JF1450: Why Lease An Office Space When You Can Own The Building? With Shiloh Lundahl

Shiloh is a therapist and real estate investor. When he needed a new office space, rather than lease, he found an office building to buy and put tenants in. He also has a lot of lease option properties as an investor. Shiloh breaks down exactly how he structures his lease options and tells us how he’s grown his investing business to where it is today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Shiloh Lundahl Real Estate Background:

  • Child and family therapist and real estate investor
  • Started investing in 2010 with one SFR
  • Now focuses on lease options and owns over 50 units
  • Based in Gilbert, AZ
  • Say hi to him at www.blueequities.com
  • Best Ever Book: Richest Man in Babylon

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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, Shiloh Lundahl. How are you doing, Shiloh?

Shiloh Lundahl: I’m doing pretty good.

Joe Fairless: Well, I’m glad to hear that, and so am I. I’m looking forward to our conversation. Shiloh is a child and family therapist, and he’s also a real estate investor. He started investing in 2010 with one single-family rental, and now focuses on lease options and owns over 50 units. Based in Gilbert, Arizona. With that being said, Shiloh, will you give the Best Ever listeners just a little bit more about your background and your current focus?

Shiloh Lundahl: Sure. As you said, back in 2010 is when we got our first rental property. We moved to Arizona in about 2008, after I got my masters degree in social work; we moved down here, and I’ve been working as a therapist ever since.

We moved during the downturn in the market, and so we were able to get our own homes for a pretty decent price, and then a couple years later the homes around us – there were so many foreclosures… And I had a friend of mine who was a real estate agent at the time, and I was listening a lot to the Rich Dad, Poor Dad series… So I told my buddy that I wanted to buy a rental.

We were looking around our neighborhood and we purchased this property out in — it was a place called San Tan Valley, in Arizona. That’s kind of how we got started back in 2010… But then I didn’t do anything else until 2014, when I came into real estate. The practice that I have is based out of Mesa, Arizona, and the building in which I have my practice – it came up on the market; the owner had passed away, and his widow was selling the building, so I approached her (or her realtor) and asked if I could buy the building.

I ended up purchasing the building that I have my practice out of, now I rent it out to 11 other therapists, and myself.

Joe Fairless: Wow. Did you buy that outright, just traditionally?

Shiloh Lundahl: Yeah, I did but it… It was a traditional purchase. But because I also have my practice here, I got an owner occupy loan, and then I had a family member that helped me with the down payment for the building… So that’s kind of how I got the down payment for the building. Then I was able to actually purchase it with that.

Joe Fairless: So you said there are — how many offices? Did you say 11 other offices in that building?

Shiloh Lundahl: Yeah, we have 12 offices and a group room. I have one of the offices, and then there’s 11 other therapists that I rent out to.

Joe Fairless: Okay. What year was this when you bought it?

Shiloh Lundahl: It was back in 2014.

Joe Fairless: 2014. How many other offices at the time, in 2014, were occupied?

Shiloh Lundahl: When I bought the building, it was split into two different suites. On the suite where the therapists were at, there were six offices. So when I bought the building, I built out the other side. There was already five offices, and then just an open space, so I kind of closed off that office space and made a large group room, and then I converted the kitchen into another office. So at the beginning there were six, and then I was able to make 12 out of it.

Joe Fairless: That’s an incredible value-add play and vision, because it’s clearly worked out for you. In 2014 when it was on the market, you mentioned there were six offices, were the other five occupied with tenants?

Shiloh Lundahl: Yes. The six therapists on the one side… And I knew that when I purchase the building, what I wanted to do was I wanted to build out the other side and fill it with other therapists… So before I actually closed on the building, I had talked with a lot of other therapists that wanted to come over and be part of our group, and then I was able to fill all the office spaces even before I closed.

I closed at the beginning of November, I had the contractor come in over a two-week period of time in the evenings, and they rehabbed that other side, and then by the 15th of November, I had all 12 offices filled.

Joe Fairless: Wow. That’s incredible… You’re just going through the playbook of what to do on a commercial transaction, value-add play, and I’d like to recap some of this, either in a little bit or at the very end of our conversation, and I will… But I asked if there were other residents in those offices because – and you said there were – and I asked that because they also had the opportunity to do what you’re doing, but they did not. And I’m not pointing fingers at anyone, I’m just making an observation that you chose to act on it and actually purchase it – and not only purchase it, but you then did the value-add play, where you talked to other therapists, recruited them over, got them filled up, and then were doing some construction.

So you not only had the foresight to see the vision, but then you started executing on it in advance… What gave you the confidence to do that?

Shiloh Lundahl: It’s interesting… At the time I knew that I wanted to be here in this building, and when the other side was empty, I thought “Man, I really don’t want a dentist office going into the other side and then setting up a room on the other side of my wall, where they’re drilling teeth while I’m doing a therapy session. I don’t want them to be definitely interrupting the environment”, so I felt kind of a need to have one of us buy the building.

I talked to some of the other therapists, but they just weren’t in a position that they were able to do it… And I was able to do it, so I structured my finances and things in a certain way to where I was able to get a loan and purchase the building.

The other people – they had the opportunity, but my personality is that of if I want something, I go and I figure out a way to make it happen, and that’s kind of what happened with the building.

Joe Fairless: It sounds like you saw a danger in what could take place, so you didn’t want to put your business in a vulnerable position where you got people getting their teeth drilled on right next door, so that pushed you to action.

Have you seen that take place in your other endeavors as you’ve progressed in real estate, where you saw that you might be in a tight spot if you didn’t take action, so then you did?

Shiloh Lundahl: Well, I don’t know so much that exactly, but as soon as I got the building, it really kind of ignited this real estate bug inside of me… So I ran across my Rich Dad, Poor Dad audios again at the time, and I listened to those, and I thought “Man, why did I ever stop investing in real estate before?”

Then I contacted my buddy who helped me get that original property and I said “Hey, I wanna do another deal with you.”

So in 2015 he and I started doing deals together, and we ended up doing three in 2015… So there was just something that — again, I saw that opportunity and I just started to take action. Connecting with my buddy was great, because he had a lot more experience than me. So we did that in 2015, and then in 2016 I ended up doing a year-long education program – one of those expensive programs, but it really kind of helped me… And I think that my personality really worked well with doing a program like that, because it gave me more confidence. Then in 2016 my buddy and I – we ended up doing seven deals, where we did six flips and one buy and hold.

Then in 2017 we switched our model over to a lease option model. Then in 2017 we got 23 deals, and then we kept 17 of them to do lease options.

So far this year we’ve done another eight that we’re doing lease options on. So we definitely switched our model, from doing — I got the commercial building, and then I went into doing flips, we saw the margin getting smaller on the flips, so then we switched over to doing the lease option model, and we’ve been doing that ever since. That model has been fantastic for us.

Joe Fairless: How much per deal were you making on flips, compared to a lease option?

Shiloh Lundahl: In 2016, with the six flips that we did, we netted about 95k each. That is maybe about 15k or so per flip. Now the lease option — it’s a longer play; it’s a 3-5 year play, but my buddy and I each make probably I would say on average between 30k and 40k on each lease option deal. And it’s also more tax beneficial to do it this way, that doing it the flip way.

Joe Fairless: Because it spreads it out…

Shiloh Lundahl: Well, it spreads it out, we don’t have to play short-term capital gains…

Joe Fairless: Right.

Shiloh Lundahl: We’re able to fake depreciation, and then at the end we’re able to take that; when they exercise the option, we can take that and we can do a 1031 exchange into another property and delay our taxes possibly inevitably.

Joe Fairless: How do you structure it with the person who’s leasing it from you?

Shiloh Lundahl: Our model is we go and we find a property that we can have our all-in be less than $140,000. That means the purchase and the rehab. We want that 140k to be 75% or less of the market value.

What that does is it gives us an opportunity to have that 25% equity; we can go to a bank and we can refinance the property. In a lot of these situations we’ve been able to take out the majority, if not all of our money into the property.

So that’s how  we get the property – we find it, and then sometimes we advertise it on the MLS, or Craigslist; we advertise that we have a lease option property, and a lot of people don’t know what a lease option property is, so what we’ve done is we’ve created this little video that I have up on my website, and we’ll send people there so they can actually watch the videos. It’s like four-minute little cartoon videos on what a lease option is.

People will be interested — sometimes they’ll call us just because they wanna rent, and we’re like “Well, we’re actually looking for end buyers”, and then we explain it, then they’ll go watch the video, and if they’re interested, they’ll give us a call back, and then they’ll come in with a $3,900 fee to purchase the option in order to get into the property.

Then they’re able to get into the property, and then we connect them with a mortgage broker a year or so into it, where they can go and they can start rebuilding their credit, so that they can purchase the property within that time period, whether it’s five years or four years or three years. And then they’re just paying rent during that time – we don’t do any credit backs, or anything like that… But they’re paying that time, they’re paying down our mortgage, and then we actually sell the property for about 5%-7% higher than the current market value, because we know that prices tend to go up due to appreciation… So by the time they go to buy it, they can actually buy the property for a little bit less than what current market value is… So they’re happy about that, we’re happy because we got a good tenant in there the entire time, they paid down the mortgage… So it really works out for everybody really well.

Joe Fairless: Thank you for walking through that. You just did the play-by-play for how to structure a lease option. That $3,900 fee that they originally pay – is that applied towards their principal?

Shiloh Lundahl: It is not, and it’s not for a couple of reasons… One is they’re paying for an option to purchase the property. Just like if you were to go to the stock market and you buy an option – you don’t actually buy the stocks; you buy an option to buy the stocks. If the stock goes up, then hey, that’s great, I can still buy the stock for this price. Or with a put option, if the stock goes down, you can still buy it for that price that you’ve determined… It’s the same with this house – they buy the option to buy the house for that specific amount.

Now, some people might say “Well, can we have this worked into the price of the property?” and what we say is “We’ve already adjusted it for that, so the price of the property is actually $3,900 more than what you’re buying it for, so we’re just taking that off and we’re agreeing to this price.” So that’s what we do.

Joe Fairless: How long is the option?

Shiloh Lundahl: Last year we did five-year options. This year we’re doing four-year options, and the next year we’re doing three-year options, so that in the year 2022 we’ll have a lot of these options coming due the same year, and then we can go and we can kind of group them together and do some 1031 exchanges into larger properties, with them being grouped together.

Joe Fairless: What would be a red flag for a prospective buyer to get into a lease option where you don’t think that they would qualify in, say, three years to actually exercise?

Shiloh Lundahl: Somebody comes in and they say “I can’t really come up with that $3,900 right up front. Can I divide that out into a couple different months?” That to me says that this person is having a hard time being able to take care of their finances where they don’t have some sort of emergency fund or savings… So they may not be the best fit for one of our properties. That’s a red flag.

Then we also do a credit check. We look to see “Okay, if they can just go and buy their own property right now, why is it they wanna do a lease option?” Is it that their credit is bad, or maybe they just started a business, so they’re not able to get a regular loan right now. So we look at their credit to see where that is, and then we ask “Well, are they able to take care of some of these things the next two years, so that they can purchase the property?” And then are there any felonies or anything like that that may prohibit them from getting a loan?

So we’re looking at all of those things to see if they were to be connected with one of our loan brokers (or whoever), would they be able to work with them in order to get them ready to buy the property.

Joe Fairless: How many do you have right now that are with lease options?

Shiloh Lundahl: We have currently 20 lease options going on right now.

Joe Fairless: Wow… What’s that like from a paperwork standpoint?

Shiloh Lundahl: I have two assistants that work for me, and they just work hourly… But when I did that year-long training program, one of the things that my coach said over and over again is “Shiloh, if you’re gonna get bigger in this, you need to get an assistant. You need to get an assistant.” Every single week when I talked to him, he said “Do you have an assistant? Do you have an assistant?” And it’s absolutely true.

As a therapist, I get paid pretty well per session. I don’t do insurance, I just charge a fee for service, and taking my time out from meeting with families, which is one thing that I’m really good at, to go and do some smaller tasks of meeting with a prospective tenant, and things like that – it’s not very wise money-wise or time-wise… So having these assistants that are able to go and meet with the clients, and they do better with the paperwork, and they keep track of all of the rent when it comes in, they put it in a spreadsheet and everything like that… So really, they’re doing a good majority of that.

Basically, over the last 2-3 years I’ve kind of built this system where I have my realtor who’s my partner in most of these deals, and then I have my two assistants, and he has an assistant, and then we have a contractor that we’ve used many times… So I’m able to do most of my real estate over the phone.

Joe Fairless: The assistants – in total, what do you think is the monthly expense for their time?

Shiloh Lundahl: Good question. I would say maybe $1,000, maybe $1,500, depending on how much time they’re actually spending… But I’ve built that into some of the rents, and then also that’s not just for my real estate businesses. They do the paperwork for my counseling business, and for the building, and several other things that I have going on… And actually, they help me with a lot of other things.

I work in Arizona, but I live half the week in California with my family, and then I just travel back and forth… So I’m only in Arizona about half the week, so if I need my car taken in to go to the shop, then I just call my assistant, she goes, she takes it in, she gets it taken care of, and then she brings it back to me.

So when I’m in Arizona, I’m working all the time, and I have my assistants doing all of the different things that I need done. So part of it is real estate, part of it is personal, part of it is my counseling practice.

Joe Fairless: Looking at the average profits per deal, $30,000/deal…

Shiloh Lundahl: Now, that’s $30,000 for me and $30,000 for my partner.

Joe Fairless: Right, I’m with you. So 30k for you, per deal… And that 15k/flip was also for you… So about 30k/deal, spread out over five years, that’s $6,000/year on average. How much of that is front-loaded and how much is backloaded?

Shiloh Lundahl: I would say most of it is gonna come in on the backend. We get cashflow from each of our properties, but the cashflow that we get is not a whole lot. So it might be 100 for me and 100 for my partner — and actually, we do bring people in on deals like this… What will happen is let’s say we have a property that we wanna do. We go and we get a hard money lender that will come in and they’ll pay for the majority of the purchase price.

Then an investor that kind of wants to learn our system will have them come in and they pay for the rehab… And then we’re showing him how we took  down the property, how we determined it was gonna be  a good property, and then we show him our whole system from start to finish, and then at the end, when we go and we get a long-term loan, we are then paying back the hard money lender and the private money lender… And the private money lender is happy because they get 10% return on their money — or 10% APR, I should say, return on their money… And then they get the whole experience of learning about it.

So that’s one way that we partner with people… But then on the back-end, let’s say we have a property that still has maybe 10k or 15k of our own money into it, and it’s only leveraged about 70%… We might bring somebody in on the back-end and do a second position note on that property, for maybe 10k or 15k. We’re able to suck out our money and leverage the property up to maybe about 80%, and then that other person just gets passive income… And then they also get to learn the system that we’re using if they’d like…

So the cashflow might be 100 for me, 100 for my partner, and then maybe 100 for this second position investor. So the cashflow isn’t really big per property, but at the end when they go to exercise the option, they’re paying for the closing costs, they’ve been paying down the mortgage on the property, and that’s when we get that big $60,000 profit that then is split between my partner and I.

Joe Fairless: Got it down to a system, that’s for darn sure. It’s impressive how you think about it. How much did you invest in your education during that year program?

Shiloh Lundahl: We invested  — this was my wife and I… Actually, it’s a funny story… So I go to  a three-day Rich Dad, Poor Dad seminar and I come home and I say to my wife, “Hey sweetie, I wanna do this program; it costs about 40k”, and she’s like “No.” I said, “Okay.”

Joe Fairless: [laughs] “Next. What do you wanna have for dinner?”

Shiloh Lundahl: Yeah. And then we do a flip and we lose about 5k on it, and then she goes to a three-day training, and she comes back and says “Honey, I signed us up for this $40,000 program.” So it wasn’t the Rich Dad, Poor Dad one, but it was another program that she signed us up for…

Joe Fairless: Wow… [laughs] Which one was it?

Shiloh Lundahl: It was called Advanced Real Estate Education. That was the one that we did.

Joe Fairless: It’s very vague-sounding.

Shiloh Lundahl: It was… Well, it was interesting, because it was actually several different funnels to one program… I think the one funnel that we went through was called The Success Path, and the Advanced Real Estate Education was like a bigger one…

Now, it just really kind of worked well with my personality. My personality isn’t so much “read something in a book and then go and do it.” My personality is “Go and talk with people and mingle with people and hear what they’re doing, and spend time with them, and then I can go do it.” That’s just me.

So it was $40,000, but then we paid $25,000 for a coach, and then we also paid a $5,000 package in order to get more funding, and things like that… It really did help with the funding. We had about $200,000 available to us when we started, and then at the end we had about $800,000 available, as I was working with banks and all of these different avenues… So all of that was really helpful for me; it worked well with my personality.

There’s a lot of other people that paid the money that are not nearly as successful as we are with it, but that’s because of their personality. I think that paying for education can be helpful if you work it. I think a lot of people will pay and then they just expect the program to give them things… It was just something that opened my mind to — at the beginning, I thought I’m gonna do four deals a year; going through the education program, I realized I can really do 20 deals or more a year… So the next year we did do 23 deals, and now my partner and I are thinking about doing maybe about 15 deals a year, just adding to our portfolio.

Joe Fairless: The individuals who paid for the $40,000 program but they did not get the ROI, because in your words, they didn’t — well, I don’t know exactly what you said, but you said it worked well for your personality… What about their personality didn’t make the return on investment a good one?

Shiloh Lundahl: Well, I guess looking at it in terms of — if you buy a gym membership, and there are gym memberships that are $10, there are gym memberships that are $40, there are gym memberships that are $100+/month… So it isn’t so much the — how do I put it…? You can pay $100 for a gym membership, and that might even include a personal trainer here and there. But if you don’t go to the gym, and if you don’t work with that personal trainer and if you don’t have goals like “This is what I’m gonna do” and then go there day after day and work towards meeting those goals, then it doesn’t matter how much your gym membership is, you’re not gonna get the results you want.

So for me, doing that program gave me an opportunity to start, and then I just kept going, and as much information they would give me, I would listen to, I would read up on… Or they would say “Go and try this. Go and call our Craigslist ads and see if anybody wants to sell the property”, so I went and I did that. It says “Go and connect with other realtors in your area”, so I went and I did that. “Go to the REIA meetings in your area”, so I went and I did that. I did all of these things that they encouraged me to do.

Joe Fairless: Others weren’t?

Shiloh Lundahl: Yeah, and I think that’s the thing. Other people may have hang-ups of calling people out of the blue and going through the scripts of how to talk to somebody, and how to talk about “Hey, do you rent? Are you buying?”, and all of these questions – a lot of people have that hesitation towards talking to people.

I think my personality plus my profession gave me a little bit more of an advantage of feeling more comfortable talking to people… Because I meet people every day that I’ve never before, and in a short period of time they’re talking to me about everything that’s going on in their life. I think that may have given me more of an advantage over others.

Joe Fairless: It certainly did, and — holy cow, someone invests $40,000 in a program and they don’t wanna make these phone calls that the program says… I just wanna shake them, like “What are you doing?! Call, pick up the phone! Here, I’ll dial a person for you! Call someone! This is the process that’s proven.” Well, this is human nature; it’s just how people are.

What is your best real estate investing advice ever?

Shiloh Lundahl: Good question. I guess my best advice would be to just do it. Go, learn what you can, and then partner with somebody who knows what they’re doing; that’s the biggest thing. There are a lot of people that really know how to do it. Go up to them, take them out to lunch and say “Hey, you know what? I’d really like to know what you’re doing. I’d like to start, I’d like to maybe do a deal with you”, and then when you say that, it’s likely that they’re gonna say “Well, I already have systems in place”, and then you say to them “Here, can I fund your next deal?” So that’s the biggest thing.

My partner and I, we do a lot of real estate not using a lot of our own money now, but at the beginning we had to use a lot of our own money to get started.

If you don’t have much money to start, what I would suggest is go and take control of your finances and start saving. The best book on that is gonna be The Richest Man in Babylon – great book, that will teach you how to start. Start saving, pay yourself 10% first; then you start building that nest egg, you have a little nest egg, and then you go and you say “Hey, I wanna help out… What can I do? I have this money, how can I get started?”

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Shiloh Lundahl: I’m ready.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:26:05].00] to [00:27:08].16]

Joe Fairless: Best ever deal you’ve done?

Shiloh Lundahl: The best ever deal I’ve done was actually a recent one… It’s kind of a funky deal. We saw this one on the MLS, it was a manufactured home out in a place called Apache Junction, which historically has been looked at as a place that you wouldn’t wanna live, in the Phoenix valley. It’s way on the outskirts, it’s kind of in that area that people thought wasn’t very good.

We found this manufactured home on this acre and a quarter, that was being sold with the lot next to it, and it was kind of a probate kind of deal. We really wanted it, so we called up the realtor who was selling it, and he said “Well, I already have some offers on it.” They were selling it for 160k, and we said “Well, we really want this property and we’d like you to represent us.” Even though my partner is a realtor, we said “We’d like you to be the realtor on the deal and just kind of let us know what we should come in at.”

He said, “Well, I think that if you were to put in an offer for 170k you’d be a pretty good candidate.” So we put in the offer for 170k, they accepted our offer… And then on the lot next to it, it had two dilapidated houses… So we go over, and during the inspection period we had a plumber come over and take a look at the plumbing; the plumbing was bad on one of the dilapidated houses, so we go back to the seller and we renegotiated down to 160k. Then as soon as we closed on the property, we already had people that wanted to do lease options with us, and I had other people that wanted to invest with us… So we partnered with an investor as a private money lender; they came in, put 10k into fixing up the manufactured home, we brought somebody else in to buy the home at 195k, we put the other lot on the MLS, and we sold that for 105k.

We took the 105k, we paid down the hard money down to like 64k, plus we had the investor come in with 74k… So that whole deal – we were able to get the person to buy the property for 195k, and our all-in was about 74k. So we just did that.

It was a manufactured home out in an area that people thought was not very good… So that was one of our sweetest deals over the last year.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Shiloh Lundahl: We’ve made lots and lots of mistakes. One of the recent mistakes that we’ve made is we bought a property, and then when the contractor came in to redo some of the plumbing in the house, he’s like “We can’t find where to turn on the plumbing from outside.” It turns out there was no plumbing built to the house… So that was a problem.

Joe Fairless: Details… [laughs]

Shiloh Lundahl: Yeah, we bought it  without making sure that there was plumbing to the house, so now we had to go to the neighbor and do a well agreement with the neighbor in order to get water to the house, and that was an extra 13k+ and about two months in work… On that deal, my partner and I were each supposed to make about 50k on the deal, so we’re each gonna make maybe 40k instead. So it’s still gonna be a good deal, but that was one of our mistakes.

Joe Fairless: Best ever way you like to give back?

Shiloh Lundahl: I grew up being raised by a single mom, and my grandfather was a doctor… So one of the things that he said that he did was he would provide some of his services at a discounted rate to some families that have a hard time paying for it… So one of the things that I do to give back is I give single moms a discounted rate on therapy, because I remember growing up how there were some difficulties there financially for us… So that’s one of the ways that I give back, by doing the discounted rate for single moms.

Joe Fairless: How can the Best Ever listeners get in touch with you and learn more about what you’ve got going on?

Shiloh Lundahl: They can come to my website, which is blueequities.com. They can get to know me a little bit there. I also do blog posts on Bigger Pockets, so they can find me out there [unintelligible [00:30:58].17] And I have my phone number there, they can give me a call and reach out to me in that way.

Joe Fairless: Well, thank you so much for being on the show… You really did a crash course on lease options. It was really kind of two separate conversations, and I love it, because we learned two separate things. One is the commercial property that you bought, and what you did to add value to it. By the way, what did you buy it for and what’s it worth now?

Shiloh Lundahl: I bought it for 515k, I put about 35k into it. Recently we got an appraisal, but the appraisal that we got came in way lower than I think that it should have… It came in at 615k. But the rents that I get monthly are about $8,500/month. So if you were to just look at it in terms of a cap rate, we’ve got a cap rate of maybe 7% or 8%. It’d be worth about 700k or 750k. My guess is it’s more worth that today.

Joe Fairless: And you’re not paying rent to someone else. Other people are paying your mortgage, actually.

Shiloh Lundahl: It cash-flows pretty well. It’s definitely my best cash-flowing property, and it’s great because I can choose who I want to come into our group… There was some turnover at the beginning, and it was kind of tough for some of the people that were here at the beginning, but since then, it’s been great. I have awesome people that I work with, and it’s just been a great, great purchase.

Joe Fairless: Well, that, and then a lease options crash course, so thanks so much for being on the show. I’m really grateful that you talked to us about both of those aspects of your business and what you’re working on. I hope you have a best ever day, and we’ll talk to you soon.

Shiloh Lundahl: Thanks so much, Joe. I really appreciate you having me on your show.


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Best Real Estate Investing Advice Ever Show Podcast

JF1029: Making Money With Delinquent Loans

From buying judgement liens to buying distressed mortgage notes, Jay and his partners specialize in bad debt.  If you want to know how to make money in a less popular area of investing, pay attention to what Jay says!  As a previous debt collection attorney for 20 years, he knows a thing or two about distressed assets.

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Jay Tenenbaum real estate background:
-Managing Director at AZP Capital, full-service real estate investment firm
-After closing the law practice, he started investing in judgment liens with a focus on real property
-Company has now bought 211 assets in 3 years
-Was a practicing debt collection attorney for 20 years in Southern California
-Based in Gilbert, Arizona
-Say hi to him at 714.458.6317 or www.azpcapital.com
-Best Ever Book: Lifeonaire

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Joe Fairless: Best Ever listeners, 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 fluff.

With us today – Jay Tenenbaum. How are you doing, Jay?

Jay Tenenbaum: I’m great, thank you.

Joe Fairless: Nice to have you on the show. A little bit about Jay – he is at AZP Capital. His company now bought 211 assets in about three years. Prior to this, he was practicing debt collection attorney in Southern California. He is based right now in Gilbert, Arizona. With that being said, Jay, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jay Tenenbaum: Sure. So I first started as a debt collection attorney from 1990 to 2008. I was in law practice with my wife; we closed the practice in 2008, and fortunately the marriage survived… We’re happily married for almost 27 years now. From there, I transitioned into buying judgment liens in California and executing on the real property, at which point in time that turned into an opportunity to start buying distressed mortgage notes. That was August 2013… So I’ve said — you know, I’ve been “in debt” most of my life; not personally, just in the debt field. This segue, the transition into notes was just chasing a different debt instrument, from  debt collection to judgment liens to notes.

Joe Fairless: Buying judgment liens and executing on the real property – can you elaborate on that for anyone who’s not familiar with what that means?

Jay Tenenbaum: What happens is somewhere along the lines we were buying judgments that were originated from unsecured credit cards; some other attorney had sued the card holder on the defaulted credit card. A lien was attached to their real property that they owned, and most attorneys just let it sit as a dormant, passive collection effort where if the credit card holder goes to refinance or sell the property, then the judgment lien has to be paid off.

What we did is there is a provision in California – most states have a similar procedure – where you can ask the court to sell the property. Not at foreclosure per se, but a remedy that’s more formal, more involuntary than just waiting for the passive opportunity.

Joe Fairless: You made a lot of friends doing that, didn’t you?

Jay Tenenbaum: [laughs] I did and I didn’t… We didn’t sell a whole lot of properties because we just got a lot of payoffs; we weren’t looking to take anybody’s house, we were just looking to get paid off. In that time, especially with some of the older borrowers, I turned them on to some lending sources, including reverse mortgages, and got their lien paid off…

My style has always been one of treating a borrower or a credit card holder etc. with dignity and respect, and I did that in my debt collection space, I did that in the judgment lien space, I do that with my borrowers down in the mortgage space.

Joe Fairless: So then you transitioned from that to buying distressed mortgage notes in August 2013. Can you give a summary of that business model?

Jay Tenenbaum: Sure. You’re buying defaulted mortgage notes from banks to hedge funds, in one-offs (one at a time or [unintelligible [00:05:39].16] pools). Our business model is we’re buying notes that the borrower still lives in the property. We are then working really hard to keep the borrower in the home and work out a load mod. As a private investor, we don’t have the bureaucracy, the red tape to approve a loan mod, or nearly require the extensive amount of paperwork to apply.

Joe Fairless: And you make money in which ways? Because I know there’s a variety of ways.

Jay Tenenbaum: You make money indeed in a variety of ways. You’re buying the assets at 30-40 cents on the dollar, you are then [unintelligible [00:06:09].16] cash flow right away when you’re doing a loan mod with a borrower. Thereafter, after the payments are seasoned a little bit, you’re either able to resell the performing loan to another investor who likes performing loans, or you can encourage the borrower to refinance the property and pay you off.

That’s just one exit strategy, and there’s a variety of strategies in the note business. That’s just one with regards to a borrower that’s in an occupied property, who’s committed to working out a solution.

Joe Fairless: What are a couple others, and then we’ll transition into what you’re doing now?

Jay Tenenbaum: Sure, Joe. I have approached borrowers and said, “Okay, I bought the loan (let’s say) for $20,000 and you owe $80,000. I’ll accept a short payoff.” The property value is probably worth 50k. FHA has got a program where you can get refinanced out at 97% of the value, so even though the property was in the water, I got a check for $50,000 on a $20,000 investment, taking a haircut on what I call “Monopoly money”, because the unpaid balance is higher than the value; it’s just Monopoly money anywhere.

A borrower who just says, “Look, I can’t afford the property anymore” will give you a [unintelligible [00:07:16].27] foreclosure. Now you’ve got an REO to dispose of, fix and flip it or wholesale it, or even we do a lot of seller financing in the REO side of our portfolio.

Invariably, you may have to foreclose if the borrower doesn’t want to cooperate… That’s then the enforcing reality. That’s to name a few…

Joe Fairless: Yeah, that’s good. Thank you for that. Now let’s talk about what you’re doing – how are you making right now?

Jay Tenenbaum: Well, we make money — like I said, we bought 211 assets; we still manage probably around 120, of which about over a third of that portfolio is performing.

Joe Fairless: Okay, I’m sorry… So you’re  buying distressed mortgage notes still. I thought you transitioned out of that and transitioned into something else. So this is what you’re doing right now.

Jay Tenenbaum: Exactly.

Joe Fairless: Cool. So you’ve bought 211 assets. Were they distressed at the time, most of them?

Jay Tenenbaum: Yes.

Joe Fairless: Okay. How do you know which distressed asset to buy and which one to stay away from?

Jay Tenenbaum: Good question. It’s all about your due diligence. You will get a spreadsheet from a bank or a hedge fund that could have 15 assets on it. It could have 100 assets on it. What we do is we just initially make the general filters, meaning we wanna buy occupied – that’s kind of our primary criteria, because of our core business model. We wanna buy single-family residences, one to four units. Typically, we stay away from condos, mobile homes, land, things like that.

We wanna be in our favorite target markets, which is typically the Midwest and the South – Ohio, Indiana, Michigan, Alabama, the Carolinas…

Joe Fairless: Why those areas?

Jay Tenenbaum: Good question. We bought in 24 different states, because we buy occupied assets and get cash from anyone; it really didn’t matter what state the greenback was coming from. But to really do this well, you’ve gotta build your teams around 5-6 target markets. The Midwest and the South are the areas where primarily you see a  lot of inventory on a regular basis; you get your better values. Like I said, I’m buying assets at 30-40 cents on the dollar.

In California, for example, you’d be buying assets at 80-90 cents on the dollar. Florida is okay, there’s still some value in Florida somewhere, but mostly your (what we call) non-judicial states where foreclosures are faster and the prices are higher… So you’ve gotta foreclose in those states that I’ve mentioned. You’re doing it by a traditional closure lawsuit, which may take up to a year in certain instances, but you’re getting good value, plus we work really hard with the borrowers to keep them in their homes, so we’re still foreclosing on less than a third of our portfolio.

Joe Fairless: Okay. Occupied single-family, 1-4 units, South and Midwest… What else to determine if it’s a distressed note that you wanna buy versus a distressed note that you don’t?

Jay Tenenbaum: Again, if you’re really starting to look granularly into that, you’re looking at values of the properties… We’ve cut our teeth on what we call the lower value stuff, where the houses are around 50k. But you don’t really wanna buy — you can pick up a 20k house for probably 5k or less. We’ve done well with that stuff, but that’s where you’re getting in kind of a riskier endeavor.

Joe Fairless: Why is it riskier?

Jay Tenenbaum: Because if you’ve gotta foreclose, you’re gonna spend the same insurance, you’re gonna spend the same foreclosure fees, you’re gonna spend the same servicing on a $20,000 house as you are a $50,000 house or a $150,000 house. And if you take it back, how much can you rehab a $20,000 house?

Joe Fairless: Right.

Jay Tenenbaum: Now, we’ve gotten around that when we’ve missed a little bit here or there with our seller finance platform. That way, we will either sell a property to a buyer as a handyman special, or put a little bit of rehab in it – we call it a haircut and a shave – and put a buyer a in there. You can otherwise qualify for a loan.

We’ve also seller financed to investors who are looking to fix and flip or keep them in a buy and hold rental portfolio.

Joe Fairless: You look at the values of properties… So what is your sweet spot, if it’s not the 50k or less?

Jay Tenenbaum: Our sweet spot is probably 50k-100k houses. Above 50k you’re getting into what we call more the higher value class; a little more competition, a little more pricier just because of the values, but you’ve got a little bit of bigger margins there. My son will characterize that – when you’re buying the lower value space, you are getting three-quarters of a grape, and if you’re buying in the higher value space, you’re getting into recoveries of one-quarter of a watermelon.

I can buy a $50,000 house in Michigan for $10,000, and get a $400/month payment. Those investors who are enamored with the numerical percentage returns do very well on the lower value side. On the higher value side, you are buying that 100k house for maybe close to 65k, but you’re probably getting a $1,000/month payment as well.

The numerical returns are probably high teens, low twenties, but you’re getting more cash in your pocket every month.

Joe Fairless: Why isn’t the sweet spot 100k-250k?

Jay Tenenbaum: It can be, but if you’re raising private capital, the question becomes “To earn a good return, to put good money back in your pocket, it’s all a matter of just how much capital you need to deploy?” When you’re buying a 100k house, it’s 65 cents on the dollar – that’s $65,000. I can buy a ton of those.

We buy about a quarter million dollars worth of assets a month… Or we at least target to spend about a quarter million dollars a month. We don’t always hit that number. We start out with putting bids about that amount, but then things drop out in diligence and we may not end up spending that much.

So the question is “Okay, if I’m gonna buy a $250,000 house, I’m spending close to $160,000 to do that.”

Joe Fairless: I loved your old school calculator noise, by the way.

Jay Tenenbaum: Thank you! $160,000 – I can get two, three properties for the same $160,000. A littel diversity of risk as well.

Joe Fairless: Anything else as it relates to how to determine which distressed asset to buy and stay away from that you think we should mention?

Jay Tenenbaum: Since we don’t own the asset itself – we own the paper, we don’t own the property… That’s a distinction that troubles fix and flip investors all the time… What I’m about to get into is condition, and fix and flip investors are like “What about the condition of the property?” Well, unless the property is vacant, you can’t get inside the property because you don’t own the property itself.

Joe Fairless: Right.

Jay Tenenbaum: So with buying occupied – again, it’s more suited to our core business model, but in addition, being occupied is lesser of a risk the property is beat up inside, number one. That’s key as far as condition. Number two, we do a variety of property preservation – people that go out and do occupancy checks; these are local realtors to drive-by evaluations and a combination of both. So we have an idea of what the outside looks like, with kind of the presumptions, kind of like Blackjack where the dealer shows a 7 as the up card, so you assume there’s a ten there.

So you’re assuming that a borrower who lives there, the house isn’t beat up too bad on the inside. Other than that, from the outside you see tarps on roofs, or you’ve just got war zone neighborhoods… Delinquent property taxes are too high, to where what the seller wants for purchase and the value and the amount of the taxes just may not be a good numerical play…

Your values are key. You can’t agree on the value with any seller, but you’ve gotta know that what you’re gonna get for it and what you believe your values are are such that you can still make money. That’s where you sharpen your pencil and you make sure that your ROI calculators are precise.

Other than that, in your due diligence if there’s any defects in the chain of title, or loans delinquent for too long… Things like that. That’s kind of the priority checklist as far as what we look at and how we determine what makes the cut or not. A lot of stuff drops out because we only wanna pay X for a property, because we believe the value to be X, and the seller says “No, I want this for it.” We know at that price we could make money.

Joe Fairless: I’m glad you mentioned loans delinquent for too long, because that brings up the question “How long is too long for it to be delinquent?”

Jay Tenenbaum: It all depends on the particular state and their statute of limitations, but typically we won’t buy stuff that’s delinquent more than — now that we’re in 2017, probably 2013, 2014-ish.

Joe Fairless: 4-5 years…?

Jay Tenenbaum: Yeah, that’s probably right on the cusp of where we wanna see the delinquency. You don’t wanna buy anything that’s delinquent too much, because the borrower just hasn’t figured out what they’re gonna do yet. If it’s been delinquent for too long, you’re probably looking either at a foreclosure because they just [unintelligible [00:15:54].06] throw in the towel, they’re just living there for free, and you don’t wanna get into some statute of limitations issues that could preclude your ability to take back the property.

Joe Fairless: I wanna switch gears… Do you have interactions with the investors who are investing in these assets?

Jay Tenenbaum: Absolutely, all the time. We are a capital joint venture partners. I think the misnomer is, at least for us — our mission is… Typically, when you say you’re gonna joint venture with someone,  you’re like “Okay, it’s a passive opportunity.” If an investor wants a passive opportunity, that’s fine. But a lot of our investors are coming from places where they’ve had a little bit of education. I speak nationally any place, anytime, anywhere I can, so usually it’s an educational-type forum that I’m speaking at, so the attendees want to just learn as well as invest… So we provide that. I’m all about repetition; learning by doing, by repetition. Our investors – they can be hands-on what we do.

Typically, we start out [unintelligible [00:16:49].04] We start out together, we’ve already selected the assets, we’ve already done the diligence, we’re looking for you to fund them, and then we teach you from “Now that I acquired my first asset, what do we do from here?” The second rodeo would be breaking in on the diligence side. There’s too may moving parts to teach you all at once.

Joe Fairless: Describe your current investor – who they are, what’s their experience, how old are they, male/female? Just to give an idea of your current investor. I ask because this has to be a different profile of an investor who’s investing in distressed assets. My guess is they’re more sophisticated than typical investors, but I want to hear if that’s correct or not.

Jay Tenenbaum: It’s partially correct. I think my investor base – the note investing world is still probably a male-dominated world, although there are plenty of women involved. Two of my business partners are women, and the fourth business partner is my son.

They may have an advantage as far as calling banks and hedge funds to get someone on the phone. An asset manager will return for a phone call for a woman more than he will a man.

My investor base is probably still two-thirds, one third male/female, and I say that in terms of a lot of husband and wife teams as well, so that would be 50/50 there.

Sophisticated investors – yes and no. Again, I find most of them through whatever educational platform I’m speaking at. They had a desire to learn this business somehow, some way, some why first. All I’m doing is filling the need to allow them to get in the business, shorten up the learning curve, get in this business self-sufficiently.

When we were buying more of the lower value assets – an investment of, say, $50,000 would buy three or four lower value assets, and we’ve done quite well for many of our investors in that space… As we’ve kind of — I wouldn’t say we shifted… We’ve bought REOs in that asset class, and maybe REOs in some higher asset class from a particular source, and we started buying some higher value stuff.

I like all three asset classes. As we grew, institutional money started coming to us and said “We wanna throw money at you to buy this or that. We love what you do, we see your track record, we’re scared to death of the lower value stuff that you’re doing, so we want some higher value stuff.” To buy into the higher value class, you’re probably looking at an investment in capital 75k to 200k, to get you more of, say, one asset versus the diversity of risk, but a higher cushion of minimized risk, even though you’re investing in one asset. So that’s kind of where we’re at right now.

Joe Fairless: Based on your experience in the debt space, what is your best real estate investing advice ever?

Jay Tenenbaum: As I just said, my debt collection background is to me my specific skill, quality, expertise that I bring into this space. I believe that everybody has a particular skill, quality of expertise that makes them good for this business. Debt collection just happens to be mine.

My son’s the one that does the acquisitions. I’m not wired to sit in front of a computer and break down a tape. Others that are listening to this podcast are more suited to that, and that’s YOUR special skill, quality or expertise. A lot of what we do, a lot of what I’ve learned in this business – almost the last four years – can be taught, can be learned, except I don’t really believe that debt collection — the moniker is usually “Don’t try this at home.” If I taught you what I know and learned in 20 years, your head would explode.
It’s really something that should be left to a professional, just because of the liability and the regulations. Same when you’re getting into seller financing, and things like that. They’re better left to the professionals, just because of the rules and regulations that we have to deal with.

I don’t do as much of the borrower outreach as I used to. I use a third-party credit counselor to do most of my outreach. I take a different approach than the debt collectors and I’m coming at borrowers saying “We wanna be your advocate, let me help you talk to the lender.”

Funny story – I started using this particular company because when we first bought, my first 65 notes was from a hedge fund that I became closer related to than just a buyer/seller relationship. In that regard, I asked them one day “What was your best borrower outreach in all the time that you managed your hedge fund?” He said it was credit counseling; they had brought it in house out of necessity, and basically they took their debt collector, loss mitigator guys, asset managers and just got them certified in debt collection. They’re on my same page as to what I want, and they do a phenomenal job.

Joe Fairless: Great stuff. We’re going deep in debt collection and just distressed assets, and I’m enjoying it because it’s not an area that we usually go deep in. Are you ready for the Best Ever Lightning Round?

Jay Tenenbaum: Sure.

Joe Fairless: First, a quick word from our Best Ever partners.

Break: [00:21:33].16] to [00:22:30].05]

Joe Fairless: What’s the best ever book you’ve read?

Jay Tenenbaum: Lifeonaire.

Joe Fairless: Life In Air…?

Jay Tenenbaum: Yes. It’s like “billionaire”, but with “life” in front of it.

Joe Fairless: Oh, got it. I see what you just did. Best ever deal you’ve done?

Jay Tenenbaum: There’s so many… Each one is so unique and special… Best ever deal I’ve done – most recent – I bought an asset in Chicago for $60,000. The borrower unfortunately set fire on the second floor. We insured it for $100,000, got a check for $100,000, and then short saled it to an investor friend of our son’s for another 12k.

Joe Fairless: [laughs] Oh my gosh…

Jay Tenenbaum: It’s one of my most recent deals; I’m short on memory here. A lot of the deals rank as best because of the connection and the solution and the help and the assistance that we provide to the borrower.

Joe Fairless: What’s a mistake you’ve made on a particular deal?

Jay Tenenbaum: Overpaying for the asset. The information that we had and our diligence turned out to be accurate. The vendor that we used turned out to be not somebody that we could rely on for the information.

Joe Fairless: Best ever way you like to give back?

Jay Tenenbaum: To work on my joint venture partners to teach them this business.

Joe Fairless: And I’m just remembering – you mentioned the word “tape” earlier… That is a spreadsheet that has a bunch of properties or distressed notes that you get to choose to purchase or not purchase… What is the best place the Best Ever listeners can get in touch with you?

Jay Tenenbaum: Cell phone is 714-458-63-17. E-mail is jay@azpcapital.com. Or visit our website, at www.azpcapital.com as well.

Joe Fairless: Excellent. Jay, thank you for being on the show. Thanks for just being very clear with how to determine which distressed note to buy and which one to pass on, and how you approach that. One, is it occupied? Because it’s less of a risk that the property is beat up, among other things. Two, single-family residence, 1-4 units. Three, Midwest and South – you get better values. Four, the value of the property – 50k-100k is the sweet spot; you talked about why. And then miscellaneous things like occupancy checks, doing drive-bys, chain of title, make sure that’s clear, and that it hasn’t been delinquent for too long. It depends on the state, but usually 4-5 years or longer is too long… Plus all the other wonderful things we’ve talked about.

I hope you have a Best Ever day. Thanks so much for being on the show, and we’ll talk to you soon.

Jay Tenenbaum: My pleasure. Thanks for having me.


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