Creative Finance Explained: Deal, Debt, and Equity in Order

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0:00 Hello and welcome to my office here in
0:02 Abalene, Texas. My name is Christian
0:03 Osgun, the host of Multi Family
0:05 Strategy. I own over 650 [music] units
0:07 and buildings that look like this.
0:08 Beautiful properties, beautiful areas.
0:10 You're in my roughly 5,000T office that
0:13 came with this building with Day One
0:15 Cash Flow. [music] Today's video is
0:17 going to go over how to get creative.
0:19 And it's not just how to get seller
0:21 financing or seller financing is the
0:22 key. In fact, it's not just one
0:24 strategy. It's actually much simpler
0:26 than people think, but everyone goes
0:28 about it wrong. The common thing that I
0:30 hear from a ton of investors, how do you
0:33 get seller financing? How do we
0:35 negotiate? How do I ask for it? How do
0:36 you convince the owner to give you
0:38 seller financing? You're already going
0:40 about it wrong. I'll show you exactly
0:41 how to do it and why seller financing
0:44 specifically is not what you're looking
0:46 for. As an addition, I'll also walk you
0:47 around the property so you can see what
0:48 you can buy if your [music] budget is
0:50 $0. Because this is what I bought with
0:53 $0 in my pocket. So, follow me. First of
0:55 all, it's the negotiation. You're not
0:57 negotiating or asking for seller
0:58 financing. You would never do that. If
1:01 you ask for seller financing, especially
1:02 on an intro call, what you're basically
1:04 doing is putting a sticker on your head
1:05 that says, "Hello, I'm new to real
1:07 estate and I also don't have any money."
1:08 If you want to convince someone that
1:09 you're a ready, able, and willing buyer,
1:11 you're very unlikely to get them to
1:12 believe that if you open with, "Hey,
1:14 let's talk about financing." For what
1:16 deal? You don't know any of the facts.
1:18 How could you possibly discuss
1:20 financing? You need to ask everything in
1:22 order. So, your mission is negotiate
1:23 every deal the exact same. [music] Where
1:26 does it work conventionally? I want to
1:28 get the same financing 25% down at
1:31 today's interest rates. Where does the
1:32 deal work? I want to call, talk to
1:35 brokers, talk to owners, negotiate the
1:36 deal based on par for the course. So
1:38 every single conversation looks exactly
1:41 the same. Now, if you're like me, I like
1:43 that boringness because I like my money
1:44 to be boring. I want to be [music]
1:45 consistent. Now, when you benchmark
1:47 there, what you're doing instead of
1:48 giving a seller your problems is you're
1:50 now saying, "Hey, this is where the
1:51 bank's looking at the deal. Does this
1:53 work for you?" If it's a truly good
1:54 deal, you can close it conventionally
1:57 financed. I'll actually tell you how to
1:58 do that on this video as well. However,
2:00 start [music] where the bank would want
2:02 to lend on the property. That's where
2:03 the deal works. When you make this
2:05 offer, they may say no. They may want a
2:06 different price. They may want different
2:08 terms. They may have a different idea
2:09 totally, but the difference is I'm not
2:11 starting with my problems or how much
2:12 money I have. I'm starting by where does
2:14 the deal make sense conventionally and
2:16 I'm getting the seller to give me their
2:17 pieces. The marriage of what works for
2:19 me and what works for them is where we
2:21 have a deal. Now, in my case, I know
2:22 what I want. You should write this down
2:24 if you don't already know this.
2:25 Long-term cash flowing fixed rate debt.
2:27 I want to buy a property that pays me
2:28 day one that I can hold forever where
2:30 the rate is fixed so that my expenses
2:32 don't change partway through my deal,
2:33 which is how a lot of people got wiped
2:35 out here in this last market cycle.
2:36 Long-term cash flowing fixed rate debt.
2:38 That is all it is. If I get that and
2:41 identify what they're after, now can add
2:43 a little bit of pivity and give them
2:44 what they want. Now, this property
2:45 behind me was actually 70% of it was
2:48 owned by the bank. The bank was actually
2:50 the partner on this deal, which isn't
2:52 super common, but it happens from time
2:54 to time. They were willing to lend on
2:55 custom terms, 7% interest only, to
2:58 transfer the property to us, let us
2:59 finish the lease up, which we're now
3:00 100% occupied, so that we can refinance
3:02 into an even better debt product. Now,
3:04 we're almost done with that loan
3:05 process. Our interest rate looks like
3:06 it's going to be about 5.1%.
3:09 That is long-term debt. But we were able
3:11 to close this seller financedish. It's
3:14 bank financed and seller financed at the
3:16 same time, which is a super interesting
3:18 debt structure. The point is, I didn't
3:20 negotiate this saying like, "Hey, can we
3:22 got to get creative on the financing and
3:23 then start talking about the deal?" In
3:25 fact, the price on this was unlisted.
3:26 So, you get to a site like Craigslist or
3:28 lubnet.com. The great thing about this
3:30 model is that every deal, we don't care
3:32 about the price. We're going to figure
3:33 out where it works based on the deal's
3:35 own merits. So, you'll see a lot of
3:37 things that say unlisted. They may be
3:39 deals, they may not be deals, we don't
3:40 know. I don't care what the price is.
3:42 You may say, "Hey, this looks really
3:43 expensive for what it is." All you're
3:44 doing when you're looking for deals now,
3:46 so you're looking at the picture and go,
3:47 "Hey, does this look like what I want to
3:48 buy? Does the broker who represent this
3:51 likely list other properties that look
3:53 like this from time to time? If this is
3:55 what I want to buy, and this broker is
3:56 the one who has the deals, we want the
3:58 relationship. We want to start making
3:59 offers. They'll start sending you stuff
4:01 that look closer to what you want. But
4:03 if you're offering conventionally and
4:04 you're offering consistently, and I mean
4:06 like one time a week on a deal that
4:08 could get accepted, what ends up
4:09 happening is three, four, or five times
4:11 a year, uh, you actually get a yes where
4:13 you figure out what they want. In
4:14 [music] this case, they want to trade
4:16 the property as quickly as possible with
4:17 as little friction as possible. They're
4:19 willing to facilitate the financing.
4:20 [music] We got this very, very low down.
4:23 The refinance, which is coming in about
4:25 6 months after, is actually a very
4:27 significant cash out refinance. So
4:29 technically, we waited six months to get
4:31 paid to buy this deal and we bought at
4:33 $0 out of pocket. Now, your models that
4:35 you can use. Yes, seller financing is
4:37 often a tool. In fact, it's about 70% of
4:39 my deals have it. We've also had deals
4:40 where you get creative on the equity. We
4:42 have an amazing deal. It has the cash
4:44 flow. The bank doesn't allow second
4:46 position debt, so I can't use seller
4:48 financing. Lenders love it. Now, they
4:50 just want me to build a team that has
4:51 the money. If I don't have the money, I
4:53 just have to build a team that does.
4:55 What you do is you package the deal. The
4:56 opportunity that makes money. We have
4:58 the debt product, which should we have a
4:59 bank who's conditionally on board as
5:00 long as we build the right team? And
5:02 then I find the people who have the
5:03 money, the experience, the credit score,
5:05 whatever the bank tells me I need to
5:06 close the deal. You now go out and find
5:07 that. Here's the difference. Instead of
5:09 looking for money first, I'm looking for
5:11 people who want to make money on a deal
5:12 that's already making money day one.
5:14 I've already packaged it. I've already
5:15 lined up a debt product. I'm just
5:17 building a team of people who now also
5:19 want to make money alongside us. That is
5:21 massively different. Now, strategies
5:23 that I've used for you notetakers,
5:26 straight up seller financing, first
5:27 position note, the seller basically just
5:29 plays the bank. They want a certain
5:31 price. We meet them on terms. We close
5:33 the deal. Done deal. As long as I get
5:35 that long-term cash flowing fixed rate
5:36 debt, I'm good to go. Model number two,
5:40 seller does a little bit of seller
5:41 financing. Let's say 30% of the deal.
5:43 The bank comes in and says, "Yeah, we're
5:45 comfortable doing 60%." Well, now we're
5:46 doing a low down deal. We're 10% down.
5:49 How easy is it now to go to investors
5:50 and say, "Hey, we got a custom debt
5:51 product. I have a deal. It makes money
5:53 day one. We have a awesome business plan
5:56 for how it's going to make more money as
5:57 we continue to own it and manage it. And
6:00 all I need is 10% of the capital. Once
6:01 we get that, we're closed. As an
6:03 investor, that's a much easier pitch
6:05 than, hey, if I find a great deal, would
6:07 you invest in it? You can't raise the
6:08 capital first, but you can get as
6:09 creative as you want. Now, the structure
6:11 for the private capital, if the deal
6:13 cash flows a ton one, we'll share a
6:15 bunch of the cash flow, and I'll buy
6:17 them out later at a refinance for
6:18 exactly what they put in. We'll
6:19 structure it very similarly to the
6:22 structure of a loan. If the deal doesn't
6:23 have very strong cash flow, still has
6:25 the cash flow, but if it's not very
6:27 strong cash flow, how do we account for
6:29 that? Well, we say, "Hey, we have to
6:30 find a project that has enough upside
6:32 where we can pay the investor out of a
6:34 future refinance [music] and multiply
6:36 their money." So, they either get cash
6:37 flow multiple or a blend of the two. If
6:39 you're looking for the magic slider for
6:41 the both both ends of where you put
6:43 this, if you give someone 8 to 10% of
6:45 cash flow, they're usually really happy
6:46 to park their money there. If as long as
6:47 stable and consistent, backed by real
6:49 estate, awesome investment. If you
6:50 double their money in less than 5 years,
6:53 they're also pretty happy. If you have
6:54 decent cash flow and decent upside, you
6:56 can do like 5% cash flow. Or you blend
6:59 them. You can say, "Hey, this deal works
7:01 really well if I distribute 5% cash flow
7:02 to you and then give you a 1.5x on your
7:05 money at year four." But that's the
7:07 sliding scale somewhere between those
7:08 two. Your deal will tell you what the
7:10 money needs to be structured as. If you
7:12 go at it this way, you can call every
7:13 opportunity with the exact same phone
7:15 call, negotiate it the exact same way,
7:17 then start adding in creativity. Now,
7:19 you can also just do conventionally bank
7:21 finance and just customize the partners
7:22 however you want. You can blend any type
7:25 of deal and debt and equity. There's so
7:28 many options. It comes down to those
7:30 three things. Usually have a first
7:31 position note, sometimes a second
7:33 position note. You find the additional
7:34 capital after you already know how the
7:37 money is going to be made. You find
7:39 other people who also want to make money
7:41 who do not yet have a deal, of which
7:42 there are many, and you close it out.
7:44 End result, you can end up with a
7:46 property like this. This is a very cool
7:48 piece of real estate that I did not have
7:50 to pay to own. I did the work to put
7:52 together the transaction. I negotiated.
7:55 I asked for what we needed and we found
7:56 a path to where every party wins. That
7:59 is creative finance. It's not asking for
8:01 seller finance. It's not following one
8:03 guru strategy. It's not a
8:05 one-sizefits-all. is how do I get
8:07 everything I want and everything the
8:08 seller needs and how do we make both
8:10 statements true at the same time. If you
8:12 answer that question, you will get a yes
8:14 every single time on your deals and
8:16 creative finance will be unlocked. Hope
8:18 this helped. Hope you enjoyed the
8:19 property tour while I talked here. Hope
8:21 you took good notes. If you apply this
8:23 deal debt equity and do it in the right
8:25 order, you will find there's unlimited
8:28 opportunities in real estate. Thanks for
8:29 watching. I'll see you on the next
8:30 episode.
8:31 [music]