We’re talking with Mitch Stephen of 1000houses.com who’s built a thriving business that revolves around selling homes for cash flow with no tenant problems. It’s the art of selling with owner finance and he’s mastered getting private money, finding and selling homes in San Antonio Texas on a Promissory note. In this episode we’ll go over:
– exactly how he got started flipping 45 homes in his first year with no money
– Where he puts his profits for long-term generational wealth (its not single family houses)
– How he finds buyers- How to conquer new investors most troubling obstacles
– The right attitude to have
– How to abide by the Dodd-Frank laws
– How to perform wrap mortgages
– How to make your lenders happy and much more.
If you can live off the down payments and your monthly cash flow just stacks up in the bank account, why would you ever sell a note?
PAUL DOCAMPO: All right, welcome to another interview at Deals Today Podcast, and I am your host, Paul, at RealEstateAudios.com. We’re going to be chatting with Mitch Stephen at 1000Houses.com. The reason why his url is 1000Houses because, at the time, he’d flipped over a thousand houses. Today, he’s flipped over 2000 houses. He flips about a hundred a year, and he’s been doing this for 26 years at the time of this recording.
What does he do? Does he traditionally flip, because the title says that it’s a no-maintenance, no-tenant cash flow, and he doesn’t do the traditional buy-and-hold, you buy it and you rent it out. He sells them, and he sells them on payments. He creates that steady cash flow with absolutely no maintenance in place, absolutely no tenants in place. Over the years, he’s developed his own structure to find money to pay off these private lenders to fund these deals, to find the deals, and to find the buyers and to get them to make the payments to him and what kind of percentage and down payment. We’re going to talk about all that, his whole model of doing this, why he does it, and what he does for the long-term wealth because you might be thinking, well, that only lasts for 10, 20, 30 years. He does have something on the backend that he does for creating that long-term wealth, and that is storage facilities. We talk a little bit about that towards the end. So, tune in for the whole thing, and of course, if you’re not on my email list, go to RealEstateAudios.com where you can get my newsletter, a few free gifts on marketing and copywriting, and let’s get to it.
(0:01:53.8) Mitch, in your blog you talk about how in your first year you did about 45 houses. That’s quite an achievement. How did you go about doing that? Forty-five houses in one year. People struggle with getting one house in one year.
MITCH STEPHEN: My biggest problem was funding. But then it was also a different time back then when, if you had good credit, you could apply for any credit card, and they just checked your credit, and if you had good credit, they gave you a credit card with all the cash advance, maximum limits, and everything. I learned real quick that I could apply…I applied for like 45 credit cards and I got all of them, and I had great credit. Even through all my business failures, I always paid everyone back and I never missed my payments. I kept my name. It was very important to me, and it paid off because I have 45 credit cards that, if I wanted to take a week to go collect the cash advances off of all of them, I could put like $500,000 on my kitchen table. And no one would loan me any money because I didn’t have a track record. I had good credit, but I didn’t have a track record. I wasn’t bankable. I hadn’t been in the business. So, I just used those credit cards to buy all those houses. Again, it was another time. In San Antonio back then, you could buy a house in the lesser neighborhoods, the lesser parts of town for $15, $20,000. So, I would go get $10,000 off of this card and $10,000 off of that card and buy the house and then get $10,000 off another card and I’d rehab the house. So I’d have $30,000 of zero interest, no payments for 12 months or 18 months or six months. I would just sell those houses on owner finance notes and then sell the notes simultaneously when I created it to some note brokers in town. I would get 83 to 90 percent of the note value, and I’d get five percent down and a five-percent throwaway second, which I never threw away, and I did it 450 times in a row.
PDC: You said 80-90 percent. Correct me if I’m wrong, I’ve heard in the note business you can only sell notes at 65 percent of the value, so how did you end up selling at 80-90 percent?
MITCH STEPHEN: (0:03:52.6) It was a different time. Associates was in business. They were a division of Ford Motor Credit, and they were paying 83-87 percent on up to 93 percent if it had any kind of seasoning. I was selling these notes at 87 percent of their face value without collecting the first payment. Actually, how my buyers got approved was I would send in their application that had their social and everything on it, then I would describe the house and its values, and then I would describe the note I wanted to make. I’d say, “If I make this note on this house to this guy, how much will you pay me for the note,” before I collect one payment. If I liked the number, my buyer was approved. If I didn’t like the number, I found someone else. Sometimes I would even buy the house, sell the house on a note, and sell the note at the same closing.
PDC: That’s a pretty complicated process. You’re 23 years old at the time getting started in this. Did you have a mentor to show you the ropes on this?
MITCH STEPHEN: (0:04:51.9) At the time, there was still Ron LeGrand
and Lou Brown. I had been reading the oldtimers, Dave Deldadio and Jimmy Napier and Nothing Down by Robert Allen. So, I had these seeds planted into me that you could make things work if you were a coyote. You had to be kind of like a coyote. You had to figure out how to survive. I missed a lot of deals because I couldn’t do a lot of things, but I wasn’t concerned with the deals that I missed. I was concerned with the deals that I could do. I had a job for a little while, and I put $35,000 in the bank, which was how much I made a year bartending. Then I quit in March of 1996 to see what I could do if I worked full time, and I did 45 houses that first year. The second year I did 65 houses, and the third year I did 150 houses with a partner, Sam Madrid. He’s Sam Hombre in my book. Then we found out 150 houses was too much because we made a lot of money but we sucked at systems and we didn’t have the right infrastructure. So, a lot of that money was going out the back door and being lost with contractors and all that. Ron LeGrand was actually the one that told me to do half as many houses and make more money and have a life, so I went back to just cutting back. Then I’ve done about a hundred houses a year for over two decades. That’s a house about every 4-5 days for over two decades.
PDC: Has your methodology changed since then?
MITCH STEPHEN: (0:06:17.0) Everything changes. It’s been changing since the day I started, and it’s changing every day as we speak. It’s about being a coyote a little bit. If the place you’re at is not providing enough food, you’ve got to move around. You’ve got to figure out where it is. You’ve got to keep morphing. That’s what Failing Forward to Financial Freedom…my first book, My Life & 1000 Houses: Failing Forward to Financial Freedom, that’s what it was about. It was about how I kept morphing, moving from pain to pleasure. If something hurt me, I’d sit down and pick myself up and dust myself off and go, “That hurt. How do I keep that from happening again?” And then if something happened good, I would sit down and say, “How do I make that happen more often and put up some numbers? How do I multiply that?” It’s just all about morphing. Laws change. Associates closed. When Associates closed, I had sold 97 houses of the 150, and I had 53 houses in my inventory. Then Associates closed because there was too much fraud in the secondary subprime note business, so they closed. It didn’t matter who you sold your notes to, at the end of the day, they all ended up at Associates. So what happened effectively is note buying died in the whole country for about four years.
PDC: Was this during the crash or after the crash?
MITCH STEPHEN: (0:07:30.5) No, they just got tired of doing it. It was a Tuesday. We called it Black Tuesday, and I think it was like 2001 or 2002. It was a good time. Just Associates was getting frauded so bad. People were fixing up the outside of houses and making straw buyers and then creating false notes and then selling 10 or 12 of them to them and then making the payment for a month or two until they had 15 of them, and then they’d sell the whole bundle and then the payment stream would stop because these bullshit investors, these scam investors would get their big payoff and then they’d quit making payments and then Associates would go to that house and open the front door and the floor was dirt. There wasn’t anything inside the house. They were buying these notes on drive-by appraisals because we didn’t own the houses anymore so we couldn’t go in the house. It wasn’t our house. So they were doing drive-bys and just looking at the outside of the house. Well, the bad apples caught onto that and started manipulating. And then they quit.
But what happened was I had these 53 houses, and my endgame had terminated. It wasn’t the same game anymore. The game just stopped on one day. I had no place to sell my notes. So I got in a panic, and I said, “Well, the first thing I’ve got to do is I’ve got to load all these houses because I can’t just sit here making payments on all these houses if I’m going to expect to survive.” So, I loaded all these houses back then with about 10 percent down, which was around $3,000 or $3,500. I loaded 50 houses at $3,000 a piece, so I had $150,000 in the bank. Then I was clearing $350-$400 a house back then, so I had $25,000 coming in every month positive between what I owed. The problem was I had short-term notes. Then I had to go back and renegotiate or find private lenders, and that’s when I learned to find private lenders because I got my ass in the crap. I had to find them. I went and found people to take me out of these six-month notes, by the way 18 percent and a $2,000 kicker because I was turning these houses so fast that the people that loaned me money had to get a very high interest rate and they even had to get a $2,000 kicker because they were only in the deal for eight weeks or four weeks. So, I had to get out from under that money, and I did. I got longer term money that I was allowed to wrap. That’s how I morphed into the business I’m in, not because I dreamt it up. It was because I didn’t have a choice.
PDC: So, those 53 in inventory, those are all tied up with credit cards still.
MITCH STEPHEN: (0:09:53.4) Or basically a hard-money lender, 18 percent and a $2,000 kicker. The cool thing was I didn’t have to make payments. The 18 percent accrued because I was selling these houses within a month or two when I got them. So, the guy said, “I don’t even want to keep up with the payments. Just let it accrue, and when you sell the note, we’ll settle up with whatever percentage of that 18 percent you owe me and the $2,000 kicker.” The most I ever made in that one month was $93,000 net profit, but I was giving 50 percent away to anybody who brought the deal. That was 50 cents on the dollar. And I had a partner. We were making 50 percent, which meant he got 25 percent and I got 25 percent. My 25 percent was worth $93,000.
PDC: You sold these off pretty quickly. Is that still a trend today selling these with your own owner financing in place?
MITCH STEPHEN: (0:10:42.3) Not to institutions or institutional note buyers, but I learned how to sell notes to private people where I still collect for them through my servicing company. I still know what’s going on. I still know if these people are late. I still manage the notes for them, but I could cash out. You know what I mean? I’m not obligated to buy the note back, but a lot of times I wanted to buy the notes back because these people had done such great improvements to the houses or whatever. Or I could just reload the house for my note buyer and be like a knight on a white horse. I was just too good to be true because I would watch it all and, if anything would go bad with the notes, I would go by and talk to the people and get it straightened out or I’d go through the foreclosure and tell my people you’re not going to get a payment for the next three or four months, but then we’re going to get another down payment. You’ll probably be able to be made whole from there, and we’ll get a new buyer and I’ll probably be able to keep some of that down payment myself for my effort. So it wasn’t all just out of the greatness of my heart. I was also getting paid because I would get paid some of that down payment, too, to do the right thing.
PDC: So, it was your name or entity still on that note, or you completely…was it…the word hypothecated. Did you hypothecate these notes?
MITCH STEPHEN: (0:11:49.6) No, I sold the notes, but I would keep the last two years of the payments. So, I still had an interest in the note, so then if I had to resell it and reload it, I could do it without a real estate license because I still had an interest in the note. I was still owed two years.
PDC: Was that also a help with capital gains tax when you do sell it because you’re still attached to it?
MITCH STEPHEN: (0:12:11.4) No, selling a note is not protected by capital gains. I had to pay my tax when I sold the note to begin with. The point was I never really sold many notes after that because, when Associates closed and I had to load those 53 houses myself, this big lightbulb went off. I kept the down payments. I had none of my money in these houses, not a penny. I had $150,000 in down payments in my bank account, and I had $25,000 a month coming in. I thought to myself, why the hell did I ever sell a note? What was I doing? I didn’t invent that either. I just learned about it and was decently savvy enough to recognize, hell, if you can live off the down payments and your monthly cash flow just stacks up in the bank account, why would you ever sell a note?
PDC: When you started moving to more private lenders for the acquisitions part of it, how was the deal cut? You might have briefly mentioned it, but I didn’t quite get it. How does that all work out with your private lender in place in the frontend acquiring these properties?
MITCH STEPHEN: (0:13:09.3) Before COVID, I had $26 million I owed to private lenders that was out on the street. They all signed in the loan that I could wrap the mortgage, which meant I could sell this house on payments to someone else and not have to pay them off. So I would buy the house…I’m just using some round numbers that were close, so don’t split hairs on the numbers. Just understand the theory. I would buy the house for $53,000. I would go borrow from a private lender $55,000. I would always borrow $2,000 more than what I needed to buy it, close it, and fix it. Whatever that number was, I always borrowed $2,000 more because it cost me about $2,000 to find that seller. Maybe a little more, maybe a little less, but on average. If I was buying a hundred houses a year, and I was leaving $2,000 worth of advertising in every house, that was $200,000 a year. In five years, that’s a million bucks. You can’t borrow the extra $2,000 if you’re going to banks or hard money lenders. They won’t let it happen. But private people…I’m still only borrowing 65 percent or less of what I can owner finance the house for. I average borrowing 58 percent of what I can sell the house for. That’s my average. But I won’t borrow over 65. So I borrow $55,000, and let’s say it was eight percent and my payment was $350. Then I’d sell the house for $100,000 with $10,000 down. That $10,000 went in my pocket because I didn’t have any money in the house. That’s what I would buy my groceries and make my mortgage payment and pay my car payment or whatever with. Then I’d sell a house and carry the $90,000 at 30 years at 10 percent. So I was making two percent on my borrowed money, but I was making the full 10 percent on the difference between 55 and 90. Today, I only have about 18 or 20 million out because, during COVID, as people would pay me off…I don’t ever ask people to pay me off. I don’t want people to pay me off. I want them to go the whole 30 years, but people still pay me off. As people would pay me off, some of my lenders in COVID elected to hold onto their money for a little while and keep some of their powder dry because no one knew what COVID was going to do. So I went from 26 million out on the street to maybe 18 or 20 right now today, but they’re coming back now.
The owner finance business is a very durable and very dependable cash flow because I don’t have any liabilities of a landlord. You understand this because you do it. When I sell that house and I’m supposed to get $850 a month coming in and I owe $350 to my private lender, I’m keeping that $500 in the middle. If their air conditioner breaks or the hot water heater goes out, it’s not my house. I sold it to these people on payments. When the mortgage payment comes in, there’s very little reasons for it to go back out. In fact, the only reason is to foreclose. If I have to foreclose, then I may have to spend a little money, but I’m going to go find another buyer with another down payment. I usually get paid more than whole on the turnaround. So it’s been a very beautiful strategy. It actually booms in the recession.
n the recession, because I didn’t need a bank to buy houses, I was buying houses at 50 percent of what they were worth 30 days ago because of the recession, and I was selling them for higher than I’d ever sold them before because, when no one can buy a house, they’ve got to rent a house during a recession. When everyone is renting houses because no one can buy a house because the banks are not lending, then there are a lot of pressures put on rents so the rents are going up. My owner finance formula is based on the rents, so in the recession, this really weird dynamic happens. The prices drop like a rock, so I’m buying houses at super low prices. But the rents go up because everyone is a renter, and I’m selling them based on the rents. It creates this huge disparity. The thing that makes it work is I don’t need a bank to buy the houses because I have private lenders, and my buyer doesn’t need a bank to buy my house because I’m giving him the loan. So I don’t need a bank on either end at a time when banks are closed. That’s when I just boom like crazy. I was buying a house a day in the 2008 recession.
PDC: Does the time to sell increase when banks are lending like crazy?
MITCH STEPHEN: (0:17:20.8) You know, you got to make up your mind. Are you in the new loan business, or are you in the owner finance business? Because they don’t mix. I tried to put people in on notes and then get them to refinance later so I could get my big hit. What happens is…first of all, in the recession I was selling over a hundred percent over the market. I was buying houses from 15-years-ago prices during the recession. The prices had gotten to up here. The recession hit, and they fell down to here. I was buying here, but I was selling them for $59,000 within nine days. I was selling a hundred percent over the traditional cost. How I was doing that was my buyers don’t have a choice to go get a new loan. Their choice is, do you want pay $1,100 a month to rent that house across the street, or do you want to pay $1,100 a month to own this one right here, just like the one you’re living in across the street? The difference is you got to have 10 percent or more as a down payment, and I will consider you. There’s not a lot of people offering that. I average 12 percent down and nine days on the market. During COVID right now, I’m averaging four days on the market.
PDC: What did you do to change with the Dodd-Frank laws? What do you do to stay within those laws?
MITCH STEPHEN: What city are you in?
PDC: I’m in southern California. Chino, California, right next to LA.
MITCH STEPHEN: (0:18:40.2) First thing is a lot of people ran out of the business because it was 2,500 pages, and no one understood it. I started to get out of the business because I’m not a big fan of regulation and paperwork. I’m a simple guy. But I just made too much money. I thought, I can’t just throw this thing in the trash. How much does it take out of my profit for me to conform? The first question was, how do I conform? We just called the Savings & Loan Commission and got a hold of the commissioner that had jurisdiction over seller financiers like me and said, “What the hell does this mean and what do I gotta do?” Of course, they’re kind of like the IRS. They don’t want to give you an answer. They’re not responsible for any answer they give you. But we at least showed that we were trying to conform. Then we would call and ask them questions. What about this part?
It took a while, but finally some lawyers came on board that had actually read the 2,500 pages and actually had an opinion on it of what to do. Then we would call the commissioner and say, “Are we reading this right? Can we do this?” They did allow us, by grace, to hire a third-party RMLO so I didn’t have to be licensed or I didn’t have to have a full-time employee that only worked for me be licensed. They gave us grace, and they’re still giving us grace to this day. I just learned to conform.
What happened before Dodd-Frank was I could meet a buyer at eight in the morning. I could show them the house. They could like the house. We could go to the office at 10 o’clock. We could discuss the numbers. We could all agree. They could go to lunch and go pick up their down payment while I was eating lunch and doing the paperwork. They’d show back up at one o’clock. They’d give me their down payment. We’d sign the papers, and I could give them their keys and they were in the house by five o’clock that afternoon with zero closing costs. All Dodd-Frank did was now it cost them $1,800 and it takes 21 days. I just had to adapt.
PDC: I understand with all this that you’re making you’re also moving that money over to storage facilities, right? You’re buying storage facilities. You own storage facilities currently, right?
MITCH STEPHEN: (0:20:43.9) Yeah. Here’s the problem. One-time cash events…I’m quoting Jack Bosch from the book Forever Cash. You’ve got one-time cash, you’ve got temporary cash, and you’ve got forever cash. Direct quote from Jack Bosch and the book Forever Cash. I like the way he puts it, so I’m going to use him.
One-time cash events are wholesales or fix-and-flips. You know, got a house, do the deal, it’s over. You got paid one time.Temporary cash is like the note business. You buy a house, you get a down payment, you collect payments for a long time, and eventually they pay you off. But it’s a temporary cash stream, right? It’s temporary because all notes expire or get paid off. Even if you make a 30-year note, the average note is only going to last seven and a half years in the United States as an average. Maybe in the economic echelon that I deal in the notes may last 10 or 11 or 12 years. I’m not sure. But they last a little longer because my people are not apt to go out and refinance. So it’s a temporary cash stream.
I learned early on, to work myself out of a job, I had to take all the money I was making from the one-time cash events and the temporary cash events, and I had to buy into a forever cash flow stream. I chose storages, boat storages on dry land. They just build little garages they pull into and shut the door and leave the lake. Or mini-storages where they store their household goods. Or covered parking or open parking. But when I bought a storage facility, that facility was mine until I said it was over. It continues to collect rent and continues to pay me until I decide to sell that place. So that was a forever place. That’s the thing.
PDC: With your students, you teach them this exact model how to do it from A to Z? Do you even instruct them to start buying storage facilities with this one-time, temporary cash flow?
MITCH STEPHEN: (0:22:27.9) Well, with students, we’ve got to do just-in-time learning. We just need to progress from where you’re at. The first thing about that is you’ve got to learn how to make a lot of money to buy this stuff. You’ve got to learn how to make some money. I’ll talk or teach whatever level they’re at. If they want to talk about storages, I’ll talk about it. But usually, I’m just trying to get them to a point where, first of all, they can quit their job so they can get an extra 126 hours a year to devote to themselves and their family and becoming an expert at whatever they’re passionate about. Then the next level after that is to build wealth. Then the next level after that is to preserve it by buying forever cash things. Usually by the time people start making money, they’ve got their own ideas. They might be going into apartments or strip centers or whatever, developing land or whatever. You know, I’ll talk to people about anything they want to talk about.
PDC: In the event that, five years into their note payments, they lose their job, something catastrophic happens…you kind of briefly mentioned this, but how do you set the course so you can avoid the whole foreclosure process?
MITCH STEPHEN: (0:23:34.3) I don’t. I put myself as a lien holder, and they owe me a note. I have a lien on their property. The deal is we live in two different states. My foreclosure process and Georgia’s foreclosure process…Texas and Georgia are about the fastest foreclosure process in the world, Mississippi. The flyover states seem to have not lost their freakin’ minds and still give the guy putting up the money some rights. In the liberal states, they give all the rights to the tenant who has nothing committed to anything, which doesn’t make any sense to me. My seller finance strategy won’t work in places nearly as well, or even at all, in states where you can’t get someone out of a house in a reasonable period of time. Can’t do it in Florida. But there are other ways to do it, like you’re suggesting. In Florida, there’s a way to do it. It’s not my way, but I know the way. In California, there are lease options and a bunch of stuff, but still, if you’ve got to go in front of a judge to get this stuff done, if those judges are liberal and bleeding hearts, then, you know, oh, it’s Christmas or it’s snowing and she’s pregnant. We’ve got to leave them in there for another six months. It’s like where the hell does it say that in the statute? Did I misread it? But you can’t argue with a judge. So you’ve got to go someplace where laws are interpreted a little more conservatively.
PDC: Are some of your students doing this outside of their home state?
MITCH STEPHEN: (0:24:53.4) Yes. Now, it’s a bigger challenge, but if you learn to develop a market from afar, then you actually have a real business because, if you’re in California doing houses in Georgia, you have to come up with a real business. You’re going to create a real business. It’s a little more challenging, but at the end of the day, you have created a business that you work on, not in. Therefore, you enjoy the ultimate freedom of owning a business. A lot of business owners are running on a hamster wheel, and they’re just glorified employees with all the liability.
PDC: I love the information. How do people get in touch with you and find you?
MITCH STEPHEN: (0:25:31.1) Just go to 1000Houses.com. You can find my 1000Houses.com podcast, all my books, my blogs. I’ve got tons of free stuff there. My YouTube channel. Everything in the world is there. 1000Houses.com.
PDC: And that will be in the show notes as well. All right, Mitch. I appreciate you being on here. I really do. That was a load of information. I love hearing another guy that does owner finance in a much bigger world than I’m involved with, but I love hearing all the nooks and crannies of it.
MITCH STEPHEN: (0:26:03.1) Well, you don’t have to do a lot to be successful. Just always remember, I’ve been in the business a very long time. These things didn’t happen overnight. It was just one step at a time, one progression at a time. If you asked me if I would have ever believed where I’m at 20 years ago, I didn’t see this at all. I never set goals. I only set the challenge of me as a person and my business being better than it was last year. That’s what I do, and it’s led me this far so far.
PDC: All right, Mitch. I appreciate you being on here. We’ll keep in touch. Thank you.
MITCH STEPHEN: Bye, now.
PDC: All right. That’s another episode in the can. Stay tuned for the next one and my marketing tidbits every single week on the Deals Today Podcast. Make sure you subscribe, you rate it, you review it, and you share it please. It keeps me going with this. It gets more guests on the show. If you’re not on my email list, go to RealEstateAudios.com, subscribe there to get onto my daily newsletter where I give daily mindset, business, marketing, copywriting tips all for real estate investors right there and any special gifts I’m giving away. Go onto RealEstateAudios.com.