The Science of Flipping - Episode 185: Creative Financing with the GOAT Eddie Speed

Episode Date: February 5, 2021

Creative Financing with the GOAT Eddie Speed

Term is really important. Don't agree to short-term financing if you can avoid it. So even if you have to put interest on it, you might do 20-year, zero interest the first 10 years, and do 4% interest the second 10 years. You're going, well, that's not that great of a deal. That's a killer deal. What is up, everybody? Welcome back to the Science Flipping Podcast. If you are not watching this video, that just means you're not on YouTube. You're listening to it on iTunes or Spotify or anyone else. Be aware. These episodes are also over on my YouTube channel, just Justin Colby.

So youtube.com forward slash Justin Colby. Because today I have a very, very special guest. He's been a longtime friend of mine and one of my mentors in the creative finance space. He has done more. I'm going to let him tell you the story, but he's done more deals than I, you know, in the creative space than I've done as a whole in my 14 year career. So Mr. Eddie Speed is in the house. What's up, brother? What's up, my friend? How you doing? Dude, I'm doing blessed, man. It's so great to constantly reconnect with you. And the timing of this podcast to me is so prevalent, right? Because we're still in this COVID thing and it's February 2nd as we're

recording this podcast. And I don't know when this whole thing's going to end. But listen, I've had an incredible run through this and I think a lot of investors have, but the hurdle that is so crazy to me is for all of, and I know you and I agree on this, with all the chaos that happened in the political situation, with all the chaos that's happening around the world socially, the real estate market continues to appreciate, it continues to be on fire and sellers continue to want top dollar. And by the way, rightly so, that's actually smart of them. And what I see and so many of my colleagues see is what you and I are going to discuss today is what do we do with those sellers that we can't get them negotiated to our price point where it's a deal for us. What do we do? How do we

structure it? And I know there's a lot and you're going to have a lot of answers to this, but let's simplify it. Let's go for 15, 20 minutes and give the people what they want. So let's just start there. Let's start with the creative financing. Give everyone a little bit of your background so they know who Eddie Speed is and the history of Eddie Speed and the incredible experience you have. And then we'll go from there. Well, I started as a creative finance note guy in 1980. Long time ago. I was a young guy like you one time. I was born in 81. I don't want to date you, brother. I don't want to date you. Like you one time. But you know, so here's a funny story. The market morphs. Things happen.

Around 1990, I became highly involved with real estate investors. In fact, the guy that founded Homevestors lived in Dallas-Fort Worth, where I lived, and I became his note guy. And they were more structured at the time. Real estate investors were more, you know, spotted all over. They weren't connected masterminds and things like that, like they are today. And so we basically set up a system where their franchisees could use creative financing, right? So I've been doing that literally since about 1990. And then, so what I figured out is this, Justin, there's people say, what can you do with it? That's like, you know, saying, what can you do with a can of paint? You can paint a lot of things with it, right? That's right. But the truth of the matter is, here's the simple thing that somebody I believe today should really get.

If you're making 20 offers, my bet is if you're pretty dang good at the business like Justin, you are, if you're pretty dang good at it, you're going to close one out of 20. That's right. All right. That means that you're throwing 19 leads in the garbage. And I'll bet you that of those 19 leads you're throwing in the garbage, there's a decent possibility that you could negotiate between six and eight deals. Not all the 19, because some of them you can't make a deal out of no matter what. But of those deals you're throwing in the garbage, that you probably could start negotiating six to eight of those deals on creative terms offers.

And basically here, it's really simple concept, right? A seller has a property that's worth 200 grand, just nice round numbers, right? A seller has a property worth 200 grand, okay? They owe 100 grand, right? A seller has a property worth 200 grand. Okay. They owe a hundred grand. Okay. They have a hundred thousand dollars debt and a hundred thousand dollars in equity. They want a hundred grand cash. Well, wait a minute. That's not going to work. Okay. So why don't you pay them the hundred grand? It's not that you can't pay them the hundred grand. It's not that you can't pay them the hundred grand. It's when you pay them and how you pay them. Right. In other words, what if I could, instead of paying cash

for property, I could buy a property with monopoly money. Yep. And that's the idea. And so there's a lot of different ways that, you know, there's a sequence that we go through to show people you're not going to show people this in five minutes you're not going to make them that's an unrealistic expectation but I would say to you that we've come up with a lot of different ways to structure deals where it sounds kind of like you've sort of lost your mind and you're paying retail but the truth of matter is the way you structure the financing, it becomes a bargain. Agreed 100%. And I agreed. Let me ask the question I think everyone would ask. Why would you give them the retail number? Why would that make sense for us investors?

Because if they want 200, they owe 100. You say, you know what? I'm going to give you your 200. Now, I know what you're going to say is you're going to put it on terms, right? And here's how we're going to structure it. But why do that? Why would an investor do that? Listen, there's two ways to make money in a real estate transaction. One way is buy low, sell high. The other way is to structure financing where you can control the property long-term with the way you structure the financing and it gives you the power to go rent it, resell it on a wrap note. So there's two different ways to make money in real estate and they're kind of polar opposites. Buy low, sell high. You're saying, why would you ever pay retail?

I'd pay retail because they're not going to accept anything less than that. But they are going to accept terms that a bank or mortgage company would never agree to. That's right. And by the way, Justin, let me just tell you this. If done correctly, the odds of buying your own debt from them, in other words, you're the borrower, they're the lender. The odds of your negotiating and buying that debt from them at a discount, buying your own note at a discount down the road if done correctly is probably 100%. Agreed. Yeah, I think one of the things, you know, I just structured a seller finance deal on a mobile home in Kingman, Arizona. And if you've never been to Kingman, that's because no one goes to Kingman. That's why.

But the reality is I understand enough. I've been around 14 years. You are my mentor, right? Like you have taught me. And so the reality is I didn't get a deal, but it was a great deal because I immediately wholesaled the deal because I structured it right. Even though it was retail, I didn't want a mobile home in Kingman, Arizona. It was not something I wanted in my portfolio. So I didn't really want to keep it

in the sense of what you're saying, where I could have structured on terms and then kept it in my portfolio and arbitrage the rent or even resold it on a wrap, you know, seller finance. So what I did is I wholesaled it. I had a buyer who wanted that and liked the terms they were inheriting, for lack of a better way of saying it. And they came in with enough money to give the original seller what they needed to sell, which is what I agreed to, right? I negotiated. I agreed to $2,500 going to the seller in their pocket so they can move. And then I took the remaining down payment from my buyer as a wholesale fee. And my buyer inherits the terms that I

negotiated with the seller based around the terms that they have with their existing lender. Everyone ultimately won because my buyer, just like you brought up, is just going to keep it in a portfolio. He's just going to keep that, specifically the mobile, in his portfolio and rent it out long-term and have a property he didn't have to really go get a note with or go get a loan with, et cetera. And it's a good rental. And I would make the argument, wait for appreciation and allow that all to happen. I don't know if that's going to happen with a mobile. I just think he liked the terms. He sees a couple of dollars in it monthly.

I don't know what actually his long-term exit strategy is, to be honest with you. Well, you think in terms of this. What you did was you structured financing and flipped the deal with financing in place, right? To a guy, and now he controls the property. And let's just use hypothetical numbers. Let's just say the normal debt service on that deal might be 600 a month. But with crazy terms, now all of a sudden his debt service is 300 a month. He can rent it. He can resell it with seller financing and he can wrap it. He can do, in other words, the way it's a deal is because you structured such favorable terms for the borrower that now anybody would want to step into your seat.

That's right. Yeah. And you know, when's, it, when you go up against those sellers that like we all do every day, it is literally part of our daily routine, right? Because we're marketing and we're in front of these cells. Oh, I want retail, right? I want 200. Well, you know, why aren't you listing the property? I don't really want to list the property. I don't want to go through that. All right. Well, I can get you your 200. Let me see. Let me buy some time for myself. I got to go to my money guy and see if he can create, I got to go to Eddie. Let me see if he can create a way that we can get this done. Is that okay with you, Mr. Seller? And then it's just a making sure you understand the process. Let me, let me kind of plug you

real quick. If you guys go to, it's called, is it the note school or note school? Note school. Note school.com forward slash TSOF. That is what Eddie gave me. So he knows where you guys are funneling from. So note school.com forward slash TSOF. Eddie will be able to help you guys out on a much deeper, deeper, deeper level. Obviously we have 15, 20 minutes here on this podcast. Um, but talk to Eddie and his team and he can really help structure. I mean, the reason why I was able to get that mobile home in Kingman done is because Eddie's taught me over these years how to get this structure done. Right. And so, um, it's really important because to your point, if we have 20 leads, we're getting one for sure. No doubt, 100%. But what do we do with the other 19?

Can we get six to eight? I would tell you this, all people should realize it still comes down to the motivation of the seller. If they have zero motivation and they want retail and they're like, ah, I'm really only talking to you because you said you'd make me an offer. It's almost impossible to structure any type of creative deal anyways, just because there's zero motivation.

They never really thought about selling. They got your note in the mail, whatever the case may be, you cold call them. There's no want, desire, need to move. They're likely not, I don't care what you offer them unless you offer them 200 grand above market. So you still have to filter that out. But if you do have someone that is like,

I'd like to move before February is over, but I want 200 and you comp it and you jump on PropStream, you go to PropStream and promo code TSOF on PropStream as well, you realize it's 200. What are you going to do? You call Eddie and you have him and his team help you, right?

I mean, the reality is the terms, one of the best things that you've always taught me is you can literally create anything you want. You just put it on paper, create like to your point, let's just say, you know, the seller wants a certain amount in his pocket. You can get that financed through the note over time. I mean, there's literally no limit, I guess is what I'm trying to say here, right, Eddie? I mean, you can literally create anything. Lots of options. And you're going to, you know, what we would love to do is to teach you to listen to the customer and figure out what their real pain is and fix their pain. And they're going to have to give up something. Everybody in the world that gets

something gives up something. Okay. I mean, that's what life's all about is the compromise. You get a new car and it's the perfect car. Well, guess what? It's probably pricey. You gave up something. Totally. Right. I mean, you know, I get the perfect Range Rover. Well, guess what? My mileage just went from 20 miles a gallon to 13 miles a gallon. Now I'm pissed. Exactly. I mean, there's always something. So we are very good, I think, at helping you let them list out their priorities and then go through a process of defining and prioritizing what really is important. So sometimes people think, well, it's always you're going to carry zero interest for 20 years and all their equity. That probably happens 20% of the time. Right. Right. You know, guys, Seth and, and Brett and all those guys that do some of that. Yep. Yep. That's not, but they can't,

none of nobody can pull it off a hundred percent of the time. That's right. So we teach them other strategies to get what they want. Let me ask you a question, Justin. How many times have you ever been 15% away from making a deal with somebody? Countless. I couldn't even tell you. 15%. Not 50%. 15. 10%. You're here and they're here. Okay, so write them an error note. A what? An error note. In other words, write them a note at zero interest,

zero payments due in 15 years. Make it, they subordinate to financing, they subordinate to any future financing. It's just a lump sum due in the future. Could you afford to raise your price if you could do that? A hundred percent. It's almost like just an IOU. Hey, in 15 years, I owe you $15,000.

That's it. So that's a good, simple thought process that everybody could leave here with this podcast and say, you know what? I everybody could leave here with this podcast and say, you know what? I actually could go do that right now. What would be, and I think that would be a great way to kind of surmise this, wrap this up to some extent. Like what would be, I think I know the answer, but for those that might not, what would be your number one kind of go-to thought when dealing with the seller? Like deal structure. What would be your number one creative offer out of the gate creative as a starting point for you? What would you suggest most people try to

structure? You always try to get no interest. You're basically saying, I'm paying for your equity over time and that's why I can pay you the full amount of your equity. Term is really important. Don't agree to short-term financing if you can avoid it. So even if you had to put interest on it, you might do 20-year, zero interest the first 10 years and do 4% interest the second 10 years. You're going, well, that's not that great of a deal. That's a killer deal. Because remember, you had 10 years of paying down principal. Exactly. Now you're playing, you're paying interest, but interest on what far less principal. That's right.

That's a simple idea that, that people could go apply right now. So I teach people like one of the things I think are important is you got to understand what you're negotiating for. Generally understand some of this stuff and you don't understand what it's for. And the one last thing I would say, Justin, is this. I think I know your audience, right? And they're going, oh, my God, Lordy, this gets complicated. Right.

You know, getting rich sometimes has a little bit of a twist to it. I agree. This what I'm really saying to you subliminally, guys, is this. This is a wealth strategy. We're not asking you to give up your transactional money. We're not asking you to give up your transactional money. We're not asking you to give up your salary that you're earning flipping houses. We're saying, why would you not take your business and load a sidecar with something that let you grow wealth that you could never give up?

Instead of this money, you'll never get that money back again that you made in a flip, but you can suck out of that wealth pit over and over and over. Amen. And like you said, a lot of my friends and colleagues, they have also gone to you as their mentor. I mean, you are, I don't want to age you, but the godfather of this creative stuff, at least in our space, right? And so one of the things that we've had this big revelation recently is this idea of once you're able to get the terms from the seller and you actually get in contract and or close escrow based around the terms being so good for you, how you exit that property is also an incredible upside, right? The more creative you can even get with that too.

You don't need to just sit there and hold it. You can actually, now I would say this and I'd want your take on it. If you immediately turn around and sell it after you close, right? You're not going to get the 27 and a half years depreciation, correct? Well, I love seller financing. And as you know, and a lot of guys that I've helped, high volume guys like you, a lot of them I've helped, I've taught them just to seller finance because they'll turn around a seller financing

and get 15 or 20% down. But they may have paid almost nothing down and they sell it with 20% down. That's their flip money. That's it. Plus they get a check for the next 20 years. That's right. That's kind of having your cake and eating it too, right? Yeah. The reason why I wanted your perspective, a lot of people buy rentals or hold for the wealth, right? You brought up building wealth and that's what we're all in it

for. Let's just be very transparent here. Rentals have wealth. Rentals generally don't have good cashflow. Right. Stellar financing has wealth and cashflow. So dive a little bit deeper in that because I want people to also understand once you actually execute and purchase the property, there's also great creative ways. Like you just said, you can build your wealth and get cashflow. Talk a little bit more about that. I think that- So guys that have rentals, if you look at your rentals, you've got your gross income

and then you've got all these expenses. And when you take all these expenses out, it doesn't a lot of times give you a good check at the end of the month, right? You and I have a very good mutual friend and a student and big high volume player in Phoenix. And he took about a third of his portfolio and he said, these things just don't make good rentals. I said, they make killer seller finance deals. And so all of a sudden he's like, good grief. I like doubled and tripled my monthly income from going from a rental to just owner financing my equity. Yes. So then all of a sudden that becomes another strategy with notes is like, how do I exit it? One last thing, Justin,

I would say on that topic is the real estate market is on fire. We completely get that. But there are things that are wrong in the market that people just aren't talking about. 35% of the people that could get a mortgage in last January, this January could not get a mortgage. Right? I mean, literally the mortgage origination business has tightened up underwriting the point that one third of the people that could get a mortgage can't anymore. Well, see, that's a perfect guide about a house from you seller financing. You're saying, yeah, I know, but he didn't have a big down payment. And maybe, do you know what the average down payment was for conventional mortgages like in the month of

January? 5%. 19%. Wow. For a conventional mortgage, according to Ellie May, the average down payment was 19% down. So see, everybody thinks it's 5% down. That's just not true. Yeah. So you can market and find people with incredible good down payment money. And just because they can't get a conventional mortgage today doesn't mean they have bad credit and a sad story. See what I'm saying? Oh, wait a minute. Now you're saying I could resell with seller financing, earn big money today in the form of their down payment. And then I'm collecting interest and I'm paying interest. I'm collecting higher interest and I'm paying lower interest. Isn't that what your bank does? I make an arbitrage. That's it. That's it. I love it. I mean, so again, we are, you know, listen, you, you run two day courses. You have entire coaching around this.

Again, go to noteschool.com forward slash T S O F. Talk to Eddie and his team. Like even if you have rentals and you're not even in the acquiring more flips or wholesaling game like I am, you need to be thinking about what we just talked about. How many of those rentals are not good performing assets and you just want the wealth building? Well, why not have the cash flow? Not the cash flow, but the cash, like a 20% down, 10% down of value plus actual increased income monthly over time, how many more of those rentals could you actually go buy? And it's only because your exit strategy is so strong. I mean, again, Eddie is a wealth of knowledge. I appreciate you

coming on. There's so many good creative things. We should probably do this more often, truthfully, because your structure works in an up and a down market. It does. It just always works. That's the hurdle. And that's why it's so important for me to have you on here is because people need to understand, let's just say you close 3% of the leads that you bring in as a wholesaler. Let's say 3%. So for every 100 leads you close three, what's happening with the 97 leads that you just brought in and you're spending money on marketing, you have cold callers, you have direct mail, you you're spending money. Why aren't you monetizing those leads? It's because

you just don't know how that's the hurdle. Right. So, brother, I appreciate you. I know we could have gone on and on and on. Anyone anyone, you know, noschool.com forward slash TSOF, that way he knows you're coming from this podcast. But also anything you want to leave the people with where they can follow you or just a tip you want to give them, anything you want to leave with. You know, I'm going to give them, if they go to that website and give us their information, we're going to give them a really good, about 50 page book, about six chapters. We're going to give examples of how to buy on terms about five different ways. It's a short read. It might take you an hour or two to read it. Right. And then

we're going to give them a little workshop. I mean, it's some solid stuff. So we're leaving people with some like, oh my God, I can see this. Okay. How do I get some sticky factor to this? I want to give them something they feel like they can touch. Yep. 100%. Dude. I love it. I appreciate you, dude. Thank you very much. I'm glad that you and the fam are all healthy through all this and we'll make sure you come back on here very, very soon. Thank you, Justin. See you, bud. see you bud