JF2226: 7 Figure Flipping With Brad Smotherman
Brad Smotherman is a full-time real estate investor with a 7-figure flipping business and 11 years of experience. He started as a realtor at 17 years old after finishing highschool and he saw how the successful realtors started to struggle after the 2008 crash and he quickly decided that he did want to deal with that himself in the future when he was near retirement so he decided to pivot to focus on investments. His long term goal is to become the bank and own all of his properties on paper through owner financing.
Brad Smotherman Real Estate Background:
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“Focus on your mindset first to make sure you are ready and willing to pay the cost of success” – Brad Smotherman
Theo Hicks: Hello, best ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today we’ll be speaking with Brad Smotherman. Brad, how are you doing today?
Brad Smotherman: Very good, Theo. I appreciate you having me on.
Theo Hicks: Absolutely. And thanks for taking the time to speak with us today. A little bit about Brad. He’s a full-time real estate investor who owns a 7-figure flipping business. He has 11 years of real estate investing experience, and he’s completed 550 transactions, with a focus on flipping. He is based in Nashville, Tennessee, and you can say hi to him at his website, which is https://www.bradsmotherman.com/.
Brad, do you mind telling us a little bit more about your background and what you’re focused on today?
Brad Smotherman: Certainly. I got involved in real estate when I was 17 years old. I woke up one morning and decided to get my real estate license. Now, Theo, I have no idea what made me do that. I didn’t go to bed thinking about real estate, but I woke up and I was like, “Well, I’ll do this.” And I was just finishing high school, so I got my real estate license. I sold real estate through college. That worked out extremely well until the crash happened.
What I saw in middle of the real estate collapse was that the real estate agents that I knew that had done extremely well in 2004, 2005 and 2006, had once again began to struggle. I didn’t want to do that in my 50s and 60s. The people that I saw that weathered the storm the best, were the people that had long term assets with long term cash flow, so I decided, well, I’ve really got to become an investor some way, somehow.
In 2010, I retired my real estate license to do investment. From that point, we went from startup to success to scale, and at this point, we’ve bought in 21 states and we’ve had a lot of fun doing so. That’s kind of a recap of my previous 15 years.
Theo Hicks: What is your focus now?
Brad Smotherman: In terms of the focus, a lot of what we do now is we create owner finance notes. We’re buying creatively, we’re selling with owner financing, we get a down payment, we get a note, and then we get cash flow in the interim.
Theo Hicks: You’re buying properties and then you’re fixing them up, and then you’re selling them to people using owner financing, so you’re basically a lender in that case?
Brad Smotherman: Yeah, we’re becoming the bank. And my long term goal is to own most of my net worth in paper. I have this idea that property equals problems and liability. If I owned everything in a file cabinet, which was my notes and deeds of trust or my notes and mortgages, then I’d be extremely happy. But one caveat there, we don’t really fix the properties. Whenever we’re doing owner financing, one thing that I found is that there’s more money in financing than in fixing. If we look at the tallest building in any major city, I have yet to see the tallest building in a major city be a construction company. But I’ve certainly almost always seen it be a finance company, either a bank or an insurance company. We’re trying to get more into the interest income and the note side of the business versus owning property and fixing property.
Theo Hicks: Okay. Do you buy just straight up notes too or are you just focusing on this right now, where you buy the property and then do owner financing?
Brad Smotherman: Yeah, I’m not really much on buying notes. The reason for that is, it’s really cash-intensive. Whenever we’re creating notes, we’re able to do that with very little cash in the deal, and that just makes it to where our yield is, I hate to say the word obscene, but we have very, very high yields on our notes because we keep cash out of the deal. Whenever we understand negotiation deal structure, then we can do these kinds of things that are pretty high level.
Theo Hicks: Can you walk us through an example of one of these deals?
Brad Smotherman: Sure. Certainly. My first deal ever, and I still remember when the lead came in because this was August of 2010… A very hot day, gas was $4 a gallon, I barely had money to put gas in my truck, I had a Dodge Ram at the time, and for those of you guys that are pickup truck owners, you know what I’m talking about.
I still remember the lead came in and I thought, “Gosh, I just don’t want to deal with this person.” I’d had eight months of failure. I hadn’t bought a house, and I was just really struggling. But then I checked my commitment. I was like, “Okay, well, Brad, you wanted to do this business, and you quit accounting to do this business. So let’s go do this business.” The voicemail was not unlike any other, just a basic, “Hey, I have a house I need to sell. Call me back.” I called him back, set the appointment, it was a divorce situation.
Here’s kind of the numbers behind it. In first position on this deal, the sellers owed $97,000. And they were 100% fine with me taking over payments on that 97k. What I did before I closed on the deal—and there was no walk away. The purchase price was $97,000, and what was owed was $97,000, so they weren’t getting any cash at closing.
Before I closed it, I turned around and I marketed the houses with owner financing, and I sold the house for $135,000 with $20,000 down. In this scenario, the $20,000 cash went to me as a down payment and then I had roughly an $18,000 note at closing, which was the difference in what the buyers owed and what was in first position. So that $18,000 note threw off about $400 per month. That was my first deal. That’s not really uncommon in terms of deals that we do today.
Theo Hicks: One thing I’m confused—so where did that $18,000 number come from?
Brad Smotherman: $135,000 is what I sold the house for, we got $20,000 down that left 115. The $115,000 that the buyer still owed is all-inclusive of the $97,000 first mortgage. The difference there 115 and 97 is the $18,000 note profit that we had. That was money that was owed to me.
Theo Hicks: I got it. Basically, the person who bought the house gave you 20 grand, and the payments they gave you, most of that went to paying the seller financing that you had. And then the difference between what the person you found was paying and what you owed to the seller was your $400 a month.
Brad Smotherman: Ballparking it, yes, that’s correct.
Theo Hicks: Okay, perfect. This is essentially what you do full-time now – you will find homes, that you’ll buy them at seller financing and then resell that house to someone else.
Brad Smotherman: Correct. 70% of our purchases are still done even today with some kind of built-in financing from our seller. And then at that point, we have options. We can either sell the house with owner financing, but we can retail out if we choose.
Theo Hicks: Okay, so the two things I want to focus on here then is one, how are you finding these deals? And then two, after we answer that question, I want to talk about how you’re finding these buyers.
Brad Smotherman: And that’s a great question. In terms of finding the deals, it’s really market-specific. To put it in perspective in terms of a scale, I bought in Pittsburgh, Pennsylvania, and I bought in Dallas, Fort Worth. What worked in one market really didn’t work in another. That’s why I’m really kind of against this one size fits all kind of marketing strategy, because it really depends on number one, what is someone’s goal? Number two, how much time do they have? How much capital do they have to invest in their marketing machine? And then also, what’s the demographics of that market?
When you look at Pittsburgh versus Dallas, Fort Worth, you see that they’re exceptionally different markets. One is highly appreciating, one is not. One is a different price point than the other. What I found across my career is that marketing is really market-specific.
The short answer on how do we find the deals is it really depends on the market and what we’re doing at the time. In terms of finding the buyers, it’s really interesting. Depending on the month—and it really depends, but depending on the month, between 10 and 25 percent of the buyers in the overall market that are applying for mortgages are denied. That means that roughly between 10 and 25 percent of the overall buyer pool for real estate right now need owner financing. And that’s a big number, guys.
Whenever I looked at the numbers in Nashville—my home market is Nashville, but we bought all over the place. But the last time that I checked in Nashville, there were 2700 houses on the market on the MLS. That’s supposed to service, let’s say, 90% of the buyers. Well, I think you’d be pretty hard-pressed to find five houses that are offered with owner financing that are supposedly supposed to service the other 10% of buyers that need owner financing. As we can see, there’s a big disparity in the supply-demand curve when it comes to these markets.
When we come to finding buyers, we can generally within two or three weeks, sell a house with owner financing just based off of Facebook marketplace, and really, Craigslist.
Theo Hicks: Let us know the messaging you include in those Facebook marketplace and Craigslist ads.
Brad Smotherman: One of the questions that I often get is are we just offering owner financing and just trying to create a buyer’s list, or are we selling the property and offering specifics on the property?
One thing that’s different than wholesaling – in the wholesaling model, you build a buyer’s list and those buyers generally they stay in the market. I’ve been buying and selling real estate for almost 11 years now. Just like me, there are other people that have been doing it for a decade or longer and so they’re constantly in that market, right?
The owner-finance buyer pool is a little bit different, because they’re constantly either in the market or out. What I mean by that is, if someone is at the end of their lease, and they’re thinking about, “Well, do I want to buy a house or do I want to sign up another lease?” then they have maybe a two or three-month window there, where they’re looking at “Well, what are we going to do with this situation?”
So if I’m marketing a house with owner financing today, which is in let’s just say, July, that buyer pool is going to be different than October, because there’s people that were interested in July that have either signed the lease or they bought something. It’s a constantly changing market. It’s a little bit different than the wholesaling model, if that makes sense.
Theo Hicks: If you were listing it right now, what would you say?
Brad Smotherman: In terms of what?
Theo Hicks: On your Craigslist and Facebook marketplace add.
Brad Smotherman: We’re going to market the house. So owner financing, must sell [unintelligible [00:12:50].08], three-bedroom, two baths, has a big yard or needs work or whatever the interesting thing is about that house. You’ll have probably 20 to 30 inquiries a day off of Facebook Marketplace. If you’re doing this, it becomes a little bit difficult to manage the lead flow from the buyers. But we’re going to market the property, the specifics of the property, the terms of the deal. We kind of go through an FAQ, Frequently Asked Questions, based on owner financing, and we want to drive traffic to the house.
Once people are in front of the house, they know that they have to have a down payment, they know the price, they’ve seen the area and they’ve seen the exterior. Then at that point, we’re comfortable in terms of speaking with someone, getting them inside the property. If they want it, then we’ll set an in-person interview to see if they qualify for the loan.
Theo Hicks: Okay. I want to circle back to how you’re finding these deals. I know you said it depends on the goal, the time, the money, the demographic. Can you just maybe give us an example of how you found some of the more recent deals you’ve done?
Brad Smotherman: Yeah, and the thing is that there’s a big difference in push versus pull marketing. There was a point where we were mailing out roughly 70,000 yellow letters a month. It got to where the effectiveness of that medium really collapsed. Most of what we’re doing now is online, so either YouTube, Facebook or Google ads. It’s a big difference whenever someone contacts us for us to buy something, versus we’re contacting someone hoping that they’ll sell something, like direct mail has been in the past few years.
A lot of what we do is PPC, whether it’s Google ads or its Facebook marketing, but we want to be in a position where people are contacting us because they have a problem, versus we’re interrupting their pattern and putting them in a position where maybe they contact us because a lot of the people from the direct mail world in terms of the sellers, they think they’ve hit the lottery, because they just got this handwritten letter that says, “Well, somebody is interested in buying my property all cash, and they haven’t seen it, and I’m probably the only person that they mailed this to.” Right?
We want to be in a position where we have motivated people that have a problem that we can solve, versus being in a position where we’re chasing people… Because that really completely destroys the negotiation frame.
Theo Hicks: What does your team look like? Is it just you or do you have other people on your team who are helping you with this process?
Brad Smotherman: Now, I’ve pretty well delegated myself out of a job. I have a controller, I have an acquisition person, a disposition person, a marketing manager, and assistant, a bookkeeper, a construction manager, and we have a couple of other just VAs and that kind of thing. We have a, I wouldn’t say a big team; I’d say actually, frankly, we’re pretty lean based on what we’re doing, but I do have help. It’s kind of to the point—it’s been a long time that we bought and sold houses that I’ve never personally seen. But now it’s getting to the point where we’re buying and selling houses I don’t know about, and that’s kind of a fun and scary position to be in. But we have a pretty good team in terms of creating what we’re creating.
Theo Hicks: Looking at the first example – you bought the house for 97k, no money down, and then you sold it for 135k with 20k down. How long are these people typically holding on to the house? What happens when they sell? Are you done at that point, once you’ve sold it the first time, or do you have involvement on the backend when they decide to sell the house?
Brad Smotherman: That’s a good question. In terms of our paper that we create, we look at it and say, well, either the people are going to default, or pay us off within five years. And that’s held pretty well across our career. In terms of how are we involved after the sale – we’re not involved when it comes to vacancy and repair like a rental. And that’s a big reason why I want to own notes and not rentals is, I get out of vacancy and repair. So I don’t have tenants and toilets and that kind of thing.
Now, the one thing that we do is we service the paper. We have a payment coming in, we have a payment that goes out to the underlying, and we manage that process. And whenever the buyer that we have in place gets ready to either refinance or pay the loan off, then we have to generate a payoff. So kind of the conversation comes it’s like XYZ title company calls in and says, “Hey, we need to pay off on 123 Main Street, can you get us a payoff?” So we send the payoff in and wiring instructions so that they can wire in the payoff, and that’s kind of how that works.
Theo Hicks: Do you have any prepayment penalties if they pay off before five years?
Brad Smotherman: That’s a great question. We don’t do prepayment penalties and we don’t do balloons in general. We have 30 year amortized notes. On some of those notes, we’re going to have rising interest rates and some of them are going to be fixed.
Theo Hicks: Okay, Brad, what is your best real estate investing advice ever?
Brad Smotherman: It’s a couple of things. I’m going to go from a macro and then a micro perspective. On the macro perspective, we have to focus on our mindset first, to make sure that we’re ready and willing to do this business. It is an amazing business. It can absolutely change your life, but we have to be ready and willing to pay the price that that success entails.
On the micro perspective, marketing is an investment, it’s not a cost. If we can change our mind on that, and focus on our marketing and lead gen – it’s a lead gen business, and if you’re able to effectively lead generate, it makes the rest of the world a lot easier.
Theo Hicks: Okay, Brad, are ready for the best ever lightning round?
Brad Smotherman: Sounds like fun, man. Let’s do it.
Theo Hicks: Okay.
Theo Hicks: Okay, Brad, what is the best ever book you’ve recently read?
Brad Smotherman: I think 12 Rules for Life by Jordan Peterson.
Theo Hicks: If your business were to collapse today, what would you do next?
Brad Smotherman: That’s a really great question. Whenever it comes to being proficient in something, once you’re proficient in something, it never really leaves you. Let’s say I was dropped in a market that I’ve never been in before, and all of my assets and everything is taken away – I’m going to continue doing what we’re doing. And that’s three things – we lead generate, we negotiate and we deal-structure, and that creates a lot of profitability.
Theo Hicks: Tell me about a time where you’ve lost money on one of these deals. If so, how much did you lose? What lesson did you learn?
Brad Smotherman: There was a time when I decided I was going to do some land development. I bought a piece of land and I really had an amazing deal. The land was bought well, in a great location. I had it engineered well, we got through planning everything, and then it came down to the county engineer decided he didn’t want this much density, even though the zoning allowed for it.
I went to litigator attorney, and he said, “Brad, you will win this, but it’ll cost you 100k, and three and a half, maybe four years.” I decided that cost really didn’t make sense. We ended up having to go with half the lots that we had been promised on the front end. That makes profitability pretty difficult, because your fixed costs are the same. I was in a situation where we ended up losing money, maybe 30 or so thousand dollars on that.
Theo Hicks: What about the deal you made the most money on?
Brad Smotherman: Oh, man. That’s tough to say. I bought a property for 70,000 one time and we sold it for 245k as is. That’s the first one that comes to mind. We may have something better, I’m not sure, but that’s the one that we were able to catch it at the right time. I would say probably that one in terms of what’s top of mind awareness.
Theo Hicks: What is the best ever way you like to give back?
Brad Smotherman: I get a lot of gratification in helping others do these kinds of transactions. So helping others do these kinds of deals, especially deals that they didn’t know existed before, is really gratifying for me.
Theo Hicks: Lastly, what’s the best ever place to reach you?
Brad Smotherman: Yeah, for those that are interested in me, you can check me out on my podcast Investor Creator, or you can email me directly, firstname.lastname@example.org.
Theo Hicks: Perfect, Brad Thanks for joining us today and talking about this very creative strategy. I personally had not heard of this before. Basically, you’re buying properties from distressed owners via seller financing, and then you’re reselling them to someone else via seller financing and then you get paid with the difference between those two notes plus whatever downpayment you get from the buyer. Very interesting.
You walked us through a sample deal, your first deal that you did in August 2020, where you bought the property for literally no money down, and then you resold it and you made $20,000 from that downpayment plus a couple hundred dollars per month in interest from that loan.
We talked about how you are able to find the type of seller financing deals, you mentioned it is very market-specific. You don’t believe in the one size fits all marketing approaches. It depends on what the person’s goal is, it depends on how much time they have, how much money they have and how the demographic is.
And you mentioned how you used to send out a bunch of direct mailers, but you don’t really like that; you’d rather have people contacting you that have a problem, as opposed to people thinking that they’ve hit the lottery by you sending this letter. And so now you focus on YouTube, Facebook and Google ads, more specifically, the pay per click type.
And then once you have that deal, you mentioned how you’re finding the buyers. I like the way you mathematically broke it down and said that 10% to 20% of buyers in the market applying for mortgages are denied, which means that their only other option is seller financing. So if you look at the MLS, all those houses are servicing 75% to 90% of the buyers, but not many properties are servicing the other 10% to 25% of people who need seller financing. So you said that supply and demand is way off there. So that’s definitely a need you identified.
You mentioned how to find these buyers is with Facebook Marketplace and Craigslist ads. And again, you walked us through the fact that for these types of deals, the buyer is either in the market or out of the market, so there’s really small window to track these people. So just like on the front end, how you find these buyers is also depend on the time of the year. But you gave us an example of whenever you are creating a marketing piece in say July, you talk about the house, you talked about the term of the deal, you have a FAQ for questions they might have about owner financing. And then you mentioned how you’ve got basically five-year terms when they’re paid off or default. You don’t do any prepayment or balloons. And you kind of broke down that you have different members on your team that allow you to delegate everything.
And then your best ever advice; macro, was to focus on the mindset to make sure you’re ready and willing to pay the price of success, and you’re ready for that. And then on a micro perspective, you want people to realize that marketing is an investment and not a cost.
Again, Brad, I really appreciate you coming on the show. Best ever listeners, as always, thank you for listening. Have a best ever day and I’ll talk to you tomorrow.
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