Epic Real Estate Investing - EREI 058: Building Your Portfolio with Squeaky Clean Partnerships

Episode Date: July 30, 2013

Matt fields a listener's call that results in a complete episode on seller financing, how to simply structure a seller financed deal and how to use that same structure in an alternative way to build your own portfolio creating squeaky clean partnerships. Matt formed several partnerships with podcast listeners since last week and some of them are getting paid this week. To learn how they're doing it, go to EpicWholesalers.com for the details. Download Matt's free real estate investing course at FreeRealEstateInvestingCourse.com Learn more about your ad choices. Visit megaphone.fm/adchoices

Broadcasting from Terrio Studios in Glendale, California, it's time for Epic Real Estate Investing with Matt Terrio. Yeah. Hello. Hello, and welcome to another episode of Epic Real Estate Investing, where I show people how to get out of the rat race using real estate. And, you know, it all begins with just a simple shift in mindset, a shift and focus, if you will. Simply just stop focusing on making and saving money and start focusing. on creating residual income. What we like to call in the real estate world, cash flow.

You see, by doing just that, I escaped the rat race in less than four years. What literally 99% of our population is unable to do in 40 years. I don't share that with you to brag, not by any means. I don't consider myself special in any way, meaning anyone can do this if someone would only show them how. Someone was gracious enough to let me in on this particular life secret. and now I'm letting you in on it. I'm paying it forward, so to speak.

And if you think that's good news, it gets better. Because it took me just under four years to escape the rat race. And that was with making a ton of dumb mistakes. Meaning, if you hang out here for a while, you should be able to travel that road much quicker than I did. And to help you get started, I created a free step-by-step course to show you exactly how to do it, to show you exactly how to do it if I had to do it again.

And you can download that course for free at free. Real Estateinvestingcourse.com. Free real estate investing course.com. All righty. So got a lot of great response from last week's episode regarding Epic wholesalers.com. And if you missed it, that is a new web portal that I launched recently to give you, just my podcast listeners and academy members, just to give you access to my personal buyers list of which they're buying properties all across the country.

And this past week, several of you signed up. And I'm happy to say that we've already entered into contract with a couple of you, Brad Donnelly of St. Louis and Brad Weber of Cleveland, which will be closing those deals this Wednesday. It's pretty fast, huh? I mean, that's less than a week from when they submitted the property to actually closing escrow, which means that's less than seven days to a payday for these two. And, you know, we actually have received several other properties this week from this community

that we're reviewing right now. So I should have more great stories to share with you next week. And if you want to find out what this is all about, either go back and listen to episode 57, our last episode, where I went into great detail about epic wholesalers.com, or just simply go to epic wholesalers.com the website and you'll find everything that you need to know right there in black and white. And right after this episode, I'm going to be recording a video to post there too,

providing some additional information. Okay? Cool. So if you have a question, comment or concern that you'd like, me to address on the show, you may call the epic real estate hotline and leave me your question there at 1-888-891-7203, 1-88-8-891-7203, just like Rashida did this last week. Hi Matt, this is Rashida calling from Traveno to Tennessee. Hey, I have a question for you.

I am in the throes of putting together a deal with the seller and I agreed to purchase the price at one price and to pay her a down payment

and then once I fix and slips the property I was going to pay her the remainder for the balance of your agreed to price one year from closing date so let's just say For example, I bought the house for $30,000, but at closing, I'm only paying for $10,000,

and one year later, once I've been slipped the property, I will pay her the remaining $20,000. So my question is, do I need to get a real estate mortgage to draw up that type of contract that would specify what we're trying to do. And also, she wants to keep title to the property until the remaining balance is paid. So how would that look in terms of who has ownership? Would I still have ownership, but I have the deed to the property and she has title? I'm kind of confused on how to structure this deal to those type of terms. So if you help me out, I really appreciate it.

Okay, thanks for the call, Rashida. And, you know, I actually called Rashida back right away after hearing her message. As it seemed, you know, time might have been of the essence that she was putting that deal together right then. But I also wanted to answer her question here on the show because the answer can give you some insight, I think some really useful and practical insight on a creative way of accessing seller financing or making the seller your partner and you both profiting from the transaction. and at the end, I'm going to go into detail on how you can use this strategy to create squeaky, clean partnerships as well. So, Rashida, first, hey, I just want to congratulate you on taking some action and getting into talks with a motivated seller. That's awesome progress.

We've never talked before. I don't know how long you've been doing this, but I'm just excited that you're actually, you're in action, you're talking to motivated sellers. And then you got to the point where you reached a win-win solution. You reached an agreement. I mean, it seems to me that you're moving at the speed of instruction. Then you got stuck and you asked for help. This is so perfect. That is exactly how you're supposed to do this business.

You don't need to see the entire staircase to take the first step. And because you took those first few steps, you got to a place where you were forced to get creative. And you came up with a solution. And I love your solution. I love your idea. It's very creative, especially if you've never done it before. So nice work. Now, you know, now that you've got a win-win solution,

you know, Rashida just needs to know how to put the paperwork together and then she's got a deal. She's likely going to help a motivated seller get out of their situation and Rashida's probably going to get paid for it. I mean, I don't know the details of her deal, but just by the nature of her having made it this far, I have confidence that she's going to work this out. I have all the confidence in the world that this is going to work out for her. And you know what? And if it doesn't, hey, no big deal. Just go out and do it again.

I mean, some deals are going to pay you and some won't. Just move on to the next one. and take comfort in knowing that the more deals you do, the more often they will pay you. That's how this works. So, she's agreed to purchase this property for $30,000. That's the purchase price. She's agreed to put $10,000 down right now and then pay the seller the balance of $20,000 within the year.

And, you know, that's really pretty easy to put together. But the seller wants to remain on title. Now, that could be the tricky part. I mean, that the seller wants to remain on title. At least, you know what, at least that's what the seller thinks they want. What the seller really wants is the control or the security to make sure that Rashida will actually follow through and pay the $20,000 by the end of the year. I mean, that's what every lender wants.

They want to know when they're going to get their money back. They want to know how much they're getting. And they want to know what happens if you can't follow through. And if you can adequately satisfy those three questions for people that you borrow money from, you'll never be at a loss for money. and that doesn't make a difference whether that's from an institutional lender like a bank or your parents or a friend or your boss or whoever that may be or in this case the seller themselves all they want to know is when they'll get their money back how much they'll get and what happens

if you can't follow through so rishita has answered those questions mostly she has an agreement that the seller will get $10,000 now and the balance of $20,000 within a year so the first two questions they've been answered. In exchange for the seller's property, she'll give them a little bit of money right now and the rest within a year. The rest a little bit later. Now, tentatively, when they have agreed, you know, should Rashida not be able to follow through and pay that $20,000 balance, the seller wants to remain on title for their security. That's what she wants. The seller, I don't know if she or she or she on the seller, but that's what the seller wants. if Rashida can't follow through

in case it doesn't work out she wants to remain on title so she still owns her property. She doesn't want to lose her property. That's how the seller will feel comfortable and secure. But this has to be a win-win solution. Rashida is a little bit exposed here. I mean, she's putting $10,000 down, right?

What security does she have? I mean, she should be uncomfortable as by allowing the seller to be on title. Rashida has no security in this scenario for the $10,000 that she's going to pay the seller. So one option, and you always have options, there's multiple options, but one option is they could create a contract stating the aforementioned, but I don't like that from Rashida's perspective. I don't like it for the fact that lawyers would have to get involved and when lawyers involved, extra money would have to be paid out. Negotiations would likely go back and forth because that's just what lawyers do.

And a lot of time is going to be wasted. And we might lose the opportunity there and overall would just be a big pain in the ass. but they could still do it this way. And although Rashida would have some security via a written agreement, she wouldn't have any control over the property. And it's almost certain she's going to need a good amount of control over the property to fulfill her part of the agreement. I mean, even if this written contract was recorded against the property,

clouding title, you know, as long as the seller, the holder of title, they are the owner. And they have the owner's rights. They have the right of possession, meaning they have control over Rashida's access to the property. And she's going to need access so that she can show the property to potential buyers, to inspect for repairs and to perform those repairs. Or maybe even a rehab or a remodel is in Rashida's plans. I don't know. Maybe she wants to fix it before she actually flips it and sells it.

Regardless of what her plans are, she will need the seller's cooperation at all times. and because in this business, time is money, you need to be in control of your time. You need to be in control of the clock. So you need to be in control of the property. So that would be a sticking point for me, especially with my own non-refundable $10,000 down in the deal. So how can Rashida get control of the property without taking away the seller's security in the deal? And, you know, I tried to paint a little bit of a picture that was going to be a different. and tricky situation.

But this is actually a very easy, and there may be other ways to do this, but this really is an easy situation or an easy solution. You know, you could use a lease, you can use options, you can use all kinds of stuff and make it more complicated,

but there is a much easier way to do this, and this is how I would do it. I would write the contract up for the purchase price of $30,000. That hasn't changed. That'll be the same. Then the terms of the payment would be $10,000 down now,

which is the same, and then the seller would carry back a $20,000 mortgage. And in that mortgage, there'd be no monthly payments, and then the full balance would do would be in a year, a balloon payment at the end of the year, end of 12 months. So that's very simple. And no lawyers are necessary, right? No lawyers are necessary.

The $20,000 mortgage, or note, as it would be referred to, would be recorded against the property with a first trust deed. I mean, and this is no different than if Rashida went and got a one-year loan from a bank. But in this case, the seller is acting as the bank. bank. And that note and first trust deed will be recorded against the property at the closing of escrow. Title will belong to Rashida. The seller's not going to keep it. Title is going to pass to Rashida. If I was in Rashida's situation, I wouldn't accept it any other way. This is how I'd want it. Title will belong to Rashida. Then the note and first trust deed will belong to the seller.

Rashida is now the sole owner and the seller is now the mortgage holder. And although the seller isn't on title, they haven't lost one bit of security. You see, if Rashida can't perform and pay off the balance within that year, per that first trust deed, the seller can now foreclose and take the property back, just like the bank would do. But now the seller has those rights because she's holding the mortgage so she gets those rights per the first trust deed. She can go ahead and foreclose on the property and take it back if Rashida can't follow through if she can't keep her part of the deal.

and then that seller will get to keep the $10,000 down payment that Rashida paid up front. And now the seller would have the opportunity to sell it all over again, collect another down payment and do this whole process again. This is a really great situation for the seller to be in. And, you know, if you have any doubt in the seller's security, don't. I mean, this is why banks do what they do. You don't need to be on title to have security. You know, banks, they loan money to real estate buyers. as they get all the security of owning real estate

because they technically still own it. But as the note holder, they don't have any of the headaches that can accompany being a real estate owner. They don't have to deal with tenants. They don't have to deal with maintenance. They don't have to deal with any of that. They just sit back and they collect the money.

The bank, or in our example, the seller, is still technically the owner of the property. They just aren't on title. They are what's called a cloud on title, meaning that property cannot be transferred without the title being cleared, meaning that that $20,000 payment being paid off. Rashida wouldn't be able to go and sell the property

and the seller not be paid off. There's no way that she could get around that. So the seller is just as secure as they would be if they were on title, if they were the owner of the real estate. Okay? Does that make sense? Hopefully. And you know, because this is a, oh, this is the best part. because this is a very basic structure that escrow companies and title companies perform every single day between banks and homeowners, this paperwork is as simple as pie for them to put together.

I mean, they do it every day. All they have to do is change the names. You have a new borrower and you have a new lender. And then you just insert the terms of the loan on the note. Very simple. You don't need an attorney for this. Your escrow or your title officer can do this for you with their eyes closed. So I really like this structure a lot and I use it a lot.

not only between myself and motivated sellers, but also when I borrow money from someone to purchase a property. You see, I don't really like doing partnerships in real estate, meaning I don't like drafting partnership agreements where both partners are the owners of the real estate. I either like to be the owner of the property or I like to be the lender on the property. You see, when you structure your partnerships like this,

it does a few things. First, it keeps the transaction really clean, squeaky clean. No out of the ordinary paperwork or attorneys are involved or necessary. It only requires a simple promissary note and a trust deed of which escrow or title will take care of that for you. You don't even need to know how to put that together. It's very simple and clean. The second reason is this structure clearly defines everybody's role in the venture. You see, the owner is responsible for the property.

They're responsible for the maintenance and the care of the property, any work that may be involved. And they're responsible for executing the exit strategy. while the lender doesn't have to do anything unless the owner messes up, unless the owner can't follow through. And in that case, that brings me to the third reason I like this structure, and that is that the laws are clearly defined on what steps should be taken to resolve any issues. And everybody knows it up front, and it's very equitable. It's how it works for every piece of real estate.

And those will vary depending, obviously, where the property is located per each state's laws, but it's still very crisp and clean and it's very clear cut. There's no room for real argument there, right? Just the laws and everybody's responsibility are clearly defined when one person's the owner and one person's the lender. So I like this structure. In fact, I actually own almost all of my real estate this way. Now, let's go back to, let's talk about this a little bit more.

Let's go back to Rashida's situation. As there's something different, she could propose to the seller. It's just another option she has available to her. It's not right or wrong, just another option. And as her deal stands right now, Rashida has $10,000 for her own money in the deal, and she's on the hook for $20,000 more. So the question here is,

what if Rashida cannot execute her exa strategy? What if she can't sell the property for enough to pay off the loan? Or what if she can only sell it for $30,000? Maybe she valued a $30,000. and she sold her for $30,000. Well, that being the case, Rashida wouldn't make any money, right? I mean, from a $30,000 sale,

she gets her $10,000 back, and then the rest goes to clear the title on, yeah, to clear title on the property to pay off the seller's $20,000 note. She might even be out the pocket a little bit on closing costs. She might have to come out of the pocket with some extra money. I mean, that would suck, wouldn't it?

Definitely. She spent the entire year working on this deal and didn't make any profit. So what could she have done up front to increase her likelihood of making a profit? Again, there are probably several things she could have done. There are many ways to structure such a deal, but without knowing all of the details of the deal and the seller's specific situation, because that's going to dictate a lot what situation the seller is in.

Let's just keep this really, really simple. What if instead of promising the seller $20,000, Roshita promised to split the proceeds or profit with the seller. What if she partnered with the seller that way? To split the equity. That way, Rishita wouldn't be on the hook for a hard amount of $20,000. There'd be some flexibility in the deal for Rishita and a greater potential to generate a profit.

So if she sold it for $30,000, Rashida would get her initial $10,000 back and then split the $20,000 with the seller. and maybe it would be a 50-50 split or a 60-40, 70-30 or 80-20 split. Whatever would be, that would be agreed to up front. But the difference here being that Rashida is not on the hook for $20,000. What if she put $10,000 down and agreed to just 20% of the profit over her $10,000? So she agreed to an 80-20 split where she took the 20%.

Well, if she sold the property for $30,000, she would get her $10,000. back and 20%, an extra $4,000. She would have made a $4,000 profit in an equity split situation where she would have broke even on the previous situation, under the previous structure. She'd have to sell that property for $34,000 to create the same profit. Now, I don't know what type of deal with regard to value Rashida has, and that's not the point. The point is each deal is different, and sometimes that scenario won, the first scenario, where she was on the hook for a hard amount of $20,000, sometimes that would make more sense.

And sometimes scenario two would make more sense. You know, in some cases, scenario one could end up being a much better deal. I mean, what if she sold the property for $100,000 and she only had to pay back $20,000 on that note? I mean, that could be a huge payday for her. That could be much better than having to split the profit. The point is, I just wanted to give you an alternative way to look at making the seller or your partner, keeping everyone secure in the deal while increasing your chance of creating a

profit for yourself. I mean, every deal is going to be different. We all know that. Just do the math and decide which scenario would most likely work best for you. Oh, but wait, how does the seller in scenario two, the equity split scenario, how does that seller share in the equity if they are the lender? don't you have to be on title to share in the equity? Good question.

Did any of you catch that? If you did, congrats. Congrats for listening. If you didn't, don't worry. You would have caught it once it got down to creating the paperwork because you had gotten stuck again. And that's okay. You could have just asked for help

and we'd have walked right on through this again. So another way to do this again, you can get an attorney involved to write this all up for you, but there's a much simpler way. We don't want to muddy up the waters with an additional contract. We don't want to muddy up the waters or the negotiations with having an attorney or attorneys involved. So we'll keep everything as it is. We'll keep Rashida as the owner on title 100%, and the seller will still be the lender 100%.

Now, Rashida is going to share, to keep a simple. We'll just say that it was a 50-50 equity share between Rashida and the seller. Okay, so they decided to split the profit 50-50. 50-50 of the so 50% of the equity above rishita's $10,000 that's how that would work but in the paperwork we're not going to call it equity okay on the note that equity we were referred to as deferred interest interest that isn't due until the balance is paid did you get that so it's a 50-50 split of the equity above rshaed is $10,000 down payment but in the equity, we're not going to call it, or in the paperwork, we're not going to call it equity.

On the note, that equity will be referred to as deferred interest. And that's interest that it's deferred. It's not due until the balance is paid. Got it? You see, owners, people on title receive equity in a deal. Lenders receive interest in a deal. I mean, it's still, it's all considered profit, but it's just referred to differently in the to keep the owner's rights with their rights on the owner's side of the transaction,

and to keep the lender with their rights on the lender side of the transaction. It still keeps all the separation, it still keeps it all nice and clean. You got it? So instead of equity split, it's equity. Rashida's going to get equity and the lender's going to get deferred interest. The numbers work out exactly the same, but we got to keep the paperwork separate. You see, armed with just that information, and if you've missed any of that, go ahead listen to this episode again because it's gold in here.

This is how I built almost my entire portfolio is on these principles right here. You see, armed with that information, there should be absolutely no limit to your creativity and forming these squeaky, clean partnerships. They're no-brainers. So strive to be the owner or the lender in every deal and avoid sharing title as often as possible. Okay? All right, that's it for today. If you happen to have a question, comment, or concern, that you happen to have a question, comment, or

concern that you'd like me to answer or address here live on the show, please share them with me on the epic real estate investing hotline, just like Rashida did today at 1-888-891-7203. 888-891-7203. And until next time, as a very wise person once said, travel as far as you can see. And when you get there, you'll see further. I love what Rashida did with this deal. She traveled as far as she could see. And then she asked for some help.

And now she's traveling further. This would have never happened for her the other way around. So to your success, I'm Matt Terrio, living the dream. You've been listening to Epic Real Estate Investing, the world's foremost authority on separating the facts from the BS in real estate investing education. If you enjoyed this show, please take a minute to visit iTunes and share your thoughts. Thanks for listening. We'll see you next time here at Epic Real Estate Investing with Matt Terrio.

This podcast is a part of... the C-suite radio network. For more top business podcasts, visit c-sweetradio.com.