\n<\/p>\n
Pace Morby<\/strong><\/a>\u2019s name is synonymous with creative financing<\/strong><\/a>. In fact, you could say that he\u2019s brought back a revival of strategies like subject to<\/strong> and seller financing<\/strong>. He\u2019s been so successful with these strategies that Pace has been able to buy over six hundred rental units this year without using a single bank loan! <\/strong>He believes that now, even with rising interest rates and high inflation<\/a>, rookie investors have a chance to get better deals than ever before!<\/p>\n Welcome to this week\u2019s episode, where we\u2019re live from BPCon2022! We\u2019ve brought in Pace Morby, friend of BiggerPockets, to talk about everything related to creative finance<\/strong>. If you\u2019re brand new to this topic, don\u2019t be alarmed. While some of Pace\u2019s methods may sound complicated, they aren\u2019t actually so difficult in practice. And in just one episode with Pace, you could be convinced to try them out on your next deal!<\/p>\n Pace shares how he\u2019s finding deals<\/strong>, where he\u2019s buying<\/strong>, the negotiation tactics <\/strong>he uses, and why now may be one of the best times to buy. He also discusses why sellers are so open to trying alternative financing options, how you can pick up real estate deals for zero dollars down<\/strong>, and why creative finance options offer far better returns <\/strong>than bank financing in 2022, 2023, and beyond!<\/p>\n Ashley: Pace: Ashley: Tony: Ashley: Tony: Ashley: Pace: Ashley: Pace: Tony: Pace: Ashley: Pace: Tony: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Tony: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Tony: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Tony: Pace: Tony: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Tony: Pace: Tony: Ashley: Pace: Tony: Pace: Tony: Ashley: Pace: Ashley: Pace: Ashley: Pace: Tony: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Tony: Pace: Ashley: Pace: Ashley: Pace: Tony: Pace: Ashley: Tony: Pace: Tony: Pace: Ashley: Pace: Tony: Pace: Tony: Pace: Tony: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: Pace: Ashley: \u00a0<\/p>\n<\/div>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Check out our <\/i>sponsor page<\/a><\/i>!<\/i><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
This is Real Estate Rookie episode 236.<\/p>\n
People confuse debt and ownership, meaning I can take over payments on a house and people go, \u201cHow? Don\u2019t you have to pay off the debt in order for you to become the new owner?\u201d No, I don\u2019t. Think about it this way, if I go into a grocery store and I use a credit card and I buy a bunch of groceries, who\u2019s the owner of those groceries if I use a credit card to buy them? How do you know that? If I use somebody else\u2019s money, how am I the owner of those groceries?<\/p>\n
My name is Ashley Kehr and I\u2019m here with my co-host, Tony Robinson.<\/p>\n
And welcome to The Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, motivation and stories you need to hear to kickstart your investing journey. And I usually read a review at this point, but I didn\u2019t pull one up. So I\u2019m just going to ask you guys, leave us an honest rating and review on whatever platform it is you\u2019re listening to and we\u2019ll give you a shout out on the show. So Ash, we have an amazing guest, one of my favorite episodes we\u2019ve done recently, we have Pace Morby on the podcast, and this was an encyclopedia of everything subject two.<\/p>\n
And we are going to have him back on and do a live workshop. So we\u2019re super excited about that, too. But Pace talks about creative financing, so doing subject two deals, and seller financing, breaks down what the difference is between them, who is the motivated seller to actually want to do these deals with you, how to negotiate, what the steps you take to actually get these deals done.<\/p>\n
He also talks about how a truck with over 300,000 miles is what prompted his whole journey into creative finance. It was a really great story, so make sure you listen for that as well.<\/p>\n
So once again, we are live from BP Con. We are taking every advantage and opportunity of getting to meet people in person and get them into our interview room here that we have set up that is actually sponsored by Pace. So thank you very much for that, Pace. Welcome to the show. Thank you so much for joining us on our morning talk show, or evening talk show.<\/p>\n
This is amazing. Look at this backdrop you guys have. They made this just for you guys.<\/p>\n
No, it\u2019s just for you. All the other guests have come in here, it was nothing. Then they brought this all on when you came in. But for anybody that doesn\u2019t know you, just tell us a little bit about yourself and actually how you got started into real estate.<\/p>\n
Oh, great question. So I came from a family of 12 kids, so 12 kids in my family, I\u2019m number three, nine kids underneath me, same mom, same dad. And when I was growing up, my parents were in the construction trades. I learned how to work really hard, blue collar background, and my dad could never afford the house, the size of the house, that he needed to house all the kids he had. So he had a job as an accountant and then moonlit as a contractor. And so my whole life growing up, my parents lived in sub two houses, seller finance houses, lease option houses in order to afford those houses. So that was like my background in real estate and creative finance. But when I got older, I became a contractor and I was Opendoor\u2019s main contractor for seven years.
So I opened up their markets and that\u2019s how I got into construction and got into the real estate world. And one day somebody comes up to me and they go, \u201cPace, why aren\u2019t you in real estate?\u201d I\u2019m like, \u201cWhat are you talking about? I am in real estate.\u201d And they go, \u201cNo, no, no. Opendoor\u2019s in real estate, you\u2019re a service provider.\u201d And I was like, \u201cOh my gosh,\u201d and it hit me right in the chest. And I knew that I had to make a deviation into doing projects and construction and stuff for myself. And so luckily I met some people at some meetups, a lady named Brittany, and she says, \u201cHere\u2019s how you do it, here\u2019s how you send out postcards, here\u2019s how you do this.\u201d And I got my first deal 10 years ago, roughly, and it was through a postcard, it was a wholesale deal, and that\u2019s how I got into real estate.<\/p>\n
So we talk all the time, Pace, about the power of networking and building relationships, and we were just talking about this before we started recording as well, and something we tell all of our audience members is that if you want to get started in real estate investing, oftentimes it\u2019s such a scary and lonely path, and the best way to get past that is by networking. And it\u2019s so funny that the person that you met at a meetup was the person that kind of changed your life trajectory because the same thing happened to me. I met a guy at a meetup, we invest mostly in vacation rentals, and I met a guy at a meetup and it was that guy that introduced me to Airbnbs. Now we\u2019ve got a portfolio across multiple states. So it\u2019s like you never know where that one connection might take you.<\/p>\n
Yeah, it\u2019s empowering. So when you\u2019re looking at this path of real estate, if you look at it like everybody only has one flashlight, I can only light the path in front of me so far and so I\u2019ve got to find other people with other flashlights on the same path. And so I\u2019ve got to just put people on that path in front of me that have a flashlight too, that light it just far enough, and you\u2019ll get far enough down your path, you\u2019ll get your first deal, your second deal, and you turn around, you look back and you go, \u201cI have never made a dollar in real estate by myself.\u201d Have you guys ever made money in real estate by yourself?<\/p>\n
Actually, no.<\/p>\n
So think about that. If you guys are at home, you\u2019re a rookie, you\u2019re a newbie, you\u2019re just starting in here, if you\u2019re consuming content, no matter how much content you take in or any education you take in, you have to apply that with other human beings. So you have to network, it is an absolute requirement. It\u2019s not a suggestion, it\u2019s not a great idea, it is an absolute requirement. Every single deal we\u2019ve all done has had other people involved that you\u2019ve had to network with in order to get those deals done. Unless you guys\u2026 have you ever done a deal where you\u2019re like, \u201cI didn\u2019t need anybody else?\u201d<\/p>\n
No.<\/p>\n
No.<\/p>\n
Isn\u2019t that weird to think about?<\/p>\n
It is.<\/p>\n
Nobody talks about it. But two weeks ago I was like, \u201cOh my gosh, I\u2019ve never made a dollar in real estate by myself.\u201d<\/p>\n
So in the beginning, when you mentioned your parents talking about how they were able to purchase properties, you mentioned a couple terms, subject two, can you talk about those different creative financing deals and explain what those are?<\/p>\n
So most people look at buying a home, you got to go through a bank. You go down to Chase, Bank of America, Quicken Loans, and you apply, you get a loan and you acquire a house, right? It\u2019s based on your credit, how much cash you have and your credentials, like how long you\u2019ve been at your job, what kind of job do you have, your degree, those types of things are important, credit score, blah, blah, blah. My parents, no matter how good their credit score was, my dad\u2019s income during the day was a\u2026 he was a CPA, so he made $60,000 a year, but he had 14 people in his household. So how is my dad going to afford living in a eight bed, five bath house, making $60,000 a year? He\u2019s not.<\/p>\n
And paying for all the food, clothes, everything else.<\/p>\n
Right. And so what my dad did, bless his heart, he would come home from his CPA job and then he would run a painting company, but his painting company was all under the table, so it was non-documented cash. So a bank\u2019s not going to look at that and go, \u201cOkay, you\u2019re approved for a bigger house.\u201d So what my dad did is he went directly to the owners of properties, he goes, \u201cOh, there\u2019s an eight bed, five bath house, or a seven bed, four bath house, my kids and my wife and I could live in there.\u201d And my dad would go to them and say, \u201cWhy don\u2019t we just work out a deal, instead of me going to the bank and applying, you become my bank?\u201d
And I didn\u2019t really truly understand this until later in life, but I realized that creative finance, like the ability to buy anything without your own cash, without any credit and without credentials, applies to everything, even things outside of houses. And it wasn\u2019t until I was a contractor, like I mentioned earlier, that it really hit home with me. My dad didn\u2019t teach me this stuff. I just knew we lived in bigger houses than my dad could qualify for and my dad would stay, say stuff like, \u201cOwn or carry, sell or finance,\u201d and because I was a teenager and a knucklehead, I didn\u2019t take the time to learn it. And my dad also didn\u2019t utilize those strategies as an investment strategy, he only used them to get his family into a bigger house.<\/p>\n
It was more survival more, really.<\/p>\n
Survival. So when I became a contractor, I have this story that really hits home of what seller finance is. It\u2019s my F-150 story. Have you guys ever heard this story? It\u2019s cool.<\/p>\n
No, I don\u2019t think so.<\/p>\n
All right, great. So I have this F-150. I\u2019m a contractor. My guys are driving the truck. The truck hits 320,000 miles. Okay, well now I\u2019ve got some problems. This truck\u2019s starting to have issues. So I go, \u201cOkay, well I\u2019ll take it out of my fleet and I\u2019ll throw it out on Craigslist and I\u2019ll sell this thing and I\u2019ll take that money, go buy a better truck, something with less problems.\u201d So where do we go when we want to find the value of a car?<\/p>\n
A Kelley Blue Book.<\/p>\n
Boom, Kelley Blue book. So it\u2019s like Zillow for cars, right? So I go on Kelley Blue book and the truck says it\u2019s only worth five grand. And I\u2019m like, \u201cOkay, well if I sell my truck for $5,000 on Craigslist, Facebook marketplace, Offer Up whatever, am I going to get $5,000?\u201d<\/p>\n
Probably not.<\/p>\n
No. Because somebody\u2019s going to come along and be like $3,500 all cash today, as if like\u2026 what else were you going to pay with besides cash? You know what I\u2019m saying? So I decided not to put it up for sale for five grand, I put it up for sale for $10,000 because I\u2019m a belligerent seller. And I go for 10 grand and I\u2019m thinking, \u201cI don\u2019t need all the buyers. I just need one buyer that would pay 10 grand.\u201d Well, three months goes by, I don\u2019t sell the truck. So my wife comes in to me, she goes, \u201cWhy don\u2019t\u2026 you know how your dad used to buy houses where he would just get the sellers to let him make payments? Why don\u2019t you sell your truck on payments?\u201d And I\u2019m like, \u201cOh my gosh, that\u2019s so freaking genius.\u201d
So I go back to Craigslist where I had the truck for sale and I changed one thing and it was, \u201cF-150, will take payments.\u201d So did I sell that truck for 10 grand? I sold it for $12,500 and I let the buyer just make monthly payments to me. And I was like, \u201cOh my gosh, I did this with a truck, why can\u2019t I do this with a house?\u201d Now you might ask yourself the question of, \u201cWell, why did Jose,\u201d the guy who bought the truck from me, \u201cwhy did he pay $12,500?\u201d I also learned that the value in anything is not based on the purchase price. The value, this is important for people that want to learn creative finance, the value of anything is based on what you can do with the thing you bought.
So he looked at that truck, he made me $350 payment, but he turned around and earned $7,000 a month in a painting business he used for that truck. So did he overpay for that truck? No, he didn\u2019t have to use his credit, he used a thousand dollars down payment to get into a truck he couldn\u2019t otherwise qualify for and I was like, \u201cI need to be doing this in real estate all the time. I can go acquire anything I want this exact way.\u201d So I call my dad and I go, \u201cIs this what you\u2019ve been doing?\u201d He goes, \u201cYes, every single house I bought.\u201d And so I go, \u201cWell, what about people that have payments on their cars or on their house?\u201d He goes, \u201cOh, you can just take over the payments.\u201d I\u2019m like, \u201cYou\u2019re joking me. I can just take over somebody\u2019s payments on their car?\u201d
And he goes, \u201cYeah, go to lease trader.com. You can take over somebody\u2019s lease right now. In two minutes, you want a BMW X5, you want a G wagon, you go to lease trader.com right now and you can take over somebody\u2019s G wagon, just take over their payments.\u201d And I was like, \u201cYou can do this with houses?\u201d And that\u2019s what subject two is. Subject two is a seller sells their house to you by you just taking over their existing payments. You don\u2019t have to qualify, you don\u2019t have to do anything, just take over their payments. And seller finance means that the seller had the house paid all the way off, and they create an agreement with you that says, \u201cHey, just make the payments to me.\u201d And I was off to the races and we\u2019ve now, just this year, we bought 600 multifamily deals with seller finance\u2026 or with creative finance, and we bought about 70 single family homes all through creative finance, just this year alone.<\/p>\n
That\u2019s awesome. Congratulations.<\/p>\n
It\u2019s pretty cool, pretty cool.<\/p>\n
When you had that conversation with your dad, were you already purchasing property, you were investing in that?<\/p>\n
I was doing some wholesale.<\/p>\n
And how did that pivot and change for you?<\/p>\n
Everything. Because there\u2019s a KPI, if you guys don\u2019t know what the word KPI means, it\u2019s key performance indicator, the number one KPI I looked at in my business at the time as a acquisition person buying deals was cost per contract. So how much money in marketing did I have to spend in billboards, TV, radio, postcards, letters, SEO, PPC, whatever it was, what was my cost per contract? And if you\u2019re a wholesaler or you are somebody out there trying to fix and flip, the average cost per contract when you\u2019re spending money on advertising is about seven to $10,000 depending on what part of the country you\u2019re in.
So you go, \u201cOkay, I want to go out and find my own deals direct to seller.\u201d Well, you\u2019re going to have to spend seven grand in marketing. That\u2019s daunting and scary for somebody that\u2019s brand new. But with creative finance, my cost is zero. And so for me, when I was wholesaling, I go, \u201cOh my gosh, I can go to other people\u2019s sellers,\u201d like a real estate agent or another wholesaler and go, \u201cWhen you have a seller that wants too much money, I\u2019ll buy it on seller finance, and when you have a seller that has no equity, I\u2019ll buy it on subject two.\u201d And it changed everything for me. And my cost per contract went to $0.<\/p>\n
So Pace, you talked about your motivation for selling the truck, seller finance. If I\u2019m a new investor, can I make the assumption that the motivation for homeowners is the same as your truck? What would prompt someone to want to sell their home subject two or a seller finance?<\/p>\n
Okay, so let\u2019s talk about the difference between subject two and seller finance. So subject to typically, like I\u2019d say 80 to 90%, I haven\u2019t done the math on this, but just my gut experience, 80 to 90% of the time on a sub two deal, the seller\u2019s in some sort of pain, they\u2019re in foreclosure, they\u2019re going through a divorce, they don\u2019t have equity, a lot of times they refinanced their house last year, they pulled all their equity out, now they want to go sell, they don\u2019t have any equity, so they can\u2019t sell without cutting a check. So that\u2019s subject two, that\u2019s typically that pain. So if you guys are looking for a sub two deal, a really great place to go is expired listings, agents. What market you\u2019re in\u2026<\/p>\n
Buffalo.<\/p>\n
Buffalo. You\u2019re doing deals in Buffalo? I don\u2019t know why I thought you were doing deals in Florida.<\/p>\n
No, no.<\/p>\n
Maybe I saw you guys on vacation in Florida.<\/p>\n
Probably.<\/p>\n
That\u2019s what it was.<\/p>\n
We\u2019re down there like every month.<\/p>\n
Okay, there you go. That\u2019s why. See, I follow you and I thought you were doing deals in Florida. So expired listings are a really great way to find sub two deals. Seller finance is not pain, it\u2019s gain. The seller of a seller finance deal wants one thing and one thing alone\u2026 now, there\u2019s other benefits than this one thing, but the one thing that they care about anything else is they want to win the negotiation, which means they want the top line price to be as high as possible. So I\u2019ve got a deal in San Angelo, Texas, I just closed 30 days ago, it\u2019s a 43 unit deal, seller\u2019s name is Mario, seller finance, seller gave me $0 down, 4% interest and he gave me 50 year note. Crazy, right?<\/p>\n
50 years?<\/p>\n
50 years. I took Eric, my video guy, over there, and it was just like jaw dropping to watch me negotiate this deal. Why would Mario do that? Well, number one, the property, 43 units, is only worth 2.7 million. I paid three million. Did I overpay for the property? I think most people go, \u201cYeah, you overpaid for the property.\u201d But I go, I didn\u2019t put any money down, it cash flows on day one. I have zero cost of capital. Why would Mario do that? Well, he got $3 million on paper, he\u2019s charging me interest 4%, he avoided going through an agent, so he didn\u2019t have to pay 6% to agents, he didn\u2019t have to pay the closing costs, no appraisal. When you guys are in the commercial world, like multi-family, appraisals are expensive, surveys are expensive, we avoided all of that stuff.
So if you compare him getting three million at 4%, he\u2019ll end up getting about $6 million over the term of the loan. But where do those payments go? They go to his children. So when he passes away, he doesn\u2019t need the three million, he\u2019s like, \u201cI\u2019m worth a hundred million dollars, I don\u2019t need the $3 million right now.\u201d So the biggest reason is sales price. The second biggest reason is that it mitigates their tax liability. So imagine if Mario, who bought that property for a million 20 years ago sells it to me for three million 20 years later, how much in taxes he is going to have to pay?<\/p>\n
That\u2019s a big tax bill.<\/p>\n
Massive. He has a $2 million gain. So he\u2019s got a big influx of cash that comes into his bank account, now he\u2019s got hundreds of thousands of dollars of tax. But if we spread that out over 30, 40 years, what he can now do is every year he can offset the money he receives with other tax right offs. So essentially being zero tax liability on that deal.<\/p>\n
Okay, so now that everybody listening knows that, they know the advantages, they know what they are for the seller, What happens when you\u2019re actually negotiating with the seller? You\u2019re face to face with them, do you do it on phone, what\u2019s your typical setting? And then how do you actually convince them or pitch this or give them some key points, I guess, or tips?<\/p>\n
I love that. So here\u2019s the great thing about creative finance, it\u2019s easier than cash by far. People think, \u201cOh, I\u2019m going to start with wholesale or I\u2019m going to start with fixing and flipping and I\u2019m going to start with BRRRR.\u201d Guys, no offense to any of those, I do all of them, they\u2019re all great, they all work incredibly well, but in order for me to do a wholesale deal, I\u2019ve got to offer 60 cents on the dollar, 50 cents on the dollar. In creative finance, I can pay 80, 90 cents on the dollar and make actually more money than the person who paid 50 cents on the dollar.
The greatest part about it is that creative finance is the only thing that is\u2026 it\u2019s not a zero sum game, which means the seller makes more money, it doesn\u2019t take money out of my pocket. In a cash transaction, I have to low ball a seller in order for me to make money on my flip or in order for me to have a good refinance on a BRRRR. In create finance, no banks needed, no credit needed, so I can pay the seller more on paper and when I\u2019m talking to a seller and they go, \u201cWell, why would I do that?\u201d And I go, \u201cHonestly, why would you let somebody pay 60 cents on the dollar? Why wouldn\u2019t you let me pay 90 cents on the dollar of what it\u2019s worth?\u201d What would you rather do, go into appointment and pay 90 cents on the dollar or 50 cents on the dollar?<\/p>\n
50 cents.<\/p>\n
Really?<\/p>\n
No.<\/p>\n
No, I mean in terms of as a salesperson.<\/p>\n
Yeah, as a salesperson because-<\/p>\n
As a sales person.<\/p>\n
\u2026 you\u2019re going to get the commission.<\/p>\n
No, no. Let\u2019s say that you\u2019re a wholesaler.<\/p>\n
Okay.<\/p>\n
And your job is to go in and get a contract with a seller directly. There\u2019s no agent, you\u2019re not the agent, you\u2019re just acquiring the deal. You have to convince that homeowner to sell their property to you for 50 cents on the dollar to be a wholesaler. But in creative finance, I can tell them to sell it to me at 90 cents.<\/p>\n
So, okay. So yeah, so they\u2019re going to be more willing to make more.<\/p>\n
They\u2019re making way, way more. The second they see how much more money they\u2019re making, it\u2019s like why would they ever sell on cash?<\/p>\n
So, okay to clear it up is you\u2019re saying that you\u2019re able to make the numbers work at 90 cents on the dollar and that\u2019s the advantage?<\/p>\n
Yeah, all day long.<\/p>\n
Okay.<\/p>\n
So for example, if I go out and if I did that same deal with Mario and I had to buy it cash, I would\u2019ve had to given him $2.4, $2.5 million to make it work and guess what I would\u2019ve had to do? Qualify for a loan and then go raise $700,000 from partners or investors and give that $700,000 worth of ownership to those investors. So now I\u2019m into that deal with a higher interest rate, I had to pull my credit, I had to raise money, give up ownership and the seller actually got less money.<\/p>\n
Okay, so let\u2019s break that down even more. How are you figuring out what that purchase price is? So are you working backwards then?<\/p>\n
We\u2019re always working backwards. So the number one thing I always ask\u2026 So when a seller\u2019s\u2026 I go, \u201cWhat are you looking for?\u201d Mario says, \u201cI want $3 million.\u201d I go, \u201cGreat. If I was able to come up to $3 million, could you give me terms?\u201d Mario says, \u201cSure, I\u2019ll give you terms. What are you thinking?\u201d And I go, \u201cWell, here\u2019s the problem, Mario. Most of my deals I buy are $0 down, 0% interest. So I doubt you\u2019ll want to do a deal with me.\u201d He goes, \u201cI\u2019ll do $0 down, but I will not do 0% interest.\u201d I go, \u201cOkay, well what are you thinking?\u201d This is all recorded by the way, I record most of my appointments. \u201cI\u2019ll do 4%.\u201d I go, \u201cOkay, great. Do you want a balloon?\u201d He goes, No. If I do a balloon, I still have the same tax problem. I\u2019d rather just let you make payments to my kids even after I\u2019m passed away. My kids keep bearing the interest, it\u2019s a great investment.\u201d So that\u2019s how\u2026 literally was like a four minute conversation.<\/p>\n
So Pace, are you specifically looking for\u2026 you talked about failed listings as one way, you talked about talking with wholesalers or agents that the sellers are maybe asking for too much, but say I don\u2019t have a relationship with an agent, say I don\u2019t have a relationship with the wholesaler, I\u2019m brand new, am I just going on the MLS looking for listings that say seller financing or creative financing? What other ways can I\u2026<\/p>\n
You could do that. So you could go on the MLS. If you are an agent, you could go on the MLS. If you go on landwatch.com, have you guys ever heard of Land Watch?<\/p>\n
No.<\/p>\n
No.<\/p>\n
It\u2019s so gangster. It\u2019s a great website. If you go to Land Watch, Land Watch has 11,400 seller finance listings right now on their website. 11,000. That\u2019s nationwide. If you go on your MLS, you\u2019ll average, depending on the market, you\u2019ll average about a hundred seller finance listings per one million population. So there\u2019s a lot of seller finance stuff out there. But let\u2019s say that I\u2019m brand new, I don\u2019t know any of that, what list do I go pull? I would go to listsource.com or wherever you guys\u2026 if you guys are using PropStream, they\u2019re a big sponsor of this event, Foreclosures, huge.
Right now, this is what I love doing too and you guys should have me back, I\u2019ll call Foreclosures with you guys. We\u2019ll do it. Tell them in the comments, tell them whatever I will call Foreclosures live. So Foreclosure list is the easiest. We can get a deal in 15 minutes. Hands down, easy done. Foreclosure is really good. Expired Listings is really good. People are going through divorce, people are going through bankruptcy, typically that\u2019s sub two deal. Seller finance is a high equity list, so you can literally pull a list on ListSource that says people have their house paid off. Or you can see people that have owned a property for over 10 years, that typically is a really great seller finance opportunity too.<\/p>\n
So once I find someone Pace, and I\u2019m like, \u201cOkay, this person\u2019s a good candidate for seller finance or sub two,\u201d how do I structure that in a legal sense that they don\u2019t just run away with the property or try and kick me out after I moved in?<\/p>\n
Well, he who has the deed is the one that controls the property. So it\u2019s set up the same paperwork that you go to\u2026 if you go to Bank of America and you get a loan from them, it\u2019s literally the same paperwork. So it\u2019s no different than anything else. Same paperwork, same documents, same ownership goes to you. It\u2019s not some under the table, weird thing. The deed comes in your name. Nobody can change anything about that. So think about this too, this is something that confuses a lot of people, people confuse debt and ownership. Meaning I can take over payments on a house and people go, \u201cHow don\u2019t you have to pay off the debt in order for you to become the new owner?\u201d No, I don\u2019t. Think about it this way, if I go into a grocery store and I use a credit card and I buy a bunch of groceries, who\u2019s the owner of those groceries if I use a credit card to buy them?
How do you know that? If I use somebody else\u2019s money, how am I the owner of those groceries?<\/p>\n
Cause you bought them.<\/p>\n
You take them home.<\/p>\n
Okay, so great, I love that. So two reasons why. One, I have the ownership physically, but couldn\u2019t somebody just come up and steal those from me? They could, but the second thing I have is I have a receipt and proof of purchase. So in real estate, the receipt of real estate is called the deed. Whoever holds the receipt is the owner of those groceries, so whoever holds the deed is the person who holds that property. So think about this, I go to grocery store, I buy groceries with an American Express and I\u2019m walking out into the parking lot and I walk up to you and I go, \u201cHey, I see you got those groceries. What\u2019d you pay for them?\u201d You go, \u201c200 bucks.\u201d
I go, \u201cI\u2019ll pay you $225 for those.\u201d And you go, \u201cOkay, I\u2019ll make 25 bucks like that.\u201d And I go, \u201cBut one caveat, I\u2019ll just pay your credit card payment for you.\u201d I just subject twoed your grocery bill. So the credit card payment and the ownership are not the same. And so people don\u2019t understand that I can just go and transfer a deed 25,000 times in two days, but the debt just stays in one place. The American Express bill stays in the same place, nothing alters, nothing changes, nobody does anything to it. It\u2019s just whoever is currently holding the deed makes the payment to the mortgage. So a subject two deal is the seller\u2019s name stays on the mortgage, your name stays on the deed, you\u2019re the owner. Nobody can take the deed from you without a legal transfer.<\/p>\n
I actually did one subject two deal, and it was actually before I even learned who you were, and we had had a guest on the podcast who had kind of taught us a little bit about it, but I wish I would\u2019ve found you because it would\u2019ve made the process a lot smoother. It took I think over a year to actually close on the property just because my attorney wasn\u2019t familiar with it and get everything\u2026 all the ducks in a row. But as I did it, I\u2026 it was a farm. So there was lots of pieces moving with it and dealing with this farmer, he didn\u2019t really know a lot and it was answering his question. Cause some of the common questions that he had, and I had, so the first one is how do we know that the mortgage isn\u2019t going to be called because of the change\u2026 for the due-on-sale clause?<\/p>\n
Okay, she\u2019s talking about the due-on-sale clause. So the due-on-sale clause happens about one out of every 5,000 sub two transfer. So it\u2019s going to happen. And if you do a lot of sub two deals, you will run into a due-on-sale clause. There\u2019s very typical reasons why the due-on-sale clause gets called. Number one, improper paperwork. Upfront, you use the wrong paperwork. Number two, you didn\u2019t transfer the insurance properly. And number three, you\u2019re a knucklehead and you stopped making the payment. Those are the only three reasons you\u2019ll ever get the due-on-sale clause called. Then when a due-on-sale clause gets called, which it does happen, it\u2019s happened to me five times. You need to know how to handle it.
So why did the due-on-sale clause get called? It\u2019s because you transferred the\u2026 or the farmer, me, I transferred the ownership, the receipt of my farm, over to you, I gave it to you. And the bank sees that we transferred ownership and they go, \u201cHold on, you just took ownership of this farm, but there\u2019s a loan in that farmer\u2019s name still, you need to pay that off.\u201d Legally you don\u2019t have to pay it off. The bank has the right to call it due, not the obligation, but they have the right to say, \u201cHey, we want Ashley to pay that now.\u201d So how do you handle it when you run into it? How do you handle the due-on-sale clause? How do you get rid of it so easy?<\/p>\n
I don\u2019t know the answer, do you?<\/p>\n
I don\u2019t know either, yeah, no.
Okay, so the way you get rid of the due-on-sale clause is one, make sure you did your paperwork up front, two, make sure you did your insurance properly and three, make sure you make your payment. But if it does still get called, which is very incredibly rare, what do you do? The deed is what triggered the due-on-sale clause, so what do we have to do?<\/p>\n
Transfer it back.<\/p>\n
[inaudible 00:26:14] deed back.<\/p>\n
Transfer the deed back to the farmer and repurchase it on a lease option where your option price is the mortgage balance the day of your execution. Does that make sense?<\/p>\n
Yeah, it does.<\/p>\n
So it\u2019s technically a\u2026 it\u2019s still a sub two deal, but you haven\u2019t transferred the lease\u2026 or you haven\u2019t transferred the deed.<\/p>\n
So my second question-<\/p>\n
I got that from a bank by the way. So I\u2019ll tell you how this happened. So I had a property on Lost Dutchman trail. The seller was in foreclosure and we reinstate the foreclosure, he was behind like $20,000, but we reinstate the foreclosure the day before we transferred the deed. And why is that a problem? Well, because the bank that had the loan, they\u2019re a small bank, Johnston Bank, shout out Johnston Bank. They only had five branches. So the president of all the branches was the person actually handling the foreclosures. So we reinstate the loan, we closed the deal the next day and the following Monday he goes to his stack of manila folders and he goes, \u201cOh, Lost Dutchman is now no longer in foreclosures.\u201d So he goes to reinstate it. It\u2019s just a slow process for them, they did a couple days after we had already closed on it, and he goes to reinstate the loan and he sees that we transferred the ownership.
So he physically manually saw\u2026 nobody\u2019s calling due-on-sale clause unless it\u2019s like a situation like that. So they send out a letter, we get the letter two, three weeks later, I call the guy myself, the branch owner, and I go, \u201cDude, we caught up the mortgage payments. Why are you calling the due-on-sale clause? We\u2019re making the payments.\u201d He goes, \u201cOh, it\u2019s just bank policy.\u201d I go, \u201cOkay, well,\u201d and he sounded nonchalant, like he ran into this a hundred times, I go, \u201cOkay, well what do you suggest I do? Because I bought this subject two and I caught up the payments.\u201d And he goes, \u201cOh yeah, easy. All you do is just deed it back to them and then rebuy it on a lease option and the option price is the mortgage balance the day you execute the option.\u201d I was like, \u201cDone, thanks, have a good day.\u201d Pretty simple.<\/p>\n
Yeah, that is.<\/p>\n
So that\u2019s one of five ways to overcome the due-on-sale clause, we can talk about another day, but that one\u2019s really simple.<\/p>\n
So follow Pace if you want to learn more about that.<\/p>\n
Yeah. If you want to get nitty gritty, this is not rookie stuff, but the reason why don\u2019t I just originally buy on a lease option with the option price being the mortgage balance?<\/p>\n
Because you want the deed.<\/p>\n
I want the deed because when I have the deed, I get the tax benefits and the tax benefits allow me to not pay any taxes every year.<\/p>\n
So my second question for that would be on the seller side is, okay, the mortgage is still in their name. How do they go and get another mortgage? And this is-<\/p>\n
So DTI coverage.<\/p>\n
This is actually how I found you because this was the last piece of the puzzle, the last question I needed and that\u2019s how I found you.<\/p>\n
Love this. Okay, how does any investor go and get another loan when we go get multiple loans on\u2026 and you guys are going and getting Airbnbs and you\u2019re investing, How do you get more loans?<\/p>\n
You have to show that there\u2019s income on the other properties.<\/p>\n
There you go. So it\u2019s the same thing. So when I get a seller, so I had one of my favorite deals I ever did, Dave Biarsky. Okay, so here\u2019s what happens. Dave ski driving home one day, he gets a wild hair and he is driving home one day from work and he sees a new home development across the street from his development where he\u2019s lived for 19 years and he turns in there, he goes in, gets suckered into a $20,000 non-refundable deposit on a brand new build, drives back over to his house and his wife\u2019s like, \u201cHey sweetheart, where you been? I haven\u2019t seen you. You usually home on time.\u201d
He goes, \u201cBabe, I just bought as a brand new house.\u201d And she goes, \u201cOh my gosh, this is amazing. Can we turn this one into a rental or something?\u201d And he goes, \u201cNo. The lender over at the new home build said we have to sell this house in order to qualify for the new house. We can\u2019t have two houses.\u201d She goes, \u201cOkay, no problem. Let me call my friend who\u2019s a real estate agent and let\u2019s have them list the property. It\u2019ll sell in two months and that house will be done in six months. It\u2019ll be perfect. We\u2019ll rent for a couple months, it\u2019ll be perfect timing.\u201d You following me? Okay, so five and a half months later they still haven\u2019t sold the house.<\/p>\n
And it\u2019s coming time to close on that new house.<\/p>\n
Yeah, they got two weeks.<\/p>\n
It\u2019s coming time to close. They\u2019re going to lose their $20,000 non-refundable and they\u2019re going to sell that house to another person. The agent on that listing calls me up and goes, \u201cPace, I saw that you do this creative finance stuff, what do we do?\u201d<\/p>\n
Wait, and had you ever met this agent before? Did you have a relationship with them?<\/p>\n
I saw her at a meetup and I was like, \u201cHey, if you ever have-<\/p>\n
The power of networking.<\/p>\n
The power of networking. So I go up to people, I go, \u201cHey, if you ever have a seller that has a hard time selling their listing because they have lack of equity, come to me.\u201d The seller had lived in the property 19 years, why doesn\u2019t he have equity? Cause he refinanced, pulled out all his equity out of the deal. So he has no equity. Now you\u2019re telling a homeowner that just put $20,000 on a new home build that he\u2019s going to have to write a check to sell this house. Is that the only money he\u2019s going to have to pay to close out on that house?
No, he\u2019s got the rest of his down payment, he\u2019s got furniture, because everybody, when you get a new house, you\u2019re pumped about your furniture. He\u2019s like, \u201cI got a barbecue thing, I got all the stuff I want to do and now she\u2019s telling me I got to cut a check to sell my other one.\u201d I go, \u201cWell what if you didn\u2019t have to write a check? What if you just walked from the property, let me take over the deed?\u201d He goes, \u201cNo, I can\u2019t do that.\u201d I go, \u201cWhy not, Dave, it solves every problem in the book.\u201d And he goes, \u201cBecause my lender on the new house says that I have to sell this house in order to qualify.\u201d I go, \u201cNo, she doesn\u2019t know what she\u2019s talking about. I was a loan officer for years. Let me call her and talk to her underwriter.\u201d
So I got on the phone with the underwriter, I\u2019ve done this 400 times by the way, get on the phone with the underwriter, not the loan officer, if you\u2019re talking to loan officer, they don\u2019t know, they\u2019re salespeople. I was a loan officer, we\u2019re salespeople. Talk to the underwriter. So you talk to the underwriter and you say, \u201cHey underwriter, I\u2019m buying this house subject two, I\u2019m going to be making the payments. What do you need to see from me in order to wipe this off their debt to income ratio to qualify for the other one?\u201d She goes, \u201cOh, he never told me he was going to do that. No problem.\u201d So we write up our agreement. By the way, you should always use a servicing company when you do sub two and seller finance stuff. West Star is the company-<\/p>\n
Can you define servicing company?<\/p>\n
So a servicing company is, let\u2019s say that you and I create a financial arrangement and we want to make sure there\u2019s a non-interested third party watching what we\u2019re doing, making sure you\u2019re receiving it, I\u2019m paying it on time, we would hire her as a servicing company to make sure. So there\u2019s companies like West Star Loan servicing that you pay them $17 a month per house and they are the sheriff of every creative finance deal you\u2019ll ever do. So I worked this out with Dave and Dave goes, \u201cHoly crap, you solved every single problem in the book for me. I thought I was going to be in a world of hurt.\u201d So debt to income ratio needs to be wiped out by the underwriter on the deal.<\/p>\n
So Pace, I mean first dude, thank you so much man. This has been a crash course on everything subject two.<\/p>\n
Oh yeah, I could talk about this for 20 hours.<\/p>\n
So I mean, last question for you, brother. So I just want to know, so given where we\u2019re at with the economy, with inflation, there\u2019s a lot of people feeling the sky\u2019s falling, now is a terrible time to invest in real estate. Does subject two still make sense in this environment?<\/p>\n
My average deal I\u2019m acquiring is 3.25%. My average BRRRR deal that I do is about seven and a half to eight and a half percent. So I honestly don\u2019t know a market where subject two hasn\u2019t made sense, will not make sense. Subject two is and will always be a strategy that will dominate. Right now it is winning big time. I\u2019m being overwhelmed where people are like, \u201cOh my gosh, our listings went from 10 days on market to now 70 days on market, please whatever you got to do.\u201d
So here\u2019s a really good example for brand new people. I will randomly do this once a month or I\u2019ll go in my local market in Arizona and go, \u201cAnybody in Arizona come to my office today, We\u2019re going to go\u2026 we\u2019re going to do a group activity for seven hours today where I\u2019m going to teach you guys what creative finance is and then we\u2019re going to do a contest at the end of the day for 45 minutes and we\u2019re going to get everybody on the phone and we\u2019re going to see how fast we can get a deal.\u201d So we just did this two weeks ago. First, where you go is you go, listings have been on the market for longer than 90 days, call the agent, say, \u201cHey agent, if you\u2019re having a hard time with that listing, I\u2019m okay just taking over the payments. Would you pitch that to your seller?\u201d So in 45 minutes a group of a hundred people got six written contracts signed back from the agents done in 45 minutes. This market is incredibly easy. You\u2019ll be pouring in with properties.<\/p>\n
So when they\u2019re doing that, are you guys looking up on PropStream or any other software?<\/p>\n
That\u2019s where we got the list.<\/p>\n
What the estimated payment is and mortgage payments?<\/p>\n
Yeah, so you\u2019ll have the estimated mortgage. Here\u2019s how you know, when you said structure, last thing guys, so sorry. Have them have me come back because I will come back and I\u2019ll talk forever. Here\u2019s how we know if it\u2019s a good deal. I don\u2019t care about purchase price. People send me stuff like, \u201cPace. I got a four bed, three bath or three car,\u201d I\u2019m like, I don\u2019t care about any of that. What can I bring in on the property? What\u2019s the highest and best value of that amount?
Same thing. I go to AirDNA, if it\u2019s going to be an Airbnb, if it\u2019s a sober living facility, I call a sober living company and I find out what I could bring in on that property and then I reverse engineer with the seller and I go, \u201cOkay, if I can bring in three grand a month, the most I can pay the seller is $2,000 a month because I\u2019ve got blah blah blah blah blah, expenses and whatever else.\u201d So you reverse engineer and a lot of that information before we get to the negotiating part of the conversation, a lot of it we find on PropStream.<\/p>\n
Yeah.<\/p>\n
Yeah.<\/p>\n
Cause I think that\u2019s such a\u2026 Are you finding that too with the seller, finding their motivation to\u2026 or what they want out of the deal? So if purchase price is important to them or interest rate, like they just know they want a high interest rate, but maybe you amortize it over 50 years or things like that. Are you thinking at all variables?<\/p>\n
Sellers typically don\u2019t want a high interest rate unless they\u2019re already a creative finance guy like me. When somebody goes, \u201cYeah, I\u2019ll seller finance it to you, I want 20% down and 8% interest. I know he\u2019s already\u2026 he\u2019s probably already taken my course, or whatever, or he is been in the game for 20 years. Yeah. But if they go, \u201cOh yeah, what does that mean?\u201d I go, \u201cGreat, you care about purchase price,\u201d it\u2019s kind of like a teeter-totter, \u201cI\u2019ll give you a high purchase price but you got to give me low down payment, low interest.\u201d And they go, \u201cOkay, no problem.\u201d They care about the purchase price more than anything else.<\/p>\n
Interesting.<\/p>\n
We have literally barely touched the surface of this. We could go on for hours.<\/p>\n
I know, I feel like I\u2019m going to be laying in bed tonight just like there\u2019s so many more questions.<\/p>\n
Oh my gosh. The thing is I can\u2019t go out and get a cash deal\u2026 I could get a cash deal pretty quickly, but I could guarantee you if you guys had me back, I could show you how we could get a deal under contract within an hour on the Rookie show start to finish, agent sending us a contract signed. It\u2019s that simple.<\/p>\n
Yeah, we should definitely do that.<\/p>\n
Guys, less information, more implementation, I would love to implement some of the stuff and do it live if you guys would have me back.<\/p>\n
I think that\u2019s part of the problem with the show is we get a lot of stories and what people are doing and stuff-<\/p>\n
Let\u2019s freaking do it.<\/p>\n
\u2026 but like the step by step, like doing a workshop, that would be so fun.<\/p>\n
I would love to. That\u2019s what I\u2026 You get, and I know you guys are the same way, you start talking about these strategies, you\u2019re like, \u201cOkay great, let\u2019s go. Let\u2019s go buy something.\u201d So if you guys have me back, I\u2019d love to do that. It doesn\u2019t have to be in person, but we even do it virtual, it\u2019d be great. We could do the same thing.<\/p>\n
Yeah. Cool. Well, one question I do have, because I think this would be for everyone that\u2019s listening, where are you getting the proper steps and the proper documentation? So when I bought the farm, it was\u2026 my attorney had no idea where to even start with documentation.<\/p>\n
So I went and paid an attorney in my local state named Sean St. Clair. I have an attorney, actually brought him here to BP Con, had him on my panel. My attorney who I learned from for years and years actually was on my panel today. So I just go to an attorney that\u2019s been doing creative finance and I had them draft documents and then the documents were great, but really you need somebody when you run into a specific situation, especially with a farm, there\u2019s all sorts of weird things going on with farms, you need to have somebody that knows what they\u2019re doing and the way I found these people was networking at meetups.<\/p>\n
And that\u2019s cool, the answer is basically just asking what their experience, if they have experience, in doing subject two.<\/p>\n
Yeah. Have you ever closed a sub two deal? We have a list actually because my job, or my goal, years ago with creative finance is, I said my overall goal is I want to normalize the conversation around creative finance. That\u2019s my goal. If I accomplish that, I could die, I\u2019d be happy. I want to normalize the conversation. One thing that we\u2019ve done is we\u2019ve found five title companies or title attorneys in every single state across the country and we\u2019ve put them on a Google sheet. So if you guys want, I\u2019ll give that to you guys, you can give it to your audience.<\/p>\n
Yeah, we would love that. So we\u2019ll put that into the show notes for you guys.<\/p>\n
There\u2019s not a single state in the country you can\u2019t do sub two, seller finance, novation agreements, wraps, [inaudible 00:38:51], you can do anything in all 50 states. Not just legal, it\u2019s been getting done for hundreds of years.<\/p>\n
Well, thank you so much Pace. This has been awesome.<\/p>\n
Have me back.<\/p>\n
And also thank you for sponsoring this media room. We\u2019ve been really taking advantage of it. This is our third podcast we\u2019ve done today in here, so thank you. Yeah. But where can everyone find out more information about you?<\/p>\n
Go to BiggerPockts episode whatever I was on. It was the first one I was on in November of 2021.<\/p>\n
We will also link that number in the show notes.<\/p>\n
There you go. Go watch that.<\/p>\n
Well, thank you so much for joining us today. I\u2019m Ashley at Wealth Rentals and he\u2019s Tony at Tony J. Robinson on Instagram. Thank you guys so much for listening and we\u2019ll be back on Wednesday with another episode.
(Singing)<\/p>\n