Stop Buying Bad Deals: BRRRR Due Diligence Mistakes That Kill Investor Profits

Joel Kraut (00:00)
I never understood this. God, everyone has a car, right? And you go to the car dealership armed to the teeth to go negotiate for $8 a month. And you spend the whole day doing that. It’s crazy, but we’ve all done it. Right. And

I’ve had so many investors get into properties and you ask them, how’d you get into it? Well, my friend said it was a good deal. The realtor said I couldn’t miss. And that was their due diligence. It doesn’t make any sense, but they’ll go fight.

Scott Bursey (01:55)
I’m your host Scott Bursey and today we’ve got a guest who is supplying the high octane fuel we need to master the BRRRR strategy. That’s buy, rehab, rent, refinance, repeat. Our guest Joel Kraut of BRRRR Loans is bringing the fuel of streamlined no-headed capital recycling. He’s the expert pros turn two when the refinance step is the only thing standing between them and their portfolio growth.

Get ready to download some serious financing wisdom because Joel is bringing the clarity you need to keep your deals flowing and your capital growing. Joel, welcome to the show.

Joel Kraut (02:31)
Scott, great to be here and awesome intro. Thank you.

Scott Bursey (02:34)
It is just a pleasure having you here, Joel, and for our listeners who may not be familiar with your journey, please tell us how did your career begin and what is your main focus now?

Joel Kraut (02:45)
So I started in 1996, 30 years ago, which I’m proud to celebrate my 30th year. I’m still surviving and standing here and having a good time with it. Uh, there’s been a lot of ups and downs on the roads, you know, some really great successes and. Truthfully some pure annihilations, which has been documented on the internet. So people know and have seen some of my downturns in 08, 9, and you know, it’s real out there. Right. So anyone who.

professors to be perfect is just not telling you guys the truth. So it is a journey and you have to stay at it every day. You know, for us at this point, you know, it’s a great opportunity to help people on their journeys and experience that with them or for our company, for myself personally, two of my children work here. So that’s a really cool thing for us. So we have a tight knit company in that regard. We have about 13 people.

You know, we’ve advanced in the technology world, people, use two VAs across the world. So, you know, we’ve had to evolve a lot. And for me, a guy who basically thought a computer was to send an email, you know, I had to learn a lot over the years and, you know, learn how to use these things as professional tools and, and help us grow. Not just as a company, but with people, right? You know, it’s all about the people. And we’re very fortunate to have thousands of great clients and people that we interact with all the time.

Scott Bursey (04:05)
That is just incredible perspective, Joel. And what really caught my attention about you was the way that you’ve been able to simplify and perfect the capital recycling process for investors. You turn the refinance step, which is often a bottleneck, let’s face it, into a seamless transaction that immediately injects fuel back into their business for the next deal.

Joel Kraut (05:16)
Yeah, I think for us, you we want to keep it as simple as possible for people. A lot of people for many decades went to banks. I did too, when I first started, that was the normal modus operandi, right? That was just the standard operating procedure. You know, Wall Street, private equity firms started to look at what the really low lying fruit was of the banking world’s products and said, Hey, you know, we can do that and really move the needle and move a lot of money.

Right? Because Wall Street’s only going to get involved when they can move a lot of money to make their returns that they need to on the money. So, you know, many years ago we got involved in this side, what’s commonly referred to as the non-qualified or non-QM side of the world. And you started to see what was available. And I, I borrowed privately for the first time in 2007, right? Going into disaster, we had a condo project going up.

We had sold most of the project, we had deposits and the bank stopped funding. We didn’t really understand the magnitude of what was happening out there. We were in a bank and we were selling condos and they were selling. And then all of a sudden the music truly stopped. And then our bank notified us that they would not fund anymore. The construction draws. Well, you have these deposits. Back then the deposits got released to you so you could use them towards building.

And now we have a whole bunch of people who potentially going to sue us because we can’t finish and deliver. Fortunately, somebody introduced us to a private person who lent money. I didn’t even understand what was happening because I’d only borrowed from banks to that point. And it opened my eyes to a whole new world. And to this day, we’re still friends. and I, just closed on a what’s the Thursday, Tuesday of this week. So we still lend together and

Instead of being his bar, now I’m kind of his co-pilot and lending out his money. We do that as well. So, you know, the world has just shown me that you have to be adaptable and if you’re not, you’re going to perish. And we’re at another inflection point in the world right now with AI technology. you know, we feel the same way about that.

Scott Bursey (07:13)
Good, very good point. And on that note, what is the single biggest strength of the BIRD strategy in today’s shifting market?

Joel Kraut (07:22)
Well, I think what you see is people from around the country and around the world have shifted, right? For many, many years of my career, the Rust Belt, we, old enough people that would know that it’s called the Rust Belt, you know, people who are in the Midwest and some of those states like Ohio and Indiana and West Virginia and Kentucky that might not have been shown all that love, Alabama, Missouri, Oklahoma. Now.

are very, very sexy. Cash flow still works really well there. And in some of the big primary markets, know, your Los Angeles is Chicago’s, New York’s, Miami’s, you know, cash flow is not working as well. So people have pivoted and gone to these other areas. You know, as a lender, you can kind of see this on a macro level and see it happen. When somebody calls you from Israel or India or South Korea, and they want to know about

your programs where they can buy properties in Indianapolis, you kind of take note because they used to call you about Miami or New York and now they’re pivoting and you can see the trend changing and we have to stay on top of that and be there all the time for the different people and also help people here locally understand that as quickly as possible so they can pivot. You know, we want people to be successful and want to help them with that information.

Scott Bursey (08:39)
How are you able to turn on a dime? What sort of technology or strategy do you employ?

Joel Kraut (08:44)
Well, some of the borrowers themselves help us with that. They’re showing you what they’re doing, but there is a lot of different tracking tools and you know, for zero to $99 a month, you can buy a tremendous amount of data services. And as people go to the property radars of the world.

you can start to see some different things. You can use core logics. You can get accounts there, even for an individual investor that is still at a rational price level. You can use what’s called Forcasa. They have a lot of market data. And you can start to see what’s happening very early in the cycles. You don’t have to wait a year. It’s not like watching the news when they tell you what happened and started nine, 12 months ago in time lag. Here, you can probably cut that down to zero to 90 days, which is you want and need as an investor.

You got to stay on top of that.

Scott Bursey (09:32)
must stay on top of it and work efficiently. Let’s shift gears here just a tad now, Joel. What is the most common roadblock investors hit during the refinance stage?

Joel Kraut (10:17)
I think it’s their own frustration.

People will get frustrated with, why do I need that? How come you’re asking me for that? At the end of the day, we’re taking these loans and packaging them and then selling them to an end buyer, right? A third party market. And that’s what they require. So that’s why we have to ask it. Every month, if the calendar changes, you need the next month’s bank statement. that’s ridiculous. You’re right, but I can’t change it. So let’s not fight and waste the whole day with each other. Let’s…

Make it easier for you. I’m only asking you for six to eight things, depending on the type of loan. We’re keeping it very simple. We have some people who don’t fight and in two hours can send us everything and in 12 to 14 days close. We have other people who only ask you what day they can close. And even though they haven’t responded to an email for three straight days asking for the same thing.

So that’s a frustration in the industry. I’m sure every lender experiences it and different borrowers at different times have experienced it from their side. I understand it’s frustrating, but if we actually just work together instead of nitpicking and fighting with each other, we can both help each other go three days faster, which is really what you want. You want your money faster, Scott. And we’re not asking you to do anything that’s abnormal. mean,

So I feel like that’s part of the process for all of us that we encounter. ⁓

Scott Bursey (11:33)
I know relationships are very important in your business. How do you create strong relationships, Joel?

Joel Kraut (11:40)
People think I’m nuts. Honestly, I think I’m insane. Sometimes I will literally go to different areas around the country and I will come sit down with you and talk and see your project. I can’t get to everyone all year. I’m not trying to mislead anybody, but I’m going to be out there around America physically. I still believe in that. I still think the Scots of the world love when you come and show them the respect, not just that you can make money lending to them, but the respect of

Let’s go see what he’s doing. Let’s go physically walk it together. Let’s hear and see and feel what it really means to him and show him that we care too. Together that changes things. So on almost every new construction site that I do loans for, I go out and visit with the guys. I have built a lot of single family homes. It’s a labor of love and you take tremendous pride in what you’re doing. And to go share that with somebody changes the relationship forever.

people who are building portfolios that are young. mean, you you’re changing lives. It’s great.

Scott Bursey (12:32)
people.

You really are Joel and people do business with folks that they know, they like and they trust. And I can tell that means a lot to you.

Joel Kraut (12:47)
You know, I like to joke with people. You don’t get this pretty without taking a few punches, but in some different things in life, people want to work with people who have been through some failure and didn’t quit because then they feel like they won’t quit on them. And they’re right. I think that’s a very important transition and a thing to understand for a lot of younger people in the game. I don’t care what age you are. I care how much experience you have in the business.

A 24 year old could have three great, four great years of experience. And a 60 year old could just have started three years later also. So you can’t look at the number of chronological age. You have to look at what they’re doing. You know, some people come to us as master plumbers, master electricians. They have a lot of job site experience. You have to respect that. They’re licensed. They’ve done thousands of different jobs for people. And now they’re taking it and doing it for themselves. And you want to help them with that, not fight with them. That’s ridiculous.

us.

Scott Bursey (14:19)
Yeah, point well taken. Let’s rev up the engines here a little bit, Where is the greatest untapped opportunity for finding high equity bird deals in your view currently in this market?

Joel Kraut (14:31)
Well, unfortunately, foreclosures starting to rise around the country. It’s not nearly the levels it was in 2019. So I’m not trying to put out any kind of, wow, you know, go crazy type thing. But in today’s market, the foreclosures very different. Almost not all, but almost have a lot of equity, but they can’t make the payments. So it’s not an untapped market, but people have shied away from those high priced homes.

But a lot of those high priced homes that are now falling into issues have a lot of equity in them. And somebody doesn’t want to walk away from $400,000 of equity. But if you can grab 250 of it and give them 150 of it, you have a nice starting point. So paying attention there and seeing what’s happening in your respective markets around you, you know, in the 90 minute circle from where you live might provide you that type of opportunity.

I also still am a huge believer only because it happens every day and I’m not trying to make fun of it. But for me, the probate market, know, the inheritance and people moving on after, you know, three, five year battles with cancer, you know, taking care of their parents and what a lot of the people truthfully.

don’t want to go back to the home that they grew up in where their parents have passed and they really want to sell it and get the check and move forward with their lives. And, you know, that’s an opportunity to be reasonably fair with the people. And at the same time, you know, you can get an advantage entry point to the market. So I feel even today with all the newfangled strategies and cool courses that people put out, those two basics, which really haven’t changed to the seventies are still there.

There’s a great opportunity. You have to constantly be out there working it. And if you are, you’ll win.

Scott Bursey (16:07)
That vision is what separates players from legends. And on this note, Joel, what regulatory or market risk poses the biggest threat to capital recycling efficiency in the BRRRR?

Joel Kraut (16:12)
Thank

Well, I think you’re starting to see more and more regulations come in, even to quote our private markets. I think that’s going to continue. The government has in different states, put some law on the books related to wholesalers, which affects, you know, free markets. And as that has raised its head.

It’s now transferred over to landlord tenant laws and the imbalance or balance between in different states. I think those are some of the challenges that we all collectively need to work through. Like almost anything our government has to deal with that comes down to communication from both sides. And if that’s no good, the results won’t be any good. If we can work to improve that between sides, we can.

find a more reasonable middle ground for both sides that both people, both people have factions at the table can live with and you know, our business can thrive. So we have to all work together to manage that and be rational, not just, you know, I want, I want, I want.

Scott Bursey (17:14)
Let’s touch deeper into the BRRRR For an investor focused on the repeat step, say, what is the key metric to analyze before locking in a new BRRRR loan?

Joel Kraut (17:27)
Well, I think our industry makes it super easy for people, but I think it also makes it so easy. Sometimes it can be a little disheartening long-term. And what I mean by that is we’re factoring so few of the expenses to make sure your loan works. That although you can borrow the money, that’s true. When you’re operating your property, sometimes it doesn’t work. Being realistic as an operator and a buyer is very important.

You know, you are going to pay for certain things, not just real estate taxes, not just insurance. And you need to factor it into your overall equation or else you’re to take yourself into a place that leaves yourself no room for error at all. And that’s not a place to invest from that’s just spending money, hoping you can outrun the devil and you’re not going to be able to. So we want to help people understand that and point that out.

I learned a long time ago, I don’t understand the reason why everybody buys real estate. There’s a lot of personal reasons that go on behind the scenes. There’s a lot of different things going on in families that I’m not privy to, but I do want to still help people take a look at deals and make sure they make sense for them. If they tell me, Hey, I got this. I’m doing this for a totally different reason.

I will respect that.

But if we’re really working through the deal together and you’re asking me for my opinion, I’m going to show you. And sometimes the answer is I wouldn’t do that deal, even though I’m not going to close the loan and make some money. And I feel like over the long term, that strategy has worked well and it’s saved some people some losses and it’s helped other people stay in a position where they can be confident and keep executing properly instead of being overwhelmed and indulge, not indulge, but overwhelmed by, you know, having some bad investments on their portfolio.

and can’t get out of the way. That’s really tough. I’ve been there. It’s not a good feeling.

Scott Bursey (19:04)
That’s some pure fire for our listeners. Joel, given that the refinance is the most critical step in achieving scale in the BRRRR method, what is the most effective process or system approach should implement to guarantee the highest possible after repair value, ARV, appraisal, every time they refinance?

Joel Kraut (19:08)
You

There’s no doubt that appraisals are becoming a little tricky out there in a lot of different markets. If you’re going to be an investor, you have to be very realistic on the go in. If you’re looking at houses that are comps in your mind, you got to make sure they’re really comps. We get a lot of appraisals. The comp is 0.2 miles away. Seems very reasonable, right? Every textbook would tell you it’s within a quarter mile. You’re good to go. But if I look at the picture in the appraisal of the map.

And those 0.2, three of them are on one side of a four lane road and yours is on the opposite side of the four lane road. And you’re trying to tell me they’re all the same value. There is a reason the other ones on the other side of that road are selling for a higher price. Could be the school system. Could be police fire, could be different access to municipal services, but you need to start to pay attention to that. And before you make your final decisions, make sure you understand that. understanding your locations.

is equally as important to counting bedroom counts, counting bathroom counts and square footage and just saying vanilla, this is the same. It’s not always. And you need to actually take that extra minute. It’s your money. It’s the most.

I never understood this. God, everyone has a car, right? And you go to the car dealership armed to the teeth to go negotiate for $8 a month. And you spend the whole day doing that. It’s crazy, but we’ve all done it. Right. And

I’ve had so many investors get into properties and you ask them, how’d you get into it? Well, my friend said it was a good deal. The realtor said I couldn’t miss. And that was their due diligence. It doesn’t make any sense, but they’ll go fight.

be between $489 a month and $480 a month, like they’re life dependent. But here they signed a mortgage for $300,000 because their friend said it was a good deal. It’s crazy, it’s insane. But you see it time and time again. We want to help people. I know it’s hard, you know, one, two, three at a time, but we want to help people get away from that and understand how important due diligence really is. And it’s not just a word people say.

Scott Bursey (21:14)
Absolutely, that was some great advice and you’ve given us so many golden nuggets here today. But is there anything additional that you’d to leave with our listeners here today, Joel?

Joel Kraut (21:25)
I think you need to take a look at whatever you’ve already done in your life and map out the positives so that you can relay it to another person. And, know, even if it’s painful, be honest, it took me a long time to understand that to the nth degree. And as you start to peel that back and you can relay that to your point earlier today with when we were talking, you know, no like trust. Well, people buy confidence.

not cockiness, competence, real competence, and some kindness, right? As part of the trust. Like it doesn’t cost anything to be nice to somebody, even if you’re not going to do business with them. You never know where it might lead. They could refer you somewhere, but understanding some of those core principles and incorporating them into your life, it could change things for you. And

It’s your life. It’s the most important thing you have. If you’re not going to invest in yourself, who are you investing in? When you do that, all your other relationships will get better, easier to work with, and easier to understand. People want to relate to you more, work with you more, choose to be with you more.

It took me a long time to get smart. That’s true. You know, joking with, you know, getting punched in the face a few times, but you know, life will teach you that over time. And this is not a contest out there to see who can take the most pain. So if we can help people, you know, get through that process a little faster and a little clearer, we want to do that. Loans will come. That’s true. But helping people in that sense with a little kindness and a little awareness, that can really change someone’s life. And we want to be involved in that because we value it. You know, we understand what it’s done.

for us and you know every day hasn’t been rosy so we want to be conscious that all the time and understand what impact that could have on other people.

Scott Bursey (22:59)
Some excellent words, And Joel, this has been an absolute masterclass for our listeners that want to follow your journey or collaborate with you. What’s the best way for them to reach you?

Joel Kraut (23:12)
One of the easiest places to get us is at brrrr.com So B with four R’s.com. We respond, humans respond. And yes, I do respond myself as well. So, you know, that’s probably the easiest place where anyone in the world can reach out. We’ve had people from other countries drop notes there. We’ve gotten back to them after I figured out honestly, how to use the different phone systems, but we do it.

I think that’s probably the simplest way they can follow us on Instagram @brrrr_loans I’m @joelbrrrr So we’re trying to make it easy. You know, people are our most important asset and you know, to us, that’s our lifeblood. So it’s really important to be able to communicate with people and respond to them.

Scott Bursey (23:53)
Joel, this has been an absolute pleasure. Thank you for joining us today.

Joel Kraut (23:57)
Thank

you. Thanks for having me. I appreciate the opportunity to be here with you.

Scott Bursey (24:01)
And to our listeners, we appreciate each and every one of you. If you got value from today’s episode, please subscribe. We’ve got a lineup of exceptional guests, just like Joel Kraut who are making huge moves in the market and the world. Until next time, remember, be kind, keep your standards high and your vision clear. We’ll see you in the next episode, everyone.