This is a familiar lesson in early business success encountering market disruption and failure, rethinking and adapting to succeed in a new market.
By Susan Thomas Springer
Zack Wiest displayed the entrepreneurial spirit from an early age. After a couple small business ventures in high school, he started college and a new business. Wiest and a friend from Brooklyn bought shortdate products with a limited shelf life (such as shampoo and vitamins) in bulk, transported them back to his hometown in Pennsylvania and sold the soon-to-expire items at wholesale. “We realized that we could buy something for a dollar in New York and bring it to Harrisburg and sell it for $2,” says Wiest. “Not only could we make a profit for ourselves, but we could offer phenomenal deals to retail customers as well.”
Wiest may have been selling short dates, but the lessons learned were long lasting. Buying a product at one price and selling it for a higher price in a way that benefits everyone is the same philosophy he uses in his two businesses today. In 2006, he founded PA Deals, a residential sales and acquisitions company that sells 80 to 100 single-family homes a year to real estate investors. Also, the company has its own $5.5 million rental portfolio. Wiest is a partner in a sister company, Harrisburg Property Management Group, which handles all the day-to-day operations necessary to cost-effectively manage rentals including tenant placement, rent collection, conflict resolution, repair and maintenance, and turn-over.
“Beginning Badly?”
While Wiest gained basic business skills in his first venture, such as how to source products and provide customer service, real estate had more lessons in store. When he looked around for a new business opportunity with greater profit potential than shortdate sales, he noticed late-night television ads promising real estate investors could “get rich quick.” At age 19, he bought one of those courses and jumped into learning about investing with additional courses and seminars. He grew impatient with his business administration classes and left college to pursue real estate, using the small nest egg built from the short-date sale business.
Without a mentor or a clear vision of the right investment strategy for him, he tried rental property with the goal of passive income. That soon proved to be a “complete and utter disaster.” Wiest realized he’d bought the wrong properties, paid too much for them, renovated haphazardly and selected the worst tenants. The first year he collected little rent.
“I really learned early on what not to do in real estate – and I unfortunately learned it as the owner, not as a student,” says Wiest. “Thinking you know what you’re doing and actually doing it are two completely different things.”
Turning Bad Good
Ever the optimist, Wiest remained undaunted that real estate was the right career for him.
“I think I was smart enough to realize it wasn’t the business that wasn’t working, it was me,” says Wiest. “I wasn’t doing the right stuff. I was a believer in the business. I had seen so many case studies and stories of people having success, and I just absolutely believed them.”
So Wiest started looking at better strategies to make money in real estate in a way that would provide a steady stream of income and eventually net worth creation. He transitioned from a buy & hold investor into a fix & flip investor and a wholesaler. That strategy was going back to his roots by selling properties for more than he had put into them. Thanks to his “trial by error” education, his new strategy and a booming economy, business soon looked a lot rosier.
Riding the Boom
In 2001 to 2007 “things were just on fire in the U.S. from a real estate standpoint.” In those years, Wiest and team flipped about 500 houses to either retail buyers or real estate investors. “Everything we touched turned to gold,” says Wiest. “We were flipping 100 houses a year, every single year without fail. We were doing revenues in some years at $1.4 million and $1.3 million. That was a tremendous amount of business for an area as small as where I’m from.”
Doing that volume of business in Harrisburg resulted in a huge impact on the local area.
“We were revitalizing neighborhoods through the acquisition of real estate in strategic locations,” says Wiest. “We were helping other investors make money by selling them the right deals at the right price. We were helping ourselves make money by finding terrific deals out in the marketplace through really creative marketing strategies.”
Wiest remembers feeling like “the luckiest guy in the world” to be in his late 20s and experiencing such success.
“I went from making a maybe middle-class income at best to making more money than I had ever known existed,” says Wiest. “It was like, this can’t even be real.”
Regrouping After The Bust
In 2008, the economy nosedived, and Wiest’s business halted “almost as if it were overnight.”
“The business model that I know is no longer working. The clients that I had are no longer buying. The banks that I was sending buyers to for financing were no longer lending. The tenants that we were renting to didn’t have money to pay the rent. It was just a nightmare.”
The model that Ideal Investment Homes had worked hard to create and systematize was now obsolete.
“The world as I knew it was essentially at a standstill,” says Wiest. “And it was scary stuff.”
That year and into ‘09, the team strategized on how to reinvent themselves. They realized that during the crisis it was no longer a viable strategy to sell properties to the retail buyer because they were dealing with economic heartache, losing their jobs and losing their homes to foreclosure. That meant an increased demand for good quality rental property. So Ideal Investment Homes set up a new business model based around selling rental properties to real estate investors rather than owner occupants. That meant seeking investors who wanted to hold the property long-term through a predictable, turnkey approach.
“We were trying to build a business model that allowed our clients to buy income-producing assets from our company in a very safe and a very structured manner,” says Wiest. To support these clients and help them generate a better return on their money, the team created additional services including a full-service property management company. Harrisburg Property Management Group opened in ‘09. That new model has lasted.
“To this day we sell anywhere between 80 to 100 properties per year to real estate investors using that exact same business model,” says Wiest.
Building the Team
Ideal Investment Homes has five full-time employees and Harrisburg Property Management Group has 10. Wiest says his long-term employees have made key contributions to the companies’ success.
“I have been fortunate enough to have aligned myself with some pretty solid people early on. Most of our executive team started as clients and have now gone on to become part of the company over the years,” says Wiest.
“I’ve been able to keep them by just being a very fair and reasonable human being and offering opportunities for everybody to grow with the company,” says Wiest, adding that employees benefit financially from the company’s success.
“When the company wins, the rest of us do as well,” says Wiest. “There’s really more of a buy-in when you’ve got that performance-based bonus structure in place.”
He learned the hard way not to hire friends and family after he had to let them go, an experience he’s found other entrepreneurs shared as well. However, there is one exception to that rule – his mother. Miriam Yordy, Director of Accounting and Settlements, has been with him from day one.
“She handles all accounting as well as a hundred other things around here. She’s allowed me to stay grounded, focus on what’s really important.”
Business Philosophy
Wiest runs his businesses with a core belief in karma, or “what goes around, comes around.”
Since “you get what you give” he makes decisions that are not solely driven by revenue. For example, if investors looked only at margins, they’d be attracted to mediocre properties, available at low prices because nobody wants them. Wiest understands the allure of cheap properties that can be purchased for $50,000, rehabbed for $20,000, and rented for $1,000 a month – by the numbers it seems like a recipe for success. However, houses like that are usually in neighborhoods where there are all tenants, with no pride of ownership, poor schools and high crime. So Wiest takes a pass on junk properties.
“Having standards means are we are selecting and selling the right properties to begin with or are we setting people up to fail from day one?” says Wiest. We think the latter plan is opportunistic and unethical.
His litmus test to answer that question is: would he be comfortable leaving the property to his children?
“Anything I sell, I would gladly own myself,” says Wiest. “When you operate from a position like that, I think everything else is that much easier moving forward.”
With that standard in mind, PA Deals seeks houses that are the best located properties in the marketplace because “a real estate portfolio is only as good as its assets.”
In the Pennsylvania state capital, Harrisburg, that translates into two to four bedrooms, two bathrooms at minimum, 1100 to 1600 square feet, and with efficient heating and cooling. They analyze the micro-neighborhood to assess the quality of life, including schools, employment opportunities, population trends and stability.
Neighborhoods that include owner-occupants are not only healthier, they are also better areas for investors because future resale will be faster.
“The only thing landlords think about is cash flow, when most of the money made on a rental property is actually realized at the time of liquidation,” says Wiest.
Wiest points out that in rental neighborhoods, future sales are limited to investors who are looking for a deal that will not maximize profit. While everyone knows the “location, location” cliché, investors often don’t get it right. Instead, they are apt to think “buy cheap, rent high” rather than “rent to quality people and maximize selling. Buy and manage right.”
“In my opinion, property management is absolutely the glue that will hold a portfolio together,” says Wiest. “Without good property management everything else is going to come crashing down.”
PA Deals' investors can find experienced property management in Harrisburg Property Management Group.
“We know how to systematically implement proven management systems, proven rent collection systems and proven eviction systems. All of the things that cause investors heartache, we’ve developed a system around it that can in most cases provide efficient results,” says Wiest.
Advice For Other Investors
In his 15 years of real estate investment, Wiest has gained hard-earned advice to offer. First, he recommends doing a detailed self-analysis detailing your resources and the best strategy for your situation rather than what a “guru” tells you to buy. For example, if you’re lacking the reserve money needing to hold real estate and fix whatever breaks, look at quicker options like a fix & flip.
Second, find experienced, successful investors to model yourself after.
“If I’d listened to what smart people told me 15 years ago, and not thought I knew better, it would have saved me years and years off the learning curve,” says Wiest.
Last, don’t rush in. Be methodical and take time to thoroughly assess a deal to make sure it’s right for you. Wiest has seen too many people regret a purchase the day after.
“It’s easy to get into a deal but, oh my gosh, is it hard to get out!” says Wiest.
Wiest educates investors every Saturday on his radio show on WHP580am called “Creating Wealth Through Real Estate Radio Talk Show.”
Also, he is co-organizer of the largest real estate investors club in central Pennsylvania, The Landlord and Investors Mastermind Group.
“Joining your local investors club or association is paramount to your long-term success,” says Wiest. “The relationships you’ll make in those meetings, the ideas you’ll get, are absolutely priceless.”
As investors learn, mistakes are simply part of the process.
“I look at failure as one of the greatest things that could happen to somebody in business because without it you’re never going to grow, you’re never going to learn, you’re never going to get to the next level without overcoming obstacles and facing challenges and dealing with failure,” says Wiest.
As he tells his clients, “We’ve made all the mistakes twice so you don’t have to.”