#97 - Creative Deal Structuring: Smart Real Estate Strategies with Chris Prefontaine

[00:00:00] Welcome back to Passive Income Pilots everyone, Tait Duryea here with Ryan Gibson. What's up Ryan? Oh, I'm doing good. You know, I just want to have a moment of silence for the victims on the recent accident in DCA and in Philadelphia.

[00:00:19] So hats go out to all the victims involved. Very tragic events and you know this show doesn't really talk about airplanes and aviation accidents but you know just such a demoralizing event for all the families and military men and women that were involved and and you know our hearts go out to them and you know and the families so absolutely

[00:00:40] but anyway don't don't mean to start on a negative note but man first aviation catastrophe in 16 years in the United States. What a safety record for those that are listening that aren't pilots just know that like aviation is the safest mode of transportation and you know things do happen but you know don't have that anxiety on your next flight. I mean if you can or you may have anxiety but you know just know that

[00:01:03] there are men and women the professionals in this industry are safe. We learn from our mistakes and we take it very seriously and I'm sure whatever findings are going to come out of that accident. We're going to take it and we're going to we're going to improve our national airspace system our training programs and all that and just our hearts go out to what happened. It's just such an unfortunate event. So thank you, Ron.

[00:01:24] Yeah, so back to the show Tate we've got a killer episode today. I think you really do real estate is all about finding money to buy your property whether it's a loan or a down payment or structuring financing and sometimes it might feel like there's no hope when there's interest rates that are super high and the sellers want a lot of money. But the thing that I love about real estate the most is it's how creative you can be. When people ask me like what do you what do you love most about what you do day to day.

[00:01:53] All I do and Tate you do the same thing like creative deal structuring. Yep. How can you creatively structure the financing create win-wins. Yeah to win-wins and we create wins for everyone around. It's all we do all day. Yeah, it's it's so wonderful because real estate unlike other industries that are conniving and backstabbing and you know it's and and they're they're played like zero sum games. Real estate is not a zero sum game.

[00:02:22] Just because I make money doesn't mean Ryan doesn't just because you make money doesn't mean the next guy doesn't. It's you can structure things creatively where everybody wins and that's what we're talking about today is creating creative strategies right that let everybody win that solve a problem for the seller and create a winning scenario for the buyer and vice versa. So I'm excited to get into it.

[00:02:47] And you might be tuning into the show and you might be thinking like, okay, what's the so what like I'm just a passive investor and Tate's Orion syndication through Spartan or turbine. You know, I'd be like why why does this matter. It matters because when we present a deal to you guys to invest in and we talk. We're going to talk about like hey the seller is carrying back the note or we've got seller financing or we've done some kind of creative deal structuring.

[00:03:11] We want to pull the curtain back and show you guys how we do that or if you're listening to the show and you're like, man, I'm trying to buy my short term rental. I'm trying to buy my my own house or I'm trying to buy a small multi multi-family building and I want to structure the financing in a way that makes sense.

[00:03:30] This episode is going to really ring home for you because you're going to have a ton of creative financing strategies to take away from this and a great resource nonetheless as well. So Tate, who is this gentleman that we're bringing on the show today?

[00:03:43] Absolutely. This is Chris Prefontaine. Chris is the chairman and founder of Smart Real Estate Coach. He's been in the real estate industry since 1991 and educates on creative financing subject to wealth and information. So we're excited to get into the show without further ado.

[00:04:06] Welcome to Passive Income Pilots, where pilots upgrade their money. This is the definitive source for personal finance and investment tactics for aviators. We interview world renowned experts and share these lessons with the flying community. So if you're ready for practical knowledge and insights, let's roll. Chris Prefontaine, thank you so much for joining us. You bet. Glad to be here, guys.

[00:04:31] Chris, I'm so excited about today because we're going to get into how to finance deals and how to do it without a bank. So that's really cool. And then we're also going to talk about ways that you can be active in this and offset more of your W-2 income because I know a lot of pilots out there, they want to offset that $400,000, $500,000 that they're making per year. So we're going to get into all that stuff. But would you mind just kind of who are you and kind of what you do and how long you've been in this industry to give you the platform?

[00:05:01] to really talk about in educating our listeners about this kind of stuff? Yeah, I'll give you the 10,000 foot view as I shared with you guys before. And if you wanted me to peel it back, I'm happy to. I'm in my 34th year in real estate. So I will put them to sleep if I go back that far.

[00:05:13] I started in 91. I built hundreds of homes. Then I transferred into putting my broker hat on, building a franchise and selling at the Coldwell Banker. That was 2000. And then I ran up through the 2008 crash, which is the impetus to what I'm doing today because I had, oh gosh, 23, 24 properties, maybe all different asset classes.

[00:05:32] But one key thing in there, they know pilots for the most part probably have great credit and great income, right? I had great income and great credit. And then I went in the toilet when the market tanked and I was on 23 loans personally, and they value chopped by a half or two thirds. So that was a major lesson. And then I said, okay, I got to re-engineer things if I'm going to do anything in real estate. And that was create some new rules. We're not going to use banks to Europe, to your point earlier that you alluded to.

[00:05:55] We're not going to put gobs of our own money down, and we're not going to go out and borrow even privately. We're going to do everything on what I call terms, which is creative real estate. So everybody gets a general term. And so that from 2012 on, that's all I've done personally. And then organically around 2014 or so, the last 10 or 11 years, we had demand to teach it. And so now we're all over North America doing deals with students the way that I discovered the hard way out in the field.

[00:06:24] You know what? You know, it's so funny because people ask me all the time, like, how did you get into your first self-storage deal? How did you convince the lender to give you a loan? How did you convince a bank that you had the experience? And a lot of people that go out and buy their first deal, they have to get like KP's or partner with other key partners that have experience. And then they've got the resume to sort of get the loan. Right.

[00:06:46] But the first time I bought my first self-storage facility, I got super lucky because the owner was in his 80s and he said, hey, Ryan, we'll sell you this property, but you have to take seller financing. Meaning that, meaning that. Sweet. Sweet. Yeah. You know, I mean, there was negotiation involved in that, but he was basically like, hey, you have to take seller financing because when I sell this property, I have no basis in it because I've owned it for 30 plus years.

[00:07:16] I'm going to have to pay a ton of taxes if I take this whole gain. But if I give you the loan on the portion of the property and you just give me a little down payment, I don't have to pay that tax. And, you know, I'm in my 80s. I just want the cash flow. I don't want to do the work on my storage property. And I was just surprised to hear that, A, number one.

[00:07:40] And B, like there are people out there, there are tons of deals out there where sellers actually want to give you the loan back on the property. And so that's why Tate and I are just delighted to have you come on and talk about these different strategies, because while that one kind of fell in my lap, I know that there are some techniques to sort of show sellers the benefit of getting a seller carry back and make them go, oh, hey, light bulb.

[00:08:05] Like this is actually benefiting me and it benefits you, the buyer, because you're not on the, you're not going to a bank. And I mean, let me tell you about my first flip, right? Like third, I called 30 banks to get my first loan. And so like it's, you know, it's a lot of work. So if it's, it might be a lot of work to get seller financing, but it's a ton of work to get a bank loan. So would you just kind of really like for an airline pilot that's hearing about seller financing for the very first time, like that might even be a term that they don't even know what that is.

[00:08:33] Can you guys just break it down from a top level? Yeah, sure. And let me just comment on that. You said that all the work it takes, but the other piece of that is, and then I'll talk about the owner finance mechanics and we can rip it apart. The other piece of that is when you go get a bank loan, yes, it's a lot of work, underwriting and all that. But you're also 99% of the time going to sign personally, especially if you're new. And if you're flying around and you're busy and you got great credit and great cash, why risk your personal assets if you don't have to? So we'll plant that seed for now, I guess. So owner financing, picture this.

[00:09:01] You, you, as a pilot, you drive by and you fly by many banks. You're, you're, all you're asking the seller to do is be a bank. So, uh, you did a self-storage. I did my own office building this way. All I said was to the owner was you be the bank. I make monthly payments to you. And at some year in the future, we'll have a balloon payment. In this case, it was 20 years. It was a good deal, but just picture that. So you're buying a property instead of new money coming to the table.

[00:09:26] If you ever bought a house as a pilot, you bought a house, new money came, comes to the table on the settlement statement. It has the bank name there and the amount you borrowed. Instead, it's going to say owner financing of some sort of language with that, depending on what the title company wants to see. And then there's going to be a promissory note and a mortgage. That's it. Promissory note outlines your promise to pay. A mortgage secures that particular seller as the bank. Just like a bank has a first mortgage on your house when you buy it with new money, the seller is going to have a first mortgage position.

[00:09:54] So they're protected on the building or property you buy from them. So I could buy a hundred thousand dollar house. Seller could carry back an $80,000 seller finance note. And I got to give them $20,000. They're going to hold an $80,000 note on the property. And I promised to pay that note over 20 years, 30 years, 50 years, 100 years, whatever. Whatever that promissory note says. And they continue benefiting from the cash flow from the selling note. So that's great. Yeah.

[00:10:23] And to your point earlier, Ryan, like the guy, same story with me. The guy was an elderly guy. He's since passed away. But in 18, I bought this and he said, Chris, the realtors don't get it. I have a four by eight sign on a busy road out there. It says owner financing. I want it for estate planning and tax reasons, right? You probably knew he was ill. And he said to bring me offers. I don't want it. I don't want to pay the tax upfront. It allows them to spread it out over time. Same exact scenario. And if you look at the stats, we could talk about where we get properties. But a third of the properties, ballpark.

[00:10:53] In the United States, a free and clear property. That's where we go talk to sales who are free and clear. Because they'll do these fun deals. Now, think about it. How many baby boomers own real estate that are retiring that don't have heirs to give their properties to? And they've owned the property forever. And they've got the note paid off. Everything's free and clear. And here comes a motivated person to buy the property. And they're asking for that note. Can you talk about the tax benefit?

[00:11:20] Because I think that's really important to understand. What do you mean there's a tax and estate planning benefit? What's that all about? From the seller's point of view. Yeah. Exactly. Yeah. Let me hit a few things in no priority order. So when I say estate planning, think of the guy who passed away sadly with me. He did not want to give his wife and his son who he thought was going to get the building. And he moved as an attorney to Chicago. And he's left by himself. He did not want to give them a building to run. He wanted to give them a cash flow stream. That was his deal.

[00:11:50] Now, the tax issue is this. I don't want to get too crazy. And I'm not an accountant. So disclosure. Do it this way for everybody to understand. Even if you're listening driving. You said that there was no basis with that particular gentleman. But let's throw a basis at this, right? Let's say... And what is a basis? Just for everybody. Let's not leave anybody behind. What's basis mean? Yeah. So I buy a building tomorrow for a half a million dollars. And I have some costs involved. The cost of that transaction and related costs are now what I start off my day one with what

[00:12:20] they call a basis. Every year, I'm going to depreciate that. My CPA is going to depreciate, you know, claim depreciation on my tax return. So my basis reduces every year. Now, so to your point, the gentleman had zero basis. Everything's going to be capital gains. And that's scenario. Let's paint a picture for someone to understand round numbers. I buy a building for a million bucks and the seller has... Their accountant tells them your basis is down to half a million. If I structure an owner financing payment, again, I'm just using round numbers of $5,000

[00:12:50] a month to that seller. And it's principal only, which is primarily how we do it. No interest. We give them their price, but we don't do interest. Every time I make a $5,000 payment to that seller, because his basis is half of the value I'm paying, half of his payment each month is subject to capital gains. That's it. And it's spread out over time. He doesn't get whacked all up front. That's how capital gains in the basis works. So you remember, guys, we've had episodes. And Tate, I don't know if you have the episode number off the top of your head, but we talked

[00:13:19] about cost segregations, bonus depreciation. Yeah. All in the world. And straight line depreciation. And so just to get back to like, you know, I think we talk a lot about basis on the show, like, oh, I have no basis in this or whatever. That means that like you have taken that depreciation and for the purposes of taxes, you depreciated the asset down to zero. Asset's still worth a million bucks, but you've taken the depreciation. And so when you sell that, you're going to pay the gain from zero to a million, not from

[00:13:47] what you paid from 30 years ago. Right? So when I brought up that self-storage facility. You're borrowing the tax benefit. Exactly. That self-storage facility was built in the seventies or the eighties. I can't remember exactly. And he had owned it for so long. He had completely wiped out his basis in it. I mean, he sold the property to me for like, I don't know, 1.5 million or something like that. But it was great because he said, Hey, I'm going to, I'm going to carry back a note for

[00:14:13] 900 grand and you guys got to put down the down payment for the rest. And, um, you know, it's super fun. If you don't mind getting into it, you talked about principle versus interest and all that. Um, I want to dive into that. But one thing that was interesting about this guy was I asked him, I said, well, what do you want to, you know, I didn't ask him what interest rate he wanted to make. I just said, Hey, what do you, what, what payment do you need per month to make your life run? Right? Cause like you said, like these estate guys want that. And he said, I need $7,000 a month.

[00:14:41] So we went home and we went on a little amortization calculator and we, we landed on 4% interest in 25 year amortization. And it, it calculated, uh, you know, a $7,000 payment. We went to him and he didn't care how it was coming to him. So let me give you a idea on that. This might be helpful. So I said with a lot of our residential, we'll do principle only. So when I said that to him, he's experienced, you know, most of the land here on the island, I live on a three town Island. And he said, he literally almost fell off his jade. What are you talking about? No interest.

[00:15:11] So what he was a math guy, he understood it. He loved doing deals. And he said, so what we came to without any underwriting, without any hassle, just him and I is for 18 months, I paid 3000 a month principle only on a commercial building for 18 months. At the end of the 18 months, we took the balance remaining and we amortized it at, he wanted like five and a half. I think we settled at 5.2. So I want to get some serious pounding down or principle, unlike any bank loan you'd get. And then he wanted to eventually get his interest rate. Boom. Took minutes to structure that.

[00:15:40] And to your point earlier, who's doing this? Who's doing these deals? Now, we like talking to free and clear, but who's doing these deals? You're either helping them accomplish a goal the market wasn't. That was my guy and your guy. Or you're solving a problem. Now, free and clear, it's usually not a problem, right? Because they're not financially out. But in all those types of deals we do, it is. But in a free and clear world, you're helping accomplish a goal the market's not. Yeah. That's what's going on. Right.

[00:16:05] And I think it's so important to, you know, you forget that sometimes people don't want a big pile of cash, which is what's going to happen if you go to a bank, you put 20% down, you get a bank loan for 80, you buy a $2 million property and they own it free and clear. They're getting $2 million. And they're going to have to pay capital gains on all of it. But again, like you were saying, that gentleman didn't want to receive all that cash. Maybe he didn't want to give all that cash to his son or to his wife and then die.

[00:16:32] And they have to manage the tax hit and a giant pile of cash that isn't generating cash flow. Instead, he can structure it so that it generates an income stream that sits in a trust and pays out over time in his absence. Real quick, I just want to, I want to shine a flashlight and click into the other side of this. Cause there might be a 65 year old pilot or 64 and a half year old pilot who's about to retire. He or she has a bunch of rental properties. They're all free and clear.

[00:17:03] They're completely done dealing with these properties and they want to sell them. And they're hearing this and going, wait a minute, I don't have to pay off. Like, I don't get the, I don't need the pile of cash. I've got a pile of cash over here. What I don't need is more tax liability. So can we kind of give an angle from both? Like what's. And let me inject here. One other, one other concept that we've talked about before is 1031ing and then passing a property onto your heirs after you die.

[00:17:30] So we talked about it being depreciated to zero. If you pass a property onto an heir after your death, they get the step up in basis. What that means, if you, if, if that property is worth $2 million, but your basis in is zero, meaning you sell it, you recognize that $2 million capital gains, you're going to pay that, the taxes on that versus if you pass away and pass it on to the next generation, they get the step up in basis. Now the basis 2 million, they can sell it the following day and they pay no capital gains tax.

[00:18:00] But that means you have to wait until you die. You got to keep managing that rental property for the next 20, 30 years. And if you want to get out of it now without a huge tax hit, that's, that's what we're talking about here. So I'm sorry. I'll pass the mic back over. No, I, yeah, I just, I just wanted to get the other, the other perspective too. Like, like why would I want to give somebody seller financing if I'm the seller? How do I know they're going to pay? How do I structure? So. I have a thought on that. I thought about what you guys were saying.

[00:18:27] And that is, so there is a creative financing real estate association, like you'd have a board of realtors, let's say, right? With a net, with a certain moral ethical standards. So when I talk to sellers and I go, yeah, I got 10 calls this week or, you know, I say, okay, great. Make sure whether we talk ever again, make sure that they are accredited by the creative financing real estate association. So if you have properties to Ryan's point, that's all you to make sure. All the people in our community have to be, but they're, we're not the only one.

[00:18:57] So you just want to make sure you're in good hands. And if you're in good hands, you'll get, you'll have deals that guard the finish line. Yeah. You know, let's talk about the benefits of how you can actually potentially make more money on the sale of the deal. If you provide seller financing at a lower interest rate, then maybe the market would bear. Right. I mean, that's a strategy too, right? Well, yeah. If you're going to be a bank and everybody has their money invested in different places. So there's no judgment there.

[00:19:26] It's just, if you're going to be the bank, two things can happen. One, you can get an interest rate. So you, now you're, you're getting your profit on the, on the building of the house, but you're also getting the interest of your bank. Banks buy and build big buildings because they can make money in interest. And then secondly, we typically pay a premium on, on properties as long as we get our term. So the building I bought wasn't a huge building, but I gave him his price. Nobody else was. Why did I give him his price? Gladly. I was getting principal paid down and I was getting a nice long term and I didn't have to go through underwriting.

[00:19:55] So if you're sitting on property, you can be the bank and pick up that extra profit center and get some, get some of your wish on term too for your estate play. It's a win-win. Absolutely. And like Ryan said, you're literally receiving more total dollars in the door than you would if you just sold it outright because that $2 million building, it's worth $2 million today.

[00:20:17] But if you carry 1.6, 1.5, call it, you know, 75% of the value at a 5% interest rate, which is less than, than the market today. It's a win for the buyer and it's a win for you. You're making 5% interest on, you know, a million and a half. That's a great income stream. Now, it depends on what you have available to you to go and roll that money into. Maybe you have a deal that you're going to make, you know, 10% on the money and you're

[00:20:45] like, nah, I'm not interested in, you know, can you speak to that? I mean, what, what are the alternatives that these people have or that what they don't have in order to be attracted to, to the idea? Or does it have to be, does it have to revolve around the tax benefit? And you're saying, obviously within this real estate realm, right? That's what you're talking about. So, cause they have all kinds of options, right? Right, exactly. I mean, why, why would someone want, I mean, other than the taxable gain that they don't

[00:21:11] want to recognize, why else might someone want to say, sure, I'll give you a 5% interest loan. I'll carry the note instead of just getting a lump sum. I mean, they're, they have to, there's an opportunity cost there, right? Because now they don't have that whole 2 million bucks to go do something else with, right? Well, and I don't, I definitely don't want to poo poo any stock people out there, right? But let me just say this, just for a quick comparison. If I'm me personally, this is my world.

[00:21:36] If I'm going to sell a building for say 3 million bucks and my option is sell it now, go dump that in the stock market or some other investment or do some order financing. I know for a fact that a stock can perhaps maybe on a bad day go to zero. I know for a fact, my building can't go to zero. Number one. Number two, I collect interest along the way, very, very passively. And number three, if by chance, regardless of being the best buyer on the planet, they

[00:22:05] default, what is your worst scenario? You take it back. You foreclosed. And I have a comment with that. You don't even have to foreclose, but you foreclose, you get your property back and you maybe realize a bunch of principal pay down since then, the building went up. Your worst scenario is not bad. You keep the down payment. Yeah. Yeah. That's what I mean. So your downside is not a downside. And how you get around the foreclosure is some states will paper it differently, but

[00:22:30] you can either do a contract for deed, which means lying to the short of it in basic terms is that deed's going to sit in escrow until the contract's fulfilled. Who's escrow? Your attorney's. Uh, or in some states allow a default agreement that has a pre-signed deed and every breath's back. So you don't have to go through the 10 or 20 grand worth of foreclosure even these days if you paper it right. Chris, you just said a lot there. Deed, escrow, foreclosure, default state, right? Right. Attorney, attorney, attorney.

[00:22:59] That's what I just heard. So who's your, who's your, so I'm, I'm a pilot. I'm just like listening to this conversation. I'm like, man, I cannot wait to get home from my trip and list my property with a big old sign that says seller financing available. But who, who's, who needs to be on my team to make these documents like be bonafide and recorded correctly and all that. Who might, who's my first call on that? Uh, if you're a pilot to come home from property, you're going to want your attorney, uh, who understands creative real estate.

[00:23:29] Now, let me just caveat. I've been doing this a long time in a lot of different states. A real estate attorney doesn't necessarily mean they do creative real estate. In fact, that's going to be the toughest because they say, yeah, I can do that. And I've never done one. So you want someone like I have different attorneys for different niches within what I do. I have an attorney who's done thousands and tens of thousands of owner financing, tens of thousands of sub two, you know, so your attorney is the first answer to your question for sure. Cause they'll pay for it properly. Uh, now I mean, we have them all done, right? Is my short answer always.

[00:23:58] And I can help people, but you're going to want your attorney to make sure they get eyes on it. How do people find that attorney in, say they live in Denver and they're like, all right, I want to do this. Do they just go on Google and type in, you know, owner financing attorney? Um, I would not. I'd either go through the bar or better locally, go to your local REIA, real estate investment association. Usually there's going to be a, a, there's one or a handful of creative real estate attorneys in there and they'll all know who it is.

[00:24:28] Excellent. Uh, so it's a REIA for sure for real estate, uh, investment association. We speak at them all over the country. They're everywhere. Um, you can find them in your local area for sure. That's great. I'd also recommend to like going to a title company is probably like a good, you know, place to kind of, Hey, they'll, they'll know who's doing deals and, and how to get it recorded and things like that, but, and they'll know the creative ones. Cause they got to make it work. Yeah. Yeah. Yeah. Totally. Great advice.

[00:24:54] So you mentioned something about only paying principal and I, maybe this is too in the weeds, but I thought the IRS required minimum interest to be paid on loans. How would you work? How would you work through that? It's called infuted interest. If you, everybody can Google this. There's certain asset classes and price ranges that are excluded is the short answer. So like I was looking to sell a company. Recently, and there's imputed interest, right? There's imputed interest over a million dollar properties. It's certain properties that are exempt.

[00:25:23] So you just got to Google that and make sure you're not, uh, cause cause you'll get whacked if you don't write. You get one, two or 3%, whatever the federal guidelines are. We're actually negotiating seller carry back on like a $10 million right now on a pretty big portfolio deal that we're trying to take down. But what's your, what's your sweet spot? Like what's the right, like, is this for big deals, small deals, medium sized deal? Like what's your down the fairway, down the rate, down the center line, you know, kind of deal that you're typically seeing like loan amount, seller carry back.

[00:25:52] Like what does that look like to, to folks? Couple different answers, Ryan. Great question. Couple different answers only because everyone's palette is going to be different, right? What, what they're working on. So I'll give you a few ways to look at this one. If I'm looking to generate income, not so passively look at, I'm looking to get my own business and I want to generate some income. The simple formula, then I'll go broader. The simple formula is, is three things. As long as you find a house free and clear for $200,000 or higher, most markets, even the low end. Okay. I can find that.

[00:26:22] Second, you structure at least a 48 month term, four years. And third, your monthly principal payment to the seller as the bank now, first position on the property secured is going to be $950 or higher. When you do those three things, four years, 200 grand more, 950 or higher, you have a deal that's six figure deal. The way we do it. So that, so that's a broad answer for people that go, I want to do this as a business. Now, if you want to do it as a little bit more passive, not entirely passive and do it

[00:26:50] with a, like I do with my mixed use building or multis, then different animals. You're going to look for free and clear in the asset class you want and seek them out and then structure a longer term deal more on net operating income versus trying to exit the way I said earlier. That makes sense? Yeah. Yeah, that makes sense. Lots of terminology there, right? So let's go slow. When you say $200,000 property or greater, so you're just talking about, I go to Redfin,

[00:27:15] Zillow, and I sort by 200K or greater, that's going to knock down a bunch of properties. And I think what you're getting at is like, you can't be doing this on $50,000 properties. If you're going to make six figures, there's just not enough juice in the deal. So you, you want kind of a minimum scale. And then you mentioned free and clear properties, right? So that basically means no debt. The mortgage has been completely paid off and the seller is going to have enough breathing room to actually give you something of value back.

[00:27:44] I mean, if they're already in a highly leveraged property, they're not going to be able to give you any loan back because they don't have the option to carry back a note. They've got to pay off the bank when that property sells, right? Yeah. And they have different, like different mindset and goals because it might be a financial thing in there. Like it's a whole different animal. But when you talk to someone free and clear, it's usually quite, quite an easy conversation because call it ego or call it whatever you want to call it. They want their price, right? They're usually not. I don't have to sell this. I want my price. Great. I just need my term.

[00:28:13] And that's how we structure a lot of those win-win. How do you find those free and clear properties? How would you even go about, how do you find these properties? Two ways. First of all, you can buy a list, right? You can buy a list these days of anything, not in Canada. It's restricted, but in the United States, we do both. Literally, you can say, I want in this zip code, all the free and clear properties in this asset class. And by the way, I want three bedrooms in a garage. Or by the way, I want a four to 10 unit multi-building. We've done that. So you just have to pick it and you can buy the list.

[00:28:43] So if you're listening to this and you've been getting calls, like I do all the time, it's because somebody has a list and they pulled all the data and they know that you're in some prime position to sell. So it happens to me, I get calls all the time. Like, hey, you'd be surprised what lists these days. There's post-COVID stress, there's burnt out landlords. These are lists. I'm not making these up. So you can buy any list. And the list, you just Google and buy? Right.

[00:29:10] We have software that does it, but there's old data. Yeah, you can Google it. There's like an old database I used to use before software, melissadata.com. You find those online. Yeah. And our databases can sort a little bit deeper, but yeah, they're easy to do. And you guys help people uncover this data that do some education with you, right? Yeah. We'll get into that. So we have like white-labeled software that 90-something percent of our students will just do what we do because everything's built in the workflows and everything we do and everybody's referencing the same animal, right?

[00:29:39] But you can get it elsewhere. All right. I want to dive into, you've been in real estate for a long time, since 1991. I want to talk about the difference today versus 2008 because everybody looks back and says, oh, if we go into a recession, another 2008 is going to happen. That's the last benchmark that a lot of people have for what happens to real estate during a recession. And then we can get into some off-market strategies.

[00:30:05] But let's really understand what the residential landscape looks like today. We spent a lot of time on this show talking about commercial. Let's talk about residential. It's totally different today, right? It's entirely different. And I'll give you an eye-opener book to read it. We all know the person who wrote it. It's an awesome book. So I'll leave that for teaser for a second. It was so overbuilt during that time period and then the whole banking crisis. But it was the inventory situation now compared to that is entirely different.

[00:30:33] And of course, the interest rate climate and the bogus notes that were being bought by banks, it's not the same animal. So I'm not, the billionaires don't know what's going to happen. I actually don't know what's going to happen, but they're not comparable. They're two different animals because of that, mainly the inventory. Excellent. So people, as I understand it, you know what I mean? People have a ton of equity in their homes nowadays versus then, you know, a lot of people had put zero money down, leveraged 100%.

[00:31:00] Whereas today, you know, there's a lot of free and clear. There are a lot of people that just have a ton of equity and there's also just not a lot of inventory for sale. I have a stat for you. 2024 was the lowest transaction volume in residential real estate since 1995. And another stat that makes that even more poignant is that there were 70 million less people in the United States in 1995. So, I mean, I don't know what the population adjusted transaction volume was, but I mean,

[00:31:30] nothing traded hands. So what are some strategies that people can go out and find rental properties that aren't listed on Zillow? They're not on Redfin. The seller hasn't taken the initiative to even list this property yet. But all of our deals, with a few exceptions of referrals, when I say us, the entire community, right? Not just our family, are done off market. And so here are two different simple ways to do it. When people get more aggressive and they want to get into a business on their own, it can get more advanced.

[00:31:58] But these are the very basic ways we start people. One, we have a simple 100 bucks or so a month that'll feed the community member for sale by owners. So technically, it's on the market, but it's not on the realtor market. For rent by owners and expired listings that didn't sell in the open market. So they'll feed these every single day. They'll get live feeds. Then a virtual assistant is calling them. Not me, not the investor. The virtual assistant's reaching out.

[00:32:28] And she or he is finding the cream of the crop. They're trained in creative real estate. Then and only then will that name surface to the investor to then call because they say, hey, yeah, I want to learn more about that. So now you're talking to people that want to talk to you. That's one way. Second way is to buy these lists or have the software that kicks these lists out. So I just had, I mean, say for our properties and I said, how's our postcard million do? We don't do tens of thousands of them because it's a little bit costly. What we do is we keep tinkering with these to keep tripping them out there.

[00:32:56] And we pick tax delinquent little equity was one of the lists, for example, that comes to mind. I always love free and clear out of state. You can just buy those lists. They're free and clear. They don't live here. It's a second home, third home, fourth home, sometimes. And those are great lists. So those are just like five categories that we swim in and just depends what the market's doing. So a quick example, during COVID, I remember like it was yesterday, February, March hits, our community deals taken in, we call them takens, but properties under contract quadrupled

[00:33:25] in one month. Boom. Because sellers were scared and they needed a guy. Two months later, as you guys know, everybody was selling everything like nothing just by throwing it on for sale by owner. So we fished in a different pond. We didn't fish in for sale by owner anymore. We fished in, you know, a different pond with maybe a niche list, but they're all off market with the exception of a Fizbo for sale by owner advertising. You know, when I first got into real estate, I never understood this distressed seller out of state off market thing. Cause I was so, you know, cause I was so hungry to like buy rental.

[00:33:54] I was like, buy, buy, buy, buy, buy, buy. Right. I was like, I'm going to buy a rental property in Cleveland and Philly and do all this stuff. And then it hit me like a ton of bricks. Like I want nothing to do with this property anymore. And like, I started answering those calls from wholesalers and from people that were trying to buy my properties off market. Cause I was like, God, please take this property from me. Like I want an easy transaction. I don't want to deal with anything and I just want it gone. Right.

[00:34:19] Cause I was out of state, had equity in my home and I had no interest in running that rental property anymore because I had started my own commercial real estate platform and it was just distracting me. Right. And so like to Chris's point, like he's been talking about situations and lifestyle and all that stuff. Like I was the perfect person to call. Cause I was like, yes, I'm going to sell. When can you close?

[00:34:45] And I don't want any nonsense about doing all these walkthroughs and taking all these pictures and all this crap. It was like, I just want you to buy it. Right. Like for a timing timing. Yeah, totally. They got you week one when you bought it, you would have been like, I'm all set. Right. So it's just timing life in real estate, life changes. Chris, how many touch points do you find that you need? You know, just to catch anybody up. That's not fully tracking here.

[00:35:09] What we're talking about is finding sellers, finding property owners that are motivated to get rid of their properties, but haven't actually taken the initiative to go list it yet. And you're trying to short, shortcut this process by getting in front of them first to say, Hey, I want to buy it. I want to make this easy for you. You don't have to list it. You don't have to get a realtor. You don't have to clean up the property. You don't have to do anything. I'm just going to, I'm going to, let's make this transaction happen off of the open market. How many touch points do you find that you need?

[00:35:39] Because I, you know, I own a small multifamily in South Carolina and I've, I've gotten a letter or two, but I've only received one from each person and then they just disappear. And if somebody sent me 10 letters, I might call them back. Or at least if you needed to, you, you know what to call, right? Yeah. Right. Exactly. Yeah. And maybe that's their strategy. They, they send me one letter and if it was the right time. Sure. But I mean, do you send multiple?

[00:36:07] When we mail, it's got to be a minimum of three and it should be five or seven when we mail. And I say that because when I came out of the crash, I had zero money and zero credit. I mentioned that earlier at the beginning of the show. So my strategy was I got a phone and I know how to get the list. That's all I could do because I had nothing else. Now as we, so as we expand, we would buy a list and teach in that. But, um, I would say at least three. Yeah. Yeah. And I think to your point earlier, you know, you talked about sending 10,000 letters a month or something like that.

[00:36:35] Years ago, I ran an off market campaign and like you buy this massive list and you have thousands and thousands of people to mail. But I think the most important thing is like, yeah, you got to mail them all. But the, the second time, the third time to your point, Chris, like that's the most important. So rather than hit 10,000 people once, I'd rather hit 500 people, you know, 10 times. Right.

[00:36:57] And I'd rather do like a smaller, more manageable pool than, than trying to cast the net super wide and then go, oh, I sent a letter out and nothing worked. Part of it is what you just said. Manageable. You said key thing because whether you're, you got all day to, to, to feel the calls or not. And I don't want you feeling the car right away. We'll have a system, but whether you do or not, you, you got to watch that. So we'll take a list of only like, I think today's was 3000, but we'll do 500 like every other week just to keep the phone ring.

[00:37:26] It's all, it's nothing crazy and it's nothing crazy cost wise either. Chris, nearly everybody listening to this show has some property in mind that they'd like to buy. I'm sure whether it's a, an Airbnb or it's their next house. How would that person approach the conversation with the seller about potentially having a seller carry? Yeah. Let's talk specifically about them wanting their own house, right? Let's just use that as the example.

[00:37:53] That's the easiest call to make for your VA or you, if it's your own personal property, because you sincerely like I bought a home on the island here and I was trying to get near the water. So once I found mine, my kids want to do the same thing. So I just simply either mail or call and say, Hey, I'm looking for a home for a family member. And that's, that was an easy canvassing to do. It's an honest call. It's conversations that happen. As far as them holding paper with owner financing or the other ways we buy. I always say, if my initial conversation with you act like you're talking to your neighbor.

[00:38:23] And I'm talking to Tate and I say, if they say, yeah, I'm interested. Okay, great. I want to know where they're going. Like, yeah, we were thinking about mobile. Great. Where are you going? How soon did you want to be there? And what if that doesn't happen? That tells me if they're motivated or not. Right. That's good. Just like you were talking to me, but hey, I saw, I saw your sign. Where are you going? Great. When did you need to be there? What if that doesn't sell? It's just a normal conversation. And you look and listen for something you can solve for. That's all it is. Like the guy I mentioned, like Ryan had his guy. You just listen for something to solve for. You know, trying to convince them.

[00:38:53] And my question then to them is, okay, if I can get you full price, I haven't seen your property yet, but if I can get you to your price, are you open to doing that on lease purchase or owner financing? Would be sort of a line that I would use. And you find out right away. That's great. So Chris, two things I can summarize from that. You took action and actually did something, had a conversation and you listened. Right. Like you like, cause I think too often, you know, we think about like, okay, I want to

[00:39:20] try to get seller financing and get, you know, a 3% interest rate and 25 year amortization and see if he can carry the note for, you know, 50 years and do a sub sub two. And you know, all the, and it's like, dude, what are you doing? Like, just go to the person and say, I'm interested in buying your house or take whatever, whatever tack that is. And then just be like, what problem are you trying to solve? Right. And cause like that, the guy that we bought the seller, the storage from that had the

[00:39:46] seller financing, he just told us, listen, I want 600 grand or whatever it was. And I want to make $7,000 a month of passive, like go figure it out. Right. And so it was like, we went back and tinkered around and then came up with a solution. And a lot of time people will say like what their pain points are, what they're trying to accomplish. And it's helpful to do, by the way, uh, Ryan and take, cause I had a neighbor who very wealthy

[00:40:12] worked for a big bank, bought a home below us owner financing for like that time. This is a while ago. Maybe it was 3 million bucks. And the guy owner financed him for a few years. Why? He was going through divorce. He wanted to keep it below the radar until that was all settled and done. And then he financed it and paid off the sale. So it was a short term deal, but they struck a win-win. The guy got his price. The buyer, my friend said, I need to keep this below the radar. I need owner financing for two or three years. So it goes both directions. You just got to listen. Look, basic example.

[00:40:39] Why do people go to attorneys, accountants, uh, dentists, auto body, keep going, right? They go to solve problems. That's all we're doing. Yeah. Right. That's so good. By the way, I know two people who have knocked on two doors. They're looking for their primary residence and they, they wanted to buy that house in that neighborhood. And they literally walked up to the door, knocked on the door and said, Hey, I'm starting my family. I love your house. I'd love to buy it. I know two people that have gotten their houses that way. Just go and knock on the door. Yeah.

[00:41:08] Some of my best deals in the, in the decades doing this where I drive by my initial knee jerk is, Oh, I'm sure somebody drove by already. And I get either land deals or house deals that way. My brother bought his last lake house that way. Just writing a few hand letters. Yeah. And I want to stress the timing, right? Because like one of my acquisitions guys on my team, he was leaving a, um, he was, uh, fly fishing out in the Western slope of Colorado and he was getting onto the highway and he looks over and he sees a self-storage facility and he goes, that looks like a Spartan deal.

[00:41:37] And so he got back to the office. He looks up the seller, calls the seller and the seller goes, good timing. I was just getting ready to retire. I want to move to Texas and do my, you know, do my retirement thing. Yeah. I'll sell it to you. Drafted up a contract. Done. All time. It's all about timing. And I'm sure that guy got hit with a thousand letters, you know, over the years, but we hit right at the right time. And, and timing is, is huge because you never know how the circumstances change. Just stay, just stay at it.

[00:42:05] However, at it consistently is for you to stay at it. Well, I think the, the off market and the owner financing are really powerful tools. I think people need to be aware that, that these are strategies that, you know, your general partners are implementing in large scale real estate deals. And you're, you may be a limited partner. You may be a passive investor in one of these deals that's already using one of these strategies. But if you want to, to implement this, Chris, we want to make this as, as user-friendly

[00:42:34] and as applicable to people as possible. If they're, if they're having that conversation with the seller and the seller says, you know, to their surprise, yeah, I'd be open to that. And then they go, oh, I got to figure out how to do this. Yeah. How, how can they find more resources in terms of, you know, how to structure it? Are there, are there books that you would recommend or are there examples that people can go and consume so that they feel more confident in, in structuring something that's fair for both sides? Yeah.

[00:43:03] I'm big on free because there's so much stuff out there, right? So on YouTube, for example, I've got, I don't know if it's Approach 500 now, but there's several hundred deals. We just post them on our, if you type in smart real estate coach on YouTube, so they can go watch that ad nauseum. There's so many different ones that you guys know, no one deals the same. So you go on there and get a feel for what I referenced earlier about the paydays, the three paydays and what these deals look like. And then we ship out our free book to your tribe. They can just go to wicked smart books.com forward slash PIP.

[00:43:33] And it's not one of those offers guys where it goes free, free book. And then you got to put in 20 bucks for shipping. It's free. We ship it out of here for free. You'll get the physical book. That's amazing. And I love the Rhode Island accent. I'm just like, I'm loving it. Well, it's actually Massachusetts. Then I transpired around. It's like, I was going to say, it seems a little bit more up the way anyway. So we already kind of like went deep into this seller financing thing, but we also wanted just

[00:43:58] to maybe lightly touch on subject to, and then also like there's a pilot listening. I know it right now. Who's like, man, this is like too much work. I don't want anything to do with this. I just want to make money. How can I, how can I just like passively like rental properties are not passive activity, right? Like that. We try to preach that on the show. Rental properties are active work. Like you have to find the deal. You have to finance the deal. You have to manage it, the manager, the manager, whatever. It's not a passive deal.

[00:44:25] So if there's a conclusion that we can talk about that, but like, let's get into subject too real quick, because I've heard the sub two and, and all this, and it's kind of become this popular strategy, especially because interest rates have spiked to like seven, 8%. So sub two, I think is really taken off. What, what the heck are we talking about here? Yeah. As I said, let's keep it that level. So here's what sub two means when you see it online or anywhere else on the show.

[00:44:52] I buy Ryan's home this time, instead of the way we described with owner financing, instead of that, what happens is I'm not bringing new money to the table. Ryan, unlike the free and clear owner might be someone that wants some relief financially. So what's going to happen to my settlement statement when I buy his home is the loan's going to stay in his name that he got from whatever bank it is. And it's going to say on the settlement statement, subject to existing loan with XYZ Bank and the exact amount he owes as of the day of closing.

[00:45:21] And sometimes people are behind, but let's just say just the loan itself. Now, that loan is going to stay in his name until someday I cash it out, even though the property is going to transfer. And again, I'm not an attorney, but you're going to, you're going to put that into the proper vehicle could be a trust for you, but you get someone that knows how to do subject to deals. And let me say it from this standpoint, because I lived it. In 08, I was on everything personally. So in the crash game, the door got knocked on the cause. I get called from all kinds of creditors and bank. Okay.

[00:45:52] Going to COVID, I had about 76 different properties. Guess how many loans I was on personally? Zippo. There's a different, put my hand on the pillow at night and a different conversation with a seller when you're not signed personally. It's a totally different business model. So that's what that means. That's why we do it. So let me just repeat this back. So I want to go buy a house. There's already a loan in place. And you're telling me that I can basically assume that loan kind of like, and, and then

[00:46:21] give the seller maybe a little bit of money or not, or not, right. Maybe the seller is overwatched and they're just, they're just trying to like avoid like a distressful situation. Maybe they can't make payments anymore or whatever. And they don't want to have that ding against them. And there you are right at the right time as the buyer saying, I'm going to take your loan. I'm going to take this house and I'm going to make the payments on your loan.

[00:46:46] That's to me sounds like kind of on the verge of like a gray area of like, I mean, because aren't there loan documents that say I can't like that, you know, there's the due on sale clause. Yeah. I want to clarify. So assume, just somebody knows, cause I get this from other students. Assume means, cause there will go, might be anyone's assumable. You can assume it. I don't want to assume it. Assume means I got to apply for the bank and take that loan.

[00:47:13] We're not assuming we're paying on behalf of, and to you guys both point, the due on sale clause in 82, the government St. Germain Act came into play. And that said that I could put my home in a trust if it's for family planning reasons and estate reasons. So when the deal is, I'll call it papered properly. And this is a whole of the show. Then, and there's even an attorney who went up against the bank and won hands down because of this, because when it's papered properly, you're protected by that government St.

[00:47:43] Germain Act of 82. I think it is. So just know there's a proper way of papering it. It's another hour for discussion, but there's a right way of doing it. Or it would be a gray area. Right. And, and I've been at this 33 and a quarter years now, and I've never had a loan called. Why? Because we do what we say we're going to do. You pay the bill, right? Banks don't want houses. They want payments. When you do something incorrectly, you may have a problem. Yeah. It makes sense. Put this in perspective for me. Is it always someone who's in financial distress? I have a condo real life, two and a half percent interest rate.

[00:48:13] I refinanced it at the perfect time during COVID. I never want to sell that property because of the two and a half percent interest rate, but it's a condo in 10 years. The building's starting to get a little older. I start thinking, you know what? I'm ready to get out of this thing. Is that a good, uh, you know, subject for a subject to at that point, I'll be 12 years in to a 30 year fixed, uh, two and a half percent interest rate loan. Does it make sense for me to sell that to someone subject to, or do I have to have some

[00:48:42] financial distress for it to make sense for me as the seller? No, I'm glad you brought this up. Cause while we were talking with Ryan about it, I'm thinking Rick, the guy who worked for the government I told you about did three like this, where the owners were pretty well off, about a million dollar properties. They only owe two, three, 400 grand. But what they were trying to do is protect all the equity there and the market wasn't giving it to them. So Rick did a sub two. We call it a hybrid deal. Rick did a sub two in the underlying debt. This would be your case.

[00:49:09] And then he gave him a second mortgage for the difference on the equity and protected every penny of it. The market wasn't giving him that. So he was doing both. He's doing a seller financing and a sub two. Yes. Because the leverage is quite, quite low. Yeah. Conveniently qualified. But yeah. And, and to your point with your interest rate, we're seeing in the community like weekly, not even monthly, weekly properties coming up with two, three, four or 5% interest rates. And we grab them. Cause where are you going to get that? All right. We're going to have to have you back on to talk more about sub twos. Yes. For sub two. Yeah.

[00:49:39] Just for sub two. We'll do a sub two episode. Yeah. Sweet. Yeah. Okay. So I don't want to do any of this stuff. What do I do now, Chris? I just want to give someone money and I want to be in real estate, but I want to, you know, how does that stuff work? Yeah. Similar to what I say would make sure you go to reputable people in our world. So I'm going to deflect that time-wise back to you guys and say, you'll be the resource. You'll be the hub to say, here's where you go to do that. I'm going to default you guys on that one. Uh, time-wise too. I mean, that's basically a syndication, right?

[00:50:07] I mean, that's kind of the, what we're getting at is, you know, if you want like, you know, Tate and I have deals that we, that we raise money for and we do these strategies that Chris is talking about. We do the seller financing. We structure the deal. We get very attractive financing. And, you know, it's simple writing a check and you're investing in the limited partnership. So these types of things happen with big operations, small operations, people who have multiple properties.

[00:50:36] Um, so it just, it just kind of gives you a look behind the curtain on like a, how you can go ahead and do it. Right. If you want to go out and build your own portfolio, you can call Chris and he's got education out the wazoo and all that stuff. And he can help bring you into his program and do that. If you're like, you know what? I don't, you know, I don't really want to spend my, my layovers and my, my days off. You know, I really want to be passive. You know, you can partner with guys like me and Tate, like to do, you know, that we'll

[00:51:05] go do all the stuff that Chris is talking about. And if it makes sense, right. Structure a deal in that way. So, you know, this show is called passive income pilots. Um, but it's good to go a layer down just to kind of show you, okay, what is an operator doing to best creatively structure a deal? Kind of the nuts and bolts that go in behind that. But, and there's options. Like if you want to do it yourself, you can do it yourself. Great. If you want to do it on, you know, if you want to do it passively, that option also exists as well. Absolutely. I'm thinking family.

[00:51:34] Cause I just, cause we're a family company and we tend to attract that. Look, you're a pilot. You got some, uh, cash. You don't want to be active. Well, get some family members started in it better, best way to set them up in my opinion. Yeah. That's a really good point too. I mean, like, you know, or you're thinking about doing this and your family members want to be passive, you know, and, or your friends or whoever, like you can do, you can syndicate the, the down payment side or like, likewise, you can share with your family members that want to get into the real estate, share this episode, say, Hey, you want to get into real estate.

[00:52:03] Here's a great show on how to do it with, I don't want to say no money down. I think that sounds cheesy because all you got to pay transfer something. There's gotta be, there's always money either. There's nothing is no money down. Cause you got to advertise, you got to pay for classes. You got to spend the time. Time is money. Like nothing is no money down. But what I mean is like, you can go buy a million dollar property and maybe not have to put down a 40%, 30% down payment. You could probably reduce that a lot through some strategies, but you're going to pay money to get there.

[00:52:32] Like, don't let anybody say that. I'll do a tease that we bought an oceanfront Cape Cod resort area for a 945 grand with what? Eight grand. Amazing. Beautiful problem. Yeah. So if you're interested in doing it actively and rolling up your sleeves and learning, first of all, you know, investing a ton of time and energy into actually learning and becoming smart with this stuff and implementing some of these strategies, go talk to Chris. How do people get in touch with you? They can just go to that link at wickedspotbooks.com forward slash VIP.

[00:53:02] They'll get me that way. Or the website, smartrealestatecoach.com. We'll link to that in the show notes. Chris, thanks so much for coming on. We look forward to having you back on to talk more about the sub twos. Thanks guys. A lot of fun. Thank you. Thanks, Chris. And thanks for tuning in. If you guys have a question on one of our topics, you can always email us at ask at passiveincomepilots.com. Until then, catch you on the next episode.