Let me cut through the crap right now and get straight to the point.
The way I do and teach this business is all about being a Transactional Engineer — being able to handle any seller situation that comes your way and turning it into a win-win deal for you and the seller, whether they have enough equity in their house for a cash deal or not.
That may include any form of seller financing on the acquisition or the exit, or an all-cash deal, or maybe it’s a hybrid deal where you buy with cash and exit with terms, or vice versa.
There are a million different ways to acquire property, and only ONE of them requires the seller to be paid off in all cash. Yet this ONE acquisition method is the one everyone is chasing, and it’s hurting your deal flow, as I’ll explain in a minute.
So there are multiple benefits from taking the blinders off and learning these alternative strategies. I’ll describe some of the benefits below but…
The Big Point Is This:
Don’t pigeon-hole yourself into thinking it’s all-cash or nothing.
Don’t hinder your business by only looking for ONE type of deal and ignoring all the rest.
Don’t think that you have to fix-up a house to add value to it.
Don’t think you have to get a big discount on a house to make money with it.
Benefit One: Double Your Conversion So You Can Ultimately Dominate Your Market (if you want to)
Doing this right can literally DOUBLE your conversion rate from leads to deals. In other words, you can do twice as many deals from the same amount of leads when you get smart about this and take your blinders off.
Think about it, what could you do if you knew you had twice as much opportunity to turn a lead into a deal as 95% of other investors out there who are just searching for distressed, discounted, ugly houses?
Could you pay more per lead?
This is how you dominate a market. As the great marketer, Dan Kennedy, says, he who can spend the most to acquire a customer (a deal) wins.
So if you can convert more leads to deals, that means you make a higher average revenue per lead, which means you can pay more to generate that lead than the next investor, which means you can out-spend them on marketing and take over your market.
Benefit Two: Less Risk & Fewer Costly Entanglements
When you personally sign on a note you put your whole life and family at risk, and for what? For a piddly little house?? That’s insane. You can buy all the houses you want with no money down and no personal guarantee.
When you get seller financing, there is no personal guarantee. When you get a bank or hard money loan, there is.
Rehabbing and selling a house on the retail market is the most risky and has the most costly entanglements of all the ways to do deals.
There are too many people and forces outside of your control with which you must work to get a fix-and-flip deal done, which directly affect your profit. For example — have you ever had an appraiser give you a $20k haircut when you go to sell? That’s what we call a bad hair day.
Contrast that with being a transactional engineer — whenever I get into a deal it’s not a question of whether I will win or lose. It’s a question of which way I will win first. And if I can’t go into the deal like that, then I simply don’t do the deal. It’s all in how you structure it.
If I have zero cash in a deal, how much risk do I have in that deal? That’s right: zero.
Don’t write big check, can’t lose big check. Don’t make any promises you can’t keep, and don’t personally guarantee any debt.
Follow those three things and you’ll be way ahead of the curve.
Because I operate with such little risk in any given deal, for starters, I sleep better at night. But the big benefit is that I can run my business from my desk in about 5 hours a week.
Because when there isn’t really ANYTHING in your deals that could “take you out”, then you can run your business in a much more relaxed manner, i.e. I can delegate 95% of the tasks of the business to one or two good assistants.
This is how I’m able to do multiple deals a month with minimal time involved personally, and minimal headaches and worries.
Benefit Three: Make Chunks of Cash Now While Building Long-Term Wealth at the Same Time
People talk about how the buy-and-hold guys are always arguing with the flippers about which strategy is better.
I say, why not combine them?
When you open your eyes to terms deals, you can get paid like on a flip every time you acquire a cash-flowing rental property.
I’ll illustrate this below when I discuss my bread and butter deal type, but the thing to know right now is that when you do terms deals you get a big chunk of money now, money monthly, and a big chunk of money at the end.
When you do wholesales and fix-and-flips, sure you make a decent check (if you’re good), but you’re not building anything of value. You’re building a job for yourself and you will remain on the hamster wheel forever.
Many Tools In Your Acquisition Tool Belt
Now again, when I say “terms deals” I mean they include some form of seller financing on the acquisition or exit. This could be taking over their debt subject-to, using a wrap mortgage or AITD, seller carryback, or some combination of those.
When I tell people this, their response is usually something like, oh man I’ve heard of subject-to, I’d love to do some of those deals but I can’t find any in my market!
This is an ignorant statement in my opinion. Every seller you talk to who has a house with a mortgage on it is a potential subject-to deal.
You are foolish to think that it’s all about CASH NOW with every seller out there. Some of them, perhaps most of them, are more concerned with DEBT RELIEF than anything else. Or maybe they just want to move on in their life and this property is holding them back.
There are many many “people benefits”, as A.D. Kessler points out in his book, that are often much more important in the deal than cash.
I’ve said it before elsewhere, but I’ll say it again, we don’t need the most cash-strapped desperate motivated sellers when we have these terms strategies in our tool belt. We just need a seller who’s flexible.
And because of that, we can simply pick up the phone and call FSBO’s off of Zillow if we wanted to. Talk about free seller leads!
My Bread & Butter Type of Deal
So there are tons of different ways a deal can go, however, they all boil down to just a few very common types of deals in my world
I’d guess 90% of my deals are terms deals and the other 10% I’ll usually wholesale, or if it’s a lipstick remodel maybe I’ll actually do a “fix-and-flip” here and there.
But the majority of my deals look like this:
I buy the property from the seller subject-to their existing debt. In other words, you take title to the property and agree to start making the payments on their existing mortgage.
If they have any equity due to them from the sale, they don’t get that at the time I take title. They get that whenever I cash out of the property. Until then, they get a seller carry-back note for their equity, with no payments, no interest, and no balloon, due on sale. That means their equity is literally just sitting there on the property, and they’ll get that whenever I ultimately cash out of the property, usually when my buyer refinances.
If the seller has no mortgage on the property, i.e. they own it free and clear, I simply negotiate the lowest monthly payment I can with them, and get 0% interest.
So when I buy the property, I pay the closing costs, but I have no down payment, so I have almost zero cash tied up in the deal.
Once I’ve acquired the property, I’ve gotten the deed, I hold title, I OWN the property — even if the seller’s mortgage is still in their name.
Then I sell the property with some form of seller financing, usually a lease-option.
I collect a large non-refundable option fee from the tenant-buyer, which gets credited toward their down payment, and I start collecting monthly lease payments from them.
My front-end profit is the amount I can collect on the option fee from my tenant-buyer, less any closing costs or down payment I had to pay out to the seller. As I said before, we usually buy with nothing down, but sometimes we’ll give the seller a few thousand down.
My monthly cash flow is whatever spread I can get between the underlying mortgage payment (or my payment to the seller if they owned it free and clear), and the lease amount I can get from my tenant-buyer.
My back-end profit is whatever the tenant-buyer still owes me after their option fee, minus whatever I still owe to the seller or the seller’s bank.
Let’s take a look at a few example deals to illustrate this:
Free & Clear in Charlotte, NC
A couple months ago I bought a house from a seller in Charlotte for $413k. The house was probably only worth $430k tops. It was in pristine condition, didn’t need any work, and was a beautiful home in a great area. Even had a little pond in the back of the house.
The seller owned it free and clear, and I believe he had been trying to sell it for some time. They had already moved up to their dream home in the mountains, about 3 hours away.
At this point, the seller was simply tired of driving back down to Charlotte every other week to check on the house.
He didn’t need the money — they had plenty of money. He didn’t have a mortgage payment on it, so he didn’t need debt relief either. He just simply wanted it off his plate.
So I negotiated to buy the house from him with owner financing. We haggled a little bit, but ended up agreeing to $5,000 down, $1,200/mo at 0% interest, with a 3 year balloon, and I’d pay the taxes and insurance on top of that each month.
I then turned around and sold the house for $449,900 on a lease-option to a tenant-buyer who gave me $45,000 for the non-refundable option fee, and is paying me a $2,000/mo lease payment. I set the lease-option term to 30 months (normally we’d only do 24 months tops, but these guys had a big down payment).
So how did I come out on the deal?
Front-End Profit: $45k option fee less the $5k I paid to seller less closing costs of about $1,500 = $38,500 profit
Monthly Cash Flow: $2,000 rental income less the $1,200 to seller and $300 to taxes and insurance = approximately $500/mo profit (remember, with a lease-option, the tenant makes all repairs)
Back-End Equity: $449,900 less the $45,000 option fee, less the $413,000 purchase price, plus the $5,000 I paid to the seller as a down payment, plus the $1,200/mo principal-only payments I’m making to him. So if the deal goes the full 30 months with my tenant-buyer, my back-end payday will be $32,900 profit.
Total Profit: $86,400
Subject-To in Winston-Salem, NC
My first terms deal I ever did was with a seller who called me off of my classified ad in the local print newspaper.
I talked to her on the phone to screen the deal, then set an appointment to go see the house.
When I got to the house it was clear that she was not going to let me leave without me buying it. She had just had the yard mowed and the house cleaned up.
By the time I left the house she was nearly crying tears of joy, saying I was an answer to her prayers.
She owed about $92k on the house with about $650/mo mortgage payment. House was in great shape. ARV maybe $110k.
I bought the house for what she owed on it. In other words, she deeded me the house and I began making payments on her mortgage.
Within a week of buying the house, I had the house sold on a lease option for $129,900. The tenant-buyer gave me $20,000 as their option fee, and $700/mo lease payment, 24 month term.
Front-End Profit: $20,000 option fee less my closing costs of $950, and I did give the seller $1,400 moving money on that one = $17,650 profit
Monthly Cash Flow: not a huge monthly spread on this one, just $50/mo, but remember, tenant-buyer makes all repairs, and I got $20k out of them up front.
Back-End Equity: $129,900 less the $20,000 option fee, less the $92k owed on the mortgage, plus any debt paydown over time = $17,900 minimum profit
TOTAL PROFIT: $36,750
Subject-To on a Fix-and-Flip in Winston-Salem, NC
Sellers called, they were 3 months behind on their mortgage. They owed about $70k on the house, with about $7k in back payments. House needed cosmetic work, but would retail for $130k.
I bought the house subject-to their debt, brought their loan current with $7k cash I borrowed on a 0% credit card. I used that same 0% credit card to put about $15k into the cosmetic repairs, i.e. paint and carpet, and then listed it with a realtor for $129,900 and got a full price offer within a couple weeks.
What was my profit?
$130,000 sale price
– $9,800 commissions and concessions
– $7,000 back payments
– $3,000 holding costs
– $15,000 repairs
– $70,000 mortgage
= $25,200 profit
The whole deal took me maybe 3 months.
I’d like to point out, though, that I didn’t have to come up with the $70k to purchase the property. I didn’t have to get approved by any lending institution for the deal (I already had the 0% credit card in my pocket). And I didn’t have to personally guarantee a giant loan with a loan shark (I mean a hard money lender) to do the deal.
Let’s Poke Some Holes
I know some of you reading this are shouting all kinds of profanities and questions at me, incredulous that I would do such kinds of deals.
That’s illegal, you’re scamming sellers and buyers!
I’ll remind you that every single seller and buyer we work with does so willingly and cheerfully. Nobody holds a gun to their head and forces them to do it. If they didn’t want to do it, they wouldn’t do it. Period.
In fact we get a video testimonial from all of them and they’re all happy that we came along.
So please, stop asking “why would a seller do this??”
I don’t know why. BUT THEY DO. Get over it.
What if the bank calls the loan due???
When you do it right, this is simply a non-issue. Could they call it due? Sure. Will they? Probably not…until you try it yourself. But even if they did, you’ll be able to handle it if it ever came to that. Get over it.
This won’t work in my HOT market, houses are selling in days!
Oh yeah? Go check your local MLS for houses that have been on the market for 90+ days. I bet you’ll find some. The fact is this has nothing to do with the market. There are sellers who will do this everywhere. Get over it.
Lease-options?? That’s small money compared to fix and flips!
Most fix-and-flip guys I know are happy to make $20–25k after 6 months of work in a deal. How much did I make on that $450k lease-option with no work? Oh yeah, about $37k on the front end, with total profit over time about $86k.
You can’t do this business only working 5 hours a week!
Well, maybe YOU can’t, but I can. But only because I have the systems and the team. What’s my team? I have two acquisitionists paid mostly on commission, one in each of the cities I work, and a full-time virtual assistant about $800/mo.
Where do you find these deals?
Same place any investor finds any deal — we do marketing to generate inbound seller leads (the trifecta: Facebook, Google Ads, Direct Mail), we pay other companies to generate leads for us and we pay them per lead, and we have our V.A. make outbound calls to FSBO’s, FRBO’s, and Expired Listings.
Here’s one of our actual signs we use to get these buyers.
Where do you find these tenant-buyers with big money?
Same way we find the ones without money — we market to generate buyer leads, and then pre-screen them to see if they have money or not. Facebook, Craigslist, our own website, Zillow, Hotpads, Trulia, pointer signs in the area, etc.
What if your tenant-buyer tears up the house that you paid top-dollar for??
Ok let’s see, if the tenant-buyer in the $450k house tears it up, they lose the house and their $45,000 option fee. They have major skin in the game NOT to screw up.
But let’s say they did. Well, I’d either fix it, or I’d sell it as is.
Didn’t I make about $37k profit on the front-end with that deal? Could I use some of that money to fix the house? Am I still in a favorable position if I do?
You bet I am!
Here’s some advice that I think a lot of people need to hear:
Stop asking all these “what if” questions.
Sure, it’s good to hope for the best and plan for the worst. But what a lot of people do is search and search for all the reasons NOT to do something when what they should be seeking instead are all the reasons TO do something like this.
These people will be stuck in whatever rut they’re in until they change their thinking about stuff like this.