A Real Estate Strategy That Will Make You Flip

Hey, it's Mark Podolski, the land geek with your favorite niche real estate website, www.thelandgeek.com. and I'm really excited for today's guest because he has a model that really I find very intriguing. I know Scott finds very intriguing as well. But that being said, I'd be remiss if I didn't properly introduce my co host. You know him, you love him, Scott Todd. Scotttodd.net landmodo.com Most importantly, if not automating your Craigslist and your Facebook postings, posting domination.com thelandgeek Scott Todd. How are you, Mark?

I'm great. How are you?

I'm great. I'm great. I'm excited. I'm excited to soak in the wisdom, the knowledge.

This is always when, whenever we, we hear about like this type of, of an investment, I kind of get shiny object syndrome. And I wonder, like, should I be talking to Brad? I mean, our guest. Should I be talking to our guest and not you, Mark? I don't know. We'll have to see.

I don't know. Let's see. I'm excited to just let it all go and maybe, you know, be in the Brad Smotherman camp. If you don't know who Brad Smotherman is, Brad Smotherman is our guest from Brad smotherman.com. he is a professional house flipper, but the way that he sells the houses is very unique, very special, and actually kind of cool. So, Brad Smotherman, welcome to the podcast. How are you doing?

Very well, Mark. Appreciate you guys having me on.

So, Brad, let's rewind the tape a bit. And before you became a professional investor, what were you doing?

Well, I got into real estate when I was 17. I decided to get my real estate license and I sold real estate through college. Well, College ended right at 08. And I thought, well, gosh, this is a terrible real estate market. Let me use this accounting degree that I worked on for four years and that lasted for about 30 days. So I went into tax, decided pretty quickly, like, I can't do this type of work, the desk environment. I'm an entrepreneur at heart and all this. And so I went back into selling real estate. Well, guys, it was really pretty bad timing. You know, 2008, fall of 2008 was not the best time to be jumping back into a real estate sales career. But we made ends meet. The beginning of 2010, I started doing the investing side. So I retired my license, started buying houses, selling houses, mostly with owner financing and you know, just been rocking and rolling ever since.

Okay, great. So if you wouldn't mind, walk us through your model and why it's unique from the typical house flipper.

Sure. So it's kind of funny. The evolution of my business really started as buying with equity and selling with owner financing. Because I was able to do that in a way that, that needed very little money. Well, I didn't have any money, so I had to find a way that was not traditional. And I looked at wholesaling and different things. And so I started off creating wrap notes, then I built up some cash and I thought, well, this is what you do when you get some cash. You start doing these HGTV style rehabs and Joanna Gaines style and these gut reframes and all this. And I did that for a couple years and I realized pretty quickly, like, there's really no money in the fixing. The real money's in the financing, in my opinion. So switched the model back, started doing more and more owner finance. That one of the biggest mistakes I've made the past five years is the market was so great, I retailed out of too much and I should have kept more in note. So right now we're doing probably 70% of our business is we're taking the profit, putting it into note taking instead of taking the house retail like a fix and flip flipper would. Or instead of wholesaling the house like wholesalers do, we're getting the property under contract and then we're selling with owner financing. We're creating all these wrap notes.

Okay. So that's a lot to unpack. So let's unpack the first part, which is you buying a house with equity. So what does that mean?

Yeah, so we bought, I guess we bought two yesterday. We bought a house for $50,000. That's a cash offer at 50k and we'll owner finance that one for probably 150 with $20,000 down. So I'll have net $30,000 cash and a $130,000 note that is financed somewhere around 7 to 8% on a 30 year note. Okay. The other transaction was actually we bought it subject to, which means that the lien, the mortgage in this case that was in place in our seller's name remains in place after closing. Okay. So this lady, really nice lady, she was about six months behind on her mortgage. And so we gave her $15,000 cash to take over $115,000 loan at 4% and then we'll sell that property at 7.9% at 200. So I mean, that's kind of. And I hate to like throw out the numbers because I know it's confusing for some people, but you know, that's kind of like an average sort of deal for us.

Right. So your passive income then is what on a typical note deal?

Yeah. So you know, notes obviously are a promise to pay. So, you know, a lot of people kind of get this somewhat confused with like lease, purchasing or land contracts. We don't want to do that. We do real owner financing where the buyer gets the deed at closing. But an average cash flow for us. I don't know exactly. I used to really keep up with it. I'd say a range would be from 250 to $800 a month. And somewhere in the middle there, four or five hundred dollars a month would be an average.

Right, but. But essentially though, the way that you have it structured is that that person living in that house owns that house. They're taking care of that house. So it's not like you're a landlord, Correct?

That's right. So the reason that we like notes, there's a lot of reasons, but namely two is we get out of vacancy and we get out of repair. So there's no tenants and toilets. We have an owner and if their H Vac goes out, then they're calling the H Vac man or woman. They're not calling us as the bank in this kind of position. So we are able to scale and have a lot more notes and manage notes in house a lot easier than we could. Rentals all over the place.

Scott Todd, why doesn't everyone do this? Why would the HGTV people go into fix and flipping if they could just do notes? This is so much simpler.

I don't think that they read that line in Rich Dad, Poor dad where he says be the bank, not the banker. Like that, that is of that whole book. Rich dad, Poor Dad. That is like the one line I remember. Like, like anything. Be the bank, not the banker. I don't know, man. Like, I think that people think that the note side is. Is boring. They just don't even think about. They see what's on HGTV and then they go execute. Or they try to. And the reality is like he's doing the same thing that we're doing with our notes, right? Like we're selling it on owner financing and reaping the yield. And that's where the money is. The money is not in the flipping of anything. I don't know. I want to be the Bank.

I want to be the bank. I mean, Brad, I love your model. It's very similar to our model. What I'd like to know is what sucks about it. Why isn't everyone doing it? If I go to a RIA meeting and there's 100 people in the room, 99 of them are flippers, landlords or wholesalers. Why aren't they the bank? Why aren't they no people?

I think that there's a few reasons for that. Number one, I think that the big push for newer investors has been wholesaling the past decade. And there's various people that. And it's not a terrible model. I don't think that there's a bad way to do a great deal, but I do think that there's better way than others to do a great deal. And so I'm not disparaging against wholesalers, but I don't like the wholesaling model. Because if you think about it, if someone is willing to sell to you at 60 cents on the dollar, then they're probably willing to finance you if you know how to ask for it and you understand deal structure to the context that you need to create financing. And so I think that that's one thing is that most of the information out there is the wholesale and the fix and flip model. I think, secondly, that people have the idea that have to have a lot of cash to get into the note business. And that's not exactly true. If you know how to negotiate deal structure. You can create equity instead of cash and then sell with owner financing. And I think that also a part of this is that people don't understand that those eight or 10 pieces of paper that's a note in deed of trust or note and mortgage is real. It doesn't feel real because you don't own anything that you can really go and look at besides your file cabinet. Right. And so I think for that reason it kind of scares people away.

So I'm just kind of curious. Okay, so, like, can you walk me through, like this deal, like the one that you did yesterday? You said you bought it for 50. Somebody that's lined up to put $20,000 down, or better yet, I don't know if you do or not, but you think theoretically you're going to get $20,000 on the deal down?

Correct.

With 30 in the bank or into the deal you're gonna sell for 150. Finance, you know, 130. In that case. All right, this house, the reason that you're getting it with that discount, I mean there's obviously some repairs that need to be done. Right. Like this house is not like turnkey ready to go, is it?

Well, it's rentable. I wouldn't say that. It's like it's not updated. You know, it needs updates. So it has the knotty pine walls and It's a brick 1960s ranch. So you know, it needs some updating. But I mean it's certainly fine. I mean there's nothing wrong with the house. I didn't see it's livable. It's not like, it's not like it's a good house.

Okay.

All right.

No, not at all. I mean, I have done deals with those before. We had one house where the roof leaked so bad that we had to put on our marketing. If it's raining today, then take your umbrella inside the house. And we actually sold that one with owner financing.

Yeah, and I think that's the key, right? That's the key is like you're selling it with owner financing.

But.

Okay, so like how are you getting your deal flow? Where are the deals coming from? Are they coming from bandit signs and that type of thing or like how.

Do you find these things? Yeah, well, when I started off in 2010, all I did was bandit signs and I found that in my markets at least that the signs work less effectively as they used to. Which I'd say that's probably true for all marketing mediums because the market was so bad in 2010. But now all of our lead flow, I can't say all 90% is from Google AdWords. And we just started a cold calling campaign across multiple states to contact pre foreclosures. So I'm really testing the cold calling to see how that's going to work. I don't know exactly yet, but it looks promising and I think it's going to be something that we're going to want to do long term. But yes, to answer the question, we have to do real marketing to create the lead flow that's necessary to buy these high equity deals. Alright.

And then are you sending somebody out to look at them because you're doing multi state, are you? You know, like if you're doing multi state, are you, I mean, I don't think you're going out looking at them. Do you have teams that people look at them?

Yeah. So my business hub is still Metro Nashville, so most of what we do is still within driving distance. But yeah, we've done deals In I think 16 states at this point. It looks like we're buying a house. A guy called me yesterday, and it's just south of Sacramento, California, and it looks like a promising deal, a deal that we would do. And so we're kind of all over the place. So to answer the question, yes, we have to have a real idea of value and a real idea of condition, and so we're going to lean on local professionals to give us that information.

Gotcha. Gotcha.

Okay. All right.

And so then you're not selling with a realtor, then, like, you're just doing your ads to find your buyer.

Correct. So when we're selling with owner financing, which, again, is roughly 70% of my business, then we're going to handle the sale ourself. We don't list with a realtor. We don't find that it's necessary. Although I do think it would be easier sometimes because we've got, like, we can buy still more houses than we can really effectively manage the sale of, which is kind of funny because we've been in a seller's market for a long time, but we can still buy more equity than we can get rid of, you know, which is a great position to be in. But, you know, most of the time, we're selling the property ourself.

Yeah. I mean, that sounds like exactly kind of what we're doing.

Right.

You know, obviously, it's a different approach because we're doing direct mail, but, I mean, like, that's the same problem we have. Like, I can buy more. I can buy, like, unlimited land.

Yeah.

And sellers are there, but, like, it's so easy to accumulate this stuff that, you know, like, you're gonna sell and.

You have to have, like, a full.

Court press to sell, and you can do it. The problem is, is that I think you can find the land easier, or in Brad's case, the house is easier than you can sometimes find the sellers. That's amazing.

Yeah. I mean, the buyer pool for owner financing is vast. And I don't remember the exact statistics, but I think it was January, somewhere around 31% of mortgage applications were denied. When you think about that, that's roughly a third of the mortgage applications. So if we think about today's market, that for every two houses that are, another house could have been sold had they been able to get the money. And that's a big market, and there's not many of us playing in it.

Yeah. That's huge. That's huge, Mark.

Yeah. I love it. I know, I know. I'm getting shiny object syndrome, but, you know, there Are the legal issues that, you know, land is exempt because we're not dealing with a tenant. So do you have to deal with Dodd Frank, RESPA and the SAFE Act?

Yeah, I mean, Dodd Frank is something that we have to consider. And so the short answer on that, for those that don't know Dodd bank is a banking regulatory act and part of which was putting the clamp down on owner financing. So we have a limited amount of transactions that we can do per individual without a residential mortgage loan officer approving the transaction. But the short answer is if the Dodd Frank act is a concern, is to not originate. So what we do in a three of our transactions is we're having our seller before we close. We're going to put our buyer in place and our seller is originating the loan. And so the only place that we show up is in an assignment of note or deed note, deed of trust or mortgage. Ah.

That'S slick.

That's slick.

Like that skirting of it, isn't it?

Yeah. And so it's like, well, we don't originate, you know, and so that there's no issue. The second reason that we want to do it that way is we're starting to put a lot of our notes into a Roth. And so, you know, self direct the Roth. Well, the seller originates this.

I lost you in a self directed Roth, Correct.

Yeah, we're putting it into a self directed Roth. And so with that, if the seller originates a loan, then my Roth can come in and buy that loan at closing. And so you think about what is the value of a second behind a first that we just pulled from foreclosure with a C or D paper borrower. Well, on the open market it's worth very little. So we're able to go in and buy for pennies on the dollar, these notes and throw it into a Roth, which is kind of my, my long term strategy.

Wow.

I loves it. I love it. Scott, the shiny object. Yeah.

Just thinking, well, I mean, you guys.

Could do that with, with the land. You know, you guys are creating notes on land. So I mean, just three it in the Roth.

Yeah. And like I'll buy, I'll buy land in my, in my qualified retirement plan. I'll do that and then sell it. So I'm doing kind of doing the same thing for us. I don't have to worry about the origination piece. So, you know, it's, it's a little bit easier, I think.

Right.

It's hard.

But you know, essentially it's just one less step.

Sure.

Right. Right now. What about foreclosure? I mean, I just, I imagine that hopefully it's a rare event. Like I know for us we have, because we use land contracts, it's not a big deal if someone defaults. But with a deed of trust, you would have to pay, you know, an attorney and the foreclosure fees and the time is that. What percent of that occurs, would you say?

And that's a great question and it's probably one thing that I missed on why people don't get involved in notes is they're scared of the foreclosure process. Well, depending on the state. You know, if you're in a mortgage state, then certainly the closure process is a longer process than an eviction. But indeed of trust states, which is most of where I play, it's really not that big of a deal. It's not that much difference. But all your paper. All is a big word. Let me back up. 90% of your paper is either going to default or pay off in five or six years. Okay, so. And I would say roughly 10% of your paper is going to default. I have yet to have a default happen where it wasn't to my financial benefit to take the house because we get real down payments and we service the loan pretty closely. But also, you know, we've been in a very appreciating market. And so we would basically recapture, you know, three or four or five years of appreciation at that point. Plus we got a 20 or 25k down payment on the front end. So it's just double dipping, you know, those kinds of transactions. I don't mind it from a financial perspective. I do mind it from an ethical perspective. I don't want to foreclose on anyone, certainly not a family. But at the same time, you know, we have agreements and if they don't pay, then I can't give them the house. And they understand that. And I've never had a super difficult situation with a seller. You know, if someone is getting, I say a seller, a borrower, if someone is getting behind on a payment, you know, we'll do an in house refinance, we'll put back payments on the back end of the loan to get people current if we think that they can at that point afford the loan. So, you know, if somebody loses a job or they get sick, then we're going to take those circumstances into consideration. But at the same time, we're running a business. And so there's kind of a gray area there and a fine line between being fair and being a pushover, I.

Would say, yeah, absolutely, absolutely. And I would, I'm wondering because, you know, a lot of times people ask me, well, what are the best places to go to buy raw land? And I'm always like, well, it's the southwest, northwest, California and Florida. Because nobody wakes up and thinks themselves, boy, I'd like to buy some raw land today in Minnesota. Unless you live in Minnesota. So are there certain states or counties or cities that you would say are ideal for this type of investing over others? Or is it, are you agnostic as far as, you know the areas? Are you just opportunistic?

Yeah, and I guess it's a really good question and I think it's a really deep answer that I could really go into. But the high points are, it depends. So of course I would think a little bit differently on a transaction in Flint, Michigan right now because they still, to my understanding, haven't dealt with the water problem. You know, but if a property is in a market of, you know, 15 or 20 plus thousand people, so we have to have population, I really don't want a transaction in the middle of Littleton, Kansas, if there is such a thing, where there's a population of 150 people. So like that's something that would kind of turn me off. As far as states. I mean, there are certain states that are a little bit more pro business than others. I know Washington state has some kind of weird laws about investors marketing to pre foreclosure people. I mean, my personal stance is that has to drive the foreclosure rate up because we buy a lot of houses and save a lot of people from foreclosure. But you know, I guess the short answer is it depends. There's not a deal that I not look at probably outside of Alaska, because we had one come in that was in Alaska and I was just like, I don't know anything about there. Like I've heard it stays dark there three months a year or something. It's like I just, I don't, I didn't want to take the time to learn about that market to kind of figure that one out.

Alright, great, great. And then as far as managing your notes, I assume you're using a note servicing company?

No, we manage in house.

You do manage in house?

We manage in house.

Do you collect automatically via ach?

We don't and I really should. And so basically I'm kind of old school on this and it's just by laziness. You know, when I started I had a program that amortizes everything out and bill statements and 1098s and all that. And so our payments are due on the 10th and the underlying payments are on the 15th. So we have kind of a five day grace period. There's to get the cash in, get it deposited, see who's going to pay or not, put some pressure on them and then the underlying payments are due on the 15th. And I mean we're pretty, I don't know, 19th century when it comes to our collection processes, I guess.

Man, if there was just some platform that would manage no payments, Mark, it'd.

Be amazing, wouldn't it? If there's just some way to automate that, do the amortization and have no note setup fees. I wish there was something out there.

Oh wait.

Today's podcast is sponsored by Geek Pay IO. It is the way to automate a one time, set it and forget it way to automate collecting your notes. If the ACH fails, you can have a credit card on file as a backup. You're definitely going to get paid with certainty. Your borrower can log in, they can make a prepayment at any time. It automates the notifications. It is going to save you so much time. And actually with a note servicing fee the way that we have a price because there's no note setup fees, it's actually a profit center and doesn't cost you anything. Check it out. Do the demo at GeekPay IO. Also, if you want to learn how to get to the next level in our business, you want to schedule a call with the Zen master Mike Zaino or Scott bossman@thelandgeek.com training. So Brad, how'd you like that little sold setup? Are you sold? Check it out. You'll love it. You'll love it. And I'm sure you have tons of notes. I think our the way that we do it is like a buck a note after 99 bucks after 99 notes.

So yeah, that's certainly agreeable.

It's super affordable. Anyways, back to you. Right. Okay, I want to do your model. What's the best way to get started?

You know, real estate is a super wide and a super deep knowledge base. So you have to know a lot about a lot of things. And so what I would say is this model begins the same way that almost every other model begins, which is through the marketing machine. So we have to have effective marketing to go out and capture motivated seller leads to where we can buy equity. The second thing that we have to understand is how to Negotiate from the front door to the contract in a way that's going to allow us to buy on terms. So I'm not a big fan of like, hey, let's pay all cash for houses in most circumstances and without some form of financing. So, you know, we buy subject to. We buy with true owner financing, usually at 0% rates because of our negotiation that we've kind of set up that structure. And then third, you have to have the deal structure in mind while you're going through that negotiation so that you can kind of pave the road for that seller, the direction that you want them to go. Right. A lot of it is really starts with the marketing. So if someone starts their marketing machine, they have a negotiation structure from front door to contract, and then they learn a lot about deal structure and how to negotiate it, then they can be successful in this.

Scott, Todd, you ready to partner on this?

Mark? I'm ready to roll, man. I'm, like, ready to, like, start cruising now. Could I buy this to a realtor or no? Like the realtors? The like. No.

It's tough to negotiate good deals with a third party. You know, I'm a firm believer that negotiation is best done in person. And it's really best to have a framework and a script whenever you do your negotiation. So when we have all of that that I've kind of come up with across the years, but going through realtors is really, really tough.

Gotcha. Okay. All right.

Yeah, you know what? Scott and I are kind of spoiled now. We're each working about two hours a week in our land business because. Automated. How many hours a week are you working in your note. Your land, not your house. Note business.

Yeah, and that's a great question. It's so funny because whenever you're in real estate, if you have your iPad and your iPhone, you're technically on call. So, I mean, I'm on call, like, all the time. But as far as the amount of work, I don't know, it becomes a gray area on what is work, because now I'll go to the Mexican restaurant for lunch and, you know, work a little bit. But I'm more just having good. A good time. If I had to guess, I'd say somewhere around 25 hours.

Okay.

All right.

Well, Brad, this has been really enlightening. I'm so glad that you came on to share your wisdom on this incredible model. But as you know, we're going to ask you for one last piece of wisdom. A website, a resource, a book, something actionable where the art of passive income listeners can go right now, improve their businesses, improve their lives. What have you got?

This is not exactly real estate related, but I've been reading 12 Rules for Life by Jordan Peterson, and I think it's just an amazing, amazing book. So, you know, if you're a business person or not, there's so much wisdom and insight in that book that that's where I'm sending people right now.

I love that book. That book is like a. Like a hard slap in the face every page. There's a lot of depth to that book. It is not the lightest read.

No, it's not. But I think will withstand the test of time. And there's so much media right now that doesn't.

Yeah, absolutely. That's a great tip, Scott. Todd, are you ready for your tip of the week?

How do I stand up against that one? That is a good book, by the way. All right, Mark, check out this Chrome plugin that I have, like, adopted and love. It's called Colorzilla Colorzilla. And you can, like, Google, like, Colorzilla.com, right? And what it does is basically Colorzilla Colorzilla.com and basically what it is is like, it goes. It's a Chrome plugin. It goes up there in your Chrome browser. And then whenever you want to know, like, what color something is on a website, like maybe you're trying to do some design or maybe you're trying to match colors or something, you just go and you take the eyedropper, you drop it on the color thing, and then what it does is it takes that color and saves it to your clipboard. You just copy it to your clipboard and then, boom, you're off to the races. And you have all the hex colors that you want. So all of our designers will like that.

I like it. Eric Peterson right now is smiling.

Maybe, Maybe. He probably already knows about it, though.

I know he's probably. Maybe he's rolling his eyes right now. Like, really?

Yeah.

Color zone. That's so 2012.

I like it.

I just found it. I like it.

Yeah, I think it's cool, though. I've never heard of it, so. Very good. Well, my tip of the week. Learn more about Brad and his incredible model@brad smotherman.com. and if you can't spell Smotherman, don't worry about it because we're gonna have a link to the page, so learn more. Brad smotherman.com and Brad, are we good?

Yeah. I mean, that was fantastic. You guys can also find me on investor creator podcast with Brad, go through notes and financing and all kinds of fun stuff that my wife doesn't want to hear about anymore. So you're doing her a favor by not shutting me down. You know, you guys keep listening, I'll keep talking, and she won't have to hear it.

That's how my wife feels, I think, and Mark's wife, too. Like, we just might need to, like, get on this call more often, just talk, because, well, it's such a fun.

Business, you know, and it's a great thing to enjoy what you do. So, I mean, I. I love it.

Yeah, I love it. It's not work, is it?

No, I have a tough time answering that question. It's like, I don't really know.

Right. It's like the fine work. Yeah. Scott. Todd, are we good?

We're good, Mark.

Well, I want to thank all the listeners. And if you're getting value out of these podcasts, do me a favor. Put it on social media, send it to a friend. But the most important thing you can do to really help us out is three little things. You got to subscribe, you got a rate, you got to review the podcast. Send us a screenshot of that review to support the landgeek.com we're gonna send you for free the $97 passive income launch kit for free. So please do that. All right, Scott, are you ready?

Ready, Mark? Ready. One, two, three. Let freedom ring, ring.

Brad's, like, rolling his eyes, like, really, guys?

Boy, we did really, really good at the last boot camp, though. That's all I gotta say.

It's way better live. That's awesome.

It is way better live.

I like when we're not live that we do it every other word.

Yeah, I think so, too. Yeah, we'll change it up next time.

Right, Because Brad won't come back again.

We'll get him back.

We'll get him back. No, I'm happy to come back. Absolutely.

All right, awesome. Well, thanks, everyone, and we'll see everyone next time.