What Acquisition Financing Options Do I Have (HA 1255)

Transcript:

Steven Butala:
Steven Jill here.

Jill DeWit:
Good day.

Steven Butala:
Welcome to the House Academy Show entertaining real estate investment talk. I’m Steven Jack Butala.

Jill DeWit:
And I’m Jill Dewitt broadcasting from Sunny, Southern California.

Steven Butala:
Today Jill and I talk about what acquisition financing options do you have during these virus times. And the short answer is, and we’ll get into it later. The detailed answer because that’s what Jill likes the details. You have the exact same options that you had before this all started, unless you’re trying to do something really wacky or trying to do something out of the ordinary, like buy an empty building. If you’re buying an apartment building and it’s empty, you’re going to have a lot more trouble now than you did before. Or if you’re a super high risk for the bank personally with a super low credit score. And here’s the big issue is with that during these virus times and during an economic downturn, there’s a higher possibility that those things are going to happen. So what ends up happening is a lot less money gets lent in risky scenarios, but banks still love to land on properties and scenarios where they don’t see a lot of risks. So what do you do? Avoid high risk stuff.

Jill DeWit:
That’s funny. I was, I was watching a Facebook live that somebody was doing today. It was an investor talking with his… They do a lot of houses and so they were talking about, and he’s a realtor. So he’s an investor and a realtor, broker. Has his own-

Steven Butala:
Sounds like a bad joke.

Jill DeWit:
Right, I know. And there he was asking, you said, “All right, we do all these deals together. Who do you think is the one that’s really winning right now? Is it the investor? Is it the real estate agent or is it the lender, the mortgage guy?” And you know what his answer was?

Steven Butala:
The lender.

Jill DeWit:
Yes. You’re so smart.

Steven Butala:
When do lenders ever lose?

Jill DeWit:
Exactly. So yeah, he’s like, “These guys are killing it right now.”

Steven Butala:
Yep. I have a whole shelf to business model about starting a mortgage brokerage company, but I can’t get my head around it because-

Jill DeWit:
I have lots of time. Is that the problem? I have oodles of time.

Steven Butala:
I just have issues in my soul about sucking fees out of deals that aren’t mine and representing other people-

Jill DeWit:
You know what? I hate fees.

Steven Butala:
So do I.

Jill DeWit:
I hate fees with a passion. We don’t do it now. We go into our deals with our deal funder and we’ll talk about this here in a minute, where we shake hands, I’m responsible for this. You’re responsible that we’re not going to nickel and dime each other. We just know what it is, is what it is, period, done.

Steven Butala:
To finish the thought, instead of being a mortgage broker and taking four or 500 bucks off of a deal. We just decided to be the bank itself.

Jill DeWit:
Right.

Steven Butala:
So now we’re a private equity lender for the right types of land and house deals. And that solves it for me because now we’re partners. We’re not sucking money out of someone else’s deal.

Jill DeWit:
Yup, we’re going to talk more about that.

Steven Butala:
Before we get into it, let’s take a question posted by one of our members on the houseacademy.com online community. It’s free.

Jill DeWit:
Mike wrote, “I’ve been working with two realtors in two separate states. I’ve been using them to have them check out properties, to get an idea of what I can list at, list them for et cetera. I feel like as a courtesy, I should give them the listing. So I continue to having them as my boots on the ground. However, I feel like in both instances, I could do a better job selling the properties myself.”

Steven Butala:
That’s always true.

Jill DeWit:
Exactly, yeah. “These are just small properties and probably a huge pool of other properties that they have listed. So I’m going to give them some more time. However, does anyone have a best practices for telling the realtors that you want to de-list the property? Would I still need to pay them commission if I listed myself within the agreement period, et cetera, thanks. You want to go first or you want me to go first?

Steven Butala:
You should go first.

Jill DeWit:
Okay. The answer is yes, you will still pay them. Don’t even bother trying not to. But when you go into it, you want to try to have an arrangement for houses, hopefully 90 days to six months, that’s really makes sense. And I think that’s what most of them will agree to depending on the environment. When we’re doing land, sometimes it’s six months to a year, which I’m not a fan of and usually it doesn’t go that long, but that’s just kind of their rule of thumb when they do these contracts.

Jill DeWit:
So let me go back to this thing. Depending on the type of property that it is and how you’re going to sell it, you may or may not use somebody. I usually don’t. We’re usually selling to other investors and I don’t really need someone in there in that capacity, but I like the way you’re using them. Why don’t you offer them some money? There’s no reason to not. And you should pay them a little something for their time if they don’t get the listing and have a nice relationship with them. There’s so many benefits that could come from this, from properties that come up, that they don’t want to work with, that they’re going to throw to you later on or deals that you guys can do together. There’s just a lot of possibilities.

Steven Butala:
Yeah, what Jill said. There’s almost no chance that you’re going to sign a non-exclusive agreement with a real estate agent, meaning they just don’t do it. A long time ago, I used to have conversations with people who owned a lot of commercial real estate that went like this. Absolutely my office building or my longterm care facility is for sale. It’s not on the market, but it’s always for sale. And if we can get five million bucks, I’m happy to pay 2%. And so that’s a pocket listing but they’re probably not going to sign something that says that and I’ve done deals. I wouldn’t do this today ever, but I’m not recommending you do. But back then before the internet, I’d get on the phone and I would sell the property. I would find five million buyer because I was so in tune with what was happening with Wall Street driven companies, where they could overpay for an asset like that and get paid.

Jill DeWit:
But you weren’t as a broker, you were working as what capacity?

Steven Butala:
I was not operating as a licensed real estate broker in any capacity. It was selling the company and it was an investment banking capacity.

Jill DeWit:
That’s how I wanted to say it.

Steven Butala:
Yeah, thank you.

Jill DeWit:
It sounded like you were a broker. I’m like, please define this.

Steven Butala:
Oh, yeah. Thank you. I mean, that was a different time and a different business. But back to the point, real estate agents are going to demand an exclusive agreement. And it’s what Jill said, they’re going to get paid. Even if the buyer comes-

Jill DeWit:
Straight to you [crosstalk 00:06:46].

Steven Butala:
Your next door neighbor buys the property, you got to pay.

Jill DeWit:
Yeah.

Steven Butala:
So think twice about using real estate agents, unless they’re really qualified. And earlier I was making a joke about it, “I think I’d sell the job better myself. That’s not necessarily the case in a lot of scenarios. We’re buying and selling a lot of property in Tennessee right now, Jill and I are.

Jill DeWit:
And I don’t know-

Steven Butala:
Yeah, I’ve been there once and I don’t think Jill’s ever been there. And we have some very, very good brokers that we’re working with there that are making these deals happen for us so it can happen. It can be a positive thing.

Jill DeWit:
I’d rather continue on and do the right thing and find one of these guys is going to shine for you. And one of these guys, you’re going to want to work with, and one of these guys is going… Because here’s the point of this. As you’re using these guys, Mike’s boots on the ground. I envision one of them coming to you saying, “I got three buyers that’d be really interested in this.” That’s your guy and that’s what you want. So then you guys could become a team down the road. You find the properties, he tells you thumbs up, thumbs down. He brings you a buyer within hours or days and you have a beautiful relationship.

Steven Butala:
So please be conscious of this though.

Jill DeWit:
Like us.

Steven Butala:
I really need to make this point and it’s actually, I think a good point. Old school I mean, look at an auto mechanic, a tech developer, like a web developer, and let’s say a real estate agent. They all have multiple clients. So it’s not so much, who’s the best one at their job? Who’s the best auto mechanic? Who’s the best IT person? Or who’s the best real estate agent? The person who is the best at accomplishing stuff for themselves and for their clients is the best time manager. And there is no way you can tell by talking to that person, if they’re a good time manager. So what ends up happening is right now, we have one of the best developers I’ve ever worked with ever who happens to be a pretty terrible time manager.

Steven Butala:
So when we have his attention for about 24 hours straight, because they will sit and work for 24 hours drinking red bull and whatever else, eating pizza. They can create magical products, which we are more than happy to pay for it. We just can’t ever get his attention. And so that’s the same thing with real estate agents and brokers. They only can work on so many deals and if they love your deal, ask them this, have this conversation. That’s why these two people in Tennessee are doing so well for us because before we buy the property, we asked them if we should buy it and how fast they can sell it. [crosstalk 00:09:16] Do they have somebody in mind where they can just sell it and get the whole thing done in two weeks? Because they don’t want to work on it forever either.

Jill DeWit:
Exactly.

Steven Butala:
How many people, how many listings is that guy have that he just shoved to the end of the line for us because we’ve made that phone call that day?

Jill DeWit:
Right, exactly.

Steven Butala:
You just got to be conscious of that. It happens all the time. Today’s topic. What acquisition financing options do I have during these virus slash economic downturn times? This is the meat of the show.

Jill DeWit:
I don’t think there are any different.

Steven Butala:
It’s like I said earlier, they’re not different. What you should be doing is adjusting what you’re buying based on if you’re using regular conventional financing, not like a partnership financing. Well, in any case, you should be really dramatically adjusting what types of houses you’re buying and where. And if you’re using financing, that’s times 10 for that reason. You need to be buying property cheaper than you’ve ever been buying it before, because it’s theoretically higher risk right now. There’s a smaller buyer pool. Landlords are not going to be super excited like they usually are to buy property because a certain percentage of their portfolio is not paying now or they’re paying less. “Is this all tragic? Oh my gosh, is it?” No, it’s fine. You just have to adjust what you’re doing. You have to have these conversations. You need to Jillify it. You need to talk to all the landlords that you know in the market for hours what you want, how do you want me to do it?

Jill DeWit:
How did the numbers need to look? And what-

Steven Butala:
What’s the deal look like now?

Jill DeWit:
What’s the vacancy percentage, whatever it is. What can you stomach? What do you want me to find? What’s your threshold?

Steven Butala:
Then you need to put the phone down and pick up two or three lenders that you used to working with or introduce yourself to new ones and say, “What are you guys financing on? What do last five deals look like for you? What was the loan to value? What do the interest rates look like? Are you doing like revise for existing tenants because by the way, I can go buy those too. There’s a lot of lenders that want to sell property right now. So you need to constantly adjust to the market. And unfortunately what gets to the media is these tragic personal stories of people that would fail anyway. In the best of times they would fail. So you need to have to adjust almost week by week now, which is one of the things that we try to do in the show is tell you what’s going on right now. Constantly, every single person, every single person that makes it to our advanced group is an adapt and overcome mentality.

Jill DeWit:
I want to ask you some questions about the different funding options and I want you to give me your little definition on… You just talked about borrowing from a bank, we got that one.

Steven Butala:
Yeah.

Jill DeWit:
Okay, what about assigning a property? I want you to tell me, “I’m Joe, I’m New House Academy person and I’m thinking of all my options. Okay, the bank thing, got it, check. What if I don’t even use a bank? What if I just do an assignment? What are your thoughts on that?

Steven Butala:
I’m not a big fan and I know you’re not either. There’s a seedy part to that. We’ve all done them. Jill and I have done them. If you already have a buyer lined up and you know exactly what they want and you find a property and it fits the bill and you call the guy and he says, “Yeah, I’d love to do that deal. That’s exactly what I’m doing for. I’ll just pay you 10,000 bucks out of escrow.” I think there’s nothing wrong with doing a transaction like that at all. Here’s what I would never do on that. Find a property, it’s pretty good deal. Not a crazy deal, a crazy good deal. Just a pretty good deal. And then start shopping it and trying to find somebody to buy it. I think it’s a seedy.

Steven Butala:
Everyone’s going to find out what you’re doing. The title companies frown on it.

Jill DeWit:
Those often don’t go well.

Steven Butala:
Yeah. If there’s anything that goes wrong in the deal, from a buyer’s perspective or maybe the physical plant itself with houses, not so much land, sometimes something goes wrong. You’re just giving them a reason to get out of it. So if the deal is worth dealing, if you have a great deal, here’s the bottom line. If you find a great deal in recessionary times like this, you’re going to find money.

Jill DeWit:
Well, let me go by the next one. What about like deal funding with a partner?

Steven Butala:
That’s the best way to do all this. I mean, do you agree?

Jill DeWit:
I do. I’m being unrelated third party here. I’m interviewing you. Please tell us-

Steven Butala:
I don’t want you to be an unrelated third party. I don’t want to be related to you.

Jill DeWit:
Aw, thank you. You say that now.

Steven Butala:
While camera’s on.

Jill DeWit:
Oh, there we go. Thank you. All right, so the deal funding, please explain.

Steven Butala:
I would love to actually hear you explain deal funding because you had the whole thing up.

Jill DeWit:
As we’re talking about what’s a good idea and bad idea, we’re talking about your options too for the show. So one of the options that you have is finding someone like us who will fund the whole deal. I’m not a bank. There’s no fees. I’m not a percentage, but either the whole property we’re either going to put both of our names on the deed or my name on the deed, depending on what agreement we strike up. And then at the end, when we sell it and we’re going to, as part of the agreement, we’re going to figure out I’m responsible for this, you’re responsible for that using our situation. The person’s bringing us to the deal. They know the area. They know the market. They know everything. It’s the reason why they love it. I just said, “yeah, you’re right.”

Jill DeWit:
Kind of thing and here’s the money and they’re going to go do all the work kind of thing. And then we have a predetermined arrangement where at the end that you’re getting X percentage, I’m getting Y percentage, everybody’s happy. Maybe we have our boots on the ground even, I don’t know. And they’re getting a little piece of the action. Whatever it is, we have it all spelled out ahead of time. And that’s the deal funding. And that’s why I love it. It’s just so nice because you’re not… I don’t need your credit score. I have an equity stake in the property. So that’s what makes me feel really, really good about this whole thing. Again, I either own it outright or own a large chunk of it, of the property. And then do you want to add to that?

Steven Butala:
I will at the end.

Jill DeWit:
Oh, well that was the end of my deal funding speech and I have one more.

Steven Butala:
Here’s what Jill said, here’s what a deal looks like. Just like that. It all starts with what I think I can sell it for. And what I think I can sell it for is a direct result of what’s actually selling in the most recent data set I can get. So if property in a zip code where you have a house or where you’re marketing to buy out properties, last month it sold for $150,000 bucks lifetime property. So you know you can sell it for a hundred and you’re buying a property that’s in reasonably tenable shape for 60 to $70,000. We’re going to help you find the deal. Something has to be immensely wrong with you if you can’t find a private investor in the group that we have, either land or houses, you’re just not trying hard enough.

Steven Butala:
You’re not exposing that transaction to everybody to fund it. I mean, we’re talking about one third of the price that it’s retailed for last month. You know what? Don’t hold us to that. Some great thing has to be in this deal. It’s usually equity. And then we can finance it or anybody can finance it. A bank can finance it when it’s that great of a deal. I wouldn’t recommend that. I would take it to somebody in our group because now you’re talking about doing a deal in 20 minutes, instead of however long it takes a bank to do it.

Jill DeWit:
Okay. Here’s my final question. Sir, tell me what about using your own money?

Steven Butala:
I’d go back and forth on that. Jill and I use our own money on almost every land deal. I’m trying to think of when we’ve done a deal with the partner for land-

Jill DeWit:
Not for land.

Steven Butala:
… Just because we just know it so well. For houses that tend to be more cash intensive that aren’t a slam dunk, we will bring somebody in.

Jill DeWit:
My thing is velocity. Like I can do more deals at the same time if I’m not using my own money, no kidding.

Steven Butala:
But these sayings, you’ve all heard the sayings, other people’s money and all this crazy stuff from Wall Street. And I think those sayings are all rooted in something that’s really negative and kind of like a pathological. Like you were trying to take other people’s money and use other people’s money. And so while I think there’s a place for that, I would rather have everybody have a little bit of skin in the game instead of a hundred percent to zero.

Jill DeWit:
I like that too. I agree.

Steven Butala:
You do? Okay.

Jill DeWit:
No, I really do agree.

Steven Butala:
I had a business partner who that was his saying. He had it on his desk, “Use other people’s money.” And that relationship ended very poorly.

Jill DeWit:
Yeah. I like it. I like when we each have a skin in the game. It just makes a difference, you know that.

Steven Butala:
Yeah, it all starts with a great deal.

Jill DeWit:
Yeah, that’s true.

Steven Butala:
If you have a great deal, it’s like, “Wait a second, this is a great deal. I’m not going to share it with Bank of America.”

Jill DeWit:
Exactly. That’s a good point.

Steven Butala:
Or am I going to share it with my uncle who does these kinds of deals anyway.

Jill DeWit:
Exactly.

Steven Butala:
Or am I going to share it with a guy who knows everything about this market and he loves doing these deals? Yeah. And he’s going to do 50 more deals with me if we can just get this one done.

Jill DeWit:
Totally.

Steven Butala:
That’s all positive, common sense. Not other people’s money negative.

Jill DeWit:
And that’s why you should go into these. That’s a good plan. Like for me, and I can end it on this. If you go into it with thinking it’s a great deal. If I had the cash right now, I do about myself, period. I don’t want to share it with anybody. That’s how you should go into it. It’s that good of a deal. I’d sell a child right now. Not like that but do you know what I mean? I’d pawn something really good.

Steven Butala:
That’s a different show right there.

Jill DeWit:
Sorry but it’s that good of a deal. And I’m looking at the person I’m doing the deal with is I’m looking at them as a potential business partner for longterm things. If you have that mindset and you can answer both questions like that, you’re going to do great. Happy you could join us today. Every Tuesday and Thursday, we are right here on the House Academy Show. Mondays, Wednesdays, and Fridays we are on the Land Academy Show.

Steven Butala:
Tomorrow the episode on the Land Academy Show is called when should you rezone or subdivide a property? You are not alone in your real estate ambition. If you’re too busy tomorrow to listen to this show, the answer is never. No, there’s a few times it makes a lot of sense to split property, especially land, but we’ll talk all about it tomorrow.

Jill DeWit:
The House Academy show remains commercial free for you, our loyal listener. So wherever you’re watching, wherever you’re listening, please subscribe and rate us there.

Steven Butala:
We are Steve and Jill.

Jill DeWit:
We are Steve and Jill.

Steven Butala:
Information.

Jill DeWit:
And inclination.

Steven Butala:
To buy undervalued property.