Table of Contents - Notable Cash Flow with Notes featuring Brad Smotherman
Dave Debeau [00:00:08] Well, hey, everyone, this is Dave Debeau with another episode of the Property Profits Real Estate podcast. Brad, don't try to say that three times in a row quickly, it'll twist your tongue out. That's for sure. My special guest for today is Brad Smitherman. And Brad is a very experienced real estate entrepreneur, spent over four hundred transactions and focus primarily on creating notes. And I know a lot of folks that are listening to this podcast or watching this podcast are Canadians. And we're not one hundred and ten percent up to speed as much as Americans on what notes are so really looking forward to this, Brad, and seeing how we can apply what you've learned up here in Canada.
Brad Smotherman [00:00:49] Dave, it's great to be with you.
Dave Debeau [00:00:51] So where are you calling it from today?
Brad Smotherman [00:00:53] I'm based out of Nashville, Tennessee, which is in the southeast US.
Dave Debeau [00:00:56] Yeah, for sure. There are a lot of country, country, Western fans up here, so we definitely know where Nashville is.
Brad Smotherman [00:01:02] Absolutely. Oh, come on down and listen to some country music.
Dave Debeau [00:01:06] Sounds like you could be a country singer. Brad, you got you got you got the accent right in there as well.
Brad Smotherman [00:01:12] My family was in agriculture and farming, so I suppose it just kind of came along with the territory.
Dave Debeau [00:01:17] Beautiful. Beautiful. So, Brad, why don't you tell us a little bit about how you got into real estate investing, how you got into notes?
Brad Smotherman [00:01:23] It was kind of an odd thing. I woke up one day when I was 17 years old and decided to get my real estate license, and I decided to do that the summer before college. So I went into college, did the college thing and got my degree, didn't know what to do with it, went into accounting for about 30 days and got my first check. And I thought, gosh, I've just done so much better with selling real estate. And then the crash happened. So I went back into selling real estate. The crash happened. And what I saw was that there were many real estate agents that had done super well during the boom of four or five and six that were going back into their offices and beginning to cold call. Now, there's nothing wrong with cold calling, but I did want to do that, my 50s and 60s. And so the people that I saw that were weathering the storm were people that had created cash flow. So that's what's kind of propelled me into I've got to learn this investing thing so that I can do what I want to do when I want to do it.
Dave Debeau [00:02:14] So there's a whole swag of different ways to do that. How did you dial in or why did you dial in on notes? How did that come across your radar?
Brad Smotherman [00:02:22] Well, that's a great question. So the first thing that I did when I decided to be this big real estate investor guy was I went to the bank where I just got a mortgage for my first house. And I said, Hey, Mr. Banker, I've made a few months payments. I'm going to be this real estate investing guy. I'd need you to to provide some financing for me so that I can go out and buy houses. And he said, Brad, you're one hundred percent approved for your loan as long as you pay off the loan that you just took out with us, which didn't put me in a great position. So I had to find another way. And so people are generally they know about the wholesaling model where you buy something under value and you sell the contract. I found a mentor who what he would do is he would put a house under contract. He would market it with owner financing. And by doing that, we're able to create what we call wrap notes or second lien positions that are wrapped around first. And so it was the only way that I could do the business at the time, because this was 2010. The crash had happened. Nobody had equity, but we can still buy houses and people still needed owner financing. So it worked out pretty well.
Dave Debeau [00:03:29] OK, that's very, very cool. Now, if somebody listeners are going, holy smokes, that sounds interesting, but I have no clue of what you just explained. So I know we can't go into super in in-depth, but can you kind of give us the thirty thousand foot perspective, grade to level explanation of what a wraparound note or wraparound mortgages and how.
Brad Smotherman [00:03:50] Yeah, and I'll try to be as fast as I can. So there's only three ways to buy houses you can pay cash you can buy with terms, or you can do a combination of those two. So those are the three ways, the way that we do it in general and there's always an exception, but in general we're buying a house subject to a lean. So say there's a mortgage for one hundred thousand dollars. The people, the sellers, they just want out. So we're leaving the one hundred thousand dollar in position in place. And then I'll market the house with no financing and sell it for probably one hundred and fifty would be like an average transaction for us. So at that point I'd get maybe a say a twenty thousand dollar down payment that goes to me. So I have some cash they want. I'll have a thirty thousand dollar lean position and second position behind that hundred thousand dollar first. So we're creating cash flow, monthly cash flow and then we get a payoff in the future. So we have basically three profit centers in this model. We have the down payment, we have the monthly cash flow and we have the payoff of that lean in the future.
Dave Debeau [00:04:48] So just to make sure I understand it. So the new buyer of the house is making one payment to you on that wraparound mortgage? Correct. You are paying the bank on the primary mortgage, is that correct? That's correct. Is the new owner even aware that there's another underlying mortgage on the property?
Brad Smotherman [00:05:10] Oh, certainly, yeah. We disclose everything.
Dave Debeau [00:05:12] Yeah. OK, perfect. Then in this case, basically, you've created twenty thousand, so you bought you find a motivated seller Grand on the House, that's about what it might be worth a little bit more. But they just want to get the heck out. They might be behind a few months on their payments. You're going to bring it up to speed, get everything on track. You're going to turn around, offer this as owner financing. You're creating this wraparound mortgage. You're finding a buyer is going to come in and have a down payment, maybe 20 grand bang that goes in your pocket. You've now got a hundred and thirty thousand dollar note or mortgage wrap around mortgage on this property that gives you a thirty thousand dollar spread with. Correct on the bank. They're paying you, you're paying the bank, you're building up equity over time with the mortgage, pay down the loan, pay down on both loans I guess. And then when they how do they actually how do they finalizes or how does this just kind of go on forever or do you how does that typically work?
Brad Smotherman [00:06:13] And that's a great question. So I have this theory that balloons are for clowns so we don't put balloons in our notes. In the US, it's kind of standard to have a 30 year note. So we have fully amortized 30 year notes, but we put a rising interest rate on the loans that we want to pay off. Now, it's probably outside of the scope of this interview, but you will have notes that you never want to pay off and then you have some that you want to pay off quicker depending on what your yield is, a return on equity on that note position. So the short answer is it finalizes when the owner of the house that is our borrower wants it to finalize so they can sell the house, they can refinance us out at any point. There's no prepayment penalty, but we don't put balloons and say, well, you have to pay us off this point because it's just going to create a position of default. We do not want these houses for sure.
Dave Debeau [00:07:00] And then I guess you also have the opportunity to turn around and sell it if you wanted to. Is that correct?
Brad Smotherman [00:07:05] That's correct. And we do that some, but as much as we can, we want to hold the
Dave Debeau [00:07:08] paper because again, you're all about long term cash flow, right? You are correct. And to create I mean, it's pretty brilliant because you're getting into these properties of no money down. You're creating equity out of thin air. You're solving somebody else's problem, and you're making a good a good profit in the middle. So that's what you got to start with. If it's been a few years now and you've done a whole bunch of transactions and you've been working with people and coaching people by knowing what you know now, is there anything that you would do differently if you were starting all over again?
Brad Smotherman [00:07:41] The first thing that I would do is I would create a negotiating platform. So one issue that I had whenever I started is like I'm a one man show, I'm doing the marketing, I'm going to the appointments, I'm doing a little bit of rehab here on a few houses. And, you know, and that's fine. Everybody starts at the same place having never bought an investment property. But I would have in order to alleviate the stress in the pressure of that appointment with that seller, I would have created a negotiating platform that allowed me to have a system to go from the front door to the equity position every single time. And that's one thing that I mean by that.
Dave Debeau [00:08:16] I don't quite understand what you mean.
Brad Smotherman [00:08:18] OK, so I would go to the front door and I would be nervous because at that point it was about how good Brad is. OK, now I'm going to say the exact same thing every single time in the same way, so that it's no longer about me. It's about the process. Does that make sense?
Dave Debeau [00:08:34] So you would be about creating it, creating your presentation. That's right. To property sellers, is that correct?
Brad Smotherman [00:08:41] Because frankly, my first transaction that I did extremely well on, I don't even have the slightest idea how I got that under contract. I suppose that the seller said, well, Brad, if you want the equity position, here it is. Here's my purchase and sale agreement. Just sign here. I don't really know. I mean, it was just luck because I was terrible when I did, you know? So I mean, that's one thing that I would say. The second thing I would say is begin your marketing machine. Earlier, I was really cheap on my marketing side. I looked at marketing as an expense as opposed to an investment. And now I know that it's not. That's the one thing I can't spend money too much money on is the marketing that's official.
Dave Debeau [00:09:19] Yeah. Yeah, especially. Yeah, that's a big problem I see a lot of people having. Right. They're so cheap and chintzy when it comes to trying to get the deals and are too reliant on the ways everybody else is doing it. There's all especially up here in Canada, everybody's surfing the MLS and hitting up realtors for people. That's not where the deals are. The deals are correct. When you go out, beat the bushes and find motivated sellers yourself. By the time they get to a realtor, first of all, they're usually not motivated. Second of all, there's just you can't really make a deal with a realtor in the way, so make sense. So what were you doing for marketing when you first got started?
Brad Smotherman [00:09:57] So whenever I first started, I was doing what we called bandit signs, which were the signs on the side of the road that looked terrible. And they were very effective at the time because nobody had equity. People were getting foreclosed on. So terrible market and have a sign that says, hey, I'll buy the house. Looking back, I would have bought a lot. Haven't known what the market was going to do, but you know that hindsight's 20, 20, that's where I started. Then I moved to direct mail. Once it got to where the signs really weren't working, I got to the point where I was sending out seventy thousand letters a month is a lot of mail and that got inefficient. But we were still buying transactions from it. But it would to put it in perspective, we were sending out seventy thousand letters to create the same deal flow as fifteen thousand letters had created twenty four to thirty six months earlier. Wow. So the effectiveness of the direct mail in the markets when I was in just collapsed. So then I went to PPC, which is what I'm doing now, paper and Google AdWords, that kind of thing. And that's been really good for the past two to three years.
Dave Debeau [00:10:58] And I guess you always have to be on your toes, right? Because things change as such and it'll change everything.
Brad Smotherman [00:11:03] Yeah, it'll change again. I'm beginning to see that.
Dave Debeau [00:11:06] So that's the way life goes, I guess. And nothing ever stays the same for very long. OK, so very, very good. And Brad, what what are some of the biggest mistakes you see other people making, you know, in addition to the mistakes you made yourself, but are there any other mistakes you see newbies making when they're getting into trying to do what you're doing with with creating notes?
Brad Smotherman [00:11:29] Well, it's such a niche thing. I don't really see a whole lot of people creating notes the way that we're doing it. One thing that I'll say is I lost years in the battle for mindset. So I was generally negative. I had a lack mentality. It was difficult for me to spend money on marketing. I was jealous whenever someone else had a transaction that I wish I had. And all that comes down to rooted issues in myself versus anything with the exterior. Well, I mean, you and I both know it's not so much what happens, it's how we react to it at this point. So, yeah, I mean, what the game of real estate's played between the years, it's very little externally because, I mean, even if the market crash like it did in 08, I know what to do now and frankly, would probably help my business. But know at the end of the day, the one thing that I see a lot of people, they're just oblivious to the idea of you have to think about what you're thinking about, because if you're not taking time out to be like, OK, like, what's my thought process is here, like what's the root cause of the way that I'm thinking, then you're going to in my opinion, most people make very bad decisions.
Dave Debeau [00:12:34] Yeah, a very, very good. So kudos to you for realizing that. What did you do to kind of turn that around? Did you go read a bunch of books? Did you get coaching and get therapy? What worked best for you?
Brad Smotherman [00:12:47] Yeah, so a few things. Number one, I want to to spend time with people that are going to bring me up. Yeah. So the problem that I think a lot of people have is, you know, we don't choose the family that we're born into, you know, and in my family, I have a lot of people that were negative. Well, Brad, you can't do real estate. That's just a scam. And all this. Well, I have some of those same people that won't talk to me now because they think I've been too successful or whatever, you know, which is fine either way. Right. So thinking about who you're around is is something that I think is very important. Number two, I think just filling your mind with positive material, whether that's books, podcasts, you know, movies that are generally inspirational is something that I did for a long time, even to the point that I would fast from any kind of traditional music, you know, being from the Country Music City, there's some really sad songs that get put out there, man. It's like you can't listen to the dog dying and the wife left and all of this. It's tough to listen to when you're trying to put it deal together. So, you know, at the end of the day, we have to be cognizant of what's around us then what we're allowing into our.
Dave Debeau [00:13:55] Very, very sad. Yes, yeah, I never thought of that. You're absolutely right. You're in the middle of musical negativity, right? That's right. Country music's built on. All right. So, Brad, we're we're just about running out of time here, my friend. I told you, it's fun and it's fast, a little bit too fast. But before we wrap up, maybe you can give us a couple of suggestions for somebody, especially somebody up here in Canada is interested in exploring, creating notes. What would be some baby steps they could take to kind of get their feet wet?
Brad Smotherman [00:14:31] Yeah. So I think it's two things. Number one, I think you need to fund a mentor that has been down the road that you want to go back. And the idea of that is if I hadn't had my mentor, I never would have accomplished what I've accomplished. They can take years off your learning curve. And not only that, but you're going to avoid a lot of the mistakes you would have made, which is just as important, if not more. The second thing is everything starts with a motivated seller. So if we're able to create motivated seller lead flow, then we can figure out what direction we want to take that. Whether you want to be a rental guy or you want to be a guy or you won't be the flip person or whatever that is, we have to have motivated sellers to learn how to legionary, right?
Dave Debeau [00:15:18] Yeah, very, very good. Good advice. All right. So, Brad, if people are interested in finding out more about you and what you do, I think you offer some coaching or some assistance for folks. How can they find out more about Brad's mother?
Brad Smotherman [00:15:32] Yeah, so I've got a podcast on iTunes. Investor creator were generally a top 100 business on iTunes. Also, I have a private Facebook group, the Investor Creative Community. So we're happy to have.
Dave Debeau [00:15:43] Awesome. Very good, Brad. It's been a lot of fun. Thank you very much for being on the podcast. I really appreciate it.
Brad Smotherman [00:15:49] Thank you, Dave. Enjoyed it.
Dave Debeau [00:15:51] All right. Thank everyone. And we will see you on the next episode. Take care. Well, thanks very much for checking out the property profits podcast. And you like what we're doing here. Please head on over to iTunes, subscribe read us and leave us the review. He very much appreciated. And if you're looking to create a regular flow of inbound investor inquiries about your real estate deals, then I invite you to attend one of my upcoming live online demonstrations. And you can check that out at Investor Attraction Demo Dotcom Ticker.