Episode 21: Fix and Flip with David Thomas #1

Scott Williams: Sweet Home Santa Barbara where the skies are so blue. Sweet Home Santa Barbara, what’s worked for me can work for you.

Jonathan Robinson: Welcome back, friends, to Sweet Home Santa Barbara. I’m your co-host, Jonathan Robinson. We have a special guest today which we will be introducing in just a minute, Dave Thomas. But before we talk to Dave, I want to say hello to my co-host.

Scott: Scott Williams. Hi! Jonathan.

Jonathan: Should be an exciting episode today because we have a true expert and I thought that you could give a little bit about Dave Thomas’s background.

Scott: Yes, indeed. I met Dave more than 25 years ago and he was already very established in the trade of buying homes in Santa Barbara. Fixing up, reselling, very specialized in that. I asked Dave a little bit about how he got started in this and he was very interested in homes way back in his early life. As a child, he did designs and got very involved with the whole idea of homes. Then, after college, he got an opportunity to buy his first home and resell it. We’re going to talk to him about that. Dave has fixed up and resold more than 185 homes in the Santa Barbara area. As far as I know, that’s his record. I know of no other person or organization for that matter, other than a builder building new homes that have done anything like that kind of numbers. So, Dave, welcome to Sweet Home Santa Barbara today.

Dave: Thanks, Scott.

Jonathan: Well, Dave, I’m not an expert in this field so I’m really curious how you got into fixing up and selling homes.

Dave: I don’t think I really intentionally started with that in mind. I got a master’s degree in English Lit. I wanted to come back and live in Santa Barbara again, so I came back. I always wanted to fix something up, I think. But, when I bought my first house, I really fell in love with the place, and I really didn’t want to sell it. But I borrowed the money from my dad to pay $29,500 for my first house and I had to pay it back. So, I either had to go back into teaching, to try and pay him back slowly or sell the property. And I realized that I enjoyed the process of fixing it up. I knew that unless I sold the first house, I couldn’t go on to anything else because I’d just be stuck with that. So, that’s kind of how it started. I came across a little ad in the newspaper for a little English cottage that was for sale. Called the real estate agent late one evening. She showed it to me the next morning and I end up buying it. The couple that I sold it to in 1973 is still living in that house. The original owners, they’ve never sold it, and it’s on a little lane on Melkus Street on North Vocal into a really sweet little English cottage and so there.

Jonathan: I think it’s worth more than $29,000 nowadays.

Dave: Yeah, it sure is. I can actually make the payment on that house. By really not bedrooms, substitute teaching, and driving a taxicab. Between all of those, I was able to make a payment you could never do today with that limited source of income. Because in my time, I was spending my time fixing the house up whenever I could. That’s what happened.

Scott: So, you started out as part-time?

Dave: Yeah.

Scott: How long was it part-time for you?

Dave: It took me about 5 or 6 months to fix up the first house and sell it. Then, by the time I bought the second house, I was pretty much devoted to working on that full-time. And that took probably another 6 months to sell. The second house was up on Miramar Drive. They had a really wonderful view looking down the coastline. But it was all beat up and overgrown when I bought a house and you can’t even see the full potential of the view until we did a lot of tree trimming. All of a sudden, it opened up and it was really beautiful. I paid, I think, 3 to 5 for that. I sold it for $60,000 and I thought I’d died. I’d made so much money. I think it was just under $20,000. For teaching, I made $7500 that one year for a whole year of teaching. So, relative to that it seemed like it was kind of a home run.

Jonathan: You’ve been at this a long time. I’m surprised you didn’t have a building background or contractor background. So, you learn just by doing? Or how did you know?

Dave: Before I was waiting to get into grad school, I worked my arise and bought a new home in the Walnut Park area. I worked for a contractor just doing cleanup or around the track while I was waiting to get to school. I told him I was interested in buying a house. And I thought since he was a contractor, he would really put me down. Because I didn’t know anything about electricity or plumbing, or any of it. He said something that really encouraged me. He said, “You can hire those things out. You just need to know what to do.” 

I think I have an idea about what to do. And I think I can take care of the other things. I painted the whole house myself, which was kind of daunting. Did all the yard work. I used to put plants in my Volkswagen rough. I’ve made numerous runs to the dump on my old Volkswagen back. But I was able to hire a few things. Not many because I didn’t have a lot of money. The first house had really good bones, and a lot of it was clean up, and just showcasing what was already there under the surface. And it was the perfect house in retrospect to get started with.

Jonathan: So how has it changed? That was a lot of years ago. Do you still go about it the same way? Or how do you look at buying and fixing up houses now?

Dave: It’s different in a lot of ways. I’ll give you an example. A house that I paid $180,000 for about 35 years ago in Montecito, a little cottage on William Lane came on the market for $4.9 million recently. That’s $4.9 million. I sold it after I fixed it up for $295,000. It went into overbid and I saw it closed last week for $5.3 million. If I were starting today, I could never afford to buy that house even to start with. Even if a bargain on it to start with probably $2.5 to $3. How do you come up with that kind of money when you’re a young kid? So, that’s a huge change point. 

The house my parents bought in the Sunshine Track of Walnut Lane where I grew up, they paid 14.5. My dad thought he’d really hit a home run when he sold it for 22.5. I just saw one close on San Lorenzo, which is the street I grew up on, for a million to something. That’s a low Lita tract house that is 60 years old. And it was probably in truly original condition.

Again, if you had to come up with the down payment, even a modest down payment would be 20% if it’s not owner-occupied or whatever. They want to define it, that’s $200,000 or more. And you can have an $800,000 mortgage you have to qualify for. So, it’s a big game changer, the price of properties now. It’s a whole different thing. Now I have a credit line. Established myself. I have the means to jump in and pay cash for things, which gives me a distinct advantage. But I certainly wouldn’t have had that when I was starting.

Jonathan: So now, the little guy has a hard time doing this. It’s more of a business for people like you who have a track record and some money and can go about it. When you’re thinking of the business part of it, what are you looking for nowadays?

Dave: It’s still, like you said, a business. I had a friend who started and bought a house right after I did because he got kind of excited about it. But he overpaid for the property, did the wrong things, and wound up never doing it again. It’s still a business and you really have to buy, right? I think you make a lot of the profit upfront; you can only create so much value. And I think you have to be careful about that. 

For people trying to get started in Santa Barbara, you better have a benefactor. Somebody who has deep pockets or you’re not going to be able to get started there. The way the market has been appreciating. I mean, if you can get in at least the last couple of years, you can make money while you sleep just by owning the thing. But, if the music stops and you’ve overpaid, you’re in big trouble. So, I always have been careful about what I bought and how much I paid. I felt I had a margin going in. So, all of a sudden, things started to shift, I could get out of bed and not lose my shirt. Because, if you want to remain a player, you have to still be with it and you have to be able to keep doing it. And if you lose all your money, the game’s over and you can’t do it. And if you’d love doing it and enjoy it, you just have to be careful that you can continue doing that.

Jonathan: Scott, you know a lot about the real estate business, and wondering if you have any questions about that. 

Scott: Well, Dave, you talked about that overtime you got a track record. So, at some point, banks were willing to back you. Is that what started happening? Or talk about what you started and how that changed.

Dave: There was a mortgage lender years ago named Doug Playero. Who I’m sure you probably remember, Scott? 

Scott: Yes.

Dave: He used to help me on some of my first lawns. One time, he came to me, and this was really nice of him because it can cost him future business. He said, “Dave, you really need to get a credit line with a bank and get started doing it.” And I remember going to Santa Barbara Bank and Trust and applying for a $100,000 credit line and they turned me down. And I went down the street and got a million-dollar credit line from another bank name in Santa Barbara. It shows you how subjective that whole thing, yet. I was turned out for $100,000 and got a million in another. Once I got that credit line, and it’s increased since then, it’s probably one of the biggest non-secured credit lines that they have. I was able then to buy things much more easily and I didn’t have to get a lot of loans. 

Sometimes, there were additional expenses in securing a loan if you can pay cash. When I was starting, cash buyers weren’t that political, and I don’t think it mattered that much. But in a really competitive market, if you’re not a cash buyer, you’re pretty much out of luck. So today, there have been a number of things I’ve been able to buy because I could close it in 10 days with cash. And that gave me an advantage over someone who might have to apply for a loan. So, it’s been invaluable to have that. I’m grateful I have been able to work. Other banks I work with now, as much as you pay, they can trust you. I’ve had a really good one before.

Scott: How many homes did you sell before you had a sufficient track record that a bank could say, “He knows what he’s doing, and he knows how to do this. He’s going to be able to continue doing this.”? Where did you cross over?

Dave: I would guess on maybe my 15th house or something like that. I remember at Santa Barbara Bank and Trust; the services lady was in charge of lending. And she kept asking me all the time, “What is your secondary source of repayment?” And I said, “I don’t have one.” If my secondary sources are my own prepayments, my first source of repayment, it’s selling the property. And she just could never get that. So consequently, that wasn’t the bank that I would be doing business with long term. 

Because when you’re starting, you just need somebody who thinks maybe this guy has got a clue as to what’s happening, and they reached out to kind of help. I mean, they have to protect your own interests and I get that. But still, mostly the Bank and Trust are willing to reach toward me and get what I’m doing. That’s why I’ve stayed with them.

Jonathan: Let me ask you a question. It sorts of fits into the situation here. In some markets, the market changes, you’ve bought a home that maybe it’s a little bit difficult to sell. Occasionally, it must occur that a house doesn’t sell that easily. What do you do?

Dave: My father used to say, “You can’t force the market.” The truth is you can. But the only way you’re going to force the market is to reduce the price of your property until you get to the sweet spot where someone’s going to step up and buy it. 

Amazingly enough of the 185 properties we’ve done, I’ve never lost any money on any house. Our profits have shrunk over what we projected. But we’ve always been in the black, and I feel really fortunate about that. But there have been times when we went through 2 or 3 price reductions, or the market started to shift quickly. And all of a sudden you realize, “Wow! We better get serious here or we’re going to get stuck.” So, I’ve always worked with agents and pretty receptive sellers. And if we felt like the market was moving, contrary to everybody to the move, we would make quick adjustments. 

I never wanted to hold out and just see if a year or two out somebody would step up and buy the place. I always felt like we wanted to go on and we want to protect our interests. So, we wanted to be responsive to the market and redesign. It’s always been the way to go. And Scott, when you and I’ve worked together, that’s been the way it’s been. I know when we had our Harbor Hills, we had to reduce it I think once, and we had a fabulous property with an incredible view. But it didn’t go right away so we invested a little bit, and then it went.

Scott: I recall on that one, Dave. We reduced the price and the market responded enough; it actually raised the price back up. Not as far as we were, but it went above where we reduce the price to the market. 

Dave: Yeah, it is. One of the funniest properties Scott, you ever sold me was on 4 Vista. You called me and it was 2 properties that were side by side. And they had numerous infractions with the city, and illegal structures galore. And the guy that owned it I remember lived in Hawaii, and he was at one of those phone lines with like five other parties, and he was way out somewhere. It was just a crazy deal. And I remember when I went down to the city, and I told him I bought it. I was going to tear down some of these structures, they were so excited because they had just been tagging these people for years. And I guess I could never reach the guy because he lived out in the middle of nowhere. It was really funny, we finally got that up. And then you listen to those, we sold both of those properties individually. And it came out just like, but the Mace has always been an extremely good market to work.

Scott: Well, if you think about sizing up the market, because you’ve talked a little bit that you didn’t lose money, but you’re sizing up the market. What kind of mindset do you put yourself into? So, think about 6 months out, what the world might be like at that? Where do you stand? How do you figure that out? 

Dave: You know, Scott, I’ve never really liked a project that was protracted, that was going to take a lot of time to complete. Or maybe I had to get a zoning change, or variance, or something like that. Maybe you just can’t put your eggs in a basket where you aren’t sure where it’s going to go. You’ll be denied and all of a sudden, you’re in big trouble. It’s something that would take a long time to develop. 

Like I get calls all the time and someone will say, “Well, you can build units on the back.” Or you could do this, and you could do that. But fighting with the city and getting things approved can take a really long time. And a lot can change in a year or two. A lot today could change in a matter of months. I mean, our world right now is extremely volatile. The economy is really shaky. Here, inflation is running wild. Interest rates are screamingly high, going higher. All those things make you think, “What’s this going to look like in 6 months?” 

So, I’m currently in Escrow right now. On a type of property, I haven’t done many. We’re doing an upper-end, Upper East condominium. And the thing I like about it is we can do simple things to that property, and it really makes it shine. It’s got shag carpet right now, dated fixtures, and things like that. We can make simple changes. Right now, even wading through some kinds of materials can take a long time. 

On a property, I did in Samer Canvas last year, took 7 months to get the stone. I actually sold the property before the stone arrived and had to put a substitute in there. So, you just don’t want things that right now, at least, that would take a long time. Or as I said, asked for some kind of variance or something that’s really out of my control. So, I’m looking for things that have simpler solutions and don’t involve as much serious remodeling. I just don’t think right now for me, it’s the time to do that.

Jonathan: That’s all really helpful information, Dave. You know a lot of stuff and we plan to do another podcast with you where we talk about specific remodeling ideas and suggestions. Now, we know kind of an overview of the business and how you look at things. So, if people want more information, I guess that they can contact you, Scott. What’s the best way for them to go about contacting you and maybe finding out more about some of Dave’s services, as well?

Scott: You can reach me at scott@ScottWilliams.com. And if you have a house that you’d like to sell to Dave or you’d like to find out if maybe he’s the right person to purchase your home, contact me, and we’ll get hold of Dave, and we’ll check out the situation.

Jonathan: We will be talking to Dave Thomas more on future episodes. Thank you for listening to Sweet Home Santa Barbara.

Scott: Thank you for listening. Please subscribe to our podcast on your favorite app. If you know someone preparing to sell their home, please tell them about the podcast. Visit ScottWilliams.com to contact me and download the 2 free E-booklets “Is My House Saleable Now?” and “How Not to Buy a Money Pit”. Thank you for listening.