October 13, 2018

JF1502: Avoid Banks And Buy On Terms #SituationSaturday with Chris Prefontaine

Chris is back on the show to share a situation with us that helped him grow, and happens to be a situation many real estate investors encounter themselves. Sometimes we just can’t find all the money we need to complete a deal. Wouldn’t it be nice if you had a way to buy with owner financing more often? Chris has some tips and proven techniques he uses that you can use to make that happen. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

First off, I hope you’re having a best ever weekend. Because today is Saturday, it’s Situation Saturday, where we’re going to talk about a specific situation, and if you come across it, then you’ll know how to handle it. We’re gonna be talking about the situation of, well, you don’t wanna use banks, and you want to buy on terms, so we brought back Chris Prefontaine to discuss that with us. How are you doing, Chris?

Chris Prefontaine: I’m doing awesome. Good to be back, Joe, as always.

Joe Fairless: Yeah, nice to have you back. If you recognize Chris, then that’s because you’re a loyal best ever listener. Episode 1128, “How to purchase 4-10 properties per month with lease options.” Chris is the founder of Smart Real Estate Coach, and also the host of Smart Real Estate Coach Podcast. Based in Newport, Rhode Island. With that being said, Chris, talk to us about a deal that you’ve recently done, on terms, and then we’ll go from there.

Chris Prefontaine: I’ve got one on the top of my brain here that we did actually with a student, a ten-acre parcel land. The guy was actually debt-free, and the reason I wanna use this one as an example, Joe – a lot of people hear “terms”, and they say “Well, why the heck would a seller do that?” or “They must be desperate”, or you get all those kinds of comments… This guy was actually not desperate whatsoever, other than the fact that – he had no debt – he wanted to leave the area and get to (it was during the fall season) a holiday several hours away on a plane to be with his kids.

So he was trying to sell his property – gorgeous property – at 599k, dropped it to around 499k, and then dropped it even lower. I think we ended up buying somewhere around 429k. We structured zero money down, we bought the property by making payments $1,540/month, principal only. We actually got a two-year term, which is against what we usually do; we usually go longer. But we got a two-year term, and then we turned around and sold that property… And I’m giving you rough numbers, but we turned around and sold that property for 499k, on the same two-year terms, rent to own, keeping in mind we got the massive principal paydown every single month, a nice little payday upfront when we [unintelligible [00:05:09].29] and of course, a nice monthly spread. I think on paying the loan at $1,540, our intake was around $2,300. A great little deal. Without doing the math, I think there’s about 100k-120k on that deal.

Joe Fairless: So you bought it at 429k, you sold it for 499k, so there’s 70k right there… And then the 30k that you were referring to, rough math, that makes it 100k – is that on the spread of what you pay the seller and what the lease to own person pays you, plus the down payment they paid initially to get in the deal?

Chris Prefontaine: Well, you’ve got two that we didn’t quantify. Yeah, you’ve got the spread to sell, just the markup, and then in principle paydown over 24 months you’ve got just under 40k, and then on the spread itself, which is the difference between the 23k and the $2,300 and the $1,540 you’ve got about $760. Now, out of that comes a little bit of insurance… So call it $600 even, over two years. $600/month times two years. That’s a decent one, too; I think that’s 14k-15k. So you’ve got 40k, 15k, and then the markup on the house.

Joe Fairless: When you look at deals, what are some red flags – or perhaps green flags I should say, where it’s like “Oh man, this is perfect for a lease option.”

Chris Prefontaine: We look at motivation, so that’s a good question… Any deal is good with the right motivation. And again, not necessarily in debt or anything, just the right motivation. “I’ve gotta leave the state”, “I’ve got a job”, “I gotta leave because I wanna be with family.” Anything that says “I’ve gotta leave at a certain date.” And then, of course, there are the stressful ones, too.

I just look at motivation quite frankly because any deal can be structured on a lease-purchase or owner financing. Every deal can, except for the person that says “I need all my money now. I’ve gotta go buy a house for my family.” That’s the only person we can’t help. Every other deal, we can help.

Joe Fairless: When you’re doing a deal and you are structuring the lease option, what are some initial objections that they might have?

Chris Prefontaine: Need their cash now. Every for sale by owner or expired listing we speak with of course says “No, I’d rather have my cash down”, to which we say “Yeah, I get it. 99% of the people we talk to want their cash now”, but the reality is that a lot of the buyers aren’t qualifying right now, and we go through the whole process with them. So the biggest objection is “I’d rather have my cash now.”

Joe Fairless: So what do you say to that?

Chris Prefontaine: I plant a little – for a lack of a better word – [unintelligible [00:07:28].16]. We tell them, “Depending on the market you’re in, the statistics say nationally that somewhere between 15% to 80% of the buyers today, if they walked in as is, cannot qualify for the loan, whether that’s they have great credit and they need seasoning, or whether that’s they don’t have enough down, or they have crappy credit.” We explain that to them, and they’re like “Oh, man. Maybe I won’t sell it by the day I’ve gotta get out of here.” That’s one thing.

The second thing is they’re usually netting more cash out with us. They’re not paying a realtor, they’re not dealing with pullback on home inspections, because we do our own, unless unbeknownst to us something happens. We’re usually not doing an inspection. So it’s usually more net out and less hassle for them.

Once we get them through that – again, as long as they not NEED today the money – we can usually work them around sticking around and get more money with us.

Joe Fairless: And the challenge for you is to find someone to then do the lease option… Otherwise, if you don’t, then you’re stuck paying the monthly payments to the seller.

Chris Prefontaine: Typically, with very few exceptions, all our deals are written contingent upon us finding a buyer. We usually get 90 days to do that. Some don’t care and let us take our time, some want a little less, some are such good deals we do just go ahead and commit to it and pay them payment. If we’re getting a sweet deal, we don’t wanna milk it and lose the deal over getting greedy over one or two payments. So it just depends. But most, especially if you’re new, you wouldn’t take it on. You’d wait till you found your buyer.

Joe Fairless: Okay. How do you find the buyer?

Chris Prefontaine: Believe it or not, the buyer is the easy piece, because people are looking for terms, and a lot of these buyers gave up, they threw their arms up because they can’t get a house… So we put it on 20-21 different portals, but it starts with just simple things like the new Marketplace on Facebook, Craigslist, RentLinx… Just very simple sites like that, that we can put rent to own, we can do for sale, but we’re driving all of them to rent to own.

Joe Fairless: What’s that conversation sound like?

Chris Prefontaine: My son is the buyer specialist, but basically, when he brings the person through the system, that might start with a phone call, but 80% of those, despite what your ad says, 80% of them are renters. They’re just calling, regardless of what the ad says. So he’s putting them through some automated videos that explain rent to own. So he’s not talking [unintelligible [00:09:33].02] and just wasting all that time. We drive them to our website, they go through how does rent to own work, commonly asked questions… If they feel they’re qualified after that or if it’s a fit, they give him a call back, because it tells them right in the video “You are gonna have to have a down payment. This is about a buyer, not a renter. You are gonna take responsibility for the home, you are gonna do all the repairs. This is just like you own it; we’re just a bridge for you to get you to your mortgage point.”

Joe Fairless: Any local or state laws that are different that you have to be aware of, or does this just apply everywhere?

Chris Prefontaine: There are little quirks. Like, you can’t do sandwiches in Texas. You can buy all day long on owner financing in Subject to, and then turn around and do what you want, but you cannot be in the middle of a lease; you can’t be in a sandwich. You can’t lease option a house and rent to own it. That’s a no-no in Texas.

There’s a three-day right of rescission in North Carolina; that’s just like doing a regular refi, conventionally… Things like that. Nothing that can’t be worked around as long as you understand the nuances and the laws in the states. Most of them are pretty basic.

Joe Fairless: What’s another deal, a recent one that you’ve done?

Chris Prefontaine: I can actually talk about a sandwich, since we keep talking about it. I threw a owner financing at you… We did a nice little deal where an older gentleman owned the house outright, so I preferred at the time to do an owner financing. He didn’t wanna give up the deed, so I said “Fine, we’ll structure a lease purchase.” We put that under agreement. He couldn’t sell it (let me back up) for 189k. He could not sell it for that. And keep in mind, this gentleman is in his 80’s, he’s caring for an ailing wife and didn’t have time, so I don’t think he did it justice, which is why he was interested.

We bought the property on a lease purchase at (I think it was) 177k and change. We structured an $850/month payment, and we stipulated that $350 of that – because remember, there no mortgage – would go towards the principle. We structured a three-year term, and we turned around and sold that for 225k on a three-year term. The seller, by the way, whenever I say a three-year term, has an automatic built-in “one year if I need it.” So I always build in a buffer.

So we sold it for 225k, we sold it for the monthly amount of $1,276. So a small spread between $1,276 and $850, the markup from the 189k to the 225k, and then of course, that $350/month principal paydown.

Here’s what’s cool, Joe – you’re always doing three paydays… Because I know investors are always like “I need cash today.” Okay, so you get the upfront down payment, you get the monthly spread, so you get money over time, and then you get in the back-end. So it’s a nice little way to build up equity and build up wealth.

Joe Fairless: Does that down payment go towards the amount that they pay on the house when they buy it?

Chris Prefontaine: Yeah, absolutely. I think this one might have been somewhere around 10k-12k if I remember. I think it was 12k. Yes, that’s just like a standard purchase and sales agreement, in that they’re getting full credit for that.

Joe Fairless: Got it. What’s a typical issue or mistake that beginning investors make whenever structuring these deals?

Chris Prefontaine: A biggie is you get the deal and you’re going “Man, now I’ve gotta sell it!”, and we’ve done this… So, it’s putting a buyer in the home that doesn’t have a big enough down payment, and here’s how I would define that – in a couple states that we operate in, you can at least take first month and last month, or first month in a security, from any renter, if you wanna be in the renter world.

So if someone comes to us and they have — say, in this deal, a couple grand… That’s equivalent to a renter doing that; that’s what you wanna stay aware from, because all you’re getting is a renter. We want buyers that legitimately had a little [unintelligible [00:13:05].01] in their credit, or had a legitimate “I’m self-employed, I need some seasoning with my bank, sometime…” That’s what we want. So they need to come up somewhere between 3% and 10% now and over time, or you’re making a major mistake; you’re asking for a default there. You just get a renter.

Joe Fairless: What happens when the default takes place?

Chris Prefontaine: We’ve had plenty, obviously… What happens is if they have to leave because they had a life event and that caused a financial event – a divorce, a death, we’ve had them all – then what happens is they leave, or you have to evict them; sometimes it’s amicable, sometimes it’s not (I’d say 50/50). Then we put the home back on the market and we exercise our extra year option with the seller if we need it, and we just resell it to another rent to own buyer.

Or, we had one recently where one of the spouses became handicapped, and they left, so they forfeited the deposit and called us and said “Well, I’ve gotta leave.” It was a sad thing, they left. We didn’t have a lot of time left; I was very friendly at this point with the seller, we had a good relationship, and I said “Look, I’ll just put it on the open market and we’ll sell it.” That’s always an option. So we put it on the open market, got him what he wanted, we made out great and we moved on. So you can sell it conventionally, or you can resell it rent to own.

Joe Fairless: What’s an example of a deal where you lost money on this approach?

Chris Prefontaine: I honestly haven’t gotten hit on a lease purchase because when we get hit — I’ll give you an example of when I say “We got hit.” You can just extend the deal or resell it like I just said. So we had a deal early on – this would have been like 2013 – where we had a seller sign a lead disclosure, your standard state lead disclosure. So we took that for face value, we put a tenant buyer in there; the tenant buyer had little kids, the walls started chipping… Long story short – we get a lead test and there’s lead.

I took it Subject to, so this seller is long gone. In this case it’s not a sandwich lease where I have in my agreement they have to handle it… So we did get stung. The right thing to do was to not force them to get out but to fix it. And it was an expensive one, it was probably 30k or so. What we ended up doing because we owned it Subject to is we just extended the term actually with the buyer. We didn’t have to do anything on the seller end. And they happily did that, and we said we needed more time because of the lead repair.

Now, if that was a sandwich, we have now built into our agreements that the seller is responsible for any lead, mold, asbestos – we’ve built that in over the years. These agreements are super-important when you get down these roads where you can create some headaches. We’ve created enough, and we’ve fixed them with the future agreements.

Joe Fairless: What else, if anything, should we talk about as it relates to lease options that we haven’t talked about during this conversation?

Chris Prefontaine: The biggest thing is – I just explained some basic deals, but there’s something I call [unintelligible [00:15:42].21] on these things, because things change. Let me give you a few examples. I’ve done it, my students have done it – we’re in a lease purchase agreement, the buyer calls and says “Hey, good news. I know we have two years left, but I got my mortgage.” We had this happen in month 11 once, on a four-year deal. Now, logically, if we stay in longer, we make more money. So I said to him, “Great!” We’re not gonna hold him up.

We call the seller and we say “Look, we came across some money where we may be actually selling the property. If we we were to cash you out three years earlier than you expected, what’s the lowest you could take?” and every single time they answer with a lower number. Every time.

I had a recent six-unit close out that had an owner financing deal put together on it, and I said to him “I know you’ve got 14 months left, Fred, but we can cash this out sooner. What’s the lowest you could do if we can pull this off?” He came down 12k in one conversation. So you’re creating these “fourth paydays” on these cash-outs on the back end. So on face value they’re good, and they can get even better if you’re creative and get to know the nuances.

Joe Fairless: Yes, it’s super-smart to take a challenge which could be a bad situation for you all, and then figure out a way to make it a good situation. For anyone who agrees to those terms to do a lease option with someone, now we know if we get a call and they say “Hey, if I can buy you out early…”, we say “No, I’m good. I’d like the same amount… Or more.” [laughter]

Chris Prefontaine: Yeah, really.

Joe Fairless: Yeah, or more… Then it’s like, “Well, okay. Fine, we’ll just pay you what we agreed to.”

Chris Prefontaine: Well, it’s kind of cool, because in my book I called it the [unintelligible [00:17:07].20] but think about it – you’ve been at this a while; I know a lot of people have a set niche, and we do too, but I wanna be able to, if a deal comes across my plate, know what the heck to do with it. So whether that’s [unintelligible [00:17:18].25] to your or someone else in a different niche, or whether that’s me getting creative because I know how to do it, you just wanna be trained enough deals, enough times you’ve seen it where you can pivot and make money out of a deal no matter how it comes to you.

Joe Fairless: How can the Best Ever listeners learn more about what you’ve got going on?

Chris Prefontaine: They can just jump onto the site, nothing tricky. It’s SmartRealEstateCoach.com, and there’s  a free webinar there, if they can stand listening to me for another 60 minutes. It’s totally free, and I give them all kinds of goodies at the back end, so it’s worth your time. If it’s something that resonates – fantastic, and if it’s not, keep digging, because there’s plenty of good people out there.

Joe Fairless: Well, I really appreciate you sharing some insight into lease options, talking about the case studies with the 10-acre parcel of land, where the guy was just debt free and wanted to leave, but wasn’t in a financially tight spot, how you structured it, and then also that fourth payday, should unexpectedly your tenant buyer want to purchase it early, get approved, and there’s a way that you could perhaps position that so that you get paid an additional amount of money.

Thanks so much for being on the show. I hope you have a Best Ever day, and we’ll talk to you soon.

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