Creative Financing Q&A: LLCs, Negotiations & More

i can't negotiate my down payment with a bank the bank has loan programs they say it's either 20 down or it's 35 down or it's 10 down or it's three and a half percent down there's no negotiating that down payment with a loan but if i go directly to a seller and i work out subject to or seller finance i have the ability to negotiate a lower down payment therefore giving me a larger cash on cash return free real estate as far as i'm concerned what's going on everyone it's pace morby today's host of the bigger pockets podcast you might be wondering where is david where is beardie brandon where i sent them off to play jiu-jitsu with each other is that what you say you say play jiu-jitsu i'm not sure but anyway in all seriousness it's our job here at the bigger pockets podcast to show you how to get started building wealth through real estate today we do that by bringing on top performers expert investors and just plain regular people trying to make it happen as well we do that by laying out the tactics and mindset that will make you financially free if you make the simple choice to take consistent action like like subscribe etc if you're getting value here today we have ken diana eric and ralph and myself jumping into those four people's questions all about creative finance llc structures all the fun things that i wish i knew when i was just starting in real estate pace is there anything else you want to add no pace let's get right into it ken doyle welcome to the show how can i help you today brother how are you pace i'm loving life fantastic yeah my question for you is you know with all industries they go through cycles and real estate market has cycles as well even though kobet's kind of thrown this off a bit you know typically around 18 years with the phases as you go through so thinking about that from the investor side and specifically on your creative financing when you look at the phases as we're going through these cycles does it dictate any of the types of creative financing you may come to the table with whether it's you know sub two seller financing novation whatever the option might be or is it strictly driven by the problem you're trying to solve for the homeowner that's a great question so what you're asking is do you make a determination of what strategy you use based on the seller's needs or does the market typically determine that so what options you're talking about is you're talking about subject to right taking over somebody's existing mortgage transferring the d to your name you're talking about seller finance where the seller creates an agreement with you where they become the bank and you hold the deed and make payments to that seller over time or a novation agreement which is primarily used for a fix and flip a creative finance fix and flip the answer is really interesting so if you look at seller finance versus subject to they are really really similar to each other right we're going to the seller and we're saying hey i would like to work out terms with you on your house rather than me paying it all the way off in a market where people don't have a lot of equity in their homes subject to becomes one of these massive massive power moves so usually in a distressed market subject to is super super strong so the market does dictate that because people have low equity if pf people have low equity the likelihood of them just saying hey look take over my house i'll give you the deed that is really really high now in a market like this right now here we are october of 2021 market is super high and what does that mean it means that a lot of sellers have a tremendous amount of equity and when that's the case sellers ultimately are way more willing to sell on seller finance so we're seeing an a switch so two years ago i'd say 70 of our acquisitions in the creative finance world were subject to now that has swapped to be more like 60 our seller finance it's almost flip flop the opposite way and the reason being is because now i'm negotiating against the seller's equity in a seller finance situation so absolutely the market dictates um you know how we approach that because of their equity going up and down now in a novation agreement same novation agreement is flatlined all the way through right an ovation agreement we use it for the same reasons all the way through and the answer to your question is the market usually dictates whether i'm using subject to more often or if i'm using seller finance more often hopefully that answers your question absolutely that's fantastic now do you have any follow-up questions i do have a follow-up so thinking about the four phases in real estate and you know if you're looking at textbook i don't know if we're in textbook i mean or do we fall do you think in kind of the re recession phase right now i mean how do you view that and what should we be looking at going into 2022 the main thing that i look at and i was i was in the market in 2006 2007 as a contractor so i was i had a different viewpoint right my p the people who were hiring me to build homes and do construction work they could they had so many jobs i was booked out for like two years what i realized is a lot of the jobs that i was doing as a contractor were houses that nobody was actually moving into what these builders were doing is they were pre-selling lots and there was all these people playing all these games so it was a fake it was a fake fictitious fugazi situation going on right now we have a true supply and demand issue right a true supply and demand issue i think even if interest rate rates tick up a little bit the market is still going to continue to be hot because what do we have a deficiency of nearly four plus million homes and the homes that we're renovating and the homes that we're selling there's a family moving in every one of these people so we have a lack of supply and at the end of the day supply and demand really dictate what the market is doing a black swan event like covid didn't slow us down it only he does he heated us up it was unpair i've never seen anything like it we made i think we made about six million dollars last year just in the appreciation of our rental properties six million dollars if you can believe that so we don't look at that as something we can bank on or something that we're super excited about because we just look look at hey the market is going to cycle at some point it is going to slow down or have a pullback but we feel me my colleagues my partners and the people that we do research with we feel like we're not going to have any slow down for at least 36 months yeah we in fact we actively have about 25 fix and flips going on at any given time five or six of those are acquired with creative finance the other 20 are acquired through you know some sort of private lending of some sort we decided we're going to go from 25 active projects to 30 active projects just because we're so confident in what's going on in the in the retail market yeah it is crazy and i would say from our wholesale business where a lot of our contracts are selling in our wholesale business those are going to hedge funds people to have there's so much cash in the market right now because the hedge funds are saying we believe that the market's going to continue to soar and soar and soar and they are partly you know to blame for the manipulation of the market a little bit but really they see what we see or rather i should say we see what they see because you know they're ahead of the curve on us they do way more research they have way more money way more resource resources but they're pouring their money into real estate right now because they know even if they buy over retail and i'll tell you i'll tell you a really interesting thing that just happened to us they're paying over retail on houses right now and they're happy to do so we just sold a house to open door okay we sold a house to open door and the retail value of the property was three hundred and fifty thousand dollars they paid three hundred ninety nine thousand dollars sight unseen they waived uh appraisal they waived their inspection bought it as is 399 they never even saw the house okay why are they doing that couple of things they're moving the market they're moving the market because here's what happened we we researched that neighborhood and found they owned 21 homes in that neighborhood so them paying 49 000 over retail what they did is they amplified the value of all those other homes so yes they might have paid 49 000 over retail on that one house but they probably made a million and a half dollars in appreciation by forcing the appraisals to you know for for history to happen in that market we see the people doing that we see a lot of that happening and there is manipulation in the market but here's the funny thing retail buyers because interest rates are so low and demand is so high and supply is so low retail buyers are also coming in and waiving appraisal waving walk-throughs waiving all of these things even inspection the last 25 30 houses that we've sold on the retail market have all waived anything that they that you would normally expect a buyer to want appraisal inspection and a waiving and inspection they're not waiving the inspection they still do the inspection obviously because their lender wants it but what they're doing is they're saying as is we're not going to ask for any repairs now what i remember back in 2006 and 2007 is i remember the speed of the market i remember people saying it's not going to slow down it's going to keep going and so of course we have trepidation of course we have hesitation but we have a very different world than we had back then i'm sure you can agree lending practices are different with dodd-frank and all the other things that are going on people have a lot of cash people are putting down payments down these are qualified buyers there's no prime you know subprime scam going on right now and so the buyers moving into these homes are qualified good buyers i feel like we have a really strong chance of having growth over 36 months before we have any sort of pullback fantastic i'd love to hear that buy real estate real estate ken doyle everybody thank you ken i appreciate you brother thank you for your time i appreciate it diana moreno welcome to the show how can i help you today hey what's up pace yeah so um i had a question actually about um how to comp for buyers who want a certain return in their investment okay so you have buyers that you are wanting to bring deals to you want to bring investments to these buyers right so let's say it's a somebody like me okay i can tell you everything that it comes down to for us is the yield okay so yield is it is a a fancy word for basically cash on cash return so let's talk about that for a second okay most investors are looking for a cash on cash return of at least 12 percent let's say that i go buy a house and i go get a mortgage to buy that house that mortgage requires me to put three and a half percent down and i buy the house for two hundred thousand dollars well i already know i'm gonna put seven grand down right three and a half percent at 200 grand is seven grand down i'm gonna pay for some closing costs i'm gonna pay some other miscellaneous expenses let's just put it up to fifteen thousand dollars all in i'm 15 grand in getting a loan on this property and now i turn around and i rent it out okay if i make and i'm gonna have you do some math so pull out your calculated are you on your phone are you on your laptop yeah i got i got my phone on me so i can do something okay great so let's do some math if i invested fifteen thousand dollars in that property don't type in 15 grand yet i'm just going to lead the audience down this road and this property makes me 300 a month in net income i i get to put that in my pocket after all my expenses that means at the end of the year i have thirty six hundred dollars from that property's cash flow are you following me on that yep okay now what we want to do is we now want to say if i invested 15 grand and i have 3 600 at the end of the year in cash flow what is my return what is my yield so let's do this math 3 600 divided divided by 15 000. 3 600 by 15 000 0.24 20. so that's a 24 return on your money wow okay so this is how i look at all my deals i look at what's my cash requirement how much money do i have to put into the deal and how much money will i make in my pocket at the end of the year that would be my cash on cash return my yield if i put in 15 000 how much money would that yield me in return that's where the silly word yield comes from how much will it yield me right so cash on cash return is the mo single most important way to comp a house for a buyer you're going to look at it from their side of things and you're going to say how much cash is going to have to be invested in this property and how much money will they make year over year and you divide those numbers and it comes out with a percentage i know brandon turner who's the main host of the bigger pockets podcast he says repeatedly over and over and over he's happy with anything 12 percent and above yeah so a house like that 24 return that's a pretty dang good return yeah i doubled on that i returned there right so it's it's a very simple way of looking at things and so what you want to do is when you're looking at opportunities for your buyers the main thing i ask buyers as i will ask the buyer say hey buyer like for me exactly for example i get people call me go hey pace i want to bring you opportunities what is your cash and cash requirement what are you looking for to make on your your yearly um investment into the property for me i'm a little bit crazy diana because i use creative finance and so i have an unfair advantage against other people that are going out and getting loans i require i will not look at a deal unless there's a 30 cash on cash return i won't even look at it yeah what i would rather do is if somebody brings me a deal that's less than 30 percent cash on cash return i will wholesale that or help them find a buyer for it but i'm not interested in a 12 a 15 a 20 cash on cash return because utilizing creative finance we get a lot of free houses so when i get a free house guess what that means my cash investment is very very low therefore my return on my cash investment is very very high because i didn't have to put much in to get a lot out does that make sense yeah that makes sense yeah that yeah that totally makes sense and i can see why like um yeah like like you would do creative finance right because if you're getting 85 like return on it like it's nothing that's ridiculous yeah it's ridiculous if you look at people that are investing in the stock market do you know what the average return in the stock market is it's close to seven percent so if you're somebody investing in the stock market and you get a seven percent return on your investment wouldn't it be better just to be in real estate make 12 15 24 85 return oh yeah no doubt yeah wow so what i want you to do is when you go talk to potential buyers people that you're going to field deals for and you're going to submit deals to i want you to ask them first and foremost what type of cash on cash return are you looking for yeah and that will tell you how to go look for deals for them yeah okay so for example i have a deal somebody sent to me yesterday okay it's a two million dollar um apartment complex the seller is is saying hey i'm willing to sell this entire apartment complex on seller finance right but i want a million dollar down payment he wants a 50 down payment on a 2 million purchase so what you're then doing is you're requiring your buyer to put a million dollars in cash down so i can tell you their cash on cash return is going to be so small it will not be worth their time i see right yeah and so you'll know where to negotiate with that seller where you go look seller if i put a million dollars into the property my cash on cash return is going to be very low the most i can offer you is 150 000 down and then that allows your buyer to you really have to ask your buyer how much cash on cash return do they want in order for you to negotiate with the seller that you're talking to about seller finance or subject to oh yeah that makes total sense i can see why you have any follow-up questions for me um yeah just no not anymore questions but yeah i can see why like you would not want to give like so much of a high down payment at first because yeah because of the cash on cash return right and that's the thing that's great about creative finance is that i can negotiate my down payment with my seller whereas i can't negotiate my down payment with a bank the bank has loan programs they say it's either 20 down or it's 35 percent down or it's 10 percent down or it's three and a half percent down there's no negotiating that down payment with a loan but if i go directly to a seller and i work out subject to or seller finance i have the ability to negotiate a lower down payment therefore giving me a larger cash on cash return it's free real estate as far as i'm concerned yeah free real estate for sure diana you're amazing thank you for the question thank you please eric clinton how you doing my brother welcome to the show what's up pace what's up what do you got for me today well well here we go like yourself you know my goal is to fix and flip and do some buy and hold so i put together a team of uh people with me to go ahead on this venture and um i need to know how important because um i heard this on your 26 hour live you know that if you didn't have your llc if you didn't have your llc um you you weren't in business and you said get off the platform and so immediately i took care of that i mean i had one that just wasn't functional for what i wanted to do for what i wanted to do here but um so the question is how important is business structure in doing what i want to do accomplishing what i want to accomplish and or systems and team structure to do this how great of a question is this so phenomenal so here's what here's what i find out is that the corporate structure let's just be clear for everybody paying attention corporate structure would be like my company set up right my llc or maybe a general partnership if that's the direction i want to go establishing an actual business costs a couple hundred dollars right and i give you a suggestion on that um live i use a company called um prime corporate services is who i use and i love prime they're great but what i love about having an llc setup is that you don't think about it right a lot of times i run into investors that are starting starting starting and when they get their first contract maybe it's a wholesale contract or they land their first flip or what have you they're really scared that they then don't have an llc and they say should i buy this property in my personal name now an llc does multiple things for you it subconsciously tells you you are truly in business because you now have a corporate entity it's a subconscious thing that allows you to move forward in your business and so a lot of people that are just consuming content and not taking action one of those very small actions you can take is go get an llc set up okay very inexpensive now you can say i'm in business i've got a business i need to start filling that business's bank account with real money and real deals right the next thing an llc does is it protects you so let's say you go do a fix and flip let's say you go do a buy and hold let's say you go do a wholesale deal when you do those deals you want to do them inside of your llc because in the event which it will happen if you haven't been in a lawsuit my feeling is you haven't been in business long enough you will run into weird things you'll run into a tenant problem you'll run into we ran into an issue five or six years ago where we did a fix and flip and a year later the person who bought the property from us on the retail market sued us because of a faulty roof and what was funny is we didn't even do the roof we never touched the roof it was an older roof and we didn't provide them a warranty it wasn't our responsibility they had an inspection but it doesn't mean people won't sue you people can sue you for anything at any time so if you get a lawsuit the last thing you want to do is have a lawsuit in your personal name you want to have that in an llc because it provides protection against you and all your personal assets right they can't come after you personally if you did the activities in an llc so for me it's more peace of mind knowing that when i'm running down this path and i'm building a team and systems and processes i know that i'm doing it inside of an llc that personally i have no liability whatsoever so that if something goes wrong i'm fine my family's fine my personal assets are fine so for me it is a couple hundred dollars which people go to the movies and uh and have a sushi dinner spend 200 300 like go spend the money on the llc get the llc set up properly right now in that 26 hour live i educated you guys on what i suggest for the llc structure just to make it simple inexpensive etc now after you start that llc your next question eric is how important are business systems and processes well let me tell you how important they are it's noon my time most people that are running real estate businesses and have 30 active fix and flips going on and have a tremendous amount of buy and hold properties and a lot of airbnbs all over the place we have an active wholesale operation running you know we're on an a e in us have a five-year contract for a television show we own virtual assistant businesses we have all these things without systems and processes i would not physically be able to be here i would be running and gunning like a chicken with its head cut off because i didn't have processes and systems right somebody to answer the phone somebody to put out a fire somebody to move a lead along even when a lead comes to me sometimes people will go pace i need help with this lead i'll answer a question real quick and i throw it right back into the system right back into the conveyor belt and have the acquisition people handle it i never get myself caught inside my business because i am actually my own worst enemy i had to learn how to create systems and processes so that the business would run without me it is very very important so eric in the very beginning of your business i would suggest the first and most important thing i would do is you should get a virtual assistant i'm sure have you have you considered getting a virtual assistant absolutely okay so get a virtual assistant to take one task off your plate per month and for a lot of people if you're out there looking for deals that could be take the cold calling off your plate so i would suggest choose one activity per month that you don't want to do and hand it over to that virtual assistant train them until they can't do any more and then get another virtual assistant and by the time you have two virtual assistants i would then have a conversation internally and say do i need an actual assistant or an actual employee on boots on the ground but most investors looking for wholesale deals fix and flips creative finance opportunities they're cold calling they're texting they're on social media looking in and going through facebook groups and looking for deals those are tasks that an uh that a virtual assistant can do and those can be automated so when you wake up in the morning your calendar is booked with appointments to talk to sellers that is the first thing i would do is how do i offload those tasks so all day long i'm just talking to sellers and making money phone calls what most people do is they make the cold calls themselves which can be done by a nine or ten dollar an hour person even part-time and then you hear them saying i've been trying to get into real estate for six months and i go okay great what are you doing every day what's your day look like well i start out by cold calling five or six hours a day and i go you what you you cold call yourself five or six hours you should not be doing that you should offload that to a lower paying position and they should be amplifying you on money making conversations only and so those systems and processes will keep your sanity you'll make way more money and you'll be motivated and you'll have tons of passion you won't feel like you'll ever burn out if you're offloading those things right out of the gate what do you feel like you need to outsource right out of the gate just that the cold calling there you go i i see a lot of people teaching how to cold call how to cold call how to cold call i personally think cold calling is a waste of time for somebody like me i would never do it what i would do is if i'm lacking budget i would probably drive for deals and i would call and text sellers directly but cold calling just you know hitting the phone and calling some big massive list that's something that a virtual assistant can do and if you don't have the budget for it start with driving for deals then upgrade and hire a cold caller that just sits there full time and call sellers in fact my goal for you eric would be how quickly can i get somebody else setting two appointments a day for me every day now you'll see this with me and my partners we do this obviously in our business our virtual assistants can generate two good leads per day each so two leads per day man those are good quality conversations with sellers some of them might say i'm not you know i want too much money well at that point you know this eric you can pivot that conversation to creative finance which is great but let's keep it basic you've got to have an llc just for the subconscious and you've got to have the virtual assistant just so you don't burn yourself out the last thing you want to do is be three months four months into this and go man i went on that vacation for five days and it's been hard for me to get back into cold calling and get re-motivated have you ever felt like that before i don't go on vacation so no i'm not you know what i'm saying like a barbecue or i went to a football game or whatever right i know what you're saying you know hey that's it that's a that's the thing do you deserve a vacation absolutely absolutely and the thing keeping you from being on vacation is one of two things it's either a lack of deals or it's a lack of systems right and guess what a virtual assistant can solve both of those so i would maybe and this is what i tell people a lot of times too this is so important that i would go squad up i would go find somebody else and say hey let's share a virtual assistant so we don't have the you know added expense that's too great you know i mean virtual assistant's like the one-fifth the cost of an american employee so it's a great way to go for that cold calling or texting task and then you don't ever have to do it and all you do is you look at your calendar every morning and you say who am i talking to not who am i cold calling awesome that's what's gonna happen i appreciate it that's what's gonna happen that was great i hope i hope that was helpful guy i wish somebody came i wish i could jump in a time machine and tell myself that seven eight years ago and that's why i asked the question i was hustling and i was like reveling in the hustle mode and the mentality and then i realized man i just spent three years chasing my tail when i could have just hired somebody to do a lot of these tasks and now i can do all sorts of things and people ask me all the time how do you have your hands in so many things and how are you doing so much i go because other people are doing the majority of the work i'm the one that gets to do the high level tasks the tasks that make me the most money that's where i focus all my time and energy that's great thanks for being an awesome pace i always appreciate you i always appreciate everything you you're the man brother thank you for the question it was awesome you got it well let's get let's get into this ralph welcome to the bigger pocket show thank you so much for coming on here you have a great question i'm excited to answer what is your questions for for the audience so my question is when locking a sub two deal i was wondering how you feel about adjustable rate mortgages uh so i found that out recently about a guy was the deal actually didn't end up going through anyways but it would still be good to know what the approach should be so how do you feel about that phenomenal question so let me reiterate the question for the people in the back that don't understand exactly what the question was your question is pace how do you feel about buying a home subject to which means keeping the mortgage in the seller's name and taking the deed right subject to how do you feel about buying a house subject to that has an adjustable rate mortgage and my answer is i don't mind it but i have an equation where i only take on one out of 20 acquisitions that i do in my portfolio are allowed to have an adjustable rate mortgage okay so let me tell you what happened in 2008 2009 a lot of the investors that we're buying subject to that's right guys subject to has been around a very long time in fact we we know subject to has been going out back at least 100 years people have been taking deeds on properties that have mortgages and debts on them for a very very long time it is perfectly legal just to be very clear with you guys in future episodes of being in bigger pockets i really hope to bring on a couple of my attorneys we can chop up some of the legalities and the fun parts of the inner workings of subject to but let's throw that to the side it's not illegal it's perfectly legal it's fun um in fact a lot of my investors are lenders in my business which is great but in 2008 and 2009 the majority of my colleagues were buying subject-to deals on adjustable rate mortgages now at the time those properties were cash flowing and that's perfectly fine if the market crashes what do i care about the value of the house going down as long as my cash flow continues to go because we all know the market's going to rebound at some point might be five years maybe 20 years whatever why was it so bad in 2008 and 2009 when the interest rates rose on those adjustable rate mortgages what happened is those properties no longer cash flowed and now my colleagues were now hemorrhaging money on every property and those properties were underwater so it was a double whammy they had no equity in fact they had negative equity and they had an adjustable rate mortgage that now just turned the opposite direction and now they're losing 200 a month not making 400 or 500 a month it was that dramatic i had friends that were worth 20 30 40 million dollars that ended up losing just about everything and the main reason why is because they were acquiring subject-to deals on adjustable rate mortgages and they weren't thinking what would happen if the market completely turned and adjust the interest rates rose so for us we own multiple houses with adjustable rate mortgages i'm not opposed to it i just limit my exposure to it by limiting one out of 20 acquisitions into my portfolio are allowed to have an adjustable rate mortgage so you will you will do it but you don't want to have any properties it's kind of here and there the thing is the adjustable rate mortgages are kind of a thing of the past if you run into them they're very very rare back in 2006 2005 2007 they were everywhere everybody was doing adjustable rate mortgages that's kind of an old model do they still exist yes they do but they're very rare most of the properties that you're going to run into now with subject-to opportunities are going to be fixed rate mortgages so last month we bought a property with an adjustable rate mortgage now let's look at this okay if i have one property and it's an adjustable rate mortgage and i'm making three hundred dollars a month in cash flow what i do is i say let's say worst case case scenario the interest rates go up a full percentage am i still cash flowing and if i'm not cash flowing do i have the ability to cover that cost my feeling is if it's your first subject to deal that you're ever buying do not buy it with an adjustable rate mortgage i would assign it to another investor like me who can handle if the mortgage if the market fluctuates right if you send me a deal and it's adjustable rate mortgage i've got so many other properties that are cash flowing that one property not cash flowing in my portfolio is not going to make a dent in my portfolio that was that answers the next question i was going to ask that was perfect yeah is assign the deal to a seasoned investor like me you can lock those deals up just plan on assigning them if you're newer to creative finance and make 10 15 20 000 assignment fee on those things and let somebody else take on the adjustable rate mortgage that's more experienced and has more resources thank you pace that's that fixes everything there that's the goal that's my job brother thank you so much for the question absolutely do we have time for maybe a follow-up question sure come on bro you know me i know i i love to talk let's go awesome awesome so i am um talking to another seller later today who is stuck on a number that i mean i still have to bring her down to reality but we're starting to think together that we're good the people i'm squatting up with we're thinking about pitching an ovation i don't know i know some very basics of it but if you were me and you were going to try to just pitch it at its most basic how would you pitch that do you have anything you could give me i just did i just locked up a seller on an innovation agreement on a 26-hour live i did on youtube but i will kind of reiterate and do it in a very simple format for everybody here on bigger pockets what is a novation agreement first and foremost a novation agreement is an instrument that allows me to fix and flip a property without ever having to own it and so what i tell a seller is i say well what if we just partner on the fix and flip what if i just lock in a number for you you let me go fix and flip the property and when i sell it to my buyer i then pay you off now in the real estate community this is also known as a net listing but you are you i imagine ralph you're not a realtor right okay no so a realtor can go to a seller and say i want to get i want to put you in an agreement called a net listing which means i'm going to list the property with a promise of giving you a net number so what that means is i let's say this what does the seller want ralph uh and this you under number 165. okay so the seller wants 165. so i would tell this i would say look if i can come up to your number of 165 what it's going to do is it's going to put me in a realm where i probably can't make the money i need to make it's going to put me in a really tight area that if one thing goes wrong i could potentially lose money and i don't want to do that however if you let me renovate and clean up the property and put it on the market invest my money into the property and i guarantee you in in our agreement that you will get 165 when i sell it to my end buyer would you be opening to a partnership or something along those lines that's the question and they go okay so you're not buying it nope i'm not buying it i'm not buying the property i'm guaranteeing you a 165 number after i clean up put the property on the market and i sell it to my end buyer in the real estate world again if i'm a real estate agent i would do it a little bit different i would say i'm going to list your property for whatever i think i can list it for a billion dollars 20 billion dollars it doesn't matter to you mr seller because i'm going to guarantee you 165 000 if i can guarantee you 165 000 do i have your permission to clean up the property and list the property as long as i can get you your 165. that's called a net listing when you're a real estate agent does that make sense yes it's very simple a novation agreement i hate the way that it's it's worded because innovation is a word that most people have never heard before and so it's like kind of scrambles the brain and it tells you that you should be this it should be way more complex than it really is it is the most simple creative finance strategy ever it is simply renovating a property that you don't own promising the seller if a very specific number before you start renovating and you get the seller their number when you finalize the renovation and you sell it to a home buyer on the back end gotcha and who would very yeah that that's great um and for the people that are paying attention they might say well why would i use innovation agreement well think about this let's say that ralph's number to the seller is 150 and the seller says i'm not going to sell unless i get 165. a lot of the times a fix and flipper can't pay 165 is because they have acquisition cost right we pay hard money lender fees we pay hard money payments we pay closing costs title and escrow fees we pay insurance and all these things along the way that a lot of times cost us 15 000 so in essence if i'm buying a property from a homeowner for 150 with all of those added expenses and things that add up i'm really buying it for 165 it's just that the seller doesn't get the 165 they get 150 and all these other pif people get paid 15 000 so in a novation agreement it allows me to pay 165 because i don't have to pay hard money lender fees i don't have to pay close of escrow fees i don't have to pay title and escrow fees and guess where that money goes it doesn't go to all these other business professionals it goes to the seller which is where it should go so when you pitch it like that to a seller and you let the seller know look in a novation agreement which i don't ever call it innovation agreement with the seller i call it a partnership agreement so they they understand it's a partnership i'm giving you a guaranteed number you're letting me fix the property without owning it and then there's obviously a lot of mechanics behind the scenes of like how to protect yourself how to make sure that you don't lose money there's all those things which is another conversation for another day but if you just tell the seller i can give you 165 as long as i can give you 165 and you don't force me to give you 165 and then other people another 15 grand why don't i give you 165 and we meet in the middle you let me renovate the property without purchasing it and i will guarantee that i can come up to 165 in our agreement genius i like that it's very simple it's logical that's the beautiful thing about creative finance it is truly one of the one the only logical way for both parties to truly win and this is the only way that she'll do it because we've been i mean i've talked her down from 180 down to that and she's not budging from there it's been weeks yeah so tell her look and then go through exactly what i just told her say if i bought it from you at 165 i'm really buying it for 180 and here's why and i would love to give you 165 as long as i can give you 165 and nobody else any money and that would require for us to have an agreement together that's a sort of a partnership that's perfect i'm calling her tonight so do it lock it up man go get the deal done awesome thank you so much good work brother thank you for the question it's really good absolutely thank you as well and thank you for your time i really appreciate you and uh any time brother anytime thank you awesome all right bye thank you biggerpockets for having me on today's show i am so grateful i have learned so much over the years on this exact podcast it is almost so real that i'm here in person and guys if you've gotten value today please make sure you download this podcast anywhere you get your podcast make sure you like you subscribe you comment down below this is all about action taking building community down in the comments and encouraging each other to take the next step in your real estate journey we'll see you on the next episode of the bigger pockets podcast this is pace morby signing off for the biggerpockets podcast please follow me i am a future tv reality star i have a bikini calendar coming out next year so look forward to that join me on my instagram at pacemorby and look out for that calendar coming soon [Music] you

Channel: BiggerPockets

Views: 69,230

Keywords: biggerpockets, real estate, real estate investing, investing, rentals, rental property, investing in real estate, income property, bigger pockets, passive income, creative financing, real estate creative financing, pace morby, creative finance, creative financing in real estate, how to creative finance, seller financing, subject to deals, seller finance, wholesaling, flipping, fix and flip, real estate investor, real estate investing strategies, no money down real estate

Id: VWCxaDOR5HE

Length: 42min 13sec (2533 seconds)

Published: Tue Nov 09 2021