Best Real Estate Investing Advice Ever Show Podcast

JF996: How to Buy, Hold, and Sell Seller Financed NOTES

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Seller financing is your creative method to cash flow and huge returns, and our guest is able to create, purchase, and hold seller financed notes.

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Dawn Rickabaugh Real Estate Background:
– Owner of Note Queen Capital and specializes in owner-carry portfolio and been an investor for 13 years
– Buys seller-financed notes across the country and helps others get started investing in notes
– Consults in real estate transactions that involve owner financing, and buys & sells real estate
– Based in Carson City, Nevada
– Say hi to her at www.notequeen.com
– Best Ever Book: A Course in Miracles

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Buy Seller-Financed Notes

 

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 fluff.

With us today, Dawn Rickabaugh. How are you doing, Dawn?

Dawn Rickabaugh: I’m doing great, thanks for having me!

Joe Fairless: Well, it’s our pleasure. Nice to have you on the show. Dawn is the owner of Note Queen Capital, and specializes in owner carry notes, and she has also been an investor for 13 years. She buys seller-financed notes across the country and helps others get started in notes. She is based in Carson City, Nevada. With that being said, Dawn, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Dawn Rickabaugh: I would love to, thanks Joe. Well, I graduated from college with a bachelor’s in nursing, and I worked in an ER, in an ICU and I raised for babies, and all during that time I would take these courses and think that I think I can be an entrepreneur some day. That day turned out to be 2004, when I put my nursing job on a dime; I still had four kids and two mortgages and three dogs, and I decided “Hey, I’m other gonna think or swim, but I’m gonna go for it.” I fell in love with the note business; I just love the financial calculator, I love being able to work that and figure out how to solve problems, and I just love how private money works; I stay away from bank financing.

Ever since I quit that job, I’ve been doing a variety of things, but what I do most is I buy owner carry paper. That means when somebody offers owner financing and they become the bank of their property, sometimes that want that payment stream, but then sometimes they need cash instead of the $800 or $1,500 that’s coming in per month; they need a lump sum of cash for something, and that’s where I come in with my investors, and we take down these investments.

Joe Fairless: How do you get a deal? Do you usually find it yourself and have the conversation with the owner?

Dawn Rickabaugh: That’s a great question. Everyone wants to know how do you find notes. A lot of people do direct mail, just like you do direct mail to find motivated real estate sellers – you can do that for paper. You can buy lists of people that have carried that paper and want to sell their property. For me, I’ve never done that; it doesn’t mean it’s a bad idea, but I end up attracting a lot of business to me because of my positioning in the marketplace. I’m talking directly with sellers, and I also have people that bring me deals, that are very good note brokers, note finders, and they find them in a variety of ways, whether it’s direct mail, Craigslist… Just other internet-based resources. So that’s the way I find them, and then investors – once you have a good deal, it’s not hard to find the money.

One person gets their friends and family involved, so the private money tends to grow organically, and so do the note leads. But the other thing that I really love is having this understanding the secondary market for private paper gives me a real advantage as a real estate investor, because I understand how to buy with owner financing and how to sell with owner financing, and how to get liquid either way, if I need to, to make the deal work. So to me, the best ever advice as a real estate investor, you need understand the secondary market for notes, because it will give you the edge that most investors just don’t even see.

Joe Fairless: I’d love for you to elaborate more on that in a second, but first, before you elaborate on that, I think what would be good is if you give us a specific example of a past deal, and tell us the story about the individual – how you came across them and why they ended up doing the deal with you in the way that you wanted it to be structured.

Dawn Rickabaugh: Okay, fantastic. I have several I can pull from this week. Here’s an example – it’s not my ordinary example, but it’s kind of fun to talk about… There’s a nice property in Laguna Niguel – a really [unintelligible [00:06:02].22]  of Orange County, California. They’ve been on the market, they need to sell, and they got an offer for their four million purchase price, but the buyer only wanted to put two million down, and he wanted another couple years to be able to pay off the balance. So that’s two million down owner carry, and that’s a very reasonable thing for the sellers to become the lenders and just say, “Hey, yeah, we’ll let him pay us monthly, $16,000/month and within two years he’ll pay us off”, except for they need to cash out because they’ve got an underlying bank loan that’s pretty sizeable that they just wanna get rid of.

So here’s the situation where the note sellers – they’ve got to sell the property for the price they wanted, in exchange for carrying terms; they could have made probably 250k-300k in interest just being willing to do that, but since they don’t wanna do that and they need to sell, they came to me and said “Can you structure this deal in a way that we can sell the note right after we create it?” So that’s what I’m doing in that situation, where they used owner carry to get sold, but they used the sale of the note to liquidate, to get a couple extra hundred grand in their pocket, plus get rid of that underlying bank loan that was making everybody nervous.

So what I get, besides a consulting fee to sort of puppeteer the whole thing, but I get to buy the note and add it to our portfolio, because I’m buying it at a discount. And because they brought me in ahead of time, we could minimize the discount that would be required, because notes can sell for 50 cents on the dollar, or 30 cents on the dollar, or 90 cents on the dollar, depending on how the whole deal is put together.

Joe Fairless: Okay, so you will have the note, and there is already two million paid down on it. It’s a four-million-dollar note, right?

Dawn Rickabaugh: Right. No, four million dollars sale price. Two million down, and a two-million-dollar owner carry note that I’m gonna be able to buy for 1.9. It was a very small discount because I was brought in in the beginning as a consultant to say “How do we cash out of this without being chopped off at the knees?”

Joe Fairless: So it’s a two-million-dollar note, and you bought it for 1.9, so there’s a $100,000 spread, and the best case scenario for you is that you get $100,000 over two years as a result of this person paying down the note.

Dawn Rickabaugh: Right, but you also have the face rate of the interest rate. So between the discount and the face rate that the borrower is paying, it works out about to 9%, and this is a very excellent collateral. The worst case scenario would be the best case scenario where you end up owning for two million dollars, plus legal fees – you end up owning this really killer property in Laguna Niguel. So that’s the best case scenario, if there’s a default. The worst case scenario is that me and my investors get to put almost two million dollars to work and make really a total of about 270k in interest over a two-year term.

Now, the thing that’s interesting about buying notes at a discount versus just I could have made a loan, but the borrower only wanted to pay 5,5%, no more. So most private lenders don’t lend at that. But they could get the owner to carry a 5,5%, but then the owner just has to discount on their side. It’s like the seller has sort of paid the points, in a way, to get liquid out of this, but what they were doing is finally being able to get out of a property that they needed to sell, and this is the best offer that’s come along so far, so it really worked for them on a multiplicity of levels… But here’s the deal – he gets two years to pay off the note, but if he pays it off early, technically on this there’s a $2,052,000, so basically there’s a $150,000 spread. So if he doesn’t ride it to maturity — let’s say he pays it off six months from now, in December, but I still get the whole balance.

So if the balance on the note from him – it still has a balance of let’s say $2,030,000 and I only paid 1,9, that honoring discount that you get when a note pays off earlier than expected, there’s a minimum yield of around 8,5%-9%, but if he pays off early, it will push us over 13% on this really excellent, safe investment. So that’s kind of the beauty of buying discounted paper, versus just making an origination, like a private money loan, or something.

Joe Fairless: That’s fascinating.

Dawn Rickabaugh: It’s about crunching the numbers to make it work. And then I can take it to a real small level too, because that’s out of the reach of most of us. I don’t buy four million dollar homes myself. [dog barking] Sorry about that… Someone let the dog in. [laughter] Okay, that was the best ever puppy in the world, so it actually works for your show. [laughter]

Joe Fairless: Beautiful, nice segue! Good save! [laughter] So on a smaller level…

Dawn Rickabaugh: Yeah, let’s just take it on a smaller level. Here in my hometown of Carson City, Nevada, somebody had a mobile home note. Let’s say they sold their mobile home for $22,000  and they took $10,000 from the buyer, so they ended up with a $12,000 note. Who’s gonna buy a note secured by a little mobile home in Carson City, where the space rent is like $425 and it’s first-lien position…? Well, this kid – he could receive those payments and it could be really well, but the problem was he needed to leave town; he needed to get liquid and just move and never look back. That was a Craigslist, actually. I had created a filter saying “anyone talking about promissory notes, drop it into my inbox.”

I got it while I was at the gym one morning, I called him, and I bought the $12,000 for like $6,000. He was thrilled. So it’s not a huge gain for me… Okay, I’ll double my money in the next four years, but little things like that stacked up really go a long way. So I solved the problem of the guy needing to cash out, and there’s not very much of a market for that. And also, I’m rehabbing and selling mobile homes on owner carry terms. So if someone doesn’t have all cash, I say “Hey, if you can put at least $5,000 down, I’ll carry for you”, so as a real estate investor I have the edge, because I know how owner financing works, and if I get tight, unliquid, I can sell off a piece of my note to get liquid again.

Joe Fairless: Was the actual Craigslist ad “anyone talking about promissory notes” – did you post that?

Dawn Rickabaugh: Yeah, I have this revolving “I buy property, I buy paper”, or anything promissory notes, owner carry – I’ve created filters, so that Craigslist dropped those in to me, and I also have an ad that just says I buy these things. But I keep revolving on Craigslist, and some of the guys that bring me deals, that hustle out there and are good at nailing things down, they find them on Craigslist or they’re just hustling out on the internet, and then others, they spend 5k a month on direct mail campaigns, and we’re able to convert those leads very effectively.

Joe Fairless: How did you get the lead in California, the Orange County one?

Dawn Rickabaugh: That’s all about positioning. I’ve spent my time building my business very slowly and organically, like the turtle approach versus the hare, where I’ve been blogging since 2008, I wrote a book back in 2009. I’m working on my second release this summer, which is gonna be a lot more fun to put out there, even than my first book, and then I did a lot of speaking. So I guess when you position yourself a certain way, then people care about you, they like you, they get to know you, and so they think of your when they have a situation. So a lot of times when a deal is falling apart… Even my neighbor, last year – she’s a realtor and she was double-ending this nice, sweet deal, $15,000 getting ready to drop in her pocket, except for the funding fell through. So she brought me in to save that deal from falling apart, and I know she bought a hot tub with that money and I haven’t been invited over yet to sit in it. [laughter]

Joe Fairless: How did you save that deal? What did you two?

Dawn Rickabaugh: We could have hit it two ways; the reason it fell apart is because the borrower — he had a big down payment, like 30%, but he couldn’t get the loan because he didn’t have the seasoning in the business, because they moved from a California business to a Nevada business, and they didn’t have two years in Nevada yet. So he couldn’t get a loan, which is absolutely ridiculous; he has a great credit risk. He could have gotten hard money, or I could have set him up with 9% or 10% money and 2-4 points [unintelligible [00:14:49].08] expenses. Then I looked at the seller and I was like “They’ve got great existing financing in place. The only problem is they’re 30k behind [unintelligible [00:14:57].08]” so that’s 5% financing. So I said, “Here’s the deal. Buyer has the money to get them all their equity and take over – not subject to, but we did a wrap, so that the people that are on the loan can’t get cut out of the deal by accident; they always have a play. Do you understand what I mean by “a wrap” versus “subject to”?

Joe Fairless: Elaborate, will you?

Dawn Rickabaugh: The borrower actually owes the seller and the seller owes the bank. So we need to make sure that the seller, if they don’t get their money from the borrower, that they have the right to foreclose and get the property back. If you take it subject to, if there’s a default and they start — well, in this case, the credit was crap anyway, because they hadn’t paid for two years, but they had equity still… But anyway, so they couldn’t step back in if they wanted to, because you need to have a way for the sellers to have a play to get back in the deal, so that’s why I use it as a wrap. Borrower owes seller, seller owes bank, and then we have a note servicing company to keep score for everybody. So when the borrower pays the seller, they know that the seller is paying the bank loan because he doesn’t wanna be paying, and then find out that it’s going into default. And the sellers actually want their credit to be rebuilt. So this was beautiful.

The buyer – he brought in a big amount of cash to give them all their equity and to bring the loan current, so then instead of paying 3 points and 10% for a private loan, he’s not leveraging the 5% bank loan that’s still on the seller’s name, and the sellers are gonna win because now somebody is rebuilding their credit. By the time that this is done, they’re gonna have 2, 3, 4 years of perfect payment history and it will rebuild their credit so that when they’re ready, they can go get another loan and start their lives over, and then by that time the guy can get a loan in his own name, because they will have sufficient seasoning of the business here in Nevada. So that’s where it was just like an epic win/win for everybody.

Joe Fairless: Yeah, what a deal… Thank you for this example. These are three examples that are just phenomenal case studies, for different reasons. I wanna ask one last follow-up question about the Orange County deal… You mentioned you put yourself out there, but specifically how did you get in contact with them? You talked about the things that you do, but did they reach out to you via a website, or what?

Dawn Rickabaugh: Yeah, they sent me an e-mail… I guess they’d heard me speak and we must have met years ago. The funny thing is this guy is actually an attorney, but when it comes to this stuff he calls me, because attorneys — it’s really great when they know that they don’t know everything… [laughs] So usually I’m educating attorneys about the secondary note thing. But he’s also a real estate investor, so he knew about this deal and he wanted me involved to help these people that he knew. This is actually the second referral that he’s brought to me, to help create a win/win solution for all the parties. And it doesn’t always involve a note to get sold, sometimes it’s a lease option, or we put a trust together… There’s not one hammer fits all, but when you understand the secondary market for notes and you can do that dance between property and paper, you just become a killer problem solver. And it’s not only fun, but it’s lucrative.

Joe Fairless: Feel free to repeat the secondary note thing, but… I have to mention it, because I’ve got this whole lead-up music too when I ask you, and it would just kill the whole show if I don’t ask you specifically… But you can repeat your answer, that’s fine. So what is your best real estate investing advice ever?

Dawn Rickabaugh: Learn the dance between property and paper. Learn how the secondary market for private paper works and you will have the edge over every other real estate investor that you perceive as competing with you and your market.

Joe Fairless: That is true. Just hearing you talk through these case studies… It’s 3.0 real estate investing, and it’s something that a lot of people don’t know about, and I’m grateful that you’re on the show talking about it, and I’m grateful that you spiced it up that go around… Instead of “understand the secondary markets”, you gave us a little “learn the dance between…”, so thanks for that too.

Dawn Rickabaugh: You’re welcome. I think people need to dance. Dance, and sing, and laugh, and have fun.

Joe Fairless: There we go. Well, are you ready for the Best Ever Lightning Round?

Dawn Rickabaugh: Oh, I have my little paper here.

Joe Fairless: Oh, okay… Well, I might have to ask you some questions that aren’t on it, just to keep you on your toes.

Dawn Rickabaugh: [laughs] Okay.

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

Break: [[00:19:43].20] to [[00:20:30].21]

Joe Fairless: Best ever music you like to dance to?

Dawn Rickabaugh: [laughs] Well, lately it’s country… Since I moved to Carson City, Nevada, I bought a truck, I bought a Harley, and I can do country dancing now. But don’t tell anyone.

Joe Fairless: [laughs] Well, I think we told a lot of people just now. Best ever book you’ve read?

Dawn Rickabaugh: Course In Miracles.

Joe Fairless: Best ever deal you’ve done?

Dawn Rickabaugh: Buying a non-performing diverse note that was in second position for $10,000 and nine months later getting $80,000 when it paid off.

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

Dawn Rickabaugh: Creating homes for families who are shut out of the system. They don’t have all cash, they can’t get a bank loan, but they still need stability for our communities and they need a home for the family. So that owner carry thing that I help make happen in my own backyard – that makes me feel good. And also sharing information, so people get inspired to do this in their own communities and create those financial solutions just one moment pop to another.

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

Dawn Rickabaugh: Trusting a title company to do the right paperwork, to do it right, and then finding out they didn’t, and then I just wanna hit myself.

Joe Fairless: [laughs] What do you do now to mitigate that risk?

Dawn Rickabaugh: I read things. I take responsibility for all the documentation and paperwork, the due diligence. I kind of read stuff; just sort of reading things.

Joe Fairless: And where can the Best Ever listeners get in touch with you?

Dawn Rickabaugh: NoteQueen.com. And I also have a podcast – Owner Financing & Note Investing Podcast.

Joe Fairless: Alright. Well, we’ve got two ways then – the podcast, go check it out, as well as NoteQueen.com. Dawn, I loved the case studies; that’s one of the best ways to learn. You gave us the case study in California, the case study with the mobile home note, and the case study with your neighbor, and three solutions, all having a central theme of, as you said earlier, knowing the secondary market for notes and being able to structure it accordingly. I learned a lot on this subject in particular.

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

Dawn Rickabaugh: Thank you so much, Joe. It’s been a privilege. Take care.

 

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JF979: Why He Went Through FIVE Property Managers in FOUR Years

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His first investment purchase was a 62 unit building…out of state. Our guest went through 5 property managers in 4 years…but why? You’ll have to find out.

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Todd Tresidder Real Estate Background:

– Financial Coach and Owner of FinancialMentor.com
– Age of 23 his net worth was $0 and 12 years later he was a millionaire
– Retired at age 35 from Hedge Fund Investment Manager that was responsible for 20+ million dollar portfolio
– Financially independent from age 35 through investing – not marketing
– Based in Reno, Nevada
– Say hi to him at https://financialmentor.com/
– Best Ever book: The War of Art

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choosing property managers

Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, 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 fluffy stuff.

With us today, Todd Tresidder. How are you doing, Todd?

Todd Tresidder: Doing good, Joe. Thanks for having me on the show.

Joe Fairless: Nice to have you on the show. A little bit about Todd – he is a financial coach and owner of FinancialMentor.com. At the age of 23 his net worth was zero bucks, and 12 years later he was a millionaire. He retired at age 35 from hedge fund investment manager that was responsible for a 20 million dollar plus portfolio. He’s done tax liens, he has had ownership interest in apartment communities, he’s bought a bunch of acreage, and he got out of all that stuff right before 2008. We’re gonna talk to him about that.

With that being said, Todd, do you wanna give the Best Ever listeners a little bit more about your background and your current focus and then we’ll rewind?

Todd Tresidder: Sure, my background is hedge fund investing. I’m a quant, so I came up through quantitative analysis of what I call paper assets – normal securities markets. I was one of the early pioneers of computer algorithmic trading, so I developed a lot of that. I started developing while I was in college. I had this crazy idea in an investments class that I took up to my investments professor. I was looking at all these charts of different stocks and stuff in investment books, and I went up to him and I said, “You know, I can make money off that mathematically, I don’t have to know anything about it.”

I gotta give you a context for this, because I’m a bit older… Computers were just brand new. The Apple were still being made in a garage, IBM was just coming out with the first PC, it was an 8088 processor, slow as snails… So for me to run around and say that I can do computer algorithmic trading was just completely hare-brained. But it worked. We built a whole hedge fund around it, and that’s how I built my wealth originally. Then we sold the hedge fund and I branched off into real estate, which is where this story picks up.

Joe Fairless: So you sold your hedge fund, went into real estate… Roughly how much did you have to invest at the time, after you sold your hedge fund?

Todd Tresidder: I don’t give exact dollar amounts, but it sits in excess of a million.

Joe Fairless: Okay, so you had over a million dollars. What did you do with it?

Todd Tresidder: Well, part of it I put into real estate. I wanted to diversify. I had a strong paper asset background, but I also had enough background to know that there’s risk, there’s volatility, and I wanted non-correlated sources of return. I also wanted cash-flow producing sources  of return. Real estate is obviously the natural avenue for that, so I started developing a real estate portfolio, and being the financial junkie that I am, I went into a variety of strategies. I did tax liens, I got hooked on this idea of acquiring real estate for pennies on the dollar, as all the marketing promotion says, for doing tax lien investing, so I went down that avenue.

Then I also had kind of an interesting insight – at least interesting to me at the time… Back then you could do non-recourse financing on large properties, so I figured out that I could buy a large apartment complex for about the same risk or less than I could buy a single-family home. So I went “Well, why would I do one versus the other?” So here I am, kind of a new investor, and I’m realizing the risk/reward is in favor of large apartment buildings. I’m fairly new to real estate, and I went straight to large apartment complexes. The first one I purchased was a 62-unit building, and the second one I bought was 101-unit. I did that with none of my own money, the second one. That was a completely leveraged deal, using investor money. All I did was assemble the deal.

Joe Fairless: Let’s talk about each of those real quick. The 62-unit building – that was all of your money?

Todd Tresidder: It was family money, as well. My mother-in-law – she’s passed away now, but she was a partner in that deal, as well. She was trying to get into real estate. I put the deal together, but she was a half investor and I was the other half.

Joe Fairless: Okay. What year was this, by the way?

Todd Tresidder: 1998.

Joe Fairless: 1998. Your first large deal on real estate is a 62-unit…

Todd Tresidder: No, let me be clear – it was my first investment real estate purchase.

Joe Fairless: Oh, you didn’t do tax liens before that?

Todd Tresidder: No, my first purchase ever was a 62-unit, with my own money.

Joe Fairless: Okay, and where were you living at the time and how far away was it from where you were living?

Todd Tresidder: That’s a great question, because that was actually my downfall. I was an out-of-town investor; I lived in Reno, Nevada, and I bought in Kansas City, Missouri. Again, the angle of this – because I’m a quant, I was driven by numbers; the numbers were obviously more compelling in the Midwest. The problem is – I’m sure you’re totally aware of this – the inefficiencies of running an operation from out of town were overwhelming. I built it into my budgets, but I was way off base.

I had no idea — I remember running across some information when I was creating my strategies and stuff where they talked about the dishonesty of property managers, but I just way underestimated the level of dishonesty involved. I went through five property managers in four years, and I wasn’t even getting lowbrow guys; these were like the top of the line in the area. I’m not gonna name names, because I actually won a $475,000 lawsuit against one of them.

Joe Fairless: Wow… [laughs]

Todd Tresidder: Yeah, for mismanagement. They had stolen so much money and mismanaged the property so poorly, and I actually documented it. I did a full forensic accounting, I presented it, and the insurance company just rolled over.

So I’m not gonna name names, but I went through five management companies in four years… And here’s the thing, because again, these were done on non-recourse financing, like I was saying earlier. One of the deals on that is you have to get changes in management approved, right?

It’s kind of a clerical process, but it was funny, because I’d gone through so many managers so quick that the woman that ran the portfolio that my property was in – we actually got on a first name basis, so I’m just gonna call her Jennifer for purposes of the interview… I call her up for my fifth management rollover – and this was the breaking point for me – and I said “You know, I’m replacing them again. I got another management company.” I told her, I go, “You know, Jennifer, I must be your stupidest owner. I cannot get this right.” I genuinely thought it was all about me, that I was just so dumb that I couldn’t get this right, that I couldn’t figure out how to manage the building and get an honest property manager in there… And she said to me, she goes “Todd, you? No, you’re the least of my problems. I’ve got a whole portfolio of this stuff and they’re all getting ripped off blind. The only difference is you’re watching so closely, you catch them all.”

Joe Fairless: Yeah, that is a great point that our fake-name-Jennifer mentioned. That’s what I wanted to ask you about – what were the signs that you identified? Because I guarantee that there’s someone in this situation who’s getting ripped off… So what did you identify that perhaps they can look for?

Todd Tresidder: Well, we could fill five interviews. It was like whack-a-mole. You’d figure out how to plug one hole, and they would open new ones. Let me give you the first manager, just to give you something concrete to work with. The first manager, they had a multi-property portfolio in an area, and they had a maintenance team, so you would pay pro rata, and it sold you on the basis of “This is gonna be efficient because you’re only paying for a portion of this maintenance team when they’re actually working on your property.” Well, how are the ways they steal from you? Well, they double-triple book the maintenance guys.

I actually got to know several owners within this portfolio of properties being managed in this area, so I networked to him — we had a conference call and we started figuring out that they were doing anywhere from 200%-300% billing on these two guys who we dubbed Tweedledum and Tweedledee.

One of the guys in the portfolio was flying out there anyway to check on his property, so he didn’t announce it to the management company – he flew out there and monitored Tweedledum and Tweedledee for two days, just followed them around, and we’re all getting double-billed while they’re in the Donut Shop, having coffee and eating donuts in the morning. So we figured out that angle, and then another angle was — in my due diligence, they’re not allowed to own property in the same area, because it’s conflict of interest; the management company can’t own personally property in the same area, but then they bought property after I hired them, and they were running maintenance expenses through my property that were being done on their property.

I could go on and on and on, the number of ways… The company that I actually won the lawsuit against, they were so egregious… I owned all the laundry equipment. Rather than leasing the laundry facilities, I owned them [unintelligible [00:10:09].12] is coming in. They claimed zero laundry revenue. They were just pocketing the quarters.

Joe Fairless: I’m sure – knowing you – you asked them, “Hey, what’s going on with the laundry?” the first month that you saw that. What was their response?

Todd Tresidder: They just said there was no laundry revenue. They’d lie. They all lasted six months. It takes you a while. You can’t just start off taking these guys to the grill. You’re trying to build a relationship; you’re out of town, you’re kind of dependent, so it’s not like you can just come in with both guns firing and claim these guys are idiots.

The other thing, too – the company that I won the lawsuit against, these guys were both accountants by trade, so they were trained accountants and they were cooking the books. Real estate is not rocket science. You’ve got gross potential income, you subtract your vacancies, subtract your delinquencies and you should have collected rents. None of the numbers reconciled, and they had these bogus accounting entries, and I would challenge them on it month after month, and I’d say “Look, I’m not rocket science at this, but you guys are trained accountants – this stuff’s gotta reconcile”, and it never did, and that’s when I started the forensic accounting. Once I got some of the documentation, Bam! They were fired and replaced.

But just to give your listeners an idea of how much this theft can cost you, I finally did get an honest company in there. I got one company as a young company – they weren’t established, and they had this young Hispanic couple that was really honest and really good-working. They took over my building, they put the young Hispanic couple in there, and these people were totally honest. They tracked everything. If I was getting a new carpet put it, I would spec out – it’s a new carpet, with new padding. And they would monitor the job as they would do it, and they’d call me up and say, “Mr. Todd, I wanted to make sure you said new padding, right? They’re trying to roll the carpet over the old padding, I just wanted to check with you.” I said, “Absolutely!” She would catch stuff like this.

Or I spec-ed out a new roof and I gave her all the details of the roof. They went up there and checked on it several times a day. She calls me up and she goes — she wouldn’t call me by my real name [unintelligible [00:12:00].00] She’d go, “Mr. Todd, I’m noticing that they hadn’t torn the roof all the way down to the plywood like you had specified when you wrote to me. They’re trying to tar over the new roof. Is that acceptable?” and I’d be like “Absolutely not!” She would document it.

Joe Fairless: Wow.

Todd Tresidder: My costs — I improved the building, and my costs dropped in a half with their management, my overhead cost. I wildly improved the building; they turned over the entire inventory in one year, and my costs were still half of what they were when the thieves were in there.

Joe Fairless: Wow. I wanna talk briefly about the 101-unit building, and then what happened to all these buildings. 101-unit – you certainly piqued my curiosity, and I’m sure the listeners’. You had no money in it, you raised all the money from investors, and then you had an ownership interest as a result of putting it all together?

Todd Tresidder: Yeah, so I got 10% of the building, so I got 10 units, basically… For no money, just for assembling the deal. What it was — I’d done a good job of negotiating, it was wellbelow market… Basically, these people, even with giving me 10% of the deal, they basically closed on double what they’d put into it. So they doubled their money at the closing table, with me having 10%, and I didn’t even have to manage it; one of the other partners managed it. So literally, I just assembled the deal and took 10 units for assembling the deal and negotiating it.

It was a very complicated deal, and that’s one of the reasons I got it. The seller was a very wealthy, aged attorney, and he had cleared out his entire portfolio as he prepared for death, and he was down to three large properties. He had a massive property portfolio. He sold everything, he was down to the final three, and they were all problem properties, so he was just done. The money was irrelevant to him; he had more money than he’d ever spend and he was just giving it all away anyway. So he just needed the thing done and he felt that I have the skill to get it done.

It was a really complicated loan package, because we had to get improvements and we had to package it all it and get the improvements done, get the investment money… It was a lot of effort, but in the end it was a fun adventure to get 10 units for just putting a deal together.

Joe Fairless: In that type of structure, do you take an acquisition fee?

Todd Tresidder: No, I took the 10 units. In order words, I walked the talk with them. I positioned myself in alignment with the owners.

Joe Fairless: Got it. You didn’t have any money in it, but you got the equity via the 10%.

Todd Tresidder: Yeah, so they got access to a deal they never could have gotten otherwise. They didn’t have the skill or the connections or the resources to put it together. I had those, so they just put the money. It was really a stupid deal, Joe, when you think about it… Because I gave away so much equity. I would have been far better off using my own money and keeping all the equity for myself.

Joe Fairless: How much did you raise?

Todd Tresidder: It was a long time ago, Joe, I’m not recalling the exact amount.

Joe Fairless: A million, 200k, 10 million? Which number is closest?

Todd Tresidder: No, the deal was just under two million, because it was just under 20k/unit. It was a two million dollar deal and we sold it for about 42k/unit, 4-5 years later. Most of the equity was built at the closing table, because what we had done…

Just to give you a quick story on it – the property was one of those 1970s properties where they have the mansard roofs. It’s a two-story building, the mansard roofs go within about two feet of the ground. And these were particularly hideous, because the mansard roofs were practically falling off the property. So what I did was I went in, we tore the mansards off, recited the buildings, put all new windows in, redid the parking lot, put rod iron gating all around it, and new landscaping. So literally, the building was so transformed in its appearance that an old maintenance guy who was re-interviewing for a job passed the building and he didn’t even recognize it.

It was completely transformed, and as you know, most tenants’ decision is made before they ever walk into a unit. Well, this guy had put all his money on the insides of the units because it was gonna be such a hassle for him to fix the building up from the exterior, so the interiors of these units were beautiful. He had dumped money into them. They had new carpets, new appliances… That’s where all your money goes, right? He had never done the exteriors, but the exterior is where everybody’s judging your property.

I went in, redid the exterior, he had already dumped the money in the interiors, we didn’t have to do much to the units themselves, and the numbers on the building were transformed. Suddenly, we could get people in there, the occupancy went back up, and then Bam! We sold it a few years later for a fat profit.

And again, as I said, I was stupid, because I got ten units… I made 200k on it, but I left two million on the table. I threw away 2 million to get 200k, so the leverage wasn’t worth it. I would have been far better off keeping the deal. The value is in my creating the deal.

Joe Fairless: And the last question on this, and then I’d like to ask about you exiting these deals across the board… The 62-unit – what did you buy it for and what did you sell it for, if you can remember?

Todd Tresidder: Very similar numbers. It was about 18k/unit and about 42k a door. All these were out in the Midwest, and the analysis I had was I had strong job growth… As you know, the value of the properties is determined by the income growth of the area… So I had strong job growth in these areas that I was targeting, and they were low cost in terms of purchasing or acquisition. My analysis showed it was gonna take about 65k/door to build competing buildings, so I figured I had a pretty safe run for rent increases until values jumped up to the middle forties, and then I was gonna sell, which is exactly what I did.

Joe Fairless: These properties, plus some other stuff that you had, you exited out of at what point in time and why?

Todd Tresidder: I tried starting selling in about 2005, but as you know, you don’t move large buildings quickly. It takes a while, so I started really warming up to the idea of getting out of them in 2005. I had tenants in the buildings that didn’t even qualify to rent from me, their credit was poor, and they were getting 30-year loans for $300,000 houses in the area, and these apartments are running for like $600/month kind of thing. This guy didn’t even qualify to be my tenant. Of course, I know that because when he’s applying as a tenant, I see his credit history.

It was just a real wake-up call… This happened once, it happened twice… I was like, “If these tenants can qualify for a $300,000 loan, who’s left?” I already felt like I was dragging the bottom of the barrel just to try to fill the building, because again you’ve gotta go back in time… The credit environment was so permissive, it was kind of a go-go period, so it was really hard to get quality tenants back then. Most people weren’t renters; the better part of the people weren’t renters, they were buyers. Now all of a sudden the lowest quality was buyers.

The other thing too, I had a little bit of a privilege from being a coach – I was coaching people on building wealth; I’d been doing that for a long time, and I noticed that suddenly every client that was coming in wanted to get rich in real estate. I was analyzing deals with them, and the deals made no mass sense. Even the prices they were gonna offer me for the properties – I didn’t feel they were worth what they were offering me. I certainly wouldn’t have paid them, and I knew the buildings inside out.

So there were a lot of indicators, and I went “You know, I kind of did this wrong by buying out of town to begin with.”

I did really well on a lot of points – I bought them right, I negotiated them well, I got good prices on them, I had good loans on them… I did a lot of things well, but buying out of town was kind of my downfall. I felt like I really bought myself a headache, I was ready to get rid of them anyway, and I looked and I said “I don’t know if this is a top in the market, because nobody can call a final top”, but I knew the risk/reward was way out of balance, and I just said “I’m done with this. Let me start selling.”

Effectively, I think the first deal unwound in 2006, the second deal unwound late 2006, maybe early 2007… Then I had a lot of miscellaneous stuff, some houses and some acreage, and all that sold fairly quickly. So I got down to just the home I live in by the time the downturn occurred.

Joe Fairless: And now fast-forward to today, are you doing real estate investing? If so, why, or why not?

Todd Tresidder: I have not. I’m not comfortable with financial leverage at this time. The thing about financial leverage — and I missed out, right? You don’t hit all strikes in this business. Every now and then you miss them. So yeah, it turns out I would have been better off grabbing a falling knife in the 2009 bottom, but I really didn’t believe the government bailouts were gonna work, and I still feel like all they’ve really done is kick the can down the road and reinflated the balloon.
So the thing about financial leverage in real estate – I have a policy when I buy real estate; I really wanna get back in, but I have a policy which is when I buy it, I have to be comfortable being stuck with it. I have to feel like if the market goes illiquid, if the market turns down and I’m stuck with it, I gotta be happy owning that thing. [unintelligible [00:20:27].28] in my area, Reno – because I’m not willing to buy out of town again – the numbers don’t make sense to me.

Joe Fairless: As far as buying it and being comfortable being stuck with it, I would think if you’re making more rent and that covers your expenses, it doesn’t matter what the value is as it goes up and down…

Todd Tresidder: Absolutely. I agree with you 100%. If you’re positive cash flow with a margin of safety, who cares?

Joe Fairless: Right.

Todd Tresidder: But that’s not what I get here.

Joe Fairless: Got it, okay.

Todd Tresidder: These are premium markets; pricing here is akin to California, to give you a flavor. Pricing in my local market does not represent value.

Joe Fairless: Based on your experience as a real estate investor and also someone who has a broader background in investing, what is your best advice ever?

Todd Tresidder: Pay attention to the numbers. Wealth compounds through mathematics. Your wealth is determined by the expectancy of your investment strategy. Numbers drive the thing. Yet, with real estate if we’re gonna apply — my paper asset investing is primarily mathematical in nature. I’m very mathematically driven in real estate as well, but the thing is that real estate is an art form, too. Real estate isn’t just numbers. I have a thing, I call them “sick buildings.” You know what I’m talking about, Joe…? Where it doesn’t matter what you pay for a building, it’s never gonna work. And there’s other buildings that even if you pay the premium, over time they’re gonna work out.
So there’s an art form to real estate, too. You have to go beyond the numbers. You have to balance your numbers with insightful analysis.

Joe Fairless: If you’re not doing real estate investing now, what’s the primary thing you’re making the most money on?

Todd Tresidder: Well, business for one… My FinancialMentor business is profitable, as well as my paper asset portfolio, which I still use the same strategies I did back in the hedge fund days.

Joe Fairless: Are you ready for the Best Ever Lightning Round? First, a quick word from our Best Ever partners.

Break: [[00:22:15].20] to [[00:22:57].24]

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

Todd Tresidder: Okay, so first of all you’ve gotta know something about me, Joe – I’m not a superlatives guy… So best ever book – there’s a lot of great books. I’ll just name one that I’ve gotten a lot of value out of, that I shared with a lot of people, which is The War Of Art by Steven Pressfield. The thing that’s amazing about that book is anybody that’s moving forward in their life is gonna run into this thing he calls “Resistance”, and it’s hardcoded into our DNA. This Resistance is a major factor in what keeps people from achieving their goals. It’s just a beautiful little book, quick little one-page stories and things that really gets you clear on what Resistance is and how it negatively impacts your life. It’s a great read for anyone.

Joe Fairless: From your real estate background or experiences, what’s the best ever deal?

Todd Tresidder: Best ever deal… I would say that deal I put together for investor money — no, hold on a second… No, it’s not. The tax lien deal. I got a perfectly rentable house – it’s not a great value; it was probably worth 60-80k, and I think I was into it for about $800 in back taxes. That was obviously the best deal ever.

Joe Fairless: If you were getting deals like that, I assume – maybe I shouldn’t assume, but I assume they were out of your city… Why wouldn’t you continue to do that?

Todd Tresidder: It’s an ugly, ugly business. In the end, you have to be happy and you have to like what you’re doing with your life and your energy and your time. I developed a strategy to sort out the high probability tax liens that would actually fall through the deed. I developed this system… There’s anecdotal evidence that correlates with fall through the deed, and so I would do all the research and find all the liens, gather them up and do all the processing and everything, and sure enough, I was right; it worked.

Joe Fairless: What was the main takeaway for the connection?

Todd Tresidder: Well, they had to be free and clear, which usually means easy come, easy go. Somebody got them easy come, easy go; they’re usually gifted or inherited, so people aren’t paying attention, and the generation that paid for it is usually not the generation that loses it to taxes.

And then you take that and combine it with some problematic life story – usually drugs, jail time, crime, whatever. There’s this sad story of human despair associated with a property that will fall through nearly always… If it’s valuable. You also have to be very careful of environmental disasters. You have to do your due diligence on each individual parcel, because a lot of them that fall through are falling through because they’re truly valueless or negative value because they have an environmental disaster. Assuming they’re valuable, they’ll fall through for totally all the wrong reasons, if you will.

So when you start gathering your wealth through a game plan built around that, it’s really ugly business. I went through several years of it, and I had one deal… It was a really sad story. A grandmother gifted a grandson a home when she passed away. Son lived in it with his lover, and there was guns, they were terrorizing the neighborhood, there was drugs, the grandson ultimately died of AIDS, [unintelligible [00:25:53].03] there was a lot of crime involved, and eventually the police came out… It was horrible. It was just this disgusting thing, and I’m in the middle of it, serving notices to the necessary parties… The family is coming back in saying they want it, but they have no title to it… It was just horrible. I finally said it’s just not worth it.

Joe Fairless: On a completely different note…

Todd Tresidder: On a positive note… [laughs] At least you can get an honest flavor for what would send somebody away from free and clear real estate for pennies on the dollar…

Joe Fairless: Yeah, absolutely correct. I’m glad you share that. What’s the best ever way you like to give back?

Todd Tresidder: Through education, the business I’m doing. I love sharing my knowledge and sharing it at cost-efficient price points so people get more value than they pay for. I love the difference it makes in people’s lives. There’s not a week that goes by that somebody doesn’t write an e-mail telling me how I changed their lives.

Joe Fairless: Thinking back to any of the real estate deals that you’ve done, what’s a mistake you made on a deal?

Todd Tresidder: Buying out of town, hands down. I did 9 things out of 10 right, and I did that one wrong… I was warned, I’d read it, but I just thought that there’s gotta be a way to find an honest property manager. Luckily, I did find one long enough to turn it around and sell it, but basically buying out of town is just so inefficient… It’s really hard.

I don’t know what your experience has been on that or what you’ve heard from other guests, but my experience was very one-sided.

Joe Fairless: I guess the question I have for you on that is you made money on the 101-unit and on the 62-unit because you were buying properties that were cash-flowing in a different market than where you lived, so there was an opportunity cost there. If you don’t buy in out-of-town markets, then if you don’t have those opportunities in your market, then you wouldn’t have had that cash flow and those chunks of change.

Todd Tresidder: Well, let me clarify… I made capital gains. A lot of the cash flow got robbed in inefficiency from the dishonest management. So the buildings were rollercoasters. There were times when they would cash flow as the management was trying to impress me, and then as they went to thieving and they started lining their pockets, the buildings would roll over and go to negative cash flow. I’d fire them, I’d get a new one in, they’d try to impress me and it would go positive for a while, then it would go negative as they’d start stealing again, and on and on the circle went.

It was never great from a cash flow standpoint, even though I had extraordinary values and a lot of equity in the buildings, and it’s because of the thieving of the management and the inefficiency of the operation… But yeah, there was capital gains on the backside, but again, you have to understand I’m pretty good with paper assets, I don’t need the headaches to create the capital gains.

Joe Fairless: Where can the Best Ever listeners get in touch with you?

Todd Tresidder: FinancialMentor.com. I give away a free book and I have a free course called 52 Weeks To Financial Freedom. And no, you won’t get rich quick, but there’s a whole framework that I teach around the path to financial independence and how it works. It includes all asset classes, including real estate. It’s business entrepreneurship, real estate, paper assets, and it’s for free. It’s over at FinancialMentor.com.

Joe Fairless: Fascinating conversation. I could have talked to you about any one of these topics for a while, and I’m grateful that you were on the show… From how to bust a crooked property management company and the things to look for, like double and triple-booking maintenance people, to the successful syndications that you did with the 101-unit as well as the joint venture type of deal you did with the 62-unit. Then the tax lien information, pros and cons on both sides of that, as well as the things that got your spidey sense tingling a little bit about the deals – or the market rather – with the tenants being approved for $300,000 homes who could barely qualify to rent $600 apartments.
Thanks so much for being on the show. I hope you have a best ever day. Lots of lessons learned… We’ll talk to you soon!

Todd Tresidder: Thank you, Joe.

 

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JF970: How Options We are Given in Life Serve Us to Fight Fear

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He’s done every deal in the book and fought adversity in the market. Now he helps others get over their fear of making real estate decisions.

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Mark Collard Real Estate Background:

– Founder & CEO of the Outback, a seminar/empowerment company for real estate investors
– Travels and speaks internationally on real estate
– He hosts events all over the US for real estate professionals and real estate investors
– His mission is to fundamentally change thinking in real estate from fear-based to empowered
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– Best Ever Book: Outwitting the Devil

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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 fluff.

With us today, Mark Collard. How are you doing, Mark?

Mark Collard: Hey, I’m doing great. Thanks for having me.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about Mark… He is the founder and CEO of the Outback, which is a seminar/empowerment company for real estate investors. He is a full-time real estate investor, as well as he does coaching. His mission is to fundamentally change thinking in real estate from fear-based to being empowered. You can say hi to him at his website, CoachCollard.com. Based in Las Vegas, Nevada… With that being said, Mark, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Mark Collard: In 1999 I got started in real estate, but I actually started as a mortgage loan officer. I spent about a year really learning the mortgage business, and it kind of propelled me into things. I had done a little bit of study back in the day on [unintelligible [00:03:08].17] no money down program, and what I realized pretty quickly was that my finance knowledge, understanding traditional finance kind of gave me X-ray vision (that’s what I called it) into a transaction, into people’s contexts and their situations, and I realized my finance knowledge was a competitive edge and it helped me put deals together.

I started buying real estate, I started with subject to’s and lease options, bailed a few people out of foreclosure, and it just started going from there. I’d done everything wide, I guess you could say, on the highway of real estate, from note buying to commercial discounts, short sales, foreclosures, subject to’s, lease options… That’s just my thing nowadays, that’s what I do.

Early on, I realized that a lot of people deal with fear that freezes them up, or they get in the middle of a transaction and they don’t know anything, so they just go on to this story in their head, and it’s fear-based. You and I both know that fear doesn’t serve anybody, so part of what I’ve done is put the Outback together… The Outback is a mindset decision to seek solutions at all costs, and you don’t quit; you just continue to look and consider what options are there. Consider everything, but you won’t do anything… So I’ll consider unreasonable options and I’ll entertain those ideas, and in there I’m generally able to find a solution for somebody that helps me to put a creative real estate deal together. That’s the quick version.

Joe Fairless: I’m curious, when you were a mortgage officer and you saw that the finance knowledge gave you a competitive edge, what did you apply specifically, or what did you learn that gave you that edge?

Mark Collard: It was really understanding the trustee sell process. At the time I happened to be in Arizona… My little triangle, my place where I play now is Arizona, California and Nevada, and all of those locations have a [unintelligible [00:04:52].08] so it’s a non-judicial process, it’s a pre-defined statutory 90-day or a little more process in every day… Mastering that process or learning that process through the lending business and seeing people going to foreclosure – it allowed me to see through the transaction. Most homeowners, when they go delinquent, immediately are like “Oh my gosh, what am I gonna do? I need to call the bank and ask them what they can do or what I can do.”

Joe Fairless: Yep.

Mark Collard: And the bank’s only gonna tell you their process on how to prevent you from going delinquent or how to take your property back when you don’t pay it. What I realized is they’re just as misinformed as the homeowner is, and being in the mortgage business just allowed me to see through that, so I was able to put together solutions based in reality, rather than “Oh my god, I’m gonna lose my home!”, because as soon as a homeowner goes there, they lose their empowerment, and everything I do is about staying empowered; you’ve gotta continue to make decisions in the face of diversity, you can’t just go into fear. [unintelligible [00:05:46].13] authority over to the lenders.

Joe Fairless: Let’s talk about that… As an investor now, knowing what you know through the process of being a mortgage loan officer, how did you approach it with the homeowner and how did you provide a solution for them?

Mark Collard: Literally, my second transaction ever – a buddy of mine called me and said, “Hey, I’ve had my property listed for a year… It hasn’t sold, and I need to get rid of it. I can’t afford it anymore.” I said, “Well, rather than get rid of it, can I just take it over for you?” He said, “Sure. What does that look like?” I said, “Well, I’ll bring the paperwork over. You don’t have any equity, so just give it to me and I’ll figure it out.” And he says, “Well, I’m already delinquent, so my credit’s shut.”  I said, “Well, that’s in both of our favor, so I’ll figure it out from there.”

He owned  [unintelligible [00:06:29].05] on a first FHA loan, and he has a second with Green Tree. He didn’t know what to do, he thought he was stuck. He had it listed for 118k, which is the amount he owed to both lenders, for like a year. Relatively quickly, I was able to negotiate a second discount with Green Tree mortgage. I thought it was actually a short sale at the time, I actually didn’t know what I was doing; I just knew to go-go-go.

So they discounted it down $1,500, I purchased the —

Joe Fairless: Holy cow, I wanna pause right there… Green Tree lowered their second mortgage from 118k to $1,500?

Mark Collard: No, actually the Green Tree second was 17k, and the first with [unintelligible [00:07:13].29] was 101k.

Joe Fairless: Oh, I thought you said he had it listed for 218k, which is what he owed…

Mark Collard: 118k.

Joe Fairless: Oh, 118k! Okay, I misheard that. Alright, so they went from 17k and change to about $1,500?

Mark Collard: Correct. I actually made them an offer officially… I calculated my numbers and justified how I was gonna make my offer, and I made an $1,100 offer. They said no to it immediately, and I basically sat on my thumbs for three weeks, just saying, “Hey, I don’t really know what to do.” Three weeks later they just called me and sent over a fax and said, “Hey, we’ll take it.” So I basically effectively bought my own second mortgage, because now I owned the property; I bought the second mortgage for $1,500, but it had a lien for $1,700, so I just created an arbitrary $15,500 in equity. [unintelligible [00:08:00].14] it was just all the taste I needed, and I just went gangbusters.

I’ve done deals like that where we discounted debt 300k-400k, and freed up half a million dollars in equity.

Joe Fairless: Wow… So how do you go about reaching out to a lender? What do you do? Do you just call the 1-800 number and say “I’ve got a mortgage”, or what?

Mark Collard: Yeah, you literally start with that, but again, my mortgage background gives me context for everything… So depending on the circumstance, if I’m the homeowner or if I’ve already got the property subject to, I don’t do something like that unless I get the original homeowner to sign a bar’s authorization to give me access to enquire on their behalf.

I usually have our P’s and Q’s in order, so I’ll just call and say, “Hey, I’m calling about this property and this loan. I have a bar’s authorization I need to send you so that you’ll talk to me.” They’ll give me a fax number, I’ll fax it in… Anywhere from 24 hours to ten days, depending on how inefficient they are, I’ll get in contact with them again and we’ll start having a dialogue. A lot of times I’ll just throw a hook in the water, so to speak, and fish with no worm, so to speak, trying to find the right person… Sometimes it’s the asset manager with [unintelligible [00:09:07].18] sometimes it’s a higher up VP that I have to get to… It’s always different; every lender is different, every scenario is different, every circumstance is different. It’s really about just being diligent and imposing our will on them, and it takes time.

Joe Fairless: Yeah, I imagine it takes time just because there’s a lot of red tape with lenders and a lot of process, right?

Mark Collard: Lots of red tape. I think they’re the originators of red tape.

Joe Fairless: [laughs] Any tips? You just gave some great ones as far as “Be patient, know it’s a long process, get to the right people…” Any other tips before we change gears a little bit, as it relates to working with lenders and negotiating down the mortgages?

Mark Collard: Be willing to not take no for an answer and be willing to be somewhat unreasonable about your request. You have to approach them with a “I know more than you” or “I’m gonna do more than you” attitude. A lot of time we acquiesce to the person that answers the phone and their position and we buy into their lack of authority and the fact that they have to follow what I call “procedure number 9.”

I have a permanent script that’s built into me that says, “Hey, Mr./Mrs. Person That I’m Talking To, I totally appreciate your position and the fact that your corporate policy says XYZ, and procedure number 9 won’t allow you to do that, but in my world I’m actually in your position and I’m the owner of the business, so my procedure is bigger than yours, my corporate policy is bigger than yours, and we can do this one of two ways: I can run directly through you on the phone, it can be a very ugly and difficult conversation, or you can accommodate me and help me get to the right person, which is probably, starting off, your manager.”

I’m professional about it, but I’m very stern, and I can talk circles around most people that aren’t bank presidents… In some cases bank presidents, so I’m gonna get my way, it’s just gonna take time. So just be patient.

Joe Fairless: Now let’s talk about — how about the last deal you did, can you tell us about it?

Mark Collard: Actually, I’m working on one right now… It’s in process, it just hasn’t completely gone through, and I think that’s probably the highlight of everything.

Joe Fairless: Oh, really?

Mark Collard: Yeah, I’m working on a mobile home park right now, and the scenario is there’s an older gentleman that’s ready to retire; he’s got a mom-and-pop run (so to speak) mobile home park. I learned through reading and I went through a bootcamp on mobile home parks and that type of thing… They basically are mom-and-pop run and they’re very run down and always underperforming.

He shows a certain amount of money, he claims a certain amount of money, he’s got his gross expenses and his gross income, but his reality is different than what he shows on paper. So if that price is 300-400k more than it’s actually worth, that’s being nice… But recently I ran across a technique from a guy, just two weeks ago he was at an REI club here, and we like to attend the other ones to gain knowledge and network. He gave me  a creative finance technique I’d never seen or used before, and immediately I understood it… So I put that on the board with this gentleman last week. It’s been about two-and-a-half months since we last talked, and he’s entertaining the idea right now.

Joe Fairless: Really? That’s cool… Isn’t it nice to learn some stuff and then immediately implement it?

Mark Collard: Well, what’s really cool is I pride myself on my finance knowledge, my creative finance techniques and I have a lot of experience with it; I constantly challenge myself, but I didn’t know this event was gonna be like that. My buddy told me, he said, “Hey, this guy’s got something a little bit different, you might wanna check it out.” Sure enough, it blew my doors.

He’s got this technique — I think he labels it incorrectly… He calls it a “zero percent down creative finance.” I think “zero percent”, saying that to somebody, even a seller, it turns people off. But effectively, he’s willing to listen to them… He calls it an “avatar seller” – he has a certain type of seller with a certain motivation, and he says “If they’re at a price where they hadn’t sold in a while, their motivation is getting stronger and stronger”, and it’s not unreasonable; go ahead and give them their purchase price, go ahead and give them their unreasonable number. Pay 300-400k more.

Basically, here’s what the deal’s gonna be: offer them their price or even more, offer them no money down terms, take over their loan, but basically you’re gonna do a seller carry, and whatever you pay them on a monthly, it’s gonna be 100% applied to the equity or to the payoff of the loan. So he basically says, “Mister Seller, I will give you (I’m just gonna use arbitrary numbers) $7,500/month for 12 years.” If you calculate that out, that’s gonna work out to be 1.1 million, which is the asking price. “You’ll be completely paid off and out of the picture, and I’ll own the property free and clear.”

Basically, their motivation is like “Wow, this guy’s gonna pay me X every single month…” They don’t think about whether it’s gonna pay down the mortgage, they’re just saying “That works for me”, and it gives them their price that they wanted. Basically, I’m gonna own a property in 12 years if he says yes.

Joe Fairless: Okay, I see.

Mark Collard: Now, that’s [unintelligible [00:14:11].01] all the due diligence, but that’s the effective concept of it.

Joe Fairless: Yeah, thank you for sharing that.

Mark Collard: It’s a gentleman named Chris [unintelligible [00:14:20].10] He’s an attorney and a creative finance guy, and I’m very impressed with his program.

Joe Fairless: Thanks for giving him a shoutout; I don’t think I’ve interviewed him. Maybe I should interview him. I just wanna recap, though…

In this scenario, it’s a no-money-down seller finance scenario, where you pay them their asking price – if they’re being unreasonable, pay them their asking price; or even if they’re not, you still could use this, but this is particularly good for that. You give them, say $5,000 a month, times 12 months in the year, say, for ten years… And whatever that amount is, whatever that total is, that’s their overall purchase price that gets paid to them.

The money that you pay them, you said it goes to the principle payment of what you owe – is that correct?

Mark Collard: That’s correct. Starting month one, 100% paydown.

Joe Fairless: Say they want $500,000 for their property – then you could pay them $60,000… It would be eight years and three months. So a $500,000, for $5,000 a month… “I’ll give you $5,000 for every month for eight years and three months”, and then obviously, when we run our numbers, we have to conservatively project that it’s going to cash-flow above and beyond all the expenses, which are including this $5,000 right?

Mark Collard: Correct.

Joe Fairless: And the way we come up with the amount we can pay them a month is by identifying how much we can conservatively expect to receive for the property, and then maybe half it… Or we can make it 50 years, or whatever it is.

Mark Collard: Sure, he actually has a spreadsheet he uses, and everything… I didn’t go to his actual class, I was just in that 45-minute share he did. My mortgage knowledge allowed me to pick that up and get it, and I’ve got so much experience applying similar stuff that it just made sense to me. I don’t have to scrutinize it for hours and hours to know it works. I’ve talked to those sellers for years and years and years, I know they’re out there.

Joe Fairless: Yeah, that’s cool. How did the conversation go when you went back to the mobile home park person?

Mark Collard: It was exactly as Chris had said it would be… It was identical. The motivations were there, all his issues were there. He had a couple of other issues; he needs a little more money on the front side, and he explained to me why, and those were personal reasons for himself, so… That won’t be a deal breaker, it would just money in, and we have a smaller number to play with or less time to pay on it… But he didn’t blink at the idea of 150% paydown on the mortgage, and he was more focused on his needs, and “Hey, I just need a bigger chunk of cash upfront.” That’s kind of our negotiation point right now.

Joe Fairless: That’s a fun share, thanks for that.

Mark Collard: Yeah, you bet!

Joe Fairless: Alright, what’s your best real estate investing advice ever?

Mark Collard: Best real estate investing advice ever is – and I’ll say this to anybody, no matter how long they’ve been in the business – Robert Kiyosaki says that if you buy real estate for it to only go up in value, you’re a speculator, and I’ve stuck to that. So you do not have to buy real estate… You can buy real estate, and when you get to a place like me, you can [unintelligible [00:17:33].28] anything, but just because you can doesn’t mean you should.

You’ve gotta see your entrance, your acquisition strategy, and you’ve gotta be able to see money on the backside, either cash flow or through a discount. So you don’t have to buy real estate. Learn to say no. There’s several pieces of his advice in there.

Joe Fairless: Yeah, absolutely. And what is an example of a property that you said no to, if you can think of one?

Mark Collard: One of my favorites… Actually, my partner today – his name’s John Lee, he’s here in Vegas and he runs the Outback with me – when I was training him and kind of getting him into the Outback mode he brought a property to me, and one of the fundamentals that I practice is that we buy based on a particular MAO, and we don’t deviate the MAO. I’m sure you know what that is…

Joe Fairless: No, what’s MAO? I don’t know what that is.

Mark Collard: It’s a Maximum Allowable Offer. It’s a predefined [unintelligible [00:18:21].19] the ARV or the actual value of the property of what we think we can sell it for. So one of the things that I’ve learned, especially being here in Vegas, is that dollars and dollar signs and numbers make us intoxicated, but percentages never lie. I always translate my profit to a percentage, so the percentage doesn’t get me intoxicated; it’s not very sexy, it’s just like, “Hey, if I’m gonna make 13% return on investment in a couple months – cool.” If I keep that number a number, and it says “Hey, you’re gonna make $82,000”, I’m like “Wow, that’s a lot of money”, right?

Well, in this particular case, the $82,000 translated to a percentage that was way under our profit model, so I stopped in kind of mid-sentence, so to speak. And he says to me, “How does this not make sense?” I said, “Well, it makes sense from the standpoint of you’re looking at the dollar amount. Yes, $82,000 is a lot of money, but you just blew the model out of the water. Do we invest that way?” and he looks at me and almost gets in tears, and he was like “No, we don’t. You’re right, this is no deal”, so we said no.

He was already counting dollar signs in his head, but it was an exciting and permanent learning point.

Joe Fairless: That makes a lot of sense to me. The one question I have where I can see someone going and taking the opposite argument is if there is, let’s say, million dollars worth of profit, and it’s like maybe a 8% return… But then you could in theory get 16% return on a bunch of smaller deals, the ease of transaction of management of this one, albeit less return, and the risk, where you’re not having to do a lot — well, I guess it could be argued both ways, because all your eggs are in one basket, versus being spread out… But the point is you might be able to get the same amount of return or less return on only one deal, whereas you have to do a lot of other deals to get a faster return.

Mark Collard: Yeah, and I wouldn’t disagree with your logic in your statement, but the reality for me is that risk is relative to what you know; I learned that from Kiyosaki, as well. For me, it’s about what you have at risk. If I have to put a lot at risk to get that 8%, it’s not worth it because that’s beyond my model.

I know a lot of people can justify “Hey, for $100,000 deals maybe you say no, but that’s a big chunk of money”… No, everything for me works the same, and I learned that in the mortgage business. If a lender loans 80% LTV and they want 20% down, there’s a reason… And just because it’s a big deal doesn’t mean you can fudge the numbers. Percentages always worked the same. The market can shift 5%, 10% on a million-dollar property just like it can on a small property, and the percentages and the models keep you safe and prevent you from making mistakes.

Joe Fairless: I like it.

Mark Collard: I can understand the logic, but I’m committed to not doing that.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Mark Collard: Yeah, let’s do it.

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

Break: [[00:21:27].05] to [[00:22:09].13]

Joe Fairless: Best ever book you’ve read?

Mark Collard: Outwitting the Devil by Napoleon Hill, his most recent one.

Joe Fairless: Best ever deal you’ve done?

Mark Collard: It’s a scratch & dent lender, I bought a property subject to… Within 90 days I put up 100k and I got half a million back in 89 days.

Joe Fairless: What’s a scratch & dent lender?

Mark Collard: [laughs] It was back before the meltdown — actually, it was in the middle of the meltdown. It was a lender that goes out and buys subprime debt that never gets paid. So it was a 1.4 million dollar loan and it never made one payment.

Joe Fairless: And how did you make that money?

Mark Collard: I discounted the debt. I called the lender, the lender said “Hey, we’ve already sold this loan off”, and I said “Well, who did you sell it to? It just now went delinquent.” They said, “Yeah, there’s a scratch & dent lender out of New York.” They gave me the number, I called them and I negotiated… It took 89 days and we were able to sell the property and discount the property by close to half a million dollars.

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

Mark Collard: My time. We call ourselves investors in man and land, in that order, and I always consider that a relationship is way more important than a deal, so we always put people first in the transaction. We meet tons of people, we give our time. We have a statement that we say, “Everybody’s worth five minutes”… And you encourage them, you give them ideas, you share your resources and you never know what’s gonna come back.

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

Mark Collard: Getting intoxicated and basically buying too many properties too fast. I’ve done that twice.

Joe Fairless: You were literally drunk?

Mark Collard: [laughs] No, intoxicated is not so much an actual inebriation, it’s buying real estate with your ego versus your models.

Joe Fairless: You live in Vegas, I wasn’t sure. I had to clarify. [laughter] A lot of fun stuff happening over there.

Mark Collard: Understood.

Joe Fairless: It makes sense. Where can the Best Ever listeners get in touch with you?

Mark Collard: They can reach out to me at any time, coachcollard.com, or you can e-mail me at mark@coachcollard.com. My phone number is 702 625 21 07. Please, just give me some grace, because I don’t call people back very quickly. Feel free to text.

Joe Fairless: Alright, well you’re the exact opposite of me… I hate text messages. I hate them with a passion. Mark, I did love our conversation though, on the opposite end of that… Holy cow, some really practical piece of advice. Three things are standing out in my notes. One is on your second transaction, how you negotiated with the lender from $17,000 to $1,500, and you gave some examples for how to do that.

Two is the mobile home park that you’re working on, with the zero money down, seller financing structure, and you discussed how to approach it that way… And then three is your percentage thing. I like your quote, “Just because you can buy, doesn’t mean you should buy”, and translate the profits into a percentage – I love that stuff. We talked about how we might think of it differently, but how you’re holding steady with your thought process and appreciate that.

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

Mark Collard: You as well, thank you very much. I enjoyed being on the show.

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JF964: Do You Know About these LEGAL LOOPHOLES of Real Estate? #SkillsetSunday

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Best Real Estate Investing Crash Course Ever!

Rich Dad Advisor, Garrett Sutton, shares his powerful knowledge of legal loopholes in real estate. LLCs, C Corp.’s, S Corps, which do use and why would you use them? How do you keep more money yet be an upstanding citizen? Your real estate approach is about to change, don’t miss this one!

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Garrett Sutton Real Estate Background:

– Founder of two companies, Corporate Direct and Sutton Law Center
– Assists entrepreneurs and real estate investors to protect their assets and maximize their financial goals
– Author who has sold more than 850,000 books including, Loopholes of Real Estate
– Member of the elite group of “Rich Dad Advisors” for bestselling author Robert Kiyosaki
– Based in Reno, Nevada
– Say hi to him at http://www.sutlaw.com/

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legal real estate loopholes

 

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 fluff.

I hope you’re having a best ever weekend. Because it is Sunday, we have a special segment called Skillset Sunday. By the end of our conversation, you’re going to have a specific skill that perhaps you didn’t have, and holy cow – we’ve got someone who is here to educate us on all sorts of legal loopholes we want to close in our real estate investing business. How are you doing, Garrett Sutton?

Garrett Sutton: Good, Joe. It’s a pleasure to be with you today!

Joe Fairless: Well, nice to have you on the show, my friend. A little bit about Garrett – he is the founder of two companies: Corporate Direct and Sutton Law Center. He is the author who has sold more than 850,000 books, including Loopholes of Real Estate. He’s a member of an elite group of Rich Dad advisors for the best-selling author, Robert Kiyosaki, who has been a guest on the show. He’s based in Reno, Nevada.

With that being said, Garrett, before we dive into legal loopholes we wanna close in our business, can you give the best ever listeners a little bit more about your background?

Garrett Sutton: Sure. I grew up in the San Francisco Bay Area, and I attended the University of California, Berkeley, then I went across the Bay to Hastings Law School, I got my law degree, practiced in San Francisco and Washington DC, and I always liked the mountains in Lake Tahoe and skiing, so I moved to Reno in 1989. It was a great move, I raised a family here; Nevada is a great state, along with Wyoming, for setting up corporations.

I’ve been happily practicing law in Reno, Nevada for several years now, and I enjoy traveling the world with Robert Kiyosaki and the other Rich Dad advisors and just talking about financial education and how people can take steps on their own – because they don’t teach this in school – to become financially aware and then financially free.

So it’s been a really great process to go through and it’s just very rewarding to help people. I’m glad there are people out there like you, Joe, that are providing education to people on a continuing basis. This is important for people to gain this knowledge so that they can move forward as well.

Joe Fairless: I completely agree. You mentioned that Nevada and Wyoming are great states for setting up corporations… What makes a state great for setting up a corporation?

Garrett Sutton: Well, it’s two things – one is the law. California, for example, has a very weak asset protection law with their corporations and LLCs. Nevada and Wyoming take the other side of things – they want to make their law as protective as possible, along with Delaware and South Dakota and some other states. They provide excellent laws to help people protect their assets.

Wyoming also offers privacy. When you set up an LLC in Wyoming, on the Secretary of State’s website they don’t list your name as being an owner or a manager or a member. So we like the privacy, we wanna keep a low profile, and Wyoming provides that. The annual fee for Wyoming is only $50/year, versus $800 for California, and other states are more expensive.

So we really like Wyoming, we also like Nevada, and you have the choice of what state to incorporate in. You’re not locked into incorporating in the state that you live in. You can choose which state has the best laws and do the best to take advantage of those laws.

Joe Fairless: What if you have already incorporated in New York, for example? Can you switch that to Wyoming?

Garrett Sutton: You can, and one of the strategies we do, Joe, is if you have property in New York, we would have it owned by a New York LLC, and then you would have the New York LLC owned by a Wyoming LLC. That’s the best strategy.

So if you have the property in New York, title is in the name of a New York LLC, you’re probably okay, and then you would just take the next step of having the New York LLC be owned by the Wyoming LLC, which if someone’s suing you personally – after a car wreck, for example – they would have to fight through the Wyoming LLC to even get at the New York LLC. Wyoming offers excellent asset protection through the charging order procedure. So that’s a way to do it.

Now, say you really want a Wyoming LLC for your New York property… You can take the New York LLC – it’s called a continuance – go to the Wyoming Secretary Of State and continue it into Wyoming, and all of a sudden your New York LLC becomes a Wyoming LLC, with the same incorporation date and the same EIN number. So it can be done.

Joe Fairless: And that’s called a continuance?

Garrett Sutton: Yes.

Joe Fairless: And you said you go to the Wyoming Secretary of State and request that?

Garrett Sutton: Yes.

Joe Fairless: Interesting.

Garrett Sutton: And our firm provides that service. We do it for a lot of people. So if you’re in a state where you don’t like the laws, you can move over to Wyoming and take advantage of their laws.

Joe Fairless: What is the downside? Living in a state and then having an LLC or an S-corp in Wyoming, but you’re not necessarily physically there…

Garrett Sutton: One downside would be say you have a business in New York and you have a Wyoming LLC doing business in New York. To do it right, you would have to qualify the Wyoming LLC to do business in New York, and you’re gonna pay the same fees as you would if you started in New York to begin with. So you’d just be paying two state filing fees instead of one. But as we said, Wyoming is only $50/year, and we serve as the resident agent there in Jackson for $125/year. So for $175/year, you’re paying a little bit more for better asset protection.

Joe Fairless: And that would be the fee that you all charge? $175?

Garrett Sutton: Well, the annual fee, yeah. The set up fee, if you mentioned Rich Dad, it’s $595, perennity, plus the state filing fees, which vary state to state. So it’s $595 plus, Wyoming for example is $100, so $695. Then on an annual basis after the first year, after everything’s set up, it’s $175/year, $50 to the state of Wyoming and $125 for us to be the resident agent. Not expensive.

Joe Fairless: Not expensive. After we get done talking, Garrett, I am going to talk to you offline… I messed up when I started one of my LLCs. I set it up in New York because I was living in New York, and I had to publish it in some newspaper for $2,000, and then in another newspaper… All in it was actually $2,000; one was $1,000, the other was $1,000, and I don’t know what’s going on with one of my LLCs, so I’m actually going to hire you and do this. Cool, well selfishly, thank you for that info. [laughs]

Garrett Sutton: Yeah, we provide a cleanup service, so if you haven’t done your minutes for a while or you haven’t kept up to date, we’ll clean it up for you. It’s not a problem.
The key thing is you wanna follow the formalities. You wanna make sure that you’re paying the annual fees, you’re doing your annual minutes… You’re following these pretty simple requirements. If you don’t follow them, then someone can pierce the veil and get at your personal assets. So it’s important to follow these formalities on an ongoing basis.

Joe Fairless: I’m taking notes, perhaps I missed this – I thought you said there are two things to consider: one is asset protection… Was there another, or did I miss that?

Garrett Sutton: No, the key thing for me is asset protection. Now, there are some tax issues involved, and you’ll work with your tax advisor, but for me, you’re gonna pay the same in taxes with an LLC (maybe you’ll save some) than you would personally, because you can get depreciation personally… But here’s the interesting thing, Joe – if you operate a business or run real estate in your individual name, you have a five times greater risk of being audited by the IRS than if you operate through an LLC or a corporation. That right there is a good reason to be incorporated; you’re gonna follow all the tax rules, you’re gonna follow all the corporate rules, but by doing that, you’re gonna be protected and you have a much lower risk of running into an IRS audit.

Joe Fairless: Let’s talk about other legal loopholes as real estate investors. Now that I selfishly got what I wanted to — no, I’m kidding. [laughs] Now that we’ve talked about some loopholes, what are some other loopholes…? You’ve written a book about it… What are some things that you have identified that we should talk about during today’s conversation?

Garrett Sutton: Well, with loopholes for the tax side – you wanna open those and take advantage of them, and on the legal side, you wanna close them and protect yourself. Certainly using LLCs to hold real estate – in some cases you’ll use LPs (Limited Partnerships). One of the things that happens, Joe, is people will set up the LLC for their real estate, and then they’ll forget to transfer title from their name into the LLC name, and you don’t have the asset protection unless you do that transfer, from your name into the LLC.

When someone’s looking to sue over the property at 123 Elm Street, and they go to the county recorder and it’s in your name, that’s an easy path for them to get at your personal assets. When the county recorder says 123 Elm Street is held by Joe’s LLC, an attorney is gonna think twice about suing, especially on a personal claim, against you… Because it’s in an LLC, and if we’ve structured it right, it’s gonna be difficult to get at that asset. So we wanna be sure and transfer title.

Now, what we talk about in the book Loopholes of Real Estate, some people are worried – “If I have a loan against the property and I transfer the property, isn’t that a sale of the asset?” Well, no, it’s not a sale. You’ve just transferred it from your name to your LLC, you haven’t sold the property. And in most cases, 999,000 out of a million, it’s just not gonna be an issue. The bank will not call the note. And here’s the magic language you use if it’s an issue (and the FHA buys this language)… It’s called continuity of obligation.

What that means is when you buy that duplex in your individual name, you had to sign a personal guarantee and you had to give the bank a first deed of trust against the property. Now, when you transfer from your name into the LLC, there’s a continuity of obligation. The bank still has your personal guarantee, they still have a first deed of trust against the property, so the obligation has not been diminished, so that’s the language you’ll used. But as I was mentioning, it’s rare when you see a bank actually call the note.

Banks are getting more understanding of people holding title to their real estate in an LLC. What my clients say and what I’ve had in my experience is the banker will say, “Well, I can’t tell you that you can do that, but if you do that, we’re not gonna bother you.” That’s what they’ll say. They’ll say “I’m not gonna advocate it. We want you to take title when you buy the property in your individual name, but you know, after you buy the property and you transfer it into an LLC, we’re not gonna bother you.”

So I would always recommend that people, even if they’re financing the property, take title eventually in the name of an LLC. We talk about those issues in the book.

Joe Fairless: What is the process that you would recommend in terms of doing that? Would you talk to the lender first, or would you do it and talk to them about continuity of obligation if they bring it up later?

Garrett Sutton: Well, is it better to ask permission or forgiveness?

Joe Fairless: Right…

Garrett Sutton: So I would do it, and as long as they keep receiving a check, and the check will be in the name of the LLC – as long as they keep receiving the mortgage check made out in the LLC account, they’re not gonna bother you with it. So I always recommend to do it. And if you have a good relationship with the banker, if the banker is a friend of yours, you could ask him, and 99% of the time they’re gonna say “Just do it, don’t tell us about it.”

Now, Joe, the one thing you have to do if you do that is you have to let the insurance company know the title is in the name of the LLC, because you’ll take title in your individual name and that’s who the policy will be with… Then when you transfer it to the LLC, the insurance company needs to know that.

We had a client, before they came to us they were in Los Angeles; they had a duplex, the insurance was in their individual name, they transferred title to the LLC, there was a fire, and the insurance company said, “Well, we’re not ensuring the LLC, we’re ensuring you”, and they denied coverage.

When you talk to the insurance company they’ll say “Well, if you put it into an LLC, that’s a business, and we have to charge you a higher premium”, which is, of course, nonsense; it’s the same risk. Here’s how you skin the cat: you tell the insurance company “I’m gonna keep the insurance in my individual name (so you get the lower premium), but I want you to list the LLC as an additional insured.” That’s how you do it.

Joe Fairless: I love that. That’s a real-world problem you just solved, because I guarantee a lot of people – myself included – who know it makes sense to transfer your real estate into LLCs did not think of also getting the insurance company to add that LLC as an additional insured. If you ask them to do so, do they ask why?

Garrett Sutton: Nowadays a lot of them know why… I’ve never had my agent ask why, but she knows that I’m holding properties in LLCs; the insurance is in my name, and it’s really easy for her to add the LLC as an additional insured.

Joe Fairless: Earlier you said to use LLCs to hold real estate and in some cases use LPs. When would we use Limited Partnerships, LPs?

Garrett Sutton: That’s a really good question. There are limited times when you would use the Limited Partnership. A couple things – first of all, in California there’s an extra franchise tax on LLCs based on gross receipts; not how profitable you are, but just money coming in the door. So in California, to avoid this kind of offensive franchise tax, you may look at using a Limited Partnership.

Now, the Limited Partnership requires that you set up two entities, right? You set up the Limited Partnership that’s chartered with the state, but then the general partner can either be an individual, or you as a corporation or LLC. The problem with you being the individual general partner is you have unlimited liability for that property, and so we have to have the general partnership interest be in the name of a corporation or LLC. Unlike the LLC where we only have to set up one entity to get everybody protected, in the LP you have to set up two. That’s a downside.

On the plus side, it’s really clear that if mom and dad own 2% as general partners of the LP through their corporation (LLC), they can gift 98% to the kids over time, and with that 2% general partnership interest, they have absolute control over the Limited Partnership. So the kids can’t come in and force mom and dad out. The kids would have to live with their 98%, while mom and dad were able to pay for various expenses, pay for medical, whatever they want, with that 2% interest and stay in control. That’s one of the big advantages of the LP.

I have another book called How To Use Limited Liability Companies and Limited Partnerships – I just came out with the fourth edition – and we talk about those issues… The use of the LP for estate planning and gifting to the kids, because that’s a great use for that entity.

Joe Fairless: Something happens and people sue us… It’s a litigious society, as you know in your line of work, and you do what you can with your clients to help protect stuff from happening. What are either entities or structures that we can employ — I’ve heard of land trust before, and I’ve interviewed people and they seem almost too good to be true. What are your thoughts on that, before I [unintelligible [00:19:32].15]

Garrett Sutton: Okay, I have a whole chapter in Loopholes Of Real Estate on land trust, just busting up the misconceptions about them. First of all, they offer no asset protection. You have a duplex in the name of a land trust and a tenant sues – they’re suing you personally, right? There’s no protection. This idea that you have privacy if someone’s gonna sue the land trust and they can’t find who the owner is is nonsense.

If they go and try and find who the owner is and they can’t, all they have to do is go to the court and get a court order to publish notice in the newspaper, of the lawsuit, and you’re never gonna see that notice. The plaintiff, the person bringing the case, is gonna win the case by default. That’s not a good position to be in. So this idea that the privacy of a land trust keeps you out of court is nonsense. It puts you further behind in the court system.

For example, if there’s a problem on the property and the tenant sues, and they can’t find out where you are, then you don’t have the opportunity to notify your insurance company of the claim, and then there’s a default judgment against you. Your insurance company could say, “Look, you didn’t notify us of this claim, we’re not gonna cover you”, and you’re in a worse position than if you’d used an LLC. So the land trust is not a very good way to go.

As well, they say “Well, there’s no asset protection with a land trust, so have three land trusts owned by one LLC, and that gives you the asset protection.” The problem with that is if the land trust gets sued, the LLC is the responsible party – well, you’ve just let someone into an LLC that owns three properties, so you have compounded the problem. Now the tenant can reach three properties instead of one, so you’re absolutely right, Joe… There’s way too much misinformation out there; it sounds too good to be true, and when that’s the case, it usually isn’t true, and that is certainly the case with land trusts.

I always recommend that people be very cautious about what they hear on these land trusts.

Joe Fairless: You say the word “land trust” with so much disdain… [laughs] It’s like poison, I can tell, from your mouth. Is there a time when it would be good to use one?

Garrett Sutton: There would be one case, and that would be where the bank says, “Absolutely not, you cannot put the property into an LLC. We’re gonna sue you, we’re gonna call the note” or whatever. So what you do is they can’t not let you put property into a living trust. For state planning purposes, we can put real estate into the name of the living trust. The land trust and the living trust are very similar. So you put it into the land trust, and then you have the beneficiary be an LLC. That would be the only case I would use the land trust.

This idea – and believe me, there are all these non-lawyers out there promoting these land trusts… They have no idea what the law is, but they have latched onto the idea that the land trust is something they can sell… You just have to be very cautious on who you take advice from.

Joe Fairless: Yes, that is true. Well, really quick as we wrap up, let’s talk about one other thing… First off, my overarching question earlier was “Is there something else that we haven’t talked about that you implement with your clients, that typically isn’t implemented already?”

Garrett Sutton: Yeah, I like — you have your New York duplex, owned by a New York LLC, and turn that as owned by a Wyoming LLC. You get a Connecticut property – we have a  Connecticut fourplex in a Connecticut LLC owned by that same Wyoming LLC. So we don’t need to set up a new Wyoming every time.

Now, the next step is you can have what’s called an asset protection trust on that Wyoming LLC, and that provides excellent asset protection. The problem is it’s an irrevocable trust. You can’t really change it around. When we talk through this with our clients, most don’t do it because there are expenses, and they’re irrevocable.

The Wyoming LLC gives you the flexibility to change things around if you want, and it gives you the good protection. So some of our clients, Joe, would consider a Nevada asset protection trust, for example… Most of them wouldn’t, knowing that they’re just as pretty well protected with that Wyoming LLC.

Joe Fairless: Where can the Best Ever listeners get in touch with you and your firm?

Garrett Sutton: Our website is CorporateDirect.com, and we have lots of information there. We offer a free 15-minute consult with an incorporating specialist, so you can call up and talk to someone on the phone about your situation. You can call 800 600 1760 and talk to a live body about what you should do in your situation and how we can help you.

As I said at the top of the show, it’s been great traveling around with Robert Kiyosaki and educating people. That’s how our firm has grown – by providing information to people, and if we can help you with these entities, we’re happy to do so.

Joe Fairless: Is there anything else that we haven’t talked about that you wanna briefly mention to the Best Ever listeners?

Garrett Sutton: I just think that we are a litigious society and that will never change. I just don’t see our system changing at all. So as you get started, you need to protect your wealth right at the start. If you wait and you get sued, it’s too late to set up your asset protection, so you have to do this when the seas are calm, when you have no problems… Then it’s okay to set up your asset protection structures.

Once you’ve even then threatened with a lawsuit – not received the summons, but actually been threatened by a lawsuit, it’s too late to set up these LLCs and other structures… So just do it right from the start.

Joe Fairless: Garrett, this has been an educational conversation. Thank you for being on the show, talking about overall asset protection. I love the one-two punch that you mentioned: tax loopholes – you want to open up, legal loopholes – you want to close. And talking through, if you’ve already created an LLC, then doing a continuance in a state like Wyoming… This is still relevant to basically everyone who has an LLC who didn’t start it in the state that they should have (myself included) and then also the difference between why we should own real estate in LLCs, which I think a lot of the Best Ever listeners know, but you went two levels deeper and talked about the importance of letting the insurance company know that it’s in the LLC’s name and add them as additional insured, and make sure that you transfer your title from your name to the LLC. So two things that perhaps people aren’t aware of.

Then lastly, the difference between LLCs and LPs, as well as overall asset protection, and your thoughts on land trusts – of course, I can’t forget that. So Garrett, thanks again for being on the show. I hope you have a best ever weekend, and we’ll talk to you soon.

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real estate pro advice

JF881: Why Wholesaling Requires OVER-DELIVERY of Expectations in Marketing, Sellers, and Buyers

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“Above and beyond” is a phrase that the denotes doing a little more than what was expected. You are going to hear that today from Sinclair, because she has scaled her business by doing more than her competition. Hear about how she was able to grow by going the extra mile.

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Sinclair Sweat Real Estate Background:

– Full time real estate investor
– Primarily focused on single family homes and wholesaling for over 4 years
– Based in Las Vegas, Nevada
– Say hi to him at 313-412-8189
– Best Ever Book: Think and Grow Rich by Napolean Hill

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real estate pro advice

JF830: EBay was Where He Found His 2nd Home and Flips and Holds

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Have you ever purchased anything on eBay? How about a house? Today’s guest did it, and is now focused on his big goal, which is to buy and hold multi family units. Hear how he started and where he’s going!

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Omar Merced Real Estate Background:

– Agent with Real Estate Wishes LLC
– Started investing in real estate in 2002 buying a fourplex
– Bought second investment property on eBay
– Became an agent in 2009 and got into property management, managing 1,000 doors.
– Currently flipping houses and moving to multi family next year
– Joined Army at 17 years old and served for 16 years
– Based in Las Vegas, Nevada
– Say hi to him at http://www.realestatewishes.com
– Best Ever Book: Richest Man in Babylon

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors. We make funding your projects easy so you can focus on what you do best…rehabilitating homes.

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JF725: When a Lawsuit Eats Your Profits on a Property #situationsaturday

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Today’s guest found himself in a sticky situation when he was being sued in a fix and flip project didn’t go the way he planned. A storm came and damages racked up. $35,000 would be owed by our guest, but luckily he completed the transaction in a creative way, hear how he did it.

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Bill Gatten Real Estate Background:

– Co founder of Open Door Wealth Management; A training program in creative real estate financing
– Author of “Keeping It…”
– Based in Las Vegas, Nevada
– Say hi at landtrust.net

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no fluff real estate advice

JF694: How to Legally Seller Finance ANY Existing Loan

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Afraid of the Due On Sale Clause? Well don’t worry, our guest has you covered! He shares how you can slip into a seller financed deal on any existing loan while complying with Didd Frank. This is a VALUABLE episode, listen up!

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Bill Gatten Real Estate Background:

– Co founder of Open Door Wealth Management
– Author of “Keeping It…”
– Based in Las Vegas, Nevada
– Say hi at landtrust.net

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