Pace Morby (03:33):

We do is the deed, it’s literally a one page document. People that don’t know what a deed is, I should pull it up. But a deed is a one page document. What we do is we pre-sign the deed, the seller signs it, I sign, it gets notarized. And we hold that deed for as long as we want, five years, 10 years, 15 years, literally in a safety deposit box. And the day that I decide I want to transfer the deed into my name, let’s say I want to sell it, or I want to refinance it, all I do is I pull that deed out. I walk down to the county recorder’s office and I spend $17 and I record the deed and I become the owner of record. That is what we call an agreement for sale.

Robert Leonard (04:08):

How hard is all of that to explain to somebody that you’re trying to buy their property from?

Pace Morby (04:13):

I tell everything through stories. And so it’s actually very easy to explain. I tell stories about F-150 trucks. If I never bring up subject to agreement for sale, lease option, seller finance, I never bring up any of that stuff, I always just tell it in a story. For example, I told a story the other day, it’s the same story I tell a thousand times a year. When a seller says, I don’t know what this means, right? They don’t know what seller finance means. I go, well, seller finance is very literal. The seller is financing me. People still don’t understand that. I then tell the sellers a story and it’s my F-150 story. I go, okay, well, Susan, I used to have an F-150. Okay? It had 320,000 miles on it. It was time for me to sell that truck.

Pace Morby (04:56):

It wasn’t serving my construction business anymore. It was starting to have engine failure and engine problems. And so I decided to go and see what it was worth to see what I could sell it for. Susan, the seller, I go, so Susan, your house, where do you go to verify what it’s worth? She’s like, Zillow. And I go, okay, well, Zillow for cars is what? She’s like, Kelley Blue Book. I go, exactly. I go to Kelley Blue Book, the Zillow for cars, and I find out my truck that’s made me hundreds of thousands of dollars being in my construction business is only worth five grand. I know that if I go put that truck on Craigslist for five grand, I’m not getting five grand. What am I getting? I’m going to get 3,500 bucks.

Pace Morby (05:37):

It’s the same thing with the motorcycle. If you have a KTM that you bought for 10 grand, you go put on Craigslist, you’re not getting 10 grand. Someone’s going to say $8,700 cash. And I go, Susan, so this is what happens with investors. You want to sell your house for a hundred grand. People are going to come in and lowball you at 50, $60,000 so that they can make money. Right? I go, I’m belligerent, just like you Susan. This is a true story by the way. This is how I got one of my first zero down 0% seller finance deals was with Susan telling the same story. I go, so Susan, you want to sell your house for a hundred grand, but everybody else is coming to you for $60,000 offers. What if I came up to a hundred grand, would you give me terms? She has no idea what terms are.

Pace Morby (06:17):

So I then started telling her this story about the F-150. I go, so Susan, I’m belligerent just like you. You Want a hundred grand. I’m thinking I want 10 for something that is really only worth five. I’m stupid. I go to Craigslist and I go put my truck on Craigslist for $10,000. And I go, Susan, you’re not going to sell your house for a hundred grand. Everybody’s offering you 60. Just like I’m not going to sell my truck for 10,000, people are going to offer me 3,500 bucks. I go, Susan, do you think I even sold my truck for $10,000 after three months of being on Craigslist? She’s like, well, obviously not. It’s been on Craigslist for three months. And I go, no, I didn’t. I didn’t even get a call, an offer, a text. I didn’t get anything.

Pace Morby (06:56):

It was obviously wildly outrageous for me to sell that truck with 320,000 miles for 10 grand. What did I do? She’s like, I don’t know. I go, same predicament you’re in. What you think is worth $100,000 to you is only worth five $50,000 on the market. I go, Susan, here’s what I did. I’m sitting there in my office, I’m catching up on emails. My wife walks into me and she says, hey sweetheart, could you sell the truck? Because every time I come home or I leave, I got to navigate around the truck in the driveway and it’s being in pain in the ass. And I’m like, sweetheart, what do you want me to do? I’m not selling this truck for five grand. She goes, you’re the creative finance guy, why don’t you take payments for it?

Pace Morby (07:31):

I go, oh my gosh, that’s so genius. So what I did is I went back to Craigslist, Susan and I literally changed one thing. I said F-150, will take payments. Did I sell that truck for $10,000 Susan? She’s like, probably. And I go, I did, but I actually sold it for $12,500 because I had 30 people converge on me. I’ll take it. I’ll take it. I’ll take it. I’ll take it. I’ll take it. And she’s like, wow, that’s crazy. I go, so I took $1,000 down and I got a $350 payment for whatever. But the powerful thing is Susan, I sold my truck for two and a half times what most people would think that truck is worth to somebody who didn’t have a ton of money down, was just starting their construction business and knew how to fix an engine.

Pace Morby (08:20):

And so I go, that’s how I propose I’ll buy your house for a hundred grand. If you give me terms, I can come up to your $100,000. If you give me screen share capabilities, I’ll show you this house actually, this is a great house. It’s one of my favorite houses. It’s a little teeny house, but it is powerful to see how these documents are written. This house on 78th, 1906, 78th place in Mesa, I’m going to show you guys the closing documents and I’ll show you at the time I had somebody go, dude, you’re overpaying for that property. And I’m like, I’m not overpaying for anything. The reality is the value of something is not the purchase price, the value of something is what you can do with it.

Pace Morby (09:06):

And so Jose, the gentleman who bought my truck for $12,500, what did he do with that truck for $12,500? Did he overpay for it? Well, some knucklehead would say, yeah, why would he pay that much money? Well, because he didn’t have to use his credit. He didn’t have to go and verify his employment or tax records or any of that kind of stuff. Okay? This property you’ll see this little screen share. I ended up buying this as you can see, here’s the agreement between me and Susan and you can see her name right here. Where are they? Dale and Susan Poer. Right here. Dale and Susan Poer living trust. They started their living trust in 2016, but I bought this property in 2020. This was probably the 15th or 20th 0% seller finance deal I did. But this was the first zero down 0% seller finance deal I did.

Pace Morby (09:54):

I bought it for a hundred grand. She gave me, if you can see right here, what’s my interest rate?

Robert Leonard (10:01):

0%.

Pace Morby (10:01):

0% seller finance. What’s my payment? $375 a month. The renter, I took over a renter in this property. She had a tenant in the property. The tenant was paying $1,650 a month. My payment to Dale and Susan is $375 a month. I make about after insurance and little bit of repair stuff, I make roughly $1,000 a month net on this property. So check this out. In two years, this is roughly two years ago, I ended up buying it for 110. That’s a longer story. I’ll tell you in a minute. I bought it two years ago, roughly two and a half years ago. And you can see now the value of the property is now worth $255,000. I really don’t care about this number to be honest. This number, and now I’ve got $145,000 in equity on the deal.

Pace Morby (10:53):

I really don’t care about that number. What I care about is the $1,000 a month this one property makes me every single month. Okay? So she comes to me and she goes, well, I do want some money down, Pace. I go, okay, well I’ll give you money down, but you got to sell her finance not only the property to me, you got to sell her finance my down payment. And she’s like, what? I go, yeah, I’ll give you the down payment. But I need to take the income from the property to pay that down payment. And she’s like, okay. If you buy from me 110,000, I’ll do that. I go, okay, great. So what I did is over the course of a year I made $12,000 net on the income of the property and I paid her $10,000 out of that income from the property for my down payment, plus her monthly payment of $375.

Pace Morby (11:37):

So she seller financed the $375. She seller financed the down payment. I started doing that so many more times. I just started going zero down, whatever interest rate you want. And that’s how I buy a ton of my properties now, zero down. You can do this with anything. You can do this with RVs. You can do it with trailers. You can do it with motorcycles. You can do it with cars. You can do it with houses. Multifamily, mobile home parks. We’ve got nearly 900 doors in our portfolio right now and all of them were purchased with creative finance, 900 doors.

Robert Leonard (12:10):

As part of this theory, let’s say you paid 110 for that. And you got 0% interest rate. If you finance that five, 6%, say you bought it for even 70 or 80,000, instead of 110, you’re going to pay probably close to $200,000 over the life of that loan when you include the interest. So when paying 110 with no interest is really not that bad, it sounds like. Is that part of the strategy?

Pace Morby (12:32):

That’s a really good way of looking at it. That’s how I used to describe it to people. I was like, well, who’s better off? The person paying 0% interest for 40 grand over retail or 3% interest at retail? And then you do the calculator and you’re like, oh my gosh, the 0% interest is amazing. Because here’s what’s happened in the two years since I owned it, I’ve paid that $10,000 down. So now I owed a hundred, right? That was her down payment over that first year. But I’ve now owned it for 30 months roughly. If you think about it, 30 months at $375 a month, I’ve paid another $11,250 down on the mortgage to her. I only owe $88,750 on something that is worth now 250. Every penny I’ve paid to Susan pays down the mortgage versus you have a motorcycle payment, a car payment, an RV payment, 85% of your payment goes to interest. None of my money goes to interest.

Pace Morby (13:27):

And so I dominate in this strategy. And so my net worth is growing crazy every single month, because it’s the make money while you sleep. When people say make money in your sleep, they think they’re talking about cash flow and cash flow’s great. But the real money that you make while you’re sleeping is the money that’s being paid down on all your debts by somebody else, like a tenant or a corporate rental or an Airbnb tenant or something along those lines. They are paying down the debt. Same thing with my Airstream, the person I’m renting my Airstream to is paying off my Airstream. Not me. They’re paying it off. I go and acquire these debts and I let other people pay them off. I call it crowdsourcing my retirement. Everybody else is building my retirement for me, but me.

Robert Leonard (14:13):

Why did Susan do this? Was she in foreclosure? It sounds like she had a good tenant there. So it sounds she-

Pace Morby (14:18):

Again, let’s go back to subject to. This was not a subject to deal. This was a seller finance deal. So subject to sellers are in pain. So Lost Dutchman Way, that seller was in pain. He was in foreclosure. Susan, everything with seller finance is about gain. What does that mean? It means they just want to sell their property for a higher dollar amount than what it’s worth. And they want to gain more money. They want to win. It’s a different demographic. People that are in foreclosure, got situations going on. People that own their properties free and clear, pretty good decision makers, and they’re always trying to negotiate and try and get the highest dollar amount for their stuff.

Pace Morby (14:52):

And so if you let them win on the purchase price, they’ll let you win on the terms. And so that’s how I got that. So Dale and Susan, 65 years old, they were in the process of selling all of their rentals because they’re like, we just want, ironically, it’s funny. What do you think they wanted to do? Travel the country in their RV with peace of mind that they don’t have to deal with tenants, toilets, trash, none of that stuff. And so she’s like, this is great actually. We get a $375 monthly bill from you. We don’t have to deal with the tenants. And I get to sell the house for $110,000 that everybody else is offering me 60s. When somebody says, why? I’ve already answered it, but I’ll give you another reason why. I’ll give you multiple reasons why.

Pace Morby (15:37):

Number one, no real estate agents got paid in that deal. So nobody took and had to go through real estate agents that took commissions. She didn’t have to pay taxes on the full $110,000, because if she receives the money in this year, she has to pay taxes on that income. That’s income. So she’d have to pay taxes. But if you spread that out over 20 years, now you have a lower tax liability year over year because, who’s going to pay more taxes? The person who receives $110,000 in cash today or the person who receives $110,000 of cash over 20 years? The 110 today, because they’re going to base your taxes on this year’s income. You only get taxed on money you receive, not money you technically wrote an agreement for.

Pace Morby (16:22):

So she only gets taxed on the payments she receives every single year. So think about it. Her tax liability goes way down. So she gets to keep her actual $110,000. The biggest reason, she’s retired, she didn’t want to deal with the tenants. This happens all the time. Me I’m in building mode. I don’t care about dealing with tenants because I know that’s a rite of passage. They have already retired. They’ve accumulated their wealth through real estate and so now they’re in a different phase of their life, which is I want to upgrade myself from the landlord and become the lender. Everybody wants to be the lender. Everybody wants to be the bank.

Pace Morby (16:56):

And the biggest reason besides all of those, is she sold the house for 50 grand more than anybody else was willing to give her. That’s it. In seller finance and subject to, creative finance in general, the seller gets more money and the buyer wins by not having to go through all the bull crap. So there’s no inspections, there’s no appraisals, there’s none of that stuff happens. I literally can just go close on the property in two days. It took us two days to close that deal.

Robert Leonard (17:22):

Not to be morbid, but if she’s 65, really what good is 110 grand over 20 years? Why wouldn’t she want that [inaudible 00:17:29].

Pace Morby (17:31):

No, what are they going to do with the money upfront? If you guys think this way, you guys are thinking the way you’re thinking today. Imagine you are retired, right? You’re at 65 years old, you’re worth probably five, $7 million. That’s kind of the average. People that have invested in real estate just dabbling on the side, you’re going to be worth five to $7 million when you retire. No argument. That’s minimum. When you’re at five to $7 million, you’ve got passive income, you’ve got stocks, you’ve got social security income, you’ve got passive money coming in. You don’t need a chunk of money. What are you going to do with a chunk of money at 65 years old, when you’re already worth five or $7 million? You ain’t doing with that money. You know what I’m saying?

Pace Morby (18:09):

These sellers don’t need that money. They just want more passive income and a more passive lifestyle. And so first and foremost, don’t put your brain in these sellers heads because your brain, I’m talking about people in the audience, you don’t have a net worth of these sellers. You don’t have the net worth of these sellers. You don’t know what they know and you don’t make the same decisions they make. One day you will and you’ll turn around and you go, by the way guys, if you go, check this out, do you know what Dale and Susan did? They did what we call creating a note. Okay? They created a note, right? A note between me and them, it’s called a promissory note. We created a note. I already showed you the document. That document showed the 0% with 375. They could take that note today and they could go sell that to a note investor.

Pace Morby (18:54):

People don’t even know there’s note investors out there. A note investor would go, I’ll buy that note from you. And they could buy it from Dale and Susan for 80 cents on the dollar, which gives them upside of return. And Dale and Susan could cash out of my agreement at any point by selling the agreement to somebody else. These things have been going on for a thousand years. It’s just that the normal human beings in their nine to fives and all the limited knowledge we’ve been given in the blue collar trades, nobody’s telling us this is how real finance works. Okay? I create notes as well. It’s a whole nother topic for another day. But anytime somebody’s seller financing something to you, it’s called creating a promissory note. I promise to pay you. Therefore we’re writing it on a note.

Pace Morby (19:39):

Couldn’t that seller go and sell that note to somebody else and just get a chunk of cash today anytime they want? Dale and Susan really needed the cash for some catastrophic event. They don’t have to wait for me to pay them off. They could just take their note that is my agreement with them attached to the real estate and go sell that for 80 cents on the dollar, get a big chunk of money and wipe their hands free and clear of the deal. Pretty simple, pretty simple. It’s just so new to people that they’re like, wait, did Pace create this? I didn’t create any of this. I’ve perfected a lot of it because there’s not a lot of great information about it out there. The people that teach it are like 80 years old. There’s nobody young teaching this with any real credibility.

Pace Morby (20:18):

It’s crazy. If you guys go online, Google this right now, how to note invest or how to invest in notes, you’ll find probably three or 400 websites where people are trading notes, three or 400 websites with thousands of people on those websites trading notes. Okay? Go type it in, note investing.

Robert Leonard (20:40):

We had Dave Van Horn here on the show who-

Pace Morby (20:43):

Dave’s great.

Robert Leonard (20:44):

… he wrote the Note Investing book for BiggerPockets. So if anybody’s interested in listening-

Pace Morby (20:48):

There you go.

Robert Leonard (20:49):

… go back and find that episode.

Pace Morby (20:51):

Check it out. Guys, look at this, all this stuff, real estate note investing, note investing tools. This one’s a really good, yield street investing, minimum is 500 bucks. You guys can go on here and let’s see, note tools. There’s a lot of great YouTube videos about it. Let’s see, buy a seller finance note. We buy private mortgage notes. Number one direct note buyer. Guys, this is everywhere. Okay? There’s people that are buying these notes left, right and center. This is how real money is made behind the scenes.

Pace Morby (21:21):

And nobody knows about it, because our school teachers get paid $40,000 a year. They don’t give a crap about teaching us this kind of stuff, because they don’t want to learn it themselves. This is the kind of stuff I wish I knew. Go create a note, sell it. Trade notes, pledge notes, do all sorts of crazy stuff.

Robert Leonard (21:36):

How’d you find Susan?

Pace Morby (21:37):

[inaudible 00:21:37] touched on 1% of the stuff we do.

Robert Leonard (21:40):

How did you find them?

Pace Morby (21:42):

Cold call.

Robert Leonard (21:43):

You just pulled a list?

Pace Morby (21:45):

Cold call. It was a list of high equity. You can go on, there’s a website called BatchLeads that we use. We go to BatchLeads and you can pull a very specific list. batchleads.io is the name of it. Batchleads.io, I can find foreclosures, divorces, bankruptcies. I can find high equity. So people have a lot of equity that have their houses paid off free and clear that are more likely to sell or finance to me. We call them and we go, hey, we’re looking for a house to buy in the neighborhood. Literally we have a company called startvirtual.com that does all of our cold calling for us. Start like go, startvirtual.com. Startvirtual.com. We go hire virtual assistance with them and they cold call and they set up opportunities, we go out to the appointments and we buy houses. It’s that simple.

Robert Leonard (22:30):

I want to go back to the sub-to for a second, because I have a couple other questions. I have a million questions. But specifically somebody with a foreclosure, let’s go back to that one you had, that we talked about. Why wouldn’t you just sell it? If he’s in foreclosure, why not just sell it-

Pace Morby (22:42):

No equity. And think about this, people go, the market’s hot. Everybody has equity. No they don’t guys. Think about this, in the last three years where mortgage rates have been so low, what have most homeowners been doing? They’ve been doing cash out refinances. This is why everybody’s spending money right now. The government printed trillions of dollars and every homeowner and their dog in the last five years has done a refinance on their house. When you do a refinance, you pull out all your equity, you go buy stupid with it. And now you lose your job because of COVID or whatever reason. And now you’re in foreclosure on a house that you already took all your equity out of.

Pace Morby (23:20):

A lot of times, subject to, again, it’s people that are in pain, they’re in foreclosure, they don’t have enough equity to sell the house.

Robert Leonard (23:27):

Now my other big question about subject to is, because you’re assuming they still have that debt in their name, it’s still on their credit report. It’s still screwing their DTI. How do you get around that factor?

Pace Morby (23:40):

Well, first and foremost, I’m going to put this on my Instagram here in the next couple of days, but I have a seller that called me the other day. We bought their house subject to seven years ago. Okay? She called me and she says, hey, I just want to thank you. Everything you said to me worked exactly the way you said it would. And at the time she didn’t want to sell the house to me subject to, because she’s like, well, why would I let you take over my debt? It’s still in my name. And I’m like, Lauren, your house is in foreclosure. You need me to take over your mortgage and get this mortgage back into a good standing position, so that one day in the future, two years, three years, five years, whatever it is, you go to buy another house and you don’t have a foreclosure on your record.

Pace Morby (24:23):

Let me stop the foreclosure. Take over the mortgage balance and have a mortgage in good standing that I am paying for and rebuilding your credit. She goes, oh wow. I’d never thought about it that way. People that I buy from subject to, I only improve their credit. As far as the debt to income ratio goes, this is another conversation we’re going to get into the weeds on. We teach people how to overcome the debt to income ratio. For example, how do landlords own hundreds of properties with loans? People think that real estate investors go buy houses with cash. Guys, I don’t know one real estate investor that buys houses with cash unless they’re 60 years old and they have a ton of cash.

Robert Leonard (25:01):

Dave Ramsey.

Pace Morby (25:03):

Here’s the thing. He’s a genius and he’s very intelligent and he saves a lot of people a lot of money and people that are fearful of growing and becoming a multimillionaire. Guys, if you are a Dave Ramsey advocate, have fun being worth two or $3 million when you’re 65 and that two or $3 million will be worth in today’s money, 200 grand. You will never truly be able to retire with Dave Ramsey’s plan if you want to live any sort of successful like, I want to drive a car I want to drive. I want to eat food I want to eat. This guy teaches you guys how to be a slave to a lower barrier lifestyle. What Dave should be teaching you is how to go make more money. Go teach people how to make more money and stack skills like rent RVs, buy real estate.

Pace Morby (25:47):

Anyway, people aren’t buying things with cash. Okay? What landlords are doing is they’re going to a bank and they’re getting a loan and they’re turning into a rental and they’re stacking wealth and they do another one, they do another one. They go get 10, 15 loans. Their debt to income ratio does not support them getting 10 to 15 loans. How do you do that? The way you do it is you show that the property is being paid for that you bought last month. And then you go to the new bank. You go, hey, that property’s being paid for by my tenants, here’s my proof of rentals. What they do is they lower that payment from your previous loan off of your debt to income ratio that justifies you buying another one, and then justifies you buying another one.

Pace Morby (26:24):

So the way we do this is we coach our sellers on showing proof that the bank note or the subject to deal is being paid for. And how do they do that? I use a third party servicing company, I use a company called Evergreen Note Servicing. Okay? Evergreen Note Servicing. Evergreen Note Servicing handles all. They take money out of my account. They make the payment to the seller’s mortgage and then they create a report. They are a licensed third party to service mortgages. When the seller goes to get another mortgage and the mortgage company says, hey, you have an old mortgage here. The seller goes, here’s proof that it’s being paid for by a third party licensed company that services the note and I’m not the one paying for it, somebody else is paying for it.

Pace Morby (27:10):

And the new lender will take that payment off of their debt to income ratio, allowing them to buy another house. So Lauren, the person who called me, she literally called me to say, I just want to thank you. I was so fearful that I wasn’t going to be able to get another mortgage because I don’t make enough money to support two house payments. But because you provided the servicing company, she gets an email every month, every time her payment is made on her subject to loan, she gets an email, every month. Payment’s been made and she gets a report, a PDF report tracking all the times that I’ve made the payment. All she had to do was show that to her new mortgage company and they took that balance off of her DTI.

Robert Leonard (27:47):

Even big banks, the most conventional banks you can think of do that?

Pace Morby (27:51):

Yeah. Every bank does that. I was a licensed loan officer. That’s what we did. As a loan officer what you do is you look at everybody’s child support. You’re this. How many cars you have. And then you compare it against their income. You go, your debt to your income ratio is not good enough. And so what we do as loan officers is we coach people on how to overcome that. All right, here’s what we need to do. We need to wipe out this credit card thing. We need to do this. And then we can make your debt to income ratio work. As a loan officer a lot of times people would come to us for another rental purchase, or even I saw people that sold their house subject to would come to us three years later and would go, hey, I already have a mortgage in my name, but somebody else is paying it.

Pace Morby (28:28):

And I go, that’s easy. All we do got to do is show that they’re the ones paying for it. And I can bring it to my underwriters and say, you’re not obligated on that debt or you’re not the one paying it. Just like a landlord has a tenant paying it.

Robert Leonard (28:40):

Could you just give her the copy of the lease that you have? Because as the owner of that rental, that’s usually what you do, is you give the lender for your next property, your lease. Could you just do that with her?

Pace Morby (28:48):

I have a property on, this one’s a really good one. I like showing this one because of how much money I’ve made on it. And the seller and I are really good friends. We became really good friends. This property on 2720 North Sterling, I bought it for such a weird dollar amount right here, 372,788. I bought it for that weird dollar amount because that’s what the seller owed on the mortgage, was exactly 372,788. I bought it roughly three years ago coming on three years ago. And look how much it’s worth now. I’ve made $308,000 in appreciation on that property in 30 months, crazy. This property I turned into an Airbnb, but the seller is Dave Biaski is his name. Dave Biaski. Why did he sell this property to me?

Pace Morby (29:28):

Well, because Robert, he was in the process of buying a brand new home, literally in the same neighborhood. He didn’t have any equity on that house. 2720 North Sterling, because he had just done a cash out refi, pulled out all his cash. He hires a real estate agent to sell the property for him six months after he does the cash out refi, because he saw a house being built, the newer subdivision inside that big, greater planned community. He’s like, I want to buy that house. I want a new house. He goes over, puts a $20,000 deposit on that new house. And the lender for that new house goes, hey, you got to go sell the house on Sterling so I can approve you by the time this house gets built.

Pace Morby (30:09):

So what does he do? He goes home, tells his wife, Jeanie. Hey Jeanie, we got to sell this house. Who should we call? They hire a friend, a real estate agent, friend of theirs. And that friend is like, you just did a cash out refi. How are you going to sell this thing? You have no equity dude. They listed it for 410. Couldn’t sell it. Lowered it to 390. They were getting offers at 390, but he owes 372. If he sold it for three 90, the seller doesn’t get that $18,000 difference. That goes to commissions and closing costs and all sorts of stuff. The seller Dave would’ve had to sell that property in Sterling and cut a check for 20 grand to get rid of that house. Because he had already sucked out all the energy out of that deal with a cash out refi.

Pace Morby (30:48):

So the agent calls me and goes, hey Pace, I know you’re the creative guy. Would you be interested in doing something creative on this house? I’m like, yeah, of course. I bought that house subject to and the number one question Dave had was, Pace my new lender on my house that’s being built right now needs to see that I’ve sold this house. I go, no Dave, your lender needs to see that you’re not responsible for the payment. And so what we did is we wrote a lease agreement. Okay? I didn’t even have a tenant in the property yet, but we wrote a lease agreement and we issued that lease agreement to the lender. And the lender took that as a way, and they took off 75% of his payment from his DTI because it had been literally the first day, day one. It was like, here’s the lease agreement. And the lender goes, all right, I’ll take 75% off the DTI. And it made the deal work.

Robert Leonard (31:38):

All of this makes a ton of sense, but go back to [inaudible 00:31:41] Jose, was your truck as an example, what happens if he doesn’t pay you? And all of this sounds good. We’re kind of in an interesting time right now in the economy. What happens if something that you bought subject to, or even seller financing, you’re having issues with the tenant, you can’t make the mortgage payment, somebody buys an RV to rent it out, they got debt on it, they can’t make the note. Because people are starting to rent RVs because they don’t have the disposable income. What do we do in those situations? This seems a really good strategy, but I’m just a little bit worried that it’s a when times are good strategy.

Pace Morby (32:10):

No, think about 2008, right? Market crashes, market crashes, what did not crash? Rental rates. Rental rates did not crash. In fact rental rates go up in a bad economy because people can’t afford to live in their house, so they go and room together and they go get in apartment buildings, or they go and move in with each other and they rent. We are becoming a renter’s nation, in 10 years half of our nation will be renting. Right now it’s 38% of us are renting. Rental rates have always and will always go up. Even if you just Google this. We go, rental rates, they started tracking them in 1914 when they had the technology to do so. And you’ll see rental rates have always gone up. And so even in 2018, where is this thing?

Pace Morby (32:54):

In 2008 rent rates went up. Okay. When the market crashes, people who have rentals kill it. What do I care? Think about this. I have a house right there on Sterling, right now. I just showed it to you. The house on Sterling I owe $370,000 on that mortgage. It’s now worth $680,000, right? What do I care if it goes down to $300,000 and I’m under water 70 grand? I don’t care. The reason I bought that property was not so that I saw the value go up and down. The reason I bought that property is to see monthly cash flow from my rental. When the market crashes, people’s houses values go down, people get foreclosed on. People get kicked out of their houses and then where do they go? They go to rent.

Pace Morby (33:41):

The houses didn’t go vacant on rentals in 2008, rentals went up because people could not afford houses. So if there’s an economic shift, which this has happened, go back every eight to 10 years in all of our real estate history that we’ve been tracking, you’ll see economic downturn in real estate, housing market crashes, values of properties go up, guess what goes up? Rentals. Rentals have always and will always continue to compound, compound, compound and go higher and higher and higher and higher. Never in history, never in recorded history of real estate have we ever had a reversal on rental rates. Rental rates have always gone up. I buy things based on not the equity. I tell people all the time, equity comes, equity goes, but the cash will always flow.

Pace Morby (34:28):

If I bought a property based on cash flow, I will always cash flow that property except for one category. There’s only one category that will not cash flow during an economic depression, it’s-

Robert Leonard (34:39):

Short term rentals.

Pace Morby (34:40):

What’s that?

Robert Leonard (34:41):

Short term rentals?

Pace Morby (34:42):

Short term rentals. They get [inaudible 00:34:43]. I have seven luxury Airbnbs and I already know that my other 50 something Airbnbs that are kind of lower end Airbnbs, they’ll dominate because people are still going to travel. They still go to seminars. They still go to graduations. They still see people in hospitals. They still go travel around, now and especially in the post pandemic world, people are traveling and living in my Airbnbs for two, three months at a time, which is amazing, but they don’t do that in luxury Airbnbs. In luxury Airbnbs it’s like four day weekends at $600 a night, they’ll spend 2,500 bucks. What’s going to happen on my luxury Airbnbs, is I will be at a net loss on my luxury Airbnbs during our upcoming economic depression. But my lower end Airbnbs will more than overcome the cash flow disadvantage.

Robert Leonard (35:29):

And like you said, you’ll just-

Pace Morby (35:30):

And I’ll keep those properties.

Robert Leonard (35:32):

Through the cash flow.

Pace Morby (35:34):

I’ll keep my luxury Airbnbs. I’m not going to get rid of them. Some people are like, dump them, dump them, dump them. I’m like, they’re being paid down. These are my retirement. I’m going to retire when I hit a billion dollars in net worth. And I’m going to do it all through real estate. I’m not going to sell anything until I’m like 65 years old. I will keep everything. There’s no point in me selling a property.

Robert Leonard (35:57):

I know the current conditions are not really slowing you down. I know you just bought, you were mentioning you were coming back from Texas. You bought a 40 unit deal in Texas. I know you also bought it with a $0 down, 4% interest rate and a 50 year note. Walk us through that deal and how you landed it.

Pace Morby (36:13):

Okay. Number one, social media. Okay? I got it from social media. It was a wholesaler who their mentor doesn’t teach them creative finance. He’s sitting there cold calling apartment buildings and trying to buy apartment buildings at 60 cents on the dollar. He’ll DM me deals and go, hey, I got a deal. Hey, I got a deal. I’m like, these aren’t deals man. If it’s a cash deal, you got to buy it at 60 cents on the dollar. If it’s a creative finance deal, I’ll buy it at 100 cents on the dollar. I’ll buy it for whatever it’s worth or even more as long as I have really good terms. He’s like, I don’t know terms. He just kept sending me cash deals for months. And I finally go, dude, don’t send me another cash deal. I’m not interested in looking at cash deals. And he goes, well, I don’t know how to do creative finance.

Pace Morby (36:53):

I’m like, go to my YouTube channel, go watch a bunch of YouTube stuff, how to talk to sellers. And when you get a seller that’s interested in terms, I will then look at your lead. So he sends me this thing in San Angelo, 40 units. So San Angelo’s like three hours away from Dallas. It’s actually 43 units. And the sellers owned it for 15 years or so. And the seller says, I would love to sell this to you on seller finance. I would love to sell this to you on seller finance. And I’ll tell you the reasons why in a couple of minutes. I get on the phone with the seller. I negotiate the deal. I give the seller exactly the dollar amount he’s looking for because the seller, again, guys, these sellers are not you and they’re not me. These sellers that have big portfolios, a lot of them are worth 50 to $100 dollars.

Pace Morby (37:37):

And some of you in the audience cannot even fathom that number because you haven’t hit your first million dollars yet. Once you hit your first million, your second million, your fifth million, your 10th million, you start realizing there’s a lot of rich people out there that own a lot of real estate that look like bums. They don’t have matching socks. They drive cars with donut tires on them, but they’re worth 50 million bucks. It’s crazy. This seller goes, I would love to sell this on seller finance. And so I get it under contract. I tell him I want a lower payment. He goes, well, how do you propose to do a lower payment? Because he wants interest, right? He wants interest.

Pace Morby (38:14):

I go, well, let’s do a zero down, because I’m buying another 53 unit this next week. I’m putting actually a good amount of money down. If you let me do $0 down. How did I convince him on $0 down? I just told you, you just might not have picked it up. I told Mario the seller, I said, look, I’ve got another deal I’m buying this week where I’m putting a lot of cash down. That shows credibility. That shows it’s a third party story. I’m buying other deals other than him. And I go, so I’m going to be tapped out on cash for a couple of months, which I’m not. But I always say this. If you let me get into the deal with no money, then I can buy it at your purchase price which was $3 million and I’ll pay you whatever you want.

Pace Morby (38:56):

So he goes, all right, let’s do three million, no money down. And then he added 5% interest and I negotiated him to 4% interest. Because he’s like, well the interest rates are really high right now. I’ll split the difference between 4% and 6%, which is now the interest rates are at 6%. I’m like, well Mario, the interest rates are high temporarily because they’re trying to slow down the market. Should I come back to you in a year when the interest rates come back down or start tinkering down or should we just negotiate something that works for both parties? He’s like, yeah, that makes sense. So he came up with 4%. The payment was $17,000 based on that setup. So I go, it’s a little high for me. I want to try and get my payment to you somewhere between 10 and $12,000.

Pace Morby (39:36):

And so the way we did that, is we took a 30 year agreement and we stretched it to 50 years so that he actually gets more interest long term. Again, people are like, wouldn’t why wouldn’t he want the money up front? Guys, the only people that want money up front are broke. These guys have a lot of money. What is he going to do with $3 million? Okay? He’s going to go invest it in something. Let’s pay attention to this. People that don’t understand financing, do not understand this. They think of this as if they are the seller. You are not the seller. You do not own the $3 million property outright. You are not the seller. So stop thinking you are the seller, you’re not. Mario goes, this is super advantageous for me. We do a YouTube video all about this, which we haven’t edited yet.

Pace Morby (40:20):

And he goes through about 11 reasons why this is advantageous to him. If you’re in the audience, write these things down and don’t ever ask me why a seller would do this ever again because here’s the reasons why. Number one, if he sold this for $3 million on the market, with an agent, it will cost him about 12% to sell that property. Why? Because commission to an agent, closing costs, concessions, survey, all the things that have to be done on a multifamily property to sell the property average around 12%. The seller pays that 12%. So what is 12% of $3 million? It’s $360,000. So right there, $360,000 more money goes to his bottom line. It is a way better investment for him to sell to me than going through an agent. So that’s number one.

Pace Morby (41:16):

Number two, when he bought the property, he bought the property for $1.5 million. So if he sells it to me for $3 million and he takes the cash in year one, he now has a significant tax liability. He’s not going to take, I’ll whiteboard this real quick, because people are going to lose track of this. Hold on a second. If he sells the property for $3 million, he’s going to pay $360,000 in closing costs, commissions, all that kind of stuff because the seller pays for that. Okay? And then he’s also, let’s say his net, remember he bought the property for 1.5 million. He has a $1.5 million gain in that timeframe that he’s owned it if he sold it to me for 3 million.

Pace Morby (42:04):

Now, if you take that 360 out, then he technically, let’s go down here. You can tell I use this whiteboard a lot. $1.5 million gain in that timeframe, subtract his 360 that he has to pay to agents and all that kind of stuff. He technically has a $1.14 million gain. He’s going to pay massive tax on that gain if he sells this property in the first year, massive. He’ll probably pay somewhere around 30%. So now not only did he have to pay this out in commissions, he’s now going to have to pay 30% in taxes for selling the property. And so he’s going to walk away, instead of making $1.5 million like most knuckleheads think he’s going to make, because he bought it for 1.5, he sold it for three.

Pace Morby (42:48):

He is going to make $1.5 million. No he’s not going to make $1.5 million. Why would a seller sell to you any other way besides seller finance? That’s the way you have to think about this. He avoids all the commissions, all the closing costs, all the broker stuff, all the surveys, all the home warranties and all that crap. Then he avoids the tax liability of 30% of this, which is another $340,000 in taxes. So right here between this 360 and this 340, he’s already sold the property for $700,000 more because of seller finance than he would have if he sold through cash. The question you have to stop and ask yourself really is, why would any seller sell to you for cash? They’re going to lose 700 grand right out of the gates.

Pace Morby (43:37):

Now, there’s some major benefits there. The third reason, this was actually his number one reason, is he said he wanted to sell the property because he’s 55 years old. He’s like, I’ve been retired since I was 35. Okay? His name’s Mario. Mario moved from Bulgaria to America, New York City with $60 in his pocket, 35 years ago, when he was 20. He lived in his cousin’s house, in their basement in Long Island. He would go work at a restaurant down the street. And within two months he went and took his brokers, broker school and learned terminology and started learning English. And he bought his first deal ever, was a subject to deal. 35 years ago. He’s been doing creative finance for 35 years. And so for him he’s like, this is easy for me.

Pace Morby (44:22):

But now he’s like, even though I’ve been retired since I was 35 years old. He’s like, I want to be really retired. Because right now even though since 35, I haven’t had to worry about income, I still deal with the tenants. I’m kind of a smaller, I’m on par. This is a thing a lot of people also don’t understand, is that these landlords get to be tired landlords. They get to a point where they are like, I’m done dealing with the tenants and the property management. I’m done. I just want to retire. He’s got a 12 year old boy. He’s like, I don’t get to see my son as much as I’d like. And so I’m selling all my assets on seller finance so that I have true passive income.

Pace Morby (45:01):

The problem is, as he’s selling this property for $3 million, he goes, the hard thing right now is that I don’t have something to roll into through a 1031 exchange. If I sell this for cash, even after spending all this money on commissions, closing costs, et cetera. If I want to avoid the tax, I would have to 1031, roll that money into another deal. And he goes, that means I got to buy another deal. I don’t want to buy another deal. I want to retire. Instead of doing a 1031 exchange, this is a way that sellers will avoid paying all of those taxes. I’ve given you hundreds, not hundreds but probably a dozen reasons or so why this works. No appraisal, no inspection, no real estate agents on either side. No survey. You can close this transaction in less than five days.

Pace Morby (45:47):

Do you know how long it takes for me to go, we just closed $109 million purchase in Charlotte, North Carolina, 440 units, multifamily. Took us six months to get the lending put together for that. Six months. So avoids all of that. If he was going to sell this on cash, guess what, his buyer was going to have to go get a loan to buy the property. That lender is going to go through appraisals and inspections and all sorts of stuff. He gets to avoid all of that. All of it. I was sitting there listening to Mario tell me all the reasons why he sold the property. I wrote them all down. He says, I’ll receive more money. I avoid a 1031. No agents or commissions. I will make more money because of that. Seller will be upgraded from landlord to the lender, which is the highest calling in all of real estate. And I will have true passive income. The tax benefits, the seller will be able to spread out all his tax benefits.

Pace Morby (46:39):

No more tenants. This is number nine. And then he also, check this out, he will receive interest payments on this sale. He’s getting 4% interest guys. Think about this. If we go to bankrate.com, for example, okay? Go to bankrate.com. Here, let’s go. I’ll pull this up in just a second. Bank rate mortgage calculator. Okay? If you go to bank rate mortgage calculator and you type in $3 million at 4% interest, let’s look at this. Let’s say $3 million, no down payment.

Robert Leonard (47:14):

That’s 30 million, right?

Pace Morby (47:16):

30 million. Now I have a 30 year mortgage on this. So forgive me on this. I’m sorry. I have a 40 year mortgage. My payment’s going to be lower than this. My payment and bank rate won’t let me do a 50 year mortgage on this, which is annoying, but it is what is. In a 30 year mortgage, look at this, $0 down, $3 million for 30 years at 4%. My payment to the seller, okay? Is $14,000. This is what’s powerful. Okay? Let’s look at the amortization on this. The amortization on this shows you, you guys don’t know this calculator, a lot of people don’t know this calculator, look at how much interest he’ll make on this deal. Did he sell this property to me for three million or did he sell this property to me for $5,156,239?

Pace Morby (47:59):

He will receive an additional $2 million of interest on this deal because he did this deal with me. Now, Mario’s not going to be around to receive those checks, but guess what, Mario doesn’t need those checks today. He’s already a wealthy real estate investor. Where do those payments go? They go to his estate and his children and his grandchildren and all that kind of stuff. Guys, all the wealthy people, the Rothschilds and all these people that are out there in the world, they build wealth to leave to their children. Why would somebody at 55 years old take, there’s no balloon payment on this by the way. I have all the way for 50 years, I can make this payment for the rest of my 50 years.

Pace Morby (48:36):

My payment’s 11 grand, but he’ll probably get two million or so in interest. So there’s another reason why a seller would sell to you on seller finance, is because they get interest on the deal. Remember, I’m not negotiating with somebody in my position. I’m negotiating typically with somebody at a much higher, more elevated position than me financially and they have the ability to play the bank. This happens all the time. In fact, a lot of the properties that people buy with multifamily between 50 units and 100 units, all are purchased on seller finance to some degree. It’s crazy.

Robert Leonard (49:07):

And like we talked about earlier, he could sell that note if he really wanted to.

Pace Morby (49:11):

Yeah. And he said that. He’s like, if I need money for whatever reason, I could go sell this $3 million note for $2.7 million. He’s like, I’m still going to walk away with more money in my pocket if I sold the note than if I went through a real estate agent and commissions and closing costs and surveys and this, that, and the other. He’s like, for him, he says there’s no benefit to him selling on cash. No benefit

Robert Leonard (49:34):

Pace, let’s assume you’ve convinced people listening to the show. They’re like, subject to seller financing, whatever creative financing strategy it is that they learn from you. That’s the route they want to go. Where do they start?

Pace Morby (49:47):

Guys, like any other business. Okay? Any business you have to have leads. You have to have people to talk to. Okay? If you’re brand new, you don’t even know what I’m talking about. I have a free Facebook group called Creative Finance with Pace Morby. There’s 50,000 people in that Facebook group, all doing these, not doing these deals, there’s probably about 10,000 people in that group actually doing a good amount of these types of deals. The other 40,000 people are learning and they are adding value to the other 10,000 people by saying, let me drive and look for ugly houses. Let me do this for you. Let me provide value. Let me go take photos for a property. I would say, get involved in a community of people that are doing this.

Pace Morby (50:24):

It’s just like, how do I learn how to ride motocross better? I get around friends that are riding motocross. Join Facebook groups, go to the track, go up in the mountains and hang out with these people and ask them, why are you using that Alpinestar boot versus that Alpinestar boot? Why do you like that helmet versus that helmet? What are you guys doing when you can’t get your motorcycle to start? You have to be around people that have the answers. And so I would suggest they go to my free Facebook group. It’s free to join and free to stay in there for the rest of your life. I don’t sell anything in that Facebook group.

Robert Leonard (50:55):

Other than just the Facebook group, as we round up this episode, I want to give you a chance to tell everybody where they can go to find you. We talked a lot about social media earlier. What’s your YouTube channel? What are your Instagram, Twitter, whatever other platforms you’re on. What are your handles that everybody can go find you?

Pace Morby (51:11):

Everything’s under Pace Morby. I was lucky enough to have a name that’s unique, so Pace Morby. Just look me up on Facebook, YouTube, TikTok. YouTube I would say is my favorite because it’s longer form, right? We’ve been on here two hours and nine minutes, and for me it feels like seven minutes, because I love talking about this stuff. And so if you guys want more things where I’m talking to sellers and I’m breaking down deals and you see me explaining things in longer form. My YouTube channel is the best place to go. Just Pace Morby, youtube.com/pacemorby.

Robert Leonard (51:40):

I will link to all of Pace’s resources in the show notes below for anybody that’s interested in connecting. I’ll also put the resources, he mentioned a couple different StartVirtual, the note collection, Evergreen Note Servicing, and a bunch of other stuff. I’ll put all that in the show notes below for anybody else that’s interested in checking those out as well. Pace, I really enjoy this. I think this is the longest podcast we’ve had. I really appreciate you taking such a big chunk out of your day to meet with me-

Pace Morby (52:06):

Of course.

Robert Leonard (52:07):

… and teach the audience. Thank you.

Pace Morby (52:09):

Thank you brother. I appreciate the opportunity. You guys have a great show and happy to come back. If you guys ever get questions from your audience, they want to talk about a specific episode or a specific thing and deep dive on it for 30 or 40 minutes, I’m happy to come back for a part two of this anytime.

Robert Leonard (52:22):

That sounds great. I will definitely take you up on that. Everybody, if you enjoyed this episode, reach out to Pace. Let him know that you heard it here. I know you guys are great about that. So please continue to do that. Pace, thanks so much.

Pace Morby (52:33):

Thank you brother.

Robert Leonard (52:35):

All right guys, that’s all I had for this week’s episode of real estate investing. I’ll see you again next week.

Outro (52:40):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday we teach you about Bitcoin and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.