Wraps, Lease Options & Slow Flips: A Creative Finance Deep Dive with Philip Louden - The Note Investor Podcast

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[00:02]
A
Hey everyone. Welcome to the Seller Finance or Creative Deals podcast. I'm Dan Depen and today joined by Philip Louden. So, Philip, how you doing?
[00:10]
B
Yeah, amazing.
[00:12]
A
Good. Yeah. So I've seen you online for like quite a while. Haven't interacted a whole ton. So excited to have you on. So maybe start by just telling us a little bit about you and kind of. Kind of what you do.
[00:23]
B
Yeah, for sure. It's always an interesting question to share about myself because I have many, many different lives I've lived in in real estate. I guess I start off as a backpacker. After, after college I went to Australia and worked and traveled for, for a year using a working holiday visa, kind of soul searching and looking for like, what I want to create in the world. I looked at how most people, I guess, lived the nine to five life and I knew that was not for me.
[00:49]
A
What parts of Australia were you running? I've been there three times, but it's been a long time. I used to get there for work every now and then.
[00:56]
B
Yeah, nice. Yeah, it's kind of a crazy traveler. Like I. I started off in Brisbane, had some friends there, and then I went three hours out of Brisbane to a place called Stanthorpe and I worked on like one of the largest farms in Australia doing straight manual labor with a lot of the other backpackers. Um, and then I spent about two months in the Wits Sunday Islands working at a retreat center or a resort. And then I was in the, the Daintree rainforest, the oldest rainforest in the world in the north of Australia. Uh, spent a lot of time near Byron Bay, about a month in Tasmania. Uh, so really the country I was like kind of traveling and doing some hitchhiking and I was kind of a crazy young backpacker.
[01:33]
A
That, that's awesome. When I was there, I was there for work, so I didn't get to do as much exploring as you did. But I always went to Brisbane because we had, I was working for Oracle at the time and the Queensland Brain Institute was like a big reference customer and we had like, you know, customer user groups and stuff. And then, you know, I had gotten to Sydney and, and Melbourne for like work meetings. And there was one where I got to do like an overnight to Perth, which was fun just because it felt like it's about as far away from home as you can get. Although those trips I was like, you know, you like, fly to a cool place, go to a bunch of meetings, sleep, go another meeting and then like fly out. So I didn't get to see as Nearly as much of it as you did.
[02:12]
B
Yeah. You know, I probably see more of Australia than most Australians because it was like the phase of. The phase of life, of travel and exploration and. Yeah, it was amazing.
[02:23]
A
Very cool. So. So then what do you end up doing after that?
[02:25]
B
Yeah, so, like, so that was my. That was my year of. Of soul searching. And then at. A year went by, and after that year, I still had no idea what I wanted to do with my life. I found a lot of things I did not want to do with my life. So I popped over to Bali, which is right next to Australia. I bought a 200 computer and started learning how. I was like, I need to figure out how to make money because I'm going to run out of money. And that led me the long way into entrepreneurship. And then I moved to Chiang Mai, Thailand, and then I spent about five years living in between Bali and Chiang Mai, Thailand. I'm doing online businesses.
[03:02]
A
Yeah. You ever come across the. The Dynamite Circle?
[03:05]
B
Yeah, yeah.
[03:06]
A
Or being part of that? Yeah, I was part of that for several years. I say it sounds like you're like the ideal. Yeah, I'm not in that anymore, but I was in it for a long time. Yeah. Nice.
[03:15]
B
Amazing. So, yes, I was like Southeast Asia kind of digital nomad for a while, learning how to build businesses and learning the basics of business. I was always, like, I always wanted to build things that had a big impact in the world. I'm a lot more mission driven than necessarily, like, financially driven. And I kind of got stuck in these small businesses. I had a website development company, and then I was doing drop shipping for a bit. And then when Covid hit, I kind of got to this point where I didn't feel very fulfilled by my business. I wanted to really figure out the money side of things so that I could spend more time building things that I was more passionate about. And Covid hit and I had an opportunity to join some friends in Kansas City who were starting a real estate company. And so they were building a wholesaling company. And I said, you know what? I'm 29 years old and it feels like time to get back to the U.S. i spent like about five or five years outside, and so I moved back to the United States, went to Kansas City, had never been there before, and we started a wholesaling company from the top story of a duplex that we were. Were renting out. So it was like, me, my friend Tanner and his brother Bryce and his wife all living in this small house, kind of like the Business from the garage and we started a wholesaling company.
[04:29]
A
Why? Why Kansas City? Was it just because they were there? Because it seems like I have a lot of clients that do stuff like in Kansas City. It seems to be like a hub for some reason.
[04:39]
B
Yeah, for sure. So, yeah, it was just because they were there. It was happening.
[04:45]
A
Nice.
[04:46]
B
Yeah. And yeah, so we, at that point we, we started scaling up a wholesaling operation. So we started off, we got the book, the One Thing by Gary Keller. And to get very focused in on like what our thing is, we decided we're going to text message market people and I will call them. And my experience in real estate was very slim. I didn't know very much about real estate at all, but I knew that the basics that we lock up a property for low enough we can sell it to a flipper for a little bit more. And so we started texting people. We started hopping on phone call. We got our first deal in the first about two or three months. Then we got our second and third deal. And then we hired some mentors. We built out the CRM. I did everything they told us to do. We scaled a wholesaling operation to doing about six properties per month. And I realized I kind of hated that business. I kind of built a business that I felt very trapped in.
[05:35]
A
And I've never done that, but it appears to be a grind. I don't have any firsthand experience with it.
[05:43]
B
Yeah, it was definitely a grind. And I, and I was just like, man, I'm like, I went from drop shipping, like physical products, like drop shipping houses. I'm just like middle manning these houses. And I felt very much so. I feel like I kept building these businesses and I was trapping myself inside of and I wanted to kind of, I wanted to evolve past that. Right. And that's around the time that we started learning about creative financing. Locking up deals with creative financing. And we found a local mentor who showed us that the power of how we can sell our finance properties to families that don't qualify with the banks. And that's the beginning of really the exit strategy that I fell in love with. And that is, you know, building, creating notes.
[06:22]
A
No, that, that's awesome. How, how did you find that mentor? Like, how did that. Because that's the thing with creative finance. It's. It's been around forever. It's probably bigger than people think, but it seems like a lot of the knowledge is fairly opaque. Like can be hard to find.
[06:37]
B
Yeah. So, yeah, I feel like we, we found this guy Just learning how to do subject to properties. They learned how to lock a property subject to the existing mortgage. We found a guy that's been doing it for about 30 years in Kansas City. And so he helped us really walk us through the process of our first two sub twos. And the first one we just wholesaled it was in Topeka, Kansas. We wholesaled it for $5,000 to a guy that we knew from some real estate groups. And the next one we got, he showed us what he's been doing for about 30 years, which is seller financing to families that don't qualify with the banks. And a lot of those buyers oftentimes end up being first generation Americans and entrepreneurs and 1099 employees. And so the first deal we got like a pretty significant down payment on, I think it was like 50 plus thousand that we got down, which not every deal is like that. But you know, we, and it also cash flowed about 700 bucks a month and we would have wholesaled this for $10,000. So you know we were. And like on top of that the family was first generation American from Honduras and they were extremely grateful. They're basically achieving the American dream by gaining access to homeownership. And there it was, it hit very different than wholesaling a house to a hedge fund. You know, it was like one we're creating cash flow. And this is like a lot of like the shtick I think of like of this model and how I think about it is do you do the game Cash Flow Quadrant by Robert Kiyosaki?
[07:58]
A
Yeah, I've seen it. I trying to think if I played it, if I did it was like six or seven years ago, but I remember coming across that.
[08:05]
B
Yeah, yeah. So there's a game called Cash Flow Quadrant by Robert Kiyosaki, who Rich dad, poor dad. And the whole goal of this game is to. You're stuck in the middle at first and it's called the rat race. You're in the rat race and you have a certain amount of monthly expenses. And to escape the rat race you must get, must get enough cash flow to cover those monthly expenses. And then you're freed up to play a bigger game on the outside. That's when bigger opportunities come into play. And so that game really showed me the actual game and purpose of real estate. And the goal, goal number one, how I see it is to get enough cash flow to cover your monthly expenses. Because when that, that happens, you know this, for example, this deal created 750amonth in cash flow. Right. And Rather than a wholesale, which gets us active income, but then is. It's finished forever.
[08:50]
A
It's fee income. Right. It's like a one time.
[08:53]
B
It's a one time that every month you start from zero. And like if you do that for a year, two years, three years, it starts to get really exhausting to start from zero every single month. And it took me, I took a very roundabout way of understanding the purpose and goal of what of in my opinion of real estate. And that is to escape from the rat race and also to hold on to assets I'll appreciate every time. And so that's when I started. We started adding in more of these deals and getting more cash flow. And each deal that we did, it felt like a weight was lifting off our chest because we were just getting, having money that's going to come in no matter what. And yeah. So cash flow quadrant. Like once you get, once you escape the rat race, like how. What I say is, you know, when you have enough cash flow to cover your monthly expenses, you're then freed up to live from a space of inspiration rather than a place of desperation. Desperation is how am I going to pay my bills? Inspiration is like, my bills are covered. Like now, you know, what do I want to create in the world? And whether that's, you know, larger real estate business or whether it's giving back to a number, you know, whatever, you're free to a world of opportunity at that point. Mm.
[09:59]
A
So like specifically like, how are you structuring your creative deals? Or like, what's the model you're using today?
[10:06]
B
Yeah, so we do, we do a combination. So I do a combination of 10 year lease options, contract for deeds. We also do slow flips as well. So there's like, there's a bunch of different ways to structure these deals. But how I talk about is like the first question is like, how am I getting long term financing in place? And then there's different answers to that question. Right. So we do a combination of creative acquisitions. We do some variations of Burr model where we buy, renovate, refinance, and then we do slow flips where there's like $30,000 properties that are livable all across the country in smaller markets. And we can sell or finance those at a premium to families that want to own rather than rent. So we do, we do a combination of all of these. I mostly buy my properties from wholesalers at this point.
[10:54]
A
Oh, okay. So you've got people finding them for you and then you.
[10:58]
B
I'm lazy now. I spend enough time Going direct to sellers. So I'm now at the point where I have my wholesalers who bring me deal. I know how the numbers work really well. Like I, you know, we've done over 70 of these in Kansas City. And then I have a community of people doing these deals all over the countries. I've had my head inside of, you know, thousands of of these deals, just looking at it, underwriting with people, looking at the numbers, seeing how the numbers play together and so on.
[11:25]
A
Yeah. One of the things I like about, I've always liked about loans in general is even though they're all sort of unique in some ways, like they're also kind of rinsing, repeat and. Yeah. You can kind of do the back of the envelope math in your head.
[11:36]
B
Yeah.
[11:37]
A
After you've seen like, like enough of them.
[11:41]
B
Yeah. The numbers start to make sense and. Yeah.
[11:46]
A
Yeah. So maybe you can talk about the lease options a little bit maybe just to educate me because I haven't actually done one of those myself. I've originated, you know, land contracts and mortgages and deeds of trust and that kind of stuff. But like where do the, the lease options kind of come into play for you and like how do you like to structure those?
[12:04]
B
Yeah, so now, now I do a combination of. I'm very opportunistic. So I'll market a deal as a lease option. I'll also have it simultaneously marketed by someone else to sell it on, on contract for deed. Or we do 30 year lease options sometimes also. But the 10 year lease options, how we structure it is one, it's a 10 year lease option. Two is the families are responsible for all minor repairs. And also like the philosophy of how we structure our portfolio is like, you heard my story. I've backpacker, traveler, love to be. I like, I like living life with, with peace. So I want to structure. And this is why I love wraps, why I love doing seller finance deals and doing notes. Because it eliminates a lot of the headaches of having a real estate portfolio. Right. Like rentals people are calling you for things you have to deal with repairs or unexpected, unexpected repairs, Capex, all that. You know, when you originate notes you kind of get rid of a lot of that, a lot of those headaches that come with having traditional portfolios. And so a lot of my ethos and like how I think about structuring a portfolio is around creating maximum peace. I have a lot of friends who have like 100 plus rentals. Right. And it sounds, you know, on the outside, sounds like amazing, like, okay, Great. That guy's crushing it. But if you look at the day to day life like inside of managing 100 plus rentals, it's not always the, the you know, the roses and glitter that you might imagine, you know, there's a lot of running around frantically.
[13:28]
A
Yeah, I, I can't imagine. And like, like I have friends in other lines of business that have been very successful and very scalable but like they kind of don't sleep. Like it's kind of day to day kind of. They're very successful but like at a price.
[13:44]
B
Yes, we, we're at your freedom. Like freedom is what we're going after. Freedom in all areas of our life and doing in a way that like is helping the world and helping people. And so we're helping families can access to home ownership. We're helping, you know, when we acquire properties, we're helping people who can't sell their properties sell them in some sort. And so that's like the ecosystem of wins. Like doing good while doing well. These are the mottos that are important to us because we want to build something that we feel good about and that's leading ourselves and other people into like greater freedom within their lives. So the first 70 plus deals we did were all a combination of contract for Ds and 30 year lease options which basically mirror a contract for D. They're not very sellable notes. You wouldn't like these. As a note buyer. I would imagine so. And then eventually I wanted to get more depreciation benefits and I want to have an alternative to just selling properties on seller financing for when the markets are, you know, all markets are based off supply and demand. And Kansas City is one of the more competitive markets for doing seller finance deals and originating notes. So I started doing 10 year lease options as well. And so with 10 year lease options, how I structure it to optimize for peace is the families are responsible for all repairs under $1500. Right. So anything minor the families are responsible for that live inside the properties. Anything that is above that, those families will bring the first thousand dollars towards those repairs. And what this does is it helps us to make sure that these families are not just going to be calling us for any sort of reason. They need to put some skin in the game and then we'll cover anything on top of it. So that's, you know, the roof goes out or the air conditioner goes out or anything major happens, we will be responsible for that. With this, the burden of ownership transfers from them to us. So if you're doing a traditional seller financing deal, you can't really write off depreciation. Right. Because the burden of ownership is not on you. The burden of ownership is on the family living inside the property. And so if we have the burden of ownership through these major repairs, we can then also write off depreciation. Yeah, so that's like. That's how we structure it. And then we have a floor price and a ceiling and a roof price on that option. Meaning that this can be based off the appraised values. For example, the floor is 200,000 and the roof's like 230. So they would capitalize on any appreciation above 230. But they couldn't like balloon us out or refinance this out and.
[16:05]
A
Oh, I see. So. So, so if they want to execute the option and buy the property, there's not necessarily a fixed price that's specified. It's based on an appraisal, but then. But needs to fall within a range. So there's kind of like a minimum floor and then. Yes, a ceiling. Okay, that makes sense. So that way you can kind of share and potential appreciation. But. But they do.
[16:31]
B
Yeah. And then we give them their options. Well, their option fees credited towards the purchase also.
[16:36]
A
And how many people execute on the options? Like do they just tend to keep the lease going or.
[16:42]
B
Yeah, I'm not sure. I mean with our. So this I've only been doing for the past two years or so, but I would say I have friends have been doing it for a lot longer and they say around different people say different things. It depends on how you structure it. Right. So around 50 would be great, but I don't know if it's actually that much. But once again, like the eth. Our ethos is like I have a heart for our buyers. Like if they come in and they're paying, I would even transition them to a seller financing note after a few years if they weren't able to get the financing. So we have a good person in the property. I want to give them the right path towards homeownership. For the notes that we originate, we have about a 90 success rate so far. Not have executed, but like families that have. Are still in the property, still making payments.
[17:24]
A
Yeah, I'm actually in the process of buying. Well, it's a. It's a portfolio of land contracts, but there's actually this one in there that. That was a lease option. And it's funny because I've never bought a lease option, but it's. It's funny because they had, like, 10 years to exercise it, and it's been 10 years, and they've paid like clockwork. But I don't know if they just, like, forgot to convert it or what. So once I get a hold of it, I'll see it. I'll just. I mean, in theory, I could hose them for the terms of the contract, but I wouldn't do that. It's like they've been paying like clockwork. So I'm guessing maybe they just put this in place a long time ago and forgot about making payments and forgot about it or. Yeah, or whatever. So now. Now how do you go about, like, finding borrowers or. Or lease option buyers for your properties?
[18:12]
B
Yeah. So for. For lease options, we do our own marketing, and then for. For borrowers, we have. People in our markets are trained up to, like, specialize in finding these buyers. That's my favorite way. That's my favorite way to. To find them because, once again, I'm, like, a little bit lazy. I don't like to do more work than I have to. But we have a bunch of different ways to do them. We've done everything from. We've learned, like, anything you can imagine, we've probably done from going. There's. There's a thing called the Taco Trail in Kansas City. So we went to the taco restaurants and put up a bunch of signs in the front yard. Signs in the neighborhood. Facebook marketplace, of course, Facebook groups, Craigslist. We got a $75,000 down buyer from Craigslist before, which is pretty cool. Facebook ads, buy, sell, trade groups, like, all over. So we've, you know, marketing is marketing. At the end of the day, it's more about the marketing is like, how can I get eyeballs on this? And one of the things I love about notes is, you know, there's a starving crowd out there because there's so many people that want to own, and they don't have the ability to do it in traditional means. It's just, how do I get those eyes? The eyes? The right eyes on the deal.
[19:25]
A
Yeah. Do you ever, like, use, like, just traditional agents or you kind of do it all yourself?
[19:29]
B
No, I mean, not traditional agents, but people that specialize in these buyers. They're not always real estate agents. They're more like consultants who will go. And they have people who they've. I sold to this guy's cousin, and now this person's looking, and they have that network built out. I find traditional agents to be a little more, like, fixed in their mindset. Usually like they had the agent, they had the agent, like blinders on. They didn't always, they don't always understand what we're doing.
[19:56]
A
Yeah, if you do, it's kind of like, like what I've done is. So for me, if I don't create a boatload of notes myself, when I do, it's like a one off REO on a defaulted loan that I bought. So I can't really necessarily like set up like the whole machine like you have in Kansas City. So sometimes for me it's easier just to get an agent and let them handle it, but I have to find ones who understand creative finance and are investor friendly. So what I tend to do is find is I'll call around if I don't already have somebody in that city and find somebody who like specializes in REOs, because those people tend to understand that stuff. So if somebody understand, it's good. But yeah, Joe, blow agent off the street, their mind's gonna think, they just won't understand.
[20:48]
B
So when you buy distressed notes, you're buying them all over the country?
[20:51]
A
I do, yeah. My, mine are all over the place. And, and when I do buy a distressed note, generally I'm trying to rehab the borrower and not end up with the property. But sometimes I do. So when I get an reo, it's like a one off in a random place that I may not have, you know, any team on the ground. And so at that point it means things have gone wrong. So I'm mostly trying to get rid of the property. And a lot of times they're pretty beat down by the time I get them. So I can't necessarily sell it to an owner occupant on owner finance because, you know, they might not, you know, they may not be able to handle that. So sometimes I'm just selling like to a local cash buyer investor that's going to fix and flip it or whatever. But when I can, I try to sell it on owner finance. And I, I sold one recently and I've got another one that's under contract right now. I'm crossing my fingers that that goes through in a couple weeks. But a lot, it's funny on both of these I've gotten this mix of seller finance offers with different terms and cash offers. So it's kind of a fun game to sit down there and look at them and figure out. It's like, what would you prefer? Would you prefer this much now or alone with this down payment and this cash flow. So, so I, I find my list for stuff like I get, I'm not so much stating my terms and getting them like I'll give like suggested terms, but I'll get offers that are kind of all over the map.
[22:20]
B
How many properties have you filled? Like they've gotten back. You've had to fill with new buyers across the country.
[22:28]
A
Overall, probably eight or nine.
[22:31]
B
Okay, so not many. Okay.
[22:33]
A
Yeah, not, not a ton.
[22:34]
B
And then are these amazers, Are these small markets you have a minimum size market you buy notes in?
[22:39]
A
Yeah, usually. So I'm generally trying to buy in a city that has at least like 20,000 people. Because the other thing that happens is if it's too small or if it's like out in the middle of nowhere, like I'll buy performing loans in a rural area. But you know, the other thing too is a lot of times like a lot of minor up north at Michigan and Ohio and Indiana. So depending on the time of year, you got to get the property winterized and different things. You need vendors and you know, so it's kind of a consideration when I'm buying lunch because you got to be able to get people out there to do work and secure it and potentially clean it out and then find an agent that understands this stuff. So yeah, this one can be tricky.
[23:23]
B
It's one of the reasons I stayed in one market is I just like to have, I like to have just everything centralized. But now that we're starting to do more slow flips, which is, you know, a different variation on this, you know, we are looking at. I'm starting doing in smaller markets, but I'm still going to be like focused in just a few.
[23:39]
A
Yeah. Maybe you can talk a little bit about the slow flip model. It seems to be increasingly popular. It's one I've never done. I've not. I have a lot of clients that do that. I'm a little not skeptical of the model, but I worry about like the, the borrower like starting out upside down. But maybe talk a little bit about it.
[24:00]
B
Yeah, for sure. So I feel like the, the slow flip structure is a little bit more entry level friendly. I would say like for people that are doing maybe they had some wholesaling experience or rental experience and you're doing the wraps. It's, it's or originating notes is a little like too many moving parts because there's all these properties that are sitting on market that are, you know, being, being sold that need work for 20, 30,000 do dollars in all these small markets around the country. So the idea of the slow Flip is you lock up those either with seller financing or you bring in private capital to acquire these properties and then you can sell them for 70, 80, $90,000 on seller financing. So the demographic of buyers. So the cons of the slow flip are yes, usually they're going to be a little bit upside down because the down payments are so low. Two is it's a different buyer demographic. So typically they would turn way more often than our traditional originations that we do when we're getting, you know, 10, 20, $25,000 down. It's a different buyer demographic. But like the idea from these individuals perspective is they're paying eleven hundred dollars per month renting, right? So if you give them the opportunity to own a property, they can make their own, they can fix it up and they can, you know, add to build an equity by doing repairs
[25:20]
A
and
[25:20]
B
they can do that for 800 bucks a month. You know, that's a pretty decent, they're paying less per month and they have like the feeling of homeownership. So there's a lot of people, there's a lot of people like this who are, who are interested. I'm curious from like a note buying perspective that people sell these notes and we'll kind of.
[25:37]
A
Yeah, I, I've never bought one. I, I personally wouldn't buy one because, because if I'm buying a note, I'm looking at number one, like what's my return? Assuming it keeps paying. But then I got on my downside, if this thing defaults, I'm going to have legal expenses, carrying costs, et cetera, et cetera. On average it'll cost me about 10,000 bucks to get a property back. And there's a lot of variation in that number. But that's legal. Usually if they default, they're not paying taxes and insurance and there could be a clean out and other stuff. And so then I gotta look at, okay, if I go through that to get the property back and then sell it, what do I get out of it? So if it started off as like a 30k, really I wouldn't want to buy a note on a property that's probably worth less than about 75k anyhow. Because usually if a borrower defaults on those, it's not that they're damaging the property, but they kind of neglect everything. So like it's going to be rough when you get it back. So, you know, you may be selling that thing for 20K. And so, you know, for me to buy a loan like that, I'd have to Be into it for a really small amount of money and no slow flippers ever gonna sell it for that. So. So yeah, I don't, I don't necessarily see those loans getting sold. I know one guy, I don't know the details of it, but I've got one client who has like set, like he does a lot of those and he set up a fund which I think is an interesting model. I don't know the details of like how he has that set up, but I guess, you know, that would be a way for investors to participate in that. But now their money's spread across this like portfolio and you're not buying one loan that could go red that you could get upside down on. So that, that's an interesting strategy.
[27:35]
B
Yeah, it's a good way to do it. And it's, it's, it's, it's. I feel like it's a little more of an entry level way to, to get into these types of deals because like finding these deals is just relatively easy and then selling them is also like relatively easy, like within two weeks, you know.
[27:51]
A
Yeah, like, like I'm, yeah, it's like I'm originally from like central Pennsylvania. There's a lot of like I, I know areas where there's properties like that. So. Yeah, so I get it from that standpoint, there's a lot of those kinds of opportunities like all around.
[28:08]
B
Yeah. And then the country and the downsides, you have to be very discerning about the. But you want a lifer, you want someone who's gonna live in there for the rest of their life and you want to be discerning about who goes into this property. So I don't think it'll cost necessarily 10,000 for, you know you can just get it back and usually resell it, but you will have a period of holding costs and you know, we can get people out and depending on the state. Right. We want to do in states where you can get people out relatively quick.
[28:33]
A
Yeah, I mean I would assume the trick is just making sure like, like a 30, 40k property is not going to be awesome, but we'll just be making sure it's not due for like a roof or furnace or something.
[28:43]
B
Exactly.
[28:43]
A
Crazy. Where the borrower is going to get like I know back in the day there was a company harbor portfolio. They bought like thousands of reos from, from Fannie and Freddie after the financial crisis and there were a lot of those like 30 40k homes and they put people in them on land contracts but they didn't like scrub anything. And there were a lot of stories of where they put some like brand new homeowner that didn't really understand like the difference between owning and renting. And they would get in there and find out like oh, the furnace doesn't work or the roof leaks and they would just bail. And so they had attorney generals going after them because. Yes, you just have to avoid that kind of stuff.
[29:25]
B
Yeah, for sure. Yeah. So it's, it's just all different variations on, on building those and then from the note buyer perspective and that's a different perspect have to think about like do you want to hold onto these forever? Do you want to sell these? I'm curious, when you, when you buy notes, like what kind of returns do you look to get on notes that you're buying? What's your, what's your like buy box? I guess.
[29:44]
A
Yeah, so. So it's a wide spectrum. So on kind of one end of the barbell, like if I'm buying for my self directed ira, I mostly just want like solid performing notes. And so I'm just looking for steady payments over time, equity protection. And I might, and you know, I might be okay with, you know, usually around like 11, 12 return, maybe even down to 10 if it's like super solid. Like I'm not swinging for the fences with those. I just want like solid cash flow in there. Outside of that, in my llc, I'll do a lot of hypothecations. So I'll buy a cash flowing loan and then take a loan from an investor and create a spread. You know, those can have, you know, some more hair on them, maybe some erratic, a little bit of erratic pay history. There's a lot of borrowers who will, they're not going to fully default, but they won't necessarily make a payment reliably every month, like they'll miss and then make two. And so you can buy those at a bigger discount. So those you can buy for like you know, 14, 15, 16%. And then the other end of the spectrum, you know, if it's non performing or depending how non performing or how risky, you know, I might need to price that at like a 30, 40% return because there's going to be, there could be so much volatility in them. So it's, it's really a wide range depending on the type of loan that it is and kind of what I'm trying to accomplish.
[31:16]
B
Gotcha.
[31:17]
A
So yeah. Okay.
[31:18]
B
Well, what do you feel like are the most common ones that you, that
[31:21]
A
you Acquire for me it's those what I call like the sub performing ones. Like it's the ones where the borrowers are paying and maybe they pay in a little bit of erratic fashion, but it averages out to 11 or 12 payments over the course of 12 months. Because for me, over the course of the year, as long as I get that, I'm good to go. And then a lot of those that I buy were originated several years ago and you know, the properties have gone up in value. So I've got a lot of equity protection. So if that. Because those kind of borrowers are obviously going to default at a higher rate than a borrower that pays reliably. But a lot of the ones that buy were originated five, ten plus years ago. And so the property values have appreciated. So I've got a lot of room, you know, to, to get made whole if they do end up defaulting. And then some of them if it's a land contract in a state where you can do a forfeiture, you know, like I've had deals that I did better because the borrower defaulted and gave up the property even though I was on the phone with them explaining that you have a lot of equity here, it's insane. You should either keep this or you can just sell the property. You're going to lose equity. And you know, sometimes they do it anyways. I find sometimes financial literacy is not the best.
[32:39]
B
Yeah, for sure, all around.
[32:41]
A
So.
[32:41]
B
Yeah. Well, what's your, what's your vision for the continued growth of cog the underwriter and also for your own portfolio?
[32:48]
A
Yeah, for me, I mean for call the underwriter I would say that, you know, there's a lot of seller finance loans that are created every year like you know, 100,000 plus depending on what you believe. It's probably a lot larger because that 100k numbers based on record, you know, a lot of land, a lot of stuff's not recorded and there's probably you know, 90 plus percent of those I would say are created like all wrong in various ways. So like there's a big need for those servicers. So it's more like getting out to all those people. So that's what I've been working on. The loan buying is interesting because when I took over call the underwriter over a year and a half coming up on two years now, my original plan was I was going to wind down a lot of my note buying and just focus on the note creating. But then it was challenging to sell notes like most of your like individual Note buyers are just absurdly conservative. They will find any reason not to do something. It's like the polar opposite of the note creator who will find any reason to do something. And, and both of those parties tend to get over rotated. And then since I have such a big network now of note creators, you know, I have people who like, hey, can you help me sell this loan? Or hey, I created loan through you guys a couple years ago. Do you want to buy it? And sometimes I just buy it. So my access to inventory has grown. So I've actually gone the other direction in my note portfolio and it's expanded just kind of on its own. So that'll probably continue a bit. I don't want that to get too big because portfolio management is its own thing. It's not as intense as like property management on a rental. But you know, if you get enough, there's still a lot going on there. So I'm trying to manage that. What I may do is tilt to a fewer number of larger loans because the thing is the work for each loan, it's based on like the loan, not the dollar amount. So. So the, the next knob will probably turn there at some point. I'll cap the number and then just focus on doing larger ones. So.
[35:06]
B
Gotcha.
[35:08]
A
Yeah. So it's an interesting world. Very, very, very niche, you know, Very, very.
[35:13]
B
It's a nice, it's a nice corner of the real estate market. Hang out in. I think so.
[35:17]
A
Well, I like it because there's no shortage of loans that are out there and there's very few individuals that buy them. So the whole supply demand equation is like nothing else you'll find anywhere else. So. Well, cool. And then I think you've got a community and stuff. Maybe you talk a little bit more about what, what you've got going on and here.
[35:36]
B
Yeah, so Facebook's a great way. We have a school community called Seller Finance Freedom Academy. Then I have a mentorship group called Rap Academy. And we focus on kind of get done with you structure, where we have a handful of coaches and we just like handhold people through the process of learning how to structure and put these deals together. And so I do a bunch of master classes all the time. I love this stuff. I love, I love freedom. I love creating freedom. I love supporting people and creating freedom. I think that this, to me, this niche in real estate is the best I found to build prosperous, peaceful, relatively passive portfolio. Lots of P's there, but yeah, yeah, so, so this is, this is what we do. And so yeah, on Facebook. Philip Louden is a great way to kind of tap in. You can message me there. I'll respond, and I can get you tapped into some of the stuff that we're. That we're doing and building and creating.
[36:33]
A
No, that's awesome. Well, I'll put links to your stuff in the descriptions. And thanks again for joining. I really appreciate you coming on.
[36:40]
B
Yeah, thanks for having me.

Summary7 min read

The Note Investor Podcast Episode: Wraps, Lease Options & Slow Flips: A Creative Finance Deep Dive with Philip Louden
Host: Dan Deppen
Guest: Philip Louden
Date: June 30, 2026

Episode Overview

In this episode, host Dan Deppen sits down with seasoned real estate investor and creative finance expert Philip Louden for an in-depth conversation about alternative real estate strategies. They explore Philip’s journey from a digital nomad to a full-time investor, and dive into the mechanics, mindsets, and strategies behind wraps, lease options, and slow flips. The episode offers practical insights for creating passive cash flow, building win-win solutions, and maintaining sanity and freedom through creative deal structuring.

Philip Louden’s Background & Path to Real Estate

(00:23–06:21)

Philip shares his non-traditional journey, starting as a post-college backpacker in Australia, then moving through Bali and Chiang Mai, Thailand, running various online businesses.
Describes his realization during the COVID-19 pandemic that he wanted to better understand the money side of things, prompting his move back to the US.
Partners with friends in Kansas City to launch a wholesaling outfit, which they ramp up to six deals per month—but finds the transactional nature unsatisfying and "a grind."
- Notable quote:
  “I felt very much so I kept building these businesses and I was trapping myself inside of them.” – Philip (05:05)
Discovers creative financing after meeting a veteran local investor who specialized in seller-financing homes to families not qualifying for traditional loans.

The Shift to Creative Financing & Notes

(06:21–09:58)

Philip and his team start utilizing "subject to" investing and seller financing, quickly witnessing the life-changing impact for families—especially first-generation immigrants.
- Quote:
  “They were basically achieving the American dream by gaining access to homeownership…it hit very different than wholesaling a house to a hedge fund.” – Philip (07:24)
Embraces the philosophy from Robert Kiyosaki’s “Cash Flow Quadrant”: the goal of real estate is to escape the rat race by creating enough passive income to cover living expenses.
- Quote:
  “When you have enough cash flow to cover your monthly expenses, you’re then freed up to live from a space of inspiration rather than a place of desperation.” – Philip (09:47)

Current Deal Structuring & Models

(09:58–13:28)

Philip uses a blend of:
- 10-year lease options
- Contract-for-deeds
- Slow flips (buying cheap properties, then seller-financing at higher price points)
Now acquires the majority of properties from wholesalers, leveraging his expertise in underwriting and structuring creative deals.
- Quote:
  "I’m lazy now. I spend enough time going direct to sellers. So now I have wholesalers who bring me deals." – Philip (10:58)
Discusses his focus on cash flow, scalability, and peace, structuring deals to minimize headaches and ongoing hassles compared to traditional rental portfolios.

Lease Options: Structures & Rationale

(13:28–16:05)

Focuses on creating nearly hands-off portfolios:
- 10-year lease options designed so buyers are responsible for all repairs under $1,500, sharing major repair costs beyond that threshold.
- This allows investors to retain depreciation benefits while shifting much of the maintenance burden to the buyer.
Lease options serve as flexible tools, providing potential pathways to homeownership for buyers who struggle to qualify for standard loans.
- Quote:
  “A lot of my ethos…is around creating maximum peace.” – Philip (12:31)
Explains floor-and-ceiling price ranges tied to the property’s appraised value at option exercise (prevents buyers from capitalizing on runaway appreciation, but lets them share upside).

Buyer Success Rates & Ethos

(16:05–18:12)

On lease option execution rates:
- Philip’s data is limited to a couple years, but peers report around 50% execution (though varies widely).
- Emphasizes a “heart for buyers”: committed to finding creative ways (like transitioning to seller financing) to help successful payers achieve homeownership even if they can't refinance conventionally.
90%+ of seller-financed buyers remain current and in their homes.
- Quote:
  “Our ethos is…I want to give them the right path toward homeownership.” – Philip (16:57)

Finding Well-Qualified Buyers

(18:12–20:47)

Multi-pronged marketing: Facebook Marketplace, Craigslist (noting a $75,000 down payment from one lead), “Taco Trail” restaurant signage, and networked specialists who connect buyers within their communities.
Prefers using consultants with deep community ties over traditional agents, who may not grasp creative finance deals.
- Quote:
  “Traditional agents…don’t always understand what we’re doing.” – Philip (19:28)

The Realities of Disposition and Note Acquisitions

(20:47–23:22, 24:00–27:34)

Dan explains his process for selling REOs when he acquires property through non-performing note workouts — sometimes via agents who “understand creative finance and are investor friendly,” usually in cities 20,000+ population.
Discusses challenges of selling or originating loans on distressed or rural properties.
Philip lists the advantages of centralizing deal activity in a primary market (e.g., Kansas City), but is expanding into slow flips in smaller markets.

Slow Flips: Model, Pitfalls, and Buyer Demographics

(24:00–29:25)

Slow flips: buying low-price homes (often $30-40k), selling on terms for $70-90k.
- Appeals to buyers who want to own and are paying similar or more for rent.
- Notable risk: buyers often start “upside down,” and note performance is typically lower than traditional notes.
  - “You want a lifer,” someone expected to stay long-term.
- Memorable moment: Discussion of companies that abused the model by selling uninspected, run-down homes, resulting in lawsuits (28:43).
  - “You just have to avoid that kind of stuff.” – Dan (29:25)
From a note buyer’s lens, Dan is wary of slow flips, highlighting the risk of default and high carrying costs upon foreclosure—meaning these notes are rarely traded in the secondary market.

Note Buying Criteria & Portfolio Management

(29:44–35:06)

Dan’s “buy box”:
- Seeks double-digit returns, with yield requirements rising alongside risk.
- Prefers “sub-performing” loans where payments are less predictable, but property value has appreciated, ensuring equity protection even if the borrower defaults.
- Avoids small-dollar properties, especially those under $75k, due to expense/loss risk on foreclosure.
Notes that most seller-financed loans are not properly originated, citing market inefficiencies and opportunity for better practices.
- “Most individual note buyers are just absurdly conservative…polar opposite of the note creator, who will find any reason to do something.” – Dan (34:36)
Plans to focus on fewer, larger loans to streamline management.

Building a Mission-Driven Business & Community

(35:35–36:39)

Philip shares about his Seller Finance Freedom Academy and mentorship group, Rap Academy, focused on helping investors build peaceful, profitable portfolios through creative finance.
- “I love freedom. I love supporting people and creating freedom…I think this niche in real estate is the best I found to build a prosperous, peaceful, relatively passive portfolio.” – Philip (36:01)
Encourages listeners to connect via Facebook or reach out for more on his masterclasses and coaching communities.

Key Takeaways & Memorable Quotes

“Once you escape the rat race…you are then freed up to live from a space of inspiration rather than desperation.” – Philip Louden (09:47)
“I’m a lot more mission-driven than necessarily, like, financially driven.” – Philip Louden (03:14)
On serving alternative buyers:
“There’s a starving crowd out there because there’s so many people that want to own, and they don’t have the ability to do it in traditional means.” – Philip Louden (19:13)
“Traditional agents…don’t always understand what we’re doing.” – Philip Louden (19:28)
On slow flips:
“You want a lifer, you want someone who’s gonna live in there for the rest of their life and you want to be discerning about who goes into this property.” – Philip Louden (28:11)
On underwriting:
“For me, over the course of the year, as long as I get [my return], I’m good to go…If it’s a land contract in a state where you can do a forfeiture…sometimes I did better because the borrower defaulted and gave up the property.” – Dan Deppen (31:20–32:38)
On community:
“I love freedom. I love supporting people and creating freedom…I think that this niche in real estate is the best I found.” – Philip Louden (36:01)

Important Timestamps

00:23–06:21: Philip’s journey to creative real estate
06:21–09:58: Discovering creative finance, impact on buyers, Cash Flow Quadrant
09:58–13:28: How Philip currently structures deals
13:28–16:05: Lease options & maximizing ‘peace’ in portfolios
18:12–19:55: Marketing for buyers; the value of community consultants
23:39–24:00: Transitioning to ‘slow flip’ models in new markets
24:00–29:25: Deep dive into slow flips: structure, risk, buyer pools
29:44–35:06: Dan on note-buying criteria, risk, and strategy
35:35–36:39: Philip’s community, mission, and how to connect

This episode is a candid, tactical, and philosophical look at making real estate both profitable and meaningful through creative finance. Whether you’re seeking passive cash flow, impact, or real-world deal structuring tips, you’ll find plenty to dig into. For more from Philip, check out the Seller Finance Freedom Academy or search “Philip Louden” on Facebook.

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Transcript84 lines

[00:02]
A
Hey everyone. Welcome to the Seller Finance or Creative Deals podcast. I'm Dan Depen and today joined by Philip Louden. So, Philip, how you doing?
[00:10]
B
Yeah, amazing.
[00:12]
A
Good. Yeah. So I've seen you online for like quite a while. Haven't interacted a whole ton. So excited to have you on. So maybe start by just telling us a little bit about you and kind of. Kind of what you do.
[00:23]
B
Yeah, for sure. It's always an interesting question to share about myself because I have many, many different lives I've lived in in real estate. I guess I start off as a backpacker. After, after college I went to Australia and worked and traveled for, for a year using a working holiday visa, kind of soul searching and looking for like, what I want to create in the world. I looked at how most people, I guess, lived the nine to five life and I knew that was not for me.
[00:49]
A
What parts of Australia were you running? I've been there three times, but it's been a long time. I used to get there for work every now and then.
[00:56]
B
Yeah, nice. Yeah, it's kind of a crazy traveler. Like I. I started off in Brisbane, had some friends there, and then I went three hours out of Brisbane to a place called Stanthorpe and I worked on like one of the largest farms in Australia doing straight manual labor with a lot of the other backpackers. Um, and then I spent about two months in the Wits Sunday Islands working at a retreat center or a resort. And then I was in the, the Daintree rainforest, the oldest rainforest in the world in the north of Australia. Uh, spent a lot of time near Byron Bay, about a month in Tasmania. Uh, so really the country I was like kind of traveling and doing some hitchhiking and I was kind of a crazy young backpacker.
[01:33]
A
That, that's awesome. When I was there, I was there for work, so I didn't get to do as much exploring as you did. But I always went to Brisbane because we had, I was working for Oracle at the time and the Queensland Brain Institute was like a big reference customer and we had like, you know, customer user groups and stuff. And then, you know, I had gotten to Sydney and, and Melbourne for like work meetings. And there was one where I got to do like an overnight to Perth, which was fun just because it felt like it's about as far away from home as you can get. Although those trips I was like, you know, you like, fly to a cool place, go to a bunch of meetings, sleep, go another meeting and then like fly out. So I didn't get to see as Nearly as much of it as you did.
[02:12]
B
Yeah. You know, I probably see more of Australia than most Australians because it was like the phase of. The phase of life, of travel and exploration and. Yeah, it was amazing.
[02:23]
A
Very cool. So. So then what do you end up doing after that?
[02:25]
B
Yeah, so, like, so that was my. That was my year of. Of soul searching. And then at. A year went by, and after that year, I still had no idea what I wanted to do with my life. I found a lot of things I did not want to do with my life. So I popped over to Bali, which is right next to Australia. I bought a 200 computer and started learning how. I was like, I need to figure out how to make money because I'm going to run out of money. And that led me the long way into entrepreneurship. And then I moved to Chiang Mai, Thailand, and then I spent about five years living in between Bali and Chiang Mai, Thailand. I'm doing online businesses.
[03:02]
A
Yeah. You ever come across the. The Dynamite Circle?
[03:05]
B
Yeah, yeah.
[03:06]
A
Or being part of that? Yeah, I was part of that for several years. I say it sounds like you're like the ideal. Yeah, I'm not in that anymore, but I was in it for a long time. Yeah. Nice.
[03:15]
B
Amazing. So, yes, I was like Southeast Asia kind of digital nomad for a while, learning how to build businesses and learning the basics of business. I was always, like, I always wanted to build things that had a big impact in the world. I'm a lot more mission driven than necessarily, like, financially driven. And I kind of got stuck in these small businesses. I had a website development company, and then I was doing drop shipping for a bit. And then when Covid hit, I kind of got to this point where I didn't feel very fulfilled by my business. I wanted to really figure out the money side of things so that I could spend more time building things that I was more passionate about. And Covid hit and I had an opportunity to join some friends in Kansas City who were starting a real estate company. And so they were building a wholesaling company. And I said, you know what? I'm 29 years old and it feels like time to get back to the U.S. i spent like about five or five years outside, and so I moved back to the United States, went to Kansas City, had never been there before, and we started a wholesaling company from the top story of a duplex that we were. Were renting out. So it was like, me, my friend Tanner and his brother Bryce and his wife all living in this small house, kind of like the Business from the garage and we started a wholesaling company.
[04:29]
A
Why? Why Kansas City? Was it just because they were there? Because it seems like I have a lot of clients that do stuff like in Kansas City. It seems to be like a hub for some reason.
[04:39]
B
Yeah, for sure. So, yeah, it was just because they were there. It was happening.
[04:45]
A
Nice.
[04:46]
B
Yeah. And yeah, so we, at that point we, we started scaling up a wholesaling operation. So we started off, we got the book, the One Thing by Gary Keller. And to get very focused in on like what our thing is, we decided we're going to text message market people and I will call them. And my experience in real estate was very slim. I didn't know very much about real estate at all, but I knew that the basics that we lock up a property for low enough we can sell it to a flipper for a little bit more. And so we started texting people. We started hopping on phone call. We got our first deal in the first about two or three months. Then we got our second and third deal. And then we hired some mentors. We built out the CRM. I did everything they told us to do. We scaled a wholesaling operation to doing about six properties per month. And I realized I kind of hated that business. I kind of built a business that I felt very trapped in.
[05:35]
A
And I've never done that, but it appears to be a grind. I don't have any firsthand experience with it.
[05:43]
B
Yeah, it was definitely a grind. And I, and I was just like, man, I'm like, I went from drop shipping, like physical products, like drop shipping houses. I'm just like middle manning these houses. And I felt very much so. I feel like I kept building these businesses and I was trapping myself inside of and I wanted to kind of, I wanted to evolve past that. Right. And that's around the time that we started learning about creative financing. Locking up deals with creative financing. And we found a local mentor who showed us that the power of how we can sell our finance properties to families that don't qualify with the banks. And that's the beginning of really the exit strategy that I fell in love with. And that is, you know, building, creating notes.
[06:22]
A
No, that, that's awesome. How, how did you find that mentor? Like, how did that. Because that's the thing with creative finance. It's. It's been around forever. It's probably bigger than people think, but it seems like a lot of the knowledge is fairly opaque. Like can be hard to find.
[06:37]
B
Yeah. So, yeah, I feel like we, we found this guy Just learning how to do subject to properties. They learned how to lock a property subject to the existing mortgage. We found a guy that's been doing it for about 30 years in Kansas City. And so he helped us really walk us through the process of our first two sub twos. And the first one we just wholesaled it was in Topeka, Kansas. We wholesaled it for $5,000 to a guy that we knew from some real estate groups. And the next one we got, he showed us what he's been doing for about 30 years, which is seller financing to families that don't qualify with the banks. And a lot of those buyers oftentimes end up being first generation Americans and entrepreneurs and 1099 employees. And so the first deal we got like a pretty significant down payment on, I think it was like 50 plus thousand that we got down, which not every deal is like that. But you know, we, and it also cash flowed about 700 bucks a month and we would have wholesaled this for $10,000. So you know we were. And like on top of that the family was first generation American from Honduras and they were extremely grateful. They're basically achieving the American dream by gaining access to homeownership. And there it was, it hit very different than wholesaling a house to a hedge fund. You know, it was like one we're creating cash flow. And this is like a lot of like the shtick I think of like of this model and how I think about it is do you do the game Cash Flow Quadrant by Robert Kiyosaki?
[07:58]
A
Yeah, I've seen it. I trying to think if I played it, if I did it was like six or seven years ago, but I remember coming across that.
[08:05]
B
Yeah, yeah. So there's a game called Cash Flow Quadrant by Robert Kiyosaki, who Rich dad, poor dad. And the whole goal of this game is to. You're stuck in the middle at first and it's called the rat race. You're in the rat race and you have a certain amount of monthly expenses. And to escape the rat race you must get, must get enough cash flow to cover those monthly expenses. And then you're freed up to play a bigger game on the outside. That's when bigger opportunities come into play. And so that game really showed me the actual game and purpose of real estate. And the goal, goal number one, how I see it is to get enough cash flow to cover your monthly expenses. Because when that, that happens, you know this, for example, this deal created 750amonth in cash flow. Right. And Rather than a wholesale, which gets us active income, but then is. It's finished forever.
[08:50]
A
It's fee income. Right. It's like a one time.
[08:53]
B
It's a one time that every month you start from zero. And like if you do that for a year, two years, three years, it starts to get really exhausting to start from zero every single month. And it took me, I took a very roundabout way of understanding the purpose and goal of what of in my opinion of real estate. And that is to escape from the rat race and also to hold on to assets I'll appreciate every time. And so that's when I started. We started adding in more of these deals and getting more cash flow. And each deal that we did, it felt like a weight was lifting off our chest because we were just getting, having money that's going to come in no matter what. And yeah. So cash flow quadrant. Like once you get, once you escape the rat race, like how. What I say is, you know, when you have enough cash flow to cover your monthly expenses, you're then freed up to live from a space of inspiration rather than a place of desperation. Desperation is how am I going to pay my bills? Inspiration is like, my bills are covered. Like now, you know, what do I want to create in the world? And whether that's, you know, larger real estate business or whether it's giving back to a number, you know, whatever, you're free to a world of opportunity at that point. Mm.
[09:59]
A
So like specifically like, how are you structuring your creative deals? Or like, what's the model you're using today?
[10:06]
B
Yeah, so we do, we do a combination. So I do a combination of 10 year lease options, contract for deeds. We also do slow flips as well. So there's like, there's a bunch of different ways to structure these deals. But how I talk about is like the first question is like, how am I getting long term financing in place? And then there's different answers to that question. Right. So we do a combination of creative acquisitions. We do some variations of Burr model where we buy, renovate, refinance, and then we do slow flips where there's like $30,000 properties that are livable all across the country in smaller markets. And we can sell or finance those at a premium to families that want to own rather than rent. So we do, we do a combination of all of these. I mostly buy my properties from wholesalers at this point.
[10:54]
A
Oh, okay. So you've got people finding them for you and then you.
[10:58]
B
I'm lazy now. I spend enough time Going direct to sellers. So I'm now at the point where I have my wholesalers who bring me deal. I know how the numbers work really well. Like I, you know, we've done over 70 of these in Kansas City. And then I have a community of people doing these deals all over the countries. I've had my head inside of, you know, thousands of of these deals, just looking at it, underwriting with people, looking at the numbers, seeing how the numbers play together and so on.
[11:25]
A
Yeah. One of the things I like about, I've always liked about loans in general is even though they're all sort of unique in some ways, like they're also kind of rinsing, repeat and. Yeah. You can kind of do the back of the envelope math in your head.
[11:36]
B
Yeah.
[11:37]
A
After you've seen like, like enough of them.
[11:41]
B
Yeah. The numbers start to make sense and. Yeah.
[11:46]
A
Yeah. So maybe you can talk about the lease options a little bit maybe just to educate me because I haven't actually done one of those myself. I've originated, you know, land contracts and mortgages and deeds of trust and that kind of stuff. But like where do the, the lease options kind of come into play for you and like how do you like to structure those?
[12:04]
B
Yeah, so now, now I do a combination of. I'm very opportunistic. So I'll market a deal as a lease option. I'll also have it simultaneously marketed by someone else to sell it on, on contract for deed. Or we do 30 year lease options sometimes also. But the 10 year lease options, how we structure it is one, it's a 10 year lease option. Two is the families are responsible for all minor repairs. And also like the philosophy of how we structure our portfolio is like, you heard my story. I've backpacker, traveler, love to be. I like, I like living life with, with peace. So I want to structure. And this is why I love wraps, why I love doing seller finance deals and doing notes. Because it eliminates a lot of the headaches of having a real estate portfolio. Right. Like rentals people are calling you for things you have to deal with repairs or unexpected, unexpected repairs, Capex, all that. You know, when you originate notes you kind of get rid of a lot of that, a lot of those headaches that come with having traditional portfolios. And so a lot of my ethos and like how I think about structuring a portfolio is around creating maximum peace. I have a lot of friends who have like 100 plus rentals. Right. And it sounds, you know, on the outside, sounds like amazing, like, okay, Great. That guy's crushing it. But if you look at the day to day life like inside of managing 100 plus rentals, it's not always the, the you know, the roses and glitter that you might imagine, you know, there's a lot of running around frantically.
[13:28]
A
Yeah, I, I can't imagine. And like, like I have friends in other lines of business that have been very successful and very scalable but like they kind of don't sleep. Like it's kind of day to day kind of. They're very successful but like at a price.
[13:44]
B
Yes, we, we're at your freedom. Like freedom is what we're going after. Freedom in all areas of our life and doing in a way that like is helping the world and helping people. And so we're helping families can access to home ownership. We're helping, you know, when we acquire properties, we're helping people who can't sell their properties sell them in some sort. And so that's like the ecosystem of wins. Like doing good while doing well. These are the mottos that are important to us because we want to build something that we feel good about and that's leading ourselves and other people into like greater freedom within their lives. So the first 70 plus deals we did were all a combination of contract for Ds and 30 year lease options which basically mirror a contract for D. They're not very sellable notes. You wouldn't like these. As a note buyer. I would imagine so. And then eventually I wanted to get more depreciation benefits and I want to have an alternative to just selling properties on seller financing for when the markets are, you know, all markets are based off supply and demand. And Kansas City is one of the more competitive markets for doing seller finance deals and originating notes. So I started doing 10 year lease options as well. And so with 10 year lease options, how I structure it to optimize for peace is the families are responsible for all repairs under $1500. Right. So anything minor the families are responsible for that live inside the properties. Anything that is above that, those families will bring the first thousand dollars towards those repairs. And what this does is it helps us to make sure that these families are not just going to be calling us for any sort of reason. They need to put some skin in the game and then we'll cover anything on top of it. So that's, you know, the roof goes out or the air conditioner goes out or anything major happens, we will be responsible for that. With this, the burden of ownership transfers from them to us. So if you're doing a traditional seller financing deal, you can't really write off depreciation. Right. Because the burden of ownership is not on you. The burden of ownership is on the family living inside the property. And so if we have the burden of ownership through these major repairs, we can then also write off depreciation. Yeah, so that's like. That's how we structure it. And then we have a floor price and a ceiling and a roof price on that option. Meaning that this can be based off the appraised values. For example, the floor is 200,000 and the roof's like 230. So they would capitalize on any appreciation above 230. But they couldn't like balloon us out or refinance this out and.
[16:05]
A
Oh, I see. So. So, so if they want to execute the option and buy the property, there's not necessarily a fixed price that's specified. It's based on an appraisal, but then. But needs to fall within a range. So there's kind of like a minimum floor and then. Yes, a ceiling. Okay, that makes sense. So that way you can kind of share and potential appreciation. But. But they do.
[16:31]
B
Yeah. And then we give them their options. Well, their option fees credited towards the purchase also.
[16:36]
A
And how many people execute on the options? Like do they just tend to keep the lease going or.
[16:42]
B
Yeah, I'm not sure. I mean with our. So this I've only been doing for the past two years or so, but I would say I have friends have been doing it for a lot longer and they say around different people say different things. It depends on how you structure it. Right. So around 50 would be great, but I don't know if it's actually that much. But once again, like the eth. Our ethos is like I have a heart for our buyers. Like if they come in and they're paying, I would even transition them to a seller financing note after a few years if they weren't able to get the financing. So we have a good person in the property. I want to give them the right path towards homeownership. For the notes that we originate, we have about a 90 success rate so far. Not have executed, but like families that have. Are still in the property, still making payments.
[17:24]
A
Yeah, I'm actually in the process of buying. Well, it's a. It's a portfolio of land contracts, but there's actually this one in there that. That was a lease option. And it's funny because I've never bought a lease option, but it's. It's funny because they had, like, 10 years to exercise it, and it's been 10 years, and they've paid like clockwork. But I don't know if they just, like, forgot to convert it or what. So once I get a hold of it, I'll see it. I'll just. I mean, in theory, I could hose them for the terms of the contract, but I wouldn't do that. It's like they've been paying like clockwork. So I'm guessing maybe they just put this in place a long time ago and forgot about making payments and forgot about it or. Yeah, or whatever. So now. Now how do you go about, like, finding borrowers or. Or lease option buyers for your properties?
[18:12]
B
Yeah. So for. For lease options, we do our own marketing, and then for. For borrowers, we have. People in our markets are trained up to, like, specialize in finding these buyers. That's my favorite way. That's my favorite way to. To find them because, once again, I'm, like, a little bit lazy. I don't like to do more work than I have to. But we have a bunch of different ways to do them. We've done everything from. We've learned, like, anything you can imagine, we've probably done from going. There's. There's a thing called the Taco Trail in Kansas City. So we went to the taco restaurants and put up a bunch of signs in the front yard. Signs in the neighborhood. Facebook marketplace, of course, Facebook groups, Craigslist. We got a $75,000 down buyer from Craigslist before, which is pretty cool. Facebook ads, buy, sell, trade groups, like, all over. So we've, you know, marketing is marketing. At the end of the day, it's more about the marketing is like, how can I get eyeballs on this? And one of the things I love about notes is, you know, there's a starving crowd out there because there's so many people that want to own, and they don't have the ability to do it in traditional means. It's just, how do I get those eyes? The eyes? The right eyes on the deal.
[19:25]
A
Yeah. Do you ever, like, use, like, just traditional agents or you kind of do it all yourself?
[19:29]
B
No, I mean, not traditional agents, but people that specialize in these buyers. They're not always real estate agents. They're more like consultants who will go. And they have people who they've. I sold to this guy's cousin, and now this person's looking, and they have that network built out. I find traditional agents to be a little more, like, fixed in their mindset. Usually like they had the agent, they had the agent, like blinders on. They didn't always, they don't always understand what we're doing.
[19:56]
A
Yeah, if you do, it's kind of like, like what I've done is. So for me, if I don't create a boatload of notes myself, when I do, it's like a one off REO on a defaulted loan that I bought. So I can't really necessarily like set up like the whole machine like you have in Kansas City. So sometimes for me it's easier just to get an agent and let them handle it, but I have to find ones who understand creative finance and are investor friendly. So what I tend to do is find is I'll call around if I don't already have somebody in that city and find somebody who like specializes in REOs, because those people tend to understand that stuff. So if somebody understand, it's good. But yeah, Joe, blow agent off the street, their mind's gonna think, they just won't understand.
[20:48]
B
So when you buy distressed notes, you're buying them all over the country?
[20:51]
A
I do, yeah. My, mine are all over the place. And, and when I do buy a distressed note, generally I'm trying to rehab the borrower and not end up with the property. But sometimes I do. So when I get an reo, it's like a one off in a random place that I may not have, you know, any team on the ground. And so at that point it means things have gone wrong. So I'm mostly trying to get rid of the property. And a lot of times they're pretty beat down by the time I get them. So I can't necessarily sell it to an owner occupant on owner finance because, you know, they might not, you know, they may not be able to handle that. So sometimes I'm just selling like to a local cash buyer investor that's going to fix and flip it or whatever. But when I can, I try to sell it on owner finance. And I, I sold one recently and I've got another one that's under contract right now. I'm crossing my fingers that that goes through in a couple weeks. But a lot, it's funny on both of these I've gotten this mix of seller finance offers with different terms and cash offers. So it's kind of a fun game to sit down there and look at them and figure out. It's like, what would you prefer? Would you prefer this much now or alone with this down payment and this cash flow. So, so I, I find my list for stuff like I get, I'm not so much stating my terms and getting them like I'll give like suggested terms, but I'll get offers that are kind of all over the map.
[22:20]
B
How many properties have you filled? Like they've gotten back. You've had to fill with new buyers across the country.
[22:28]
A
Overall, probably eight or nine.
[22:31]
B
Okay, so not many. Okay.
[22:33]
A
Yeah, not, not a ton.
[22:34]
B
And then are these amazers, Are these small markets you have a minimum size market you buy notes in?
[22:39]
A
Yeah, usually. So I'm generally trying to buy in a city that has at least like 20,000 people. Because the other thing that happens is if it's too small or if it's like out in the middle of nowhere, like I'll buy performing loans in a rural area. But you know, the other thing too is a lot of times like a lot of minor up north at Michigan and Ohio and Indiana. So depending on the time of year, you got to get the property winterized and different things. You need vendors and you know, so it's kind of a consideration when I'm buying lunch because you got to be able to get people out there to do work and secure it and potentially clean it out and then find an agent that understands this stuff. So yeah, this one can be tricky.
[23:23]
B
It's one of the reasons I stayed in one market is I just like to have, I like to have just everything centralized. But now that we're starting to do more slow flips, which is, you know, a different variation on this, you know, we are looking at. I'm starting doing in smaller markets, but I'm still going to be like focused in just a few.
[23:39]
A
Yeah. Maybe you can talk a little bit about the slow flip model. It seems to be increasingly popular. It's one I've never done. I've not. I have a lot of clients that do that. I'm a little not skeptical of the model, but I worry about like the, the borrower like starting out upside down. But maybe talk a little bit about it.
[24:00]
B
Yeah, for sure. So I feel like the, the slow flip structure is a little bit more entry level friendly. I would say like for people that are doing maybe they had some wholesaling experience or rental experience and you're doing the wraps. It's, it's or originating notes is a little like too many moving parts because there's all these properties that are sitting on market that are, you know, being, being sold that need work for 20, 30,000 do dollars in all these small markets around the country. So the idea of the slow Flip is you lock up those either with seller financing or you bring in private capital to acquire these properties and then you can sell them for 70, 80, $90,000 on seller financing. So the demographic of buyers. So the cons of the slow flip are yes, usually they're going to be a little bit upside down because the down payments are so low. Two is it's a different buyer demographic. So typically they would turn way more often than our traditional originations that we do when we're getting, you know, 10, 20, $25,000 down. It's a different buyer demographic. But like the idea from these individuals perspective is they're paying eleven hundred dollars per month renting, right? So if you give them the opportunity to own a property, they can make their own, they can fix it up and they can, you know, add to build an equity by doing repairs
[25:20]
A
and
[25:20]
B
they can do that for 800 bucks a month. You know, that's a pretty decent, they're paying less per month and they have like the feeling of homeownership. So there's a lot of people, there's a lot of people like this who are, who are interested. I'm curious from like a note buying perspective that people sell these notes and we'll kind of.
[25:37]
A
Yeah, I, I've never bought one. I, I personally wouldn't buy one because, because if I'm buying a note, I'm looking at number one, like what's my return? Assuming it keeps paying. But then I got on my downside, if this thing defaults, I'm going to have legal expenses, carrying costs, et cetera, et cetera. On average it'll cost me about 10,000 bucks to get a property back. And there's a lot of variation in that number. But that's legal. Usually if they default, they're not paying taxes and insurance and there could be a clean out and other stuff. And so then I gotta look at, okay, if I go through that to get the property back and then sell it, what do I get out of it? So if it started off as like a 30k, really I wouldn't want to buy a note on a property that's probably worth less than about 75k anyhow. Because usually if a borrower defaults on those, it's not that they're damaging the property, but they kind of neglect everything. So like it's going to be rough when you get it back. So, you know, you may be selling that thing for 20K. And so, you know, for me to buy a loan like that, I'd have to Be into it for a really small amount of money and no slow flippers ever gonna sell it for that. So. So yeah, I don't, I don't necessarily see those loans getting sold. I know one guy, I don't know the details of it, but I've got one client who has like set, like he does a lot of those and he set up a fund which I think is an interesting model. I don't know the details of like how he has that set up, but I guess, you know, that would be a way for investors to participate in that. But now their money's spread across this like portfolio and you're not buying one loan that could go red that you could get upside down on. So that, that's an interesting strategy.
[27:35]
B
Yeah, it's a good way to do it. And it's, it's, it's, it's. I feel like it's a little more of an entry level way to, to get into these types of deals because like finding these deals is just relatively easy and then selling them is also like relatively easy, like within two weeks, you know.
[27:51]
A
Yeah, like, like I'm, yeah, it's like I'm originally from like central Pennsylvania. There's a lot of like I, I know areas where there's properties like that. So. Yeah, so I get it from that standpoint, there's a lot of those kinds of opportunities like all around.
[28:08]
B
Yeah. And then the country and the downsides, you have to be very discerning about the. But you want a lifer, you want someone who's gonna live in there for the rest of their life and you want to be discerning about who goes into this property. So I don't think it'll cost necessarily 10,000 for, you know you can just get it back and usually resell it, but you will have a period of holding costs and you know, we can get people out and depending on the state. Right. We want to do in states where you can get people out relatively quick.
[28:33]
A
Yeah, I mean I would assume the trick is just making sure like, like a 30, 40k property is not going to be awesome, but we'll just be making sure it's not due for like a roof or furnace or something.
[28:43]
B
Exactly.
[28:43]
A
Crazy. Where the borrower is going to get like I know back in the day there was a company harbor portfolio. They bought like thousands of reos from, from Fannie and Freddie after the financial crisis and there were a lot of those like 30 40k homes and they put people in them on land contracts but they didn't like scrub anything. And there were a lot of stories of where they put some like brand new homeowner that didn't really understand like the difference between owning and renting. And they would get in there and find out like oh, the furnace doesn't work or the roof leaks and they would just bail. And so they had attorney generals going after them because. Yes, you just have to avoid that kind of stuff.
[29:25]
B
Yeah, for sure. Yeah. So it's, it's just all different variations on, on building those and then from the note buyer perspective and that's a different perspect have to think about like do you want to hold onto these forever? Do you want to sell these? I'm curious, when you, when you buy notes, like what kind of returns do you look to get on notes that you're buying? What's your, what's your like buy box? I guess.
[29:44]
A
Yeah, so. So it's a wide spectrum. So on kind of one end of the barbell, like if I'm buying for my self directed ira, I mostly just want like solid performing notes. And so I'm just looking for steady payments over time, equity protection. And I might, and you know, I might be okay with, you know, usually around like 11, 12 return, maybe even down to 10 if it's like super solid. Like I'm not swinging for the fences with those. I just want like solid cash flow in there. Outside of that, in my llc, I'll do a lot of hypothecations. So I'll buy a cash flowing loan and then take a loan from an investor and create a spread. You know, those can have, you know, some more hair on them, maybe some erratic, a little bit of erratic pay history. There's a lot of borrowers who will, they're not going to fully default, but they won't necessarily make a payment reliably every month, like they'll miss and then make two. And so you can buy those at a bigger discount. So those you can buy for like you know, 14, 15, 16%. And then the other end of the spectrum, you know, if it's non performing or depending how non performing or how risky, you know, I might need to price that at like a 30, 40% return because there's going to be, there could be so much volatility in them. So it's, it's really a wide range depending on the type of loan that it is and kind of what I'm trying to accomplish.
[31:16]
B
Gotcha.
[31:17]
A
So yeah. Okay.
[31:18]
B
Well, what do you feel like are the most common ones that you, that
[31:21]
A
you Acquire for me it's those what I call like the sub performing ones. Like it's the ones where the borrowers are paying and maybe they pay in a little bit of erratic fashion, but it averages out to 11 or 12 payments over the course of 12 months. Because for me, over the course of the year, as long as I get that, I'm good to go. And then a lot of those that I buy were originated several years ago and you know, the properties have gone up in value. So I've got a lot of equity protection. So if that. Because those kind of borrowers are obviously going to default at a higher rate than a borrower that pays reliably. But a lot of the ones that buy were originated five, ten plus years ago. And so the property values have appreciated. So I've got a lot of room, you know, to, to get made whole if they do end up defaulting. And then some of them if it's a land contract in a state where you can do a forfeiture, you know, like I've had deals that I did better because the borrower defaulted and gave up the property even though I was on the phone with them explaining that you have a lot of equity here, it's insane. You should either keep this or you can just sell the property. You're going to lose equity. And you know, sometimes they do it anyways. I find sometimes financial literacy is not the best.
[32:39]
B
Yeah, for sure, all around.
[32:41]
A
So.
[32:41]
B
Yeah. Well, what's your, what's your vision for the continued growth of cog the underwriter and also for your own portfolio?
[32:48]
A
Yeah, for me, I mean for call the underwriter I would say that, you know, there's a lot of seller finance loans that are created every year like you know, 100,000 plus depending on what you believe. It's probably a lot larger because that 100k numbers based on record, you know, a lot of land, a lot of stuff's not recorded and there's probably you know, 90 plus percent of those I would say are created like all wrong in various ways. So like there's a big need for those servicers. So it's more like getting out to all those people. So that's what I've been working on. The loan buying is interesting because when I took over call the underwriter over a year and a half coming up on two years now, my original plan was I was going to wind down a lot of my note buying and just focus on the note creating. But then it was challenging to sell notes like most of your like individual Note buyers are just absurdly conservative. They will find any reason not to do something. It's like the polar opposite of the note creator who will find any reason to do something. And, and both of those parties tend to get over rotated. And then since I have such a big network now of note creators, you know, I have people who like, hey, can you help me sell this loan? Or hey, I created loan through you guys a couple years ago. Do you want to buy it? And sometimes I just buy it. So my access to inventory has grown. So I've actually gone the other direction in my note portfolio and it's expanded just kind of on its own. So that'll probably continue a bit. I don't want that to get too big because portfolio management is its own thing. It's not as intense as like property management on a rental. But you know, if you get enough, there's still a lot going on there. So I'm trying to manage that. What I may do is tilt to a fewer number of larger loans because the thing is the work for each loan, it's based on like the loan, not the dollar amount. So. So the, the next knob will probably turn there at some point. I'll cap the number and then just focus on doing larger ones. So.
[35:06]
B
Gotcha.
[35:08]
A
Yeah. So it's an interesting world. Very, very, very niche, you know, Very, very.
[35:13]
B
It's a nice, it's a nice corner of the real estate market. Hang out in. I think so.
[35:17]
A
Well, I like it because there's no shortage of loans that are out there and there's very few individuals that buy them. So the whole supply demand equation is like nothing else you'll find anywhere else. So. Well, cool. And then I think you've got a community and stuff. Maybe you talk a little bit more about what, what you've got going on and here.
[35:36]
B
Yeah, so Facebook's a great way. We have a school community called Seller Finance Freedom Academy. Then I have a mentorship group called Rap Academy. And we focus on kind of get done with you structure, where we have a handful of coaches and we just like handhold people through the process of learning how to structure and put these deals together. And so I do a bunch of master classes all the time. I love this stuff. I love, I love freedom. I love creating freedom. I love supporting people and creating freedom. I think that this, to me, this niche in real estate is the best I found to build prosperous, peaceful, relatively passive portfolio. Lots of P's there, but yeah, yeah, so, so this is, this is what we do. And so yeah, on Facebook. Philip Louden is a great way to kind of tap in. You can message me there. I'll respond, and I can get you tapped into some of the stuff that we're. That we're doing and building and creating.
[36:33]
A
No, that's awesome. Well, I'll put links to your stuff in the descriptions. And thanks again for joining. I really appreciate you coming on.
[36:40]
B
Yeah, thanks for having me.