Pace Morby: Multifamily Creative Financing

Full Podcast Transcript: Ep #111 – Pace Morby on Creative Real Estate Investing with Seller Financing & Subject-To Strategies

────────────────────────────── Introduction and Welcome

Rod Khleif: Welcome to another edition of Life Time Cash Flow through Real Estate Investing. I’m Rod Khleif and I’m thrilled you’re here. Well, you guys have a big treat today. So I’ve got Pace Morby in the house. And if you don’t know who he is, then I don’t know what rock you’ve been living under. But he’s host of Ian’s most popular show, which is Triple Digit Flip in his third season.

Rod Khleif: He’s done thousands of real estate deals and he’s an expert in creative financing. And I’m going to kick his ass because we’re going to do the single family versus multifamily today. I love it. Welcome to the show, brother.

Pace Morby: Rod, you’ve been one of my heroes for a long time.

Rod Khleif: I appreciate you. Now, what a kind thing to say.

Pace Morby: I always looked up to you.

Rod Khleif: Think, that’s so kind of you to say that, brother. Well, so, you know, as most interviewers do in podcasts, we have you tell your story first. So why don’t we start there? For those of you, the few handful of people that don’t know…

────────────────────────────── Pace Morby’s Journey & Background

Pace Morby: No, of course. Yeah. Guys, I grew up in a family of 12 kids. I was not an immigrant wearing wood shoes like Rod was, but I grew up in a family of 12 kids, father obviously working two, maybe three jobs, depending on the time of the year. Well, yeah, Phoenix and Utah got… In, bouncing back and forth, back and forth. I watched my father as a contractor and I got into my twenties. And what do you think I became? I became a contractor, right? And I was a contractor for a long time. I worked for Opendoor, Offer, PAD, Zillow, all those big companies. I was Opendoor’s first contractor they ever hired.

Pace Morby: Well, so for those of you guys that know Opendoor massive iBuyer and they changed the game in a lot of ways, but I was their contractor so they came into Phoenix, Arizona. That was their test market. I was the first person they called because at the time I was actually doing a good job on social media. I was using Instagram and my best two employees were my two thumbs and they pulled up a hashtag. This was “Arizona Construction.” They were looking for Arizona contractors, and the name of my company was Easy Contracting, and they found me really easily. I went in their office and man alive. I was just by my company, blew up. We had 250 employees doing 20, $30 million a year in revenue with just the iBuyer.

Pace Morby: So I saw how the buyers were just gobbling up all these assets and I had a handful of other clients that were smaller clients and there was a client 11 years ago. Her name is Bethany Willis, and Bethany hired me to do all her flips and about 11 years ago she just yelled at me. She met me at one of her job sites. She yells at me, she’s like, “What the hell are you doing? Being a contractor? You’re making money for the other people; all the money is in owning the real estate.” And maybe two months after I met her, she showed me how to get my first deal. She made me spend money on marketing. She made me go on appointments. She taught me how to handle an appointment. And I got started in single family and within a couple of months of getting my first deal, I got my first deal made $25,000.

Pace Morby: I assigned a single family home to Bethany and she flipped it. And I thought, “This is amazing. I get a lead.” She taught me how to generate leads. I go to the house, I get the house under contract. She taught me how to do all that. I assigned the deal to Bethany and I’m thinking, “Rod, this is the funniest thing about this.” I thought I was in hog heaven because I was like, “Yeah, making 25 grand on the assignment was amazing, but I get to be her contractor on the flip.” I was so excited about being her contractor on the flip that I didn’t realize that I had just changed my entire life. And she stops and she goes, “You are forever fired. As my contractor, I just showed you how to do deals, you idiot. Why do you want to continue to be a contractor?” Wow. This woman was like a mother to me. She was amazing. And within two months I was doing creative finance deals because I had another woman. Her name is Eileen. She was my s-cross. Or she’d been doing creative finance deals for 41 years before I met her. And she was asking me, “Hey, I see you doing all these deals. It’s amazing. You’re opening up escrow on all these transactions. This is awesome. Where are all your leads coming from, and what do those leads look like?” And she asked me, “What am I doing with my leads that had no equity or the sellers wanted too much money?” And she taught me Subject-To. She taught me seller financing and man, I just gobbled up 41 years of information so quickly with her. And I basically have spent most of my ten-year career doing almost nothing but creative finance deals. So today I have 300 single family homes in the portfolio, all subject-to and seller finance deals, and we have 1,500 multifamily doors. Some are, we have two RV parks, two mobile home parks and the rest of them are mid-sized multifamily, B class, all seller finance, all subject-to.

Rod Khleif: The multifamily as well.

Pace Morby: Yep. All the multifamily too. You got to… I stuck with the lane. It just, you know, I’d done a bunch of bird deals just like I’m sure you’ve done a lot of bird deals and refinances and it’s such a massive pain in the ass. And when you see a good deal, you know, you’ll see an asset. For example, I saw a clip you were talking about recently, some guy talking about how he’s selling all his properties in Florida because the insurance is going through the roof. And you are like, “Dude, you’re an idiot.” I hope that’s what I said because he was an idiot.

────────────────────────────── Creative Financing Strategies

Pace Morby: Yeah, you very intelligently were like, “I will take anything I can get in Florida. The insurance is going to work itself out.” And so there have been times where I’ve seen good deals, but the interest rate just kills the ability to cash flow. And so that’s been my experience — a lot of times I’ll see a seller that’s in pain. They’ve got motivation, but the interest rate doesn’t match up with my ability to buy at the purchase price. So I just have gotten into a habit of just going directly to the seller and working on seller finance terms.

Rod Khleif: You know, I told you before we started recording, I’ve done a ton of subject-to myself.

Pace Morby: You know…

Rod Khleif: Not to your level probably, but at least 100, I think back in the day, maybe a couple.

Pace Morby: You’re in the top 1% of 1%. That, yeah, for sure.

Rod Khleif: Yeah, I did a lot and I’ve done a lot of seller finance deals as well. And you know, I think it’s an incredible strategy. In fact, you know, it’s one of the things I teach. If you’ve got an elderly seller that’s got a free and clear property, for example, and you don’t offer seller financing, you’re doing them a disservice. With taxes, if they’re fully depreciated on their property, they’re going to end up with $0.70 on the dollar at best when they’re done. And you can have a conversation with them, something like, “Mr. or Mrs. Seller, I’m going to give you enough of a down payment and I’m serious – I’m going to pay you three, four, five, six, seven percent interest. You’re going to get, you know, whatever it is at the bank, it’s less than that. And you’re only going to pay taxes on what you get every year from me.” So many times an elderly seller is going to be afraid of high-risk investments. Their money is just sitting in the bank, which, you know, may even have better rates than it did before. But when you do seller financing, you can double or triple the money they’d get monthly from the bank.

Pace Morby: And it’s on an asset that they already understand. They get it. They understand it. They’ve owned it for 20 years or what have you. Like the filter that we use when we go out, we’re buying primarily direct from the seller. And the challenge is that many of your students, I collaborate with a lot of your students as well, will do direct through a broker sometimes. But brokers just don’t understand creative finance, right? And so it’s like playing telephone — you’re calling the broker and asking the broker to educate the seller on tax implications when the broker never learned anything about tax implications. So I primarily go directly to the seller. We filter for 25 years of ownership or longer, and the property typically will also filter — they don’t even own the property in an LLC; they own it in their personal name.

Rod Khleif: That’s how long it’s been.

Pace Morby: How long it’s been. And they’ve owned the property. They’ve refinanced it a couple of times, just extracted the cash out of the deal. And so we call them up and we say, “Hey, we want to help you with a retirement plan. We want to upgrade you from the landlord to the lender.”

Rod Khleif: Nice.

Pace Morby: And we want to use this asset as the safest investment you’ve ever made. But remove your responsibility of dealing with the tenants, etc. And that’s what we do. We go directly to the seller — it’s about what taxes they care more about. If I can avoid the broker and all the crap that goes into selling these properties and, more importantly, I can avoid the capital gains tax without doing a 1031 exchange — because that’s the craziest thing — people are like, “Well, I’ll just do a 1031 exchange, like it’ll work out. Now they own another asset. They’re not retiring.”

Rod Khleif: Exactly. And by the way, he’s talking about the 1031 tax deferred exchange where you have to pay within a certain amount of time, identify the property you’re going to buy when you sell your property, and close on it within a certain period. That can create a sense of urgency and sometimes pressure you into paying too much for a property. Thank God they’ve brought back bonus depreciation, cost segregation, and so on. But, you know, I don’t like having that kind of pressure. And I love your script, by the way. That’s an awesome script you just shared for four owners.

Rod Khleif: And you do that with multifamily as well.

Pace Morby: Multifamily — you know it, work it. What’s great about multifamily, and you know this better than I do because you’ve been in the game longer than me, is the sellers are typically savvy with seller finance. A lot of times they acquired the asset with some form of financing, so they get it right. They’re usually business owners deploying capital for their own tax reasons. Whereas I would say with single family, I could argue that single family is actually more challenging to do subject-to and seller finance on because you’re educating a single family homeowner who might only own that one asset. So when you’re negotiating some sort of seller finance, it may go over their head. Whereas a 50-unit or larger owner — 95% of the time they know what seller finance is.

Rod Khleif: Sure, there’s no better financing than seller financing. There’s no credit report. If you have a challenged asset that’s not stabilized, you’re going to have a difficult time getting traditional financing. And there’s no better financing. You dictate the terms. I’ve done seller finance deals where I haven’t paid anything down; I’ve done deals where I made a payment for a year because the property was trashed and I told them, “We need to stabilize the property before I make payments to you.” And it was the truth. Now, another thing that’s big with retirees, retired sellers, is seller financing, right? They focus on the relationship first and the asset second because when people get older, they’re relationship-driven. And so, you know, don’t take advantage of them; instead, create a win-win situation, bond with them, and create fantastic deals. I’m sure you’ve done that.

Pace Morby: Yeah. I’ve got a guy named Mario in San Angelo, Texas. Three years ago, he was listed with a broker for a 43-unit multifamily — a good little base hit for most people. I know you’re going for much larger assets.

Rod Khleif: 43 is great.

Pace Morby: 43 is a good one. It’s good when you can now afford an on-site manager, which is nice. So we saw it listed for 3 million bucks and it was on the market for six months. The broker couldn’t get the number. So on month five, I called the broker and said, “Hey, looks like it’s been on the market for a while.” I might not be your best offer, but I want to let you know that I’m going to offer seller finance. Ninety percent of the time, the broker doesn’t even show the seller the seller finance offer because they don’t understand it — or they’re too embarrassed to say they don’t. So that deal would expire. We then called the seller directly — Mario — and that 43-unit deal was structured with zero down, 4% interest, with no balloon payment.

Rod Khleif: But why?

Pace Morby: Why would Mario do that? Now we’re in the process of buying his stock a second time with him because we’ve now owned it for two years. He’s seen payments come in for two years. We built the relationship, right? Not only is he selling us a second asset, but he’s also become our private money lender on other projects.

Rod Khleif: Well, because…

Pace Morby: He understands. The bond that you’re talking about.

────────────────────────────── Expanding to Multifamily & Managing Assets

Rod Khleif: So how do you do 50 years?

Pace Morby: It’s a great little story. So Mario is…

Rod Khleif: He’s a retiree, right? He’s in his 70. No.

Pace Morby: He was… How old would you say, Mario was? I think he was around 45.

Rod Khleif: 50. So young. Okay.

Pace Morby: Yeah, a younger guy. Here’s the story: My team calls him directly. “Hey, Mario, would you take seller finance?” He says, “Yes, I would, but I want to meet the person in person face-to-face if we’re going to work out a deal.” So I fly to Dallas, drive to San Angelo where the asset is, and we meet in the parking lot. He did not want to go toward the property because he had his kid inside the escalator. I was like, “It’s kind of weird. Why doesn’t your kid just go hang out on the playground and find out?” I couldn’t get anywhere with him. He wanted 20% down, which I never do on seller financed deals. He wanted 8% interest in a five-year blend. I’m like, “Mario, there’s nothing for me here. I could get a better deal at the bank and, more importantly, I could choose the asset if I went to the bank.” And he says, “Well, what?” Anyway, we couldn’t get anywhere. Then I noticed his kid still on the escalator even 45 minutes into the conversation. I said, “Tell your kid to go hang out on the playground.” He said, “I would, but my kid hates this property.” And then I saw a window of opportunity.

────────────────────────────── Sponsor Message Break

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────────────────────────────── Additional Creative Financing & Investment Strategies

Pace Morby: Seven months ago, the reason I decided to put the property on the market with the broker was because it was my son’s birthday. My wife asked him, “What do you want for your 12th birthday?” His answer was, “I want my dad to love me as much as he loves his tenants.” So I worked out a deal with Mario and said, “What if I could tell you that when your son is 62, this asset that he hates today will result in you receiving a check for $11,000—the final payment on his 62nd birthday—as a symbol of your love? Every single month you’ll get a check for $11,000.”

Rod Khleif: That’s good.

Pace Morby: Bro, so good. And Eric came with me. For anyone who can’t see, my videographer Eric travels with me all over the country. This was roughly three years ago. We interviewed Mario, who ended up in tears because the solution was so powerful for him. He said, “I want to retire. I want to retire, but I can’t unless I do a 1031 exchange. And if I turn 31, I now have a bigger asset and a bigger problem.” And you know, most of these sellers are not big institutions with massive teams—they’re mom and pop guys replacing their own toilets and lightbulbs. And so for Mario, who was missing all his son’s games and was forced to drive up two or three times a week to his property, the deal was structured so he would make 4% on his money and continue to receive payments even past his death. He was so amazed that he even gave his son the promissory note for his birthday.

Rod Khleif: Brilliant, brother.

Pace Morby: Freaking cool.

Rod Khleif: As real estate investors, we are problem solvers. When you look at something creatively in our space—regardless of asset class—and put on your creative hat to come up with solutions, success is inevitable. That’s a brilliant solution.

────────────────────────────── Single Family Versus Multifamily Investing

Pace Morby: Seeing here in single family — which, you know, I have 3000 in my portfolio — I’ve probably done two or three thousand creative finance deals in single family. Now we’re focusing a lot more on RV parks and some fun asset classes at this point. In single family, you’re typically dealing with a subject-to seller; you’re taking over their existing payments.

Rod Khleif: Hold on one sec. So subject-to is when somebody got a mortgage and you step in and take over their mortgage. That’s basically it. You’re not assuming it—you’re buying it subject-to that debt. And a lot of people worry about a due-on-sale clause. I’ve never seen a mortgage company exercise a due-on-sale clause.

Pace Morby: I’ve had five — actually, I’ve seen ten total including my five — but I’ve never seen it cause real issues. The way you overcome the due-on-sale clause is really simple: you can use a land trust or even do a deed-back arrangement with a lease option.

Rod Khleif: Exactly. Usually I use a land trust. I had hundreds of them. Land trusts are great because they give you anonymity. And you know, we’re going a little deep on this, but subject-to is a great way to take over a property that might not have as much equity as you need.

Pace Morby: Right. I look at it and I think, “There are people that bought in 2007 before the market crashed. They had all this equity. The market was going up, then crashed. Those people, if they had just kept their assets, would have seen their tenants pay down the mortgage for 15 years.” Those guys with fixed rates look back and say, “Why did I do that?” Their existing mortgage, locked in at a low rate, would have allowed them to raise rents multiple times over the years. The real value in a subject-to deal is never really about the equity—it’s about acquiring a really low rate locked in and getting good cash flow. So if you want a single family home today, there are plenty of resources like LandWatch.com, where there are thousands of creative finance listings right now. That’s for single family, RV parks, gas stations—everything. And then there are expired listings. I go to an agent and ask, “Do you know how many expired listings happen every day?” In Maricopa County, where I’m at—Scottsdale area—it’s 40 a day. Forty real estate agents get fired every day because a house is on the market for six months. So we call the seller directly and say, “Hey, did anybody pitch you to just take over your payments?” And that’s how we get a lot of our duplexes and four-plexes. In fact, my camera guy Eric just sold me a four-plex, a duplex and another single family home. He found them on expired listings, assigned them to me, and I just bought them.

Rod Khleif: Foreclosures, too? I used to knock on doors of people in foreclosure every night for about 8 to 10 years—about 500 houses. That’s probably why I locked up a lot of subject-to deals back then.

Pace Morby: Yep. Anybody can do this. So expired listings are really good. The challenge is, you often have to go through an agent to get quality ones. So if you’re an agent or know an agent, get your expired listing lists. And then there are foreclosures — one of the greatest opportunities. Why did these sellers even try to sell on the market? Because they didn’t have any equity. You just take over their payments and save them from foreclosure.

────────────────────────────── Managing and Expanding Real Estate Assets

Rod Khleif: So in your single family portfolio, how do you manage long-distance?

Pace Morby: I have two traveling asset managers, and underneath those asset managers, we have a nationwide property management company. There’s a company called Mind Property Management, based in New York, and they’re one of the only three that operate in all 50 states. So we work with them along with our traveling asset managers. For example, one of my asset managers, Heidi Silva, is full time with me. What she does is, if we have a midterm rental or an Airbnb, she’ll set the property up, disconnect, and then move on to the next one. Right now, she’s living in Montana at my RV park that we just bought for $5 million seller-financed. She sets up, gets a manager in place, and then moves on. In my single family portfolio, about 80% is long-term rent — boring old stuff, which is the right way to go. I used to do 75 Airbnbs in Atlanta, Georgia, and now I have zero there. I converted them to midterm rentals because that gives you more stable cash flow without the constant turnover of furniture, dealing with “Karens” and other short-term rental headaches.

Rod Khleif: Right. My long-term tenants, especially in multifamily, just want to be left alone. With Airbnb you deal with constant issues.

────────────────────────────── The Single Family vs. Multifamily Debate

Rod Khleif: So back to creative financing for a minute. In the multifamily space, aside from subject-to and seller financing, what else comes to mind under the creative financing umbrella?

Pace Morby: There’s land contracts, contracts-for-deed, bond-for-deed, lease options — we call those executory contracts. For example, if I want to buy a large multifamily deal, say a 500-unit in Houston that already has existing debt, I use an executory contract. I sign over the warranty deed to myself through a title company and get title insurance, but I don’t record the deed at the county recorder’s office. That way, I control the asset and get all the tax benefits, depreciation, and appreciation without triggering the bank’s due-on-sale clause.

Rod Khleif: Have you ever done creative financing where the seller stays in the deal?

Pace Morby: Yes, I have. Sellers sometimes come in and say, “We’ll sell you the asset, but we want 10% of the back end when you go and sell it.” They don’t want any involvement in the management or cash flow; they just want a piece of the equity. That’s more common with multifamily, where sellers might have trouble raising capital.

Rod Khleif: And with the current market conditions — bridge debt, refinancing challenges — it’s causing some deals to be structured creatively. If you’re an accredited investor, remember our San Antonio deal: a 200-unit property a mile away from a 296-unit complex we already own, where we’re getting it at phenomenal numbers.

────────────────────────────── Mindset, Lessons & Conclusion

Rod Khleif: I like to tell my students that we are problem solvers. When you can look at something creatively in our space, regardless of asset class, and put on your creative hat to come up with solutions — success is inevitable.

Pace Morby: Exactly. It’s fun, man. This game — whether it’s the 2,000 houses you had before or dealing with failed deals — everything you do now, everything you did before, is a journey of self-discovery. It’s about how creative you can be, how many deep relationships you can create, how many skill sets you pick up, and ultimately, growing your courage muscle.

Rod Khleif: I’m not afraid of failure. I’ve built 27 businesses, some worth tens of millions of dollars, and yes, we fail our way to success. I got to meet some amazing people who remind me that every failure is just a stepping stone.

Pace Morby: Absolutely. I believe that even a small first deal — like 20 to 50 single family homes — can build your skills, relationships, and courage. Even though I eventually pivoted to multifamily, I learned so much from single family. Now, I sometimes joke that I might eventually have not a single family home in my portfolio.

Rod Khleif: It’s true. Single family has its challenges. A vacancy in a single family can wipe out months of cash flow, whereas in multifamily, one vacancy is less impactful. I learned that the logistics of managing 800 houses versus a few apartment complexes are worlds apart.

Pace Morby: Exactly. When things go south in single family, you’re left scrambling for contractors and dealing with maintenance issues that can drain your cash flow.

Rod Khleif: And that’s the difference. It’s all about the numbers, the asset class, and understanding where your cash flow really comes from. I even wrote a book on creating lifetime cash flow through multifamily investing.

Pace Morby: Could someone have convinced you at 20 houses to pivot to multifamily?

Rod Khleif: You know, I bought 2000 houses with a small team and had our own management company. It was simple, but eventually, I got lazy — and if I still owned those 500 houses in Denver, I’d be netting a million dollars a month. But then I met the love of my life and built an amazing compound. Life is about trade-offs, and every decision shapes who we become.

Pace Morby: Absolutely. And remember, it all comes down to building your skills, developing those relationships, and growing your courage to take that first step.

Rod Khleif: So, for anyone just starting out, don’t be afraid. Whether it’s a house, a duplex, or a small multifamily building, the key is to get started, learn from each deal, and let that momentum carry you forward.

Pace Morby: If you want to learn more about creative finance, check out our YouTube channel. I break down every deal, have my attorney on to discuss settlement statements, and answer questions via Instagram DMs. Just send me a voice memo with your question and I’ll get back to you.

Rod Khleif: And remember, mindset is everything. I spend a lot of time on psychology because 80 to 90% of success in anything is mindset. So, Pace, what drives you? What makes you jump out of bed every morning?

Pace Morby: At our level, we don’t worry about our own families anymore — we’ve built security. For me, it’s the daily texts from my team. For example, Shelley on my team texted me two weeks ago. Before this job, she was on track to be a lunch lady because she had so little self-worth. Now, a year later, she’s a transaction coordinator on many of our deals, and she’s owning her own real estate. That kind of impact — changing someone’s life — is what drives me. Guys like you and me have a responsibility to use our skills and talents to provide opportunities for those who don’t have them.

Rod Khleif: What a great answer. It’s a gift to get that kind of love and success. I’m blessed to feel it every day.

Pace Morby: It’s the emotional income — the helper’s heroin. Once you help somebody get a deal, you can’t stop.

Rod Khleif: Absolutely. Well, brother, it’s been amazing to catch up. For everyone listening, check out Pace Morby when you’re ready to start in single family, and trust me — as you grow, you’ll naturally progress to multifamily.

Pace Morby: And please, Rod, come hang out with our team sometime. Bring your team out and experience it for yourself.

Rod Khleif: It was great to see you, brother. Thank you, everyone. Appreciate it.

────────────────────────────── End of Transcript