Creative Financing: 2022’s Antidote to High Interest Rates

Dave:
Hey, everyone. Welcome to On the Market. I’m your host, Dave Meyer, joined by Jamil Damji, for a very special episode today. Do you want to tell everyone who’s coming on today, Jamil?

Jamil:
It’s my best friend, my best buddy in the whole world, Pace Morby. I am thrilled to have him here. He’s a real estate genius, and he’s going to school us all in the world of creative finance. Your minds are going to be blown.

Dave:
Honestly, mine was. It was so cool, and just so you know, we obviously… Pace has so much information, but we brought him on today because what he’s really known for and what he’s a specialist in is creative finance. We’re going to talk about two specific strategies, seller financing and sub-to, and both of those, given the interest rate environment that we’re in right now are becoming, at least in my opinion, you’ll hear all about this, more and more attractive options for everyday real estate investors. It gives you options to pay less in interest basically, and so-

Jamil:
Absolutely.

Dave:
… if you are running into 6% interest rates and you’re worried about that and it’s causing you to shy away from deals, you’re definitely, definitely going to want to listen to this episode. All right, we ran way too long in talking to Pace because it was fun and he has such a great story, so we’ll keep this introduction short, and let’s welcome Pace Morby onto On the Market.
Pace Morby, welcome to On the Market. Thank you so much for being here.

Pace:
My favorite show in real estate, brother. Thank you for having me, both of you.

Dave:
Oh, you’re just saying that. You say that to all of the shows.

Pace:
I don’t. This show is unbelievable. I’ve been waiting for BiggerPockets to do something this epic. You guys are the best.

Dave:
Awesome. Well thank you. I want to start because if our audience doesn’t know, we are in the presence right now of one of the great bromances in real estate investing right now, I think, right? I mean-

Jamil:
A hundred percent.

Dave:
… Pace and-

Jamil:
That’s a-

Dave:
… Jamil, if you don’t know, are on a show on A&E called Triple Digit Flip. They work together, and I’m just curious, I don’t even know the backstory. How did you guys meet and start running these businesses together?

Pace:
Oh, can I tell this story?

Dave:
Please do, Pace.

Pace:
Okay, so this is an interesting story, maybe to us, but I was a contractor for a long time. I was working for Opendoor, Offerpad, Zillow. I was their main contractor doing all their turns here in Phoenix, Arizona. I would do their work, bill them, send them an invoice, and that’s how I was making money on their fix and flips. Well, Opendoor changed their business model. They went from spending a lot of money on renovations to very little. They threw in an algorithm where they go, “Look, hey, Pace, we’ve got some news for you.” I go into the office. I have 180 employees at the time just dedicated only to Opendoor. We were doing like a million a month in revenue with them.
They come in. I talk to a lady named Megan. She goes, “Well, we’ve got some good news and some bad news. The good news is, here’s a bonus check for a hundred thousand dollars. Thanks for all the hard work.” I’m like, “Yes.” “Then, the bad news is we’re going to change our entire business model, so we’re going to go from spending an average of $50,000 per house to spending closer to $3,000 per house.”

Dave:
Whoa.

Pace:
You imagine having 180 employees dedicated to that business model, and then all of a sudden you need maybe one-tenth of them?

Dave:
Wow.

Pace:
What I did is I deviated my business to focus on local fix and flippers and I said, “Okay, I’m not going to let go of my guys. I love my guys. I love my business. I’m going to deviate my clientele to find local fix and flippers that are doing also turns and that kind of stuff, quick fix and flips.” I find a guy, I’m not proud of this, but I found a guy that essentially was running a Ponzi scheme. I got into him a million dollars, so Dave, I’ve always been really creative.
How I built my business as a construction contractor is I would go to guys like this gentleman, let’s just say his name is John. It’s not John, but let’s just say it is John, and I’d go, “Hey, I see you’re fixing and flipping. I see public record. You’re doing 20, 30 deals a year. How about I come in and be your contractor? I will fund, I will be a line of credit to you, and I will fund your renovations and you can pay me at the end of your project when you sell the house.”
It was the fastest way to grow a business because essentially, all of these people that are fixing and flipping, they’re going, “Okay, well, I can get hard money to purchase the house, but how am I going to pay for the renovation?” I essentially was their private money lender and their contractor. Blew up my business like crazy. I was so well-known in town as the contractor to go to because of the creative way that I would go in and build my business. Well, this worked until it didn’t, and there was a guy that was buying really bad deals and he was borrowing money from friends, family. Finally, he hears about me and he calls me up, starts courting me.
Very long story short, four years later, I’m into this guy well over a million dollars in cash, and he comes to me and he goes, “I’ll get you all your money back. I know you’ve got these rentals, these sub-to and seller finance and these private house you have. If you can sell all of those and get me the cash I need to wrap up these next 20 projects, I can get you flush. I just need to finish these next 20 projects.”
The problem, Dave, is I was just so deep into this hole at this point, I couldn’t see way out except for I’m going to dig… Here’s what I’m going to do. I’m going to dig myself out and like get a tunnel to go upwards. That’s what I was thinking, so I go and sell 40 rentals, I sell my personal house just to save my bacon. Essentially, in the midst of all of this, I go, “I need a confidant. I need somebody that I can trust and I can get some advice from because everybody’s telling me I’m crazy.”
I was almost looking for somebody to justify my position. I was looking for… Whatever truth you seek, you will find it, like whatever… If you go out and you want to believe your own lies, I wanted to believe the lie that this guy was ever going to pay me back. I wanted to believe it so desperately, so I was going around town finding people that had done business with him trying to find somebody that was like, “No, the guy’s credible.” Well, I run into Jamil’s name and I’m like trying to find this guy Jamil. People talked about Jamil. He was like a ghost in town. He was doing 10, 15… Literally, this guy was a ghost. He was like a night owl. Nobody even knew where he was or anything, but people were doing deals with him, a lot of deals, like 15, 20 deals every single month.
His name was on the lips of like some of the most prolific investors here in Phoenix, so his name would come up everywhere I’d go, restaurants, eating with people, going to RIAs. I’d hear people on YouTube podcasting about, “This guy Jamil, this guy Jamil, but don’t talk about his name.” I don’t know what this… He was like Machiavelli. It was the craziest thing ever.

Dave:
Don’t look him in the eyes, whatever you do.

Pace:
Basically, it was just like that, and I go on Instagram. I find this guy with a user name of @jdamji, and it has no photos, no posts, and his profile photo is an owl.

Dave:
So mysterious.

Pace:
Seriously, this is it. I DM him and I go, “Hey, man, I’m in trouble with this guy named John, and I heard you’ve done a lot of deals with this guy. I’m kind of looking for somebody to help me through this with some advice.” Jamil takes two weeks to reply to me. This would be before Jamil was on social media. This was years ago, roughly six, seven years ago. Jamil goes, “We need to meet for lunch. We need to have a conversation.” This is a much longer story, but I’m going to wrap it up in 30 seconds.
Jamil sits me down and shows me through public record that this guy was running a Ponzi scheme. He was paying over retail value for houses with other wholesalers because what he was trying to do, this was his business model, he would tell all the wholesalers in town, “Go find me deals. Bring them all to me and I’ll do dispo or sell those to you to end buyers.” The way to beat out all his competition, from other people that were doing disposition, is he would overpay for these houses. Eight out of 10 times it would work, and the other 20% of the time he would overpay and he couldn’t sell the deal, but he didn’t want to go back to that wholesaler and say, “I’m going to bail on that deal,” and ruin that relationship. What he would do is he would bring the house to me and go, “Dig me out of this hole. Fund the construction. Hopefully we can rehab ourselves out of this bad decision I made.”
Jamil sits me down, shows me all through public record, “Pace, this guy’s leveraging 18% hard money. He’s got second position and third position loans from friends and families. This guy is running a Ponzi scheme to like the highest level.”

Dave:
Wow.

Pace:
Dave, I still didn’t believe Jamil. I sold my personal house.

Dave:
Oh, no.

Pace:
I sold 40 rentals and I got enough cash to give this guy. Right as I gave this guy the rest of my cash, I went through this six-month thing of liquidating all my assets to dig myself out, I get a bankruptcy letter. Hits me right on my doorstep, and the guy, he ends up filing bankruptcy on nearly $16 million of debt.

Dave:
Oh my God.

Jamil:
Yeah.

Dave:
Wow.

Pace:
Bonkers.

Dave:
I’m sorry to hear that. That’s horrible.

Pace:
It was one of the greatest things that ever happened to me, to be honest, okay.

Jamil:
It was.

Pace:
One of the reasons why is because I learned to never doubt a single thing that Jamil Damji has to say.

Dave:
It’s… Yeah, we all have to just… Whatever Jamil says, we have to follow from now on.

Pace:
Basically. This is what started a wonderful relationship. Jamil and I were actually competitors. We’ve always been competitors. We chase after the same cash deals here locally, and we go into a meetup, let’s say there’s a 200-person meetup here in Phoenix. Him and I are working the room with the same goal to get deals from people in that room. I’ll run up to people and I’ll go, “Hey, you got a deal for me?” They go, “I already sold it to Jamil.” I’m like, “Gosh, dang it.”
That’s how our relationship started. We started hanging out with each other a lot, and we realized that we were like the yin to each other’s yang. We started having so much fun that one day Jamil comes to me and he says, this is like three years into our relationship, he says, “I think we should take this buddy comedy on the road.” I think what we do is we just fly around and we go to local RIAs and we talk to people about how collaborating with your competition is one of the greatest things you could ever do.
I’m almost done with this story. This is how we ended up getting a TV show, too. We go and we spend money and time and energy going to these RIAs and people would say stuff like, “Man, do you have a coaching product?” We’re like, “No, we’re here to help you. We don’t have a product. We’re not coaches. We’re just here to show you what collaboration’s like.” People were dumbfounded and we created this amazing cult-like following of people that were like, “Wow, these guys are like genuinely here to just lay down the truth and teach us.” We’d go on appointments with people. We would go door-knocking. We would fly all over the country and do this with people.
Well, one day, Jamil and I are like, “Let’s take a two-week break.” At this time, I was just starting my YouTube channel and I go, “Cool. I’m going to go film YouTube. You go home, you take a break.” We’ve been on the road for like 60 days straight and just helping people. The day we get home, I get a text message from a guy named Ryan and he says, “Pace, I’ve got this deal. Cash deal, $165,000.” I go, “Love it. I want it. Send it to me. I’ll fix and flip that.” Five minutes later, Dave, he goes, “I’m sorry. The price is now $175,000.” I’m like, “What? Why? Why didn’t you just send it to me at 175? Why are we playing this game?” He says, “Well, because I have another guy bidding. He said he’d pay 175.” I go, “Gosh, dang it. Fine, I’ll pay 176.”
He comes back and he goes, “Okay, it’s 185 now.” This other guy just keeps hiking it up, and so I text Jamil and I go, “Bro, am I crazy to think that there’s no way to make money on this deal? Would you comp this for me? Some idiot is bidding me up on the other side of this wholesaler and I’m about to pay 186 for this thing I was about to pay 165 for.” Jamil goes, “I’m the other idiot.”

Dave:
That’s amazing. Did either of you buy it?

Pace:
We bought it together. It was one of those-

Dave:
Okay, yeah.

Pace:
… first deals we did together, and so I said, “Let’s just buy the deal together. Let’s stop bidding each other up. Dave, what we did is we went on Instagram and we told people, “Hey, we’ve never seen the house. We bought it sight unseen like you do fixing and flipping a lot of times. We go, “Meet us at the property. We’re going to do a walk-through.” We bring our YouTube crew and we ended up having like 40, 50 people go to this walk-through just randomly within like two hours of us posting this Instagram Story.
People show up. We film the YouTube video with all these people walking through the property with us, and Jamil’s just being hilarious, like he’s picking up the seller’s, the previous homeowner’s clothes and putting them on and using different voices and stuff. Well, dude, this is the craziest thing. Somebody sends this YouTube video to A&E-

Dave:
Whoa.

Pace:
… and they go, “There’s nothing like these two on TV. They’re competitors, but they’re collaborating, and they’re bringing the audience to the actual house.” Think about that. All these videos people do about like, “Hey, look at my house,” it’s like we started doing videos where we brought the audience as a live audience to our YouTube videos. A&E just fell in love with the strategy and what we loved, and so we got a TV show out of all of this stuff, so when… People are like, “I feel so bad that this guy filed bankruptcy on you,” I’m like, “It was the beginning of the greatest path of my life.”

Dave:
It’s so funny how that works out. It seems to always be the time you’re in the depths of despair that some glimmer of hope or something changes that leads to that best thing. I think that’s a really good lesson for people just investing in general, and appreciate you sharing your losses. Jamil did this on one of our previous episodes, too, but in this age of social media, you see people just presenting these front where everything is so great and there’s no losses and you’re always winning and making millions. There are hard times and it’s really cool to see how you turned what must have been really difficult, I’m sure it was really difficult at the time, into something that has been so fruitful and enjoyable for both of you.

Pace:
Yeah, it’s interesting. Looking at like the people who have a victim mentality versus, “How do I win the situation?” How do I… What’s that martial arts where you take the momentum being thrown at you and you throw it a different direction?

Dave:
That’s Jiu-Jitsu.

Pace:
Okay, cool, so it’s like Jiu-Jitsu. It’s like, “Okay, whatever energy’s being thrown at me, I’m going to use that momentum versus absorbing it and becoming the victim of that energy.” These are the things I’ve learned from Jamil is like how to use that energy properly, and it’s the same thing in this market right now. I see a lot of people complaining about interest rates and this and all these other things, and I’m like, “Guys, use these things to your advantage. You can either be a victim, or you can dominate in this exact market.” Jamil’s story about the 50… It was the 53-unit deal that you were talking about?

Jamil:
Yeah, yeah.

Pace:
Great story, and when it was going… I was watching this happen to Jamil, I was like, “I already know what you’re going to do, man. You’re going to use this as a learning lesson for hundreds of thousands of people to hear this story.” I think that video’s doing really, really well. People are loving it in the comments and stuff. Was that just recently released?

Jamil:
Yeah, it was just a released podcast we did here-

Pace:
[inaudible 00:16:29].

Jamil:
… on BiggerPockets.

Pace:
Anyway, the market, it’s changed a lot and I see a lot of people complaining about it and I’m over here thriving in this environment, excited about when these types of things happen, interest rate hikes, economic turmoil, those types of things. You just got to use it to your advantage. That’s all there is to it.

Jamil:
You know, to add to that, Pace, the interesting thing is for me, I’m a single-family guy. I’m a wholesaler. That’s my niche and I et it. I can wholesale and comp and do all these things in my sleep because it’s in my DNA, but I really want to get involved in other things. Pace and I, we both have an extremely lucrative life and I’m here, he watched me write a huge check to the IRS last year, and then he showed me his $3500 refund. I know how much money he makes, and so I’m like dumbfounded. I’m like, “Bro, what are you doing? How are you mitigating your tax situation? How are you accomplishing this?” This is the hardest thing that is in my life right now is, how do I keep the money I’m earning?
Had I done… Had I listened to Pace more, I would have been in this deal in a different structure. I would have been in this deal creatively and it would have saved my bacon, it would have saved the earnest money. The deal would have worked if I had put the deal together the way that he does. I’m watching this guy travel around the country, still right now, buying deals in Texas, buying deals in North Carolina, buying deals everywhere across the country using creative methods, minimizing his tax situation by depreciation, creating massive cash flow. While everybody is screaming about lending terms, he’s creating his own.

Dave:
Well, that is a perfect segue, and totally agree because we wanted to have yo on here, Pace, because you’ve become known in the real estate investing community for being one of the most creative people when it comes to financing deals. There is this challenge now, and I’m sure you’ll teach us how to make the best of it, but interest rates have nearly doubled over the last couple of months. For people who are just approaching their real estate investing with conventional mortgages, that makes cash flow more difficult to find. It makes everything less affordable, and so I’d love for you to just help our audience understand what alternative options are out there and how you, like you said, are thriving in this type of environment.

Pace:
Okay, cool, so last year, I did 40 BRRRRR deals, single-family BRRRRR deals. I don’t talk a lot about BRRRRR because it’s not on-brand for me. It confuses like what I’m talking about, but I love the BRRRRR strategy. I did 40 last year. This year, I’ll do less than 20.

Jamil:
Yes. I don’t know that you necessarily love it, Pace.

Pace:
Right. Okay. What it is is I guess I feel like I’m in a different lane. That’s all there is to it. I’ll do 20 deals this year that are BRRRRR and they’re way compressed, way, way, way compressed. A lot of the deals we had in our pipeline back in January that we were planning on buying and… You know, a lot of times, the BRRRRR strategy will take three to nine months, sometimes upwards of 12 depending on the size of the deal. We had to cancel a lot of deals or go back and renegotiate with the sellers and say, “I can’t do this on cash. We need to do this on terms instead.” Some of those sellers were like, “You’re renegotiating. This is not good business practice, and I’d rather just cancel the contract with you.” Some of those sellers were amenable to a seller finance situation, which was great.
Here’s the thing. Last year, dong 40 BRRRRR deals, this year doing 20, you can see that somebody doing BRRRRR, me actively, my business cut in half. However, last year, I acquired about a hundred rentals through seller finance. This year, I will buy 900 doors with seller finance and subject-to, 900, so my business has more than 9Xed through this economic situation. It’s because… I don’t know if you guys have ever heard of the analogy of fishing, where people will think that you fishing… Fishing works all day long. You could go out to a river or a lake and you can fish all day long and you will catch fish. No matter what time of day, you will catch fish.
However, there are certain conditions during the day where the kelp comes up off the floor and things are happening in the water based on the moon and all sorts of things that when your lure is in the water at those times, the fish are way more active. They’re taking the same bait that they weren’t taking two hours prior. That’s very similar to creative finance, so the creative finance strategies that we’re seeing dominate right now are seller finance, subject to novation agreements. Arbitrage right now is crazy, like Airbnb Arbitrage is crazy right now. Then, finally, lease options.
The two that I love more than anything is subject-to and seller finance, so I’ll give you a really good example. I’ve got a deal in San Angelo, Texas. 43-unit multifamily, zero dollars down, 4% interest, and the seller’s giving me 50-year terms with no balloon.

Dave:
Whoa.

Pace:
Whoa, right?

Dave:
Can you explain a little bit about why? Like what-

Pace:
Yes.

Dave:
… is the psychology of a seller that-

Jamil:
[inaudible 00:21:59].

Dave:
… motivates them to do that?

Pace:
Bro, I can tell you, this is one of the biggest barriers to entering into creative finance is that you… Rule number one of creative finance is never lose money. Okay, always cash flow. That’s rule number one. Rule number two is never put your brain in the seller’s head because so many times we’re like, “Why would they do this?” Oftentimes, the answer is because they have a lot more money than you do. They’re way older than you. They’re way more experienced than you are, and most people entering into real estate that are brand new that don’t understand creative finance are like, “Why would somebody give up a property that I’m desperately trying to get my hands on? Why would they do it in a way that makes so much sense for me?”
I’ll give you this story. Gentleman’s name is Mario. I actually was so excited about this guy because I flew out to San Angelo and I spent a whole day with him recording. I got 19 reasons why he did this deal this way, and I recorded the whole thing so that people could have it, and it’s on YouTube. You guys can hear Mario with his own words. He moves to America. He’s Romanian. He moves to America 35 years ago. The first deal he ever did was a subject-to deal. Why? He couldn’t get bank financing. He was a foreigner. He didn’t have the money, and so he’s like, “I want to get into real estate. What’s the only way I can do that?” Well, seller finance or subject-to.
He does a subject-to 35 years ago, and then he purchases an entire real estate portfolio and nearly $300 million of real estate over about 10 years all using creative finance because that was the only thing he knew. What you learn through all of this is a lot of times, people, what you focus on expands. People focus on BRRRRR, they focus on cash deals, and that’s what expands in their universe. Meanwhile, I say no to cash deals. People send me a deal on my Instagram. “Pace, I got a great deal.” Perfect, send it to somebody else. Send it to Jamil. I don’t want cash deals. I only want creative, and because of that, I’m overwhelmed. I turn down a hundred deals for every one that I buy.
Why did Mario do this? Number one, he’s 55 years old. He wants to truly retire. How does a seller sell a $3 million asset, not pay taxes, and truly retire? Well, some people will say, “Well, he should 1031 it. He should roll his gains to the next deal.” Okay, well, two things have to happen for that. One, he has to have another deal, and if he’s trying to retire, does that sound like something he wants? No, he doesn’t.

Dave:
Not retiring.

Pace:
He wants to retire, so, one, he doesn’t want another deal to roll into. Two, he says, “I don’t have another deal,” and so it makes sense for me if I take my money in interest payments from you, 4% interest, maybe I die tomorrow. Maybe I die in 20 years. Maybe I die in 30 years, but either way, I don’t need the money today. I just don’t want to give it to the IRS. I want those payments to go to my children. That’s another reason. The payments will bear interest. One of the things I ask in my interview, I go, “So Mario, will you make more money on this real estate transaction than you would going through a cash deal?” He goes, “Oh my gosh, literally three times more money. I will make three times more money on this deal.”
Here’s a couple of reasons why. One, no agents involved. Two, no appraisals are involved. Three, we’re not going through months and months and months of inspections and all that kind of stuff. You get a deal under contract with seller finance on multifamily or anything, and I can close three days later. Go through a title company. Takes almost no time. He can sell at the price that makes sense for him, so if you run this deal, this deal is only worth about 2.85 million. I bought it for 3 million. I overpaid on paper for this deal, but the difference is I didn’t give him a down payment. I immediately inherit a multifamily property that’s bringing in $30,000 a month after my payment to him because he’s been upgraded from landlord to lender. He’s now the lender. He receives payments from me. After all my CapEx, after my property management, after everything, I net $11,000 net net, in my pocket every month on day one.

Dave:
That’s with “overpaying” for that property?

Pace:
That’s overpaying for the property.

Jamil:
The landlord’s going to make, well, the owner’s going to make tremendously more money because even at 4% interest, that’s him. He’s the bank now. You paid him more money from the property than he would have gotten, and now he’s actually getting that. You guys ever look at an amortization schedule? It’ll make you sick.

Pace:
It’ll make you sick. If you go to… BiggerPockets has a bunch of amazing calculators. You guys should go look at those, but so, one, he did the calculation and when we were talking to him, it was a cold call. We cold call multifamily deals that are over 30 units and under 150 units. That’s where we get the deals from. People have a lot of equity. We’ll call them and say, “Hey, are you interested in selling?” That’s where this lead came from. Mario does the calculation.
He says, “If I put this on the market, I can sell this for 2.85 million probably. I’m going to have to go through a broker, and they’re going to have a broker, and we’re going to pay all of these commissions and all of these things and it’s going to take six months for me to get out of the deal. How about I just sell it for 2.85 million on seller finance and I put 4% interest on it so by the time I sold it for cash,” he says, “I would have walked away with about $2.45 million out of the 2.85?”
$450,000 went in his pocket, at least on paper, and the great thing is he’ll bear interest on that additional $450,000, not only the 2.4. Those are a couple of big reasons. The biggest reason I find with sellers on seller finance is they want to mitigate their tax liability. You only get paid on what you receive. I’m sorry, you only get taxed on what you receive. He’s not going to get taxed on that full $2.85 million today. He’ll get taxed only as he receives the money, and if he stretches that out over 50 years, he’s going to have other write-offs next year that will actually mitigate the gain that he gets next year. He essentially can set up a zero taxable event on this deal by stretching this deal out.
Those are like five of the 19 reasons he gave. His biggest thing is he like, “Honestly, I just make a decision, I go with it.” The other thing is, he now still has control of that asset. I own it, but he’s my bank. We set up a clause in the seller finance situation where if I default, it immediately reverts back to him. He keeps any payments I’ve made along the way. He keeps any improvements, any rent raises I have. He’s like, “This is the safest investment I could ever make. Where else am I going to put my $2.85 million right now? The stock market’s crashing, crypto’s crashing, everything’s crashing. Where else am I going to put my money that’s safe, secure, and I know the asset better than the person who bought it from me?”

Jamil:
Pace, what’s the instrument that you’re using called that reverts the property right back to the seller in case of a default?

Pace:
It’s called a performance deed. It’s something me an attorney created about six years ago where you get sellers that go, “Well, what if you default?” I go, “That’s a really great question. How do I create an instrument, a document that protects the seller and myself in the event that I default? Let’s say I get abducted by aliens. I’m not around to make the payment. I’m not around to manage the property anymore.
How does that seller get it in a traditional sense as they go foreclose on you? Who wants to foreclose on you? Nobody, and so what you do is you have a clause in your deed, or I’m sorry, in your deed of trust that’s called a performance clause. It says that on the 31st day of me being late, the property will revert back to them. The way we do that is we have a deed in lieu document that is pre-signed, notarized that the seller can go and file in the event that I default.

Dave:
That’s super cool. I mean, you have to… At first, when you say 4%, it’s kind of like, “Oh, 4% is not a great interest rate,” but you have to understand the seller’s mentality, like you said, and the context of what else is available for someone who wants to retire. Normally, someone might take that money. They might sell it to you just for cash or whatever, put it in a savings account because back in the day, you could earn 5% on a savings account. Now, it’s, what, 0.5% or something like that. Or, if you’re approaching retirement, a lot of times a financial advisor will advise you to put money in bonds. Bonds now are yielding far less than 4%, for example.
It really depends on where you are in your career. If you’re 22 years old and you’re trying to get wealthy as quickly as possible, 4% probably doesn’t sound that attractive to you, but if you’re 55 years old and you’re trying to retire and you can have, as Pace said, an extremely safe investment that yields you more than the other safe investments out there like a savings account or a bond right now, then, that is an incredibly attractive offer. I’m curious, Pace, if these like market conditions that we’re seeing right now are helping you generate leads. Are you seeing a bigger influx of people who are interested in this given what else is going on in the economy?

Pace:
Yeah, the word I would use is overwhelming, and if you don’t mind, I want to put a button on that 4%. If people understand amortization calculators, most of the interest you receive is in the first 10, 15 years. Effectively, that investor or that lender, Mario in this example, he’s not making 4% for the first 10 years. Then, if you do the research, what’s the average amount of time that an investor will keep a property before they refinance and pull the cash out of the deal to roll into another deal? It’s about seven to 12 years.
He’s looking at this like, “I’m going to give you a 50-year note, but you’re going to get greedy to the point where this is going to go up in value. You’re going to see a million dollars sitting on the table in equity and you’re going to go get a refinance at 5% with your bank, and I’m going to get paid all the way off.” I will have borne or bore 4% interest, which probably is more effective, is probably more at like a 12 to 14% rate considering that most of the payments I’m making are interest. It’s like 85% interest.

Dave:
That’s such a good point. Yeah, that’s such a good point that… If anyone doesn’t understand this, quick, as you said, you pay most of your interest in the first couple of years, but I appreciate this because it allows me to shamelessly plug my book that’s coming out-

Pace:
Yes, please.

Dave:
… which explains all of this. It’s called Real Estate by the Numbers. It’s available for preorder now on BiggerPockets, but it talks all about amortization and how loans work. That’s a really great point, Pace. Thank you for bringing that up, is that both as a buyer, it’s not great because you’re paying more money to the bank for the first couple of years. That’s why if you only hold the rental property for the first couple of years, you actually don’t do that well and it’s better to hold it for a long period of time, but if you are the seller, it’s completely different. If you’re seller financing, you’re making so much interest up front and that, I hadn’t even thought about that. That’s such an attractive option.

Pace:
Yeah, it really is, and if you really think about most investors strategies is that I go buy even a BRRRRR deal. I do a BRRRRR strategy. I’d take over a deal, sub-to. I’d buy something on seller finance. It’s going to appreciate, and you’re going to have some loan paydown, so what ends up happening is you go, “Where can I get some tax-free chunks of money?” You go refinance for four years, eight years, 12 years. We currently have close to…. We’re a little over a thousand doors right now in our portfolio, and I don’t have a single loan in my portfolio that’s older than seven years.

Dave:
Oh, wow.

Pace:
It just goes to tell you that we’re refinancing a lot. Like in December, we refinanced seven properties. We pulled a million and a half dollars out. We took that million and a half dollars, rolled it into new deals, and so most sellers that are savvy in seller finance, especially the multifamily world, most of those sellers, they bought their deals on seller finance. That’s how common this is. They are like, “Oh, of course, I’ll give you a 30-year note or a 50-year note because I know you’re not going to last 10 years.”

Jamil:
Pace, do you find that sellers in multifamily are more open to this seller finance are subject to structure than in single family? Or do you think it’s fairly even?

Pace:
It’s not even remotely close to even. It is so dramatically different. Sellers in the single-family realm, they’ve only bought one, maybe two properties their whole life, and so they don’t even remember what the word “escrow” means, let alone anything else. I’d say in the single-family realm, the first 300 deals I got in single-family, I surpassed that. That took me years to get that. In multifamily, I did that in a quarter because multifamily sellers, typically multifamily sellers used to be multifamily buyers. Going out and getting a commercial loan in multifamily requires a net worth requirement and it requires liquidity.
It is so challenging to go out and get a multifamily loan, and so most multifamily purchasers also use seller finance in order to get into the assets they hold today. It’s very common, and so when you say terms to a single-family seller, they go, “Wait, what? What are terms?” I tell the infamous F-150 story probably 50 times a week because it dumbs down what creative finance is to a single-family op or homeowner. When I talk to sellers on storage units, like A.J. Osborne, a lot of everybody knows A.J. Osborne. I was helping one of his acquisition guys the other day talk to a storage unit operator. I brought up terms and the guy’s like, “Oh yeah, I’m down for terms. You give me 20% down, I’ll carry the rest of the deal, all day long.”
A.J. Osborne’s team is like, “Oh my gosh, it was that easy?” I go, “Yeah, this guy probably bought it… I put the guy on mute, I go, “He probably bought this on seller finance.” I take him off mute and I go, “By chance, did you buy this asset with seller finance?” He goes, “Oh yeah, I buy all of my stuff with seller finance.” It so overwhelmingly common in the multifamily and commercial space because of the challenge of getting loans in that space.

Dave:
That’s really, yeah, I had never really thought about that, but yeah, I’m sure it’s so much easier for you to talk to people who have done this before. For those of us, myself included, who really just buy smaller things, it feels like no one would want to do this and that it would be a lot of education for single-family homes, but if you focus on multifamily, it sounds like there’s maybe just less resistance and there’s more comfort with it right off the bat.

Pace:
Yeah, I would say that 20% of what I’ve learned about creative finance has actually come from my sellers and a hundred percent of those sellers were multifamily sellers because these guys have owned, guys and gals, they’ve owned these assets for 20, 30, 40 years. They’ve taken the tax depreciation, they’ve done all the things, and now they’re at a point where like, “Where else can I put my money that’s safe? I can’t, and I don’t want to manage these anymore.”
This is what’s great about multifamily, too, and seller finance is that most of the operators in multifamily are Ma and Pa operators, which means they don’t have an operations manager, they don’t have an asset manager. They don’t even have property managers. Most of these people are going and physically knocking on the doors of their tenants and collecting rents on their 20-unit, 30-unit, 50-unit deals. When you ask for a P&L, some of them are like, “Huh, how about I just show you my bank account? I’ll show you my deposits.” That is very, very common in the 30- to 150-unit range.

Jamil:
Those sellers, because they don’t have a P&L, they can’t even… their buyer couldn’t even get a loan.

Pace:
No, and it is so common, so here’s what happens. A lot of them will go… Okay, like I’ve got a seller named Moe in Corpus Christi. He’s got 25 million in multifamily real estate. We just closed on 3 million of it and I’m slated to buy the next 25 million over the next two years from this guy. I’m going to like own 1% of Corpus Christi in two years. It’ll be great.” Moe, he started in life, a lot of these sellers started in life as business operators and they go, “All right.” Moe owned convenience stores. He goes, “Okay, I’m making money as a convenience store operator. I need to put my money somewhere I can get tax benefits.” They go to strip malls, they go to what they know. He’s already in a commercial building, so he buys the strip mall that he was renting in.
He then goes and buys multifamily, multifamily, multifamily. Gets to a point and goes, “Okay, I’ve got enough cash coming in. I really don’t want to operate this. This has become a nightmare for me.” Who do they hire? They hire their wife or their kids. They’re not going to Masterminds. They’re not learning how to scale their business. They’re not doing what we’re doing. These are old school people that have been doing this like with pencil and paper. Microsoft Excel is advanced for them legitimately.
You go to them and say, “Hey, I can take over this asset. I’ll pay you close to what you’re currently making now. You just got to let me get into this deal with very little money down, low interest, and give me a good runway that I can go and raise the rents and do something else with it.” Moe could not even… Moe goes, “Oh my gosh, you would take these off my,” this was a big paradigm shift for me. Everybody says, “Why do sellers do this? It doesn’t make sense.”
Then, Moe, my seller currently, is like, “Wait, you would take these off my hands and you would make a payment to me? Oh my gosh, this is like a dream come true. I have been sitting there dealing with tenants.” I go, “Well, Moe, the problem is you didn’t hire a property manager.” He goes, “Yeah, I don’t do well with people. I love my tenants, but I don’t like employees.” They don’t scale a business that is functional, and so you come in and you’re essentially taking over their business. It is so… It is like taking candy from a baby because we know how to scale and operate businesses.

Dave:
Yeah, but you’re not like stealing from them, you know? It’s not taking-

Pace:
No, I’m giving them more money-

Dave:
… from a baby.

Pace:
… than anywhere else.

Dave:
Yeah, exactly. Yeah. There’s just candy for everyone. You’re just helping them. You’re giving them almost it sounds like the same amount of capital that they need to live their lives, and you’re just taking over the asset, which is pretty incredible.

Jamil:
You think about that too, right? Because of the amortization schedule, they’re really getting all of that income right out the front, but guess what> They’re doing it without having to work now.

Pace:
The thing with like a cash deal that I… You know, we’ve done a lot of wholesale, a lot of wholesale, a lot of fix and flip. We still are very active in that business. I just don’t talk about it as much because it’s not my passion, it’s not where my heart lies. I love being ultra creative and figuring things out, and I could go on and tell you a whole bunch of stories about recent deals that we’re working on if we have the time. I look at a cash deal, and really when I’m going and buying, let’s say, a house that the ARV is $300,000. I could sell it on the market after I renovate it for $300,000. In order to make a good amount of money, I got to buy that for like 160, 170 because I know I’m going to have to go put 50 grand into it.
A seller has to sell a property to me for 50 cents on the dollar in order for me to make money, and so they’re getting something. Obviously, the house isn’t worth 300 grand in the condition I’m buying it in, but I’m basically buying all of that potential, and I have to really get my number as far down as possible for me to make as much money as possible. In creative finance, it is the only thing that I can make the seller win at a very high level, mitigate tax, have large amounts of money coming into them over time. Then, on my side, I can pay them more, but it actually becomes easier for me to acquire that asset because of the way I enter that deal. Zero dollars down or… I have not done a deal where I’ve put more than 7% down in, I don’t know, probably six, seven years.

Dave:
That’s crazy.

Pace:
It’s crazy. This deal with Moe, let me break this down really quickly. The deal with Moe, Corpus Christi, it’s the 30-unit, buying it for $3 million, so a hundred thousand dollars a unit. I go do… We get it under contract seller finance He wants 10% down. I go, “No, I’m not going to do 10% down, Moe. That’s crazy. All my other sellers are giving me 5% down.” He goes, “Okay, great.” “Well, I’ll give you 5% down.”
That’s $150,000. For most people that are new to this business, that seems incredibly daunting, and it is, but when I was brand new to this, that money wouldn’t come from me. I would just go to other people and go, “Hey, I’ve got a deal under contract. Who wants to be my financial partner? You bring the money, I bring the deal. We go 50-50.” Now, I’m 50% owner of a $3 million asset with no money out of my pocket, so 5% down. With Moe, it’s 3% interest, 50 years with him on the mortgage.
We go do the inspection and I go, “Man, in order for me to raise rents and take this asset over, I’m going to have to put a hundred thousand dollars into this $3 million deal.” I go to Moe and I go, “Hey, Moe, I’m still okay with putting a $150,000 down, but I want that $150,000 to actually go into the renovation.” Moe goes, “Okay, I’m cool with that.” I just want to make sure you’re going to operate this properly. My down payment is actually going into the renovation directly.

Dave:
Yeah. I mean, that’s why you call it seller or creative finance. It’s an incredibly creative way to use your money to mutually benefit both you and the seller. I’m curious, for Moe, this deal or the deal you were talking about before, have you done the analysis? Or do you think they would pencil if you were just using rates like-

Pace:
No.

Dave:
… if you just went to a bank and go… Just there’s no way, right?

Pace:
They won’t pencil unless you are okay with losing money for three years.

Dave:
No, that’s not pencil, right?

Pace:
No.

Dave:
I mean, I guess maybe for some people.

Pace:
I see some people… I saw a guy teaching creative finance. That’s why my first rule of creative finance is never lose money, even on day one. It’s never okay to buy a deal in the hopes that you’re going to raise the rents at some point to make the deal work. It needs to work-

Jamil:
Cash flow from day one.

Pace:
… day one, like maybe within 60 days because sometimes you got to improve it and get it filled up and whatever else, but definitely within the first 60 days. If I went down, for example, let’s look at the Mario deal. If I went down and I went to get a loan for that multifamily deal, my lender is going to give me… Right now, a commercial loan is about 6%. It’s double, it’s double what I’m paying, or it’s 50% higher than what I’m paying Mario.
Then, the lender is going to ask me to put about 30% down. That’s $900,000, and this is why people have to go and do syndications and funds is because they’re like, “Hey, guys, I got to go put 30% down on this deal. Let’s go pool our money together and I’ll give the lender 70% of the deal.” Guys, I didn’t have to raise any money for that Mario deal, and I’m a hundred percent the owner, no syndication, no fund because of the way that the terms allowed me to get into the deal.

Dave:
Do you think this is… I mean, sort of we asked this before, but is this just giving you more deal flow? Other people who aren’t considering seller finance just can’t make these deals work. Are you just finding that you can… You basically have a broader pool of deals to pull from because you have the ability to make deals work that people who aren’t thinking this creatively can’t make them work.

Pace:
Yeah. I’m like the guy in Santa’s shop that like I take all the broken toys that people screw up on and I make them better than what anybody else can. I’m in this little room by myself and I’m just tinkering around and making things work and people are like, “How did you do that?”

Jamil:
My community is cash buyer wholesale, and so a lot of the people we’re talking to that’s…. If we’re working agents, we tend to find if we can’t make a deal work based off of a cash price because maybe the house is too nice and it doesn’t need all these repairs or maybe the seller just doesn’t want to come off their number. What’ll happen a lot is people from my community will connect from people from Pace’s Subto community and they will create an opportunity there where normally there wouldn’t have been.
Even people in wholesale take note that this strategy adds a tremendous amount of tools to your tool belt because now when you’re… Say, for instance, you’re cold calling and you’re going direct to homeowners. They want a number that just doesn’t make sense for you. You can now monetize that because people are wholesaling these creative deals. My student body, they’re not all that interested in collecting property. They’re not super worried about depreciation or wanting to property manage or do the things that Pace is trying to do, but Pace is at a different season of his life and he wants to collect and have assets. There’s people that’ll pay assignment fees for these opportunities.

Pace:
I just paid a $210,000 assignment fee on a massive seller finance deal that I just bought, $210,000. People learn how to lock up the contract or at least get the seller interested, and then me or somebody on my team gets on the phone and actually works out all of the details. Then, I’ll pay somebody a massive assignment fee. That was 0% seller finance, so for me it made a lot of sense for me to pay a big assignment fee. They asked for 500,000. I’m like, “No,” but I ended up paying $210,000 to somebody for an assignment on a creative finance deal, so-

Jamil:
I think that was…. Was that an Astro student that you did that with?

Pace:
It was an Astro student, yeah.

Jamil:
Yeah, because I heard about that. It was a big win that we had on one of our support calls. They were like, “I just made $200,000 selling a deal to your best friend.”

Pace:
You know, it’s funny as I’ve got a text message right now from Ryan Larue, and if you remember at the-

Jamil:
He’s awesome.

Pace:
… very beginning of the show-

Jamil:
Yep.

Pace:
… Ryan is the guy that was between Jamil and I, that he was the guy pitting us against each other that ended up getting us a TV show. Ryan’s got a deal right now in Phoenix, 49 units, seller wants full retail for the multifamily. The challenge is he was in contract with somebody else buying it. What do you think happened to that contract?

Jamil:
Ooh, they walked away from their earnest money and had to tuck their tail between their legs because they couldn’t get lending.

Pace:
That’s exactly it. They locked the deal up. They put hard earnest money down. They were going to buy the multifamily with 30% down, get their lender to come to the table, and the deal had fell apart because interest rates came up. Ryan watches me. He’s not one of my students, but he watches me all the time. He goes, “This is the greatest thing.” He’s like, “I get one wholesaler that will bring me four or five deals a year that they’re like, ‘I don’t know what to do with this, but the guy says he is open to terms.’ I go, ‘Great. Let me get on the phone, and I work out terms.'”
It’s a 49-unit deal in Phoenix. Seller just wants his number. Here’s the thing thing for you to understand if you’re in the audience. Why do sellers like seller finance? They want to win at one thing. They want to win at their number. These guys are real estate investors at the end of the day. They look at things on spreadsheets. People don’t realize this. Wealthy people don’t have billions of dollars sitting in their bank account. They have assets that they add up and they go, “That’s my net worth.” When a seller is willing to sell something to you on seller finance, their number one priority is selling it at top dollar so they can say, “I won the game.”

Dave:
Yeah. They want that top line number. That’s what they care about because they’re like, “I bought it for X and I want it to double or I want to sell it for Y.” They’re willing to negotiate with you to make sure that that top line number is what they want it to be.

Pace:
I’ve got a really great single-family deal. I’d love to show it to you guys if we’ve got the time. Here’s the deal, so this is my document. You can see the seller who sold this house to me. By the way, I have their permission. They’re great, that we’ve done videos with them. We just closed on this deal, what was this? What was the date? July 15th, so roughly a month ago I closed on this deal. Single-family property, but it has two houses on it, literally two three-bed, two-bath houses on the same property. Look at what my monthly installments say, principal only. This lead came from a failed wholesaler locking this up at too high of a price and then trying to sell it to a hedge fund. The hedge funds, because of interest rates, they slowed down their buying, and in a lot of ways, just stopped buying altogether.
All these wholesalers are going around town canceling deals on sellers, and I come in and I’m just gobbling deals up. That was a zero down, zero percent interest seller finance deal with a seller. The same exact day, I bought a subject-to deal, same exact situation. The seller refinanced last year. I get a lot of sellers that have refinanced in the last two, three years, pulled out their equity, and now they’re in a situation where marketing softening, days on market have gone from three days on market to 90 days on market type of thing. Now, they’re like, “I can’t sell my house. I have very little equity, and now I’m getting low-ball offers.” We’re coming in and picking up houses left and right on sub-to because people are just saying, “Take over my house and give me 2,000 bucks for moving expenses and here’s my house. We’re just getting free houses with subject-to right now.

Dave:
That’s unbelievable and a good segue because I want to talk about subject-to, and I’m going to do a terrible job explaining what it is. You’ll do it better, but basically what it means if, correct me if I’m wrong here, is that rather than buying a house by taking out a loan in your own name or even using something like a death service coverage ratio loan, you’re basically just taking over the existing owner’s loan. To me, one of the main reasons I was so excited to have you on here today is that something like 50% of homeowners right now have a mortgage under 4%, right?

Jamil:
Yeah, wow.

Dave:
If you are trying to buy a home and 6% isn’t working for you, it just seems like a no-brainer for sub-to because you could assume you have a 50-50 chance that if you approach someone and they’re interested that that loan is going to be under 4%, which just seems incredibly attractive right now.

Pace:
Our average sub-to interest rate on all of our real estate-owned sheet is 3.2%.

Dave:
That’s crazy. That’s so good.

Pace:
That’s our average. We have deals, we have VA loans that are like 2.6%. We have so many, like my personal… the personal house I live in right now, it’s a… I bought this house for $3.3 million. Interest rate on it is 2.8% on a $3 million sub-to deal.

Dave:
Unreal, and if they’re similarly to seller finance, are you seeing a lot of willingness and deal flow right now? One thing-

Pace:
Yeah.

Dave:
… we talked about in the show is that there is this theory right now. Have you heard like the lock-in effect?

Pace:
Mm-hmm.

Dave:
Where people aren’t going to sell-

Pace:
Stuck in their houses.

Dave:
… because they don’t want to sell and pick up a new mortgage at 6% or whatever. I’m just curious if like sub-to deals are slowing down for you because people know that they’ve got something valuable at 3% and they don’t want to give it up?

Pace:
No, not at all, so here’s an interesting thing. I differentiate seller finance and sub-to in this way. Sub-to means the seller’s typically going through a painful situation. No matter what the economy’s doing, no matter what is going on, somebody’s always going through a divorce, somebody’s always going to lose their job. Something’s going to happen all the time. No matter what’s going on, the best of markets, the worst of markets, you’re not going to stop people from fighting with each other and getting divorced. These things happen.

Jamil:
Are you saying sub-to is great for like distress?

Pace:
Yep. Sub-to is pain. Distressful situation typically, and seller finance, so I call it pain and gain. Sub-to, it’s all about pain. Seller finance, it’s all about gain. That seller wants that gain. They want that top line number. That’s the most important thing to them. In sub-to, people are saying, “I can’t sell my house. It’s not selling. I need to get out of it.” Expired listings, if you guys want to go get a sub-to deal today, look at expired listings, thousands and thousands. I could pull up right now online public record. I could pull up thousands of expired listings just in the last 60 days in just Maricopa County alone.

Jamil:
You could just… Even easier than that, if you go… I mean, right now, I have a student who’s been cold calling real estate agents live and anything that’s sitting on the market even over 90 days, this doesn’t require you to go and do any research, guys. You can go right on to any of these platforms and look at days on market, 90 days or more, and you can call any of those real estate agents and ask them if their sellers would be open to terms. They are, “Really? Really? You want to do a deal? Oh my God, yes. Let me get my seller on the phone and let’s see if we can put this together.” It’s literally that easy right now.

Pace:
I’ve got a deal with an agent we just closed on last week. It was her first sub-to deal, and she said, “I had this property listed for 60 days. The homeowner had a job opportunity in New Zealand. He left thinking, ‘Hey, market’s hot. It’s going to sell in like a couple of days.’ He leaves, leaves the house vacant. Now, he’s got a mortgage payment he’s paying.” I come along. Somebody on my team calls. It was 60-day-old listing. We call the agent and we go, “Hey, what if we just take over the payments on that? Would the seller be open?” She goes, “Wait, that’s not possible. I’ve never heard of that before.” We go, “Well, if you talk to either our escrow officer or maybe our attorney, they can explain it to you that we do this all of the time, a few times a week just here in Phoenix, Arizona. She’s like, “Let me throw it by my seller.”
She calls the seller and the seller goes, “Oh yeah, subject-to? Yeah, I’ll do that all day long.” Seller knew what subject-to was and he was like, “I just don’t want to make the payment anymore. Take the house over.” It’s a five-bed, three-bath house. We’re turning it into an Airbnb. I took over payments. We paid the agent in that situation, so people always have that question. “Well, if you’re working a sub-to deal where you’re taking over payments and the seller’s getting basically no money, how do you pay the agent? Do you pay the agent?” Absolutely. Think about how most people buy houses. That’s a $700,000 house we’re taking over, by the way, a $700,000 house. If I’m a traditional buyer, how much money am I bringing in cash to the table to buy that deal? 150 to 200,000.

Jamil:
Yeah, 20%.

Pace:
I come to the table by paying this lady 20 grand in commissions. I’m $120,000 less to get into that deal than anybody else.

Dave:
You’re making the agent whole basically. You’re paying that 2.8-

Pace:
Yeah.

Dave:
… 3% commission or whatever.

Pace:
Basically the way I looked at it, too, is I bought the greatest testimonial from an agent you could ever ask for because she goes and she’s doing a video with us this week. She’s just like, “This is crazy that this solved my problem as an agent and my broker didn’t teach this to me. Nobody taught this to me. I thought that there’s no way that this is possible, and here you go.” She’s like, “I get listings that people come to me and they go, ‘I have no equity in this deal. Can you sell it?’ The agent says, ‘I can’t help you.'”

Dave:
Right.

Jamil:
Mm-hmm.

Pace:
This helps agents, it helps brokers, it helps the sellers. It is absolutely amazing. Going back to like what’s going on in the market right now, what I love about… The exit strategies are amplified as well because now, all of these buyers being told, “Interest rates are at 6%. You’re going to have to bring more money to the table,” all of this. If you’re a buyer, my sister McLaren, here’s a great example. My sister McLaren, she wants to move back to Phoenix, Arizona, and she’s like, Pace, everything’s 6%.” I’m like, “McLaren, just have your husband call on expired listings.” She calls an expired listings. Fourth phone call she gets ahold of is an agent who couldn’t even sell their own house. She’s moving into the house in two weeks, taking over payments, no money to the seller, expired listings.

Dave:
How does it work? Can you just explain quickly how it works with no money to the seller?

Pace:
The seller just says, “I don’t have enough, I don’t have any equity in the deal,” so why… If I-

Dave:
Oh, because they don’t have any equity, so they don’t even care. They wouldn’t make money even if they did sell it outright.

Jamil:
They’d actually have to come to the table with money if they were going to sell a traditional.

Pace:
Yeah, I’ve got a great… One of my favorite stories I ever had is a guy named Dave Byarsky. Listing was five and a half months old. The agent calls me up. She goes, “My listing’s going to expire in two weeks. I don’t know what to do. I didn’t know this guy didn’t have equity. He had just pulled cash out, refi six months prior. He has no money, and every time we get an offer, I have to deliver bad news that he’s going to have to cut a check for $40,000 to get rid of this house.” I go, “Okay, well, I can take over his payments,” and she’s like, “Would you? Would you?” I go, “Yeah, sure.”
Dave Byarsky, who’s now still a friend of mine, I go in and I say, “Hey, I can take over the payments.” He goes, “Amazing, so you’re telling me I don’t have to write?” It goes… Your mindset needs to go from, “Wait, why am I not paying the seller?”, to understanding that the seller’s going to say, “Wait, I don’t have to pay you anything?” Dave was so skeptical. He was like, “You’re going to send me an invoice or something. You’re going to send… There’s no way that… This is the seller says, ‘This is too good to be true.'” I am putting money in their pocket. I’m holding them back from having to deploy $40,000 to get rid of something they no longer want.

Dave:
Yeah.

Pace:
This is why we have to remind ourselves, “Don’t put your brain in the seller’s head.”

Jamil:
That’s so real though, guys, and I think a lot of people in the real estate investing space, the barrier to entry for them is always that.

Pace:
Mindset.

Jamil:
It’s your mindset. You’re not thinking the way that the other people are thinking. You have to step out of your shoes and you have to look at deals from the perspective of the different parties.

Pace:
Here’s a good action step for people that are wanting to know, “How do I go get a sub-to deal today?” Okay, go find expired listings. Google “expired listings” if you have to. There’s a hundred websites that sell expired listings, or if you have an agent in your local market, just call your agent and go, “Hey, can you pull all expired listings from the MLS?” Very, very simple. All you do is you call these people and you say, “Hey, I noticed your listing expired. Was there something you were looking for on the market that you were not able to receive?” That’s the question.
You let them talk and they tell you, “My agent this, they didn’t do open houses.” You’re going to hear them complain about somebody is now the common enemy is what I call it. You now have rapport you’re building. “Oh man, I’m sorry to hear that. I’m so sorry to hear that, I’m so sorry to hear that.” “Well, you know, me and my team, we’re buying properties. I’m wondering, would you be open to an offer of us making payments to you on that house instead of giving you a lump sum up front?”
It’s very simple. That is it. You’ve got people that were just beat up by the market and they obviously wanted to sell. They’re telling you on public record they want to sell their property. They’re also telling you on public record they weren’t able to, so you calling them, you’re going to be their savior. This is not hard sales. This is not, “Pace, how do I negotiate? Pace, how do I say the magical words?” Guys, they want to sell their properties and they were not able to do so.

Dave:
This is incredible advice, Pace. Thank you, and unfortunately, we have to go. You have incredible stories. I could listen to this all day, but we can’t. I got to ask you before we get out of here, you’re obviously very in tune with what’s happening in the market and the economy. What do you think’s going to happen just on a large scale in the housing market over the next couple of months? You think we’re going to see some declines? Or how do you see things playing out over the next year or two?

Pace:
You know, it’s interesting because there’s people on YouTube that are creating salacious material so that they can get clicks.

Dave:
It pisses me off.

Pace:
It’s really tough because like the only person I really watch is Dave, you, Dave, because you go through-

Dave:
[inaudible 01:02:35].

Pace:
… and it’s based on numbers. You actually go through. You analyze software. You look at what’s going on. There’s a couple of other people I really respect as well. Kenny McElroy, you guys have had him on your show. He’s epic. Outside of that, everybody else is just on YouTube trying to get YouTube to pay them Google AdSense, whatever it is.
Here’s what I look at. Interest rates change things dramatically. Jamil said something to me the other day. He says, “Pace, if I walk over to a thermostat and I turn that thermostat from 75 down to 68 degrees, wouldn’t I be crazy to think that that room was not going to cool off?” Like, “Well, yeah, of course, unless the air conditioning unit’s broken.” He’s like, “That’s the thing. The market is going to cool off because of interest rates.” It’s going to happen and it has happened. It’s slowed down our fix and flips. It’s slowed down a lot of things, but that’s a great thing. It resettles the sellers because really, where do deals come from? They come from sellers. The seller is the beginning of a real estate transaction.
When you settle down what their expectations are like, “I’m going to go sell the house on the market in 14 minutes,” then that gives us an opportunity to jump in and buy these types of deals. I’m happy about it. I know that the Fed is meeting again on I believe September 20th or September 21st. They’re 100% without a doubt raising rates again.

Dave:
Of course, yeah.

Pace:
Right. We saw what a rate hike did or a couple of rate hikes did to us this year. It doubled and tripled the days on the market, and I think that right now because lenders, they’ve basically hedged against that and they raised their rates a little bit higher than the Fed did. We’ve been actually seeing the lenders shrink down a little bit to accommodate that overexaggeration essentially. Right now, I think for like a month and a half, I think activity’s going to come back up a little bit, but on September 20th and 21st, we’re going to see another rate hike. It’s going to slow down. The last quarter of this year, if you’re in traditional real estate, strap in for a fun ride, but you’re not going to be priced out of the market. Your people are still going to be buying, it’s just that you got to be reasonable on your sales price.
For us in the fix and flip game, forget about creative finance, forget about wholesale. In the fix and flip game, what all of us have done is we have all been aggressive for the last two or three years. We know the ARV’s 300 grand and we still list the property for $350,000 because we now the market was hot the last couple of years. When we say, “Oh my gosh, our listing only sold for $310,000. We had to take a $40,000 price haircut.” It’s like, “No you didn’t, knucklehead. You sold it for 10 grand still over what it was worth.

Jamil:
Yeah. People are always like, “I’m losing money.” It’s like, “No, you’re not. You just made all this money. You just made slightly less than your dream pie in the sky amount that you were going to ask for was going to make you.

Pace:
I just think the rocket boosters are just slowing down. I still think that we’ve got a lot of growth. I think this is the greatest time to get into real estate personally, not just creative finance, but other stuff. I love the market. Somebody comes to me the other day, Dave, and they give me this alternative real estate investment, or not real estate investment, a different type of investment. I go, “Dude, all day long, the only thing I will ever invest my money in is real estate,” and I’m not wasting my time and energy anywhere else. It’s the safest, best, and this market, I’m excited about it.

Dave:
All right. I love it, and just to continue your analogy there, it’s like you turn it down from 75 to 68, 68’s still pretty warm, you know? It’s like it’s not-

Pace:
Yeah.

Dave:
… like it’s crashing. It’s not like it’s going to 32 degrees, and I completely agree with you. I think cooling is good. It’s good for everyone. It’s good for home buyers, it’s good for home sellers, it’s good for investors. I know there’s a lot of headlines out there, people are freaking out, but take it from Pace, Jamil. These guys are doing just dozens of deals every single week or every single month, and if they’re investing, it should give the rest of us who aren’t as active a lot of confidence and perspective about how to take advantage of this market.

Pace:
Love it.

Dave:
Pace, thank you so much for being here. I know you have so many different social medias and things, but if people want to learn more from you or connect with you, where should they do that?

Pace:
Go to YouTube and type in “BiggerPockets Pace Morby.” Go watch my BiggerPockets episode that I was interviewed last November. It’s a very, very popular episode.

Dave:
I listen to it. It was extremely good, and you really get into like the details of how to pull these strategies off, so that definitely… listen to that. I should have asked you this off the air, but you’re writing a book for BiggerPockets?

Pace:
Yeah, we are. We’re currently in the first round of editing right now. They’re cleaning up all my foul language and making it nice.

Dave:
Nice. We got two shameless book plugs into this podcast episode, which is great. Jamil, we’re going to have to get you to write one next.

Jamil:
I’m in the process.

Dave:
Oh, really? Excellent.

Jamil:
Yeah, The BiggerPockets First Wholesaling Book.

Dave:
Ooh, yeah.

Pace:
All right.

Jamil:
Yes, yes.

Dave:
We should start a little book club here. We’re all BiggerPockets authors now. All right. Well, Pace, Jamil, thank you guys both for being here. We really appreciate it.
Man, Jamil, that was awesome. Man, you get to listen to Pace talk every day, I guess, but, man, he’s-

Jamil:
All the time, man.

Dave:
… got incredible stories and he’s such a good storyteller. It is so fascinating to listen to him, and just one of the most unique approaches to real estate that I’ve ever heard.

Jamil:
Honest to God, and really guys, if you did not pick up a million dollars worth of game in this episode, listen again.

Dave:
Dude, I was just sitting here the whole time thinking like, “How do I get a sub-to deal? I got to start thinking about-

Jamil:
That’s it.

Dave:
… “seller financing.” It’s inspiring, honestly.

Jamil:
The best. He’s the best. Love him.

Dave:
It’s great, and I loved hearing the story of how you guys met. You know, you guys are such a duo. I was envisioning you had this like meet cute one time where you’re competing over a wholesale deal and your eyes locked and it was love-

Jamil:
Oh, it was-

Dave:
… at first sight, but-

Jamil:
… hearts and all the things.

Dave:
Yeah, yeah, exactly. The romantic music started playing in the background, but-

Jamil:
It’s truly one of those friendships that’s so easy for me. I love traveling around the country with him. I’m godfather to his two daughters. You know, like-

Dave:
Wow.

Jamil:
… it’s… This is a real friendship, and it’s a friendship of my life. There’s nobody in the world that I’d rather be doing this with.

Dave:
Dude, I love hearing that because we talk, obviously, about economics and making money and all of this stuff here, but you want to have fun with your life. You want real estate investing not to be stressful or to this thing that you’re always worried about. You want us to have a good time, and I think you and Pace are such a good model of what a good business partnership/friendship can be and something we all-

Jamil:
Or-

Dave:
… probably aspire to.

Jamil:
… business competition because-

Dave:
I know, it’s so crazy.

Jamil:
… we compete so much. You know, we’re really not partners. We really compete. It’s just like, how do you love the guy you deck?

Dave:
Yeah, yeah. It is great, and I think it’s a good lesson for people because there’s you and Pace are such a good example of people who share so much information and you’re not afraid of competition. You’re not-

Jamil:
No.

Dave:
… withholding information or talking about your failures or successes because you’re worried someone’s going to compete with you. You can obviously… You gain more, you learn more by engaging with your competition and just engaging with the community in general, just like being a part of the larger real estate investment community has so much to offer. Thank you, everyone, for listening. We’ll see you all next time.
On the Market is created by me, Dave Meyer, and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Speaker 4:
Come on.