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Investment-Grade Distress

Two youths of the Great Recession dove into the frenzy of distressed real estate and made it an investment-grade discipline.

ABOVE Lindsay Davis (left) and Clayton Mobley turn distressed homes into high-return investment opportunities.
 

The story of Spartan Value Investors is part “Storage Wars” and part “Property Brothers,” a dose of Greek history and a lot of hard work.

The Birmingham-based company just made the Inc. 5000 list for the fourth year in a row, is ranked 1,098 on the 2017 list with a 384 percent growth and has reached $16.3 million in revenue. The company is ranked No. 11 on the Inc. list among the top companies in Alabama for 2017. Not bad for a company that started by buying foreclosed houses on the courthouse steps in Tuscaloosa seven years ago.

Clayton Mobley, 31, is co-founder, CEO and member manager of Spartan Value Investors, and Lindsay Davis, who was recently recognized in the International Business Awards Woman of the Year competition, in the banking, financial services and real estate category, is the firm’s chief operating officer.

Mobley and Davis both worked at Cintas, the industrial laundry company, following graduation from the University of Alabama. Mobley earned a degree in finance, Davis in public relations, but jobs were scarce at the time and Cintas was a port in the economic storm.

After four and a half years at Cintas, Mobley left and started doing foreclosures full time, with Davis working with him part time.

“I got hooked up with some folks that were buying and re-selling foreclosures down in Montgomery, and they had a partner that was not doing right by them,” Mobley says. “They called me up and said, ‘Hey, will you look at this financial stuff?’  What I did was not very spectacular, just some basic asset allocation, but after that, I said ‘Do you mind if I look at this foreclosure stuff in Tuscaloosa?’ So we looked at it and I said, ‘Man, we could do this on the side, and Lindsay could help me out with it.’”

“I didn’t have any money, so we started out in about a 200-square-foot space in downtown Tuscaloosa. It was tough to start with,” Mobley says. “I saved about $5,000 to put in, and our other investors put in most of the money to buy houses. And within the first six months I had lost the whole $5,000, and I think, as a company, we lost about $50,000 the first six months. It was gut-wrenching; it was really, really tough.”

Mobley moved operations to Birmingham after the 2011 tornado and things began to change.

“I didn’t have a big real estate background, and the only way I knew to buy a house was on the courthouse steps,” Mobley says. Owing to the drama that can get involved in a courthouse auction, Mobley says his company had to institute some inflexible controls.

“One of our big things is, we try to be dispassionately objective. You can get real soaked in real estate. You have to be disciplined, and it is all about the numbers,” he says.

“The way we do it now, our acquisition manager will text our maximum bid and then we have somebody else who will bid. You can’t get all emotional at the courthouse. There will be 10 to 20 people down there bidding on houses. If we get it at our max bid, we get it; if we don’t, we don’t. ”

“You are not allowed to go over our max bid,” Davis adds. “You can really get caught up in the moment, because it is fun.”

“We have areas we focus on,” Davis says, “but not from a demographics standpoint. It is more of an owner-occupant versus tenant standpoint. We focus more on the Center Point, Hueytown, Bessemer, Pleasant Grove areas. We have done really well in those areas, because we are able to purchase the property at an affordable price. We do a lot of renovation to it (the house) before we sell it to investors. And we look at whether there is a good pool of tenants in the area that will be able to rent it.”

Renovations are a key element to making their investment strategy work.

 

“We started out just flipping houses just like you see on TV,” Mobley says. “We don’t do any of that anymore. We pivoted about four or five years ago and started only re-selling houses to investor clients. So most of the time our client, the person who buys the houses, is not from Alabama. They live in places like California or New York or somewhere where the house prices are really high. We have investors in 42 different states and seven different countries now.”

“They like the cash flow,” says Davis. “In California you have to buy a $500,000 house, then you might get $5,000, $4,000 a month in rent, so you are negative cash flow and you are depending on appreciation to get any kind of return. In Alabama, for that $500,000 we can put you in five houses and still charge rent of around $1,000 a month.”

Mobley says the company’s investors want a good rate of return on their investment property “so we buy, renovate it and resell it to them and then a property management company comes in and manages it. We try to be humble, but we feel like we have built a really good brand in the industry, so people keep coming back to us.”

The company’s first year of revenue was about $170,000. “We sold two houses that year. This year we will sell 200,” Mobley says, “and we should be about $24 million in revenue this year.” Mobley says his company “put 200 listings in the MLS this year.”

Mobley says the company will spend about $10 million in construction costs to bring their houses up to rental condition.

“We do a little bit more than most companies on construction,” Davis says. “We source granite from Brazil, so we put granite in all of our rental properties, no matter where they are. We do tin roofs, new HVACS, new flooring.

“A lot of the properties that we have purchased have been distressed properties, they have been condemned properties, vacant and so on. Since we have been purchasing and renovating and selling, we have seen other owner-occupied property values (in the neighborhood) increase.”

“We want to improve the quality of the neighborhood and the quality of the asset long term,” Mobley says. “Our contractors hear it all the time. We have had a lot of positive feedback.”

Spartan Value Investors is a limited liability company and the parent company. “We have investors in Spartan Value Investors, which is kind of our mother company,” says Mobley, “which owns Spartan Invest, which is the turnkey company, and also the property management company, Alabama Rental, and Spartan Realty, which is our brokerage.”

“The big thing is,” Mobley says, “people are disenchanted with the stock market. You invest in a share of a stock that could be extremely leveraged, have all kinds of debt on it, you have management that you don’t know, you really don’t know what the value of that is, based off something that somebody else told you. We really feel like we are helping people diversify out of that mentality. You are investing in something that you can touch, like that is your house. This is not a piece of paper. One of the biggest things they have to take risk on is us — that we will take care of them and we will manage it effectively.”

“Our average return rate for investment is 9.2 percent,” Davis says. “That is a lot better right now than any stock you can buy.”

Mobley says the company has several referral sources and has “partnered with who we think are the best in the industry. They are people who help investors invest in real estate, and we pay them.”

According to Mobley, “We thought Birmingham was just the right market for this system, so we got lucky,” and moving the process to other areas is part of his five-year plan.

“I feel like our model of the turnkey renovation can be duplicated,” Davis says. “The biggest thing would be developing the property management, and that would be the most complicated part, but I definitely feel that the process can be moved.”

Mobley says the name he chose for the company is intended to underline a certain fierceness of discipline. “We are big fans of just the Spartan culture. You know, they were the best warriors in antiquity. We are really focused on what we do, and we really are passionate about enlightening people, to help them understand that single family house real estate investment is a great investment long term for your portfolio.”

Bill Gerdes and Art Meripol are freelance contributors to Business Alabama. Gerdes is based in Hoover and Meripol in Birmingham.

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