Figure Out Your Buy Box on Your First Deal

We are here today with my guy Chris and we are going to get him a deal and we're going to give him a deal using what most people know as the Morbi method. So we're going to talk about what that looks like, the whole process, start to finish, you know, starting from the very, very, very beginning. You know, in order to get a deal you need to know what exactly you're looking for, right? You know, if you're, there's no sense of us, you know, going out and finding a single family home for long term rental if in the back of your mind all you want is a short term rental, right? Which I just throwing that out there as an example. But it's really, really critical for you to know your buy box. So wanted to talk today about what your buy box looks like and then that will be the foundation for us to start generating leads. So that way we can start getting you some deal flow, right? It's going to take hundreds, maybe even a thousand properties, hopefully not a thousand properties that we're going to have to take a look at before one actually pencils out. So there's two big considerations with this type of strategy is you have to look at really the overall debt structure, right? And then you also have to look at because you have another component involved which is a lender. So in a sub 2 deal, the beauty of sub 2 deals is there's no lender involved, right? So that makes that pretty easy. However, I don't know what happened to my camera but however, because there's no lender involved, there's no like check and balances of like what's a good deal, what's not a good deal, right? Because you could easily get a really bad deal under contract and no one's there to stop you because you don't have a lender involved, right? And the difference here is that you do have a lender involved in this Morbi Method type of transaction. So that is like the first pass, right? They have to check your credit score. They have to check, you know, obviously the property itself. If it's a, you know, DSCR type of loan, they're going to want to know that it cash flows. So those are things that you don't have to worry about in a sub 2 transaction. And then third you have to worry about experience, right? So in order for you to even get the first funding part, right, let's say it's 70 or 75 LTV, you have to check all the boxes there, you know, the credit score, the experience or the, the, I guess the second what I listed would be the DSER and the experience. Right. So those are three things you don't have to worry about. You know, I can go get a bad sub duty owner contract. They don't ask me these questions. But it's a bad deal.

Right.

So kind of with that being said, let's talk about what you're looking for in your buy box and then we can talk about resources and how we kind of fit around that.

Okay. So when it comes to being really creative, right, because you're like the master of Morbi methods. The more I look into it, I realize that multifamily for me, I believe would be a better option going into that being is that the prices of multifamily is a little higher. Right. It's a little more challenging to come up with the capital. Right. So when it comes to becoming creative, I believe that this is a great situation for Morvi. So something that I would be looking for would be, you know, 12 unit or higher, something in the couple million. That would be my buy box. I would preferably like to stay within the state that I reside in just so I can, you know, kind of go look at it, make sure everything's running well. Right. Obviously we can get a property management company to run it, but if there's nothing here suitable, I, I'm always willing to venture out. Another state that I would like to look at is Texas, preferably the Houston market or surrounding areas. So that, that would, that would generally be where I'm concentrating my energy at the most.

Okay, so we're, we're skipping the whole single family step. We're just going straight to multifamily. I love how you're making this so hard for me. I love it. I love it. Okay, so.

Okay, so you did say stuff too. You did say something.

Well, let's talk about even in, even in the sub two part. Like, because you have to, you can convince the seller, right. As far as the getting it under contract. But then on the back end, how are you going to convince a private money lender, right. As far as the credibility or like the deal still has to pencil out if you're raising capital, depending on you're.

Raising it from starting there.

What's that?

The end is that I'm starting new, right. I'm starting on my first deal, right?

Yeah. So like if we look at, you know, going the commercial route, that would be the concern, right. It would be the experience. And I think you could probably get away, get away with it if you bring in someone that has experience in that similar type of asset class. Right. So if you have someone that's already managing a 50 unit, you know that that makes it easier. Right. So partnering with someone that definitely has a strong credibility background. Now it doesn't mean like they have to be the guarantor because then you have to think about also is like, how much of the deal do you want to be your deal? Like if it's your deal and you need to partner with someone, you got to think about the different roles at play. So the different roles of like, I'm going to be the guarantor of the loan, in my mind, that holds a lot of weight because your, you know, your name's on there as far as, you know, your credit. Right.

Yeah.

Go sideways or they're coming after you as the guarantor. So that holds a lot of weight to me. I mean, that's definitely a valuable contribution. But then if you bring in a partner and that partner who's experienced also has to be the guarantor of the loan, you kind of like, you know, in a roundabout way negated the value or diluted the value of what you're bringing as the loan sponsor to the table. Right. Because they are also the loan sponsor too. So it's like, you know, you're both in it in the same role, so it kind of dilutes that emphasis. Now if it's just you and then the other one's like, yeah, I'll lend you my experience, no problem. And you know, if you want to be the guarantor and loan, use your credit. Cool. Like, then you can talk about the splits of what that looks like. And then if you, let's say if you're managing the property yourself and that's something that the other person doesn't have to do, then that, you know, can create an imbalance of, you know, more in your favor. Right. Because then you're adding a different contribution to the transaction versus not. So it's all, it's kind of like there's no hard and fast rule on it, but you have to look at all those different dynamics at play there.

Okay. So I mean, should, should I concentrate more on a just a single family sub two being as that, you know, I haven't had my first deal yet. What would your recommendation be?

You know, we could definitely look at it and see how it goes on the commercial side. I think the challenge with single family, Even in sub 2, again, it goes back to what I was just mentioning. If you're looking for a deal, then you're probably, you know, most people are obviously raising capital for, for sub 2 transactions or pretty much every type of transaction, right. And then you're going into the private money PML market and raising capital. And I think the landscape of raising capital has changed a lot. You know, when I first got into sub two, they would just give out money to anybody. And then over the past couple years people have been burned so much that the PMLs have become a lot more strict, like even more so more strict than banks, which is a good thing for them. You know, they're protecting themselves, they're doing their due diligence. You know, they're making sure the borrowers worthy of the investment. Right. But it makes it a lot more challenging if a someone who's like in their first deal or even second deal, like they're trying to borrow capital, it's going to be a huge pause for concern or it's going to make, it's just going to make it really, really hard. Right? So then you have to, again same situation, you got to bring in someone who's more experienced, then they have to raise the capital. And then you start to look at it and it's like, okay, if that experienced person sourced the deal, they're going to operate it and they're going to raise the capital. Then it's like where, where does that fit into that equation? And there, there's no, in that scenario, there's no credit to guarantee, right. So you can't be a loan sponsor at a sub 2 deal. So those are things you gotta consider, right. If you are going to operate the property, you know, there's definitely some value there. But then on the other side someone could easily say, well if you don't have experience operating the property, I need to make sure that it's operating correctly and I gotta kind of train you and educate you and, and that's not my position, but that's, that's what someone would normally say.

Yeah.

And so when you look at that, it's kind of the chicken or the egg type of situation. It's like, well, I mean, how the heck am I going to get experience if, if no one's willing to give me a chance? Where it's like, you know, when you get now, you know, obviously AI has taken over, but a long time ago, you know, 10 years ago it was everyone that was hiring entry level jobs required an MBA degree, but you couldn't get into MBA school unless you had been working for two or three years. So it's like, okay, I can't get into MBA school because I haven't been working and I can't get a job because I don't have an mba. It's like, what the heck? Like, how can I, how can I make this work? Yeah, I wish, I wish my camera would stop freaking doing this. I packed because I'm going to California tomorrow. I packed all my like normal podcasts. I was trying to use my, my little handheld camera. I've never, it's super high quality, but I've never done a, like an actual live. And now I know that this is not. Do that with. What is it the cord? I don't know. Maybe it just, it just randomly shuts off. Like it just keeps shutting off. But anyway, so it's, it's really a chicken or egg situation. And I think it's always easier to raise capital directly from the seller in a more B method type of transaction. You know, even if you're new, it's a much easier sell because you're kind of like you're dangling this carrot in front of them as far as, for whatever reason, they have a property that's not selling and you're giving them away to get their full asking price, if not more, if there's any interest structured into the deal. And so that's a benefit. Right. They don't want to have their property. You know, sometimes they get sellers fatigue and their property sitting there for 150 days and they're just like, come on, someone just put me at my misery. Because it's not just, it's not just that. That's, it's not just the property sitting on market that's an issue. It's also the holding cost. Right. You know, the property has holding cost every month. You know, let's say it's two or $3,000. Well, if it's sitting on market, that's two or $3,000 every month that the owner has to be footing the bill with. Right. They're going to get to the point. It's like, just get this, get this headache. Yeah, I'm over. Right. Just get it away from me. And so you can a lot of times raise the capital directly from the seller in that seller finance arrangement, which is a lot easier to do. But it sounds like, you know, your, your buy box, you want to focus on Indiana, right? Is that.

I would like to.

Yeah, yeah.

I would like to, definitely.

Yeah. And so are you looking to manage the property yourself? Are you like wanting to go down the path of Property management. As far as like I want to start managing my own rentals or is that kind of just like I don't want to deal with this headache as.

Of right now, I don't like because I have a W2. So I don't even think I'd have the time being as my hours are pretty funky. You know, if I had more time after work, I would do it. I know that takes a lot of work to do that. I've seen you a couple of times, you're out there doing your thing. So if it was doable, I would do it. I would say yes. But if it, the numbers worked, right where I could get a management company in there to take to relieve some of the stress off of me, I would definitely do that right off the rip. Okay. Yeah. So okay. That's where I would be at.

So I mean we can cast a wide, a wide net, right? Because we want to create opportunities. And if our buy box, you know, I do think people should focus on one particular market. But if we're like trying to like get a feel for opportunities, right. If you're casting a wider net, you know, it's going to be greater chance for more opportunities. So if we're looking at multiple markets, being like Houston and then if we're looking at Indiana, are you looking just all over the state of Indiana? Like what about those random towns that you haven't even heard of that got like 10,000 people?

So that's where I, because I'm not, you know, I'm not very experienced in this where my worry comes in with smaller towns is that, you know, what is the percentage that, you know, if I got a 32 unit apartment complex, right. What, what's the rate that it's going to be filled? 90% of the time. Right. Being with the population. So lately I've been looking into what are the populations in each city, the top 20 biggest cities in the area. What's the growth looking like in all those cities? So indeed obviously the biggest one. So I have been looking in other cities. I know Columbus is a really good one. I know that Kokomo is growing. So I've been venturing into those other cities where I see growth. I'm looking into what companies are coming in to build new, new factories or new warehouses to add jobs. Right. Hospitals. So I'm doing the research in that aspect to try to see what the potential growth is in those cities. So that, that could be one less worry.

And then. Yeah, I mean Pace talks about this all the time. It's, you know, there's not that many 12 units and up. I mean, there's, there's a lot more than like, mobile home parks. But if you compare 12 units and up to single family, I mean, the number is just enormous, you know, in terms of available supply and single family versus 12 units and up. There's only so many 12 units. Like, I don't even, I can't even recall the last time I drove by a 12 unit in Indianapolis. I don't really see them too often. You know, I see them in the hood probably every now and then, but there's not a ton of them out there. And then you got to take into consideration, okay, there's not a ton out there. How many of them are like, actually listed or open to selling. So the pool of availability is very minimal, Very, very minimal. Right now we can target that as like one of your core focuses, but we might want to, like, expand it a little more to see like, hey, I want the 12 units, but if I'm not going to get the 12 units, here's what I want to get in, in this market and this market instead. So it sounds like what I'm hearing is Indiana in highly populated markets. And then you also mentioned Houston, right?

Houston, yeah. Like north. Anywhere around Houston? Pretty much, yeah. Preferably like the northwest side. North. Northwest side, but yeah.

Okay. Okay, cool. And so what, what are you doing on the where? I guess walk me through what have you been doing so far up to this point as far as like, are you just checking potential deals out and sub two through, like, sourcing leads every day or what do you tell me what's going on?

I, I've been, I've been getting on prop stream, checking out what's out there. Been going on Kretzki, Krexy, Zillow, obviously, and LoopNet. And I've been looking at. Seeing what's out there in, like I said, preferably in Indiana. I, I have been looking at smaller stuff like duplexes, triplexes, you know, looking for like, specific things that stand out. Seller, finance, owner finance, anything like that. Something creative that they're willing to, to, to see if they're, they're, they're open to that. So that, that's what I've been doing. I haven't really looked in Texas. I'm not trying to get the signing shiny, you know, hijack syndrome. I'm really trying to focus on Indiana, see what I can find here before I start venturing it out to over there. So that's, that's what I've been doing.

So you rather focus strictly than on Indiana, then?

Yeah.

Okay. Okay.

I just, I. You know, being as that I. I'm still shooting for my first deal, you know, I want to learn the process, and if I can, if it could be something that's close by, I. In my head, it just makes more sense, I guess.

Yep. Okay, so what does that look like to you as far as learning the process, or what is it that you want to learn the most in the kind of deal cycle? Like, because there may be some parts where it's like the acquisition part of getting the lead. Some people may be like, dude, I don't. I don't care about that. Like, just send me the deal, and then I care about this part. This part, this part.

So for me, when it comes to smaller units, like, let's say a duplex or triplex, you know, underwriting, those aren't really difficult anymore. But really the process of, like, okay, once we find the deal and we talk to the agent, that's where I get stuck. Right. So I send them an offer letter, but I don't know how to write that out. And then they come back with it. Right. We just keep going back and forth. And then from there is, do we get the transition coordinator to come in, or is it title or, you know, that that's where I start getting lost is all you.

Okay, so are you talking about the LOI stage?

Yeah, I mean, so, I mean, if I. When I underwrite it, right, obviously I'm going to talk to the agent and say, hey, look, this, I like this property. Yada, yada, yada. More than likely they're gonna be like, okay, send me an offer. What do you have? So really structuring it is where my challenge is at and then going from there.

So, like, the actual. You're talking about, even at the loi, like, what are the words physically written on this page?

I've tried to find. I've tried to find, like, just on Google, like, how is the LOI structured and stuff like that? I don't really find a whole lot. But, yeah, something like that would be. Because I've heard from numerous people, like, you can just write whatever. Doesn't really matter. It's an loi. But, you know, because it's not a contract. It's just soft offer.

Yeah. And a lot of times agents, like, they don't like Lois because it's not a contract. They hate it. There's just something you got to take into consideration. You know, you Might get some pissed off agents, but that's how I do it. You know, I send out Lois and then see what the interest level is from there. So you want, you want to see underneath the hood on like, what does that even loi look like? Why is it, why are these words said this way and not that way? Right? And then getting on the phone with the agent, like what do I say, what do you say? What not to say? That kind of stuff.

Yeah. And then the other thing is so like, let's say we're going through the process and you know, we say 1500 EMD and then it would be like a seven or ten day contingency for the inspection or whatever. And so being at that, being at that point is like I'm completely stuck. I, I'm, I just, I think I'm somewhat nervous because I don't know where to, what's going to happen after that, what's going to happen during that. So.

Yeah, yeah. So first of all, I, I start off with 500 EMD because I'm just gangster like that. Like I, even on like a million dollar Property, I'm like 500, really? Okay, yeah. The property I bought, that was like one point. The purchase price was 1.1 million. It was, it was 500 EMD. And so like, you know, you're gonna get, you're gonna get the terms that you ask for. Right. To some extent. I mean they could push back and it, there's definitely an art to it. I don't, I very rarely ever get a deal where they're just like, yes, everything you said 100, we'll take it, lock it in. Right. People want to feel like they got a deal like on both sides, like they negotiated. You also got to think the agent, you know, the agent wants to feel like they advocated for their client. And they, they can go back to their client and say, hey, here's, you know, and they'll show the loi. They'll say, hey, here's the loi. The guy asked for $500, I got him up to a thousand or fifteen hundred. He asked for seven years on a, or he asked for ten years and I got him down to a seven year balloon. He asked for this and I, we got him to this. And like, you know, so they want to feel like they earned their keep.

Right. So is that a, is that a tactic for you being, is that you chart, you, you ask for a 500 EMD because you know that they're going to say, well, we want a thousand for the emd to make them feel better when they take it to the seller.

Dude, it's the craziest thing. Like, I rarely have people, like, come back and ask for higher emd. Like, it's. It's so wild. Part of it is probably how I represent myself in the transaction as far as being, like, legitimate. But, you know, every now and then I'll. I'll get someone to say, hey, we need EMD to be like 2500 or 2 grand, depending on the, you know, property. And, you know, that depends whether I want the deal or not. Sometimes I'm like, okay, sure, let's do it. You know, I don't, you know, doesn't bother me. So in a. In a sense, it is a negotiation tactic. I would say more. So I do that on the other terms, like maturity date. I start out at 10 years knowing that they're going to probably try to beat me down. Monthly payment. You know, I'll start out pretty low, you know, lower than what, you know, I might be able to afford. You know, maybe there's some wiggle room there. So those are kind of some of the things that I'll, like, kind of bake into the deal and just plan for us to have a dialogue back and forth where we're going to be adjusting terms. Okay, so I'll kind of present, you know, what I would consider, like, my pie in the sky best deal structure. But then I'll have my own internal, you know, deal structure underwriting and say, hey, this is where I'm, you know, drawing the line in the sand, and I'm not willing to go below this or above this, depending on what the term is that they're. They're asking me to come up or down on. So there's definitely a game I never lead with all my cards on the table because they always come back with something, right? Like in a, you know, more B method type of structure. Cash to seller, for example, I'll leave that lower so that way I have room to go up if they're gonna beat me down on the monthly payment. And I really want my monthly payment to be $500, and they're beating me up to $800. Like, I'm gonna make some adjustments to the cash to seller. I'll come back to them and say, hey, how about instead of this, I'll give you this much more cash to seller money at closing. In return, I really want my monthly payment to be here. So I'm kind of like, fighting for my terms by moving some numbers around. So there's definitely some tactics to that, and every offer is different, but I have a general framework at how I, like, put that together and what I'm willing to do, what I'm willing not to do. That makes sense.

Yep, it makes sense. Perfect sense.

Yeah. So as far as. So we're looking for a deal for you. What is it that. As far as you. And it sounds like you don't necessarily want to manage that, or you kind of just want to learn, I guess, how to manage it and just see what that work looks like or what.

Yeah, I. I mean, if I could. If I could swing it, I would love to do it. I mean, because that's just another. Another tool in my tool belt that I'm going to be able to have. Right. Another more value that I can add, something else that I'm gonna. I'm gonna. I'm gonna learn along the way. So obviously, when it comes. If it's something bigger, not gonna happen. But if it's a triplex quadplex or fourplex, you know, or duplex, I. I think I could. I could manage that. You know, I think that would be doable. So being as that, you know, I could find something smaller like that in the city, in Indy or the surrounding towns, I think that would be better. Yeah, definitely. 100.

All right. Okay. Well, what are you thinking as far as kind of taking that to the finish line, as far as start to finish or like, what. What is your idea of a partnership? Right. If you. Let's say you and I are partnering, what does that. What does that look like to you? What does it. What do you want to look like?

If. When it comes to a partnership, being as that it's my first deal. Right. I would split it down the middle or a little bit more your way. I take a little less because I believe in sweat equity. So 60, 40, you know, 50. 50, 60, 40. Just so, because I'm learning the process, obviously, I'm going to look for the property. I'm going to call the agent. I'm going to, like I said, put sweat equity. If I need to go do stuff, go take care of things, whether it's finding a repair guy or if it's something that I can do, something simple. Right. I would do that. I've never managed a property, so. So you have your portfolio. That would be something that I would need to learn. That's really where I would be.

Yeah, yeah. No, so what I'm trying to think of a scalable model of. Because part of my Mount Everest is to help, you know, 2 million people. That's a lot of people. So I better get going.

Yeah.

So my thought is I, I kind of want to. I have enough headaches of my own that I'm just like, I'm kind of just tired of dealing with headaches. So I'm kind of thinking about pivoting into a new business model. And not to say that I won't keep adding more of those headaches on my own. I mean, when the deal, you know, presents itself. But I'm kind of thinking about like helping people kind of close their first deal or just like just other deals specifically. Even if they are experienced and it's like this type of deal structure, a lot of people don't know how to do it. I'm thinking of doing something like 70, 30, where like, let's say you are coming in and it's your deal, you're getting 70 and I'm getting 30. And what you're doing is essentially it's your deal. Like you're, you're like qualifying. If it's a morbid method, you know, you're using your credit, you're qualifying it, you're gonna operate the property in terms of either actually operate it or. Because what a lot of people don't know is when they hire the property manager, they almost all suck. And you have to like manage the manager and you have to know what you're doing to manage the manager and be like, hey, what happened with this? Like, why aren't you calling this person? This person applied four days ago. Where are we at? Like, even if in my portfolio, like I have someone working for me full time, they're the property manager. I'm constantly doing that. Every single day. I'm like, where we at with this? Where are we at with that? Like, did you call this person? Did you adjust the lease? I saw this email come through four days ago. They asked for A, B and C to, for the leases to be changed. I haven't seen that come through yet. Where are we at? Like just, I mean, it's just constant. Like, so even if I'm not like, even though I'm not managing the day to day communication, I am absolutely still doing data, like management. And that's just, I mean, that's just where I'm at currently. But so you would be either operating it yourself or like managing the manager. And what I would do is I would just help you with that whole process. I won't be like day to day as far as like every single day handling and managing all those issues. But what I'll do is I'll give you the knowledge and, you know, in the beginning it'll be like that, and I'm cool with that, and I'll just help and educate through that.

It's kind of like a kid learning how to ride a bike. You put on the training wheels and as they go on, you take them off, and then they're slowly just. They're riding the bike without training wheels.

Yeah. Yeah. I mean, more or less that's kind of my thoughts on how to structure something that would be scalable, like within, like the Orbit program or like within the community. So that way, at the end of the day, at some point, those headaches become your headaches, and I'm just kind of on the front end, like, well, and all throughout. Right. Like, I'll be your true partner and, you know, help you out along the way. But a large part of it is like, you know, that 30 that essentially you're giving up is like, that's just getting, you know, removing the training wheels. Right. And just starting from getting on top of the bike and then you using the training wheels, and then eventually we're going to take them off and you're gonna. You're gonna start pedaling down the street yourself. I actually, when I was learning to ride a bike, this is a bad. Probably a bad example, but I was running, I was learning to ride a bike. I hit a parked car twice, like a week apart. Like, the car was parked, and I.

Just started going towards the car. Is that what you did?

Yeah. And then a couple days later, I did the same exact thing, same car, and I hit it again. But it won't be like that for you. Okay? We won't.

I hope not.

We won't hit any part.

I don't. I don't need a cast on. On my leg or something, you know?

No, no. I want the deal to be your deal and you get a large percent of it. Okay. Because, I mean, you're. I mean, it eventually will turn into your deal. Right? But you'll get a lot of that education along the way and on the front end. And you'll get. You won't feel like you're like, oh, crap, like, what do I do next? And you're just, like, helpless. Like, I'll just be there to help you and we won't really need. I mean, we probably won't need a transaction coordinator. Like, I'll just, I'll just do that, like, and I'll. If you want to Learn that part. I'll show you that part. But if you just want it done, then I'll just do it.

Okay. I mean, I. I would like to learn every step. I know it's a lot of stuff. You've been doing it for, what you say over 10 years. So.

You know, as far as the TC part or just, like, everything.

Everything. Oh, yeah, yeah. So I get it. You know, you have a lot of years in your belt. I don't even have a year yet, so. But if. If the windows allow it and I have the space for it. Yeah, man, I. I want to learn as much and I. As much as I can absorb. You know, I'm all about it, so. So, yeah, definitely.

Yeah. So we can. We can start looking at. And I'll. I'll help you source the deal, too. Like, I'll go find the deal or if you find the deal. I mean, obviously, you know, we'll. We'll just take whatever comes in, but I'll help you find the deal, too, because I'm using Loi Blaster. So I'll just start hitting, you know, some of those markets that you're looking for, because I haven't been actively searching. You know, something comes up, great, but if not, you know, I'm not out there searching every day. So I'll start, you know, searching and start looking at deals more actively to try to get something in the door for you to kind of get that process going.

Yeah, I'll. I'll. I mean, I'll keep looking. Definitely going to look for something. Turnkey. Don't want to put a whole. I don't want to put any rehab into it. Yeah, it just makes more sense. The more and more I think about it, the more people that I talk to, you know, they're just looking for that. Right? I. I mean, like, yeah, you're not really putting a whole lot of money into it, so that's one less of a pain that you have to worry about. Maybe later or as of right now, that's. That's really what I'm going to be looking for. So.

Okay. What. What does success look like to you as far as timeline does that. Are you looking for something in the next.

Yesterday. Yesterday? Yeah, I. I mean, as soon as I can, I just. I'm ready to get my feet dirty, my. My hands dirty, and I'm ready to get in there and just. Just really. I've always. I've learned that I'm a person, that once I get in there and I'm learning it all I just. I don't stop. I get so obsessed that I just want to keep doing it. And I think getting.