Posted by Tom Thumb on September 24, 2010 at 14:08:37:
Mrs. Thumb won’t take your comments lightly.
Sub2 is dangerous if you are broke - Posted by Lee
Posted by Lee on September 20, 2010 at 17:44:58:
Here is a true story of what happened to one
local real estate investor in 2007-2008.
The investor was buying houses sub2 at 80
cents on the dollar and selling them on leas
options. These houses were in prime areas
and some even had $2000 mortgage
payments on them. The investor had over 50
homes sub2 but when the market went bad
they had negative cashflows. Eventually she
lost all 60 properties.
Read up on “The Porter Case” - Posted by Frank Chin
Posted by Frank Chin on September 21, 2010 at 06:49:34:
In the archives here, back in the year 2002, there was one such case discuseed at length, called “The Porter Case”. The discussion is located in the archive year 2002, under “The Porter Case”, or you can use this link:
http://www.creonline.com/wwwboard/messages/arc_2002//arc_11/11577.html
Guess history repeats itself.
it’s dangerous to sell to investors sub2 - Posted by Kristine-CA
Posted by Kristine-CA on September 20, 2010 at 22:25:07:
What did the investor lose again? The investor had very little to lose
compared to the 60 property owners who sold to her sub2. They were
expecting her to make the payments, per her promise/agreement to
them.
If you buy with no or negative cash flow, then the market tanking has
little to do with cashflow. They were most likely negative cf deals to
begin with. The investor was most likely banking on the lease option
deposits and an eventual cash out.
Lease options have a small number that cash out, even in a good
market. In 2007-8, the writing was already on the wall. Wonder what
RE course/guru that investor was following…
Doesn’t sound like sub2 was really the problem - Posted by IB (NJ)
Posted by IB (NJ) on September 20, 2010 at 20:07:43:
Buying at 80% was. Esp. if your market tanked 30% or more like some markets here did.
Re: it’s dangerous to sell to investors sub2 - Posted by Lee
Posted by Lee on September 21, 2010 at 24:58:07:
I was told that the investor was a student of lou brown but I don’t think that it had anything to do with his teachings. It all had to do with taking on to much risk.
The investor was not practicing good Risk Managment techniques.
Re: it’s dangerous to sell to investors sub2 - Posted by Lee
Posted by Lee on September 21, 2010 at 24:14:07:
Also never depend on the lease option cashing out. In most areas there is only about a 30-50% chance that the tenant/buyers will eventually buy the property and that is in a good market.
I have had tenant/buyers demand their money back. You can argue all that you want with them about the fact thaqt they lost it when they didn’t perform but if they take it to court then you will most likely lose.
Even if they don’t take you to court they can always trash your house to the point that it will cost you $5000 to get the house back in order.
Sometimes it is easier to just give the tenant/buyer
their option money back to get them to move on.
One old time real estate investor told me that the longer that a tenant/buyer lives in the house the less likely that they will buy it. I find that this is true because their life circumstances change. They have a job transfer, Divorce/Marriage, new baby, etc and the house no longer is what they need.
Imagine a young couple that moves into a starter home and you give them 3 years to exercise their option. The wife gets pregnant and now they need a larger home. The chance of them buying this home is almost zero.
Also buyers will often fall in love with a house when they first see it but after living in the property for a few years the impulse buy is not there. This is also why people buy a new car every few years even though their current car serves their needs.
This is commonly know as the grass is always greener syndrome.
Re: it’s dangerous to sell to investors sub2 - Posted by Lee
Posted by Lee on September 20, 2010 at 23:59:54:
The investor didn’t personally sign on the loans but she guaranteed that she would make the payments.
It is possible that she could be charged by the attorney general with fraud, wire fraud, and several other criminal charges. I believe that this is highly unlikely but if an investor defaulted on 50 properties then it would make great news for a prosecutor that was trying to get elected to office to have the evil investor that defrauded home owners thru a real estate investment scheme brought up on charges. So at the worst it could mean 10-20 years in federal prison.
Re: Doesn’t sound like sub2 was really the problem - Posted by Lee
Posted by Lee on September 20, 2010 at 22:26:53:
The problem was that when the market tanked and people decided that they wanted to downsize their 290k home for a 150k home and cut their monthly payment from $2200 to $1200 then the investor was left holding the bag on homes she couldn’t get rented for a positive cashflow.
One thing that needs to be considered with every technique. What is the RISK.
Remember that Donald Trump almost lost everything in the 90’s because of high amounts of risk that he had taken.
Dave Ramsey did declare bankruptcy back in the early 90s and lost about 4 million in property. One thing that Dave teaches is that debt is risk.
Its true that debt can allow you to highly leverage and in a market that is rising it is great but in a falling market it is really bad.
Re: it’s dangerous to sell to investors sub2 - Posted by michaela-CA
Posted by michaela-CA on September 21, 2010 at 12:27:59:
I’ve known Louis for a long time. He has excellent paperwork (I believe it’s called ‘the whole enchilada’ or something like that) and he’s well known to dot every ‘i’. His forms will help you cover your hide. And he knows his stuff.
BUT, he will always look out for himself first, so if someone partners with him in some way, they need to make sure that they read the paperwork VERY carefully.
That’s all I’m saying
Michaela
Re: it’s dangerous to sell to investors sub2 - Posted by Woody
Posted by Woody on September 21, 2010 at 19:16:29:
I never could understand the arguement that those who do sub2s also preach to never do lease options, as it’s better to get the deed; but yet they always try and sell with an option.
I hear you Lee, but I think you are not talking from experience. Your comments are generalized and with experience you would know how to avoid the pit falls you mention.
Re: it’s dangerous to sell to investors sub2 - Posted by WAREIA
Posted by WAREIA on September 21, 2010 at 10:53:33:
I read an article put out by NAR (National Association of Realtors that 87% of Seller Carry Type transactions never result in the buyer obtaining permanent financing or actually purchasing the property. The article also said that it was much less for Lease Purchase and Lease Options.
Re: it’s dangerous to sell to investors sub2 - Posted by IB (NJ)
Posted by IB (NJ) on September 21, 2010 at 13:39:00:
I think that if you take on 60 properties subject to and don’t pay for ANY reason, you HAVE defrauded the home owners. It was her responsibility to ensure that those mortgages were paid.
WA buyers sub-to have been jailed - Posted by John Merchant
Posted by John Merchant on September 21, 2010 at 13:11:10:
Wade Cook, a prominent WA REI/Guru who wrote a number of books and courses and took in a lot of gullible folk was convicted and sentenced for a number of felonies a few years back.
And Cook wasn’t the first WA “expert” to shoot himself in the foot w sub-tos. I’m recalling a couple of smart guys in Renton area a few years earlier got themselves in really hot water doing so.
In fact those guys in that case were basically responsible for WA toughening up its law so any provable pattern of buying sub-to followed by failure to pay as agreed is today grounds to support felony conviction.
Bummed. - Posted by Kristine-CA
Posted by Kristine-CA on September 21, 2010 at 23:55:45:
Seriously bummed. I asked for a link to support the idea and numbers
posted here. All I got was an email off the board that says that it was
several years ago, the article was lost in a computer crash…and that I
should be able to find it, somewhere on the NARS site if I search under
lease options. Sigh. One might want to note that NARS has changed it’s
tune on seller financing in this market. One might want to note there is
no article stating any such thing as 87% of “Seller Carry Type”
transactions never result in … at least on any search engine that I
can find.
Can we please try to do better than support POVs with articles that are
MIA. How about stating our opinion as just that…unless we have
supporting docs, etc. What do you say?
NAR article - Posted by Kristine-Ca
Posted by Kristine-Ca on September 21, 2010 at 12:50:05:
Can you please send the link to that article. I’d like to see NARs numbers on this and what they were basing it on…what they consider a “Seller Carry Type” transaction. A seller carry back where I am IS permanent financing and IS a purchase. I doubt that seller carryback 1st mortgages have a higher rate of default that than your average subprime loans. 
But I want to see the NAR spin on this one.
Wade Cook - Posted by Kristine-CA
Posted by Kristine-CA on September 22, 2010 at 24:09:29:
Wade Cook might be the first REI author I ever read. A book I
borrowed from the library in the 1990s. I’d never heard of him. But
many of my friends knew of his spiel and his seminars via infomericials
and ads.
I know of no conviction involving sub2s, however. He (and his wife)
were convicted for tax evasion. Is there a WA court case involving his
actual RE deals where he was convicted and sentenced for his
involvement in getting the deed, etc.? Kristine
Re: Bummed. - Posted by WAREIA
Posted by WAREIA on September 22, 2010 at 14:55:54:
Don’t you think that I’m bummed too. I would really like to still have that article so I could show it to sellers who want to do Lease Options or other inherently dangerous forms of Seller Carry type transactions.
Besides, why should I have to do all your research for you. I did a search just a few minutes ago and found several sources and articles supporting much the same results as I once found in the article I had from the NARs site.
Re: Bummed. - Posted by Tom Thumb
Posted by Tom Thumb on September 22, 2010 at 16:57:24:
WAREIA. I located the article on Google to which you referred. Here is the
link: http://garymialocq.tripod.com/leaseoptionhorrorstory.pdf
Re: Bummed. - Posted by Kristine-CA
Posted by Kristine-CA on September 22, 2010 at 15:09:21:
I’m a research goddess, so there’s usually no problem with me doing
research. Like I said, I really want to know how NARS defined “seller
carry type” and where they got the 87%. You were the one who said
the number. So I should just assume you are correct? And that you
aren’t misquoting or misunderstanding?
There are plenty of articles on NARs about lease options. None of them
say what you said…87% yadaya. Also, you could have posted that
response for everyone to see, instead of in a private email that
basically says you can’t support what you said.