Episode 10: How to Fund and Finance Your Land Deals Like a Pro Artwork

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The Ground Game Podcast

Episode 10: How to Fund and Finance Your Land Deals Like a Pro

December 03, 2024 • Justin Piche and Clay Hepler • Season 1 • Episode 10

🎙️ Welcome Back to The Ground Game Podcast! 🎙️

In this episode of The Ground Game Podcast, hosts Clay Hepler and Justin Piche dive deep into the essential topic of funding and financing land deals. They explore various strategies and methods that can help investors maximize their profits while minimizing costs.

Key Highlights:

Quarterly Goals Update: Clay shares insights into his recent challenges with pipeline revenue and the importance of sticking to processes, while Justin discusses his success in realizing significant gross profits over the past weeks.
Team Building Tactics: Clay introduces the concept of Performance Improvement Plans (PIPs) as a structured approach to support underperforming team members, emphasizing the importance of clear expectations and accountability.
Creative Financing Strategies: The hosts discuss various funding options, including cash purchases, funding partners, bank financing, hard money loans, and the innovative approach of setting up a limited partnership for funding deals. They weigh the benefits and drawbacks of each method, providing valuable insights for both new and experienced investors.
Real-World Deal Review: Justin shares a recent experience with a property in Georgia that involved navigating timber conservation status and rollback taxes, highlighting the importance of due diligence in land transactions.
Tech Tools for Efficiency: Justin introduces a new tool, Texting Betty, which integrates with Follow Up Boss to automate text messaging, enhancing communication and follow-up processes in their land investing business.

This episode is packed with actionable advice and real-world examples that can help you elevate your land investing game. Whether you're just starting out or looking to refine your existing processes, this conversation is a must-listen!

Hosts:

Clay Hepler: A seasoned real estate entrepreneur focused on building an eight-figure land flipping and development business.
Justin Piche: A former US Navy submarine officer turned real estate entrepreneur, dedicated to building high-performing teams.

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Clay Hepler (00:00)
Welcome to the Ground Game Podcast. This is your host, Clay Hepler.

Justin Piche (00:05)
And this is Justin Piche, and we're here to teach you how to win the ground game.

Clay Hepler (00:22)
I was thinking about our conversation from last week and the sort of difficulties that people really run into. And it's interesting, you know, when scaling a business, right? It's really interesting. A lot of times when we say those things, they're actually more for ourselves than they are for other people. And so, you know, there's a couple of things that are, that are present in my business currently that

are opportunities, but they're not solving problems, right? And a lot of times I think that what trips people up is actually focusing too much time on opportunities and not enough times of actually solving problems in our business. And one of the big things that we're working on currently is our disposition process, right? And offering more owner financing to our sellers.

because we know that we can turn around and actually sell these deals. And I think that's kind of what inspired our episode today is we go deep dive into some creative financing, selling and buying creative financing. I think it's just really timely for a lot of people to help them up their game to put more money in their pocket.

Justin Piche (01:22)
Yeah, I agree. And maybe as a quick intro to everybody, you know, we're going to go through, it's kind of a normal episode. We're going to go through some updates on quarterly goals. Clay's got a team building tactics to share. Our main topic today is really what Clay just said is funding financing. We'll talk a little bit about acquisitions and Dispo funding and financing for deals. And then I thought at the end, I'd like to talk through a tool that I just am onboarding in my, in my kind of tech stack right now.

that'll be, that'll be interesting. I wanted to try it out for a while, but I'll give a quick update of what I'm doing and why I'm using it. and then I've got a little deal review, maybe some, maybe some nuggets for rollback taxes in there. so yeah, Clay, why don't you give a quick update on your quarterly goals?

Clay Hepler (02:32)
Yeah. So, man, we like, talked about a couple of weeks ago, we got hit really, really hard. had a, a month that when I look back, we had about

October was about 350 K under contract. and we had bad deals after bad deal after bad deal fall out of contract for easement problems. a lot of easement issues. I'm sure you've never dealt with anything like that. and, and, you know, contested ownership and, going through some quick action for quiet titles that.

that actually have killed deals. And so, man, I I talked about this last week. We just had a, I've had a really tough last two weeks. And so our pipeline revenue for the quarter is at about 250K at this point, which is really low for where we need to be in order to hit our goals. But we had some really tough hits.

And this happens in, in a land business. had some really tough hits over the last two or three weeks. And, and I know that that's a narrative that it, for those that are active followers, this happens guys. And it's just about continuously sticking to your processes and improving. And so, you know, we're going to, we're digging deep this weekend and onboarding a new lead manager. We're going to talk about a little bit about, some things that I'm doing later in our team building tactics about how we're.

or shifting in order to produce more predictable, consistent revenue production. but yeah, man, that's, would say we, added an extra it's Tuesday now should be about 70 K this week, but we're, we're tracking about 250 K for the quarter over the last month and week.

Justin Piche (04:27)
Yeah, man, this business is a series of ups and downs for sure. Hopefully mostly ups. That's the goal. Right. Just a quick update on my goals. We let's see. We realized 60 K in gross profit over the last course of the last week, which I think bumps up somewhere around half a million, maybe five fifteen, somewhere like that towards our quarterly goal, which is eight hundred and realize gross profit this this quarter. So we're on track.

And honestly, man, it's been a, for me, it's been a really good two weeks on sales. We've just got a ton of contracts signed on the sales side. You know, it feels like this business is sometimes like a slinky, you know, like you, you send a slinky back and forth and like it comes in these ways and bunches and there's a month or two of dry, a dry spell you on acquisitions or sales. And then it just, all of a sudden the flood gates open and it feels like we're kind of.

reaping the benefits of those floodgates right now, which is good because, you know, come end of December, everything gets slow again, especially on the sales side. And so we really need, I keep telling my sales team, we got to get it while the getting's good, right? We got to get these properties to market. And we're still working through a backlog of properties to list and sell. We ended up moving over one of my other team members from acquisitions over to sales to give my sales manager, Brian, another sales team member to help.

catch up and get more properties listed. Something else we did is we do a lot of Facebook marketplace listings and we were just using my Facebook essentially to list all of our properties. And in order to stay unbanned on Facebook marketplace, you can only list so many things each day. Otherwise you'll get flagged and banned from Facebook marketplace. so cycling through our inventory of properties took a long time and we'd have properties that have marketplace listings that are

a really old essentially. And now we've rolled out my wife's Facebook. We've rolled out my, my, my assistant's Facebook and my sales manager's Facebook and my Facebook. So now we have four Facebook accounts, all people at the company that are now listing properties on marketplace to sell, which is great because we have about 60 properties in inventory. And so every two weeks, essentially we can get through one listing per property every two weeks.

which is great. It's been generating a lot more leads. Our listings are fresher on marketplace. So that's been that's been really, really solid. So I'm pretty pumped about that. That's really Yeah, that's pretty much it towards towards quarterly goals.

Clay Hepler (07:06)
Yeah. And as a land investor, we kind of know that there are these seasons of harvest, reaping the harvest and then no longer having any harvest, which is it's kind of like the fall and spring are like the bonanzas for selling land. And then the summer and the winter sort of are when it gets pretty cold in selling land. Right.

And so you want to time those things pretty well. It really depends on the market that you're in, to be fair. Florida in the winter is not really going to be that affected. mean, people are going down there. There's a lot of snowbirds going down there. But most markets are pretty thoroughly affected in the winter. So yeah, dude, let's jump into the hard-hitting tactics, team building tactics. These are the hard-hitting, actionable tactics that we actually use every week to enhance

Justin Piche (07:35)
Yep, 100%.

Clay Hepler (08:03)
manage and scale our teams. Now, for me, know, over the past two weeks, I've been talking about problems with losing pipeline rev not bringing enough, honestly not bringing enough in, you know. For our size of business, you know, someone might say, hey, you know, you're 250K in five weeks. That's freaking awesome, right? But for our size of business,

Justin Piche (08:14)
Thank

Clay Hepler (08:29)
it should be way more than there's sort of a couple of places there could be a massive constraint. Right. In our sales process, which is a little different than Justin's for those long time listeners, our lead managers are the people that are actually qualifying these leads pretty heavily. Right. So they're the ones that if they're beating enough doors down, they're going to put a lot of leads in the hands of our closers to close.

So lead managers are incredibly important. Our closers are incredibly important too, right? But we've had a lead manager that's been consistently underperforming. And in our business, when someone is underperforming, we do what is called a performance improvement plan, okay?

So a performance improvement plan is a plan that is made between a manager and an employee that is focused on getting the performance up of the individual. Okay? So this happens when there's a pretty significant dip in performance and it's sort of the first red flag.

of saying to the employee, hey, there's a problem here. You're not meeting expectations. So let's give you more support. Let's give you more acknowledgement an effort to get you to the improvement, the performance that you need to get to, right? And so you come alongside this person and really spend a lot more time, whether you are the manager of this person or there was a sales manager or whatever position is, to get them to hit their goals, right?

Usually a PIP can last anywhere between one to two weeks. And so I reached out to a lead manager and I said, hey, you're not hitting our daily qualifications that we need you to hit. And you're really not doing as well as executing the script as someone in your position at the time that you've been in our company. So we need to improve those two things. And if we don't improve those two things, we're going to have a different conversation. And so we have a formal meeting. We go through the performance improvement plan and we say,

You know, this is what we're going to focus on over the next two weeks or one week. If we improve here, great. You're off the performance improvement plan. If we're not, if we don't improve here, then we're going have a different conversation. Right? And so this is a really fair way to approach an employee in a very formal sense to say, hey, I'm documenting that there is a missed expectation here between what you should be doing and what the position requires.

and I'm gonna come alongside you and empower you and support you and give you the resources you need to hit that level. But if you don't hit that level, then in most cases, it's an immediate firing or it's a reshuffling within the company. And that's a fair way to approach your employees so that they always know if they're underperforming, they have an opportunity to raise their bar and improve. But in all reality,

Justin Piche (11:09)
you

Clay Hepler (11:25)
I haven't found many people that have gone through a performance improvement plan that have actually been able to improve their game. But even if there's one in 10, we want to give them the opportunity to do that.

Justin Piche (11:39)
corporate world, PIPs, performance improvement plans are generally seen as like the death knell. You know, like you get a PIP and it's like, all right, you're on your way out. they really are intended to be used as a tool to raise the performance of that individual, not just raise the performance, but make clear expectations, get a commitment from them. And honestly, my philosophy on PIPs is that they need to be designed such that they are achievable.

There's measurable goals or measurable milestones or measurable improvements that you can actually look at and say, yes, you did this in order for them to be a good PIP. And this kind of goes back to, don't know if we were talking about last week or the week before the kind of hiring or the firing framework, like deciding whether or not you need to fire somebody. This is a step in that process, right? Making sure those expectations are clear, getting their commitment to improving, evaluating their level of improvement.

and then having another discussion afterwards. And sometimes, you know, these tools can be used to really raise the level of engagement and level of competence of your employees. But I think you're right. In a lot of cases, it's really just a, you know, capacity to do it issue that doesn't get resolved and ends up in that person exiting the company. And it might also be used as a tool to show that person they don't quite have the capacity to do it as well.

Clay Hepler (13:00)
That's right. And one last thing, think as you are scaling your business, right, which is primarily the people that are listening to the ground game, right, you're maybe doing one to three deals a month. You're looking to take your business to the next level and have more consistency. The way we do that is do one thing like we do everything. And a PIP is a representation of a more structured process to firing and

your employees will see that and understand that the company is getting more serious. If you're taking this and you're like, I'm inspired by Justin and Clay right now and I actually want to implement this into my process, man, I think that people see that and they start to see like, I know that as an employee, I'm never gonna just be fired. I'm always gonna have the opportunity to get a pip and be able to improve my game.

And I think a lot of people, a lot of global talent, is the primarily the talent that sort of is the backbone of the land business, appreciates that because most employers just like don't do that.

Justin Piche (14:11)
almost everybody wants to do a good job. Like they want to do what you're asking them to do. And so if they're not doing it, the PIP is just a way to show them more clearly. And, know, you have to, again, look at yourself and say, did I do everything I could to prevent them from getting on a PIP in the first place? Did I give them the tools they needed to succeed? And if you look at yourself and you say, no, I didn't, then

You need to start with that and then, you know, putting on a PIP is still fine, but you need to make sure you at least get those expectations across clearly then. But if you do, if you did, if you said they had all the tools, they had all the expectations and they're still not meeting it, boom, PIP, you know, get it written up, get it formalized, get them to agree to achieve these milestones, execute on it, and then do what you say you're gonna do. If they don't meet it, it's time to go.

Clay Hepler (15:00)
It's time to go. And let's say, I think it's time to move on to our main topic today, which is funding deals, funding partners cash. mean, Justin, tell her audience a little bit about the general structure of this.

Justin Piche (15:06)
Yeah.

Yeah. Well, the reason why I wanted to talk about this today is because this is something that I think everybody struggles with or goes through figuring out what is the optimum way to fund my deals. And there isn't a perfect solution for everybody, right? Everybody comes with a different set of resources, a different level of lend ability, if you will, a different track record of being able to close deals. And then the deal quality you bring obviously is different. You sometimes you have home runs where

you're doubling, tripling, plus your money on a deal. And sometimes you have deals with smaller margins that still are profitable. You know the market, you know you can get them sold, but maybe a traditional deal funder isn't going to be willing to put up the capital for that because there's not enough profit in it for them. so one of the key metric or key kind of goals for any investor in any business in general is driving down the cost of capital, right?

You need capital to purchase properties. need capital to improve properties. And if that capital is incredibly expensive, then it's going to eat into your net profit, right? It's going to make, take longer to achieve whatever that net profit take home goal you have is. If you have to give more of your profits away to investors or other people, then that leaves less than the table for you. So it should be your, your goal, your to drive down that cost and investigate whatever method you can to fund deals in an inexpensive or less expensive way. So

What we're going to do is we're going to talk through a couple of the kind of common ones and maybe some slightly less common ones in the land investing space and talk through the benefits kind of drawbacks that we see of each one. Not to say any of them are bad. mean, honestly, we talked about this in another episode, but even even a tiny piece of a watermelon is sometimes better than a whole grape or however the saying goes. Right. Getting a small piece of a good deal is better than either the not getting it or being forced to do smaller deals that you can fund yourself.

So the first one let's talk through is using cash. Okay, I think this is a pretty straightforward. You get a property under contract, you agree on a price and you have the cash in your bank account and you spend the cash, you buy the property and then you sell it. And so it's really easy. The benefits are you have full control over the deal. You have full control over the profit of the deal and

Nobody has any piece your profits. Like you're gonna make all that money that whatever you sell the property for. But there are drawbacks to that, right? And one of them is the loss of opportunity, right? If you have a limited pie, which most people do, right? You have a limited amount of money that you can use to invest in properties. If you invest that property or that money in one property and that's all your money, well then you don't have the money to maintain equity in other deals that you might be doing.

that cash is tied up, it's lost its opportunity, unless you do something else like leverage the property in the future, which is something we'll talk about here as well. What do you see as the main benefits and drawbacks of using cash?

Clay Hepler (18:16)
Yeah, so I'm kind of an anti-cash guy. and I think about it very simply, which is the return on your marketing dollars is going to be in almost every case higher than your return on your cash. Now, what are the examples that it's not? I think if you're doing a value add deal, entitlement deal, subdivide deal,

That's actually where it makes sense, right? Because the exit strategy, you can get your basis out, right? You can get all your money out, you can get your down payment out, and then you can stay in the deal and do some owner financing and reduce your taxable burden, build cashflow out of it, and sort of, it's primarily a tax consideration, right? But at the end of the day, you're going to, if you don't need the money, you can be,

basically get an infinite return on your money. Right? You get all your marketing costs out, your basis, your, you pay off your loan. But if we're talking on a standard flip, it's very, very hard to get above a 300 to 400 % ROI. Now, does it happen? Absolutely it happens, right? But for me, I like to invest my money into growing my business.

And this is just a personal philosophy. It might be right, it might not be right. But I'd rather invest my money in growing my business than invest my money in my deals. So I think the drawback there is the opportunity cost that Justin just talked about, right? Again, as you see, it's situational, but in most cases, I'm not gonna put the money. But if you buy something for 20K and sell it for...

70k a couple of months later Like it's it that's gonna probably be better than your 3x RoAS, right? So there is a place for this. There is a place for this

Justin Piche (20:25)
Yeah. And I use a lot of cash in my business. And I think it comes from maybe having cash, right? Sitting that isn't being, isn't as productive other places. Like for example, I'm not really buying a bunch of stocks. I have a 401k that has a stock portfolio, but I'm not using my excess cash to buy stocks because I know that I can make a much better return in my business just using that cash invested in properties. And now the other side of it is,

I wouldn't want personally to invest all that cash in operating expenses, marketing expenses, et cetera, because my business structure isn't ready for that much marketing, right? Like I can't spend all of that money on marketing at the moment or else I would have to, I would have to very much grow my team and the markets we're in, in order to support that amount of spending and actually take advantage of all those, those opportunities. But yeah, I mean, cash is, it's simple, but

I agree. prefer now when I first started, it was pretty much all my own cash, but now I prefer partnering with people and using other people's money to do deals and to scale that way. All right, then. Yeah, go ahead.

Clay Hepler (21:36)
I was going to say what shifted for you.

Justin Piche (21:41)
you know, honestly, was mainly the, the need to keep cash in the operating account to fund business operations. And I get, I just got too aggressive with holding onto equity and deals and deals weren't selling when we expected them to in some cases, right? Deals would go long. We'd expect to release a cash. Yeah. Does that ever happen? Yeah. So deals, deals stay in inventory a little bit longer. And then it's like, man, now it was almost by necessity.

Clay Hepler (21:59)
dude, I thought that never happened.

Justin Piche (22:08)
Like I kind of forced myself into it by deploying all of my cash into properties and then being like, all right, well, we're hitting a slow patch. A couple of sales that we had fell through. Now I need to buy these new deals. They're great opportunities. I can't sell fund anymore. I need to use other people's money and give other people a little bit of piece of this pie to get this deal over the line.

I think everybody eventually, unless you're just flush with cash, right? Everybody eventually hits that point. If you're scaling your business is like you're hopefully your deal flow outpaces your investible cash. I mean, that's, that's what scaling is all is all about, right? You're creating more and more and more opportunity and you will limit your growth if you're only using this set pile of cash, right? I think it's easier to grow an acquisition pipeline faster than it is to fully sell out. And it's always a lagging

thing, right? I consistently feel this as, I talked to my team about this today because one of the last things we'll talk about is kind of the new way I'm going about funding on my properties. But we're constantly kind of lagging where we have this huge, we're scaling our marketing, we're scaling our deal flow, we're getting more things under contract, we're getting more opportunity, but it still takes three, six, nine, 12, 18 months in some cases with big subdivides or maybe even longer to actually sell those out, get all the cash returned.

and then realize the profits to grow the investment portfolio or the properties and inventory. And we're scaling that faster than things are being released. So we have to find money partners.

Clay Hepler (23:40)
So let's talk about finding money partners. One of the core ways that investors actually in this business, they get scale is they don't start with flush with cash. I talk to a lot of people every week with the accelerator, right? And they're say, hey, I might have 20K, I might have 40K. And I think that's just good enough to get started. We talked about that in a previous episode. But they're not flush with cash and they might not have rich Uncle Johnny.

Or they they're not as smart as Justin and coming coming in with a bunch with a bunch of cash

But I partnered with funding partners my first year and gave up a ton of profit. I gave up a ton of profit. And the reality is they play a crucial role. They play a crucial role. And so I think the benefits for a funding partner, which you you have big programs like 50-50 splits or 60-40 splits. Dude, the benefits of these programs is they really help people get the due diligence right.

So many land investors mess up the due diligence, especially at the beginning. And if you work with a pro, you get that help. And that's so important, man, it's so important. And also, it does allow you to reinvest in your process. So you basically get a, imagine like a chief underwriter on your deal. So you're paying what you would pay an underwriter, right, which could be a couple thousand bucks a month. And every single month.

and you're paying them to do your underwriting for you, you know, after you package the deal up, get all the due diligence put together. that's a massive benefit. And then they pay for everything. They pay for literally everything. And so, you know, obviously the drawbacks for a funding partner is the equity split, know, 50-50, 60-40, whatever it is, 65-35. you know, I think at the beginning,

Justin Piche (25:35)
you

Clay Hepler (25:39)
That's okay to give up in order to get your feet wet. you know, I came from the house flipping world and you you would do deals on, you'd buy a $500,000 house and you'd maybe make 10%, 15 % on that deal. But like, so is the hard money lender.

Right? With the points, with the fees, they might make 25 % they might make 25k. Let's just say. So if you have a $75,000 pie and they make 25k, it's a pretty similar split as the funding partner is in the land business. Right? So I always kind of think about that because of my background with flipping houses. And that's where I see the real true benefits and the drawbacks of a funding partner. What do you think,

Justin Piche (26:18)
you

Hey guys, this is Justin. Just interrupting your podcast to say, hey, if you're getting some value out of this, if you're finding anything, any of these nuggets that we're putting down here valuable to your business, please leave us a comment. Let us know what's valuable, what you want to hear more of. And if you have any questions, please pop them down, put them in the comments as well, because we'd love to start doing some Q &A episodes where we answer questions from our listeners. That's it. Thank you so much.

Back to your regularly scheduled programming.

I agree. think the especially for newer investors that don't have like strong capital resources or track record, right, to go to their friends and family and say, hey, look, I've done these 30 deals. They've all been profitable. Here's the here's the results of my investments so far. Are you interested in investing? And I can give you a solid return of 15, 20, 25 percent on your cash.

A funding partner helps you build your track record and absolutely that is what you hit the nail on the head. You're parting with somebody who is not going to put their money at risk unless they believe in the deal themselves. And so they're going to do that underwriting and due diligence on their side as well. And if they're going to invest with you, then it's much more likely that it actually is in fact a good deal. You know, if you, if you don't have the full experience to know that yourself, then that's, that's a good check. But yeah, the drawback, like you said, is just a lot of profit gone. But oftentimes in this business, that's kind of

what's necessary when you're first starting out. So maybe a bit of a twist. This is something that I started doing pretty quickly is getting funding partners, but structuring it more like a GPLP kind of split where I was the manager of the deal or my company, my operating company was the manager of the deal who brought the deal, bought the deal, et cetera. And then I was bringing in partners, silent partners or limited partners into a silent partnership agreement that

they then got a share of profits. We basically said, hey, we're going to target a 30 % or 40 % return on your cash in this deal. And you'll invest in a portion of this deal. And the profits split will be the GP gets X amount. Maybe it was 60 % of the deal. Maybe it was 70%. Maybe it was 50%. And then the equity partners or the silent partners will get a certain percentage. And this is not legal advice. So if anybody's an attorney, please don't, don't, don't take this for legal advice. Consult with an attorney.

Usually I would do this with one single partner and then myself, I would basically fund usually like half of the deal or 60 % or 30 % and somebody else will come in and fund the rest. And then we'd run the deal and then we distribute funds in accordance with that agreement. And it allowed me to get a little bit cheaper money, but I wasn't able to really do that confidently until I had a bit of a track record.

Clay Hepler (29:13)
So I mean, I think that the benefit of something like that is you sort of have more flexibility, right? You're the guy that runs the show. And the benefits is, hey, I know I have this cash, this dry powder that I can implement right away, and I can go out and buy any deal that I want. And whatever the split is, whether it's, like you said, 65, 35, 70, 30, 50, 50,

You're targeting a really healthy, dude, 30%, right? 40%. And I think that that's really helpful, but you're not gonna be able to do that unless you first go through the using cash, the funding partners and actually have the credibility to do that. Unless, to be fair, you have a lot of confidence and you just go out there and do it, which I wouldn't necessarily recommend because...

There's so many things that, you know, I learned a grave lesson on my 60th deal that like is I'm glad that I didn't have any investors. Actually, I did have investors in that and I had to make them whole. had to come up with like 65K of my own money. a lot of times people don't have that excess capital that they can just put in if something goes wrong. And unfortunately, it wasn't even what I did wrong. It was

Justin Piche (30:21)
you

Clay Hepler (30:38)
something that my realtor did wrong. the benefits of this is the flexibility. Right. There's obviously the quote unquote drawback is cost of capital is high. But I think that the benefits surely outweigh the drawbacks.

Justin Piche (30:53)
Now this is, I'm embarrassed to say, but it took me more than a year to realize this next one that I can use bank financing for the purchase of land. I don't know why I didn't realize this. And we can, think we talked about this in another podcast, but you can use bank money to do a deal. Like a lot, a lot of folks start, you know, in the small kind of desert square type, like cheaper properties. And to be fair, you're

probably not going to find a bank that's willing to lend you, you know, 80 % loan to value on a $15,000 purchase. That's probably not going to happen. But when you start getting into the middle size, middle to larger size parcels, we're talking $100,000 market value or, or purchase price rather, or more, it is not terribly hard to find a local community bank in the market that that property that is willing to lend 80 % loan to value 75 % loan to value in some cases, 85 % loan to value on those deals.

And so it took me about a year to figure that out and once I did really any opportunity that I have on subdivides or on just cash flips I will go through a bank and get bank loans on and a perfect example of this is I have a property in Georgia that I bought for $80,000 and I went through a bank that I'd used before on a small subdivide and they gave me an 80 % loan to value loan on it. So I basically was

about 20 after all closing fees and everything I needed to bring to the table. was about $20,000 into the deal at an 80 85, I think $1,000 purchase price and sold the deal for $170,000, which if I had paid all cash, that's still a good deal, right? Essentially almost doubling my money. But now I've turned $20,000 into basically like a 70 something thousand dollar profit and using leverage, using just a bank loan. was able to easily sell fund.

bring that cash and make a 300 % return on cash by using a bank loan and using leverage. And I think the benefits, I mean, the benefits of bank financing are you have a very reliable partner that does their financial due diligence on you and your ability to repay them. And they appraise the property to make sure they're not underwater on the loan. So, you know, you're getting a property like below value or at at market value, whatever they assess it to be. And you, they know you have the financial capability to pay them back. It allows you to bring much less cash.

and reap a much larger return on cash reward for it.

Clay Hepler (33:22)
Right, and this is sort of the cash bank financing blend a lot of people can use to scale their business. When we're talking about pure cash, the reason why it's so difficult to scale with this is because if you're slugging out 80k, 40k, 50k, that's really hard. especially when you're starting out, that's why we use leverage of the funding partners. But the ultimate leverage is the debt.

Right? know, debt is the ultimate leverage in this case, and we can juice our cash on cash very easily. Now, the other form of debt is the hard money, right? So hard money, depending on your type of hard money, it's not really readily available in this space. Now, there will be lenders that say that they're hard money lenders, and they'll charge you like, you know, three points per month, right? Which is a 36 % ROI, right?

That's 36 % hard money, which is basically an equity split. Or there people that will charge you a prepayment penalty of 8%. So if you flip the deal in two months, then you still pay the prepayment penalty and you end up paying them a 80 % IRR. And so there are different levels of hard money. Now, the hard money that I came from,

is the house flipping hard money. House flipping hard money could be anywhere between one to two points, 11 to 13%, 14%, and then some junk fees and they're depending. All of the lenders that I know that do hard money have a lot of junk fees. Because land is, a lot of times these guys aren't even appraising the property. But what I find is,

Justin Piche (34:55)
Thank

Clay Hepler (35:15)
If you have a good enough track record, you can find very good hard money lenders. I have a hard money lender that I found, I have two that I finally found that are willing to lend up to that she just lent 400k on a deal that we bought. And at 11 % and a point and half, that's basically bank financing. But there's no appraisals, there are quick closes. So there's a lot of stuff there that is...

Justin Piche (35:41)
Thank

Clay Hepler (35:44)
more attractive than using bank financing and you might pay a couple of interest rates higher and a couple of points more. But it's hard to find, to be fair. And a lot of the hard money lenders in the space that are self-proclaimed hard money lenders, although they are to a certain extent using debt, first lien position, their terms are a lot more aggressive than your classic house-slipping hard money lender.

Justin Piche (36:12)
Yeah. Yeah. I think that's probably a like a good place for people to move to from funding partners. But it does the drawbacks of debt financing are that you're on the hook for those interest payments or those principal and interest payments, depending on how the loan's structured. You're on the hook for those. Right. Whereas a funding partner, a money partner, that money is invested. And if the deal takes longer than expected, the profit split, whatever is already negotiated. It's you already have that split.

codified in your original agreement and you're not going to be paying more, right? But the downside is that it could be more expensive with a hard money. It could be cheaper. It could be much cheaper, but you're also on the hook for those payments, whatever that structure looks like. Maybe that's monthly, maybe that's quarterly, maybe that's annually. And if the deal takes a lot longer than you expect to sell, that's where it can get kind of painful. You have that ongoing debt service you have to make sure you've set aside.

Clay Hepler (37:07)
That's right.

Justin Piche (37:10)
The last one that I have written down here is something that I am doing or have just done essentially, which is starting a fund. I'm not going to call it a fund. It's a limited partnership, but it's in the style of a fund. Right. And so you've seen maybe some of you guys have done this or talked to people who have done this, who have spun up funds to invest in real estate, to do land developments, et cetera. What I've done is I've worked with a good buddy of mine to set up a general partnership, a limited partnership.

The limited partnership is takes on investors. And so I have actually moved my operating cash that I used to invest in my own business and deals out of the business and into a limited partnership. The limited partnership owns an investment company. The investment company is what makes investments. And that is the entity at which now my operating company is partnering with. And this is kind of high level. I might be losing some folks here, but

that investment company is partnering with scout land group, my land company to do deals. And the way we're negotiating it is essentially just a set, like a fixed return on cash invested goal for that investing company. And so when I give a deal, for example, that I want, that I need to get funded, we will do our, do my underwriting, you know, I'll be conservative. I typically am not overestimating price. I want to be true. You know, I kind of want to over deliver a little bit.

And so I'll get my underwriting, it'll have the purchase price, any improvement costs, survey, whatever, all in costs essentially is what the investment company that's owned by the limited partnership is paying for. That money comes into my company, we buy the property and whatever the cash they invested in is, whatever that cash invested is, we're targeting a certain return on that cash. And so whatever the projected profit is of that deal, that will determine essentially the equity split between the funding company

and my company. So maybe as an example, let's say I had a property that was

the funding company is going to invest 100,000 all in. And we project after everything said and done, our gross back to us from the sale will be 200,000. Right? The return on cash might for them might be 25%, let's just say. And so the agreement is going to be that they essentially get 25 % of the profits of this deal for funding the whole deal. And my operating company then gets the other 75. Now, when the deal actually plays out,

And let's say we sell it for a little bit less. We sell it for, I don't know, 180 or something like that. They're still going to get that 25 % of that profit. But instead of $25,000 profit on their a hundred K, it's going to be a $20,000 profit on their a hundred K and I will get the other 60 vice versa. If the deal is better, we sell it for two 30 or two 50 or whatever. They will get a bigger piece. They'll get still 25%. and we'll obviously make more, but they'll make a better return on their cash. And that's the way I'm structuring.

kind of all my deal funding. my partners that I currently have, have quite a few different money partners that are in deals that want to maintain investing with me rather than having to enter into all these individual partnerships and spinning up all these new agreements and tracking all these investors separately. I'm now going to be dealing with one entity that one entity is dealing with me and any other investment opportunities we find. And there's one agreement.

We maintain an investment schedule so I don't have to enter into a new partnership on every single deal. like we have an operating agreement between our entities, basically a funding agreement and an investment schedule. Deals get placed on the investment schedule. get lined out underwriting. The profit split is codified in that investment schedule and then we run the deal. And it's really, for me, it's great because it's much less complex managing all that capital. And it also is much easier now for me to raise money

because it's not like, hey, buddy, like, do you want to invest in this one deal with me? Here's what it looks like. And they're like, no. And I've pitched it to another person or whatever. Investors can instead come into this limited partnership and then they get access to essentially all the deals, spreading out their risk amongst dozens of deals, as opposed to just investing in one. And then as those deals pay out, those funds go back into the investment company and then distributions get out or the profit gets allocated to partners based on their limited partnership share.

and then they can take distributions from that. And then we do basically quarterly rebalancing. So every time at the end of the quarter, we'll look at all the profits, the realized gains, that will redistribute that according to the ownership percentage of the LP. And then each of those partners will then get a updated ownership share. So some people might pull their money out, some people might leave all theirs in and let it ride and update the ownership. And then the next quarter the profits come in, they get split the same way and rebalancing occurs. And it's really...

I much prefer this method for scaling a business. just, it takes a while to get there. It's not something I would recommend for somebody who's starting out their first few deals. Certainly once you have, you identify that need to drive down your cost of capital and you have consistent deal flow, this model in my opinion is much better.

Clay Hepler (42:09)
you

Yeah, so this is essentially the drawbacks of this is if you do not have deal flow, what you do is you end up putting together an expensive operating agreement and pulling investors and you can't allocate capital. so every day that their money sits in the fund, what happens is their return on their capital actually decreases. So if you're not churning quickly,

Justin Piche (42:37)
Yeah, exactly.

Clay Hepler (42:47)
You're actually, like you're under pressure to buy deals and sell them quickly. So it increases your pressure. Now not that you don't have that pressure, right, when you're actually operating in your business, but there's the external pressure, right? So you might say to investors if you're raising a fund, hey, you know, we're targeting, you know, I don't know, 25 % IRR this year, let's just say. But all of a sudden,

You know, you don't hit as many deals and so you might want to force a deal, right? To get your 25 % because you're like, I'm just going to try to push this one deal because it'll get my 25%. You have to constantly be in motion. So unless you have a true amount of deal flow in excess of what you currently have and know that you can project out that you'll have that deal flow, this structure really does not make sense because it's a lot of bookkeeping, a lot of admin stuff.

and you gotta have enough deals to make it work. Does that resonate with you, Justin?

Justin Piche (43:49)
Yeah, 100%. It doesn't make sense if you don't have quite a solid amount of lead flow or a solid amount of opportunity for larger deals coming in as well. But that's where I'm at right now. That's the stage where I'm at is where I want a much more consistent, repeatable funding model that's easy to raise money into. And it's very official, right? It's very official. There's official entities. It's not this kind of side.

agreement with a friend or whatever for a deal partnership. It's a limited partnership fully formed in the state of Texas with a general partner with a C corporation operating as a general partner, an investment company. Like it's all very, very formal and straightened up. And it does give investors a little bit more confidence, obviously, to invest in that kind of a structure too. So it's easier, in my opinion, to raise money from folks to say, look, this is what you're actually investing in.

And in order to get to this point, though, real quick, like obviously without a track record. And I've got 200 something deals now on my my deal sheet where I can show that I've had one loss. I've had one property that lost me money. I lost five grand on a like twenty five thousand dollar purchase over the course of the last more than three years now. And so I can stand on that record and I can show my investors that and show the deals that we have in the pipeline and give them the confidence to to invest.

Clay Hepler (45:13)
Yeah. And people do this, just one last thing. People do this with, you can either do an equity or debt fund. Okay. So if you do a debt fund, there's a distribution of, imagine this, like you have a, you raise a bunch of money and say, hey, you you're going to, it's going to be 11 % IRR. Right. And we pay that out quarterly, no matter what happens. Right. Obviously the equity fund is different, right. As we, we spoke about earlier, right. There's, you're not on the hook. If you do not place the capital.

Justin Piche (45:19)
Yeah.

Clay Hepler (45:43)
in an equity fund, you're not on the hook. But if you are in a debt fund, you might have a an aggregate cost of capital, but you definitely have a higher aggregate amount of pressure to execute on your deal. So is that extra 5 % per per per annum worth it? Maybe the 10 % per annum? Maybe it is.

For a lot of entrepreneurs, willing to bet it all. But it's definitely easier with the equity in terms of the pressure.

Justin Piche (46:15)
Yeah.

One quick, like sweet little thing that we're able to do too in this limited partnership structure is that working with a really small local bank to do all the banking needs for it. And so they've, they've agreed to actually give a line of credit to the investment company up to 50 % of the assets in the investment company. And so right now we have about one and a half million dollars in there and we're targeting a $2 million total raise.

but the bank is going to come in with a million dollar, $750,000 or a million dollar line of credit to amplify that cash. So I'm the limited partner, obviously in this agreement, in this case, my buddy is the GP and part of the reason for that, there's a couple of reasons I'm not going to get into it in here on the call, my, each dollar I put into there now has essentially the purchasing power of $1.5, right? $1.50.

And that line of credit is a pretty convenient thing, right? I use lines of credit against my personal assets sometimes to make investments. And the line of credit is from a bank. It's bank financing essentially at 10 % or 9 % or 9.5 % or something like that. It's very reasonable interest rate kind of line of credit debt against the assets in the fund. And that's something that is hard to do if you're just doing it all in your business, but it's much easier to do if you have a pretty official structure, limited partnership.

Clay Hepler (47:47)
Yes.

I agree. So let's move into the, mean, you have anything else to add here before we move into our deal review, I know we're coming up on the end of the podcast here.

Justin Piche (47:51)
Yeah, any.

Yeah, I did have one thing I want to talk about. I'm just excited about it. I just had my kind of onboarding call today. I you follow up boss, right? Clay, I know Clay uses follow up boss as well. A lot of folks in the land investing space do. It's incredibly powerful. Contact management CRM with automated follow ups, action plans, great way of classifying lead stages, et cetera. It's my phone system. I use it really heavily. And one thing I have never done.

And one thing the follow boss can't do is automate text messages. You can't automate text messages in follow up boss. You can send like an initial text, afterwards texts are all have to be done manually. You can create templates. You can create tasks that have your team go in and actually send text messages, but you can't automate it. There's a software called texting Betty. Have you ever heard of texting Betty?

Okay, so Texting Betty is an API integration with Follow Up Boss and they use Twilio and they use obviously a bunch of automations, using Texting Betty, can automate text to outbound text as a part of your action plans. And so I just subscribed to it, I think it's like 150 bucks a month, it's not crazy expensive or it's 100. I think they have two different.

plans. They have 150 bucks a month, which is all using their system, or you can get your own Twilio account and then you can pay $100 a month and you get more text output. I created my own Twilio account and I'm using their $100 a month plan because I expect to be in excess of their thousand text a month limit. But I'm super pumped about that because we have so many action plans built out both on the acquisition side, not as many as we need, but we're working on that. And then on the sales side, we have a lot about being able to automate follow up texts.

for all of our buyers that go out to see properties or that reach out to us that we put on action plans that are interested in a property and engage them via email, engage them via text all automatically without agents having to go in and click all those things and actually send those texts. I think it's going to be a game changer for follow up for us.

Clay Hepler (50:06)
Whoa.

Justin Piche (50:08)
Yeah. So I want to talk about that because if anybody's using follow-up boss, I'll report back in a later podcast on the results and how it's kind of working for us in our business. the key I learned about this like a year ago, I just didn't bite the bullet, but now I see the opportunity. And so we're going to we're starting to roll that out right now.

Clay Hepler (50:26)
That's awesome. We used to have that in Podio. It was very convenient. I just got sick of the Podio UI and all the excess. Yeah.

Justin Piche (50:36)
I'm with you, man. I've used Podio in a couple different businesses and I just really don't like the UI. I really don't like it at all.

Clay Hepler (50:43)
The UI is so bad, it's so bad, it's so bad. So yeah, so we just had that in Podio and that's one thing in Fall Out Boss that I really hate and I'm gonna be messaging, texting Betty later today. Sounds like an awesome.

Justin Piche (50:55)
Yeah, let me see if there's a referral link. Let me see if there's a referral link. Well, let's go. Let's move into the deal This has happened to me a couple of times and I might have talked about it before, but this is one that's that's fresh. So I got this property under contract in Georgia and Georgia is the main state where this has impacted me. But in Georgia, when you have timberland.

oftentimes folks will put it into a 10 year timber conservation status. And what that does for them is that it lowers their tax burden substantially. But if you take it out of timber conservation, anytime in that 10 years, you have to pay, you have to pay interest and rollback taxes and all this different stuff. And it can be like really, really expensive. So I actually first found out about this when I was buying a property.

in Georgia, a subdivide and I called the county and I was kind of talking, they're like, this is in timber conservation. They were telling me about what the penalties might be. I was so lucky though, because I was buying the property at the end of last year, November, December timeframe, and the status, the 10 years was up in January.

Clay Hepler (52:06)
Wow.

Justin Piche (52:09)
It rolled out of timber conservation. I didn't have to pay any rollback anything, but it ended. But if I had rolled it out, if I didn't know that, let's just say, and I had purchased it and then filed my plat in December, for example, nine years and 11 months into the timber conservation, I would have owed $60,000 in rollback taxes and interest. I was only buying the property for a hundred grand. So I would have increased almost like 1.6 X to my cost and made the deal.

not workable at that price. So it's a good thing I found it out. But ever since then, we've been looking for that on properties in Georgia. And so I have another property in the same county, actually similar, similar size under contract that's in the fourth year of timber conservation. And I, you know, I have a full acquisitions team that basically gets properties under contract without me really even looking at them anymore. And so we got this property under contract, negotiated the price, really good price.

Moving it through, I start reaching out to surveyors to get the plat started. And all of a sudden we get it through in title and title comes back to us and says, Hey, are you keeping this in timber conservation? To which I'm like, no, we didn't catch that it was in timber conservation. Is this going to blow up the deal or not? So I had my transaction coordinator ask them specifically, Hey, how much is it going to cost all this stuff? and they came up with some huge number like 20.

Clay Hepler (53:18)
Hahaha

Justin Piche (53:30)
20 grand or something in extra taxes we'd have to pay. And so we talked to the seller and we said, hey, this is what we're getting from the title company. And they were like, no, no, no, I don't think it's going to be that expensive. They called and it's actually only $6,000. So this is an $87,000 purchase price. So it's not substantial. 20K might've been a lot, but 6K is not so much. So we agreed to split the cost of pulling it out of timber conservation with the sellers. Basically bumps our cost basis up.

you know, $3,000. It still is a great deal, workable deal. But it is something that can bite you if you're looking for property in states that have that status. So maybe for listeners, I would just say, make sure you understand the conservation status of any property you're buying and understand what those rollback taxes are going to be to pull it out. Because sometimes it's not that much about a property in North Carolina and rolled it out. only have like a three year type thing and ended up having to pay $3,000 extra that I didn't expect when I was buying it.

And it wasn't that big of a hit, it was an unexpected $3,000 cost. And in Georgia, it can really get you. And I'm not really familiar with other states that have such a substantial rollback tax. If any of the listeners are, drop them in the comments. I'd love to hear what states have those kind of issues that people should be aware of. But yeah.

Clay Hepler (54:45)
Dude, that's awesome. I've gotten hit by so many times in South Carolina, I can't even tell you. It's a big thing in South Carolina, because they have a similar sort of green belt program. A lot of states do. It just depends on how aggressive it is. So guys, you know the deal. End of the podcast here. Gentlemen's agreement is if you got benefit from this podcast, please rate, review and subscribe and share with your friends. Justin and I leave it all out on the field every single week and we get benefit.

from you guys giving us feedback and it really helps us grow this show. Another thing that we're gonna be doing more and more is the Q &A. So if you have any questions, put them in your comments. First of all, give me a shout out, obviously, you don't have to worry about Justin, but you can give me a shout out below and then after you do that, can put the questions below. We're gonna be doing a lot of Q &A in the future and so you can include that every single time.

Justin, anything to add here before we jump off?

Justin Piche (55:45)
Just a quick reminder. We are not attorneys. We are not tax professionals or anything like that. So anything you hear in this podcast is not legal advice. We're just consult legal professionals if you're going to do any kind of unique funding structure. It's really important that you protect your risk and you don't just, you know, take our word for it. You know, we do our own due diligence on the things that we do and balance the risk for the things that we do. And you really need to own that and do it, do it, do the same yourself. But that's it. No, man. Great, great podcast.

Appreciate it.