Dave has co-founded a property management company and has managed over 10,000 homes. His company is not a typical property management company, they strive to be better in all areas than other companies. They are even working on the technology side that is severely lacking in the property management space. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Dave Diaz Real Estate Background:
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Co-Founder, Head of Operations for Great Jones – a property management startup
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Expert in property management: bought, renovated, leased, and managed over 10,000 homes
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Based in Fort Myers, FL
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Say hi to him at https://www.greatjones.co/
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Best Ever Book: Blue Ocean Strategy
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TRANSCRIPTION
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, Dave Diaz. How are you doing, Dave?
Dave Diaz: Fantastic! Thanks, Joe.
Joe Fairless: Well, I’m glad to hear that, and welcome to the show. A little bit about Dave – he is the co-founder and head of operations for Great Jones, which is a property management startup. He is an expert in property management; he has bought, renovated, leased and managed over 10,000 homes. Based in Fort Myers, FL. With that being said, Dave, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Dave Diaz: Yeah, sure. So I was very fortunate to come out of the institutional world of high finance and land in the mortgage crisis as one of the largest auction buyers on the West Coast of Florida. We had just enough money, contacts to go really big in flipping. Then got swept up in the institutional aggregation of single-family homes; these big Wall Street groups, publicly-traded companies that bought tens of thousands of houses after the mortgage crisis, and that gave us a really good on-the-ground, but also a high-level experience in buying, renovating, leasing and managing thousands upon thousands of homes for really big money investors… But never forgot where we started with our own IRA’s and other people’s money, one or two deals at a time.
Joe Fairless: What’s your focus now?
Dave Diaz: Great Jones is a tech-enabled property management company. We could go into detail there, I’ll leave that up to you, but the reality is with property management and the execution of the income property investment is not the same as buying a public security. People forget that when you buy a stock, you’re buying the leadership of the company as well, but they take that for granted. When you buy an income property, unless you’re self-managing, you’re buying the execution of the person you hired to do that as well, and having done it with P&L responsibility for hundreds of millions of dollars’ worth of homes, we know it can be done better, more efficiently and just differently than the industry’s status quo, which currently exists to put more money in the manager’s pocket than the owner’s if things are left to chance.
Joe Fairless: Yeah, let’s definitely dive into that. One follow-up question about what you said earlier and then we’ll get into how you bring that value proposition to life with what you’ve just said… The big money investors, so the Wall Street groups, that were doing all those renovations, or that were buying the properties and you all were managing and doing the renovations for – what is the difference in the metrics that they look at, compared to a private individual that has a portfolio of, say, five to ten homes with you all?
Dave Diaz: That’s a great question. They’re gonna view a basket of homes very similarly to the way an apartment operator would view hundreds of units. So they’re talking about global occupancy metrics, rent increase down to the tenth of a basis point type thing… They’re really granular, because these numbers are spread across so many homes that the percentages become more important than the outcome of any specific asset… Whereas if we’ve got five houses and we take a big hit on something, it’s material; to them, it’s a rounding error.
At the same time, I think they can be a bit penny wise and pound foolish on the way in which they approach these things. Most of their decisions are built towards scale, so even if something is an investment decision that we would all agree we should do on this one property, they don’t typically have the bandwidth to administrate things that don’t follow the conveyor belt smoothly… So sometimes they have to opt out of really good deals that we would all love to have.
Examples of that might be buying a home that is older than their age limitation; a lot of the Wall Street firms won’t buy them older than 1990; some are even 2000+ now in terms of age… And most of them have cap-ex or initial improvement cost limits that might be in the 20k to 25k range, whereas if we bought a really hairy asset, that might actually be the one that has the most built-in equity when we’re done improving it as an individual investor; they won’t touch that.
The logic is sound – they’ve got an employee they’re trying to get to manage 25 rehabs a month, they give him one 100k project. If you’ve ever been on one of those, you know they become all-inclusive, and you can spend most of your week over there every week, and it just destroys the conveyor belt that is the aggregation process… So they really opt out of what might be some great individual deals.
Joe Fairless: And conversely, from the private side, the investor who has five to ten – what are some things that you’ve seen the larger institutions do that you think that an investor could learn a thing or two from?
Dave Diaz: So they do pay attention to broader metrics; I don’t get asked very sophisticated questions by most individual owners… It’s interesting, if somebody will ask “Am I occupied?” Like, they’ve got one house – to them it’s binary, it’s either yes or no; it’s 100 or 0. They don’t really care that the market’s 98.5% occupied, they logically only care that they’re empty.
But at the same time, if you’re empty and the market is 98.5% occupied, you’ve gotta ask yourself why. “Why am I the outlier?” So that’s one.
The other thing is they just standardize so much better. One of the things I learned early on, even in my own investments, and especially doing it for other people, was wherever possible and where rational, I standardize. Same flooring, same paint colors, same paint substrates… It’s this brand, this finish, this level… That way, if I have to go back in and touch up three years from now, I’m not repainting the whole property. You’d just be surprised how many people do one-off things that aren’t repeatable, and they spend a lot of money downstream on that item again… Like, “Okay, now it’s a full repaint, because I have no idea what’s on the wall.” Even if I think I know what the color was, I can’t remember exactly what brand and finish, and that doesn’t go well when you try to touch up that paint with something that’s slightly different. So that would be a big one – they standardize.
At the same time, I would say do it really logical; if I can get a great deal on a discount tile, and I only need enough for one house, probably not a big deal if I keep an extra case in case something breaks. But my paint I’m super-specific about, because I know that’s gonna go back in every house.
Joe Fairless: Now, talking about Great Jones and the opportunity you saw in the marketplace which led you to co-found the company… So what is it exactly that you all do for real estate investors who pay for your company services?
Dave Diaz: We are third-party property managers. Our mission is to democratize Wall Street level performance for main street investors. Someone that has three houses with us, the investor from Ohio that’s got three properties with me in South-West Florida – they’re paying the same price as a Wall Street level firm for an air conditioner. A guy who buys 10,000 air conditioners a year, I’m not giving the same price too on that equipment to this individual investor; we’ve essentially taken all the barriers down. You don’t have to own billions of dollars in real estate to get the same pricing.
I think there’s a couple of important trends that your listeners would wanna know about, given the state of the property management industry. If you’ll indulge me for a second – this is not a push on our product, as we don’t manage [unintelligible [00:10:24].04] but I think it’s things that people just don’t know. The industry is basically all utilizing six out of the box platforms; things like Propertyware, PropertyBoss, Appfolio, Buildium – you know the names… Those softwares have over the last several years more and more focused their revenue streams on taking the ancillary revenue that managers used to enjoy – things like online rent payments, application fee premiums… Those types of — we would call them junk fees, but they were [unintelligible [00:10:52].27] fees. Those are now going to the provider, not the manager.
So where Propertyware used charge you 50 cents for an ACH transaction when a tenant paid, and you might charge four bucks and you could pay for your really nice car with those transactions, now they charge five dollars and they get all five. I think it’s $4,95 when they process an ACH.
What that’s done to the management industry is it’s forced the managers to go deeper and deeper into the owners’ pockets to collect additional revenue. So jet fuel prices going up on the airlines – all of a sudden now you’re paying for luggage fees, and a drink costs twice as much, and all that stuff… So it’s created a junk fee fueled industry where there’s just a ton of misalignment.
So I was spending my weekend managing x thousands of homes, and I’ve got my buddies with 20 houses in Fort Myers calling me and saying, “Hey, I’ve got an air conditioning quote for some obscene number, from somebody managing a lot of homes.” And I’m texting them one phone number to call and they’d get it for half.
I realized, like “Man, this isn’t excusable. These people should know better.” If you’re managing a certain volume of homes, you either should know better or you do know better and you’re pocketing the difference… I don’t care why, it’s just inexcusable. That’s where Great Jones was formed.
We said, hey, this could be a much better experience for the investor if we align our interests, meaning I’m not having a good day making $1,000 on an air conditioner when you’re having a bad day and have to buy one. And if we create transparency by not having any junk fees and just posting everything that we’re doing in real-time, with actual receipts and stated pricing… So it’s a challenging industry.
The other piece that we’re seeing now is people are starting to take this out on the resident if they’re not going directly after the owner. A lot of owners are not aware that they’re taking out their quest for junk fees on the resident, which is really troubling… So again, to me it’s a misalignment. I saw a lease the other day where a third of the security deposit was a non-refundable administration fee to the manager. I guarantee the owner had no idea that of their $1,200 deposit, $400 of it was a fee to the manager if it ever had to be exercised. So they’re sitting there thinking, “Hey, I’ve got a month’s rent. This is all hunky-dory.” Really? No, you’ve got two-thirds of a month’s rent.
In the same lease there was a huge maintenance call charge. Every time the resident picked up the phone to report maintenance, they got charged $50 for the phone call. Now, if you get four months before move-out and you’ve got a shower that’s leaking just a little bit, but it’s not really bugging you, are you gonna pay $50 to report it? Remember, a good chunk of your security deposit is non-refundable already… Or you’re just gonna say “Forget it, man… I’m gonna let this thing leak”, and when the owner pays $2,000 or some obscene number to replace a shower that could have been done for $900, they don’t know the motivations and the contractual misalignment that led them to that place.” You didn’t have to have a rotted shower, but because they wanted to charge him to tell you about it, and because their deposit was mostly forfeit, you’ve landed here.
Joe Fairless: You mentioned that you all have stated pricing… So what is the pricing for how you make money?
Dave Diaz: Our fees are super-transparent, and I hope the industry goes this way for the sake of owners. We are a straight percentage of rents collected; no markups, no junk fees, ever. We’re super easy. You’re paying x%, and that is it. No if, and’s or but’s; you will not see another fee, and we’re not taking it out on the resident either. The only time we ever charge the resident anything is if they actually force us to incur a hard cost on their behalf.
So we just think there’s a place in here to be the good guys, and to make up the junk fees via scale.
A typical residential property manager has something like 50 units per full-time employee… So if you think about them paying that person 50k-60k/year on average, their base fees are wiped out by the cost of staff, whereas we can, through technology and through our past operating experience, improve on that employee-to-home ratio significantly, while not sacrificing service to the owner or the resident. If anything, things are actually cheaper, better faster, because we’re leveraging the technology to ensure that things are done, and done efficiently.
The other thing is our maintenance, and things like that… We don’t do self-performed maintenance; we’re not misaligned in that way. I’m never billing people for my time. But if you say “Dave, what’s a 3,5-ton horizontal install HVAC with a heat pump [unintelligible [00:15:19].01] ?”, I have that on a spreadsheet; that is a number. That is not “Oh, let me get four bids.” This is gonna be X dollars and Y cents, and that’s it, no if, and’s or but’s. And usually, that price for us is gonna be the same as a Wall Street firm, if not slightly less. Don’t tell anybody, but we pay less than most of the Wall Street firms for this stuff because we pay faster. So – same vendor, but my payment terms are twice as fast, so I actually get things cheaper than the guys who have 80,000 homes.
Joe Fairless: That’s good just to get the best pricing – pay a lot faster. In terms of the percent of rents collected, does that percent change based on the number of properties that you manage for that owner?
Dave Diaz: It does. So you should be looking for a reasonable hybrid, and also it would depend on the area. The percent of rent for Northern California, where the average rent might be or $2,500 or $2,800 is gonna be different than an area where the average rent is $900.
Joe Fairless: Sure.
Dave Diaz: At the end of the day, there’s a hard cost to administrating the time for those properties… So yeah, volume matters, volume with the owner matters, and average rent in the area is important, as well.
We also have a price cap where no owner ever pays more than $149/month for properties. Somebody with a $6,000/month property is capped out on that fee, because we just thought it was fair. There’s no reason that somebody with a penthouse — was it really worth $600 to collect a rent check? I wish… That would be fantastic for me, but we thought that it was fundamentally unfair and we just weren’t gonna do that to our customers.
Joe Fairless: And what’s the lowest amount that you collect on a property?
Dave Diaz: Our typical fees – and I think this is well in line with national averages – are between 8% and 10%. And again, it depends on the area, and the home price… What I think is important is — I’ve had several owners, and this is just so hard for somebody who’s not in the business to do… But I’ve had owners come to me with 5% contracts, and by the time we got to page four of reading the contracts, we realized they were paying something closer to an effective 20%, with added inspection fees and maintenance markup fees, and “Oh, you called me and I have to go to your house – that’s another $100 fee.”
And again, it kind of comes back to this, like, whatever you’re paying, the industry is trending towards this [unintelligible [00:17:30].08] and everytime I do something, I intend to then charge you for doing it, and we just felt like that was fundamentally wrong. In that case, your base fee should be zero.
In another world we didn’t feel like it was the right way to do it, but you could argue that the whole industry should be a la carte, and you should only get paid when you do something. We thought that would misalign; I didn’t want anybody saying “Hey, you made up stuff to do, so you could bill me”, so we went the other way, and we said “Look, it’s an all-in-one number, and we think it’s an incredibly fair number.” If we actually go toe to toe, I think it’s half of what most people are paying, regardless of the contract firms, when they add it all up.
Joe Fairless: In terms of the bulk pricing — I wrote “bulk pricing”, but I don’t believe you said that; you just said you get better pricing on, say A/C units and other things; I wrote down bulk… But one of the variables is based on the speed in which you pay the vendor whatever their price is. Does that mean that the owner has to pay that lightning quick, or do you pay and then the owner pays you back out of the rent, or some other method?
Dave Diaz: There are a couple things… When I look at vendors, I look at three things. I look at the size or type — so you’re gonna find basically three levels of this: the guys who are on the radio, meaning you’re paying for advertising, you’re paying for a salesperson, the person who show up to your house to [unintelligible [00:18:50].14] is not an HVAC tech, they’re a paid salesperson, getting a percentage of what they sell. Then there’s this building somewhere, with ten accountants, and the overhead associated with that. That’s your super-premium — I’m not knocking the guys at all, but the guys you hear on the radio, that are like owned by private equity companies and are national providers of these things.
Then your Benjamin Franklin Plumbings, your One Hour air conditioning – again, these are great retail firms; I’m sure they do a fantastic job, but that wouldn’t be my choice as an insider. You’re paying three people to get to the actual technician. We are looking at the layer where our typical vendor is gonna have 3-5 vans, a family member doing their accounting, and when you google their office address, it’s a house with three vans parked on the side. They’re licensed and ensured, but your overhead is zero. The person running that is in one of those vans. That’s to me the cheapest licensed, qualified human that you’re gonna get to do the work and do it well.
And then there’s the layer below that – I have people who are like “No, I’ll just pick a guy up at Home Depot”, and it’s like look, you can do that, but if they flood your house by hitting a pipe with something, who are you suing? That to me is unsustainable, unscalable, and I wouldn’t do that to anybody.
If your father-in-law wants to paint your house for $200, god bless him and let him do it, but I can’t do that repeatedly… So we find this happy middle ground. First, you know the type, then you’ve got to understand the part and labor cost. If ever in doubt, if you have no idea what you’re talking about – I’m really giving away my best secret here… Because I was a finance MBA; I grew up poor, but I didn’t grow up on a roof with my dad, or anything cool like that… I wish I could say I knew all this stuff when I started this, I just didn’t. What I was really good at was adding, subtracting, multiplying, dividing. I was on the math team, but I stopped at geometry. So I was a nerd, but a dumb nerd, if that makes sense.
So I would sit there and ask open-ended questions, like “How did you get to that cost?” There’s only two components – labor and material. Material, somebody will quote “Oh, this is a 0.152 millimeter flux capacitor” if they’re building a time machine. Okay, I google it while they’re talking, and I find it on HD Supply for $7, and they’re trying to charge me $200 for it. And then I say, “Well, okay, you’ve got a flux capacitor (or whatever you’re trying to sell me). How long does it take you about to install?” “Seven hours.” “Really? Because my resident said you were there for 15 minutes looking at this and putting in the part.” And then “What are you really an hour? What’s a fair price for that trade?” and you just build the price back that way. With Amazon and Google you can find darn near anything now instantly on the internet; you’re not searching through some trade journal.
Okay, you’re gonna be there for two hours. Fine. Let’s just say that’s the actual numbers and he’s not lying to you… You can basically build a reasonable cost. Fine, you’re an electrician, I’ll give you $100/hour, I know what the part costs. I’ll give you the part cost plus 20%.” You’ve now gotten a retail quote of $700 down to $250.
I had a guy in Chicago — I’d never laid foot in the city of Chicago, and I had a guy try to charge me $7,000 for a sewer lateral. This is a pipe that runs from the house to the street, right?
Joe Fairless: What should it be?
Dave Diaz: In Fort Myers I’m paying $1,300 for this thing. His excuse was the hole’s deeper and we use more gravel. Okay… So you’re digging 8 feet instead of 5, with the same [unintelligible [00:22:07].10] And then I’m like “So gravel here is $300/truck… How much gravel are you using? I’m still trying to get to the extra $6,000, if you’d just help me here…”, and he ran on a schema like $2,200. I said, “Fine, I’ll give you $2,200 because it’s Chicago, and everybody’s gotta pay the mob (or whatever they have to do to do business) [unintelligible [00:22:33].20] That’s insanity.”
Joe Fairless: What did he say?
Dave Diaz: He hung up on me, but I called three more guys, and somebody did it for my price. And that’s the other thing – you’re not crazy. I think people will tell you you’re crazy… When I landed on the ground in Indianapolis for one of my roles I didn’t know a soul there. I had literally 29 air conditioning guys tell me my numbers were fake, like I didn’t know what a Goodman costs from Goodman, even though I had a price sheet in my hand… And the “We teach our contractors to make money here, and nobody will ever do it for that price…” You know what, the 30th guy said yes. And then he introduced me to the plumber, and to the electrician, and to all the other guys that work in that ecosystem of licensed, wonderful humans, helping building their businesses. These guys have great lives because of the volume of work companies like ours can give them… But there’s an ecosystem of that; there’s an ecosystem of super-premium retailers, and there’s an ecosystem of wholesalers, just like if you think about retail, there’s a Nordstrom and there’s a wholesale guy with the stuff that falls off the back of a truck, right? Where are you shopping for your items?
Joe Fairless: This is great stuff. I love how you went into that in detail. What is your best real estate investing advice ever?
Dave Diaz: It would actually line up with a lot of this… I tell people two things – build your network, which has a lot of what we’ve just talked about, if you’re new to an area… And I’ll tell you, the second thing is diversify wherever possible. That can be done a couple of ways. If I’m gonna buy two properties, I like to be local because I’m in the business and I can touch and feel it. Another way to diversify is geographic – buy in three or four different locations, five locations across the country.
I personally don’t geographically diversify because I’m in the business and that’s what I do every day anyway; it might as well be in my backyard. If I wasn’t in the business, I’d buy in five markets, just to hedge risk.
Beyond that, I would say build your team. When I go into a place, whether it’s new or whether it’s local, once you hit a vein — it’s like mining a precious metal… Like that air conditioning guy; it took me a long time of prospecting, 29 calls, until the 30th guy is like “Yeah. You’re not crazy. That is what this stuff costs, we totally admit that. We’ll go do it for this.” My next question is always “Great, who else you’ve got?” and you’d be surprised – a good title agent, or a good investment salesperson, a realtor, they typically have a property manager, like us. When you hire me, you’re hiring my ecosystem. I just did all the work for you. I’ve got a title guy that will close for next to nothing, and we’ve got great salespeople; we’ve got all that stuff… Even though they’re not in our company, that’s our ecosystem.
You could start your vein of mining anywhere in that ecosystem; you’ve just gotta find one. So whatever you know the best, find one of those that you know is right, and then ask them who else they know, because they’re gonna connect you to the rest of your ecosystem.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Dave Diaz: I’m all in.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Break: [00:25:36].11] to [00:26:26].18]
Joe Fairless: Best ever book you’ve recently read?
Dave Diaz: I like Blue Ocean Strategy. That one has served me very well. Go where others are not.
Joe Fairless: Best ever deal you’ve done?
Dave Diaz: Crazy tax deed investment. We actually foreclosed out the bank’s second mortgage by letting the tax deed foreclose on something we already owned.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Dave Diaz: In that same deal, I did not title the repurchase of the asset in a new name, and the bank came looking for the excess proceeds. That cost myself $50,000 by not changing the name of something, because I was too cheap to call my lawyer and spend $300 to ask how to do it.
Joe Fairless: [laughs]
Dave Diaz: So I hit a grand slam – my partner and I at the time hit a grand slam and turned it into a double by not paying $300 for some legal.
Joe Fairless: Best ever way you like to give back?
Dave Diaz: I love widows and orphans, and we are very heavy on a personal level into Compassion International. I think that’s one of the greatest [unintelligible [00:27:20].24]
Joe Fairless: And how can the Best Ever listeners learn more about what you’ve got going on?
Dave Diaz: GreatJones.co is our website, and also hello@greatjones.co is our e-mail. I mean this sincerely, we are in the business of helping people; we’ve done this all over the place. If you have a question, or you just want straight-up advice – I don’t care if you’re in Seattle – if we have something we can offer you in terms of advice, we will give it to you.
Joe Fairless: Well, I enjoyed our conversation, that’s for sure, and looking forward to seeing how Great Jones continues to do what you all are doing. I learned a lot from you in terms of industry’s trends, as well as your approach for your business and in terms of the bulk pricing, or rather the things you look for in vendors and how you understand the parts and the labor costs, and then you reverse-engineer that… Fascinating conversation.
Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Dave Diaz: Thanks, Joe.
