How to Structure Creative Real Estate Deals

0:00So, owner financing is actually really, really simple. Instead of you going and getting a loan from say a bank like Wells Fargo or Chase or anything like that, you're actually getting your loan from the seller. But oftent times the seller themselves has a loan with one of those institutions. And so what they're doing in order to provide you a loan with owner financing is they are leaving that mortgage in place. Okay? So they're just leaving it in place and then I am taking the financial responsibility of making the payments to that mortgage when I purchase it.

0:39So why would I do that? There's a number of reasons why I would want to do that. Number one is they may or may not have a lower interest rate. Right? That's the easiest one that a lot of people talk about. The one that's not talked about as much is actually the difference in amortization. And amortization is is the way your payment on a house is calculated via your interest rate. So most not most and all amortization interest is usually front-loaded and you're paying very little principal. So on a house that say let's say I buy a house for or I buy a property worth $120,000 or has $120,000 lean, let's put it that way.

1:19And let's say it's worth a h 100,000, but they have been paying on that loan for say eight years. Okay, so they have eight years paid down. If you calculate that versus buying a house at 100,000 at a fully amortized, I don't know that exact math, but they're actually going to be you might actually pay the other one off sooner and pay less money because of interest. So, that might be one benefit. But the big kicker was really the difference in rent and cash flow. So, if I'm taking over at that time, I'm looking for discounted deals.

1:53Really, what I was looking for is just how can I make money in real estate. That's all I cared about. Like, how can I make money off this deal? So, if the house is worth a h 100red,000, but they have a loan for 120 back then. What I was looking for is, okay, well, what could the house rent for? It can rent for 1,700, but their principal, interest, taxes, and insurance payment was$,350. Well, I immediately knew there that there was $450 in cash flow between the two. Okay.

2:24So that was the benefit to me of being able to buy a deal and keep their low mortgage in place. They becomes my financing rather than me having to go get a loan and now I own a property without having to get financing from a third party or bring any money down. I can just essentially take over the mortgage. Okay? Maybe give them five or six. My biggest my biggest question I still ask this to is like what are your immediate cash needs? — Like how much cash do you need right now? Sometimes it's two grand, sometimes it's $35,000.

2:55It just depends. — Yeah. So, how'd you get the big screen TV guy out? — how did we get that out? — I actually don't remember. I remember when I sold, we actually had a hard time selling that property. I don't remember getting him out, but I do remember when we were selling it, it was sitting there for a while, like two months, and and I was showing people, owner financing, showing people through and I just read Robert Kaldini's book, Influence, and have you ever read that book?

3:30It's really, really good. — No, I haven't. I've heard of it. — Yeah, it's really, really good. He has another one called Preluence that's probably a little bit better for sales, but classic. Anyway, I just read it and when I was walking up, I was like testing this and I dropped, they walked in front of me and I dropped a dollar on the ground, like right in front of me. I just dropped a dollar and I bent down. I was like, "Oh, check this out." And I picked up a dollar. I was like, "There's a dollar on the ground." And the guy's like, "Oh, that's cool." I was like, "Here, you guys have it." And he's like, "What?" I was like, "It was on the ground.

4:01Like, we're all here. Blah, blah, blah. I don't need it." And I gave it to him. And he's like, "No way. Why would you do that?" And it was just $1. It was just $1. And we walk inside, we're going around and while we're standing in the kitchen, we ended up signing the paperwork for him to buy that deal. And yeah, we end up signing it and selling it that time. So, I like to say that that was my first experience practicing something from Robert Kildin's wrist, but I don't remember how I got that guy out. We might have done a cash for keys.

4:33We did a lot of that where we just offered cash for keys. Yeah. — When we came in, we've had to do evictions. I had to do an eviction in Irving, Texas. Where we actually showed up with five guys showed up when the conible pulled up. We've had to do some crazy stuff. So, anyway, — yeah. And we didn't even really talk about the the rep part of it either, but you know, that that there's so much value to a lot of people in like like you just described, that financing is in place already.

5:04So, if you can offer financing then to someone else who's looking for a property that doesn't qualify for financing, doesn't know how to go out and find an owner finance deal, — you know, you can charge a premium for that that property then. So, so yeah. So, — and and Kirby, you could charge a premium in multiple areas. I was just talking to actually my assistant. He is was considering like selling his property and moving and capturing out because he's got so much equity.

5:38And he was asking me how do I make the most out of this house. And I was telling him if he was to owner finance it, if he was willing to do that and do essentially a wrap on his mortgage, — if he was to owner finance it out, he could charge about a 10% premium on top of what he could list it for cash. Now, his house is worth about $3.99. I was like, you'll probably be able to get a lot of people say you'll be able to get 10% down. I was like, you'll probably be able to get like $25,000 down at that price point. Much more than that's pretty tough, no matter the price point.

6:11But I was like, you'll probably get about $25,000 down and because of where interest rates are at, instead of just giving an 8%, like you will be able to charge like an 11% interest rate. — So you get a premium not only on the sale price, but then you get a premium on the interest rate as well, which then increases your principal and your interest payment. And that principle and interest versus what your underlying lean is is going to be your cash flow. And then depending on the payown, which is kind of complicated to do, but if you guys get a financial calculator and play with it, he has like I think nine nine or 10 years on his amortization he's in.

6:50— The payown rate will it'll pay down faster than the payown for the new buyer. So it actually increase his equity. And then I was like, if you waited five years, then you could just sell your note to a bank essentially. — Yeah. — And and then you can capitalize on the back end even if you sell it at a discount. Guys, I know I'm kind of getting into some complicated stuff, but there's I think the thing that is really exciting about this is that you things can be very profitable if you kind of know the fundamental elements of interest, amortization, cash in, cash out, monthly payments, you know, the payown rates, those different things allow you to be flexible when you're buying a deal.

7:36— Yeah, that's such a great point. And when we first started, you know, I I started by flipping as well back 2011 or 2012, you know, right in that time frame, similar time frame. We started a flipping company and I remember, you know, we were doing offmarket marketing and I remember in the beginning, — I mean, looking back, we threw away so many incredible leads because we had one way of looking at things. And like you just said, like there's a thousand different ways to make money on a deal, you know, and and you just got to figure out what's important to the seller and then structure things in a way that that you know makes sense for both of you.

8:13And you know, so we, but we went into it with the mindset of we want to buy this cheap and we were going to put rehab into it and then we're going to sell it more expensive and and that was the only option. And man, like we we left a ton of money on the table and — well, and and what I think is I so I think there's a double-edged sword to that. I think one, you leave money on the table, but you actually avoid, and I think this kind of gets into some of the pitfalls. So, cuz I've I I had I've had a pretty big crash and burn, okay, that I had to recover from, just to be completely frank.

8:46And part of that crash and burn was so once I went full-time over the next 18 months, we bought about 127, not about, we bought 127 subject two houses. Okay. — Wow. — basically all the way to 2016 and then I sold out of that portfolio. Well, because our management of the portfolio was horrible and our financial management was horrible, pretty much non-existent. We got not into a lot of trouble, but we it it started eating us alive.

9:24And so what happened was, and I'm actually going to circle here in a in a minute. What happened was is we got so caught up in trying to manage and buy deals that we couldn't figure out where all our money was going. — Mhm. — Because we had payments in and out with this. And then it was, I believe it was 2016, there was a huge increase in in taxes on properties across the board. Now, what happened for us, Kirby, was we had this huge increase. So, we started getting all these letters of, hey, your escrow payment is going up on your underlying leans, property taxes.

10:01Yes. — Well, when you're doing a subject to owner financing, you have to pass that through. — Well, I'm dealing with like regular people, right? Like that don't and I have I've never been a mortgage company ever. So, now I get this thing, all our payments gone up. We haven't passed it through the end. And all of a sudden, we went from making like $40, $50,000 a month to like negative $20,000 a month. — Oh. — Because we absorbed it cuz we didn't know how to pass it through. — Yeah. — So, it took us three months to figure out how to pass it through.

10:35But then once we actually passed it through, like everybody hated us. Like we were the bearer of bad news. — Oh yeah. — And there was this huge swing. And so what I what I like to say is I I actually got really burned and I went cash only for a long time. So when I sold out, that was a big reason why I sold out is I was like, yo, like I was afraid. I was afraid it was going to bankrupt me. Like I was so scared. And so I went out and I was like, listen, I'm only going to do subject two.

11:09I'm only going to buy owner financing to acquire. I'm not rapping anymore. And and so I started acquiring, but then I was just doing for cash, right? I was just flipping, doing for cash, wholesaling, and I kind of got addicted to that cash for a little bit. But to go back to your point about like focus on one thing, I think it's really important to understand like to have the knowledge in your mind because when situations come up like I think one of the things I see is people will like learn or they'll go to these courses, which I'm a huge proponent of.

11:42I bought like everybody's course just to find nuggets I don't find. But it's even why I read so much is I'm just trying to put things in my head. What I'm not trying to always do is like systemize everybody's process though. What I'm trying to do is when I come into a situation, does this remind me of something that I learned? And if it does and it doesn't fit my normal model, can I solve a problem that I otherwise am at what I like to call an impass on?

12:14— Because often and and often what happens is when you get the best creative deals and I learned this actually when I called them the first time is like in that first set when I did those first eight properties, the first eight subject twos is all of those people I had already come to an impass on. I had made them a cash offer that they could not accept, right? But they wanted to sell still and they just didn't have an option, right? So what happened was we came to an impass. They said, "No, I can't take that." And I said, "No, I'm not willing to do that." Based on my normal system, we both came to a no.

12:50And we both settled, "All right, cool. We're good." Well, once that happened, when I called back, what happened was I was like, "Hey, I was thinking about you and I came across another strategy that I thought might help you. Would you be interested in hearing it?" Well, they're like, "Yeah, I don't have any other options." And when I followed up, they were way more open to my conversation. Why? Because we first came to an impass. So, what I like to tell people when I first get involved or people are coming is it's always awesome to start with wholesaling or flipping or whatever because you know exactly what you need to buy it for.

13:29People are expecting a cash offer and you're demonstrating what I like to call financial dominance. I have the ability to pay cash and buy it now. — Yeah. — And if it doesn't work, you say, "Thank you so much. Have a good day. Goodbye." — Yeah. — And then you get off the phone. But then whenever you call back, if you weren't needy, you can play the game of, "Hey, did you end up selling that property?" I always do. That's my followup. Like people do complicated follow-up. My follow-up is did you sell the property yet?

14:00— That's the only reason I'm calling them. — Yeah. — and if the answer is no, well, what's your plan? Well, did you Well, hey, I was actually thinking about you because I came across this thing and another deal I was doing. I was thinking, man, this might this might help John Smith. I'd love to talk to you about it if you're open. And then they're like, yeah, I'm open. So now I got permission. And now you're brainstorming with them. — Yeah. Because and that's that's kind of how I've been able to structure creative deals because if I don't do it that way, if I start on the front end by saying, "Well, would you be willing to own or finance the property, Jimmy, or would you be willing to, you know, receive your equity in monthly installments or would you be willing to any of these techniques?" What

14:49I found was is that's when people want the 20% down. That's when it feels like you're trying, you're kind of chasing it. — Yeah. — so I always recommend — do the cash first, come to an impass, both of you say no before you do anything creative or problem solving. So that's kind of my format. I know people have different things, but that's what's always worked for me. — Yeah. No, it's I mean that's such a great point and it's it's funny you say that because even most of the deals that that I do today are are MLS deals.

15:27You know, we're buying small multi-unit short-term rentals and we can find deals on the MLS, but the vast majority that I look at, I go back to the realtor and I don't give them a low ball offer or I don't tell like most of the time I need it a lot cheaper than it's listed for. — Yeah. — And and that's the case for a lot of investor. Like you're going to have to put in offers that are low. But I don't give them a low ball. I say, "I'm sorry. I, you know, I looked at the property. I like it, but I just can't make the numbers work, you know, and here's why." And I explain why it's not going to work for me.

16:00And and as long as you have a logical reason why it doesn't work, you know, there's a lot more work that's needed. It's, you know, it just doesn't work. Then they say, "Oh, okay. Well, what would you pay?" You know, like then they're asking me for the offer. It's not me saying, "Hey, you know, you need to sell this to me for, you know, $50,000 less than it's listed for, whatever." And so they're like, "Well, you know, I understand all that. Like, what would you pay just so I know?" And and so then I tell them that and so then they know, you know, yeah, okay.

16:31And and I typically work with the listing agent. — So then, you know, usually they say, "Oh, okay. Yeah, the seller wouldn't do that." But then it's amazing three months later when I get the call and say, "Well, it hasn't sold yet. Now they're really willing to to entertain your offer. So, — yes. — dude, Kirby, I the reason why I love that is I think the hidden thing in us going about that route rather than just throwing out offers or is where like what you did is you demonstrated credibility and what I like to call finan I like the concept of financial dominance because I like the Jordan Peterson has the lobster dominance.

17:10He has like this whole thing he walks people through. And so the idea is like if you if you act more alpha, you kind of raise up in the, you know, the hierarchy. — Well, what you're doing is you're saying, "Hey, I'm not going to make you an offer. I'm willing to buy it and I can buy it today, but I can't buy yours for these reasons." — Yeah. — And you're demonstrating your like willingness to walk away. And now in people's minds, okay, Kirby can actually do this deal if it fits his criteria rather than just, oh, they're another lowball offer.

17:47It's like, no, like they've got a legit system. So, if they can't, the phrase that comes up, which I would imagine comes up when the listing agent calls you, is like, "Hey, I was speaking to the seller and you know, I just remembered our conversation and I recommended that we would revisit you and see if see if there's an opportunity for us to work together." — Yeah. — And that dude, that's what's in my opinion, I — I think that's like some gold right there. Like that whole system is so gold.

18:19— Yeah. Oh, no.