JF1652: How To Complete 100 Creative Financing Deals In 3 Years with Zach Beach
Sometimes getting creative is necessary to make a deal work. Zach and the company he works with, only do creative deals, or as he says they buy on terms. He has three primary creative financing strategies; lease purchase, owner financing, and subject-to. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Zach Beach Real Estate Background:
- Successful real estate investor
- Has completed over 100 deals in under 3 years, buying and selling properties without using any of his own cash, credit, or investors’ money
- Based in Newport, RI
- Say hi to him at www.freesrecbook.com
- Best Ever Book: Surrender Experiment
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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 of that fluffy stuff.
With us today, Zach Beach. How are you doing, Zach?
Zach Beach: I am excellent, Joe. Thanks for having me on, I look forward to bringing your audience some value and keeping everything moving forward. Hopefully I’ve got some really great advice for you guys.
Joe Fairless: Well, you’ve set the bar so high, I appreciate that. I normally like to set the bar really low and then just kind of go right underneath the bar, or maybe right over it, but I love it. Alright, the bar’s high, you’re gonna bring a lot of value, looking forward to this.
A little bit about Zach – he completed over 100 deals in under three years, buying and selling properties without using his own cash, credit, or investors’ money. Based in Newport, Rhode Island. With that being said, Zach, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Zach Beach: Yeah, I’d love to. Just to bring some big picture to it as well, when I first joined real estate I had no experience at all. I actually joined my family’s business, where we actually buy and sell properties locally in Southern New England, but we also coach and teach people exactly how to do exactly what we do around the country as well, so we immerse ourselves in other people’s business and help them grow and scale that.
But yeah, when I started, when I was 25, I knew absolutely nothing. I didn’t come from a family that had real estate, although I did end up marrying into a family that was heavily involved in real estate, and that’s kind of how I got involved. Then looking three years ahead, I’ve done – of course, with all the credit to my team and the associates that I work with – well over 100 deals now, in less than three years. I’ll be full-time real estate in April of this year.
Joe Fairless: Wow. Well, congratulations on that. That’s a big milestone for sure, for being full-time. When you say you’ve completed over 100 deals in under three years, buying and selling properties without using your own cash, credit or investor money, my guess is that you’re wholesaling deals. Is that correct?
Zach Beach: That is not correct, no. What I meant by it – I’ll be full-time three years this upcoming April.
Joe Fairless: Oh, cool. Good. Well, three years congratulations then.
Zach Beach: Thanks, Joe. I appreciate it. So no, I’m not a wholesaler, although in my family business we buy and sell property on terms… So either lease-purchase, owner financing, or subject to deals. Then we do have other creative ways of getting deals done, but those are usually our three main focuses right there.
Joe Fairless: Alright, say that a little bit slower for me, so I can write down… Lease-purchase, owner finance, or subject to?
Zach Beach: Yeah, correct.
Joe Fairless: Cool. Let’s talk about each of them.
Zach Beach: Yeah, of course. I can always slow down for you. [laughter] I thought you were from New England…
Joe Fairless: Well, I’m from Texas, so there’s why I can’t keep up; nah, I’m kidding. But I usually type pretty fast, so — I heard them correctly: lease-purchase, owner finance, subject to… Let’s talk about an example deal that you’ve done recently for each of these, so we can be educated on the pros and cons for each. Lease-purchase, let’s start with that.
Zach Beach: Lease-purchase just means that you’re agreeing upon a price with a seller today. Typically, we’ll then take over any and all responsibilities of that property for a period of time, and then on or before a specific date I will cash them out. The really simple way to keep this is we’re gonna have like a net lease, where we put little to no money down, a net lease, and then a definitive date of purchase.
Joe Fairless: Cool. And do you have an example of a deal that this happened on recently?
Zach Beach: Sure, I’d be more than happy to give you plenty examples. We can just keep it super-simple though, so let’s say if you agreed upon a price with a seller for, say, $200,000, and they had a $50,000 mortgage on the property, you would be locking in $150,000 worth of equity right from the beginning, and then I would take over whatever their monthly payments are.
Let’s say PITI (principal, interest, taxes and insurance) is equal to $1,000 – we’ll take over that, and then on or before a specific date I will then pay off the remaining balance on the mortgage, and give them their equity that we locked in at the beginning of $150,000.
Joe Fairless: Let’s just do an example for each of the three, and then we’ll talk about pros and cons for each, and when you use them. Owner finance – pretty straightforward, but please, just elaborate on what it is and an example.
Zach Beach: Sure, so we actually do things slightly different than maybe your audience is used to hearing. When we do owner-financing deals, again, we’re coming in with little to no money down. We are typically tying up the property at full market value; we’ll then close on it. The seller will hold the mortgage. These typically range anywhere from, say, 3 to 10 years on average is our length of term; we then construct principal-only payments, which we’ll then be paying principal-only payments with a balloon date on or before whatever end date we agree upon.
Joe Fairless: And maybe an example of a deal you’ve done recently under owner finance?
Zach Beach: Sure. Recently we did a deal up here on the South Coast of Massachusetts. We closed on a house at $940,000, we then constructed a deal where we were gonna be paying the owner $2,500/month that was coming directly off the note, for 48 months, and then on or before that end date we’re then going to — whatever his bank credited, we’ll then pay that balloon to that property.
I think the important part to this too is – and we can get to it on how we actually make money and sell these; I’m only talking about how we’re buying them right now, which may kind of full-circle this around to why this makes sense and why we do this… But yeah, so that’s $2,500/month for 48 months; then we would just pay off the remaining balloon at that time.
Joe Fairless: And then subject to?
Zach Beach: A subject to deal – typically we’ll buy it subject to the existing loan. I know you can combine owner financing and subject to deals, but just to keep it super-simple on how we do it… Typically, we’re buying a property subject to if they’re selling basically for what they owe. Say the market is saying it’s worth $250,000, they owe $250,000 – we’ll then just close on it. We’ll typically pay just the closing costs, and then we will take title, but the mortgage will stay in the seller’s name.
What then we’ll do is we will have a long-term deal there where we’re waiting for the principal, the paydown, and the market to increase, that way eventually there’s a spread and we can sell the property.
Joe Fairless: So the market has to appreciate in value in order for the subject-to deal to work?
Zach Beach: The way we sell properties is we sell them to our rent-to-own program. We actually are able to sell the property at a premium, because somebody’s gonna need time… But ideally, on a subject to deal, it’s gonna be a long-term deal, so that way we can have the principal on the mortgage paid down, and then have the market appreciate and there’ll be a nice spread. But even if the market stays relatively flat, because we sell it through our rent-to-own program, we are gonna be able to create a spread right off the bat.
Joe Fairless: Now let’s take a giant step back and look at the three different approaches – lease-purchase, owner finance and subject to. Assuming that we know how to do each of the three, which you’ve just explained what they are, and some examples – how do you know when to implement each one?
Zach Beach: Yeah, great question. Just a quick rule of thumb would be if there’s a mortgage on a property and the seller has equity in it, it’s simply gonna be a lease-purchase deal, because we’re gonna take over the mortgage. If there’s a free and clear property, that’s when I would be implementing the owner financing, even though we may be able to do the lease-purchase as well… But if it’s free and clear, I’m always aiming for an owner financing deal.
Then the subject to deal – it would make the most sense if you’re buying the property at roughly about what the seller owes, and there’s little to no equity in it.
Joe Fairless: And how do you make money with the subject to? I know the component of what needs to happen, because we just talked about that, but where does the big profit come into play for you on a subject to?
Zach Beach: Again, we’ll sell it on a long-term rent to own. The profit – we actually make three paydays, and this is how we get paid on each one of these deals. So we’re gonna get paid from the non-refundable deposit that comes in from our tenant buyer. A tenant buyer tends to be someone who is looking to become a homeowner, they just need some time in order to become mortgage-ready… So someone who’s self-employed, or had a legitimate hiccup in their credit. They’ll come in with a non-refundable deposit, which is going to be above and beyond what we bought the property for, so we’re able to sell it at a premium.
Payday number two is gonna be the difference between what we have to pay – either the mortgage or the seller – and what we can get for a monthly rent payment. Then payday number three is when the property actually gets cashed out, when the tenant buyer becomes the homeowner. That will happen from the premium that we put on the house – there’s usually an additional premium left over from the original non-refundable deposit – and the principal paydown on the property. Because if you kind of caught what I said before – we’re locking in the seller’s equity today; obviously, on the mortgage, it is gonna pay down throughout the term, which we’re gonna get that benefit. So on the back-end, when it sells, we get that premium as well.
Joe Fairless: The rent payment that your rent-to-own person is paying – does that go towards their principal balance whenever they go to exercise their option to purchase?
Zach Beach: No, it does not. The only thing that counts towards the actual purchase price is going to be their non-refundable deposit, which we usually collect anywhere from 3% to 10% down, but not every buyer is gonna have, say, 10% down… So what we’ll do is throughout their lease term – we will schedule additional payments, which will count towards the purchase price. Because ideally, I wanna get the buyer up to about 10% for them to be able to get into the best programs, not just any program to get a mortgage. And then also, I would love it if they didn’t have to come to the table with additional money.
Joe Fairless: And how long are the loans usually?
Zach Beach: Our typical timeframe for a lease-purchase is gonna be anywhere from, say, 12 to 30 months.
Joe Fairless: What percent of those don’t exercise their option to purchase and just walk away?
Zach Beach: Yeah, so obviously there’s a couple things we can do to bring down that percentage, but I would say about 10%.
Joe Fairless: That’s pretty low. That’s lower than I thought it would be.
Zach Beach: We have a very predictable process to put these buyers through, and we constantly are innovating our process… Because I know there’s a bunch of people out there that are doing rent-to-owns and they don’t really care if they buyer ever cashes out. That’s the opposite of how we approach this. We’re a family business, and we typically sell to families, so we’re always looking to constantly innovate and increase that number of people that are successful.
We bring them through a very strict vetting process. We will never place anybody in a property that we didn’t truly thing was gonna get to the finish line, and then we always make sure that they have legitimate steps in place that if they do A, B and C, they will become a homeowner.
Joe Fairless: When you have a property that you’re acquiring through one of these three methods, you obviously need someone who does not have good credit, but can qualify and improve their credit, and be a customer of yours… So how do you attract those individuals?
Zach Beach: We’re attracting those individuals by different marketing concepts that we do. It’s roughly about 80% of the market nationally that cannot walk into a bank and get a loan, so you’re talking about a very significant piece of the market. It’s definitely an overlooked niche on which we focus on… So finding buyers typically isn’t the issue. Now, don’t get me wrong, out of that 80% I was talking about, maybe 20% of those are real, qualified people that we would wanna stick in the house… But as you can imagine, that market is just significantly bigger than someone that can actually walk into a bank and get a loan today. So finding buyers typically isn’t the problem.
Joe Fairless: Based on your experience as a real estate investor, what’s your best real estate investing advice ever?
Zach Beach: I would say don’t sign personally. We have created this entire business around the fact that my father-in-law Chris actually got hit in ’08, and now we just don’t want that to ever happen again, especially with an up and down economy, and a real estate market that can be volatile at times. So don’t ever sign personally, and don’t use your own credit if you don’t have to either. And if you can avoid using other investors’ money, certainly do your best to do so, even though I know that there are definitely positions where that is 100% valuable. But if you can avoid doing any of those, then you’re taking away some major risk if the market does fall out again.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Zach Beach: I love it, let’s do it!
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve recently read?
Zach Beach: The Surrender Experiment.
Joe Fairless: Oh, what’s that about?
Zach Beach: It’s Michael Singer, who’s the CEO of WebMD. He talks a lot about meditation; I don’t know if that’s something that you’re into, but it’s all about surrendering to the Universe, and instead of placing your own desires and wants and trying to control everything, to almost surrender and allow things to happen around you and be more present.
Joe Fairless: Best ever deal you’ve done?
Zach Beach: The best ever deal I’ve done is a property that we have in Connecticut, where we did an owner financing deal; $1,000 principal-only payments on it, 48-month term… Had an additional one-bedroom unit over the garage that we rented as well, so not only do we have a great lease-purchase deal going on on the main house, but we’ve also got some additional cashflow coming in from another piece of the property, and that should equal us well over six figures. But the best thing about that was that we were able to help out a seller that had a legitimate need that other people couldn’t necessarily fulfill, and he had a wonderful family, so I’m just happy that everything’s working out.
Joe Fairless: What’s a mistake you’ve made on a transaction recently?
Zach Beach: I always like to go back to it… My biggest mistake is definitely on a transaction — maybe not recently, but my first deal, which was almost three years ago. I didn’t do enough vetting process, so as soon as we actually took over the property we actually had to de-let it and it cost over $30,000.
Joe Fairless: You had to what?
Zach Beach: De-let the property.
Joe Fairless: De-let it, okay.
Zach Beach: Yeah. I didn’t do enough due diligence, so that was 100% my fault, but being young and early in the game, I was trying to prove myself, and sometimes you make mistakes when you’re trying to go too fast.
Joe Fairless: Best ever way you like to give back?
Zach Beach: I donate a part of each one of my checks to the Purple Project, which was created by Chris Herren, who used to be an ex Boston Celtics. It’s all about helping people that are coming off of drugs.
Joe Fairless: How can the Best Ever listeners learn more about what you’ve got going on?
Zach Beach: I’d love to give you our free Amazon best-selling book, and I mean free. I’m not asking you for shipping or handling. It’s actually by my father-in-law, Chris. It’s at freesrecbook.com. Enjoy it. It’s a best-selling Amazon book, and there’s tons and tons of great advice in there.
Joe Fairless: Well, I enjoyed our conversation. Because I’m not doing subject to and lease-purchases, I always need a refresher, and you certainly gave me a refresher, and perhaps some Best Ever listeners who are focused on the single-family home stuff, three really valuable tools to use whenever you’re looking at opportunities.
I love that you talked about when each circumstance comes into play. For lease-purchase, if there’s a mortgage on the property and the seller has equity, then usually a lease-purchase. If it’s free and clear, then usually owner financing, and if you’re buying it for what the seller owes on it, then usually subject to. I’m sure we could do an episode on each of the three in detail, with ins and outs of them, but you gave us a great overview and I’m grateful for that.
I appreciate your expertise, I appreciate you sharing your advice with us. I hope you have a best ever day, and we’ll talk to you soon.
Zach Beach: Thanks, Joe.