Epic Real Estate Investing - More Seller Financing as an Exit Strategy | 240

Episode Date: December 12, 2016

Listen as Matt Theriault further explores the art and science of seller financing. Discover how you can create more opportunity and achieve your financial goals faster when you consider all of your exit strategies. Do the dirty math, submit the offer, get the contract, and THEN consider the exit strategy that will bring you the strongest return on your investment.   ______   The free course is new and improved!  To access to the two fastest and easiest strategies to a paycheck in real estate, go to FreeRealEstateInvestingCourse.com or text “FreeCourse” to 55678. What interests you most? • E.ducation • P.roperties • I.ncome • C.oaching   Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. Broadcasting from Terrio Studios in Glendale, California, it's time for Epic Real Estate Investing with Matt Terrio. Uh, yeah, what's up? Hello. And welcome. Welcome to Epic Real Estate Investing, the place where I show people how to escape the rat race using real estate. And if you're just getting started and or you're looking for new and creative ways of making money in real estate, I put together a free course just for you, including a checklist on how to find motivated sellers,

property owners that are willing and able to sell you their property at a discount and to access that free course. Go to free real estate investing course.com. Free real estate investing course.com. And got a great show for you today. Oh, before we go there, real quick, the tickets and seats are filling up over at the Epic Intensive. That event is coming up in end of January.

I think it's January 26th and 27th. I don't have the calendar right in front of me, but I think those are the dates. Go to epicintensive.com. You can get all the information there, including the dates. And, you know, super early bird pricing is still up and running and available.

And the closer we get to capacity, the higher that price is going to go. And it's really just kind of the way event planning works, I guess. And it's the way that the fee structures and everything work with hotels. So that's just kind of why we have to do that. So the more people we get in,

the earlier we get them in, the cheaper it is for us to put on that event. So that's why we do that. So go to Epicintensive.com. Love to see you there. I've already seen so many people. Probably, I don't know, there's a good portion of the people that were there

that the last one are coming to this one as well. So it's great to see you guys coming back. We're going to cover a whole new subject. Well, there'll be some overlap. There'll be some repeat. There'll be some refresher, some gray area where they two overlap because we're still talking about strategies

for a shifting market. But we're going to be talking a little bit more about escaping the rat race and creating wealth through real estate. That's going to be a little bit more of the focus, talking about cash flow and stuff like that. So hopefully you can make it. I'd love to see you there at epicintensive.com.

All right. So I do have a great show for you today. It's going to be tough, however, to follow up last week's show with Mitch Steven, where we tapped into some of the art around seller financing. And based on your feedback, I would say, no, actually you said it was one of your favorite episodes ever, if not the most favorite episode.

it because I found myself going back and listening to that episode again, twice actually. And I rarely do that. And it's been a long time since I've gone back and listened to one of my own episodes. And it's just kind of, I just remember there were things there that were discussed. You know, when two people, I guess specifically two people that got started in real estate with very little resources financially, you know, you're forced to get creative and you get two creative minds coming from two different parts of the country. You put those two minds together and you never know what's going to come.

come from that conversation. So I wanted to make sure that there wasn't anything that I missed because I know there were some really cool stuff that we discussed. And so, and you actually, you heard it as well because you shared that with me. So thank you for listening. Thank you for sharing this show with your friends and family and your associates. I love it. It's very difficult to promote a podcast.

So we rely so much on you and sharing this with your friends. So if you like what you hear, thanks for sharing. And it helps us keep the lights on as well. All right? So I get it. You know, why that was your favorite episode. It's why I do real estate the way that I do, as the possibilities are really endless when it comes to creative acquisition and exit strategies. You know, so many people think, like, you need money to make money in real estate.

You have to have money to do this. And it certainly helps if you do. I'm not saying it's going to hurt you if you have it, but in some respects it might. You know, it's really not all about the actual currency that you have in your pocket in the bank. in the bank. It's more about the intellectual currency you have in your brain. That's really the more intellectual currency you have, the less actual currency you're going to need.

And actually, vice versa. The more actual currency you have, the less of that intellectual currency you're probably going to develop. Okay, so they go hand in hand. But anyway, last week's episode, we got a lot of bunch of questions. They came in, which I just thought to go ahead and answer today. As the questions I received from subscribers,

I can tell, you know, I can tell where you are in your business based on the questions that you ask, I mean, almost instantly. So I'll answer, I'm really just one of the questions that came in many shapes and forms. I'm going to answer that question, but it's going to allow me to bring up a point or two that I've brought up here several times on the show. And it's going to allow me to answer a concern also of one of my private coaching clients that came up to me this week. And so I just can kind of kill all of these birds, a bunch of birds with one stone or with this one episode. rather. All right.

So I've got three points I want to share for you today. So the first one is got to get it under contract as fast as possible. You've got to get your deals under contract. I've shared that so many times and it's just so important. But I can tell by the questions that you ask that this isn't a focus of yours. Or maybe it's a focus, but there's no action behind that focus. All right. I mean, you create the lead through your marketing efforts.

You contact the lead. You build some rapport. You set the appointment. Do your quick and dirty math. And boom, present the offer. Don't overthink it up to this point. Don't, you know, overthinking what you should offer or what you're going to do with a property

before you get it under contract, that's a time stealer, and it's a good way to lose good deals. All right? So you just get a rough idea from Zillow or any number of sites out there. If you've got the multiple listing service, use that as well. It's fine. But you just want a rough number to formulate the property's value,

knowing that this initial opinion of value that you're going to formulate here, just know that it's likely going to change. It's going to go up or it's going to go down. It's likely going to change. But just get a quick starting point. Then back out a small spread in case you end up wholesaling the deal. This spread could be anywhere from 70 to 90% of the property's value.

And then the general rule of thumb. And what I just said there, in case you end up wholesaling the deal, I really want you to start shifting your focus from going in and getting a deal, just you're so focused. I'm going to do it. I'm going to wholesale this deal. Don't go in that way. I want you to keep your options open. We'll talk a little bit more about that in a second bit.

But keep your options opening. In case you're going to wholesale the deal, take that number you got from Zillow and then back out a spread. There could be anywhere from 70 to, I don't know, 80 percent or 70, 90 percent of the property's value. And that's just a general rule of thumb. Could be the lower the area's property value, the more of the spread you're going to want to create.

For example, 70 percent. of 100,000 property value is going to leave you with 30% of equity, right? 70% of $100,000 that leaves you with $30,000 of equity. 70% of a $300,000 property that leaves you with $90,000 or $90,000 of equity. Granted, we'd all like to have that $90,000 of equity, right? But would you still do a $300,000 deal for the same $30,000 profit you'd make off a $100,000 deal? Yeah, $30,000 is $30,000. It doesn't matter if the property is $100,000 or $300,000.

Yes, of course you'd do that. So knowing that, you could start with somewhere in the ballpark of deducting just 10% if that was your market. So you could offer more on the property, which would increase the likelihood of getting your offer accepted and make the same amount of money. Okay, so just keep that in mind. That's not what I'm really wanted to talk about today. I was just pointing that out that that's not an absolute, that fair market value minus 70%. That's not an absolute. The higher you go up in your property values, the smaller that that percentage could be.

so that that could allow you to get more offers accepted because you don't have to come in so low. So just keep that in mind when doing your quick and dirty math formula. So you start with the property's value, back out some equity in case you end up wholesaling the property, then subtract an estimate of repairs, and then don't forget to subtract some profit for yourself. So an example of your quick and dirty math formula might be

the after repair value times 70% minus repairs minus profit equals your offer price. Boom, you're done. So put that number on a contract and present it to the seller. If you made any mistakes, you can adjust later during your due diligence. Or if you made a big mistake, you can cancel the agreement. It's not the intention, of course, to go in knowing that you're going to cancel any time. That's not the intention, no.

But it is an option. And the reason I draw your attention to this option is really just for one thing, is to demonstrate that there's nothing to be afraid of by presenting an offer and presenting an offer quickly. And you want to get into the habit of doing this. You're never going to do deals unless you do develop this habit. I mean, your success in this business is going to be directly tied to the number of offers you present. I mean, even if you just woke up every day, looked up a property on the multiple listing service

or looked up a property on Zillow and just wrote an offer and sent it in, sent it to the owner. This is a good daily habit to develop, by the way. I mean, just think, if you did that once a day after a year, 365 days a year, how many more deals would you do than you're doing right now? just something to consider. All right. So that's point one. Get it under contract.

Worry about what you're going to do with it later. You've got to get that property secured. You've got to get that deal secured. Once you've got it under a contract, you're going to want to analyze for various exit strategies. Because you just don't know what you're going to get when you're marketing to motivated sellers. And if you limit yourself to just being a wholesaler, you're going to miss deals. And if you got lit up by what Mitch Stephen talked to, we talked about last week, and you now want to be a seller financier on the exit of every deal,

if that's going to be your solitary focus, you're going to miss out on opportunity there as well. So you want to analyze for multiple exit strategies and pick the exit strategy that's going to move you toward your financial goal the fastest. Maybe it's adding an extra $500 a month to your monthly cash flow. Maybe that's going to move you to your financial goal the fastest. or maybe it's a quick $20,000 wholesale fee so you can take down another deal that you have under contract that you want to hold. So maybe wholesale on that property get that $20,000 in your pocket so you can go put that to you somewhere else. Maybe that's going to move you toward your financial goal the fastest.

My point is just be open, analyze for multiple exit strategies of which will ultimately help you to find who your customer is. Yes, you have a customer, right? You know, if you're just a wholesaler, who's your customer? Most likely a fix and flipper, right? Absolutely. So maybe your customer is a fix and flipper. So you're going to have to make sure that there's enough equity in the deal to accommodate the repairs, the fix and flippers profit and your profit. So you're going to analyze for that strategy. Then if your customer is a buy and hold investor, you're going to make sure that there's a decent amount of cash on cash return for that buy and hold investor and as well as to carve out some profit for yourself. But you're going to be focused more on the cash on cash return and maybe not so much the equity. And if you're going to if you're going to fix and flip it yourself, then you're going to want to make sure that. you're creating a nice place for the person that is going to live in the property in a way that's going to compete or exceed what's the houses in the area. So it's going to sell fast and people are going to want to pay top dollar.

Maybe you have multiple people that want it and they bid it up. So that's different if you're going to fix it and flip it yourself. You're looking at something different there. So this is point number two. You have to know your customer. And what Mitch and I discussed last week was a totally different customer, right? it was a resident owner that would rather own than rent. But for one reason or another, they can't buy through conventional means.

That's a different type of customer. And depending on who your customer is, will determine how much you can actually pay for your deal. And that's going to give you a competitive edge when talking to sellers and presenting your offers. For example, the person that talked to your seller, say, just before you, you might be single-minded with their focus on making a fix and flip out of that property. and so all they're vying for is their equity position. They need equity in the deal for a fix and flip to work. So they need to buy really low. So they didn't get their offer accepted.

But you, because you have multiple exit strategies in your tool belt, you don't necessarily need such a strong equity position. You're going in with your quick and dirty math. You're trying to get in and you're going to go figure it out later, right? So you don't necessarily need such a strong equity position, but rather to make sure that the property cash flows. you can resell with the seller financing at a payment that is close to market rent, like what we talked about last week.

The value of the property doesn't matter so much when you're thinking about your customer. You see, you're not thinking about the value. Your customer, you're thinking about your customer's problem, and you're there to fix it. So we've calculated equity type deals on this show many times. In fact, I just went over the quick and dirty math equation just a second ago. That's your equity equation, basically. We've covered cash flow calculations many times here as well. you take your annual gross rent, multiply that by 60%,

then subtract the annual debt service, if there's any, and then divide that by how much money you put in or are going to put in to the deal. And what you're left with is your cash on cash return. Annual gross rent, multiply that by 60%. Subtract the debt service, and then divide that by how much money you put into the deal. And what you're left with there is your cash on cash return.

Now, the big question that came in from last week's episode was, can you cover again how you end up with a mortgage payment that is the same as the rent, the way that Mitch does it? So let's go through this one a little bit more slowly. Okay. For this seller finance exit strategy to work, you've got to craft terms where payments would be the same as the market rent. Now, I'm talking about price and terms. I'm talking about price in terms when you're selling the property now, not when you're acquiring the property, not when you're buying the property. We're analyzing this for a different type of exit strategy. So you're crafting terms to how you're going to exit this deal, how you're going to sell it.

Okay. So what we want to do is focus on creating a mortgage payment that would be the same as the market rent. That will let us know how much we can sell the property for. Mitch likes to dial it in exactly to get that monthly payment the exact same as rent. And there's nothing wrong with that. My experience causes me to believe, though, that people are. willing to pay a little bit more than market rent if it means they're actually going to own the property that they're that they're living in okay both ways work both ways work just a little a little

different thought process but both ways work nothing wrong with it with the way Mitch does it nothing wrong with the way that I do it it's just my experience says you know people will pay a little bit more if they know they're going to own the property rather than just being a tenant in that property okay both ways work all right let's go through the formula to determine how much we can sell a property for, of which ultimately tells us how much we can buy that property for. So that's why we need to know how much. That's why we're analyzing it to see how much we can sell it for, so we know how much we can buy it for.

So keep in mind, with this strategy, the value of the property here is really meaningless. It doesn't matter. It's not meaningless, but it doesn't matter all that much. We're not focused on the value of the property, like the comps, what the comp say. So keep that in mind with this strategy. Okay. Don't start spouting off. Hey, Matt said it doesn't matter.

property's worth. No, it does, absolutely, but I'm talking about with this specific strategy. What we're more concerned with is the payment of which we'll be passing on to the resident owner. And we want that payment to be the same as it would cost for that resident owner to rent the property, of which when you can do that, the reason you want to line those two up, because that will typically cause a quicker sale. It expands your buyer pool because you already know there's people out there willing to pay that much to rent the property. And if they can own the property. You've got in it's not going to cost them anymore. It's going to cause, you've got a big buyer or a pool and it's going to cause a quicker sale. All right. So that's what

that's the purpose. So let's say, let's just say market rent is a thousand bucks. Okay. So you're going to want to begin by subtracting the taxes and insurance because that market rent is $1,000. So we want to say pass on to the our buyer that the expense, the total monthly expense for them to buy that property is going to be right at $1,000. So when you own a property, property, you have to pay taxes and insurance. When you rent, the owner pays it. The landlord pays the taxes and insurance. But if this person is going to buy the property, they're now going to be responsible for this. So you start with your $1,000. There's your market rent. You're going to want to, and then now you begin by subtracting taxes and insurance, which leaves you with your

target payment. Okay, that leaves you with your target payment. Now, the taxes and insurance, it's going to vary from market to market, state to state, city to city, property to property even. So you'll need to know these numbers for your area. I mean, a quick trip to your county assessor's office is going to give you the property tax rate. A quick call to your insurance agent is going to give you the insurance rate. And after you've done this a few times, you'll know the ballpark number for your area when it comes to taxes and insurance. And you can just plug that into your quick and dirty math formula. Okay.

But say, let's say for this purpose, taxes and insurance, for this $1,000 a month market rent property adds up to $100. So we're going to subtract $100 from $1,000. And you're left with $900. There's your target payment number. $900. So to back into the price of the property that you're going to sell it for, you need the rate you're going to charge in your seller finance note that you're going to be creating for your buyer.

And this number is relative. There's not a right or wrong. I like to push that number as high as possible for the market. For example, a conventional loan for a home can currently be acquired for somewhere between 4% and 5%. Right? So that's what I mean by its relative. So we know that if they were to go to the bank, they're going to pay 4 or 5%.

And if they could go to the bank, they would have already done that and they would pay the four or five percent. So we can charge more because we're giving access to owning this property. So nine or ten percent would be a logical starting point in today's environment. And there's several reasons you want to push this as high as possible. And most of them are probably obvious. Higher rate means more money to you. Higher rate means you can afford to pay more for private money if you're using private money, which means more private money opportunity if you're paying more.

and three typically it's easier to sell the note should you need to liquidate your position in that property. There's some others, but those are the things that come to mind and they're pretty obvious. So you take your payment $900 and multiply it by 12. Okay? So we got our target payment of $900. We multiply that by 12. That's going to give you the annual payment. And then you divide it by the rate you're going to charge, the rate that you're going to put on your seller finance note.

So let's say it's 10%. Just keep the math simple. So if you're doing the math with me, that gives you $108,000 the price. That's the ballpark number. It's actually not the price. It's the number that you can carry back through financing the buyer yourself. That's the number you're going to carry of where their monthly payment to you would be the same as if they were to rent. And I say it's the ballpark number because this was an interest-only payment that we just calculated.

We just calculated a quick and simple interest. when selling to a resident owner, you're going to want to use a fully amortized payment. I use a mortgage calculator to get the exact number, but you'd never be able to follow along on this podcast. You might be lost already with the math, and I understand. I'm just trying to clarify and answer some questions and do the best I can in this format. And in case you don't have your mortgage calculator with you, and if you're out in the field and you need to do some quick calculations, this works pretty well as your quick and dirty

math equation. All right. So let's back up. Our target is a $900 month payment. multiply that by 12 and then divide by the interest rate you're going to charge your buyer and you're left with the number that you can carry back. In this example, it's $108,000. That's what we're going to carry back.

That's not what we're going to sell the property for. That's what we're going to carry back because we need a down payment from this buyer. They've got to have some skin in the game, right? In case they default, you want something in your pocket and you also want them to cause them not to default or an incentive. If so, they've got 10% down there, they don't want to lose that. It's a lot bigger than a security deposit. Okay, this can be a bigger chunk of money to that person.

So if you want to say, say you want to ask for 10% down payment from your buyer. So take 100% minus your desired down payment, the percentage. So if you want 10%, subtract 10% from 100%, and you get 90%, right? You get 90%. So divide 90% into your carryback price. 90% divided into $108,000. That gives you a sales price of $120,000. That's what you're going to sell it for.

So you're going to sell it for 120. You take 10% down $12,000, right? And you're going to carry back $108,000, which is going to give them that $900 a month of payment. That's what you're going to sell the property for, $120,000. So you can provide that mortgage payment to your buyer. that would equal that market rent. Doesn't matter what the market value of the property is.

We haven't even talked about COPS, right? I mean, if you want to match up a mortgage payment to the market rent, that's what the number is, $120,000. Now, that property could be valued at $150,000, or it could be valued at $100,000. But to you, the market value for this exit strategy is $120,000. So now you can make a better decision at what price you're going to close at for this property. and that's going to all depend on your own minimum deal standards,

just like if you're going to be a fix and flipper or a wholesaler, or if you're going to buy and hold. So I know it's tough to follow in this audio format. So let me go over this formula one more time. So you can write this down if you haven't already, and maybe I can clarify something in case I lost you somewhere. So you take market rent, subtract the monthly taxes and insurance, multiply that by 12 to get your annual payment.

Okay, market rent minus taxes, minus insurance, multiply that number by 12 to get annual, your annual payment. Divide by the interest rate that you're going to charge your buyer. That gives you the ballpark amount you're going to carry back. And again, I say ballpark because we're calculating interest only payments here. During your due diligence, you can go ahead and break out the mortgage calculator and get that exact payments. But this is just ballpark.

But now you have the amount you're going to carry back, right? subtract from 100% the amount of down payment you want and divide it into the amount you're going to carry back. And that's going to give you the sales price of the property. So that last step, take 100% minus the amount that you want to take down payment. So if it's a 10% down payment that you want, it's 100% minus 10% that gives you 90%. Divide that into the amount that you're going to carry back. And that's going to give you the sales price of the property.

All right. Now that you know what you can sell it for, you know what you can buy it for. And Mitch likes to shoot for 50% of that number. So we have $120,000 is going to be our sales price. He likes to shoot for 50% of that number. So he's going to go for, he's going to try and buy that property at $60,000. Right? And there's nothing wrong with that at all.

Buying it, just making that 50, going for that 50% number. But understand you can create some really good deals for yourself by paying 55% or by 60%. 65%, even 70 or 80%. I mean, there are just so many other variables to consider. You use the quick and dirty math to get into contract, and then you go and use your nice and clean math to analyze your deal before you close that deal. All right? So point number one, get it under contract.

Point number two, know your customer. Analyze exit strategies for all of your potential customers and pick the exit strategy that's going to get you to your financial goal the fastest. Maybe it's going to be wholesaling that deal. Maybe you're going in thinking that you're going to do this strategy and you're going to sell a seller financing, but that might not be what you need to do right now for your financial goals, right? Maybe you've got five deals that you're working on right now and you don't want to manage all those. So you want to dump these two, hold these two, and then turn this one into a note. Your situation is always going to be changing. So focus on your financial goal, what's going to get you to where you want to go the fastest, okay? So maybe it's wholesaling. Maybe it's buying hold. Maybe it's what we discussed today. All right. So that's point number two. Know your customer. Point three is sell to your customer. You have to, when you go to market your property, you want to sell it to your

customer. Meaning if your customer is a fix and flipper, you're going to be promoting equity in your marketing. That's what a fix and flipper wants. They want to see equity. They want to see room in there for them to make a profit. If your customer is a buy and hold investor, you're going to promote return on investment. This is how much you put in and this is how much money you're going to get back. Okay, they want to get their return on investment.

That's what you're going to market. If your customer is a retail buy, buyer, promote the features and benefits of the property, promote the lifestyle and the standard of living of the property, because that's your customer. Now, if your customer is a tenant that would rather own than rent, you're going to sell payments. Just like when you go to buy a car, they don't focus on the purchase price of the car. They focus on how much you want to pay per month.

That's like the first question they ask. Well, how much do you want your monthly payment to be? Same idea here. All righty? So the big points I wanted to make today, number one, get it under contract. Okay, don't go in any deal focused on this is what I'm going to do with it. Just do your quick and dirty math, get it under contract, and then go and analyze which exit strategy is going to get you to your financial goals the fastest, okay? That's number one.

Just get it under contract. Don't waste your time. Number two, know your customer. Okay? You want to know your customer. So you're going to analyze for all exit strategies to determine who the best customer is going to be for you to get to your financial goal the fastest. And point number three, then now you're going to sell to your customer. Got it?

So fix and flipper, you're going to sell equity. Buy and hold investment. You're going to sell return on investment. And if you've got a tenant like what the customer that we talked about last week with Mitch, then you're going to sell payments. If that tenant wants to own the property, all they're concerned about is how much it's going to cost them. and are you going to sell payments. All right. If you followed along, fantastic. If you didn't, listen to it again. I did my best. It's tough to follow along math equations in an audio type format. So I repeated myself a lot in this episode because I kind of was thinking, like how you might be

thinking, listening to me, trying to get these equations down. If you need to go back and listen to it again, I try to do it, break it up in and do it in several locations to where you can write that down and have that for your use in your market and in your business. All righty. So been great today. God bless. 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.

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