209: Buying Real Estate Without Cash or Loans

SHOW NOTES FOR EPISODE 209: BUYING REAL ESTATE WITHOUT CASH OR LOANS

Best-selling real estate book author Chris Prefontaine was so crushed in the 2008 recession that he vowed to never again sign another loan application.  In today’s podcast, Chris shares how he has creatively done over $80 million in real estate transactions without his own cash and without bank loans.

What You Will Learn

• How to acquire real estate without cash or bank loans?
• What is a lease option?
• How to purchase homes through lease-purchases?
• Why 95% of Chris Prefontaine’s lease-option tenant-buyers complete their home purchases
• How to predictably generate consistent cash flow with minimal effort
• How to help people acquire their first home even if they have bad credit?
• How to get paid 3 times on every deal?
• How to cash flow “right now” and cash flow “continuously”?
• How to protect yourself from loan nightmares with 3 buy strategies?

About Our Guest

Chris Prefontaine

Chris Prefontaine is the best-selling author of book Real Estate on Your Terms: Create Continuous Cash Flow Now, Without Using Your Cash or Credit  and is founder of Smart Real Estate Coach.com and the of Smart Real Estate Coach Podcast .  Chris has been in real estate for 25+ years.  His experience includes the construction of over 100+ single family and duplex homes (mostly during the 1990’s and selectively to-date), has owned a Realty Executives Franchise (Massachusetts 1994-2000) as broker owner which was eventually sold to Coldwell Banker in 2000.  During the 2000’s, he has been involved in coaching $½ million and higher annual income realtors to scale & automate their business throughout US and Canada.  He also participated in condo conversions (multi-family homes to condos) and “raise the roof” projects (converting single family ranches to colonials in growth neighborhoods).

Chris has been a big advocate of education and participates regularly in high-end mastermind groups and consulting with private mentors.  He runs his own real estate business with his family team, participating in their own deals and completing between 2-5 properties monthly, so they’re in the trenches every single week.  Chris and his family/team have done over $80 million in real estate transactions. They also mentor, coach, consult and partner with students around the country to do exactly what they do.

More About Chris

• After the 2008 crash, because it was so difficult to get real estate loans, Chris had to restructure his business to purchase real estate without using their own cash or taking out bank loans.
• Chris, together with his wife Kim, their son Nick, daughter Kayla and son-in-law Zach, along with their whole team, continue to do the same thing today.

A Unique Business Structure

• Today, they purchase their properties in one of three ways:
  • 40% – 50% on lease purchase/lease-to-own/lease options
  • 30% – 40% on owner financing (debt free, monthly principal only payments) – great inflation hedge,  huge principal pay down benefit and are quite lucrative
  • Balance being a mix of “subject to” or working with existing financing (the loan stays in the seller’s name)
• Exit Strategy:
  • Put rent-to-own tenant-buyers in all the homes with a game plan, before doing so, to get them cashed out and mortgage ready on or before the term they already have set-up with the seller
• Current Portfolio
  • Average 50 – 55 properties in-process at any given time
  • Each month, they are adding new properties and some may be closing out
  • Average value – $3-$4 million in cash-outs that are scheduled in the next one-five years
• Typical term of each deal is 36 months (but can range from 2-9 years)
  • Lease Option is a pathway for credit enhancement prior to mortgage qualifying seasoning
  • 9-year deal is is rare but would be initiated for people who are either upside down or leverage fully
    • Don’t have any room for what the value is compared to what they owe.
    • They need a lot of time so the market can bring the value up while the debt comes down
    • Overtime, his business can benefit from the principal pay down (whether it’s existing financing or owner financing that they create)
• Predictability
  • They’ve done the business long enough to know what it takes to generate X amount of business
    • How many owners to talk to to get a deal
    • How much the deal is worth
    • “If we hit our targets next week, we will get X, Y and Z”
• The key to their business is:
  • not using their own cash
  • not taking out bank loans

Creating Three “Pay Days”

• So, every single time put up a deal together, they create three distinct “paydays” on every single house.  They get cash:
  1. When they take in a deposit upfront when you install a tenant-buyer
  2. Regular monthly cash flow from the difference between the lease payment and the mortgage ($300 monthly average)
  3. When you cash out at the back end, pick up all the principal pay down benefit as well as the premium on the home
• The average deal earns $75,000 after 1-5 years

Typical Lease Option Defined

• Example:
  • A seller has a mortgage of $250,000
  • The home is worth $300,000 (Chris’ typical home value target is $190,000-$590,000 – sweet spot for quick movement)
  • The owner is having trouble paying the loan and/or selling the home
  • Chris’ company comes in to assist by creating a lease-purchase contract which states that
    • The homeowner’s name will remain on deed and the loan
    • Chris’ company agrees to pay their mortgage payment
    • Chris’ company puts a tenant-buyer in the home
    • Collects a lease payment every month from the tenant-buyer that is above the mortgage payment
    • Tenant-buyer must continue to maintain the property
    • The tenant-buyer also gets a 30-day protection from the seller it there are any problems (refrigerator dies, water heater is broken, etc.)
    • The seller will receive $50,000 cash-out on closing or before the term of 36 months
    • At the end of the term
      • Chris’ company will hand over the $50,000 out of closing
      • Will pay off their loan.  The loan is less than 3 years, so they benefit from it.
  • Rare exceptions
    • Recently put a $1,000,000 ocean front home under contract
    • Doing principal-only payments for 4 years
    • Their system works in every price range.  It just depends on the market
• Chris’ Protection from Risk in the Transaction
  • In the seller contract to lease-purchase the home, he always makes it contingent on finding a tenant-buyer before taking over payments
  • He carefully pre-screens his tenant-buyers (for mortgage readiness, credit, cash flow, etc.) so there is a high likelihood that they will successfully complete the purchase.  He creates a game plan for each tenant-buyer that says, by such and such a date, that they will be able to qualify for a mortgage financing and take over the home.
  • However, if something happens and they are unable to continue paying the lease, he has it built into his contract that he can find another tenant-buyer
  • A system is in place that carefully pre-screens tenant-buyer to set them up to succeed up to the finish line and not to fail.
• 95% of Chris’ tenant-buyers complete the transaction and end up owning the home

Capital Gains and Tax Issues

• Don’t have to report the income until the option is exercised (cash-out at end) or if person defaults
• Average deposit at the start is $25,000.  Some pay 50% when they get it and the rest at closing
• Talk with your CPA for what’s best for your situation
• Best to do the business within your self-directed IRA or 401-K as long as you can

If a tenant-buyer can’t afford their high-priced home now, how will they do so in the future?

• Many are post 2008-2010 buyers
• Many people went through difficult times
  • Lost their executive job
  • But are not on their feet again
  • Maybe a divorce
  • Bad credit
  • Credit enhancement needed
• They haven’t bought a home since 2008
• They are now doing well cash flow wise
• Pre-2008, people could get a “stated income loan” that required very little documentation – today is different
  • The bank requires “seasoning” – time reporting your income the right way
  • The buyer has $40,000 to $60,000 set aside to buy a home
  • They just need a pathway through a rent-to-own program as an alternative solution for bank’s requirement of 2 years seasoning
  • While the buyer is leasing the home, they have to file the next 2 years of tax returns (the seasoning)
  • The tenant-buyer will go back to Chris (the underwriters), two years later, for proof of deposit and proof of paying every month.
  • The main thing is reporting their income and qualify the way they are supposed to the size and price of house they’re trying to buy
• As you get into the higher price range, this is more prevalent
• The real key is the tenant-buyer locks in the price for the home in a lease-purchase agreement and they are building up equity in the home, even though the home may be a little high initially at the time of the contract
• This also allows a refinance that can be easier to obtain versus that of a new loan.

His Markets

• His students are called associates
• They lock arms with Chris to buy homes arms to buy homes around the country
• 25-27 different states
• Different state laws or any existing caveat may affect the types of lease options and deals they can do

How Much Does it Cost Associates to Get Started

• At a recent live event, Chris asked the associates what amount deposit they had to put down to get their lease purchase agreements started
• The average was between $10-100
• The group, in the room, had over $22 million in real estate tied up
• To run this business, and doing 1-2 deals a month, the average person spends $500-750 per month (not counting website and hosting)
  • Includes:
    • Virtual assistant calling
    • Phone system in place

His Team

• It is an infrastructure of family who works with students and associates to learn how to do the same thing Chris and his fgamily is doing on a daily basis
• Chris deals with sellers and works directly with associates
• His son-in-law Zach has recently replaced him in handling the sellers
• Once you have a property,  his son Nick is the buyer’s specialist, helping you to get your property sold
• His daughter Kayla is the support team and does the paper works.

What’s it Like Working With His Family

• The trust factor is good
• He likes the predictability because he knows them and how they work
• They are on a “per-deal” basis
• Everyone is on the same page
  • They want their next deal closed
  • They want the next student deal closed
• He even opened a self-directed IRA for his grandson where he will put deals into that will generate all he will need for college tuition

Biggest Mistakes

• First, it was the 2008 debacle that, for Chris, was painful to relive (discussed in the first chapter of his book)
• Second, his strategy back then was buy and hold, create a thin spread monthly, build on the equity in the back end. When the market lost 20%-30%, and one market he was in, 70%, that philosophy of taking up bank loans, signing on commercial loans, and at the time he had 22 properties, doesn’t bode too well.
• From 2009 – 2012 , he went spent his time onwork-outs, short sales, working on foreclosures, working with the banks
• The experience motivated him to re-engineer his business to never again be on a loan again, buy more creatively, create win-wins both on the  buying and selling side which did not exist in the debacle
• It was a good lesson but it was a painful one.

Biggest Success

• It’s the re-engineering and the building with the family of what he has today
• To set that kind of infrastructure up, to put a time frame, inside of 18 months, they had that up and running folly, with 20 properties running in the inventory, waiting to be cashed out (over a $1M)
• To set up that short of time frame was, by far, the biggest win and continues today as they scale
• Getting back on track, not having the exposure and not to worrying about loans

Advice to Old Dawgs Interested in Getting Started in This Type of Investing

• If you need cash now, cash to sustain current lifestyle and cash for the rest of retirement
• Create the number of deals you need to meet your goals
• They can go into Chris’ free webinar and see what the business looks like
• If they are want to move forward in his program, they would need about $1,000 per month for 4-6 months to get started before they will generate the cash flow they need

Where He Sees His Business in the Future

• Continue doing what he’s doing, and help others as how they do it
• He has trained his children to replace himself in the business. They teach others how to do the same
• He trained his son-in-law how to replace Chris and he will train up his kids to replace him and free himself up to do more coaching
• While the business is in “auto-pilot” they can help others to do the same
• Every deal is new and unique
• Chris himself does a one-on one with associates, especially in the startup in dealing in the seller side.  In transition,    They have a virtual assistant and phone system set up that runs on auto pilot.

Rap-It-Up

• Favorite Real Estate book:  Am I Being Too Subtle by Sam Zell
• Favorite business book:  The Hard Thing About Hard Things by Ben Horowitz
• Most valuable web site for success (other than your own): getleverage.com
• Favorite app: Calm  &  Telegram Apps
• If you had to start all over, knowing what you know, and you only had $1,000 cash, what would you do to launch your real estate investing business?  Find a mentor that is doing what you want to do and find a niche that you want to be in, find a personality that you can connect with and hang on to them. 

How to Reach Chris

• smartrealestatecoach.com
• chris@smartrealestatecoach.com
• Smart Real Estate Coach Podcast

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