Working with Brokers and Creative Finance?

Hey YouTube, it's Cody and Christian Osgood back for this week's Whiteboard Wednesday, getting posted on an actual Wednesday. Yes, and we've got 5 more questions for you that people put in the comments, and we're gonna jump right into it with Derek from Tuscaloosa. Derek asked, on a creative finance deal, you pick it up for $1 million, most people want skin in the game if they're gonna front the down payment. How do you handle this?

So there is such a thing as zero-down deals, and it's something that Cody and I have looked at and negotiated. That being said, most deals are not going to be a true zero-down. Most lenders are going to want you to have some skin in the game, whatever that looks like. You're going to have to bring some money to the table. I would not— if I didn't have any money, I probably wouldn't be investing in a zero-down deal because if something went wrong and required additional capital, I don't want to be pinched. So while we are huge advocates of, you know, put as little down as you are required to, you are very likely going to need some down payment to get started in the game.

And I had to do that because I actually had no money when I got started. And the way that you get into those opportunities with low to no money down is through implicit trust. You have to build a relationship, and we put a lot of videos on this YouTube channel about how we cultivate relationships and how I personally cultivated all my relationships. But you have to build trust because if you don't have the money to put down and they need some money down today, you're going to have to go get that either yourself or from someone else, and they're going to have to take a leap of faith with you. And to do that, you need to build a relationship, which you've seen any trends on this channel. Everything is relationship-based.

Absolutely. So Cody, next question. Should you use hard money for down payments in creative finance if you don't have cash? If so, how do you pay that money off without losing money? Essentially, how do you use hard money and still make money?

Well, you're gonna have to figure out, number one, to answer your question, I used hard money to get started. I used 12% interest money. A lot of people, including my family, told me that was too expensive. And it was really expensive, but you have to look at the opportunity cost. If I was too afraid to borrow at 12% and trust my numbers on the deal that I knew would cash flow just based on simple math, then I would not own any one apartment units today. I just wouldn't because I wouldn't have gotten my first deal. So you need to be able to run your numbers and you're going to have to buy in a higher cash flow market. I did not start investing in Seattle. It's hard to make it work there when you're borrowing at 12% on a down payment. The other trick to making this thing actually pencil out is you need to get a really low down payment. If you can do 5 or 10% down, let's say you're buying a million-dollar property, it's much easier to cash flow if you're only paying 12% interest on, let's say, $50,000, 5% down, than it is if you do $250,000 of hard money. So if you can borrow less at higher interest rates and still get into the deal, and really focus on maxing out your seller finance note percentage-wise, then your odds of being able to cash flow that piece of real estate go way up.

So essentially, when you're borrowing at 12% for your first deal, it would have cost you more not to do the deal at 12%.

That's exactly right. The opportunity cost. And then we've got, love the video. What team members would you recommend an investor to have?

That is a really good question. I feel like that's something that people get really bogged down on, especially in— I've read so many books where it's like, hey, you have to build out your team. You need your lawyer, your accountant, your brokers, your wholesalers. The list goes on forever. You will need more people on your team when you're starting. You can do small deals by yourself. If you have a partner, it is really good to have someone who is really good at the logistics and someone who is really good at bringing in business. In our group, Cody brings in the fish. He is fantastic at finding deals, negotiating deals, finding money. The logistics on the back end— there is accounting that's needed for that, there's property management, there— it turns out you actually have bills to pay when you buy a property. I'm really good at tracking that stuff. Between the two of us, we are better together as a team. I recommend starting there if you want to partner and build out a team. Wait till you have a deal before you find new members. You will eventually need a lawyer, you will eventually need an accountant. If you try to stack your entire team before you actually buy real estate, you're going to end up spinning your wheels and end up never actually buying real estate. That's where I see a lot of people get stuck reading books on how to get started. Too many steps. Eliminate those, buy something, then start building out your team. Uh, next question. "When you're calling property owners to build relationships, are you letting them know that you're a local investor? Also, how do you go about ending that phone call with them?" Well, it depends.

Because if you're not a local investor yet, then I wouldn't lead with that. When I got started, I was not a local investor. I didn't own anything. My original call, I had a deal fall out of contract, it was for a client, so when I made the phone call, for the very first deal. I just said, "Hey, I had a deal in the area that fell apart." Granted, it wasn't my deal that fell apart, it was for a client. Because I was a real estate agent, still am today. But in that scenario, I wasn't an investor because I didn't own anything. I don't want to lie about my story. I want to just be very transparent. And so if you're not currently an investor in that market, I wouldn't lead with that. I would lead with, "I'm trying to get started. This is where I'm at and this is where I'm looking to go." really, this is why, this is what it would allow me to do. So I would start there. When you're ending the call, I would just try and book a meeting. As far as making a phone call goes, you're just a voice on the other end of the line, and until you put a face to the name, they're not going to really remember you. And so I would prioritize when you're going into this call, or really any meeting, have an objective for the call or the meeting that you book, and then have a takeaway. That's really important. Have an objective going in, have a takeaway going out. So when you're making this call, my objective is to book a meeting, and then I might get a couple takeaways from the phone call, but really my goal is I want to go meet with them because we can't work together if we never meet up. It's very difficult to do that over one phone call.

And Again, focus on not being transactional. The way that you are going to phrase the initial question when you're letting them know if you're an investor or not, if you're calling them to learn, it's implied. Don't make it about a deal. Don't make it about, "Hey, I'm trying to buy in the market." Just reach out and have an honest conversation. You have an awesome property here. I don't know how you did it. I'm trying to accomplish the same stuff. Can we meet for coffee, for lunch? That is the objective of every phone call. Relationships are built in person, not over the phone.

And then our last question for today: Do you use brokers in your market to help you find deals? And if so, who typically pays the commission when the property is sold?

I like this question. First of all, yes, we absolutely use brokers. Both Cody and I are licensed. That being said, I don't need to make money on every transaction as a broker. We run into this a lot. Brokers will ask, well, who's going to get the fees? If a broker fee messes up the deal, or the deal only works because we got a commission, it was never a good deal to begin with. I am so happy to pay professionals in the market that we're in to find us great deals, because that increases our deal flow and strengthens our relationships. Turns out, if your job is finding us deals, you like to make money doing that. So brokers, absolutely. Every market we're in, we have brokers that we love. Know, trust, and find us good deals. And we make sure they get paid. To the second part of your question, when they get paid, typically it's going to be the seller who pays commissions. So when we are in acquisition, we are not paying broker fees. I'm still open to it if we have the right deal and the seller doesn't want to pay commission. You can negotiate that in. And again, on a good deal, I am so happy to make sure that everyone makes money. So it's not a hard and fast rule, but generally speaking, it's going to be the seller who pays those commissions, not you as the buyer.

And on a— just as a bonus question, because I've seen and heard this before with the seller finance deals, because that's all I've ever done, their commission comes out of the down payment. It's typically not an additional fee. So if I'm putting 10% down and the broker fee is 2%, we subtract that 2% from the down payment. That just goes to the broker for putting the deal together. But, uh, that said, that is it for today's 5 questions. If you have more questions you want to look at and get some answers on, put them in the comments below. If you haven't already, like, comment, and subscribe, and we'll see you guys next time.