How Creative Finance Turned a Negative Equity Property Into a Six-Figure Payday

Rachel Baws (00:00)
So they handed the keys back and this was a property that I’d done on a wrap. So obviously the seller was still on the hook for the mortgage, although I’d been paying it all those, but I had this buyer in there. ⁓ So they handed the keys back and they walked and then I just sold it. And that was a six figure payday for a property that nobody could do.

Dylan Silver (01:58)
Hey folks, welcome back to the show. Today’s guest, Rachel Baws is a real estate investor with over 20 years of experience building and managing a portfolio across multiple markets. She operates in San Antonio, Los Angeles, Northern Michigan and Indiana using a mix of buy and hold short-term and mid-term rentals and creative finance strategies. She also leads a real estate team of four along with a larger operational team that includes bookkeepers, back office support, allowing her to run a scalable and diversified business.

Creative finance has been a core part of her strategy from the beginning and she continues to use it to adapt to challenging market conditions today. Rachel, thanks for taking the time today.

Rachel Baws (02:37)
Thank you for having me. It’s fun to be here.

Dylan Silver (02:40)
Now you’ve been a creative finance veteran for over 20 years. What’s a deal you did early on that made you realize how powerful creative finance actually is?

Rachel Baws (02:55)
You know, it’s so funny you asked that because I think a lot of investors when they’re new to creative finance don’t get the full penny drop moment until further on in the transaction. But one that I can tell you about is one that I often talk about. And it’s a real estate, a residential property that I helped a seller who wanted to move out of the country to sell. was in negative equity.

so no one else would touch it. Realtors wouldn’t be able to deal with it because they put it on the market, they’re still going to pay closing, the seller’s got to pay closing costs, all the, you know, everything else in order to close it out. And they didn’t have any spare cash because they had packed up all their possessions and they were moving to a different country and they needed every penny they could get. So they were stuck. And

I sat down with them, explained what creative finance was, and this is way before Sub2 was even a thing. I mean, obviously creative transactions have been taking place for years and years and years and decades and decades, but it was certainly long before Sub2 was popular and kind of known. But I sat down with the sellers and explained, look,

I can make these payments for you instead of them coming out of your pocket, they’ll come out of my pocket. How does that sound? And they were like, all for it. They did not. They were happy to sign whatever the papers were that the attorneys had created because they were like, this is a problem. I need out of it. You’re here to help me. Let’s do it. So we did that. ⁓ And I put a, I call them tenant buyers. There’s somebody who’s

they’re not a tenant because they own the property, they haven’t fully cashed you out and they’re sort of in that limbo period. ⁓ So put a tenant buyer in there and they gave some down payment and bear in mind again, the property’s in negative equity. They gave a deposit and then they were paying every month the mortgage and everything else. ⁓

Now there were, I think it was a couple of hundred dollars a month that I had to put in for the first couple of years to start because it didn’t cash flow. Anyway, five years down the track I said to them, hey, you’ve been with me for five years. What do want to do?

you know, I want you to move on. This is a stepping stone. We don’t need to be together for life. And obviously all of that was in the paperwork before we even started the contract, you know, before we even signed the contract. But they said, I think I need another year and then I’ll get a, you know, then I’ll get a mortgage. And I was like, okay, we can live with that. So they were in there for year six. I asked them once more, okay, the end of year six is coming up. What do want to do?

And they said, can you just give me one more year? And I said, fine, let’s do it. And at the end of year seven, ⁓ I said, okay, are you going to, you know, you need to cash this out? Are you going to sell? Are you going to refinance? What are you going to do? And they said, no, I’m just going to give you the keys back and walk. And I was like, wait, you’ve put a deposit down. You’ve made payments now for seven years and you’re happy to walk. And they’re like, yeah, it’s easier for me.

Dylan Silver (07:03)
Hmm.

Rachel Baws (07:15)
So they handed the keys back and this was a property that I’d done on a wrap. So obviously the seller was still on the hook for the mortgage, although I’d been paying it all those, but I had this buyer in there. So they handed the keys back and they walked and then I just sold it. And that was a six figure payday for a property that nobody could do.

for a property they couldn’t sell on the open market because the debt load was higher than the value.

Dylan Silver (07:47)
Right.

You know, in these situations, you know, where you do have some negative equity and you have to get creative, it almost benefits when things are off the beaten path. Like you mentioned this buyer who effectively said, hey, I’m not going to end up purchasing the property. So it sounds like, you know, kind of lease option. And when they walk, well, now you have equity in the property potentially. And you mentioned this big payday for yourself.

And it takes a different kind of lens, right? Because everyone else might see that deal and they may see lots of thorns and a potential headache, but you take that and you say, okay, well, let’s ride the wave of appreciation while also paying down this debt. And then at the end of the day, the tenant can come and they can purchase the home or we can go ahead and sell it after they’ve gone ahead and moved out.

Rachel Baws (08:40)
Absolutely, absolutely. And I think a lot of investors, when they hear a property that’s negative equity or no equity, they can only see the immediate and not the long term prognosis. And that’s why, you know,

you only have to normally, depending on how negative the negative equity portion is, you only have to cash flow it for a couple of years until, especially if you’re renting it out, rents increase, but your payments don’t. So you’ve kind of got that buffer. I mean, there are just so many ways to do these kind of deals. And that’s the bit that I find most exciting. And that’s why.

everyone seems to bring their problem properties to me and I kind of find ways to do things where others don’t. It’s funny, I was in a meeting the other day, I also buy industrial and other asset classes but I was in a meeting the other day.

And there were five of us on the call and somebody said, do you have, you know, what can we do in this scenario? Like we were trying to figure out how to offer seller finance or how to buy an industrial asset with seller finance. And somebody said, you know, what can we do? I said, I’ve got a million ideas. And one of the other women on the call said, we knew you had, that’s why we asked the question. Because there’s always so many ways of doing things, but that’s the bit I find fun.

Dylan Silver (10:10)
You’re active in multiple different markets, San Antonio, Los Angeles, Michigan, Indiana. How did you get active in markets that are, know, for the outside of looking in, very distinct? mean, San Antonio and Los Angeles, feel like are Indiana are completely different segments or completely different markets.

Rachel Baws (11:06)
They are. I started in Michigan. That was just a random kind of event or occurrence. And so then I got to understand that market and then built there. In fact, the industrial that we’re talking about is in North Carolina. So even though those four locations are kind of where I know and understand, again, because I know

about how to put these transactions together kind of people pull me into other markets, which I’m more than happy to be involved in. But yeah, I mean, there’s been just kind of random events that have taken me from one place to another. And real estate is real estate. know, the dynamics shift, the demographics shift, but at the end of the day, it’s just about numbers, about what’s the upside.

You know what your exit strategy is. I’m always about I like a couple of different exit strategies whenever I acquire an asset. I’m always looking at what’s the end goal? How do I sell this? How you know what’s the prognosis? Am I turning it into something else? Am I repurposing it somehow? So.

Dylan Silver (12:21)
seems like a really hot asset class right now and the Carolinas as well. You mentioned the deal as I believe in North Carolina. Seems like an area where all eyes of real estate investing are on the Carolinas right now. How did you come across that industrial deal?

Rachel Baws (12:38)
somebody else brought me into it. So I’m part of a few different networks of investors who are quite hot in larger asset classes. mean, like most people, I started in residential and that’s kind of still, I mean, I still got a portfolio in residential and that’s still my love because it means I get to help people, especially on the creative finance side of things. But at the end of the day,

tenants or dealing with tenants, not that I manage my own portfolios, but just, you know, my PMs always talk about this tenant and they’re always asking me, you know, what do do here? And it’s quite nice to have a bit of a diverse portfolio where you’re not just dealing with people who live in properties. I’m going to say that that as nicely as I can, because it’s a different mindset, right? If you’ve got a tenant who’s an

who’s a commercial tenant in an industrial asset and it’s a very different mindset to somebody who is living in a house. ⁓ There’s, I don’t want to say there’s a bit of a sense of entitlement sometimes with some tenants but at the end of the day that you know it’s their home and they want to be able to live there and I get that but yeah.

people who have leases in an industrial asset have a different mindset. that’s kind of why I diversify. Well, that’s partly why I diversified. But to answer your question, yeah, I just got brought in because people know that I can speak to a broker and can understand that lingo. mean, my background is working for an investment offer.

multiple investment banks over my time. So I’ve dealt a lot with lenders and all that sort of stuff.

Dylan Silver (14:29)
that’s the best way

to get a deal is have it come to you, right? And I think that’s really the holy grail of all leads is the inbound leads when it’s maybe trickier or when other people feel they even need that expertise. And I think there’s so many people, certainly in the single family space, who spend so much time driving for dollars and doing cold calls. But really when you have a broker or someone reach out to you and say, you

What do you think about this? That’s where everyone wants to get to. I do want to pivot here though, Rachel, and ask you about the STR space and the midterm rental space. To me and lot of other people, there’s some similarities between these spaces, but some differences. Can a short-term rental and a midterm rental be in the same space? Can you easily convert a short-term into a midterm? Are there unique qualities?

that you would have for a property that you might have in a short term that you would not have in a midterm.

Rachel Baws (16:11)
So I think for short term, I mean, the way I’ve always run my short terms is they definitely need to be near something that is a constant draw card, near an attraction or a skiing resort or something that is gonna bring people back time and time again for shorter periods of time. Not everyone wants to…

maybe obviously we’ve got snowbirds that you know come and go from to escape the winter. Not everyone would potentially want to live in the same location for a midterm as a short term. I’ve pivoted, I’m still in the short term space but I prefer the midterm. Again it’s a different mindset. I mean I’ve been very fortunate I’ve of course had, shall we say, hairy

experiences with short-term rentals and parties and that sort of stuff that will be forever etched on my memory. And I’ve got many, many, many stories about those sorts of things. But with midterm rentals, you’re less exposed, you’re less, those kinds of things are less likely to happen. And I think that, you know, when we say STRs,

it’s synonymous with Airbnb, which is unfortunate because we’re kind of giving free advertising to Airbnbs, even if it’s not, you know, purely an Airbnb. But I think that model is getting a little harder. I’ve noticed over the last six months or so, I think that model is getting a little harder to maintain, to attract people. ⁓ I know Airbnb changed their algorithms a while back and that

excuse my French, I was going to say screwed, that messed a lot of people up with their bookings, their numbers just dropped. But I think also our habits, our shopping habits are changing, the way we’re doing things are changing, people are, you know, it kind of all plays in.

Dylan Silver (18:12)
Yeah. I mean,

that that’s so critical to point out because I’ve seen it as well. I mean, I look at this and I think, you know, are we getting to a point where people will be able to like click sign a lease online the same way that they would for a short term rental or midterm rental? Like if someone are we going to maybe get to a point where people are saying, hey, if I’m going to be living in a place, I want to kind of be able to do it online just the same way that I would do with a

Airbnb, right? And Airbnb isn’t going in and asking, you know, all these questions and asking for a security deposit and all this type of thing. They’re making it relatively simple. It’s based on reviews. So you understand how is the owner and then how is the potential tenant for the stay. And maybe we get to that point with more traditional leases as well on scale because

Frankly speaking, there’s a lot of people who the process is like mysterious to them. Hey, finders fee, brokers fee, security deposit, application fee, and people just want a place to stay, right?

Rachel Baws (19:20)
Yes, yes. There are a couple of companies, they’re quite prevalent in Los Angeles and I think they’re also nationwide who are making it really simple and I think that space is definitely going to emerge more and more as a…

you know, as our habits continue to change. But they have properties in LA where you literally can do that. You can sign up online. You can move in. And if you decide in a month’s time that…

even if you’ve got a lease for six months or 12 months, if you decide in a month’s time or two months time, actually you don’t want to live there anymore, you can transfer that lease to another city, another building that they’ve got even in the same city. And they’re just making it really easy for people to be a bit nomadic and to, you know, up sticks and move.

even on the same lease, but just in a different location, which is crazy. So I think there’s going to be more ebb and flow with those sorts of contracts going forwards.

Dylan Silver (20:28)
As a self-described nomad myself, I’m a fan of that type of model. Very, very interesting to hear. We are coming up on time here, Rachel. Any new projects that you’re working on, and then as well, what’s the best way for folks to reach out to your team?

Rachel Baws (20:34)
Hmm.

so new projects, always. I am one of those people who life to me is about doing it all. So there are, I’ve got stuff on the go while I’m here in San Antonio. I’ve obviously got things that are happening in North Carolina. I’ve got stuff going on in LA. So yes, there are, there are multiple things. best way is probably my website, which is just rachelbaws.com. I’ve got,

information about, I’ve also got a bookkeeping business which is numberfied.com, ⁓ N-U-M-B-E-R-F-I-E-D numberfied.com. So I’ve got my own team of bookkeepers. But yeah, the best way is through me and…

And I’m happy to help any of your tribe if they have deals they can’t figure out, if they need help with numbers, if they need help with closing. I love the whole collaboration thing. That’s important to me. So more than happy to help people if they need a bit of a partner on things. Capital, I can, you know, I have access to capital. So yeah.

Dylan Silver (21:50)
Rachel, thank you

so much for joining us today. Thank you for your time.

Rachel Baws (21:54)
You’re very welcome. Nice to chat.