Cody Davis on Structuring Deals for Maximum Returns

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1:00What we're going to do here is we're going to create content based on what you said. In this one here is with Mr. Cody Davis. One of the feedbacks from the group is they would love to hear Cody talk about deal structure. We also had many other people talk about creative financing and financing in general. So Cody, I thought you and I would just spend a full episode talking about all the different ways we have done deal structures and basically what do we anchor on with putting a deal together? Sound good? Sounds great. All right, so I think we just start off with the basics. Obviously you and I have just done standard bank loans or DSCR loans. The standard 20, 25 percent down. Again, we have done those, but we've done lots of other things. What's another deal structure that you have done that we can talk about? Well, we'll start with the risky side of things, hard money. Well, hard money is easy to get into, hard to get out of. That's why it's called hard money for my experience. I found a deal. It was an RV park.

2:01It was worth about a million dollars. I bought it for $373. I convinced a hard money lender to give me $6.50. Damn. Okay. So they gave $5.25 a close and then after I got it and proved books, they gave me another $125,000 shortly thereafter. So massive leverage point because I got a scream and deal. And of course, that was $0.00 down. Because even with fees, I got cash out with such a high leverage point. And the property paid for the entirety of the mortgage. But where that's dangerous is those typically have shorter term balloons. So easy to get into, but it could be hard to get out of. Yeah, we've done plenty of hard money loans. It was very common back in 089 and 10 because banks would not lend all of it out. Olivia and I had, you know, a fair amount of real estate. And banks thought that we were the problem, right? Real estate investors were the problem. So we had to go hard money. And in our case, at least at that time, we had to do 35% down.

3:02And they would do 65% of purchase or of value, whatever was lower. Again, whatever was lower. I think it was three points, 12% interest, interest only into your point one year. Right? That, you know, one year feels like a long time. It is not in real estate. And, um, you know, that was very, very trying. Now, thankfully, we were doing lots of these. And my website at the time, wealth building, pro took off. And I was able to refive with private money. But you're absolutely right. Hard money, easy to get into. Hard to get out of really short clocks, lots of fees. But sometimes, you know, if you get a screaming deal, right? If you buy something that's worth a million for 350, you're going to go get that money somehow some way. And, you know, hard, hard money will do 100%. And in your case, nearly 200%. So it can't happen. Yeah. And the reason I did such high leverage is because I found I can get a better rate with a rate in term refi than with a cash out.

4:03Of course. My perspective to the hard my lender is like, I got so much value here. I'm going to refinance it. Give me all the cash so I can get a better rate on the back end. And you're going to make your fees on the front end. And all the sex to cash just goes to liquidity. If I need to pay it off, I can pay it down. And so it was an easy pitch. Well, I got to ask. I think people would be remiss if I didn't ask. How the hell did you find a million dollar deal for 350? How'd that come across your plate? Broker relationship. Yeah, broke. And they're like, hey, this is a really good deal. You can do it by yourself. But I'd appreciate it if you bring me on. So he actually came into the deal too. That was back when I was doing all those different partnerships. And partnerships are a deal structure way too. But one of my least favorites. Yeah, we'll get to that next. The other thing we have done is seller financing. I'll talk about one deal that I did. A seller, you know, we had actually done one transaction. We bought one small house from him. I want to say there was 2016.

5:04He came to us. I think 2019. And basically said, you know, I want to sell you everything we have. I have. Are you interested? And I asked why. And he goes, well, you know, you bought so and so house for me. And you did what you said you were going to do. Even though the repairs were more than you expected. Basically, we kept our word, right? We didn't nickel and diamond on a little house. So he brought us these 14 units, two four plexes, a triplex in three houses. So 14 units. And he had a dollar amount in mind for the portfolio. Let's call it, let's just call it a million bucks for just, I forget what it was. But for me, it wasn't the, it wasn't the million bucks. It was the payment. So again, I think these, I think these 14 units, they were at the time grossing, I don't know, let's call it 800 bucks, or eight grand. Let's just say eight grand. So I told him that, you know, I frankly don't care about the purchase price.

6:05I care a little bit about the down payment. I don't want to bring anything more than 100 grand. But I cannot, cannot have the payment be more than 3000 bucks. Because again, 8,000 gross, you know, best case, I could run it at 50% expenses. That leaves us, you know, only a thousand dollars. And sure, I thought I could raise rents and all of that. But again, I'm trying to negotiate the best deal I can. And he agreed initially, and then ultimately pushed us to 3,200. So I think we ended up buying that thing for about 800 grand, sticker, 3,200 bucks, full, full, full 30 year, fully amortized loan. And I think, and the key to me on these seller finance deals, especially portfolios, is I never named the interest rate. I named the payment. And that's kind of a little weird, right? Everybody wants to talk interest rate. And I just talk payment. I say, hey, it grosses eight, I already own lots of stuff like this.

7:05I can't run it any better than 50% expenses. That means four grand left over for mortgage taxes and insurance. You know, I need three grand and then, you know, we can work out the rest later. I think in that case, my interest rate is something like in the threes or something like that. So again, I don't name, I don't typically name interest rates on seller financing deals. Yeah, I think that's super smart. I think it's super smart. So on the seller finance note, one way to spin it, I bought it eight plaques. It was originally a five, turned it into an eight, we've talked about it before, bought it for 430. If I were to buy that with a bank loan, which I did, they would typically ask for 25% down. So I'm dropping a hundred grand in chain. For the same amount of upside, I have to drop a hundred and something thousand. What I did is I asked the seller to hold the contract in second position for a portion of my down payment. So the seller finance 15% of the purchase subordinate to the

8:06bank loan, I showed the bank loan of a pro forma and granted no one's ever seen a pro forma they didn't like. Yes, a realistic pro forma. So I didn't even hit the debt coverage ratio that they were looking for day one. But I bought this deal with 75% bank money, 15% seller second in 10% down. And the craziest thing about that is it, if I'm getting the same amount of upside, let's say I get about 300 grand and net upside on the deal. If I put a hundred grand down, I turned 100 into 400. Great deal. If I put 43,000 down, I turned 43 into 343. The return explodes. That was a intentional use of high leverage. And I did it through a mix of bank and seller notes. Yeah, that's great. I mean, it's actually it's funny. The third property we ever bought. It's actually in my book one rental out of time. We were out of money. Right. At the time, I didn't know any different. I didn't know about creative financing. Didn't know about this. We wanted to buy a property. I think it was on terrace.

9:07We no longer own it. And all I had was 10% down. And at the time, you could get 80% first. And what we ended up realizing, much like you, is the seller had to come in for the second position. So my third deal, my third house. Basically, now we're out of money. We had a seller come in for a second. And it was what is now, I guess, called a silent second. We had five years to pay off the second zero interest, zero payments. We ended up paying them back when we refied. That was kind of the plan. We refied, I think, three years later and paid them off that little second. But yeah, you can get seconds. They don't even have to have payments. And in this case, we had five years to come up with the additional 10% down. That was a pretty creative deal, I thought. Did the lender know about it? Or so I wasn't a silent second. So it was like a no payments or whatever that is. Yeah, I've been learning about that because I'm getting my MLO. So it's a purchase money mortgage.

10:09There you go. Yeah, and you can do that with Helox too. I've been learning that you can do on a purchase of a residential owner-octified, where you get like 75% from first and then a Helox for 15 and 10% down. It's pretty cool. Yeah. What are some other, I mean, we both done 1031 exchanges, right? Kind of sell one by others. There's lots of deal structures. But when you're looking to get creative, like there's a target out there that you're looking at, what are the pieces that you kind of break down? Yeah. So I want to figure out how to buy a property and then make sure I have sustained cash flows. I don't lose it. And so when I negotiate the seller note, something that I often do, because I'm building a relationship with these people, if I'm going a millions of dollars or hundreds of thousands, I want to be able to pay them. Yeah. I have a situation right now, 15 unit. I own 1.2 million. I'm looking at refinancing it and I reached out and said, hey, if I refinance this, you guys don't really want the money. I don't really want to pay you off.

11:11What if we just move this note, the 1.2? And I use that and I basically substitute the collateral. So instead of backing with 15, I'm going to back you with this brand new 7plex over here. So I'm increasing your collateral by shifting it. It's a substitution of collateral clause. And now I can basically refinance another asset. I own or use that money in first position to go pay essentially cash for another deal. And so that's something I'm doing to maneuver private debts throughout the portfolio. And that way they don't realize a game. Yeah, and so this is really creative. Because when you're looking at a deal structure, I think we both anchor on the first thing. We've got to be able to put the pieces together. So we guarantee it cash flows. Because again, we don't want to create a deal structure where a stiff wind will knock us over. That is always paramount to me. It's to make sure that this deal stand alone, come hell of high water is going to cash flow. And I'm not really at least a large thread of losing it.

12:11And then for me, it really comes down to the payment and the term. I no longer will accept five years. I did that in the beginning. I will now only accept 10 years or longer. Because I had one five year note come do at the wrong time. And that was very stressful. But yeah, it's not always an option, right? Not everybody goes for 10 years. But thankfully, we don't have to do any more deals. But yeah, I don't like anything shorter than 10 years. What about you? I'm going seven. But yeah, 10 years is better. Longer is definitely better. Because you create options, not obligations. And that's a big differentiator between people that stay in business and people that are just in business. Yeah. The other thing that I've seen you do, I don't think Olivia and I have done this. I don't think so. But again, you just kind of brought it up. You're willing to really play the game of monopoly well where you're moving equity, right? You may have a particular property that's equity rich. You'll move equity.

13:12You'll take debt like the 1.2 from an asset, move it over there. So A, the seller doesn't have a sudden huge tax bill, right? Because they've been living off the payments and they don't want that tax hit. But again, you're willing to have those conversations. And I don't think a lot of investors are. A lot of investors look at that 12plex. You just talked about and said, screw it. I'm refinancing. Pay them off. It better for me. And you're like, no, let's go have a conversation with them. And maybe there's some other way we can do this. And you end up with a lot more liquidity. And you don't have a pissed off seller. Right. I just want to keep them happy. And I want everybody to make money. So finding a way to do that is really important if you're going to be an intentional entrepreneur. I like to think that I'm pretty intentional with the way I stack my money. Another way you could do a deal, something that I've done before, which you have to put a lot of thoughtful consideration into, is if you have someone like a buddy with money, and they say they want to get into business, they don't know how I've done partnership where I have the day-to-day operations,

14:13the control, and so I'm the driver in the situation. But I have a fixed buyout. So they're part of it, but I buy them out. That would be my least favorite. However, I see a lot of people doing it. Or let's say we go do a deal together, you bring the money, I bring the deal. And then I have the right, or you have the right to buy out the other partners so that they can own it at one point by themselves. I think that- Yeah, so let's give people, for example, because I love all of that. But I think there's a piece that will scratch people's head. And that is, give us an example of a buyout number. So let's say you do a deal for 400, they bring in 100 to 25% down, you bring nothing. What's the buyout clause in that example? Like, four in a quarter, four 50, what would a buyout clause look like? My deals were wild, so what I did in the very beginning, so I'm putting 100, I bought them out for 200. Oh, snap! Oh, okay. And here's the learning lesson that everybody can take away, because I didn't know. I do it now on any partnerships,

15:14but it's a phased buyout. So if I buy them out in the first year, it's not the same price as the last year. So on my very first deal, that's a good point. I had to do a buyout for one party. I didn't have to, but it was the right thing to do. They had a life event, and so I was like, if I'm buying out someone, I might as well buy out everybody. And so I executed a buyout two for one within six months. Oh, out. Yeah, but there's different ways to do it too. So some of them are two for one. Some were one and a half for one, but it's the structure. Some get cash, like they want cash. Some people are wanting to be bought out on a note. So they actually sell or find you. Oh, they turn into a payment. Okay. Yeah. So that's how I did a lot of my early on buyouts. My partners would end up sell or financing their position to me backed by the real estate. That makes sense. And then I'm not doing a cash out refi when I refinance it. So I get a better rate, because I can subordinate the debt. And they're happy with it because they have equity and now they're backed by the property.

16:14Yeah, secure, secure position. That's really cool. I'm curious. What kind of interest rates were you getting on those five six seven? What are you, what were you getting on those? On those eight to 12. Okay. And so they were really happy because they were not getting that in a bank. Well, and what's really interesting is that let's say someone goes from a hundred grand invested to now in six months, they get a note on one 50. Well, eight percent on one 50 is a 12 percent return on one hundred. So they were getting a marked up basis and they were getting a really premium cash flow for what they put in. And of course, as people weren't doing any work, they believed in me early. And so they got rewarded. Yeah. Nowadays, it's smarter to make it cheaper. Like that was just a ridiculous return. Yeah, yeah. But again, I kind of bringing it forward. Today, you would have stairs, right? Year one is this. Year two is this. Year three is this. You wouldn't start at two to one. No, and no, and that's really expensive money. Now, it would have been more expensive in my situation

17:15not to do the deal, but learn from the lesson and do better next time as my thought. Yeah, I don't know if you've ever done this. Olivia and I have only ever done this once. We picked up a little house. I think it was on park. And then we found an office building that was just completely wrecked. Literally homeless were in there. They used to be like four offices top and bottom. They kicked out each wall and they were just running them up. And I think we picked up this little two-bedroom one house. It was like 650 square feet. I think we bought it for like 70 grand. I think we put 20 in. So let's call all in 90 grand. Yeah. And we found the owner of this office building. He was just desperate. He wanted to get 200 grand for the building. Because it's a city lot. It's a corner lot, easy access, plenty of parking. It was just it was just bad timing and he got run over. And you know, 200 probably was a fair number for just the dirt.

18:18But it wasn't selling. It was a bad time in the economy. People were nervous. So I actually took a flyer. We had never done this before. We had never bought an office building before. But I reached out to him. I found his number via I think it was property radar or prop stream. One of those one of those places and I called him. And I said, hey, my name is Michael Zuber. I don't know a bunch of real estate. You know, I don't know if you're interested in this. But I just wanted to run a crazy idea by it. And I'm talking about your office building on blah, blah, blaster. Okay, great. What do you want to do? I said, I'm just curious. How about if we trade? I have this little two-bedroom one-bath house. Really cute. It's already rented like 1100 bucks. It's already remodeled. You know, it's probably worth 150 at the time. What if we just swap? What if we just trade? You take mine. I'll take yours. And you know, after a little bit of thinking, he said, yes. So we actually traded real estate.

19:19Now, I think there were actually two transactions. We bought his and he bought ours and, you know, double risk or whatever. Title did their thing. But we, but from a living ice standpoint, as we took this house, we owned free and clear. That was, you know, we traded that for an office building. And then what we did with our team is like, within a month, we cleaned up the, we cleaned it up, kicked them out, secured the doors, rebuilt the walls. And then we sold the building for like 400 on a seller financing or something crazy like that. Yeah, it was, it was a really quick turn. But, you know, we actually traded, I call it a trade. I don't think if you looked it up in title, it would show a trade. I think it would show two different sales. But as far as I'm concerned, we traded one pretty asset for one pile of junk. Yeah, I haven't done it like that. However, I used to, with my partner, Christian, who I'm not partnered with anymore. But one of the ways we separated stuff out, we owned a management company together and we owned a sixplex. I signed over my share in management company for his share in the sixplex LLC.

20:23And so we traded a company for a property. So I got the property. He got the business, which he later sold. And then I've also done it where we trade notes that were signers on for property. So one way I got out of past partnerships, is let's say we have a private note from one of those buyouts, I would sign into that debt obligation and get him out with the lender in exchange for a property. And so I simplified his universe from a debt perspective. And I built my asset portfolio with no money out of pockets. So that's how I did some of these maneuvers. We shifted around debt obligations, shifted around companies. And that works. So I think when we kind of net all of this out, when we're looking at doing creative deals, to me, it's about the seller in the property. Because the seller clearly has to have equity. They clearly have to have equity. If they have debt up to their eyeballs,

21:24it's really hard to be creative. Not impossible, but hard. It's far easier when somebody has at least a 50% equity position, that way you can get a second, you can really talk about some seller financing, you know, below market interest rates. Any other kind of things that you look for with the seller, when you're looking to get creative? I've done wraps. I've done lease options. They did the subject to thing once on a duplex, just to see if I could do it and did it. And that was fine. But rather than just focusing on how creative can I get? Because if you go too far down the rabbit hole, it's not repeatable. And then it's not scalable. That's the problem. The big thing got identified. What do I want? And do I think there's a way to do it? And the answer, whether you think so or not, there's always a way to do it. But you have to know the objective of the transaction. And that's the most important thing up front. It's like, okay, if I want to get control of this nicer building and access older building, what are my options?

22:25Well, I could trade it. We could swap. We could do seller financing. We could do hard money. What's the best thing for my stated goal and build a strategy around that? Because there's a way to do anything. You've probably done just about every creative structure over your investing timeline. But you have to think about what you want. Because that's more important than oh, I could be the most creative person. Yeah, I just want to take a slight right turn on that. I think you're absolutely right. I think at the end of the day, it's what's Oliminized by box. I think you're right. But to me, it always starts with the seller. I'm always trying to figure out what they want. Because if I can't figure out what they want, like let's just say, for example, they want cash because they got two years left to live and they just want a party like rock stars in the last couple of years. A seller financing is probably not going to work. But a low down or a quick close and all cash might

23:26and then to your point, maybe we go get cash from private investors or something like that. But I think I think I think most new real estate investors and I'm not saying this is you or I, they focus on themselves first and not enough on the seller or the property. And that's why I talked about prop stream or property radar. I don't really don't remember which one I use to figure out the owner of that office building. Because I just I was like, dude, that thing's ugly. But I think it's the kind of ugly that we know how to fix. And then I'm like, I'm certainly not going to buy it. The thing is clearly not financeable. Maybe we can trade. And you know, I had to, I had to, I had to call them up. And the other thing on that deal is I didn't rely on agents. I didn't want to call, because it was listed, right? I didn't want to go through his listing agent because it was that creative. So I just called call them. And ultimately we did use his agent for paperwork. So he got paid or she got paid. I forget it was a he or she.

24:27But I do think it starts with the seller, the property. And then to your point, never forgetting what you want. Because at the end of the day, if it doesn't work for you, it's not worth doing. Well, in a preface that, I started my whole journey calling up owners, because I view them as owners, not sellers. And so I would, I would learn how they got to where they're at. And typically in that meeting, they're going to tell me what some of their goals were, how they shifted, what they're looking to. And so like that's a, that's a before all this happens. Kind of, yes, agreed. And then it's important to know exactly what you want. Because some people say, well, I just want security to know that you're going to perform. And I don't like a low down payment. And so and deals like that. I did a deal that was four and a half percent down, three percent interest. They wanted 25 percent down. And so to get around that, I said, look, I'm going to do a low down payment now. But every single year, I'm going to have an additional down payment of two percent. And we'll do that for the life alone. Just kind of a check once a year.

25:28And what that shows is I need to make this perform. Otherwise, I'm going to have to write a check. So if I make a property or perform, the property pays them. And so I'm, I'm building up this. You know, I got to focus on the cash flow. So I can build up my equity over time and write them a check. And there's a way to do it. But yeah, knowing what you want, you can always got to know that. But the meeting and figuring out what is this owner, what are they trying to do? Where are they coming from? Where are they going? Yeah, I love, you say the same words I do is you've got to treat these folks like owners, not sellers. And that's what a lot of these wholesalers and people that reach out to me don't understand. They treat me like a seller. And I'm not a seller. I'm an owner. And just that little pivot continues the conversation. And you'll learn a lot more being respectful and treating them like owners. Again, folks, this came from a survey from our orat year three. It's also something we could do inside our school community. Let us know inside school if you want Cody and I to go deeper maybe do a Q&A session

26:30with our school community. Maybe we could set that up. We could do it during the Gen Z accountability call one weekend. Let us know in the comments. Cody, closing thoughts. There's one other structure that I didn't share that I learned. So I know you're taught me this on a 15 year he sold me. I tried again to do it and he's like, no, I don't really want to do that right now. So the way he bought it was he owned a rental house with a little leverage. And he was buying this 15 unit way back when this was in 81, I believe. So a long time ago, he bought it for 140,000, which seems cheap. But back then, I mean, that's a lot of money for what it was. The rent's from $100. So what he ended up doing was the seller financed 100% seller finance. They paid closing costs. They did a first mortgage of 90,000 against the 15 facts. And they did a mortgage of 50,000 against this other rental house. Ah, yes. And so you can hold the note with different collateral pieces. And so that was their skin in the game.

27:32It was essentially a seller finance cash out because they're basically extracting equity with that collateral. And so that was cool. Yeah, that was a cool way to do it. Yeah, again, we have done something very similar. Again, when you have a monopoly board and there's different equity positions, that equity is, I'll call it tradable, usable, seller seconds, collaterals. We've done that once before. Again, we wanted a low down payment. And they want, I think we wanted 10%, they wanted 30. We did the same thing. We peeled off 20% equity from another asset. So now they had two notes, one on that property and a second on a different property. So very, very cool. Well, Cody, you're amazing. Thank you for being a part of the community. Thank you for leading the Gen Z plus call Saturday mornings. Have a great week. You too. Thanks a lot. President Barack Obama. Virginia, we are counting on you. Republicans want to steal enough seats in Congress to raid the next election and wield unchecked power for two more years.

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