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Owner Financing & Subject To’s With Grant Kemp
We’re honored to kick off the day with our buddy, Grant Kemp who’s an amazing investor. This guy rocks, he kicks butt. You may know him from showing up on Teach Me Something Grant on Propelio.com, but he’s much more of a well-known real estate investor with a big passion for owner financing. Welcome, Grant. How’s it going up there in Dallas?
It’s awesome. I’m honored to be on the show here and looking forward to chat in some owner financing because I just love the strategy. It’s great for everybody and not enough people fully understand and appreciate it.
Tell people a little about yourself, who you are, your company. We’ll go from there first.
I’m one of the stories. I didn’t start with anything. I was in a small thousand-foot house growing up with gang signs tagged on it. I didn’t have a penny to start with, but I started searching for, “How do I buy houses without having any money?” That’s what my Google searching was, “How do I do this?” Fortunately, I got led down the path of owner financing and this was back in 2011 when I first got started. I got out there and saw that it’s an awesome strategy to do. I partnered up with Scott Horne for a long time and buying houses that way. I ended up seeing that there was a big need for compliance because a lot of guys were out there just Wild Westing it like, “Whatever, nobody’s ever going to find me,” and so I created a company named Texas Pride Lending that you may be familiar with, which we grew that to be the largest RMLO service in the nation. I sold that company a couple of years ago. Now I am still focusing on investing, doing the training stuff and the mentoring.
That’s where we met.
I came out and spoke at one of your things about the compliance side of all of this.
You came out to one of our virtual workshops here in Austin.
That was a fun time. You had a bunch of people out there.
Are you buying properties here in Texas primarily or you do it in other areas?
Pretty much all of Texas. I’m a DFW guy. I like buying in DFW.
What’s your big strategy? Do you buy property and turn it into cashflow with owner financing or fix and flip it? Let’s talk about your basic strategy.
My favorite strategy is that of buying a house subject to and then fixing it up, sell it around on a wraparound mortgage. With that, you’re getting cashflow and you’re getting a down payment up front. I do wholesale, I do fix and flips, I do rentals but the one that makes the most money with the least amount of risk on the line is if you’re able to buy sub to and wrap it. That’s my favorite strategy. That’s what I push for first and foremost.
Let’s talk a little about sub to because there are a lot of people out there that’s like, “What? You can buy a house with an existing financing in place?”
That’s the key to when I say I was Google searching for, “How do you buy houses without having any money?” That’s the key to it because essentially what you do is you’re going to sit down in front of your seller. It’s on these guys that owe $0.85 on the dollar. They can’t sell it to a cash buyer for $0.70 or $0.75 and so cash buyers are having to pass up on it. Whereas what we can do is sit down in front of them and say, “I’ll buy your house. I’ll become the owner of the house but we’re going to leave the mortgage in place as is, with your name on it and everything. My name’s not going on it, but we’re going to keep making those payments on your behalf moving forward.” It’s an existing financing in place. I like to refer to it as unlimited non-institutionalized non-recourse money. What better money can you get?
Let’s make sure we state a couple of things here. I agree with you. It’s a great source. I love sub to. We do a lot of those here in town. Then we turn around, wrap the mortgage, and sell the house owner financing, technically the wraparound mortgage, to somebody else in a higher interest rate, higher payment, higher sales amount so arbitraging the difference. It’s totally not true with the non-recourse aspect of it because if the banks do find out sometimes, they do have the right to call the due-on-sale clause.
I’m glad you draw that differentiation because that’s not at all what I’m referring to. What I’m referring to is if something goes wrong, you personally will not be on the hook for anything because it’s all going through your LLC and everything signed there. That’s all I’m referring to, beyond that, I’m glad you bring that up because sub to is not without its risks. One of those is the due-on-sale clause. Basically, every mortgage is going to have that which says, “If you sell this house, we do have the right to ask for the remainder of this payment to be due and payable at that point in time.” The thing is, historically speaking, it just typically doesn’t happen because my question is always what does the bank want at the end of the day? They want their money and they want their payments. As long as that’s happening, historically speaking, it’s a non-issue. My office is calling on the experience of Scott Horne. We’ve seen about 10,000 of those go through and under ten have ever been called.
It’s a small amount. The only reason I bring it up is, “What about the due-on-sale clause?” You should know about it. The important thing is if you’re going to do something and take over subject to financing, which basically is taking over the property with existing financing in place, is make sure you do some basic things to ensure that the bank can get its pennies on the dollar.
One of the big things is insurance on that and getting insurance right. When the due-on-sale clause is going to get called, it’s typically somebody who did the insurance the wrong way. The other things that people can do, that they’ll point to, is using a land trust to put the note in, but while that does avail, and it does help the chances of due-on-sale not getting called, it’s not a fail-safe. Don’t believe in any of the gurus who are like, “I found the way around due-on-sale clause. It’s called Garn-St. Germain Act and you can’t foreclose if it’s in a trust.” That’s not true.
Do you mind giving a tip or two on how you’re finding deals that you can take over subject to?
When we’re in the super-hot market, it’s going to be the time that sub to is going to be less likely for you to find, but on the flip side, that’s when you take advantage of all the cash. There’s stupid cash out on the market right now. It’s slowing down a little bit but do some of your cash strategies at those times. Sub to shines in that turn, sub to shines in that down market. The reason I say that is that when more people are facing foreclosure there’s not as much equity in the houses. That’s when sub to shines so I encourage you to learn now because we’re ten years into an eight-year cycle. There’s something around the corner where it will turn, and this is going to be your number one strategy to keep you from losing your rear and along with the notes.
I want to be very clear that when I’m talking owner financing sub to, this is inclusive to what Scott is talking about with notes. We’re creating these notes. The reason why I go into the whole downturn is that that’s going to be where your best leads are. Your best leads are going to be people facing foreclosure, like a pre-foreclosure lead because what is the best option? Either lose your house and not get to buy another house for the next seven years or let Joe investor buy the house sub to and take the chance that everything goes right. Joe investor is going to come in and catch up all the back payments and make your credit look good as you’re paying forward.
Those are going to be people who are highly motivated to do something in the subject to arena. The other next step down is going to be the divorcees. A lot of times you can get divorced couples who are done with it and they want it off of their hands. That can be a great area for sub to as well, but we’ve used donor financing and all kinds of leads. I always say it’s all the same leads you’re already talking to, it’s just if you don’t know the strategy, you’re passing up on a lot of conversions.
That’s a good point about how in the upmarket, at a peak and a hot market, everybody’s trying to sell a little bit. I was talking to our friend, Melody Medley. We were talking about the market, how Dallas-Fort Worth especially the higher priced houses aren’t selling as fast as they used to. One of the things that I have seen in the past and currently as well too is you see people have gone out refinance their houses. They’ve got low interest rates, pulled some equity out, trying to do some fun things. Hopefully, they’re not spending that extra money they pulled out on toys and vacations. Those people who try to move their jobs or maybe something happens, now they have more mortgages on their house than the one it’s worth when the market dips a little bit. Sometimes those can be great subject to deals. If the interest rate is low enough, so the payment is below market rents, that’s a strategy you’re looking at as well too.
Basically, what you’re looking at is trying to see if you can cashflow. Can you get that money upfront on one of these deals? If you’re not going to cashflow that’s okay, but there are still rules of thumb that you want to live by because you’re analyzing a deal a little bit differently. You’ve still got to do your due diligence. When the market has dipped and when you do have those close margins, you can totally make it work. You have to make sure it’s going to work. You have to look at all the numbers.
Let’s talk about through owner financing. When you’re seeing a house out there and you’re working with borrowers, what are some of the things that you like to approach the homeowners about trying to get them to do owner financing for you?
You’re talking about when we’re talking to our sellers, how do we acquire this property with owner financing? Owner financing, seller financing is the umbrella term. Within that term, you have free and clear owner financing where you can have them note for you, got subject to or you’re essentially taking over on their payments. You’ve got wraparound mortgages where you’re financing it to somebody for a higher rate and payment than you’re paying on those things. All these things are synonymous that we’re talking about with slight differences. His question being, “If somebody does have equity on their property, they are a decent seller, how can you approach owner financing and have them be okay with letting you pay them out over time?” You’ve got to have your negotiations ready on that. The thing is that they will make so much more money by selling it to you on interest terms that make sense to you.
You can give them a higher purchase price where they’ll end up making a ton more money if they accept your offer. It’s a difference of time versus money, so how are you going to approach those sellers for these types of situations saying, “You’re trying to sell me this house at $80,000. What if I gave you $85,000 but I paid it to you like a mortgage of over the next twenty years at 4.5%? Ultimately, what that means is you’re going to be making $130,000 off of this. That sounds good for somebody who was just going to be sitting this money in a bank account or a CD making 0.01% on it. Maybe getting 4.5% on an equity that they are familiar with or on a property that they are familiar with that makes sense for them.
Pointing out to the seller, “What are you going to do with this money if I was to give you all cash? What if I could pay you way more for your money than anybody else is going to offer?” My favorite question to lead into that is are you willing to take your equity in installments? That’s the key question in your negotiation. Don’t say, “Do you want to sell or finance this to me?” A lot of times you’ll get yes and that’s when you know you can be creative and start offering them interest and terms for their purchase instead of having to go to your hard money lender and put two points down and pay 12%.
Subject to is by far the most complicated of strategies. When you’re doing subject to and wrapping, there are more turning gears, there are more legalities you’ve got to be aware of, stuff like Dodd-Frank that guys like you are going to care about whenever. What we’re talking about here is we’re setting up notes for our own portfolio that we can sell to guys that Scott is training on how to buy notes. That is a way to get out as well and so there are a lot of different turning gears and absolutely, find a JV partner. Somebody who’s done this stuff before. The subtle plug, I do personal mentoring. I do an online training course at CreativeCashflow.com. I teach on all of this kind of stuff too and it’s a great synergy with what you’re already learning through Scott.
I may not buy a lot of owner finance but that doesn’t mean I haven’t created them over the years. Back in 2004 to 2008, I created a lot of owner finance. I’d been doing a lot of wraparound mortgage. We were structuring deals with owner financing and then doing a simultaneous close to sell the first and the second off at the closing table. Selling the first off to Boston Note, The Alliance Group, a variety of note buyers out there, then keeping the seconds for cashflow or putting the second into an IRA. We’ve got this so many creative stuff out there. I love the defaulted notes aspect, it’s where most my bread and butter is. It’s very difficult to owner financing and going from the note.
I get people who come to me, they’ve gone through a workshop and say, “I want to do owner financing on my properties.” I’m like, “Why do you want to owner finance or fix and flip that you just did?” They’re like, “Over the cashflow.” I’m like, “That’s great, there’s nothing wrong with cashflow, but what are you going to do with all that money that’s tied up as equity in the deal, they’ve tied up for twelve months now before you the sold note off?” What people say is, “I want to do an owner finance note and they sell the note off.” It’s not as easy as it may not to. I like owner financing, but I think it’s a strategy for those that either can’t sell the house because they can’t sell it traditionally. Maybe it’s got some title issues or some stuff that they can get it moved or owner financing that way or somebody that maybe they do owe too much of the property they fix and flip, maybe they need to hold onto it for a while, wait for appreciation to kick in. A lot of people forget the fact that a lot of newly originating notes don’t sell immediately at full value.
I’ll agree with you and disagree with you on certain points there. The part that I will agree with you to a certain degree is especially if you’re using your own capital to purchase these properties, that’s a lot of money to be on the line. You have to look at your annualized returns and see if that fits within your strategy for what you need because doing it in this fashion, setting up an owner financed note, it’s a tomorrow money play. You’ve got today money and you’ve got tomorrow money. Your today money is going to be the fix and flips and the wholesales. You’ve got the tomorrow money which is your rentals and even this owner financing but the plus side is you do get 10% down upfront.
There’s a little bit of today money there. You’re making what you want on an average wholesale up-front and then you’re getting $300, $400, $500 a month and a cashflow. If that matches your ROI requirements then you’re cool, then you’re good to go on that. If it doesn’t match your ROI requirements, then you’ve got to find some different ways to go and nobody’s buying notes at full price. You can’t count on selling it, “I’m going to set up this note. It’s going to be $100,000 house and I’ll get $10,000 up front. $90,000 note. I’ll sell it for $90,000 in a year.” It’s not going to work like that. They always need a discount. You should count on most people are buying in that 75% of your unpaid balance range but there are few good buyers out there. Some of your students are those that I’ve seen buying well. I’ve got some institutional guys. You might get 87% to 90% but that’s about all you can hope for in that one-year seasoning period. I’ll agree with those things.
The part that I’ll disagree with is if that equity that you have tied up is somebody else’s 401(k). You’re getting your money at 6%. Then you’re selling this mortgage to somebody else as a wraparound of this IRA and you do have that for a little bit more long-term. That’s a loan that doesn’t have a due-on-sale clause on it. That’s a loan that cannot be taken away from you and you can play that arbitrage on whatever level you’ve got there. Then you’ve got equity that is making a full 9.5% or 9.9% on your sale side. I cap it at $250,000, which is our city’s median range. Anything under that is great for owner financing. I don’t care much else than those price points except for there are a few parts of town that they’re not going to have $10,000, $20,000 down and that might be a good rental or a good flip area or something like that. To the point that you can only buy these houses when they’re low equity and it can only work for you whenever it’s a house you can’t sell. That’s the part I’ll disagree with. Definitely look what your cost of capital is and how that’s getting you the returns you want and if that lines up with your strategy.
Talking more so about the fact is people get excited, they put their own money into it. They don’t understand that they’re not going to get par for the notes. We deal a lot with the First National Acceptance Corporation, which is one of the largest buyers of owner finance across the country. It’s owned by Fred Foote down at Lansing. They have an office in Austin, Texas. They talk a lot about the 10-10-10 strategy. Getting 10% down and trying to have the interest rate around 10% interest. While you’re doing individual one-offs every once a while, having a ten-year balloon on it if you can. A lot of the note buyers out there who are buying, if I’m buying a note, I want to see at least probably a double-digit return.
I think most people are buying 12% and 13% is what they’re wanting to see.
You have to realize, if you’re originating that note for those people out there, if you do somebody at 6%, you can take 50% discount from somebody who is looking for 12% return. People who have a solo 401(k) or self-directed IRA and stuff like that, they might be happy making a 6% to 8% return on their money, which is great. That’s cheap money. One of the great things you’ve got to keep in mind is to try to make that note that you’re creating on a true owner finance origination as attractive as possible.
The one thing that I will pipe in there about their suggestion of the 10-10-10 is I will vehemently agree with two and vehemently disagree with the third, which is the balloon. The balloon payment because of Dodd-Frank Act and this is fairly in the grand scheme of things because we’re talking about laws that took place in 2012, 2014, and 2016. You want what’s called a qualified mortgage in Dodd-Frank’s minds. For us, it’s easy because we’re considered what’s called a small creditor, which means we have less than $2 billion in assets and have done fewer than 2,000 owner finance notes.
You’re a small creditor so you don’t have a maximum DTI legally. You don’t have a minimum credit score legally to approve a buyer and there are several things, but your maximum amortization is 30 years and doesn’t have a balloon. If you want a balloon, you want to light a fire under them to refinance or get paid off by that point in time. What you can do and still have a qualified mortgage is an adjustable rate. If you set your adjustable rate to maybe a step-rate mortgage that happens in that ten years or something to start lighting that fire you can still get that QM, that qualified mortgage, and that’s what gives us all the court protections if somebody were to sue in the future saying, “I wasn’t able to pay this house off and it’s America so, therefore, it’s not my fault and I’m suing you.”
Let’s talk about the paper work that’s involved with this. Why don’t we talk about some of the things that you do to help make it a good underwriting when it comes to identifying opportunities and say this going to work and this is not going to work.
When you’re saying paperwork, I’m thinking about contracts. When you say it’s going to work or not going to work, I’m thinking due diligence. What are you talking about?
Let’s start off with the due diligence.
Due diligence, for me, there are three major rules of thumb that I like you to live by when you’re in the owner financing world. One of the things I commonly say is you can buy a house at 95%, 100% of ARV and still turn a six-figure profit on $120,000 house. It is very possible because arbitrage and interest rates are so powerful, but this isn’t like a cash purchase where we can just say buy it at $0.75 and back out repairs and that’s your purchase price because we’ve got different things we need to look at. The three rules of thumb that I like to live by is if you’re putting cash into the deal, for instance, you find a house that’s facing foreclosure, they’re $12,000 behind on payments and you’ve got to put $8,000 into this house to make it look right.
That’s $20,000 that you’re going to have to put on the market to make this deal work. I want you to double that number and have that amount and equity of the deal. It’s like if we find a house that they owe $90,000 and it needs $5,000 and they’re up-to-date, we’re in it 95% of $100,000 house but I only put $5,000 in and if I double $5,000 I get $10,000. That means $90,000 plus $10,000 is $100,000. That would meet my rule of thumb requirement because you’re probably going to make that $5,000 back pretty quick and then start cashflowing well. That $5,000 will probably come back in a down payment or something along those lines.
There’s that, but then in markets like this, we’re running into a lot of people who have $40,000 in arrears. Their house needs $30,000 to $40,000 to repair. Whenever the numbers start getting too big to reasonably expect a two times cash to even possibly work then I get to a $0.82 mark. It’s like if the loan you’re taking over on plus all the cash you’re putting into this deal adds up to 82% of that ARV-ish, you’re probably good to go because you’ve gotten a lot of your financing taken care of for you in that sub to note, which is typically in the 4% to 5% range, fully amortized and that’s a good asset to have. Those are the two things.
The last thing is if you’ve got cash out on the market that’s not going to get made back by your down payment because if I buy a house I’m going to get a 10% down payment when I sell it. If that 10% down payment isn’t enough to catch me up for the arrears and repairs that I had to put in there, whatever money I have left over that needs to be made back. I want to make that money back within eighteen to twenty months of originating that loan. Those are the three ways to analyze your deal of, “Does this make sense even though it’s a thin deal?”
Let’s dive into the paperwork side of things.
Paperwork is so important because there are a lot of tripwires, a lot of gears that are turning, so you need to use an attorney that knows how to do this stuff, first and foremost. I use Scott Horne, he and I were partners for a very long time. He is still the attorney I use. He has the best paperwork that I’ve seen out there. Gaylene Lonergan also does this stuff, she’s up in Dallas. Those are the two that I’ve seen a lot of the subject to stuff goes through. If it’s not sub to but it’s also owner financed, maybe you’re doing free and clear or something like that. Another fine attorney is going to be Matt Cook. He will give you some good paperwork and stuff like that to get going on that. You need to get your paperwork from a good attorney. It’s going to be a lot.
You sign the TREC. In Texas, the TREC, the promulgated realtor contract. It’s the hard one to come up with and then you’re going to have an addendum on it. Like in Scott’s case that’s a 29-page addendum. You need to know how to explain all of these stuff to them. Once you get that contract for the acquisition then you start marketing to find a buyer. When you find that buyer, you do basically the same contract with them the TREC and the addendum. You agree to terms, 10% down, 9% whatever, 30 years and you’re going to send them to an RMLO company.
Texas Pride Lending is the company that I founded several years ago. They’re who I send all my stuff through. There are others out there but you just send the buyer to RMLO and you say, “RMLO, I need you to gather up everything from this person that’s going to make it to where if they ever say ‘America’ and sue me I can show this to the judge and get that QM status and be protected.” That’s what the RMLO does. They gather whatever information is needed so that you can say, “Yes, your honor, I felt like this person was going to be able to repay me and here’s the paperwork I came to that conclusion,” then you’re solved. The RMLO does not approve them. You approve them they give you all the paperwork, you say, “Yes, this looks good,” and then you close with them. You get a down payment and you start getting some cashflow off of it.
Let’s talk about some of those forms that the RMLO are collecting besides the addendum and the TREC contract. Are we talking about they’re pulling credit on the people, they pay stubs, is it a ninja loan, no income, no job?
No. For instance, Texas Pride Lending, they’re the only ones I can speak to because they’re the only ones whose operations I’ve obviously been involved with. What they do is gather the W2. If they don’t have W2 because you’re going to run into a lot of people who just get paid cash, that’s okay. It’s not something to panic about because Dodd-Frank outlines how to handle something like that. We will collect their income statements, verified, so you’ve got verified income. They do pull the credit. They do get a loan application and then they’re providing all the truth in lending documents.
There’s going to be everything that you would have to sign if you were going to the bank and getting a loan for yourself at a mortgage. All of that same stuff. We want our buyer to sign for us. They’ll give that loan application. All the income docs, all the verifications, along with the terms that you had agreed to. That’s what you need to have in what’s called your underwriting package. We are talking mortgages, we are talking regulated. We are talking about something that the government cares about. You’ve got to make sure that you’re looking at the right things and you have proof that you did. At the end of the day, because we’re small creditors, our requirements are very low on what we have to turn away.
What’s the cost for having Texas Pride do the paperwork for it?
Last I used them was $850. I think they’re still at $850 a file. They have opened up an office in Houston. They’re up here in Dallas as well. Definitely get the buyer to pay for that entire fee, as well as the rest of the closing costs. Your buyer should pay 100% of the closing costs for you. One of the great things about doing the owner financing is that you’re going to pay an attorney a little bit of money to acquire, but your buyer pays for all the closing costs on the disposition side. You charge that to them, it doesn’t come out of your pocket but they’re paying to protect you and them for that matter. They get the best disclosures that way.
Do you get title insurance on your deals?
It’s a good illustration if we’re in person and we’ve got a whole crowd of people because what I will ask is who in here has paid for title insurance before? About 80% to 90% of the people will raise their hand and I will say who has ever had to make an insurance claim? Every so once in a while, somebody will relieve their hand up. 99% of the time you will never have to make an insurance title insurance claim and of that 1% of the time, 99% of that time, that claim is going to be for under $2,000. Think about how many title insurance policies have you bought. How many times have you made a claim? It is not a legal requirement to get a title insurance policy that is something that we just decide to do. If you’re going to put a lot of cash on the market, whether that is through a loan from one of your lenders or your own cash or anything like that, please get a title insurance policy. Protect that money, but title insurance is there to protect you from losing your house, protecting you from losing your investment.
If you only put in $5,000 of cash on this deal for subject to and a title insurance policy is $1,500, you’re paying $1,500 to protect $5,000 at the end of the day. If you do 50 to 100 of those in a year, that adds up to a lot of money that you’ve paid in title insurance policies that you’re never going to use. If a title claim does come up, it’s typically less than $2,000. Pay the title claim and be over with it. Out of that, even 50% of the time that the title claim comes up that wasn’t caught by title insurance, it’s passed their statute of limitations anyway. Please don’t interpret that as, “Grant told me never to buy a title insurance policy. I lost a bunch of money because Grant said.” I’m not a lawyer. Scott’s not an attorney, we’re not CPA. We don’t represent you, but what I am saying is that’s how we do things. I don’t buy title policies on sub to, but I absolutely buy it on anything cash related. If you’re doing a cash purchase, get title insurance to protect yourself.
What are some big mistakes that you see investors making with owner financing?
This is owner financing and general market. This is a Facebook world, this is a social media world. The volume of deals does not qualify as the quality of deals. Just because people are taking deals down doesn’t mean they’re taking good deals down. Don’t get so desperate because you see people flaunting that they are going on appointments or this or that the other, that you’re like, “This isn’t a deal, but I’ve got to make it work and owner financing is the only way to do it, so I’m going to squeeze it in there and do it.” Don’t just do owner financing because it doesn’t work for some other strategy. That’s not where owner financing sits. Owner financing is a viable and phenomenal strategy that you need to do proper due diligence on and if it’s a deal take it down. What I’m seeing a lot of people do is they are like, “It’s in the sticks. It’s a piece of crap, it costs $30,000 more than it’s worth. I’m going to owner finance it,” and then they get into a bad spot.
My crossover there is that the people are paying too much attention to social media and getting pressured into feeling like they need to do deals even though it’s not a deal. Owner financing is a great strategy but what it is not is, “This doesn’t work for anything else, therefore, I’m going to owner finance it.” Sometimes it just a crap lead.
A lot of people get it, they get a dealitis or as we say sometimes in our neck of the woods, the OTSC syndrome, Oh That’s So Cute. They get so excited about the house and the numbers don’t make sense. They still want to bang their head against the wall in trying to make something happen. Sometimes you’ve got to walk away.
The market’s hard, I’m not trying to act like it’s not. It’s a difficult market right now at least in Dallas and you’re in Austin. Austin has been ridiculous for a while. It’s a difficult market on the single-family side. Sometimes it’s a crap lead. When I say sometimes, I’m going to say a lot of times. You’re going to have to say no to a lot of stuff. This doesn’t fit every single thing in but it does give you the best chance to convert leads that are already on your table that you may have said no to in another strategy. Now that you know this strategy, it totally fits in the mark and will make you a lot of money.
Have you ever picked up any non-performing owner finance deals that you’ve got to take down?
Do you mean acquired a non-performing owner finance deal from somebody? I haven’t. If the seller has already owner financed that mortgage from somebody, I typically let a sleeping dog lie. I might call that lender and see what’s going on. If they want out, I can buy the house but personally, I’m just not trying to step on other people’s toes. I take that back. You said you were sure it was yes. It is yes, I just remembered one. With the exception of one time where the person who had owner financed it had screwed this guy over. He had him sign a non-homestead affidavit, even though the guy didn’t speak English and he didn’t know what he was signing. That way he could charge him 17% on his mortgage and was doing a five-year balloon or something like that. He didn’t do any underwriting and had this guy in there like first chance of him being late was trying to foreclose on him and this dude was in a bad spot. I hate the snakes out there in the market because they are there. There are a lot of snakes in the market. I hate that crap, but I bought the house. I got him out of foreclosure so that he wasn’t facing that anymore. I helped him out a little bit on that.
What are some of the best ways that your marketing defines owner finance deals?
It’s about those targeted lists. That’s where it’s all at is not just pulling a zip code, not just pulling an area but making sure that they’ve got some motivation. It’s the same list you’d be looking at otherwise. Probate, foreclosure, those are those are great places, a divorce is a great place. Even your code violations, any time that you’ve got some motivation there. I’m not ready to say that mail is dead but it’s pretty much, it’s on its last leg right now and everything is cyclical, so it will probably come back eventually and be the great new thing that everybody’s like, “Have you tried mail?” For now, it’s not there.
The problem is by the time your piece of mail is arriving on somebody’s doorstep, we’ve already talked to them three times. It’s an information age, so you’ve got to move on it and get there quick. Those phone calls are big, the door knocking is big. I’m hearing a lot of people getting success with the bandit signs, but I don’t personally do them because of the laws. It is against code. It’s a code violation and I don’t want to have to lie to a code enforcer to keep from getting fined. We don’t get bandit signs but I’ve heard that those are working well for people as well.
What do you mean by that? Are you talking about people putting on the corner of the street or in front of a house or what?
Put it out on the corner of the street. We buy houses signs that are on city property. If it’s in personal property like you’re putting a sign in your front yard or you’re putting a sign in the front yard of somebody who lives on the corner and you knock on their door and you’re like, “Is it okay if I put the sign out here for a little while?” Then it’s okay with the city, but most of the time people are not doing that. They’re just sticking the sign in the yard and hoping the city code compliance doesn’t call them out on it.
All these people who are sending out postcards, letters or things like that, waiting for a response back because if you’re smart about it, if you’re pulling the code violations and being active and aggressive in going on door knocking or things like that, you’ll be a direct mail piece any time.
Direct mail has its validity. When I got into this business, my first pieces were getting 13% returns and right now we’re happy to get one and a half. It’s a drastic change in what’s out there. I will say too, with the internet marketing, it’s 2018 and right now I have yet to see somebody get successful with internet marketing for home purchases. We’re not quite there yet as our selling generation gets younger and younger then we’re going to be more and more in the area of people who go and look on Google first. I just haven’t seen it. I’ve seen a lot of people pour a lot of money and regret the internet marketing side of things right now, but it will turn soon. I’m just not sure when that is.
I have a little tip from a Dallas-Fort Worth agent who gets a lot of his investment leads through social media, but he does it a little bit differently. He pulls a list of all the agents’ emails and their cell phone numbers off the MLS or direct from the border realtors here in Dallas County wherever and he uploads those lists, those emails and cell phone numbers as custom audiences in Facebook. Then he creates a short video like, “Do you have a property you can’t sell?” That’s how he targets. He probably gets about 30 leads a month off of that and it’s pretty inexpensive.
To further that tip, if you are wanting to go that way which is cool, I will probably try something like that out. You’ve got to go with your business Facebook and go to Business.Facebook.com and not Facebook.com and just have a page on there. If you’ve got Business.Facebook.com that’s where you get to upload custom audiences. That’s where big brother comes into play. That’s all the big brother stuff out there. If you’re on regular Facebook, you don’t have some of those capabilities. There’s a follow-up tip to that.
That’s a good correction on your part there. We did an episode called Hacking Facebook. We talked about having a business page.
It’s a powerful tool right now.
A lot of markets are hot out there, Dallas-Fort Worth being one of those, a lot of the other areas in Houston. I buy so much stuff outside of Texas. When you’re going to be originating a loan because we get this where we would take a property back, we take a note back and I’ve got some friends that are out there, “We’re going to owner financing to a borrower.” I’m like, “Make sure you double check some things. Make sure you run it by RMLO to make sure everything’s in place. Make sure you get some skin in the game.” It’s probably one of the biggest things, do you agree?
I require 10% down payment because note buyers want to see 90% LTV max. There are some creative and cool ways that you can get that 10%. If they only have five right now or they only have eight right now, I can show you some cool ways to capture the rest of that. It still has a down payment. It still meets the requirements that we need. You’ve got to have them get some skin in the game or else the default rate is going to shoot through the roof. With a 10% down payment, our default rate is less than 1%. These guys are ready to stay in their house.
You get some 10%, you’re giving people maybe an opportunity. We’re not talking these all people are bad people, it could be self-employed. They may not have a W2. They may not have a credit score because something bad happened in the past, but they got the down payment.
There are lots of reasons why somebody is going to buy owner finance. That’s one of the reasons why I push whenever the market gets worse that’s going to be a prime owner financing time because then the banks close up, they don’t want to lend as easily, but there are still a lot of people that have cash, that want to own a house. You’re buying pool gets up higher even as your seller pool gets higher.
I’ll give you an example. We’ve been tracking the non-prime lenders out there. There are roughly about 90 different banks, loan institutions. That’s on the low end. I know there are more that are showing up on where we track here. They’re doing loans, 70%, 75%, 65% LTV a day out of bankruptcy.
You start to see a lot more of those pop up these last few years.
We have somebody in at 10% down. A nice change, he’s got a good job. Maybe he’s gone through a financial hiccup, a divorce, has been laid off for a while or something like that. It’s a great opportunity to help some people out there and truly make it a win-win.
If you’ve heard me talk before, you’ve probably heard me preach about I hate when people are like, “Why do you do this?” It’s like, “I just love helping people.” I don’t think that’s why you do this. You do this because it’s real estate and it makes a lot of money so why not be honest about that. The flip side of that is that’s not to say that we can’t be happy that we’re also helping people out. If you were in this to help people you’d be working for the Red Cross. You’re in this because it makes a lot of money, but it is nice that you are setting up a win-win-win situation.
You’re helping a seller out who typically was unable to sell their house in any other way and they were probably going to lose it, hurt their credit, hurt themselves and you’re helping that happen. Then you’re helping put a buyer in there that would have never been able to buy a house through conventional mortgages. Our default rate is very low so it proves that these guys are taking it seriously and wanted that home ownership and then you win because you make a lot of money in the deal.
I don’t want to take much of your time. I want to say thank you for coming on the show. I’m excited to have you on here. We’ve talked about this for a while. We’re also going to have you come on to Note CAMP as well and talk more about owner finance strategies and stuff like that too.
It’s just such a great strategy. You’ve got to have all the tools in your tool belt. I feel like you need to have something to hit every type of niche and we have the wholesales and fix and flips and rentals and add your owner financing and then set that up before your note sales. The note space is very cooperative here. It’s awesome. I can’t wait for that Note CAMP. I appreciate what you’re doing in spreading this knowledge out there. I’m looking forward to it. Thank you so much for having me onto your show, it’s a lot of fun.
What’s the best way for people to get ahold of you, Grant?
Facebook is good. My name is Grant Kemp, you can get me there. Look up at CCF mentors CreativeCashflow.com and you can check out my website. I’ve got an academy where I truly teach literally everything from start to finish. It’s not one of those give me $1,000 so you can teach me how to pay another $20,000 to you. It’s actual real information that’s going to help you out with that.
Thanks so much. We’ll be out to DFW Real Estate Investor Meetup. Have a great day.
Thanks. I appreciate you having me out.
Check Grant Kemp at his website. Owner financing is a great strategy for some things out there and for some of the real estate deals. It’s definitely something we have used a lot in the past and continue to help our other investors out there make some things happen. Go out, make something happen and we’ll see you all at the top.
- Grant Kemp
- Texas Pride Lending
- First National Acceptance Corporation
- Scott Horne
- Hacking Facebook – previous episode
- Note CAMP
About Grant Kemp
Experienced in all types of real estate investing strategies from “Subject to”, fix & flip, pre-foreclosure, wholesaling etc…. Fully plugged into the heart of investing in DFW, our office has an RE law firm, Title company, RMLO services, Note Sales, Wholesaling, Hard Money, Real Estate Brokerage, Investing Firm, and everything else needed for you to be successful in the residential real estate investing industry alongside us.