Our guest, Joe Crump has helped many people to buy and sell properties. Today, he will help you, by bringing more creative real estate investing strategies! Learn what he thinks of the changing market, why you should pursue the win-win strategies when dealing with the sellers, and how Joe flips lease options.
What You Will Learn About Creative Real Estate Investing – Joe Crump:
- What inspired Joe Crump to transition from the film industry to real estate
- What he learned from the ’91 market crash and how it helped him to survive the last one
- How his business looks like today
- Where and how he finds his employees
- What excites him when it comes to the changes in the market
- How Joe approaches sellers
- Why is the win-win strategy the best one
- Why seller financing is better than conventional loans
- The zero down structure hierarchy
- How he flips lease options
- How you can get Joe Crump’s training videos for free
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Matt Theriault: Okay, so on the phone, I’m with Mr. Michael Pendleton. He is a member of The Your First Deal Course, and you know what? He got his first deal.
So I saw him post about it on the follow-through Friday post inside of the Your First Deal private Facebook group, and I just brought him on here to talk about it. And so, Michael, how are you?
Michael Pendleton: I’m doing well. I appreciate you having me on.
Matt: You bet! And just, actually, I appreciate you for just taking instruction, and following through, and getting paid.
Michael: It’s pretty easy when you lay everything out. You literally just have to do it. There’s really no excuse.
Matt: Well, I’m glad you said that. People are tired of hearing me say it. What market are you in, Michael?
Michael: Oklahoma City.
Matt: Oklahoma City. Alrighty. And then … So you had like three deals coming around, but you posted your first check, I think it was for … I don’t have a picture. It was like $15,000?
Michael: Yeah, 14,500, Exactly.
Matt: 14,500. Close enough. So how did you find this particular deal?
Michael: That was actually printing off my own postcards, and stamping them myself, and mailing them. And so it’s just an absentee owner list, and so I ended up getting a call on it. It was actually … kind of took your three-option letter of intent, and your … that slam and kind of combined it, really, into the postcard, just had it front and back and [inaudible 00:01:19]. You know, I kind of laid all my cards on the table? And the ones that called me back were generally pretty interested.
Matt: Nice. Ingenuity, resourceful.
Matt: Very good. All right. So, it doesn’t sound like rocket science to me.
Matt: What’s your plan next, in strategy, was to flip it, I presume, since you already got paid?
Matt: Right? Perfect. And how much money you made on that was 14,500.
Matt: And so, you got two others. Let’s talk about those. How did you find those two? The same way?
Michael: Same way. The other two were actually a package deal from a landlord. And I actually ended up making offers on three. He accepted two out of three and went seller financing with another investor. But, you know, they ended up being great deals.
Matt: Cool. So you got these three deals in. What [crosstalk 00:02:06] would you say is your biggest lesson learned in these transactions?
Michael: You know, I’ve always heard it, and you’ve probably said it 100 times I think that, you know, if you have a deal, it’s really easy to get rid of. And early on, in hindsight, I found myself, I guess massaging the numbers, just to get something under contract.
And so I’d get it under contract. You know, I had seven or eight under contract, and I just couldn’t figure out why I couldn’t move them. And then, you know, I kind of sat down and self-analyzed, and realized I didn’t have a deal. I was convincing myself. I was trying to get somebody to buy a property and, you know, these three, the first one was gone in about 30 minutes, and the second one was gone in two hours.
And so, the lesson learned. You know, a deal will be gone very quickly. And so if it’s not gone very quickly, you probably need to do a little self-analysis and figuring out if it’s actually a deal.
Matt: Right. Yeah. It’s either a lack of exposure or it’s not a deal, right?
Matt: So, how are you and Casey going to celebrate?
Michael: Now that we have a marketing budget, and so we … That’s all I’m doing actually, I think, these last two weeks and, you know, with our isolations, and just really been working on the systems.
This is our third business since a week. We own quite a few other businesses, and so I have to automate, and so to get it to be successful, to be able to scale it. And so taking the marketing budget … You had a podcast with Cris Chico, and so I’m doing a lot of Facebook advertising right now, and really just trying to find ways to streamline, and see how I can scale while simultaneously back myself out.
Matt: Fantastic. You’ve been a pleasure to have around the community. Keep doing what you’re doing. If you need anything, you let us know. And we’ll do this again.
Michael: Outstanding. Well, I appreciate everything you do. You give a wealth of information and, you know, people really just have to do it, and that’s all it is.
Matt: That’s awesome. Thanks, Michael. Have a good one.
Michael: I appreciate it. You too.
So, if you would like to walk in Michael’s footsteps and get that first or next deal done, put one of those $14,500 checks in your pocket, you can go to freerealestateinvestingcourse.com Everything you need, as you heard, is available inside that course to get your first or your next deal done, using little to no money. Go to freerealestateinvestingcourse.com.
Speaker 1: This is Theriault Media.
Matt: Alrighty. So today, I am joined by a seasoned real estate investor that started back in 1986. And just three years after he’d started, he had been able to purchase $17,000,000 worth of property. And since, he has helped many hundreds of people buy and sell real estate, and he’s sold a ton of it for himself. He’s also taught many, many folks how to become real estate investors, quit their day jobs, and change their lives.
So please help me welcome to the show, Mr. Joe Crump. Joe, welcome to Epic Real Estate Investing.
Joe: Thanks for having me on the call, Matt.
Matt: You bet.
Joe: One thing you forgot to mention. I also lost that $17,000,000. So, that happened back in 1991. And so I’ve been through the ups and downs of this whole process, and it took me a few years to come back from that major loss. But I learned a whole new way of investing [crosstalk 00:05:33] because of this.
Matt: Yeah, they say … Excuse me, I was just reading one of the memes on Instagram, and it was of Bill Gates. And he said, “Success is a terrible teacher.” So you must be a phenomenal teacher now. No, I resemble some of those remarks, so I get it. You know, I was reading up a little bit about you, and you had started in the film business, and there’s a little bit of parallel there. I started in the music business and made a transition over to real estate.
What inspired that transition from film to real estate for you?
Joe: Well, I was working in Los Angeles. I went to film school, and I was working in Los Angeles as a grip, which is lighting, the lighting department in the business. And I was sitting on the dolly, the camera dolly, with the assistant cameraman one day back in 1985 or so, and he was telling me about the house that he owned. And he had made more money on the appreciation on his house than we both had made that year, you know, working in the business. And we were doing pretty well in the business. And I thought, “Wow, this is amazing. You make this money without doing anything.” And so I thought it’d be a great idea. “Let’s go out and buy a house.” And so I went out immediately, and I bought a brand new construction. It hadn’t been built yet. And it was a stupid way to buy property.
I went out and got a loan on it, and by the time they were finished building it … It took about three months, four months to build it. It had gone up 20% in value. And I bought it at full price when I bought it, but it went up in value because the market was going crazy at the time in California. And so I thought, “Well, what am I going to do with this? It’s too far away from where I live. I don’t want to live in it. I don’t really want to put a tenant in it. You know, because it’s too far away. I don’t want to manage it.” So I just sold it and I made a profit. And I thought, “This was pretty cool. I can make money and maybe if I bought a property below market value,” and a big light bulb goes on, “that maybe I could make even more money.”
So I did it again, and I started flipping property. And then I started building property up in the Hollywood Hills and building some really large houses up there, you know, the million-dollar properties at the time. And this is like back in the 80s.
And then in ’90, ’91 is when the big SNL crisis happened and the crash came, and that’s when I got caught in that whole mess. And it was because I was leveraged out, and I was using loans. I was using, you know, mortgages. I was using my own credit. I was using my own cash into these deals. And that’s how I was able to build very quickly. But the level of risk on deals like that is so much higher than if you do it with seller financing or you do zero-down techniques, or if you use cash only for properties, which is what I do these days. It’s the subject … You know, I do both seller financing and cash only deals.
Matt: Okay. So lost it in ’90, ’91. How did the next crash pan out for you? Were you able to learn from your lessons, and make it through there, 2006, 2007?
Joe: Oh, yeah. I didn’t have, you know, my name on the line at that point. I had gotten my credit back in place, and I have perfect credit again, and I’m able to borrow. And I borrowed some more and bought some more properties, but I was also able to buy them in a way that was sustainable no matter what happened to the market. As long as I could put tenants in there, they were sustainable.
At the time, in 2004, 2005, I mean, I saw the bubble coming. It was the same thing that was happening back in the ’90s. And so I saw it coming again, and I knew that it was coming. I was just surprised that it took till ’07, ’08 before it really hit. I thought it was going to happen before that. So I was warning everybody about it, and people were going down to Florida, and they were buying into these condos that were being built in Florida, and they’d pay 4 or $500,000.
They’d put 20%, they’d get a new loan on it, and when that crash happened, they couldn’t sell those properties. So now they’re stuck with these properties, and these big payments on these $400,000 loans. And the potential income for those properties is $1,200 a month, so they couldn’t sustain that business. At the same time, because of the no income verification loans, we were selling subdivisions, and I was selling properties to investors that were sustainable. So they could buy a property that was 120 or 150 in a new subdivision, that we were able to structure deals so they could get in with a really low down payment. Because of these no income verification loans, everything worked out pretty smoothly. And as long as they had enough reserve, they weren’t going to lose money because the income on those properties was more than the cost of the loan.
So it made sense. But there was still the risk for them. And one of the problems with ’07 and ’08 is we not only had declines and values, but we also had a lot more vacancies. I went from a … With my portfolio, I went from a 3% vacancy rate to a 20% vacancy rate. So any properties that I had mortgages on, I had to make sure those were paid, which I had enough reserves to do that, and I was prepared for it. But there are people that weren’t, and that didn’t keep any reserves, and they lost their properties, especially the ones that had negative cash flow. And with a 20% vacancy rate, that can be pretty painful. If it lasts for six months or a year or two years, that’s going to be very painful for people.
So you don’t want to put yourself into a position where you have that going on. And anybody that’s doing seller financing knows that if you get into a situation like that … Let’s say you take a property subject to, or you can give that property back to the seller, as long as you give it back to them in, at least as far as I’m concerned, give it back to them and in the condition that it’s as equal or better than what you’ve got it, and that it’s paid up, and on time.
You know, I don’t give back properties that I’m three months late on. And so I’m fortunate enough not to have had to do that because I had built my portfolio during those intervening years to be substantial enough so I didn’t have that cash flow problem. But I saw a lot of people go down because of that. And a lot of people that did loans and mortgages had that happen to them as well during ’07.
So having a little bit of foresight, having some experience, and having that pain in the past, made me very much not want that to happen again.
Matt: Right, right.
Joe: It was a painful, humiliating experience.
Matt: What does your business look like today?
Joe: Well, I have a, you know, a fairly sizable portfolio, and I also have most of it taken care of by someone else.
My philosophy in all this is systemization. You have to systemize, automate, and outsource the work in your business so that you can extract yourself. Because what you want, you know, as we all know, we want to work on our business rather than in our business. We don’t want to be the day-to-day stuff that we’re doing. We want to be able to look at the people that are in our field, the people that are … Our employees, our partners, we want to be able to see that everybody’s doing what they’re supposed to be doing. We want to have systems set up so that they know what they’re supposed to be doing. And then all we want to do is sit back and tweak things, and make sure that things are moving along smoothly.
I also try to set up systems so that each part of the system relies on another member of the team to make sure that the job gets done. So if Mary has to do a job, Sam over here knows about it, and he can’t get his job done unless Mary does her job. And so if Mary doesn’t do her job, I find out about it from Sam and vice versa. So you set up systems so that they all interrelate with each other, and that you find out about the problems very quickly because everybody else can’t do their job unless the other jobs are done.
So it’s really important to set up your systems properly so that you don’t have one person who’s doing all the work, and then if something happens to them, and you don’t hear from them for a week, suddenly I find out you’ve just lost a bunch of money because they didn’t do their job or they’ve disappeared or you’re not gonna have them any longer. And that’s a really unpleasant thing to happen.
After a while, when you’re doing this and you have a good system set up, and you’re working with people like me, everybody works from their own home. I don’t have an office space. I don’t want to go into an office space. I don’t want the overhead of office space. And I prefer, and most everybody that works for me would prefer to work at home anyway. It gives them some freedom. And we have worked together long enough. Most of my people have worked with me for almost a decade or more, so I’ve been able to keep continuity with my employees because they’re happy being able to do the work that they do. You know, I try to take care of them. I try to make sure that they’re happy with their job, and their pay, and their growth, and their potential for the future. But they try to make sure that I’m happy with the work that they’re doing. And, you know, that’s worked out pretty well for us over the years.
Matt: It sounds like good relationships with your team.
Joe: Yeah, yeah. Very important.
Matt: I couldn’t agree more. Are you still in acquisition mode, or are you just strictly in management mode at this moment?
Joe: Yes, I work with several new … A lot of the times with my acquisition is through my partners. So I’ll bring in people that I’ve … actually have been through my mentor program, and that’s pretty much the only people that I partner with these days because, having gone through six months of my training, and they understand what I’m looking for. They understand what I need. And what I’m trying to accomplish. So if they bring me a deal and say, “Hey, Joe, we’ve got … We’ve got one here. I don’t have the capital to do it. Do you want to bring in some capital and do something like this?” I can step in and do that. Or if they have a deal that, “Hey, I’ve got a property. I’ve got … I can get it on a land contract, I can get a subject to, but it needs a little bit of work. You know, we want to put a little bit of capital into it. Do you want to do that?” And I’ll come into deals like that. And then we set up separate LLCs to work with separate people like that.
So a lot of the investing that I’m doing now is using the money that I’ve put into my Roth IRA over the years and, you know, continuing to build that tax-free money. And you’re … I expect you’ve talked to other people about self-directed Roth IRAs, correct? Okay.
Matt: Mm-hmm (affirmative).
Joe: So …
Matt: Yeah. Great. So then, that’s kind of clear that as the answer to the question I was going to ask you. I was going to ask you what’s your best source or the most common source for off-market deals today? And it sounds like it’s partnering with your students or your clients.
Joe: I can tell you where we’re … ‘Cause I’m still bringing in leads. We’re generating leads. So I’m bringing in leads, and then I’m working with people as well. So that’s another part of it. And most of the leads that we’re getting are coming from the software system that we developed. I have a system that I call the Push-Button Auto Marketer, and it’s a lead generation development and conversion system, and it helps you automate your business. So I use it for my business, and then I also sell it to other investors who use it. And essentially, the basics of the system as it goes out to Zillow, and it pulls off all of the For Sale by Owners in a particular area. And it’ll send them a text that says, “Would you consider selling your home, rent-to-buy rather than selling it outright?” And it sends them a series of texts over a three-month period or whatever period I tell it to, and it’ll send different messages to them over that period.
So it’s a drip system for that group. And it sends them texts, it can send voice blasts, it can send them emails, it can … We’re getting ready to add a new module to be able to send snail mail. So it can send postcards and letters, and that it can do it in a sequence. It then takes those people that respond, puts them into a CRM like contact relationship management module within the system, and helps us keep track of those people as well. And then we know we’ve got people that are making calls to those people, and trying to put together deals.
And within that system as well, we’ve also … You know, we have a lead questionnaire. They can fill out that lead questionnaire online, get all the information that’s needed, and then the person with the skill, the rainmaker, whoever I’ve got assigned to that task, the person who’s the most skilled, usually one of my students, is making that call and closing the deal. Then they can also call through the system, which is kind of nice. One of the problems with dealing with any kind of telemarketer, and not so much my partner students, but my telemarketers that I pay hourly is it’s hard to keep track of their time.
We’ve set up the system so that it actually can record their calls and we can keep track of how long they’re on the phone. Instead of paying them, you know they send me an invoice, say, “I worked 10 hours and I made these 10 calls.” What we do instead is I’ll pay you 150% of the time that you’re on the call, and then we monitor them based upon the amount of time that they’re on the call because we have recordings of their calls. We can say they’ve worked for an hour. We pay them for an hour and a half of the time. That’s how they get paid, and that makes it possible for us to monitor.
It also makes it possible for us to listen to their recordings and make sure they’re not saying things to people that they shouldn’t be saying, and help them with the training process going through that. It’s really a helpful thing. I can put as many team members into the system as I want. We can assign leads to particular team members. Let’s say we’ve got a lead that’s assigned to one of my people and I want that person to call six days into the time that lead comes into our process.
I can have the system set up and the template created, sort of a follow-up template created that I can attach to that lead that says on day one they get this text, on day two they get this voice blast, on day three they get another text except it’s got a URL to one of their websites, the clone sites that I’ve got. On day five I want my team member to call them. We have an email or a text or a voice blast, whichever I choose. I can have that sent to the team member saying, “You need to call this lead today.”
They can go into CRM. They can see who the lead is. They can see what they’ve said to that lead so far, and be able to call them and do that follow up efficiently, and then keep their notes on it, so what’s supposed to happen next, and either leave them in that follow-up system, or, if need be, put them into a different follow-up system that applies more to that person based on the conversation that they had, or hopefully actually put a deal together with that person and close a deal.
Matt: Nice. Sounds like you got a really good thorough system set up. You’d said you had telemarketers. Are these employees? Are they contractors, virtual assistants, or is it a service?
Joe: No. It’s all the people that I’ve trained. Usually, we found them through either Upwork or Craigslist. We’ll either run ads in Craigslist. If I want people that are in a specific area, then I’m going to use Craigslist, but Upwork is pretty good too. I’ve found that it doesn’t really matter where the people are. They just have to have pretty good language skills. I’m looking for people who have decent language skills. If you’re hiring a telemarketer, it’s the last thing that I tell people to outsource.
As you’re going through this, first you want to automate everything that you’re doing. There’s going to be some things that you have to have humans do, and that’s what you’re going to outsource. You’re probably going to outsource the easier tasks first, the time consuming easy tasks. Like just having an admin person to make sure that your leads are getting followed up on and keeping your system going. If I have somebody who’s making calls, I have an admin person there who’s checking to make sure that they’re making those calls and that they’re following up and they’re putting notes into the system to make sure those calls have been made.
That person isn’t going to be very expensive. I may pay $8 or $10 an hour. Over time their rate’s going to go up, but that’s what I would start them at. Then I’m going to find somebody who’s going to be my boots on the ground because we’re doing a lot of this stuff remotely. If I’m in Indiana and I want to put a deal together in California, I can go into my auto-marketer system. I can buy a 213 area code phone number so that we can call through the system and it’ll look like I’m local to the people that I’m calling.
Whoever’s calling whether it’s a telemarketer, they can call through the system and they can call from that number and it’ll look like a local cal. That does make a difference when you’re going through the process. If anybody asks we always tell them that we’re not local, but rarely do people ask.
Matt: Got it. What’s going on in the marketplace that you see right now that either excites you or has you concerned and how is it changing the way you’re doing business?
Joe: I hate to be Pollyanna but I’m always excited about the market, whether it’s going up or whether it’s going down because it means different types of business and different types of leads. During the boom times, that’s always good because our portfolio is appreciating. There’s a lot of properties out there, a lot of people are selling, a lot of people are excited about selling. We can still do the zero down structures.
There are not as many people that are in desperate need, so you don’t see as many substantially under market value properties unless you go in a deeper marketing search, maybe going after absentee or expireds, going after that type of thing, or finding investors through the for sale by owner process. Those are places that we can find a lot of undervalued properties. As the market declines, those things start getting more attractive and wholesaling becomes more interesting. There are a lot more people that are willing to do subject-to and land contracts and contract for deed and multi mortgages and assignable cash deals.
We’re able to use more of our zero down structures when we see the market decline. We’ve had a really nice run here over the last few years where the market has been increasing. Personally, I think that we’re heading towards another market decline. We’re seeing some softening in a lot of the markets across the country right now. I’m in a unique position being a teacher. I expect you have that same experience because you get to learn from everybody who’s in different areas and what they’re experiencing. That’s what we’re seeing right now.
There are still some very nice places in the country, but I never buy based on appreciation. I love appreciation. I love it when it happens, but you can never build a strategy around appreciation. That’s what I did in the beginning, and that’s why I had those losses. Ultimately I thought this market is going up 20% per year, 30% a year. I’m going to make money no matter how stupid I am. You can in that kind of market until it turns. Then when it turns if you’re still in that market, you’re going to get caught in it, and you’re going to get hammered.
The goal is to buy based on one of two things, either substantially under market value for either cash or terms, or closer to market value on terms. Those are the only two ways that we make money as real estate investors that’s reliable, sustainable, and a long-term strategy in any type of market whether it’s appreciating, depreciating, high-end market, low-end market. The stuff that I’ve been doing works in all those markets. We tweak it slightly based on where the market’s at and what kind of responses we’re getting.
Matt: I’ve built probably, I don’t know, I guess all of it really now that I’m thinking. I was looking for an exception but I don’t think there’s too many. I’ve built my whole portfolio on creative acquisition strategies. I think we have a lot of similarities there in how we prefer to purchase. I always look to the seller for my first source of financing if I can. I think I have a little bit of a different approach on how I approach a seller with regard to introducing terms. How do you do it? You mentioned a little bit of something with your push button automated system and sending it out to Zillow and offering a rent to own type acquisition.
Do you lead with that creative structure, or do you try and come around to it in another way?
Joe: Yes. Before I go into that, please tell me your basic concept, because I’d love to hear what you’re doing. I always love [crosstalk 00:26:49].
Matt: Sure. You touched on it. You didn’t say it in the exact words, but I think we think in somewhat a similar way is that as a real estate investor I want to purchase a property in one of two ways. It’s going to be my price and the seller’s terms or the seller’s price and my terms. As long as I can control one of them I know I can always make a deal for myself. I prefer to go for equity first. I will go in with trying to get the low ball offer accepted and position myself in a way where it looks beneficial to them. Then if they want more, then I’ll back out.
If we’re going to go a little bit more for your price, then we’re going to have to adjust the terms a little bit. I go through that way. I did in the beginning, and it got very frustrating, and maybe because I was just a little bit inexperienced in the beginning with it. Going through and offering a subject-to deal right off the bat, I got a lot of resistance there in the beginning. I figured a different way to do it and to get less resistance and actually earn more trust with the seller along the way, also, by just going in with the traditional offer, and then starting getting creative once I found out a little bit more about their needs and their motivation.
Joe: I think that’s a pretty valid way to do it. I have no problem with that. One of the things, though, I like to have is a lot of leads. I want as many people that are interested and listening to me as possible. I also like to have people who are thinking a little bit creatively and are starting to understand as they’re trying to sell their property that they’re probably not going to do it as a for sale by owner. We know that 85% to 95% of for sale by owners don’t succeed. They either take their property off the market or they list it with a realtor.
We want to look at giving them some other options. Maybe the way that I’m thinking about it is I think that what you’re doing is absolutely valid. I think that one of the things that I try to teach, and I think that I do it because I want my students to come across as credible to the people that they’re working with. I think that the best way to do that is by having full transparency and by treating the people that you’re working with the same way that you would treat your family.
If you’re talking to your mom, what would you suggest to her in order to get her property sold? If I’m going to talk to someone and say, “You want to sell your property,” first I want to get their ear, and that’s why we use the lease option. Because of all the types of approaches we’ve done with our marketing, that’s been the one that’s gotten us the most leads that are convertible.
Once we get them, then we’re starting to look at the situation. We have to ask them a series of questions about their situation, what they’re trying to accomplish, what position they’re in, how much mortgages they’ve got, how much their payments are. What’s going to make the most sense for them? If you’re talking to your mom and she says, “Hey, Matt, I want to sell my property. I want to sell my house, and I don’t want to use a realtor because they’re going to cost me 7%, 8%, 15% based on closing costs, and negotiation, and repairs, and all the other expenses.” It’s going to probably cost 12% to 15% after all is said and done.
Plus, it’s going to take you three months to get it sold on average, and another 45 days on that to get it closed. Does it make sense for me to do that? Does it make sense for me to sell it in some other manner? Then you start to look at, what’s their situation, or do they have a need situation or do they have a greed situation? Are they wanting more money? Is that the issue, or is it they don’t have too many options? You help them understand what their options are by going through that list of options with them.
Have you talked to a realtor yet? Does that make sense to you? Do you know what it costs to work with a realtor? In those conversations learning to use a Socratic method of sales, which is basically asking questions to help people come to their own conclusion that aligns with yours. That’s how Socrates did it. There’s actually some good books on Socratic selling if you just Google or just go to Amazon and find them. There are some good books on that.
Leading people down the path, it’s more of a consultative type of sales. You’re not twisting some old lady’s arm to try to squeeze out every bit of equity out of her property that she was planning on giving to her kids when she died. Instead, you’re saying, “What makes the most sense for you?” I know there’s a lot of ways that I can make money. I can make good money, and there are some people that they just want to get rid of the property and they’re happy to give it to me with the price that I need in order to be profitable for me.
I can get a lot of undervalued properties that way, and I can find people that just want to make the most money and do a lease option because that’s how they’re going to make the most money. If they hold onto that property, they’ve got some really nice places where they can make money. They can make money from depreciation on their taxes. You’re going to get that 27 and a half year depreciation, 3.64% of the tax basis of that property every year.
They’re going to get the buy down on their mortgage if they’ve got a mortgage, every month. How much is that? It’s $150, $200, $300. How much are they getting on that? They’re going to get the cash flow, the difference between their income on the property and their costs on the property, their monthly PITI. They’re going to get the appreciation on the property if it goes up in value because lease options usually don’t exercise their option. Less than 30% of lease options exercise their option.
It probably means that you’re going to keep that property, which is the best financial situation you could be in. If they exercise the option and they take it, you’re going to get top dollar without paying any realtor fees, and so you’re going to be walking away with all the money, all of your equity instead of a dramatically reduced amount which you get after you pay the realtor fees. There are some really nice ways to express that to people that are trying to get their property sold and are struggling with for sale by owner and don’t like the idea of working with a realtor.
Matt: Agreed. I’ve given you the Cliff notes of behind the scenes, not behind the scenes, but at least the strategy of my acquisition. We go right down that, we take very much a consultative approach. It’s all what’s in the best interest for them. As long as the market allows to both get what we want, then we got a win-win deal.
Joe: Win-win is everything in business because it makes it possible for you to have a lifestyle that you’d actually want. The people that are doing win-lose deals, they’re in pain all the time because they’re putting a lot of people in pain. Your life is going to be painful when you put people in pain. If you’re solving problems for people, it’s like Zig Ziglar always said, the more people you help, the more money you make. If you solve problems for a living, you’re going to have a lot more people happy with you.
When you go to a closing and the seller gives you a hug saying, “Boy, thank you for doing this.” The buyer is in tears because they could not have bought a property without doing it using terms the way you’re teaching them, the way you help them do it, there are very few things that are as rewarding as changing people’s lives like that. It can be a really powerful thing. In the meantime, you make a ton of money.
Matt: What’s one commonly held truth that you disagree with?
Joe: That you should use loans and leverage your money, conventional loans. When you go out to a bank, first of all, it makes the deal a lot more complex. I would walk away from loans and start doing it with seller financing. Then once you’ve made enough money with seller financing, use that cash to buy properties, and maybe work in low-end markets, rural areas, urban areas that can be good rental markets. We’ve been doing a lot of that. There’s an awful lot of seller-financed deals in those types of situations.
You get into an area that’s got $40,000 properties, it’s hard for people to go out and get a loan because most the conventional lenders won’t loan under $40,000. If you go out and get a land contract on a deal like that, and say, “Look, I’m going to pay you on this land contract.” If you want to, I’ll give you a quick breakdown of how we … Actually, that’s a really interesting structure that your people might enjoy hearing about.
We’re doing zero interest land contracts or contract for deeds if you’re in a trust deed state. Essentially we’d go to somebody, let’s say they’ve got a $40,000 property, and let’s say they make $750 a month of income on that property, which isn’t uncommon on these low-end properties because you have a really high income to cost ratio on those, which makes your return on investment very high for those types of properties.
Let’s say you’ve only got $700 a month income on that. You know it’s going to cost you $70 a month to have the property management. You want $200 a month of positive cash flow and the taxes and insurance, let’s say that costs you $150 a month. Now, that puts you up to $420 in cost on a $700. That means you’ve got $280 a month of money that you can spend on debt service. If you take that $40,000, you divide that $280 into it, that gives you 142 months. You divide that by 12 months, that means you’ve got 11.9 years and you can pay that thing off at $280 a month. We’re finding a lot of properties that we’re paying off in five to seven years because of this, because we’re doing zero interest. The way we approach it, the people say we’ll make these amount of payments over this amount of time to pay you this much money. Is that acceptable? If they accept that, that makes a really wonderful investment, because we’re not only getting that $200 a month positive cash flow, we’re also getting that $280 a month that’s going directly to principal. If you get $100,000 loan from the bank, your first 10 years you’re putting $100 a month towards that $100,000. The $900 a month goes towards the other expenses. So, it makes a lot of sense when you buy properties like this because your capital and your equity go up dramatically.
The other types of top properties you can buy, even if you have $20,000 or $30,000 or $40,000 you can go in and buy properties like this and you can keep them for the long term. Put those in your portfolio. Let the money come in. Don’t touch those properties. Don’t sell them. Just hold onto them. Build your portfolio. In the meantime, the way you make your income is by either flipping properties or finding other ways to bring income in from using terms deals, whether it’s doing lease option flips on high end properties, because if you’re working in a million dollar property market, say you’re working in Brooklyn or you’re working in Queens or you’re working in Sacramento, you’re dealing with high-end properties and you can start bringing in between $10,000 and $50,000 lease option fees on high-income properties like that. That starts getting attractive as well.
In addition to that, you can also get promissory notes if they don’t have enough for a down payment. You can take an additional chunk of money or an additional down payment from a promissory note even if you’re flipping the property so you don’t have to hold onto those properties when using sandwich leases, which I think is a mistake.
Matt: I’m glad you talked your way through it because now I had an immediate question when you said the commonly held truth that you disagree with is taking conventional bank loans. But, it’s not necessarily the source of the loan, it was the difference between a 30 year amortized or a zero percent interest loan.
Joe: It’s also the risk. It’s also the risk. If you look at the reason that I crashed was the market going under, but if the banks had stayed with me I could’ve completed because I was doing construction up in the Hollywood Hills when things crashed, if the banks had stayed with me, we could’ve completed those deals. Then, we could’ve gotten out of them and we would’ve been okay. But, the banks got nervous. They had to call the loans due. We had to walk away because of that situation. They came to us when the equity dropped and said you gotta come up with more cash, which we didn’t have at the time. If you have too many properties that have too many notes on them, and let’s say you’ve got $200 a month positive cash flow on a property, a lot of times people will take even subject two properties, let alone regular single family home and rented it, but most tax assessor areas charge more to investors than they do to homeowners. In Indiana, it’s a 1% or a homeowner minus some deductions like mortgage exceptions and homestead exceptions. You can get it down to about half a percent.
But, if you take over that property as an investor, your tax rate goes up to 2% on the taxable assessed value. Suddenly, you’ve doubled or done more than double your cost on that. So, if suddenly your $150 or $200 a month cash flow disappears because your taxes went up that second year. Now you don’t have any cash flow and as soon as you have a vacancy you gotta come out of pocket to make that happen. What I tell everybody when they’re keeping properties like this, if you lease option the properties rather than rent it, you can get a lease option fee. So, let’s say you got a $100,000 property. You get a $5,000 lease option fee, maybe another $5,000 as a promissory note that they’re paying you. You take that $5,000, and if you only have one property to your name, you probably wanna take that whole $5,000 and put it into an escrow account and not touch it because that property is gonna go vacant at some point. You’re gonna have to make the payments on it and you’re gonna have to do some minor repairs, and put another tenant in there. Of course, when you put another tenant in there, it’s gonna be another lease option fee, so you get another $5,000. That may not happen for a year, it may not happen for three years, may not ever happen. They may just stay there.
If I have somebody goes in a three-year lease option and their three years is up and they don’t exercise their option, they wanna stay on the property, I’ll probably let them stay on the property. It makes sense. So, they could be in there for a decade.
Matt: Maybe you’re doing both. Are you acquiring lease option or are you selling lease option or both?
Joe: I’m selling on a lease option.
Matt: Right, that’s right.
Joe: I have what I call the zero down structure hierarchy. I believe there’s a hierarchy of control. Whether you’re the buyer or the seller, that hierarchy is reversed. So, if you start, if you’re the buyer of that property, the strongest position that you can be in is subject two, because you get the deed. If you have the deed to that property, next is multi-mortgage, and then land contractor, contract for deed. The next one after that is assignable cash deals, and then lease options. If I’m selling a property, the strongest position I can be in as the seller is to sell it on a lease option, because it makes the buyer in the weakest position. When I talk about strength and weakness, you have to assume that you’re the most ethical person in the room. Knowing that, you know that you’re gonna do the right thing with people. You’re not gonna cheat people. Because having this control gives you power. So, you have to know that you’re the most ethical person in the room. You’re gonna do the right thing. In order for you to do the right thing, you have to be in control. So, make sure that you’re in control of your deals and understand what kind of control you have based on the structure that you’re using in the transaction.
Matt: I totally understand. I was following along through this whole conversation a little bit lost in regard to when you were talking about your offer to Zillow FSBOs and the rent to own acquisition thing. Maybe I misunderstood that. I was like wow, you’re acquiring lease option?
Joe: We’re flipping lease options.
Matt: You’re flipping lease option. Got it.
Joe: Essentially what we’re doing is we’re saying would you consider doing a lease option? If they say yes, then what we’ll do is we’ll take their property. We’ll say how much do you want for the property? I want $200,000 for the property. Okay, what’s the market rent for that property? Let’s say it’s $1,800 a month. So, you’ve got a $200,000 property. That’s what you’re gonna give them for that property. You don’t really have to worry too much about negotiating price on a deal like this. If it’s worth close to $200,000, you’re probably okay. I’m then gonna raise the price to maybe $220,000 and I’m gonna try to get maybe $10,000 in cash and maybe $10,000 as a promissory note from a new buyer. Or at least $5,000 and $5,000 on something like that. I’m gonna go out there and I’m going to assign my right to buy. The way I’m gonna get control of this property is with a one-page option agreement. I call it the lease option memo. It’s basically an option agreement saying that I have the right to buy this property or assign it to someone else. Our memo actually defines what we’re doing. It tells them we’re gonna go and sell this to somebody else and we’re gonna make a profit on it.
That makes us a principal in the transaction. When you become a principal in the transaction, it makes it legal for you to sell that property. If you’re no a principal and you don’t have a real estate license, then if you try to sell it, then you’re doing something that’s illegal. So, make sure you have the document that makes it legal so that you can do it and become a principal and be able to flip that property. Essentially, we’ll get the $5,000 or $10,000 from the lease option buyer. We’re gonna raise that price to $210,000. They’re gonna come up with $10,000. We’re gonna keep the $10,000. They’re gonna come up with the first month’s rent. We pass that on to the seller. It’d be $1,800. We also pass on the buyer. We’re out of the deal at that point. And then, that buyer is gonna move into the property and make payments to that seller for that three year period, which is typically what we do on a lease option.
Matt: Go it.
Joe: Until they-
Matt: No, totally following you now. Super. So, you go and do an option with the seller and then you’re exiting by assigning that option and putting a lease in place for the seller.
Joe:… Correct. The reason that we market with lease options is because that’s the thing that we’re gonna get the most responses from. If you send out a text blast saying I wanna buy your property, I’m an investor, and I wanna get a good deal on it, you’re gonna get fewer responses than if you say I wanna do a lease option. The way our text blast works over that three month period, the drip system that we use, it does send out different messages. It sends out one that says I’m interested in making an offer on your property and it sends them to another website, you can see it, wewillbuy.com. Basically, just an I buy houses website. Another website it sends them to is this is how we flip lease options. That’s called buyersforyourhouse.com. I’ve set up the system so that it’s got all these different websites in it with different types of offers that we drip on the sellers over time so they can see one, that we’re credible. Two, that we’ve got different ways to solve the problem. Three, that maybe we hit them at the right time with the right message. That’s the goal here, is to get enough people that you’re hitting with messages at different times through their selling process, whether it’s the first day that they’ve got on the market or three months into it, or even after that and try to convert those people.
Matt: Fat. Sweet. When you’re taking over the option, are you actually giving them an option fee or are you waiting until you find the buyer?
Joe: No, they don’t get an option fee. They get the first month’s rent.
Matt: Oh, the first month’s rent? Okay.
Joe: Right. The reason I developed it this way was because when I originally was a real estate agent, because after everything crashed for me back in ’91 I became an agent, and I turned into actually a top producing agent within that first year. It taught me some things about real estate that I didn’t know as an investor and as a builder. I would go out and I would do a listing presentation as an agent to somebody who didn’t have much equity and they would have to come to closing with $10,000 to be able to sell their property because that would be about what the real estate agent fee would cost, and they didn’t have it. So, I was walking away from these deals not because they didn’t wanna work with me but because they couldn’t.
So, I said why don’t I just lease option the property for you? You don’t have too many options here. You can’t pay for a realtor to get rid of it. You don’t have any equity in the property. This’ll end up actually making you money if I do it this way. But, the way agents fill properties on lease option is they typically charge a month’s rent to do that, because that’s what property managers do. That’s what’s kind of expected. So, I just modified it. I didn’t wanna work for one month’s rent, and most agents don’t wanna work for one month’s rent. I didn’t want the $1,200. I wanted the $5,000 or I wanted the $10,000. And, I wanted to be able to get my seller the amount of money they needed in order to be able to sell the property and not have to come to closing with money. So, I gave them full value, I raised the price a little bit over market value, asked for a down payment, and then got people that couldn’t have bought a property, own their own property, into a property in a way that’s probably cheaper for them than buying it with a regular standard mortgage.
Matt: Got it. I totally understand. Where I’m trying to go with this, is your option actually executed before you find the buyer? Have you given them their first month’s rent?
Joe: No, no, no.
Matt: No? Okay.
Joe: No, we don’t execute until we have a buyer. So, it’s contingent upon us finding a buyer.
Matt: Got it, okay.
Joe: And, we give ourselves 90 days to do that. Honestly, it takes usually less than three or four weeks to find somebody. Everything is contingent or determinant by the monthly payment. It’s not about the purchase price. It’s about the monthly payment. If you’re at market rent or below, you’ll probably sell it within three or four weeks using Craigslist, Zillow, Facebook, and a sign in the yard. Those things are simple enough to be able to get that property sold if that monthly payment is in line with market rent. Because you have to remember, people look at, according to the Association of Realtors, 18 to 23 houses before they buy one. They’re gonna buy the best thing that they can buy for the money out there. So, if you’re not competing with the other properties properly in the space that they’re competing, which on rental or lease options is gonna be a monthly payment, if you’re not competing on that level, then all you’re gonna do is help somebody else sell their property.
Matt: Right, right. No, I’m with you 100%. I guess where you threw me was where you started talking about being a principal in the transaction. I thought there was a distinction you were creating between whether you have a property under a purchase agreement as a principal or as an option agreement as a principal. But, they’re the same.
Joe: They’re the same.
Matt: Yes, okay. I thought there was something that you were defining and that I wasn’t following along with, but I got ya. I’m with you. Cool. I like it. Thank you. Joe, if someone wanted to get in touch with you, what would be the best way for them to do that?
Joe: Probably to start out with go to my blog. Joecrumpblog.com. There are over 500 free training videos there. There’s a lot of material there. If they’re interested in the auto marketer, pushbuttonautomarketer.com is where that’s located. If they wanna work with me personally, I also have a six-month mentor program where I work personally with people. I’m the coach, the person that they’re talking to. They can go to zerodowninvesting.com. Spell out zero, Z-E-R-O, downinvesting.com. There are details about how that program works. It’s an expensive program. It’s like going to college for a semester. It’s about the same cost as going to college for a semester.
And, I have certain expectations for people when they get into it, so I always ask that if they’re interested in that, they can scroll down to the bottom of the page and my phone number’s there. They can call me and I’ll answer their questions, but I’ll also have questions for them about what they’re doing and what they’re trying to accomplish because I’m a little careful about who I bring into the program. I think the most important thing, and I’m sure you’ve come across this yourself, but the most important thing to learning how to be an investor is not that you have capital, it’s not that you have good credit, it’s not that you’re really smart or they’re really good on the phone or any of those things. What matters is if you have a good attitude and they have the willingness to work and willingness to follow through and do the stuff that I teach. If they do that, then I guarantee you that they’ll make money. If they don’t do that, I guarantee you they won’t make a dime.
Matt: Right? I get it. Yeah, we all have our areas of, I don’t know, I use the word expertise very loosely because there’s so much that we can all still learn, but you gotta do your part and we can’t help everybody, so I see the screening process. I understand that whole-heartedly. Great. I really enjoyed this, Joe. Thank you for taking the time out to come and share your wisdom here on the show. I say we stay in touch and we do it again. Is that all right with you?
Joe: Absolutely, any time. I really appreciate it. Thanks for having me on.
Matt: Yeah, I appreciated you as well, and you’re very welcome. All righty, so that’s it for today. God bless to your success. I’m Matt Theriault, living the dream. [crosstalk 00:53:01] Take care.