Real Estate Strategies Debated With Pace Morby
Episode 548: Real Estate Strategies Debated With Pace Morby
There are so many different strategies to become successful in real estate. Today, Pace Morby joins Mitch Stephen to discuss some of these. Pace hosts A&E’s most popular TV show, Triple-Digit Flip. Each week, he teaches tens of thousands of students creative financing in his online communities and strives to be the #1 source for anyone looking to get started in real estate. Tune into today’s show to hear these experts take on some real estate strategies.
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I’m here with Pace Morby. He is the star of Triple Digit Flip on A&E. We talked a bit about that process. Once upon a time, A&E followed me around for Flip That House in San Antonio. I was asking him about how that business works. It was very interesting to hear his take on it. Pace does about 400 wholesales a year. He’s out of Phoenix, Arizona.
He also does sub-tos and rents them for the most part. He has about 1,000 houses that he’s carrying and collecting rent from. He said out of the 1,000, he has about 30 of them and sold them through seller finance notes. The rest of it is true rent income. You also said that for about 30% of the 1,000 houses that you rent the seller finance them for you.
I love this conversation because, as Pace knows and you all know, I don’t like renting houses myself. It could be that I was the worst landlord on the planet or I was dealing at such a low economic echelon because when I started in my mind, I had to buy at the bottom, which was the war zones, which is the hardest place to collect rent and even hold the house together because they will tear it down in New York in a minute.
Maybe that’s where I went wrong but either way, I ran into seller financing and liked seller financing a lot better because all I was responsible for was collecting the payment. However, you have to get into some forever strategy, something that you hold forever because notes are temporary. I went into self storage. Pace stayed with the houses. Do you do any apartments?
We just closed on a 408-unit for $109 million acquisition in Charlotte.
Here’s another big difference between Pace and myself. I deal in my county and contiguous counties. This guy will go in 48 states?
We are in 30 states and own assets in 30 states.
You are not afraid of anything, the distance or different markets. I can’t fathom it but that goes to show that if you put your mind to something, you figure out how to do it.
What is interesting, Mitch, is I’ve followed you for a long time. You are truly a legend in creative finance. All the conversations behind the scenes, us, the creative finance guys, get together. We go to these seminars, go to dinner afterward, and have these very high-level conversations, and Mitch Stephen comes up in those conversations frequently. I want to make sure that the audience knows they are learning from somebody that me, myself, and the people in my group have looked up to for many years. Mitch, thank you for everything you do.
One thing I want to hit on that is I would venture to say the most challenging part of being successful in real estate is that there are so many different strategies to become successful in real estate. Finding out who you are as an individual and what path you want to follow is, I believe, one of the hardest things you could do as a new person. Mitch and I used some of the same strategies. We use them differently based on what Mitch and I are looking for. When you are new, how do you make that determination? How did you make the decision that owner financing was the right thing for you?
I’m writing my seventh book, My Life & 1,000 Houses: Random Thoughts and Stories from A Serial House Flipper. I’m not driving in any one direction. I’m talking about whatever pops in my mind. I wrote a chapter called Cash versus Cashflow. I’m talking about exactly what you are talking about. There are so many strategies, and it is mind-boggling. We don’t have the time, energy, nor money to experiment with each one of them. By the time you got to the end of the list of strategies, the whole market would have changed, and the one you liked probably wouldn’t even work anymore.
That’s another thing, strategies do change all the time. You’ve got to keep morphing and moving them. Your talents start out at pretty much zero, and then you start to get talents in certain areas, and you will have to mesh your talent with the strategy that you are morphing. You are morphing your talents and strategy to fit your market. It’s a hard job but I came up with what I thought was a good idea. “Pick. Are you a cash guy or a cashflow guy?” That will cut a lot of s*** right out from the beginning.
What do you mean by that?
I see these guys hooked on cash and a bunch of flips. They get cash but pay the maximum tax, and it’s a glorified job, and I do want to revisit that because it’s not completely true that it has to be a job. You can automate anything that you can think of.
I would venture to say, in my personal opinion, that the one business in all of the real estate that is the most challenging to automate is the flipping business because it’s heavily reliant on human beings to do the physical work versus the mechanics of property management, etc. Fixing and flipping houses is a glorified job.Finding out who you are as an individual and what path you want to follow is one of the hardest things you could do when you’re new in real estate. Click To Tweet
I haven’t seen the last 400 houses I bought, nor fixed nor flipped.
On the surface, some of these things are jobs. If you are a wholesaler, you wholesale that house, you get one check, you got to go. To quote Jack Bosch, “One-time cash, temporary cash, forever cash.” The one-time cash events are more like a job because you wrap up one, you got to go find another one, and it doesn’t ever end.
That would be wholesale and fix and flip. That’s one-time cash.
Not fix and flip because you know what I mean.
You could wholetail it. The second one is temporary cash, and I assume you are talking about owner financing.
I would sell a house for $150,000, get $15,000 down, which is what I live on, and pay my bills with. I created another $500 a month positive cashflow, for which I have no liabilities. If the air conditioner breaks, it’s not my air conditioner. I sold it on payments.
It’s a real cash cow because there’s no reason for foreclosure, for any money to go out. It just comes in. One-time cash and temporary cash, the problem with those two things is eventually you burn out, die or your north portfolio pays off. You have to have a forever strategy for your overall plan.
For you, would that be storage units?
Yes. I buy storage units. We have a different opinion but there’s no right or wrong opinion. It’s what works for you. Landlording on houses, where people lived in my houses, didn’t work for me but I realized you had to be a landlord for something or else your income stream was at the mercy of someone else saying when it was going to end.
I started buying storage because they didn’t live in them, but it was still rent, and it would go on until I said and it is the forever portion of my investment. I flip, wholesale, sell or finance houses to create a big old bucket of money, and I do that with other people’s money. I don’t have any of my money in this, not a penny. All my money goes over into storages, and there I rent a little 10×10 and 10×20 cubicles, until I say, “I don’t want to do it anymore,” which probably never.
Storage rentals are way less complicated than a house. There’s no plumbing, electricity or no hot water heater to speak of. That’s the legacy I’m handing to my daughter, who has been in the middle of my office for many years. She’s running it now, and there’s no need ever to sell it or cash out of it. I will ride it all the way until my ride is done, and then I will hand over the train to my daughter, and she can get on it and ride it whenever.
The acquisition strategy that you utilize, which is generating leads, either wholesaling, fixing, and flipping or taking them down and then turning around and seller financing them out and creating notes, is very similar to my strategy. The same way we acquire. You are one of the best at teaching raising private capital, which is if I could go back and acquire one skill sooner and faster, it would have been raising capital.
How old are you?
I was dead broke at 34. I was starting to get into real estate and do some things at 34. You are so far ahead of me. It took a long time for me to find myself and where I belonged and what I did well. It took me even longer to believe a whole bunch of other things that I had to believe earlier, and one was that I was worthy of private money.
The most interesting paradigm shift you have to have, as somebody that is acquiring and building a legacy with other people’s money, is that one you ask yourself the question, “Where are these people? Where are they located? How do I find them?” Number two, “Why would they give me money? Why don’t they go and invest the money themselves?”
“Why would they give it to me? I’m new in the business. I had a bankruptcy a couple of years ago. I don’t even speak the language that good. I don’t even own my own house. I’m fat. I’m ugly.”
It goes on and on. My partner, Mike Powell, was good at getting money from his family but then, after that, it ran out, and he stopped getting money. I said, “What’s going on?” He goes, “I don’t know. I need to think about why I can’t go past my family.” He comes back and he goes, “I’m 25 years old. I don’t even own my own house. These guys are wealthy and successful people that I usually talk to about this. Why the hell would they give their money to me?”
That’s when it dawned on me. Part of being a good coach is changing people’s mindsets or perceptions. I looked at Mike and said, “You are making yourself way too important in this formula. No one gives a crap about you. Charles Manson should be able to get this money from prison. It didn’t matter how many people he murdered. It’s about the deal. What is the house worth? How much are you asking to borrow? If you don’t pay him as agreed, what do they get?
If this is good enough, what they get instead of getting paid as agreed, then they are going to give you the loan. It’s that simple. It has nothing to do with you. It’s about the deal.” Many people get turned off, though, when we say things like, “It’s the deal that brings the money.” They think, “That’s just a cliché.”
Let me tell a quick story about one of my biggest paradigm shifts regarding private capital. I’ve read your book on raising private capital. It’s phenomenal. One of the best places to find private money is from deals themselves. I’m sure you’ve done this before.
You get a seller who’s selling a property. They are getting a big check, whether it’s a wholesale deal or whatever it is that you are doing. Your seller will get a big fat check at the close of escrow. Do you think that our sellers know what the hell to do with money to go back out and reinvest it? Absolutely not.
I have a seller, her name’s Desiree. I bought a property from her for $110,000. It has been a couple of years now. I asked Desiree a simple question. Anybody out there doing deals and you are talking to your clients you are buying deals from. Ask your seller, “What do you plan on doing with this money when you receive it?” Ninety nine percent of the time, it’s to pay off a credit card, buy a new car or something along those lines but then whatever’s left over after that, they have no idea or zero ideas what to do with it.
With Desiree, I said, “Desiree, would you be open to letting me use that $110,000 to buy subject to and seller finance deals from my other sellers? You can be my second note behind my subject to loans.” She’s like, “It sounds great.” I go, “Let me show you a deal.” Before I closed escrow on her deal, I drove her out to another property. I showed her the property. We were in escrow, so I took a black marker and wrote on the wall in the kitchen. “Here’s the deal. Here’s how you make your money,” and she goes, “Why would I ever invest in anything but this?”
Desiree still to this day, has $110,000 with me. I cut her a check every single month on the first of the month. She has been with me for a couple of years and came after buying her house. I didn’t even know who she was. When I showed that to my partner and he’s like, “Do you know how many sellers that have received $300,000, $400,000 or $200,000 from us buying their houses that we didn’t ask one simple question, “What do you plan on doing with that money?” A good coach like Mitch will teach you 1 strategy, 1 question to ask somebody for the rest of your life, and it will make you millions of dollars in raising private capital. It’s freaking unbelievable.
Thanks for the kudos. I’m humbled by this always because I don’t see me from the outside. I just know what I do here and keep my head down and working. It’s nice to hear the kudos.
The one thing I wish I would have gotten a hold of a lot earlier was the art of raising private money. The other thing was to delegate and get myself out of the middle of my business.
I was the main reason my business didn’t grow for many years. I was right in the middle. I was the clog in the pipe. It took me a long time to see it. I was trying to grow this company and was all pissed off all the time because it wasn’t growing, and it became to find out the reason why it wasn’t growing was I was getting out of the way.
For your first several years in the business, did you have an executive assistant, or did you do everything yourself?
I did a couple of deals by myself, but I always had a senior partner who knew what they were doing. It was where I picked up a lot of information. I didn’t get paid nearly what I should’ve got paid but I was picking up knowledge like crazy. More valuable in the end run than money ever would be because, with the knowledge, I could make millions of dollars.
Very shortly after that, I had to have people push my files through the closing because I had too many. In 1996, my fourth year full-time, I did 150 houses going in. I sold 150 houses that year coming out. I had 50 at the end of the year, so I sold 100. That’s 250 transactions. I was selling the notes at the time. With the 250 transactions, we are buying a house and then selling it to someone else. If you take out the weekends and the holidays, it’s 1.7 closings a working day, 250 minus 52 weekends, which is 102 days. They don’t go 1.7 closings a work day. It goes four days with nothing, and then all hell breaks loose, and you got 8 closings in 1 day, and you are trying to find the money.
You are calling your lenders and saying, “Did you wire money? I can’t get ahold of you. Closing is supposed to happen in two hours. Can I run over and get a check?”
I’m going to throw this out there. This is not a new revelation to my family. I had a lot of families, and it caused a lot of strife. What I should have done was hire people I could fire. You can’t fire family all that easily. I should have hired people, I could fire right on the spot when they didn’t perform or didn’t show up, or whatever.
The other thing is I quit hiring and training. I poach. I buy the best people in the business. They show me how to do what I want to be done in this chair. I have my ideas and know how I want this chair to run but the guy that I’m stealing from the next company should be able to tell me how it works. I will say, “I want it to work like this. You can do it like that but I have been doing this for several years for this other company, and how we do it is like this, and it eliminates these problems.” “Let’s do it your way.” I was sitting there trying to train people in a chair that I wasn’t even that good at. That’s why I needed someone to sit in that chair because I wasn’t any good at it.
The problem with that is that guys like you and me that are visionaries can see what we want years in the future. We can articulate it and get our team excited. We are visionaries. What we have a hard time with is we don’t see that is the most valuable part of the business. It’s like being Tom Brady. He isn’t just good at throwing a football. He’s good at building culture inside of his community or football team, and they all want to follow him into battle.
At the end of the day, your job is to be the quarterback but then you have defensive line coaches. You have offense, special ops, and all these things. Those are things like CFOs and COOs. I didn’t hire a COO for a couple of years too late but when I finally found a COO, I did exactly what you said. I go, “I’m so sick of having to spend the first 3 to 6 months of teaching somebody what their job is supposed to be, and I’m paying them to learn their job. How crazy is this?”
They quit and go get another job for a few thousand dollars more or something.
I did what you said. I said, “I’m looking for somebody who already has experience in this industry. I will pay you a $10,000 signing bonus and pay you $2,000 a month more than what you are getting paid now.” I put that all over social media and hired the best operations manager I ever got. It’s an unbelievable game-changer. It tripled my business in a year because things were happening. Delegation and raising private capital, if people could learn those two things in their first year or first year and a half of being in business, you would be ten times further and faster.The best places to find private money are from deals themselves. Click To Tweet
I had mind-screwed myself for many years that no one could do this. The business was me. There were so many variables that I had to watch it. I got with a coach who sat me down and said, “You flip houses, and you think that’s not a business that you can delegate or automate?” I said, “Might be one of the ones you can’t.” He says, “What do you think is harder building a BMW car from the minute it starts going through the factory to the end or flipping a house?” I said, “Building a BMW, of course?” He says, “They push one out like every 60 seconds, and the owner of that company is not there.” That’s when I said, “I’m just mind-screwing myself. I’m trying to make myself believe that this business has to have me.”
The paradigm shifts right there. I love that.
You are going to relate to this. I was going to quit because it was so much and I was burned out wearing every hat but I couldn’t make myself quit because it’s too much money every year. It’s $2.5 million, $2 million profit every year. I was going to put it in a box and walk away. I thought, “Before I do that, let me try to automate one more time,” and what the difference was, then I went to the mastermind that was specifically tailored to help me solve this problem.
I didn’t give a f*** if I bought a house or not. I didn’t care. I was trying to fix a business one last time before I walked away and put it in a box and threw the whole income. In many years’ worth of legacy, goodwill, and everything, I was going to throw it all the way. That was the difference. The first four times, I tried to fix it and failed. I did not give myself permission not to buy 100 houses. I was trying to fix my business with what was left over of me after buying 100 houses.
It’s like you were trying to put out a fire while pouring gasoline on it.
I never heard it put better. That’s what I was doing. I was pouring gasoline on this fire with one hand, and I had a hose on the other hand, and it was burning up. This time, I didn’t care if I bought another house at all, I only bought 30 houses that year. Those houses walked right in the front door and laid down on my desk.
I wasn’t even looking for those 30. I was trying to fix a business and had cashflow behind the business because I had the houses that I seller finance. If you seller finance 300 houses with an average of $500 a month profit, it’s $150,000 a month profit positive cashflow coming in. I had earned the right to sit down and try to fix this business.
I went away, and it took several months but we took it one chair at a time, and we would hire somebody, and then they would not work out or quit. The most heartbreaking thing is when it doesn’t work out with that person, and you put in so much time. My partner, Mike Powell’s dad, runs a big lumber company. They have 150 employees or something. He said, “When I need a tow truck driver, I don’t go hire 1 and train 1. I go to the company, find the biggest bad-ass tow truck guy driver, offered more money, and bring him over here. He shows me how tow truck driving works.” That’s what we started doing. We started poaching.
I had another influencer guy a couple of years ago. He goes, “You shouldn’t hire anybody unless you know how to do their job yourself,” and I was like, “That is literally the worst advice that should ever come out of your mouth.” That’s like telling me I should go learn how to drill teeth before I go hire somebody to get my cavity out.
You have to learn how to fly a plane before you can take a trip. You can’t hire a pilot or a company to fly it. You have to know how to fly the plane. You just need to walk.
That’s exactly the advice. I’m like, “I hire professionals.” You were a blue-collar guy who grew up in a blue-collar family. The challenge with blue-collar guys is that we learned so in-depth how to touch everything we make money with our own bare hands. We are taught that there’s pride in doing that, and there is. I’m a blue-collar guy. My dad and I were contractors. I flipped houses for Open Doors, Zillow, and Offer Pad. I was their biggest fix and flipper, and that’s how I got into the industry.
I had the hardest time automated because the blue-collar part about us is like, “You do the work yourself. You cowboy up. You do the job,” but then when you start trying to delegate and take it from a hobby to a business that is the mental break that we have to go in and shatter that belief inside of our head and go, “I can’t get there on my own.” You go and join the mastermind, and that mastermind taught you, “Here’s how you delegate. Here’s how you find the right people.” Do you remember the first person that you found that was a key person in your business that changed everything?
Let’s start with partners. I would get the right partner and say, “We are not 1 plus 1 equals 2. We are 1 plus 1 equals 5.”
This is what I tell people, “You can look at 1 plus 1 as equals 2, and that to me is not a good partnership or you can look at 1 plus 1 equals 11.” That is what you and Mike Powell and other partnerships and alliances do. The same thing with me. I have a partner. His name is Cody Barton. Nobody ever sees him but he’s behind the scenes running the businesses while I’m going full steam ahead and creating, “I’m the boat, and he’s the person surfing the wake and utilizing the wake to our benefit.” That’s what you mean as good partnerships that have the opposite personalities of you that fill in the gaps that you couldn’t do otherwise.
I see a lot of people that partner up that are almost identical, and you don’t need a partner that’s identical to you. You need one that has all the things that you don’t have. That’s what you are looking for in a partner or when you hire someone to take over a position. They need to fill in the gaps of what you don’t know how to do in that area.
If I’m brand new and haven’t done a deal yet, it would probably be bad advice to go and hire somebody right out of the gate until I have money coming in.
You have to do the first couple of deals yourself.
You have to get some income coming in.
You need to know the business, at least that well if you are going to this business. You need to know the basics of whether you are wholesaling or flipping.
You need to have the framework. If you could go back all over again, would you have started hiring and maybe the second year you were in the business? When do you think you would have started hiring, and what would have been the first position you would have hired?
At the end of my first year because I quit in March of ’96 and did 45 houses by the end of the year. I was ready. I lived in a different time in a town called San Antonio, Texas. I had some revelations. In San Antonio, Texas, there’s a skyline right behind me. In 1996, you could buy houses for $8,000, $10,000, $12,000 or $15,000. They weren’t war zone. $25,000 was an expensive house on the lesser side of town but on the lesser side of town, it was $8,000, $10,000, and $12,000.
I learned quick. No one would give me any money, and I didn’t believe in myself or even have the mindset to even go out and get private money. What I did was I learned quick that back then, if you had good credit and you sent off for the card, they would send you the card. They checked your credit and gave you the card. They didn’t check how much available credit you could get your hands on and run to Mexico. If you have good credit, they will give you the card.
I applied for 75 credit cards and got 55 of them. I was buying houses on my credit cards. “Give me $10,000 to buy the house and $5,000 to fix it.” I have $350,000 worth of credit card debt with 0% or 1% interest, and then I wouldn’t even have the deal in 30 or 60 days. I was buying houses with credit cards but keeping track of that. I was fortunate I had my wife that would keep track once she got over the shock that we owed $350,000 on credit cards because I didn’t ask her permission. Once I avoided that divorce, which took quite a lot, then she got onboard and started keeping track.
I say this, number one, “Let’s delegate the low-hanging fruit first.” This is books, income tax returns, receptionist, filing, and collections. You shouldn’t ever collect your own money because people don’t get paid that much to collect it for you. We make money when we buy this property. Where it all starts is you buy a property at a significant discount, is that not where the rubber meets the road in this business?
It’s either a significant discount or good terms.
It’s a deal or however you want to frame it. What you get paid to do is to find the deal. If there is a second, it’s to find the money. They are almost equally important because if you can’t find the money and you find the deal, and you can’t take it down, there are some creative ways to get it done but still.
There are a lot of wholesalers in town. I’m sure that you have the same thing. It’s because I have the advantage of raising private capital, wholesalers will bring me deals that they don’t have private capital for. I sit there with a net where I’m capturing other people’s deals they will bring to me because they didn’t learn the art of private money lending. I did have a superpower where not only can I find my own deals and make them work but other people in town bring me deals because they don’t have private lending.
I have this thing if I’m invited to a seminar or whenever I speak. I talked about seller financing and said, “I’m about to make the wholesaler sick. If you are a wholesaler, go ahead and get your barf bag out now. I’m going to make you puke.” I said, “You find these perfectly good deals and sell them to me or somebody, and you make, what’s the average wholesale deal?”
In my experience, they will say between $8,000 and $10,000, maybe $12,000. It’s what the normal wholesale deal is. I said, “I get about that same amount for a down payment but because I know how to get the private money and stay in this deal for 30 years, I’m going to make 360 months’ worth of $500 a month positive income.”
“That’s $180,000 potential. $500 a month times 360 months is $180,000. You, as a wholesaler, got your $12,000, and it’s over. I got a $12,000 down payment, and they still owe me 360 months at $500 a month positive cashflow to me. That’s $180,000. The reason why I’m a multimillionaire is that every deal I freaking made, they still owed me $180,000 while you are struggling because with every deal you made, you got $12,000, and it’s over. The whole difference was the ability to find private money.”
If I were anybody out there reading, I would spend the next year learning how to master that art of finding private money. My course is called Private Money Changes Everything. It’s a real light course. It’s not bulky. It’s not heavy. It’s rich. You need to know what to ask and what to say. You need to know how to answer the 21 objections, which are the only 21 objections I’ve ever heard.
If you hear number 22, call me and tell me. Mostly, you can do the course, read the book, and go to the movie all you want but you have to get yourself out there and ask a few people or implement the strategy. It’s a numbers game like anything else. If you ask enough people for money, you will find the money.
We’ve got a little daughter, and she’s learning how to swim. I have this analogy where I get all these people that they go and read books, watch videos, listen to podcasts, and do all this stuff, and essentially, they are trying to swim in the game of real estate. I asked somebody and they go, “I have been trying to get into real estate for a few years.” I go, “If you think of getting into real estate like learning how to swim, are you practicing swimming in the actual water or are you in the living room, practicing swimming in the air?”
They are like, “What do you mean?” I go, “Are you getting in the water, figuring out what the water feels like and muscle memory, and moving with the water? That’s what you’ve got to do. You’ve got to get in the water and take action. Otherwise, nothing you are doing is going to matter. It’s like, you are practicing how to swim in the living room. You look like an idiot.” This is what they said, “I don’t want to look stupid.” I go, “Who looks dumber? The person practicing swimming in the shallow end or the person in the living room practicing swimming in the air?”
The one in the living room looks pretty dumb.You shouldn't hire anybody unless you know how to do their job yourself. Click To Tweet
The reality is if you are not in the water and practicing, you will never learn how to swim in this game. Going back, delegation, raising private capital and implementing it by going out and purposely making mistakes with mentors by your side like having a Mitch or someone you can rely on. You guys do a weekly call. What day do you guys do your weekly call?
Tuesday at 7:00 Central Standard Time.
If I’m starting out, what I would do is I would go out purposely because of those mistakes by getting in the water and saying, “I’m going to try and say this to a private money lender or I’m going to go through the contacts on my phone, and I’m going to use the words that I’ve learned from Mitch. If I screw up and get stuck,” come into the Tuesday call and ask a question.
Instead of you asking a question because you are curious, you are asking a question because it’s something you are dealing with. For me, one of the biggest things that hold people up from being successful is they are not implementing information. What’s happening is you, and I received the same information, comes into our brains, and we have to make a decision. Is that information interesting or is it important?
If it’s interesting, that means you are not going to use it. If it’s important, it means you can go out and use it immediately. The information you are absorbing, reading, or learning, is it interesting or important to solve real-world problems you are facing with? It’s so funny because people come to you to learn creative finance, but the reality is the three things they should learn are, “How do I implement? How do I raise private capital? How do I delegate this and turn this into a real business?” The side benefits are worth tens of millions of dollars.
That’s why I take anybody on the weekly call because I don’t know who’s going to make it or not. It’s such a small amount of money for the amount of information. It’s $4,000 for the year and comes with 500 hours of archive calls. If you listened to those 500, you would understand the ups and downs and the problems and successes of real estate. You will be way ahead.
As you said, learning comes from learning on-the-job training because once you’ve lived through a lesson, you are not likely to forget. The other thing is there’s confirmation on those calls. You see and hear people week after week that doesn’t sound are not any smarter than you, and yet they made $50,000. You will know it’s not contrived because we were talking about that deal two weeks ago when it was an idea. They then got the contract the week after that. They then did the work, had some trouble with some contractors, and put it up for sale. That situation has been watched for six weeks on this call. He makes 50 calls 1 day and says he made $50,000 or $100,000.
There’s some real validation for people going, “These people are making some money, and if they can, why can’t I?” That’s where the call helps a lot. The other thing is you can avoid a lot of mistakes because you can hear a lot of what people are doing that’s wrong before you have the chance to make that mistake. The business is unique in every deal but has limitations to how much it goes on. There is a limit to it. They might have different pieces from different directions but at the end of the day, they are all the same pieces. I believe in the call.
One of the reasons I’m still on the call after a couple of years is not because I like giving up my Tuesday night but because I learn a lot from the call myself and have been in the business for many years. These people make me think about situations that I never thought of. They can get themselves into some crap. You must have had to work to get in this bad. Now, I’m trying to figure out, “How do you get out?” As a team, we figure it out. It’s rewarding for me in the educational department. That’s why I’m still on that call. You offer a call four times a week.
Our stuff is sold out. It’s hard to get in. I don’t think we are opening up any spots for another year or so. I wouldn’t worry about me. If you guys want to learn anything about what I’m doing, you can check out my YouTube channel. Mitch, I have been learning from you. You are a legend in the game.
We learned from everybody. Who all did you study?
I grew up in a household where my father had twelve children. It was never bankable for a house large enough to house twelve children. My dad was an accountant during the day, and then he was a painter at night. He made more money as a painter on nights and weekends than he did as an accountant. All of that was under-the-table money.
Growing up, my dad bought every house direct to seller, seller finance, subject to or on the lease options. Now, we don’t live in Texas, so lease options are a little easier outside of Texas, but I have watched it my whole life. Even my mom is a seamstress, and when they were first starting out, my mom would go to a Michael’s or craft store and say, “Can I get a line of credit or a credit card from you guys so I can take materials to turn them into dresses, suits, dolls, and stuff like that to go out and make money?” She was rejected. My mom found somebody in her church that let her use her credit card.
My mom would then use somebody else’s credit card, go to Michael’s, buy materials, go sell those materials and those products, and pay the credit card off, and her friend, who let her borrow the credit card, a little bit of return. I watched my mom using private money. I watched my dad use creative finance all the way growing up but it didn’t dawn on me because my dad never used those strategies as income streams.
My dad only used those strategies to house his children. It never struck me until I turned 30 and I’m like, ” What the hell? Why am I a contractor with 250 employees when I should be buying the houses instead of fixing and flipping?” I flipped 7,000 houses for Opendoor, OfferPad and Zillow before I ever flipped a house for myself. You know what’s funny? I didn’t believe I could do it myself.
There’s a different theory, and I want to ask you, did it get to a point where you have had enough? What I’m looking for in my students on the one-on-one level is to see whether theve’ve had enough of the meters peg. It has to be pegged way over in the red because that angst is what gets people off their ass and bolster up what it takes to be your own entrepreneurial guy.
It takes some angst like, “I’ve had enough of people telling me when I can go on vacation or how much I can earn. I’ve had enough of people telling me how I have to dress, what time I have to get up, and what time I can go home. I’ve had enough of this s***.” If that’s pegged over there, it takes a certain amount of angst. Did you have that angst?
Here’s where my moment was. I learned to be a contractor from my dad. When I was young and wanted to make $20, my dad would take me painting with him. I learned to be a blue-collar guy from a young age. What did I do when I got into my twenties? I started a construction business. It’s pretty simple. I learned construction from my dad and jumped into construction, but I also learned creative ways to build my businesses from my dad and mom.
What I did was stupid but also very smart. I took it to an extreme, and it burned me. I would go to customers that were flipping houses like Opendoor, OfferPad, Zillow or other local fix and flippers in Arizona and say, “I’ve got a line of credit, credit cards, and cash. If you don’t haggle me on my prices, I will fund your construction on your flip, and you can pay me my full bill when you sell the house to your buyer.” My business blew up. I went from $1 million a year to $25 million in revenue a year because I was creatively thinking, “How do I fund other people’s construction.”
I had one guy that ended up running a Ponzi scheme on me, and I ended up losing all of my money. The day my daughter was born, I got a bankruptcy letter from him. He filed bankruptcy, and all the money he owed me for the last few years of accumulating, me funding all of his renovations, he wiped the slate clean. There was that moment where I was like, “Here I am, thinking I was building a business and a legacy for my daughter and my children, and one man wiped me clean. I have no control. I have no aspect of control whatsoever. F this.” In six months, I had my business completely shut down and was full-time in real estate, and never looked back.
Everybody has their time in the woods, and I don’t care who you are. Everyone has that story. It’s almost like a requirement. The difference is you didn’t quit because a lot of people would have gone in a hole, won a battle or checked out and said the business was a scam. The business isn’t a scam. You just met the con man. There are good ones and great ones. I finished a story on con men and how to recognize and deal with them if you want to beat them after you’ve already committed the sin of investing with them.
I got to hear that because I’m not good at this. I see the good in everybody.
I was the worst.
The problem is when you operate with a belief that everybody operates the same as you, you get addicted to believing everybody is as trustworthy as you.
What happened is if I borrow money from somebody I’ve never defaulted and never had an issue with, I assume subconsciously that everybody is the same way.
A few years ago, I gave a guy $250,000, and he strung me out until finally, I sent him a text because he won’t pick up the phone. I go, “I’m screwed, right? I would rather live my life knowing I got screwed than spend any more time chasing you down for this $250,000.” He says, “Honestly, yes. You are screwed.” I go, “Thanks. That’s all I need to know. I’m never going to collect the money. I’m moving on.” Do you know why I lost the money? It’s because I loaned money to somebody without it being tied to real estate. Going back to private money lending, the greatest return for your investors is the money they give you that’s tied to actual real estate.
Their worst nightmare that you don’t pay them is going to be your private lenders’ biggest coup because if they’ve tied themselves to the right collateral, which I don’t ever present a deal that isn’t the right collateral, anyone in the world would say, “That’s more than fair.” You want to know about conning the cons. The first thing is to recognize. I’m curious. The guy that got to you, either one of them, do they have angelic facades?
Who do they say they are? They are a pastor or a policeman. What do they say they are?
They are a pastor.
Was the return for you over the top or big, or are you doing it as a friend?
The first person that wiped me out millions of dollars, the big origin story of how I got into real estate, didn’t promise necessarily a huge return. They promised a steady flow of projects for my construction business that I would never want for more projects, big promises. “You will never have to spend money on marketing ever again. I will give you more projects you will ever be able to handle.”
This guy calls me on one of the Tuesday night calls. This is where you can’t sub out to underlying coaching. I can’t sum up my many years. He says, “I got $135,000 house that you could buy for $35,000.” I said, “How much work does it need?” He says, “It needs the front yard mowed.” I said, “Do you have a contract?” He said, “No.” I said, “Why?” He goes, “I don’t know if we are going to get the money.” I said, “Don’t worry about that. Go get the contract and get 45 days to close. If you can get at least 30.”
Next call, he comes back. “I got the contract.” I said, “Did you get 45 days to close?” He said, “Yes, I did.” I said, “Did you have him initial where it says 45 days to close?” He says, “Yes.” I said, “That 45-day is going to be really important. We may need every minute of it.” Next week he calls and says, “I have a problem with my house, my big deal.” I said, “What?” He says, “The guy says if I don’t close my Friday before noon, he’s walking the deal,” the seller.
My guy’s saying, “Can he do that?” I said, “It’s hard to make someone sell anything if they don’t want to if they sign the contract or not. It’s usually not worth it,” but I think we have a bigger problem. I said, “Who does this guy say he is?” He says, “He says his name is John Smith.” I said, “No, not his name. Who does he portray himself as?” He said, “He’s a policeman.” I said, “Bingo. We’ve hit a con.”Good partnerships have opposite personalities that fill in the gaps you couldn't do otherwise. Click To Tweet
I said, “Number one deals over the top for you. Do you think $35,000 for a $135,000 house where you have to mow the lawn a little bit over the top?” “Yes.” “Number two, angelic facade, policeman, pastor, Marine or whatever has a light white glossy glow of Christianity on it that qualifies,” but the thing that always causes you to go back and look at these first 2 is the 3rd one. The third one is the red flag, it’s untimely and unreasonable time pressures.
Once you see the unreasonable time pressure, that’s when you go back, and you start looking, “Is the deal over the top? Is this guy angelic façade?” If those three things line up, you must start doing your research. If you find out that he is a con, which I’ve done before and said, “I’ve already given the money. I’ve already lost control of the deed.” The way you con a con back is you never let him know he’s a con, and you promise him a much bigger deal once this one settled up, a huge one because that’s the chink in their armor. Greed and easy money.
I once had a guy get to me for an $80,000 loan. I put up the money, he had the house, and we are going to split the $150,000 sale. I put up the money, and the house is sold. I was very young in the business. He had put the deed in his name. He sold it. All the money went to his account and was not paying me. I went in and could hear them screaming in his office. They were coming out, and another person would go in and was screaming at him.
I walked in and said, “This is the greatest deal ever. I love this business. You are so smart.” I started building their ego and said, “I got another one better than this one. It’s $450,000. My dad is going to put up the money, and it’s worth $700,000. I’ve already got it bought and already have it sold but it’s going to foreclosure on Tuesday, it’s Friday and I got a sell-up with my dad now or Monday morning, so I can get this foreclosure before it goes to foreclosure. I already got the people willing to sell it to me.” He settled up with my dad and me.
In the hopes of getting the next con.
It’s because he was going to own a $700,000 house. I said, “Let’s do the paperwork the same.” That’s the other thing you look for in cons. “We will do the paperwork later. Go ahead and put up your money.” My word is my bond. They go on and on about their Christianity, you better check them out fast. If they got big Christian symbols on their construction trucks, you better check them out. I hate to say that because I’m a Christian. When people keep ramming their Christianity upfront, then it puts my red flags up.
The first guy that took me for any money when I originally met him said, “My name is John. You can trust me. I’m a Christian.” Literally, in his introduction, “You can trust me. I’m a Christian.” He led with the angelic facade. I’ve never heard of anybody using that.
I would’ve run that guy to the end. At some point, you even say, “I’m willing to make you the loan. I need your Social Security number on a deal. I will do a background credit check, and I’m doing all this or I’m not doing anything.” When those three things line up, you do things to kill your dealer because you might feel bad that you would kill the deal that you were excited about. If you start asking them for certain things and if you can’t research them in the background without them knowing if you need to ask them for their Social to get to the bottom of who they are and they don’t give it to you, then you will lose a deal.
It’s always on your mind. You will be wondering, “I wonder if I offended that guy or if he ran away because he was a con.” The deal is if you asked me for my Social, you want to do a deal with me, and we are going to do a deal, I will give you my Social any day of the week. I will give you my date of birth and my driver’s license. If we are going to go do a deal together and it involves some reasonable amounts of money, I don’t have anything to worry about.
I have a credibility packet that I give to my private lenders, and it’s my personal credit score. My company’s bank balance, and our profit and loss for the last year. I also give them now our schedule of real estate owned. It shows everything in a Microsoft Excel spreadsheet. They can go and copy and paste the addresses. Go and look up county records and see that we are the actual owners of the property. Within two minutes, they are like, “Wow.”
Nowhere did I need to tell somebody that I was a Mormon missionary. I did this and that. I was an Eagle Scout and all these other things. Those things are nice little cherries on top, but I didn’t buy the cake for the cherry on top. I bought the cake for the cake, so show me the cake. “Where’s the paperwork? Where are the credentials? What’s the deal look like?” Everything else is cherry on top.
One time, I was going to talk to one of the biggest fish in San Antonio, a very wealthy, successful, respected, and known man. They said I had only ten minutes with him. I went in with my tax returns. I went into my spreadsheet and the deals I do with an explanation. I went with my driver’s license, a copy of my Social Security card, and two crisp $100 bills right on top. He was going through the files or my little thing. I took my rubber band off.
I showed him my spreadsheets and explained what I do. I showed him the last few years’ tax returns, and then I showed him my driver’s license. He looked at the copy of my Social Security card, and he goes, “What are the two $100 bills for?” I said, “It’s for a private detective. Hire anyone. You put them on me. You have everything you need.” He handed me back my $200.
This is about wealthy people. They make decisions fast, and when they make decisions, they go in 100%. He says, “I don’t need the private detective so you can have the $200 back.” He said, “How much do you want?” I said “$500,000 or $5 million. I will use whatever.” He goes, “Why don’t we start with $1 million?” It was from the $200 bills.
I have many cons back. They are much weaker than you think. Their greed is so high. The trick is you cannot let them know that you are a con. They are usually narcissistic and egotistical. Narcissistic in the sense that they don’t believe they do anything wrong. The pathological conman doesn’t even believe that he’s doing anything wrong.
There’s the diabolical conman who knows and doesn’t care how much he’s going to hurt you. He just wants your money. He’s hiding behind the fact that all is fair in love and war, “If I can beat you on the business battlefield, then you deserve to lose,” but he knows that he’s going to hurt you. Those are the two kinds, either way, and you can’t let them know that you know that they are a con.
I learned this from The Art Of War, a book by Sun Tzu. I didn’t get a lot out of that book but I got one thing out of it. One of them was that if you recognize a spy in your camp, the tendency is to run the point. “He’s a spy. Arrest him,” and then we hang him in the camp by the night’s end, and I celebrate a tiny little victory in the war.The ability to find private money changes everything. Click To Tweet
I could shut the hell up, send the spy home with wrong information, get the enemy to move into vulnerable positions because they think they know something, and then I can kill them all and win the whole war. If you want to win the war with a con, you can’t let them know that you know they are a con. You have to set them up with a much bigger deal.
You need to do it in phases. You can’t do it all in one conversation or it becomes too obvious. One day you talked to him, “I’m working on a deal.” The next day, “I got this deal. It’s going to cost about $450,000.” You string it out and make it seem real. At the end of the day says, “I got to pull the trigger on this but you got to settle up with this other one before we move into this. I’m going to roll it all plus more into the next one and do it the same way we did it before. I have to do this so fast. I can’t even worry about paperwork. I will sign the paperwork later.”
That’s another thing I listened for from the other side where people are saying, “Why don’t you put in the money and we will get the paperwork done next week.” When I hear that I’m like, “Who are you?” That’s when I started doing the research. It’s worked for me four times in a row. Two of them were me when I was young, and then 2 or 3 other times, I coached students who got conned, and they got the money from their con.
Where did you make this video on your YouTube channel or where is it? You said you made a video.
I’m writing about a chapter a day. I have ADD, so my chapters are short but I take things that have happened to me and make them into a story. I wrote that story about the cons, and then the day before that, I was writing about how to beat these cons. There’s how to recognize the con, and then there’s another chapter on how to beat the con.
If you want to try to beat them if you’ve got nothing to lose because you’ve already gotten out of control of your money or your property. If you have nothing to lose, then you try this. It doesn’t hurt anything. The only thing you can’t do when you are counting the cons is you don’t have exactly as much leverage as the con has. The con will forge documents and notaries and write hot checks.
When you are conning a con, you cannot break any laws. You have to con them with illusion. You can’t con them with forged documents it’s not going to do any good to beat the con of his game if you become a criminal. I studied cons for a long time. I studied them because if you look back at the cons, they make so much money. If they would apply the talent that they have within the boundaries of the law or integrity, they would never worry about money or be broke ever because they are so talented.
The reason why I was studying them was that I wanted to know how do they get these people’s confidence like this? The problem is some of the things they do, I cannot do. I can’t promise someone a 200% rate of return. They can because they are never going to pay you. They can promise whatever rate of return they want. I’m limited by that.
They can break laws and do things I can’t do but still, I’m very intrigued about how these conmen and how their lives are so long, it seems like people would catch on to them but they move from place to place and start over all the time. They are always starting over and moving a magnificent amount of money. Bernie Madoff, why the hell did that guy have to lie?
He was a smart guy. He could get it somewhere else.
Most of them are. They prey on your kindness, naivete, integrity, and giving-ness.
A lot of times it’s your Christian values, which is why a lot of them use the evangelical facade. They prey on your Christian values of, “Help your brother and sister,” and all those types of things. They pray to Bible stories.
What do you have to pray about if you are going to go after them and try to get made whole? I’ve never gone after them to get up on them. I want to break even or get my money back, forget about my time and my deal. I want to get my principal back. When you are going after them, they only have 1 or 2 chinks in their armor. They have maybe the ego and greed. Those are the two biggest ones.
I got that answer when I was in that waiting room, listening to those people’s screaming at this guy and leaving. I would move up in line, and another person would go in, and there would be screaming and yelling, and I started praying, “It’s obvious to me. I’ve been had. I don’t have a leg to stand on. This guy has got me locked stock and barrel.” Where is the chink? How do I beat this guy?
I started asking him prayers about, “How to beat this guy.” The answer I got was, that you can only beat them through their ego and greed. When I went in there, I was all smiling. I was the only guy that wasn’t cussing him out. I made him feel like I was so frigging dumb that it was almost irresistible to him not to go for the $700,000. I made myself look so completely naive that he couldn’t resist himself and was lucky for me. I don’t know why I’ve never heard anybody talk about cons before. Have you ever heard anybody talk about cons before?
No. I love it. There should be a whole book, especially for people getting into real estate and private money lending and doing deals with people because they are out there. I ran into a handful of them and lost a lot of money, not knowing what you said right here. This would have saved me millions of dollars and years of my life, anxiety, and near divorce situations with my wife because of the stress in our household caused by con artists.
It’s very stressful, and it doesn’t do anything for your self-esteem. From football to the Olympics to whatever, there are con men that are great and top of their game. Anybody could get taken by them. If you are not a little bit hardened and cynical and start saying, “I could blow over this point but I’m not.” I appreciate you being on the show. I could talk to you forever. I want to invite you to my ranch in Bigfoot, Texas, so whenever you want to come. We would have a great time. Anything you want to say to the new guys out there before we wrap it up?
Mitch Stephen is a legend. That’s all I got to say.
I appreciate you, thanks.
Appreciate you, brother.
I would like to thank LiveComm.com for sponsoring this episode. Please go there and watch the little videos on the homepage. It’s the reason why I have four days on the market. My last couple of hundred houses and the last a hundred houses, I don’t even put out any signs, not even one sign in the front yard. It’s a very amazing tool. It can be used for a lot of things and a lot of businesses. I’m going to show you how I used it for my business and check it out.
It has everything to do with smartphone numbers, capturing incoming calls or cell phone numbers, and sending out text messages to people who have already contacted you about your product or service. It’s a very inexpensive and affordable way to advertise. It’s always a dead-on bullseye. Thank you. We are out of here. Bye now.
Thank you, guys.
About Pace Morby
Host of A&E’s most popular TV show ‘Triple Digit Flip,’ Pace Morby is one of the most creative real estate investors on the planet, using dozens of virtually unknown strategies to acquire 1,000 doors nationwide and a portfolio totaling $150 million in assets. Each week, he teaches tens of thousands of students creative financing in his online communities and strives to be the #1 source for anyone looking to get started in real estate.
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