Making Money on Deals that Most Investors Throw In the Trash

79 Replies

Hey folks,

Today on the BiggerPockets Podcast we are excited to bring you an interview with @Grant Kemp and he shares his strategy for buying over a dozen homes a month ... most of which require little-to-no money out of pocket. The cool thing is... most of these deals have very little equity so wholesalers, flippers, and landlords tend to avoid them!

Don't miss this great show!

@Brandon Turner

When I first read the thread title, I thought this was to be another discussion about the trials and tribulations of Waldo. ;-)

Hah @Roy N. not yet... but that's coming :) I'm doing an eviction on that property right now. Dumb pot dealing tenant!

Originally posted by @Brandon Turner :
Hah @Roy N. not yet... but that's coming :) I'm doing an eviction on that property right now. Dumb pot dealing tenant!

hey I thought pot is legal in WA? Isn't this guy just cutting edge entrepreneur? :)

Absolutely awesome podcast episode! As a completely new wholesaler it really peeled my eyes open to other possibilities with deals that don't meet the wholesale criteria I usually look for. Keep it up guys your podcast rocks!

HAha @Cal C. it may be legal... but it still tells something about their rent-paying ability! :)

Thanks @Gary Mariencheck ! I thought so too! Blew my mind in a lot of ways! Thanks for listening - and if you haven't yet... you know we love reviews on iTunes :)

@Brandon Turner , maybe they are having a tougher time making ends meet since their product was legalized. He/she should consider moving to less progressive state.

Originally posted by @Brandon Turner :
Hah @Roy N. not yet... but that's coming :) I'm doing an eviction on that property right now. Dumb pot dealing tenant!

I'm sure it has nothing to do with "desire-ability"... Either way, nobody is immune to drug dealers in a building... Unfortunately in Massachusetts it's also sort of legal or at least not illegal, so you can't use it as reason for an eviction... But you can use non-payment ALL DAY!

thanks for having me on! I look forward to working with everyone who hears the podcast on questions that might come up!

Originally posted by @Grant Kemp :
thanks for having me on! I look forward to working with everyone who hears the podcast on questions that might come up!

I tried to ask this in the podcast comments, but it didn't post. How do you see the mortgage statement?

Great podcast!!! Brandon you must watch Top Gun...you missing out man :))

Much better, with less time wasted than before!

A key point is that the person interviewed has only been doing this since July of 2012, so less than two years. That is not long enough for much to have gone wrong. How many of his buyers have to stop paying at once before everything collapses on itself? The risk is magnified if somebody only operates in one geographic area. A substantial reserve would be essential to make it through a general downturn, as it would also be a time when finding replacement buyers would be very difficult.

Originally posted by @Brandon Turner :
HAha @Cal C. it may be legal... but it still tells something about their rent-paying ability! :)

The people I know that grow and sell pot in Northern California don't have any problem with rents.......because they are wealthy and own their own properties, with lots of land. The only grower I know that rents lives in SF and pays $4K+ rent for his Victorian "mixed use" rental. Even if they went to jail, there is money to take care of their business while they are away.

Do you really think your tenant would be better able to pay rents with a different income source? The guy just isn't good at what he does. :)

What a great podcast! Inspiring! It is funny how the interview starts out with he began his journey with Rich Dad Poor Dad. That is the same reason I am on this website and spending all my spare time reading and researching real estate investing! It sounds like that is the reason most people have fell in love with the idea of financial freedom and passive income.

Thanks for the great podcast. I really appreciated hearing the details on documenting a borrower's "ability to repay" and how debt-to-income ratios aren't always a reflection of that.

@Grant Kemp is pretty amazing. Inspirational. He even takes time to respond to messages (of course now his life is on another level since this podcast). But truly awesome.

Can we have a video blog on the step by step of how this is executed. The paperwork required? I've read and listened to everything and somewhere in it all I get lost because I just need to see it executed.

What I did get from one post and the podcast was that an RMLO and attorney is essential. Is it if they know what to do then you are ok as they have to verify each step? I'm just terrified I miss some minute but very important detail and then I end up in jail.

@Cal C. you just have the seller show it to you. Then you can change the delivery address to yours

@Stephen Masek There's legitimacy in your concern, but in reality there's not much difference here than, say, taking out a HML and worrying about refi's once they're done and you have renters in them (which people do all the time). Here's the thing, every seller knows that *their* property is separate from all others. I let them all know that the worst case scenario in this transaction is that they are getting the property back. My liability here is next to none due to all the disclosures and explanations we do. Now, ethically do I plan on making the payments as/if/when properties come back to me? Absolutely...and I've made good on that promise already as I sit here debt servicing a few of my properties right now. But 1. If I have to let a property go back to the seller because I can't afford to debt service it, that's something the seller knew could happen 2. If that were to ever happen, it's only that property that's affected as far as my portfolio is concerned and 3. The goal here is to have enough cash flow to float the few properties you may have to float. For instance, my average cashflow is about $350. After 10 properties that's $3,500 cashflow. With less than a 3% default, we'd have to look at larger numbers for it to really show, but let's say I had to take even 2 of those properties back: with an average bank payment of $800 PITI, that $3500 has set up more than enough monthly income to float our payments and expenses for those 10 properties (8 cashflowing, 2 defaulted). Obviously, the apocalypse can happen and everything can crash upon itself, but I do have the fortune of partnering with the attorney that's been doing this for 25+ years, so we've got the experience to call upon that says that this is not a big concern and that it's a viable business model.

@k.

Kristine Marie Poe I'm so glad you got something out of it! I highly recommend visiting the cfpb's website, consumerfinance.gov They've got some really good compliance guides put up

@Denisha M. Those are some very kind words, thank you! You're absolutely right, you need to have a good RMLO/Attorney team in place to get this done. This is precisely why the first thing I did when looking to get serious was partner with an attorney. I'm actually able to originate in Massachusetts so let me know if you ever need help on something

Grant, that is good to read. Besides the monthly income, additional reserves would allow you and people who do the same type of business to make it through a general economic event, or a local event such as a major factory closure. In your case, you mentioned buying with cash, so I suspect you have such reserves, even though it was not covered in the interview.

It would be nice to see back-up or contingency plans covered in all interviews.

@Brandon Turner @Joshua Dorkin @Grant Kemp

Thanks for the informative podcast! I enjoyed it! Got some good info out of it with Podio and Postlets. It was also good to learn that the 43% DTI rule is just a guideline. Gland to hear that smaller creditors can oversee that. I've been having such issues with my DTI with refinancing my investment property with the big lenders. I'm reaching out to the smaller lenders now. Cross my fingers that I can finally get refinanced and cashfloooooow!

@Stephen Masek you're right, there should always be contingencies and you should always hedge your bet. I do buy plenty of houses with cash, I wholesale properties, Fix and flip, hold rentals etc... I don't think it's ever wise to have all your eggs in one basket, but right now the owner financed basket is booming so about 95% of my portfolio is there.

@Grant Kemp @Brandon Turner

Excellent, excellent podcast! Grant, thank you so much for the information. I'm a new investor and sub2 looks like a perfect fit for me! Looking forward to diving in ASAP!

@Grant Kemp have you tried selling any of these notes? That term doesn't suffice because a note buyer typically doesn't incur a note to payoff when they are buying a note.

Using the numbers you used in the podcast- Say you bought a property for 90K and the sellers have a 5.5 30 year fixed mortgage. Your payment would be $511. As you stated you resold it for $105K with a $95k 15 year note at say 8%, you would be getting a payment of $908. So nearly a $400 difference, I believe you said later you average $350 so this is fairly close.

Since you'd probably want to pay off your note at the same time the buyer is paying off his note you'd have to add $220 a month so that you wouldn't have a large payment to make in 15 years, unless you can figure out a way for the buyer to get a conventional mortgage. So basically you have an income stream of $180 a month for 15 years.

If you sold that to a note (again for lack of a better term) for $5K, they would have a 15 year investment making $180k a month or a 43% ROI. You would have profited $10K from the house buyer and $5k from the note buyer. You could ask for more, but the note buyer has significant risk from early loan payoff since they have an underlying $90k original and they paid $5k for the seller financed note which is only worth $95K. So they are a bit upside down when you include foreclosure and resell costs.

Obviously one of the ways to increase the value of the note to a note buyer is to have a 5% prepayment penalty for the first few years of the note.

You could also charge if you are licensed properly to handle the payments for the note buyer.

If a note buyer has a brain they will see the sale was inflated, predatory lending and the note would be so heavily discounted he wouldn't break even. Such need to be held long term, in time the appreciation is stolen or you do the rinse and repeat. Besides, 2% interest spread over the underlying mortgage won't carry a discount on that amount if the loans are "matched" as stated. And, matching the underlying note with an interest rate spread does not amortize at the same rate as mentioned in the podcast, the higher rate is depleted slower than the original note, so there is some misapplied equity from the new buyer/borrower if the difference wasn't agreed to. I'd bet it is misapplied as the seller doesn't seem to be aware of the difference. You don't know what you don't know and you can't disclose what you don't know. Anyway, selling these notes, wow, trying to do so at par, like an assignment to investors would be a great way to get a new orange jump suit. I wouldn't go there @Cal C.

BTW, as to leaving meat on the bone, I can pick deal as clean as a vulture without selling over market value stealing the future appreciation of a buyer, financing does not add value to any property value, ask any appraiser. :)

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.