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The Ground Game Podcast
Welcome to The Ground Game Podcast, where land investing meets real talk! Join your hosts, Justin and Clay, both 7-figure land investors and seasoned entrepreneurs, as they dive deep into the world of land investing, team building, and personal growth.
The Ground Game Podcast
Episode 49: Why Net Profit Is the Only Metric That Matters in Land Flipping
🎙️ Welcome Back to The Ground Game Podcast! 🎙️
In this episode, hosts Clay Hepler and Justin Piche engage in a candid conversation about building wealth beyond land flipping. They share personal updates, insights on the challenges of land investing, and the importance of strategic decision-making in the ever-evolving real estate landscape.
Key Highlights
Personal Updates:
Clay and Justin kick off the episode with light-hearted banter about their recent travels. Justin shares his excitement about visiting Seattle and reconnecting with friends, while Clay discusses his upcoming trips and the joys of balancing family life with business.
Scaling Challenges:
The hosts delve into the complexities of managing multiple projects in land investing. They discuss the treadmill effect of relying solely on land flipping and the need to diversify income streams to ensure long-term sustainability.
Market Insights:
Clay and Justin reflect on the current market conditions, sharing their observations on sales trends and the importance of adapting to changing environments. They emphasize the need for strategic planning to maintain business growth amidst market fluctuations.
The Importance of Feedback Loops:
The episode highlights the critical role of feedback loops in entrepreneurship. Clay and Justin stress the necessity of constant self-evaluation and data analysis to align their actions with business goals, sharing their experiences with tracking key performance indicators (KPIs).
Navigating County Regulations:
Justin reveals insights from a significant development project in Texas, discussing the unexpected challenges he faced with county regulations. He emphasizes the importance of partnerships in overcoming these obstacles and navigating complex regulatory environments effectively.
Data Management and Decision-Making:
The episode wraps up with a discussion on the significance of data in land investing. Clay and Justin encourage listeners to leverage technology for informed decision-making, sharing their experiences with various systems and the importance of a cohesive tech stack.
If you're navigating the complexities of land investing and looking to build wealth beyond flipping, this episode is packed with valuable insights and actionable strategies! Don't forget to subscribe for more innovative topics on The Ground
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Clay Hepler (00:00)
Hello and welcome to another episode of the Ground Game podcast. This is your co-host, Clay Hepler.
Justin Piche (00:08)
And this is your other co-host, Justin Piche, and we're here to show you how to win the ground game.
So my video and my audio aren't quite as good today. I'm at my parents' house for Labor Day. Kids are about to go swimming. And actually, you'll find this interesting. Are you still on the Mill Pond chat?
Clay Hepler (00:39)
Dude, am, I'm still there, I'm still there. I'm posting every once in a while.
Justin Piche (00:42)
So you see, okay, so
I'm buying these little mini scuba tanks so that when we go to Josiah's house, we can go and like, there's this cave there and go kind of explore for a little bit. ⁓ And so I bought a couple, yeah, I bought a couple of these mini scuba tanks. They're like, they're pretty cool. I've never tried them before. There's half liter bottles that are...
Clay Hepler (00:56)
That's epic.
Justin Piche (01:05)
five that are 10 minutes up to 10 minutes of breathing, then a full liter, which is up to 20 minutes ish of breathing. And then there's another one that I got that's 1.9 liters, that's about up to 30 minutes ish of breathing, I guess, depending on how big and how fast you, know, how big a breaths, how fast you breathe. So I'm willing to bet they're like half for the average person of what their maximum capacity is. But I've got this little like compressor. And so I filled one up in my house before I came over to my parents' house and they have a pool.
Clay Hepler (01:17)
⁓ my gosh.
Justin Piche (01:35)
So after this podcast, I'm gonna go out and I'm gonna test out the 20 minute bottle in the pool and see how long it actually lasts.
Clay Hepler (01:41)
my gosh, that's hilarious, That's hilarious. Have you ever used one before or is this your first time?
Justin Piche (01:44)
It'll be fun. I'm excited. excited. You gotta be careful. I've
been scuba diving, so I've used real ones. I've never used one of these mini ones. But I figured it's probably like wise to test it out in a pool, you know, see how long it lasts before taking it into a cave underwater.
Clay Hepler (02:04)
Dude, yeah, you can do like, you know, the...
little things, torpedoes that you throw, you know, I love those things. Those are those are a lot of
Justin Piche (02:16)
yeah.
Clay Hepler (02:20)
and you can go.
kids or minutes just like throwing this you know the torpedoes I'm talking about
Justin Piche (02:25)
I know, yeah, my kids like them. My kids love daddy
gold bottom and like picking stuff up off the pool. ⁓ Yeah, man.
Clay Hepler (02:32)
Yeah, man. We used
to it at summer camp. used to, you know, one of the last things we do is like the last day is a grease up a watermelon and they drop it to the bottom of 12 feet. dude, like you, you're like, well, watermelons are not that heavy, but when they're greased up, they're heavy and they, would pit two teams against each other. And so you'd have to lift this watermelon up and it was.
Justin Piche (02:56)
Yeah.
Clay Hepler (03:01)
It was a lot of fun. ⁓ but it was definitely challenging. You'd like get it all the way up and someone would like interrupt you and like, to knock it out of your hands and then fall back to the bottom. ⁓ they just greased the whole thing up with Vaseline. It's pretty fun.
Justin Piche (03:18)
That does sound fun.
Clay Hepler (03:20)
So
you can drop that Vaseline, ⁓ know, covered watermelon in your pool and you or bring it to you just size the pond and you guys just throw the watermelon in there.
Justin Piche (03:26)
get a personal watermelon. Yeah, the kids would have a blast.
How's your last week been? Been up to anything? Any fun?
Clay Hepler (03:44)
Dude, this last week, let me think here. We went out to dinner with our neighbors, which one thing that surprised me, and maybe this is like, I don't know, my wife and I are just kind of more independent, but we went out with a couple, really enjoyed it, really enjoyed the time, went out to dinner with them. They're our new neighbors, right? And she is a surgeon and he is a, like in corporate finance.
And they've had a kid for two years and do they like haven't gone out that much. They've gone out like two or three times. And I'm like, do my wife, my wife and I go out on a date night two times per month at least. And we're traveling. Like we travel a lot with our kid. Like we're traveling when it was like two months old. ⁓ I don't know. I think different strokes for different folks, but for us, we're like, dude, I'm not going to stop living when I'm a parent. And that was one thing.
Justin Piche (04:42)
Yeah,
there's, there's, think there's a common, there's definitely a common misconception. At least it's a misconception in my opinion that when you have kids, like your days of traveling are over. And before you have kids, you don't know, right? Because you don't have kids. It's like when Julian and I got married 12 years ago, whatever now, we, we would travel all the time. Every year we go on a big trip, several weeks to a month to some other country. And it was fantastic. We loved it.
And we just, I thought to myself, I'm going to get all of this international travel, all this travel out before I have kids. Cause then once we start having kids, you know, we're not going to do this type of stuff. But that is not true anymore. We, we go, we, I mean, we do the thing. We hire, we have a lot of babysitters we hire. We go out on date nights, probably every other week is probably what we shoot for every week that things come up. Uh, we travel all the time with our children. We went to Europe last week for six weeks, take them wherever we want to go. It's just not that.
hard to do, ⁓ but it is harder than going by yourself. And one of the funny, you probably experienced this too, after having flown with your son on a plane. If you go by yourself on a plane, it's like, my gosh, I can just, this is magical. So I just got back from Seattle yesterday. I was out there for 10 days visiting my sister and a bunch of our friends and it was a wonderful time. weather is perfect.
Clay Hepler (05:56)
Ahahaha
Justin Piche (06:09)
up in the Pacific Northwest this time of year. Did a lot of swimming, kids got to see a lot of old friends and their cousins. ⁓ But when we flew back, I had me, Nora, my oldest and my middle son, my middle child, Jacob, all in a row. And my wife had Gracie, the baby, all the way, like, way far away from us. We were, in the very back of plane. She was, kind of in the middle of the plane.
probably about an hour-ish, hour and half in, she brought Gracie back to me. So I had all three children in the row with me for like three hours. Because she was in a row with two other people, she was in the window seat and holding like a 19 month old, which is the worst age to travel on a plane with because they are so mobile and they just want to be everywhere. And so it was just easier for her to be with her siblings because if she crawls on them or like kicks them or whatever.
Clay Hepler (06:44)
Why did she bring Gracie back to you?
Justin Piche (07:05)
⁓ My job is just to protect the people in front of me from the baby like grabbing their seat or any of the kids kicking their seat. I'm a militant about it. If I see their seat, touch the seat, I'm like, chop it off. No, no, we got to be good neighbors. We cannot disturb other people. ⁓ It was hard. It was very hard.
Clay Hepler (07:24)
Dude, the lap infant thing is tough. we don't, like we were buying, ⁓ I mean I know you guys travel a ton, but I'm surprised you didn't just buy another seat because man, it's like, I can't imagine.
Justin Piche (07:36)
It was like 800, 900
bucks a ticket to go to Seattle. So I didn't want to spend another $850 or whatever for a seat for the baby. I just like, whatever, put it on our lap. I know. Let me start using this.
Clay Hepler (07:41)
Oof.
Well, that's why you have the 2 million points. ⁓
So I think, you know, I think today, man, for me, it's like, I keep hearing this, it's a recurring theme for me. And I know it's a recurring theme for you, but it's really about, you know, deal count. Deal count is, I don't believe it's a good metric for
success in this business. No one really cares about how much deals you do. You might think other people care. I heard of this one, Morgan Housell, who's a famous financial writer. He wrote The Psychology of Money, which is an amazing book and go what his other books called, but really, really great financial writer. He talks about like how people look at like when they look at Ferraris or like sports cars.
They don't think you're cool. A lot of times they just envision themselves in the Ferrari. And I think that we have that kind of reverse effect on the amount of deals that we do. It doesn't really like no one really cares. People want to be the person that does all the deals. But if you're not making any profit, it doesn't matter. So I think we're gonna we're gonna dive into, you know, people doing 100 deals a year or whatever, but they're making less than someone that does 20, right?
And I think you and I both been there right you know I've both been it In the position that we're doing a ton of deals and you look at the end of the month you're like man I made like 300k this month, but like
Justin Piche (09:26)
How much do I get to keep? Yeah, how much do I get to keep? How much is my actual net profit? Exactly. yeah, I mean, I agree. Deal volume does not matter. What matters is profit. And I think one of the things that people don't necessarily understand until they get to a position where they're doing 100, 150, whatever deals a year is that it comes with a whole lot more headaches. A whole lot more headaches.
Clay Hepler (09:26)
I'm not making much profit, right?
Justin Piche (09:57)
And the only way it'd be worth it is if you're actually scaling net profit, not just revenue, but net profit. I don't know about you, I try to think about this myself. What would I rather do? Would I rather have a business that generates a million dollars of gross profit, 600K of net, let's just say, or 500K of net, or would I rather have a business that generates three million dollars gross profit with a ton of deals?
and still gets me instead of maybe 600 or 500 net, let's call it 750 net. I make another quarter of a million dollars a year, but I'm doing three times as many deals, three times as much gross profit, three times as much headache.
That's close. And I think I might choose the lower of those two for just the sheer amount of time, energy, stress, management that needs to happen or be an effective to successfully do that several hundred deals that $3 million gross profit business. I think about all the time, right? Because I've scaled, obviously, a pretty big team. have a complex operation. There's a of moving pieces to it. ⁓ And every once in a while, we've got a...
We've got to cut expenses. We've got to see all the bloat that we've brought into this organization to help scale it and cut back and go back to what's actually necessary, what's driving the box.
Clay Hepler (11:20)
Yeah, man, I think that social media gurus and like, look, I'm not immune to it either. Right. Talking about, I did this many deals over this period of time. I think we're all immune as creatures. know, human beings are, we're vain. Like we're vain. We're vain creatures. Right. And it does feel good to say, I built this from nothing and did this. But I think social media is the wrong scorecard.
And specifically gurus, like their proof is I've done this amount of deals and it's like, well, what's the actual net profit, right? ⁓ and this year has been for me a real year of reflection around this because I scaled up really, really fast and you know, was starting to make good money. And then it was like, Whoa, man, like where's my net income? Like, you know, I'm, I'm getting a lot more gross income. I'm,
3X in my business, but like where's the net income? And so there's like, it caused me to reflect and think about like, what's the healthy growth rate, right? So actually did some research man around like, you know, what's a healthy growth rate for a general business, right? Year over year. And what would you say is like a healthy growth rate, right? Like in a general business, like a plumbing business, let's just say a plumbing business or like, I don't know, right? Like,
Justin Piche (12:39)
haha
Clay Hepler (12:46)
Any type of normal pins.
Justin Piche (12:46)
Yeah, mean off the top
of my head, ⁓ 30 % annually, something like that would be fantastic. Sustainable.
Clay Hepler (12:54)
Right, that'd be fantastic.
That'd be sustainable, it'd be fantastic. And big companies, maybe they're at 3%, 4%, 5%, like a little bit above GDP, like massive companies. Now facts check me on this, but I would say 30 % is pretty amazing, right? A 30 % growth though, for a million dollar a year land business, is 1.3 million. So.
You know, some people look at that and they're like, well, I should double my business. I should grow by a hundred percent. I have a lot of people that come to me and like one of my clients, dude, he's killing it. Right. And he made about 500 something in some chains last year and he's going to probably make like 1.1 this year. I've been working since since the end of last year and he's like super disappointed. like, bro, you're doubling your business in a year and you have net profit. You have good net profit. Right. You preserved your margin.
But he's like, well, I wanted to triple it. And so you kind of have to hunt, right? Like it's like, but you can triple your gross profit, but the net profit's what really matters.
Justin Piche (14:00)
Yeah,
and it's harder to, it's definitely a lot easier to double gross profit than it is to double net profit. No question.
Clay Hepler (14:10)
So, so for you, for you, like, as you're thinking through this topic, like, what do you think is a healthy growth rate for a land investor? Someone came to you and was like, Hey, Justin, like, what's the what's the healthy rate of growth for that my I should be focusing on for my lamp is maybe I'm half a million dollars a year, right? I mean, half a million to a million is not that it's not that crazy of a jump, right?
Justin Piche (14:34)
Gross.
Clay Hepler (14:39)
But in terms of normally gross profit and let's say net profit too, let's say they kind of rise at the same level and then margin, what do you think is healthy for people?
Justin Piche (14:51)
Yeah, I mean, I don't man. That's a good question.
The challenge with growing too quickly, obviously, is that if you aren't spending money the right way or the optimum way, and it's hard to spend money the right way, the optimum way when you grow really fast. If you were to take the budget, maybe let's just say your OPEX budget for a million dollars a year business, maybe it's 25K a month, I don't know, 30K, 40K, somewhere in that range a month, you're spending to make this million dollar
gross profit. If you double that or triple that, you say, I'm going to triple my business, you're probably going to do a lot more business. You're probably going to do a lot more deals. You're probably going to grow your growth profit because you're going to spend more time. We have more marketing out there. You have more people to manage that marketing, ⁓ to manage those deals and leads, more negotiators, whatever. We're to get more things in a contract. You're going to do more deals, but you're not going to be spending that money optimally.
Clay Hepler (15:56)
Mm-hmm.
Justin Piche (15:57)
You're going to have to get, and this is what happened. I mean, it certainly happened in my business where we were, we were pretty focused on the markets that we were in. And we were being more selective with counties and more selective with where we're, where we're actually marketing to, to get the end product type that we really want. And then we were like, okay, let's scale. Let's, let's spend a lot of money on marketing. Let's grow the team. Let's blast out marketing. Okay. Well, then you have this problem of now I need a ton of data, a ton of data to be able to sustain this team. So.
How am going to get a ton of data? I generally, probably the best thing would be, well, let's go broad markets and still be really focused on the highest performing portions of those markets that have the property type we want to sell. Let's do that. But that's not what we did. We went really broad. We were like, let's just get data from everywhere, everything. And the thing is it worked. We scaled gross profits substantially, doubled the business a couple of years in a row.
But net profits did not, margins shrank. We didn't protect the margin as well. Net profits did not grow at the same linear rate or whatever it that gross profits, they shrank. Let me rephrase that. They didn't get smaller. Net profits also went up. They just didn't go up as quickly as gross profit. And what that tells me is that we're not spending optimally.
Clay Hepler (17:12)
Mm-hmm.
Justin Piche (17:18)
And so maybe to answer your question, like what's a reasonable growth rate? I mean, if you make 50 % net profit in addition to what you made last year, I'd that's a really, you should be super proud of that. So if you made 300K net this year and you focus on your systems, you expand your marketing, you get another core person in there, you protect your margin, the next year you make 450, that's really respectable. That's fantastic.
Clay Hepler (17:18)
Yeah.
Yeah.
Justin Piche (17:50)
Hey guys, this is Justin interrupting our podcast. As usual, want to say thank you for listening. Clay and I really appreciate it. Today we are talking about why net profit and focusing on building net profit is really what matters and some actionable steps and frameworks for thinking about how to do this in your business. If you're getting value, please leave us a comment. Let us know what you like about the podcast. We really appreciate it. Now back to your regularly scheduled programming.
You should be proud of yourself.
Clay Hepler (18:20)
Yeah,
yeah, yeah. I think the one, the reason why I really like the land business, Justin, is because it does enable us to scale net profit faster than like a household selling business. What do I mean by that? I can go after one or two big subdivides and it could disproportionately affect my net profit. In a household selling business, you can't do that, right? ⁓
Of course you can get a big flip, a big wholesale, but you can't get the consistent large hits. Where I see people like mess up, let me just say where I messed up, right? I was like, I'm just gonna scale and I'm gonna go in, and I talk about this now openly because I've solved this problem. This was a identity shift, it was a leadership problem, it was an impatience problem, right? But.
As you are trying to scale your gross profit, you start to do a bunch of things, right? And depending on the business that you're in, the feedback loops get really, really long. Okay? So in our business, what happened to a lot of investors, right? And the reason why people, you were talking, people are leaving the business, come in. It's because the feedback loops for cash conversion cycles increase. And then,
your marketing goes out there and it increases. And so you increase your core OPEX, right, with people and marketing, etc. Right? Because you're impatient and you're like, hey dude, I want to double my business or 3X my business. So, but the feedback loops are really long. So you can't predict what's actually going to happen. And so what happens is you stay at the same net profit level, you might increase your gross profit.
But it's all a result of those feedback loops, right? And so, you know, we've even gone internally, man, and we're like, dude, the things that matter next year is like protecting margin. So like when we're building out our plan for what does this look like next year, we want to have really high margins. We want to keep the main team, the main team and not like increase the amount of overhead that we have.
in the way that we would in the past, is, if I add two or three callers, I double my mail, it will equal this. It's like, yes, that is a hypothesis. But you also have to think about like your cash conversion cycles within that decision, right? I hope that kind of made sense. ⁓ I think a lot of times too, when people try to scale profit in our business, they scale through people.
and they don't have the right systems or leverage in place to extract the gross profit per the revenue per employee. And so if you want to really like have a lagging measure of this, just look at your look at your revenue per employee, or look at your net profit per employee, or gross profit per employee, you can use any of these metrics. But that's going to be a really good
way that you can look and say, am I more efficient last year than I was this year for gross profit? But the reality is like, that's what we care about. We care about net profit, gross profit doesn't matter. If you make a million dollars, if your gross profit and net profit, let's just say it's a million dollars this year, like that's a really, obviously that's like near impossible, but like that's what you should be aiming for versus stretching gross profit.
Justin Piche (22:01)
Yeah, I agree. Yeah, gross profit is way easier to see and calculate and understand the net profit for sure. I think one of the things that contributes to this long feedback loop and the feeling of, hey, I scaled, I'm getting a lot more deals, I'm doing a lot more gross this year, but my net profit hasn't increased substantially is...
that it just takes so long for that cash to come back. I that's really what it is. It's like, so if you're going to spend for growth, If you scale heavily, if you decide right now today, if you say, over the next 12 months, I'm going to double the amount of money I'm spending on people and marketing in order to double my gross profit.
The dollars of gross profit that you actually realize aren't gonna come until the very end of that 12 month period, most of them. And then the following six months. your spend goes up right now. It just goes up right now. So you're spending for this future state. And so that's one of the other reasons why it always feels like, and has always felt like for me in this business that I'm walking on, kind of like a razor's edge of.
of trying to scale operations, scale the business, scale marketing, get the pipelines full, iron out the systems to then really benefit heavily from high net profit for the business that I've built. But I've never given myself time to pause at the stage we're in and let everything get to steady state for the amount of marketing and OPEX that we currently have. We've always just been scaling, scaling, scaling, scaling, scaling, scaling.
And that's a really stressful way to operate for a long period of time. And so right now we're taking another quality look at the business, cutting expenses, looking at the things that are not panning out as well as we thought. We had a hypothesis. We implemented some marketing channel or some spend in some place. It did not produce the financial results that we were expecting. It's time to cut it. ⁓
Just trying to get a little more lean so that margins can go back up to what they used to be.
Clay Hepler (24:17)
Mm hmm. Yeah, man. I like that. Again, it's like the the cost the hidden cost of this is like, stress, right? And look, there's no business without stress. But I but I think that a lot of land investors can really empathize with this, which is like, okay, so I hear some guy on a podcast saying that he's crushing this marketing channel. And so I'm gonna implement it. And you'll implement it ad hoc like
Level one is like ad hoc, like I'm just gonna add cold calling. I'm gonna add text, I'm gonna add direct mail. The next thing is like, I'm gonna implement it and I'm gonna have some KPIs around it and I'm gonna hire maybe one person to do it. And it's a little bit better, it's a little better that way. The next is like, I'm gonna implement it with ⁓ outcome predictions, with start stop. Like if we don't yield this by this date, then we'll...
stop this marketing channel or this initiative. But there's just so many levels here, man. There's so many levels. And so it's easier for you and me to just say, like, there's the nuances here, but it's easier for you and me to just say, like, protect margins versus like, you can do this, but you have to run through all these hypotheses and these physics of like how to grow a business and how to add new revenue channels and profits so you can protect margin. It's just easier for us to just say what it just said.
So I think that the shorthand here becomes like instead of more deals, it becomes better deals, but also it becomes better systems, right? Because if you have really clear data, KPIs and systems, ⁓ it actually will protect your margins in a systemic way, right? You can just say, well, I'm just gonna, like a lot of my clients will say, well, I hear about subdividing. I'm like, well, there's that,
introduces a level of complexity that you might not be aware of, and that you might not be able to execute. So you might need to rely on someone else, which is fine. But there's also the systems that help you actually execute this and protect margin, right? It's by keeping your team members accountable. So there's kind of the two ways better team or better deals or better systems, you'll protect margin. But what people want to do is
they want to scale the systems and scale the team or and scale the lead flow. And so they don't know which variables contributing to the actual net profit. And so it just becomes an absolute chaos.
Justin Piche (26:52)
This is so common. Let's pause on that for a second. I have a tendency, I have to fight myself all the time on this very thing. Which is, I want to change so many things at once. Way too many things at once. If something's not working, or we get this good idea, like, alright, let's do this, let's do this, let's do that. It's just a terrible way to actually see the results of something. Because you don't know what exactly is impacting what. If you change...
Clay Hepler (26:54)
.
Justin Piche (27:22)
three things at once, what is it that actually had the net effect you're looking for or the most effect? Did one of those drag? Did one of those produce some sort of drag or margin decrease and one produced an offsetting margin increase? Like you don't know because you did too many things at one time. This is like a common trap. I do this all the time. I feel like I'm doing it right now, but it's hard to not when you hit certain walls, you're like, all right, we're doing this, this, this,
but it is definitely like a trap. I just wanna be changing and working and optimizing, but if I take too many pieces and move them around the chessboard all at once, I don't really know what exactly is having the right impact where.
Clay Hepler (28:02)
And it's really hard. I mean, it's hard as a business owner to do that. think it's like, internally we've implemented like, there's one core problem that the business faces at any one time. And yes, I could say there's multiple problems, but there's one core problem that the business is facing. And there's truly one thing that you can implement that will...
be the highest leverage solution for the problem. I'll give you an example. Our PSA to close rate drop precipitously ⁓ by like hundreds of percent in from from the relative high to the relative low for a ton of different reasons, a ton of different reasons, right? We could have done a we could have done 1520 different things at once to reduce the PSA closure.
Or, know, to increase the PSA to close rate, which is purchase sale agreement under contract to what we close. But what we did is we analyzed why do we, why do we not close all the deals that we got under contract? And there were certain things that were like wetlands, floodplains. we can get better at that, right? We can get better at deciphering wetlands and floodplains. Maybe that means we only
one market and you can start to see a business owner being like, my gosh, I'm gonna only go to target one market and that's all I'm gonna do now. Right? Or you could do it. But one of the things that we found was like, 65 % of the reasons why we did not close the deal was because we miss under wrote it.
Okay, and so what I did is I said, okay, what can we do to improve our underwriting capacity, right? So we could hire an underwriting coach. I'm just giving you examples. We could ⁓ go through 15 hours a day of underwriting with my underwriter so he gets better. But what I found was the real reason
that there was a disconnect between underwriting was because underwriting was being done in a vacuum. And so so we would underwrite deals. And then the underwriters would get feedback from me, but they would never get feedback from the market. And so how we solve this that the hypothesis was, we needed a way to cross departmentally communicate if an underwriting deal
Justin Piche (30:35)
you
Clay Hepler (30:42)
was approved or not by the market before we close. And so we could have done all these things. But the core the core hypothesis was, if we do this, we can increase our PSA to close rate by 150 % over this period of time. And that's the only thing we're focusing on. And it became we had this meeting this weekly meeting that we implemented and guess what?
Justin Piche (31:07)
We went back up.
Clay Hepler (31:08)
It went back up and we only focused on the one thing that we could have done a million things, right? But when you have that one thing, that one constraint that you focus on, even though it's high performance, we might say, well, I can do this. It's like, how do you lose weight? How do you lose weight? It's like, you can do a million things, but really the core thing to focus on is just don't eat over your caloric index, right? So that's the core thing, right? But like,
Justin Piche (31:30)
Too much food. Yeah. ⁓
Clay Hepler (31:36)
We messed that up in our business. That was just a little bit of a tangent.
Justin Piche (31:38)
Oh yeah.
No, no, that's it. I mean, that's a really good example. I mean, that's a really good example of focusing on one single thing at a time and seeing the improvement. What is the, this is kind of like, mean, this is common in lots of businesses, when I was in the Navy, when something went wrong, when we had some issue, we had a critique, it's called a critique. And when you have a critique, you get all the people that are involved, you know, to hire up.
and kind of people that are leading the investigation. And the goal of the critique is to figure out the actual root cause. Like what is the one thing that caused this? Not what are the series of things? What is the one thing that we can improve and put some process, procedure, training, safeguard, whatever in place so that this will never happen again. And it takes, and sometimes it takes hours of digging in and talking.
and figuring it out until you get down to like, this is the actual root cause. Like the, not just another symptom or another symptom or another symptom, because that's like a tendency people can get into. They see something go wrong. Like, well, this is, this is the thing I need to change, but that's just another symptom of something further down the line that actually is the root cause. And what it leads to is a lot of clarity on your true issue because you're spending the time and energy to really identify what is that.
single thing that's really messing you up and then you can implement an improvement and then you can see the results of what that improvement is. It's kind of a similar kind of doing a constraint analysis and abolishing a constraint in your businesses. What is the one thing you can change to make this process better or to improve your numbers or improve your close rate or whatever it might be that you're focused on? ⁓ It's hard though and it takes a lot of focus. Like it's not easy, which is why I think a lot of people probably don't
Clay Hepler (33:28)
Yeah.
Justin Piche (33:34)
do it to its completion. They'll find something that's easier to change or something that's a higher level, higher order issue that's actually truly being caused by something else and they'll fix this, but they still won't fix this and it'll come up in some other way, some other issue.
Clay Hepler (33:49)
Do one of the things I learned, I think I mentioned this in a previous podcast or you and I were on a call or something. It's like the reason why entrepreneurs fail, there are two reasons, core reasons. They lie to themselves or they become emotionally overwhelmed. And so like most people lie to themselves about them chasing these vanity metrics. So if we were to boil it down to one thing, you can do this, right? But how do you know if you're actually chasing the vanity metrics? I'm going to scale my profit.
Right, my gross profit, right? You could use start stop, ⁓ like,
the right word would be, but you could use lagging metrics to or leading metrics, but mostly lagging metrics to say, am I on the right path? And I think the core lagging metric is revenue per employee, profit per employee. Right? That's if you think you're spending too much on ⁓ your team, your OPEX, right? ⁓ And then obviously there's the margin percentage, right?
And so you need the context of the average cash conversion cycle. And that informs, and this is all in your data, but that then informs your decision around like, you know, should I add more people? Will it can compress margin? But it all comes down to that. you can't just take it in a snapshot. Like margin is over a period of time, protection of margin. And so like you can't expect your margin to be
you're adding team members on day 60, if your cash conversion cycles are 200 days, right, you can expect your true margin to show up, it could be 50 % in day 60. On day 200, it could be 20%. Right. And so I think that those are some practical, some practical playbooks for for our listeners in order to start to implement into their business. But the reality is that the question is like,
Am I building a prison or a business? Am I building a business that gives me more time and more profit or one that steals it? And it just comes down to, I scaling chaos? Am I scaling profit? Right? And we love to scale chaoses, ADD entrepreneurs, right?
Justin Piche (36:09)
Hmm, it's fun. I mean, I don't know if you feel this way, but I know
this about myself. Let's see if I can bring this focus back. There we go. I know this about myself. I thrive when things are on fire. Like I am like a tactical leadership over like fast paced issues that need immediate problem solving. That is my greatest skill set.
Clay Hepler (36:16)
Right?
Yeah. ⁓
Justin Piche (36:38)
Throw me into like, this is why I did so hell in the 80s, like throw me into a free nuclear power plant with pumps going out and the submarine sinking. like, I'm a machine giving out orders, knowing what needs to happen next. And that is not, you don't want to be in those positions as a business owner. You want to be a planner. You want to have the foresight. You want to have the, uh, the wisdom to discern what are the right things, what are the right letters to push to maximize profit.
not to feel accomplished and useful and ⁓ fulfilled because you're putting out fires and solving all these problems for everybody all the time.
Clay Hepler (37:18)
Yeah.
Justin Piche (37:19)
But that chaos, I mean, it doesn't feel good from a low stress perspective, but it feels good to know that you're solving a ton of problems. Like that feels good. love the feeling after a day when I just like solve nonstop problems all day, but that's not a good day in the business typically. A good day is when things are moving smoothly and we figure out the right metrics and we put the right processes and people, and we're not scaling too fast and we're not leaving too much opportunity on the table and deals are coming in and we're tweaking things and...
fine tuning things, like that's a better day. Those are the days that I want to have. But I fight against my own nature of the desire of being needed in the business. It's a complex kind of fight, I think.
Clay Hepler (38:02)
Yeah, yep. So you know, the call to action here is this redefine your scoreboard. Your scoreboard should be profit, not vanity, right? Profit, net profit, not vanity. I love this. I've said this quote before, but I think this is a Buffett quote. Maybe it's Charlie Munger, the late great Charlie Munger. I think it might be Buffett though. He says,
How do you know if you have an inner scorecard or an outer scorecard? The outer scorecards are the people that rent the Lamborghinis, the gurus that rent the Lamborghinis that live in the penthouse in Miami that care about gross profit but not net profit.
And and the outer scorecard versus in a scorecard Eloquently places would you rather be known as the world's best lover? But actually be the world's lers Lawrence lover or be known as the world's worst lover, but actually be the world's best lover That's all you need to know Justin anything else before we end the podcast?
Justin Piche (39:01)
Yeah. ⁓
No, just, yeah. I think it's important to, yeah, I think it's important for the listeners, maybe as another kind of, no, no, no, we're not gonna go there, but to focus on quality and focus on deals that are actually gonna move the needle and not focus on just getting as many deals as possible. And it's one of the things that I think a lot of business owners, land investors,
Clay Hepler (39:12)
to focus on being the world's best lover.
Justin Piche (39:33)
start doing after they've started. They start their business, they're like, I just want to get a deal. I want to prove this out. They grow, they do some deals. And very quickly people are like, well, I don't want to do a deal unless I'm making 20k or more. And then they get, no, I don't want to do a deal unless I'm making 50k or more. And I think that's like a kind of a good principle to have is when you grow your business, you realize, okay, well, I don't want to be focused on just doing tons of small.
deals and increase my hassle and increase my churn and increase my op-ex and increase my stress. I want to focus on quality and that's good. If you have that feeling for yourself, that's a good feeling. That means you're focused on the profit, not the vanity of doing a ton of deals, but you're focused on the right things, which is doing more quality deals, even if that's fewer deals.
Clay Hepler (40:22)
Beautiful. Guys, you know this part of the podcast. If you get benefit from it, please rate, review, subscribe, leave a little comment down below. Let us know who your favorite co-host is. ⁓ I know, I know, I know.
Justin Piche (40:40)
Nobody's done that in a while, but...
Clay Hepler (40:48)
at this point, but guys, thanks again. We always appreciate you listening to the podcast. We obviously enjoy it, but we also enjoy when you guys give us feedback, and we hope to see you and all of our listeners at the next meetup. And until next week, Justin, anything else, my man?
Justin Piche (41:03)
See you guys later.