Jun 22, 2023
Today’s guest is Jeff Stephens
Jeff is Founder of The Thoughtful Real Estate Entrepreneur and host of the podcast, “Racking Up Rentals.” Jeff's focus is on relationship-based negotiation for off-market acquisitions with Seller Financing. Join Sam and Jeff in today’s episode.
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Introduction [00:00:32]
Jeff's background and approach [00:01:00]
Seller financing as a relationship-based approach [00:03:43]
Finding the Right Properties [00:07:44]
Scaling the Business [00:09:53]
Getting Seller Financing [00:14:17]
Patience and Skill in Negotiating with Sellers [00:15:29]
Finding the Awesome in Every Deal [00:17:26]
The Infinitely Negotiable Seller Financing Loan [00:22:12]
Supercharged Seller Financing [00:22:57]
Practical Applications of Supercharged Seller Financing [00:24:11]
Conclusion and Call to Action [00:25:06]
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Connect with Jeff:
Facebook: https://www.facebook.com/JeffWStephens
Facebook: https://www.facebook.com/thoughtfulre
Instagram: https://www.instagram.com/thoughtfulrealestate/
Free Seller Financing 101 Video Training: www.sellerfinancing-101.com
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
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Want to read the full show notes of the episode? Check it out below:
Jeff Stephens (00:00:00) - That's kind of the, the problem that I think most people have trying to buy seller financing properties is that, that the default mentality they bring, and this is gonna be, you know, obvious, like, of course this is the mentality we bring is I wanna buy a property, thus I'm shopping for a property. And now I'm gonna ask the seller about seller financing. But with seller financing off market, we need to do the opposite. We need to go shopping for a person and then see what property they own. Because seller financing is much more about the person than it is about the property.
Intro (00:00:32) - 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 (00:00:45) - Jeff Stevens is the founder of the thoughtful real estate entrepreneur and host of the podcast Racking Up Reynolds. His focus is on relationship-based negotiation for off-market acquisitions with seller financing. Jeff, welcome to the show.
Jeff Stephens (00:00:58) - Thanks so much for having me here. I appreciate it.
Sam Wilson (00:01:00) - Absolutely, Jeff, the pleasure is mine. There are three questions I ask every guest who comes in the show in 90 seconds or last, can you tell me where did you start? Where are you now and how did you get there?
Jeff Stephens (00:01:09) - Yeah, absolutely. I started in, um, you know, about 15, well, maybe 17, 18 years ago by picking up that purple book Everybody has been, uh, inspired by and I thought, huh, that sounds interesting. So my wife and I had just bought our first primary residence and, and I picked up this book shortly thereafter. I thought, gosh, I bet I could tap some of the equity and buy a rental property. So we did that. We bought a triplex. It was very, very conventional, very different than what I would do today, but that got us started and I'm so glad that, that I did that deal even though I wouldn't do it again today, cuz it really got us, got us going. Fast forward a few years, I decided that I wanted to make real estate more of a full-time focus and a part-time focus. And that was about 10 years ago. And fast forward a few more years, I've really locked into kind of my particular, you know, my little niche, my little approach and, uh, that is buying properties off market relationally with great seller financing terms. And then in the last year, or well no, maybe two or three years, I've become just a good advocate for spreading the message on that because I feel like this is something that more people really deserve to understand.
Sam Wilson (00:02:14) - No, that's great. That's great. I look forward to digging into the nuances of what you do and how you do it. Um, seller financing is one of those, I think like, you know, uh, pie in the sky ideas for a lot of real estate investors, they're like, oh yeah, you know, you can get seller financing one in every hundred deals, but otherwise it's probably not gonna work out. Uh, it sounds like you have really found a, uh, a way to disprove that theory. Yeah. So really again, just let's get nerdy, let's get in the weeds, let's break it down. Mm-hmm. , talk about kind of how you discovered seller financing, the way that you approach it, kind of your thought process behind it. I'd love to love to just hear, uh, hear your thoughts on that.
Jeff Stephens (00:02:54) - Yeah, absolutely. You know, I think my very, very first experience with seller financing was one that I kind of stumbled into a little bit. This was kind of like a pocket listing situation where somebody had called me and as we had this conversation, it just sort of unfolded, but I didn't have a strong strategic idea about exactly, you know, how to optimize it. I thought, gosh, I can just buy this property and not have to go qualify for a loan, and that's really great. But as I, as I got more into this and I found my own coach and my own mentor, I started to, to refine this, um, this approach. So a couple important pillars of this, I'd say is, is it possible to buy a listed property with seller financing? Yes, it's absolutely possible, but it is not gonna be the same kind of conversation as if we're doing it off market and doing it in a relationship-based manner.
Jeff Stephens (00:03:43) - And in my experience, in my opinion, my philosophy is that we will be far more successful in negotiating much better terms for us, but also even just doing a better job of tailoring the deal for the seller too, if we get to see that person face-to-face. So I at, at this point just completely avoid anything that is listed. I just want to have a face-to-face conversation in a seller's living room. Um, a couple of the things that make seller financing actually far more, um, common or maybe even possible than a lot of people think is that a lot of buyers in real estate kind of think like, well gosh, a seller, you know, they do seller financing as kind of a last resort. They would always prefer a different outcome. They'd prefer different plan. So seller financing as a result, basically comes when situations when the seller like, boy, they just can't sell it in another way.
Jeff Stephens (00:04:34) - Or it's taking too long. Or they, they're gonna have to lower the price a lot and they're sort of doing it reluctantly. But the real, the truth is that there are certain people, while, while there are many situations that are indeed like that, the truth is there are also lots of people for whom selling their property with seller financing is once they kind of realize this and we kind of gently help unpack this conversation for them, they realize this is the best possible way for them to sell their property. And there's a couple main reasons and then I'll pause there cuz I think these are really important to, to hear. First and foremost, seller financing or, or termed an installment sale is an excellent way for the owner of a property who would otherwise have a big old gnarly capital gains tax bill to significantly ease the pain of that tax bill bill and defer large portions of it, but without needing to do a 10 31 exchange.
Jeff Stephens (00:05:30) - There's a lot of people I I know and I've bought properties from that are about 70, and they're thinking, these properties have been very, very good to me, but I'm not really in the mood to just trade one responsibility for another. I'd rather get outta this game, but how do I do that without having this big painful tax bill? Secondly, these people like having income, it's probably why they bought rental properties in the first place. So if they sell the property and then, you know, the, the, there goes the income stream. So they like to, to be able to continue to have income stream. And then the third and final reason is that there's a lot of people who say, gosh, if you know 500, a million, 2 million showed up, uh, from a closing, I don't even know exactly what I would do with it. That actually feels kind of burdensome to figure that out. It feels like kind of a big responsibility and you find the right person with those attributes and it's a great conversation. It works out perfectly for everybody.
Sam Wilson (00:06:21) - I like that. And, and, but, and again, I'll go back to my initial, tell me why I'm wrong, I guess is why I'm saying this, but it sounds like that seller is, is unique. Is that the case?
Jeff Stephens (00:06:34) - Well, they're unique in, in the sense that if you just go out into the world and stumble around and look at properties that are for sale and then say, oh, I wonder if that person has these attributes, the chances are probably not good. Right? But if you're trying to catch that particular fish mm-hmm. , you would probably want to go to the places where that particular fish lives, right? So that's kind of the, the problem that I think most people have trying to buy seller financing properties is that, that the default mentality they bring, and this is gonna be, you know, obvious, like of course this is the mentality we bring is I wanna buy a property, thus I'm shopping for a property and now I'm gonna ask the seller about seller financing. But with seller financing off market, we need to do the opposite. We need to go shopping for a person and then see what property they own. Because seller financing is much more about the person than it is about the property.
Sam Wilson (00:07:31) - So tell me, uh, break, break that down for us. I don't even, uh, if, if you told me that right now, said, Hey, Sam, go out and find the person and then find what property they own. I'd look at you like a deer in the headlights like I'm doing right now, and say, how, how do you do that?
Jeff Stephens (00:07:44) - Absolutely. So here's, here's exactly what I do. I know that there's certain areas, my my little geographic sandbox where I want to buy properties, and I'm pretty picky about those. So I define these areas, let's just call 'em zip codes. And then I say, who are the people who would have the attributes that I just kind of went through? Who would have a nasty tap capital gains tax problem? Uh, an owner occupant of a house, probably not, right? Uh, but a landlord, a person who owns an investment property and has owned it for a, a reasonable period of time. Okay, there's, there's my person, right? Mm. So now I'm trying to query a list and I actually just do this with, uh, my local title company. I just say, Hey, would you please query the public database for the following parameters and send me a spreadsheet?
Jeff Stephens (00:08:25) - So I say, here are my zip codes. I'm looking for absentee owners of this type of property. Like let's just say in this case, um, you know, with your audience, I'm looking for five to eight unit buildings. Like, that's, that's one of the, uh, categories in my, my county's tax records is five to eight unit properties. Okay? So I'm looking for this zip code, absentee landlords, which is gonna be most of them, in this case, five to eight unit properties. They've owned the property for at least say 10 years. Um, send me the, send me the list and they send me the list. And now this is like my pond. I'm about to go fishing in the pond where there's real reasonable chance that these people are gonna have these attributes I want. Right? The next question is, how do I reach out to them?
Jeff Stephens (00:09:05) - And my, my strategy is to reach out to them with a, a dead simple. It's very strategic, but dead simple at the same time. Personal, nice, unbelievably low pressure letter that just says, hi, my name is Jeff. My wife and I have a couple rental properties. We're actively looking for another one that we could buy and manage ourselves. I came across yours at this address. Uh, I was just thinking if you would ever consider selling it, would you give us a call? It'd be lovely to just discuss it face-to-face with you. It's pretty much as simple as that. And that initiates phone calls where at that point when our, when our phone rings with that seller, pretty much always, we're the only person on the planet who knows that that property is even in play. Because these aren't people who have raised their hand, they haven't stuck a sign out front, they haven't hired a broker. There's, it's not on the internet now, we're just having a one-on-one conversation.
Sam Wilson (00:09:53) - How do you do that at scale? Like what's the, what are the, or maybe you don't, maybe let's, let's ask that. Do you do it at scale? And if you do, how? And if you don't, why not?
Jeff Stephens (00:10:04) - Yeah, so I think, I mean, I think scale is, is relative. I would say we send probably, you know, a thousand letters a month would be, so I'm not sure if that's, you know, considered scale. Yeah. Yeah. I think that this business, at least the business that I'm in, and I'm guessing a lot of your, uh, listeners here too are, it's, we don't have to have a volume game. I mean, this isn't a, a, a whole, uh, you know, residential wholesaling thing where I need to turn 30 properties a month. If I can buy 4, 5, 6 great properties a year in this part, uh, particular manner, that's a great, um, that's a great win for me. So it's the, one of the things that people I guess, push back on and they say, well, it doesn't sound like real conversations with people aren't, isn't scalable. Um, do I have a acquisitions manager of this? And I would say, yeah, I mean, because real relationships aren't scalable. I mean, I, I don't outsource the, the, uh, scaling of my ability to have more friends either. I actually just invest in those relationships knowing that these are, are very valuable things and only takes a couple great ones to get huge wins.
Sam Wilson (00:11:04) - Right. No, I think that's, that's, that's powerful what you've, what you've just said there. Um, it's also building a business the way you want. And I think, I think that's, and we'll, we'll, I'm turning left here in the conversation, but it's, so oftentimes I hear from other investors and just kind of the general vibe is that like, bigger is better and we just get bigger for bigger's sake without any real understanding of why we're actually doing what we're doing. And for you, yeah. Say, Hey, look, five or six of these a year is plenty and that's all we need. Uh, I think that's, yeah. Really powerful to know kind of what, what your parameters are there. How does, how, when you, when I mean a thousand letters a month in that five to eight unit range, I think is a lot. Just, just in the sense to finding that many owners that own those types of properties. I love what you said there though, about having a face-to-face conversation. I think that, are there anything else that you really put in that letter that makes it stand out? Is it handwritten? Is it, I mean, cuz a lot of, all of us get anybody that owns property, I'm sure you do too, get mm-hmm. the, the letters in the mail and you're like, okay, I've seen this 8,000 times. It's this Yeah. Inking letter. I've seen my, you know, last decade. Yeah. Downend, what do you do?
Jeff Stephens (00:12:18) - Yeah, yeah, absolutely. So one of the funny things I, I love, I experience this myself all the time. And then my clients, uh, who I'm coaching, I experience this all the time too, is actually two things. One is somebody calls you back from your letter and then they say, you know, I get letters like this all the time. I, I've never called anybody back before, but I'm calling you now. Something just felt different. And then the second thing is, you'll get a call, you know, nine months, two years, three years after you sent the letter from somebody saying, you know, I got the letter, the time wasn't right. I stuck it in a folder though, and now the time is right and I'm calling you back. And I think the thing is that it's, it's, they're doing that because it's worth saving. And the reason it's worth saving, the reason it's cutting through the clutter is cuz it is really clear.
Jeff Stephens (00:13:01) - It is coming from one regular person to another. And this part is really important in my opinion. Uh, we are positioning ourselves as peers, right? Most, most letters that real estate investors send position themselves as we have money, we have clients, we, you know, you, you, you kind of look like you might be the gazelle down here waiting to get taken down. We are the lion. Sure. Uh, all cash close, fast, right? And that, that puts people on guard. But if you send them a letter where the, the power dynamic is balanced, you say, Hey, I'm a local landlord like you, my wife and I have got a small business, we'd love to buy another property. Uh, anytime you wanna call, it'd be awesome to chat with you. It feels very, very safe because they're thinking like, this person is like me. They're not, they're not here to, uh, they don't see some crazy opportunity, you know, to exploit me. We're just having a conversation.
Sam Wilson (00:13:49) - I, no, I think that's, I think that's great. That's, that's really, really great, uh, insight on that. One of the things that we talked about off air was that you said, uh, or before we started recording this, you said that the best way to get seller financing is to not ask for seller financing. Yeah. Now you're going into this transaction or into this, into this pond. You're fishing in with this idea that in the end you want seller financing. Uh, yeah. How, what talk, talk me through that, uh, that line of thinking.
Jeff Stephens (00:14:17) - Yeah, so I, to me, the number one mistake that buyers make trying to get seller financing is that they show up and they make it just ridiculously obvious that this is what they want. Like, they might as well be wearing a t-shirt that says, I want to buy your property with seller financing. And so there's a couple things here. The first thing I'll say is, categorically humans, anywhere on any topic, what ideas do we like best? We like our own ideas best, right? And so when we show up and we just sort of like right outta the gate, we're like really obvious, like, Hey, I'd like to buy your property with seller financing. It's like saying, this is my idea. Which then, you know, leads to the very obvious natural next step, which is like, because it would be good for me . But if we can have this conversation in a way such that we are actually kind of eliciting the insights and the information from the seller such that when we make a proposal, I don't make offers, I make proposals when I make a proposal back to them that involves seller financing, it feels like a prescription that is perfectly tailored to the diagnosis that they just told me.
Jeff Stephens (00:15:29) - Like, we just discussed it, you know, the themselves, right? And so when, when, if you just show up and say, I wanna buy your property with seller financing, like the enthusiasm is great, but it's raises questions in people's mind. Like, why, why, why does that person need, do they need seller financing? Oh, they must have bad credit. Oh, they don't have enough down, blah, blah, blah, all this kind of stuff, right? But if we just like exhibit a little patience and a little bit of skill in asking questions that get people to say the things we need them to say out loud, now we're talking, right? Because I know if I, if I can get a seller to talk about how, uh, they want to, this is the most common thing in the world for me. A seller says, I'd love to sell this property, but man, I'll tell you the taxes would fricking kill me.
Jeff Stephens (00:16:13) - Right? Right. I know I want them to say that. So how do I open the door so that they can just walk through the door and say that thing? Right? So I might say to them like, oh gosh, you've had this property for a long time. Are you just planning to do a 10 31 exchange? I might just say that it's like a question. That's not a question, right? I mean, it's a question, but it's more like a statement and just sort of let them go. Oh no, God no. We're, you know, real estate's been great to us, but we're done. Oh really? Now I'm like putting tucking these little insights back in my head so that when I come back to them with a proposal, I say, you know, you, I was thinking about how you were telling me how you don't really want to pay the taxes, but you also don't wanna do an exchange. I think I've got an idea that might work for you. Mm-hmm.
Sam Wilson (00:16:56) - I like that. I like that. That's, and and those are, those are the, uh, the information gathering stage I will say of that relationship. How many, how many of these deals on the seller financing side have you come across where you're like, I really, I Jeff Love this deal. The seller does not wanna do seller financing. How do you, how do you gracefully walk away from that? And or have you then turned around and said, let me find an alternative way to get this closed?
Jeff Stephens (00:17:26) - Yeah, I, to me, when I, so my, my strategy for buying my approach to buying is that I need there to be something awesome about every deal. I call it find the awesome, like the, the awesome could be, wow, the rents are half of what they could be. The awesome could be the zoning that would allow you to build a whole bunch more units or some, some other form of expansion. You know, the awesome could just be like this incredible location or beauty or romance of a building. The awesome could be any aspect of, of the financing. So to me, I need to have some kind of, some kind of awesome. Hmm. So if I'm talking to a seller and it's, it's seeming like seller financing is not the prescription that is matching their diagnosis basically, to put it that way. But there's some other awesome that I have found then, then yes, I will certainly be willing to, to pivot. I I always hope that that's not the case, but yeah, I would, I would hate to pass up what, what is a, a, an amazing opportunity in a different way or seen from a different angle simply, simply because of that.
Sam Wilson (00:18:28) - Got it. Got it. Okay. Yeah, I guess that that was the question there was was, you know, do you let deals go? Cause they're not seller financing, clearly that's not the case. Interest rates have just been skyrocketing. I mean like the power of the dollar is just, it's declining rapidly. People's purchasing power is going down. Uh, how have terms changed on the seller financing side of things, maybe relative to even a couple years ago?
Jeff Stephens (00:18:53) - Yeah, so this is a great question that that really also speaks again to some of the, I would say misconceptions about seller financing. In my experience, a seller is rarely thinking to themselves, okay, I'm gonna be the bank. Let me see what US Bank is charging. Let me see what Wells Fargo is charging. What it, oh, it's gonna have to be 25 year amortization, because that's what the commercial loans at the credit union would be. In my experience, it's not that conversation at all. It's actually much more about what, what works for them and kind of what works for, for us as buyers and the deal. I don't think there's any natural correlation between, uh, market interest rates or down payments or LTVs or anything like that. Uh, with, with sellers, a great example of this would be if I'm looking at a seller financing deal and I, and I'm seeing that their rents are kind of low, and that's one of the reasons I like the, the opportunity.
Jeff Stephens (00:19:50) - I'm actually asking myself like, what are they netting each month right now? Right? I'm doing the math, a gross rents, you know, these expenses, whatever expense ratio, I think they're netting this amount right here. Now I'm, I'm also figuring out then of course, what is my note likely to be? Let's say I'm gonna put 10% down or whatever. So my note is gonna be this amount in many times, in many ways, I'm actually reverse engineering my interest rate simply so that I can show up at the proposal meeting and say, okay, I've got a proposal that gives you the same net income every month that you're getting right now. Plus gives you a little down payment, plus removes all of the hassle of, you know, of management and does the most important thing you said, which is to defer your capital gains indefinitely into the future for the term of this loan.
Jeff Stephens (00:20:35) - And so I, if the answer is like I'm proposing a 3.5% interest rate, I'm not really proposing a 3%, 3.5% interest rate, I'm proposing a, you know, $2,700 payment, it just happens to be a 3.5. Right? So I am, I'm seeing what's actually most important to them. Cuz cuz there are sellers who will say to you, um, you know, 5% is what's important. Like they have no idea what that payment amount, but for some reason 5% is the number. Like, okay, then I guess we'll work with 5% and then we'll play with the other variables, right? That, you know what I mean?
Sam Wilson (00:21:09) - Yeah, no, that makes, that makes a lot of sense. And I like, I like the way you think through that, that, uh, that gives a lot of color to that. Let's talk one last, uh, one last topic here before we get to sign off. But you were talking about how'd you put that financing a good property or repro a good, maybe you could explain that to me in more detail.
Jeff Stephens (00:21:29) - Yeah, yeah. It's so funny. I was just taking a walk this morning. I had this epiphany. I was like, oh my gosh, this topic that I talk about all the time, I've never said it in this exact way before. So what I was saying is, everybody knows how to refinance a great property, but very few people know how to re property some great financing. So here's this. So this is gonna be, since we only have a couple minutes, this is gonna be like the little bit of a, of a, of a teaser head scratcher. But hopefully, um, wonderfully enchant people as they, as they leave this podcast at episode wanting more, um, when we buy a property with seller financing, we're actually buying two things. We're buying the property and we're buying the financing, right? These are two things that they, they come together as a package, but do they have to stay together as a package forever?
Jeff Stephens (00:22:12) - And the answer is no, because a seller financing loan is infinitely negotiable and tailorable and customizable, right? If we get a loan from a bank, a major part of that deal is a three word expression. We all know do on sale. Well, a seller financing loan does not have to have a do on sale clause. In fact, a lot of sellers a do on sale clause would hurt their, uh, interests overall. You know, if I buy a property for, from somebody who wants to defer their capital gains for the next 20 years in this installment sale and six months later I think, oh, I think I'll refinance it. I have just really screwed up their whole plan, right? Sure. They don't wanna get paid off early. And frankly, if it's a great loan that I've negotiated, I don't wanna pay it off early anyway, but I do need to maybe refinance my property.
Jeff Stephens (00:22:57) - I certainly need to have the right to sell my property if I want to. And that introduces the opportunity for us to negotiate. This is something I call supercharged seller financing, uh, uh, a term, a clause, an element of our promissory note that says that the maker of the note that's us, the borrower has the right to provide a different piece of real estate as collateral. As long as the new piece of real estate also has enough equity and enough cash flow to make the payments. But we can substitute the collateral that secures the note, just a substitution of security clause. So I've bought the property and I've bought the financing, but there are scenarios in which I buy the property and I buy the financing. I'm like, yeah, the property's okay, but the financing is awesome. What if I just wanna get rid of the property but keep the financing in my portfolio? We all know the idea. So, you know, bring it full circle here. We all know the idea that you have a property and you can constantly be changing the financing on it, but what if you had financing that was awesome that you could constantly be changing the, the property that secured that financing. And when you do that, it opens up a real world of like deal structuring possibilities. It's a little bit, uh, mind blowing.
Sam Wilson (00:24:11) - That is absolutely mind blowing. Jeff, this has been awesome. We'll need to, uh, have you come back on and we'll do an episode just on that kind of, uh, thought and process and how that even practically works out. It sounds, uh, very, very interesting and intriguing. Certainly appreciate you coming on today, learned a ton from you just on the way that you approach seller financing, the way you find the properties that you're looking for, how you go to the title companies and have them pull records, your wealth of knowledge. And I certainly appreciate it. Uh, if our listeners wanna get in touch with you or learn more about you, what is the best way to do that?
Jeff Stephens (00:24:41) - Yeah, thank you so much. Yeah, I would say check out my podcast Racking Up Rentals, which you mentioned before. I really appreciate that. And then I'm also really quite active on, on Facebook and we have a small community private Facebook group called Rental Portfolio Wealth Builders. It'd be great to see people there and
Sam Wilson (00:24:57) - Fantastic. We'll make sure we include all that there in the show notes. And Jeff, thank you again for coming on today. I certainly appreciate it.
Jeff Stephens (00:25:04) - Thank you so much for the opportunity.
Sam Wilson (00:25:06) - 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 Podcast, whatever platform it is you use to listen. 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.