This is episode #432, and my guest today is Mitch Stephen.

Mitch is one of the nation’s leading experts on the Owner Finance model, but today, we’re talking mainly about the importance of private money to you as a real estate investor.

There are lots of different ways to finance deals, but private money is generally the most patient, one of the lowest costs for your business, and as scalable as you need it to be.

We not only discuss the pros and cons of private money, but share some thoughts on how you can get started raising money yourself.

Please help me welcome Mitch Stephen to the show.

Highlights of this show

  • Meet Mitch Stephen, owner finance and private money expert.
  • Learn the importance of access to private money for your real estate investing business.
  • Join the conversation on the differences between private money, bank money and hard money.
  • Listen as we talk about how to get started raising private money for your business.

Resources and Links from this show:

Listen to the Audio Version of this Episode

FlipNerd Show Transcript:

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 432, and my guest today is Mitch Stephen. Mitch has been on the show a few times before over the past five years. Mitch is one of the nation’s leading experts on the owner finance or seller finance model. But today, we’re talking mainly about the importance of private money to you as a real estate investor. In fact, Mitch’s owner finance model is so successful because of private money.
Now, there are lots of different ways to finance deals but private money is generally the most patient, one of the lowest cost for your business and as scalable as you need to be depending on how your business and the volume you’re doing. We’ll not only discuss the pros and cons of private money, but Mitch shares some thoughts on how you can get started yourself raising private money on today’s show. Please help me welcome Mitch Stephen to the show. Hey, Mitch, welcome to the show.
Mitch: What’s going on, Mike? Happy to be here.
Mike: It’s good to have you back, my friend. Yeah, yeah. I always love talking to you. It’s funny how I mentioned this many times lately on shows is I’ve got a lot of friends, people that I really respect in the industry that I don’t talk too all that often, and we’re kind of stalking each other on social media a little bit, see what you got going on. And then one of the big reasons I keep doing the podcast is add value to our listeners, for sure. But it’s always an opportunity for me to catch up with old friends. So glad to have you here.
Mitch: Yeah, we met at a mastermind a long time ago. A lot of those people became real close to me and like family, and even years after I, you know, don’t go to that mastermind anymore, I still talk to these people all the time, and they’re big pieces of my life, and it really changed my life. I understand you have a heck of a mastermind going, and I’ve been talking to my partner, Mike, and we were just saying, we need to get into a mastermind. So I think we may be headed your way, brother.
Mike: Yeah. Yeah. Awesome. Yeah. Investor Fuel is . . . So we created something pretty cool there. A little, I guess, shameless plug here. But yeah, the mastermind for us is, you know, you we talk about real estate investing. The common thread is everybody there is a successful real estate investor working hard, but we really created a family. It’s pretty amazing what happens when you get a lot of hard charging entrepreneurs that are focused on improving their lives and the lives of the ones around them, when you get those people together, just some amazing things happen that you could never kind of plan on. It just happens, right?
Mitch: Yeah. So I don’t know if I qualify, man. You guys are some pretty hotshots over there. I might have to work my way up. Do you have like [inaudible 00:02:52] level?
Mike: We’ll let you sneak in the back door. You’ve done a couple thousand deals, so we’ll let you sneak in the back door.
Mitch:Yeah.
Mike:Well, hey, Mitch, let’s talk about seller financing today. And you’ve been on the show before. We’re going to add some links down for people that want to see it. In fact, to date, you’re still the only person that we turned to show into a two-part segment because it lasted so long, and it was so good. The content was so good. So we’ll add links down below for that. But before we get started here, we’re going to continue talking about seller financing and really more importantly, the power of using private money, raising private money. But before we jump into that, hey, for those that don’t know you yet, tell us a little bit about your background.
Mitch:Okay. So, this is . . .
Mike: The short version. The short version.
Mitch: This is seven bucks that will get you a cup of coffee at Starbucks, okay? So I started in 1996 in March, and when I sold a couple of my rent houses on accident, I didn’t even know I was in the rent house business. I just had a house, and then it was too small, I moved, and I bought another one, and I had two then, and then I decided I didn’t want them anymore. So I sold them, and I made more money than I made in two years at my job. So I thought I’d better investigate this little thing called real estate. And 1500 houses later and 22 years later, it’s changed my life. I don’t know what else to say, man. I buy houses like people buy rolls of toilet paper. You know, my first year, I bought 45 houses back in the good old days, Mike. You remember the good old days when you could get in the classifieds and find a house by lunch and buy it and everything was good? And if you really screwed up, you bought two . . .
Mike: [inaudible 00:04:28] I was never part of those days. I came in at another good time, 2008. But yeah, absolutely, it’s a different market now.
Mitch: No. That was 1996. You could get in the classified ads and the newspaper. And if you screwed up, you’d buy three houses because you didn’t know how you’re going to pay for them but you go out and get a house at will. But anyways, I was a buy and hold guy for a long time. It didn’t work well for me. I was probably the worst landlord on the planet. And someone taught me about owner financing, and that became my strategy of choice, not that I don’t do everything, I do all kinds of things, but I’m out there looking for the perfect owner finance house. And along the way, I find all different kinds of houses and buildings and whatever and I just make do, you know.
Mike: Yeah, yeah. For those of you that are listening, we were going to talk primarily about private money today. Mitch focuses on seller financing, but we’ll add the links down below in the show notes for some of the past shows where we focus a lot more on seller financing.
Mitch is out of San Antonio, Texas. So just a down the road a bit from where we’re at here in Dallas, so about, I guess 4-1/2-hour south. So Mitch, just talk about, we’re going to talk about private money. Let’s talk about the role of financing though. For so a lot of people that watch the show or that are getting started in real estate investing or newer real estate investors tend to focus on wholesaling and assigning, which nothing wrong with that. I still do some wholesaling assignment myself, but people that get into it, a lot of times it’s because they don’t need financing, or they don’t think they need financing. But you and I both know that that is a rat race at some point that you never can get off that hamster wheel. So let’s just talk about the importance of financing and real estate investing at a high level as you see it.
Mitch: Well, first of all, everybody I know, started out as a wholesaler really because they were broke. Most of the time, we were just flipping the idea that we could, we had some pieces of paper that had a house tied up for 30 days. We were flipping our contracts because we didn’t even have enough money hardly for earnest money, you know. I did my first 400 deals with $10 worth of earnest money because I didn’t have any money.
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Our members include some buying one to two houses a month, up to some of the most respected investors and leaders in the real estate investing industry, some of which personally done over 1,000 deals. If you’d like to be considered for our invitation-only world class mastermind, please visit investorfuel.com to request your personal invitation. Our next meeting is coming up quickly, go to investorfuel.com now to learn more.
. . . or they don’t think they need financing. But you and I both know that that is a rat race at some point that you never can get off that hamster wheel. So let’s just talk about the importance of financing and real estate investing at a high level as you see it.
Mitch: Well, first of all, everybody I know, started out as a wholesaler, really, because they were broke. Most of the time, we were just flipping the idea that we could we had some pieces of paper that had a house tied up for 30 days. We’re flipping our contracts because we didn’t even have enough money hardly for earnest money, you know. I did my first 400 deals with $10 worth of earnest money, because I didn’t have any money.
Mike: Yeah, and we’re not saying there’s anything wrong with that. But I think, you know, when you can start to own assets, or as you like to do with seller financing, or take some other extra strategies, there’s opportunities to make more money, not every time, but sometimes, right?
Mitch: Well, there’s nothing wrong with it at all. As a matter of fact, that’s how most people start. But then you come to the conclusion that this is a job, and that you’re working for check and then as soon as you get the check, you got to start work for the next check. And you’re not building any residual, and you’re really not an investor at this point, you’re just a commodities trader, or whatever. I don’t know if what we do is a commodity, but you know . . .
So then you find, like, I found that I, if I had my credit cards, I could actually take the house down, I could put, you know, 15,000 on this credit card, and 15,000 on this credit card. And I could buy the house like 10,000 on this credit card, and I could fix the house. And it had zero percent interest at the time. And I thought, well, this is good, because the problem with flipping contracts was you had a gun to your head. And if you didn’t, you only have so many days and the clock was ticking. You know, every minute was less that you had, and sometimes you couldn’t even take the highest offer because you couldn’t be sure that the guy making the highest offer could even close, and you had such time pressure that you couldn’t even take a chance on the higher offer. You had to go with someone that you knew would close, even though it was less.
Once I figured out I could get my credit cards, I started taking the houses down, and then I had time to slow down. If I needed to clean the windows and mow the yard, I could do that. I could start high and work my way down. And having the money to take the deal down just even in the flip situation changed everything because I could slow down and take chances with people. If a guy flipped out, no problem. I just went to the next guy. But when you got that pressure, that time expiration date on that contract, that’s a hard business.
Mike: Yeah, yeah. It’s the same thing. I mean, I’ve assigned lots of houses. I’ve assigned about hundreds of hundreds houses here. But we were assigned about 100, but I realized when I can take it down, it just gives me more options, more flexibility, a little more breathing room and opportunity to, like you said, make a little bit more money ultimately. But you got to have financing to do that, and you can, with on credit cards, you know, you can’t do too many of those, right?
Mitch: Well, I had, I had $365,000 worth of unsecured debt that if I wanted to take about a week . . . See back in the day, remember, let’s be transparent. Back in the day, if you had good credit, you just applied for the card, and they gave it to you. They didn’t take a look at how much access you had the unsecured credit. They weren’t looking at it back then. And if I wanted to, I could have got about $600,000 on my kitchen table. It’d take me probably about 10 days. And then I could have left from Mexico. And apparently, a lot of people did that. They got all the cash advances from all the cards and then they left the country. And so that’s when they started regulating and started looking at that.
So I would have $400,000 worth of houses free and clear with no liens on it. And they would be worth, you know, 600,000-700,000. And so, how it worked, you know, those were short term flips, though, let’s cut to the chase here. You couldn’t, you couldn’t . . . That was just in and out for in and out deals because credit card money wasn’t good for holding for a long period of time.
Mike: Well, let’s just talk about real high, give us your thoughts on the importance of having access to financing. It started off with credit cards. That’s a lot harder to do today. And of course, credit cards could get you in trouble in a hurry. But just the importance of financing as a real estate investor, having access to capital, whether it’s hard money, banks, private money, and then we’re going to kind of dive into some of the pros and cons of each. But just share your thoughts on the importance of having access to financing as a real estate investor
Mitch: Having private money . . . I mean, you can make a good living in this business, flipping contracts, doing it whatever it is you do. But the difference between making a good living and being a multi, multi, multi, multimillionaire is private money. For example, let me just tell you like a typical owner finance deal. Let’s just say I’m using round numbers, easy numbers. Let’s say, and this happens. So don’t think it doesn’t happen because it happens all the time of my life. Doesn’t happen every day but it happens enough.
Let’s say I can find a house I can buy for 50,000. I go out and I borrow 52,000 at 8% interest only five years, non-recourse collateral only loan. So I either make my payments, or I give them the deed to my house. But that’s the only two things going to happen. That being said, never gave a deed back to anybody in my life. But then I go out and I owner finance that house for $100,000 with 10,000 down and I carry the $90,000 balance for 30 years at 10%, so I got paid. I can buy the house for 50, so I borrow 52. The reason why I always borrow an extra 2000 is it takes about $2,000 to find this guy. These kind of deals don’t grow on trees.
Mike: Yeah. It’s your marketing costs. So, you’re kind of liquidating your marketing costs by getting your bait back, right?
Mitch: Yeah, I do about 100 houses a year. If I leave 2000 and advertising and every house for the year, how much I got laying around? Like, I got 200,000 laying around.
Mike: Two hundred K, yeah.
Mitch: Do it for five years, you got a million dollars you left laying around, who’s got a million dollars to leave laying around? So I borrow the 52 at 8%. Let’s just say my payments 350, a round about close enough number. Then I sell the house for 100 with 10,000 down and I carry the $90,000 balance at 10% for 30 years. And so they owe me a principal interest payment of 850. So I got 850 coming in. I got 350 going out. So I’m clearing 500 in the middle and this is really important. I got paid $10,000, which is about what a wholesaler makes on an average deal, right, 10 grand maybe?
Mike: Yep.
Mitch: So I’m getting what a wholesaler makes, but I’m keeping because I have private money underneath this longer term, this certain color of money, I get to hold on to this deal and stay in the middle for 30 years. Okay. And that’s $500 a month times 360 months, that’s $180,000 that the wholesaler missed out on. That’s why I’m telling you the difference between being a multi, multimillionaire, just think of every deal you did, you didn’t just get 10 grand. You got 10 grand plus they owe you 150,000. You got eight grand, but they owe you 160,000. You got 12 grand, but they owe you 140,000.
And then every now and then, you’d pick up 30,000 in a down payment like money from heaven, and they still owe, you know, $100,000, what they owe me racking up on my financials and racking up to my credit, it’s made the difference, is what’s made me a multi, multimillionaire. That one extra step. So if you don’t take the time to learn how, or to master the art of raising private money, then your path is going to be much slower in a lot of instances.
Mike: Yeah. Let’s talk about . . . I want to get into private money a little bit more in just a second, let’s talk about some of the pros and cons of, you know, a lot of newer real estate investors that are getting started, they have to rely if nothing else on hard money, right? And there’s a place, I think you would agree every type of financing and local banks, hard money, private money. I think not to say anything bad about private money, about hard money at all, it has a legitimate use if you got to use it, it’s better than nothing, right? It’s not for long-term situations like what you’re talking about. But . . .
Mitch: I’m a hard money lender. I have $7,000,000 out in the streets in my town because I got so much private money, I couldn’t spend it all.
Mike: Right. But let’s just talk about the pros and cons, like hard money is good for shorter term loans, right? Because the interest rates are a lot higher. So, you would never do anything for, you know, certainly more than a year. Most people are trying to get in and out and three to six months or less, right? But it’s not a 30-year or 15-year type loan. So the big difference there is just a high interest rate just kills you on a long term.
Mitch: Well, hold on, though, it’s better than a 50% partner, if you can flip the house in a, you know, certain period of time. So the upside of hard money is, you know, if you don’t have the money at all, then you got some choices. You can skip the deal and just pass because you don’t have the money. You can go get a partner who’s going to charge you 50% if not 60%, or you can get hard money that is maybe it’s 15% annual interest, but you’re only going to have the house for three or four months. So you’re not paying 15%, you’re just paying three months of that 15%. So there’s a time and place for everything. And there’s also a time and place for banks who once you grow up and you have your financials in order, charge you 4-1/2% or 5% now. And they’ll do longer term stuff, 15 years and stuff. So you’ve got to have it all, I think.
Mike: Yeah, yeah. It’s one thing I want to mention here, I know that you’re going to talk about private money in a bit and just to kind of still a little bit of your thunder, I know what you’re going to, one of the things you’re going to say is it’s more, it’s probably the most patient money. It can be, right?
Mitch:Oh, yeah.
Mike:But to play off of that, I think one of the things that I want to make sure we talk about here with people that are listening right now, here as we sit kind of back end of 2018. We don’t know when there’s a downturn coming. Probably you and I have probably talked about this over the years that we thought it would have happened by now, right? But it hasn’t. So I don’t . . . At this point, I don’t know if it really is going to happen. I think there’s a lot of things that have fundamentally just changed, but there are ups and downs. There are market cycles. I don’t know how bad the next down will be. Maybe it won’t be that bad.
Mitch: Well, there’s always another recession coming.
Mike: There’s always a cycle, right? And what happens in what happens in cycles with banks?
Mitch: They close down. They shut down.
Mike: Yeah. They shut down, right? They get they get more conservative. They’re not lending nearly as much and truthfully, some people get their loans called even, right?
Mitch: I had a million dollars called in one day they said, “Hey, we’re calling a million bucks.”
Mike:Yeah, give us our money back.
Mitch:That’s when I learned a lesson. They told me I had eight months to bring that million dollars in, and I brought it in to them in two weeks. He said, “I gave you eight months,” I said look, “There’s this new guy named Obama who smells like he’s going to be president. I don’t know what’s going to happen. I got private lenders that want to loan me money right now. I’m not going to wait to see if they still want to loan me money in eight months. So here’s your money.” And I think I really impressed the bank that they made a million-dollar call. And I picked up the phone about 20 times in a row and got it collected and send it over to them. You know, I wanted to make a point, “You don’t want my money. You don’t want my payments anymore. I don’t need your money.”
Mike: I don’t want you. Yeah. You’ve kind of burned that bridge now. So let’s get it over with. But let’s talk, so let’s kind of dive into private money. The reason it’s important, and we’re ultimately going to hopefully give people are listening here some direction on going to raise private money, right? Because it’s the most patient, it’s usually one of the lower costs vehicles out there, and it just enables you to have more options in your business. So let’s kind of get into the flexibility I guess. Let’s talk with the flexibility of private money versus other traditional paths.
Mitch: Well, I mean my private lenders are all either retired and I do mean retired, like they don’t want to dabble. They don’t they just want a check, okay? They don’t want to hear about anything, “Just give me my check, I’m playing golf.” Whether they’re doctors or they’re lawyers or they’re professionals, but they’re seasoned or a senior professional. They’re not aggressive anymore. They’re just getting into a slowing down phase. When you talk to young attorneys and young doctors, they’re all trying to build their practice with their money. That’s not a good fit. Most of my lenders are in their 70s, some of them are in their 80s, a lot of them are dead.
You know they would have been over 20 years, but they didn’t make it that long. And the biggest thing is when the recession hits, the banks are going to close. It’ll be the cause of the session or the effect of the recession, but we can count on the banks will tighten up because that’s what happens in a recession, my humble opinion. And then if you’ve gone all bank because they were cheaper, then you’re going to be out of business in the recession because usually when there’s a recession, the banks close but what’s the stock market doing? It’s usually not doing well either, and people want out.
And the easiest time to raise private money is in a recession, because all you’ve to do is start talking about what they were worth about, you know, one month ago and what they’re worth about today and the fact that they didn’t have any way to make themselves whole. I give people collateral, if you don’t get paid by me . . . If you don’t get paid my $52,000 that I owe you, you get my $100,000 house. So I keep a balance of bank money and private money, because I know there’s another time coming, and I want to be ready for that time.
And when the bank closes, the reason why the owner finance strategy works so well, is I don’t need bank to buy the house because I got private money, and I don’t need a bank to finance my buyer, because I’m seller financing. So it’s one of the rare strategies that . . . but buy and hold is the same way, you know, you don’t need a bank to put a renter in. And so I’m open on both ends when most strategy shut down. Because most strategies require a bank to take action on one end or the other and my strategy doesn’t.
Mike: Yeah. And let’s talk about, you know, cost wise, and, you know, a private lender is going to, that’s something you negotiate. There’s not some set term of what’s typical. I think you said you typically are paying around 8%. That’s typically what I pay, but just the flexibility of it. Like I, when we need to find a house, we pick up the phone and things just happen. Rather, we don’t have pain points. Nobody’s going to analyze the deal, because we built a trusting relationship, they have some collateral behind it, and it’s really just based on trust, right? So let’s talk about the importance of that relationship.
Mitch: Well, they look at the house the first couple of times. And usually what I’ll do on the first one is, I’ll go get them and put them on my car and take them down there, because I don’t want them to go down into some of these neighborhoods I deal in and get blown away. So I have to be there to hold their hand and tell them, “It’s all going to be okay. No one’s going to shoot you here. It’s, you know, 12 noon. You know, it’s fine.” But, you know, what I don’t always deal in rough neighborhoods. I used to deal in a lot rougher neighborhoods, but now I moved up a little bit. But they don’t . . . No one looks at my houses now, except for the new the new guys. The new guys always look at the first two or three and then they stop.
Mike: Yeah, they get it.
Mitch: But let me tell you a true story. So the other day I get a text from my daughter, Shannon, who’s the center of my office, closes everything in and out for 22 years, okay? Shannon, my daughter. She sends me a text and says, “I think we have a problem.” Which immediately sends me through the roof because my mind goes to all kinds of places, you know. So I called her up and said, “What’s the problem?” She says, “We got to fund 12 houses in the next 15 days.” I said, “Okay. So what’s the problem?” She says, “Well, it’s a million, two hundred and something thousand dollars.” I said, “Okay. I still don’t understand what’s the problem.” She says, “You can get 1,200,000 plus in 15 days to close these deals?”
I said, “Call everybody into the office. I’m going to be there in 15 minutes.” So I drove over the office. Everyone was in there. I said, “Now, Shannon’s called me. We have a small problem. We have 12 houses, 14 houses to close, and we need to raise a million, 250 to close these deals. So I need you’ll to witness something. And I picked up the phone and in three phone calls, I had the money. I said, “Now, don’t stop buying houses. Have a good day.” So that’s the power of the private money. I mean, even I was astounded, it only took three calls. But if it had taken 10 calls that day, it would have been time well spent, right?
Mike: But those are all in your . . . When you’re raising private money, you’re prospecting, you’re finding new potential lenders all the time. But once that relationship is built, and there’s this trust there, things are just easy, right?
Mitch: It is easy. And when you need to police yourself—make sure they always get the right paperwork, make sure they get it in a timely fashion. The time of anxiety is when they send the money to the title company till the time they get their time-date stamp notarized by the county clerk papers in their hands and it’s filed at the courthouse. That’s the time of anxiety, especially with new lenders. Cut that time down if you have to get in your car yourself on a new lender and drive it down there so they get their papers on the same day they wrote the check to the title company or transferred the money because that’s the time of anxiety.
And don’t get lazy with that because the difference between a con artist and a real borrower is those papers with the time-date stamp on the side with the embossed notarized signature of the county clerk, that’s what separates people. You know, I’ve had my, almost every single one of my private lenders has called me after watching an episode of “American Greed.” And I’ve learned to recognize it. And I said, “Have you been watching ‘American Greed’?” And they go, “Yeah. I have.” I said, “Okay. What are you worried about? Are you worried about that this is a scam?” They said, “Well, kind of worries me when I watched that stuff on TV.”
I said, “Look, where’s your papers at?” They said, “Well, they’re in my desk.” I said, “Get them out.” I said, “You see that time-date stamp? You see that embossed, notarized county clerk? That’s the papers those people that got scammed didn’t get, and you can look up online and you’re a first lien holder. Those people that got scammed can’t look up online and find themselves as a first lien holder. Do this for yourself so you can sleep tonight and then have a good night sleep.”
Mike: Right. Yeah. Well, let’s kind of lean into how to start raising private money. If people are listening right now, they understand the importance of private money. A lot of times people say, “You know, well, I don’t . . . Everybody in my family’s poor. I don’t know anybody that has money.” But as you know . . .
Mitch: Keep going. There there’s more excuses.
Mike:Yeah., yeah.
Mitch:I have bad credit. I have a bankruptcy. I don’t have any experience. This is my first deal. I’m too young. Who’s going to loan a 20-year-old money? The excuses go on and on and on and on. And I shouldn’t call them excuses. They’re real fears in the people, these minds. They’re limiting thoughts . . .
Mike: You have to overcome them.
Mitch: . . . and I’ve got to learn to recognize them.
Mike: Yeah. So let’s talk about how to get started when people don’t have, I mean, let’s be honest, it is easier when you have experience, when you can show, “Here’s my track record with other deals I’ve done,” when you when you can say, “Call this other lender who’s one of our private lenders and use them as a testimonial,” that gets easier, right? When you have some of that. But when you don’t have it, it doesn’t mean . . . You got to start somewhere, right? Everybody, as I say, you know, all the successful real estate investors I know in the whole country, you and I know a lot of them, right? It’s like, there’s not a single one that came out of the womb flipping houses and is a real estate expert. Like, they had to learn it. They had to go through trial and error and figure it out. So let’s talk about some of our newer investors or people that have not raised private money before. I want you to help deliver this baby, Mitch. They’re coming out of the womb now. Help them.
Mitch: One of the things a good mentor or coach does is changes your mindset. The first thing I have to do is we have to change this mindset. When I’m talking to someone who’s just starting the journey to find private money, I want to find out what their fear is. I want to find out if they’re afraid because they’re too young. My partner, my business partner, that was his fear, because he was really good at getting money from his mom and dad, but when they got tapped, he got some from his uncle. But when he got tapped, then he stopped. And I said, “You were really good with your family members, but you went outside the family, what happened?” And I finally pulled it out of him. He said, “I’m 24 years old and haven’t done but a handful of houses. These guys, I’m talking to are multimillionaires. Why in the world are they going to loan their money to a 24-year-old?”
I said, “So, oh, you think you’re too young?” I said, “Here’s the problem, you’re giving yourself way too much credit. No one cares who you are. No one cares or gives a damn about Mike Powell or Mitch Stephen, for that matter. All they want to know is if they don’t get paid, what’s their solution? And that solution is got to be good enough that you don’t matter.” So, and here’s a perfect example. Charles Manson when he was alive, should have been able to borrow private money because it would go like this. You’d have his face up to the bars and he’d go, “Hey, guard, guard.” And then the guard would say, “What do you want, Charlie?” He says, “I need to borrow 50,000.” The guard will say, “Hey, Charlie. Shove it where the sun don’t shine.” Says, “No. But guard, I just need $50,000, and I got a house that I’m going to give you a first lien on that’s worth 100. So if I don’t pay you, you get to get my $100,000 house.” And then you hear the guard pushed a little buzzer button say, “You know, get Charlie out of cell three and bring him down. Just don’t give him a pencil till we have our guns drawn.” You know, it wasn’t about how many people you murdered. It was about the collateral.” So I don’t even know how [inaudible 00:29:04].
Mike: So let’s talk a little bit about getting started. Where do people start at? Like, what is the, and by the way, I know we don’t, you know, we don’t pitch a lot of stuff here. You’ve got a program. We’re going to add a link down below in the show notes for people that want to learn more about your program on raising private money. But let’s just kind of get started. Just walk us through at a high level, how people start thinking about it and how they go have that conversation, consider a couple of options here. There’s a newer real estate investor that’s like, “Is it kind of a chicken or egg? Should I start raising private money before I have a deal? Or is it easier to get money after I have a deal available?” All those things.
Mitch: Well, you just asked about 27 questions?
Mike: I know. Let’s say this . . .
Mitch: No. I got it. I got it. I got it.
Mike: Let’s go back to the last thing I said. It’s there like a recency thing. Is it better to try to raise money when you have a deal that needs funded or before you ever done a deal and you’re just anticipating that you’re going to need financing at some point?
Mitch: Well, in the same scenario that I just described. The only reason Charlie could get the money was he could show you the collateral. So I think it’s easier to do it when you have the deal.
Mike:Right. I agree.
Mitch:Now, you could talk about it in hypotheticals and say, “Look, I buy houses that look like this, they’re usually worth about this much, and I usually borrow about this much. And if I don’t pay you, you get the collateral.” I mean, if you really don’t have a deal, then you could do it with hypotheticals. But it’s better to have a deal that you made a really good purchase on and that you’re . . . Because when you do hypotheticals, it is infinite. When you do a real deal, it’s finite.
Mike: I know when we first got started, we were we got our foot in the door through a friend of a friend at a bank. Now, this was when most of the banks weren’t lending for real estate investors. They thought we were evil. But we created a binder of here’s an example of our last 10 deals or something like that. They were just amazed, like, how did you buy it for that. Like, they just, they didn’t really understand our model of buying distressed houses and from distressed sellers, right? But when they saw that, and we could say, “Here’s the P&L for it, here’s what happened over and over again,” that gave us a tremendous amount of credibility, right?
So maybe the message for people that are getting started is you could give a hypothetical, but even if you’ve used hard money for a deal or two when you’re getting started, you have case studies now. I mean, that goes a long way with show . . . People want to visually see, like, “Show me a track record of when this has happened before, right?”
Mitch: Here’s better than hypothetical, just find somebody at the real estate club that did a real deal and just document the real deal. “This really happened. It happened over there on Jones Street, sir. Look, and it happened on Smith Street. And it happened on 8th Street. It happened on 23rd Street. Look, they’re all about the same . . . ” It all starts to have a theme running through it. So we invented a credibility template and a funding opportunity template, which goes a long way to this.
But I think you’ll find it interesting that not only do we have what you said, you know, you’re very enlightened. We have examples of the recent deals we’ve done, we have the one that’s on the table, but we also printed last month’s checks of everyone we wrote a check to payments, interest payments to. We just we just blacked out their name. But there’s the check number, there’s the amount, and there’s the totals. And you know, it’s like, and like you said, it gets a little easier when you have more experience.
But you know, when you saw, “Here’s all the houses and here’s what I’ve done and here’s the credibility package and this is who I am, this is where I’ve been and this is my motive and this is how it works and by the way, here’s $50,000 worth of checks I wrote on the first two people who loaned me money, and they just they’re just flipping through them one after another.” Says, “If you want to know what they add up to, it’s $50,000, okay.” And that was, you know, last month. And if you want to call some of these people, we can get you their numbers, but obviously, I’ve blacked out their names for privacy. But if you’re serious, we can get you in touch with them.
Mike: When people are getting started, Mitch, do you think that, you know, I think some people have a tendency to just assume they have to pay higher interest, and I can after have a lot of track record, but is that, I know, it’s not necessarily the case. But maybe share your thoughts. I can see . . .
Mitch: Actually it’s quite the opposite. What new people do is they run out and they offer 14% or 12% to some of these old timers, and they scare the hell out of them. I mean, the old timer says, “This is bull.”
Mike: Too good to be true, right?
Mitch: Yeah. Nobody pays 12%, I’ve been at . . . My CD’s paying me less than 1%. There’s got to be something wrong with this. So you’d be well served if you would ask your potential lender who shows an interest. And when they ask you how much you paying, you say, “I’m willing to be more than fair. I’ll even be . . . I’m willing to be fair, I’m even willing to be a little more than fair. What’s fair? I’ll give you a little more than fair.” Don’t be surprised if they say 4 or 5% or 6%.
Now, I will eventually move them up to 8% because I think once they get some trust, because I find that people that I’m paying less than 8% are still shopping for where they want to put their money really. And when they’re charging me more than 8%, I’m still shopping for a little less. It seems like right now at 8%, everybody’s just not worth it to shop. It’s not worth . . . I can get a little cheaper, but it’s not worth it for me to shop. And they could get a little more, but they like who they’re dealing with, and it’s not worth it for them to shop. So I find 8% to be a really fair number for everybody.
Mike: Yeah. That’s good. That’s good. Okay, Mitch, we’re going to wrap this up here in just a couple of minutes. But I want to get one more tip out of you that I think will be helpful for people. And I believe that you’ll agree with me here. There’s this situation that happens for people that haven’t raised private money yet. This might sound like this is really what happens, right? You go from having a hard time raising money because you don’t really know what you’re doing. There’s this learning curve to all of a sudden having the ability to raise way more money than you need, than you can apply, right? That’s a real thing, right?
They finally find somebody, they like you, they like what you’ve got to say, they’re like, “Well, great, I want to give you a million bucks,” and you’re like, “Well, I only need like 60,000 right now. Can you just put the rest in a savings account for me and keep it there until I need it?” Like, which means they won’t be getting 8%, they’re going to be getting 8% on 60,000 plus zero on the rest, right?
So talk about that situation and I know one of the ways that you can apply that money and get it put it to use is lending obviously. If they’ll allow you, you could relend it back out. But just talk about that situation and how to deal with the fact that you could go from, you know, needing private money to having way more than what you can even apply, which then sours the relationship with the person too, right?
Mitch: Happens all the time. I guess, I got people students and we’re coaching. They’re worried they can’t find the money. All of a sudden, the table completely turns 360. I don’t know how I’m going to get all this money out. What happens is everyone puts their little finger in. They just put their little finger in. They do 30,000, 40,000, 50,000. About the third month that you make a payment on time, they come with a little bit more. I’ve had this documented and even my students have said, “Wow, it’s about a three-months cycle.” Then another three months goes by you make your payments on time, they come with a bigger one. On about the ninth month that you’ve made your payments on time, if they have a mother lode, they’re fixing to dump it on you. They’ll call you up in about nine months and go, “Okay, I got 500,000 left, how can we get this out?”
Now, let me tell you though, it gets easier because your credibility keeps going up. I had a guy call me from Memphis, Tennessee, because it’s the reason why you and I . . . we do podcasts for a lot of reasons. This is one of the main reasons. A guy calls me from Memphis, Tennessee and says, “I’ve been listening to your podcast, listened to over 100 of them.” He goes, “I think you’re real because you stay consistent the whole time. Your morals don’t change. No matter where the conversation goes, you’re always in the center. And he goes, I want to talk to you about loan and private money. And he gave me a million dollars, and I’ve never met them in person in my life. I don’t . . . We finally exchanged pictures.
But, you know, that guy studied me for a long time. And then, you know, we gave him some references and that was it. After the references, I mean, if you pay people back on time and do what you say, it’s hard not to get more money because once they run out, the next question is, “Do you know someone else we can help make 8%? Do you know someone else we can help?” And they always refer you someone.
Mike: But as an investor, let’s say as a newer investor, if you don’t need a million bucks right now, you like the idea of I’ve got it ready for me but that investor, you know, they want . . . What you find is people want to keep their money busy, right? But if you can’t keep their money busy, give some suggestions to that person who’s listening right now that can go out, maybe raise money more than they need, but they can’t keep it busy, which isn’t good for the relationship either.
Mitch: You could loan it to me, and then when you need it back, I’ll give it back to you. Yeah, you know what I mean? But really, I had so much private money doing this hot real estate time where deals are more difficult to find than they’ve ever been. I have, you know, six, seven, eight million dollars that I’m just not going to go buy anything because I have the money. I’m only going to buy good deals. And if I can’t find good deals, then I will loan my money to people who found good deals before I got to them.
So I loan money to my competitors every day in San Antonio who found deals before I did, but I’d never loan more than I wish I would have bought it for because if they don’t pay, I’m going to grab the payment book, and I’m going to start paying it, and I’m going to make that house mine, you know. But my private lender will never know if the guy I loaned it to is paying or not because if he doesn’t pay, I’m going to pay.
Mike: You’re good for it. Yeah. That’s how you have to be.
Mitch: That’s how you have to be.
Mike: All you do there is you’re paying, conceptually, you’re paying your lenders 8%. You’ve talked to those lenders and they’re okay with you relending the money out because not everybody might, maybe would be, right? And even though for them, they’re still getting first lien deed of trust, I presume, right? So they still have that [inaudible 00:39:33]
Mitch: Well, they get an assignment of first lien collateral rights. In order to keep them out of the middle, and I don’t want to go into the [inaudible 00:39:39]. If there has to be a foreclosure, they don’t want to know about it. So I need to keep the money in my company’s name so my company can foreclose, and I just keep sending payments, and I’ll get the house, and I’ll deal with the house. My private lender never knows.
Mike: But they still have that asset, the underlying asset.
Mitch: Yeah. That’s the bottom line.
Mike: Yeah. And then you’re just making a spread. You’re marking it up to something higher than that, charging some points for your trouble and making money on it.
Mitch: Right. And the worst case scenario, they don’t make payments to me, I keep making payments instead of them making the payment, I make the payment, and I foreclosed on that house at a price, and it’s just another acquisition to me.
Mike: Yeah, yeah, yeah. Awesome. Well, Mitch, let’s . . . A couple more things here, tell us about Texas 100. I know something that’s important to you, just real high level of what it is, we’re going to add a link for people to learn more about it below, but maybe just a do a little plug on Texas 100 for us because I know it’s important.
Mitch: Well, there’s the sellerfinancecoalition.org the Texas Land Developers Association. Seller Finance has got a lobby on the federal level, a lobbyist on the federal level and the TDLA, Texas Land Developer Association, has a lobbyist on the state level, and they’re watchdogs, and they’re watching the proposed legislation, and you wouldn’t believe some of it. It’s like horrendous for us, and those guys got to get funded. So, you know, a lot of the heavy hitters were writing checks 50,000 a year and 30,000 a year really hard on a handful of people that were trying to keep these lobbyists going.
I decided to raise the Texas 100. I’m going to find 100 Texans who value this creative real estate industry enough and know and understand that if we’re not at the table, our business will be on the table. And so I’m trying to find 100 Texans that will commit to paying $1,000 a year for at least three years to help fund these lobbyists. But more than that, it’s going to be a great fraternity of people because there’s only a certain kind of people that volunteer for that. You know what I mean? There were higher heavier hitters. Some of the people that . . . We have 40 members right now. Some of the members that met in Austin last week had their Lear jets chilling on the tarmac till the meeting was over so they could get to where they were going. I mean, they flew in. I mean, big guys. And to be in the room with these kind of people is great. So what we’re doing is we’re just watching the legislation. We just recently kept some kinds of real estate investors from being lumped in with the banking commission, which was a big coup.
Mike: And just to give people some perspective here, this is a . . . A big part of your model is seller financing, as an entrepreneur, as a real estate investor, I do some seller financing but I haven’t done nearly as much as you but I still believe in the right to lend to people without the government involvement, people that can’t get loans otherwise, right? I mean, where there’s a . . .
Mitch: Yeah. But make no mistake. Today, it’s about seller financing. Before, you know, there was a day when they changed the laws on lease option and then before that, they’ve started messing with contract for deeds. Right now, the practice of flipping the contract may be no longer or doing subject-to-loans.
Mike: Put some pressure on assignments, yeah, subject-to’s, all that.
Mitch: And subject-to’s. But there’s a way to solve it. If they write the language right, it’ll be better for everybody including us. But you have to be aware of this. So we got to fund these lobbyists. So I’m trying to raise $100,000 a year, have a fraternity and when there’s a call to action when we need to call a senator, when we call a rep, there’s 100 of us that are kind of raising our hands saying, “Tell us what you need is who you need us to call and what we need to say to them, you know, brief us on it, and we’ll do it.”
Mike: Yeah, that’s awesome.
Mitch:It doesn’t take [inaudible 00:43:30]
Mike:So it’s a watchdog group to help real estate investors do what we do best, which is ultimately, let’s be honest here, helping other people, providing affordable housing and making neighborhoods nicer, right? Like [inaudible 00:43:42].
Mitch: That’s exactly what we had to go up there and explain because they got us pegged as a bunch of jerks until we get up there and show them what’s going on.
Mike: Yeah, absolutely. So we’re going to add a link for Texas, texas100.org. Mitch, tell me this. It’s called Texas 100. Is it only for Texans or . . . ?
Mitch: Well, no. As a matter of fact, some of the people in the bordering states and even Pennsylvania signed up because what happens is when a certain crappy law takes effect in one state, other states just start to ride the bandwagon. So you’ve got to stop them, no matter what state they’re in. That’s why the federal lobbyists is so important. And in working together with the state lobbyists, we start to hear what these people are thinking they’re going to do, and sometimes you’re going to walk and go, “No, no, no, you have no idea what you’re fixing to do to us, and you don’t know the good that we do to these communities. You need to think about something for a minute and hear us out.” And then once they hear us, they go, “Okay. I think we can carve you out of this law, or we can make an exception.” You know what I mean?
Mike: Yep, yep. Absolutely. Well, Mitch, thanks for joining us today. Good to see you, my friend.
Mitch: Thank you, man. I’m going to have on my show too soon, huh?
Mike: Yeah. I need to need to get on your show. Everybody, this was episode number 432 with Mitch Stephen. We’re going to add some links we talked about. Mitch has a course on raising private money too that’s really awesome. We’re going to link down below in the show notes for that, and to texas100.org. I’m also going to add a link, we didn’t talk about it here. But Mitch has written a few books. I’m going to add a link back to his site so you can check out his books, and I’ve read them, they’re great books, and seller financing is just a terrific model. It’s not something that I’ve done a tremendous amount of over the years. When I look back in hindsight, I wish I had done it a lot more. No doubt.
So everybody, this is episode number 432. We appreciate you. If you haven’t yet, if you could go out to iTunes or Stitcher Radio, Google Play, anywhere where you watch us at, give us a positive review or rating or subscribe if you haven’t, that’d be fantastic. We also post all of our shows on YouTube. Of course, we would like if you can watch them at flipnerd.com where we have literally over 1500 different shows and podcasts, hundreds of blogs and lots of great information there. So appreciate you guys. We’ll see you on the next show.
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