The Science of Flipping - Creative Financing 101

Starting point is 00:00:00 Yo, yo, what is up? What is up, everybody? Welcome back to the Science of Flipping podcast. I am your host, Justin Colby, and this podcast is all about real estate investing. The right systems, tools, processes, techniques, ability to hire, retain, and scale. It's all about making you the very best real estate investor you possibly can be. And that's why you are listening here on iTunes. If you aren't listening on iTunes, you might be watching this on YouTube. If you haven't yet joined my

Starting point is 00:00:46 YouTube channel and subscribed, please do it. These are awesome videos. And not only do I drop my podcast episodes right there on YouTube, I also drop three more videos each and every week pertaining to all things business, entrepreneurship, and real estate. So you have six total videos each and every week right there on YouTube. So go to youtube.com forward slash Justin Colby, subscribe, and make sure you are liking these videos, make sure you're engaging and turn on that notification. So you know when I drop all six videos a week. So let's get to it. This episode is going to be about creative financing, everyone's favorite subject. A good friend of mine, Pace Morby, has made subject to such a popular subject within real estate investing that I have to keep up with the

Starting point is 00:01:40 Joneses and make sure you guys understand how to start getting some of these creative deals done. I even had my team today contract a subject to deal and actually sold it already today where the homeowner is leaving his mortgage in place. He is done with the property. He is over it. He basically just wants to avoid foreclosure, and we're helping him with that. And we've already sold it to a user, an end user, an investor who's going to keep it as a rental. And so we actually wholesaled a subject to property. Now, funny enough, my buddy Pace would probably yell at me and say, Justin, why aren't you keeping it? And quite frankly, because it's in Kansas.

Starting point is 00:02:28 And I don't know Kansas very well, and I don't necessarily want a random rental in Kansas. But what I want to talk about is some of the basics of creative financing here on this episode. Things that you can try to just gather some information. And first basic of creative financing is there's no right or wrong answer. That's why we call it creative financing. Now, like I mentioned, subject to, which as defined, is you are buying a home subject to the existing loan that stays in place in the original homeowner's name. You are not inheriting the loan. You are not assuming the loan. You are simply leaving it in place and the original homeowner's name stays on the loan. You then take deed to the property and you now can pay the mortgage just like the original

Starting point is 00:03:21 homeowner. And a lot of investors tend to keep them as good rentals and then rent it out, you know, subject to the existing loan. So the first part of creative financing is there's just no right or wrong specifically, right? It is about you being creative enough to think of the ideas, as my boy Matt Theriault says, it's just a lack of ideas if you need to be creative enough to just put something together. So I'll give you a good example of a deal that we did recently near the college, ASU. The homeowner basically had a $50,000 loan left on his mortgage. He bought his home for his daughter to go to college. Essentially, she's graduated, has moved on. He then put a renter in there. After a couple years, I guess the renter left and he's kind of like, what should I do here? He actually was called by

Starting point is 00:04:19 us. Perfect timing. And essentially, we had a conversation about what he wanted to do with his home. Now this person was not in dire straits. He was not going to lose his home to foreclosure. He could continue to pay his mortgage. He could continue to rent it out. But he thought, hey, if I could get a number that I like, I might be willing to sell. Well, his number was way more than a cash offer, wholesale offer would be, right? It was, I think, like $300,000 for the property. And my cash offer, I think, was in the low twos. So not even close, right? But the home rented just like a normal long-term rent at $3,000 a month. So the 1% rent ratio really worked there if I bought it for $300,000.

Starting point is 00:05:07 But I knew the home needed some work and other things. And then the other thing that he brought to light is his daughter actually subletted some of the rooms. It was a four bedroom home in Tempe. His daughter subletted some of the rooms. And so he said rent could get all the way up to $4,500 a month if you actually have a master lease with some sub-lended rooms. And so that really intrigued me. And I said, well, shoot, if I could get close to $4,500 a month, I could pay way more than $300. So I said, listen, let me see if I can get to $300, but I would need something in return. And that is for you to be willing to be creative. I'll give you the 300, but I need to structure it in a very creative way. And so what I did is we structured a subject to with a wrap, essentially. So his loan stayed in place. He also gave me another $250,000 loan on paper, right? He

Starting point is 00:05:58 became the bank. Um, and we structured a mortgage payment that was principal only, meaning the money that I paid him every month, which I think was just under $300. It was like, let's call it $2,500 if I remember correctly. That went to him, and whatever his mortgage payment was, which I forgot at this point, but I think it was something like he was paying $500 or $600 a month on his mortgage, maybe a little bit more. He would take from his $2,500 and pay his own mortgage, and then he would pocket the rest. And it worked for everybody. He got a much higher price than I would be willing to pay for the home. It wasn't in very good condition.

Starting point is 00:06:39 It wasn't in the greatest Tempe area. And so he got the number he wanted. I got creativity. And ultimately, again, I would probably be yelled at by my buddy Pace, but I wholesaled it off to someone who just wanted that rental and it made sense to them. And so the first rule of thumb is there's no just right answer. This technically was a subject too, but we did a wrap. He created a loan on top of that and we had one payment and his bank got paid and he got paid out of that one payment. And so that's the first thing.

Starting point is 00:07:11 I get questions all the time from my students, right? All the time, my students are like, well, how do I structure this? And what should I say to the seller? And the first questions you need to ask is, what does the seller want? Become a value to the seller. Figure out a way to be a solution to them. And sometimes, and more often than not, is getting them out of a

Starting point is 00:07:30 really difficult situation they might be in, right? The home might go to foreclosure. They might be done. A lot of times it's that, but sometimes they just want more money. Well, I'm willing to pay them more money as long as they can be creative and fit a good buy box for me. And so that's really, you know, a big thing about creative financing is there's just no right way to do it. Now, the second point I've mentioned a couple of times, creative financing is good for all exit strategies. You can wholesale it and just assign your contract to an end user. You can buy it. Well, you can buy it and rehab it. Like you can literally buy it with the creative financing terms and remodel it and sell it off top dollar. That a lot of times helps because you don't have

Starting point is 00:08:17 to go get a hard money loan. You can also keep it in your rental portfolio. As I just mentioned, the two deals that I was giving as examples, they were great rentals. I was willing to pay more because I knew the rent would cover not only just the existing mortgage, but then the wrap mortgage that the seller was going to give me. And so the exit strategies really open up here. And that allows you as a marketer and a salesperson to talk to the homeowner and negotiate and create the value that is needed so you can get the deal. I was talking to one of my students and he really wants to start doing

Starting point is 00:08:53 more of these. And I said, it's going to open up your ability to get deals done. And we talked about how like every offer he's going in, every deal he's doing right now is just a normal cash type of offer. But if he is now starting to look at it and being creative when he might offer 225 and the seller wants 300, now he can actually put a different lens on and kind of look at it in a way that basically is saying, okay, I could actually get there because it rents for $3,500 a month. And as long as I can get that rent, then it will cover the mortgage, et cetera. And so this is going to help you guys get more deals as long as you structure it correctly. For those of you that are my students, I'm excited to announce I'm having a super secret guest come on next week, which will be really cool, talking all about creative financing and

Starting point is 00:09:43 the paperwork that goes along with it, which is kind of the second part to what most people want to know is what paperwork do I need to use and the reality is it just depends on what's needed in the deal so the first answer I'll give you is most title agencies escrow officers or closing lawyers will tell you exactly what will be needed first First, you need a purchase and sale agreement. At the end of the day, that starts absolutely everything. You also may need an addendum stating the terms that are creative. Don't overthink this. It quite literally could be a Word document that says addendum, and then you could list out the terms, such as existing loan to remain in place, 5% interest,

Starting point is 00:10:27 mortgage payments, $1,200 a month, et cetera, et cetera, et cetera. New loan to be $250,000, 0% interest, pensionable payments only of $1,500. All these terms, as I'm just kind of riddling some off to you, would go on the addendum or it could just be another piece of paper in your purchase agreement, right? And that will be stated. Now, when it comes to subject twos and getting like power of attorney and authorization on the loan, those documents a lot of times are needed, but again, that kind of stuff comes to light once you start to go down the path. So yes, would you need a power of attorney? Do you need authorization to work with the bank? You will need both of those

Starting point is 00:11:20 as well. And that is specific to a subject too. If you are lucky enough to be one of my students, I'm going to have a creative financing wizard come on. She's actually a transactional coordinator that only focuses on creative tough deals. So she is going to be speaking to my students. If you have interest in being a student, go to thescienceofliving.com, fill out a quick form there, and we can talk about what that looks like. So I'm excited to have that happen. But ultimately, there's three things here. A or number one, not a, but number one, there is no wrong way to do a creative financing deal. It's literally creative for a reason. Structure it however you want that provides value to the seller too. This will open up your opportunities to get deals

Starting point is 00:12:06 done because it can be all four exit strategies. You can wholesale it, you can wholetail it, you can rehab it, and you can keep it as a rental. And it gives you negotiating power when you structure something creative. And lastly will be the paperwork. You start everything with a purchase and sale agreement with terms of the creative portion on an addendum. That's the starting point. That's what you can start and open up escrow with. Now, again, as I've mentioned, some other documents may be needed, such as power of attorney and authorization form for the bank but go open a best grow and let the escrow

Starting point is 00:12:46 officer or my secret guests tell you exactly what what paperwork is needed to get the deal done credit financing is the way to go I do more than a handful two or three handfuls every year where we're doing either a rap or a subject to an agreement for sale. So this will open up your opportunity to get more deals done. If you are not watching this video right now, do not see these two stellar athletes and this awesome lighting that I put in my home office. Make sure to go to youtube.com forward slash Justin Colby, subscribe, turn on notification, make sure to check out all six videos.

Starting point is 00:13:25 I'll see you on the next podcast. Peace.

The Science of Flipping - Creative Financing 101

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.