Comparing Owner Finance Strategies With Brad Smotherman

Episode 375: Comparing Owner Finance Strategies With Brad Smotherman

View this episode on:


REIS 375 | Finance Strategies


Knowing more about real estate and its intricate details may seem hard, but it can be easier when two professionals explain it to you. Real estate investor Brad Smotherman recounts his humble beginnings and his light bulb moments on his path to success in the real estate industry. In this episode, host Mitch Stephen compares notes with Brad to see the differences between their owner finance strategies. They also dive into their successful and bad deals, emphasizing the need for having the right mindset and attitude as an entrepreneur in the financing world. Listen to Mitch and Brad as they share their insights and fill you with more real estate knowledge.

Watch the episode here

I’m here with Brad Smotherman and he’s an owner financier. Where are you from, Brad?

I’m based out of Nashville, Tennessee.

I thought it would be great to maybe have a conversation. I don’t know how he does what he does and he doesn’t know how I do what I do. I thought it would be a good time to compare notes. We’re two guys using the same strategy to see the differences between the two strategies. It’s not because one should or would be better than the other. He’s been doing it for a long time and he’s been successful. I’ve been doing it for 22 years and I’ve been successful with mine. Let’s see the two different ways, what they have in common or what the differences are. I read your bio and you come from a strong farming agricultural background. One day, you decided not to base your life on clearing thistles and praying for rain. You went out and got your real estate license in your teens.

I started the class when I was seventeen and got licensed when I was eighteen.

When I was eighteen, I looked like I was twelve. People didn’t want to buy a house from a guy that looked like he is twelve years old. I probably wasn’t the sharpest tool in the drawer and I certainly didn’t have any experience. I had a hard time with that and I ended up parking my license for a long time and then after I got in investing, I let it go. You said in the first six months you made $1,900 or something and then you got hooked up with a builder and started learning how to presale new homes then you started making some money. That’s when you saw this other mindset and this other way of living. First, it became apparent to you that there’s this whole different lifestyle out there that you wanted.

I saw him as a builder-developer and half the time he was swimming in his pool. He had people building the houses. He certainly wasn’t an excavator. He had an excavation company go out and do the next section and he did extremely well. We sold a lot of presale in the construction, a lot of custom homes and this was above median prices in my area. I was making a full-time income working weekends while I went through college.

Where did you graduate from?

Middle Tennessee State. I got an undergraduate degree in Accounting.

I graduated from the Calle U. That means the street in Spanish. It’s the most expensive education on the planet. I can think of $800,000 that it cost me so far in my career by not getting educated the right way. What happened that the light bulb went off that you wanted to buy houses yourself?

I thought that real estate was an asset class that I might be able to be successful in. I’d always heard that real estate had made more millionaires than any other asset class and I didn’t have a whole lot of belief in myself. I thought, “Let’s go into something where maybe I have a higher chance of being successful than something else.” I’ve always been somewhat of an entrepreneur. I started a little pressure washing company when I was sixteen. I was pressure washing houses and I work at a local grocery store through high school. It ended up being that the pressure washing company was doing better than I was pushing carts in the parking lot. I focused more on that and then I’ve got my real estate license. I had to find something that I thought maybe I could do.

REIS 375 | Finance Strategies

Finance Strategies: Nobody in real estate started out rich.


I had a math teacher in eighth grade who had quit teaching after 25 years to sell real estate. He had done it part-time while I was one of his students. I was raised by my grandparents and my grandfather had passed away when I was fourteen. Mr. Patterson, he was that strong male role model that I needed during that time. I called him when I was seventeen years old and said, “I’d like to get my real estate license. What do you think about this?” He said, “It would be a great thing.” Once I moved on to the builder-developer side, I saw more about investment and I knew that was a direction that I wanted to go but I wasn’t sure where. I did a lot of research and back then, this was before BiggerPockets had blown up. There was a forum with Steve Cook, Shaun McCloskey and a lot of those guys. That’s where I began to get filled with information and knowledge on the real estate investing side.

I used to participate in BiggerPockets earlier. Have you ever seen my post on there?

I’m sure I have but I don’t recall.

There was a guy there that had eighteen billion posts. He would get on there and tell me that owner financing was illegal. He kept going on and on but there are a lot of good people on there. It’s a great venue. Owner financing is one of the most misunderstood businesses. You have real estate agents, attorneys and apparently, some guy named Bill on BiggerPockets tell you that you’re doing everything illegal and it’s not.

What you said is the exact reason why I don’t like those big platforms. You can ask any normal question and you’re going to get ten different answers and probably none of them are wrong. There’s not a lot of value there when you’re looking for concise information.

I use that analogy all the time. You can go to ten lawyers and get ten different answers. The question is who’s on board? Who has the reason to believe that you can get done what you want to be done and that they are willing to defend you under this case law or whatever? Don’t make the mistake of talking just because the guy has an attorney doesn’t mean he knows everything about everything. He’s not a guy who will deep dive down in the middle. He’s not surrounded by real estate every day. He’s not going to know how to talk to you about Dodd-Frank or anything else. What do your state statutes require? Dodd-Frank is federal and state statutes are state laws or regulations.

It was tough to put together the right team. It took me a little while to find the right guys who I thought had the right answers for the right reasons. The last thing I want to do is go into this business and hurt somebody, hurt myself, go in jail or anything else. I spent a lot of time. A lot of people almost got out of owner financing when Dodd-Frank came around because it was a lot of legalese and 2,500 pages or something like that. I tried to read the first five pages and said, “It’s useless. It might as well be in French,” but it’s all about delegation. You start handing out things and figure out who can explain this to you and figure it out. I don’t think we answered the question. What was the light bulb that said you wanted to buy houses yourself? When was it?

I retired my license in 2010 to do investment. Whenever I got on FlippingHomes and that forum, it built my belief up because I saw other people in other markets that were doing things. My first mentor was David Alexander and he was the one that turned me on to owner financing. I was always attracted to the idea of notes. I thought, “How wonderful to have this promise to pay that you don’t have vacancy and repair like a rental attached to it?” It was getting into that forum and I spent countless hours there learning what I could learn. It was at that point, “We have to do this.”

There were not any books on it. The best book I read was Nothing Down by Robert Allen. It could try to help me figure out how to function while I was dead broke. Are you like me? Everyone you ever knew that got into this business started out broke. Do you know any people that started out rich?

I don’t know personally of anybody that started out rich. It’s an amazing thing because I mentor people. I had a couple of guys over my house for a cookout. These guys are professional guys and very capable but they don’t have a ton of cash. They have some assets to work with but when I started, my first closing, I had $300 in the bank. It’s not like I started with a lot. My credit was extended because my wife and I had bought our own personal residence. I went to the bank after I’ve made three or four payments and said, “I’m going to be this big investor guy. I’d like some more capital.” They said, “Brad, we’re happy to lend to you another $140,000 as soon as you pay the $140,000 that you borrowed off.” That doesn’t put me in a very great position to go out and buy houses. Luckily, I found another way and David was a great mentor. He instilled confidence in me that I could go out there and do this business. We started going out and making things happen.

Let’s talk about your strategy and then let’s see how our two strategies compare because I don’t know your strategy. Take us through a case study of the average owner financier. By the way, you did your first deal and you made $19,000, which you said might as well have been $19 million because you had no money in the bank. It was a ship coming by while you’re floating in the middle of the ocean and giving you hope that you’re going to pull yourself out of this. Let’s go through a case scenario. How was your owner finance strategy working? You’re buying somehow and then you’re selling with owner financing.

We put this under contract. We had $78,000 owed on this property and this one’s a crazy one because it’s at a 3.75% fixed rate. This house is going into foreclosure.

How many years are left on that loan?

Twenty-six years. We’ve given our sellers $1,000 to walk. We bought the property for $79,000. We have a contract to buy and in our contract to buy, it states specifically that we have the ability to market the house and that any profit whether a cash trade or note is assigned to us in the event of an assignment of contract. We turn around and we market with owner financing. We’re going to market this for $125,000 and we’ll probably get $10,000 down. My average is $25,000 but we’ll say $10,000 on this one. We’ll have $115,000 note wrapped around a $78,000 first in that transaction. I’m not sure about the cash flow because I haven’t run it.

Your acquisition price is $79,000. What was your sales price?


You’re doing a sub-to.

We’re buying that $78,000 mortgage subject to. We’ll have $115,000 note in the second position. That’s all inclusive of the $78,000 first. We’ll have however much note equity that is, roughly close to $40,000 in note equity in that transaction. That $40,000 note equity position throws off cash flow per month. Because we’re going to be selling at $115,000, that second will be at 7%. Effectively, we’ll make as much money on this roughly as the bank does. With that position, it’s a very safe and secure position for us and a good transaction that everybody should do.

You’re carrying the $115,000 at what percent?

Usually, we do 7.9%. This one is in an area where there are a little bit more rules. Sometimes, we’ll have to move the rate down a little bit but if there’s a 3.75% underlining, I don’t mind doing 7%.

REIS 375 | Finance Strategies

Finance Strategies: You may have to put out some amount to effectively buy the property free and clear because it’s going to pay itself off after vacancy and repair.


Is it for 30 years?

Yeah, 30 years fully amortized and we do fixed rates. There’s no balloon and there’s no prepayment penalty.

Do you know what your payment is on that 3.75% loan?

Not off the top of my head. I just know the rate.

Let’s figure it out. Do you have a mortgage calculator? I’ll figure it out one side and you’ll figure out the other side. It’s important to see the cashflow here generated with $1,000 and the upfront cash that you kept. Did you spend any of that $10,000 fixing up the place or did you sell it as is?

We’re selling as is. It looks like $765 on the wrap. Does that look like it’s about right for you?

Yeah, $765. Let’s figure, it was an $82,000 loan at 3.75%. It’s $380 per month. $765 minus $380, you’re making more than the bank’s making by $5 in this roundabout scenario and you did that with $1,000. You put $9,000 in your pocket when you took the $10,000 down payment. You made $9,000 on this transaction upfront to create a $385 positive cashflow for 26 years and then for the last four years, you get to keep the whole $765 if the loan ever made it that far, which we both know it probably won’t. The average note in America I heard lasts about seven and a half to eight years. What have you heard?

I see that a vast majority of my papers are either going to the fall to pay off in five. I’m pretty much-running schedules for five years. If it goes longer than that great because on most of the transactions, I don’t want to be paid off.

Where are you getting your money? You did the sub-to. Do you only do sub? Is that the only thing you do or do you ever do owner finance sales other than sub-tos?

We do both. I would say a vast majority of ours are subject to wraps. We’re taking over payments on an underlying and then some on owner financing. Maybe 20% of my business will be a free and clear property where we get true owner financing from the seller but 90% of the time, we get 0% financing on that. With that, we can buy for market rates and the amortization makes a difference in our equity position.

You’re also making sure your contract 99% of the time, that loan is wrappable or assumable. Do you even do the substitution of the collateral clause when you get those kinds of great loans?

A lot of the times we’re getting the loan on a promissory note. There’s no secure position for the lender but I sign those personally. I don’t like the idea of signing those two corporations. I want the people to feel secure in that but if people don’t feel good about that, a lot of people I know out there are thinking, “Why would someone do that?” I’ve had attorneys do that. It doesn’t mean that someone is not astute that they do something like that but the first thing that I want is to have the deal secured by a promissory note. If someone’s uncomfortable with that, then we’re going to do a substitution of collateral clause in the note and deed of trust. People are generally okay with that and don’t mention interest. If you mentioned interest, then you know they’re going to want interest but in most of our cases, we’re not paying interest on our owner finances and those are effectively like free houses. We bought a triplex.

When he says, “Don’t mention interest,” you say, “You want $100,000 for your house and you want $5,000 down. You want $95,000,” then you divide $95,000 by 180 months or 240 months and say, “It’s twenty years at X per month. Is that okay with you? Is that good?” If they say yes, you’ve got an interest-free loan because you took the balance and divided it by a number of months. If you mention interest rate, then people are going to want interest. If we name a number that they’re happy to get per month, if they’re happy to get that amount per month, then there doesn’t need to be any interest rate. Let’s do an example. You take $95,000 and divide it by twenty years, which is 240 months. “Is $395 a month good?”

If they say no and they’d need $450, then divide the $95,000 by $450 per month and tell them, “I’ll give you $450 a month for 211 months.” That’s a 0% loan. It’s a great tactic. It works often in my career as well as Brad’s. If someone ever says, “That’s a zero-interest loan,” then your reply needs to be immediate. You need to rehearse it in the mirror but it needs to be fast. In my humble opinion you just say, “I’m willing to pay a fair interest rate. The banks are charging 1.5% or 2%. I even pay a little more than fair likely. What do you think is fair?” I set the bar down by 1.5% or 2%. When they name a number, maybe it’s 4% or 3% or something.

One thing that I’ll say there and this is a little trick that we do. If someone wants interest, we start adding payments to the end of the loan. If we’re talking about a twenty-year term and then they get another three years of payments, then the present value of that interest payment is exceptionally low. I would recommend start adding payments to the end as opposed to giving a rate overall.

I never heard that before and hats off to you. That’s why I like to do this show. I learned something myself and that’s a great day for me because I’m always looking through that window. When does Mitch Stephen get to pick up a nugget? What are you’re saying? You add another ten payments to the back end. What if I pay ten payments of 450 at the end? When you divide that over the whole course of the loan, it’s a fraction of a percent.

It’s still effectively an interest-free loan and in many cases, we would have paid more for the house anyway but our negotiation structure is very strong.

You’re going to talk to us about a triplex that you did.

We bought this one and this is a great example of a 0% owner financed loan. This guy paid $80,000 for this property free and clear. He paid cash years ago. I contracted to buy it for $85,000 and it’s probably worth $120,000 or so. It’s an okay deal from an equity perspective on price but it’s not amazing. Would I be excited to buy a $125,000 house for $80,000? Not really, but how we’re paying this $85,000 is we’re paying $25,000 at close and then we’re paying $500 per month until paid. The fun part about this is the triplex is rented already at $1,800 a month gross. He’s trading $1,800 per month in gross rental income for $500 per month and note that’s a stated amount.

That was a zero-interest loan at $500 a month, for how many months?

REIS 375 | Finance Strategies

Finance Strategies: If push comes to shove, like losing somebody’s collateral to a different position or whatever, you have to make sure that people are made whole.


Until paid, however long that amortizes out.

Let’s figure it out. $85,000 divided by 500.

It’s for 120 months. We’re putting $25,000 down. We’ll finance $60,000.

It’s a 62% rate of return. You put down $25,000. That’s your investment and the formula is your annual income divided by your investment equals your cash on cash rate of return. It rents $1,800 a month but you’ve got to pay out $500. You’re collecting $1,300 a month times twelve, came up with a number and then I divided it by $25,000. I came up with a 62.5% rate of return. 

The way that I’ll look at it is we’re putting $25,000 up to effectively buy the property free and clear because it’s going to pay itself off even after vacancy and repair. It would have some hellacious repairs and vacancy to not clear $500 per month over time. We’re paying $25,000 effectively for the property and going to get paid monthly on top of that to do so. I was happy with that one and it’s one of the few that we’ll keep as a rental because I can’t push the value up high enough to capture the same amount of net rental income if I convert it to owner financing. We’ll see. I may get in there for a little while and decide I’d rather owner finance it out but for now, we’re going to hold it.

One of the things that you’re good at is making every scenario work because almost every deal is uniquely different. Some people think they’re all standard deals or we might say typical deals but there’s never a typical deal because A) Every property’s unique, B) Every seller’s unique, C) Every buyer’s unique and D) There are a lot of multiple things that can happen on any given situation. You have choices of which way you want to go and you need to pick the one that fits you or your plan at the time or your resources at the time.

Let’s compare what I do and let’s see if there are any differences that stand out for you. I’ll take a house that I can buy for $50,000. I’m using these numbers because I know the numbers round about $50,000. I always borrow at least $2,000 extra. I borrow $52,000. I have $14 million worth of private money that I’ve raised over my 24-year career. Most of my people were in their late seventies and early eighties seem to turn out that way. I was borrowing the money at five years at 8% interest only. I’m starting to change that to amortize these things for five to seven years but I’ll explain to you how I gave people different options. I let them pick what they’re comfortable with and then I deal with the money as such.

In this case, I always borrow an extra $2,000 and because it’s private money, there’s no hassle doing that. They don’t care. They don’t mind and it’s hardly over-leveraging when I tell you the rest of the story. Let’s say my payment’s $350 a month principal and interest, more or less give or take a couple. I owner finance the house for $100,000. I shoot for 10% down, I average 12% down but let’s just say on this at 10% down is $10,000 and I’d find it’s the $90,000 at 10% to 10.5% depending on what the weekly allowable rate is for me by RMLO. The payment’s $850 coming in. I got a nonrecourse interest-only five-year note at 8% collateral-only loan, I’m paying out $350 and I’m collecting $850 on a 30-year fixed mortgage to my buyer.

I’m clear in $500 per month and I average in my career clearing $535 per month per deal. There’s a bit of a train wreck coming there because I still have to do an extra step because I got a five-year interest only loan that I have to pay back in five years and I’ve sold it on a 30-year fixed note. If you’re interested in all the ways out of this because I don’t think we have the time nor do want to hear me explain it all right here, go to 1000Houses.com. Scroll down the page, find my blog post and search for the article, Why I Borrow at the Terms I Do. I’m always learning, advancing, morphing and more importantly, believing every day that more and more is possible.

I offer 6%, 8%, 9% or 10%. Which one do you want? The first 6% is if you offer five-year amortized loan and you only loan 50% or less of what I can owner finance the house for. If you’re only in 50% or less and I do have those homes where you’re only in 40% or 45% or maybe I’m looking for a loan for 55% but if you’re willing to loan 50%, I’ll put in the five myself to buy the two points off because the next level is 8%. I’m moving from interest-only because I’d like to take that extra step that I have to do when I have interest only loans.

The life of an entrepreneur is lonely and stressful, that is why mindset is so important in what we do. Share on X

I’d like to erase that step because that step is another step. If I can fix it up front, I don’t have that step to take. There are a lot of ways out of it. You can see it at that blog post, Why I Borrow the Terms I Do. Mostly I did it because my elderly people were deathly afraid of spending their principal. If I sent them a principal interest payment that every week, every month they would have to figure out how much was principal, they’d have to take that back down and put their savings account. It was too much for an old person and interest only where they could say, “I get that $700 check every month. I can spend it all because there’s no principal in it.” That was my thinking.

Not having amortizing loans hurt me a bit plus I had to go through these other steps. The worst-case scenario is if I had to give that thing back after five years, I would have made about $40,000. I made $30,000 in cash flow. I had to make $10,000 in the down payment, then I had a collateral only loan and I have to give it up to my lender. I know if I give up that to my lender, they’re not going to loan me anymore because they didn’t want a house. They’re in their 80s and I’ve never given up a house in my career but the worst-case scenario, if I had to under the terms and conditions that I borrowed was, I would have to give up the house at that point. That’s not a rotten plan to make $40,000 on five years on zero money down. I borrowed an extra $2,000 because it takes me about $2,000 to find this guy that wants to sell me this house at half off. I always borrow an extra $2,000 because I do about 100 houses a year and if I leave $2,000 in every house, that means I leave $200,000 a year in a house and in five years, that’s $1 million. No one has $1 million to leave lying around in a house over a five-year period.

The next choice is 8%. It is a full six or seven-year amortized loan. It evens out. It doesn’t matter to me which one you pick, but you have to borrow 51% to 65% of what I can sell. You have to loan me 51% to 65% of what I can owner finance the house for. I call it the OFV, the owner finance value. It’s maybe one of the only things I ever coined in my life. I never let my lenders in over 65% of the OFV, Owner Finance Value. I do go into a little bit of an explanation to them that the owner finance value is a value unto itself. It has nothing to do with comps. It has to do with what the rents are. I’m trying to get this guy that’s paying $1,000 rent in the neighborhood that has $1,000 PITIS payment, Principal Interest Taxes Insurance and possibly servicing fee if I can fit it in of $35 a month. That’s not too complicated.

6% to 8%, it matters whether the loan is less than 50% or more, never in over 65%, then it becomes the 9% and 10% choices. At 9%, I want a ten-year fully amortized loan. All of these loans are nonrecourse. The worst-case scenario and you’re going to be in $65,000. You’re going to loan me on a $100,000 house. That is a very protected, pretty safe position to be in a first lien. I averaged 58% LTV. While the most I will go is $65,000, most of my investors on average are only loaning me $58,000 on a $100,000 house. That’s a 42% cushion. The prices of houses would have to decline. The owner finance value would have to decline by 42% before they had exactly in it what it was worth. That’s a strong position.

The 9% jumps up. The Millennials or the people that are getting in young with their 401(k)s and their IRAs and are learning how to self-direct, they got all the time in the world on their hand. They don’t want to be in and out. They’re not worried. The old people were like, “I’m not going to live ten to fifteen years.” They wanted shorter term and I didn’t like that. Especially when you’re growing, shorter amortizations put a crimp in your cashflow when you’re trying to get financially free. I started finding these younger people out there that have nothing but time before they’re 59 and a half. They’re in their 20s and their 30s. They got decades to go and they’re like, “I want to put it in and forget it. Put in the payment there and I don’t care about principal interest. When it gets up enough, I’m going to buy another. I’m going to loan you some more.”

I said, “I’ll give you a 9% if you give me a ten-year fully amortized loan, non-recourse collateral only,” and people started biting on that because I gave them the choice. You can go to the Toyota shop and you can get a Corolla or you can go over to the Lexus. It’s still made by Toyota and they’ll charge you $120,000 or $180,000 for the Lexus. I put out the choices, “What do you want?” Some people want to make more when I offer the 6% or 8%. I like that. It doesn’t matter to me which one they pick. They’re all winners in my book. If you want 6%, great. If you want to be conservative, I’ll appease your conservatism. We’ll get you in something that’s padded.

If you want to be more aggressive, let me show you how you can get 9% to 10%. Give me a ten-year fully amortized loan or you want 10%. Give me a fifteen-year am with a ten-year balloon. I’ll probably run it fifteen-year am first. If they decline it, I would say, “How about fifteen-year am with a ten-year balloon?” I’ve started letting people tell me what they wanted to do and I started giving the choices. I don’t care which one and that’s my plan. I’m using none of my money. I don’t have to do subject tos. I know how to do subject tos but these people, I forgot in the terms of their loan to me, they also give me the right to wrap this mortgage in writing. It’s part of their loan to me, it’s in there. I have permission that there’s no due on sale clause. It eliminates some consternation over what could happen.

I don’t think we’re that far apart but the art of this, Brad, was the art of raising private money. The way to find these people that are interested to have this conversation, not everybody who has a conversation with me says yes but enough of them had said yes. The coolest thing is once they get six to ten months or years’ worth of payments, they’re easy to refer grandma, grandpa, mom, dad, their uncle or their brother. They’re on board with it. It starts to snowball but that’s my way, I don’t think our ways are that different.

It’s pretty similar. To talk about subject to, the reason that I like subject tos are the rates that we’re getting on these underlyings are exceptionally low. I don’t think that’s going away anytime soon. A lot of times we’re wrapping 4% money. I’ve got one in Atlanta, Georgia that’s set to close where we have a $140,000 at 4.25%, and I’ve sold it at $250,000 at 6.99%. It’s amazing that we have all of this cheap money that we can wrap. The only difference in the free and clear properties is where you’re putting someone first position in a private money position. I’m selling partials. If there are 360 payments, for those of you who don’t know, I can tell off a group of payments on the front end.

Say it’s two years, five years or however many years that payment is to get the free and clear tail end of payments on the back end of that loan. It’s a different position there, but I’m 100% with you when it comes to securing our people because if someone’s going to trust me with running some of their cash, I’ve never had a private lender lose money. If I have a private lender that loses money, it’s because I’ve gone broke too. I don’t think that’s going to happen. That’s how I feel about it. Even though you’re not personally signing for these loans, I’m sure that if push comes to shove like you lose somebody’s collateral to a different position or whatever it had to be to make sure that people are made whole. That’s part of what I do too.

REIS 375 | Finance Strategies

Finance Strategies: If somebody wants to get into a house, they’re going to find a way to get in.


I’ve never filed Bankruptcy Chapter 13, missed a loan, foreclosed on and I don’t intend to but I deal in big margins because big things can happen. People go, “You have huge margins.” I said, “You don’t understand some of the risks I take.” I’ve learned to mitigate them very well. Maybe I’ve lost on five houses in the last twenty years to a grand total of maybe $80,000 divided by five but thank God they all didn’t happen in the same week. It wouldn’t have mattered. If something goes wrong on my side of the equation, I fix it, pay for it, write it a check or I don’t care. My private lenders are never going to hear about my problems. It will never happen.

I have a house burned down one time without insurance. My doctor called me and said, “What happens when one of your houses burns down?” I said, “One of your houses already has burned down.” He’s like, “Which one?” I said, “I don’t remember the address. It was twelve years ago.” “Why didn’t you tell me?” I said, “It’s none of your business.” He said, “How much was it?” I said, “I do remember that. It was $38,000.” The people that got foreclosed on moved in next door as renters and they set the house on fire that night and they beat my insurance policies. They went to jail for arson but anyways he said, “You lost $38,000?” I said, “No. The lot was worth $25,000. I lost $13,000.” I was short $13,000 and I wrote a check for it. You don’t loan me your money to hear my BS. You want to get paid. That’s all.

It’s amazing that things can happen. I had somebody try to burn one of my houses down and they didn’t succeed. I had a girl get raped in one of my houses that was in rehab once. You run into all kinds of things.

Of course, that was all your fault. They tried to sue you.

No, I never heard anything about it. The house was boarded up as well as it could be and somewhat secure. If somebody wants in a house, they’re going to find a way to get in. It’s a terrible situation.

It’s all the cost of doing business. This is something you’ve got to deal with washers, dryers, freezers and stoves. If I had $10 for every one of them missing out of my house window units, I’d be a millionaire all over again. You said one thing and you’re right, owner financing is going to be more and more prevalent, more and more profitable and more and more understood in the next ten years than it has been in the previous ten years. I started in 1996 owner financing houses, actually buying the house, selling the house on payments and then selling the note in a triple closing. I had my first 450 deals in a row then finally when associates closed, I couldn’t sell my notes anymore. It dried up for five years. I had to keep my notes and all of a sudden that light bulb went off. Why did you ever sell a note?

Back then they had institutional note buyers.

They were paying 83% to 87%, which was cheaper than the closing costs on a traditional loan even. Sometimes they would even pay par if they were seasoned enough but I was doing it all on a pristine note. I was selling the note and ten minutes after I created it and using the note buyer’s money to buy the house. That’s why I say you keep morphing but let’s talk about this. Doing the fix and flips is one-time cash and doing the owner financing’s temporary cash. I learned pretty quick that you had to move your money into some forever cash play or you’d look up one day, no matter how many notes you had, 200, 300, 400, you wouldn’t have any notes left because they’re going to pay you off. You’d have a bundle of cash over there and a big tax bill but you wouldn’t have any income anymore unless you went back to work.

I’ve chosen to eliminate that and I take all the wealth that I’ve built through one-time cash strategies and temporary cash strategies, i.e. the note business and I buy self-storage locations. I bought a boat storage because I live around a lake. I started out buying boat storages where people would back their boat into a garage, shut the door and you couldn’t see it from the outside. I built all these boxes with doors and they’d put their boats in them and close the doors. I started doing self-storage because they asked me for that. There was a need for covered parking and open parking on and on. I have fourteen storage locations around this lake where I live and 1,600 doors and they average $100 a month per door. That’s my forever play. That’s rent and I will collect that rent until the day I die. It’s also where I get my depreciation because as an owner financier, we lose depreciation. We got to get into something to mitigate our taxes. Are you doing something forever play yet?

Yes and no. Part of it is whenever we’re getting PR payments in a first position lien, then they are a depreciating asset. With that, we have to take the principal amount and put it back into something which we can in stock or we can do in whatever asset that you want but we have to secure that position. Otherwise, we’re losing net worth but the cool thing about wraps is they appreciate. On the wrap side, we’re not concerned about that. The cashflow payment is the cash flow payment. I’m sure that there’s a scenario in which a wrap would depreciate if the underlying rate was higher than the wrap but in almost all situations that don’t happen.

Having the right mindset and positive mental attitude, to begin with, is important. Share on X

What do you say wrap appreciates? You don’t own the property anymore when you sell it. Help me understand.

Wraps appreciate because like in the example that we did at the beginning of the segment, there are 26 years remaining on the first but I wrapped it with a 30-year loan. The principal payment is paying down faster the first position lien than the wrap. On day one, say I had $40,000 in note equity, in year five I may have $47,000 or $50,000.

I’ve never heard it put like that before. Your wrap is appreciating because you’re paying off faster than your buyers paying off.

We don’t look at those in terms of being an issue. The thing is, Mitch, we’re creating so much in note equity that I don’t think it’s going to make a difference long-term but I have looked at different commercial assets. I looked at mobile home parks, which I personally don’t have interest in. Self-storage is cool but my concern there is I’m in a very quickly developing area in Middle Tennessee. We’re having a self-storage building that has been up for ten years and all the sudden, there’s a new one. It seems to me the competition might be an issue. I don’t know because I don’t know that business but at some point, I’m going to have to trade up into some bigger commercial asset, whether multifamily or self-storage or whatever that is that interests me to bury the cash. At that point, it’s not about getting the yield, it’s about not losing the principal. I’m sure in the future years I’ll start seriously looking at that.

I strongly suggest that you take a hard look at storages. They’re great. They have no sheetrock, no carpet, no hot water heaters and there’s a lot less resistance. Anytime you’re trying to push someone out of a home, there are kids. Where are we going to sleep tonight? That’s a high-pressure point. There could be a lot of resistance to that. Apartments and homes, I tried it for a while. The bottom line is it’s a lot more elusive because a lot more things can happen in a residence. Things can go wrong, break or get torn up. Storage is pretty hard to mess it up. When it’s time for them to go, they realize the same thing that I’ve realized for 22 years, it’s a bunch of junk and it isn’t worth anything. They’ll walk easy.

They’ll go take out anything of real value before they walk, all this stuff of Storage Wars and finding billion-dollar assets inside these storages. I have wrongful disposal insurance because I was told to have it and that was a good idea. It didn’t cost that much and I’m glad I did because I told some guy to get rid of Unit 12 and he’s dyslexic, so he got rid of Unit 21. Of course, everything in that storage now is worth $1 million. The record collection was worth $1 million. There was a Rolex in there and there was a $20,000 diamond ring. By the way, this one that he disposed of had a dirt floor and chicken wire dividers because it wasn’t a self-storage. It was a boat storage that someone didn’t tell me and put all their stuff in.

Are your units in a more of a metro area or are they more rural?

I started out way rural because I couldn’t play. In 1991, I bought thirteen boat storages in front of a state park that had two boat launches. I bought it for $8,000 and I got the rents right off the bat to $50 a unit. It’s $400 a month on $8,000. It’s $4,800 a year. I figured out everything by accident, pretty much. I go through life. My late friend started HomeVestors. He told me that the entrepreneur rarely ends up with the business that he starts out with. We’re always morphing to the path of least resistance to the most money. That is generally not the business we start. We start to get our eyes open by being in a certain business and to the possibilities of what’s going on out there and where the loopholes are and where the gaps are in the business that we can take advantage of.

That’s true for a lot of people. You may have a lot of things that you think that HomeVestors was doing but he didn’t make his money what you think that he did. It’s not even remotely close to what you think. I’ve always been open like that. When I saw the storages and I was comparing my rent houses to the storages, first of all, a man may lose his house but he isn’t losing his boat. The point is these boats are $50,000, $80,000 and $100,000. These boats cost a lot of money and they usually have a balance owed to a bank and a bank will make up any back payments so they can get to their collateral asset and repossess the asset. To do that, they’ve got to settle with me before they can get in.

I never thought about that. That’s good.

REIS 375 | Finance Strategies

Finance Strategies: Very few people have both notes and commercial assets.


I like the boat storages more than the self-storage because the contents of the self-storage is worth nothing to me 99% of the time. Even if there is something in there that’s worth something, I don’t have the time to sort through it, take everything to the trash and then find the one Rolex watch or the Rolex watch band that’s worth $4,000 or $5,000. I don’t have time for that and I’m not going to do that. It’s not my business. That’s a completely different business and there are people out there that work that business. I want to get the unit cleared and rented out again. The reason why I have self-storage is that I want it to be diversified and offer a lot of different kinds of spaces. Climate controlled, not climate controlled, dirt floor for boats, concrete for boats. Rolled up doors solid where the dust can’t blow in and the other one’s cheaper where you know the dust can blow right under the rolling door. Bigger units, smaller units, open parking or covered parking, I was trying to diversify within an industry so that I wasn’t overloaded in any one supply.

Let me ask you this because you know the note business and you also know commercial assets. I see very few people that have both. In my market, a decent multifamily or a decent storage building, they’re selling at $4,000 to $6,000 rates. Being a note guy and creating the yields that we can create, at what point does that yield make sense? Is it like these institutional investors that they bury in cash and they don’t care? They’re trying to preserve assets.

I don’t buy those. I go out rural. I find where places and cities are growing too. I send out a letter to all the mom and pops out there. I’m looking for people that are half full or not pushing the rents as much as they could because maybe they don’t know social media and that’s why they’re half full. You could get an 80-year old guy that’s owned the place for 30 years who’s half full. His place may even be obsolete. Almost all the boat stalls I bought fifteen years ago went functionally obsolescent because the boats got taller with those big racks. The trucks, the trailers and the boats got longer and they got taller and pretty soon they wouldn’t even fit in my eight by eight by 25 anymore. I still have the land to go tear them down and convert to what I needed. I would know exactly what I needed because I’d be getting the calls.

Also, look for pieces that have extra land where you could expand. The expansion’s cool because when you have that place and you’re taking calls for a year or half, six months or whatever, you know exactly what to build because you’re getting the calls and having to say, “No, I don’t have that.” You’re building right to your calls. The other way to do it is to buy a piece of land that you can steal or that’s not worth a lot like a flag piece where all the stuff is on the highway. If you buy there on the highway, you sell the highway frontage and you get your little flag to the back where the land’s less valuable and you try to pay off that land by selling the frontage. You want some presence at the road but you only need a little piece, the building where the manager lives and the sign but the storages are down on the junk land or the not so expensive land.

You try to pay for it with the frontage. You end up maybe with two to four acres free and clear. Let’s say it was a rectangle or square but you could build some covered parking, some non-climate control, some climate control and some open parking. You did one row of each and you built as you were told what you needed more of back behind them. There are all these roads and you had all these. If you get more calls for this one, you build another road with that one and leave this alone. It helps you not have to come up with a crap-load of money at the beginning. You build to suit what you need. You’re making money and saving money. As the need comes up, you go put it in instead of doing a whole big old master plan with $2.4 million. You’re dealing with the city, water retention and sprinkler system. I went rural and there are ways to operate them remotely. Although, it would be better if you could concentrate in at least an area where you could have a central manager that could watch over things while you’re not.

I may be talking to you about that because I run across things. Great deals seem to chase me down and I’m sure that we’ll run across them.

The people that work the hardest always seem to get the luckiest. Call me anytime or text me your contact information while you’re at it. I’d love to talk to you about it. For whatever it’s worth coming from me, you’re a brilliant guy. Listening to the way you talk, the way you look at things and the fact that you even brought up partials is way over most people’s heads. It took me a while to figure out partials. You’ve done it. My friends, Eddie Speed and those guys have been telling me about partials. When the light bulb finally went off and when I finally understood the concept of partials because I was in the realm where I needed it at that time and I could receive it, I called Eddie and I was all excited. I said, “I should be doing partials.” He says, “I’ve been trying to tell you that for ten years,” but the student wasn’t ready. The teacher was there but he couldn’t penetrate me because I wasn’t ready to understand the concept. You, on the other hand, seem to be way spongier. You’re picking it up fast.

It helps to have great mentors and I don’t know anybody that traveled anywhere worth going by themselves.

Someone called me a self-made man and what they meant was I wasn’t given anything or I didn’t have a silver spoon in my family and I didn’t have money but I argued with the idea of self-made. There were a hundred people around me that made the difference of whether I made it or not. Even in some of the tiniest ways but the important ways. One, I had a great mom and dad. I knew I was never going to sleep in the rain. I would never go hungry but maybe knowing that allowed me to take some chances that maybe I wouldn’t have taken if I didn’t have that net.

Mindset is so important in what we do. The life of an entrepreneur is a lonely life. It can be stressful, you have to deal with fear and those kinds of things. Having the right mindset and positive mental attitude to begin with is important.

With the market going into a stabilization and prices are declining in some markets, assets are going to be cheaper with better terms. Share on X

This is a personal question. You don’t have to answer if you don’t want to but my wife was not an entrepreneur and she was not on board with me for the longest time and it was very stressful. I wrote my book, My Life and 1,000 Houses: Failing Forward to Financial Freedom. I had a tragedy happen. I didn’t know what I was starting to catalog my life. It ended up being a book but I had never intended to write one but I was honest about what was going on in my life because to me I was journaling to myself. I put it out there and come to find out a lot of people have a lot of those different kinds of struggles. Was your wife always on board with what you did or did you have to prove yourself along the way to her pretty quick?

I was blessed that when we were dating, I was running this model home. She saw that if we had a date at 6:00 PM and somebody walked into the model home to look at a house at 5:55 that the date got moved to 8:30. She believes in me more than I believe in myself. I first got into this business and the crash had happened in ‘08. Builder-developer went bankrupt. I ended up saying, “I’ve got this accounting degree. Maybe I should go into this and get my CPA,” which was the plan at some point. I went into tax for about 30 days and I had this boss at a local firm here in Nashville and he had this real Napoleon complex. The tax return could be correct but because this piece of paper was supposed to be on top of this piece of paper in the file, he would get unglued.

I was telling my wife about this and I was trying not to complain because it hurt my feelings to have to go and do that anyway because I could do better. She was like, “Quit.” I was like, “It’s the worst economy in a hundred years. Real estate market’s going to hell. We would be living off of your kindergarten teacher salaries.” She’s like, “We’ll figure it out. Quit.” Maybe three or four days later, I did. She supported us for roughly six months until I can get some sales back in the pipeline. I’m super blessed and I have friends where their spouses are disparaging against the business. I see how tough that is for them to deal with.

It’s hard. Even after I was doing quite well, my wife didn’t understand not having a job where the check was going to come from. I would say, “I put more money in the bank this month than you make all year. I don’t understand.” People raised a certain way or set in a certain way of looking at in the world, it’s hard to change that sometimes. She eventually came around but I call it hush money. I had to put some hush money in the bank. I sold a couple of notes, I put it right over there in her bank account and put her name on it. At the time, she made $36,000 a year. I put $40,000 in the bank and I said, “Can you hush up now, please?”

On the rehab side especially, you can have $100,000 or $2,000 in cash and then five or six days later you’re tapping the credit line because it’s how fast the cash can go out. That’s one reason why I love the note businesses. It’s that steady cash flow that continually goes up as you’re adding notes to the portfolio but they had to move the money to a different bank to get away from their spouse.

The greatest strategy in the world in the owner finance thing is to buy it, but don’t fix it. Owner finance it for enough, in my case, at least 35% more up to 50% or 60%. Owner finance it to the guy who wants to make payments and fix it and watch as the guy making payments to you goes over budget rehabbing your collateral. That’s the greatest plan on the planet. It saves time and saves risk and it improves your position almost daily if the guy’s making improvements to your collateral. Buy it, don’t fix it. Owner finance it for a nice profit margin.

Watch the guy making payments to you go over budget instead of you going over budget in remodel. Watch him go over budget fixing up the collateral and making your deal with him stronger and stronger with every dollar, with every repair they make to that house. By owner financing, we can sell houses with a hole in the roof the size of a dining room table. That will never fly in a new loan situation. The house won’t pass inspection. We are the inspectors and the buyer can buy what he’s comfortable with. We can sell him the house and the hole and finance both of them.

I literally had a house, where on the marketing if it’s raining, you’re going to have to take your umbrella inside the house. The roof was disintegrating and there’s water pouring in on all places. I bought that house for $2,000 cash and I sold it for $25,000 with $5,000 down. Owner financing will sell houses.

We could probably talk for a month but we’ve done a good job. Anything you want to say to the new investors out there that are looking to maybe get in the business or maybe started the business?

The one thing that I’ll say and we touched on it is that the next ten years, owner financing is going to have a better effect on the market than the previous ten. The previous ten we went from and the depths of the recession prices were low. Very few people had equity to there’s all of this 3%, 4% and 5% money that we can wrap. With the market going into more of a stabilization and maybe prices are declining in some markets, we’re going to be able to buy assets cheaper in the coming market with better terms and then we’ll be able to owner finance these houses to a bigger buyer pool because whenever there’s a downplay in the market, banks tighten. It’s the best of both worlds. We’re going to be able to capture the asset cheaper and with better terms and sell it to a bigger buyer pool.

REIS 375 | Finance Strategies

Finance Strategies: In the next ten years, owner financing is going to have a better effect on the market than the previous ten.


You have a podcast. It is called Investor Creator. If I may ask or invite myself, can I be on your podcast and let’s talk about why owner financing strategy may be recession-proof? I would never say that this business is recession proof because that’s a huge statement but I would say if there’s such thing as a recession-proof business, what you and I are dealing with owner financing is recession-proof and I’ll give you all the reasons why I think and we can tap in. Let’s make that the topic. We’re going to talk about the possibility that owner finance strategy is recession proof.

I know what it did for me in the last recession, which was near a depression if not a depression but some people categorize it as a depression. It was very deep and very bad and I boomed like crazy. We’ll discuss how and why the natural laws of finance in consumers and all that why it works the way it does. My banker didn’t believe me and he’s from Harvard and I’m from nowhere. I didn’t go to college and he kept telling me I was wrong. I said, “No, I’m not. Watch what’s happening.” I was buying a house a day in the recession and selling them for more than I’d ever sold them for.

I don’t think it will be that bad but as we continued to decline, owner financing gets better.

I want to thank every single one of you, I got you some Brad Smotherman. Please go to TaxFreeFuture.com. Watch the videos there on how you can start a retirement plan and defer your taxes for decades depending or not pay any. You will not believe what your financial advisers are not telling you. Be sure to check out Brad’s podcast, Investor Creator. Thank you so much, Brad, for taking the time to be on.

Thank you, Mitch. I enjoyed it.


Important Links


About Brad Smotherman

REIS 299 | Finance StrategiesI’m Brad and I want to tell you the truth about what it takes to succeed as a real estate investor. But before I do, let me tell you a story. It starts with a 16-year-old boy pushing carts at the grocery store. My family had been in farming and agriculture for generations. But at a young age, I decided that shipping cattle across the country, and farming soybean and corn…praying for rain each July and August…was not what I wanted for future generations of my family.

Nothing wrong with farming…these are some of the toughest and hardest working people I’ve ever met. I was just done cutting thistles and praying for rain. I woke up one day when I was 17 years old and decided I was going to get my real estate license. I’m not sure why…I guess I thought it can’t be worse than pushing grocery carts. Right after high school, the summer before college, I got licensed in Tennessee and began my career as a real estate salesperson with Keller Williams Realty.

My first 6 months I made a total of $1827.27. Now….guys…I don’t care how you budget. That doesn’t pay the bills. Luckily, soon after, I was picked up by a builder/developer from my church and I ran his model home. I began to have regular closings at age 20 and learned custom presale new construction. I saw his lifestyle….He had money. He had time to do what he enjoyed. It was a paradigm shift in my thinking. I decided to become a real estate investor.

In 2010 I burned the bridges and retired my real estate license…having never bought a house before. It took 8 grueling months of putting out bandit signs on the weekend to hit my first deal…a wrap note and deed of trust along with $19,000 in down payment. Goal accomplished. That money felt like $19,000,000 since I had about $300 at the time.

I began my marketing machine. And the rest is history. Hundreds and hundreds of transactions later…one more house is just not that exciting anymore. What is exciting is helping others across the goal line. I remember what it felt like investing in marketing instead of going on vacations. And I remember what it felt like not putting $4.00/gallon gas in my truck because I didn’t have it. It doesn’t have to be this way. Today I run and manage a 7 figure flipping business, and hold notes across Middle Tennessee. We invest in multiple states and have houses from Michigan to Georgia right now. It’s possible. I’m here to show you how.


Love the show? Subscribe, rate, review, and share!
Join the Real Estate Investor Summit Community: