? Can everything work out the way I need it to?” And a small percentage of the houses we analyze, do we ever actually end up buying?

David:
That same mentality is required of a real estate agent. When it works out well, agents and investors are a really good synergy because they understand the skillset is similar between the two, the mindset you have to create. When it doesn’t go well is when someone thinks that being an agent is like a W2 job they had somewhere else. At every W2 job any of us had, we typically waited for a lead that the business generated to walk in the door and tell us what they want.

David:
So if you think about the person that works at McDonald’s, they’re not out there looking for someone who’s hungry and saying, “You should come eat at this McDonald’s. This is the best McDonald’s ever. You should let me be the person.” They just stand there, the person walks up, they say what they want. They punch it in a computer and they call that work. That’s how we’re brainwashed in America to look at what our job is. We’re just waiting for the very last piece of this huge structure that’s been developed to create interest in something and compete against other restaurants and drive in clients.

David:
That’s where most agents have a hard time making the switch, and especially top producers are the ones that embrace it. It’s just like the real estate investors that get it. It’s like Ashley, I know you buy tons of different kinds of real estate, you have all these opportunities that come your way. That’s because people in your community know, Ashley buys stuff. So when something comes up, you pop in their head and they go, “Boom. I want to go to her.” Tony, in your market I know, is it in Joshua Tree? Is that where a lot of your work is being done?

Tony:
Yeah.

David:
I guarantee you there’s realtors there and people there that when they see a listing come up in Joshua Tree, they associate Joshua Tree with Tony. So right off the bat, you’re going to get opportunities to look at before other people do. That’s how you guys are getting deals is you’ve learned to associate your name in people’s heads with what you want. I tell realtors that there’s there’s a game you have to play. I’ll play it with you guys right now, all right. I’m going to say the name-

Tony:
It sounds like Saw or something, right?

David:
It’s not that kind of game. This is cool. Because you have to have me back for my third book that comes out. So if this goes like Saw, I wouldn’t be able to come back up and talk about it. I’m going to say the name of a household item and you two as quickly as you can, are going to tell me the brand that pops in your head. It’s going to be a race to see who can come up with something first. All right?

Tony:
Okay.

David:
The item is going to be toothpaste.

Ashley:
Colgate.

Tony:
Colgate.

David:
All right. So Ashley won, but the point is I’ve only heard two brands the entire time I’ve ever played this game. People either say Colgate or Crest. So the idea is if one of you were going to pick up some toothpaste for me, you’re coming over to hang out and I’m you say, “Hey, can I bring anything to the party?” “Actually I need some toothpaste. Can you pick some up,” you would not go through the 40 different kinds of toothpaste and spend a lot of time trying to figure out what’s the one that David might want. You would look through it all. As soon as you saw Crest or Colgate, you’re like, “Boom, that’s it.” You’d grab it. And you’d check out and that’s what you would bring.

David:
That’s what every realtor has to do in their spheres world. Every human they know, when they hear real estate needs to think that realtor’s name, just like every investor has to do the same thing. That’s why we always say, “I buy houses.” And I even go a little bit further. I tell people, “If you hear the word divorce, if you hear of a death in a family, I need you to remember me right away, because those things often lead to the sale of a house and I want to hear about it before it goes to either another realtor or another investor.”

David:
And so if you want to be a top producer in real estate sales, mortgage loans, real estate investing, house flipping, really anything, what we’re all doing is we’re competing for the real estate in people’s heads, so they think of us first when that thing pops up.

Tony:
So David, I want to touch on this or pull this thread a little bit more. We talk a lot about the importance of having a platform and people knowing you, liking you and trusting you. And it sounds like that’s what you’re saying. There’s this big funnel that you need to build where there’s a lot of people at the top. And the better you can get at widening the top of that funnel, the bigger your business becomes. For someone that’s looking to become a more skillful agent, how important is it to build that platform? And what is the best way to do that as an agent?

David:
That’s a great question. Let’s go back to my McDonald’s example. The most valuable person at McDonald’s is not the person that stands at the computer and waits for you to walk up and say, “I want a cheeseburger and I want fries.” The most valuable person at McDonald’s is the one that sits in the marketing department and says, “What commercial should we run? What special should we run? Where should we put our restaurants to get eyeballs on it and make people want to go eat? When should we run these commercials? What are we looking for in this?” They’re looking to trigger your brain to get you to think of them when you’re hungry or when you’re driving by to think, “Oh, I should go to that place.” But in the W2 world, we are absolved of any responsibility of having to think about how to generate a lead.

David:
So one of the epiphanies I had to have was I had to realize every job I ever had was not a job, it was a tiny piece and a very big puzzle that was the least important part of the whole thing, which is why they leveraged it out first.

David:
Think about the job of a host or a hostess at a restaurant. That was one of the first jobs I had. I was a host and then I worked my web to bus boy, then server and I kept going. I literally would just wait for someone to walk in a door, say, “Hi, how many people are there in your group? Oh, there’s three of you.” Did a little bit of thinking like who’s the next server to get a table, and then grab menus and walk them 20 feet or something. It was ridiculously easy. But I called that work. And if I worked for six hours or eight hours, I was like, “I’ve been at work all day.” No, I’ve not been at work. I’ve been walking 20 feet back and forth in an air conditioned environment, wearing comfortable shoes without having to think very hard.

David:
When I embraced that really isn’t labor, that as long as the world’s been spinning this might be one of the easiest jobs a human being’s ever had, I stopped feeling bad when I had to do more. And that was when I started to really work hard and ask other people, “Hey, can I help you with what you’re doing?” And build a good reputation and show ambition that my boss started looking to promote me.

David:
If you want to be a top producing agent, what you have to understand is it’s your job to get people to come eat at the restaurant. That is the most important part of your business and that’s what you need to be doing. You have to be talking to human beings, hosting events, putting stuff on social media that people care about and want to watch. If McDonald’s made bad commercials, we wouldn’t go eat there. It doesn’t matter how good the food might be. This is a terrible example, because we started talking about fitness and I went to McDonald’s. But I think you guys know what I’m saying here.

David:
Realtors have to understand your job is marketing and then the paperwork and the legal aspect and how to use a lockbox. That’s all the job of the hostess, just walking people back and forth between tables. That’s not what you should be worried about how to do well. If you want to get in this business, you have to be thinking about, “How do I get people to want to come to me?” So you need to know a lot about real estate. You need to have a lot of connections. You need to be able to help somebody achieve what their goal would be. And then you have to manage the entire restaurant because you are the business, you’re not an employee in someone else’s business.

Tony:
David, I’m so glad you brought that up. We’ve heard this many, many times, people work with other people that they know, that they like and they trust. It’s an old marketing adage. If you want someone to buy something from you, they’ve got to know and like you and trust you. And the point you just made about all the transactional things of creating a listing and doing the lockbox, those are all the things that happen after all the hard work of building that relationship comes first. So we’re big proponents.

Tony:
Even as a rookie investor, whether you’re an agent or not, you should be out there talking to people about what it is that you’re doing. And whether that’s a podcast, whether that’s a YouTube channel, a blog, whatever it is, find a way to get your journey out in front of other people. Because eventually, you’re going to find someone that’s going to resonate with that story.

Tony:
David, I want to switch gears just a little bit. As a new investor who’s looking to work with an agent, I think one of the biggest mistakes that rookies make is trying to buy everything and anything. They’re just like, “I want a good deal.” How can a rookie investor and an agent work together to tighten up that criteria, and I think do a better job of finding the right deals for the right person?

David:
Man, the first thing that the rookie investor has to understand is when you say the word deal, do you know what that means? In fact, I think this is just something everyone in America could really benefit from. We often find ourselves at odds or arguing with another person over a concept before we’ve even defined what we think that is. So if you think about the hot button topics, like abortion would be one of them, right? Roe vs wade is in there. One side typically believes that what you’re doing is killing a human, and the other side believes that it’s not a human yet. But they scream at each other over what they think that the other person should be doing. But they’re not on the same definition of if it’s a human or not. If they did, they would probably not be at odds with each other. I just see this happen in relationships all the time is we don’t stop to define what we are actually at odds about. You might be on the same page and not realize it.

David:
So we say the word deal, but deal means something very different to me than what it does to somebody who’s new than what it does to somebody who is an agent. And so if you’re buying in a good area, all real estate at some point becomes a good deal. Think about people that bought a house 30 years ago. Are any of them mad about that right now? Even if it wasn’t a good deal or they thought that they’ve overpaid, they’re pretty happy. So the new person has to understand that this is not like other things in life where there’s clearly one better thing than all the others and you’re looking for it. This is more like dating. What’s the right person for you, for your situation? What you might like this personality, for someone else that’s the worst personality ever. You have to understand what you want.

David:
And that’s the thing when rookie investors don’t and they tell an agent, “I want a deal,” the agent doesn’t know what that means. They haven’t defined what that is. They don’t know what to go look for. So the agent spends a lot of time trying to make the person happy, and they don’t because the person doesn’t even know what’s going to make them happy. Then the agent starts ghosting them. Then the investor gets irritated or angry and says, “Agents don’t care, they’re greedy. The industry sucks.” And then they may think real estate itself sucks. I watch this happen all the time.

David:
So what I would say is what an investor should do is sit down and say, “What’s my ultimate goal? I want to have X amount of money. Okay. Well, how many houses am I going to have to get there? It’s going to be about this much. How do I get some momentum moving in that direction? Maybe I should house hack. What does a house hack look like? Well, it’s probably going to be a multi-family or a house with a lot of square footage that can be divided up. All right, let me talk to my agent about if I should get a multifamily or a house with a lot of square footage and see what they have to say.”

David:
The agent is probably going to say, “Well, the lender says if you want to get a multifamily right now, 15% down is the minimum, even for a primary residence.” That might eliminate it. Now you know you’re looking for a bigger house with a basement and you’re asking, do you have enough capital to finish the basement or not? It needs to be a finished basement and a house of big square footage, which area? Now the agent can actually help you, and now you have clarity on what you’re doing. And once you get that first deal, start asking yourself, “What would my second deal look like?” That is a much more practical approach where both sides can work together to be successful than saying, “Send me a deal,” then they run it through a BiggerPockets calculator, they get an ROI that looks good. And they have no idea what to do next.

Ashley:
David talking about that communication between agents and the investor, what are some things that the investor should be telling the agent to set them up for success? I did this leadership training recently with FTX, and it was based off of the book, Extreme Ownership. And in it, it talked about yes, the people following you can fail and it’s not always their fault. It definitely can be the leader’s fault. And these agents are part of the investor’s team.

Ashley:
So if you are an agent and you feel like you are failing this investor, what’s a list of things that a successful agent could give investors and say, “You know what, I want to be the best agent to you that I can be. Here’s a list of things I need from you, and this is how we can make it work.”?

David:
That’s the best question that you could ask. If an agent does that, they will be good. And as the guy running the team, this is my hardest problem because this industry tends to draw the high eye on the disc. They want to be liked. They want to be a waiter. “What would you like? You’d like a glass of wine, I’m on it.” Okay, you want the steak, I’ll go get it for you.” They want the client to tell them, “This is what I want,” and then they just want to deliver it and feel good and be happy. But in this world, the client is looking usually for more leadership than what they understand. They want to be led. A lot of agents are not comfortable leading. They don’t like the responsibility that comes with that. And so then they avoid the difficult conversations.

David:
So we sell a lot of houses in California, Northern California, the Bay area, very hot market, Southern California, Los Angeles, also a very hot market. So people will come to us with an idea and they’ll say, “Hey, I want to do the BRRRR, and I want to borrow money at 0% from somebody else. And it needs to be 70% of ARV minus repairs. And I want to be in Malibu.” They’ll give you this ridiculous list that is never going to happen. And our job is to hear them out, look past what they’re saying and hear what they want.

David:
When they say, “I want to buy in Malibu,” they’re either saying, “I want to be in a really good area that’s going to appreciate,” or they’re saying, “My ultimate goal is to have enough money to live in this part.” That means we need to put a plan together to get them there, not actually go look for a house in Malibu that they can use the BRRRR method on with an FHA loan, which is what they’re going to be thinking. So what we try to do, and we do this well is we say, “That won’t work and here’s why, but here’s what will work.” And if we take what will work and we take your ultimate goal and chop it into maybe four or five steps over a period of time, we can get you to the house in Malibu.

David:
If more realtors did that, they would automatically disqualify the clients that are not going to work with them and not going to buy a house. And they would earn the trust of the ones that are. I firmly believe if you’re looking for an agent, they are the one who should be driving the car because they understand this world.

David:
Now, if you’re an experienced investor, you know that market inside and out, you’re not looking for a person to drive, you’re more looking for a chauffeur. You can tell them, “Take me here, go do what I want. I’m going to work in the back on my computer.” But most people listening to this podcast and most people working with agents are not in that position. They need to be driven. And so you really want to look for the agent that is not afraid to tell you the hard truths, that isn’t afraid to say, “That’s a bad idea. That won’t work. I don’t think you should do it.” And then hear them out on why.

Tony:
I think there’s lessons to be learned on both sides of that conversation, David. As the investor, you need to seek out that kind of tough love and feedback from your agent. And as the agent, you have to have the courage to stop your client from driving off a cliff and trying to do something stupid or something that’s impossible.

David:
Dude, that is exactly what my life is like every day when we’re having training. And an agent goes, “What do you do when the investor says this?” And I have to say the same thing over and over and over. That’s why I’m saying not everybody will do it, but that’s what the right relationship really should look like.

Tony:
And as a savvy investor, you want that. If I’m doing something for my health that’s detrimental, I’m paying my doctor to let me know what I’m doing wrong and how to correct it. So you want that same kind of relationship with your agent as well. Look at me dropping metaphors like David Greene. Where did that come from?

David:
That was awesome. And there’s part of human nature that doesn’t like it, especially when we’re scared we want to be in control, but it’s often the worst thing you could ever do. So if I went into either of your markets, I wouldn’t be going in there telling you two, “Here’s what I’m looking for.” I’ll be going there asking you what works in your market, what do you think I should be looking for and why? And if your answers were sensible, reasonable, supported with facts, and I believed in what you were doing, I would adapt my strategy around what you were telling me would work there, or I would recognize well that isn’t going to work for what I want. That’s not the right market for me.

David:
And so that’s typically how I tell people they should be looking at agents. If you ask that question and the agent can’t answer it, that’s not the right agent. I don’t think most people realize how many agents we have that we don’t need. There is probably 12 times more agents in the market than is actually necessary. In my office, more than half of our agents sell zero houses a year. We have over 100 agents. So more than 50 don’t sell even one house a year. Of the 50 that sell a house, half of them sell somewhere between one to three. And then the top 20% or so actually sells 10 houses a year or more.

David:
So it’s very uncommon to find an agent who actually is really good at what they’re doing. And then when you find one, they’re probably going to be busy, they’re probably going to be more direct. And that often rubs people the wrong way. The one who’s going to be super accommodating, call you back right away, they usually are doing that because they don’t have any other customers in their restaurant because their food sucks.

Ashley:
What do you do though, if your agent is unresponsive?

David:
You have to be direct.

Ashley:
How do you handle that?

David:
You have to say, “Hey, I want to work with you for this reason. I’m having a hard time, because you’re not responding back to me. Can we put some time on the schedule, every day, every three days, whatever, where you and I can touch base.” And then the next thing I say is I say, “How do you prefer to be communicated with?”

David:
So sometimes there’s an agent in a market that has stuff no one else has and I got to deal with their unresponsiveness. All right. So I typically say, “What I’m going to need from you is a response. Do you like texting? Do you like emails? Do you like a phone call? Do you like a voice note?” And if I’m direct, those successful people respond better to that. They’ll be like, “Yep. Let’s put a call on the calendar every day, four o’clock this is what we’ll go at.” And I’ll say, “Great. I will text you what the call will be about 15 minutes before so that we can have it as concise as possible.” Now that person is boom, we’re talking all the time. It’s that lack of directness that everyone gets uncomfortable with that causes all of the frustration between the two parties.

Tony:
And I think a lot of people just have different communication styles as well. And I think understanding how one person likes to communicate versus the other plays an important role in keeping that relationship strong too.

Tony:
David, I want to go back to the marketing funnel that you talked about at the beginning, because it makes me think of the next thing I want to tackle. In order to be good at marketing, you got to be really good at tracking your numbers as well. If you’re really good at tracking your numbers, you know for every 100 leads to come in, this many are going to book an appointment, this many are going to… So what kind of metrics do you think it’s important for an agent to track in their business, both in a long term, short term and everything in between?

David:
We have two that we prioritize tracking. The first is how many conversations you had in a day where you directly ask for business. There’s a book that Gary V wrote called Jab, Jab, Jab, Right Hook. And the idea is if a right hook is a knockout punch, but if you just go out there and throw that right off the bat and you miss, you’re going to get knocked out yourself. So you don’t want to go out and just say, “Hey,” on the very first conversation you have, “I’m a real estate agent. Do you know anyone that wants to sell a house?” That is very distasteful, no one’s going to like it.

David:
So what he says is your jabs are when you give value. So there’s a rhythm of give, give, give, ask. Give, give, give, ask. So I know in every conversation I have, I’m going to want to bring up real estate in some way, because I want be Crest and Colgate in your head. So what I have to do is be very interested in you, in what your goals are, and what matters to you and what your challenges are. Figure out how to give value to you three times, and then on the fourth time, I’m going to ask for what I would want. So we train our agents in how to do that and we track how many of those conversations they have in a day. And the other thing is we have a listing presentation we give, if we want to sell your house, and we have a buyer’s presentation that we give if you are going to buy a house where we spell out, this is what the whole process looks like. Most agents don’t do that.

David:
So what happens is the client feels like they’re driving in the fog and they’re creeping at two miles an hour the whole time because they’re scared to death because they don’t know what’s coming. So we lay out a whole roadmap. Here is everything we’re going to do. Here’s what the layout looks like. Here’s the road. Now they’re not as scared, they’re not as nervous when stuff comes up, we’ve gone over an inspection report with them. They know how an appraisal works. They know what the contract looks like. They know what earnest money deposit is. They know how we’re going to show them homes, what kind of feedback we want.

David:
So I track how many of those presentations our agent given a week. So what I tell the agents is, “If you give three of these presentations a week to anyone, you give it to your mom, your aunts, your cousins, your neighbors, your friend from high school, just say, ‘Hey, can you give me some feedback? This is a presentation I give to buyers. I want to know what you think.’”

David:
A, you get comfortable doing it, which is really important. You sound more confident when you’ve done it a lot. But B, you impress the crap out of them when you give it to them. It associates you as the Colgate or Crest in their head, even if they’re not ready to buy right now. And the problem is human nature never wants to do that. We want to wait till the last minute and then cram in and get through it as fast as we can and then get out there looking at houses. And so that discipline is very difficult to create with real estate agents.

David:
But I look at it like turning a Jack in the box, right? (singing). I don’t know how many times I’m going to do that, but I know if I keep doing it that thing’s going to pop. That’s how real estate agents need to look at their business. Those conversations they’re having is the cranking. And the better, the more smooth, the more value they bring, that’s the faster that they crank. And that’s what your job is, is to crank on that thing all the time. And then it should start popping. And then when it starts popping so much that you can’t keep up, that’s when the third book, Skill would be applicable in the series. That’s when you leverage out getting other people to help you with your job.

Tony:
David, I love that none of the metrics that you tracked were how many properties did you sell? Or what was your commission? So talk about why you focused on these presentations and the conversations over the numbers of volume sold and things like that.

David:
Focusing on volume sold, houses sold, the end result would be like if I wanted to get in shape and you said, “Okay, well, what you need to focus on is weighing yourself every single day.” Because if I miss four days of the gym and I eat bad, do I want to go weigh myself on the fourth day? No, I’m looking for a reason to not do that. And now that I’m not weighing myself, I don’t want to go to the gym at all. It’s very easy to lose that momentum, and then you stop looking at the numbers.

David:
If I wanted to lose weight, I should be tracking what I am eating and how many times I go to the gym and maybe what I do when I’m there. That’s a way… We call those lead measures. These are things that lead to a result. A lag measure is once you’ve already done your lead work, how did it turn out? And focusing on the end result is not a good idea. In general, we call it resulting. Annie Duke wrote a book called, what did she call it? Living Life in Bets, I believe. And she talks about poker where you can make the right call in poker, but the odds go against you and you still lose. You shouldn’t change your strategy based on the fact that the result was you lost. If you made the right move, you need to make it again. And life is a game of averages.

David:
That’s the same thing how this works. Focusing on how many houses I sold will maybe make me complacent. I sell all these houses. Now all my conversations are about how many houses I sell, why I’m better than the next realtor. That turns people off. Focusing on how many reps I’m doing, what the weight I’m pushing is and how many times I get in the gym. It is impossible to not get stronger or better if that’s what you’re focusing on as your lead measure. So if you focus on your conversations, if you focus on your presentations, you will get better by mere fact of doing them, and you will get the word out to more people the more often you do it.

Tony:
David, one example for my personal life, so my W2 job before I became a full-time real estate investor, I worked in supply chain and distribution. And that whole industry is dominated by lead metrics and lag metrics. And one of the things that I was responsible for as leader in that business was how many units we shipped per hour. How many units, how many boxes did we make leave this facility every hour? That was the lag metric that we were graded against. But every day, the things we would hold our team members accountable to had nothing to do with how many boxes they were moving per hour.

Tony:
We would literally like, “How much time are you spending in between each location? If you have to visit 30 locations to pick all these items, how fast are you getting from one spot to another? How many trips is it taking you around the warehouse to finish your picks?” So focusing on those things, if we hit all those boxes that we knew at the end of the day that we’d be able to reach that larger metric of how many units are leaving the warehouse. So I think in any goal that you have, there’s always some kind of lead metric. You can track upstream that if you knock and check all those boxes, there’s a high likelihood that you’ll hit that big goal at the end.

David:
That’s how life tends to work. So if you’re the manager, you’re probably spending more time looking at lag metrics, because you’re making sure that all of the people working for you are doing their job. And if the weight starts going up or in your case, Tony, if the shipping isn’t happening like it should be, that’s a clue, “I need to dig deeper and find out why.”

David:
So the example that I like to give would be I’m a big Golden State Warriors fan, and that team is plagued by turnovers. They just turn the ball over a lot. I don’t think the players should be thinking during the game, “How many turnovers do we have?” That doesn’t make sense, but the coach should be looking at that. And if the coach sees the turnovers are too much, this is stopping us from winning, they need to go create lead measures for the players. “Are we leaving our feet to pass? Are we throwing one handed passes instead of two? Are we getting ourselves into a jam because we made a bad decision and then we’re turning the ball over because we don’t have anywhere to go with it?” And then create practice around how to avoid that. Those lead measures are the players’ responsibility. The lag measures would be management or the coaches’ responsibility.

David:
But the point is it’s lead measures that create the result. And that’s where people should be focusing. It’s just, nobody wants to. Nobody wants to naturally be focused and disciplined when they’re making passes. It’s easier to play casual.

Tony:
Just one last thing before we get off of this, so a lot of you guys that are listening know that I trained for this fitness competition about a month ago, did pretty well, placed first in a few of the divisions that I competed in. And the things that I tracked throughout that competition, I literally have a chart in my bathroom and I would fill it out every day. I printed it out and hung on the wall in my bathroom, and I was tracking how much water I was drinking. It was a yes or no. I had a goal of drinking two gallons of water a day. Was I doing my fast cardio? I was supposed to do cardio twice a day. Was I in the weight room? Did I actually lift weights that day? Did I eat all my meals? I was supposed to be eating five to six times a day. And did I take all my supplements?

Tony:
None of those had anything to do with how I looked or what my weight was or how strong I was. I was just tracking water, food, cardio, supplements. And that was it. And it was tracking those things on a consistent basis that allowed me to reach that goal over time.

Ashley:
David, can you give an example of lead verse lag on the investor side of things?

David:
Yes, that’s really good. A lag measure would be how many houses did I put into contract? What did my net worth increase by? What did my cash flow increase by? A lead measure would be how many conversations did I have about real estate with someone that is likely to come across an off market opportunity? How many names, phone numbers and emails did I get to put into my database for followup to talk to more people? How many conversations did I have with people in the industry that could come across opportunities?

David:
One of the tried and true ways of getting a deal right now that no one could stop would be, if you just called landlords that are advertising something for rent and said, “Hey, do you want to buy?” That’s the perfect Jack in the box. They’re going to say no most likely when you call, but if you call them every month or every two months, you’re going to hit them at that point where they’re sick of dealing with the tenant, they don’t need the money anymore, they want to move. They don’t want to own the property. If you’re the first call they get, that Jack in the box is going to pop. So how many of those people did you add to your database every week? How many phone calls did you make to those people?

David:
And then my belief is as a result of staying disciplined and consistent with doing that, you will naturally get better at doing it. Human beings like to become more efficient at what we do. If Tony goes to the gym enough times, eventually he’s going to get better at lifting the weights. It’s not just he’s lifting them more. Your form’s going to get better. You’re going to get stronger. You’re going to figure out what works for you. You’re going to become more efficient. And that’s why discipline’s so important because if you keep going, it is impossible to not get better.

David:
But I think what stops people is they have this idea, I have to be strong before I go to the gym.

Tony:
David, before we move on, I just want to go back to the presentation piece really quickly because I think that’s a unique thing. I’ve worked with a lot of different agents in multiple different markets, and not a single one has given me any kind of presentation. So can you just share a little bit about what goes into that listing presentation and why you found it to be valuable?

David:
Yeah, that’s really good. So what most agents will do, this is the typical thing is they’ll go in their MLS. And the MLS typically has some kind of software with an algorithm where they will type in, it’s a 1400 square foot house with three bedrooms in this area. And it works similar to what the Zestimate works like on Zillow. And it’ll be like, bing, this house should be listed for somewhere between 580 and $600,000. They will print that out. They will take it to the seller. They’ll say, “We should list your house for somewhere between 580 and $600,000. And let me tell you why I’m so great. I will hold your hand the whole way. I will knock on every door and tell people. I will hold open houses every single weekend. I am amazing. You should trust me.” And that’s what their presentation looks like.

David:
What we do is much more detailed. So I have trained our agents to hold listing presentations the way that I sell my houses if I’m going to go sell it. So we’re going to start off by finding out what the motivation is of the person who’s selling their home. We’re then going to get the address and we’re going to run a comparative market analysis or CMA. This would be like pulling comps. We break them into three categories. There’s active listings for sale, pending listings that are already in contract, and then closed listings.

David:
What I’m looking for ideally is the shape of a pyramid. So the closed listings on the bottom are the widest. Then there’s pending sales that are a little bit less than that. And then there’s hardly any active houses on the market. That is the strength of a seller’s market, because the active homes are going pending super quick, and there’s a lot of pending homes that are selling. So you have a lot of sales.

David:
If it’s the opposite of that, if I see a lot of active houses on top and hardly anything that is sold on the bottom, that’s going to be a buyer’s market. It’s going to be harder for us to be able to sell their home. I then call every single agent that has a pending transaction, and I ask them, “How many offers did you get?” You got to build some rapport before you do it, but we find that out. “How many offers did you get? Do you think you priced it too low? Would you have priced it higher? Do you think you went too high? What were the complaints? What did the buyers say? What was your experience like that you ultimately went into contract?” Because those pendings are the ones you want to know about. That’s the girls that found a date to the dance. You want to find out how did you do that? Because I want to be able to do the same.

David:
Then I call, or I don’t call but someone on the team calls every single active listing, it used to be me. And we say, “How many showings are you getting? How much interest are you getting? Do you feel like it’s softening up? Do you think you priced too high?” And we find out from them what kind of action are they getting? And we take notes on every single one of those conversations on that sheet with all the addresses. We take that with us to the listing presentation, and we sit there, we have a branded folder. We have a pop socket to go on the back of their phone and a pen that says David Greene, a cool brochure that explains what we do. And we start off by giving a PowerPoint presentation that shows this is what makes a house sell. This is where buyers are finding their homes. This is how we market your house to different people. Here’s some of the lies that realtors will tell you.

David:
One of the common ones that a realtor will say is, “I will market your house to X amount of people. I will get it in front of a lot of humans.” That was legit 30 years ago when it was very hard to get a house in front of people. But we live in the online dating age. It’s not hard to find someone online. Every house is everywhere. It’s not hard to find it. Everyone’s looking at it. The goal is to make it stand out.

David:
So we’ll say, “We’re not going to show your house. Some more people. They’re all already going to see it. It’s going to hit all of the portals. What we’re going to do is market it like this. We’re going to use drone footage, we’re going to use this type of staging. We’re going to use these type of cameras. This is what our other listing pictures look like. This is how we’re going to market your home.”

David:
Then we get into how we’re going to follow up with leads. We have a service where if somebody texts a number when they’re near the home, our software will interact with their phone’s GPS, and it will automatically send them a text that says here’s all the information about the phone. It notifies one of our agents. They then call that person and say, “Hey, did you want to set up a showing?” In today’s day and age, people’s attention spans are very short. Nobody is going to go stop at a house, look up the address, Google it, try to find it online. They’re just going to keep going. And no one calls anymore either. They all want a text. Me too.

David:
So we go over what we do to make it easier for buyers to find the house. Then we go over once we get multiple offers, these are negotiation strategies we use to find the buyer that needs the house the most so we can get you the very most. Then we go over. Why they’re going to pay for a home inspection up front. And even though that’s going to cost $500, it’s going to stop the eight to $15,000 request for repairs that’s going to come back our way that happens every time when you make a buyer, get their own inspection. We show them how much money we’re going to save just because we’re better, then how much money we’re going to make them because of how hard that we negotiate.

David:
Then we go over the CMA. We show here’s all your competition. This is what we found. Here’s our edge. Here’s all the pending homes. This is what they said. This is exactly where the market is right now. Here’s where we should list at. Here’s our commission. We sign the listing agreement and then we start the process of getting the house ready.

David:
Then before we even put it on the market, we take that same CMA that we saved in the computer, we run it again, we see what’s new. We call all of those homes and if we see that demand has gone up, we price it a little bit higher than we agreed on the listing agreement. If prices have gone down, we adjust the other way before we even put the house on the market. So there is a lot of work that goes in on our side to being as precise as we can.

David:
And that is something I don’t think if you’re inexperienced with selling homes, because most people sell a house every 10 years, it doesn’t happen all the time. Just looking for the cheapest agent drives me crazy because there’s no way if they’re getting a discounted rate, they’re doing any of that. They’re just going to put a sign in the yard, wait for offers to come in and then give it to you and say, “Hey, what do you want to do?” And that’s another thing that we do different. Before you even get the offer in front of you, we have already talked to listing agent and tried to negotiate up as high as we could possibly get it before we bring it to you.

David:
So I don’t like the, “Here’s three offers. Which one do you want?” That most agents do. Well, here’s where they came in. Here’s what we said. These guys came up 60 grand. These guys came up 40 grand, but I think they got a little more to go. And these people are willing to come in all cash, or whatever the case would be. So we’re trying to make our clients money before they even see the offers that come in.

Ashley:
David, you just gave great examples of how to make yourself an agent that stands out. And I think Tony and I are both sitting here thinking, oh, the next time we sell a house, we want somebody like that.

Tony:
I’m thinking like, I don’t even want to tell a house, but David, can you just take my house please? Anyway [inaudible 00:49:07].

Ashley:
And I think that just also proved the point in the beginning too, is that if you are an investor thinking that you should get your license to become a great investor, are you going to want to learn all that stuff? Are you going to want to take the time to do all that research? And most likely, no. I don’t even want to do the paperwork of a contract, let alone do all of that valuable tools and skillset that your team has, those agents, I don’t want to have to learn to be the best at that like they are.

Ashley:
I think real estate agent is one of the easiest things an investor can outsource for somebody on their team. And I think you just gave the exact reason, a great example of why you should outsource it if you’re not going to take the time to learn those things and become the best at being a real estate agent.

David:
You don’t hear a lot of investors saying, “Should I get a degree in bookkeeping so I can keep my own books? Or should I go get my contractors’ license so I can do my own rehab?” But for some reason the agent thing seems easy and there’s nothing to it, and I can just go do it myself and I can save money. But it’s just like everything else. There’s a skillset that goes into being good at doing this. And what my hope is-

Ashley:
Yeah. And are you really even saving money though? Yes, you’ll get your commission on the back end, which ends up being, what does an agent actually walk away with, would you say is average, David?

David:
Oh, the buyers are getting about two point half percent, but then the broker’s going to get 30% of that, and then they’re going to have to pay for everything that they went in to sell. It’s not what people think.

Ashley:
Right. And their license. And then you even said, you go through the contracts and you help them negotiate and you figure out what the right price point is, all those things where they probably end up getting more money not even being the agent because [inaudible 00:51:00] their experienced agent helped them.

David:
Yeah. I’ll give you an example of a house that I bought. The person I bought it from used a discount real estate brokerage. I won’t say the name of it, but it’s very well known in the industry that people go there to save money. And the agents that work there are the worst. He hired that company to represent him on the selling side. And I had an agent on my team representing me on the buying side. So they listed the house too high, found out from the listening agent, the seller insisted ongoing at 2.15. And she told him, “We need to be closer. We need to be less than that.” She was not strong enough to overcome him and she let him make the decision.

David:
So that house sat there in a very desirable neighborhood in the East Bay, super close to an even better one. Primo area, 5,000 square feet. It sat there for 40 days or so and it didn’t sell. So I went in and I wrote a much lower offer and I asked for $75,000 in closing costs, and I structured it so that we had a very long time that we could get out of the house. And his agent did not explain to him all of the nuances of this offer which I wrote on purpose to where it wasn’t super easy to… she was going to have to read the contract.

David:
So he goes into contract with us and then he’s already mad because I got it for much less than what he was asking for. And not long after that, we saw a rush of buyers come in. And so he was mad because he realized he could have got more. Then at the closing table, he realized we were getting a $75,000 credit. So that was even worse. Then he was under the assumption he was going to get a free rent back. Well, he had to pay the rent back at my mortgage, which was 10 grand a month, not his mortgage, which had been $2,500 a month because he bought that house a really long time ago.

David:
So at every stage he got hammered. He probably lost about 300 to 400,000 on the purchase price. Then $75,000 on the closing cost, then the money he had to pay to rent it back because he wanted to save money on the agent. And that I just frequently see this in our industry where people pat themselves on the back because they beat their own agent in negotiating the listing commission. And I just ask, “Do you want an agent that you can out negotiate negotiating for you with a guy like me who’s coming after you hard?”

David:
And so my hopes are that people that are not agents will still get this book and read it, so they can tell their agent that they’re working with, “This is what I would like you to do,” because most of those agents don’t know this stuff.

Tony:
David man, so much good information. My head’s still spinning from the agent presentation side. But hopefully everyone that’s listening here understands that there’s a tremendous amount of value in working with an agent that really knows what they’re doing.

Tony:
Before we wrap up, David, I just want to ask, if I’m a new investor, what’s a good way for me to connect with an agent that knows all the stuff that you’re talking about?

David:
One thing you can do is go on the BiggerPockets Agent Finder and you can look for agents. I’m a proponent of, you want to find one that has sold some homes. If you’re new, you don’t want the agent that’s sold no homes, unless they’re already an investor and they know real estate from that perspective. But the first several transactions an agent does, they’re screwing up left and right, they don’t even know it. So you don’t want that person learning on your dime.

David:
If you’re in California, obviously I want people to reach out to me. I still, for some reason… Help me understand this, you two. I will get someone that listens to me on the podcast, loves what I say, finds a different agent to sell their house and then DMs me and says, “What should I do? My agent messed this up.” I’m trying to figure out what is it about my presentation that makes people think I don’t want you calling me to sell your house?

Tony:
I don’t know. I think it’s that you’re like a celebrity to people. Maybe there’s this-

David:
Intimidation?

Tony:
Yeah, maybe a little bit.

David:
I’m not too proud to sell your home. I’m writing books about it because I want to sell your home. So please, come to me if you want to sell a house. But when you do find someone in an area that I’m not going to be servicing, you really need to ask questions about if they own real estate. I would rather have an agent that owns real estate and doesn’t know the paperwork side or doesn’t have the best personality, but they’ve done it themselves, so they know what questions they had when they were buying the house. Way more than a really fun, charismatic, energetic agent who is probably broke and rents their own home and just knows how the paperwork side goes, but they’re not going to have the resources you need like a handyman that can fix things, a reputable property management company.

David:
There’s a lot of things as investors that save us a lot of money when we get the right connection or areas of expertise that we can really benefit from. So don’t assume just because they have a license that they’re all the same. We don’t assume every restaurant’s going to be good. You really want to do research if you’re trying to find one place to eat at, that has really good reviews that you feel really good about. And talk to a couple before you make that decision.

Ashley:
David, Thank you for sharing that. And for our Rookies listening, if you want to find more information about finding an agent, you can go to BiggerPockets Agent Finder on biggerpockets.com. It’s basically like a matchmaking website. You can go in and put your market, what strategy you’re looking to do, and be matched with an agent that can help you get your first or your next investment property.

Ashley:
David, we have a segment on here that is called the Rookie Exam, and we actually tailored it to you a little differently than we normally would with a Rookie. So the first question is where do you see inflation going by the end of the year?

David:
Higher and higher. No one knows how to answer this question first off. So I just want to put that out there, but the way I see inflation is it’s like this semi truck that is going down a very steep grade and just picking up steam because it’s been from momentum from the last 10 years or eight years. It’s not like we just started it. It’s just now hitting us. And trying to raise interest rates is like lightly touching a brake pad to the rotor. It is not nearly enough to stop what’s coming.

David:
So I expect this really rough phenomena of inflation continuing to go, asset prices going higher, the cost of food and everything, gas going higher, at the same time that rising interest rates make it so people spend less money. So if you’re on the lower end of the demographic outlook here, you’re getting squeezed hard, because everything you’re buying is going to cost more, and the money you’re making at work isn’t worth as much, and interest rates going up make it when you do want to borrow money, that it’s extra expensive.

David:
So I think it’s going to be a long time before we can slow the semi truck down that’s just barreling down the hill. So if people are saying, “Oh, they’re raising interest rates, they’re going to curb inflation.” It eventually could happen. You don’t just flip your fingers and you can stop that tidal wave that we’ve created from all the stimulus that we made.

David:
But I like you asking that question because I think that not enough investors are looking at the big picture. They’re still looking at by local market and they’re zooming in on the actual spreadsheet and what’s the ROI, and they just don’t see the huge tidal wave that’s coming to crash on them.

Tony:
And if the Rookies who are listening want more information or just a better education on the market at large, BiggerPockets just launched on the Market Podcast with our buddy, Dave Myers, some other great guests on there as well. So be sure to check that out. They’ve got some really, really insightful episodes already about what’s going on in the marketplace.

Tony:
So David, next question. The Fed also just bumped interest rates, I think it was 50 basis points yesterday. So we can all anticipate that’s going to trickle into the world of real estate investing. We’ll continue to see interest rates on homes rise. How are you adjusting your game plan both as an investor and as an agent with that news?

David:
I’m making a video about this very topic on my YouTube channel. It’s youtube.com/davidgreenerealestate. And here is my ultimate take in how it works. There’s a contingent of people that are saying, if rates go up, homes are more affordable. Therefore, prices must come down. And they’re holding very firmly to that belief. And they’re actually getting angry at me because I’m saying I don’t think that’s going to happen. Well, let me explain.

David:
If supply and demand are perfectly, even in a harmonious state, like we all wish they would be, if interest rates go up that makes homes less affordable, what that’s really doing is decreasing demand. It’s bringing less buyers that are able to buy. So in a perfect state, if demand went down prices, meaning the supply side would have to match it to hit that equilibrium. That’s the framework that the people who are saying prices should come down because rates went up, they’re operating from the assumption that we have something close to supply and demand being even because the closer they are to even the more sensitive the market is to interest rates.

David:
We have something more like this. Demand is incredibly high and supply is incredibly low. So rates going up will in fact bring demand down, but it’s not nearly enough to get all the way to where it’s even with supply. So what that means is if you’re in the bottom half of the people, you were barely pre-approved, you’re just trying to fight your way to the market, you get drowned. But all the other people that have plenty of money, there’s still so much demand for housing and they see that it’s still a long term, the best investment you can make. There’s less risk than crypto, than NFTs, than stocks, than everything else. And with inflation continuing to rise, even though your rate went up, the rent you’re going to get is probably going to go up too. That’s the problem.

David:
I don’t think the rate hikes that we’re seeing are going to bring prices down. I think they’re going to wash out people that were barely able to buy. And I’m not happy about that. I don’t like it. What I think we need to do is build a lot more housing and bring some kind of equilibrium so people can figure out what to expect. But unfortunately, I don’t see enough of that going on.

Tony:
So David, say I’m a new agent and I see these kinds of things happening, do I need to adjust my game plan at all? Or can I just ride the same wave that we’ve been riding?

David:
The people that are going to struggle are, I don’t want to say a first time home buyer, but it’s a person with not a lot of income. If you’re living in a market where the average person can afford a $400,000 house and the average house is $400,000, you’re going to have a hard time getting a client that can actually get anything, because those few houses that are 400,000 are going to get snatched up really quick.

David:
What I would be doing is instead of solving the problem of the first time home buyer, which is I will make this comfortable and I will be there for you emotionally, and I will take away the fear, what you need to be looking at is how do I solve the problem of the person with some wealth? How do I get good at explaining a 1031 exchange? How do I learn the tax benefits of real estate ownership so I can share this with people that already have a little bit of wealth? How do I look at the return on equity in a property so I can go to Ashley who maybe has three houses that are cash flowing strong, but she’s getting a 2% return on her equity and say, “Look, if we sell these three houses and reinvest into this thing, I can get you an 8% return on that investment, which means your cash flow will go up times four.”

David:
And painting a picture for people that already have the assets or have a little bit more wealth that would make them feel comfortable using you, especially if they’re not already comfortable with real estate, because they’re not going to know that you’re new.

Ashley:
I think that little thing too, you just dropped right there is being an agent and knowing your client too, that they have other properties and what those properties are and how they can tie into the game plan that you’re helping them put together. Well, David, before we end the show, we do one last segment and it is to feature a Rookie rockstar. This is a Rookie investor that has left us a message either at 1-888-5-ROOKIE or in the Real Estate Rookie Facebook group, or has sent a DM to Tony or I on Instagram.

Ashley:
So this week’s Rookie rockstar is Jorge Gonzalez. He is on property number six in Dallas, Texas, which is a triplex and it is turned out to be a success. He purchased the property about three months ago, did some renovations. The purchase price was $449,000 renovation cost $42,000. And with his down payment, his total money upfront was $152,000. So he ended up with a total monthly cash flow of $2,060 on this property. His mortgage is 2010 a month and he has expected about $430 a month for vacancy and repairs. And the CapEx, he said that everything is all brand new, so he’s not planning on it for the immediate future.

Ashley:
Well, great job, Jorge. And if you want to be featured as our Rookie rockstar, please leave us a message anywhere online, social media, the Facebook group, and we would love to have you featured.

Ashley:
Well, David, thank you so much for joining us again. This book is going to be part of a three part series, correct? So we’re going to have you back a third time.

David:
I sure hope so.

Ashley:
Well, can you let everyone know where they can find out some more information about you and reach out to you? Do you have a podcast or anything?

David:
Yeah, I dabble in the podcast space myself every once in a while. You can follow me online @davidgreene24. That’s where all my social media are wherever you like. We are just now creating a TikTok. I think it’s Official David Greene because some other jerk already took David Greene 24, hoping I would buy it from them.

Ashley:
That would be Tony.

David:
Was it really?

Tony:
Yeah.

David:
It’s a good investment that you two made there. My YouTube channel is David Greene Real Estate. Very boring name, but pretty easy to remember. And then you can catch me at the BiggerPockets Real Estate podcast with Rob Abasolo. And then if you want to get the book Skill, if you know a real estate agent, you’d like to give him a gift, help them to step it up or if your own real estate agent could use a little bit of improvement, go to biggerpockets.com/skill. You could get the book there.

Ashley:
Well David, thank you very much. Everybody I’m Ashley @wealthfromrentals. He’s Tony @tonyjrobinson. Don’t forget to leave us a five star review on your favorite podcast platform. And we will be back on Saturday with A Rookie Reply.