Getting Creative with Creative Finance

Dan Austin: [0:02] Welcome to the Collecting Keys Friday Focus. Hey there. Welcome back to another episode of the Collecting Keys Friday Focus. You got me, Dan Austin, as your host today, and and I want to talk about getting creative with Creative Finance. But before I do, I gotta do a plug for our Instant Investor Program, just because I know there's some people out there that are new listeners, or other listeners that have ignored everything Mike and I say, and don't actually know we have a awesome group coaching program, the Instant Investor Program, and it's exactly what it sounds like. We help teach you and coach you how to be an investor somewhat instantly. You know, we've got people in the program right now that just just joined us not too long ago, that are gonna hit multi 6 figures in income this year. We have other folks talking about leaving their w two job. So if you're looking to accelerate your growth, look at growing your pipeline of deals, exit your w two, or just grow your side hustle real estate, whatever it is, we got something for you here. Go to collectingkeys.com, click on the blue button at the top that says become an instant investor. Book a call and see if you're a good fit for the program. So without further ado, let's dive into some creative finance stuff. And the reason why I'm doing this is because we actually just locked up a seller finance deal last week, and as I was coaching the sales guy through this, we had some other sales guys on our team asking some questions, and of course, in our group coaching, we always have good questions around creative financing through it. So I thought it was time to bring all these topics to the top of the list, and just go down some of the things. And I wanna talk about what are the three inputs that we generally negotiate, as well as like what are the three things that we generally look at to say this constitutes a possible seller finance deal.

Dan Austin: [1:40] Now we have other creative finance like subject to innovation and stuff like that, those will be other days, let's just talk today specifically about seller finance. So what are the things that constitute a possible seller finance deal? Like, what are you listening to when the seller when when you're talking to a seller, or you're talking to a lead, whatever it is, what are you listening for to say, this might be a seller finance pitch, instead of a cash offer pitch. One of the first things is, is they want a higher value than we typically offer the cash offer. So say you're you're offering 75% ARV minus repairs, but they come in and they're like, I want 85% ARV. You're already knowing right there that, gosh, it's gonna be tight for you to flip the property, or tight for you to if you have to do renovations to completely burrow the property, because you already know you need 75% of the value to to get all your cash out. So it's high value. With that being said, it kinda also needs to be somewhat turnkey, unless you're okay with investing money, or you know somebody that's okay that you're gonna sell to, it's okay with investing money into it, in addition to a possible down payment. It doesn't have to be turnkey though. Another thing is that they don't wanna pay tax.

Dan Austin: [2:47] They talk about taxes, or you bring up the fact that they're gonna pay capital gains, and they they just really show or speak of some disdain for paying the government, paying the tax ban, and they don't wanna sell you because they know they're gonna have to pay capital gains. Another thing to listen for is maybe it's a rental property, which is really great, or they do want some residual income. It's like, ah, it's a rental property for me, and I just I'm an older guy, I don't have much, I don't have any other income, I really enjoy this, it's like my pension. You know, and so maybe they wanna keep collecting those rent checks. And for this one, we like to see things that are also rented under market value. So if it's if turnkey, they want market value, and they're renting it for $18.50, and the market rents 1,900, there's not a lot of spread there, if that's really if they really want that income. So something to think about while you're listening. So our deal that we just locked up is that typical seller finance deal, this textbook really. It was a tired landlord, he's eighty eighty years old, he doesn't wanna pay taxes, hates taxes, He wanted closer to retail value, he didn't want, know, a 100% retail value, but I think we got in there at probably like 85% retail value, somewhere in there. He does need a little bit of carpet and paint work, because it was rented, and like I said, he's a title landlord.

Dan Austin: [4:02] Tenants are moving out, and you know, he needs that carpet replaced, some new flooring, some new paints, some new fixtures, those sorts of things, just to kinda update it. But it is like a mid nineties built, a class property in a great area. The other thing is he he wanted the residual income. He's getting older. He didn't wanna have to deal with with the tenants, and he was renting it quite a bit below market, but he knows what he's got. He's a guy that's been a landlord for a while. He knows he's got a great asset. He knows he can keep getting income from a rental, he knows how to do all that sort of stuff. But he did, he hit those three things I just told you, he wanted to avoid paying taxes, or he at least saw the benefit of not having to pay taxes right up front. And he he wanted a higher value, because he knew he had a good property, and he wants that residual income. So right then and there, we knew, okay, this is a pivot we're going to offer. So then that brings me to my next point, which are, what are those three inputs that we're generally negotiating? Before you go out and pitch a seller finance deal and pitch potential terms, you need to listen to what they care about and what they want. And then you can start adjusting these three inputs. The first input generally people bring up is down payment.

Dan Austin: [5:06] The second thing that's brought up is usually interest rate. Everybody talks about mortgages and loans in terms of interest rates. And then lastly, I call it monthly payment, but really it's the amortization. But we get to adjust that as far as without it really affecting the first two, and also having it reduce the payment. All three of these can reduce the payment amount, or increase the payment amount, but amortization is a really powerful tool. So I call that monthly payment, just so you can remember it. There's other things that do get negotiated, like a balloon payment, do they want a balloon payment at the full amortization, so it's a thirty year loan? Or do they want, hey, I wanna amortize it for thirty years, just because it gets us to that payment amount, and then I want it paid back full in five or seven years. That's typically what we see. So there's that, plus some other stuff that can be negotiated, again, it's creative, so anything can be negotiated. But let's talk about these three inputs first. So if they want a really, really high down payment, it might kill the deal, not always. We had a couple that wanted a $100,000 down payment, and we actually made that happen. We actually dispoed that as well. The down payment, you typically wanna get that as close to zero as possible.

Dan Austin: [6:13] And I'm gonna talk about trade offs here after this. And then interest rate, when they say interest rate, is it 10%, is it 5%, you know, you you have kinda the benchmark of what what's the going rate, like right now, say it's 7%, so you're going investor rate, or 8%. So anything you get below that, it's a good deal from an interest rate standpoint. But you can also go above that interest rate, it's not It doesn't have to be fixed, it doesn't have to be zero. However, if you can negotiate 0% interest, principal only, you can really trade off on some of these other inputs, because that is just the ultimate maximized leverage, right, you're getting money for free. And then lastly, that monthly payment amortization. So you typically hear, like when people go and get a fifteen year loan, or a thirty year loan, that's basically the amortization of that loan. That's how many years you have that that loan is theoretically split up. If you took the loan out for thirty years, each payment would be split up evenly, and then by the end of that thirty years, it would be paid off. Even if you have a five year balloon payment, right, you're still amortizing over thirty years. In five years, you will have twenty five years left on that loan, with the exact same amount of even payments. That's what it means. So in this case, I'll use our example for the deal, the guy wanted a 10% down payment. We don't love it. He also wanted 5% interest.

Dan Austin: [7:30] Don't love it, but it's better than what what the 8% we'd have to go if we got traditional funding right now on a commercial loan. 10% down payment, the purchase price was 425,000. I don't have a big down payment, honestly, but the ARV, the act the value now is is a 100 is 525,000. So we got equity. That's one of our trade offs. We did get some good equity. We have a lower interest rate. He has a somewhat bigger I'd prefer like 5% or 0%, but ten percent's not bad. We have some people that want larger ones. But then here was the kicker. When he said 5% interest rate, I immediately knew, okay, let's not negotiate that right now. That's not a bad one. Of course, we want less, but let's ask him what he wants for a monthly payment. And sometimes you can you can seed this a little bit, and say, hey, you know, if you know that they're renting for say 1,500, you know market rents 2,000 say, you can seed this by saying, hey, you know, you're getting 1,500 now, but you gotta pay taxes, you have to pay insurance, you have to pay all these fees, and property management. What if you didn't have to do anything, you didn't have to pay the tax, you don't have to do any of that, you just collect a check, I get you a thousand dollars a month.

Dan Austin: [8:38] Is that a good payment for you, and get you that 5% interest? That to them is a pitch now. They're getting they're getting their same interest. They're not collecting the same gross revenue, but they're probably gonna collect it near what they typically get after they actually pay for everything. Right? So you're kinda backing it off, because you know you're gonna have to pay for those as well anyways. So they're You're getting that lower payment, and you're fixing it, right? And so if they say, yep, that's okay. Well, on a $425,000 loan, if we have 5% interest for us, you know, even less than $42,000 down payment, so let's say a $380,000 loan, to get to a thousand dollar a month payment, we're gonna have to have, you know, a hundred something year amortization. But that doesn't matter. Right? Because he also wants a balloon in five years. But that hundred hundred year amortization or whatever it is, I don't actually have the number in front of me, gets us to that thousand dollar payment. Now, in our situation, it was actually an $1,800 payment is what he wanted, and that's what we negotiated, and our rents were, you know, around 25 or $2,600, is what we think is gross rents. So it's a great great property, if somebody wanted to rent it, or just as a primary residence.

Dan Austin: [9:45] So with that being said, we ended up having to adjust the amortization or the monthly payment amount to meet what he needed. And this is where I wanna talk about trade offs. So don't get immediately turned off when they want a big down payment, because it's like, hey, okay, if I can give you that big down payment, which is not typical, can you give me an interest free loan basically, or can we do a principal only loan, is how I like that, where we pay you monthly principal only payments. Or can, hey, if that's the case, you want a $100,000 down payment, can I give you a thousand dollars a month? Since you're getting a bunch of money up front, can I give you a thousand dollars up per month? And then start doing these trade offs. So the trade offs become because little money out of pocket is great, right? So if you could get a zero or zero upfront down payment, but you had a higher interest rate, that's okay, right? Because potentially, you could be cash flowing less, but your ROI is much higher. So you have less skin in the game, you're and getting say $200 a month in net cash flow. Okay, that's great. But if you have a higher down payment, you certainly want more more of a cash flow, because you need to You have some reasonable ROI. So if you think about it from an ROI standpoint, that makes sense. And then on the amortization and interest rate, don't just immediately say, bock at a high interest rate, because you know you can adjust the amortization. You can even pay a higher price for the property, given a low, low, low interest rate, or given a low, low monthly payment, or both.

Dan Austin: [11:09] So say the property is worth 500,000, pay 500,000 for it retail, especially if they're going to give you a 0% interest loan, and your monthly payment's gonna be 1,000, and you can rent it for 2,000. Because now you're getting a great spread, and you're getting a huge debt pay down. So Mike and I have done deals where we will just do a debt pay down play, we have one that we do right now, we get $600 a month is our monthly payment, it's 0% interest. So basically $600 goes to the debt pay down, we paid retail for the property. And the balloon is such that, by the time it's paid down, we will have enough equity, we could refinance it, and still not have to bring money to it, or we could sell it, and scrape the equity right then and there. Pure debt play, or pure debt pay down pay, our monthly cash flow on it after all, all said and done is like a 100, $200. It's not a lot, but when you add it with that debt pay down, it's considerably high. So thinking about the trade off within those inputs is a key, and the key, I'll just summarize this, is listen before you pitch. What do they care about? If they don't even bring up interest rate, don't bring up interest rate. Start with monthly payment. If they're really worried about a down payment, start there, and then figure out the trade off is. If they wanna if they're okay with a low down payment, and a bit higher monthly payment, then go there. If they want a big down payment, and a high monthly payment, or low monthly payment, like go there. But listen most importantly to what they're saying, and I try to tell this to our sales team whenever I bring this up, is it's a nuanced conversation that's not black and white, and it's more imperative during these conversations that you listen.

Dan Austin: [12:41] Once you realize that a cash offer is not going to work, listen to what they need, listen to what they want, listen to where you can help them out, because you can trade off and adjust the down payment, the interest rate, and the amortization. Now, I'll give you one more crazy trade off. So we talked about balloon payoff. What if they want a full retail asking price for a property, and even in five years, you're probably not gonna be able to pay down enough debt to have enough equity in the property to get you to a refinance rate where you can not have to bring money to table, and you can refinance this person out, and have 75% equity, or 25% equity in the property. What if you could extend that payoff to seven years, or ten years, or to a time that gives you enough time, if you pay retail, to have the debt terms paid down enough to where you don't have to come to the table at refinance with cash as a rental property. That's just another trade off where, okay, and it's a math equation, right? And so it's like, okay, you're de risking yourself of holding on to debt, and holding on to an asset that you can't do anything with at the time that the loan comes due. So trade that off. So push out the loan due date, and increase the price. You could sometimes, in some cases, you can even pay more than value, if you look at your debt terms.

Dan Austin: [14:00] So say the property's worth 500,000, and you're like, hey, mister seller, your house is worth 500. What if I can give you $525,000? That's $25,000 over anybody's offer. But what I want you to do, is I want you to carry the note for this property, and I'm going to give you x percent interest, you're gonna get a good interest rate, you're gonna get this, you're gonna get that. But during that period of time, you need the debt pay down, and you need some cash flow, because it is a defensive move. You don't wanna just go all in on the debt, you want some cash flow out of that. But you can easily do that just by adjusting one thing, which is the balloon payment, and you can now increase the other terms. So it really becomes a trade off. That's really all I wanna talk about as far as negotiating, and then also think about your exit, I'll just I'll just shut up after this, so this one doesn't run too long, but your exit, you can pay attention to that. So on your exit, you can wholesale this to a buy and hold investor, you can wholesale this to a flipper potentially, depending on how much margin's in there, and what the terms are. You can flip it yourself, buy and hold it yourself. Typically what I see is a good exits are buy and hold, or wholesaling to a buy and hold person. So that wholesale typically looks like an increased sale price, and an increased down payment to match that. So if the seller wants a 10% down payment on a $100,000 house, the seller needs $10,000, right? Say you wanna make $10,000 on this wholesale fee, then you need to increase the sales price to say, a 110,000, and then have a essentially a 20%, but not quite 20% down payment.

Dan Austin: [15:37] If that math goes right, then basically, the the loan is actually a 100,000 or $90,000 basically, whatever the seller is expecting that loan to be, and the seller gets 10,000 for the down, and and you get 10,000 for the down. Fundamentally, that's what you're trying to do on those. Or, which is even more creative, and a lot more fun, which is what we're gonna do on ours, is do a seller wrap. So then wrap up that seller finance note, and actually add in some margin, monthly margin. So you can do that by increasing the interest rate. So say you negotiate a really low interest rate, you could give the seller or the new buyer all the same terms, except for instead of it being a 5% interest rate, sell to them on an 8%, and then you just collect that 3% interest margin right to you out of escrow, and you set up an escrow with a local escrow company. Or you can adjust the sales price of the property to a higher sales price, lower the amortization, so the amount coming in every month is higher, paying that seller exactly what they're expected, and paying that loan down for exactly what is expected for each month, but then you're collecting the rest into your pocket. Because now you've got, say for example, the house is a $100,000, and you sell it on a wrap, you sell a wrap to a new buyer for a 125,000. So basically, you're amortizing the 100,000 with your seller and all their terms, and then you're taking your 25,000 and amortizing for yourself, and you're collecting that over a longer period of time, in addition to any down payment you've collected. So that one gets a little confusing.

Dan Austin: [17:04] So do some research, hit me up in the DMs, hit us up, and and feel free to ask me questions on how to actually set that up with the paperwork and all that sort of stuff. But I'll stop there at the exit, because I know we can get really complicated and detailed here on lots of other things, but fundamentally, with those exits, it's just like a straight wholesale, like I said, and you typically make up your your fee on the down payment in an increased price, sales price, or the wrap. Those are the two most popular, and the two honestly best and most profitable ways to do these things. So I'll stop there, as I said. Again, you have questions, hit me up on Instagram at investor mandana, I love answering questions for people, especially about creative finance, because it's so much fun when you know, you talk about it a lot, it's like a really hard math problem, but then once a person, it clicks, they can forever negotiate these deals, and it's not an issue anymore. It's just it's gotta click, you gotta hear it enough times. So without further ado, I will end it just the way I started it, and send you guys to collectingkeys dot com, check out the Instant Investor program there, book a call with us. Also, like and share these as much as possible, post it on Instagram, say whichever your favorite episode is, give us a five star review, all that sort of stuff helps us grow, so that we can have more cool things like keys calling down in Scottsdale for all you guys out there wanting to show up and hang out with us. So alright, I will let you all go. See you all next week.

Dan Austin: [18:27] Thanks for listening to this collecting keys Friday focus. Be sure to subscribe wherever you listen to your podcasts.