Dohn Thornton isn’t known as “The Short Sale Guy” for nothing! He walks us through his short sale buying strategy — and how short sales have changed in the last 20 years.
Dohn also has a unique asset protection and tax minimizing strategy, called vortex banking (also known as infinite banking). While it’s certainly not for everyone, it’s an effective way to reduce taxes and protect yourself from lawsuits.
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Brian: Hey, guys. Brian Davis here from Spark Rental. Happy Tuesday. And I am super excited to have a guest with us today. Joan Thornton, also known as the short sale guy who has been doing short sales for decades. He is one of the leading experts on short sales in the US. Don’t thank you so much for joining us today.
Dohn: No problem. And it’s called actually Don the agent.
Brian: I’m sorry. This shows what I know.
Dohn: Thank you for having me. I love it.
Brian: So, Don, how did you get started in real estate investing? We always like to ask people, where did you start? And then, it gives us a backdrop for how you have scaled up since then.
Dohn: I probably have one of the most unique origin stories in the business in the sense that it all started in Russia. Believe it or not,
Dohn: Yes, I was a Russian major in college. I went over to work at the embassy in the late 1980s. I went there to learn Russian and by the time my contract was over, the Soviet Union had fallen. And I decided to stay. Because at that point in time, if you were an American and you spoke Russian, all the foreign money was coming in. And I said, if have no experience at all, here’s five to $6,000 a month, go out there and work with us. So I disabuse myself of government service after that. But, I stayed for about, I don’t know. For 14 years, maybe 13, 14 years. I married a woman. We have two kids. And I was representing an American company that wanted to do pipeline inspection for the Russian water mains in different cities. And I put together a consortium, an $18 million contract to rehab water pipes in St Petersburg in my Orlando based company chickened out and said, We don’t want we don’t want the risk. What if our stuff breaks down? We’re going to pull out. And so instead of getting $1,000,000 commission check, they fired me. And so it was like I made it. I made a vow. Never again will I work for somebody. And so my sister lives in Orlando. I flew here and I said, whatever it is, it’s going to be real estate because I like real estate and I’m going to break through on my own business somehow, someway, or I’m not going to make it.
Dohn: So I did mortgages, I did real estate as a realtor, nothing clicked. I couldn’t do anything. But then my one of my mortgage partners told me, Look, why don’t you go down to Clearwater? There’s a seminar about short sales. Go check it out. I never had any real estate investing experience. I wasn’t a wholesaler, none of that stuff. I just heard Short Sale and it said Interesting. So I went there. I was blown away by the concept, the fact that you could create equity out of thin air, just negotiating and no risk at all. And I said, I’m over that. I want this. Well, it’s harder than you think it is at a seminar, right? So I didn’t have any money to pay for the seminar, of course. So I raised my hand. I said, Look, I am desperate and hungry. Is there anybody out there? What would you do in my place? And he said, Start knocking on doors of foreclosures. You can get the foreclosure downloads in the courts for free. Just start knocking on doors and ask them to give you their house. I said this, no effin way that’s going to happen. But you know what? The very first door I knocked on, the guy said yes.
Brian: Oh, wow!
Dohn: Yes. So? So I said, now what do I do? Back then, you didn’t have all these courses and stuff. It was very few and far between. I think you had a lot on the ground and a few other people and that was it. So I just went to my local REIA, found an investor to partner up with me. He said, Sure. So I worked with him, got him ten houses, screwed me over. So I went to another one. Same thing. Screwed over the guy. The last guy was the worst because I got him 36 houses in ten weeks. All upside down properties. I was supposed to get 25% from it. Screwed me over. I didn’t get anything. So for nine months, I basically spun my wheels. But I learned every single time and again I had a desperation factor. My family was over in Moscow. I was never going to see him again unless I started making nice money. So I had two houses left that I hadn’t given him yet. So I went to back to the local area and I made an announcement. I said, Look, if someone gives me $3,000 per house, I will give you 50% of my profit of whatever I make on these two short sells. So one investor said Yes, that kept me going. I already had a couple that were in Pipeline and this was in late 2003. So on February 17th, 2004, I had my first closing. And I went from barely making it. Supplementing my food with gas card money going to get big bites to 711 to keep me going when times were really really rough. And I made almost $1,000,000 in 2004 and I never looked back. So that’s kind of how what happened with me and my origin story. So.
Brian: Okay. So from those two deals that you had to bring in another guy to help finance, how did you scale upward from there? How did you go from those two deals to $1,000,000 in just that same year?
Dohn: Well, The nice thing about short sales, it does not require capital. You just got to find the deals and negotiate them and you create your equity. And so that was the beauty of it. Now, it was easier to do back then. I mean, with my newbie knowledge that I had then, if I started short sales, now I crash and burn. It’s way too complicated now than it was then, luckily, because I’ve kind of grandfathered myself in by doing it so much to stay on top of how things work. Then I’m able to still make money. But if you look at how I did my short sales back then and how I do them now, there’s no comparison. I do almost everything differently. The only thing that stays the same is that we still get the download the court foreclosures and we still contact people. The scriptures are the same, but the negotiations and the exit strategies are all different.
Brian: So for people who aren’t familiar with how short sales work, walk us through exactly how these deals work. So a borrower is upside down on their home. They owe more than what the home is worth. So how do you go from negative equity to buying a property at a discount?
Dohn: Well, you know, it’s all a dance, right? And everything is subjective because the lender’s objective is get as much as we can to recoup what we put into this. We’re taking a loss. We want to we want to mitigate our loss. That’s why the departments that we negotiate with are called loss mitigation, because they’re trying to reduce their loss. My agenda is I want to get them below. I generally know what number I can get. So if it’s if the property is upside down up to ten and I know I can sell this easy at 180. All right, I’m trying to get 160 or I’m trying to get the lender to agree to let me buy or or let a buyer that I have with me at 160. So now you get into subjective negotiations, right? Because they’ve got their comps. I’ve got my comps. They think they send their BPO agents in, which is basically just a realtor to go in and take pictures and write up a short idea of the condition of property, or they’ll do a full blown appraisal and listen, those people, there’s no rule that says they have to come in high, but they don’t get repeat business from the lenders. They keep coming in low. Right? So they come back high. We do a value dispute. And I would say, frankly, that the reason why we’re so good at this is that we are the kings of the value dispute wars.
Brian: Because that’s where the value creation lies. Right. Their ability to negotiate with lenders.
Dohn: Yes, exactly.
Brian: That’s the root of this whole strategy.
Dohn: Plus, we have been doing it for so long and we know a lot of these negotiators, almost not like we’re friends. But, you know, you work with people over and over and over again. We know exactly what they want, how they want it. We pride ourselves on making their job so much easier that they are more than willing to not necessarily rubberstamp it. They think it’s the benefit of the doubt, and oftentimes that’s what makes the deal work and where it doesn’t. And the people that do short sales intermittently every now and then, they make so many mistakes and it just burns bridges with these guys and they just play hardball and say, you know what? We’ll just let it go back to the auction. Right. Because they know that right now they can get a lot of money at the auction. It’s not like it was even a few years ago. So they’re not afraid to go to the auctions anymore. The lenders, they’ll do whatever fair offers are out there and say, we’ll take our chances at the auction. So it’s a dance and the relationships have to be there and you have to know exactly how to get it to them. And that only comes with years and years of experience.
Brian: Yeah, that makes total sense. I mean, especially because what limited experiences I’ve had with short sales has been that. I mean, lenders have a lot of red tape in this process. Right. And but if you are as familiar with this process as you are and if you’re familiar with each of these lenders and the loan mitigation officers that work there, you can be very nimble and quick in meeting their bureaucratic standards, whereas the average person, if I came in there as someone with no experience doing it would be a lot harder for me to, like you said, make this easy on the loss mitigation officer.
Dohn: But we’re getting these things now 45-60 days out, the time we get them going. The only issue it has is with VA loans. Sometimes you get stuck with a bad appraisal and those appraisals are good for four months. You’re kind of stuck for four months. So that happens sometimes, but for the most part, we can get them done in 60 days, 90 days max now. So it’s not as long of a wait as it used to be.
Brian: So if I understand your business model correctly, you are actually wholesaling these properties to other investors. You’re not actually taking title to these properties yourself, is that.
Dohn: I used to. I don’t anymore. And we figured out an exit strategy that works really well, that allows everything’s on the hood, everything is disclosed, but I don’t have to take title to it, which I think is a much better, much better strategy because I have zero risk. Absolutely. And it’s just better for everybody around. Now, I’m not going to talk about how we do it. That’s that’s kind of our trade secret. That’s our secret. But I like the fact that everything is on the hood and is approved by everybody. And so because you know, how it is in real estate is lack of disclosure is what kills you. You know, they go back and get you if nothing is disclosed in the way we do our business, everything is disclosed, every eye is dotted, every TS crossed and no problem.
Brian: Okay. Well, so what tips do you have? What secrets can you share for people who are interested in following this business model? You know, whether that’s buying short sales to wholesale or buying short sales to keep themselves either as a flip or as a runner.
Dohn: Honestly. Brian, I would tell you this. We’re expanding our business throughout the entire United States. It’s almost impossible as a newbie or someone who has no experience to come in and learn how to do this. It’s too complicated. There’s such a long learning curve. So what I decided was, you know what? We have a unique selling point in that we can come in here as an investors. And if I can develop relationships and network with wholesalers, other investors and flippers, whatever, and say, look, when you’re out there beating the bushes and you’re trying to find distressed sellers, and if you come upon a person that’s upside down on their mortgage, normally you would say, okay, move on to the next right. What I’m telling you is that has value. Work with me. Send it to us. Joint venture with us. We’ll do all the heavy lifting. We’ll create the profit. And when we close. You’re in for a cut of the deal. We’ll do a joint venture agreement. In that way, you’re monetizing leads that would be dead for you normally. Now they have value. And it’s a very it can be a lucrative second income source for you guys.
Brian: Well, that makes total sense. So you’ve basically outsourced the lead generation for this in exchange for bringing your network and your expertise to the table.
Dohn: Yes, exactly. So I got to be a win win situation for everybody.
Brian: No, that makes total sense.
Dohn: And if you’ve already had your cash buyers set up for your wholesale business, bring them in as well.
Brian: Why not. Yeah. For for cycle there in the in the deal.
Brian: So Don, you we were talking before the show about how you have a unique strategy for minimizing your taxes and creating asset protection in these deals. So walk us through how that works. So it involves some infinite banking which can get complicated, but if you can bring it down to like the third grader level, how do you do asset protection and tax protection?
Dohn: Okay. So, the way I do it is everything in my business. I run through a trust and I’m going to give you a mouthful, the title of the trust, because it’s five components to it that are very important. It is a non grantor, irrevocable, complex, discretionary, spendthrift trust based on contract law. It’s not something you’re in a financial legal zone. Most attorneys don’t know about it. Most accountants don’t know about it. If they do know about it, they don’t talk about it because it solves so many problems. They can’t make money. Because this trust solves all their problems. But in a nutshell, they know time is limited. Think about this. You have an entity now that when you sell your assets into the trust. So if you have a property, let’s say that you’ve got a trust set up and you’re going to close on a deal. You’re going to close on a deal with the trust. The trust is going to be the owner. You’re going to be the trustee. You’re going to have 100%. Control on that trust. But you have zero liability and you have zero skin in the game because it’s all in the trust. So if I have a buy and hold property, let’s see if I have an apartment or a duplex or whatever and I decide I want to sell it. The biggest bugaboo for people is capital gains taxes. Right. They think I’ve got to do a 1031 exchange or there are some people that are going to go to frickin Puerto Rico for 183 days out of the year to avoid taxes, or they’ll put their money into an opportunity zone and they get they save 100% on capital gains.
Dohn: But you’ve got to wait a year, I mean, ten years to get that right with this trust, by the way it’s composed and the way that it is in complete compliance with IRS Code 643. That property is a trust asset, you sell it and then money comes back into the trust. There are no capital gains that have to be paid. So that money is now that would have gone into another property that maybe you wanted to buy or didn’t want to buy, but you had to because you had to avoid the capital gains or or pay the IRS. Worst case scenario. Now, that’s in your trust. You can use that, invest in other properties, put it into an infinite banking policy, your whole life policy, whatever you want to do, that money is available. I just work with a client that had a seven still in his business for $7.5 million. He was on the hook for like 1.3 million now buying a trust. Everything’s selling all his assets of his business into the trust. He’s going to resell that now to an end buyer and that 1.3 million approximately that he was going to pay the IRS. He’s got that to work with, invest to improve his business or whatever he wants to do with it as long as it’s the trust expense.
Dohn: So from that point of view, there’s nothing better for real estate investors than to run your business through a trust. And it’s not just capital gains for my business since I flip, quote unquote flip. Right, with my short sales, all of that income is ordinary income. It’s taxed at 32%. So when I was running through my escow, then I was getting hit with all that. It’s like having IRRs is a third is a one third partner in my business. So now all I have to do is set my LLC up, run my business an LLC. I make the trust a 90% partner in that I can lease the assets that are now in the trust to the LLC. And so I’m not going to get really in the weeds about this, but just very basically speaking, if I have $1 million as my pretax net income from which I’m going to determine how much I’m going to pay in taxes, which is around 320,000, if it’s 32% right, I can take 970,000 of that 1 million and get that into the trust. That’s passive income for the trust. And again, in accordance with IRS Code 643, that can be declared an extra ordinary dividend for the trust. And by statute, as long as that money stays inside the trust and is not dispersed. No taxes. You never pay taxes on it.
Brian: But then how do you get money to live on? I mean, you have to move money out of the trust to your self.
Dohn: No. Because first of all, what you can write off in a business is very limited as a trust when you have your assets or all your trust as a trust expense, let’s say your house, your cars, everything. If you have children, their beneficiaries, the trust can pay for, I would say, what, 90, 90% of what your living expenses are. It can give you the trust can pay for as as trust expenses, whatever. You can’t pay for food, fashion and fun. That’s really what we talk about. Well, when you sell your assets to the trust to begin with, the trust is going to give you a note that you can draw upon and get cash from that whenever you want. And by the way, that’s not a tax.
Brian: Trust to pay your interest. On that note, well.
Dohn: Then the interest would be the interest would be taxable. But if it’s just a straight withdraw of the value they put you sold into it, then that’s tax free. So if I had 500,000 as a note that I got in exchange for selling my assets, personal and business into the trust that if I needed, say, 20,000, I just had the trust cut me in check and in my demand note is reduced by that amount of money. And then that’s, that’s why I need cash. Or if you’re doing infinite banking, if you’ve got that whole life policy, you can borrow against that policy. And that’s also tax free money that you can use for whatever you want if if it does. But I’m telling you, so much of this is a trust write off. Brian, do you have do you have children?
Brian: One Yeah. Two year old daughter.
Dohn: Your daughter. Okay. The trust will pay for all of her education as a trust expense. Any kind of medicine. Trust pays for any kind of wellness. Trust pays for. Culture.
Brian: And it’s all tax free?
Dohn: It’s all you’re paying for it with tax free money inside your trust.
Brian: All right. So, by the way, we linked to your website in the comments here. Financial freedom for you and our site. So visit that site. And we also added John was generous enough to include his phone number.
Dohn: Text me or call me.
Brian: So, yeah, we have one audience member here. Terry still says, got your e-book. Can’t wait to read and use it with you, Dohn. And that is Terry in Houston. So, Terry, glad to hear it.
Dohn: I’m not kidding, guys. I hate to go charges. I’m not kidding, guys. Short sales if you come put an upside down property. I’m your huckleberry. We’ll make money on it. And whether you’re in a position now in your investing career at some point in time, hopefully. Right. You’re going to reach that point where you’re going to say, you know what, I don’t want to be a target to have someone do a slip and fall or a contractor falls off a ladder and I’m on the hook. And you want to lock that down and never be able to have a lawsuit go against you or and you’re tired of paying those taxes like I was then you’re going to want to come to me as well because I’m going to hook you up. So these two go hand in hand. But it’s not a the trust is not a panacea. You have to have a successful business already putting money into it. Right. So…
Brian: It takes capital to operate.
Dohn: And you can take advantage of the trust much more than you would otherwise.
Brian: Yeah, no, it makes total sense. And you know, when people disregard or write off asset protection and say, oh, you know, the only people who get sued or people who are doing bad things, that is just not true. I’ve been sued several times as a real estate investor, including by neighbors who didn’t like the way that my contractors did work at a property. I mean, all kinds of goofy stuff happens. Tenants can sue you if they don’t feel like paying the rent. I mean, anyone can sue anyone else for any reason at any time. And the more assets that you have, the more of a target is on your back for lawsuits. So…
Dohn: Normally all you have to do is just tell the attorney he was thinking about suing. You said, look, this is my stuff. It’s been through trust. You might want to brush up on that. And they see they can’t. There’s lawyers. Don’t waste your time on stuff they can’t crack. Right? If it does get to the point where it’s in front of the judge, a judge will toss it because it cannot spend. A trust organization cannot be sued. Unless there’s fraud or criminal activity.
Brian: Interesting. And to your point that you just said, there’s a deterrence factor here as well, where attorneys, judges, they’re interested in the low hanging fruit. They don’t want to waste a whole bunch of time on a lawsuit that isn’t going to go anywhere. So, yeah, there is an element of deterrence here when you are this well protected. People will just move on and look for easier targets rather than messing around with you.
Brian: So Rhonda in the audience asks, Do you need a lawyer to set up this trust? Does it seems the answer is yes.
Brian: Let me rephrase her question then. How easy is it to set up this sort of trust without an attorney?
Dohn: You don’t need an attorney. The trust the company that I work with has a copyright on the trust. They sell the trust book and all the training that goes with it and all the support, the accounting and legal support. It’s all there as part of your investment. And literally you fill out the trust application and there’s no credit in that, that just just basically details about how you want the trust set up the beneficiaries who the trustee that kind of stuff and then you get the trust book two days after you buy it. Fedex out to you.
Brian: So your company can help people set this up. You’re not a law firm, of course. So, you know, but you help people with the legal documents and…
Dohn: I can get them the trust buy the trust through for me, get them the trust. And then the company will support them. Unlimited consultation for a year and the accounting firm will do their taxes for free for the first year and they’ll make sure you get everything set up correctly. And then the other oh, one more thing about this, because you have all the asset protection inside the trust. You don’t need to have all these land trusts and LLCs and holding companies and get an LLC in Wyoming, all that crap, you know, because you have the asset protection. So listen, one tax return, one entity owns every all of your assets. It can be one property can be 100 properties. It’s all in the trust, right? So think about for those of you who are more sophisticated, think about how much money you spend on accounting every year. You know, with the LLCs, the bank accounts, tax returns, all the attorneys, accountants, these attorneys have set them up.
Brian: Separate renewal fees for each LLC.
Dohn: Yeah. You don’t have to register this with your state. Local state. My s corp is registered with tthe state of Florida has to be. Trusts don’t have to be. No annual fees and anonymity too, right.
Brian: Yeah. You don’t need a resident agent.
Dohn: No, that stuff.
Brian: All right. So Britney asks, how do you find your short sale deals?
Dohn: I do it by the courts. That’s how I do it. So basically, for me, it depends if you are in a judicial or a non-judicial state. So Florida is a judicial state, which means judicial state, which means that the bank has to go through the courts to get a force for a foreclosure auction sale at the courthouse.
Brian: So it’s public records. You can pull the foreclosure filings from public records with the courts.
Dohn: Now, other states like Georgia and Texas, they are non-judicial states, which means the bank does the foreclosure itself. It just does a filing with the court 30 days before the auction. So that’s not a good way. I would say to you that any method or tactic or strategy designed to find distressed sellers will find people who need short sales. So that’s why I say, look, if you’re already wholesaling, keep doing it. If you’re already looking for fixing flips, do it. Nothing is exotic about how to find people who are upside down, and you just got to find people in distress. And when you talk to them, ask the magic question, do you owe more than what the house is worth or do you have equity? If they say they don’t have any equity, that’s a short sale and that’s money. Come to papa here, you know, and we’ll joint venture and we’ll make money on that because otherwise you just walk away from it, right?
Brian: Well, right. So that is actually what has jumped out the most to me in this conversation. You know, I got my start in real estate buying pre foreclosures and nine out of ten of them, maybe more than that, there was no equity in the property. Right. So those were lost deals, right? I mean, those are deals that I the most I could do was refer them to a bankruptcy attorney or something like that. But, if you were out there buying distressed homes and particularly foreclosures, this is a way for you to actually monetize all of those deals. Those majority of homeowners who don’t have any equity, these buyers can refer them to. You do a profit sharing agreement. I love it.
Dohn: Yeah. Win-win.
Brian: Dohn, are there any final tips or final thoughts you want to share with the audience before we call this episode complete?
Dohn: You know, I’ve said so much already. The only thing I will say at the end is that just circling back to my origin story, a lot of people would equip the first time the mentor screwed them more would have quit the second time most everybody would quit the third time. I wouldn’t be here if I didn’t keep getting up off the floor and moving forward. The law of success is almost unfailing. You will be rewarded eventually if you just don’t quit. But you have to prove yourself to the universe. And the way to do that is just say, okay, I’m giving myself a year. I will not quit unless a year goes by and then do action every day towards that goal. If you do that, no matter what you’re trying to do, whatever strategy you’re using, you will be successful. But it rarely happens quick.
Brian: It’s never overnight and when it’s overnight you end up losing the money later anyway, so you have to earn it the hard way is what I’ve found. I lost hundreds of thousands of dollars on the first real estate deals that I did, and like you said, most people would walk away at that point. I considered it tuition for an education in real estate investing.
Brian: Dohn, thank you so much for joining us today. This was an enlightening conversation, super fascinating. Both the short sale side of your business and the asset and tax protection side of your business. As we pointed out, you can visit Dohn’s website at http://financialfreedom4u.now.site. That link is in the comments and Don’s phone number is in there as well. Dohn, thanks again.
Dohn: And I really enjoyed it.
Brian: You guys, we will see you next Tuesday, same time, same place. Have a great week in the meantime.