Speaker 1:
All right. So in real estate, there are many options available to you as far as owning property, selling property in whatever that looks like for you. But a new, a new option that is available to folks that many times has not been discussed is the idea of controlling a property. So we're just going to take a really, really 30,000-foot look view from the question of, "Can I Control A Property?" So, can I control the property? Sh, with the advent of iBuyer programs, there used to be systems that would only allow for folks to kind of just reach out to agents and say, "Hey, I want to sell my house." And the agent would say, "Well, I can sell your house for this. This is my opinion of the market X, Y, and Z." And those were pretty much people's only options. However, with the onset of buyer programs, now there are different options to home sellers or sellers of all types. It looks like we can sell your property or if you want, we will go ahead and buy your property for this.
Speaker 1:
And this has actually- it's kind of controversial. Some people like it, some people don't. However, it's opened up some opportunities. So, some questions that need to be asked when you're running through the progression and trying to figure out if controlling a property is possible, is the first question of course. When you go to talk to somebody about selling their property is: Can you actually just buy the deal outright? A lot of times this can look like just a bird where you're like buying a rehabbing it, renting it back out, and then refinancing it to pull the cash back out. Or maybe it's a property where it's a little distressed and you can turn around and fix it up and flip it. And if those aren't really options and there's obviously a slew of options that make buying a deal look good, but if those aren't really working for you, the next question you must ask yourself really is: Can I wholesale the deal?
Speaker 1:
And if they can wholesale the deal, like if they're really in a dire need, the seller needs to get their property out from under them, well then you can maybe put down some money and then get the property quote-unquote under contract in order to wholesale a deal out-right. And hopefully, make like a wholesale commission check off that. But if those aren't really the next steps, then you should kind of consider, like, you should try to control the deal. And the whole bread and butter of controlling the deal is talking about terms. The owner carried a loan is a great option for controlling a deal. A lot of times that can look like an agreed-upon monthly payments, with also an agreed-upon money down and sometimes they're willing- the seller's willing to have less money upfront or maybe they want more money upfront. But it's attractive to the home seller, in this case, because they get to keep the interest instead of the bank earning the interest over the lifetime of the loan.
Speaker 1:
So that's another option to make available to sellers in order to control that property. And another fantastic option is a lease option. If you really want to own the property, you can lease the property from them with the option to own it in the end. A subset of this is called a lease option sandwich. Where you have the lease option with the seller and then you can, after you gain possession and you're controlling the property, turn around and create another lease option to somebody else. It works best when the least option on the front end is has a longer-term than the lease option on the back end, so that you get bought out and then you can settle your debt with the first person. Partnerships are another fantastic way to do this. But it's kind of, it's very important to start thinking about real estate in terms of not just buying and selling but more in terms of like: How can I control this asset in order to take it's an income-producing possibility into my favor so that I can control the property and make it generate income for me? So those are just some, some ideas for controlling properties and kind of the progression to control properties. Does anybody have any other just general questions or anything like that?
Speaker 4:
I got one real fast, and obviously [inaudible 00:05:02] you can chime in on this. But what is like the biggest- are a lot of homeowners open to owner-carried loans and what are the biggest advantages and or disadvantages to doing that?
Speaker 1:
So no, it's definitely a smaller percentage of sellers who are open to owner-carried financing. Most of the time it's because they want the money upfront. And obviously, with an owner seller, you know, carried financing contract, it's going to take a longer time for the seller to get the entirety of their money. Versus through a mortgage or through a mortgage loan, they will end up getting the money over, you know, 30-45 days whenever the loan closes and they get their check. So no, not as many people are open to it, but some people are and I see a lot of folks interested in it. So if it is an option, it's something that should be explored and it's, once again, is advantageous or more attractive. It can be more attractive to the seller because they get the interest on the money as well and not just the money upfront. So if they're open to it, if they don't need the cash right away, it could be an option that would work for them.
Speaker 2:
Owner financing also happens a lot in business. So if you're like buying a business or buying a property along with a business, a lot of times the owner will carry that just because there'll be some sort of like hold back or clawback with the business as well. So you find that, like, the people that are more interested in it are more interested in business, because it's just kind of used more than that. So if you're getting- [crosstalk 00:06:40] investors in general. If it's the first time, if it's their first home and they're selling it, chances are of them entering into this is very slim to none. As you like to start getting more into investments and more into rentals, that becomes a better option, you know, allowing to control the deal. If you are able to convince someone to do this, the probably the less experience they have, the better control or better measures that you're going to, better terms that you're going to be able to get. So it's important to understand how these works and what to do with them.
Speaker 1:
Cool.
Speaker 5:
When you say lease options sandwich is there, do you have like an example of what that would look like?
Speaker 1:
Yeah, sure. So like a lease options sandwich what it kind of... As an example of what a lease options sandwich would look like is: you go to Bob and Bob's selling a property and you arrange a contract with Bob to purchase the property from him with monthly payments like you're leasing it from him, but it's kind of like lease-to-own. So if you're leasing-to-own then you have agreed upon the terms, and maybe it's like a 15-year lease option or it's probably more realistically like somewhere between five and eight-year lease option. Then once you gain control of that and you have that lease option with Bob, you can then turn around and say, "Hey Mary, I have this great property." And Mary's always wanted to be a homeowner and you know that she really can't afford, necessarily, to do that the traditional way. So you say, "Hey, what if I turned around and gave you this option to lease the property or, you know, a five-year lease contract." So you have like a three-year gap. What that would do is allow you to get the money from Mary, so then you can pay Bob off. So you have this sandwich, where you control the difference there.
Speaker 5:
Okay.
Speaker 2:
Our dad utilizes, maybe not necessarily the lease option sandwich, but what he would do was he would convince the owner to do- carry the contract, and he would purchase it from them and then just do payments. And then he would lease it out until it was kind of dilapidated or had some deferred maintenance and then he would do it a lease option. And that kind of, like, progression allowed him to maximize his profits throughout the course of the asset. And about 25% of the time the asset would come back to him on the lease option. So that's kind of something that if you are running numbers and doing this multiple times, you might add that into the proforma.
Speaker 5:
When, so, when your dad would do that, how long was the term that he would pay the original seller from? Like is it a 10-year term or longer?
Speaker 2:
I think it, I mean it varied. It was like whatever they could get. A nice one or kind of one to kind of get it figured out is the five, five year, 30 year AM. So it's like five years, after five years, you've got a balloon payment to pay it off, but AM on a 30 year AM. Or sometimes you can do... I mean like that's the fun thing about an owner carried loan, like, you can have, you can pay just interest-only for five years, And then you can elevate the sales price a little bit. You're like, "Well if I only have to pay interest only for five years and then it's really kind of like I'm renting it for that amount and then I'm buying it at a future date for that price." Then the owner gets to collect interest, which is kind of like income, as opposed to paying back capital gains. So if they're an older couple and they don't have a lot of other income, that interest will typically keep them under the tax thresholds so they don't have to pay any taxes on it. So say it's $2,000 a month, that means that they're getting $24,000 a year and that's all that they make. They don't have to pay taxes on that. Whereas if they were getting returned to the capital, then they would have to pay 20% taxes on them. Does that make sense?
Speaker 5:
Yeah. And then they'd, so they'd only pay taxes when the balloon payment is paid to them?
Speaker 2:
Correct. Well, they can get their capital returned from what they put their basis into it. But then they also have to pay depreciation capture pre-tax, depreciation recapture tax. So, like, if they bought a house for a hundred grand and then they're selling it to you for three-hundred grand, they could write off on their taxes any principal that they get back from you. They, I think they can elect, how to take it on their taxes. So they can elect to take it as that first hundred grand and a return of capital. Or they can elect to take it as the 200,000 being profit. So that profit is what they would have to take to pay taxes on the capital gains.
Speaker 5:
Okay.
Speaker 2:
So if they sold it like today for that amount, they would get their $100,000 back that they bought it for, essentially. And then they would, they would have to pay 20% tax on that 200 grand. So they'd have to pay $40,000 in tax.
Speaker 5:
Okay, because capital gains is 20%?
Speaker 2:
Yep.
Speaker 5:
Okay.
Speaker 2:
So doing an owner carried a loan, they get to choose how they take that and how much tax they pay. So they wouldn't, they could spread that tax out over a longer period of time. And it also provides income, and if they don't have the money they don't spend it. So, that's also kind of like when you're talking to some people, like, they, you know, if they have money and they spend it, this is a good way to, you know, make sure that they have something coming in each month and their expenses are covered.
Speaker 5:
And so, like if say the interest-only payment was higher than that 2000 like let's say it was 3000 a month, it was a bigger property or whatever.
Speaker 2:
Or the interest rate is just higher, right?
Speaker 5:
Yeah, yeah, yeah. Or the interest rates higher, whatever it may be. Do they have to pay taxes on interest? Pass that through [inaudible 00:13:14]
Speaker 2:
So that would be considered as normal income.
Speaker 5:
Oh, okay.
Speaker 2:
Interest is like normal income. So if you collect, you know, $60,000 in interest a year, it's kind of like a $60,000 salary.
Speaker 5:
Okay.
Speaker 2:
And so you have to pay normal taxes on that. Capital gains are off of profits.
Speaker 5:
Okay. That makes sense.
Speaker 2:
Yeah. And now it's, you're getting into like the nitty-gritty details, but it's definitely good to understand it so that if you're trying to explain this to someone that maybe doesn't understand how the owner carried works, you know, being knowledgeable about this and being able to explain it to them is highly valuable. And then also, you know, exudes confidence and allows them to trust you and builds rapport.
Speaker 5:
Yeah. All right.
Speaker 2:
Cool. Taylor, what are some like examples of partnerships?
Speaker 1:
Yeah. Well one example of a partnership that I've had a personal business, is when you have helped a client through the process of maybe buying their first house, and they kind of catch the vision of properties and their ability to generate an income. Then kind of creates for a very good situation to potentially partner with your client going forward into rental properties or even fix and flip opportunities, whatever they, whatever the co-passion looks like. So I have been able to do that with one of my clients. Other partnerships look like networking events. If you find someone who's looking to do something similar with you, you know, exchanging information and being in touch with them. I'm just kind of always having your feelers out there, staying well networked. But, whenever you bring more people to the table, it just opens up more options. Of course, it's more complicated, but you have more options, more expertise and it's just kind of better all the way around.
Speaker 2:
How if, if someone was like trying to sell their house, how would you partner with them to sell the house or to get it sold? If you couldn't do, if the owner carried a loan wouldn't it make sense? Like, say it was worth more because it didn't rent out for much; like you get that where there's a lot more interest in it. How would you partner with the home seller in order to get the property sold?
Speaker 1:
Yeah, well, I personally have not done this. But I've heard of this being done and being done successfully in a situation where the property's a bit more run-down or dilapidated. Partnering with the owner to put money into the property and elevate its status so that you can potentially sell it for more is a great option. So kind of fixing up a property using may be money that you have that they need, and then kind of working out a deal where you guys can split profits after the sale is done is a great option. Or partner with someone who's in a distress situation where they, they're going need- or they're under foreclosure or whatever their situation looks like. Just telling them that you will come alongside them and help get their property sold. It'd be for discounted rates or for some stake in the profit to be made. Those are some ideas that I know have worked for others in the past.
Speaker 2:
Yep. Those are, those are all options. I guess kind of the- and I think the intent of this whole presentation is that, like, there are so many different ways to do it. Like if you want to get it done like there's, there's got to be a way to do it. And just being creative and thinking outside the box and coming up with a solution that works for everyone. Generally, you can find a way to, you know, find it work for you and for the seller or the person trying to get rid of the house.
Speaker 1:
Yeah, absolutely.
Speaker 2:
Cool. Good work.
Speaker 1:
Sweet. Thanks, guys.
Speaker 2:
Yeah. Any other questions? Any other questions for me? No?
Speaker 1:
Under a owner's, owner finance, like an owner carried contract. When you have a balloon payment due under of like a 30-year amortization, do you pay the amortized interest on the five year- like if it's a five-year balloon, just on a five-year balloon or do you pay it over the course of the entire amortization when it comes due? I don't know if I phrased that exactly right, but...
Speaker 2:
So you're talking about a balloon, a balloon contract. To say that it's a contract for $100,000 and it's a balloon after five years, and the 5% interest rate amortized over 30 years. Is that what kind of what we're talking about?
Speaker 1:
Sure. Yeah, exactly.
Speaker 2:
So each month you would pay one-twelfth of the interest. So one-twelfth of $5,000 which would be, like, well let's just say it's $500, plus whatever the amortization is. So to get it over 30 years, so probably be like a $700 payment or maybe even $600 payment. I don't know what those amortization tables are off the top of my head. And then you'd have taxes and insurance or whatnot. So you would pay that consecutively each month over for five years. And then at the end of five years, whatever principle is still left. So each month you were paying about a hundred dollars in principle.
Speaker 2:
So five years is about $6,000. So you would have- Oh, after five years, $94,000 approximately.
Speaker 1:
Okie doke. All right.
Speaker 2:
Does that make sense?
Speaker 1:
Yeah. Follow that.
Speaker 2:
Okay. And obviously, if you look at the amortization tables that whatever initial, initial principal payment starts, like, it'll start out at say $95 and then after each month, like, you pay a dollar more of interest or dollar more of principal. I mean it changes. So, you got to have those tables and you just got to do the math. And, and also if you like to make extra payments during those months, it can reduce the principal and also reduces the interest. And that definitely makes it a lot harder for the calculations cause you should reset the table each time. So...
Speaker 1:
Okay. No, that answers my question.
Speaker 2:
Okay. I kind of thought that was what you were asking. So any other questions? Cool. All right, I'm going to stop the recording now.
Speaker 5:
Wait, AJ, how many times- you guys have done seller carried stuff before, right?
Speaker 2:
Yep.
Speaker 5:
What, I mean, obviously it could pretty much happen in any situation, but what situation would you say is like the most common for a seller carried contract?
Speaker 2:
Well, I mean-
Speaker 5:
Is it just like the older population that wants the monthly income or?
Speaker 2:
It's generally that's looking to retire. So someone that doesn't want, and this is just what we found, is someone that is, knows that they're going to be living for another 20, 30, 40 years and they don't want to deal with the property anymore. They've had it for a while and they want to see it continue as a rental, and they just want equal payments every month. And just so that they have something to live off of that pays the expenses and they don't want it, you know? I mean if they- a lot of times if you get like that sum of money like you want to put it to work and then that's working itself. So, you know, and that's the other thing to describe. Like if someone, if they don't have like a 1031 or some other place to put the money like real estate's a good conservative investment.
Speaker 2:
I mean look at the stock market. What happened in the last two or three weeks. Like if someone had sold three weeks ago and then dumped all that money into the stock market, like all of a sudden be worth 25% less. Like, how awful would that be? Like real estate, especially income-generating real estate, it is very, very stable and very conservative. So I mean I'd take the, I mean a lot of owners are like, "Shoot. I'll, I'll take the interest of the bank would be getting and you know, I'll let this next person given it a swing or a go at it. And worst-case scenario, like the property, comes back to me or, or I get paid off early." So I mean it's definitely a win-win situation.
Speaker 2:
We've- the one big one that we did, we did interest-only for two years and then started the amortization after that. Which gave us a couple of years to get the rents up and fix it up to where it should be. We knew that we had to invest a lot of money in it over the stumble years in order to get the rents up. And so we're like, "Hey, give us this interest-only portion so that we can use that capital, fix places up and get the rents up and then we'll be able to pay you more money." And that, that worked well. You know for them it's kind of, they're still getting the sales price that they want. It's just a deferment of that payment. And then you can also set it on just like a different amortization schedule. If they still wanted to get it in 30, still want to get 30 years, then we do interest-only for two years and then set it on a 28-year amortization and they still get all their money within 30 years.
Speaker 3:
And then what kind of down payments do you pay?
Speaker 2:
And this is where you can use, you know, generally, an owner that is familiar with these carried contracts is like, "Yeah, I want to see some skin in the game. I just want, I don't want you to go in and run it off the road and just take all the, take all the rents. And leave me high and dry, and it takes me six months to get the property back." Like that costs a lot of money. So, you know, we've seen as low as like 5%. But typically like 20% is pretty key. You know, which I love owner carried contracts so much is if you're going to a bank you need 25%. So I mean if an owner asked for 25% you're like, "You know, I can just go to a bank and get that like that. That doesn't help me out that much." So I mean usually 20% it's about the highest. And then, you know, we have seen lower, in some cases. You know, if you're going to be putting in money to the property, that's where we offer lower. We're like, "We'll give you five or 10% but we're going to have to put in, you know, five or 10% of the property value just to get it up to where it's in rentable condition and work spending that money. So, you know, if you should get the property back, you're going to be better off for it." And that's usually kind of the plea with, like, let's, you know, let me take this over and put some money into it and get a better sales price out of it.
