JF1241: Buy Real Estate With Little Or No Money Down with Wendy Patton
Wendy has been investing in real estate for 32 years, specializing in little to no money down options. If you’re looking for a crash course in lease options, land contracts, subject to, and others, this is the episode for you! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Wendy Patton Real Estate Background:
-Recognized world-wide as one of the most inspiring speakers on “Little or No Money Down” real estate investing.
-Orchestrating the most complete and easy to follow Lease Option & Subject To programs in the US and UK.
– she has done over 750 deals and been investing since 1985
-Focus is on creative seller financing lease options, subject tos, and land contracts (contract for deed)
-Founder of the Michigan Real Estate Investors and has been investing since she was 21 years old
-Say hi to her at https://wendypatton.com/
-Based in Detroit, Michigan
-Best Ever Book: The One Thing by Gary Keller
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff. With us today, Wendy Patton. How are you doing, Wendy?
Wendy Patton: Excellent, Joe. Thank you for having me.
Joe Fairless: My pleasure, nice to have you on the show. Wendy has done over 750 deals, and has been investing since 1985. Her focus is on creative seller financing, lease options, subject to’s and land contracts (contract for deeds). She is based in Detroit, Michigan. Wendy, with that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Wendy Patton: You bet, Joe. When I started in 1985 I was young and broke, and did not have anything saved, did not have any credit established. I wanted to get started in this investing business. I started it because my mother gave me a real estate course that she had purchased at an event, and my father said “No, we’re not gonna do that.” He was a little bit fearful of this investing world.
She gave me the course after I had graduated from college, and on my way from Colorado to Michigan I listened to the course and decided “Oh my gosh, this is what I wanna do! This is so much more exciting than my degree is in!” So I started to pursue that on top of the job that I already had, and was able to start buying properties using creative financing strategies, because like I said, I only made $10/hour and had to pay for living expenses, so I didn’t have a lot of money. Then I ended up getting married, had twins, unfortunately got divorced, so I was a single a mother for many years as well.
So I started doing these creative strategies like a land contract, where you just pay a small amount down to the seller, they finance it instead of the bank. Then I started getting into — the biggest specialty and what I’m more known for is lease options. So I was leasing properties with the option to buy them, and then subletting them with the lease option to buy them to another end buyer – what we call a sandwich lease option – and started making a boatload of money. Of course, I ended up quitting my job soon after that. That’s what I’ve done… I’ve done so many of those, Joe, over the years, and I’ve done other kinds of investing, but some of my favorite things are just those creative strategies that it takes a little bit more creativity to put together.
Now I have the money, so I also buy fix and flip, and I buy and hold… However, those creative deals are the ones that I really enjoy, because they make you think about how to structure something.
Joe Fairless: Yeah, it keeps things fresh, too.
Wendy Patton: Yeah, they’re all different.
Joe Fairless: Let’s talk about one. Will you tell us a story of one creative financing example that you’ve done?
Wendy Patton: Sure. I have this one deal, and it was a deal that — I had an ad on Craigslist, and it basically said “Company, looking for 3-4 homes for a long-term lease.” So this woman called me, she had this home, it had been listed for 189.9k on the market, and it hadn’t sold, it had just expired. So she saw my ad and decided that since it hadn’t sold, maybe she should lease it. Of course, after we talked – I have a little script that I use – she really wanted to sell it, which is what I really wanted to do, buy it.
We worked out a deal, and it kind of sounds a little bit strange, but I ended up paying 185k for it. Now mind you, with commissions she wouldn’t have received 185k; however, because of the terms she gave me – it was a real low monthly; I think I paid $1,100 a month and I had the option to buy it for three years at the 185k.
Well, I knew I could lease it for $1,495 a month, so $1,500/month, and I was able to option it to a tenant buyer who paid me 225k for that deal. So I was able to create this $40,000 spread on the purchase and the selling of something that just didn’t sell on the retail market, and had almost $400/month cashflow on that deal.
It was really kind of an interesting deal. People will say “Why would this person pay you 225k?” and I said “Well, guess what it appraised for?” It appraised for 225k or 240k, I can’t remember for sure, but it was more than what she paid for it. And it was kind of out in the country… This woman had seven dogs.
Okay, first of all, landlords are not gonna take someone with seven dogs, right?
Joe Fairless: [laughs] Right…
Wendy Patton: And she had some credit issues, so that’s why she needed something like a lease option. She just had needed a little bit of time to improve her credit, and it took her only about 18 months to do that, and then she was able to cash me out on that deal. So I’ve done lots and lots of those types of deals, with lease options.
Joe Fairless: Let’s do a summarized replay of that… I’m gonna attempt to recap what you’ve just said, just so I have it in my head clearly. Your purchase price was 185k, and you agreed to pay $1,100/month in monthly payments, and I assume you had a balloon payment too with her?
Wendy Patton: Yeah, and actually I didn’t put anything down on that one and I didn’t get any credit of the $1,100. Had I thought a little more creatively [unintelligible [00:07:24].08] to be credited, but I didn’t.
Joe Fairless: Okay, so it was $1,100 in rent then.
Wendy Patton: Yeah, I paid $1,100, it was rent; totally expense, nothing credited.
Joe Fairless: Okay, $1,100 in rent. That doesn’t go towards your purchase price, and then you have a balloon payment… And when was the balloon payment due?
Wendy Patton: Within three years.
Joe Fairless: Within three years. So basically, I’m thinking doomsday scenario, you don’t find a buyer, but you do find a tenant, and they are renting for the same amount that you’re renting it for from her, and since you have no money in, you’re breaking even… But if you can find someone who pays above that in rent, and then also agrees to a higher purchase price, then you’re making money in both of those areas.
Wendy Patton: Yeah. I didn’t really get into the full details. One of the things that the buyer did is she also gave me $10,000 down, non-refundable. So I’m not putting anything down with that seller, I’m getting this $10,000 down, so I have $10,000 in my pocket when I started this deal, on top of that cashflow. That’s the part that — even if they don’t buy, that’s what’s beautiful about a lease option; if they don’t buy, or I don’t wanna buy, or I can’t buy, I’m in control with the privilege and the right to purchase that property, but not the obligation.
And even though I have this balloon, it’s not really a balloon because that would imply maybe that I have to pay it off by that time. I have the right to buy it by that time, but I don’t have to do it. So if things tank, doomsday, we have another 2007 type of market – no problem, I can go back to the seller, renegotiate, or go back to the seller and say “You know, I’ve decided I’m not gonna exercise my lease with option to buy.”
Joe Fairless: And the $225,000 purchase price, when she was looking for 185k – is that seller financing where you’re doing the financing for it?
Wendy Patton: I actually only do a lease with an option to buy on it. So it’s not true seller financing, because I don’t even own it, and she’s not gonna own it, so I’m not technically financing it, however I kind of put it in that same bucket of creativity, where it’s almost like owner financing. I am kind of financing it for them in the short-term, until they can get their mortgage. And usually, when I get a deal from a seller, I usually will get a 3-5 years type of timeframe; that’s kind of my typical. Sometimes longer, not usually much less. But when I get my buyer time, usually I will give them between 12 and 18, maybe 24 months, depending on the situation. If they had a bankruptcy and they need that two years, or whatever their situation is, it’s kind of dependent on them, why they need that time to get a mortgage.
Sometimes they may only need six more months, and in that case I may give them nine. I’m gonna give them a few extra months of cushion on the back-end to get that done.
Joe Fairless: The appraisal is an important aspect of this, since they’re getting financing in a traditional sense… In that case, did it appraise for 225k? And if so, what happens if it didn’t?
Wendy Patton: That one actually appraised for more than 225k. And I think the reason that it can, especially when you get to these unusual properties – that one was kind of out in the country, it had 10 acres; it was a little bit unique in that regard – the appraisals are a little bit more flexible than like maybe a city consistent type of “every cookie cutter home is the same.” If it didn’t appraise, I do not have to sell; I only have to sell for 225k. The buyer may not buy if it doesn’t appraise, but I only have to sell at 225k.
Now, I could choose to go down, Joe. There have been times over the years — of course, I’ve done a lot of deals, so there have been a few times over the years where it didn’t appraise, and I’m a realtor, so I go back, I look at the comps at that time, and I might say “I agree with the appraiser”, and maybe then I will go down. I have a choice to, I don’t have to.
For me, I have kind of a philosophy that I’ve taken over these years, because I’ve been in business a long time and I feel like one of the things that became important to me was this whole rule of “Pigs get fat, hogs go to slaughter”, or “You never get hurt taking a profit”, that kind of philosophy. So if I’m still gonna make money and it’s the right thing to do to drop that price because that’s truly what it might be worth, I would reduce my price if I could still make a profit. But that doesn’t mean someone listening has to do that; they just have to sell it for what they agreed to.
Joe Fairless: Right. Will you tell us a story of another deal that you’ve done?
Wendy Patton: Sure. So that’s called a sandwich lease option. Another strategy would be what’s called a cooperative lease option. That’s kind of like wholesaling a deal. So I came across a deal recently where the seller came to me and was willing to do a lease option, however they wanted about 149k, so we’ll just call it 150k, right? And it was really only worth maybe 155k, or something like that. It was so close, and I didn’t feel like I could mark it up that much more than about 155k, because [unintelligible [00:12:36].01]
So what I did is I went in and locked it up on a lease option for the 150k, and I flipped it to a tenant buyer for 5k. But then I’m out of it. So it’s not a sandwich; I actually assigned my contract to the tenant buyer for the 150k, but they paid me 5k for it. Just like we do in wholesaling for investors, except that this is not wholesaling to an investor, it’s wholesaling to like a tenant buyer, who’s willing to pay top dollar to get terms on a property that they’re going to live in and occupy.
I’ve done lots that are like that, those little flip things. We find these deals that just don’t have enough meat on the bones, and I’m not gonna do anything like that; there’s no money in it. I can’t sandwich that, I can’t really do much with it, but I can flip it for 5k. I can do those all day long.
Joe Fairless: So when you come across a deal that the seller is looking for top dollar – or whoever is representing the seller is looking for top dollar – then this is a place where you can go, where you flip it to a tenant buyer who would then buy it directly from the seller, and they’re just assigning the rights to purchase.
Wendy Patton: You got it, exactly. It’s just there’s not enough in there. And this is a great strategy for anyone listening who is an investor, who is out scrounging for deals, they’re sourcing them and they find some deals but it’s just nothing there. We probably have turned away many deals like that, and as long as the seller is willing to do a creative thing like a lease with an option to buy for a few years out, then it’s a perfect opportunity to flip that [unintelligible [00:14:12].17]
Typically, an option fee is gonna be about 3%-5% of that purchase price. In that example, 5k, that’s just a hair over 3%, and that’s gonna be a typical deal that I can do all day long like that.
Joe Fairless: What’s the most complicated deal you’ve done?
Wendy Patton: What was complicated…?
Joe Fairless: Or just a lot of people involved, or a lot of entities, or it was just really challenging – whichever direction you wanna go with this.
Wendy Patton: I’m gonna think of one that’s just really recent… One of my most complicated ones was — I do some small development where there was a lot split, and there was a property that I was buying… I bought the property on an option, so the owner came to me and said “Hey, I’ve got this other property that’s down the road, it’s on this canal”, and our waterfront properties are fairly valuable here in Michigan.
So it was on the canal, not the main part of the lake, but number one, it wasn’t ready; I felt like it could be split, but I wanted to make, of course, the purchase subject to this split being done, and I had to go through an entire process that took about nine months where I had to do an application to the city, I had to hire a surveyor… I had to put a lot of money out on this deal without it closing.
Joe Fairless: And time.
Wendy Patton: Soil borings on it… And to make sure that — the city wanted soil borings to know what could be built and what the quality of the ground was. So it was a lot of things that I don’t normally deal in, and I learned a lot about just land development, just from this one little teeny parcel.
It ended up working out. We ended up getting the approval, we got the right to split it, and then at the last minute after it was ready to split and it got all approved – I went to all the meetings and I went in front of the township… Then the seller goes “You know, I kind of changed my mind. Maybe my son wants to buy it.” So then immediately — I have this thing called a claim of interest that gets recorded against their title… And I didn’t even tell him I was doing this; I went right to the county, recorded my claim of interest to say “Hey world, I have an interest in this property. I’ve got a purchase agreement dated such and such”, and then once I had it recorded, I came back and I called him and I said, “Hey, I just wanna let you know that we need to move forward. I think you should contact an attorney if you feel like we have a valid contract… But I have a claim of interest recorded against this, because I’ve done everything and I’ve paid all those money out and I’ve spent nine months to split this property and make it valuable.”
I think he got some legal advice, and the guy was like [unintelligible [00:16:32].02] you’re not gonna win… You might as well just sell it to Wendy.” And he did, and it worked out fine, but there was that moment of “We changed our mind.” I had a little bit of complexities in that project, and…
Joe Fairless: And some drama.
Wendy Patton: Yeah.
Joe Fairless: When he told you that, was it over the phone or e-mail, by the way?
Wendy Patton: Over the phone.
Joe Fairless: Over the phone. Let’s pretend I’m him. Wendy, I actually think a relative of mine is going to buy it, but I appreciate working with you and talking to you over the last nine months.
Wendy Patton: Okay, Joe, why did you change your mind? What happened? I thought your son didn’t wanna buy that property.
Joe Fairless: Okay, so now we’ll step out of role-playing… So I give you a reason, and then how do you end that conversation?
Wendy Patton: I’m trying to remember exactly how that call went, but I probably would have said something like “Okay, Joe, you know what? I hear what you’re saying and I need some time to digest that. Let me think through that. Can I give you a call back maybe tomorrow or the next day?”
Joe Fairless: Yup.
Wendy Patton: And then what that does is it keeps that relationship still intact, where I didn’t get angry, I didn’t get upset with him, however, I needed to go protect myself immediately with the title. Because as soon as someone starts to flake out on me and I’ve done work, I immediately go and record that, because I’ve got to protect my interest at that point. I don’t ever normally do that unless there is an issue.
Then I came back and said, “Okay, Joe, here’s the deal. I’ve really thought about it, and I just don’t feel that it’s fair. I’ve spent the last nine months doing this, and if you want to get out of the contract, then I feel like it’s only right that you pay me now what I’m going to sell those properties for.” And he goes “Well, what do you think that would be?” and I go, “Well, it’s gonna be a lot more than you sold it to me for, because now I’ve put thousands of dollars, and not including any of my time, into confirming to see if these properties are even splittable. And now what they’re worth is two lots, not one, because of the work I did. So if you’d like to buy me out, then you could. Would you wanna do that?”
And of course, he had no idea what they were gonna be worth, and when I told him what they were gonna be worth, he said “Wow, that’s a lot”, and I said, “Well yeah, that’s why I wanted to do that. I went through this whole process.” And we ended up closing on it, but it was a little bit risky there for a minute. I was a little bit worried for a little bit; I was like, “Oh man, I just did all that work…”
Joe Fairless: Oh, I bet. Yeah, nine months, that’s a long time and that’s a lot of money. How did you know what to do with the county to push that through for the split?
Wendy Patton: Well, normally when you’re gonna do anything that’s gonna be a split or land development, you kind of start with the city first – and that one really was through just the city – where I would go to them… I actually usually go in or call the assessor first, or whoever in that particular — in Michigan it’s the assessor’s office, they’re the ones that go out and value land and properties. I would call them and just say “Hey, I’ve got this property. Here’s the property ID number, the address (or whatever it is). I think it might be splittable, and I just kind of wanna know if you think it might be; if you could tell me the process over the phone or if you can tell by looking at your aerial overlays… Is that a possibility that it could be divided?” I’ve done quite a few of those, too.
So I just ask, and then they might say, “Well, this is what you need to do first.” “Okay, what is that? The application? Okay.” And then of course [unintelligible [00:19:45].20] soil borings, which was kind of unusual. Some cities, they’ll want perc test on it, if it’s gonna be a septic area… It depends on where you live. I kind of live on the North part of Metro Detroit, so 5-10 minutes North of me is gonna be all septic fields and bigger parcels, and then just South of me is going to be your normal lots in the city, with your city water and sewer, normal subdivisions. So they kind of look at both.
Joe Fairless: All-in, how much did you pay, and then how much did you sell it for?
Wendy Patton: I can remember my profit, because I 1031-exchanged it…
Joe Fairless: Okay, what was your profit?
Wendy Patton: It was 70k on them. For a little deal. I think we paid maybe 70k, or something… It must have been like 64k, because I probably had 5k of closing stuff, and the fees and stuff in there.
Joe Fairless: What did you 1031 into?
Wendy Patton: I 1031-ed into another property up in Northern Michigan.
Joe Fairless: What’s that deal?
Wendy Patton: It’s a lot on a golf course where we thought we would build our summer home. We put it into the company first, because it was an LLC, and then we thought that later, if we end up converting it, then we’ll do it, but we probably aren’t going to now. So we’re probably going to sell that property, or 1031 exchange it back down somewhere closer to something else; I just don’t know what it’ll be, but I’ll probably put it into more of an income-generating asset.
We just thought “Well, if we built something up there, we can rent it, we can use it a little bit…” We were just exploring that whole idea, and that’s what we thought we would do.
Joe Fairless: Based on your experience, what is your best real estate investing advice ever?
Wendy Patton: There’s a couple things, not just one thing. Number one, of course, get started immediately. Get as educated as you can. One of my biggest things I always tell investors that are wanting to get started, I say “Look, it’s not easy, it does take a lot of hard work, but it will pay off in the long-run if you just do it, and you do it persistently and consistently.”
Turn off the TV at night; stop watching that crap. You’re filling your mind with negative stuff. Spend your evenings listening to podcasts like this, to positive motivational things, reading, educating yourself, calling sellers, whatever it is… Especially if you have a full-time job. I think it’s that whole changing your mindset, and have some really strong goals that you’re gonna go after.
So it’s not necessarily all the real estate stuff. Actually, to me I would say the mindset is the most important thing. It’s changing your thinking first, because real estate is — yeah, you learn about real estate, you wanna learn about the techniques; all that stuff is great, but to me, the biggest thing that ever held me back was I didn’t think that I should make more than 100k or 200k/year. I actually had an issue with that, and from the very beginning I thought, “Well, money is the root of all evil” and all that stuff. I think everyone has these types of things that hold them back.
Yesterday afternoon I was mentoring one of the agents in my office. He was saying that he has been living at the poverty level for 15 years, but he’s brilliant. And I said, “Well, why are you living at the poverty level?” and he said “Because I think it’s this message I got when I was a kid, that I would never amount to much.” And I’m like, “Well, when are you gonna change that? I’ll help you. Let’s work on this right now. Because if you don’t change that mindset, you never will amount to much as far as income goes.” Anyways, I could go on for hours on that whole topic.
Joe Fairless: I hear you. It’s the foundation of what we must have.
Wendy Patton: Yeah. I was in a seminar last week and one of the speakers said a teenager or a kid has thousands of thoughts that go through their minds, and 80% of them are negative. But when you’re older, it’s even higher. “Am I good enough? Am I gonna amount to enough?” So it’s kind of like changing that whole mindset… And I’m not so much a ‘rah-rah-rah-rah’, it’s just that I do believe there is so much truth in that, that I have to always combat that negativity coming into our lives, or those naysayers that are saying…
My father, in the beginning he was like “Oh my god, I cannot believe you’re leaving your corporate job. Are you crazy? You have retirement, you have 401k, you have health benefits. Why would you do that? You went to college for this.” Then now, he’s 87 years old and he’s my biggest cheerleader in the entire Universe. He’s like, “Oh my god, my daughter Wendy!” He’s really cool.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Wendy Patton: Sure.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Wendy, what’s the best ever book you’ve read?
Wendy Patton: I like The One Thing by Gary Keller. It keeps you focused and on track.
Joe Fairless: Best ever deal you’ve done?
Wendy Patton: Best ever deal I’ve done… I just did one this year in my IRA; I bought this property for $200,000 out of my IRA down, I borrowed from another IRA to fund it because I already had properties in my IRA and I didn’t have the cash in there, and it’s a deal that will net me about 90k tax-free in my Roth. So there you go.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Wendy Patton: I made a lot of mistakes over the years. I think one of my biggest mistakes, Joe, was back in the downturn I was speculating in Florida and other places, speculating on future appreciation instead of investing on current numbers and watching the data in the market.
Joe Fairless: Best ever way you like to give back?
Wendy Patton: I run the Michigan real estate investors group and I absolutely love that, because that gives me the opportunity to help hundreds of people locally learn to do the techniques that I made so much money at over the years. I love that.
Joe Fairless: And how can the Best Ever listeners get in touch with you?
Wendy Patton: I would say go to my website, WendyPatton.com. It’s got my office phone number, I’ve got some free giveaways on there… I would go there to check out a little bit more about what it is that I do and what I offer.
Joe Fairless: Wendy, thank you for being on the show and educating me and perhaps some Best Ever listeners on creative strategies. You truly did deliver on what you said you were focused on, and that’s creative financing. We’ve talked about three different structures, or creative deal-making, perhaps… And that’s the sandwich lease option, the co-op lease option and the lot split.
The lessons learned along the way with each of those three, with the lot split in particular, having the moment of drama where you then had to go get a claim of interest recorded on the property, and just knowing to do that. I wouldn’t know to do that. I would be talking to people like you, certainly, if I came across that situation, and say “Hey, what do I need to do here? Can you please help me out?” So that’s why we have this podcast – for Best Ever listeners who perhaps come across situations like that, then we know “Okay, if I have a contract but someone’s trying to back out”, then claim of interest – get it recorded.
So those types of things, and then just your overall approach… I’m really grateful that you were on the show and shared that with us. Thanks for being on the show, Wendy. I hope you have a best ever day, and we’ll talk to you soon.
Wendy Patton: Thanks, Joe.