Big Fat Real Estate Checks Ep 173: In’s & Out’s of Buying Real Estate with Seller Financing & Creative Terms

Please enjoy this transcript, but please note that it may contain a few typos. With many episodes lasting over 2 hours, it can be challenging to catch minor errors. Enjoy!

Marco Kozlowski:
Hey everyone, welcome to big fat real estate checks. We’re with Gabe. We’re with Frank. And I’m Marco. Kozlowski Gallucci CEO and that IE fish. If you’re not familiar with big fat real estate checks with yours truly Marco Kozlowski, where you’re basically just hyper focused on giving you as much value as possible, give you a different perspective, show you how to be wealthy by serving the elite, but he can’t even say serving others at the highest possible level. We’re going to keep that because it’s interesting. We like interesting. And if you follow certain processes and principles, you don’t need money to make money, you actually just need skills and practice. And we’re here exactly for that reason, and I am joined with my two compadres, business partners, friends, brothers from another mother, Mother, I’m having a tongue twister day. And Frank who just somehow stays at my house for months on end and just just can’t get rid of him. Kind of like my, like my ex wife only only making me feel terrible. Stop him. You’re always invited Frank, you’re always invited at least

Frank:
you bring treats from Canada.

Marco Kozlowski:
From Canada, you earn your say by bringing me KitKats from Canada and wonder bars and potato chips or chips that are from that are made of ketchup. It’s not the Tim Tams Tim Tams those are Australian but delicious. So anyway, let’s get off of food for just one second D. We are going to be discussing today. Oh, before I forget, if you love this, please like us love us share us make sure that you add us to whatever series that you’re watching our our mission is really to give you relevant, fresh content that can be applicable as soon as possible. And we’re very proud of our five star average reviews. So let’s keep that up. And, yeah, let’s today discuss, really having a full picture of terms with the actual cost or price of something, we just did a podcast on pricing terms. If you haven’t listened to it or about to listen to it, I think that’s a pretty good one to listen to, as well as all the others. But really understanding the full picture. And being educated on really what’s happening is going to make a big difference between the actual price of buying something or custom buy something with versus terms. And most people want to buy assets. Well, we buy assets at 30% discounts, and those that we don’t buy at 30% off, we we don’t close with asset based lending, since it’s more than that, by being able to take over debt and do creative things. We’re creating terms, which will eclipse a better price, always. So we’re always looking to create the best terms possible. And that is why we actually have an impasse in our process. And I think we have a podcast on that. So who wants to start? Gay since I started feel free.

Frank:
I don’t know what lesson I was just thinking terms. But terms can it’s a double edged sword isn’t not as some people could be. So if you’re if you’re buying something on terms, if you don’t have the full picture or the full story, you may be paying a lot more for that item or that property than anticipated. We use terms like I said, Marco we, we look for the discount first and our terms in terms of later on in the process, so we can leverage our capital to give you a better return. So you know, like car dealerships, you know, they they sell on terms and sort of other retailers they sell in terms, but it doesn’t necessarily mean you’re getting a better deal by leveraging it out. That’s how they make money. In fact, some of them, you have to finance to them with the terms because that’s where they make their money. This is not so much money, I guess on a on a new vehicle. There’s a little bit depending on the type of vehicle, but they’re making money on the actual terms. So that’s what I mean, it’s it could be a double edged sword when you get into it. But if you do it properly, terms can be your best friend, it’s better than cash. And there’s a there’s a perception where, I don’t know maybe America, I’ll let you explain the example. Sometimes on the surface, you may look at a property and look at an item or a product. That’s, you know, a lot higher priced. And yes, it’s a lot higher price, but if you look at the terms, the terms will make it more attractive at the end of the day.

Marco Kozlowski:
So as long as there’s value, I think the key here is terms with value, right? With no trans was value there you go, right. Yeah, because we see a trap all the time. Oh, you know, this person is selling with owner financing. Right, right. So what great turn Like, you know, low down and you know, reasonable payment. All right, well, you’re like to bring back the car lot example, gave I don’t know if you want to speak to this, but the first question they ask is, well, how much you want to pay a month?

Gabriel Araish:
Exactly, exactly. And then, if they’re asking you for a payment, then you’re discounting the whole value of the car. I mean, even if you tell me you want to pay $400 a month, because that’s what you can afford? Well, that’s great. But it may have been $200 a month, if you actually look at the purchase price of the car, and then get on terms afterwards. So you have to understand what you’re paying for. And this, this works in all directions, because it’s the you know, you have the car salesman tactic, which is, I think, coming into the home sales tactic now or like, or how much you want to pay for your mortgage, and then you work your way back. And you don’t, you don’t really look at the price of the house, which is becoming dangerous, more dangerous. Fair, Dan. But But ultimately, the other the other side of the equation is sometimes you have something that at the surface doesn’t look like it makes any sense in terms of price, but when you look at the value of it, or the value to you, based on the whole story, and the terms that are available, it may actually make sense in the moment. It’s funny, Frank and I were, we’re working with a student today. And, you know, they had this property that was had a net operating income of 200, and whatever, 15 $16,000. So, so presumably, the value should be anywhere between two and $3 million, depending on where you are in the country. And the asking price, which was supposedly a super great deal, based on the seller was $17.2 million. So now when you’re looking at it, that’s pretty crazy, right? It’s, it’s a nonsense deal. And it’s actually laughable. However, what if the terms of that deal were that you have to make a $4,000 payment a year until it’s paid off? The 17? Point 2 million? Doesn’t matter how long it takes? Let’s assume that that’s the those are the terms Would that then make sense? Four times 12 is 48,000. Call that $50,000? What you have to pay, and you’re keeping 216 to 16 minus 50. leaves you with over $150,000 in your pocket every year. net, net net?

Frank:
You do this calculation in your head, I got 100%. Yes, you did.

Marco Kozlowski:
You lost me at $4,000.

Gabriel Araish:
That’s okay. You know, go back and listen to this all over again. If not, you can use the speed and go back to let me

Frank:
say, calculator for

Marco Kozlowski:
this. A calculator. I love that. All right. So

Gabriel Araish:
let me say it’s stuck in a library. Let me say

Marco Kozlowski:
it in, in in layman’s terms, because none of us are as smart as you again. All right, it’s like paying a million dollars for $100,000 property. And the payment is $1 a month.

Gabriel Araish:
That’s pretty much it. Now all of a sudden, that becomes a great deal as opposed to a laughable because

Marco Kozlowski:
no one would pay a million dollars for $100,000 deal. But if the payments $100, literally $1 a month for the next million months. Now there is a downside to that and that you can never sell it, you have to keep it

Gabriel Araish:
unless you sell it with the same terms

Marco Kozlowski:
unless you if if the terms don’t change, right, because

Gabriel Araish:
you change them to $2 a month. where

Marco Kozlowski:
I’m going with this is that like for an example, for example, owner financing, where we’re going to sell it to you or give you a car at x, y, z or Zed amount per month, you’re upside down your car you but your car is going down in value, and you’re going to be literally upside down in your car. So the next time you trade in your car, you’re screwed because now you owe way more and you don’t have what they want. So the GAP insurance if you pay too much, which is the gap between what you owe and what it’s worth. And suddenly, you’re, you know, you’re basically rolling in a bad deal. For the next three cars. I’ve met a lot of people that have been falling victim to that right where you’re constantly, always catching up to that bad mistake or even refinancing sounds like a good idea. Frank and I had a whole conversation about this. We can have another podcast on this where people refinance at the wrong time to slower their payment, but they’re resetting their amortization schedule and actually paying way more. Because a lower payment is actually a trap. Because Oh,

Frank:
which I found out about that. Yeah. We’re

Marco Kozlowski:
like, holy shit, what the hell, right?

Frank:
It’s such an I don’t know if it’s so much in the States or maybe it is in the states too. So I think it’s more of a

Marco Kozlowski:
meanie. No, no, no, no. Is it? Oh, no. Okay, if you’ve, if you’ve ever borrowed money on a car, right? You’re you’re halfway that’s when it starts. You’re halfway done paying your car right? And your payment is based on a higher dollar amount. So you owe half as much. So if you were to refinance, right on your car loan, you’re Payment drops because it’s, you’re literally financing half of what the car is, is owed, if there’s value there, right? Yeah, you’re getting all these offers to refinance over the next three years your car because you’re gonna save a shit ton of money on your, you know on what’s happening. But what they don’t tell you is let Frank finish that because it kind of pissed him off.

Frank:
Is Yeah, the whole amortization schedule starts over again, where you’re paying your your payment, most of its been contributed to principal versus I mean, towards interest, which is principal. So it’s terrible. You’re actually we? I think we did a little test on that. Yeah. And you ended up paying, oh, man, I wish we had in the pain a lot more. It’s stupid. It’s like, Well, why would someone want to do that? They do it all the time, even your mortgage

Gabriel Araish:
right? On your mortgage. When you look at how much you pay over a 25 year period, you end up paying double the house just on the interest that you’ve that’s at like three or 4% interest, let alone it

Frank:
exactly. So if you refinance, just say you’re in your second trimester, you refinance. You just screwed yourself, you’re just back to square one. On a lesser amount, I get it a lesser amount. But the bank’s gonna take up more interest now. Because you’re back on that first trimester it was it was actually mind blowing. And yeah, I was pissed. Canadians back.

Marco Kozlowski:
I, you know, who

Frank:
knows this? I thought we in a crack like, like some kind of, well, the bank big secret. It wasn’t a secret because obviously they know what’s going on.

Marco Kozlowski:
Right? In Canada, they make it? Yeah,

Gabriel Araish:
it’s a racket, it’s a racket. In Canada, they make

Marco Kozlowski:
you refinance your property every, what, five years, six years, three to five, and they reset the amortization schedule. Every time you

Gabriel Araish:
don’t reset, they don’t reset the amortization No, if you go this rate, actually,

Frank:
if here’s where they get you. So this way, this is what I found out the reset your amortization rate, if you go to another financial institution, if you stick with the same one. So there you go, you’re handcuffed now, that, Hey, you want to stick with us. You want to refinance, we won’t reset it, but you have to stay with us.

Gabriel Araish:
So that’s how they get, you probably get a higher rate than if you move, you’re gonna get

Frank:
a higher rate because it had shopped around the shop, that this bank will go to that bank, and

Gabriel Araish:
they want you to go and that’s the reason the other banks will give you a discount is so that they can restart your amortization schedule, and this is what they’re buying.

Frank:
And here’s exactly what I meant earlier on, when I say it can be a double edged sword, where the terms with value benefit you. And sometimes the terms will benefit, you know, the banksters in this case, and

Marco Kozlowski:
you really do have to look at the complete picture, not just half the picture, for example. Would you jump out of a plane with no parachute for a million dollars? On if I want to commit suicide? Right? Nobody? Nobody says yes to that. Not yet anyway, well, what if I told you that it was a Cessna, and it was actually on the ground, and it’s only a foot off the ground, because there’s no landing gear. You just because you didn’t understand the big picture, you made a quick assumption on something. So you have to really understand the full picture. Just like when you’re the same as a car, you see, you see an ad for owner financing. And it might look like it’s a decent deal. Shit, that’s 10% down payments seem to be reasonable. But you’re overpaying for the property, which might be okay. But if you have a window to refinance within a certain amount of time, that property is still overpriced, you’ll never refinance it, you’re losing the property. And there are big traps when there’s a lot of unethical real estate, human beings that make a living out of taking people’s deposits, knowing that they’re not going to be able to refinance in a certain amount of time. And then just continuously just take that money and, and deposits over and over and over again, not because there’s no exit for you to actually do what you’re supposed to do. Or if you’re creating a deal where hey, I have no money down and got 80% from the bank, I got 20% from the seller, you have someone that that actually structured a deal, but it’s full price, with only a three year window with the seller. Well, when you refinance, you’re still going to owe more than you can actually refinance the property. And you’re not going to be able to keep your promise and you’re setting yourself up to lose that property and three years from now. So it might be a good deal upfront. And by the way, why do you think I know this? Right? So you’re making promises here and there, and then suddenly, now you can’t keep your promise and you end up losing the property anyway. So you never had the deal. And you’re dealing with, you know, all the shit that goes with that buying a property at the right price not making enough. So price first, value first, next terms, right, make sure that you understand that you’re getting the best value within those terms. And the value has to have a if there is a term with a limited time amount. Does it really give you the opportunity to give you an exit now $1 a month for the next million years? Whatever months? That is right how many years that is a million divided by 12 Can’t do that my head? I think I think you can I don’t believe it. I think you’re just saying you can’t because you don’t want to show off. It’s you know, whatever that is It’s just a lot. Yeah. Yeah, it’s a lot. It’s, I think it’s eight. Is it eight? No, it’s like I can’t do 1333. Thank you very much. Thank you very much. Thank you very much. Yours 83, whatever that is. So will I be alive? And does it matter at that point? Like, if I, if I, if I fail, what happens? What’s the consequence of not keeping those terms? And just remember what that is? If I’m buying a car that’s overpriced, what’s the consequence, go over the the lifespan of the term and see where you land and make that decision and see if it’s worth the risk or not. That’s really the way to look at that buy belief, because I’d buy a property all day long. For $100,000. I mean, for a million dollars, it’s worth 100,000 With the right terms, if I can make a cash flow. However, if something goes wrong with the property, and my whole family dies, if I don’t keep making the payment, then I might not, because something might go wrong with that property. And insurance won’t cover any damage, and I’m stuck paying that payment forever, whether I like it or not. And if it’s cheap enough, and I can afford it, that’s fine. But if it’s $5,000 a month, do I really want to stuck with that yoke around my head? Forever? Right? Am I personally guaranteeing that when something happens, I’m screwed, or my family screwed, or my ears are screwed? You want to be careful with that? What else can we any, we nail it without it? I

Gabriel Araish:
think so I mean, you can keep giving examples. But at the end of the day, you have to understand the the underlying concept, which is get all the information before being able to understand whether or not something is good for you or not good for you. And doesn’t mean if it’s good for you that it’s good for everyone. It’s good for the person who’s looking at it based on their own situation. And

Frank:
I recalled sometimes when we when we made phone calls for it was actually one particular hotel where the seller was asking whatever it was, let’s just call it a million bucks. And he had a full asking price. But the terms were not as favorable because they put the terms to be it needs a cold variance change or whatever. And they actually put us on the contract where they have to get a mortgage at us under a certain percentage for a certain amount. So those are the terms again, the seller, we were trying to get the seller to we were trying to buy the property say hey, man, you know what we’re going with cash, that would have been better than the terms he would have got at full price. So it can go the other way as well. So even from a seller perspective, like yeah, they got their full price. But now there’s terms attached to that which may not serve the seller at that point.

Gabriel Araish:
Right. So maybe just for a last example, you just because of something that we’ve done together, here is the last hotel that we purchased together. You know, the price tag was seven $8 million, something like that. That’s the asking. And they had multiple offers that were over that amount. And the reason that they were all refused is because the current use as a hotel just didn’t work at the purchase price that they asked for. And so people wanted to convert the hotel to something else. And that’s how they would bring the value to it. So that’s how most of these buyers were thinking. We were we thought differently, you were like, Okay, well, it looks like they want to keep it a hotel, because it’s important to them to keep it a hotel in a conference center. That’s fine, it doesn’t work at this at this price. So we we we went down that road saying that it’s not going to work. And because we understood what the needs were, we were able to get it at, you know, around $3 million, which is way below asking price. So it works both ways where we never thought that we can get a hotel that’s worth a lot more than what we paid for it. Because, you know, we’re used to discounts but not this type of discount. This was a major discount. But that came because of the terms and the terms was you have to keep it a hotel. And we were okay with that. And that suited us but nobody else was looking at it that way they look at you know, it suits us to convert it because that’s how we make money. So again, having all the information which we ended up getting the information that it had to be kept a hotel and that was a condition. That’s what made us you know, get the terms that we’re looking for.

Marco Kozlowski:
You just unlocked a whole other podcast on like Karen, where you know, I was oh my goodness,

Frank:
I was just brain man.

Marco Kozlowski:
I just had that scary shit.

Frank:
I was just thinking carrying from Fort Lauderdale. We said that we have time for carry don’t

Marco Kozlowski:
We don’t because or you know, are the 146 units that we bought in, in. In St. Louis. The guy’s asking a shit ton of money hadn’t raised the rent since 1986 and was asking more than its value and we got it for literally for almost a song because of something right again it’s it comes down to not just terms but the reason of sale right the reason

Frank:
for me

Gabriel Araish:
which is which is having enough information, all information

Marco Kozlowski:
exactly. So the motivator Right. So I think having a separate podcast on the kinds of things that you can do the ninja things that we all have done, and we continue to do and my tribe is doing because of knowing what’s happening and what they need to do next, and not focusing necessarily on the price and the terms, we do focus on price. But we create terms that suit the seller to give them exactly what they need to serve them at the highest level. And I think a separate podcast on that would be, we have a lot of stories so we can we can find some great ones on that. And you’d be shocked as to the kinds of things that we’ve put together and done. And sometimes with that, sometimes a lot of times with zero money that the seller is looking for, it’s just something else, and I don’t want him to get out of the bag. What am I thinking?

Gabriel Araish:
Thinking that you’re thinking? I

Frank:
don’t know, you’re my head. What do you what am I thinking now?

Marco Kozlowski:
I can’t tell you what you’re thinking because I appreciate it.

Frank:
I think we’re thinking we’re done. That’s what I’m thinking. All right,

Marco Kozlowski:
let’s not make it. Alright guys. Of course, always appreciate your feedback. Gabe, Frank, thanks so much, you guys invaluable to this listener, I hope you enjoyed this. Make sure you like us love us share us and learn one thing at play one thing per day, get better at that one thing per day. And remember its success stacks on your past failures that are turned into lessons because it’s either, you know, a really good lesson or a really good story. Either way, it’s going to be great, right? So don’t worry about it. If you wake up today, it’s a great day. And that’s all that matters. Everything else is a bonus. So appreciate you. Again, like us love us shares and can’t wait for the next episode, we’re going to share some really cool stories on how we created terms based on just listening to what the sellers needs or what the sellers needs were and how we really solve a problem. And that’s how we actually create wealth is by solving other people’s problems. And in order to do that, there’s one secret thing you need to do, which I’ll share in the next episode. Thanks, guys. Appreciate you. Have a good one. Bye for now.