Listen to Bill Ham discuss creative financing in real estate. He is a 15-year veteran real estate investor, educator, and author of a new book called Creative Cash. The time will come when bank financing slows down and we will all need more tools in our toolbox to get deals done. Bill understands real estate cycles and offers up tools such as Seller Financing and Master Lease Options to help real estate investors become more creative and increase probabilities of closing deals.
Table of Contents:
- Where To Listen To The Podcast
- The Main Guy of Creative Financing
- Creative Financing Is a Valuable Equipment
- Dealing With Realtors in Creative Financing
- Creative Financing Techniques
- The SPY Technique
- A Funny Story Where It All Started
- The Next Big Stretch
- How to Reach Bill Ham
The Main Guy of Creative Financing
Darin: Bill Ham lives in Georgia and has been focused on real estate for over 15 years. He helped Jake and Gino establish their education platform, and he is the main coach in that program. Bill just released a book called Creative Cash, which outlines his experience in using creative financing and various strategies to get real estate deals done. He is a problem solver and he loves to give back and teach others.
Bill was actually a referral. I had Jake and Gino both on the podcast at separate times. Jake was on episode 17 and Gino, episode 22. And Gino reached out and said, "Hey, you should have Bill on the show." So, we got in touch with each other and he's just coming out with a book. The timing was fantastic, and I think that this is going to be a great conversation. I'm looking forward to spending a little time with Bill here.
So just to start with, how many properties, how many units have you been involved with on the real estate side?
Bill: I'm on the somewhat ownership side, I'll say. The portfolio I created was a little over about 1100 units or so. I have been involved with thousands through management, through consulting, through teaching, in partnerships with people. So a long career. I've been doing this for about a little over 15 years now.
Darin: 15 years. That's fantastic. So I'm a novice. I'm three years in here, so I'm looking forward to learning a lot from you, my friend.
Creative Financing Techniques
Darin: So in terms of your role, I know that at one point, I don't know if you still are, but you were a coach within Jake & Gino's group.
Bill: I am their head. So I helped them establish their coaching program. I helped them go from being just a podcast or not just podcasts, but I helped them go from being a podcast only into developing an actual education program.
Darin: Very cool. So you helped them develop the whole program and then how many coaches you have underneath you?
Bill: Five right now.
Darin: Fantastic. Well, in terms of books, when I got started three years ago, their book was one of the first books I read. They have a very successful podcast, but now with what you've helped them build through the coaching program. Now they're doing conferences. They've got the whole suite going, to not only grow the portfolio but also to help other people do it as well. So that's awesome. You've got this new book out called Creative Cash. Talk a little bit about that.
Bill: Yes. Creative Cash is a book about my first 402 unit portfolios. In my first 402 units, I was able to establish without using traditional lenders, such as a bank or agency debt. So I used lease options. I used seller financing, credit cards, all different types of creative financing techniques to build my first portfolio. The reason being, I was new to the business. I had no experience, had no credibility, had no money. So I had no choice. I had to just get out and figure out how not to starve in the world of real estate. And so it made me learn the art of problem-solving.
The Art of Problem-Solving
Bill: That is what the book of Creative Cash is about. It's about getting results in real estate by using problem-solving techniques to create value that you may otherwise not have.
I realized this, if you don't have a lot of cash, that doesn't stop you from being in this business. It is a hurdle. And it does mean you have some other obstacles to overcome. But if you are not rich, you can get into real estate. You just have to do it with value, you have to bring value to sellers. What kind of value? Problem-solving value. And that's what this book is about. It’s to show you how to solve problems, have creative financing, in exchange, get access to real estate.
Darin: Fantastic. So what year was that when you started getting involved?
Bill: I started in 2005.
Darin: So 2005 was still a good real estate market. It's interesting because I read the book and there's a lot of things that I learned from the book. And I thought that some of those creative financing strategies come to play when the banks and everybody's going away and they don't want to finance anymore. They're focused on all their workout issues and they're scared to make any new loans. But 2005, 2006 was still a good time. So I'm surprised. I would've thought you would have said 2007, 2008, 2009.
Bill: I got going heavily into multifamily closer to the '8, '9, '10 range. My first 75 units or so were houses. So the national market was good from '05 to '08. And of course, everywhere was bad after '08. I'm from Macon, Georgia, and the middle Georgia area has always been somewhat of an economically distressed area, not the most affluent area.
Bill: I think people in that particular city always had problems and always had some issues. And let me be clear, my first handful of units were pretty tough real estate. I'm not going to even lie to you. I was a slumlord for a little while, and I'll tell you slum lording is an art, and I got dirty in the ditches out there on the street, learning real estate.
Those were the sellers that had problems. I don't necessarily recommend listeners to get into that type of product. It was really good for education. And it was really good on the tuition side, not great on the money side. So it was really good for me to establish a business, and then what I realized was to take those techniques and started applying them to multifamily.
I got the multifamily going good around '08 through 2012 or so. To your point, we see these techniques much more readily available in cycles. So real estate and the economy always moves through market cycles. Over the last five, six, seven, eight years, the market's been really good. Therefore there has not been a lot of creative financing. So this is not a subject you're going to find a lot of material on. There's not a lot of work out there on this.
Well, that's because over the last five, seven, eight years, sellers, if they had a problem, would just take the property. They put it on the market, sell it. They'd probably get their asking price plus a dollar. And so, when the markets turn, and that's when creative financing becomes much more viable. Which is why I brought the book out today.
Techniques in Market Cycles
Bill: I know from experience in market cycles, these are going to be the techniques that we use to get deals done. Maybe it's slightly less than perfect if an asset has some distress to it. And maybe there are repairs and maintenance. Maybe the tenants have gotten delinquent on rents, such as COVID at the moment. These are all areas that will make that property questionable on financing, or at least questionable for the top tier financing.
I mean, can you get a hard money loan or some kind of bridge loan? Yes, of course. But when you go into Fannie or Freddie, these kinds of lenders want top-tier products. And at the moment we're seeing Freddie specifically and Fannie, start to look at the resume. So it is getting more difficult for people that are new to the business and don't have a three-year resume. That's what Freddie is asking for right now, a three-year resume in multifamily to qualify for one of their loans.
So it doesn't matter now how much money you have or how much net worth you have. To Freddie Mac, if you don't have a three-year resume, like-kind assets, so you can't go do a 10 unit and then expect to do 100 units. You already need to have some like-kind experience. And that's going to be tough for people wanting to get into the business. That's why I'm saying that these creative techniques, going forward, are going to be very valuable in a down cycle. And it's because the lenders quit lending, as we see.
Darin: Absolutely. And that's one of the things that I was excited about this conversation.
Creative Financing Is a Valuable Equipment
Darin: Sometimes there are people in the upmarket too. They come to me and say, "Hey, look, I'm willing to hustle but I don't have the money." And in today's market, because the agencies have been so active, and the bank lenders have been so active that you could solve that problem by partnering with other experienced people. So you go out and you do the hustle. You find the deal, you underwrite the deal, you get it to the point where it's almost locked up. Then you bring an experienced guy on, and that's been my advice to the younger generation. They're hungry, but they just don't have the capital yet. They don't have that experience yet.
But what's interesting to me is, I don't know if it's two months from now, or six months from now, or two years from now, or five years from now, but at some point, as you said, it's economic cycles. And we're going to go into a downturn and I saw it happen where, in the great recession, for sure, all the lenders just completely stopped lending. And so you can choose at that point, "Do I just get out of the game or do I figure out another way?"
I think that some of the options that you're talking about in your book are, "Hey, let's think of another way to get this done where it works for both the seller and the buyer." And so that's attractive to me, another tool in the toolbox, and some people don't think of it that way, because, "Why do I need to learn this now when we're still a good lending environment?" But it could change on a dime.
Watch Out for These Major Points
Bill: And it will. I can give you two major points to watch. Number one, we always watch our lenders. Because the way this works is, as the world changes and lenders get nervous. They start to put less money into the market, or they raise the criteria. And I don't necessarily mean interest rates. So we're not talking about interest rates. Interest rates are low, which may not stay there forever, but right now it's not an interest rate conversation. It's a qualification for the loan conversation.
And so, we're seeing lenders start to lower loan to value. They ask for more resume in their loan value, the resume is a biggie, and in a quality product. That's the third one I was thinking of, that they're moving towards. So you watch your lenders see what's going on. Now, at the moment, people would say, "Gosh, they like multifamily. Lenders are aggressive about multifamily." That's the problem. It's a supply and demand problem. So number one on multifamily real estate, the supply is low and the demand is huge, which is allowing Fannie and Freddie to put a more expensive product out there because it has not stopped the borrowing for multifamily.
That is one negative that if the trade volume continues at the rate that it has, Fannie and Freddie won't pull back some of those criteria. What we're seeing right now is the 12 to 18-month PITI reserves, the principal interest tax, and insurance reserves that you're having to put up to qualify for a Fannie and Freddie loan. And someone asked me the other day, he said, "When do you think Fannie and Freddie will stop with these reserves?" And I said, "When we stop borrowing so much money from them."
Dealing Fannie and Freddie With Creative Financing
Bill: If they can do these loans, and we're still showing up at the door and accepting these mortgages with those terms and it's in their favor, why would they quit? They won't. It has nothing to do with COVID, that's what they're saying. But if we keep borrowing at the rate we're borrowing, they're incentivized to keep the prices high. Supply and demand, that's one issue that's going to make Fannie and Freddie much more difficult to deal with going forward, number one. Number two, hotels, strip malls, and regular malls and offices are starting to go into foreclosure at a quick clip.
Now, we know the regular traditional mall space is sort of a dinosaur, it is a dying model. There have been several in Atlanta and I watch the news. There's been a lot of malls around the country that have gone back into foreclosure. We're starting to see hotels now go into foreclosure because the hospitality industry has not recovered. And I'm afraid if people continue working from home, the office space may follow.
There is a high trade volume and a lot of interest in multifamily. But at the same time, that same lender, remember they loaned on other asset classes. Not Fannie and Freddie necessarily, but CMBS, local banks, and other debt products have loaned on these other asset classes that are now starting to collapse. Most lenders are going to say, "Hey, if we're losing on this product here, why would we be so quick to put more debt into a market that we're already losing assets in?"
That's a big indication. Your foreclosures in the hospitality office and retail specifically, are going to pull a lot of lending liquidity out of the market, as well as high trade volume in multifamily.
Catching the Falling Knife
Bill: Both are going to lend towards these lenders' tightened criteria. Which is why when you have an asset that's not top performing property, you're going to struggle to get a loan from that, because they're not going to need to do subpar product or subpar lenders. That's where creative financing is going to come into play.
Darin: That makes a lot of sense. So have you done any of those other asset classes or single family, multifamily?
Bill: That's where I've been my entire career. I have not done strip malls, retail, or hospitality. And I know it academically. I study it as part of my business. So I keep an eye on the other food groups so that I know what's going on, but no, I have not personally owned any of that.
Darin: I don't know many people that play in that space, but I'm just curious as to whether there's going to be some good deals. Maybe it's time for people to look in those areas, but I don't know anything about it.
Bill: Right now, you're going to have an issue of what we call catching the falling knife. Where is the bottom and have we hit the bottom? And so, if you jump in on one of these distressed assets a little too soon, you may have a hard decline in that value before recovery. That can be true in certain markets as well, say like New York at the moment, they're struggling with their property value and their occupancy, and the decline is still current. So it hasn't leveled off at a bottom or a base yet. You would need to be careful about those assets.
Avoid Catching the Knife With Creative Financing
Bill: Although I think New York is technically a great market and it has been historically, in America, one of the strongest markets. It will recover, not tomorrow, but eventually. And I'm guessing within the next 10 years or so, that market will recover. But it doesn't mean you need to go in there and buy assets today. Give that a minute. So we want to be careful about catching that falling knife.
Darin: Right. So let's stick with multifamily since that's both the playground that we play in. In the book, it talks a lot about distressed assets, and that can include the property is distressed. It can also include, the property is fine, but the seller has distress. So talk about those two components.
So, what I have come to realize in my career, especially in teaching and doing the business, is that a good deal is about 90% seller, 10% real estate. You can have a great deal or a bad deal or whatever kind of piece of real estate you want. If you don't have a willing seller, you don't have anything.
And so I would say that the real key to this business is focusing on the human aspect, not the sticks, the bricks, and the mud. We want to go out and find sellers that have problems. Now, if a seller owns a building that is distressed, well, you probably have a distressed seller. But you could also have a distressed seller where the real estate is fine. It's something personal. Maybe they have health issues, maybe they're just burned out. I love a good old-fashioned burned-out landlord, somebody who just thought they were smarter than the average bear.
Types of Sellers
Bill: They were going to show us all how it was done. They jumped in there, they bought some real estate and they realized, "Hey, this is real. This is an actual, tangible object. This is not a stock or a bond or some kind of, 'Just write a check and set it and forget it.'" It's not a rotisserie chicken, right? You've got to manage these things.
I see a lot of really good smart people that just made mistakes in purchasing and now have buyer's remorse. Those are going to be the people that you want to focus on. The second group would be the ones that have debt coming due soon. That's a big one. What I would recommend to any listener out there, if you're looking to reach out and contact sellers directly, not going through a realtor, look for sellers who have loans that are coming due within the next 18 months. Sometime between tomorrow and 18 months from now.
Those are going to be very sensitive sellers. If the debt market pulls back, like I know it will, those people are going to have trouble refinancing. A lot of people over the last couple of years have bought under the BRRR model, the buy, renovate, refi, and repeat. There's absolutely nothing wrong with that business model until there is. And the catch is, when the debt pulls back, it's the refi part, the buy and renovate and repeat, fine, it’s the refinance, that's the killer.
And right now, a lot of lenders are not allowing cash-out refinance. That's what a lot of people bought these assets for because they saw, over the last five years, people buying an asset, holding onto it for 12 months, 18 months, refinancing.
Creative Financing Is Going Through Direct Contact Campaign
Bill: Pulling out all of their down payment. Maybe even plus some money, they've got no money in the deal. Returns are infinite, and those are sort of the high-flying deals that people hear these stories. They think, "Oh, we can all go do that."
That's not true. It's a little more difficult to pull off than people would like you to believe. Especially someone selling you something. And so, it's that refinance aspect. I think that the people that had that as an exit strategy are going to find themselves, motivated sellers, over the next 18 months. And so, that's why one of my target areas is trying to track data on debt and whose debts are coming due. That's where you want to be looking for deals.
Darin: So, in the big multifamily space, which I would define as 60 units or greater, predominantly those indicators that I know work through brokers. Whether it's off-market deals or fully marketed deals, predominantly, that type of product is coming through brokers. When you were talking about checking out the debt coming due and talking with sellers directly, are you referring to smaller multifamily like four units, two units, eight units, 12 units? And because I still would think that the larger ones are going to use broker relationships.
Bill: I always make the joke, "Do you ever see a 200 unit apartment complex with a for sale by owner sign, scribbled on a piece of cardboard, out by the road?" No. You don't find 200 units on Craigslist, right? That's not where those assets are sold. So Darin you're spot on. What I tell people is that from zero to 50, you are better off attempting to go through a direct contact campaign.
Choose Realtors in Creative Financing
Bill: Back when I did direct contact, it's more like a little yellow postcard. It said, "We buy houses." or, "We buy apartments." Nowadays, we're a lot more technologically savvy than that, but text, email, things of that nature is a direct contact campaign. I think that's very effective up to about 50 units. 50 units and higher, you're largely in the commercial realty space.
It depends on what asset class you're looking at. The larger ones are typically sold through realtors. And that is a different business. That's a little bit more difficult. You've got a gatekeeper in there. I completely cover that in my book and how to work with realtors in creative financing. I love getting my deals from realtors and all of my creative financings have come and had realtors involved with it. A little bit of an art to that, but yes, you're right, 50 and under, straight to the owner, 50 and above, probably a realtor.
Darin: Fantastic. So talk about that then. You talk about it in your book. So you just mentioned it. When you're dealing with the larger transactions. We'll get into the details on some of the different strategies you've got, but you pick one and you're going to go down that path. Maybe the broker isn't familiar with how that works or hasn't done one of those transactions before. They're a little suspect. Brokers like to get paid, right? They want to get their commission. So that brings in another variable. How do you handle that when you've got a seller, a broker who's worried about getting paid. How do you approach that?
Bill: Great question. Because you're right. Can't be mad at a realtor for wanting to make a commission, that's what they are here for.
Dealing With Realtors in Creative Financing
Bill: Step one is really to analyze the deal. Figure out what is right, wrong with the asset. Then try and figure out where the seller is at. So if you find that an asset won't qualify for traditional financing. Just, for example, let's say, the debt service ratio is too low, and the bank says, "We don't want to do the deal." All right, the seller has a problem. Now, whether the seller knows they have a problem or not, that's another question. That's what you have to figure out. You need to go now, educate the realtor and possibly the seller that this deal isn't going to go for traditional financing, and that that's not your problem, that's all buyer's problems.
That's a very important distinction. You don't want a realtor or a seller thinking that you're making some kind of creative financing offer because you have no money or no ability to close. That will get you not a good answer very quickly, right? So step one is to let this realtor know, "Hey, you can buy the property. You're good. It's not you, it's the asset, that's the issue." And because the asset's the issue, the seller has an issue.
So you sit down with the realtor and you say, "I like to start," point these things out and say, "Hey, the property does this and this." That won't qualify. What do you suggest?" And stop, and just see what that realtor says. He'll speak the first routine. So I always just ask, "What do you think?" And it's a genuine question. "What should I do? I want to help and close. And I want you to get paid, I want me to get paid. What should we do here?"
The Columbo Technique
Bill: If the realtor doesn't have a great answer, that's when you say, "Well, would your seller be possibly interested in…" That's where the creative financing offer comes in. And so, you want to be ready to explain and educate the realtor and seller on how that lease option, or how that seller financing structure, or debt partner, or whatever structure going to use, is going to work.
So you need to read my book. You need to be able to understand and speak about the mechanics of how that deal works, because a confused mind says, "No." If you really can't explain what's going on, and not only explain how it works but explain two other things. One, why this is value for the seller, and number two, how that realtor is going to get a commission check out of this.
Darin: That's what I love about what you just said. I love that approach, like, "What do you suggest? And what do you think?" Because now, all of a sudden it gets the broker engaged where he does want to get paid or she does want to get paid. And so she's like, "Yes, he's right. It's not going to qualify, not just for him, but for everybody." Then it also helps them almost feel like they're coming up with the solution.
Bill: Buy in. That's what we're discussing, buy-in. Is what I call the Columbo technique. If anybody remembers Peter Falk’s character Columbo, the old detective. He always acted stupid, but he wasn't. He just came off dumb. And so, I do that even in the sense with realtors and say things, "Gosh, I like the deal. I want to close it. I like you, it's just, I'm not sure how to get the deal done."
Creative Financing Techniques
Bill: I may suggest some sort of creative offer. What I'm doing is I'm getting that realtor's buy-in. If they will help me create that offer and they can see their fingerprints on it, in their reflection, in that offer, they're going to be infinitely more likely to champion that offer to the seller – whom you may never actually get to speak with.
Remember, we don't always often talk to the seller. Sometimes we can only go through this gatekeeper, the realtor. So you have to have the realtor not only turned in the offer but recommended the offer. And so, to get that buy-in, they've got to understand how this works. You're going to have to be able to explain it to them in detail. And again, why is it of value? That's the absolute key, why the seller needs to do this with you.
Darin: Let's go into the two main creative financing techniques that you talk about in the book. One, seller financing, and two, the master lease option. Let's maybe start with seller financing and talk about that and we'll get to the master lease option afterward. So maybe just share a few examples on when does it make sense for a seller to consider seller financing for their best interest?
Bill: Seller cannot give seller financing if they have a mortgage in place. And that's the big catch with seller financing. The seller has to have full equity. Or at least any down payment money that you're bringing to the seller would have to be enough to clear out any debt they may have on there. So a seller cannot give interest they do not have. They can't lend you a property that they've borrowed against. That's not how that works.
Darin: So what percentage of deals fall into that category? I mean, that's a big barrier to get by. So again, I'm thinking that that might be the smaller deals versus the larger deals.
Bill: Yes. Smaller deals typically. Your larger deals, you're more inclined to get a percentage carryback than 100% financing. So in your smaller deals, you may get full seller financing. You bring 10, 20% down, something of that nature, and the seller does have the equity. That's going to be typically what we call your mom and pop deals. Where that is an owner that has owned the building for a long time, 10, 20 years, and they've paid that asset down, and now they're looking to retire, they're looking to get out of the place, something else.
And seller financing is a great way for a seller who has a tremendous amount of equity to accomplish two things. One, mitigate taxes. They're not going to take a tax hit on a lump sum of cash on the sale, number one, the capital gains. Number two, it allows them to continue a sort of an annuity, a payment every single month.
Maybe they enjoyed getting cash-flow from this property, and they liked that revenue stream. Seller financing is a way to allow that seller to continue collecting a monthly payment. So that's what we're looking for. A smaller percentage of the time, you're going to find that, larger assets, you're probably getting assistance with the down payment. You may be getting a seller carryback. Now you have to get the permission of the primary debt to allow that. So it's not just about negotiating that with the seller, you do have to get permission from the bank, number one. Number two, it's not 100%.
Changing Mindset to Creative Financing
Bill: This is a question I get a lot of times. "Hey, can't I just borrow 80% from the bank and then have the seller carryback 20%? I'm in the deal with no money down?" Not going to occur. No regular lender is going to allow you to have zero at-risk capital. And that's a fancy way of saying skin in the game. That's the technical term. So I have never seen more than 10% carryback.
10% is your average for a carryback. So it is still seller financing. It's just not 100% seller. And I've done 100% up to 10%, and everything in between.
Darin: So let's go down that path that we did before, where I asked you the process you would talk to a broker. Let's do that same thing on the seller financing. So, I'm a 90-year-old guy. I've had a property for 40 years. It's paid off. I'm clipping a good cash-flow, but I'm sick of managing it, and I'm thinking to myself, I'm just going to sell it and go retire someplace. Now, you come along and you discuss it with the broker and you present something different. How do you change my mindset?
Bill: Yes. The first thing you want to address right out of the gate is the elephant in the room. And I mean, almost make a joke about it. "Hey, listen, I know you want your commission, don't worry. We're going to get you paid." Just put them at ease right out of the gate, because that is going to be their number one pushback. I guarantee you that the realtor's not listening until they think they're getting paid. So just hit that right on upfront.
How Are Realtors Getting Paid?
Darin: So how does the broker get paid?
Bill: How do they get paid? And how are we going to get them their commission? There are lots of different ways I have shared in cash-flow. So number one, the basic answer is you are probably going to pay out their commission when you exit the deal. When you refinance or you sell that asset, something like that, it's going to be sort of an IOU.
But in the meantime, what you want to do is, either have an equity share or a cash-flow share with that realtor. There are no rules. You can do anything from giving them an IOU, again, a chunk of the general partnership, limited partnership. You can give them cash-flow, you can go cut their grass every Saturday, and it doesn't matter. Creativity is on your side, but you must guarantee that they will get that commission.
Number two, bring that commission into the actual document. And I'm going to say the same thing, when we discuss lease options. You always want to show the realtor that their commission is a part of the legal document that will be filed against this property. Cloud the title with this legal document. So even if you and the realtor are good people, and for some reason, the seller turns out to be a bad person and decides to try and do something sneaky, sell the property.
You get into some other buyer without you knowing it, or go to Mexico with the money, whatever the case, you're going to have that title clouded with this document in there. It protects the realtor. So that's one thing that I address right out of the gate, "We're going to get you paid and we're going to make sure you're safe.
Never Browbeat Anyone
Bill: How am I going to do that? I'm going to put you into the document, and we're going to have a legal closing." Now you never want to do these kinds of contracts on the hood of your car. You must go through a legal closing with an attorney, with a title company so that all documents are recorded and everyone is protected. Don't ever do this outside without legal counsel. That’s how everyone here stays protected.
Darin: So I'm the broker and I've got your offer with this IOU and I've got another offer. And I'm still thinking to myself, "I want to take this other one and get paid next month when we close."
Bill: And you should. Do it. Go ahead. And when it doesn’t close call me back.
Darin: Because their structure isn't going to work. They're not going to be able to get the lender that they're saying they can get.
Bill: Fine. Never browbeat a seller, never browbeat a realtor, never strong-arm someone. That's not a good technique. You're only going to burn relationships that way. Make the offer. Show the realtor the value you bring. And if it's not you they choose to go with it, and if it's not your offer, then fine, confidence sells. Let that realtor know you got a ton of other deals you're working on. If this seller is not interested in having you solve their problems, not a problem. There's a lot of other sellers you're going to bring value to. You're going on down the street to work with them. "By the way, here's my offer. Here's my letter of intent, now, hey, if anything happens in the future."
Don't Burn Bridges
Bill: Unfortunately, if that deal doesn't go through, which I sure hope it does, and I sure hope you all make a lot of money. But if for some reason something goes wrong, "Here's my name, number. Give me a call. Love to hear from you." Never burn the bridge.
I have had a lot of deals come back to me after a hard no, after almost even being laughed at. A realtor thinks sunshine's coming out of the rear end and they're the bee's knees if you will, and then they're telling me, "Hey, who are you with this kind of offer?" And man, they come back hat in hand, eating some humble pie, when that big hot shot offer that seemed like a great offer doesn't close.
That's what we're going to see a lot more of going forward is people making offers they can't back up. Amateur realtors and amateur sellers are very quick to grab a purchase price without really vetting a buyer. Without really vetting this offer to see, "Can this buyer close this high-flying number they just threw out?" The answer turns out to be no, and then that buyer's over there re-trading the deal. That's where you get a phone call, and don't be cocky about it. Don't ever rub anything in anybody's face.
Darin: So the other point is that you talked about mitigating taxes. So on that 90-year-old guy, and I'm thinking I'm going to have to sell the property and pay my. I'm in a low basis. And I'm going to have to sell and pay my capital gain and move on. But all of a sudden you present an opportunity that gives me a lot of what I want.
Master Lease Options
Darin: It gives me continued cash flow, but I'm not having to take the big capital gain tax right off the get-go right with the seller financing?
Bill: You're only going to pay taxes on profit. That profit is going to come in monthly increments. So you're not going to have that gigantic lump sum, sucking sound of all your capital, walking out towards uncle Sam. And that's very attractive to a lot of sellers.
Darin: All right. So let's move on to master lease options. And look, I've never done seller financing or master lease option, but just the thought of master lease option sounds a lot more complicated. It's like anything, once you do it, right? And you understand it, you gain confidence and then you have another tool to offer, to solve a problem. So talk about how that works.
Bill: Absolutely. And right before we get into that, do you want to reiterate a point that you've made a couple of times? These are tools but these are not the only tools. Creative financing is about increasing probability, not possibility but probability. That's all we're trying to do.
I have found through my career and through education that you will close about one in 80 deals that you analyze. That's what I call the race to 80. So you are always trying to get to the 80th deal analyzed because that's your probability that you'll find the one to close. Well, that's taking an approach at buying real estate by saying, "Okay, here's a deal. We'll go to the bank. Then we'll get a loan. We'll put down 20%." So with creative financing, we're going to add a few more tools to the toolbox. They will increase probability.
Utilizing Tools to Achieve Creative Financing
Bill: Maybe we can do three out of 80 or four out of 80 now. The reason that I'm bringing this up is I don't want people walking around thinking, "Oh, I'm going to only do lease options. Oh, I'm going to only do seller financing." That is a terrible point of view. You, you're here to do real estate in any manner that it can be done.
By the way, if you can borrow money and put down 20% and get the deal done, you should do that. If the deal doesn't work, instead of throwing it in the trash, I'm saying, hold on, let's look at it through a new lens of creative financing and see if any of these techniques make any difference. But they are not the only technique. So very important, as you mentioned here, they are tools in the toolbox.
Darin: That's a great point. Even in today's market and before it turns, there are some deals that occupancy is below 90%. Well, the agencies won't look at that deal, right? So now if you're a buyer and you just want agency financing, then you just end up throwing that deal out where now here's a couple of opportunities to look at it from a different lens.
Bill: Correct. But not the only lens and neither is going to the bank the only way. And that's why I want people to broaden their spectrum here of how they look at real estate and to come at it from a creative problem-solving point of view. And then all of a sudden, a lot of different opportunities present themselves that you were not cognizant of before. Now they're deals where before they were not deals because you were just going at it with the one technique.
The SPY Technique
Bill: It's like they say, if all you have is a hammer, everything looks like a nail. Well, we want to have some other tools. So you're not just bashing everything with that same hammer. That's not a good way to try and do real estate. Or you will only do deals in very certain parameters and very certain types of deals. And right now, deals are hard to come by. The market's pretty heated, and so we need as many techniques to broaden and cast as wide a net as absolutely possible.
Darin: That makes sense. I'm sorry, you also talked about something in the book called SPY, in which we're talking about being a problem solver. Talk about that acronym because I thought that was interesting. It changed the focus.
Bill: That is an acronym I created after really watching a lot of my students. Some become very successful with creative financing and some failing completely with creative financing. And so I really made a case study between the two groups that succeeded and failed with my techniques. I said, "Why are some making it and some aren't?" And what I found was, it is the offer process that was knocking the ones out that weren't being successful.
Most people, like those students were looking at deals from the, "You, me. What's good for me? Then what's wrong with the property? Oh yes. There's a seller involved." And as I said, 90% of a good deal is seller, 10%, real estate. And so, they were making offers that only solved their personal problems. Maybe it solved the property's problems and almost completely ignored the seller. And so, that's when I developed this technique going, "Okay, we've got to reverse that."
Seller. Property. You.
Bill: And that's why I created the SPY technique. Seller, Property, You. That's the order in which you want to do a deal analysis and that's the order in which you want to create an offer that solves problems. Solve the seller's problems, then look at the property, solve the property's problems, and lastly, because you are the least important aspect of the deal, solve your own problems.
Darin: Everybody wants to focus on themselves.
Bill: That's not how you get creative financing. All the money you need, then you can focus on yourself. If you're trying to create wealth with someone else's money, you better focus on them first.
Darin: Absolutely. It holds when you're doing these syndicated deals and you're raising capital from investors. A lot of people may focus on how great the deal is instead of focusing on why this is a good opportunity for you as a passive investor.
Bill: Absolutely. When limited partners are investing in a deal, I'm still going to tell you, they're investing 90% in you, 10% because of the real estate. I think that's something most syndicators completely forget. Now we're talking creative financing here, but I have traditionally syndicated many deals. I've done all types of financing, not just creative financing. All of the money that I've raised, all the deals that I've done traditional syndications on, I've had maybe a handful of investors come to look at the property. Even show up and look at the asset that they just wrote a half a million-dollar check for, very few people show up.
The Rent-to-Own Type Model
Bill: It's the relationship they had with me, it's the person, not the building.
You have to focus on who you are as a person. As a business person, as a character – that's more important than the deal or the numbers or the cashflow or any of that stuff.
Darin: I mean, your track record, right? So they trust the fact that you're going to make them money. Hey, so I cut you off before. I asked you to describe what the master lease option was, and then we went into a different tangent. If we could go back to that and just describe what that is and how that works.
Bill: So the master lease option is two separate documents. Two separate contracts that collectively make our master lease option. The two separate contracts are a master lease and an option to purchase. So generally what this is, is a rent-to-own type model. If we were dealing with houses, this would be what we would call a lease option.
We use the term master lease option when we're talking about multiple units. It is functionally the same concept. Master just means more than one. The master lease allows us to go in and rent an apartment complex. The option to purchase is where we set the purchase price today and how long I have to buy the property for that price. For example, let's say, Darin, you have a deal, you're burned out by the landlord. I come in and say, "Hey, let's do a master lease option."
My master lease allows me to rent the property from you with the right to sublet those units. Meaning, I'm just going to turn around and release the property back out of the tenants who are already there, okay? That allows me to control the management, the operations, and the cash flow.
Sample Scenario in Master Lease Options
Bill: The idea is that you find some kind of property that is not financeable that could be turned around if you maybe just brought a little bit of money, or a little bit of effort, or a little bit of energy, or a better management company, or these sorts of things within. Then Darin, you and I are going to set a price for this property. And so, we'll say, "You're going to sell me this asset for $1 million. Okay, fine. How long do I have to buy this asset for $1 million?" And you and I would agree on a timeframe. Let's say, it's two years.
So you'd say, "Okay, Bill, you have two years in which to buy this asset for $1 million, and if you don't buy it in that amount of time, you're in default of this agreement." What is the remedy if you're in default? You put down what we call option money, which is about the same thing as earnest money deposit.
You're going to put up a deposit. If you purchase or exercise the option to purchase, that deposit is applied to the purchase price, just like a normal earnest money deposit. And if I don't close the option in this scenario, within that 12 or 24 months, then I'm going to default it and walk away from the deal. But you're going to keep the deposit money. So the idea is that you find something that you can negotiate that option price on, and force the value through the operations and through that master lease. You're forcing the value beyond the option price.
Approaching Risk With Creative Financing
Bill: In this scenario, our deal, we have here is a million dollars, hopefully over that two-year window, the market gets better and through my efforts on the property, I've increased the value. Now maybe it's worth $2 million, okay? A master lease option.
Darin: I'm like, "I don't want to sell it to you for a million anymore."
Bill: That is a risk. That is a very real risk if that occurs. So what I recommend since you brought that up is to cashflow back all of the earnest money within one-half of the time of the total option. All right. Let me explain that. So if you said to me, "Okay, Bill, I'll give you two years in which to buy this property." What I would do is sit down and analyze your deal and say, "How much do I believe I can produce in cash flow in 12 months?
Because that's half of our two-year window here. I would not put up more option money than that. Why? Because if we get to the end of the two years and one or two things happen, I decide I don't want to buy your property. Maybe I found something wrong with it, maybe after test driving this thing, I figured out it was a lemon, and I don't want to own it. I'm going to walk away, you're going to keep my option money, my deposit, so what I cash floated all back already. I have no risk. You just turned out to be a bad person. And you say, "You know what Bill? Sue me. I don't want to give you the property. You made it worth 10 million bucks and we agreed on a million bucks, and I'm just not going to give it to you."
The Formula of Analyzing Deals
Bill: Now, at least you have the decision to decide whether you wanted to address that legally or not. But if for some reason, I just decided to say, "Well, you're a bad person. I'm just going to let charma take care of that," at least I wouldn't have any more capital and I would not be injured financially in that scenario.
So that's why I use that formula of analyzing the deal. It's half the options window's worth of cash flow. That's also a way of creating a timeframe for the option. You can reverse the math. "Hey, how long should you and I do this option agreement for?", "Well, I don't know. Let me see how much its cash flows in a year. Where are you willing to go?" And so, that's a way that you can decide either timeframe or how much money to put down as the option.
Darin: That makes sense. Hey, you told a funny story in the book, something like somebody called you an idiot.
Bill: Yes. My very first mentor.
Darin: Really? Is that right? So tell that story. I thought that was funny.
Bill: So I had bought a duplex. My very first deal was a duplex. And I was a pilot by trade. Had been flying airplanes for some years, working and I realized that the important people were sitting behind me in the airplane. The pilot is really important from takeoff to landing, completely worthless on the ground. I didn't know that when I was going out for flight academy, and so I wound up spending hours and hours sitting around in hotels and airports waiting to just be a chauffeur. I got tired of it. And so, I spent about a year studying real estate.
A Funny Story Where It All Started
Bill: My very first deal was a duplex. I got seller financing, put a little money down. I'm a genius. I'm all high and excited, and I go to my very first REIA group meeting.
And as a local club, and it's full of all the local investors, and I come in, I'm nervous. I'm the new guy to the group. I was 28 years old at the time. So younger person and I come in. Of course as these groups do, they go around the room and say, "Okay, who's done any deals? Who's done their first deal?" And of course, "Me, I did a deal." They said, "Oh, great Bill, a round of applause for this guy," and this kind of garbage. And they said, "Well, tell us about your deal." I said, "Okay, great. It was a duplex and it cashflows $300 a month, and I paid $43,000."
When I said the price, there was a guy in the back of the room, just busted out laughing. Now, I'm like, "What?" And the guy goes, "You're an idiot." Oh my God. So I turned around and I just said, the only thing that came to my mind, I said, "Want to go to lunch?" And so I did. I took the guy to lunch and I said, "Look, what did I do wrong? Tell me." I was able to check my ego because I was willing to learn.
If I'd made a mistake, I just want to know. I was just hungry for information. And the guy says, "Look, man, you're a moron." He said, "You paid $43,000 for this duplex." He goes, "Everybody else in the neighborhood paid $20,000."
Check Your Ego Before You Get Mad
Bill: Whoops, I overpaid by more than a 2X margin. The lesson there, well there were lots of lessons.
One, when somebody tells you you're stupid, check your ego. He might have something to tell you. Before you get mad, go find out what they have to say. You can get mad at them later, but in the beginning, there might be a lesson in there.
And so that's what I did. I took him to lunch. We talked, and the ultimate mistake that I made was I analyzed the deal through a narrow window of cashflow. So I analyzed the deal from the income approach only. I did not take the deal and put it into the context of the rest of the market. So I did the old, rich dad, poor dad, it cashflows and made money and I followed the formula, and that part worked.
They forgot and talked about appraisals. And they forgot to talk about comparable sales. They forgot to talk about, "Back up and look at what everybody else is paying." So I just followed that very basic advice that I got out of that book. And it just said, "Hey, if there's cashflow, it's a good deal," terrible advice. And I overpaid by a little more than 2X. It was a good lesson.
Darin: Good lesson, right?
Bill: Still a friend of mine. It's funny. I was at a Bootcamp this last weekend and somebody came up and they said the same thing. I said, "Oh, that was a funny story. That was my favorite part of the book." And it reminded me to text my friend. I said, "Hey, go get a copy of my book. I wrote you in there."
Experiences Hone Creative Financing Skills
Bill: I said, "Do you remember the first thing you said to me? You told me I was an idiot." And he replied right back with, "Yes. Did you tell him you immediately told me to go to lunch with you?" I said, "Yeah, that was in the book." So the guy's still a very good friend of mine. I've known him for 16 years. He's on my phone right now and was one of my first mentors. A bit of an attitude, but he was one of my mentors and you know what? He was honest and he was right. I was thankful that someone had the nerve to stand up and at least tell me I was wrong. In whatever manner they were going to tell me.
Darin: But you know what? Had you not taken action? And had you not purchased the duplex, you wouldn't have gone to the REIA. You wouldn't have raised your hand. And you wouldn't have told a story. You wouldn't have met the guy.
Bill: If you screw up one, buy two. And if you screw up two, buy 10. You'll get it right eventually. Just don’t stop. If you make a mistake, cost average the mistake. It’s when you make a mistake and you stop, that's when that mistake just becomes set in stone. And I have had some really hard times in my business. I have had some very financially difficult times. I've had trouble paying my light bill and credit card. I had very financial issues in building my business. It was not all success from day one and up in riches. I went through some very hard times back in the recession and learning to build my business.
You Can Learn From Honest People
Bill: You got to learn to deal with some of that stuff and check your ego.
Darin: Well, appreciate the guy that stepped up and said that and you took him out to lunch and he shared the info with you. It reminds me of a story when I joined the multifamily mentorship group. I'm at one of the happy hours and I was naive and I'm like, "We're having beers." I'm like, "Hey, I'm a nice guy. And hey, let's partner together." A few people just laughed and just said, "Maybe." But then I had one person that said, "Darin, if I find a deal, why am I going to partner with you? I'm going to partner with the guy over there that's done five deals that has a huge database to call. What value would you bring me?"
I was like, "Holy cow." That opened my eyes. And I was like, "Well, why would you want to partner with somebody like me that's new?" And the person said, "Go find the deal. You find the deal and do all the work, and then come to me, and I'm the experienced person. Well, now you brought value." That person being honest with me, although I would have liked them to say, "Yes, I'll partner with you and bring me a deal," and it was easy. And that person being honest with me early on changed my focus to, "Now I know what I got to do. I need to go out and find the deal. I got to build relationships with these people so I know who to call when I get the deal, but I got to go out and that's the value I bring."
Bringing Value to the Table
Bill: I've had that same conversation with people and I have had an early person have that same conversation with me. They were just a lot less polite about it. But, it was the same takeaway that you had. It was rough. It hurt my feelings at the moment. And then I was super thrilled that that individual set me straight because he actually set me straight. Then I was on a path of realizing, you can't partner with someone where you don't bring value. And you don't get into deals where you don't bring value. That's not a good idea. So, the advice I would give here and that I do give most people, and that individual gave me was, "I will not partner for something I can outsource to an employee."
So when people come to me now and they say, "Hey, Bill love you. Mean it. Man, I'll carry your luggage. I'll take out the trash. And I'll do all your underwriting, whatever you need me to do," I can go on, get a VA. I can go on Fiverr and get that taken care of. And I would never forfeit equity for something that can be outsourced to an employee. So you're going to have to bring value to me that is irreplaceable, and exactly what that individual told you, find a deal. That's what my book is about. It's about getting results in finding deals.
Darin: That's huge. This wasn't planned, but the syndication field has grown in the last three, four, or five years. I just got involved three years ago, and since I've gotten involved, I've just seen a ton of new people come in.
The Next Big Stretch
Darin: And what do you think happens when we do go into a downturn? Does it thin out?
Bill: It does. Yes. And I'll try and be as positive as I can, but there are a lot of people that don't make it. Two things, when we go into a recession. I hope you have a good building that's not in terrible shape because that's where you're going to have trouble if you're in an older building. And I recommend a lot of my students avoid older buildings right now, because the hold time, maybe longer for me to be able to reach that exit strategy. Some of these buildings are really getting old and they may not have longevity as far as capital expenses are concerned.
So, number one, I hope you have a building that's in pretty decent shape. I hope you don't have debt that comes due anytime soon, and I hope you're a good operator. This is the cycle of the operator, not the speculator. The speculator does well on the upside. It's the downside that burns away all the fair-weather operators in this business. And true techniques are only passed on by those of us who have survived. Everyone else is washed away.
Darin: That's a good point. And I hear that from a lot of syndicators that are very experienced saying, "The next five, 10 years are going to be operations focused." So what's the next big stretch goal for you? Is this your first book?
Bill: It is my first book.
Darin: How was it putting it out in your first book?
Bill: It was interesting. It was really fun actually. It was a great experience working with Gino. Wheelbarrow Profits.
Second Book for Creative Financing
Bill: They helped me publish the book and they spearheaded that and I partnered with them. So it was a great partnership in the book. And I'm about 60% of the way through a second book.
Turns out I'm a writer, turns out I'm good at it. I enjoy it. And I wrote every single sentence in that book. That's a question I've been asked a lot over the last couple of weeks. Like "How does writing a book work?" You just make an outline and you turn it in to a publisher and then they write the book for you. Yes, you can do that. I did not. That is every single sentence in that book is my blood, sweat, and tears.
Yes, someone edited, but I wrote every bit of it. And I'm now about 60% of the way through a second book. That will be called Real Estate Raw, and going to be out maybe a few more months.
Darin: That's awesome. Bill, you know what? Look, it's a big step to get a book out. And then what you're doing seems to happen. Once somebody writes one, all of a sudden they realize they can do it. It's like anything in life, man. There are all these unknowns as to what you have to do to make it happen. Real estate investing is one of them, writing a book is another. And then once you do it, you understand it and you can replicate that.
Bill: Well, as I always said, you have to have a bike to learn how to ride a bike. Just go get a bike and start peddling.
Take Actions to Achieve Creative Financing
Bill: Are you going to fall off and scrape your knees? Yes, probably so, but if you never get on that thing and start peddling, you're never going to learn to ride it. Just take action. I think our brains are really only for 20% thinking, 80% action. My mind is just keeping me from doing dumb stuff and falling in holes in the road. Otherwise, I'm mostly action-focused and thought second. You gotta get out there. The world is not as difficult as people tend to think that it is. I think people harbor a lot of unnecessary anxiety about how bad things are, or how negatively someone might think of them, or what their appearance is and these sorts of things. And the world is just not as difficult as you think, just take action and go find out.
Darin: Awesome. So what's your next big stretch goal other than writing your second book?
Bill: Writing a second book, finding a good deal would be a good one. That's a bit of a tough one these days. Moving into doing a lot of the education. I am a disciplined purchaser. I look at deals every single week, several a week. And I am not passive. I'm not sitting on the sidelines waiting for the market to shift, but I don't change my parameters to match the market. I know what a good deal is, and I'm only going to buy a good deal. So I don't care what the market's doing. If it's not a good deal, I'm not going to purchase it, and I'm not going to put my investors' money in harm's way unless I truly feel that's a good deal. So I'm just not getting offers accepted because of the pricing.
Bill Outside of Real Estate
Bill: It's not that I'm inactive, I'm just staying very disciplined. And I see that lack of discipline in a lot of new syndicators. They're starting to, what I call, pencil whip deals. So they're starting to pencil whip a lot of these things. Meaning, just making it look good on a piece of paper, but in reality, in that operational cycle. I question whether a lot of those deals are going to perform as they were meant to on paper. And that's what the experienced people will tell you, "We're going into an operator cycle." That's where the curtain is going to get pulled back on people who were overly aggressive in their underwriting techniques.
Darin: What do you do for fun outside of real estate?
Bill: I like to garden. That's probably my first answer. I'm a big gardener, plant person and I'm always growing flowers.
Darin: It's funny because Jake said, I don't know if he said gardening, but he likes to work on the outside of the house.
Bill: Yes. And I think he plants a lot of flowers and does a lot of landscaping stuff around his house. He has a home that they've only been in recently. In that phase of getting his dream home right the way he likes it. And me, I see, it's not about green thumbs, it's about brown knees, right? And so, I'm just constantly in the dirt. I love playing in the dirt. I'm a big kid. I love digging, planting, doing things of that nature and I like water sports. So avid water skier. I've been skiing since I was young and a very avid water skier.
Darin: Where do you live?
Bill: I live in Atlanta.
How to Learn Creative Financing Skills?
Bill: Then we have a property up in the North Georgia Mountains on a lake called Lake Rabun, a beautiful place up in the North Georgia Mountains. So my family has had a property on that lake for four generations, almost 90 years now. We've many generations of water skiers, learned to ski in the North Georgia Mountains of all places.
Darin: I love the lake. Good time. So how do people find your book? And where can they buy your book? In what format can they buy the book? And then secondly, if somebody wants to reach out to you personally, how do they do that?
We also have the book and a masterclass. I have a little more information if you want a higher level of training at creativeapartmentdeals.com.
You can go there and get the book and the masterclass. You can also reach out to me at broadwellpropertygroup.com. That's our home website, that's our company. Broadwell Property Group, we have a spot there for investors. If anyone is interested in maybe doing some business with us, you can go in there and put your information. Our CEO, Tony Morgan, will reach out to you directly. And my email directly is firstname.lastname@example.org. Reach out to me, send me an email at email@example.com. If you have any questions, love to answer them.
Darin: Listeners, the book's name is Creative Cash. There will come a time where the financing will shift and we will all need to learn these creative financing skills. So I hope you enjoyed that one. Until next week, signing off.