Using Subject-To Wraps to Make Millions with Brad Smotherman

Sean: [00:00:52] Thank you so much for being on the show today. Go ahead and introduce yourself and let everyone know who you are and how you even got into real estate investing.

Brad: [00:00:58] My name is Brad Smotherman and I'm a local real estate investor based out of Nashville, Tennessee. I got in real estate at a young age. I was 17 years old when I decided to get my real estate license, got my license at 18 and that was in 2005. So I retired my license to do investment. And kind of the evolution of my business is I started off in real estate investing doing what we call subject-to wraps. I would buy a house basically under financing and I would sell it with owner financing. So I would create all of these wrap notes. So I did that, I built up my cash, I started doing fix and flips, the HGTV style, you know got down, reframe it, Joanna Gaines, all of that. Realized I don't really have the attention span or is there the profit in that I was making with my notes and went back into the note game. So most of our business now is buying and selling with owner financing. We still do some minor fix and flips, but that's kind of what my business has turned into and we're out there having a lot of fun. I bought at this point in 16 States. So we've done a lot of investing.

Sean: [00:01:59] Awesome. You know, I think you're the first person to be on my show that actually does subject-to wraps. Do you want to explain what that is?

Brad: [00:02:06] Yeah, I certainly can. So I think the first thing that we should start with is what is subject-to and subject-to doesn't mean a contingency. So a lot of people think, “Well subject-to deal is well, the deal is subject to an inspection or subject to refinancing.” No, so a subject-to transaction, and to tell you the history, these transactions became super super popular when interest rates got to like 15, 16, 18% because the real estate market was very difficult. But all these people selling houses had like 7, 9, 10 and 12% interest rates. So the preferable way to sell real estate at the time was to leave a loan in place and transfer title subject to that lien. So all subject-to really means is that we're leaving a lien in place whether that lien is a mortgage or a bank loan, whether that lien is a judgment or a tax lien, whatever that is. And we're taking titles up to that lien. So to put numbers to a deal, let's say a house is worth half a million. They owe hundred fifty thousand on it and we leave that hundred fifty thousand dollar loan in place and we take title subject to that lien. So then with my model, we'll take and we'll sell that house with owner financing. So we'll get down payment, we'll get cash flow and we'll get a note. So that's the basic and that's a really bird's eye view of subject-to, but in a nutshell, that's a subject-to wrap.

Sean: [00:03:28] Okay so to clarify, subject-to is basically someone owns a house and they already have a mortgage on it. Or some kind of lien like you said and when you come in there and you say we're going to buy your property subject-to, which means that you're just gonna take over their mortgage payment. Do you pay them extra money on top of that or do you just take over the mortgage and they kind of walk away from the house.

Brad: [00:03:48] Well, it depends. I mean, there are certainly transactions where we pay sellers cash at closing and that's much more normal now because everybody has an equity position. But in 2010 when I started nobody had equity. So in 2010 was very common for us to just get the deed, get the cash. Now because everybody has equity then it's pretty common for us to pay some cash at closing.

Sean: [00:04:10] And so the wrap is that you bought it. You put some money like a down payment and you have an interest payment to the bank. So the wrap is when you get a buyer in and they pay a higher down payment than what you paid and their payment to you is higher than what you have to pay to the bank.

Brad: [00:04:28] That's absolutely right. So we just did a transaction. This is kind of a bread-and-butter transaction for us. It's a little bit higher dollar for the Middle Tennessee area, but we had a transaction come in and our top 5 biggest motivators are people that are pre-foreclosure behind on payments. They had inherited property that they don't want. They are tired landlords. They're going through a divorce or there's a health and safety issue. And I say safety issue because we have bought houses from people that were being abused. So in this transaction the guy was 2 payments behind, he's got $250,000. I'm giving him $10,000 walk away money at closing. So I'm in the deal at $250,000. I'm going to sell the house with owner financing at 340,000 with probably a $20,-25,000 down payment. So just for easy numbers, we'll say $20,000 down. So I'd get $10,000 in cash today. You know, not that uncommon or that atypical for a wholesale transaction, but I'm getting $10,000 in cash today. I'm getting a wrap note of 320,000 that is wrapped around a $240,000 underlying. So in that transaction, I've got $80,000 in note equity. That would throw off a rate of return. So, you know the cash flow on that transaction, usually my wraps will net on the equity side somewhere around 15%. So we may make on that transaction $1,000 a month interest.

Sean: [00:05:56] Nice. I was wondering how do you keep track of all of this? Because you are still liable for that payment to the bank, right?

Brad: [00:06:05] It depends. The way that we do it, the way that we teach it, we don't guarantee payments. Though, and in most circumstances, we're putting our buyer in place before we close because we don't want to originate. So there's a whole other structure to that. But in general to answer your question, we use a software called Moneylender Pro, which is actually a fairly cheap software. I think it's like $250 one-time fee and it allows you to make statements, the monthly mortgage statements, the 1098. Allows us to track the amortization on the underlying and the wrap so it has a lot of functionality. That's really good.

Sean: [00:06:38] Gotcha. So your end-buyer will give you a check every month and then the software Moneylender Pro knows to accept that money and then also tracks that you're making that same payment to the bank.

Brad: [00:06:50] Correct and we do accept paper checks which we prefer, to be cashier's checks or money orders, but then we will make the underlying payments correct.

Sean: [00:06:59] So basically you have a software to keep track of all your stuff.

Brad: [00:07:01] A hundred percent. But I will say that that owning paper is a lot easier than owning rental. So we don't have vacancy, we don't have repairs. So if somebody calls us and says, “Well my HVAC went out”, it's like, “Well, sorry to hear that Mr. Buyer, but you own the house. So if I own the house, I don't call Bank of America whenever my HVAC goes out. I'll call the HVAC person.” So it's kind of the same thing here.

Sean: [00:07:22] And so who are your buyers? Are you putting this property on MLS and finding a retail buyer?

Brad: [00:07:27] So generally we're marketing through Facebook and Craigslist. So our buyers are one of two people: either they have a credit score issue in general that just allows them from traditional Bank financing or they are self-employed and they have a difficult time with banks. Now there are outliers in that, I have had people that just are like really hell-bent on not getting traditional Bank financing and they can absolutely qualify for a bank financing. I've had people that could basically pay the house off in cash, but they don't want to because those investments are in stock or other real estate and they don't want to touch it. So there's certainly other outliers as far as that goes. But when it comes down to it, most of the people that we sell to are going to fall in those two categories.

Sean: [00:08:11] Okay, so I guess what I'm asking is, you're basically wholesaling these homes or are you actually doing any renovations to property before you transfer it to a new buyer?

Brad: [00:08:20] No and it's kind of funny. It's a big joke for us like, “Who can sell the worst house?” So I have a little group that we meet. I guess two or three times a year and these are investors across the country that do a lot of different stuff. I mean some do wholesales and some do retail stuff, but you know the vast majority of us do owner financing. So basically we sell everything as is, so to the point that if the grass needs cut somebody better go cut the grass because we're selling it “as is where is”. Actually had one transaction where we bought this house and it was just a total junker. There had been a roof leak for like two years. So you can imagine like water will destroy a house over time. You give enough time, water will destroy a house but the roof leak was so bad that in our marketing we said “Look, the front door's unlocked, the house is vacant. If it's raining today though, you'll want to take your umbrella inside the house because you're gonna need it”. But we sold the house owner financing. I remember and I don't know the numbers for last month, I know in January it was somewhere around 13% of mortgage applications got denied. So with that if you take the standard mortgage market, if you think that 31% of people that want to buy a house can't, then you look at every two houses that are selling right now. There could be a third if they could get the financing. So it's a big big market.

Sean: [00:09:45] What kind of terms do you usually give for your new buyer, like what kind of spread you look for between the payment that you owe the bank and the payment that you're gonna request from this new person?

Brad: [00:09:55] Yeah, so I mean the minimum profit that I will personally take is $25,000 and that's the difference in the purchase price and the sales price. And that's pretty rare. I mean our average note is somewhere in the $40-45,000 range, but we do straight amortized loans for our buyers. So 30-year notes are fine with us. So if they want to do a 15 or 20 year note then they certainly can , but almost everybody goes with a 30-year note. We do want a reasonable down payment. So our average down payment's $25,000 and it comes down to we want skin in the game. So these are non-qualifying people and so they are higher risk and with that there needs to be higher rewards. So our average interest rate's 7.9% and depending on the transaction we may want to do a rising interest rate, but on a lot of them we fix the rate. But we don't do balloons and we don't do prepayment penalties. So there are situations we don't want the cash. We don't want the note to cash out. We want the payment and we don't want balloons because we don't want to put someone in a situation where they are going to default because if you start putting balloons and notes, you're putting them in a situation where they're likely to default. We don't want that.

Sean: [00:11:04] So think that your main point is you want the cash flow from these notes.

Brad: [00:11:08] Yeah, and there's certainly again outliers on that. So it's like for every rule there's almost always an exception. In a vast majority of our transactions the rate of return that we're getting on the note equities' so high that to get the cash back, we would have to go back to work and put that money out at a lower rate of return than what the note's getting. So in that situation, it's like number one why I don't want to go back to work to put that money to work and then secondly to do it at a lower rate of return. So probably 85 to 90% of our transactions we want the note to remain.

Sean: [00:11:40] That's funny. So like I don't understand this concept a few years ago, but banks have that prepayment penalty because they don't want the cash. They want that money working for them.

Brad: [00:11:51] Absolutely. Yeah.

Sean: [00:11:52] So do you guys actually transfer title between your seller and yourselves and then from yourselves to the buyer? Or you kind of just matching one to one and getting a slice in between?

Brad: [00:12:02] Yeah, so in a perfect environment our seller will close with our buyer. So we'll have a contract with our seller. We'll have a contract with our buyer and let them close together. And then there's an assignment of note and deed of trust or mortgage depending on the state that you're in that allows us to profit in that transaction.

Sean: [00:12:19] Awesome. Are there any downsides to your strategy.?

Brad: [00:12:23] Yeah, there are certainly downsides. So I mean Nashville has been on a rocket ship when it comes to values the past 20 years. So somebody that did our strategy in the 1970s would have lost out on a ton of appreciation. I mean there have literally been houses that friends of my father's have owned and they bought it for maybe $3000 in the cities and sold it for half a million dollars and the house got torn down. You have that kind of stuff happening. So the bad part about notes is that you forego appreciation to have an asset that does not have vacancy and repair. What I really like about notes is that your income is stated and what that means is the notes had a principal interest amount so we can't guarantee taxes and insurance, you know, the escrow payment is outside of us, but a note is a principal interest amount. So with that we know what our principal interest amount is every month that comes in and we know unless we have a default what that's that income is going to be every month. We don't have vacancy come out of that. We don't have repair come out of that. But the bad part about notes is first position lanes are depreciating assets. Whereas if you have rentals they generally appreciate but you basically pay for it in vacancy and repair.

Sean: [00:13:37] That's right. So I mean you also don't get the tax benefits like you were saying right? No depreciation on that property.

Brad: [00:13:44] Correct, but the way that I look at depreciation, I mean most people have rentals for a certain amount of time and then they sell it so you have depreciation recapture. And in that case, I mean that appreciation's a mute point.

Sean: [00:13:55] So you're mostly investing in Nashville. Tennessee is that correct?

Brad: [00:13:59] Yeah. Mostly I would say in middle and east Tennessee.

Sean: [00:14:02] How did you get connected to these other states that you said you were investing in as well?

Brad: [00:14:06] You know, it kind of happened just by happenstance. So I started getting some down payments that were free and clear houses. And those houses would be in different states. So that happened first, and then as I became more and more comfortable with different states, I partnered with a good good friend of mine in Pittsburgh, and we bought some houses together. I've partnered with a buddy of mine Kaz in Dallas  and we bought some houses together and then we just kind of branched out. So I actually market online to I believe it's a 126 different metros. From my perspective now, we're equity buyers and I don't care where property is if there's equity and we're in a position that we're comfortable. So almost anything works at a price. I never understood investors that say, “Well, I don't buy two bedroom houses” and it's like, “Okay. Well what if I had one worth a hundred grand and I'd sell it to you for a dollar, right?” So it's like don't brush the broad brushstrokes of always and never. It is always nice when a transaction is close to home, that I will say absolutely.

Sean: [00:15:12] Can you talk about how you're finding deals in the first place?

Brad: [00:15:15] Yeah. Sure. So it's kind of funny. I think that marketing is always a big word. Generally you have these really big “Who Moved My Cheese?”moments. So whenever I started in 2010, I would put out 25 bandit signs. So for those of you who don't know bandit signs, it says really tacky “We Buy Houses” signs that you see on the corners of intersections and I would put out 25 signs and get 18 calls. Well I wasn't very good on the phone. I couldn't spot a deal ,it's really tough market when it comes to buying equity because everybody was in a depressed real estate market though. It was really tough to buy but we had all this lead flow. Well, there was a time when I got really good at dealing with those those kinds of transactions and as the market increased as far as the pricing and all these markets nationally, I began to really not like the seller's market that we were in, you know. I enjoyed buying in a buyers market. Well, then we started doing a lot of direct mail, so I started off doing 15,000 pieces a month and it got to where we were sending almost 70,000 pieces a month to get the same net lead flow as we were with 15,000 maybe 24 to 36 months earlier. So it was so much mail to the point that we bought a printer, and it's like close to $100,000 printer so that we can do the mail in house and it got to where we had two people on the phone full time. We had a half-time person on the phone just to deal with the inflow from all these yellow letters and it's just like, “This is crazy man.” Like we're getting maybe hundreds and hundreds of phone calls a week just to do the same lead flow that 15,000 pieces of mail produced, you know 24 to 36 months earlier. So then I moved to Google Ads, which has been really good the past few years and I'm beginning to see it kind of slow down too. And I'm kind of surprised by that. I think part of it is Open door, New Western and Zillow. They're getting into the purchase side of real estate, which I don't think that they're going to be able to do well long-term. They just have so much capital behind that they're going to be able to withstand it for five or six or seven years but their players in the market now, so it's driving lead costs and the average investor can't go toe to toe to toe with Open Door who's paying roughly 90% of Value. So it's becoming a tougher market, but all that to say it's kind of been a “Who Moved My Cheese?” moment a few times in my career where bandit signs got to where they did work and then mail got to where it worked. And now AdWords is getting difficult. I think the new direct mail is going to be the ringless voicemail as long as the states allow it and I don't know how long that's going to be. I'm hearing some talk about different attorney generals not liking this. And the ringless voicemail for those of you who don't know is if you haven't received one, your phone rings like once and then you get a voicemail from that number so we can drop a voicemail in a very very targeted list in their cell phone saying, “Hey, buy houses in your area” sort of thing. So we're in the process of testing that out now.

Sean: [00:18:29] I know some people in San Diego that are doing that method very successfully. 70,000 letters per month is pretty ridiculous!

Brad: [00:18:37] There's a lot of mail. There's so much fun. You know, we had the printer going and it was so much fun to see all these. I basically looked at them as a lottery tickets because it's like if you have 70,000 lottery tickets, you're going to hit the lottery. It's just the question of how much but it just became so intrusive in every way, it was a really difficult way and people are still mailing. I mean, I know people I've got friends of mine across the country that invested and they're doing well with postcards, but they're sending like 60 or you know some of them a hundred thousand per month and they have, I'll call it a wide funnel, so your calls-to-contracts ratio is just a really big ratio, right? So I call that a wide funnel versus Google AdWords at one point. We were doing one transaction for every 12-lead so which is really efficient. It's a very efficient funnel. So yeah, I mean direct mail. It was a lot of mail, but we had a lot of fun with it.

Sean: [00:19:37] So do you guys not do direct mail anymore? You stopped?

Brad: [00:19:40] I haven't done direct mail for probably a year.

Sean: [00:19:43] I mean, I'm sure Google AdWords is cheaper. Right?

Brad: [00:19:45] Well, it was roughly the same cost per contract. So what I'm really concerned about it is not cost per lead but cost for contract, which is again the bottom of that funnel. But it's beginning to increase because my cost per lead across markets has doubled probably in the past four or five months.

Sean: [00:20:01] And was that for all those 14 different states that you were marketing towards?

Brad: [00:20:05] No, so whenever you market nationally, you can see like there's little anomalies in the market. So if you take a bell curve, you have your average. You're always going to have the tail of the bell curve some of which work really really well and some of which don't work at all regardless of what you do. So we try to hit the tail markets, you know, whenever we're doing national marketing. So it may be that we're in a major 100 metro, but for whatever reason there's just not many bigger players there or they have lower ad budgets or maybe the demographics older. So there's not a lot of younger people doing AdWords yet or whatever that is. We do find that across the markets that there are some markets that perform far far better than others.

Sean: [00:20:46] Were you sending 70,000 mail pieces to just Nashville or was that throughout...?

Brad: [00:20:53] That was multiple states. So I mean that was Nashville. We're doing some in Kentucky, Florida. It was kind of across the board.

Sean: [00:21:01] And do you remember what was your cost per contract on average?

Brad: [00:21:05] Right now?

Sean: [00:21:07] That's probably from before and maybe now.

Brad: [00:21:09] Yeah, so I would say that across my career. It's increased from $1000 to $1,500 to roughly $2,000 at this point.

Sean: [00:21:19] You want to hear a scary story.

Brad: [00:21:21] I'd love to hear one.

Sean: [00:21:23] I think here in the Bay Area the average is $18,000 per contract.

Brad: [00:21:27] Yeah, and I was going to say, you know, the Bay Area is just different. It's an anomaly but you guys have flips that where our average flip is somewhere around $55,000 now, $55,000 to you guys is not a good flip at all. You know, I'd say the average is two three four hundred grand and I have no idea but you know just guessing it has to be far far more.

Sean: [00:21:49] Yeah, that's true.

Brad: [00:21:53] You know, so if you look at it as return on investment, I mean you should absolutely 10x your marketing dollar and that's at a minimum. I mean our best campaign, we had a 78 times return on our marketing dollar.

Sean: [00:22:06] Wow. All right. So let's go over to my next question. Let's imagine you're starting over from scratch. What do you do to get to where you are today?

Brad: [00:22:16] Now that's a great question. I think that you really have to decide what you want. So some people really love rentals and that's great. You know, some people like notes, some people like flipping, they like construction and they want to get their hands dirty and all that. I think first you have to decide what your niche is and then you need a mentor. I think that mentors drastically cut your learning curve number one and they're going to save you a lot of money and time. So I was lucky that I had really good mentors early on who taught me the business. I certainly wouldn't have figured this out on my own. So finding a mentor and keeping the end-game in mind. So a lot of people I think have a difficult time starting because they don't understand that there's a learning curve involved. So with being a good real estate investor, you can make as much as a any type of neurosurgeon or high powered attorney, whatever that is really high level stuff. But you have to realize that those people went to school for like 10 years to be skilled. It doesn't take 10 years in real estate, but there is a learning curve so, you know so many people discount that it's not going to be easy to start. And I think part of that is what they see on TV or what they hear from these national gurus, I don't know what they're talking about. But you know finding your niche, find your mentor, have the end game in mind. Because it's the end game in mind and having that vision that's going to get you through that learning curve when times are tough.

Sean: [00:23:41] Yeah. It's amazing. I feel the exact same sentiment for what you just said. I personally went through a similar issue where I know there's so many different strategies in real estate and they all look great. So how did you decide that doing notes and subject-to wraps was your niche in the real estate investing field.

Brad: [00:23:59] Well, I mean part of it is just by default because when I started I didn't have any money to invest anyway. My first transaction whenever it closed I had like $300 in the bank and has a $20,000 net down payment and so that's how I started because I had to. Then when I got a little bit of money, I started doing the fix and flips and the rehabs and all that. And because I thought that that's just what you do. For a while I had almost a disdain for these people that would do wraps and all this because you really can do these deals with little to no money, but it's a very skilled sort of thing because you have to understand deal structure and negotiation to get to the right deal structure that you want at a very high level. So from there, I started doing my fix and flips and I realize I really didn't like that. And so it came to a point where it's the end of the year and I was looking at my best transactions and like 80% of them were note deals because they were easy to buy, they were really easy to sell, they were high profit and and I had this cash flow coming in, you know. So you build up enough notes and it becomes kind of fun because you start getting getting calls from title company saying, “Hey Brad, I noticed that you have a lien on this property. We need to pay off” and that's a pretty good call to get, and looking at the ROI on the notes, there's no way that I could take the cash and put it in the stock or put it in the multifamily or storage or whatever mobile home parks. I've looked at it all. There's nothing that I can do with the cash to get a higher ROI than what I'm doing. The only thing that I'll say is I'll look at bigger assets whenever it's just too much cash. Right? So I've got a good friend of mine that I talked to today. He's adding $2,000 per month in positive cash flow to his business in notes. I mean two grand a month, that that adds up after a while. So goes to show you the possibility in this business.

Sean: [00:25:55] Yeah. I mean, I feel the same way. I used to do a lot of flips, but the problem with flips is you're only as good as your last flip. It's not consistent. It's all transaction.

Brad: [00:26:03] Yeah, you're only as good as your last flip and everybody tells real estate is being getting out of the Rat Race and it should be and it is and it can be. But if you're not positive cash flow, you're not getting out of anything, and so with that the reason that I looked at the flips and said this is not the the direction that I want to go long term is a few things. I mean number one there's about a 30% difference in profit off the top between taking a note transaction to retail. So to put numbers to it like let's say a house is worth half a million dollars on the retail market. So that's the standard realtor MLS market. Well, there's a an entire different market when you take it to owner financing, so there's a pool of buyers that need owner financing and the supply demand curve is so different than the retail estate market that we can drive the price up. So in general I can drive the price up 10 to 15% off of the retail market to an owner finance market. So we'll just say 10% there then I don't have real estate commission. So that's 6%. I don't have all this interest in carrying costs property taxes and insurance while the property sells. So that's some more. It makes a big difference in the profit at the end of the day.

Sean: [00:27:22] That's right. Do you think someone could try this in the Bay Area? Seems like a pretty rough strategy to do here.

Brad: [00:27:30] You know as long as there's motivated sellers then there's a way to do anything. So I guess the question is “are there motivated sellers in the Bay Area?”

Sean: [00:27:41] The answer is yes, but it's very hard to find them.

Brad: [00:27:44] Yeah, I mean the thing is it's big reward, big risk. So I mean I can see $18,000 in marketing to get two or three hundred thousand dollars in net deals. And so if someone is able to spend that in marketing and get in front of a seller that's motivated, then they can certainly take that deal, turn it into a note transaction or wrap transaction because for a few reasons that actually benefit your seller. If someone's behind on payments, it's absolutely to their benefit that we take that property. So from a credit score perspective It's going to help them that at closing, the mortgages caught up and then if those payments are made on time versus paying the mortgage off whenever those payments are behind. So it's absolutely to their benefit and then if they don't need to buy a house in any certain amount of time or whatever their situation might be, taking it to an owner finance market where that financing remains in place for a longer period of time than if we just bought it subject-to and retailed out would be a good strategy but it has to be negotiated well with the idea of deal structure in mind.

Sean: [00:28:49] Got it. Cool, very valuable stuff. So besides you doing subject-to wraps and notes. What else are you doing?

Brad: [00:28:58] Well, being a father of 2 and a husband and I hope a good one, you'll have to ask my wife about that, doing the family thing is super important to me and that's another reason I like notes is doing transactions in multiple states, I can't imagine having rental houses all over the place, but we can service notes pretty efficiently. If you take 200 notes, one person can do that fairly part-time. 200 rentals though across 16 States that's going to be a bit more of a problem. So I'll think at the end of the day, I don't want my wife to step into something, God forbid if something happens to me, where she has to manage rentals or she has to, God forbid, step into a two million dollar a year wholesaling company having never bought an investment property. Like that's probably not going to work well, right?, but I do think that she could service notes. I think that she could figure that out and know and be in a pretty decent position. And I have life insurance and that's fine but building the legacy. I want to build a cash flow legacy and notes is my way to do that.

Sean: [00:30:05] Awesome. And I notice you said that you have properties out of state. So how do you have someone acquiring the property? Do you have like an acquisitions manager in every state that you purchase in?

Brad: [00:30:17] We negotiate over the phone. So we'll have 2 phone calls. The first is basically gathering the basic information and we're getting the information to determine motivation one of two ways: either motivation in price or motivation in circumstance. So let's say again house is worth half a million dollars. If someone calls and says well, I just want $300,000 for this house that's motivation in price. We don't know their motivation, but they're willing to sell at a discount. If someone says, “Well it's worth 500,000. I want 500,000, but I'm getting foreclosed on in 10 days.” Well, that should be motivation in circumstance. So we'll set both of those appointments. And then the second call is generally with me. So I'll get on the phone and then we're going into a deeper script talking about the scope of repairs and everything that we need to know to buy that property. We'll just send the contract over DocuSign. So we'll get it approved and at that point the agreement is contingent on inspection. So we'll have a couple broker price opinion done. So we'll have brokers give us opinions on the price and that's usually about a $150 a piece. I will have home inspection done. If it's something that we're going to personally put cash in and if the broker price opinion are not like clear, so there's not a consensus between the two, like let's say one of them is half a million and one of them is 300,000, then we'll go Step 2 and get an appraisal to really nail down value. So at that point we're going to have enough information from qualified professionals in that area. It's what I personally have whenever I buy local.

Sean: [00:31:47] So, how big is your current team size?

Brad: [00:31:50] Yeah, so I have a full-time acquisition person, a part-time disposition person, me, a project manager who has a couple of full-time employee, and I have a secretary. I need to get another one so. That's kind of the team right now. We're pretty lean.

Sean: [00:32:06] Your project manager is more like your GC for any rehab projects you need?

Brad: [00:32:09] Correct. Yes.

Sean: [00:32:11] So do you actually handle the phone calls yourself as well?

Brad: [00:32:13] Generally not. I have a VA that does it but if somebody's behind or you know, I'm really strict on getting to the leads within a reasonable amount of time and I mean like three minutes. Because if someone's putting an ad on AdWords, if they go to our website and then don't get a phone call back quickly, then they're going to other websites. So I mean, I'm really strict on getting to people quickly. So if we're behind and I know my VA's on the phone then I'll jump on the phone.

Sean: [00:32:45] Is your VA part of that two men group that you're talking about

Brad: [00:32:48] No that's another person.

Sean: [00:32:50] You just have one guy handling most of the phone calls or do you have like a team of people who are doing that for you?

Brad: [00:32:55] No, it's just one. So, a really crazy day would be about 10 leads. I mean, we're kind of leaning on the lean side because again, historically 12 leads has a transaction. So now if we have eight leads that day then we've almost bought a house. But because we cast a wide net on AdWords we can go with really motivated keywords. So things like “sell my house fast”, “sell my house today”,”for sale”, “foreclosure sale” and stuff like that. So if we can target those keywords across a wider net then I have fewer leads that will be able to pay less for it and only go after the really motivated keywords. So yeah, it makes a difference as far as our conversions and all that.

Sean: [00:33:45] Is your VA from the states or is it someone from like the Philippines?

Brad: [00:33:48] That's a Philippine VA. I think she's like six bucks an hour and then I'll bonus her a hundred bucks on each transaction. So I think in return she does pretty well. I'm happy to do that. I really think I want to buy her a house. It's like let's just meet our goals this year and I don't know how much is a house in there but I just think that'd be super cool. Like hey, let's buy the VA a house.

Sean: [00:34:10] Absolutely. It's amazing. So kind of I guess walk me through your acquisition process one more time in full length. So you send out some kind of advertisement whether it be direct mail or Google AdWords, then they go to your website or they call the phone number on your direct mail letter. That phone number goes to your VA in the Philippines who hopefully is awake when you guys are working on this stuff.

Brad: [00:34:38] Sort of. So we do the marketing and all the marketing that we've done really the past 12 months has been internet-based. We don't want phone calls. We want the form filled out and we have conversion rate experts that have worked on the web page to get the conversion rate to where it's to a point. And the flow of the website is to a point that it makes it really easy to know what's next. I think that's a big problem with real estate Investors. It's like nobody cares about your family, nobody cares about your company. It's like make it really easy to take that next step. Right? So the lead comes in, its on a form using Unbounce platform, which I'm sure your Silicon Valley people know about and so the the lead comes in and it's emailed to me and it's emailed to the VA. So if it's after hours for the VA then either I'll take it or I'll send it to my acquisition person that's local here to Nashville and they'll get it. So the call is being made, we have the one-part script where we're asking basically questions to go over it real quick now basically. And this is paraphrasing but basically “tell me about the house, what's the repairs, how soon do you want to close, is there a mortgage and is it current and how much are you wanting to walk away with after the mortgage has taken care of?” So that's the big five questions. And at the end of that we're making a decision on do we want to set the next appointment whether if that's a local deal to local deal. If not, it's the second part phone call. So from there on the second part phone call, I guess I'll talk about this two ways. So virtually on the second part phone call we're deciding whether to go along with what they want. And one of my things that I'm really strict on also is we never make an offer. So that's for a couple of reasons. Number one. I think that people run away from things that chase them. So if I go to a house and I'm saying “Well, I'm the best real estate investor. Here's my company credentials. I'll give you the most money and I'll close on the date of your choice. And if you want to leave the place erect, that's fine” and all that. It's like it feels like I'm almost being too easy. Right? So I do believe in rapport, but I think that people spend too much on rapport. Whenever we go to the house, our job is to get the contract in one swing. So it's like it's more of a pitch than sales. So it's like, you know, one time at bat we get one swing or we're out, right? So we're going to the house. We're going to create a little bit of rapport. We're going to ask some questions that puts them in an emotional state that allows us to negotiate. Well, we're going to be a hundred percent upfront and honest with you know, here's the sales prices. Here's our track record. This is what we think we can sell the house for ,here's your repair costs, the way that we see it, and what do you need to walk away with. But we never give a price. We found that it's pretty difficult to get run out of a house for low-balling if you never give a price, and a lot of times their prices lower than your price and so there have been multiple times in my career where someone will give me just a ridiculously low price it's like “well, no, we're going to pay a little bit more than that” because my number was higher than theirs and I think that's okay. So from there once we have the price we're going to switch in to terms. So we negotiate price first then terms. So a lot of people try to kind of intertwine it. A lot of investors say well here's option one, here's option 2, here's option 3, I think that's a terrible idea. If we have the price that they need and then we hammer it down we say, “So if I can give you that price and you'll sell me the house?” and they say yes and then we say, “Okay. Well I can give you that price if we do it like this?” so we're giving them their price if they agree to our terms, with price as a function of terms. So we can absolutely pay a million dollars for a million-dollar house, but the terms maybe $3,000 per month until paid at 0% and we do those kinds of deals all the time. So if you're a finance guy you understand present value. You understand that the present value of that is significantly lower than the purchase price, but all that to say when you go to a house, I really spend a little bit of time on rapport. Ask the questions that you need to, give them the facts that they need to make a good decision, ask them what they're hoping to walk away with, what's their walkaway-money and then you can switch that from price to terms which for us would be subject-to or buying with owner financing or whatever that is for you.

Sean: [00:39:21] Cool are you trying to get him signed In the very first meeting.

Brad: [00:39:25] Well, they don't sign anything. They approve the form or they endorse it or they give us their John Hancock on the agreement. And again, that's part of negotiation strategy is we don't say sign the contract, that just feels awful to people. But that they approve the agreement, endorse the form. People like agreements is one thing that I found.

Sean: [00:39:44] Yeah, I mean, honestly it sounds like you can do the strategy anywhere. You don't have to be in Nashville or in any state, right?

Brad: Well, I think that you can do it anywhere that there's housing. So if housing ceases to exist, I don't know what I'll do, but you know for me real estate is is a means to an end. So I'm not in love with houses. I'm not in love with land or anything like that. I'm certainly not in love with trailers or mobile homes, but it's an asset class where we can easily get financing. Many times People are going through life circumstances where they need to sell the property and selling the property quickly is secondary to getting every drop of equity out of the transaction. So to tell you a quick story, this one's kind of funny and I know what you're thinking like “Brad, I can't believe you would have a funny story” but I had a transaction. This was actually a lady. It was one of the most sad transactions I've ever had. The lady showed me the house and I go through the script. So we, a mentee with me at the time. So she was learning the business and this is the first appointment that she had ever gone on with me. She's gone on to do wonderful things, but we get to the house. I spent a little bit of time on rapport. I ask my questions, I go through the facts and I ask what the walk away money is and she said so to put numbers to it and I think there's a hundred sixty owed ,she wanted $12,000 to walk away. It needed basically five thousand dollars in repairs and it was worth I thought $230,000 and so then we say “Well I can do your $12,000 if we can do it another way. We need to take it subject-to, the loan remains in your name. It's going to be on your credit report until we pay it off and this is how it works.” So she does the agreement and one of the things that she said whenever we were getting the agreement approved was “Well, I'll sell it to you but I don't want my son to know that you're buying the house” I said, okay. And I'd already noticed that there were holes in the wall about the size of the fist right throughout the house. I said “Well, tell me about that.” She said well, he has an anger problem as you've seen and I'm moving where this is a three-bedroom house to a two-bedroom house.” And at that point, I understood she wasn't going to tell them and it's going to be our problem and that's fine. I'm a hundred percent fine with doing that. But it was so funny to me because the last thing that we do is we get pictures like, “Well, do you mind if we get some pictures?” and she said, “Well, I have a document that has pictures in it that I think maybe you'll want” and I said, “Well, okay. What is it?” and she hands me an appraisal that's roughly 16 months old and it shows me the house is like 20% bigger than what I thought it was per the tax record. So that's the first time that I've ever had someone give me an appraisal that shows me the equity position that they just gave to me and they know it. So a lot of people think that we're in this business and people don't understand what the value is or we are doing old people which is something that I hate. People know the value. And the value in getting every drop of equity from the transaction is secondary to getting the deal done because of those life circumstances and with that I think real estates a great thing and I think you can pretty much do it anywhere as long as there are housing.

Sean: [00:43:06] Awesome. Well, thank you so much for all that information. So how can people get in contact with you?

Brad: [00:43:11] Yeah, I love when people reach out. A few ways that you can get in touch with me. So the first is if you're so inclined you can add me as a friend on Facebook. It's Brad Smotherman. It's also bradsmotherman.com. And for the the podcast lovers out there. I have a podcast “Investor Creator with Brad Smotherman” on iTunes.

Sean: [00:43:28] Awesome. And by the way, you're talking about how you have students and whatnot. Is there a way that people can learn more about note investing by going on your website?

Brad: [00:43:37] We have a little bit about note investing on the website. You know, it's something that we keep the for proprietary stuff that we do pretty close to us and to the mentees, but if somebody's interested in private learning with me then just reach out and I'm happy to talk to.

Sean: [00:43:54] Awesome. Is there anything else you'd like to say before we end the show today?

Brad: [00:43:57] You know first I want to thank you for having me on I have a blast with this and if you ask my wife, it's all about what I talk about anyway, so you gave me the opportunity to talk about what I love which is real estate and notes and marketing and negotiation. I mean, one of the things that I decided early on is it's like 10,000 hour rule. It's something that people say that if you do something for 10,000 hours, you're going to be great at it, whether it's jiujuitsu or banjo or real estate, and I don't know where I'm at in that 10,000 hour rule, but I'd say I'm home on the the upper end of it if not over because I really enjoy this business. I love what it can do for people and yeah, I mean if you're interested in building a legacy, I think real estate is the way to go.

Sean: [00:44:40] Awesome. Well, thanks a lot for being on the show today.

Brad: [00:44:42] Enjoy it man.

Sean: [00:44:44] Thank you.

Brad was an incredible guest and he gave us a lot to think about. He talks about a Who Moved My Cheese moment. It's from the book who Moved My Cheese which talks about a couple of mice and humans who are in a maze. if you haven't read it yet. Go read it. The point the story is things change and you need to be flexible and adapt quickly to reap the full benefits. He was sending out a crazy amount of direct mail, 70,000 pieces a month. But he pivoted to another strategy when it wasn't producing the same results. Create great systems and have the sellers fill out a contact form online. 10X your marketing budget. It's well worth it. And owning notes is a great way to increase your passive cash flow with little to no money left in the deal. If you're interested in learning more about the strategy, you can contact Brad's website bradsmotherman.com and check out his podcast on iTunes the Investor Creator with Brad Smotherman. Hope you learned a lot. Thanks and have a great day.