Subject-to Real Estate Investing Strategies | Attorney Scott Horne

So, hello everyone. This is the millennial masterclass, Real Estate investing for beginners. And today I have the awesome privilege of interviewing attorney Scott Horn. Right out of Texas, huh? Yes, yes, yes, yes, yes. And the reason that I wanted Scott to come on today is because he is, you know, the leading expert that I found in Texas regarding subject to investing. And let me make sure that my mic is not. Let me know if there's any reverb in my mic, you guys.

So that I can turn something off if I need to. So I'm hearing something squeaky.

That's not me this time.

It's not you, it's me. It's normally me. I'm known for technical issues with regards to this volume.

I am technologically illiterate.

I get it, I get it. I see you have a whole team for it though.

That's cool.

You gotta have help somewhere.

Absolutely. So. But Scott, so I came to you because I've heard so much about you.

And I've joined your academy. I've looked at all of the videos and they are amazing. And you know when you Google or when you Even look on YouTube about subject to investing, nobody is even looking for it because nothing comes up. Really. Not a whole lot comes up. It's a bunch of old stuff that comes up, but nothing recent. No recent information.

So I don't know why that is because I'm going to take it back a little bit in history. Prior to 2009, late 2008, when the real estate crash hit, there was a lot of subject to going on, especially during the subprime days, 2000, 2008, 2009, you go back to the 1990s.

You.

Saw a little bit, but not a lot. And I can't tell you why. Okay, back in the 80s, they had this thing called the FHA non qualifying loans. They went away in 1986, I think they went in 84 and 86. And those would just walk in, sign a deed of trust, secure assumption, is your house done, move on. It was that easy.

Oh, wow.

But they all disappeared. And I can't tell you why. That's why you might see a lot of old stuff. Then when this most recent real estate crash hit, you know, people were looking for answers. The banks made changes and whatnot out there a little bit, which gave us opportunities to come in and to put together a subject to transactions. And so I think that might be why we see a lot of old stuff out there. And you know, you go back to 2009, 2010, different day, different Era in subject to as it is today, because our marketplaces have changed. You know, the real estate has increased in value now. People have recovered from the real estate crash, more or less. But we're still seeing huge opportunity, though, in that regard. So there should be updated information on there. That's one thing we're going to try to do is put more updated information out there that's more viable to today's time frame.

Awesome. So that is awesome. So just for the beginners who are on here, what Scott and I will be talking about is owning properties subject to the existing mortgage. Now, Scott, I might look a little young, but I'm 45. And I remember Carlton Sheets, right? So Carlton Sheets used to talk about subject to. That's how I was first introduced to buying properties subject to the existing mortgage. And so have I bought any? I, you know, I've looked at it, but I have never just dove into that. Usually I get a loan because I don't know all the ins and outs. But this time around, I'm gonna dive in. So that's why I want to talk to you as well, because I want other people to understand it and to know how to dive into that as well.

Okay, so let's start out with a couple of questions. Now, guys, for people who always follow me, this format is going to be a little different. If we have time. If I don't ask Scott every question I can think of on here, then we'll get to your questions. But I have a lot of questions for Scott, and I know that I'm going to hit on something that you want to know as well. So. So the first question for you, Scott, is what type of homeowner is best suited for subject to deals?

Your Internet froze, scott.

Your Internet froze.

The business. Those are the ones that we're going to hear the most of out there. But we have come across many people who need to move quickly. Maybe they're in a location or an area that's not as hot as another area and they need to get out. It could be a job transfer, divorce issue.

Medical issue. It might be where they're not really in a foreclosure scenario, but they just can't continue making that payment for some reason. Maybe they've already gone to another city where they bought a home and they don't want to afford two house payments, and they're looking for a quick solution. We find a plethora of people across the board. I will say the number one, you know, most prevalent is going to be those individuals who have run into some type of financial trouble behind in payments. They keep hoping for the best, that somehow the white knight's gonna ride up and save them with an all cash offer. But maybe they just bought the house a year or two or three ago and they haven't got any equity built up so they can't pay the real estate commissions. Or maybe the house needs paint or carpet or maybe even additional repairs and they can't afford to do that, so it won't pass appraisal standards. And so what's interesting is we kind of categorize the people out there a little bit, but we truly see a pretty wide swath of sellers that are out there. But I think the low hanging fruit, to put it that way, are gonna be those who are in some default or pre default mode and are needing a solution to their problems.

Okay, so the, so the typical, what we say in real estate, the typical motivated seller.

Well, yeah, it's just there's various modes of motivation that are out.

Right. And pre foreclosure or default is definitely one of them now. So how do you find most of your subject to deals? I heard in, in a, in one of your videos you said you close about 12 deals a month. So subject to, is that still accurate?

Well, in our law firm we close anywhere from 20 to 30 transactions a month from a creative finance scenario. In house, we don't do that many unfortunately. It's gotten a little bit competitive.

Across the board. But we're looking for them all the time. And we're marketing either to neighborhoods, we're marketing to appointments of substitute trustee. If they're at a position where there is a notice of default now where they've been posted, you're going to have to go out and knock on those doors, which means you got to get your homework done first before you walk out to go see them and hope they won't slam the door in your face. Because you might be the first one, you might be the 10th person to go there. And gosh only knows how many letters they received along the way. I had one house I saw not too long ago. It was pretty obvious the homeowner did not want to talk to anybody and she had posted probably 20 business cards inside the front door window and then posted other letters up around as if it was like wallpaper on the glass. And it's like, do not knock on my door. It was pretty clear. It's like, got it. Walk away. Yeah, but you come across that occasionally.

Hey, that, that is really a part of this I mean you, you have to have thick skin. You have to have be able to accept a whole bunch of no's to get to a yes that's a part of it. How do you get past the resistance of people who have never heard of it before as owner? So when you approach them, they've never heard of someone just taking over their mortgage and taking over. How do you convince them that this is a good thing?

Well, let me kind of back up because you know, when someone gets into a tight spot, they do not go out and call a number on a bandit sign. They don't call homevestors. They don't go to the paper or some ad and call investors. They go to a Realtor first. Right. And so the first hurdle that I think investors have to learn are how to talk to invest to Realtors the right way. Because that's going to be the person that most homeowners go to first or they've already talked to that Realtor. They realize they have a problem with their home and they're stuck. That's when they start to call the investor marketplace and or the letters that they might be receiving in the mail based upon who they are. But with that, years ago I coined what I call the four by four rule. So here in Texas, you know, we have our 4x4 pickups, right?

Yeah.

And they're prevalent. So it was an easy thing to remember. And the first way, and you've got to get past Realtor objections. And there's many, it's like due on sale clause.

Fraud issues where the investor might collect the payment from the homeowner and not pay the mortgage payment. Yeah, that happens all the time. Right. We want to prevent that. And so the four, the forcible things are this. And of course this is with the advent of the compliance issues that did not used to exist pre 2009 that came into play in 2010 or so, that's dot Frank act and the SAFE Act. So the four by four rule is basically, number one, incorporate the knowledgeable real estate attorney into your transaction. The real estate brokers want to see that. They want to see that that person's involved or that their agent has that involved. So that's the first step. Number two is real estate agents do not know how to structure transactions. They're there to market a property. Right, Right. They're not a mortgage company, they're not an investor. They don't play this game and they shouldn't. And so we have. The second one is of course a note pro consultant that is someone like myself or someone very knowledgeable in the industry who can help that agent put the deal together for their seller to help find the right buyer along the way. The third is to incorporate the rmlo, the Residential Mortgage Loan Originator, which is a loan processor today for the seller finance industry. And they process a buyer just like any other mortgage company does, provide the same packaging because that's a requirement we need to do under the SAFE act and we need to have that information to comply with Dodd Frank. And we can talk about that a little bit later. The fourth, of course is the loan servicer. Prior to 2008, 2009, we never used a loan servicer. It wasn't even in the industry that I knew of. That then comes into play because the creative finance business really took off a lot more with the things going on. And we're looking for solutions to prevent fraud. We don't want an investor to collect a payment direct and not pay the underlying mortgage. And although you never think that's going to happen, if you get in trouble financially and money comes in so often, you put it in your pocket and you don't do the right thing and pay the mortgage payment and now you can be committing fraud. So we want to create those four people and blend them into every transaction. The attorney, a note pro, consultant if and when needed, the residential mortgage loan originator for loan processing and the loan servicer. Then of course we have the four compliance rules and those are we want to comply the Texas Property code and there's 5.016 of the property code says we must provide the Texas Underlying Lien Disclosure Notice. That's a promulgated form that we have to utilize. Secondly is we want to comply with the SAFE act and that is basically processing the.

Not the seller, but a back end home buyer. The third is making sure we comply with Dodd Frank. Again, that does not deal with us buying a home sub 2, it only deals with the back end when you're selling to a homeowner. And then the last one is dealing with respa, the Real Estate Summit Procedures Act. And of course as you blend these four things together, it allows you to show a realtor that you are knowledgeable to business. As you only get one shot at this. You can't go in there and say I don't know, I need to check into this, etc. Goes around and go whatever. You don't know what you're doing. You need a knowledge base of the industry. So if we're going to buy a house subject to we need to know how we're going to talk to that realtor first. Now when you go meet with the homeowner, you know, one of the things I always say is you better know before you go. You better have done your homework on this property and you have to have a knowledge base of how to do that. You need to have a reasonable expectation of what the underlying debt is on the property, what liens may exist on the property. You need to know what the as is value is. You need to know what the real market value is. And I like to go one step further and go, if I'm going to use seller financing as my back end exit strategy, what can I sell this home for in that format? All of these items allow me when I walk in to meet that seller, know how to talk to the seller along the way. The next thing you've got to do to talk to the seller is you have to be compassionate. Because so often our sellers are in trouble in some format and.

I just find a way to very politely reiterate what they already know. I like to find out what happened, how they got there. And you have to be caring about this. If you just walk in and you start to demean the property, the situation, etc. Trying to get a better deal, you're not going to get a good feel for that seller, nor them for you. The odds are they probably aren't going to work with you. And I've seen that happen over and over again with so many investors who think that by describing how bad the property is to the seller, somehow they're going to get a better deal. But a mortgage is a mortgage, it's not going away. So you can't negotiate a better deal in that regard. And so whenever I go, I like to get information gathered so I know how I'm going to what I have to work with. Now until I walk in that front door, Latonya, I have no idea what I'm facing. Is this house neat and clean, moving, ready, or is it a war zone? And of course, as you well know, you're going to see everything in between. Right? And so having that information when you meet that seller for the first time allows you to.

Be able to formulate your offer to that seller and how you're going to talk to that seller. Because you've got to know, for instance, do they have only a first lien mortgage or do they have a second lien mortgage? Is it possible they had done a loan modification and they have one of those HUD liens out there. And because those HUD liens are zero interest, zero payments until the first lien mortgage matures, typically these sellers often forget about that. They don't even know that it exists so often. And so we need to have a knowledge to walk in first. When you're talking to them, we know where to start. We want to be polite, we want to try to understand their situation as best as possible. And then what I like to do as I'm talking to that seller is walk them through their options. Could they sell this property for cash using a realtor? And do they have the time to do that? Because in most cases they don't have the time to have a realtor listed. They don't have the money to pay that 6% commission or 5% commission or whatever it might be. Oftentimes the house needs repairs in order to pass appraisals. So going the retail route doesn't even exist. So most of the time, Latonya, our sellers already know that. So all I'm doing is in a very polite way reiterating that back to the seller, just telling them what they already know. Could the seller lease the property? Well, sure they could. But the problem is if they're behind in payments, they need money to catch the mortgage up. They can't lease it and that's not going to solve their problem. So often if they go the cash route where they come to seek an investor, we investors don't pay 100% on the dollar full value. We take a percentage off of that, less the cost of repairs. And there's a cash price 98% of the time, that cash price we're going to offer is going to be less than what they owe. So that deal doesn't work either. Most likely they already know that. So at this point in time, sellers are looking for a solution and they're looking for an answer from us. How can we help them solve their problem? And to me, that is one of the biggest things we need to work on as investors is to realize it's not just about us making all the money about that, it's about solving the problem. Because when we do the right thing, when we can help our sellers out of their bad situation, when we can help even a back end buyer, if we elect to do a seller, finance a back end buyer, buy a home, we kind of stand in the middle. We stand in the gap between a seller and a buyer. When we can help the neighborhood not have a blight with a foreclosure and help the mortgage companies not wind up a foreclosure because mortgage companies lose tens and tens and tens of thousands of dollars on every foreclosure they get. I heard that that number is about 50 to 60 thousand dollars on average. And you want to guess who pays for that? End of the day we do in taxes because this is coming out of Fannie Mae and Freddie Mac primarily. So all these things are a positive and we can blend those together and make money in the middle. That light bulb goes off on all those positives that we're creating. Awesome. And is trying to get this across to a seller. How we're going to help them, how we're going to help them solve their problem. It's huge. The next thing I like to do is explain to them that since they don't have other options, this is really what becomes what I kind of call their least worst option. Right. Realize that. But they go, are you going to pay my loan off? No, it will get paid off whenever it's paid off. But it's better what you're faced with today. I like to talk to sellers about.

That when I do buy their home subject to the debt, if they are behind in payments and when that loan is brought current at closing, they're going to get a credit bump automatically. That's a benefit. The next thing, I am going to make their payments every month for them. And when I do that in a timely fashion, their credit is going to get increased as well. So I help solve their problem. Not just the real estate problem, but now we help them recreate their credit because their home mortgage is the best way to recreate, recreate and increase their credit. They don't understand all these things. So we as investors have to parlay this back to them, help them understand it again in a very simple but a very straightforward scenario. Because they usually have problems that are out there.

And when you can blend all these things together, maybe they need a little bit of walk away cash to move, maybe they need. Maybe they really do have real equity but they just can't fix the property. We can help them get that equity either with cash from us or maybe through a second lien mortgage or maybe cash and a second lien mortgage or some variation of all of this that could be out there. We show them an exit strategy that they don't have normally. What investors either know or the young investors will learn is that realtors don't understand strategies. Realtors walk around a quality result. Their job is to market a property for a seller to find a buyer and put the two together and their job is done. They're not the mortgage company, they're not the title company, not the home inspector. They are a marketing entity. And they don't know enough information, unfortunately, to tell sellers what their options are or they don't have resources like ourselves or maybe even you, Latony, to come to to ask questions.

Yes.

Guide that seller along the way. So I think it's understanding that they're here to solve that seller's problems and scenarios. I like to tell them what the situation is in a very nice way. They already know it. And then tell them how you can help solve their problem in a proper format. Now there's other things you got to do along the way too. That kind of gets us going.

Yeah, awesome. So, yeah, that was awesome. Okay, so give me an idea. Okay, so one question. Can you wholesale a subject to deal? Like say for instance, I found something, got it under contract. Can I wholesale that to someone to another investor?

So can you assign your contract? Yes, yes, you can.

Okay.

And just remember though, what we want to do. So when we are buying a property using Creative Finance, by the way, we can buy a house from a seller using subject to mechanisms where there's an existing mortgage. Right. We can also buy using a wraparound mortgage.

But oftentimes we have sellers that have no debt. We still buy their properties using Creative Finance as well. But.

Oh goodness, Latonya, where was I going with that? Ask me your question one more time please, ma'.

Am. Can you assign a subject to deal?

Can we assign it? So once we have a contract, we can enter to a standard assignment of contract because the transaction from the seller to us as an investor, there are no rules and no regulations other than in my opinion, full and complete disclosure. So when we assign that contract to either another investor or to possibly a homeowner. Right. We can do the same thing. We want to ensure that that investor, that homeowner, whoever the assignee is going to be, has the.

Obtains the full disclosure and understands the situation, what's going on and has the ability to perform. So yes, we can do that all day long. In fact, we have an assignment form that I use for just that purpose. I will say that 10 years ago we did a lot of that, marrying sellers to home buyers. Today I still kind of like to stand in the middle even if I'm going to put a seller and a home buyer together. Okay, so kind of like a realtor in a sense. And maybe I'm going to take the down payment from the buyer as my fee. And I'm gonna let the buyer move in and take over the seller's loan in some format. I like to stay in the middle. Why? What happens if this buyer defaults five years from now?

Right.

Our sellers rarely know how to handle that situation.

Yes.

What happens if the market goes back up again? The mortgage, our seller's mortgage goes down, right? Yeah, but maybe our the value goes up. So our equity gap is widening.

Yes.

So if the equity gap widens and something happens to our buyer, because bad things do happen to good people all the time, I'd like the opportunity to step in, take the house back and resell it again and make a profit. Now there's a time and place for that. I think that's what the seller and buyer want, number one. But at the same time, if I've got a really high interest rate, underlying debt or some serious issues ongoing, maybe I do want to sign it and just step back. But if I'm just standing in the gap and standing in the middle through my corporation, my llc, my partnership, whatever it might be, and I put a back end buyer of the property, I have nothing to lose by just kind of sitting there and seeing what happens and tracking it over time. So I like to stay in the middle. Sometimes it allows me to control the deal. If I'm going to do that, yes, I'm going to make cash flow and make money as opposed to making zero. But it's also focusing on the fact that somewhere down the road something negative could happen that gives us the opportunity to regain that property.

Right. So during the situation of the coronavirus and the whole basic world shutting down, how have people with subject to mortgages, how have you fared during that with certain homeowners who have defaulted possibly on the subject to arrangement, how has that fared in your world?

Well, we have still seen opportunities come up for.

Hasn'T been as prevalent because I think too many home buyers are falling back on this forbearance issue.

They don't realize that oftentimes that could create even a bigger problem. I do believe they're going to put all of those onto the back end of the mortgage mortgages. So do I. I've heard it said through some very high sources at Fannie Mae and Freddie Mac that all of those forbearances along as a Fannie and Freddie loan, they are going to put that on the back of the loan. But then we also see these large defaults occurring and whatnot that are out there. And I don't you always hope this doesn't happen. But what I'm afraid of is that sometimes maybe in the first or second quarter of next year, we're going to see more and more defaults happening.

Absolutely.

Give us opportunities to work with these home buyers in this format. Because just because a seller defaults doesn't mean there's not a buyer to come in and buy that property. Our job is to find those two and to learn how to marry the transactions together.

Right. So my specific question is, have you had any of your buyers to default on properties and how have you handled that? Do you, do you have something in the contract where you can take over the property again and foreclose on the original on the buyer that you found since you're the middleman?

Well.

So buying a house subject to is one thing. Right. And when we do that, we take on the obligation to make that payment about the seller regardless of what our back end buyer does.

Exactly.

So my first thing is I want to make sure that investors, and especially young measures understand that this is not just a free game to play. Things can happen to your buyer or to your occupant. If it's a tenant. Oh gosh, it's horrendous. Right now if you lease the property out because tenants could stop paying. They could file this CDC declaration and not have to make payments until January.

Yeah.

Well, how are you going to pay your mortgage now? You've got to contact that lender and ask for a forbearance. Right. And hope that it's added to the back of the loan and not asked to be paid all at once come January. And all those possibilities we have are fortunate we're able to carry that debt. If those things have happened and we don't have, I think out of our entire portfolios we only have three rental properties. We have had any issues with rental properties, thank goodness. But if you have soldier, Most of what we do in our businesses is we sell our homes with seller financing. I don't like to carry a landlord and I teach and preach the seller finance business. I think it's the best way to generate wealth.

Absolutely.

But with our back end home buyers, we have been very fortunate with the hundreds and hundreds and hundreds of mortgages that we hold in escrow.

I will tell you, we had a few people default. They were good people. They did contact us. Most of these were restaurant owners and they needed help. They were shut down for three or four months. And so what we asked them to do was we asked them to come in and to sign a deed lieu of foreclosure under an agreement that we would not record it if they would just work with us going forward. And so this was maybe was April, May, June, July, payments were not paid. But as things opened up a little bit, they were able to start making the normal payment going forward in August. And we said, guys, just work with us and pay out those, those back payments the best you can over the next 6, 12, 24 months. If you can pay $100 a month, pay $100 a month. If you can pay 2 or 300, please do. And the good news is everyone is doing it awesome. Every single one. And it was awesome to set it up in a way to help them. But at the same token, while they didn't pay me, we still paid our lenders. My lenders did offer me help if I wanted it. We didn't have to have it, thank goodness. And it just allowed me to do things in that format. So again, it's about being smart, being wise, trying to do things to help people when you can and setting it up in a way that helps both parties. And we were as fortunate being able to do that.

Awesome. So I've also heard you talk about.

Purchasing properties from homeowners and there's no equity involved. Like the property. There's no equity. Can you walk us through the numbers real quick of how that works? Like, let's take a real, some real simple example of how that could work and how you can still make money doing that.

Let's take an example. I'll give you a real life. Let's assume you have a house where a seller owes $100,000. And let's say that house is worth $100,000. But let's also assume that house is in reasonably good condition. Okay, maybe I've got to go in and put new carpeting in where I have to spend 2, 3, $4,000 out of pocket. All right? But let's assume that that hundred thousand dollar loan might have five years paid off on it. So on a 30 year mortgage, they have 25 years left. So remember, you've got a 25 year loan amortized over 30. You have probably a very low interest rate, somewhere between 3 and a half and 5%. Typically, let's just say it's 4% for our conversation right now. So in my business.

I don't lease it, but I sell the property to a back end home buyer. I might do an option agreement so that I'm allowed to go find my buyer first and do a simultaneous close where I buy the house Monday morning and I sell it Monday afternoon.

Maybe I need to go ahead and buy it, get those minor repairs done, market it knowing that it's going to cost me one or two monthly payments along the way. But when I know that I can sell a home with seller financing at about 110% of value and I can get a 10% down payment. Typically out there, that 10% down payment, even have to pay a marketing fee to somebody. The money that are left over pay the reimbursements that I'm out of pocket. So I don't put any money in my pocket. But what happens is now I have maybe a 9% interest rate on a new 30 year loan at $100,000. I owe the mortgage company a hundred thousand dollars at 4%. What am I making? I'm making a 5% spread, which means I'm making about $5,000 per year, every year.

Got it.

And the first lien mortgage is being paid down faster. I'll give you another real life example here in Dallas that we did just a few months ago where the seller was in bankruptcy. I say a few months ago, this is probably. This was pre. Covid. Probably towards. It was probably a year ago. Now. This was in a gated community. This was a great house. Move in, ready. It could use a little update here and there to be really at the top of the market. The house had a value somewhere between 360, maybe 370. But our seller was 20,000, 23,000 behind in payments.

It took us about 60 days to find a buyer. And this was a home. So I said in that mid 300,000 price range in a gated community makes it hard to market. But we did find a home buyer who qualified through our Armalo process for this, who had a $30,000 down payment. So what we did was we were able to. We had a $330,000 first lien at 3 1/2% interest rate.

We sold the property not at 9%, but we sold it out in this case for about six and a half or seven percent from what I remember. I brought my interest down because of the size of the home, the dollar value and the necessity to get things moved quickly. We got the down payment from our buyer, which of course helps us to bring the loan current. We actually made a few thousand dollars in our pocket this time. But the main thing is we're making about $7,500 a year every year going forward on a beautiful home. Yeah, our seller, out of a bad situation, he was stuck house hadn't been selling. The buyer loved the house. And this one buyer is probably going to refinance the home in two or three years. So am I going to make a killing on this? No. Am I going to make 30 or $40,000 in cash flow before it's cashed out? Sure. Do we all want that? Absolutely. No, it's. Call it mailbox money. Call it. You want to call it. It pays your cell phone bill, it pays your Internet bill, pays everything else. It's this way of doing things. Well, I don't have any big equity gain in there, but what if my buyer did default? It's not going to happen in this case. He's too good of a buyer. But, oh, my gosh, things happen in real life. If it does, we get the house back. We don't owe that 23,000 arrears. We owe zero. Our house is going to be in great shape. The value has actually gone up a little bit and we could resell it again and move on. And we don't want that to happen. That's not the goal. You make your money when you buy, right? That's always the old.

Consolidated. And we're happy and we're here just to stay in the middle and we'll see what happens.

So where do you find. I'm sorry.

You can do no equity deals and you can do negative equity deals as well. Just do the math.

Gotcha. So.

Where do you normally find your buyers? The people who you buy, who buy from you. Owner financing. Where do you usually find them? Is it through your realtor contacts?

No, we do things multiple ways. Although we do have direct access to multiple listing where we can put our houses if we need to. And sometimes we do based on location, market things of that nature. We see the necessity. But so often we put our signs in the yard. And I'm going to try to give you an example here. So I'm just going to use this. This is an old Tiger Woods Augusta magazine. Okay.

Yeah.

So if you drive by and you see a realtor sign in the yard, every person knows two things. A, the house is for sale. Right. Let's take the obvious.

Yeah.

And two, if it's for sale, I need either cash or a mortgage to buy the property. Again, the obvious. So if you've already been to a mortgage company and you know that you can't qualify, credit issues, job issue, whatever it might be, and you see this sign in the yard, what are you going to do? You're going to drive on by, Right.

Keep going.

So I like to just take this sign. Let's put it in the interior yard. Leave it there. Let's go put our sign out in front, right?

Yeah.

For sale by owner, owner financing. If you're in Hispanic marketplace. Dwayne, Dwayne. And a phone number. If the house is vacant, I like to put something in the window. Pink, yellow, something that's visible, that has the basic term, the description of the house, the basic terms. I'm asking a $15,000 down payment and all you have is three. Don't call me. Yeah, you've got 10 or 11 or 12, give me a call, we'll talk. And so you learn little things like that first.

Secondly, directional signs in the area to steer people to it with owner financing because 85% of the population, plus or minus, cannot qualify for an A plus loan. So what are they going to do? They're either going to wind up leasing a property or an apartment, they're going to go live under a bridge or they're going to learn how to do this. They want to buy a house.

So oftentimes we'll put bandit signs around neighborhoods. Always using Google numbers, right?

Yep.

The bandit signed police to come after us and they do.

Ticketed, etc. On this.

We develop a network marketing reps.

Who, who are seeking people just like this who can't qualify to help them find this. You can use Facebook sites for this purpose. You can use Craigslist. Problem with Craigslist, you have to repost daily to keep your ad up. It becomes a chore.

Yeah.

If there are realtors who have listings in the area, I like to contact them to direct, let them know what we have. So if they get a buyer that can't qualify, they might be able to come buy my house instead. You know, my interest rate is probably going to be higher than the traditional mortgage rate, but at least they get to own the house, right?

Right.

And that little thing called a tax write off.

They can then apply that to what the rental rate would have been. You're going to find that the mortgage, the mortgage payment and the rental rate is going to be about the same. I learned how to talk people that way, but I try to find multiple scenarios to get the word out to people who want to buy homes in that particular area. And every neighborhood is going to be a little bit different in how you navigate that.

Gotcha. So when, if. Okay, I have two questions. I'm trying to figure out which one. Okay, so how can realtors, real estate agents, make money doing this?

Well, recognizing that There is a large, large percentage of population that can't qualify. Realtors. One of the first things a Realtor does when they get a buyer to come in, wants to buy a house, they send them to a mortgage company, get qualified. Right. And what, what do they get? They don't get qualified.

Most of them just go, sorry, I can't help you. Come back when we can. If they know how to play this game, it's a prospect. Okay. You have to ask certain questions. Okay, let's talk about your down payment. What do you have in the way of a down payment? Now, if you have an FHA, minimum 3.5% down payment, you're probably gonna buy a home. With seller financing, you're gonna need close to, you know, 8 to 10% or more in order to do this. The good news is closing costs with a seller finance deal are way less, I mean, way less than a traditional mortgage. So they're able to at least cultivate buyers in that format. They could even talk to the loan officers about buyers who didn't qualify, contact them to see if they would have an interest in this. Then the question is, can they market and try to find houses either through other investors or other homeowners to see if they're interested in doing that? But so often it's not a Realtor working with a buyer as it's a Realtor working with a seller is what's important, and it's recognizing these situations where their seller is stuck. We want the Realtors to understand there are options using creative financing, when it's done the right way, to either sell us an investor the property, or that can home buy the property, one or the other. But they have to learn how to recognize these situations when possible.

And do we as the investor, if they bring us a seller who this works for, we give them their, you know, normal 3% commission. Correct.

No.

Okay.

I think the correct answer is maybe. I think every deal is different. Right.

Okay.

Every deal is negotiable.

Yeah.

In this instance, if we're able to help them do it. Now, oftentimes realtors do want 3%.

Yeah.

Even though their job is made a lot easier in this scenario.

But everything is still negotiable.

Yeah, absolutely.

I think most workers would be tickled Pink to earn 2% on a dead deal if we're able to help them monetize that transaction.

Yeah.

But there are some, no matter what the situation is, still think they deserve free. And if the deal works, do it. Because maybe you win an alliance and a friend and you move forward with that, they bring you more deals.

Right.

And it's worth it.

Absolutely. So my other question is what. What type of cost can we expect in the acquisition of a subject to deal? I mean, you know, I know that that can vary, of course, depending on the deal, but give us an example of like what we can expect, because I don't believe it's no money down. Maybe sometimes in some circumstances, but not always.

So is this the question before the question?

No, this is the question. This is the question.

So, you know, every market is going to be different from where you are. Dallas is a hot marketplace. Houston is a hot marketplace right now. Austin, San Antonio, other states maybe not so much. You move out into your secondary or tertiary cities. Things may cool off a little bit. Right. So every market's gonna be a little different. Today, though.

What I'm seeing is when we get a transaction that we have the opportunity to buy subject to the debt, our sellers are behind in payments somewhere along the way. And typically there are repairs that are needed. And so you're gonna need the money up front to be able to bring that loan current. And probably the fund is to make whatever the repairs are in the property. And I want to give you an example about this in just a moment. Latonya. Okay, so I see you're going to need usually money to reinstate. Not always, but often. And I've done a reinstatement. I've done well, that's 77,000. They were behind in payments and the deal still made a lot of sense. And we did the transaction.

I'm seeing repairs are needed. It may be minor. Paint, carpet, maybe appliances, things like that, sprucing the yard a little bit. Just minor updates, not anything major, but I'm running into those kind of items. And then you have the last two things. One's the cost of closing. But usually we investors pay the closing cost. We're buying a house and that's going to be about, for easy round numbers, about $2,000. That includes everything.

Oh, wow.

Disclosures we provide. Those are the escrow fees at closing, I.e. the redisclosure at closing, doc prep, recording fees, title searches, etc. And things of that nature. And so we've got to consider the closing costs. And then you have your holding cost costs. And holding costs may be 30 days, 60 days, 90 days. But you have to expect and anticipate that. So either you need to have your own cash available, you need to have private second lien capital available that you can draw upon some format and then knowing what your back end strategy is will tell you how you're going to repay this money along the way. So the example I want to throw out that is very good in this regard is we had a property here in Dallas where the first lien was 123,000. So three and a half percent interest rate.

There was a $36,000 HUD second lien. And so this means she had done a loan modification and she was three years behind in payments. Not one, not two, three. So for me, I would have been thrown under the jail at that point in time. How other people do that, I don't know.

Right.

Well, at this point in time, she was 14, maybe 15 months behind again. So this thing, the obvious, she was in over 10, she needed to move on someplace else. We had a good idea about this going in. And we get in the house, we find out the house needs 25,000 in reference.

So if you've got 123 plus 36 is 159, plus another 15 is 174, let's just call it 175 for easy calculation, 25,000 repair puts us at 200,000 total in this deal. And the house had a retail value of 215,000. 99.4% of all investors would walk away from that deal.

Deal.

Is that a fair statement?

Absolutely.

And you look at, you go, whoa, that's just way too much.

We bought it. Why?

Big house, 3,000 square feet. We knew we could sell it quickly, but I needed $40,000 to close it. 25,000 in rehab, 15,000 in arrears, and I needed about $3,000 in interest carry for about three months. I knew I'd be getting repairs done in about 30 to 45 days. I knew my marketing time was going to be about 30 to 60 days.

So we got the repairs done very quickly, cleaned the house up very nicely, and in this case, the house did sell within, I think three or four weeks. Once we got the repairs done.

We sold it for 239. Nine, not two.

How much was it worth again?

215 retail. Oh, wow. Okay.

We got a $24,000 down payment. We did pay some commissions and fees for marketing, so I netted about 18,000 at closing. So far so good.

So far so good.

But I'm out of pocket $43,000. So I took the 18 and I applied it to the 43. So now I owe my private lender 25,000, or I needed to have put 25,000 cash in the deal. So what's my cash flow? What does that look like? Remember, I'm only paying money on the 123, right?

Yeah.

I'm not paying money on the 36 because it's a zero interest, zero payment HUD, second lien. You don't see those out there too much, but they're out there.

My cash flow is $1,000 a month.

So if you want to look at return on investment, that's 12,000 a year. That's almost 50% cash on cash return a year. Good luck. Find that someplace in the market.

Or I can take the thousand dollars and I can pay off my private lender. Now, I make zero money for 25 months while I'm paying off my private lender. Right. But at the end of 25 months, what do I have? My borrower owes me 216,000, maybe $215,000 on their mortgage. That's a very real mortgage. My house has been fully renovated. They're in the home making payments and I owe 159,000 on the mortgage. So now I've got hard, almost $60,000 of real equity there that would be created. But to do that deal, you had to have the capital or the cash or the second lien capital to make that work. And that's where so many young investors have to learn how to cultivate that out there in a proper way. And one of the things that we do is with our second lien lenders knowing that it is a second lien and not a first lien, which means they're at risk a lot more. Because if I don't pay my first lien lenders properly, they foreclose and my second lien gets wiped out. I don't want that to happen.

So I hyper accelerate my second lien lenders and I pay them off very quickly. Quickly. I make no money doing that. It's an investment. It is not a job. It's kind of like a certificate deposit at a bank. It's kind of like a mutual fund where you work it and let it grow. So oftentimes I always say don't quit your day job because you got to have income coming in somewhere. If you are going to play this game in this format too. Yeah, you don't always get the luxury of putting cash on your pocket. 10 years ago we used to market you made money three ways in the subject to business. You got cash today from a down payment and you could do that at that time of the marketplace. You got cash flow and you Got equity built up.

Absolutely.

The market has of course shifted and changes. And guess what? It's going to shift and change again. Right.

And it's recognizing these dynamics of what goes on, what happens and learning how to navigate it properly and correctly. That's one of the things we do here at the Subject to Academy, which is one of the things we can talk about a little bit and how we navigate all of this.

So yeah, that is, that's exactly where I was about to go. So I was going to ask you, what resources do you have? Because you have what's called the Subject to Academy. Right.

Well, we have multiple things.

Okay.

So I'll kind of walk you down the litany a little bit. Okay. So we are a Texas law firm. We are not a huge law firm. And this is all we do by the way, is we work with real estate investors and realtors in the residential investment marketplace. I don't try to do mergers and acquisitions and things of that nature. I'm not a litigation attorney. And things of that nature we are transactionally based on. We focus on the investor community primarily. And so our law firm helps to put these deals together and act as a closing agent or subject to and the back end seller finance transactions. We are title attorneys. We've got a couple offices in the Dallas Fort Worth area and we can issue title on these transactions if and or when needed that are out there.

We have a company we created called the Owner Finance Network. And so that website is the owner financenetwork.com.

We created that to be a vertically integrated company where we blend legal services, title services, note pro services when needed, loan servicing as well as loan processing services all under one roof. Now, here in the Texas marketplace, if you're in the creative finance business, there is a very good chance that I touched you somewhere along the way either in the setting up of other loan processing companies or other loan servicing companies. In fact, I'll tell you, the two biggest ones in Texas used to office my building with me and I helped them set up and provided them a lot of their business along the way. It was just time for us to go out and create our own instead of giving our business away to third parties, which is what we did. But we have trained a lot of people in the seller finance business in the Texas marketplace. Of course, as you know, Latonya, the seller finance business is viable in any state, wherever you might be. There may be some different nuances here and there, some rules you have to learn, but overall it's the exact same. Buying a Property subject to the debt is the same in Texas as it is in Ohio, as it is in Florida, as it is in North Carolina, in Arizona, wherever it might be.

Awesome.

The wrap loan is the same as well. The documentation might be just a buzz differently. There might be a few different rules here and there on a state by state basis. Which is why we always say take the time and go talk to your local real estate attorney and make sure you navigate this properly. I can only practice law here in Texas. I'm not smart enough to have licenses in all these other states. And it works very well when you can do that.

So what's the difference between. What's the difference between the subject to Academy and the owner Finance Network?

Well, the subject to Academy is just a entity within the Owner finance Network.

Gotcha.

The Owner Finance network is our own training site. There's a lot of people out there who are the gurus. I'm going to sneeze one more time. I'm sorry.

That's okay, honey.

Next time along the way when I do. Here it comes. Hang on.

It got scared off.

We were looking at it. We were looking at it.

There are a lot of people who try to teach this business and there are some who I think are very good. There are some who may not be as good. And of course, everybody wants to espouse their expertise in this industry and everybody wants to puff what they have done, whether they've actually done the number of deals they say or not, who knows? I get an opportunity to have a pedigree of having done 7,500 transactions, acquisitions. I've done 6 to 8,000 rehabs in our houses. We have sold a huge volume of transactions in this format. We're very fortunate. And all that does is gives us a knowledge base and a wisdom in this industry. We've seen so many deals that are out there. And so under the owner Finance Network, we have our online training in which your clients can go on research. We have. We try to add to that on a constant basis, just little tidbits that help the client out to understand how to buy properties properly, the seller financing, subject to the debt wraparound or otherwise, how to sell them properly, how to be compliant. We don't try to charge two arms and a leg in it. We try to be very reasonable in our price. But one thing we constantly got is I get bombarded with questions every day of the week, Sunday through Saturday, every day. Doesn't matter. My phone rings and I am Mr. Answer for most of them. They don't Realize that as an attorney I should be charging these kind of things. And so what we did was we created the Subject to Academy, which has just launched. And it is actually a online webinar, just like we're doing right now, where we give the subscribers a chance to just ask their questions and let us answer them. For you, people who are in this industry who have done it myself for 30 something years, Brian, who's done it for about 10 years, have been out there, you get different answers also from people like Brian and myself. I come from the legal world and unfortunately I'm an attorney, I'm an engineer. And so I talk a little bit more legalistically sometimes, although I can talk the paint off of the wall. I think Brian comes from a little more of the grassroots scenario and you get a different vision in the whole thing. But the key is to help people understand this business. How to talk to sellers, how to talk to buyers, how to find the deals, how to negotiate the deals, how to research the deals, how to structure the deals, whatever it might be. And there are many myriads of questions. My problem is is there's not enough time in the day for me to answer all the questions that come in constantly. And so we're hoping this provides a resource to our subscribers who can do it. And again, it is reasonable. I hope it's a reasonable price. I believe it's something like $19.95 a month. Yeah, that's going to be for two to four hours a month of Q and A. Or they can email their questions in and we can turn around and answer the questions to the best of our ability. I can't provide legal advice, but we can provide knowledge based on our expertise and knowledge of this industry to help guide the investors and help them learn as you go forward. And even if you do an in person seminar, which we do all over the state of Texas, that got shut down with COVID of course here recently and hopefully that opens back up here in about three and a half or four weeks. We'll see how that happens when all this stuff going on right now in the news goes away. Being the election. Right. What's going to happen? But hopefully something positive happens and we're able to open the country back up and get back to a normality somewhere along the way.

Absolutely.

We love doing our in person seminars and teaching our one day classes. We do that, we're doing that twice a year in the DFW area, the Houston, San Antonio, Corpus, the Valley, etc. We'll get back to that same schedule again. And you can learn a lot in the one day classes. And our one day class is of course online intertwined as well. And you get a chance to ask more questions and you get a chance to interface with the audience a little bit differently, which is beneficial. Can't do that. People have questions and we have just seen where there's so many questions out there. They are looking for answers. We thought the best way to do that was the online webinar so we can address those personally and try our best to answer them and let people listen. I'm trying to create a library on them and roll from there a little bit.

Perfect. So what day are the. What day are the zoom calls the question and answering now?

Do you think I really have that answer for you?

Yes.

My bosses tell me what to do and what to do. You know that better than I do already.

I know. I talked to the boss. I got it, I got it, I got it. So I'll ask her.

Put that out there and let you know. I wish you would think I would know that answers right. And I should know the answer.

It seems like it's Tuesday, but I'll put it in the description.

Once I have heard that, I just don't want to confirm it. And we're going to try to do it in a way at a reasonable time for investors where they can actually take time to listen to it. They can send their questions in and truly provide legitimate advice on this. Because one of my pet peeves is just like realtors who talk to their agent next door who talk to the agent next door and you wind up getting the blind leading blind. So often the investors doing the exact same thing. Investors want to tout themselves and this is going to sound really bad. I don't mean it bad for anything. But it's just human nature. Everybody said earlier they want to puff their expertise and their knowledge base, make them look better. I understand we all want to do that. It's human nature. Unfortunately, I see so often they don't have that knowledge base as well as it should be. And we want to try to dissuade that if possible. Truly, this is a great business. It's a great industry and we don't want it to go away. I know that here in Texas last year the legislation tried to shut down the seller finance business. They tried to make every one of us a licensed RMLO or completely do away with it. We do have a national organization and I'm trying to think the name of it right now is the Seller Finance Coalition is run by a gentleman, Eddie Spencer Speed and buy us a chance to go to the seller finance coalition.org do it. Please subscribe to it if you're going to play in this game. But somebody has to fight for us and they fight in Washington. But they did come into Texas to help us overcome the situation the right way. We investors don't have the ability to deal with the legislators in. You've got to get a lobbyist to do those things for you. And they're extensive. We can't always do it.

So we want to make sure that the investors who do get love this business. Learn it the right way, do it the right way. Realize it's not just about making a fast buck. You can make money in this business with longevity and you can be phenomenal business. I don't know if anything that's more fun than this business to do.

Absolutely.

Make money. It's just a whole run. Right. And it's wonderful. But we don't want these bad apples messing it up. And there are some people who still do that. So we want to help people learn how to do this the right way, give them proper advice and we hope that's what we're going to do out there that helps guide them along the way so they successful in their real estate investment careers.

Well, you have been wonderful, Scott. I know you are headed to Phoenix pretty soon, right?

Seven o' clock in the morning.

Yeah. So I won't, I won't hold you much longer. I want to thank you for joining us and I am sure the people will see this video and have other questions and I will definitely forward them to the owner Finance network. I am a member of that network and I love it so far. So thank you. Yeah, no, y', all. I don't get a discount. I wanted to do it and look at it before I even talked to him. So. Yeah. I'm glad that you were on and I do thank you. Thank you, thank you.

I passed the test.

Say that again.

I passed the test.

Yeah, you did. You did. Yeah, you did. Flying colors.

Well, thank you. You are a great host. We look forward to working with you on many future things together. Okay.

Absolutely. Scott, thank you so much. And you have a good evening.

You too.

Bye bye. Bye bye.