This is episode #429, and my guest today is Nick Legamaro.
Nick is a seasoned investor in the Dallas Fort-Worth market, and an expert at the Owner Finance model. Many of us get into real estate investing to build long term wealth, usually through rental properties. However, owning rental properties can also be a pain.
The seller finance model serves a big need in the marketplace, and is perhaps one of the best wealth building strategies for single family home real estate investors, especially in affordable housing markets.
Please help me welcome Nick Legamaro to the show.
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 host, 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.
This is episode number 429, and my guest today is Nick Legamaro. Nick is a seasoned investor in the Dallas-Fort Worth market here where I’m at, and he’s an expert at the owner-finance, or the seller-finance model. Now, many of us got into real estate investing, or get into real estate investing to build long-term wealth, usually with rental properties. However, owning rental properties can also be a pain, I could tell you that firsthand, but it’s a great model. But there might be something better. The seller-finance model serves a big need in the marketplace and is perhaps one of the best wealth-building strategies for single-family home real-estate investors, especially in affordable housing markets. You ready to learn all about the seller-finance model? Please help me welcome Nick Legamaro to the show.
Nick, welcome to the show.
Nick:Hey, Mike. Thanks for having me.
Mike:Yeah, good to see you. You know, a lot of folks . . . I say this sometimes when I’m starting the show, like, you and I have been talking here for a half-hour, like, catching up and stuff, so it’s really good to have you back. You have been on the show before. Good to see you here, and it’s also, I’m really excited to talk about seller-financing today. I started to do some myself. When I look back over 10 years and hundreds of hundreds of deals, I wish I had done more of it, and you’re an old pro now, so . . .
Nick:I don’t about an old pro, but I have done several hundred of them.
Nick:More than most.
Mike:It really is a great model for a lot of reasons, and I’m excited to share that with our listeners today. So before we jump into, kind of, talking about all that we can possibly squeeze into a show on seller-financing, why don’t you tell folks your background and how you got to where you are?
Nick:Yeah. So you know, I started in real estate probably in the early 2000s, probably ’01, ’02, and back then, there just wasn’t a whole lot going on as far as education, knowledge, REI clubs. I think there was one I can remember, and it went away, didn’t last very long. So you know, the internet was just starting up . . . no, it was around for a while, but the information just really wasn’t readily available. You know, there was a couple of late-night-TV kind of shows, and stuff like that.
But I did what a lot of people did back then, which was basically fix and flip, and my fix-and-flip model was really geared around, I didn’t have a lot of money, didn’t understand the business. I didn’t have a lot of teachers, for lack of a better word, or mentors, and so it was all really lower-price-point stuff. We’d buy it, we’d do a little low-rent-grade rehab, and I’d sell it investors, get my cashback out and repeat the process.
Well, then ’07, ’08 comes around the corner and all hell breaks loose, as everybody knows, and I was fortunate to get out fairly unscathed, but I go, “Well, this is not going to work.” And I literally took probably about three years off, ’till probably 2011, and I knew real estate was where I wanted to go. I wanted to begin full-time again, and I said, “Well, I have to forget everything I know because I can’t afford to have that same situation happen again. There’s got to be a better mousetrap, for lack of a better word.”
So I said, “I’m going to forget everything I know. I’m going to start educating myself, because now real estate had become real hot.” So there was plenty of people out there that were the so-called experts and the so-called gurus, and information all over the place, there’s a different seminar going on every weekend, it seemed like. So I said, “I’m just going to really figure out what makes the most sense to me.” And I looked at everything, looked at all kinds of different strategies.
And what it eventually boiled down to was wholesaling, and wholesaling both, you know, trying to find properties on-market as well as off-market, and it made a lot of sense to me because if something was very scalable, it made a lot of sense to me, and, as I know today, which I didn’t necessarily know then, is that everything starts with a deal. No matter what type of real estate you want to be involved in, whether you want to be a buy-and-hold investor, or a fix-and-flipper, or a wholesaler, or a lender, all of them, doesn’t matter, if you don’t have a property to begin with, you don’t have a deal.
And that’s what we’re realizing today. So now it’s sort of shifted back to there where some of the focus on the strategies is we’re really trying to find . . . it’s really about sourcing inventory, so we can do any strategies that we choose to do.
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Nick:And that’s what we’re realizing today. So now it’s sort of shifted back to there where some of the focus on the strategies is we’re really trying to find . . . it’s really about sourcing inventory, so we can do any strategies that we choose to do.
Mike:Yeah. Wholesaling is the foundation of this industry. There’s distressed property industry. Like, if you’re doing retail-grade properties, you’re effectively just in the space with builders, so you’ve got to find the deal which is a property at a wholesale price that makes sense, right?
Mike:And then from there, there’s a lot of things you could do, and so, once you find the deal, or you get good at finding deals, then it’s matter of, what are you going to do with them? So historically, I’ve fixed and flipped [inaudible 00:06:30] houses as rentals, wholesaled some, assigned a bunch, things like that, and you did that, too, for a while, right?
Nick:Yeah, absolutely. That was what I intended to start doing from the very beginning, and that’s what I did do. And so, the funny part about it is I’m more into seller-financing now, and actually what happened is the second deal I ever got through direct mail that was wholesaling was a property back then in 2011. You know, you could get a property for $30 grand or $40 grand, you know, in . . . I’m in the Dallas market. And it would be exactly what you would think it would be. It’d be a little two-bedroom and one-bath, little 750-square-foot house built in 1950. And the lady goes, “I just want out of it. I owe $25,000 on it. I don’t want any money on it. I just want to go out of it.”
I had no idea what it was worth. You know, I got a realtor involved, and then he told me it’s probably worth $50 grand. I go, “Okay. Well, they want $25,000, it’s worth $50,000. I’m probably not going to find somebody who’s going to give me $50,000 cash for it.” I didn’t think . . . you know, I know a lot more now than I did then. And I talked to somebody, I go, “Hey, I got a house for sale.” I go, “I want $50,000 for it. Do you think you can find somebody who’s got $25,000 to put down on it, and I finance the difference?” And long story short, that’s what we end up doing.
So at the end of the transaction, I basically made zero cash on the transaction, paid off the underlying debt for the seller, paid off a little bit of money to the person that helped me market the property, and then I was left with basically a note that I had created on rate and term for . . . it’s gone now. They’ve since paid it off early because I gave them too good of a deal. That doesn’t happen anymore, but, you know, that’s sort of how it evolved. Then I started asking the question. I go, “Well,” I started just doing, you know, research and trying to find this stuff out. I go, “Man, there’s a lot of people out there that . . . what we call ‘cash-rich and credit-poor.'” You know, they have a lot of cash and they want to buy, but they don’t necessarily have the credit to be able to do so.
And then I started looking at it even more, and getting more technical about it, and finding out, like, even today . . . I haven’t checked it recently, but, as recently as January, the average decline credit score was, like, 707, and that’s pretty high. I mean, a 700 credit score is fairly high, but for that to be declined for a home mortgage, from a BofA or a Wells Fargo, or a Chase, whoever it might be, that struck me as a little bit odd, and I started thinking even more about it, and I go, “What’s changed today than 10 years ago?” Well, there’s a lot of people, like yourself and myself included, that are very entrepreneurial now. They work for themselves, they create their own opportunities. It’s very difficult for somebody like myself, that’s not a W2 employee that has a pretty job at Frito-Lay, to run down into Wells Fargo and say, “Hey, I want to buy a house.”
So you know, we’ve created this opportunity to really focus on servicing a community of people that really want to have homeownership, that are hard-working but just don’t check all the boxes, you know, from a borrower’s perspective, to be able to go out and get a home loan. That’s really how it’s, sort of, evolved and moved up to the point that we are today.
Mike:Yeah, there’s a lot of people, too. There’s new entrepreneurs. I remember when I first wanted a business for myself, I wasn’t bankable. I didn’t have two years tax returns. Even though my business was doing well, it’s like I didn’t have enough track record for a lender to care. There’s a lot of Hispanic folks that just don’t use credit as widely as a lot of other Americans, so they may not have bad credit, they just don’t have established credit. They just have never used it the way that we traditionally use credit cards. There’s a lot of folks out there.
Nick:Well, you know, and you’ve brought up a point. You know, not only are there people that have the cash but not the credit, but there’s also a lot of people that are here in the United States, they come here to work, but they’re not citizens, and they don’t have a social security number, which is one of the main criterias to going down and getting the traditional, you know, loan.
So you know, whether they’re from China, or India, or Australia, or Canada, or Mexico, or wherever, you know, they come here and they work in the United States, they pay taxes in the United States, they have an international tax identification number, but they can’t go down and go buy a home. And that’s one of the voids that we try to fill by providing our services, you know, up to a certain price point. You know, we’re not doing high-end stuff. We’re . . . you know, the median home prices may be a little bit 10% under that. It’s really the market that we’re really trying to . . .
Mike:And there’s also people that have come downstream. Like, they lived in a bigger house, had some financial troubles, their credit’s all screwed up. They can afford half the house that they used to have, but a traditional lender is not going to finance that.
Nick:Yeah. Very true.
Mike:Yeah. So let’s talk a little bit about, you know, why you, as an investor, or people that are listening to this, why they would seller-finance. I mean, it’s really, kind of, a comparison with buy-and-hold. I could keep it as a rental, or I could seller-finance it and effectively be the bank.
Nick:Well, that’s what we are, you know, “be the bank,” and that’s what we try to do. And there’s a reason why banks are in the banking business, because they can, and at the end of the day, they don’t have to go own property. As a matter of fact, banks just don’t do it, not intentionally, right?
Nick:Even though it’s a good deal, when something comes back in a foreclosure situation and they get it back, they can turn around and sell, because they’re not allowed to hold the property. But even if they could, they wouldn’t want to because when you look at what amortization is, and how you get paid all your interest upfront on a loan. I mean, it takes . . . if you have a home mortgage, it takes over 23 years to get to a 50-50 tipping point where that payment . . . because the payment never changes, unless you do a refine.
So let’s call the payment $1,000 a month. Well, in the first year of that payment, $990 is going to interest and $10 is going to principle. Still making that same $1,000-a-month payment for the next 30 years. Well, once you get to Year 23, then, only then are you actually making a $500-a-month payment towards the principal and a $500-a-month payment to interest.
Mike:Wow. It’s crazy.
Nick:So negatively skewed. I don’t know who put that rule in place. I don’t know how it got approved, but . . .
Mike:Well, bankers, right?
Nick:Yeah. Well, that’s what it boils down to. So at the end of the day, it’s something we want to participate in, because I want to get all my money upfront, too. And, you know, there’s nothing wrong with buy-and-hold. A lot of people do it. I mean, if I was 20 years younger, I probably would have some more in my portfolio, but, truth of the matter is I like the fact that I like to be the bank, and by being the bank, I don’t get any phone calls. I mean, I’ve got a mortgage with . . . well, my home with Bank of America, and I got such a good deal, and I still owe a little bit of money on it. But in theory I’ve had it for maybe 15 or 20 years, I don’t know the exact number, but I can’t tell you the last time I ever called them for anything. Just don’t call the lender. You just don’t call the bank. I don’t get phone calls from my borrowers. It just doesn’t happen, you know.
Mike:It’s that owner mentality. You’re like, “Well, I own it, so, therefore, I’m responsible.” When you’re a tenant, you’re, like . . . it’s just too easy to pick up the phone to say, “Hey, this or that doesn’t work, or this knob fell off in the tub, or something.”
Nick:Yeah, exactly. And people go, “Well, the cash flow is better on a buy-and-hold.” Well, that’s . . . may be true. but you got to remember, what happens when the house vacates? What happens when there’s deferred maintenance? What happens . . . ? You know, there’s a lot of what-ifs. I’m more . . . I like when it’s my money, or I’m actually borrowing money, I really like to deal with known quantities, and I think I like what seller-financing, or holding a note . . . because you don’t even have to seller-finance.
You can even buy notes. We buy notes all the time from people, like, go write paper, and it’s another exit strategy to cash out. In fact, it’s what we did early on, is that, not until recently was I able to keep the notes that we write. I wrote hundreds and hundreds of notes where I would find the property, I’d fix the property, I’d sell the property, I’d write a note on the property, and then I’d sell the note to get my capital back out so I could redo it again. And I sold hundreds of notes that way, and, as a result of that, it just allowed me the ability to make even a little bit more money than if I would have just taken that same property and wholesale.
For example, that one house that I found, if I would have wholesaled it, let’s call it the profit within a $5,000 assignment fee. Well, by doing that little bit of extra work of fixing it, selling it, finding a buyer, that profit from that one same property would be three or four times the return. So it would be [inaudible 00:15:44] $5,000, it may be $15,000 or $20,000. Instead of selling it in a week, I took me maybe 30 or 45 days. But with the limited number of properties, it was the right thing to do. Now, I want to hold the notes, obviously, as much as possible because there’s a lot more money even longer term, because I can defer that profitability on the deal for a long, long time.
Mike:Yeah. I think most investors get to a point to where . . . pretty quickly, it’s, like, I had somebody that I was talking to earlier today, and they’ve done lots of deals, hundreds of deals, you know, a lot of experience, and they just said, “I’m tired of working that hard.” And their primary model has been fix-and-flip, and some wholesales, and there’s nothing wrong with that. You know, I’ve been doing this for 10 years, but you do get to a point to where you’re just, like, “How do I . . . ” Nobody gets in this . . . nobody gets . . . I would say probably nobody gets into this business. I know some people glamorize wholesaling, and it’s a good business, but nobody gets in this business to say, “I want to be in a hamster wheel where I have to work as hard for my hundredth deal as I did for my first deal.”
Nick:Oh, it’s a job. I mean, we want to try to turn this into, you know, something as passive as we possibly can. And even in a buy-and-hold strategy, there’s still not a lot of things, in my opinion, in my definition of being passive as a buy-and-hold investor. You know, you’re still dealing with tenants, you’re still dealing with property managers, you’re still dealing with vacancies, you know, liability . . .
Mike:On taxes, all the baloney.
Nick:There’s always something. There’s always something. And I’m not saying that it’s not profitable, because there’s a lot of people that make a lot of money in the rental game, but I also know people, they have 25, 50, 100 property portfolios and don’t make a nickel. You know, it doesn’t take much to have that thing go the wrong direction.
So you know, there again, to each their own. There’s a lot of . . . look, in real estate, there’s 50 different ways to make money and be profitable, and make a good living in investing. It’s just, which road do you want to choose to go down, and what do you like to do, and, you know, what makes the most sense for you? And a lot of it is also economy-driven. A lot of it is market-driven.
I mean, there are certain areas that doesn’t . . . here’s a perfect example. I’m in Dallas, Texas. So let’s just take a $100,000 property, for example, in Dallas, and let’s just say, for that $100,000 property in Dallas, if I was to rent that property, the rent for that property would probably be $1,200, $1,300 a month. I go to some place like Phoenix, Arizona, and there’s that same $100,000 price point, the rent value on that property is probably going to be $750 to $850. It’s going up a little bit. So you’re talking about a $400 swing in value between cash flow.
Well, when you seller-finance, one of our main objectives is to really be able to put that buyer in that property to equal to, or less of cost of renting that, like, property. So I can seller-finance that $100,000 property for $1,200, $1,300 a month in Dallas. If I was going to go buy that same $100,000-a-month property in, say, Phoenix, or another market, I’d only get $850, maybe, max a month. The reason why it works in the Texas market is because property taxes are very high here.
Nick:So as a buy-and-hold investor in the State of Texas, where the property taxes are high because there’s no state income tax, is that the rents are forced higher because, as an investor, you want to recover your cost to basically pay for your property taxes, and their insurance.
Nick:So that works to my advantage in the State of Texas because now I’m going to pass that on to the end buyer, because they’re going to have to pay that anyway.
Mike:They’re the owner. They’ve got to escrow.
Nick:You’re the owner. You have to pay for it, anyway.
Mike:Yep. So the biggest pros and cons are . . . and I could tell you, you know, for a fact . . . and I think every buy-and-hold investor would agree, my two biggest expenses, by far, for rental properties, vacancy and make-ready, turn-over. And so, those are the two of the biggest things you eliminate in the seller-finance. You’re trying to get somebody in there that’s paying close to . . . for a mortgage payment, what they would pay for rent, but they’re owning it now, so they’re, kind of, moving in the direction of building up their asset. But they’re now responsible for maintenance, and they’re now responsible . . . there shouldn’t be any vacancy unless you have to, I guess, foreclose on them, or unless they vacate and abandon the property, and leave you on the hook. But for the most part, you’ve just eliminated your two biggest expenses, right?
Nick:Yeah. I mean, there’s always a chance of default.
Mike:The third is taxes, right?
Nick:Sure. I mean, there’s always a risk of default by the borrower.
Nick:There’s always a chance to have them take the property back. But if you price it right, you buy it right, and you get a large-enough down payment, that same $100,000 example that I shared with you, you know, let’s just say, for argument’s sake, that my cost basis was $80,000. So I buy it for $80,000, I fix it. I’m in it for $80,000, but I’m selling it for $100,000. So there’s obviously . . . there’s an equity position in that property in some capacity, because I only borrowed $80,000, or I used $80,000 of my own money, I sold it to you or somebody else for $100,000. Well, not only did I sell it for $100,000, I’m also going to get a down payment. Let’s just say I get 15% down. So now, you know, the note balance drops down to $85,000 to the borrower. It’s still worth $100,000. The value doesn’t change. My cost basis drops from $80,000 down to $65,000 because, you know, now I’m only exposed $65,000 because I just got $15,000 down payment.
Nick:So if you look at it . . . look ahead one year, for example. So now I owe $65,000 in debt, whether it’s my money or I borrowed money, it really makes no difference. I have a house for $100,000. Let’s just make use round math. Let’s say the interest expense on that is $8,000 a year. So if I apply all of that interest to the $65,000, which is $8,000, it goes right to the bottom line, that’s going to drop down by $8,000 now, and the effective cost basis just drop down $8,000 off $65,000, roughly $57,000.
The note balance didn’t change much. It’s still roughly going to be $84,000 to $85,000, but maybe the property value has also gone up a little bit. So now the property value, maybe it only goes up to $105,000. So now I have $105,000 asset that I have a lien against. I don’t own it, but I control it because I have the lien, but I only owe, technically, $65,000. So in event that that defaults, how difficult is it for me to get more than $65,000, for example, on something that’s worth $105,000, especially in this market? It just doesn’t happen. So even if I had to go buy it back and foreclosure at $80,000 or $85,000, I still have my profit I made on the deal, and then I turn around and resell it.
Mike:So we talked a few minutes ago about, like, who buys from people without good credit. Let’s talk a little bit about, you know, kind of, why they buy from you, because what we haven’t said yet is when you seller-finance, the interest rates that you charge are higher than a government-subsidized loan. So government-subsidized loans now . . . what? Five percent, 5.5% of rates went up here recently, but you’re able to . . . I mean, everybody needs to understand that when the government is subsidizing something, it brings prices and rates down, but if you don’t qualify for that, you’re willing to pay more to have a home. So kind of, talk about that scenario, and why they would be willing to pay a lot higher interest rate.
Nick:Well, it’s a great question, and I get asked all the time, “Well, why would somebody pay you 9%, 9.5%, 10% interest rate on a loan?” Well, because that’s what the going rate is for them to be able to qualify, you know, the terms and conditions that are set forth to be able to do. Look, we don’t have a prepayment penalty on anything that we do. If you want to go refinance out and go down to Wells Fargo, God bless you. You know, they can go get lending anywhere, but, at the end of the day, it really boils down to this in our equation, what’s the interest rate on rent?
If I’m going to sell you a house and it’s going to cost you $1,000 a month, and I’m charging you 10% interest, I can show you value in that transaction as a borrower. You’re going to eventually owe this property at some point in time in the future, and it’s going to be worth something of value, not even taking into consideration the tax advantages that you get. You get to deduct the mortgage interest. You get to deduct the property taxes. You get to deduct all that off your income tax.
But what is the value that you’re getting when you rent a property for $1,000 a month from a landlord? What’s the interest rate on that? Well, it’s infinite because you don’t get any value back out of it. You get nothing. But you can make that argument when you’re able to keep rent . . . you know, the cost of borrowing and having home ownership, fairly similar to rent.
Now, that argument doesn’t work as much when I say, “Well, you can own it for $1,500 a month or you can rent it for $1,000,” because then it becomes much more of a subjective discussion or argument at that point.
Nick:So you know, at the end of the day, most people, they want home ownership. They’ve been told, time and time again, they can’t do it, because that’s what everybody has told them, and, at the end of the day, it’s just not true.
Mike:Yeah. And maybe a good scenario or a good analogy is, you know, I’m a Dallas Stars fan, season ticket holder, so we go to the hockey game, and, you know, same thing if you go to the movies, I guess. But when you go there, a bottle of water is $4.50. Now, I could have stopped at a gas station on the way there . . . of course, I’m not supposed to bring it in, but I could have bought that same bottle of water for, like, maybe $0.99, or something, or 1.50 bucks, maybe. But they’ve got me there, this is my only option, I’m thirsty, I want what I want, I pay more for it. We all pay more when we go to the movie theater, we go to an amusement park, we go somewhere where we’re kind of a captive audience so we don’t have any other options, we’re willing to pay more for that. It’s really . . .
Nick:Yeah, it’s convenient. You’re paying for the convenience.
Mike:That’s exactly right, yeah.
Nick:Because our borrowers are no different. They really want to go get the cheapest interest rate possible, guess what? Then go get a W2 job, go get your credit cleaned up, go save up the requirement, but, you know, that takes time, that takes energy, that takes effort. And, honestly, a lot of people, they want to take the easier path, which is . . . you know, they want it yesterday, “I want it yesterday.” That’s why when you go past the Chick-fil-A at 11:30, the drive-thru line is wrapped around the corner, but there’s two people standing in line inside. It’s a convenience factor along with it. And this is no different. If you really want to go shop and get a better deal, you can surely go do it. I mean, obviously, cash is always going to be your best option. Save up enough cash and go buy it for cash, and you don’t even need lending at that point in time.
Mike:Yeah. So a lot of people that are newer real estate investors, or maybe people that are not real estate investors at all, they don’t get this. Like, they’re, kind of, grown up thinking the American Dream is homeownership. But let’s be honest, I don’t know what homeownership is today, like around 65%, give or take a couple of points. Like, 35% of the population doesn’t own a home. And homeownership rates, you know, they might be starting to creep up a little bit with some of the financing that’s coming around lately, is loosening up.
But truthfully, you know, 30% plus of the population will never own a home. And it’s not that maybe they don’t ever want to own a home. I mean, I know some pretty wealthy people that think homeownership is crazy, and I don’t necessarily agree with them, but at the end of the day, kind of, where are we in the industry, the seller-finance industry, and where have things been, and, kind of, where do you think we’re going with the opportunity as a real estate investor, let’s say?
Nick:Well, look, after ’07, ’08, pick a year, whatever, when the banks . . . banks basically got their hand slapped. You know, things are forgotten in time, but as of today, and, I think, moving forward, when rates are . . . where it’s 2%, and 3%, and 4%, it was even harder to get loans because the risk outweighed the gain [that 00:28:29] a bank. So banks, they’ve already been told, “Don’t do this, don’t do that.” So now everything is evaluated under a microscope. You know, everything that you’ve been asked to . . . you know, you got to jump through all these hoops to go get a mortgage these days.
And here’s the problem, unless you have something already pre-established, or you’re pre-qualified, you know, you go see something . . . you find a house that you like and you want to buy, you know, there might be two, or three, four offers that are all submitted simultaneously. And by you not having the ability to go get that thing closed quickly, and basically treated as cash, it makes it extremely difficult for people to go buy, so it becomes a very frustrating process overall.
So the seller-financing, why it’s beneficial for us, and I would say, for the borrower at the same time, is we eliminate a lot of our competition on both sides of the fence, we eliminate the competition . . . if I have a house for sale on the street and there’s 15 other houses for sale, and I’m the only one that’s seller-financing, and everybody else has got it listed on MLS, I’m not competing against those guys, because I’m offering a different product and service than they are.
Nick:It’s like, you know, if you’ve got a family of seven, you’re not going and shopping for a two-door sports car when you go down, you know, the car lot. You’re looking for something that’s going to hold your capacity. And there’s no difference. We just came up with a system that really . . . not have to create internal competition amongst ourselves, and the way that we’ve done that is by providing a solution where other people have not, and that’s really the bottom line. You know, there’s, we don’t really care if 90% of . . . it’s not supposed to be ringing. Sorry about that.
Mike:It’s all right.
Nick:I’m not sure why that’s doing that. I thought the phone was turned off, but I guess it’s not.
Nick:Back to what I was saying, so, you know, we just want to make sure that, at the end of the day, we provide a service in a convenient, but we want to provide homeownership for those that want it. It’s really that simple. At the end of the day, you want to own a home, and you’re willing to do the necessary things that allow you to gain that, then we’re here to help you, and that’s [inaudible 00:30:52].
Mike:Yeah. And as investors, that’s the option that exists. The government isn’t willing to subsidize those folks with bad credit. The big banks, Wells Fargo, all those guys are not willing to step in and say, you know, “I know you got a bunch of credit problems, but we’re going to stand behind you here.” Like, they’re not doing it, so there’s a gap in the market. And there are people that want to own a home that otherwise can’t, right?
Mike:And so, that’s the void you’re filling?
Nick:I mean, in a nutshell, that’s it. It’s like, we’re willing to solve a problem for folks and individuals that haven’t been able to find a solution. Is it the best solution? Is it the only solution? No, but it’s an option, and, at the end of the day, they, ultimately, have to decide what’s in the best interest for them and their family? Do they want homeownership at this cost or this expense, or would they rather continue to what they’ve always been able to do?
And where I think this is going, I think it’s only going to get more in demand because, just, I think the sheer number of people that aren’t going to fit that buyer’s box is just going to continue to shrink.
Nick:At the end of the day, it’s just a matter of really providing an opportunity.
Mike:Yep. Nick, maybe take a couple minutes here, for those that want to get started in seller-financing, you, obviously, have learned a lot along the way from the first deal you’ve done until hundreds and hundreds of deals, just like anything, how do folks, kind of, get started moving down this path, and make sure they’re staying compliant, and really understand the opportunity?
Nick:So you really got to break it down in the different phases. You know, you have phases . . . there’s what I call three phases in this process. Phase one is the acquisition or finding of the property, so you’re taking the property down. Phase two is basically, after phase one and after you fix it, you got to go find the buyer and you got to sell it and create the note. And then, phase three is getting cash out for the note, selling the note, because unless you have a tremendous amount of working capital, most people aren’t going to be able to keep every note they write.
Mike:Yeah. It’s hard to have deep-enough pockets to be the bank.
Nick:You run out of cash. I mean, I don’t care how good of a deal it is, you end up running out of capital. And then, for the longest time, I mean, the first several hundred deals that we did, we still had to sell the majority of those notes. But at the end of the day, it still made business sense to sell . . . you know, in the beginning, you might be able to sell, you know, four and keep one. That’s probably about the ratio right now that we’re seeing. So somebody wanted to get into it, you know, you got to buy, fix, sell . . . create the paper, sell the note, do it again. You know, every four times you do it, you have enough money to basically keep one whole note yourself. And make 20, 20, 20, 20, 20. Take all that money, then buy and keep the note yourself.
So . . . forgot what I was going to say on the other side of that.
Mike:So in, kind of, terms of people getting started, the acquisition side is really no different than all real estate investing, finding deals, we talked about a million topics here on FlipNerd, I have our coaching programs, and all this stuff about how to find deals using traditional sources: direct mail, pay-per-click, whatever it might be. So you find them the same way.
Then the selling part, that’s one big thing. Like, a lot of us, kind of, classically-trained real estate investors, we focus a lot of our effort on finding deals. If I buy at the right price, I’m not going to have to worry about selling it. On your side, you’re selling it . . . and, truthfully, I sell it to wholesalers, which we can build up a list of for your [inaudible 00:34:34] years. I can sell it on the MLS, and so there’s a marketplace there, but you’re, kind of, selling . . . you could sell them on the MLS, I guess, but you, kind of, developed this selling strategy to sell into this pool of people that the traditional market has, kind of, forgotten, right?
Nick:Yeah, exactly. Look, we’ll sell to anybody. If they’ve got the money and they meet the terms and the conditions of what we’re trying to sell it for, I don’t really care, but, at the end of the day, you know, the whole objective of what we try to do is really understand what that buyer’s criteria is, and try to provide a service and a solution to meet it, you know, [inaudible 00:35:13].
Mike:Yeah. And then the cashing out, and, of course, just really understanding the regulations, which is you probably, kind of, agree the best thing to do is just go through an RMLO, which is, kind of, somebody that knows how to, kind of, tread you through these waters, right?
Nick:Yeah. I mean . . . so, a seller . . . you know, if you could break it down into just numbers, the number of steps in a wholesale transaction, let’s just call the number 10. There’s 10 steps from when you . . . be able to find the property and be able to get paid when you sign it back out. Well, on a seller-finance model, and be able to create paper and sell the note, that’s not 10. It’s like 50. So each one of those steps is a mini landmine, if you will, through the process.
I would not say that seller-financing is difficult. It’s just very complex. There’s a lot of moving parts, and there’s a lot of things, and there’s compliance issues, and there’s Dodd-Frank, and there’s SAFE Act, and there’s disclosures, and there’s all kinds of things that need rules and regulations that have to be followed. There’s ways to do all of that. We’ve done it for years. I mean, when we buy notes from investors that are looking to basically create this model, you know, we let them know exactly what the checklist looks like, make sure that all the T’s are crossed, I’s are dotted, because you don’t want to write a note that is not a desirable, you know, instrument to sell. You want to be able to get cash for it, and you want to not only get cash for it, you want to be able to get the most amount of cash for it.
Look, that’s what banks have done for years. A matter of fact, I don’t know the exact number, but I’m going to guess it’s at least 75% of all loans that are written, they’re sold the same date that they’re closed. You go to Wells Fargo and get a bank loan for your home, the next thing you know, an hour later, you’re getting a letter in the mail saying that your notes have been sold. So not only did they sell the note, they sold it for more than what the note was actually worth.
So you’re not going to get 100% on a seller-financed note, because the borrowers aren’t as pretty per se, so they don’t check all the boxes, but, you know, if you do a good job and there’s enough . . . right LTV is written, and the borrower gives enough down payment, you might get 90% of that note value. So at the end of the day, that’s how you can exit out of it and go on to, you know, the next deal.
Mike:Yep. Awesome. Well, Nick, thanks for sharing all this info with us today.
Nick:Excellent. Well, I appreciate you having me on, Mike.
Mike:Yeah, yeah, good stuff. Hey, if folks wanted to learn more about you or connect with you, or anything, is there any place they can go?
Nick:Yeah, the best thing to probably be able to do is just go to rylexcapital.com. That’s one of our corporate sites, and from there you can . . . there’s contact information, whether they’re looking to buy notes, whether they’re looking to sell notes, or just have any general information, or any general questions they want more information on.
You know, we work with guys especially in the Texas area. I’m not real knowledgeable outside of the Texas market when it comes to the seller-financing, because there’s a lot of rules and regulations, and it’s more of a state-mandated kind of thing. Texas is a . . . you know, you got land trusts in some states, you got deed for trust, and, you know, deeds in other states, you got judicial states here, and you got different foreclosure laws, and things along those lines, and all those things have an impact on how a deal is structured. So really got to know what each market or each state’s rules and regulations are.
Mike:Yeah. Awesome. Well, we’ll add a link down below for Rylex Capital, and, forgot to mention, kind of, early on that you’re obviously a member of the Investor Fuel . . .
Mike: . . . Mastermind. So we’re really grateful to have you in that group, your wealth of knowledge, and looking forward to seeing you at the . . .
Nick:I appreciate the invite, and it’s a great group of people. And, you know, I’ll tell you, what I like about it the most . . . and I’ve been around a while, and I’m still part of some other groups, but what I like about it the most is that the number of people that we have in it . . . and, from my perspective, that’s actually . . . I didn’t know that I would like that at first because, you know . . . and I’ve always, sort of, been involved in more of a smaller group, more intimate environment, but I actually like the larger because there’s just more information, and there’s more opportunity, and everything is just times10.
Mike:Yeah. And a lot of great people, too, with that, you know, just everybody is so open.
Nick:Yeah. It’s so great. And, I mean, that’s the beauty of it, is that there’s a place for everybody in there with the different groups that you have. You and Stinson [SP] have done a great job putting together. I can’t wait for the next one. And, you know, I’m working with Ted right now, you know, potentially helping working us build a new inventory for . . . you know, so we can [inaudible 00:40:12].
Mike:There’s a lot of people in the group that are starting to work together and do deals together, and stuff.
Nick:Yeah. It’s great. And so, you know . . .
Nick: . . . hopefully, people listening, they’ll check it out and maybe . . .
Mike:Yeah. We’ll add a link down below for Investor Fuel, as well, for anybody that’s interested. So awesome. Hey, thanks, again, Nick for all your time. Really appreciate it.
Nick:All right, buddy. We’ll see you soon.
Mike:Yep. Hey, everybody, this is episode number 429 with Nick Legamaro, really a wealth of knowledge in the seller-finance industry. And he’s got a lot of great information he shared here today, so hope you learned a lot. If you haven’t yet, please subscribe to us on iTunes, Stitcher Radio, Google Play, YouTube, wherever you watch us at. Of course, you can see all of our shows, and listen to all our shows or watch them on FlipNerd.com. We have over 1,500 different podcasts that we’ve created over the years, so lots, lots of great information on FlipNerd.com. But appreciate you all. Hope you got a lot out of the show. We’ll see you in the next one.
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