Private Money: Change Your Business Today With David Dodge

Episode 348: Private Money: Change Your Business Today With David Dodge

 

In an industry where you have so many things going on, anything that affords convenience is a must-have. Making things easy by trading convenience for a discount is the owner of Discount Property Investor and House Sold Easy, David Dodge. In this episode, David talks with us about all things private money—from raising and using private money to finding it. He covers the private lender scope here, sharing the basics you need to know by way of telling us his story of stumbling in this space and growing a business. David offers great insights into the importance of building credibility and trust, as well as providing convenience with the people around you. Tune in to hear more stories from David’s extensive experience in the field to learn about what to expect and more.

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I have David Dodge on. We had him one time a while back, so be sure to check out our other episode. We got along together so well I invited him down to San Antonio which he was there in no seconds flat. We went out to the ranch and we had a good time. We shot at some hogs and got to know each other and had a blast. I recognize there’s another topic that we can talk about and it’s raising private money or using private money or how to find private money. We’re going to cover the private lender scope here. David, how are you doing?

I’m doing great, Mitch. Thanks for having me.

You were down in San Antonio with the mastermind and you invited me for a day at the mastermind. I went to the mastermind and they were very gracious and nice people. They allowed me to sit in as an outsider and got to shoot the ball with them and run some things back and forth. It was a great time. This guy’s a real doer. He does about 100 houses a year, about the same as my organization. He does buy and hold. He does wholesales. You said you do about 33, 33, 33. What were the categories?

I do about a third, a third, a third. I do a third wholesale, a third rental properties and then a third fix and flip. No matter what, everything is bought at a discount and we buy everything with private lender funds. We’re borrowing from private lenders. No matter what the exit strategy is, we’re always paying cash. The reason is because all we are doing as real estate investors is we’re trading convenience for a discount. That’s all it comes down to. No matter what happens after you purchase the property, if you decide to wholesale that property, to keep it as a rental property, to fix and flip it or in your case, if you owner finance it, none of that matters if you’re not buying it at a discount.

One of the best ways that we’re able to buy at a discount is to provide cash. What does that mean? It’s convenience. We’re providing convenience. We’re coming in and we’re saying, “We don’t need to have a month or 2 or 3 of inspections, appraisals and all that stuff.” Typically, we do have an inspection period. I don’t want to mislead your audience here. We definitely have an inspection period, but that period is anywhere between 3 and 10 days. We provide cash. We buy as is and we make it easy. A lot of times people will have properties that they’re embarrassed to show or they had their hoarders or they don’t want to make repairs. Our model is we come in and we make it easy. You can leave all this stuff behind Mr. and Mrs. Seller. You don’t need to fix that sink that’s leaking. You don’t need to do anything. We are going to basically provide cash and another way to look at is convenience to the seller by making it easy, simple and quick. In return, all that we ask for is a discount.

We call them situational properties. We either deal with situational properties or people in situations. How do you buy so many houses? It’s a booming market. What’s the population where you are doing business?

The population where I’m doing business is we have about two million people.

That’s what I have. Among the two million people, there’s someone dying, divorcing, getting ill and driving off. There are a million reasons, but the long and short of it is we live where the change is. There’s always change where there’s death and illness whether we like it or not. We didn’t cause it. It’s going to happen and someone’s got to deal with that change. We’re there to help people transition. Give them at least 1 or 2 options that we can do for them. There are other options too and we find enough people on an annual basis that likes the option that we offer best.

That’s exactly right, Mitch. You nailed it.

It’s a numbers game. You’re not going to get everyone out there. The reason why I want to talk to Dave is I wanted to hone in on this private money and how important it is. I have a course that’s called Private Money Changes Everything. I have $22 million worth of private money. That didn’t happen overnight. I didn’t meet a rich person with $1 billion who saddled up with me and said, “I’m in.” I didn’t get lucky. I honed this $22 million over many years. The hardest person to get was the first one and then the second one was a little easier. The third one was a little easier and then pretty soon, they all became no issue because I had a long track record of paying people on time. How important is that, Dave?

In all businesses, you have ups and downs and paying people on time consistently is the most important.

Whether you’re up or down, you need to pay on time.

That’s what I was getting to. It doesn’t matter if you are doing awesome in your business or if the walls are caving in, your number one priority is to make sure that the private lenders get their monthly payments and/or that you are protecting their capital.

You’ve got to protect their interests, make sure their paperwork gets filed. If you tell them they’re going to have a first lien, make sure they get the first lien and make sure it happens within a day or two if not that day, if you can. The biggest anxiety especially for a new lender is always between when he let go of his money and he sees those papers filed at the courthouse. You want to limit that as much as you can. There’s a lot of people out there and it’s costing them a fortune because they don’t readily have the money available. They don’t know that they have money behind them backing them up. I know when you know. We’ll go out and make an offer on a hotel that’s early in our career might’ve been way over our head or it might still be way over our head now, but we’re not worried about that. Because we know good deals bring money and we know where to find it and we have this confidence. Let’s start out with the new guy who doesn’t have any private lenders and he wants to conquer that fear. First of all, let’s start off with, what does a private lender look like? What’s the typical private lender that loans you money? Who is he or she?

The typical private lender that we work with, some of them are also in the real estate industry. Meaning that they have rental properties or that they flip houses and some of them are not. For me personally, the majority of my lenders are. It doesn’t mean that they have to be. The reason that the majority of my lenders are is that I met these lenders at real estate investment clubs, at REIAs. If I was searching for private lenders outside of REIAs, then it would make sense that they probably aren’t in real estate. The people that I’ve sought out, I met them at real estate clubs and they also have rental properties. They also do fix and flips and typically the investors that I work with, they’re older. They don’t want to work 50, 60 hours a week where I enjoy working. I’m usually putting in that amount of time. They know that their investment with me is secured by a piece of real estate. They also know that I’m buying everything at a discount. If you’re not buying at a discount, it makes it very difficult to make money in real estate.

In all businesses, you have ups and downs and paying people on time consistently is the most important. Click To Tweet

It makes it very difficult to borrow the money because no one wants to loan.

We’re buying everything at a discount to provide convenience and the property that we are buying is backed by real estate. We have a note and deed of trust. They know that if I screw up, which I have never done to date and hopefully I never do, but if I do, they don’t have to come and try to search me down and make a big scene. They foreclose on the property and they have that property.

Let’s talk about that. I have the same policy. I give my private lenders the first lien but I have this big fear. My fear was that I would fail them. What happens if I fail them? I would rather die than fail my private lender. The truth of the matter is what I was worried about was catastrophic. If something catastrophic happens in my area or to the nation. I was still worried about that because I can promise these people everything I want to promise them, but if something goes bad, I could go under.

For example, Kim Jong Dumbass drops a dirty bomb in Downtown San Antonio and pollutes a twenty-mile radius of property with radiation. That’s not my fault. There’s nothing I did. If I said I’m going to promise to pay you, then I would still feel horrible because I had promised. I didn’t make any exceptions. What I basically did was in order to get over that, I have this theory, “When you’re afraid of something, go right to it. If you’re showing a house and there’s an ugly part, go to it first. Put it right out.

That’s a great strategy.

If you’re afraid of this one aspect of the real estate business, if you’re afraid of contracts, then don’t do anything else until you whip that altogether. Get with someone and have him coach you. Pay him and go over the contracts a hundred times until you are like, “I don’t even know what I was afraid of anymore.” I was afraid of this so what I did was I proposed a way that I want to borrow money that eliminated my fear, which was this is how I loan money to my people. I’m going to give you the first lien and you either going to get paid or you’re going to get to my house. I have two rights every day of my life. I have the right to pay you as agreed, whatever the interest rate, whatever the term or have the right to walk you down this deed. Those are my two choices every day. If you don’t like this house that I’m pledging or this piece of property that I’m pledging as your collateral because it’s a collateral only loan, it’s a nonrecourse loan. It’s either get paid or get this house. If you don’t like this property, don’t do this deal.

Here’s the thing I promised. If I’m alive, you will never have to foreclose on me and chase me. If I can’t pay you, I will come to you with the deed to your house, which is part of my commitment. If I can’t pay you which never happened. It hadn’t happened to me in 22,000 plus houses since 1996. It never happened. I don’t think it’s ever going to happen, but I’m saying, that’s my two rights. Unless I’m dead, I can always perform one of those two things. There’s no way I’m not keeping my word. My word is going to be good from now until I’m dead and even beyond when I’m dead because my office and my partners all have the same culture. We’ve been doing this for many years.

If we can’t pay, you won’t be chasing us for it. The other thing is those people that that don’t pay but collect the money anyways, they’re collecting but they’re not paying out. Those people need to be hung, in my opinion. That’s what the old West. You put them on a horse, put them under a tree and put a rope around their neck. That’s BS. If you get paid, you got money to pay. If you don’t get paid, I understand. You can call them up sand day, “Do you want to give me a few months or do you want me to walk this deed over to your house?” Be honest and tell people what you do. That’s how I learned how to sleep at night was take what scared me and get it off the table. If you don’t want to do it, don’t do it. If you do want to do it, it’s good. I have $22 million worth of debt. A lot of people are like, “Aren’t you scared of debt?” I go, “No, I’m not scared of debt. I need $44 million worth of debt.” Let’s talk about the first person that ever loaned your private money. How did it go down? Tell us the story?

It was my grandparents. That was back in 2006. This is before I knew anything about buying at a discount. I was in college and I’m sure all of your audiences are familiar with house hacking and that’s what I did in college. I bought a four-bedroom house.

What is house hacking?

Have you heard of house hacking?

No.

House hacking is very simple and all that it means is that you are going to buy a property and it can be a single-family home. It can be a duplex, it could be a quad. Essentially you’re going to live in this property, but what you’re going to do is you’re going to rent out the other rooms. This strategy is probably not a good strategy for somebody that’s got a family or children.

You’re a college student and you wanted it for free.

If you’re a college student, this is a great strategy for you. I highly recommend it. I did it two and a half times while I was in college. What I did is I went and I found a four-bedroom house. Again, I didn’t know anything about buying a discount. I hired a real estate agent. I said I want to buy a four-bedroom house. I paid retail value for that and I’ll never ever do that again, but I didn’t know. I was in college. I was 22 years old and I went and I got a real estate agent and now, we are partners on a whole bunch of units. We have about 10 to 15 units together as well. At the time, I didn’t know him that well. He was an agent and he said, “Dave, I can help you find a house.” We went out and we found a four-bedroom house. I paid $165,000 for that house. I still own that house. It was the very first one I bought. I only owe about $50,000 on it at this point.

 

What’s it worth?

It’s worth about $220,000 to $230,000 right now.

You bought it for $60,000 or $70,000 or $80,000 or whatever.

I bought it for $160,000 and it hasn’t appreciated all that much.

Between the debt reduction and the appreciation, you’ve got a big gap.

I’ve got a lot of equity in there. I bought it for $165,000 and it was just me. I had a girlfriend, but she was in a sorority at the time. She wasn’t living with me. It was me and my dog and I have a four-bedroom house. What I did is I reached out to all my friends. I said, “I got this four-bedroom house. It’s going to be awesome. Screw living in a dorm. If you’re in a fraternity, that’s one thing but if you’re not, come hang out with me. I will rent these bedrooms out at $500 a bedroom and I had three extra bedrooms, four total. I lived in one that brings three down. I rented out the other three-bedrooms and I was bringing in $1,500 a month from those three-bedrooms. The mortgage on that property and I’m going to guess here, but I think it was about $1,200. I refinanced it since so it’s changed, but at the time it was about $1,200. I was bringing in $1,500 and $300 isn’t a ton of money to be bringing in. However, not only was I bringing in $300 in cashflow or net income, but I was living for free. I digressed there, but essentially when I bought that property, it was $165,000. I’m going to get my calculator out here.

I bought it for $165,000. I got an 80% loan, $165,000 times 0.8 is $132,000 and $132,000 minus $165,000 was $33,000. I borrowed $33,000 from my grandparents and they were cool about lending it to me because they knew that if I screwed up, that we could sell this house and that they would get the majority of it back, but I didn’t ever screw them. They are my grandparents and lenders. What I did was I paid them all the cashflow plus about maybe anywhere between a third and a half of all the money I was making at my little side jobs in college. It probably took me about four years to pay that $33,000 back. My grandparents weren’t in a hurry to get it back. I was paying them a low interest rate. I think I was paying them 5%. At the end of the day, they probably would have gifted it to me but I wasn’t looking for that. I wanted to pay them back and the reason is that I wanted to do this again and again.

That’s exactly what happened to me. My dad loaned me $35,000. I wasn’t even looking for a loan. He said, “I want to give you and your brother $35,000 apiece to start your livelihood, but it’s your time now. When do you want your 35,000?” I said, “I don’t want it. I’ll borrow it. I’ll pay you back at 10% and if I can’t borrow it and pay you back at 10%, then I don’t deserve your money.” I know how much money my dad had. He didn’t have a lot, but he had a lot more than $35,000 and I wanted to be able to help him and help myself with all of it. You were doing the same thing. You were looking at him, “Don’t give me crap. Go into business with me and loan me everything.”

That’s what I did. I got that $33,000. I borrowed it and then I had to put it down on the property. The bank gave me an 80% loan. The mortgage payment was only about $1,200 and I was bringing in about $1,500. At the end of the day, I was living for free. It was basically covering all of my living expenses. I was making about $300 in cashflow, which I would send to my grandparents every month plus at an additional anywhere between an additional $250 and $700. It was roughly a third to a half of what I was making at my little side jobs. In college, everyone’s got random jobs, delivering pizzas, working at sandwich shops or whatever it might be. I worked at a commercial real estate firm as an intern making $5 or $6 an hour. I wasn’t making a ton of money, but I was some money. I was taking that money and I was paying back that debt. This is a little different than most people. Most people will make those interest payments whereas my loan to my grandparents, I was paying principal and interest. I was trying to pay that $33,000 off plus the interest.

If you’re like me, that first debt scared the hell out of you.

Absolutely and I was taking on double shifts over the weekend. My grandparents were great people and they were trying to help me out. To me it was like, “I’m going to do this ten more times. If I don’t pay them back, then they’re not going to have trust in me. After about the first year, I had probably paid back anywhere between $7,000 and $10,000 and that $33,000 and I wanted to do it again. Even though I hadn’t completely paid back that entire sum, I was making payments. I was making them on time and I was paying not only the principal but the interest and I wanted to do it again. I found another house in the neighborhood. This time it was a three-bedroom house, but I got a much better deal on it. Instead of $165,000, I think I paid $125,000 for it. What I did was I moved into that property because again I wanted these loans. I wanted to get a good rate. I went in to get a primary residence type of loan.

What I did was after I had established that first loan and I had those three roommates, I said, “If you want to stay, great. If you don’t, I’m going to find other people.” Essentially what I did is I moved into this new one and now I had four people living in this one paying $500 a month and my cashflow went up because instead of me only making $300 a month from the $1,200 to $1,500, now I’m making $800 because I was going from $1,200 a month in mortgage to $2,000 so $500 times four is $2,000 and now I was making pretty decent cashflow on this property. I did it again. I went and I got another loan from them. I bought a three-bedroom this time and I rented out two of those bedrooms. I did this three times or I want to say two and a half because the third one I bought, I didn’t move into. I bought it and I rented it out. It was the exact same scenario where I didn’t know about buying at a discount. I didn’t know about motivated sellers. I was buying market rate retail costs using an agent, but it was okay. It’s still worked out and I still own two of those three. I sold off one of them and they do great for me. They cashflow awesome.

That strategy leasing to students around the colleges is a huge strategy. If you are interested in that strategy, go to my interview with Dixie Decker. She is knocking the bottom of that thing. She’s got it all figured out, how to get the parents on the hook and everything. I’m not downplaying you, but your system at that time was probably a little light.

You’re not offending me at all.

Not buying at a discount makes it very difficult to make money in real estate. Click To Tweet

She’s written out all around the campus and she’s experienced all the problems and then plugged up all the holes in the bucket. Because if you’re like me, ready, aim, fire, your paperwork was light, everything was light.

I’m more of a ready fire, aim guy, but it worked out well, but that’s house hacking. All that means is that you buy a property, you move into it and you rent out the additional rooms. A lot of people do this here in my local market with duplexes. They’ll move into duplexes that have got two beds and one bath but two units. They and their spouse or they by themselves will live in one of those units and they’ll rent out the other one. Essentially what the goal there is to live for little to no money, basically live for free or in some scenarios, maybe you have to pay a little bit towards the mortgage. Instead of you making the entire $800 or $1,200 mortgage payment, you’re only paying $200 towards it. It’s a slow game. We all know that, but it’s a way to acquire wealth, reduce your costs and have a place to live that you could also rent out at the same time.

The point was you got your first money from your grandparents and then how are you able to buy the other two houses? Did they do it again with you?

They did it again with me.

Because you paid down rapidly and you didn’t mess around and you were trying to make a point and you did make a point. That’s what I’m getting to. My first was my dad, but then do you remember the first person you borrowed money from that wasn’t your family member?

I do and now he’s one of my business partners, which is cool. After college, I did that two-and-a-half times or three times. I essentially bought three properties. After college, I went and took a couple of different jobs doing sales and marketing. Again, I still didn’t know about buying at a discount. I didn’t know about motivated sellers. I ended up buying about five more houses over the next five to six years. I said, “I’m going to do real estate full-time,” and that’s when I learned about buying at a discount. I decided to quit my job and I went in full throttle. I didn’t have a plan B. I said, “I’m going to make this work. I don’t want to have a plan B because if you have a plan B, typically you’re not going to have as much trust in yourself.”

You burned your boats.

I burned my boats and what I started doing was I started buying courses and reading books and I probably read a hundred real estate books over that three to the four-month period after I quit my job. I learned about wholesaling. I hired a local coach to get my feet wet. When you’re wholesaling a property, you don’t have to have money. You are the cash buyer, but it’s contingent upon your partners’ approval, which could be your cash buyers. It could be anybody and everybody, but once you want to start buying rentals or do flips, you need to be able to close on those properties. I was going to a lot of different real estate clubs around town and I was meeting other investors. I was meeting a lot of people that wanted to partner with me. They liked my energy. They knew that I was committed. They knew that I was going to come across good deals.

Some of them wanted to buy those deals from me but some of those people wanted to partner with me on deals. The first private money that I got outside of the family was not even people lending money to me. It was, “Let’s partner on a flip.” I didn’t have any money, but they did and I have the deal. What I did was I go find the deal and then they would purchase the property and then either me and them together would work on the rehab or in some scenarios they would do all of the work but I would have the deal. The splits would be anywhere from 80/20 to 50/50 depending on how much money and/or effort that was required. I did five or six deals that way where we would flip those properties. They would have 100% of their money invested in the purchase and the rehab and then we would go out and sell those properties and I would make a little percent. After we did that five or six times, I realized that I could make more money than if I didn’t partner with them if I borrowed the money from them and paid them an interest rate. Some of the guys wanted to keep partnering with me.

The most expensive money you’ll ever have is a 50/50 partner.

It’s the most money you can have.

There are a lot of synergies there though. If you get with the right partner, if you’re doing 50/50 and the money guy is just a money guy like he’s a doctor and he’s not going to put anything he has. He doesn’t even know about the business, that’s expensive hard money because you’re getting the money and you’re giving up 50% of your profit. While we’ve all done it and it’s okay to do for a while, you start to figure out, “I would be much better off if I’m going to have a partner that he be sharper than me. More connected to me, be longer in the business and have more expense with me and I’ll split with that guy for 50/50 because I’m going to get some education out of it plus I’m going to get the money.”

That’s the thing, Mitch. You nailed it. Looking back in hindsight, I don’t have any regrets about anything I’ve done in real estate. In terms of buying or borrowing or partnering with people because all along the way I learned valuable lessons and I made a lot of great friends. Some of these people I’m partnered with now.

You get some confidence and I don’t believe in meeting and running off from a relationship, but relationships have a way to have their opportunities to part or they want to slow down. There are lots of times. If you sit back, don’t get in a hurry to be your own guy but the time and the opportunity come up. You go out and you start borrowing money at 8%, 9%, 10% or 12% and it’s a lot cheaper than 50%.

I house hacked in the very beginning. I started joint venturing, 50/50 partners or in some scenarios the ratio might be a little different, but essentially it was a 50/50 partner where I’d go find the deal and they wanted to do the fix and flip. I got a little wiser and I said, “I’d rather borrow this money from these people because I’m giving up 50% whereas I could maybe borrow this money at 8% or 10% or even 12% and it would be a lot more profitable to me. I started doing that where I was buying properties and fixing them up and flipping those and paying the interest. It snowballed since then. We have about probably had five or six different private lenders that we can pick from.

What are your rates?

Ours is a little different because we’re not borrowing money long-term. I know whenever you do a lot of years with the owner financing, you’re borrowing in five years and it varies.

It’s got to be wrappable because I’ve got to be able to sell the house.

Whereas we borrow, we’re typically looking for a six-month loan. However, we always ask for a year even though our goal is six months. I don’t want to have to go back and renew or disappoint somebody. I always say, “The goal is to get the money back in four to six months, but I’m going to borrow it for a year because I don’t want to have to redo this paperwork or get late and disappoint you.” There have been some scenarios where it’s taken me eight or nine months and it’s been good to know that I have positioned myself from the beginning asking for a year, even though I said, “We’re going to try to get this back and four to six.” All the loans that we have are one-year loans and they’re interest-only loans. We actually give our lenders a choice. We paid 10% or 12% and we let the lender pick. What we do is we say, “We’ll give you a 10% or we’ll give you a 12% but there’s going to be some terms on both of these and that’s why there is going to be a difference. If you want 10% no problem, I’ll pay your monthly payments each month until I can get the initial principal back or I’ll pay you 12% but it’s 100% in arrears. There are no payments.

You can pay off the principal of your loan plus you get paid the 12% for how many days you had in that.

Most of our lenders will lend 100% of the purchase and 100% of the rehab. Some of our lenders will do 100% of the purchase and then maybe half the rehab or some of them will do 100% of the purchase and none of the rehabs. It depends on what the deal looks depending on who we’re going to be reaching out to get that money from. As you build experience and this isn’t just me, this is anybody and everybody that’s reading. As you build experience, credibility and trust with these private lenders, they are going to give you better terms. I’m not saying a better rate, but they’re going to give you more money. In the beginning, I may have only got 100% of the purchase price and none of the rehab, which is okay. I had some money from wholesaling or rental cashflow that I could use to do that or a 0% credit card.

As you build credibility, experience and trust with these people, they want to make it easier for you and they want to deploy more capital to get more of a return on their money. We’re at the point now where again, we’ve built the credibility and the trust with these people. We’ll typically get 100% of the purchase and anywhere between 75% and 100% of the rehab as well. It makes it easy for us because again, we can provide that convenience to our sellers. No matter what, we’re not going to buy it if we can’t get a discount. That goes without saying. I don’t buy properties if I can’t get a discount no matter what.

If I can get a discount on those properties and I can provide convenience to those sellers, then we need to be able to close those properties fast. That’s where the private lenders come in. Having the ability to pay cash is huge and there’s been a lot of times where I’ve even won deals where my offer was less. I’m talking 15%, 20% less than somebody else might’ve been offering, but I can close next Tuesday and they might not be able to close for 45 to 60 days. Having the ability to buy with cash and provide that convenience, I’m talking true convenience to that motivated seller, to that property owner, that helps a ton. Having private lenders has changed our business and made it a whole lot easier, not only to grow the business, but also to get better deals too. There are a lot of advantages all the way around.

I want to thank you for pointing out this difference. I need $22 million because I’m getting money. I sell my houses on 30-year fixed mortgages so I have to have longer term money. When I get $1 million in one place and I go ahead and buy my houses, I need to have that money for a much longer period of time. It doesn’t come right back. When you’re flipping or wholesaling or fix and flipping, you don’t need $22 million because it’s going out, but it’s coming back in a relatively short amount of time. Sometimes in weeks or days if you’re wholesaling. It is going out but it is coming back. I do like the idea of even your wholesalers because there are ways to wholesale. We don’t need any money, but the pressure of that is big.

Also you can ruin your reputation because when you bet on time, “I have 30 days to close and I don’t have any money.” If I don’t flip this contract in 30 days or however many days you were given, then you’ve got egg on your face with your seller. It’s bad juju. What I like about having private money is that you can close on deals. Even if you think you’re going to do them quickly or there, you can close on them, you can slow down, you can take a breath. I know wholesalers that have to keep dealing with the same cheapskates all the time because they can’t take a chance on a guy they never met because, “What if he doesn’t perform? I’m going to lose everything. I’m going to lose my deal.”

Having him go ahead and fund it, slow down, calm down and take your time. I know your contract runs out in ten more days. It doesn’t matter if you go ahead and buy it. You can take another 30 days and find a buyer that’s willing to pay twice as much profit than another person. Private money looks like it costs you money, but it probably makes you money because you can calm down and take your time. You can even go in and fix a couple of major things if that’s what’s holding up this sale because now you’re own it and you can find the right guy. You can take a chance on a wild horse that’s coming down the road.

You can take a chance on him and if he flips out, there is no big deal. I still own the house. It cost me a couple of days of interest, but it’s no big deal. I’ll go call my tried and true guys tomorrow and I’ll get it done. What did I think a lot of wholesalers are doing that right now? It’s called the greater fool theory. They’re got their go-to guys that they can do a true wholesale price, but they’re trying to find these people coming from places like California and China and wherever that thing, $100,000 house when we all know it’s a $60,000 house. They’re selling these people these houses at incredible prices. I’ll give you a house hack for you.

I had a couple of problem houses that were sitting in the back burner. I was ignoring them because I already tried to sell them and it wasn’t working out through a couple of circumstances. I was upside down on these houses. Through a different chain of events, I was at an auction and I saw a couple of people buy some houses on some streets that I knew very well and I knew that I knew more or less where that house was and on what block and I couldn’t believe what they paid for those houses. I went and talked to them. I said, “How’d you buy that house?” The one guy wouldn’t talk to me. The other lady said, “We’re from California and my husband said we had so much to spend on houses and this was in my budget.”

They were buying based on what’s in the budget.

As you build experience, credibility and trust with private lenders, they are going to give you better terms. Click To Tweet

She never did a comp on it. She didn’t do anything. She’s like, “He wants to buy ten houses with $100,000 more or less. This one was $100,000 more or less if you bought it. I thought, “I got to get my two houses down here.” I foreclosed on myself, which means if the auction was on Tuesday, I can foreclose on myself and call the trustee. I don’t even have to do any paperwork because the only person that could protest the foreclosure is the guy that’s getting foreclosed on and it was me. I got to the auction in a few days and I sold those houses for about $5,000 profit when I was going to have a loss and another one for $7,000 profit when I thought I was going to have a loss and I had money in three days.

If you got upside down house and you don’t have anything else better to do and you’ve run out of ideas, take it to the auction and watch what happens. I didn’t foreclose on myself. I put it into an entity so that Mitch Stephen wouldn’t have a foreclosure on his name, even though it probably wouldn’t matter. It wouldn’t show up anywhere. I value my name a lot and I’m not going to put one on me. I had it in a land trust and I foreclosed on the land trust. I foreclosed on myself. I got rid of my houses. I had my cash in three days and I actually made money when I thought I was going to lose money because there was a bunch of fools down there right now.

What we’re doing now mostly with our private funds and again, I know your model’s a lot different than ours because you’re doing the long-term owner finance. I’m looking to start doing some of that myself, but as of now, I’m not yet. What we are using our private funds for a lot right now is the BRRRR strategy and it’s helping us acquire a lot of rental properties. Yes, we borrow for our fix and flips, but what we’ve been doing more and more of is we’re buying rental properties. We’re still using those private lenders. We are borrowing 100% of the purchase and 100% of the rehab. We’re getting a good deal on these because we’re offering convenience and we’re getting a discount. What we’re doing is we’re going in and we’re spending anywhere between, typically the minimum is about $15,000 of repairs and there’s a reason for that.

We’re typically doing a minimum of $15,000, in some scenarios $20,000 to $25,000 worth of repairs, but then what we do is we go to our bankers and we get that property appraised once it is purchased, rehabbed and rented. We now have a tenant in there paying us and we go to our bankers and they are giving us loans based upon either 70%, 75% or in some cases even 80% of what it appraises for. Why would I say that I need to spend at least $15,000? There’s a big difference between getting a loan based upon a percentage of the appraisal or getting a loan based upon the percentage of what you purchased and spent. If I can add enough value to these properties, I can essentially get these properties for nothing in the end.

I’m going to venture to say you might even be cashing out sometimes.

Yes. We don’t typically like to walk with money. We would rather have less debt service, but there are scenarios where we’ll walk with two or three. We just did one.

If you stole a house for $10,000 for some reason and it was worth $100,000 and you had $30,000 into it, you’re still going to borrow $60,000 to $70,000. You don’t want it to overlap.

We did one where it was a duplex. We bought this house with private funds about six months ago. The property needed a full rehab. We probably spent maybe around $40,000, $20,000 a unit rehabbing it. Each unit rents for $900, so that’s $1,800 total income off the property. The property appraised for a lot more than what we were into it four. We got a 75% loan and we actually walked with about $2,000. It wasn’t a ton of money, but we were able to pay back all the private lenders’ money. Not only the principal, but all the interest too. That private lender is ecstatic with me. They’re like, “This is great. Go find another property. I don’t want this money in my checking account. I want to give it back to you so I can get this interest again.”

We were able to buy the money with private funds, rehab it, get it rented and then we got a loan based on the appraisal. Why is it important to be able to get these loans based on the appraisal versus the purchase and rehab? Because no matter what, if you are getting a loan based upon a percentage of your purchase and rehab, you’re going to be leaving money in that deal. I don’t care what the numbers are because you’re only going to be able to get 75% of a loan on what you spent.

You’re leaving money in it no matter what. 75% or something, you’re still leaving in.

What we did is we went to our bankers and hopefully this is a good nugget for the readers. We went to our bankers and we said, “We’ve been hearing about people getting loans based on the appraisal and not necessarily caring so much about what’s presented over a spreadsheet, what I bought it and what I spent on it. What do we need to do as real estate investors to be able to get these loans based on the appraisal and for you as the bankers, to not care so much about what we bought it for because we’re always getting that discount and what we spent.”

My banker came back to me and he said, “There are typically two or three things that are going to make or they’re going to allow us to lend on the appraised amount and not the purchase plus rehab. Those things are experience. You got to have experience. If this is your first property, I’m not saying that you can’t do it, but most bankers aren’t going to want you to do it. They’re going to want you to have some skin in the game. Once you have some experience in some flips or some of those under your belt, that’s one way to go about doing it.”

The second way is that an order for them and their own regulations with the government and whoever else is regulating these banks. In order for them to do that, they need you to spend or at least for me and my market, at least $15,000 updating, renovating, rehabbing or whatever you want to call it, these properties. If we spend at least $15,000, they give us what’s called the entrepreneurial credit. Don’t quote me on that because every bank may have a different term for it. Every market may have a different term for it, but my bankers, they refer to it as an entrepreneurial credit. If they can say, “Dave, we don’t care what you bought this property for anymore. That’s your business,” which is awesome because in the beginning I had to provide them a HUD plus a spreadsheet with receipts for all the costs.

As long as I spend at least $15,000 on the rehab, which is very easy to prove, I can either send them a spreadsheet for that or in some cases, I’ll send them before and after pics. Literally three to five pics before, three to five pics after of the kitchen, the bath, the roof, the flooring or whatever it might be. They say, “This looks you’ve spent at least $15,000.” What they do is they give me what’s called the entrepreneurial credit and then they no longer care when I bought it for and what I spent. At that point, they say, “We’re going to send an appraiser out. We’re going to appraise this property.” Let’s say the appraiser comes back at $100,000 and I’m all into this property for $68,000. Let’s say that the neighborhood only lends 70%, 75% or 80% in my market depending on the neighborhood.

Let’s assume in this scenario that it was only a 70% loan. It doesn’t matter because I’m all in at $68,000 and that are all my costs. They’re going to then give me a loan at $70,000, but I only owe $68,000. In that scenario, I pay back my lender. I walk with a little bit of money and again, I don’t always walk with money, but in some scenarios I do. The main thing is I acquired an asset with none of my own money. I paid back my lender in full and now I have a property that has been rehabbed. I’m not just saying I have a property, I have a property that has been rehabbed and is rented with a lease in place and cashflowing for none of my own money out of pocket.

 

I want to say one thing, Mitch. There was some of my money in some scenarios out of pocket in the beginning or in this process. When I say none of my own money, I’m referring to the once I go to the bank and I get the appraisal and I get the refinance. None of my own money is invested in that deal because they have given me a loan for what I owe or in some cases a little more or everyone gets paid back and now I have acquired the assets. Not always do I get $0 in, I would say in the few months, we have done this BRRRR strategy. If you are not familiar with the BRRRR strategy, it stands for Buy, Rehab or Renovate, Rent, Refinance and Repeat. We have done this strategy for over 45 times in the last few months and the average amount of money that we’ve left in these deals is $1,200, the average. The reason that it’s not zero is that you don’t know what these properties are going to appraise for until you get the appraisal back. Oftentimes you may think that the rehab may be $20,000 and it ends up being $25,000. As you do this more and more, you get better at it.

Oftentimes, a rehab goes over. That’s almost every time in my book.

You are absolutely right but what happens is as you get better and better at it, you start getting these at $0 out of pocket or in some cases, you have the walk with money. What we’ve done is we’ve looked at some and in the beginning we were leaving $3,000, $5,000, sometimes $6,000 or $8,000 in these deals because we were learning. Now, we’re to the point where we should either get all of our money back or be into it for $0 or even walk with a little bit. If you average all of these deals over the last year, that’s about 45 that we’ve turned, the average per deal is only about $1,200. As you stated, you get that back relatively quickly with the cashflow.

I was doing about a hundred houses a year too, but I have private lenders. They’re loaning me some longer term money, five, ten years, fifteen years. I borrow money at 8% interest for five years. 9% is ten years fully amortized. 10% is fifteen years fully amortized and then there are hybrids off of that. Maybe I’ll give you 9% if you give me a fifteen-year amortization with a seven year balloon. Maybe I’ll pay you 7% if you give me a ten-year amortization with a six-year balloon or a five-year balloon. You just play with it. These loans are collateral only and non-recourse. You don’t sign personally. It’s wrappable and payable monthly. You can even make an option where they get paid in arrears, but my timeframe is so long that it would make people nervous.

You’re 8% or interest only and then when you do the 9% or 10% at either 10 or 15 year term, you fully amortize those loans with those people.

Yeah, because my interest only still leaves me with something to do in the future and I still have to address it. I started trying to find younger people that had IRAs where they couldn’t even get to their money for twenty years and they’re more like, “Let me set it and forget it. I’ll do a fifteen year. It’s not up to me whether it goes for fifteen years or not. It’s up to the person that owes me money. If they want to pay me off, I have to pay them off. None of the loans go fifteen years. By the way, if you’re interested in loaning out your money and getting out of the stock market and quit living by that ticker tape. If you’re interested in making more than 1%, here are two people right here that not only offer you a better than average rate with more security than any of these other people that are giving you. I guess the bank supposedly is FDI-insured, but it’s been, my experience is that when the government fails, it fails so big that no one’s going to take care of it. It depends on how much money you have because they only insure so much per bank or bank account.

If you’re looking at this house flipping creative real estate model, it’s not for you because it is work. It’s not like they make it sound on Flip This or whatever. Think about loaning out some money with some real collateral. The secret is to make sure that you’re happy with the collateral and what’s backing up whatever the amount that you loaned. If you’re happy with it, then do the loan and if you’re not happy, don’t do the loan. Make sure you get real documents. I always get calls from private lenders after they watch a couple of episodes. They’ll be wanting to know, “Am I on one of these pyramid schemes?” I say, “No. Here’s the difference. That guy that you saw that was balling money on real estate, never got the county clerk’s notarized signature, and it was never filed at the courthouse and you never had a first lien.

You just signed some papers and then he went to the next town and he got some more people to sign some more papers in the same house and then he went to the next town and he never gave anybody a first lien on anything. Everybody’s walking around with stupid pieces of paper. This is what I want you to do. You loaned me money. I want you to go find your papers and look where it has the time, date stamp and the notarized signature by the county clerk and then get online and see whether you’re the first lien holder online.” That’s the difference between a con man and someone who’s doing the business. Someone who knows how to loan money right. Dave, you’ve got to come back and see me sometime.

I’m going to come back.

Are you bringing your partner?

I would love to do that. That would be great.

If you want to learn more about raising private money, go to 1000houses.com/PMCE, which stands for Private Money Changes Everything. I have a course out there. You can also find it at 1000Houses.com. I’ve changed a lot of people’s life with that. It’s not complicated to go raise private money, but everyone’s afraid of it before they do it. If they haven’t done it, they’re afraid of it. All you’ve got to do is nose to nose with it. Figure out how it works, how you’re going to talk, get your conversation mapped out, learn the 21 objections and how to answer them and get a plan and go out there and put up the numbers. If you put up the numbers, you’ll find the money. I challenge you to get 50 noes in a row. You can’t do it. If you know what you’re talking about and you got a plan and you’re going to go present, you know what you’re presenting. You should be able to do it on a napkin with a piece with a pencil because that makes it look unsophisticated. People don’t want to loan money on sophisticated stuff. You get out there with your PowerPoint and you’re doing all this stuff.

When you make it complicated, it scares them. If you can, do it simple. I don’t use a napkin, but I’m talking like a scratch paper.

Give me this piece of paper. This house is worth $100,000. I need a bottle of $40,000 and I’m going to give you the first lien. If I don’t pay you, you get to my house. If I can’t pay you, I’ll walk it to you. If that turns out not to be the case, you hire an attorney for $800. I’ll give you his name and they’ll have this house for you in 90 days. You’re going to make big money on that. As a matter of fact, the worst thing’s going to happen is I’m going to pay you on time because that’s the worst thing that’s going to happen. If I don’t pay you on time, you’re going to get that piece of property and you’re going to make way more money than what I’m paying it. If you’re going to loan me the money thinking you’re going to get that property, don’t hold your breath brother, because it’s not going to happen. If it happens, you’ll be the first one.

Thank you so much for having me on again. I appreciate your time and it’s always good catching up with you. For anybody that’s reading, if you’re not using private money, you should be. It’s going to make your business change in a big way. I highly encouraged it.

It’s the difference between making a great living and becoming a multi-multimillionaire. It can make that difference in a heartbeat. I would like to pay homage to my sponsor, TaxFreeFuture.com. If you do not have a tax deferred or tax-free retirement plan with checkbook control, you have no idea the size of the hammer that you are missing in your tool belt. We’re going to tell you what your financial advisors are not telling you, you won’t believe it and then we’re going to tell you why and it’s all going make sense. Go to the website and watch the 37 little video vignettes by signing up, giving a little bit of your information and we’ll let you take a look at these 37 video vignettes that tell you all kinds of things. One of the most important things that it tells you is how to make a whole bunch of money starting with a very tiny amount in your account like $200 or $250. Most people don’t know how to proliferate from there. They think, “It’s going to take forever to grow $250 to $10,000.” No, it can be done in one move. You just got to know how to do that move. If you want to learn to dance, you’ve got to take dancing lessons.

 

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About David Dodge

400+ houses flipped to date.

Author of “The Ultimate Guide to Wholesaling Real Estate” Also have a podcast myself, a free course on wholesaling as well as courses and a coaching program.

 

 

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