The Science of Flipping - Episode 73: Need Creative Financing For Your Deals?

Episode Date: July 23, 2016

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Welcome to the Science of Flipping Podcast. I'm your host, Justin Kolbe. What is up? What is up, everybody? Welcome to the Science of Flipping Podcast. I am your host, Justin Kolbe, my co-host, Kent. It will be on the next episode. We have already done some recordings and whatnot, so we're editing and making sure everything looks all pretty. That being said, I'm happy that you guys are here. If this is your first time to the Science of Flipping podcast, get over to thescienceofflipping.com. I put together a free e-book. It's absolutely free. It is the 15 most costly mistakes investors make. These are mistakes I've made. These are mistakes that some successful real estate investing friends I have have made. I wanted to give away some things to shorten your

learning curve so that you don't feel the pain that I've had to feel and some of my friends have felt. It is absolutely free. Go to thescienceofflipping.com and download the free ebook, The 15 Most Costly Mistakes You Can Make. I've been asked several times about coaching and what that looks like. If you are interested in coaching, for my team to help coach you

and get you to that next phase, go to thescienceofflipping.com, go to the coaching tab and fill out the form. I will make sure someone in my office reaches out to you to talk to you further about coaching. If you are interested, just go to the coaching tab and fill out that form. This is episode 73, episode 73. And I'm happy to be here. We have a subject matter that I am getting many questions about and or subjects are coming up about the volatility of the market. What is going on? How can I? There's so much competition. It's a seller's market, blah, blah, blah. I can't find a deal.

How do I get a deal in this market? This is so difficult for me or whatever. It's all about there's too much competition. The market is changing. It's a seller's market. Not as many people have financial distress. I wanted to bring up a subject talking about financing homes. Okay. And there's several ways that you can put in offers. Um, and there are several ways that you can actually finance a home. So as, as wholesalers, right. And I have been a fix and flipper now for since 2008, uh, I've developed 79 townhomes out in Mesa, Arizona, or just shy of that, we actually ended up developing 22 and sold everything off to just kind of get back to what we were great at. But I definitely know what it's like to develop 22 townhomes, to say the least. And at the end of

the day, regardless of whether you're a wholesaler, whether you're a fix and flipper, whether you're a developer, you need to understand financing and financing terms and how that can be advantageous to you in a different market cycle. How is that going to be advantageous to you when there's a bunch of competition, when you need to make an offer and you're competing with a bunch of different investors. So regardless of you're a fix and flipper, regardless of you're a wholesaler or you're a buy and hold guy, you need to understand financing a little bit better.

And so I want to give you a couple different ways to structure offers. These ways can also be ways to negotiate. But I'm going to talk to you in terms of actual financing and some different ways to structure them. And I have a couple down, I think I have six here to structure deals. And I've done every type of financing that there is. I've done every type of offer structure that you could offer because I've just been around long enough, right? From,

I'm going to mention them and they're in no specific order from seller twos to wrap deals to partner financing to you name it, all cash offers, you know, you name it. And so part of that is how you offer. And part of that is a negotiation strategy, right? And at the end of the day, what I continue to talk to everybody about is you need to be a solution for the seller, period. If you don't actually understand where their motivation lies, what their motivation is, and simply what is most important to the seller,

you'll never really be able to get the proper structure down and likely not get the deal, right? If it is just money, then obviously the more money you can give them, the better off you're going to be. Possibly it might be moving. Possibly they don't really have a lot of motivation to sell and or get a big punch of money. So maybe doing a seller carry back and or a wrap deal and or a lease option, right? So again, there's no order I'm going through. I'm just letting you know that there's multiple ways to structure an offer. There's multiple ways for financing

and I'm gonna give you a handful of them today. So take a notepad, get a pen and paper because this is some stuff that you really wanna know going into an offer and really structuring deals, especially if you are buying and fixing and flipping, buying and holding. If you are a wholesaler and you're looking to make an offer and figure out a way to make it most beneficial to the seller, you name it. These are ways to get these, whether they're creative or simply just simply financing deals

and how to structure them. So number one, and again, these aren't in any specific order, everyone has heard of seller carrybacks. And what does that really mean? Well, when you go in and offer, sometimes people don't have a bunch of financial motivation. Sometimes they own them free and clear. And if they own them free and clear, you can do what we call a seller carryback where you can say, hey, listen, what will it take to buy your home right now, get you what you need financially, and you can kind of create a note for us and you can keep your rental money coming in, your mailbox money coming in.

This works really, really well, by the way, with people who are landlords. They own the home free and clear. The home is vacant and or is rented out, but they're interested in just kind of getting rid of this landlord scenario. They don't want to deal with the toilets and the roofs and the blah, blah, blah. And you say, listen, you obviously, what is your interest in being a landlord? Oh, so I can have mailbox money. I totally get that. That's great. That's how you create wealth. Well, Mr. Seller, let's talk about a scenario where you can still have that mailbox money, but you don't have to deal with the actual homeownership and the headache of being a homeowner. Let's structure a seller carryback.

And how you do that is the seller's gonna create a note for me, the buyer. They're gonna create a, you know, let's say I'm buying a home for $100,000. They're gonna create a $90,000 note at, let's call it 7%, 6%, something that's a little bit more competitive that the banks, or not competitive,

but a little bit more profitable for them than the banks would be, and I don't have to go out and get a loan because maybe my credit's bad. Maybe I just simply don't want to go through the minutiae, and we can close the deal within seven days. They create a note just like a bank would. It goes through escrow just like any sale would. I come in with my 10% down, and now I am paying them the equivalent of rent. It's not rent. It is actually a loan and I'm paying them interest and you can structure it with interest only, interest in principle, amortized or not. You get to structure that. But this works really, really good when you're dealing with someone who loves the mailbox money, doesn't love the headache of being a landlord. And you can negotiate that however you

like. Maybe they'll come in and they'll finance the whole thing for you. You have nothing out of pocket at all, right? Not a dime. They put a loan on it. You start paying them. You're starting to collect the rental income and you pay them from the rental income, right? They just become your bank. So seller carry back is one great way to structure a deal. Another deal similar to a seller carryback would be a subject to. Now in a subject to financing, what's going on here is you are using, in subject to, meaning subject to the existing loan. So you are using the seller's existing loan so that you can finance the deal. Again, maybe you don't have the credit. Maybe you won't be able to get a loan big enough or you just don't want to deal with it.

And you say, listen, as long as you're okay with this, we'll keep your loan in place. We will use a third party vendor. Westar is a great third party vendor to make sure that my payments are being made. The payments will pay your note, right? So I pay Westar, Westar pays the bank, and we will negotiate how much money you want down, and I will actually own the home now. Now, the subject to, I actually have home ownership at this point, subject to the loan. Now, that loan might have a payoff, and there might be a balloon in the next coming years, whatever that may be. And so I need to figure out, this is buying me time to go find possibly a better loan to go put my loan paperwork through, maybe bring in a capital partner, maybe pay down a bunch of the

loans so that now I have a bunch of equity and I can go refinance or take a HELOC on it. So this is a brilliant, wonderful way to buy a home, especially if you want to buy a home quick, especially if your seller's very motivated and can't afford his loan anymore. Maybe he lost his job, especially if you can't go get a loan because your credit is not very good. So a subject to the existing loan, again, everything is negotiable. So you might be able to work this where you don't have to pay any money down at all. And you can buy that home subject to the existing loan. It might help the seller. It's going to help you. And ultimately, you know, it's a great strategy to making an offer and creating creative financing. Another one here, which is somewhat similar again, is what I call a wrap deal. A wrap deal is similar to a subject to,

but the home ownership doesn't transfer. Again, I mentioned in a subject to the home ownership, I actually have a deed to that home. On a wrap deal, we wrap their existing loan with my down payment. We're wrapping them together. My down payment might be $1,000. My down payment might be $5,000. My down payment might be 10% of the purchase price of the home. It's all negotiable, okay? And I'm wrapping that into the deal.

And now I am buying the home from the homeowner. But if there is a loan in place and or if we create a loan, depending upon how it's structured, right, there is a balloon, right? And the home ownership never transfers, meaning if I ever default, if something goes haywire, the owner still owns the home. There's no need for worry about home ownership, things of that nature. So what I like to do, and I think we just closed one last week on a wrap deal, right? So the wrap deal to me is similar to a subject to, but the major key here is it protects the seller because they don't actually have to give up home ownership and it protects me or at least gives me, it doesn't protect me, it gives me the opportunity

to get a deal that possibly wouldn't get done if I just came in with a cash offer because I can offer more, right? There are loans in place, maybe they're creating a loan, I'm bringing in some money. I can offer more in this deal than maybe if I just had to do a cash on cash offer, right? So that is a huge advantage and it's an advantage to the seller. So a wrap deal is another great opportunity for you to create financing. We have the lease option, right? The lease option. Now the lease option again, uh, is a great opportunity. You have a lease in place with the homeowner with the option to buy. You use a traditional option contract, which we have, um, you know, and you are basically getting first right of refusal to

buy that home. So, uh, you know, if the seller, you know, isn't in in huge motivation to sell their home, maybe they love the rental income, you now are leasing the property, buys you time to repair your credit, get a better loan, find money, whatever the deal is, with an option to buy. In the option, again, everything is negotiable. You might have a three-year option to buy,

a five-year option to buy, a five-year option to buy. You can shorten it. Maybe there's a clause in there simply saying, I have a three-year option to buy with no penalties, something saying I can buy anytime I want. I can actually execute this option at any time. In that way, if you're able to find money, if you find a capital partner, maybe the banks are lending you money, maybe you have a hard money lender, whatever, and you're able to raise that money to close quicker, then you have that option. There's a clause in your option saying, I have the right to fulfill this option at any point I want. I don't have to wait in three years. Now in three years,

I have to make a decision and the seller has to make a decision, right? I have the option to buy first right of refusal. And in three years, they say, put up or shut up, buddy. You can continue leasing, but here's the time that you have to close the deal, right? And then you can renegotiate the option if you want. If the seller in the meantime is getting offers on his home, you are the first person that gets the first right of refusal. You get to execute that contract or that option and buy the home or they get to sell it out from you. Even though you have a lease,

your option only gives you first right of refusal. So there's a difference between a purchase contract and an option. And the main difference here is a purchase contract is a commitment. An option contract is an intent, right? Is an intent. So when that happens, they get to say, hey, I really want to take this offer from Johnny, Justin. You know, you have an option here, but can you perform on this option? If not, I'm going to sell it out to Johnny, right? So that's the lease option. Another great, brilliant, creative strategy

that you can put together to do a deal. And then I have two more that I'm gonna kind of basically make one, but it is, well, maybe I won't make them one. There's another, and I don't think it's creative, but at the end of the day, you know, if you have good credit and you have an ability to go get a loan, go get a loan, right? There's no cheaper money right now than what the banks are offering. There's nothing you can find cheaper than what the banks are offering. And so

that isn't, I wouldn't argue that's very creative, but I think a lot of times as investors, we're so built into this, use other people's money, you know, find, you know, an investor. But at the end of the day, you know, we oftentimes overlook banks and oftentimes banks possibly can give you the best option for that deal. Not every time, right? If the, if the house needs a bunch of work, they're likely not going to lend on it. It won't pass inspection, right? Or appraisal. So a lot of times the banks won't fit, but I don't want you just to simply leave it out, right? There's not a lot of creativity there, but there can be depending upon how you structure the deal. And what I would say to that is maybe you have a co-signer, maybe you have someone or a business partner who has better credit than you,

and they go out and get the loan, right? So the loan is actually in their name, or maybe you guys have a co-signer and it's in both your guys' name. And the home's in perfect condition. The rate is much better at a bank. You just don't have good credit. You can't get a good loan. Maybe you don't make enough money to get the loan. Maybe you don't show enough to get the loan. So your debt to income ratio may be off here, but you have a well-to-do uncle, aunt, cousin, business partner who is willing to partner with you, go get the loan, put it on the home, easy, cheap money. So you can creatively get that loan is why I kind of almost made this one subject is possibly partner with someone who can actually get the loan, right? And then kind of one aid to this is partner with people with money, right?

That is, again, not the most creative thing in the world, but you go and find people with money, whether it's your business partner, maybe you make them a partner, maybe it's a family member, a friend, a colleague, you know they have money, you don't have money, go talk to them about a business relationship where maybe they don't just simply lend you money like a bank would, but you bring them into the deal and say, hey, here's what we're going to do. Here's how we're going to structure it. I'm going to buy it. I'm going to rehab it. We're going to make sure you're paid at least this percentage on the loan and we're going to structure it. I'm going to buy it. I'm going to rehab it. We're going to make sure you're paid at least this percentage on the loan, and we're going to split profits if necessary, right? This is all negotiable. Everything is a negotiation, guys.

I talk to you guys a lot about sales and negotiating. This is exactly that. So this is all negotiable where you can bring in a business partner who has money, who has the ability to go get money, maybe that you don't like a conventional loan, or even he has a house that he can go get a HELOC on or a line of credit. Again, don't dismiss the banks, guys. The banks have a lot of money and they got to give it away. So maybe you bring in that partner and you structure a deal to make it make sense for both parties where you wouldn't have been able to for both parties where you wouldn't have been able

to get the loan, you wouldn't have been able to get the property because of these reasons. So that's six or seven different ways that you can structure your money to finance your deals that a lot of people are overlooking. So this is very, very important, especially in the day and age we're at right now. It's a seller's market.

There's a lot of competition. You need to figure out a way to separate yourself from the competition. And you need to figure out a way to get these deals done. So these are six or seven great ways to finance your deals and get the deal that can make your year, right? So guys, that's what I was going to talk to you guys today on the science of flipping podcast. Um, I have been getting a bunch of emails. Thank you. Thank you guys. Uh, people are just saying how great the content is, how

you're switching it up. Uh, they really are very, very appreciative. So, uh, it's my pleasure guys. I really enjoy doing this. So I'm happy to be here each and every week. And so, again, stay tuned, as I'm going to be dropping you more and different information. I'm going to start probably bringing some guests on so they can bring some perspective to you guys. So, again, I hope you have a great week, guys. I am signing out.

Justin Colby, host of the Science of Flipping podcast, and we'll talk next week. Peace.