Real Estate Entrepreneur’s Guide to Franchises and Mentors
Flipping houses has become all the rage with a host of new reality shows. The popularity might be new, but the idea of building wealth through real estate has been the way most of the 2% have built their wealth for centuries. If you want to spend your own time and skills with a hammer to flip a single house, there are many resources online that will help you get there. If you aspire to more than swinging a hammer on the weekends and instead have the ambition to build a house flipping business that can generate real income and wealth, you will benefit from some guidance.
There are a few options if you are serious about becoming a legitimate real estate entrepreneur without enduring the steep and expensive learning curve that comes with flipping houses on your own.
1) You can access online communities like www.biggerpockets.com to learn from others. There is a wealth of information and varying opinions on nearly every facet of real estate investing. It can be overwhelming due to the sheer volume of opinions and content. If you are willing to spend the time studying, there is a lot of good information out there to help build your own real estate investing business plan.
2) You can hire a mentor or coach who can act as a guide. The online world is full of “mentors” and “coaches” who claim to be experts and willing to share their “systems”. Many such people travel the country putting on free seminars that sell their coaching courses. It does beg the question though, “Why would a successful real estate entrepreneur invest time in coaching others to build a real estate investing business?” Too often, the answer is these coaches aren’t nearly as experienced or successful as they lead us to believe. If you can find a quality coach, their experience and guidance can shorten the learning curve and help you avoid costly mistakes. Coaching programs for real estate investors that have stood the test of time include Carleton Sheets courses and the Rich Dad Poor Dad workshops (http://www.richdad.com/workshops/workshops).
3) Lastly, you can invest in a franchise and build your business on a proven platform and brand. Unlike coaches, franchises are regulated by the FTC. They allow you to utilize a proven brand and systems to vastly accelerate the growth of your business. Most franchises require an initial franchise fee between $15,000 – $70,000 that gives you the rights to a specific territory. Most businesses you are likely familiar with, like McDonald’s, are franchises. It’s a proven growth strategy many successful businesses use to expand nationally and internationally. There are franchises for nearly every industry and real estate investing is no exception. The most well known is the HomeVestors franchise at https://homevestorsfranchise.com/.
Given the volume of existing online resources for flipping a single house on your own, we’ll focus on the latter two options of building a house flipping business: coaches and franchises. In order to develop and execute a house flipping business plan, you’ll benefit significantly from either a high-quality coach or a house flipping franchise. Yes, it’s possible to figure it out on your own and some have done so. The learning curve, however, is steep and long. Mistakes in this business are expensive. Trial and error might work in other businesses, but it’s a risky approach when you are developing real estate. If you can’t afford a quality guide, you probably can’t afford the inevitable mistakes that will come without one either.
Competitive Advantages Created by Owning a Franchise
Lead generation is the lifeblood of any house flipping business plan. Without consistent, quality leads from motivated sellers, no real estate investment business can succeed. A good lead is a motivated seller with equity who contacts you before they list with an agent. Such sellers value a trusted, credible brand and a quick closing. This is the advantage a franchise has over a real estate investor coach or mentor. The coach or course might provide good marketing advice and strategy, but you will still be left with building your own credible brand. Only a franchise can provide the instant credibility that is valued by motivated sellers. Yes, you can build a website in a few weeks, but it takes years to build its digital footprint with legitimate traffic that ranks highly on Google. Real estate coaches and mentors might show you how to build a site, but franchise licensing allows you to immediately piggyback on all the existing digital brand credibility that has been built by years of online traffic.
Brands with the following will have a significant competitive advantage over other sellers:
- Website that Ranks at the Top of Google
- Strong Google Reviews
- A History With the Better Business Bureau
- A Brand They’ve Seen in Other Media
- Authentic Social Media Content that Ensures Trust
- Local Phone Number and Address
A franchise should provide credibility factors such as these. HomeVestors, for example, is the oldest and most established home buying franchise in the country. If you are a seller who has just inherited property and searches for a cash buyer, who are you going to trust after a quick search online: www.homevestors.com or johnnybuyshouses.com? You are likely going to go to review sites and pick the former. Sellers aren’t just selling a house. They are often selling their family home. It matters to them who is buying it and whether that person can both execute the transaction and invest in rebuilding their family home into its former glory.
A real estate buying franchise or coaching program should have a sophisticated marketing strategy that maximizes every dollar of advertising. The present and future of marketing is digital advertising. Anyone who tells you otherwise is still doing business in a previous decade. In the age of Google Adwords, Facebook, and sophisticated retargeting strategies, it is possible to laser focus every dollar of advertising on strategically targeted prospects. A franchise should provide you with immediate domain authority and a massive competitive advantage on Google searches. If a franchise can’t provide that advantage and articulate how it does so, move on to a franchise that is operating a more sophisticated marketing strategy.
Here are some questions to ask a prospective franchise:
- What is the expected monthly advertising budget?
- What percent will be spent on digital channels and what are they?
- What percent will be spent on direct mail and what is the strategy for such mailings?
- What other marketing channels and how will they directly benefit my territory?
- Will I have a local or 800 number?
These are important questions that will have a significant bearing on your success. A franchise should give you a significant and immediate competitive advantage in lead generation. It would probably take you years to establish a digital footprint that could compete for leads on your own. Make sure the house flipping franchise you are considering will provide those assets by asking the right questions and verifying the answers with current franchisees.
If you aspire only to flip houses yourself on the weekends, you are just doing a second job and you don’t need to analyze multiple deals coming in every week. You can find a few fair deals a year by being diligent and connected. They don’t have to be good deals because you are adding value through your own sweat. If your ambition, however, is to create a legitimate multi-million dollar entrepreneurial business that can change your life, you need to generate enough leads to build a business and team around the lead source. Once you begin to generate leads at a high level through a franchise, you will have to analyze the leads well and quickly. When you generate leads upstream, there is a small window to convert them to deals. In our experience generating thousands of quality leads, we convert 5% of them to contracts. That means you must generate and analyze 20 leads for every deal. You obviously don’t want to visit each property in person, generate a comparable market analysis, and gather three construction bids on all those leads. It’s unreasonable, inefficient, and unsustainable to do that. Furthermore, if you took the time to do all those things, the leads would be gone by the time you were ready to move on any of them. Therefore, a house flipping franchise requires extraordinary systems to filter out the best leads quickly so you can laser focus on the best prospects, determine a max offer, and get them under contract quickly. You don’t have time to consult with agents and contractors for days. You need analysis systems to do the heavy lifting.
There are various web-based flipping calculators, but those aren’t sufficient if you want to generate real leads and create real wealth from real estate. For a real estate business to have reached the level of franchising, it probably has sophisticated proprietary analysis software. Such systems should accurately calculate value, construction costs, and risk projections based on your particular territory. They should be simple enough to filter hundreds of incoming leads quickly and painlessly. They should also be complex enough to provide accurate numbers that have been thoroughly tested in the real world. Many construction estimators, in particular, are highly complicated and require hours to input information. That’s not going to work. You need to generate precise numbers with minimal information and effort. That is what separates the highest level analysis systems from all the rest on the internet.
Analyzing a flip prospect is as easy as plugging numbers into a basic formula. It is, however, extraordinarily difficult to get the correct numbers to plug in. It’s even more difficult to plug in the correct numbers with limited information and time. The difference between winning and losing in the real estate development game comes down to the quality of your numbers. A coach might help you to calculate the numbers with a basic spreadsheet. A franchise should be able to automate them precisely and efficiently, allowing you to scale your entrepreneurial real estate business.
Do not commit to a franchise or mentor without observing and using their analysis systems. Ask the following questions:
- Are they fast enough?
- Do they produce accurate numbers for your specific territory?
- How do they keep them accurate and in real time?
The difference between excellent and average is significant. Be sure you are going to have tools that will not throttle your growth as you increase lead generation.
Once you have generated leads and analyzed them quickly, you’ll need the capital to make fast cash offers. The internet is full of unrealistic promises of real estate funding. The truth is you will pay according to the risk you and your property present an investor. Your risk includes your experience, amount of your skin in the game, and the quality of the deal. There is no shortage of hard money you can get at 60% LTV, 5 points, and 15% interest. That’s not good money. Those are terms that set you up for failure while hard money lenders suck you dry and repossess your rehabbed property.
While mentors and franchises may or may not fund your projects directly, they should provide you credibility and access to legitimate capital sources. It is possible to fund a flip with no money down, but you will pay a premium for the capital and you will need credibility to offset the risk of having no skin in the game. The credibility you acquire by being a part of a proven franchise system is valuable when you need to use other people’s money. Those other people with the money want to know you know what you are doing and you have proven systems in place to make good decisions.
If you have the credibility and systems of a proven franchise behind you, it’s possible to partner with capital sources to create win-win relationships. There is money to be made in flipping houses and there are good returns in funding flip projects. It’s certainly possible to build sustainable, mutually beneficial partnerships between real estate entrepreneurs and lenders. Such relationships, however, require trust and competency that are beyond the reach of johnnybuyshouses.com.
Adding Value with Construction
The myth is wrong. People don’t give away their houses. Executing a $40,000 rehab project doesn’t happen by pressing an easy button at the end of a 30-minute reality show. Profit margins must be created by adding value to the process. The value can be your sweat swinging a hammer and using a tile saw on nights and weekends, but that’s really just a part-time job. If you aspire to build a real business through real estate development, you have to create value through more than your own sweat equity.
It is possible to create value without doing any construction. For many real estate investment mentors, the primary strategy is wholesaling. Put simply, wholesaling is flipping a contract rather than flipping a house. Many of the gurus who claim to have flipped hundreds and thousands of houses have actually only flipped hundreds and thousands of contracts, not houses. It works like this: You add value with a marketing system and generate leads. You then tie up contracts with sellers and sell those contracts to actual rehabbers who add the real value to the property. As a wholesaler, you don’t have to own the property and you never have to manage a contractor. Wholesaling is the primary strategy of most real estate investors because it requires little capital and is scalable. If you are a hustler, a good marketer, live in a large market, and are an excellent negotiator, then wholesaling might be a good fit. Many have built successful businesses by wholesaling contracts. It is difficult though. It requires expertise in marketing and negotiating as the only value you are adding is the difference between how far you can negotiate down the motivated seller and negotiate up the investor buyer.
If that’s not the business you want to build, a successful real estate entrepreneur will have to add value to actual properties. While it may not be as simple as flipping a contract, construction is where real wealth in real estate is created. Eventually, the size of your real estate empire will likely be in proportion to the construction capacity you are capable of building. If you aspire to flip 40 houses a year, you will need to build a construction capacity that can produce well over a million dollars of construction. In some ways, your profits are a product of your construction production.
Building construction capacity should be a priority of any real estate investing franchise or coach. Too often coaching programs treat construction as an aside or an afterthought. Again, people don’t give houses away and there’s not a rehab button you can push. You have to add value in order to create a profit margin. As a real estate entrepreneur, building construction capacity is essential to adding value and building wealth. It’s not simply a separate chapter in a course or a third party web app. Construction is a fundamental part of a real estate investment business. It is an art and a science. It’s as much about humans as it is materials. You don’t need any technical expertise to be successful. Oftentimes, a lack of construction knowledge can be an advantage because you are more likely to stay out of the contractor’s way. You do, however, need a guide to understand how to properly execute a construction project.
A franchise should provide you with a sophisticated strategy to build and scale construction capacity. While it might appear daunting, it is also exciting. With so much value in the world created by passing papers with no tangible value added, building tangible value through construction is deeply satisfying. At a high level, your real estate business will become a micro-economy that creates real jobs and sustainable careers.
At a minimum, a franchise or coaching system should provide the following:
- Ability to accurately estimate construction costs quickly and with minimal effort and information.
- Produce usable to do lists for a contractor and crews.
- Generate specific materials lists for vendors to minimize mistakes.
- Articulate a proven strategy for managing and maintaining a mutually beneficial partnership with a general contractor.
- Provide a proven growth model for increasing construction capacity.
A quality franchise or coach should be capable of discussing all these with specificity. Vague generalities are an indication the systems lack substance and will ultimately throttle your growth.
Selecting a Real Estate Investing Franchise
There are many factors to consider in choosing any franchise, including experience, cost, support, strategy, and marketing platform. Like all areas of life, expect there to be tradeoffs. Franchises with longer track records are typically going to be more expensive. Younger franchises, however, might have more commitment to your success as they are building an important track record around your results. With newer franchises, you might get support directly from the founders rather than less experienced support reps within a larger organization. It’s important to have a clear understanding of the level of support and who will be providing it. This particular business requires fast decision making and you’ll need to have questions answered quickly.
Franchise costs can vary greatly, so understanding all the costs is especially important. Franchisors are required to file a Franchise Disclosure Document (FDD) and provide franchisees with a copy before any contracts can be signed. The FDD includes a detailed breakdown of all the costs. The initial franchise fee is one cost. There are also ongoing royalties and various other fees. Some franchisors have many small fees that can add up to significant amounts of your bottom line. Franchise marketing costs are also a factor. Every franchise handles advertising differently. Since this is a critical part of your success, take the time to fully understand the costs and your level of control, or lack thereof.
Be sure the cost structure aligns the interests of the franchisor and franchisee. The more costs and fees are front-loaded, the more risk the franchisee runs. Ideally, the franchisor will share in the success of the franchisee without demanding high initial franchise fees and required monthly fees. As a rule, the more complicated the fee structure, the more likely the financial interests of the franchisor will be unaligned with the interests of the franchisee.
One of the most important questions when buying a real estate investing franchise is whether or not the territory is protected. If it is protected, you will be granted exclusive rights to a designated territory and that prevents another franchise from opening up next to you. If the territory is not protected, multiple franchisees could be operating in your territory, creating competition among franchisees.
There are hundreds of real estate investing mentors and a few franchises. First, decide what kind of business you want to build. If you want to install tile and sand floors on your weekends, you don’t need a franchise. If you want to build a significant real estate investment business that will eventually replace your job and change your life, evaluate the franchise opportunities and select the one that will accelerate your growth and maximize your capacity.
Here is a list of real estate investment franchises, educational courses, and mentors, along with their websites.
New Again Houses www.newagainfranchise.com
Coaches, Mentors, and Courses
Rich Dad Poor Dad www.richdad.com
Carleton Sheets www.carletonsheets.com
Freedom Mentor www.freedommentor.com