Seth: Hey everybody, how's it going? This is Seth Williams and you're listening to the REtipster podcast. This is episode 181 and today, I'm talking with Steve Hodgdon.

So over the past year, I've heard Steve's name quite a bit in the different land investor circles I run in. And Steve runs an online lending platform called the Finance Land Sales or FLS.

I wanted to talk to Steve for a while because of his expertise in the funding and note buying space of the land business where it's actually kind of a small playing field in terms of the number of people who really know what they're doing. And there's a lot of people out there who do seller financing with land, but not all those people really know how to do it well and have it down to a science.

Not long ago in the REtipster Facebook group, somebody had posted their recent experience where they had sort of been gut-punched because they partnered with a land funder to fund their deal and the property didn't sell fast enough. Too much time went by and they basically were cut out of the deal and lost all the time that they had put into it. And it kind of took them by surprise.

And when I saw this, it occurred to me that while any astute funder has plenty of ways to evaluate the land investing operators they're working with, it should kind of go both ways, where the operator needs to have ways to evaluate the funders that they're going to work with to ensure their interests are represented as well.

And Steve also saw this post in our Facebook group, and he chimed in from the standpoint of another funder, and he wanted to give his take on it.

So I thought this would be a great opportunity to talk with Steve about how he thinks through deals like this. And I'm just excited to learn everything we can from this guy.

So Steve, welcome. How are you doing?

Steve: Thanks for having me on. I've been a big fan for a long time. We got to have breakfast a year ago up in Minneapolis at Dave Denniston's event. Which I signed up for again this year.

Seth: Yeah, awesome.

Steve: It was at the Unconference. It was a good room. You covered basically most of my history. As you can tell, there's a bunch of gray hair. I was in the room when credit scoring was created. That's how far back I go.

Seth: Wow.

Steve: Yeah. So in 1989, I bought a medical collection company, built that into an accounts receivable management firm, not just doing delinquent accounts, but also doing traditional, like loan servicing. I made it bigger than I thought I could manage and sold it after I was 50.

And I decided I was going to go to the country club, found out quickly that I didn't like golf that much. And what I really liked was building businesses and so I wandered over to property management and bought some commercial, bought some rentals, did that for a bit and then wound up running a new lending business down in southern California. There, I started doing some seconds for home flippers.

Seth: What does that mean, seconds?

Steve: So they've got a primary loan from a hard money or a bank and they're doing rehab on a house and they're short.

And so I was doing up to about $100,000 transactions covering the bridge financing to get you from the beginning to the end. Then I was buying lots for builders. So I'd buy a lot, sell it to a builder on terms, and then he would get his construction loan and I would subordinate the second position and get paid out when the house sold.

Then I decided I'd buy some mortgages. So I bought bought three quarters of a million dollars worth of small dollar mortgages around the country. Not a great idea, but it was, I learned a lot. And all of that got me turned to land.

And I came to land. This is maybe six years ago. I went to a land academy training that did down in Redondo Beach and said, oh, I can help this group. They need a place to monetize their notes.

And so I thought I was going to build a note-buying business and bought some notes. But from there, people said, well, I don't have a note to sell. I need money to buy the property.

And then here I am in the JV business. And I started where everybody started at 50-50. So we'll go into those terms in a minute. But let's back up and talk about the Facebook post.

So she said in the post that she did not read her contract. One of the things that you do when you have a podcast with Seth is there's, I don't know, 100 questions on this list you gave me?

Seth: I will say I've got more questions for you than I usually do because I've got so much I want to know. But yes, go ahead. Proceed.

Seth: Okay. So I'm going to try to stop wandering around with my stories like I usually do and try to—if she had come to me and she put an application, put the property into the Finance Land Sales website, we would have a little AI tool pull comps, do some stuff, look at our underwriting, which I'll get to.

But if it was approved, she would have gotten a contract. And the contract would say that typically it's a six-month term. And so you have, from the day my money goes to the title company to the day my money comes back from the title company, we have six months.

So that's really tight. And people will say, well, I need nine months. And being a smart guy, I'll go and say, well, come to me in three months and then we'll do it. Get an extension, get an assignment, do something.

Our target in our business is to turn our money at least twice a year, sometimes three times. So if I can make a 25% return on a deal, and I can do that three times in a year, I've grossed 75% on our money.

When I came into the space, it was all 50-50 deals. And that's what I had been doing in traditional fix and flip. And it struck me that there were two things. I wanted to buy my way into the space and have people know I was here.

But I also thought that the cost of money was too high, depending on the deal, right? Depending on the deal. If it's really tiny, if you're really new, if there's problems, if it's a little desert square that may take a year, yeah, it's going to be 50-50. But if it's good property that's got a lot of juice in it, then you shouldn't pay me $50,000 for parking my money for 60 days.

So I came out, I saw what people were doing, and I bought market share by doing an 80-20 split. And immediately people started doing, we had this race to the bottom on splits. So we wrote our contract to be 80-20 month 1, 70-30 month 2, 60-40 month 3, 50-50 months 4, 5, 6.

We have done things in contracts to allow partners to buy extensions. You know we've got a deal we're almost to closing. We might have an offer, sure we'll extend two weeks or a month. Oh, we found that there's a flaw with the real estate? And when we get around to talk about risk, we'll talk about underwriting and things you can't find in a virtual underwriting.

And so our average revenue share has come down from 50-50 to more like 35. I think that's about what we average. We averaged maybe a couple of points over 35%. And that seems okay, right? If the deal size is right.

The contract's written to make us as passive as possible and the partner as active as possible. Because we don't always put these in our parent organization. Our C-Corp is modern asset management. But we also have several other entities. There's trusts. There's IRAs, 401ks. Occasionally, we've done a... We have not done a deal split on our side yet, but I think that's going to come.

So if you're lending money out of an IRA, you cannot have any activity at all. Nothing. And that would be a whole other podcast and how we set up another corporation to manage our 401k.

Seth: So you're actually holding title to these properties in your entity? Is that right?

Steve: Yeah. So we're holding title to the property.

So one of the things she talked about in the post was she talked about partners. And there's a difference between a partner and a money partner or just a funder or the bank—”we have one transaction. It's going to be over and done in six months. I'm never going to see you again.” That's not a partnership.

In the couple of hundred transactions that we've done, I've done more than 50 with one partner. And we've turned a couple of million dollars with him. Those are almost all note sales. And we have a revenue share on the note sales side. And there's a whole bunch of math that goes into that.

So a partner is somebody who, what Simon Sinek says, leaders eat last. Well, my partners eat first. We try to make sure that everybody comes away with a win because I'm not interested in one transaction. I've got out of the 50 or so people, maybe it's about 50 that we funded. There's five or six that I've done 10 deals with. This one person, I've done more than 50.

But even on the one-off, it's okay. At some point, you should outgrow needing this capital. You should have enough wherewithal that you can get a bank line. There's other ways to raise money.

Seth: On that whole thing when you said you're not interested in doing like a one-off transaction? What if you'd make half a millio?

Steve:I do, I do. But that's not the partner, that's not the person that comes into our little mastermind. So we have this little group called mastermind where the partners have gotten to know each other and talk. And there's lots of communication in this network in the land world way more than I see in other markets. I mean, you guys, you're all young, you're all completely digital, and you talk shop pretty freely and that's remarkable.

Seth: Yeah.

Steve: It’s remarkable that I immediately blurted out my rates. Which you can't do in other worlds. If I’m selling whatever, I can't tell you what my net revenue is. Well, my net revenue, absent the person with the 50 deals, of the other ones we funded, we spent $5 million. The net collection was $7.5 million.

Seth: When you say spent, you mean like you actually used that to buy the properties?

Steve: We bought $5 million worth of real estate.

Seth: Okay, gotcha.

Steve: We sold for 7.5 million. Not bad. Not as advertised, that people say you're going to triple your money. Not all the time. And of that $2.5 million in profit, our partners got $1.5 million and we got $1 million gross. We had expenses, carry costs, blah, blah. But that's what our little experiment in financing land has done. “I'm here because I like you, but I'm here to say we're going to try to get serious. We're going to try to be an institution kind of in the space.”

My partner, Nick, comes from the distressed asset world, dealing with banks, doing big transactions. We love this hands-on, getting our hands dirty stuff. But we think that with our tools and how we've learned to do this enough, we've been experimenting, we've been practicing for now a couple of years, we can make a real business.

The other half of our business is this unsecured or this other more traditional lending platform. And like you said in the beginning, I take a thousand payments a month. When I was running the business that I sold, I was taking 10,000 payments a month. That business generated $30 million the year that I sold it.

So right now we're playing with our own chips. We're not beholden to anybody. This is all our money that's in and out. Um, I've got about $2 million of our cash on market right now in a variety of deals, good and bad.

So maybe we should jump to what happens when a deal goes bad.

Seth: Well, that, but also like, how do you even define what bad is? For example, the property doesn't sell in six months. What then? Does the other person get cut out of the deal or do you take over, or do you extend it? Or what happens then?

Steve: Any number of things can happen. So, it's a definition of bad and slow. I've got a very nice lot, and I think this fits into one of the things she said [in the Facebook post], is one of the deals somebody brought an offer that was low. So we don't know how low, we don't know if it was something I've gotten offers for under what I’ve paid, and I turn those down so I’ve gotten offers for a tiny little bit over.

And I'm like, well, you said this was going to sell for $100,000, and this offer is $65,000. No. Right? Why? Well, because it wasn't really worth $100,000. Well, Mr. Partner, you said it was worth $100,000. We believed your underwriting. Sometimes, let's just say people are optimistic, like realtors.

“Oh I can sell your house for a million dollars!” When they know they can only sell it for 800. They're just trying to get the listing. That's a very common thing in that world and let's just say people are enthusiastic and hopeful and they're not intending to lie. The people that lie in these transactions are the sellers. Sellers do not disclose their problems.

Seth: You're talking about the original motivated sellers?

Steve: The original motivated sellers. So the 29 acres that I bought, so what happens when something goes bad? 29 acres in North Houston rural. And I purchased it for $200,000. The partner believed that it would sell for 450.

We were told that there were, you know, boots on the ground that looked at it and this and that, and here's what a couple of our issues are. And what we found out was that this is landlocked and that the access was washed away a couple of years ago in storms. There was a bridge that was wiped out. There's a mile-long dirt road that has been destroyed because of the weather. You can't get on here unless you've got a serious CJ, unless you've got the right machinery.

Seth: Did nobody do a visual inspection of this thing before they bought it?

Steve: Well, I was told it was done.

Seth: Yeah. I'm just asking to figure out what could be done to resolve that kind of problem. What could be done to resolve it?

Steve: What could be done to resolve it? We'll go into how I underwrite in a little bit.

So anyway, I had a misunderstanding or misrepresentation. It doesn't matter. I have a property that I spent $200,000 on. This is one of the biggest deals we've done. I think we just passed 500 days. At that point, no, maybe it's over a year. It's been well over a year.

It doesn't have $200,000 in value. The county where it's in. Reassessed it for $600,000. So I've got a $1,000 a month tax bill. The partner has gone on. The partner is a coach. The partner came with lots of experience. It should be great. Talk to me next year and I'll tell you how it turned out or if I still own it.

I'm thinking about, I know somebody where I can get some cattle. So that's the extreme. So that partner relationship isn't a partner relationship right? They were using my money, making a bet and the best bet turned out bad.

So when I think I'm investing, I'm probably speculating. When I think I'm speculating, I'm probably gambling, and when I'm gambling, I'm a terrible gambler. I'm a pretty good investor, so I try to be an investor as much as I can. And so people out there looking for money from me have to keep that in mind is we want to do good deals. We want to do lots of deals.

I've got a kid who, and he's a kid, he's probably 45. He runs an auto body shop in Southern California and he trades in two counties in South Carolina. That's his hunting ground. And we've done a dozen transactions. Some of them are only like buy for five, sell for ten. But we've done these again and again. My underwriting with him is, “Oh, it's from Victor. Go.”

And he's basically selling mobile home lots, rural mobile home lots in central, south Carolina. That's what I'm looking for is 20 guys like him and I don't need to do anything else.

So she [Facebook poster] had a transaction that ran too long. She had an offer that she bought that may have been below break even if the investor was borrowing money from somebody else at 12%, which is pretty common. There's all kinds of things.

So there's seasonality. I've got a piece of property that we just got in Georgia, and this is a really nice property, but the weather there has been awful. Nobody's buying, selling anything, and a buyer agent trying to get the rent paid brings a really lowball offer that's presented.

I turn it down because I know in January, in the middle of a snowstorm, $70,000 is probably right, but I know when the sun comes out shining, it's $100,000.

Seth: Just the weather, you think, has that big of an impact on the value?

Steve: This was ice storms. If you look at when homes are sold, there's a significant dip. People don't move in January. And again, the intrinsic value of this property is way more. I'm in it for, I think, $65,000. So no, I'm going to say no to $70,000.

Seth: It almost makes me wonder, if that's a real thing, and I'm sure it probably is to some extent, why don't professional appraisers have like a seasonality approach in addition to the sales comparison approach? I mean, if it really makes that big of a difference in what time of year the offer comes in at, that's just really interesting.

Steve: My wife's family, her mother was an appraiser, her sister's an appraiser, her niece is an appraiser. They've been in Sonoma County, California doing appraisals for 50 years.

But no, they're not going to make any changes other than the statistical, backwards-looking math that they're trained to do. They're not going to make anything subjective about those things at all. They're doing what the law tells them they need to do.

Seth: Well, and I guess this is a really interesting topic because on this whole thing of, you know, say both you and the operator thought the property was going to sell for, I don't know, $200,000 or whatever the number is. And an offer comes in $20,000 below that. Who gets to make the decision about whether or not it gets sold?

Or, in that same vein, I don't know if you guys sell with seller financing, but say if you get a cash offer and a seller financing offer. And who gets to decide which one to take on that end? Like, does it all rest with you at the end of the day?

Steve: Yes. So back up to the beginning of that, we average over these couple of hundred transactions, we average 85% of what the original intent was. And we've had a couple that have gone way over.

Somebody we've done a dozen deals with, great kid, we bought two lots, two 20-acre parcels in upstate Michigan that had been dormant for years. There was supposed to be a developer in Southern California that was just dumping them because the city said, "Oh, you can't put that development there, never mind.” They retracted their approval.

It was all overgrown. We sold one and now we're even, when we sold one for what we paid for both. When we and the realtor walked into the woods where the second property was, they found a 10-year-old mobile home that had never been used. So they walked out of the property and found $100,000.

So that skews my numbers. So maybe we're really 80% of value because we bought that for $20,000 and sold it for $120,000. So that's the one, which offsets the Texas no-access property. But I'm probably going to learn how to build a bridge, by the way.

Seth: Yeah, sounds like it might be worth it.

Steve: So that was the first part. Who makes the decision? It's my money. It's my decision. But it's a we-decision. If we come into a property and we find out, oh, it won't perk. You can't get power to it. We made a mistake. Let's move on. Let's get our capital back. Let's just get out.

In other instances, we'll put money in to improve the property enough to make it sellable. We've drilled wells. We've gotten septic approval. I've got a second guy going out and looking at one now because I got a bad report from the county that you can't put a septic here. Now we're coming out and getting another professional to come out and give us another opinion. So do I get an engineered system? What can be done? So we're going to spend another thousand dollars to see if we can get that back.

But now I'm gambling. I'm certainly speculating, and I'm probably gambling. I stopped being an investor. I want to give you money, and I want to look at my watch and say, go. That's it. I want you to get paid out of the HUD at closing. I want you to get your money. I want to get my money. I want to say, that was great, go do it again.

Fortunately or unfortunately, again, a lot of gray hair, a lot of mistakes, hundreds of transactions. We can help somebody who's done a couple and is learning, is trying to go to another market, is trying to make a business instead of being a once-in-a-while wholesaler. And we can help. Sometimes that probably can overhelp.

So I don't know when I'm talking to people whether you've got as much experience with me or this is your first deal. I often don't know that as we're moving along. And I've offended a couple of people by talking down to them.

So I'm like, okay, I can't do that. So she [Facebook poster] had a deal. Timeline was too short. She didn't read her contract. And she's blaming the partner for that. If she had come to me and said, “Oh my God, I didn't know,” and her $50,000 is in jeopardy and blah, blah, blah, you know, all this stuff. “The only offer I have is a thousand dollars over.” I'm like, well, let's reassess, re-underwrite.

And if you want to stay in, offset some of my risk and put some money in as a partner. Come to my side of the table. And so if it's $50,000 and you want to get an extension for another six months, well, put 20 in. Now we'll ride to the end together. And you get my share of the money that you put in.

That's typically the first option that you'll also have to explore. Explore fire sale, dump it, go, move on.

I've done a lot of car financing. The minute you finance the car, it's worth less than you paid for it. We've done a hundred and some Teslas. Lately, we built a product for a company called EV Life. If you want to buy it, you want to finance a Tesla in California, Colorado, EV Life is the place to go.

Seth: So on the whole thing of fire sale or dump it or do something else, why haven't you done that on this landlocked property in Texas? What's making you hold that? Is it just because there's so much sunk into it and you don't want to take such a big haircut?

Seth: We're going to really go off on a tangent here.

Because the prior owner has filed a lawsuit against her children claiming they got a power of attorney illegally. That she did not know what she was signing so I just got along with this. I got named in a million-dollar lawsuit.

That week, I was going to close. I've spent 200, I was going to close that Friday at 360. I pulled out of that, gave him back the earnest money, and now I sit for months waiting to see if my title company is defending me. I got another lawyer to look over their shoulder to make sure that I'm not going to owe a million dollars because I'm a victim here too, right? I'm going to wind up suing my seller, because not only did I need a mile-long road, I needed to build a bridge and I need to make grandma happy. That is not passive investing.

That kind of stuff doesn't get talked about. Everybody's talking about happy days. Nobody's talking about loss mitigation and solving problems.

So do I want cash or do I want terms? I always want cash because it's hard to pay you when I don't have the money to pay you yet.

Seth: I guess this kind of like, I think part of what's helpful about this conversation, is, at least from your perspective, in your opinion, which is certainly worth a lot, when you're looking at what the land operator is going into, where they're expecting somebody like you to pay for everything, and you're holding title to the property, what should they expect their role to be?

It sounds like if somebody is going to partner with you, their expectations should be, I don't really get to make the decision on when it sells and for what price it sells. That's up to the guy who has all the money into it. I don't really get to decide if this thing goes past the six-month window. What's going to happen next?

And I guess if that does happen, if you do decide to fire a sale or you do something else, does that operator still get a cut of whatever profit there is, if any? Or at what point are they just cut out of the deal because they didn't do their part?

Steve: The contract says you can buy in for 20% and get an extension. You can adjust the price down 10% without asking me at all. Anything below 10%, we have to have a conversation. You have to tell me why.

Seth: So this operator, are they working with an agent to sell it, or are they trying to sell it on their own?

Steve: Typically, it's listed with an agent. I have mixed feelings about the flat fee listing services. I've had mixed experience with flat fee.

So I look for the busiest white-tail agent if we're selling on hunting land. We've got a guy in Indiana that has been selling property for us there. And all of his pictures are of him with some dead animal. He's my guy. And if he walked it and he likes it, then it's okay.

But sometimes the agent didn't get out there. Sometimes they do a desktop evaluation. They cut corners because they're only paid on commission. And sometimes I wind up buying things that have too much slope. Not anymore.

Seth: And why not anymore? What are you doing different?

Steve: One of the metrics we measure is slope.

Seth: And when you say we, do you mean like you personally, or is somebody in your team doing this, or how do you know? How can you be confident in that?

Steve: The AI's name is UV. So UV looks first, and UV looks at slope, pulls Redfin and Zillow comps, looks at distance to the nearest power pole. It has six metrics that it goes and does, and it presents those on a screen, and every property gets its own card and is a project, and it presents those there.

With a press of a button, it can pull local information from the census and that kind of stuff, like what's going on in this town. Oh, this town's got super high unemployment and poverty levels; that's not for us, maybe for some people. I've done seven projects in a very poor town in Louisiana because I've got the right partner, but generally, I want something, a secondary or tertiary market that has reasonable sell-through rates.

I look at three, the computer looks at three-month, six-month, one-year sell-through rates. We look at the neighborhood, the zip code, and the county, because you can be, some places, say, Tennessee, and there'll be one sale in the neighborhood but five sales in the county in three months. All right, there are people, they're buying and selling.

I don't like the theory of I want to go where people aren't you know there's 3,000 counties in the country and some of them, there aren't any people. I don't understand the desert square game. I don't understand. People do great. Some people just do fantastic.

I don't understand the zero-down, $99 a month, no credit check game, unless you are in the loan-to-own business, which is an old car dealership term. When I was younger, not at 67 years old. When I write a seller finance note, I want to stick it in my 401k. I want to sell it to another investor. I want to do something with it that maximizes its return.

And I just want to set it and forget it. And like I said, we take a thousand payments a month. I don't know how long ago was the last time I actually posted a payment. Now it's probably coming up on a year.

So, but back to, you know, we underwrite. I don't like properties that are built like this. I don't like properties that are underwater. I don't like wet. I don't like dry. I like trees. I like trees and I like Walmart not being very far away. That's how I would look at a house.

Seth: On this whole due diligence conversation. How much money are you willing to spend or how much money do you typically spend on due diligence? Like, are you paying for surveys or perc tests or wetland delineations?

Because it sounds like when you get to these big properties, it becomes more and more worth it to do that because you don't want to like, oh, we actually can't do anything with this property. So do you usually spend money on due diligence or how does that work?

Steve: This has been part of our experiment. We've been growing up into bigger deals. We now won't take anything under 20,000, but I still get, I get weird at 200,000. So if somebody had a million-dollar transaction, maybe we take a piece.

I just did that with somebody who was around Land Academy at the very beginning. And I put some money into one of his deals because he had a partner that it was going to take too long and they wanted it out. So I substituted in because I want to learn. They're developing, they've got a developer in hand who wants to put a senior living center on this property. And I want to see how that goes.

Seth: In situations like that, where you're only funding a part of it, are you taking like a secondary mortgage position or are you a co-owner? How does that work?

Steve: In that, the property's in a trust. I substituted for one of the other trustors. And so I own, I think, a one-sixth share. So the cost of underwriting, it's a tiny, lean business.

Nick Curry is my partner. Greg Hodgdon came on board a couple of years ago. I had a TIA [transient ischemic attack], I had a mini-stroke. And when he came up, he came up from Tucson to make sure I behaved. And he saw how much fun I was having, and he went home and started writing code.

So he based all this on Airtable, and it's moving over to a SaaS platform of some sort. And I don't know. I see him writing in Python and JavaScript. And I look over his shoulder. That stuff was way back at the beginning of my career. I was doing key punch cards.

A computer programming or any kind of data analysis background is really good for this business. If you like figuring out puzzles, this is the place to be. So what do we do? So we look at a piece of property, we try to figure out what's wrong with it. Often there's something wrong.

So I've got Greg, all the people that are doing this are all 35 years old, it's cute. So there's Nick and Greg, and then in the Philippines, there's a young man named Joaquin and a couple of admins over there. I wasn’t being a little cheap, I wanted to save some money. I didn't want to hire another $50 an hour person like I would pay in the United States. But his mother was my admin for eight years. And he had a good chunk of his education in the United States and worked for a big real estate firm in Orange County. So he's perfect for us because he is naturally pessimistic and careful.

And I'm completely a cowboy, right? So that little team does all this.

If we're doing the same transaction every time, I can ask UV, my non-paid employee, “Give me some comps on five acres in this county, and how does it compare to this property?”

Seth: When you say UV, is this something any of us can go out and start using, or is this a proprietary AI software that you have?

Steve: It's our proprietary Large Language Model built inside our Airtable.

Seth: So there's no point in me trying to Google UV, however that's spelled.

Steve: No, no, no. It's my kid naming stuff. stuff. The software, the platform he built, he called Wiggle. And the CRM that he built, he called Wobble.

Seth: Okay, sure.

Steve: Makes them happy. Yeah, because we wiggle and wobble in transactions. It makes them chuckle, right? So it's good, we should laugh, right? I forget that. I keep coming back to this. I'm old. I forget to laugh.

Seth: Me too. I get that all the time.

Steve: Yeah. So here's the takeaway from today. Have a good time.

Seth: I got to write that on my wall some days.

Steve: Right. Yeah. I mean, we're getting to help people. We're giving people with it. We're helping somebody who's got something they don't want anymore and helping somebody get something that they think is a good deal, better than what they paid for. We sell property, like I said, about 80% of what is listed of what market rate should have been.

So people are getting something. If they don't have the money, well, Steve knows how to lend money. So I already said that I don't like the zero-down, no credit check, all that stuff because I bought some of those and half of them go bad, right? You want some desert land in Oregon? I've got a couple of lots. They're just not for me.

Seth: I've had a similar experience and I don't know why people do it. I think it's just because they don't know any better. They don't know exactly how to underwrite or how to offset it by getting a higher down payment. They just don't have the metrics figured out yet. But I agree. I mean, it's a huge racket.

Steve: Discount solves the lack of underwriting. So let's work that through.

I paid $100,000 and I'm going to sell it for $500,000. If things go bad half the time, well, I made $250,000 and I still have that $100,000 to go and do again.

Seth: I suppose, if you consistently do that.

Steve: And if you build those things, and that's what I do. I buy paper and I have bought paper at a discount for decades. And I've paid basis points for paper. I've bought 10-year-old credit card accounts for half a penny. So that's one end.

By the millions upon millions of face value for tens of thousands of dollars. And all you need is five people out of the thousand to pay and you hit a home run. So that's the extreme of this. And that's a very big business. That's a very big, robust world.

So here we are. We have somebody who wants to create a seller finance note. I'm going to use the same kinds of rules that you would use if you were using a registered mortgage loan originator. If you were going to use somebody who's going to sell you a house, somebody who can qualify you for a home mortgage. I need a credit score above 640. I need proof of income that the monthly payment for this raw land that you have no utility for is no more than 10% of your pay. So if you make $5,000 a month, you can't have a $700 a month payment.

I want to price things to people. And the less you make, the lower that percentage has to be because everybody has the same basic $3,000 a month cost of living, right? If I'm going to sell to you on terms, I'm going 10% minimum, 20% makes me happy. I'm going to want a better than 640 FICO, no serious derogatory.

What I've done my whole life, right? No bankruptcies, no judgments, no criminal acts. I'm going to want to know that you have at least an active credit card that you're making a monthly payment on and your phone bill, and you know how to pay a bill.

You have to sign up for ACH. I have to have an automatic withdrawal. If you cancel your automatic withdrawal, now you're in default, the rate goes up, all that kind of stuff.

So say we have a $100,000 note that was in this drawer over here next to me. There are several. I will have bought that note for like $65,000. I'll have bought a 10-year note. The one that popped into my head was 20 years. 15 acres in northeast Tucson, a place called Marana.

And speaking of desert squares—but I understood the utility. She's going to make it a horse farm. There's a horse farm next door. It's fine. She can make $1,000 a month payment or $860 a month payment because she's a registered nurse. And her story is she is retiring from Maryland, moving to Tucson. And at that point, they will build their ranch and she will refinance me out.

So I did 20-year term, 12% interest with a balloon in five years. So I'm collecting $860 a month on a $65,000 investment for the next five years.

How did the partner get paid? That's the other question. There was a $25,000 down payment. I gave the partner 20. So the partner ate out of the down payment.

The partner had a choice. The partner could say, I want to stay in for my 50% for the whole thing. And I'm fine doing that.

Seth: Is that all spelled out in your partnership agreement in terms of when and how are you going to start taking profits? Like, does it have to be determined upfront?

Steve: It is. The base contract says all cash. The base contract, you can extend with a down payment. You can limit the price. You have to manage market.

You have to do all this work for your half. And it's one page, two pages. So we had a simple one page that we cribbed from another source. And now this, there's more that needs to be disclosed. And again, the ability to buy in if you believe in the deal or walk away, no loss.

But then when we go to a payment arrangement where you're going to ride in the whole way, the last one of those I did was 35% to them and 65% to us. Because it was going to be a 10-year note.

Seth: One quick question there. I've heard you say a few times the operator can buy into the deal to extend the timeframe. So how much is it getting extended? Is it like another six months? And like, is there a certain percentage they have to buy into? Or what is the number they have to kick in for you to do that?

Steve: We're all making this up as we go, right? I've been offering 20%. You put in 20, you reduce my risk by 20%. We'll extend this another six months.

And again, you're not handing me $20,000 or whatever. You're investing $20,000 in this deal, and you will ride along with me the same way. If you believe in this property and everything turns out okay, you'll get that money back and then some.

So this idea we have, I want to be as aligned with you as I can. The more we are on the same side of the table, the more transactions we'll do, the better things will be, the more fun we'll have. We'll see you with this exotic car thing. Somebody had to pay for that, right?

I love going places and talking shop. I want you on my side of the table until at some point you don't need me anymore. Or you need me for, you want to be 50-50 in deals. And I have people that do that. It's like, hey, I'm short 50 grand. I'll put up 50. You put up 50. Off we go.

Seth: I hear you talking about the importance of alignment with the partner, which makes total sense. It makes you wonder, under what circumstances would you not fund a deal or not work with somebody?

I understand you mentioned the deal needs to be over 20 grand. So like there's one thing, or maybe it doesn't go over 200,000. So that kind of helps us understand the size. But is there something about the person or anything else that would be a red flag?

So you'd be saying, no, like, I don't want to do this. I don't trust you. I don't like you. Anything come to mind?

Steve: I want to know where you learned. I want to know what you've done. I want some history.

My guy, who's the mechanic is like, how did he get from that to that? Right. And we were funding little fives and tens for him.

And he grew up, you know, and but I think for every one of those, there's how many people go to a school, buy a mentorship, join a $25,000 mastermind, and then don't do anything or try and fail. I think most people try and fail in whatever endeavor, most people are told they can't.

So they believe they can't, you and I, when somebody says you can't, we go, Oh, yeah, watch this. And we are the exceptions. So I want to know that you're honest. I used to run background checks. I'm not doing that lately. I'm not saying credit reports, but again, in the world that I come from, it's very easy to get public record access.

I had such a nice little transaction that I was going to do. And then I said, you want this much money, I'm going to go get a credit report. Because they were looking for a third mortgage on a house.

And I said, I'm going to look at a credit report. And she says, does it matter that I went bankrupt five years ago?

And I said, yeah, it does. Well, you know, things were different. No, no. You know, when the going gets tough, you fold. We're not aligned.

I owned a shopping center. I bought a shopping center. My biggest bet of my life. I bought a shopping center in Denver in December of 2006 for $5.5 million. In March of 2008, it was worth $2.5 million. Everybody around me was going bankrupt, right? We had the great financial crisis.

I fed that $100,000 a year for eight years. Man, did that ever turn around? I finally turned it around. I sold it for six and a half. I broke even.

Seth: Good for you. That sounds like a terrible storm to ride out.

Steve: Oh, and it destroyed me emotionally.

Seth: Oh, I'm sure. That would totally wreck me.

Steve: So here I was. I had built this business for 17 years. I cashed out. I had all this money and decided that I was going to be a real estate investor.

And guess what? I was a real estate gambler. And I'm a terrible gambler. So that stuff, you know, I used to ask people years ago, well, what'd you do in the crash? But now all of you guys, you guys were all in your 30s. You were in high school, right?

Seth: I got started in the crash and it really messed me up. To this day, I kind of carry that baggage with me and the decisions I make. It feels like baggage now, but if things crash again, it'll be a huge asset, I'm sure.

Steve: Oh, yeah. Yeah. So I'm not the right partner for everybody. I'm looking for sensible people who'll watch my back too.

Seth: I don't know if this has ever happened, and if it has, maybe you can help me understand without revealing any personal information. But have you ever worked with an operator where the relationship went sour or you just wouldn't work with them again? And if so, what happened and how could that be avoided?

Steve: By not lying to me on the way in.

Seth: It's all detailed.

Steve: You know, simple as that. I'll be polite and say it's overzealous optimism. I see a lot of that. And again, you've been around a little bit. I've been around a little longer. People that are selling stuff aren't going to tell you the bad news. And if I'm selling you my deal so you give me money.

So how do I underwrite? I underwrite differently than everybody else in my team. They all go numbers, numbers, this, that, and the other, all this.

I take my KML from Prycd. I take my Google Earth KML, and I take the little man, and I drop him down on the street in front of the property. And I look around the neighborhood. I go up and down the street.

I've seen too many things. So this last one that I said no, the deal partner, the person looking for the money, sent in their Google Earth pictures, and they showed this, that, and the other.

And their pitch was that the end user was going to be somebody who's going to want to develop some houses and make long-term appreciation and have this whole story. It was really cute, probably written by ChatGPT, and so you zoom out a little bit and you look at the neighborhood and you go a little bit to the left and you drop down and it's mobile homes from the 60s, it's boarded up houses. This is not like the hood, like Cleveland, but it's the hood of Arkansas. It's the backwoods.

Behind, on a private road, so not even a real access, is this locked parcel that somebody's trying to get rid of. And so, oh, I'm going to build nice houses there. No, you're not. So somebody has an infill lot lot and the neighborhood won't support a $400,000 house or a $350,000 house, what are you going to sell the lot for? You have to give the builder a deal.

So if the builder is going to build a $350,000 house, it's going to cost him $250,000 to do it. And so maybe he can pay $25,000 for the lot. So if you're buying the lot for $30,000, you're going to try to sell it for $50,000 and the builder can't afford to buy it.

Seth: Well, I hear what you're saying. And I think what you're getting at is the devil is in the details. And usually, if there's going to be problems with a property, it's going to be something that's not right in your face. You kind of have to look around for it a little bit.

And I think the idea of using AI to do due diligence is pretty awesome. And I feel like that's going to continue to develop. But how much can AI really do? Maybe just a first pass, but you really can't rely on that for a final decision, right?

Steve: What it can do is, what it's doing for us, is it's saving me all the selective manpower.

Seth: Yeah. 80-20 lever?

Steve: Yeah. It runs off to Zillow and gets me my sold in 30-60-90 counts it goes and it knows, go look at within a mile, go look within the zip code, go look within the county, a minute later what would have taken somebody 45 minutes is done.

And it's smart enough because it's now done enough transactions that it can pretty much tell the difference between a house, and a property that is listed as land but has improvements on it, and the Prycd model doesn't do that. When you go look at Prycd, there's a page that says, here are the comps that we use. And you'll see the same comp for Realtor, Redfin, and Zillow. They've counted it three times. And when you go look, and why is this one 100 and this one is 20? You go look and say, oh, there's a barn. There's a this, there's a that.

When I talk to the Prycd guys, I listen to them talk and I chat with them a little bit after. The data that is out there is dirty. It's just not perfect. County records or county records, listings or whatever they're what they are. I can exclude bad slope, wet, no access without having anybody touch it.

Seth: Yeah, I was actually just talking to Max from Prycd yesterday. We were talking about that exact same thing, about how like the data just isn't perfect. You know you can't trust it implicitly.

Steve: So it [AI] does half of the work and as it learns it does more and more. We're having the machine vote now.

Seth: So in terms of once it does half the work and you have to fill on the rest of the gaps, whether it's getting on Google Street View and looking around or like doing an actual perk test or a wetland study or anything like that, are you typically spending money? Like, how do you know when you have enough information to be confident enough that there's not going to be some “Gotcha!” that comes out of nowhere?

Steve: We do an over and under $50,000 and over and under $100,000. And so the more we're putting out, the more detail that we want.

If it's over $100,000, I'd like to talk to the agent while he's standing on the property with his phone and going around and showing me. That's my happy place.

Seth: And how do you know you have a good agent?

Steve: Well, because they took the time to drive out to the property and look. And I'm going to look him or her up already to make sure that they're active in their market or that the brokerage is a solid brokerage.

I've been lazy and just using Whitetail for rural rec land, but not every Whitetail branch is the same. I got a slope problem that's coming up on two years that I don't know how we're ever going to get rid of, just sitting on the balance sheet.

The agent said, “Oh yeah, this should sell based on price per acre.” Well, the thing is just a cliff, you know, and it's not hunting land because deer are not going to walk up a hill that steep.

Seth: You should check out my blog post called Slope Savvy that explains all the different things you can do with super-steep properties.

Yeah. Oh, the one you posted today, the one you posted today about the cheapest places to buy land?

Seth: Yeah.

Steve: That's not me. I mean, that's not my world. But again, if you're going to run that kind of machine, our core business collects now, like I said, a thousand payments a month, two hundred dollars a payment. A bank's not interested in that, that's kind of boring. Dull, dirty work.

So that's the same kind of thing as doing five-acre parcels. I already have a machine doing that. The idea of going to land was to start working in a better asset class than unsecured subprime loans.

Seth: When you fund these land deals, how often do they involve some kind of improvement of subdividing or improving or rezoning or anything like that? Is it just a straight flip or do they ever do stuff to it to make it worth more?

Steve: It is most, 90-plus percent, have been straight flips. And our goal for the next several years, we actually did a little discussion and planning is to move up and look at value-add solutions.

We're also going to start doing our own mailing. And those are specifically for properties that we can, at least on paper, improve.

I've got some experience in home rehabs and experience in mobile homes. And so I'm a good buyer of discounted mobile home-friendly lots because I've got the pieces in place to go get a house on it real quick. That may be something that we explore.

Paper subdivides would be the next step for us. And I've got one working in mid outside of Lansing right now. We're cutting and 10 acres and three.

Seth: So do you mean you are doing the subdivide or you're funding somebody who's doing that?

Steve: I'm funding the subdivide.

Seth: Okay.

Now, I saw you mentioned something in our Facebook group. I thought it was you, where you mentioned this concept of, you know, there comes a point when we all run out of capital and this even happens to funders when like you run out of capital.

Has that ever happened? Or if it ever did, what would you do then? Like, do you just stop for a while or is there some other place you go to get money?

Steve: It's coming. Like I said, we've got $2 million sitting on market, and some of it's going to sit there a while. Some of it just needs to wait until things warm up, you know, so the weather is better. We have deals closing every week. I will need to borrow money if I'm going to move up. And in my world, that cost of capital to me is 12 and points.

So it's how do I, how do I do that? You know, do I joint vent? Do I look to joint venture, my joint ventures, but do I shift to developing my own sourcing and then find money partners from my deals?

And we're going to run down that. We're going to look, we're going to look to move to the other side of the table. I think I'm compelling to other funders because I've got all this track record now. I think I can get 30% split money.

It's okay. I don't want to start a fund. That's a whole another job. It's just not something that I want to do. If we do a fund, the kids, my young partner can do that. I'm not going to be around long enough to... I think I'm going to be useless in 10 years. I don't think I'm going to have much to bring to the table.

So yeah, I'm open to the right people for money, but they're not going to be in this podcast. They're going to be, these are the operators that you're talking to. They're going to be people my age. They're going to be self-directed IRA investors, family funds, family office kind of.

Seth: Out of curiosity, do you ever pay for a land investor's marketing costs? I'm assuming not, but what you said earlier about how you're sending out your own mail, like, do you ever participate on that level where you're paying for them to do the mail and then you fund the deal?

Steve: We didn't. We've done two experiments with that, maybe three. We bought a bunch of DataTree credits and spun a list for two new people to see what happens. Not enough came out of it to get something really, really going.

I took my partner. I guess you can call hem my partner. LaDasha is my partner. In Alexandria, Louisiana, where I've done seven projects with her. Home rehabs, fixed rent projects. And I mailed, we did a micro-mailing for looking for a specific landlord.

We were looking for, you know, the tired landlord list. We were looking for me, right? People that own things a long time. And we got several opportunities out of, I think, I mailed 700. Just here's this little sample. She's a contractor, she got some contracting work, she got a couple of listings. She's also a broker and she got a couple of people that wanted retail.

The way things used to be, you know, she got like a 10% return, she got like a bunch of phone calls. We did our first test mailing in northern Alabama, around the Huntsville area. I mailed 10,000 pieces of mail and nothing came of it. So there's some value in this micro stuff and that fits more with where I come from. My experience is before all this automation.

Seth: Yeah, it kind of seems like, for the funder to be paying for the operators’ direct mail costs or whatever it is, it almost kind of seems like the funder isn't staying in their lane. Like, it's not really their business how that happens or how good they are at doing that.

And especially if we're working with a new person, it's it's almost likely that they'll screw it up and waste money.

Steve: Well, and that's why I want to know where you learned how to do it. Did you come out of Land Geeks? Did you go somewhere and learn it or did you just watch five YouTube videos?

The success we've had from wholesalers has been strong. People that are used to working for a $5,000 prize, now working for a 50, they're motivated. They keep people on the phone. That's a skill. I could go to several services that will pick my county, do my mail, do everything A to Z, but it's the inbound or outbound phone call that matters. It’s can I keep somebody on the phone long enough that we can get away from the us-and-them and talk about, if they have a problem, maybe I can fix it.

Seth: That whole thing about what education camp you came from, I totally understand that question. But part of me is almost like, I don't know if that's even really enough information to draw a conclusion. Because I know a lot of people who may have gone through a course, but they didn't even watch that part of the course.

Or they did, but they kind of made their own judgment call on how to pull a list, whether it be right or wrong. So I don't know. It's really tough to get to the bottom of that without having some track record to look at.

But one last question, Steve. I know you got to go pretty soon, but I don't know how often you've seen what other funders do and what their agreements and contracts look like. But when you sort of sit on the other side of the table and try to look at this from an operator's perspective or the active flipper, you know, buying and doing the deals and all that, can you think of any “Gotcha!” things that they should watch out for in a partnership agreement? Like ways that the funder could take advantage of them or do something unusual that I'd watch out for that.

Or is there no such thing? Like if it's written in the contract, read the contract and then you'll know. Put your stance on that.

Steve: That's really it, read the contract. And if the contract is too complicated, that might tell you something right there.

I've signed some really bad contracts over the years now because I didn't read pages 7 to 14. I got, “Oh yeah, I trust these people.” So a couple or three pages is probably really all it needs. A good contract is just memorizing what we've already discussed and who does what. Who does what, when you need to do things by.

So if I say, if I put in the contract that I want a for sale by owner sign on the property within seven days of closing, evidenced by a picture, that's what it is. And I will sometimes get that granular.

But I say all marketing solutions, including listings, Facebook, for sale, neighbor letters, all of that stuff. And the smart people come back and say, I can't list it with the agent because I'm just mailing. I'm mailing the neighbor letters first. I need two weeks. And my response then is, how about a phone call?

If people are adverse to the telephone, they're not going to be successful unless they're going to run a giant machine.

I don't have to talk to people anymore. I don't know really how much I really add in value. I just like talking to people.

Seth: Well, Steve, again, thank you so much. I'm very grateful for your time and going through all this stuff with me here.

If people want to learn more about you or connect with you in some way, Is there a place you recommend they go to do that?

Steve: So the people that I stay friends with and in contact with and learn together are people that I'm engaged with in money. Put a deal into financelandsales.com, fill it out, put it in, the team will do it, and magically you'll hear from me to find out your story.

I want to know Seth's story. I don't go to these conferences to learn at the conference. I go to make friends and find deal partners. There's so many more places that we could take this conversation we can talk about. Hypothecating notes, we can talk about leveraging your existing book, I've got people that I lend money against their platform, against their loan, their payment stream. In fifty thousand dollar increments, they just they're a little short, they got deals going yeah, give me half your payments in the next six months, done. You know, that kind of stuff.

But anyway, financelandsales.com is where you put a deal in. There's an email address there. And if you write there to hello@financelandsales.com, they'll filter it and give me things like, oh, Steve, they said they wanted to talk to Steve.

Seth: And I actually had a whole bunch of questions about notes that we didn't even really get to. So maybe we'll have to do a whole separate conversation at some point, Steve.

Steve: So let's work up a list for notes and that I'd like to do some screen share and say, this is how you calculate yields. And this is why, this is that.

Seth: Yeah. That'd be awesome.

Steve: FinanceLandSales.com. I've enjoyed this and I thank you very much. I hope we get to do it again. I'll see you in May in Minneapolis, if not before.

Seth: You got it. I look forward to that. Thanks, Steve.

Steve: Okay. All right. Take care.