Jim: Hello Angelique.
Angelique: Hello.
Jim: How are you?
Angelique: Good. Thank you for staying up so late for us.
Jim: No problem. I'm about to… when this is done I'm going to watch another episode of some TV show on Netflix. I'll find something.
Angelique: All right.
Jim: I'm a night owl.
Angelique: Okay. Okay. Good. Good. So Mike and you have a lot in common. He loves lease options too.
Jim: I thought you were going to say because I shaved my beard about five years ago.
Mike: How's it going? Hey Angelique. Hey Jim. How are you doing?
Jim: Hey Mike. Good.
Mike: Fantastic.
Jim: So how are things over there in Washington State?
Mike: We're making good, we're doing all right.
Jim: Well, you got a couple of companies there that are doing well in that state, right, um, Microsoft and Amazon.
Mike: And Amazon. Yeah. They seem to be doing really, really well.
Jim: How close is Puget? How do you pronounce it, Puget Sound?
Mike: Yeah, Puget Sound. So I live on Bainbridge Island. And so, it's about 200 a yard to my west over here’s Puget Sound. So I don't have a view, unfortunately. But we're right by the Sound.
Jim: How close are you to Seattle?
Mike: A half-hour at the fairy.
Jim: Good, good.
Mike: I take the car on the boat be there in a half-hour. So it's not so bad.
Jim: So the advantages of the big city and the conveniences of the simple life.
Mike: That's right, exactly. Now, where are you from?
Jim: I'm up in Ottawa, Canada.
Mike: All right.
Jim: Actually, I don't know if it's up you're probably higher than I am and if you go.
Mike: Yeah. We're pretty close to the border. Yeah.
Jim: Yeah.
Mike: Fantastic. How are you doing Angelique?
Angelique: Good, good. We already have 20 people on, people are getting on quick today.
Mike: Wow, that's good. That's good.
Jim: So you have a fairly good-sized membership?
Angelique: We have about 450 members. And we usually have about 35 to up to 135 sometimes people on these zoom calls.
Jim: Yeah, nice. Yeah, I was just looking because of the lockdown right? I said, well you know I can't get out and can talk to many people, so I had my assistant just start poking around to see if I could find some of these events to attend. And so, you guys were nice enough to invite me to have a conversation tonight. So thank you very much. Maybe share some of my history, some of my wisdom.
Angelique: You're welcome. When I saw the lease option on your history, I thought you and Mike would connect well, so that's why you got to meet with him.
Mike: I've done quite a few leases out. Well, I don't know quite a few. But it seemed like a lot… not as much lately because this is a lot more when the market dictated the need for lease options. So yeah, it was tougher to get a mortgage, we did a lot more of them, and we kept them more just as straight rentals and we flipped houses. It’s all very good.
Angelique: So Jim you want to fill us in on your background?
Jim: Give you an overview?
Angelique: Yes.
Jim: Yeah, okay. Let's see. I started real estate investing probably about 25 years ago. I was in a small town for this wedding. My niece was getting married. And I saw this ad said, live in one unit and rent out the other unit, right? So i went in between the reception or the wedding and the reception, I went and looked at this property just because I, I wanted to. And so, I went in and I talked to the guy and he was an investor and he was trying to get rid of the property, he said, “What you can do”, he says, “You can move in this”, for moving to this property. And then, the rent from the other half will help carry the property. And I said, “What if I wanted to rent out both sides?” So what we ended up doing, we ended up putting together a deal where, I was going to pay for the property over a period of time and it's a deferred agreement of purchase and sale, when I found out later it's all it was almost a lease option. So I didn't buy the property. He held the property on a mortgage for three years. And then, after three years, what I did is I used the rents from the property for the down payment to purchase a property. I think I put like a thousand dollars down on a credit card or something like that. So I did my first lease option without even knowing I was doing my lease option. At the end of that… he had a bunch of other properties. So at the end of the three years, I think I went and got a mortgage and purchased the property. And then, I did two or three more like that. So I was buying duplexes. And then, as everybody knows, if you're over-leveraged by the time you get into your fourth and fifth property, the banks don't want to talk to you anymore, right? So I got my brother involved. He was out of work. So I said, “Well, I heard about this thing called lease options”, okay? So what's that all about? So we started looking into it. And I said… oh and prior to that too, I remember with some of these purchases, I'd done another purchase. And I'm just trying to give all sorts of nice creative things that I want to bring up in this. So one of the things I did there was a duplex for sale and I got my niece who was new in real estate as well. I said, “Well, here I want you to go make this offer and get them to take back a mortgage.” Like this was her first deal to write. She said, “What do you mean?” I said, “Just ask for a vendor take back.” So I remember her coming back from the office, she's saying, “They agreed, they agreed.” So I ended up buying that property for nothing down. And this was back in the days where you, where you could right you, where you didn't really need to have any skin in the game. So then, I got into the lease options. And I remember it was kind of difficult because at first, I was trying to figure out how to position this, doing a bunch of marketing on Craigslist, Kijiji here in Canada, looking for somebody that had a property that would fit into this idea of a lease option. And because I couldn't get a mortgage, I wasn't really looking to purchase it. So what I wanted is I want the owner to hold the property, so in a sandwich lease option. And I don't know how much detail you want me to go into this stuff with explaining any of these types of scenarios or you can ask questions, or maybe if somebody has any questions. So what I did in my first lease option was actually a sandwich lease option, right? So I got the property. I released it from this person. And then I went out and found a tenant-buyer and put a person in there to rent it… I was in the middle, all right. I collected rents from the antenna buyer and then I used the rents to pay the property, and I structured that again that was a three-year deal. So at the end of three-year, I was going to buy the property or I was going to just assign it to the tenant-buyer. So I'm starting to market pretty aggressively. So I'm getting people interested. And what's happening at this point, I'm getting a lot of interest from accidents… or from motivated landlords, people who wanted to get into real estate who didn't have, what wasn't making a good go of it, right? They were finding that the whole thing about managing tenants wasn't fun. So I was getting all these, I guess, investors or landlords coming to me saying, “Hey, I've got this property, let's put it in your program.” And then what happens is, I'd get the property, and then I'd get another property from the same guy, repeat offenders. So for some of these guys, I was getting two or three properties, and I was renting them out to tenant buyers, and… Yeah. So that's how I grew my portfolio. So when I got into release options it was 2007 or eight. And then I grew my portfolio like within three years with my brother's help. We grew it to over 100,100 properties in three years.
Mike: Wow.
Jim: And then, the subprime crisis hit right? So I lost 30% on all properties across the board. And I was on the phone every day negotiating with sellers, negotiating with tenant buyers. So the scary part of this I think I lost about a million bucks in that about a six-month time frame there, not just on in value, but out of my pocket, because I was trying to keep some of these owners alive by paying my out of my pocket just a bad business decision in hindsight, right? So that's sort of where my whole lease option. I did lease options in and I kept doing these options in another city which was a more stable economy with less impact, because of the Subprime Ottawa, being the capital, it saw some fluctuations, but not as bad as this small town which was my hometown. Yeah. And so, I started doing some there. I've done a few development projects, small development, like six-unit townhomes, development projects. I've done a bunch of… I've owned rentals for a while. Now the funny thing is I don't own any properties. So I've graduated up through the starting in wholesaling, I guess, I've done and… I mean, we can get into some of these creative financing deals, because I think I've done just about everyone that you ever hear about… never purchased any property with my own money. I always brought in joint ventures or did seller financing or creative financing. And then, so now what I do is I spend most of my time raising money for other people's deals. I got most of my money into private equities doing some training. I started my own training program, now my training course. Yeah. I mean, once I hit 65, I said, “Okay, well, that's… I don't like dealing with tenants anymore either, right? And disgruntled the investors. So that's mostly what I'm doing now. So is that to give you a good framework here?
Mike: Yeah, for sure. So you said your first deal started as a sandwich lease option.
Jim: Yeah.
Mike: And then, and that was a pretty good strategy. So you started doing quite a few of those or did you ever just start to close the deal yourself and then put a tenant-buyer in there?
Jim: Yeah. Eventually, but most of them like the first 50, I think I did was all sandwich lease options.
Mike: Wow.
Jim: And the way I did sandwich lease options, I did the standard whether where the owner holds a mortgage. So I shouldn't say sandwich lease options, I did a couple of subject tubes where I did take ownership of the property, right? And then, I've also done some double closings there which is always interesting, right? And I have the exit strategy on a lot of these things. It was pretty creative too. I mean, I don't know. Have you ever done sandwich lease options, Mike?
Mike: Yeah. I've done a few.
Jim: Yeah. The tricky thing there is when you go to close is where you do the assignment right because you've got two leases. So you can do two option agreements. So you can either assign your owner or the seller's agreement to the tenant or you can sign the tenant’s agreement to the owner. And so, I've tried it both ways. And there's a lot of paperwork because you've got to do all these options for these options to execute the option agreements. And I remember being in my lawyer's office, signing all these papers and just for double closing so it gets pretty onerous. Now what I ended up doing, later on, is I got out of the… I was still the middleman from a property management perspective. So this is interesting. I don't know if people do this. So what I did is I had all the agreements between the tenant-buyer and the seller. And then I had a property management agreement and an assignment agreement at closing. So the property management agreement said, every money I collected from the tenant I would give the owner some, but I would keep some for my management fee. So that's how I got my ongoing profit from being in a lease option. And then in closing, I always had a clause in there that when they closed I would get whatever profit I had built into as part of an assignment agreement.
Mike: So let me get that straight. Then so when you would close a sandwich lease option, you weren't collecting, you're collecting the payment forwarding into the owner, you're collecting the difference.
Jim: Yeah.
Mike: That sounds pretty normal. But then, in the end, you said that you would step out of the way instead of it being an A to B, B to C transaction? Or it would be an A to C transaction?
Jim: Yeah.
Mike: You would get paid a fee.
Jim: Yeah. Initially, I was doing a lot of A to B like I would do assignments of the agreements to one of the two parties, right? And they would execute on those agreements. So there was never any double close or any type of transaction where I was involved, or what I would do. I got smart because I didn't want to put all these agreements in place. I don't know if I could be smart… I'm sure there are some tax rules and some legal rules about this, but my lawyer like I had lots of lawyers working for me back then. But what I would do is just put the agreements in place. So I had the lease agreement between the owner and the tenant-buyer, and then I had the option agreement between the owner and the tenant-buyer. But in the option agreement, I had… at closing, you will pay color and realty, whatever the amount of money was as part of that assignment. And then the property management agreement is where I got my monthly profit. And then I also usually got to keep… because I used to get paid three ways, I got paid from the option amount. So when they came in and they put so much down, the tenant buyer gave us anywhere from $10,000 to $20,000. I would take a portion of that or all of that as my finder's fee, but I would lease the property from the owner for one dollar. So I was always making a good spread. The sellers that I was negotiating with, we're always very motivated sellers, right? And that's the key, right? When you're in real estate… or at least the way I was doing real estate, there were two things you were looking for all the time, motivated sellers and investors that are all you need to look for, right, because you don't want to get involved with properties. There are lots of properties out there that you can invest in, that isn't going to cash flow very well, that you're not going to make a lot of profit. Those are easy to find. What you want is you want to get properties from sellers that are very motivated, motivated for one of two reasons. The properties run down and they can't get rid of it, or motivated, because they are personally in a bad situation, unfortunately. I mean they call it what is a death, divorce, and debt, or the three Ds.
Mike: Right.
Jim: So somebody who's accumulated a lot of debt, somebody who's had a death in the family, who's either inherited the property or were co-owners of the property like a spouse and now they can't carry it anymore, right? Or that divorce, death, divorce, and what was the other one death, debt, right? Somebody in a lot of debt… yeah or went for a divorce, that was the other one, right? So I was always finding the most motivated seller, was a landlord, who tried to become an investor. And there are a couple of bad tenants coming in trashing their place and putting it out on the market, they said I don't want to deal with this anymore here Jim. I have my property, right? Literally, I had people coming into my office throwing their keys on the thing saying here, “What can you give me for this?”
Mike: What were you doing for marketing? How are you getting sellers to contact you?
Jim: Again, I'm just thinking back in 2008, 9, 10, it was mostly online classifieds. So in your case, it would be Craigslist. In Canada, the equivalent is something called Kijiji. But I was just running a ton of ads. What was interesting too… that's to get tenant buyers. But now I find profound properties is I would… I'm an IT guy too, right? So I'm a bit of a geek. So what I did is I had an RSS Reader, if you're familiar with RSS. And what it would do is I would read the entire listing of all the ads on Kijiji or Craigslist. I can do Craigslist too using a tool called Inoreader. And so what it would do, it would show me the list of every property that got listed that day, and I had a VA that would go through that list and say, “Which one haven't I contacted yet?” right? So she'd take all those and put them in the spreadsheet for anything that I hadn't contacted, and we just sent an email out, saying, “Hey, would you be interested in selling your property, if I could make you some profit on?” Something like that, right? So invariably, I'd get one or two leads a day that we'd follow up with. And you know, within a week or two I'd have a deal that I could put together. But it's volumes and like it's hundreds of contact points to all of you. Literally, as I said, I was contacting every listing. Not every listing. What I meant was every new listing, right? Because you know, with Craigslist, people will post the same property over and over again, right? So what I would do is I post, I'd contact them the first time, the reason I had the Inoreader and the spreadsheet is I didn't want to keep spamming this person every day with the same offer, right? I'd maintain it in the spreadsheet, and then I'd do a follow-up every… maybe a couple of weeks I would offer them again. And then, what I would do is I would take all that and then I'd put it into a CRM, and then I'd just manage anybody who had some kind of interest, and then it would go into the next level of follow-ups, right? And the money's in the follow-up, right?
Mike: That's right, yes, because it's a numbers game and a lot of people… I'd imagine what you're offering a creative solution and were you contacting people to have their house named for rent or for sale or for both?
Jim: Both. I mean that's the ideal situation. Initially, you find that…
Mike: You got better success with one or the other.
Jim: Yeah. Well, first of all, I was just offering everybody who put their house up for sale and everybody who put their house up for rent, okay? And then, what I would do is when I was looking at them, I would also look at the other listing to see if they were in both, because then you know, they're really motivated. And even though there are some times when people say, a very motivated seller, it doesn't really mean it's very motivating… and the other thing is with these tools you can exclude realtors. For example, you don't want to copy, you don't want to reach out to any of the realtors who are posting, because they're not willing to make deals, or at least that was my experience with this type of thing that they're always looking for… obviously, they're in business to make money, so they want their realtor fee. Whereas the deals I'm making with the sellers, I'm not paying them anything, right? I'm just taking over their property, putting a tenant in there, and then getting out of the way or… well at least, just managing it for the period of time.
Mike: Yeah. My personal experience when I was marketing a lot for on Craigslist and online people that are advertising their house for sale and for rent, it seemed to have more success with the folks that had their homes for rent than they had for sale.
Jim: Okay.
Mike: It was easier, my experience to get a seller who was considering renting the property to think about renting it to me.
Jim: Yeah.
Mike: And buy it on a future date, rather than somebody wanting to cash out and asking them to delay that. But obviously, you get both.
Jim: Yeah. And I think that's probably because you've also got landlords that are in the rental area, the disgruntled landlords, the unhappy landlord.
Mike: Yeah. They probably just got rid of a tenant or somebody that they weren't very happy with.
Jim: The other thing I've done which wasn't a good experience and I'll just add that is I've found tenant-buyers for some of these people, okay? So I've placed tenant-buyers in there, got my finder's fee, almost like a wholesaling, I call it the lease option wholesaling. So you get a tenant-buyer and then you just charge a fee for doing that. And what's happened… one time anyway, the tenant didn't… what didn't turn out to be very good, even though I gave them the option, I said, “Listen, I can manage this for you for three years or I can just find a tenant for you and I'll give it back to you. And you only have to pay me a finder's fee.” You know, the difference between, let's say a $30,000 or $40,000 profit over the three years that I would get, versus just a $10,000 finder fee for finding a tenant-buyer.
Mike: You see out of it?
Jim: Yeah. And what happened, the tenant-buyer didn't turn out very good. So they ended up taking me to court. And so, I and the realtor split the fees on the cost of doing business. I remember taking courses way back when on the old rich dad courses years ago or the Whitney courses if anybody's old enough to remember the Russ Whitney training.
Mike: Russ Whitney?
Jim: Yeah, yeah. And I remember the instructor saying, “If you're not being sued, you're not, your business isn't growing fast enough.” Right? So I've been there quite a few times. And my lawyer's… three thousand dollars, four thousand dollars, he says, you just got to pay attention, it's the cost of doing business, right?
Mike: Yeah. So, Jim, we have… do you have a couple of questions, uh…
Jim: Okay.
Mike: One, David asked, is all of your investing in Canada, which provinces and, are you familiar with some of the differences for above and below the border.
Jim: The kind of stuff I do… there's not a lot of differences. I guess, I mean I've talked to people. I've been on Biggerpockets. I've given a lot of advice there. I've coached some people too. I don't think the nuances of the lease option, the fundamentals of the lease options are the same. There are some variables per state, I understand, what is the Dodd-Frank's rule, right, where you have to be careful. And you know, as far… and also, there are some tax rules, but I've never really been concerned about all that. I just go to my lawyers and say, “Can I do it?” you know, go to my accountant and say, “Does this make sense from a tax perspective?” I let all the experts do it. That's like… people have asked me all the time whether the, what are the lessons I've learned right over my 25 years. And the number one thing I would say is trying to do some of this stuff by myself, thinking I could put out my own offers, think I could do my own marketing, think I could do my own legal research, I've built offers from scratch, I've made offers and in hindsight and learning from all this… now, when I was very active, I just went to my lawyers and my realtors, using the professionals to do the job, made a big difference, and that's what really helped me scale.
Mike: Right? And Brandon asked us. Is there any special insurance available when you're in a sandwich lease option? For that, but I thought maybe a few.
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