Recession-Proof Investing: How to Thrive with Creative Financing Strategies-Chris Prefontaine

"Hello and welcome back to another episode of the Collective Clicks podcast. This is your host, Brandon Vitman, and today I'm joined by Chris Prefontaine. Chris specializes in creative finance, and we talk about some of the strategies that they use and how, in his opinion, creative finance is a lot more attractive than wholesaling or flipping.

Chris, welcome to the podcast. How are you doing?"

"I'm awesome. Thanks for having me, Brandon."

"Yeah, super excited for you to be here and to get to know you a little bit and understand your unique perspective on real estate investing. For those listening that aren't familiar with you and your background, would you mind just sharing a little bit of your story and what you've done and how that's kind of led you to where you are today?"

"Yeah, so I've been at this 33 years. For the sake of protecting their time and not putting them to sleep, we'll do this quickly. I'm from New England. I can go quickly, Brandon. So yeah, I've been at this 33 years. I will tell you that I've touched a lot, not all niches in real estate. I did some building back in the early 90s, owned a brokerage, sold out to Coldbanker. That was around 2000. That led up to sort of what I call the debacle, the crash of '08. And what that did - why I wanted to get you there - is what that did, the crash of '08, it really caused a lot of re-engineering in the business. And it's why and how we exist today, meaning I got out of that and said, 'All right, what are the things that I need to change or would like to change?'

And they were as follows: One, no signing personally on bank loans, like taking conventional loans out anymore, because I learned the hard way what happens when the market crashes. Two, as we talked about off-air, let's work on - when I reengineered it, I said to myself and my family, 'Let's re-engineer this so that we work on a deal not being so transactional.' If you will, like I built a home, I got a check, good check, but had to do it again to get that same check. Or a rehab, or as a broker, they were all transactional.

So we trademarked what we call the three paydays. We go out and buy real estate. We buy it without banks, we buy it creatively, but we also now teach that out in the field and have for, gosh, I don't know, 12 years or so. And when I say teach it, as I said to you offline, we don't just sell things. What we do is we say, 'Hey, let's lock arms, let's do these deals together,' because the biggest gap in real estate education is people not implementing, and mainly because they're afraid or don't have the support.

And so that's what we do. The company, Smart Real Estate Coach, has now been on Inc. 5000's fastest-growing companies for the last three years because the model works, plain and simple. So I can go back to any piece of that, Brandon, but I just want to kind of give an overview for now."

"Yeah, that's super helpful. So I guess if we can get down to the details of it, what is it that you're usually helping people with that they don't understand before they work with you, or they don't know how to do?"

"Let me answer that by saying, because I always try to give real stories, it reminds me of my story. Like, I was in the business 18 years before pivoting to laser focus on creative real estate, real on your terms. Why? I don't know why I didn't at first, but the fact is that creative real estate right now, unbeknownst to most, is by far in 33 years under the most demand right now. And there's a bunch of reasons why.

One, interest rates. Crazy interest rates right now, so many people got pushed to the side. For buyers, that means sellers are having a tougher time. Two, we're at like the third time in 50 years where it was an affordability issue. All these things scream loudly and pull on the people that know how to pivot in the market for creative real estate.

Because I know for your listeners and your experience, everybody would agree that there's one constant in real estate, and that's that it keeps changing. And so many people go, 'Well, I got to time this, and I got to go in this geographic area,' and the fact is, you don't. You need to know how to pivot in up, down, or sideways markets. And you do that by becoming that sort of transaction engineer that knows how to creatively pivot, and that's the best thing that you could do for yourself in your business right now."

"Okay, yeah, that's super helpful. And I know that a lot of, just from speaking with our clients, I know that creative finance is - I mean, obviously, there's a lot of different things that can mean, right? Lots of different ways that you can do this. And I know that we have some clients that do focus on it quite a bit, and then for many, it seems to kind of be like the thing that you maybe pull out once in a while when you're not able to come to an agreement with a seller on price for a cash deal or something like that. It's kind of like that last trick up your sleeve when other stuff doesn't work.

So anyway, with that context, can you help me understand, like, when you say creative, what exactly are you referring to? What are your favorite strategies, and how might it be different from somebody who's listening to this and saying, 'Oh, creative finance, I got that. I do that already'?"

"No, I totally get it. So a couple things you said that are super important, I'll tie it all together. One is a lot of people in our community came to us because, say, they were wholesaling or flipping, and there's a lot of things that don't fit in that box that they throw away, literally like hundreds of leads that they throw away. So to your point, they can use the creative as a, 'Hey, I'm capturing all these leads I was previously throwing away,' like literally hundreds for a lot of wholesalers. Number one.

Number two, what's neat is we, in our community, we do the opposite of what you said, Brandon. I lead all the time, every time, with creative real estate. And what does it mean to us? To answer your question, one of three things. Okay, very niched down because you are right, creative can mean so many things within one deal.

One is owner financing. We niche this down very specifically to owner financing with free and clear properties. So they have no mortgage, and we do so by making monthly principal-only payments. This is a huge sort of recession hedge, if you will. If you get a long enough term and you're paying principal-only payments, I don't care what the market does, literally do not care what the market does. So you have a chance to do 0% interest.

And I was on a show recently, and the host said, 'Well, yeah, but the free and clear properties probably went down because of the interest rates and everybody took on HELOCs and whatnot.' And I said, 'Uh oh, I better check.' Check my stat - fact is, in the last decade, free and clear properties went from about 33% of the population, like literally 33%, to about 39.3%. So almost 40% of the properties in the United States are free and clear. Why not just go target or kind of fish in that pond? So that's how we do owner financing.

And just to clarify this, you don't have to stay in the residential world. I bought my office building the same way with no underwriting and no garbage that you have to go through to go through the commercial grueling process if you had to go conventional.

Second way we buy is subject to. So next best thing to 0% interest is what? Two or three or 4% interest. We're buying homes as recent as this week in Florida. I grabbed one at 2.6% interest, buying them subject to the existing loans. Plenty, plenty of people that are going, 'Wow, I'm in trouble. I got this extra house,' or doesn't matter how good the rate is, they got to get out. That's a very cool strategy right now, both of those.

And then the third is very standard, good for a new person: lease purchase. I say good for a new person because our agreements have built into like a $10 deposit, and you can tie up these properties, not own but tie them up and control them.

And I think the kicker here, Brandon, is sort of what a lot of creative people don't do is we've trademarked it: the three payday system. Meaning, when I do a deal, it's great to get paid once, like I said, transactionally. But the way I set it up, and I write about in the book that your whole tribe can get, is they get now money. Everybody gets now money when they do a deal, but then that sets in motion sort of some continuous cash flow and then long-term cash out and wealth building. That's an ideal model so you can get off the treadmill every few months or every few years and not feel like you got to be on this proverbial treadmill to keep earning the dollars. If that makes sense."

"Yeah, that does make sense. So help me understand, like, really specifically, what these paydays are. Like, what - I mean, sounds like you very specifically say like there are three. Could you walk me through, like, a - let's just say an example deal. It doesn't have to be a real deal, but like, put some fake numbers in this and let's just understand how this usually works."

"Sure. So there's a big - this is, in my opinion - again, I'm pretty opinionated with the industry of education and real estate - there are a lot of public podcasts and YouTube videos right now, with no names I don't need to mention them, that'll come on and say, 'Hey, we exit all our properties rent-to-own, and I don't care if the buyer ever gets qualified during the rent-to-own process because I get to go out and do it again and collect another check.' And that, although that may be correct legally for them, morally and ethically, it stinks. Because what do we want to do when we exit all our properties rent-to-own? We want to make sure we set the buyer up to win and cash out the property and eventually own the property.

So here's how the three paydays work then. I want to work with - Brandon, let's say that you're in a W2, and because of COVID or personal reasons, you left and you started your own business. I want to work with you because you're not bankable today, but yet you probably have good credit, you probably have some cash, and you probably were ready to buy a house. But now you're not bankable. You can't start your own business and get a loan tomorrow. Banks are going to need two years of tax returns to get you qualified.

So I work inside that realm with buyers that are true buyers that just need time. And payday one comes in when they step up to the table like they were ready to do when they didn't know they couldn't get financing, and they put down a down payment somewhere between 5 and 10% - let's say - of the property I have. That's payday one. That's now money. That's like that transactional piece.

Payday two is the spread between the payment I'm making to the bank on that underlying loan that I'll never be on personally, remember, or the payment I'm making to the seller and what I'm collecting during the rent-to-own process. There's a delta there. That's payday two.

And payday three - and I'll give you the numbers on this in a second - and then payday three is really cool because it's the cash-out, increase in the price, you know, the increase in the sales price. But it's also all of the principal pay down throughout the term of the deal. You cash that out at the end.

All three paydays in our community range from a low of 45 grand to a high of 350,000 per deal. That's pretty lucrative. For our family business, myself and my son, it's about 75 grand per three payday per deal. We're in the lower end just 'cause the price range in New England.

So that gives you an idea of how lucrative one deal can be. I wanted to throw that in there because I'll get a rehabber that calls me, and says - I get like six of these a year from one rehabber, and he'll say, 'Hey, Chris, I can't make heads or tails out of this deal. There's no money in it.' But a three payday system can eke out, you know, six figures all day long. That's a big difference for people that are not used to how to create those kind of dollars out of thin air, literally."

"Yeah, that totally makes sense. One thing I've seen, and I'm curious how you combat this, and maybe this is just a weird question, but bear with me 'cause one thing that we deal with often is we're trying to look at like marketing return on investment. And it seems like everybody, when they're wholesaling, has an idea of how you calculate marketing return on investment. It's just well, when we make 20 grand on the deal, then, you know, and we spent five grand to get it, that's a 4X return, right? It's pretty simple.

Once you get into like three separate paydays and the time value of money and stuff like that, it gets kind of messy. And what I've seen is that, in my opinion, a lot of our clients just kind of undervalue their creative deals because they're like, 'Oh yeah, that's a deal, and I'll make a lot of money on that eventually, but I'm not really making that much money now.' And because of that, let's just not include that one in our return on investment, or let's just put it in at 10 grand, whatever the case is.

Like, do you deal with that problem commonly? Or like, how do you recommend dealing with like comparing creative deals to other deals that you're doing in your business? And because this gets important even when we're going beyond just like the business owner making the decisions to like the team making the decisions and the metrics that they're held accountable to and the fact that they're trying to hit revenue numbers for company. And like, I feel like there's just like some some natural like apples to oranges kind of comparisons happening here. And how do you deal with that?"

"Yeah, see if this answers your question because this is interesting that you bring it up. So if I do a deal - I'll use the deal I just did in Florida. So we're about to close on this. Buying it for - I'm going to use round numbers - we're buying it for 350,000 by taking on the property subject to the existing loan and then giving the seller a little bit of equity in four years, no interest, no payments.

How much am I going to spend to calculate my return on investment? How much am I going to spend to buy this house? Zero money down. But because we're giving them zero money down, this young couple, we can't expect them to pay their transfer tax. Right? So we will have an expense of, let's just say $2,500 for a round number. Okay, on $2,500, what will we create for return on investment?

Well, we'll get a down payment of about 10%. That's going to be about $40,000. That's day one. So let's just look at the first year. We'll create a monthly spread of about $500. So that's six grand a year. So in year one, on a $2,500 investment, if you will, to buy that house, we're going to pull in about 46 grand. So in year one, if I compare that to anything else, it's not infinite, but it's very strong, right? You do the math.

So, and then it just depends on when you cash it out. But the neat thing about the way we structure our three payday is I can take a four-year deal and turn it into a 10-year deal and turn it into a 20-year deal. I can do anything I want depending on what cash flow needs I'm encountering right then. I don't know if that helps your question with the ROI. I think I - I think I was tracking with you, but you tell me if I wasn't."

"No, it does, it does make sense. So one way that you're talking about is like basically how much money are we going to make in year one from the property and comparing that to - comparing that to the other - to the other types of exits. I guess what I'm getting at now is I feel - it feels to me that a lot of the companies we work with are kind of undervaluing their creative deals based on the fact that it takes a while to to get the money. And and like, how do you - you know, how you deal with that, which is which is interesting 'cause you do great creative mostly. How many of your deals are not creative, or are you just 100% creative with the deals?"

"We do mostly creative now. We'll make decisions internally, Brandon. We'll go, 'Hey, we're - it's about time we bring on a whole - a buy and hold.' So recently, I got with our assistant who's been with us for nine years, and I said, 'Hey, here's a zip code. I want you to mail postcards,' which we don't do. We do all phone work, so we don't spend money unpredictably. But I'll pointedly say, 'Hey, let's go grab a 4 to 10 unit.' How do we do it?

We buy a free and clear list of owners who are free and clear that have a 4 to 10 unit, and we'll go ahead and send those out. We'll look to do a buy and hold. But that's bought creatively still, it's just not exited right away. Most of our deals, if not all, are in the creative space for sure.

I just have this subversion, Brandon, and it doesn't mean it's wrong. It's just what I came out of the crash knowing and believing and staying with. And that is, I will not take out a bank loan and sign personally any longer. Maybe it's my age, maybe it's because I went through the crash, maybe it's all the above, but I will not do it. So I tell my students not to do it. And now, there are exceptions, of course, there are, but that's how I tell everyone: just buy creatively, don't be signing on the personal guarantee line ever."

"Yeah, yeah, that makes sense. That's super fascinating. So do you have any advice - like obviously this can get pretty complicated from the standpoint of everything involved in the transaction, and you're working with these sellers. I think a lot of people don't lead with creative just because a lot of the other stuff is a lot more simple and oftentimes is what more like what the seller is asking for in creative. Like, nobody goes - I - I would highly doubt that people are coming to you saying, 'I want to do some type of like creative finance solution to sell my house.' Like more often than not, they probably want something like a cash deal, and then you're kind of showing them, you know, the value of what you do with creative. So can you help me understand like what that conversation looks like with the seller and how you take this like complicated thing and make it easy for them to understand?"

"Yeah, yeah, very good question. So my conversation goes like this - I mean, I had one right before this call, right before this interview. My conversation goes, 'Hey, Brandon, I see you want X. If I can get you full price, are you open to doing that over time via owner financing or lease purchase?' And they'll say, 'Well, no, I want, you know, I want to sell.'

I get it. 99% of the homes I buy, the sellers want conventional full price cash. I say it kind of facetiously, but then I add the 'but,' and the 'but' is: Right now, if you talk to top-producing mortgage brokers - and I share this with a seller - about 17 to 20% of the applicants can get a loan today. That's low. That's a very low pool of buyers. So if you don't get full price in the time you want and you don't need your cash today to go buy another home, I'm a great plan B. And so that's where we get all our leads, and that's been the case for the last, again, 12 or 13 years.

You'd be surprised, though, to your earlier point, like some sellers do seek out owner financing from a buyer. My building I bought November of '18 - I just sold it recently, but I bought it in November '18, and he said to me in frustration, 'Hey, Chris, I have brokers coming in my door saying, "Hey, I have buyers, I have buyers."' He said, 'They don't understand it. I want owner financing for estate and planning reasons and tax reasons.' Like, some intelligent, sophisticated owners of single families, multis, and commercial want and require owner financing for personal reasons. So there's that component.

And the other component is we're doing a deal right now - again, I'm doing all current stuff - this week a student called me at 8 a.m. this morning and got me on the phone with a couple. That's what we do, we help with that. It's a young couple, it's a sad story, but they have to get out of the house. They're three months behind, they don't have a choice. The credit's already beat up. If they let it go, as you know, they're going to be beat up for 3 to 7 years. We're going to come in, cure the arrears, and buy that subject to. That is a gift to them for sure.

So there's all those moving parts. There's the free and clear person that wants creative and wants all their money, and then there's the person on the other end of the spectrum that is in dire needs and needs you to come in and understand how to structure that. So we do both."

"Yeah, that totally makes sense. Well, thank you for sharing some of this, Chris. It's super fascinating. So I understand that you have a book, right, that people, if they want to learn a little bit more about this, they can somehow get?"

"Yeah, so we don't do - I again, I'm going to talk about the industry again and poo-poo on that a little bit because a lot of times I'll personally look at a book, look for a book offer, right? And I get all the way through to the screen where I put my address in, it says, 'Okay, pay $8 for shipping.' I'm like, 'I thought it was free.'

So we will send you for free, no shipping, one of our - we have four, but one of our bestselling books, which describes sort of what you and I have been talking about. It's called 'Real Estate on Your Terms.' Just go to WickedSmartBooks.com - that's Wicked Smart Books with an S - dot com, slash Vitman and the number one, numeric number one. And we'll ship that out to you.

And then you and I were chitchatting before the show, we do have our annual live event. We've done this since 2016 when we were in a basement of a Chamber of Commerce, and now it's done at a larger scale. That's in Boston, Massachusetts. It's September 23rd and 24th. You can just go to QLS.live.com for information on that."

"Very cool. Thank you, Chris, for your time and generosity and sharing all your insights today. And for everybody else listening, I'll see you next week."

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