Owner Financing Real Estate

Mike:This is the FlipNerd.com Expert Real Estate Investing Show, the show for real estate investors whether you’re a veteran or brand new. I’m your show Mike Hambright and each week I bring you a new expert guest that will share their knowledge and lessons with you. If you’re excited about real estate investing, believe in personal responsibility, and taking control of your life and financial destiny, you’re in the right place.
Hey, this is Episode Number 383 and my guest today is my good friend Mitch Stephen. Mitch is the nation’s authority on owner financing properties as a real estate investor and has done extremely well with this as his primary model for nearly two decades. Building wealth with real estate is a powerful tool, no doubt about it. But unlike the more traditional route of buying and holding and acting as a landlord, Mitch shares a powerful way to generate cash flow by effectively becoming the bank.
If you’re ready to learn a more powerful way to add to your tool of building wealth with real estate, you do not want to miss this episode. Please help me welcome Mitch Stephen to the show. Hey Mitch, welcome to the show.
Mitch:How you doing, man? It’s nice to be here, Mike. It’s been a little while, hasn’t it?
Mike:Yeah, it’s good to see you. For those listening, we’re about to start here with Mitch Stephen. Good friend of mine, we haven’t talked in a little while, so it’s always good to rekindle relationships with old friends. And Mitch was on the show before but it was like 250 episodes ago. So it’s been a while.
Mitch:Hey, you forgot me, man.
Mike:No, no, no. You know what’s funny is when you start to do lots of episodes like we have here is it gets harder to find people that we haven’t talked to before that we think would be good guests for the show. So we’re kind of going back through and finding friends and folks that we thought had great content and that we’d like to hear from again, we think our guests would like to hear again. So we’re really excited to have you back on.
Mitch:Hey, I was the first guy to ever have episode A and B like back to back because of . . .
Mike:That is true.
Mitch:I’m so long winded you couldn’t get me to shut up well enough to fit into one episode.
Mike:No, no, no. That’s true. Honestly, I was so into the conversation. And for those of you that are listening, this is what happened is Mitch was on Episode Number 126 and 127. What happened was, I knew kind of the general idea of what we were going to talk about and the show is usually around 30 minutes, sometimes it goes 40 minutes. I think, we were 30, 40 minutes into it and I knew we were only like half way through and so I just paused and said, “Hey Mitch, can we turn this into part one and part two and just let’s wind down part one here and then we’ll start with part two.”
I was enthralled in the discussion, it was really great information and truthfully, even to today, I told you that I’m doing my first couple of seller finance deals out of hundreds and hundreds of deals that I’ve done. And I’ve always been really intrigued by the model and truthfully if I could go back to 2008, 2009, 2010 when we were getting super cheap houses, that would make a great . . . not that the seller finance model is not still a good model, but I look back now to a bunch of stuff that I passed on or didn’t know what else to do with, I’m like, “Oh my goodness.” If I had this tool in my shed back then what I would do differently.
Mitch:Well, the thing about it is, is the owner financing tools not a lot of people possess them and it seems to be the bastard step child of all the . . . I mean, up until about two years ago there wasn’t anybody but me even talking about it now there’s a few more people talking about it. At least my team did the research, we looked, we couldn’t find anyone else that was talking about it and there certainly wasn’t anybody talking about it that was actually doing it.
I’ve done over 1500 houses since 1996 owner financed in my home town of San Antonio. And I try to hit 100 houses every year, it’s kind of my sweet spot. This year I might, because of with the real estate market so hot, there’s a guru on every corner and everybody who watches HGTV thinks they’re a house flipper for at least 8 months until they find out that it’s work.
So I might only hit 80 this year, because I’m not going to follow that curve up. I’ve been through two recessions and I followed the curve up in the first two. I’m sitting back right now. I’m just buying fantastic deals. If they’re not fantastic, I’m not following . . . I’m not chasing the prices up. So anyways, but, it’s an anomaly of a strategy for a lot of people. A lot of people don’t know about it.
Mike:Yeah, and honestly truthfully, I think what the real market for your product is, your exit strategy is those that they’re looking to keep houses as rentals. And then you start to keep [rentals 00:04:38]. I don’t want to take thunder from your story because I know you’re going to . . . I want you to share that here in a second.
Some people, and truthfully the seller finance deals that I’m doing right now are some of my dog rentals that I wish I didn’t have. And here’s a way that I can turn those lemons into lemonade. And so I think the real beauty of the model is, for those that are interested with building wealth with rental properties but then get overwhelmed with tenants and toilets and all the crap like that, so yeah.
Mitch:It’s a great thing to do with your dogs.
Mike:Before I steal your thunder Mitch, why don’t you introduce yourself and tell us your story because I know that’s how you got into the seller finance model.
Mitch:All right, well just first, right off the bat I want to tell you that I’m not lambasting buy and holders. I’m just going to show a different side of the coin, all right? There’s the buy and hold and then there’s the seller owner financing and just be the bank and lose all the liabilities of the landlord. Either way you go it’s like, do I take a corporation or do I make an LLC? It doesn’t matter. Learn the rules of either one, pick the one you want, learn the rules and win, right? It doesn’t matter which one you pick, you just got to win.
But I was a piss poor landlord. Maybe that was it or maybe I just didn’t like land lording or I don’t know, but it didn’t work out for me. So I had to find something else to do and I stumbled into owner financing. So I had these 25 houses that I was a landlord for I was supposed to make $300 a house and that’s $7500 a month between what I owed and what I was collecting potentially on paper. But that’s where the myth goes, because you always walk in to the buy and hold seminars, like, “All right, well you’re collecting 1000 and you’re paying out 500, so you got 500 a month positive cash flow.”
Yeah bullshit, you just skipped over every air conditioner, the roof, the hot water heater. You just acted like I didn’t own all those things and I’m not responsible for all of them. And no way in hell are you going to collect $500 a month for 12 months in a row. There’s just no way in hell because something’s going to break or someone’s going to break it.
I went that year trying to make $7500 a month and I wasn’t so naïve that I thought I was going to clear it all. I really only needed $3500 a month to be my freedom number but I knew that it wasn’t going to go perfect so I made sure before I quit my job that I had $7500 a month coming in. So I’m just like trying to collect a little over 50% because I know there’s going to be some things go wrong or expenses or vacancies or whatever.
Well, at the end of the year I don’t make anything because it takes one air conditioner to wipe out $300 a month positive income for the whole year in my plan. Remember this was 20 years ago, okay. So I’m trying to rent for $800 and pay out $500 and collect $300 in the middle and it’s killing me, man. And so I want to get out of the game and the people in the houses, in the neighborhoods that I had houses, they weren’t qualifying for loans. So I got to get really scared, it’s like, “Man I’m stuck with these 25 jerks, needy . . . ” I can’t say it on air but anyways, I’m stuck with these people . . .
Mike:Let’s just say high maintenance tenants.
Mitch:Yeah, there you go. And so I’m stuck with these high maintenance tenants and I’m thinking, man I’ve become a real don’t wanter [SP], do you remember that word? A don’t wanter. I was a real don’t wanter and so I hired this guys for 10 grand, my last 10 grand to tell me how to get out of it. And he like, really set my expectations says, “It’s only going to take me like 24 hours of talking to you. You’re going to get it and then you’re going to do it. And so don’t think that just because it’s only going to take 24 hours for you to latch on to your problem that you’re ripped off because you’re going to start making money.”
I said, “Well, how much money will I make?” He says, “Well the $7500 you thought you were supposed to make every month?” I said, “Yeah.” He says, “You’re going to start making that.” I said, “Well, who the hell wouldn’t pay $10,000 for a 24 hour session that would make you $7500 a month, right?” So I write the check and he introduces me to owner financing.
I don’t even believe in it. Really, I’m not sold on it but in less than like 90 days or 120 days, it was a very short period of time. It was under half a year, I know. I get all these people to give me $3000 and they become the owner, just about what the rent was and all of a sudden I’m collecting the $7500 a month and it’s not going out to the air conditioner man because I don’t own the house anymore. There’s not a vacancy . . .
Mike:Did you seller finance them mostly to your existing tenants?
Mitch:Well, first thing I did was I owner financed my problem houses, the ones that were vacant, that were destroyed. I was buying all these houses from the VA. Remember you could get like one loan for the VA? I got like 28 of them. I probably just committed a federal crime or something back then.
Mike:I think, I don’t know. I’m not an expert. But I think, even today I think VA loans are still assumable but anyway . . .
Mitch:Not VA it was FHA loans.
Mike:Oh FHA loans yeah.
Mitch:Anyways I had more than I was supposed to have once upon a time. I hope the right of rescission is passed on that or something. But anyways, so all those houses were fixed up to the nines when I bought them. I mean, they had new appliance, new paint, new carpet, everything. And then I’d get them back after, like, a year and they were completely a wreck. And of course the first thing to go was the carpet, right? But anyways, so I didn’t even wholeheartedly believe in everything and I was collecting an average of $3000 down from 25 houses.
So all of a sudden there was something that had never happened in my life, I had $75,000 dollars in one place in one place in my bank account. 25 houses times $3000. Today my average down payment is like $8000. I’m a lot better because I’m a believer, I got a $30,000 down payment last month and $15,000 payment. Every now and then somebody shows up and says, “I want a low payment,” or “I sold my house and I want to roll it into another house and I’m going to roll it into this one.”
I never had anyone give me a $30,000 rent deposit non-refundable. So then that’s how it happened. And so I went from wanting to get out of the business and going to fail at another business. I failed at a lot of businesses. I always kept my good name, I always kept my credit but had to fold the business up in a box and go home and I thought that was going to be another one and instead I stumbled into what I’ve been doing for 25 years.
And so what I thought to myself was I had the $7500 a month coming in. I had $75000 in a bank which is more money than I’d ever seen in my life in my place . . . even in my bank account for sure, but I hadn’t even seen that much money in anybody’s bank account. That’s how young I was and dumb I was. And so now it’s coming in and then the note buyers call me.
And I said, “You want to buy what?” They said, “We want to buy that cash flow.” I said, “What do you mean?” They said, “Because, well, those people owe you money in those houses we want to buy that piece of paper.” We want them to owe us that money and we’re going to pay you a fee for it. I said, “Well how much?” And they told me and I said, “Well, what if you do 25 of them?”
And they bought 25 of my notes and I ended up with close to $500,000 in the bank in a very short period of time. Like within 12 months of meeting this guy and going through and moving from landlord, I was sitting there with more money than I ever dreamed that I would ever have, but especially by this method because this method wasn’t even on my radar. It’s like I didn’t even want to do this and it happened. And so then I thought, well, how can I make this a routine, right? What does an entrepreneur do it? How can I rinse and repeat? How can I rinse and repeat?
And I started buying houses. My first year I bought 45 houses and owner financed them. My second year about 65, my third year about 150 and owner financed 100 of them and had exactly 50 in inventory. That’s not a rounded off number. That was exactly what I had at the end of 1999 or 2000. And I just became the guy in town that’s known for owner financing the houses and eventually I became known all across the nation for the guy that did it when I started talking about it.
Mike:Right, right.
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Mitch:And I just became the guy in town that’s known for owner financing the houses and then eventually I became known all across the nation for the guy that did it when I started talking about it.
Mike:Right, right. Hey Mitch maybe just take a second, just, no, more than a second but like a minute for those who are listening right now and just explain at a really high level, the highest level, what owner financing or seller financing is and who it’s kind of for like on the buyer’s side.
Mitch:I just did it one and I got the numbers right in my head. You want to hear the numbers? Let’s do a deal.
Mike:But just conceptually what the model is, you’ve become the bank to sell to people that can’t get credit they don’t have any credit otherwise.
Mitch:I buy houses with OPM, other people’s money. They loan me their money at 8% interest only, five years, non-recourse collateral only loan and I give them a lien on the house I buy with their money. And then I sell the house. And I sell it, I take a down payment and I agree to receive payments for 30 years at 10%. So I’m borrowing $50,000 . . . let’s do the case study. So that you understand what it is, I’m buying with other people’s money and then I sell it on a note. They give me a down payment, my buyer gives me a down payment and owes me money for . . . they pay me and I pay my underlying dept. It’s called a wraparound loan.
Mike:Instead of renting these out, they become owners, you become the bank and you’re effectively not responsible. I know you’re going to talk a little more about why this makes sense. But you’re not the owner anymore. So you’re not responsible for maintenance, vacancy goes away, although sometimes you got to foreclose and turnover and all that stuff that kind of plagues real estate investors is pretty much gone.
Mitch:It dwindles, yeah and even when they leave, you have enough money to overcome it. If you get first month’s rent and a deposit equal to the first month’s rent. Let’s say the rent is $1000, that’s 2000 bucks and they just moved into your $100,000 asset. I mean, so it’s hard to recover for the damage they could do to that with 2000 bucks. Plus the attitude of a renter is completely mush compared to the attitude of a homeowner who gave you $10,000 or $15,000. You know what I mean?
Mike:Absolutely.
Mitch:So it’s completely different mindsets and homeowners are adding bedrooms, putting up porches, putting in pools, adding a concrete driveway, car ports, everything. I never showed up at one of my rent houses and they added a room to my house. No one ever did that. They might have burned a room down but they never added one. So let’s go by the numbers . . .
Mike:Yeah, let’s do a case study.
Mitch:Okay, here’s a case study. So I find a house that I can buy all in for $50,000 and believe me the greatest plan on the planet is buy it, do not fix it, owner finance it for double thereabouts and watch the person making monthly payments to you, go over budget rehabbing your collateral. That is the greatest plan on the planet. I’ll live and die by that now. I shoot for that all the time. It’s not like I don’t do rehabs it’s because I do, because not every house . . . sometimes you can do a little work to your house and make it worth a lot more. I just don’t go into these big full rehabs anymore, like these $30,000, $40,000, $50,000 rehabs, no.
I’ll buy it for a price, I’ll owner finance it for double, and I’ll give it to someone who wants to put their money and go over budget into my collateral making my position more and more secure with every nail they drive into the wall. So let’s say I can buy this house as is, $50,000 closing, everything $50,000. Maybe I move the yard, I figure that in, maybe I’m going to fix a couple of broken windows, I figure that in, $50,000 I got this house ready to sell. I’m going to borrow 52, again, at 8% interest only, five years, non-recourse collateral only loan.
In essence my lender is either going to get paid or he’s going to get my house because I’m going to give him a first lien on my house for that 50. I’m going to borrow $52,000. Now I’m all in at 50 but I’m going to borrow 52. Why is that? Because it takes about $2000 to find this house and I buy about 100 houses a year on average. If I leave $2000 laying around on 100 houses this year, Mike how much money I got laying around? $200,000. Who’s got $200,000 to leave laying around every year? Not me, so I got to borrow an extra two grand because that’s what keeps my advertising budget rolling.
I got to get that money back. It’s an expense, just like the broken window and I need to get it back. Lending institutions won’t give you this money back but private individuals are completely different. We’ll talk about the funding and all that later. Now I’m into this house, 52 at 8% interest only. Let’s just call it, $350 a month, it’s like $342 and some change but round numbers let’s call it $350 a month.
And then I sell the house as is. I didn’t waste any time on a rehab, I didn’t waste any money, I didn’t increase my risk with the rehab money, and I didn’t waste any time on the rehab. I went from buying it to 24 hours later it’s for sale with owner financing at $100,000 with $10,000 down. And I’m going to finance the $90,000 to my buyer at 10% for 30 years and his payment’s going to be like $850, his principle in interest. Now I’m also going to collect taxes and insurance and escrow servicing fee but that’s not my money. I’m collecting it but I got to move it on to something.
Mike:Right it’s passing through.
Mitch:My money is the $850 so I’m collecting $850 and I’m paying out $350. So I’m making $500 a month positive cash flow of which I am not a landlord. This is called a wraparound mortgage. It’s a legal mortgage as long as the lender agrees to in advance to let you . . . I say in advance, they could agree after the fact but it’s a lot better to do it in advance. If you’re going to go out and find this money and get these people, part of the plan is, is I’m going to owner finance it, I’m going to wrap the mortgage. Wrap meaning, my buyers note to me is going to wrap around my note to my lender.
They’re going to pay me and I’m going to pay the lender. They’re not going to pay me I’m still going to pay my lender. House burns down I’m still paying my lender, okay? But the plan is to create a spread in the middle. So when you’re collecting $500 a month with no liabilities, I mean, if that check clears, that’s my money. See when I was a landlord I could collect the $850 a month rent but I never knew if it was my money or it wasn’t my money because if the air conditioner broke, even four days from now or five days from now or 30 days from now, I had to give that money to the air conditioner man.
And I got very frustrated of doing a hell of a job and I mean a hell of a job collecting the money for the air conditioner man and the roof repair man and the hot water heater guy and the plumber and the electrician and the broken glass guy. I was collecting the crap out of this money for these guys and I wasn’t getting to keep any money and I was doing all the work and I had all the risk, all of it, 100% of the risk.
And so when I switched to this owner finance model I started collecting everything and they didn’t move out. They didn’t tear up my house and leave, they stayed in my house and they fixed it up and improved it. And with every improvement they made, my note became more solid. With every payment, they made my position became more solid. Now here’s the argument. Well you’re not getting appreciation and depreciation because it’s not your property anymore. That’s the argument of the landlords, right?
Mike:Right.
Mitch:Right. So let’s talk about that. What did I buy the house for Mike?
Mike:50.
Mitch:What did I sell it for?
Mike:100.
Mitch:How long did it take?
Mike:A couple of days.
Mitch:30, 60 days.
Mike:Yeah, yeah.
Mitch:Yeah, how much appreciation you freaking landlords want? You want to annualize this? Come on man. I double my money in 30 days, maybe 10 days, who knows? Maybe 90 days but anyways if you want to annualize it, it’s incredible. My appreciation was 100% in say 30 days. Well if you annualize that, what is that? 1200% in a year? Am I right, something like that?
Mike:Yeah, I’m not going to vouch for your math right now, Mitch.
Mitch:Okay, that’s cool, that’s cool.
Mike:But no, it’s high, it’s high for sure.
Mitch:So if it’s 100% in 30 days and you got everyone else’s appreciation is based on a year, right? Per year and if you do 100% in 30 days you got to extrapolate that out. So that solves the appreciation thing for me and all I did was, I took all that time that I was being a landlord or managing the property or the cut and pay that you would get if you hired a management company and I just put it into finding another house. I just took that same amount of time or effort or money and I put it into finding another house to compensate.
And so I had someone recently really kind of chewing my ass on Facebook saying, “You know I tried that plan and I had these notes and then they all dwindled away and then I went broke doing it and It’s a horrible plan because notes are temporary and they’re going to expire and Mitch, you’re teaching a bunch of bull crap.” I said, “Well, you stopped too early.”
There’s onetime cash and there’s temporary cash and then there’s forever cash to rip off Jack Bosch. I got to give him credit for that. I read that book and I thought it was a great thought process going on there. Jack Bosch says onetime cash is like flipping houses, right? You buy it, you fix it up, you sell it, or you buy it and you don’t fix it up, you sell it but you get one check. It’s one time, in and out, you’re done, onetime cash.
Temporary cash is like what I do. I buy it, I crate a cash flow for years maybe, 10, 15, 20 years but it’s going to expire, it’s temporary because notes have an end, you know. And so I took the wealth that I made from onetime cash transactions and temporary cash transactions and I bought storages. So my reply to the guy was, is, “It’s not a bad plan. You just stopped at the 10 yard line. You didn’t cross the goal line. You have to take the wealth that you make from these two processes and you have to buy something forever.”
Now I don’t like dealing with people as tenants where they’re living in the property. I don’t like to deal with apartments. I don’t like to deal in houses because the resistance is too much because there’s a lot going on there. There’s kids in school districts, there’s old people that . . . I’ve had to make that decision before. People are old and 93 years old and they’re not making their payments. Do I kick this 93 year old out on the street? I don’t want that to be my life forever. So when I pick the forever cash model I pick storages. Their stuff is in the unit. If I put their stuff on the street nobody really gets hurt, no one’s going to die, no one’s going to freeze to death, no one’s going to starve to death.
It was stuff and I chose that as my forever cash model because it’s still rent. But the laws are in my favor and the resistance is a lot less when you foreclose on someone’s storage, one, if you’re Johnny-on-the-spot, you can get someone out of a storage unit in 31 days to the T. You can auction their stuff in 31 days from beginning to end. Second of all, no one dies if you move their stuff out into the street. It’s not even worth anything anyways. By the time they calculate what they pay me for rent for a year, they could’ve bought all that crap new whenever they wanted.
But it’s rent and the rent still goes up every year and the debt still goes down every year if I have any debt, if I’m paying it down. And it’s also a great way of holding very valuable property that one day they’re just going to tear all of the storages down on that corner and they’re going to build a high-rise. I’m waiting for the city or the growth to come to me meanwhile I’m making a great living. I have 1400 doors. I average $92 a month per door.
Mike:Not bad.
Mitch:That’s a lot of . . . some of my mail box guys, I mean . . .
Mike:Yeah, yeah, well, Mitch, let’s talk about . . . so the seller financing stuff. Let’s get into a little bit about . . . we just went through a case study there. So I want to continue to use this case study when you talk about . . . when we talk about selling the deals ultimately because I know there’s some clarification about what you’re able to sell houses for when you seller finance them versus if you sell them the traditional route with FHA or other financing because it’s comparing apples and oranges.
I want to come back to that but let’s talk about finding deals, funding your deals because I know you borrow private money and then selling the deal. So let’s kind of dive in to finding deals, maybe, and truthfully I don’t think what you do is all that different from what a lot of other real estate investors do to find deals. But do you want to kind of share at a high level, like what you do to find your deals without giving out your . . .
Mitch:No, I’ll tell you everything I know. I mean, I think the people that want coaching or need help realize that no matter how much I tell you I can still short cut you in life. You know what I mean? If we get together I can short cut this because this is a lot of information and I instinctively know what to do when a new person can’t even remember all of the things that are on their plate.
Mike:All right, so let’s talk about finding deals.
Mitch:Okay, so finding deals. One of the things I do. I buy about a hundred houses a year most of the time. So the reason I can do that is I have four acquisition managers. That’s all they do, they work for me only. I give them very good commission slits but I got them in their own lanes. Like if one of them is working in the tax delinquents, the other three aren’t. I don’t need to be competing with myself on talking to someone who’s behind in taxes. I don’t need to be competing with myself.
If someone’s working the online auction sites, then no one else is. Again, don’t need to be competing with myself. Each person has a defined set of ways to find houses in their lane and no one else in my organization is using that strategy and so there’s four people with a lot of different strategies and then I took the realtor database which is about 11,000 people in Bexar County and I divided up, I gave them all like 3,000 somewhat realtors.
We divided the list in fours and they call on those realtors 30, 40, 50 a day to introduce themselves and then to make a spreadsheet. Out of 11,000 realtors I need 300 realtors that I can communicate with on a monthly basis and say, “This is what happened this month, this is what I’m doing, this is what I bought, this is where I got the money,”
And not ask them for deals, show them that I’m doing deals because they’ll figure out that they need to do deals with me after that. So I don’t ask anyone for deals. I show them the deals that I made this month. “I made 18 deals this month, look.” Sooner or later they’re going to wake up and go, “Hey, shit, I need to get this guy on my list.” You know, yeah.
Mike:Right, I’m curious, how many of your deals or kind of what percentage do you get through realtors? Because I like your approach there. It’s an innovative approach.
Mitch:I get like 25% or 30% because if you have 300 realtors that you’re dealing with, every realtor on the planet comes across one deal a year that they should buy themselves and they don’t. I don’t know why they don’t but they don’t and they always come. So if I can just get that one from 300 and I’m just trying to get 1 from 100 out of the 300 and I would never have to look again. Right now they’ve been enjoying a heyday. Everything they put their name on sells. You know what I mean?
They’re passing up on listing that aren’t pretty because it’s . . . but as it slows down, that 25% will move up to 35% or 40%. But my most profitable deals are from probate and attorneys in probate because the attorney’s actually working for you because he doesn’t get paid till they settle the estate.
Whether he knows, you don’t have to explain it to him or anything. He’s on your side because he wants to get paid. He needs to hurry up and settle the estate. He doesn’t give a damn what the house sells or he just needs that last piece of crap house that’s holding up the whole estate to get liquidated and that’s where I come in. I buy that.
Mike:Then you go in straight to the attorneys for that typically or . . . ?
Mitch:Yeah, yeah and the magical part about that is they can’t . . . it’d be unethical for them to charge you anything extra or get a piece of it or partner with you on the house after the fact. It’d be unethical so you don’t even have to pay the attorney anything. You’re just doing him a favor by doing what you say and closing out and showing up with the cash to close the deal.
Now do I take my attorneys to the basketball game and we sit in the front row? Yeah, but it has nothing to do with that. I just like them. I have a tendency to like people that make me . . . like the last attorney made $93,000 in three weeks. It’s hard not to like a guy like that. I would take a guy like that and when I say to the basketball game at the front row, I don’t mean the second row. I mean the front row, the front row.
Mike:Mitch, I really like the networking component that you do here because of the way we talk a lot about the power of networking. Do you do any paid advertising? Do you do direct mail, other things like that, any online lead generation for leads?
Mitch:I’m still a big believer in the direct mail. People are saying it’s not working anymore but maybe there’s reasons. But I think the biggest mistake that people make when they’re chastising direct mail is they’re sitting around waiting for the phone to right. We don’t mail out 10,000 pieces and sit there and wait for the phone to ring. What we’re waiting for is the return mail piece because I’m fixing to go to work, if my piece didn’t make it to the owner, then neither did anyone else’s piece.
And that’s the problem with direct mail is everyone’s doing it. So you walk into the house and there’s 25 postcards there and you’re one of them. Like how did you get picked? Well, I don’t even count on a call for the postcard. I’m not counting on a call. Out of 10,000 pieces there’s 100 return mails. I got my TLO, my Skip Trace system and now I’m going to work to find every single one of those 100 people and knock on their door or get them on the phone. That’s how I’m making my money. Not sitting around and waiting for someone to call me.
I’m like that old poster they used to have back in the ’60s. You know, “Patience my ass.” It had those two buzzards sitting on a deal and one of them was leaving, he says, “I’m going to go and kill something.” You know, that’s me patience my butt. I’m going to go kill something. I’m not waiting for anyone to die. I’m going to go out there and get mine. So that’s the main difference and the harder someone is to find, the more intrigued I am because when I finally find him nobody else is going to be around.
Mike:Nobody worked that hard.
Mitch:No one worked that hard and no one was clever enough. You know the last one we found was in Argentina. And we got it we finally figured out there was three of these guys with the same name on Facebook and they were all from three different countries and so we had to send out and post three different, “Please is this your house?” or “Have you ever lived in San Antonio.” To three of them in three different languages and the guy from Argentina replied back and we bought the house from him. He didn’t even know he owned a house in San Antonio.
Mike:That’s awesome. So let’s talk about funding deals next. Because your approach, like a lot a lot of real estate investors that are newer, let’s say for sure, they always use money as . . . I’m just going to say it, excuse. I think they’re stuck because they don’t have money, right?
Mitch:Yeah it’s excuse.
Mike:But after you’ve been in the business for a while you know that it’s easy to find money. Whatever your exit strategies are, whether you’re rehabbing or you want to own rentals it’s certainly easier to get financing right now than it was 10 years ago, right? Or even eight years ago, or even in five years ago, right? Money is available now. You use private money for your business. So let’s talk a little bit about what you do and how you finance deals.
Mitch:Okay. Let’s just go back to the first thing though. Let’s just get this cleared up. Do you know anyone who started out that’s successful in the creative real estate investment arena that started out rich? Do you know anyone who started out rich?
Mike:No, nobody.
Mitch:I don’t know anyone. I know people that started out rich and went broke because they were too loose with their money because it was too easy, right? They’re buying deals that aren’t deals because they can write a check. Those people all lost their money. Every single person I ever knew in this business started out broke including me, dead broke, couldn’t hardly rub two pennies together.
I was so broke that I would collect the political four by eight signs and cut them up and turn them over and write my signs on the back because I didn’t have money for plastic. I would collect everybody’s used plastic signs, garage sales, whatever, I would like wipe them down, I figured out how to make them clean with a solvent because I didn’t have any money for plastic.
Okay, so you start off broke and here’s the thing, if you have money and you want to go in this business, here’s a good plan, put it in a CD for two years, go hire Mike Hambright to teach you how to do it with no money and if you can figure out how to do it with no money, now we’ll allow you to go put your money in because you’ll be able to keep it. You know, that’s exactly what I tell people. “Mitch, I got $500,000, can you teach me [to do it 00:34:41]?” Good, put the $500,000 away, let’s learn to do it with no money.
Okay, so to find the money it’s really not that hard because . . . and I know people are shaking their head but you should be able to find money. Everyone’s got an excuse for that too. I’m too tall, I’m too fat, I’ve never done this before, I don’t have experience, I have a bankruptcy, I have had a foreclosure, I don’t know anybody with money, I’m not a salesman. Do you want to go on? It goes on and on and on about how you can’t find the money. Charles Manson ought to be able to get the money from a jail cell like right now except I think he died. Did he die?
Mike:He just died. Yeah.
Mitch:He’s not around anymore. So he can’t do it anymore but before he died he should’ve been able to get the money because all he had to be able to do was get on a computer and get a house under a contract for 50% of what it was worth or 60% of what it’s worth and now you’ve got an asset, a real asset. You’ve got a contract to buy a house in the next 30 days, then the house is worth 100 and you got on a contract for 60. They’re not buying you. They’re not loaning the money to you. They’re loaning you the money on the deal. And if the deal’s good enough the money will come.
Good deals attract money. Great deals attract a great deal of money. Greater deals attract a great deal of money at very low rates. You know, so what you have to learn is a little script or you have to figure out how to talk to people about this. I have a seven point script. It’s real easy. You should be able to do it on a napkin with a pencil or pen. You should be able to do it in less than eight minutes and you should never ask anyone for the money. Nine times out of ten people ask me, “Can I play?” I’m just showing them what I do. They ask if they can play.
Mike:People don’t really realize this because there’s a lot of people that are broke right? But a lot of broke people don’t realize that not every body’s broke. Some people have money and they just don’t know . . . there’s a lot of people that have a lot of interest. Would you say that people that lend to you have an interest in real estate investing but they just don’t want to do any of the work or are they totally agnostic to real estate at all, they don’t really care what the vehicle is?
Mitch:My favorite people are sophisticated enough and understand it. Like attorneys, I like talking to attorneys about lending me money or getting to meet their clients to loan me the money because they understand the protections of the first lien and the rights of the person who’s lending the money. How they could get made whole if I didn’t perform like I promised. They’re either going to get paid the 8% that I promise or they’re going to get my house. Let’s face it.
Remember Bernie Madoff?
Mike:Yeah.
Mitch:That scam, billions of dollars people gave him and it all disappeared. Okay, well everyone in Bernie Madoff’s organization would have had a hundred thousand dollar house as security for every $50,000, $60,000 or $70,000 they gave him. Like every time they gave him 50, 60 or 70 they got a first lien on a house, none of them would be broke.
Mike:None of them yeah.
Mitch:Not of them and in fact some of them would be way better off than they were when they loaned the money. So that’s the premise. I think really what happens is, people that are skeptical about this, you have to get some social proof. You have to get around people that are doing it. You have to watch some real case studies where a guy doesn’t have the money for the house and then all of a sudden he does have the money to the house and you listen to what he said to the guy and you hear the conversation.
And then there’s about 25 objections maybe and you just need to know how to answer the objections. It’s really simple. I don’t talk anybody into loaning me money. I show them what I do and either they get it or they don’t get it. But the other thing is, is don’t judge people because I once had a UPS driver that drove this really junky car because . . . he was my UPS driver and I never saw him outside of the UPS truck because he came to my office every day. But one day I saw him at a gas station filling up his car and it was a really junker of a car. I mean it was horrible.
And I was pulling up next to him I was getting gas and I said, “Hey how are you doing?” He says, “Yeah.” I said, “So you have a day off today or what?” He says, “Oh yeah, it’s half a day for this or something or I had a sick day and I took it.” And I said, “Okay, well . . . ” I said, “So how long have you been working for the UPS?” I was just trying to make small talk. I wasn’t even going anywhere. I was just making small talk and he said, “I’ve been there for 27 years.” Guess what I heard, Mike. Tell me what I heard. You know what I heard. You know what I heard?
Mike:No tell me.
Mitch:Well, UPS has a great 401(k) maximum plan. He’s been there 27 years. This guy’s got a million dollars in a freaking 401(k). He can’t get to it because he’s not 59 and a half so he’s driving a piece of junk. But he might have an extraordinary amount of money in a 401(k) that he can’t touch or an IRA. You know what I mean?
Mike:Yeah.
Mitch:So I ask him. I said, “Wow, they have a great retirement plan. Don’t they have one of those . . . ” And I’m playing dumb. “Don’t they have one of those if you put in they put in kind of plans, you know what do they call?” He says, “Yeah, they have a matching.” I said, “Wow, did you take advantage of that?” He said, “Man, I’ve been my whole life, I’ve been putting a lot in it my whole life.” And I said, “So did they match you?” He says, “Yeah, they matched me.” And said, “I always put the maximum in every year.” I said, “Wow,” I said, “How’s it doing for you?” He says, “Well, it was doing great until the stock market crashed last year. Now I’m only worth $600,000.” I said, “Only worth $600,000?” He says, “I was worth a million, they cut me in half.”
And I knew he had a lot of money in there. I had no idea that he had a million. Actually he had a 1.2 million and I said, “You don’t have to live like that. There’s a way not to have to have to live like that than watching that ticker tape and worrying about that.” And we had lunch and he doesn’t live like that anymore.
Mike:Yeah, that’s awesome. So let’s talk about selling deals. This is really obviously, we’re talking about seller financing. I know this is probably the easiest part after you found deals and you know how to raise money. Maybe you could share some stats, high level on, the fact that there’s a ton of people out there that would like to own a home but they can’t do it the traditional way because they don’t have good credit or maybe they have no credit and their alternative is renting. So maybe just kind of take us from there.
Mitch:The core belief of the owner finance business is that a person paying $1000 rent would rather pay $1000 to own. That’s the core belief. Now either you believe that or you don’t believe that. Now it’s not 100%, okay. There’s never 100% of anything. Just pick a number though. You think of 83 . . .
Mike:Probably more common though if they’re in a house, right? If you’re in an apartment, you’re probably temporary, you don’t want those responsibilities. But if you’re renting a house, you’re probably right it’s got to be a very high percentage that would rather own that house or make sure every payment that they make is going towards their principle, right?
Mitch:I actually think that the people from apartments want to own a house more than anybody because if you’re living in an apartment it’s even worse. You’re going to listen to the neighbors scream and make love and beat their kids. But pick a number. I know it’s not 100% but what is it? 83% of the renters, 85%, 87%, 78%, whatever it is it’s a big huge population out there that wishes they could. They just don’t know how. And they’ve been trained to think that they can’t.
So we got to go out and educate them that they can, that, “You could still own a home Mr. Apartment Renter, you can own a home. There’s ways to do it.” So that’s how I arrive at my price. I back into the rents. In a certain price range like from $150,000 down, I can make a payment plus taxes plus insurance that’s equal to what they’re paying in rent plus or minus 50 or 100 bucks. And people will pay $100 more than rent to own if not $150 just to own. And that makes sense to me.
So once you believe that then it’s all about selling and reaching those people and I’ll tell you exactly how I do it and I’ve got it down to a science. If you do the first two things right, find the house at the right price and find the right funding, then if you haven’t made a mistake on the first two steps then selling is easy because you’re going to be selling it at the right price.
We get into trouble, we may go over budget or we have too expensive money that pushes us out of budget because the holding costs are too high. Then we have to start trying to sell things for a higher price, that’s when selling gets slow. If you’re selling things right in the market and offering owner financing you have no problem whatsoever. I’m averaging eight days on the market.
Mike:That’s awesome.
Mitch:But let me tell you why. I’ve invented a company called LiveComm, livecomm.com and you buy phone numbers there. You buy them for $2 a month. The service is $29 a month plus . . . and you get one phone number with that and then you can buy as many phone numbers as you want to for $2. They’re not pretty numbers. You get to pick the area code, that’s it. I pick a LiveComm phone number for each house. And let’s say I have 10 houses for sale right now. I actually have 17 houses for sale right now this minute. But for easy math let’s just say 10. So I got 10 houses, I’ve got 10 phone numbers, I got one for each house.
And then I forward each phone number to a recording about that house, the specific house. This one’s a three bedroom, two baths, 1200 square feet, 50 by 50 lot. I’ve got a list, a legal page long of what a person could ask you about a house and if they ever ask me something that’s not on that list, I add it to that list. And I just start reading, I fill out that list, all the answers to those questions or those blanks and I just start reading it on the recording. All the way down, school district, taxes, estimated insurance, terms of the deal, what your payment might be if the interest rate was this and the balance was . . . everything.
I put 20 signs around each house. I got 10 houses and then I put one in the front yard. So there’s 210 signs out there. It’s not unusual to get 50 to 100 phone calls a day on the weekend and it was ruining my sales people which is why I had to invent LiveComm because not only is it ruining my salespeople by noon. They weren’t even answering the phone but they were giving out wrong information because who can remember all that information about every house and of course they never had the file with them, of course they didn’t.
And so the message was delivered, it was being delivered right every time and it was being delivered without burning my salespeople’s energy. At the end of the recording it doesn’t even tell them my phone number then. It says, and there’s an 11th phone number in this scenario. There’s the salesperson’s phone number. It’s in red and it’s glued in the back window. It’s taped in the back window. So the people driving by can’t call the sales person, they can only call the recording and get the recording.
At the end of the recording it says, “If you think this might be the house for you and your family, then this is what you do. Pack you and your family up, put them in the car, drive over to 123 Main Street, get out, check out the front yard, check out the back yard, walk around the house, look through the windows, check out the neighborhood and if this is still the house for you and your family and you definitely have X amount for a down payment or more, which is . . . ” I always start with 15%. ” . . . then call the red phone number in the back window.”
Now I’m only getting eight calls a day and my salespeople are fighting over them. They have the money. My down payments moved up from $3,000, $4,000 and $5000 to $8000 because I got a lot of people competing for my houses. I’m getting better quality people because they can follow instructions. They really want a house bad enough to do what I ask them to do. They prove themselves to me and I don’t wear my salesmen out showing houses all the time because the people that call them sometimes don’t even need to go to the house because they saw it all through the windows. A lot of times they don’t need to go.
And all they do is bring them over to the office. My average days on market is eight days once the house is ready for sale and here’s the kicker. Every phone number that comes from LiveComm has a text distribution list attached to it and right this minute I have 5700 people that have called my signs that want to know when I have a new owner financed house come on the market so they can go look at it. And I can text them for 1.75 cents per person and I can do it immediately.
And despite the fact it has pre-scheduling where you can pre-schedule text messages to go out. I have pre-scheduled on the first of every month, “If you’ve already bought a house or you’re no longer in the market for an owner financed house from homes2go.net please reply immediately right now with the word STOP and you will be removed from this list right now.” And despite the fact that it goes out on the first of every month, I still have 5700 people that want to know “When is my next house available?” That’s why I don’t have any problems selling houses.
Mike:That’s awesome. Truthfully and because you’re the bank, right? And when you’re the bank, like when we sell on the traditional way and I’ve sold hundreds and hundreds of houses this way and you still sell some too, you don’t seller finance everything.
Mitch:No, I don’t.
Mike:But when you sell in the traditional route it comes down to, does the person approve through the lender? Does the appraiser agree with the value of the house? All these constraints there that are all stacked against you as the seller, right?
Mitch:Yeah, does the inspector give you 40 pages of stuff that’s wrong with your house?
Mike:Right and you’re selling them as is and you’re the bank. There’s no appraisal involved. You’re not selling it based on market value or what other things they’ve sold for recently, you’re basically selling it on whether somebody agrees that they would rather own a house versus rent it and if that’s . . .
Mitch:I’m selling it on a cap rate. I’m selling it on the cap it. I’m selling it based on the cap rate, on the capitalization rate of what a landlord could get for the house per month. I’m backing into that number. And so here’s probably the most important conversation of this whole conversation is that if there is such thing as a recession proof business I think that the owner finance business might be one of them because I don’t need a bank on either end.
Let’s face it, what either causes a recession or is the direct ramification of a recession, immediately is the banks stop lending. That’s what happens. So did you notice in my strategy, I didn’t need a bank to buy the house and I didn’t need a bank to sell the house? So during the recession when everyone’s closed because the funding dried up on either one end or the other. They can’t get money to buy houses or they can’t find a lender to loan money so they can sell their house. When they all are sitting on the sidelines I’m booming because I didn’t need a bank on either end. And let’s face it, what happens to rents when the banks stop loaning money to buy houses?
Mike:They go up.
Mitch:They go up. What happens to the price of houses when the banks stop loaning money to buy houses? The prices go down. So when there’s recession you’re buying at the low of the low and you’re selling at the high of the high and if you’re using the rent to establish the price, then if the rents are going up during the recession, then your owner financed house is appreciating in value, hands down, fact. And so I’ve bought the only appreciating house in the recession because I’m offering the financing and I don’t need anyone’s permission.
Mike:Yeah, that’s awesome.
Mitch:That’s why I like the business.
Mike:Yeah, well, Mitch, we’ve gone a little long here this time we could’ve broken it up in two parts again. I guess we should’ve done that. Good, good stuff though.
Mitch:Of course we went long, of course we did.
Mike:Yeah, when we get together we’re . . . this is such an exciting topic though but for folks that are interested in learning more, I know you have three books. Tell us a little bit about what people can find in the books and learn more about this model and more about what you’ve done.
Mitch:Okay, I’ve written three books in the “My Life & 1000 Houses” series. “Failing Forward to Financial Freedom” is an entertaining biography, not a how-to book it’s just what happens after the get rich seminar. Or at least what happened to me. It was my process of going from a young and naïve entrepreneur to getting kicked all the way down the street and maturing and becoming a multi-millionaire through a strategy that I honed and honed and honed and it gives you the reasons . . . I fall down so much in this book that my nose should be flat.
It’s “Failing Forward to Financial Freedom” I talk a whole bunch about the failures which is quite different. A lot of people are tell you all the great stuff about this business, I’m telling you like all the stuff that really sucked for me. And then the question of the day after that book came out was, how do you find so many dang houses? And so I wrote “200+ Ways to Find Bargain Properties.” And it’s a how-to. I try to make it fun but at the end of the day it’s a how-to so it’s a lot drier.
And then I wanted to write the book that’s really the passion of my life, is “My Life & 1000 Houses: The Art of Owner Financing.” Which was about this little known strategy of how to owner finance houses to be successful and navigate Dodd-Frank and all the issues that that everyone thinks are so complicated. And it’s a bit sophisticated I suppose but I don’t think there’s any way to make a huge living and not have some kind of sophisticated part to it.
But I break it down to its simplest forms and show you how to solve the issues on that and you can get it all at 1000houses.com that’s 1-0-0-0-houses.com. Of course you can read all the reviews and everything if you want to on Amazon. I’ve got over 200 five star reviews. But it’s a little cheaper if you buy it through me and all the books that come from my home office direct are autographed if that means anything to you.
Mike:Yeah, awesome.
Mitch:I don’t know why it would but so many people got upset that they weren’t autographed so I said, “Well I got to start autographing them.”
Mike:Yeah, that’s cool. Awesome. We’ll add a link for 1000houses.com down below to check out Mitch’s books.
Mitch:There’s a ton of free stuff there. There’s a webinar for an hour and minutes on exactly how I operate my business. It’s all free. People chastise me, they say, I give away everything. I figure the people that want to hook up and find me, they know how to find me, they’ll find me.
Mike:Yeah, yeah, so they can find you on that site too.
Mitch:Yeah.
Mike:So, awesome Mitch. Hey, great to see you my friend.
Mitch:Nice to see you. Sorry we went over.
Mike:No, no, no, I apologize. Truthfully at one point I started to think again are we going to do what we did last time and split it into two parts. That thought crossed my mind but this is great information. I hope that folks that are listening today see an alternative to rentals or other things, other ways to build wealth. And like you said, there are . . . ultimately with the seller financed model, these payments end at some point. But I can tell you that owning a rental portfolio, while I’m glad we’ve done it because we built a lot of wealth through it, but it hasn’t come without a fair bit of heartache as well. So there’s another way.
Mitch:Yeah, yeah, there’s a different way. I’m not saying my way is perfect or right, it’s just another way. And I appreciate you going out there and having this show because I’m sure a lot of people get a lot of valuable education and a lot of people start out broke like we talked about and one of the ways to start is to listen to podcasts like FlipNerd and absorb everything you can from people out there that are living it and doing it.
Mike:Well, I couldn’t do it without having folks like you on Mitch so we appreciate it.
Mitch:Thank you so much, man. Appreciate being here.
Mike:Hey, everybody. This is Episode Number 383 with Mitch Stephen. Great, great information here. So hopefully you learned a few things. If you could if you haven’t done it yet, go out to iTunes, Stitcher Radio, Google Play, YouTube, all the places where we distribute our content at, give us a positive rating. We sure appreciate it. That’s what kind of fuels us to keep doing hundreds of episodes like this and awesome. Everybody, thanks for joining us today. Mitch, thanks one more time for joining us. Great to see you my friend.
Mitch:Good to see you, man. Thanks for having me.
Mike:Everybody have a great day. We’ll you on another upcoming episode. Take care.
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