FCP 134: Cash Flow With Houses That Actually Works! – Featuring Chris Prefontaine

Jack: All right, hello everyone, this is Jack Bosch speaking. Welcome to another episode of “The Forever Cash Life Real Estate” podcast. Today we’re going to talk about cash flow. We’re going to talk about cash flow without banks, we’re gonna talk about lease options, about seller financing, about, yeah, all these different things, but not with land. Actually, I’m going to make an exception today and talk about houses. So, but we’ll be right back.

Man: Welcome to “The Forever Cash Life Real Estate Investing Podcast” with your hosts, Jack and Michelle Bosh. Together, let’s uncover the secrets to building true wealth through real estate, and living a purpose-driven Life.

Jack: All right, welcome everyone again. So first of all, I wanna introduce our guest, Chris. How are you, Chris?

Chris: I’m excellent. Thanks, Jack.

Jack: Wonderful. So, thank you for coming on the show. I’m very curious about what you do, because you’re obviously…our audience knows us. We have been basically…realised my microphone is far away from me here. There we go. Now it’s closer. Our audience knows that we have been kind of like speaking against houses a little bit. So, because in houses, you’re dealing with tenants, toilets, trash, and all this kind of stuff. But you have a house method that allows you to actually get around a bunch of these things. Like, tell us about it.

Chris: Yeah. So we buy everything on either lease purchase, or owner financing, as far as dealing with the sellers. And then to your last point, we sell everything on either rent-to-own or owner financing. Both of those taking me out of the landlord mode in almost every case. And I say almost every case because life happens to some people, right? And they have life events, and they can mess up 2% to 5% of the time, but most of our buyers are buyers, they’re not tenants.

Jack: Oh, wonderful. So, great. So, right out of the get go, we’re going to talk today about the method of house flipping that allows you to get houses from owners on a subject to or lease option purchase. And then you turn around and you sell it with seller financing or with lease purchase agreements. All of which we are fairly familiar with, because…but we’re gonna jump with, in. But the combination is really unique and a combination is really cool. So let’s jump into that a little bit more. So first of all, before we go into that, tell us how did you come up with this? Like, give us a little bit of your backstory?

Chris: Yeah, mostly, well, I’ve been at real estate since 1991, so I’m dating myself slightly there. But I’ve done everything from building homes to land development to commercial. What happened after the ’08 crash though is, I said, “Okay, man, we got beat up badly.” And it was because we were on personally, on all the loans of all the properties that just lost a third to two thirds value. So around 2012 into ’13, we said let’s re-engineer everything, and that was no bank loans, no cash, no signing personally with banks. That’s a major, major headache and a problem waiting to happen. And then we said, “Okay, let’s do so with the sellers on terms that are long enough where we don’t care about market trends that are short, short term,” because everybody asked me that, “Well, how’s it going to work if the market changes?” I’m okay, because we have long, long terms in some of these.

Jack: Okay. So, you were hurt in the crisis because you had personally signed on a bunch of loans that lost a lot of value. And then you did the smart thing. Instead of leaving the industry, like some people did, you just looked at it as like, “Okay, how can I learn from that?” And isn’t that a key measure that, instead of, like, every loss or every failure you ever had can be a failure forever, or it can be a learning opportunity to how to make things better. So you came up with this better strategy. Now, explain that strategy to us.

Chris: So, I can go on each one. You wanna do lease purchase first?

Jack: Sure. Let’s start with lease purchase. How do you buy these things?

Chris: Okay, so let’s say…let’s assume a couple things just for the example because obviously there’s many examples. Let’s assume the home, your home, you’re the seller, your home’s worth around $300, it’s $250 debt on it. And we’re gonna go ahead and go on agreement with you, we’re gonna say, “Look, Jack, we’re gonna guarantee you your $50,000 in equity,” if that’s what we agreed on, we’re gonna guarantee it though, at the end of the term. Call it 36 months for the sake of this example. So, during that time, what happens? Well, we’re gonna start making the mortgage payments on the underlying debt directly to the bank once we firm up our tenant buyer, find our tenant buyer. That tenant buyer, by the way, needs what? Just, they need time for you to save more, fix their credit, whatever it might be. During that time period, they act, behave like, and pay for things like they’re a buyer, so I’m not in landlord mode.

Then at the end of the term or before, once they’ve gone through their mortgage-ready plan, that could be, again, credit enhancement, or building up down payment, or just seasoning with the bank. Then they’re gonna cash out with a conventional loan. When they do so, the seller gets their $50,000 in that example. We get what? We get any markup on the house that we did, we get any and all principal pay down that benefit and accrued over the term of the loan. Meanwhile, we also got the upfront down payment, and the monthly spread on the mortgage to the buyer rent payment. And I say that because there’s a lot of, you’re in the business, there’s a lot of people that do one deal, get one check. Wholesale, you know, rehabbers, etc. We do one deal, we create three different cash flow streams: now, over time, and then at the end.

Jack: All right. That makes sense. So how…to simplify it, as I like to sometimes take, you went very quickly through a bunch of things, like, so in other words, there’s a seller that just, “I don’t want my house anymore.” Why doesn’t that seller…well, we’ll get to that in a moment. But the seller doesn’t want this house anymore. You come along and you basically take over his payments, right? So like, “I’m gonna take over the payment,” and the moment, and then you go market that property, find somebody else that wants that house, you put that person into the house with a sale agreement or with a seller financing kind of deal or lease purchase agreement. We’ll cover those in a moment.

Chris: Yeah.

Jack: We do lease purchasing in our own program too. So, and then, because they can’t qualify for, usually qualify for a loan right away, but because they are going to buy that house, they are now performing as a buyer. In other words, if the air conditioner breaks, they go fix it.

Chris: Correct. Yep.

Jack: If the heater breaks, they go fix it. If they need to do something for repairs, they go fix it. So you don’t have to do those kind of things. So, in other words, the seller is happy because the seller gets his mortgage paid. And the buyer is happy because the buyer now gets to live in a house already that he builds equity towards, potentially, already.

Chris: Correct.

Jack: And then, once his credit is better or he got the inheritance or whatever it is, then he will go and then get a loan for that thing. So what is it?…So now, the obvious question that always somebody asks is, like, why isn’t this, the market is up, the market is, in many markets, the market is up. Why doesn’t the seller just sell the property himself?

Chris: Yeah, sometimes a number of different things, in no priority order. Sometimes it’s functionality and so the reason it’s not selling because we, remember, where we fish for these, where we look for these, Jack, is expired listings in for sale by owners. So both of those, you know, that’s where we’re finding our deals. So, it could be price, it could be they want all their money. It could be they owe about what it’s worth, or if they paid a realtor, they’d go negative. You know, any one of these things. Divorce, have to do something quickly. Leaving the state, you have to do something quickly. All these have happened. And I don’t wanna make it sound like it’s always a headache, that we do these on free and clear properties too, where, for personal reasons, estate planning reasons, price, we’ll do free and clear properties with sellers. And so that’s someone that doesn’t need the cash right away. This fits for anyone not needing cash right away, but wants the best price.

Jack: Okay. Because you, with this method, you, and ultimately enabling, you’re in a position that you don’t have to discount the price and get, beat them down on the price. You can get them at a decent price, you’re just then asking the other guy for a bit more, right.

Chris: Yeah, exactly. And we’re asking the seller for what, in order to do the nice price? Time. We need time. The price is not as important as time on the term.

Jack: All right, that makes sense. So time. Yeah, time, in this case, is the factor, which is a brilliant method, particularly in a market that currently is not accelerating that much anymore. So it’s, when you’re in a super accelerating market, you can buy something cheap. You don’t need time, you just buy a deal and you sell it very quickly, or if you get a big discount. But in this case, you have a market of people that want to get rid of their properties at a good price. You can provide that. Great. So now, you have a good lease option. Now explain the subject-to method to us.

Chris: Sure. Subject-to is, typically is when someone’s a little bit more stressed out, unlike the example I just gave, and they do need to move quickly for whatever reason. They could be in arrears, they just could be where they can’t afford it anymore because of a life event. So we purchase a home, we actually, there’s actually a transfer that takes place. The loan, however, stays in the seller’s name, thus the word “subject to existing financing,” and so, many examples of those we can go into, but that, there’s no set time frame on that. So we own it, we get all the benefits of ownership, write-off-wise and otherwise, but the loan’s never in our name. So we control right now, for example, anywhere around 50 or 60 homes. None of those are we on a personal loan for us. So they, they’re controlled, in one of those methods that we just talked about, and subject-to is one of them.

Jack: Right. Now, technically, it’s my understanding the bank could call that loan due if they knew about it, but has that ever happened to you?

Chris: No, there’s a couple things. I have a comment for that. Of course, they can. There’s a due-on-sale clause if a deed is transferred, right. It’s been my experience so far, and I’ve been at this 20, going on 29 years, that if you pay the bill, the bank’s not in the real estate business of taking homes back. But obviously, if you decide to do something sideways on that, you’re gonna get yourself in trouble, but we make sure they get paid on time. There’s no issue.

Jack: Right. Exactly. And that’s the thing. Banks are in the business of making money. As long as the loan gets paid, the loan gets paid. It’s not different, in a sense, for the bank that if you have a house that you’re paying a mortgage off, and you can’t make the payment, and your parents make the payment for you. Or your uncle Bob makes the payment for you, in terms of, like, the bank is not gonna reject that payment is my point.

Chris: Exactly, some people think they would. Yeah.

Jack: The bank is gonna say, “Okay, somebody’s paying for it. I don’t care.” And then they’ll continue accepting the payment, so, and that makes perfect sense. Great. So now that we established how you buy these properties, and obviously lease purchase or owner financing on the buying side, or subject-to are well-established methods out there. What I find really interesting is that what you ultimately do is, what a lot of people do is, on the selling side, they go rent the property, and just, like, make a spread on that end, but what you end up doing is you actually go and sell it with seller financing or do a lease purchase on the back end. And that is very cool. So now, explain those two concepts to us.

Chris: Sure. So let’s go with the main one that we’ve done since, you know, I’m going on seven years now, and that is the rent-to-own. So you said the, on the back end, so it’s the rent-to-own or lease purchase, same thing. And what we look for are those, very different than you hear a lot of trainers doing, so, and I mean this. We make sure that the buyers are getting a mortgage-ready plan. So in other words, we’re not accepting them into the home until and unless we know that they can eventually qualify for it. And so, if somebody came through just as a glorified renter, had no credit, no plan to get there, no down payment, then I get in the home. Because that’s just a renter. What we make sure is they have 3% to 10% down. Three might get them in the door. Over time, they’re gonna build that down payment up by making more down payments to us, which is nice for them, to get to invest in home, but also for us, for cash flow obviously. And then, so that’s your payday number one.

Then while they’re in the home, again, after they’ve been through the mortgage readiness plan and make sure they’re okay, then they’re gonna go ahead and make a payment to us, and the spread, the difference between what we’re paying the bank and them is our payday two. And then, towards the end, on or before 36 months, or whatever the plan was that the mortgage ready company gave us, we’re gonna have that as their term, with a little buffer probably, so they can make sure they get to the finish line.

Jack: Okay, yeah, that makes sense. And I actually, I respect it and I like that, that you are not just adding people in for the sake of adding them in. There’s a lot of people in the industry just, too, for everyone to know, there’s a lot of people in industry, what they do is they do what you do with on the front end, so they get the house, but then when they turn around, they just take anyone into their property as long as they have a down payment. Because here’s the thing when you do a lease purchase. You don’t just, you’re not necessarily restricted to only a one month worth of rent deposits that you have to give back. What they’re doing is they’re giving you a non-refundable deposit, is that correct?

Chris: Correct, 100%.

Jack: That deposit can be substantially higher than the normal tenant does. So what the bad guys in industry do, and I’m more than happy to not name names, but like, tell the practice, so stay away from the practice, everyone listening to this or watching this, is they’re getting just anyone in that has, like, a $3,000, $4,000, $5,000 down payment, right? And then they pay their monthly rent and they push back on the lease. If there’s something breaks, they call them and they’re like, “No, you want to buy this thing,” you’re not gonna do it. But they know very perfectly well that within two, three years, they gonna move out, they’re gonna not be able…they’re never gonna be able to buy that house, so at the end of the day, turns into a tenant that then gets frustrated, that then leaves, and guess what they do? They collect the next big deposit now, and do it again and again and again. And in essence, what they’ve created is a fancy rental property, or a fancy way to have a rental property with big deposits that they get to keep. I really don’t endorse that, don’t condone that. Because at the end of the day, yeah, it’s just like taking people’s money and preying on their hopes of being able to buy this property, but in reality, they really don’t have a plan or a chance to do that. So I really respect what you do, that you only take them once they go to this program, they have a pathway to get there. And so they are really on the way to the American Dream, to home ownership.

Chris: Yeah, so here’s a great example, Jack, on a very positive note. So, you have a lot of self-employed people that, prior to ’08, me included, could walk into a bank and get a self, I mean, a stated income loan, right? That’s what they did. So now, the contractor, goes in, they’re used to that kind of purchase, they haven’t purchased in 10 years, they walk in a bank, and there are some products out there now, but they’re like 8% and 9% for stated income. And maybe they’ll come back, but they… So they need seasoning, they need time. They have good credit, they have a down payment, they’re ready to buy. That’s a perfect example of a great person for a rent-to-own. And to your earlier point, maybe legally they’re getting away with it, but morally and ethically, that stinks, to go to sleep at night thinking these guys are not gonna buy this house ever. So that’s always been our philosophy. And from a liability standpoint, I think they’re skating on thin ice too, because, you know, we document the underwriting process, the mortgage writing process, the debt to income, I mean everything. You gotta do it that way if you’re gonna do it right, and you’re right, they are out there. They’re publicly out there. They’re on YouTube, telling people how to do it that way. It’s crazy.

Jack: Right. So I’m glad you have, you do this differently. This is one of the reasons you’re here. So great. So now, there’s the lease purchase, but you also mentioned you do seller financing on the back end, and obviously that’s something we’re extremely familiar with, because most of our land is being sold for seller financing. So when do you choose seller financing over lease purchase?

Chris: Yeah, two… Good question. Two different times. And this is more in the last couple of years, Jack. So we started getting a little smarter about longer terms, about more subject-to, so we can control it long term, or just simply longer terms than owner financing. Like, this building I’m in right now, our office building’s a 20-year owner financing deal. So if we get something that’s like 10 years out, or more, so we own it subject-to, or we own it outright, then we’ll consider owner financing if, the second criteria is, if the deposit is 10% or more. I’m not gonna turn over a deed for less than 10%. They might as well be a rent-to-own client until they get there. And you can sandwich those two, by the way, or combine those, because someone can build up with a lease purchase or rent-to-own vehicle, until they get to 10%, or 15% or whatever you decide. And then you could transfer that into an owner financing at that time. That’s a nice little combo.

Jack: So in other words, if they’re buying a $200,000 house from you, you want at a very minimum for them to either have a down payment of $20,000, or build $20,000 in equity through the rent-to-own program. And just as a reminder, before you allow them to do it, turn it into a seller financing deal.

Chris: Yeah.

Jack: Just for everyone to know, can you describe the process of a rent-to-own thing on a monthly basis? They pay you a sum of money. What happens with that sum of money on a monthly basis?

Chris: So we pay the underlying debt. It could be the seller or the bank, and then the difference, and we average like anywhere from a low of $50 to a high of $1,000, but our average like $300 here, not counting all the students. And so we keep that difference, the spread.

Jack: So you give the difference. But if somebody pays you as a rent-to-own, let’s say, $1,500 a month, what portion of that typically goes towards the purchase price or towards the…

Chris: Zero. Yeah, no, they don’t get [inaudible 00:17:45] for lease because we tell them look, some may ask, like, one out of 20 will ask, they’ll think that’s how the program works. We say, “Look, if we did that, why would you ever go get your own loan, if we’re giving you a higher credit than you could get, you know, with an amortized loan?” So no, we don’t credit any of it. However, we do have a cool program called the down payment assistance program, that puts incentive on them to put more down above and beyond what was already agreed, that 3% to 10%. So if they wanna go above and beyond that, they can go up to $500 in one calendar month, and you’ll see why we have to cap in a minute. They can go up to $500 in one calendar month, and we’ll credit them that $500 on their deposit, of course, but we’ll give them a 50% reduction in price on that. So they’ll get a $250 reduction in price at the end, when they close. It incentivizes them putting more down, it helps them get stronger for the bank. And of course, it’s good cash flow for us, and gets them more invested in the home.

Jack: Okay, I see that. So okay, so once that you work with deposits more than with a rent credit on a monthly basis.

Chris: Correct.

Jack: Oh, okay, that makes sense. So it’s a rent-to-own, but they give you let’s say a 3% deposit right there, $6,000 at the beginning on a $200,000 house, let’s just say. And then they pay $1,000 a month, and that is basically rent in this case.

Chris: Correct. That piece is just the rent.

Jack: And how would they go up to $20,000, by occasionally doing an extra $500, an extra $1,000 in deposit towards the purchase price?

Chris: Yeah, because that mortgage ready plan, remember is gonna say, “Well, this buyer or this couple should have X down by the end of, you know, to get financing.” And usually that’s closer to 10%. So what we’ll do is we’ll structure tax refunds, in the U.S. anyway, tax refunds. So February, March ish, we have a lot of deposits coming in. We might have retroactive raises or people know they get quarterly bonuses. We’ll sit with them and work that out, and then they’ll do that over time.

Jack: Okay, that’s very interesting. That’s cool. I like that. I mean, that’s, and again, you’re doing this the right way. This, of course, could be used predatorily by others, but you’re doing this the right way, that you put him on a path that you know, you gotta get your credit to that, you gotta get your deposit to that, you need a 10% down payment in order to qualify for whatever kind of like, bank loan, so let’s get you there.

Chris: Exactly.

Jack: And as they make extra payments, get bonuses, gets tax refunds, you arrange for those to be sent to you, so that you can pay down the balance. Now, do you recalibrate their monthly payments based on that at some point of time? Or no?

Chris: No, the only time, but that’s a good question. Because the only time we do re-calibrate, so to speak, is if the taxes go up. You know, let’s say it’s being escrowed in our underlying payment, which is a lot of them. If they creep up, we’ll eat that first month. Let’s say it’s $18 or some proration. We’ll eat that and we’ll send them a letter and say “Next month, your payment goes up by 18,” or whatever it is.

Jack: Right, right, right. And that’s what the banks do anyway with us, right.

Chris: Exactly. So it gets them used to it, too.

Jack: [inaudible 00:20:35] again, the deal is saying, like, either you pay from now on 50 bucks more or 500 bucks or whatever it is, or you pay us extra into the escrow account, so that we have covered that for the next year.

Chris: Exactly.

Jack: I usually [inaudible 00:20:47] the extra so that I keep my payment the same.

Chris: Yeah.

Jack: Any loans that I have on, like, on rental properties [inaudible 00:20:55]. Very nice. Very good. Cool. Now, you have written a book about that, right?

Chris: Yeah, we have two. The one that’s the basic kind of foundation is called “Real Estate On Your Terms,” is a best seller. It’s a hard copy book, and I had said to you before the show, I’m happy to give a link, and that will get them a hard copy of the book, and it includes shipping. I can’t stand when you, you know, you say, or you go online and someone says get my free book, and it, you gotta put a credit card in for $8 or $10 to shipping. So we’ll ship it out for free, that, the link is freesrecbook.com. So free, srec, stands for “smart real estate coach,” book.com.

Jack: Okay, freesrecbook.com. All right, that sounds good. Well, thank you very much. Now, what parts, is there any parts that we have not covered about what you do?

Chris: Well, I mentioned earlier I don’t wanna make it sound like all these deals are rosy, right? We do, our average three paydays is $75,000 a deal. But let me say what I mentioned in passing earlier, and that is you are gonna have people that have life events. That’s just part of real estate. And so, let’s say out of 50 deals, you’re gonna have 2, 3, 4 in a year that have a headache, they get a divorce, there’s a death, they have a job loss, you know, and so they’re probably gonna have to move on. But for the most part, the other people will stick to those programs.

Jack: Very nice. And then, what ways we talked about you dealing with the for sale by owners and the expired listings. But then on the selling side, what methods do you use to find your buyers?

Chris: Yeah, two things. When you’re brand new, you’ll advertise your very first property, and you’ll get hit, because you’re offering terms, you’ll get hit pretty heavy with interest. A lot of them are gonna be renters, and you’re gonna weed through and get to the tenant buyers, a true tenant buyers. And so then you build your own list. The easiest part of the process is the demand for the rent-to-own, believe it or not. So it’s just getting that property, and then it’ll fill. It’s just a matter of the activity and the time. It’s all online, to answer your question. So there’s probably 23 different portals that it hits if you do things like RentLinx and Craigslist and things like that.

Jack: Okay, very good. Well, nice. That was great. So, that was interesting. Again, it’s all about cash flow, guys. It’s another example how you can create cash flow in different creative ways, whether with houses or without houses. In this case, was a method that works with houses, that you can operate without banks. So, I’m enjoying this, I’m liking this. I’m still not touching houses [inaudible 00:23:23] but we’re doing apartment complexes instead, in addition to our land, but thank you very much. This is really good. So, and I have a couple of last questions, and that is, like, one of them is, like, for example, it’s kind of a rapid fire kind of question thing is like, what is your favorite book that you have been reading, that you’ve been lately reading?

Chris: “The Hard Thing About Hard Things” was recently, I just finished. That was a cool one, because it’s kind of my style, like, blunt, you know, right to the point, no fluff, just here is what happens, or here’s what can happen, in business in general. And then I love the, this is for anyone, not just real estate, but I love the Ray Kroc story you know, “Behind the Golden Arches,” the one they did a movie on. Because, forget the McDonald’s story, the fact that, how he built it and the struggles he went through and all the trials and tribulations, that was pretty cool to see, and how he scaled it.

Jack: Okay, wonderful. Yes. So business scaling books are some of my favorite books too. Then, what was your biggest failure that you had in life?

Chris: 2008, by far, 2008 was a complete nightmare. I talk about it in a full chapter in the book, so they can learn from it, with the debacle. I mean, I know a lot of people went through it, but we went through it pretty hard, too.

Jack: Okay. All right. And then another question is like, what would you, like, if you’re…someone who’s listening here and looks at all different, doesn’t really know what to do, but wants to get started in real estate, what would you tell that person?

Chris: Simple. I would…there’s so many niches, and then there’s niches within niches. So, I would jump on as many YouTube and podcast things that you can delve into, and so find out what gets you going. Find out if it’s land, find out if it’s houses or find out if it’s buildings. Find out what niche you’re getting excited about. Then, once you do that, find someone in that niche that is working and kind of heading in the same direction where you wanna go, but still currently working in the trenches, not did it 20 years ago. And then third, once you find that, that niche and that person, then don’t deviate for three years. Don’t get thrown off by shiny objects and try to look at another niche. Just three years, blinders on. And if you do that, with the right mentor or a group or a community, you’ll have a phenomenal experience. And that goes for any business, not just real estate.

Jack: Right. Absolutely agree. Couldn’t agree more. Once, we call it “get in line, stay in line,” because it’s like, it’s, if… You can’t do 15 things half-ass. You gotta do one thing right, and the key to that is spend the time up front figuring out… There’s nothing wrong with dabbling in 18 different things until you figure out which is the one that you wanna do, truly do. But don’t spend a year on each. Spend, like, just learn enough that you know, is that really juicing me, is that get me going, as you said. And once you have that one that gets you going, blinders on and keep going. That’s what we have done. That’s what you have obviously done. So with that, thank you very much. So, I love that, again, if you wanna give the website one more time where they can get a free book, go ahead.

Chris: Sure. They can head over to free, F-R-E-E, then the letters S-R-E-C, book.com, freesrecbook.com.

Jack: Wonderful. And with that, we will conclude our podcast episode. Again, this is Jack Bosch. Thank you very much for joining us. As always, give us a five star review. Give us a thumbs up if you’re watching this on YouTube or somewhere else. If you’re listening to it on a podcast platform, give us a review and share it with your friends, so we can reach more people with this message about cash flow in real estate. Thank you very much. Bye-bye.

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