How to Scale Commercial Real Estate Podcast with Sam Wilson On the New York City Podcast Network

The Power Of Lease Options: Adam Zack’s Innovative Approach To Real Estate Investing

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Today s guest is Adam Zach Adam retired from the Civil Engineering profession at age 32 through real estate investing He is a family man with a business not a businessman with a family Show summary In this podcast episode host Sam interviews retired civil engineer Adam Zack who achieved financial independence through real estate investing Adam shares his strategy of buying rental properties in up-and-coming markets and emphasizes the benefits of being a tenant buyer He discusses his approach to underwriting potential buyers based on their credit score and background and explains how he pairs investors with properties that meet their desired return criteria They also discuss the challenges of securing loans and verifying down payments as well as the potential market size for this investment strategy Adam reveals their recent launch of a fund to streamline their real estate purchases ————————————————————– Intro 00 00 00 The Marshmallow Test 00 01 49 Formulating the Plan and Executing 00 03 12 Finding the Person First Property Second 00 06 53 The option to buy structure 00 08 25 Complications and sourcing funds 00 09 17 Market potential and disqualifying criteria 00 10 51 The challenges of real estate transactions 00 18 05 Launching a real estate fund 00 20 26 Current challenges in the real estate market 00 21 15 ————————————————————– Connect with Adam Linkedin https www linkedin com in adam-zach-pe-0000303b Facebook https www facebook com ChessChief Connect with Sam I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns Facebook https www facebook com HowtoscaleCRE LinkedIn https www linkedin com in samwilsonhowtoscalecre Email me sam brickeninvestmentgroup com SUBSCRIBE and LEAVE A RATING Listen to How To Scale Commercial Real Estate Investing with Sam Wilson Apple Podcasts https podcasts apple com us podcast how-to-scale-commercial-real-estate id1539979234 Spotify https open spotify com show 4m0NWYzSvznEIjRBFtCgEL si e10d8e039b99475f ————————————————————– Want to read the full show notes of the episode Check it out below Adam Zach 00 00 00 – As a tenant buyer it s actually great to buy an up and coming markets that could drop because you just have the option but not the obligation to buy And so at the same time that s why we re setting this up not so much as like hey test drive it it s hey this is your house And if something were to go wrong we give them three years they get an option to extend for a year Plus we give them the option of like Hey if something really goes wrong we ll just sell the home And if there s whatever equity is generally left you can take part of your deposit back Just like if you bought a house now and sold it six months later you re going to lose money just 6 to agent fees whatever it is And so we re trying to set it up as much for success across the board Welcome to the How to Scale commercial real Estate show Whether you are an active or passive investor we ll teach you how to scale your real estate investing business into something big Sam Wilson 00 00 50 – Adam Zack is retired from the civil engineering profession at the age of 32 He did that through real estate investing as he claims He is a family man with a business not a business man with a family Adam welcome to the show Adam Zach 00 01 03 – Thank you Sam Good to be here Sam Wilson 00 01 05 – Absolutely The pleasure is mine Adam There are three questions I ask every guest who comes on the show in 90s or less Can you tell me where did you start Where are you now and how did you get there Adam Zach 00 01 14 – Little town of Dickinson North Dakota population 17 000 went to civil engineering school One of six found my sweetheart in college We got married We now have three kids Five three and one Got into real estate just as I graduated engineering and realized that the marshmallow test was the key to success that if I can just wait and not eat that one marshmallow today I can have two later Sam Wilson 00 01 40 – Fantastic I would venture to say that many of our listeners have no idea what you re talking about Sam Wilson 00 01 46 – I do know what you re talking about Tell us about the marshmallow test Adam Zach 00 01 49 – So they did this experiment It was kind of cruel with kids but like it was a great indicator of success in life or being able to get what you want because success has a funny success in my mind is just getting from point A to point B if you want to get there point A to point B could be I could lose 1 10 I could get whatever I want So in general they set these kids in a room and they said Hey you can have this one marshmallow now and you can just eat it or you can go play with those toys And if you wait I think it was like 30 minutes I ll give you two marshmallows later And the kids that were able to be like You know what I m going for the two marshmallows Like I m going to do it Like these kids that were you know less than ten years old that they were able to have some sort of self-control Adam Zach 00 02 27 – They tracked them over a period of like 30 or 40 years and found out that they were much happier and successful in their careers Sam Wilson 00 02 33 – Right Right Yeah absolutely So you graduate engineering school and then you get into real estate One thing I know because I am not an engineer I need engineers in my life because you exhibit this trait which is that you will research research or research plan and then execute And having had and currently have friends who are engineers getting to the point where they re like okay now we re ready to do it takes a considerably long amount of time It sounds like you were able to formulate the plan and execute which a lot of people struggle with in a in a relatively short period of time How did you do that especially coming directly out of college Adam Zach 00 03 12 – The tipping point was asymmetric reward to risk at a 2 to 1 ratio So Daniel Kahneman does this great test like you flip a coin It s heads I ll give you 50 bucks If it s tails you give me 50 bucks Adam Zach 00 03 25 – Most people won t do it Like I don t want 5050 because they fear losing two times as much as they gain winning So the tipping point is I m going to flip a coin You win 100 or you lose 50 then that s like when the tipping point is like Oh yeah I ll do that Right Like sure if I do it enough time if I m going to do that enough time I m going to win Right But if it s like it s just one time some people like you have to get to that comfort zone So for me it was okay what s the upside and is it more than a 1 to 1 ratio Because otherwise my brain cannot compute right It s like here s the reward I m betting a dollar I could lose a dollar Like I m just playing blackjack and it s like there s too many and there s so many variables that I can t control So in my mind it was how do I make it a 2 to 1 Because I have to get beyond that first for my own reptile brain Adam Zach 00 04 12 – And once I do that I m like Let s just do this enough and eventually I m gonna win right Sam Wilson 00 04 18 – Oh that s really cool Let s dig into that And I love My mind immediately actually went to Blackjack You said that I m like Yeah I think you know I m not mistaken that the casino s edge in the game of blackjack it s only like 3 10 of a percent It s not 1 Maybe it s a half a percent Whatever it is it s It s really small So I mean the casino does have the edge whatever that is 50 point call it 50 5 to your 49 5 And the game still gets played But you found a way to have that return of 2 to 1 on the okay I win I make 100 I lose I lose 50 What was it Adam Zach 00 04 57 – So for that it was specifically how can I Heads I win tails I break even Right And it was okay if I win it s going to be this Adam Zach 00 05 07 – And if I don t it s like okay over the long term I m going to generally not lose money It s not I have to get 8 It s not that I have to beat the S P It s just like okay over a period of five years if I do this the worst thing that s going to happen is I got a 10 000 education that I should have put I could have put my money in at 8 and maybe would have grown to 12 000 which is like you know do But if I win you know that now turns into a rental that I get a block that then fuels everything else And so it was looking at that ratio of like okay if I do this right in general and of course you can always go you know it could be worse right I could have not had insurance and the whole house could have fall down But it s like okay give give some sort of like 95 degree level of confidence right So like that s where it gets a little bit tricky Adam Zach 00 05 54 – But like that s how my engineer brain was like okay well the worst of the worst of the worst is like as long as I have insurance and as long as something else like in general if you hold real estate long enough like it generally works So like for my first deal it was like just try not to lose money and if I happen to be right I m going to probably learn something and win Sam Wilson 00 06 11 – Got it I love that So you began in Single Family is that right Adam Zach 00 06 16 – That s right And that s what I grew most of the portfolio It s crazy It just a single base hit at a time right That was it Just one one after another through 50 homes Sam Wilson 00 06 25 – 50 homes You have 50 rental properties currently correct Adam Zach 00 06 29 – In 13 different states Sam Wilson 00 06 31 – Wow Okay 50 rental That s that That s a twist I did not expect 50 rental properties 13 different states What was the strategy in getting outside of You re in North Dakota right You got it right Sam Wilson 00 06 49 – What was the strategy or the intention behind hey we re going to we re going to go outside of North Dakota Adam Zach 00 06 53 – So besides just taking the action getting in the game we went through like pivot one pivot two pivot three of like oh this business model is better Okay now this one s better Okay It s fixing flips No it s the burn No it s wholesaling No it s commercial No And it was like okay in general we just like okay what do you not like about what you re currently doing Solve that problem And so what we currently ended up with with okay let s find the person first and the property second which means we find someone who 1 to 3 years away from a mortgage they apply to us We preapproved them like a bank We go buy the home and sell it to them on a rent with an option to buy So we don t find any properties We don t look at properties We still get the inspection and still get the appraisal Adam Zach 00 07 30 – But now we find the people the people go shopping with an agent and then we buy the home for them Sam Wilson 00 07 36 – So I m sorry I m a slow learner Rewind that strategy again Adam Zach 00 07 42 – So So this scenario Adam cannot get into a house because I recently left my civil engineering job and on paper I make negative money So the bank says Hey turns out your debt to income ratio is out of whack Like I can t buy you an owner occupied home but you can go get a loan all day right So I can buy a non owner occupied But if I want a primary residence the bank does not like Adam in my current position Wealthy but debt to income doesn t work So I go Hey Sam if I put 20 down on a new build here in Fargo so a 400 000 house would you go get a loan for 320 000 You don t put any money up Whatever your whatever your pity is I ll pay you that plus 500 a month Adam Zach 00 08 25 – Just give me the option to buy it back at 430 000 any time in the next 18 months And you d say well what s your credit score What s your background What s like And so then we we basically underwrite people like I m a registered loan originator I m also an investor And so we underwrite people to that criteria I m like okay you re risky you re 20 down you re not risky you re 5 down And then we re basically pairing of what we want from a return just almost like we re privatizing the mortgage industry But instead of doing a first position loan Sam as the investor taking title you get to depreciate it It s a rent with an option to buy So it s more favorable to you as the investor when you re buying the home selling it on an option to buy because the option fee doesn t get taxed right away It s not like deferred capital gains You can still 1031 into something And so that s the structure that really hit the turbo button for us Sam Wilson 00 09 16 – Wow Sam Wilson 00 09 17 – I mean forgive me but that sounds that sounds complicated because you got to write borrower you got to find the right property You ve got to find the right bank Let s assume I m the lender I m the I m the one in this case putting up the 320 000 loan Does it get complicated If you are the lease option tenant I ll call it that Does it get complicated with you bringing the down payment and me securing the loan in the bank comes to me and says Hey Sam where d that 80 grand come from Adam Zach 00 09 51 – If you re putting it in your own personal name 100 because they got to source all the funds right If you re getting a commercial loan or typically a DSR they they I guess sometimes it s hey I need a show proof of funds but I m putting my 80 grand towards the title company you re bringing If you have let s say we re doing ten and ten then you would send it to the title company So in theory you just have to show the proof of funds Adam Zach 00 10 18 – But the title company is the one receiving all the funds so they re receiving my non-refundable 80 grand of option fee And then the day and the day you close the take title sign the mortgage do the personal guarantee whatever it is we re executing the lease with the option to buy So you you actually don t typically we don t touch the keys They just hand the keys over Sam Wilson 00 10 35 – Sure Right Yeah Ideally Ideally that s the that s the strategy That s really really intriguing How many potential um people are there that fit this criteria such that you can make a scalable business out of it Adam Zach 00 10 51 – So roughly 1 in 10 Americans get denied a mortgage which is which is excess of 2 million people every year There is 140 000 people searching rent to own into Google every month Wow And so all we did was tapped into that market disqualify the individuals that can only put 1 down because like there s different like there s larger companies divvy homes Home Partners of America this is their entire business model but they don t offer it up to other investors Adam Zach 00 11 23 – They say they say test drive the home put 1 down rent it with the option to buy And that s that s also a great scalable market But they only pick great properties and great locations And for us since we re tenant led we just said Oh you re picking a property and nowhere in North Dakota you re probably going to need 20 to 30 down because I don t want to come to that property I don t want this property back right And so all it is is just like a balanced almost like risk to reward of like okay if they default if Adam defaults I m keeping his 80 grand and then I m selling the property I have to evict him It s not a foreclosure because it s a lease with an option to buy So instead of being a six month foreclosure it s a 30 to 45 day eviction And it s just kind of helps protect that And then the icing on the cake is if you do a rent with an option to buy there s rent guarantee insurance that you can apply that I didn t even know existed Adam Zach 00 12 15 – The guarantors leap easy and then Single key which is in Canada coming to the United States you can literally apply coverage like the banks do with private mortgage insurance on renters And so if they default you keep their option money You have this insurance policy which is basically like you re Oh shit something went wrong because they re potentially higher risk because they don t fit the bank And so we ve just been layering that on to now try to find this balance of what does it look like What is it what is an investor want from a return How much skin do they want in the game from the tenant buyer And it s like almost going into underwriting like 101 It s just like okay well what does Sam want Does he want cash flow Does he want appreciation Does he want a nice home Does he want a nice location Okay Does one all those Okay then based on that what s the demand for people in Indianapolis that would want Sam to buy him a home And then we just play matchmaker Sam Wilson 00 13 02 – Interesting Sam Wilson 00 13 03 – Okay so let s just run the numbers here You ve got a house This is hypothetical but you got a house for 400 grand They put you know again it s you and me doing this deal Adam puts 80 grand down as the down payment Is there an option Fee in addition to that Adam Zach 00 13 20 – No So I m interchanging it It s technically an option fee but generally no Like security deposit Right It s the option fee which you can call it a down payment but it s technically an option fee in an option agreement Sam Wilson 00 13 33 – Right So okay that s your you re calling the 80 grand the option fee Totally Fine Understood And I m sure there s some reasons legally for that which we won t get into the nuances of I m sure our listeners can just make their own conclusions from that And then you say all right you know congratulations your 400 000 home is going to cost you whatever it is I don t know What would that be 2 200 a month maybe 2400 bucks a month in today s rates Sam Wilson 00 14 00 – Plus you ll be 500 bucks a month on top So the investor collects the six grand a year And then if you add them exercise in the next 18 months you ll owe me an extra 30 grand on top of that But the only way they re going to exercise is if they are able to then in 18 months go out and get a refinance Adam Zach 00 14 20 – You got it Sam Wilson 00 14 23 – What are the statistics around the people that are able to substantially turn around their lives in such a way that they actually get that refi done Adam Zach 00 14 29 – Terrible Which is why Three things Number one we created a podcast dedicated to those 1 in 10 people denied a bank loan because in general people do this all the time Hey give me ten grand move in You can get financing in a year right Yeah sure I can take the money rinse and repeat and it s like the greatest ROI you ll ever get right Ten grand plus rent and do that every year It s like just juicing the ROI Adam Zach 00 14 54 – So it s like number one stop it Okay then number two becoming a registered mortgage loan originator I m still not a great loan originator but understanding Okay what does it actually take to become qualified with a bank And then number three setting them up for success so that they can do it So whether it s a credit repair whether it s reporting the rent credits whether they re being a co-borrower on something it s seeing them through And so at the time of this we have like we have an 80 buyback rate which is staggeringly higher than like the national average of what don t know if there is like an authority but I ve heard like 5 or 10 But it s usually because you re only putting 1 or 2 down because all buy a home right now in Florida with 1 down If I can lock in a price because I m playing the appreciation game I would love to do that as what I call a tenant buyer As an investor I don t want to do that because I want the upside without the downside protection Adam Zach 00 15 44 – So like as a tenant buyer it s actually great to buy an up and coming markets that could drop because you just have the option but not the obligation to buy And so at the same time that s why we re setting this up Not so much is like hey test drive it it s Hey this is your house And if something were to go wrong we give them three years They get an option to extend for a year Plus we give them the option of like Hey if something really goes wrong we ll just sell the home And if there s whatever equity is generally left you can take part of your deposit back Just like if you bought a house now and sold it six months later you re going to lose money just 6 to agent fees whatever it is And so we re trying to set it up as much for success across the board right Sam Wilson 00 16 23 – I mean and again 80 grand is no small amount of money And so for the person that has 80 grand in savings to plunk down on a 400 000 house um you know you d hope they could figure it out Sam Wilson 00 16 36 – But it sounds like you re doing you re taking a different approach to this business because yes there are the people in the in the capacity to wash rinse repeat and really juicy returns But it doesn t really do anything for the people that live there It doesn t do anything other than really just pad your pocketbook I m not going to say it s wrong but I m going to say that you know maybe there s better ways of doing stuff It sounds like you re really making sure And you said 80 of your buyers end up exercising That s really really strong right Adam Zach 00 17 05 – Right now it s really strong I I see some ways that that might get generally lower but as of the recording of this it s 80 Sam Wilson 00 17 12 – That s awesome And that s cool I mean and that s good That s good for two people It s good for the tenant buyer and it s also good for the investor I mean because then they collect their their upside and then the tenant buyer of course ends up with the with the house Sam Wilson 00 17 27 – But you re going through the steps that probably a lot of landlords business owners aren t going to go through in order to make sure that people then exercise I think I ve only done Oh no I ve done three Three deals like this But I too like you like I went to a lot of effort to see to it that they got these across the finish line How do you handle that side of things I mean you said you re a family man with a business not a business man with the family 50 of these houses you ve got investors you ve got properties you ve got builders you ve got all of these There s a lot of moving parts there How do you manage all that Adam Zach 00 18 05 – So luckily I have an awesome business partner and a team And so we ve found kind of our own skill sets where we have someone in call it tenant relations and I m more in sales and marketing playing with Google ads and Facebook ads and trying to make sure that our website explains things to the tenant buyer is putting out content trying to help them Adam Zach 00 18 21 – And so once once you get through the closing it s it s relatively more easy because they have a monthly payment and they re just trying to get mortgage ready like that but like getting to the finish line like just in general buying a house is complicated Okay Add in the fact that our agents are showing someone that we re not even there and we re you know potentially assigning this to an investor and they re understanding like okay what does this actually mean And if one person whether it s the insurance the title company the buyer the seller the agent us the tenant buyer like if someone falls through it s like okay then the whole thing comes down just like in any other normal transaction So it s like okay being the transaction coordinator and holding everyone s hands and making sure that we have the contracts to hold everyone to it getting earnest money from either investors or the tenant buyers to make sure that they have skin in the game just to make sure things don t fall through the crack Adam Zach 00 19 11 – And then if worst case comes To it We just buy it all cash and just save the deal if something were to fall out So we have a little bit of options because we don t want to have a bad reputation out there of like Hey we can t close on homes But in general you know that s the piece And then it s like okay normally what people need to work on is their credit or it s paying down debt Rare is the time where they re just waiting for two years to get like their tax returns But you know that does happen And so it s okay How do we increase the likelihood of them buying it back which you know wasn t our primary focus Our number one was like okay how do we use this to quit our day job I ll be honest Like it wasn t very altruistic to start off I was like How do I make more money And it was like Oh it turns out Chris Krohn on YouTube is like Oh I m preaching about least options Adam Zach 00 19 52 – And then when he patented Joe McCullen it took these courses and I was trying to sandwich lease options but it was really hard to find motivated sellers But why don t I just find a motivated You know home shopper And so I found that So we re not buying it great but we re selling it well You know if you can buy it at a discount plus sell it on a lease option well then you got both We just found a model where we re purchasing properties right now off the MLS and cash flowing them all day every day Sam Wilson 00 20 18 – Wow that s wild I love it I love it Now you ve launched a fund here recently What Tell us about that Adam Zach 00 20 26 – So we kept trying to do these one off deals right Like we ll find the person we ll do all this And we said All right let s just get two of us together We ll put a bunch of money in there We ll look at the bank and the bank s like Oh yeah cool Adam Zach 00 20 35 – You guys are good for like 5 million Okay let s just go buy So any now we know that the next 30 homes we re just gonna buy like no questions asked The banks on board We got the investors we already got all the capital So we just did a you know a pretty standard fund put that together got some limited partners in there And then we re going to see how that works by 20 to 30 homes see what the returns are see what the splits are and then just either do that every year or keep it as an ongoing ongoing thing where we just keep buying more properties with the fund and keep distributing it But right now it has a sunset of hey we re just going to buy 20 homes and then we re going to go do it again Right Sam Wilson 00 21 08 – That s that s really really cool What are some bottlenecks or complications in your business right now that you presently have not solved Adam Zach 00 21 15 – Interest rates doubling over a year And so in general last year it was hotter than a pistol where everybody wanted to go through Adam Zach 00 21 24 – And it turns out the demand is still here But just like everyone in 2023 when interest rates are at 7 every So we have this list of I m going to call it pre-approved home shoppers that are like 50 to 100 people that are just like well I m not sure if I want to do it right And there s but that s America in general right Low inventory Nobody wants to give up their 3 rate like but everyone s pre-approved They could get a home and everyone s like well I don t want to overpay It s still generally like a seller s market from what we re seeing in different places even though the highs you know have come down But like it s still like homes are still going like 1 to 3 days So in general it s like everything got more expensive Well when that happens things generally slow down in general But what we ve seen is we ve got this huge demand built up but not as many contractual offers So the top of the funnel from us is still rocking where we get 1000 to 2000 people every week to our website Adam Zach 00 22 13 – We get you know ten people applying with us and you know every week So we got like 2 or 3 new home shoppers every week And it s just a matter of okay do they want to move forward with this or not And then we ll get people that came came to us from last year like Hey can I still get that Uh nope That s not it s not it s not the same you know 4 5 interest rate Sam Wilson 00 22 32 – No no it s not And that s Yeah man Very interesting Adam I ve really enjoyed having you on the show today I love what you guys are doing The strategy I understand lease options and lease to own very very well but I ve never seen it employed quite the way that you re doing it So this is very very fascinating love I love what you re doing and I also love the way you are getting people into homes and helping them get across that finish line and actually make it to homeownership in the end Sam Wilson 00 23 02 – I think that s that s a really cool unique strategy that you re employing there If our listeners want to get in touch with you or learn more about you what is the best way to do that Adam Zach 00 23 11 – If they want to learn more about me you could just follow me on Facebook If you just search Adam Zach Or if they want to learn more about this strategy it s home equity partner slash investors home Sam Wilson 00 23 21 – Equity partner com investors and Adam I butchered your last name there in the beginning Adam Zach 00 23 26 – It s just very German It s like Baquba with a Z Sam Wilson 00 23 30 – With a Z Yeah And I d definitely made it Adam Zach So Adam Zach Got it Adam Forgive me for that I ve enjoyed having you on the show today Thank you so much for coming on and have a great rest of your day Adam Zach 00 23 41 – This is a pleasure Thank you very much Thanks for the great questions Sam Wilson 00 23 44 – Hey thanks for listening to the How to Scale Commercial Real Estate podcast If you can do me a favor and subscribe and leave us a review on Apple Podcasts Spotify Google Podcasts whatever platform it is you use to listen Sam Wilson 00 23 57 – If you can do that for us that would be a fantastic help to the show It helps us both attract new listeners as well as rank higher on those directories So appreciate you listening Thanks so much and hope to catch you on the next episode Click here to visit this podcast episode
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