Big Trouble w/ Subj-to: thanks, and some comments - Posted by John Doe

Posted by David Alexander on January 29, 2002 at 17:02:37:

I didnt say it was necessary nor did I say I risk my assets… don’t take it out of context…

I believe if your not taking the risks life has to offer then your not living…

I can say thankfully I’ve only done a couple bad deals… Knock on wood… and even those were profitable… painful during… but profitable…

I can say that I have made bad descisions even in recent past… but you live and learn… just like you did with building, lest you would be getting the $6500 a month and not someone else…

But thankfully those descisions don’t define us, at least hopefully not…

I’m thankful it didnt take me 17 or 22 years… to get where I’m at, Not to say I don’t think it couldn’t all be taking away from today… I’m not that naive…

But also, my thoughts are this… to get to 1 mil or more a year, you have to do both Buy and Hold and Buy and Sell… Ask Bill Gates… If he sold everthing he wouldnt be as rich today… likewise if he held everything… he wouldnt be as rich either…

Being completely Buy and Hold is probably the biggest mistake I’ve made to date… I buy mostly subject to and sell on contract for deed… (currently L/O with the new laws here in Texas)… but, that is being fixed…

David Alexander

Big Trouble w/ Subj-to: thanks, and some comments - Posted by John Doe

Posted by John Doe on January 27, 2002 at 20:08:33:

Wow, my original post seems to have sparked far more discussion and debate that I ever hoped for. I want to express my appreciation for all the excellent posts, advice, admonishments and recommendations. Many, many useful points have been made, and I thank all for taking the time to respond.

I also want to clarify a few things that came up:

Yes, I am a real person, and no, I’m not GL or anyone else “with a grudge against subject-tos” trolling. Although I fully realize that posting anonymously raises issues of credibility, I am not comfortable discussing these issues in a public forum to be preserved for all eternity on the internet. I am sorry I am not able to be more forthcoming, but that’s the way it is. As someone noted, the actual case details are really only important to me and the other parties directly involved, but the whole larger issues of what can and does go wrong are important to all of us, and are not often discussed. That’s why I posted it.

Another poster suspected I was not presenting the “whole” story and found it hard to believe the lender would take the action he has if the payments were only a couple weeks late. While I understand the doubt, the facts are as presented. And yes, the T/Ber’s rent payment is due in the middle of the month.

As to WHY the mortgage payments were made late, even two weeks late, yes the money was used for other purposes. No, it was NOT for personal bills or entertainment or toys. It was because at the same time, a couple of other deals unraveled and I had unexpected vacancies, repairs, etc. It was a matter of “robbing Peter to pay Paul,” trying to cover one deal with another. Now that’s clearly not the right way to do business, it was stupid, idiotic and probably another whole thread. But it’s a CLASSIC example, as many pointed out, of the major RISK of doing deals without adequate cash reserves. And to make matters worse, I had done several low-margin deals, counting on good back-end profits but not getting enough cash up front, or enough monthly cash flow. I should have known better, but I took a gamble, never thought for a minute that a number of deals could go downhill simultaneously, and am now paying the price for my recklessness.

And no, I am NOT blaming anyone but myself, especially the “gurus”. Yes, I have Bronchick’s course, I did not just lift his documents somewhere, and I did read it, including the warnings. But I do agree that on this site and others like it, there’s not much discussion of what can go wrong, and how easily one seemingly minor misstep or bad judgment can lead to another. There’s a lot of cheerleading and hype, and a lot of proponents for creative deals claiming that anyone can do them, even with no money and no credit. JohnBoy has pointed out the RIGHT way for someone in that position to get started, while my experience illustrates the WRONG way.

However, despite that idiotic comment, “just pay your $%#$% bills on time,” reality isn’t always that black and white, at least not in my world. It would be nice if life were that simple, but it’s not. While I’m not going to try to justify what I did, it’s not hard to see how a newbie could take the same path, especially if the reason they got into CRE investing in the first place was because they had no cash and wanted to improve their situation.

LISTEN to JohnBoy: subject-tos and other deals where you stay in the middle are NOT for you if you don’t have cash reserves. Of couse each deal should stand on its own. But I naively thought, “Well, there aren’t any of those deals with $20 or $30 or $40k profit potential where I live, so I’ll just have to make do with tighter deals.” If I had spent more time learning HOW to find the good deals, instead of rushing into mediocre deals, I wouldn’t be telling this story now.

I believe it was GL who made the point that it’s not right that one should lose a house for paying only two weeks late. Well, that’s the same thought I had. But I made the mistake of comparing this situation to one with a regular bank lender. The banks generally don’t care at all if you’re two weeks late, as long as you pay the late charges, and they certainly won’t begin foreclosure over that short of a delinquency. But the private lender is a whole different story. I believe the comments speculating that he has learned of the equity in the property and wants it for himself are correct.

When I first called him to discuss the proposed deal, I made the mistake of telling him that chances were good the loan would be paid off within a few years, when my TBer exercised their purchase option. He said, “Well, I don’t really want that note paid off. I was planning to use the income for my retirement.” I just brushed it aside thinking that when the time came, maybe I’d approach him about transferring the mortgage to another property if he wanted to maintain the income.

But I believe he now thinks he’s found a way to keep the income AND realize an even greater profit, and he’s not about to give it up easily. I suspect that the 2 week late payments and the taxes have given him just the opening he was looking for.

And yes, the loan was brought current before any of this came up, and yes, I can borrow the money to pay the taxes and my attorney, if I have to. But given the lender’s position, I don’t think for a minute it’s going to go away that easily. Of course, I want to do the right thing for the seller and the TBers, and if that means giving up the $15k potential profit, then that’s what I’ll have to do. But I’m not ready to just walk away yet.

As I said, I’m meeting with my attorney this week and after I get his input, I’ll be in a better position to decide how to approach the TBers and their lawyer, i.e. not pushing for eviction and just trying to get them to closing as quickly as possible, or taking a more hard-line approach to get the rent paid NOW or get them out of the picture.

I’m not unwilling to consider some concessions like paying the TBer’s closing costs or lowering their price, if it will help get the deal done. I also would be willing to negotiate with the lender, but it appears he believes he holds all the cards at this point, and that may or may not be true. If all else fails, I would approach the seller and offer to deed the property back to her, thus halting a foreclosure due to DOSC violation. Fortunately, as a private loan nothing is reported to the credit bureaus, so the seller’s credit isn’t impacted unless a judgment of foreclosure is recorded.

Again, thanks to all those who took the time to respond with thoughtful criticism and concrete suggestions. No matter how it eventually works out, it’s definitely a learning experience, one which I think others will benefit from hearing. That’s why I posted it. For those interested, I will post more details when they are available.

“John Doe”

Big Trouble w/ Subj-to - Posted by GL(ON)

Posted by GL(ON) on January 28, 2002 at 14:17:34:

I still think this is an important issue, and your experience will be valuable for many of us.

Don’t forget to keep us posted on what happens.

In the meantime I have a question. When you were talking to the lender did you ever consider assuming the mortgage? Did you ask about this, or did you think the sub2/trust method was the way to go?

I ask this not to be a monday morning quarterback but because it seems to me a better and simpler way to do it, and the way I would have done it if I had the choice.

Sorry to doubt you, John Doe - Posted by Alan in Houston

Posted by Alan in Houston on January 28, 2002 at 12:12:44:

John, I was one of the people who questioned if you existed. I am sorry for the doubt. You have started a post which has snowballed due to some peoples strong opinions.

You were brave to post this information. Keep us informed how this plays out. My advice is get to your attorney, and explain your position, than get your buyer back in line. Your buyer can save all of this.

I have had a simular case happen to me and had to get the attorney involved. Things went smoothly from there.

Good Luck!

Money, Credit, Discipline, Getting Started - Posted by Frank Chin

Posted by Frank Chin on January 28, 2002 at 09:46:49:

Hi John:

You got very good advice and comments from all concerned, particularly from Mr. Bronchick regarding having adequate cash reserves to start. I know the problem with many REI is getting the cash reserves together to start.

I’ve been there before.

Before starting REI, my wife and I had a new SFH and two new cars. My salary covered the mortgage, car payments, car insurance, and my wife’s salary covered all the bills. We were a little short on credit card payments each month, so the card balances increased every month. Sound familiar ??

You can see we’re in no position to build cash reserves.

That year, we attended a Xmas party we struck up a conversation with a doctor and his wife. Their income was almost as large as ours, but they were spending one salary and saving the other.

How did they manage that ??

They explained about living BELOW your means. People with half of our incomes would live in a two bedroom apartment, and drive one used car. In fact, I’ve seen folks at work with less income car pooling, or husbands and wives picking each other up and dropping each other off to work. My wife actually had the option of public transportation.

In fact, we just met with a mortgage broker the week of the party about doing a refi on the SFH form 16% down to 13%. After the party, we thought about things, and figured that instead of a refi, we’d sell the SFH, borrow a few dollars still available against some credit lines, and put down on a three family house, instead of spending it on bills which we were at the time.

That’s what we did. We sold the SFH, sold a one year old car which we took a slight loss on. We moved into a 2BR apartment of a 3 family house renting out the other units. Depreciation greatly reduced income taxes. When the payments on the other car ended a a year or so later, our expenses were cut in half and more.

We were actually spending one salary and saving the other.

Now a word about cash reserves. We really had none, and the cash flow was break even on the first several properties we bought. But because NYC is a fast appreciating area, we were looking long term. Indeed prices tripled since the time we bought it.

But our reserves was the extra salary we’re putting away. If a tenant leaves, the roof leaked, there’s money to cover. Because we had no major disasters buying the first 3 family house, we were able to put together a down payment on the next one a year later.

I noticed living below one’s means is more common with immigrant families and the first generation American’s. Those with middle income backgrounds find this approach a very bitter pill to swallow.

That’s why I noticed some new arrivals owning businesses and properties a few short years after their arrival. Some local folks wondered out loud how they managed to do that.

There was a post on this board a while back about a South Vienamese immigrant making 2K between him and his wife saving enough to put down on a 90K donut shop, and then paying of the remaining balance of the loan a very few short years later.

I did a post about a vegetable man who came to this country illiterate, spoke no English, but founded a successful vegetable business, and started buying office buildings.

Aristotle Onassis started the same way.

So the conclusion is, that REI is not “rocket science”, but involves life style, discipline as well as knowledge. We did what we did because we really wanted to do REI.

Frank Chin

Doe is a real guy . . . - Posted by William Bronchick

Posted by William Bronchick on January 28, 2002 at 09:10:07:

Doe did email me privately. He is honorable and a real person.

Funny, but I just remembered that one of my brightest clients who has done hundreds of deals did exactly the same thing! He took subject to on a property with a private mortgage. The lender had a cow, then we met and negotiated a deal that worked for everyone.

FYI, I should mention that in Doe’s case, the lender said he didn’t care who made the payments. This being the case, accepting payments from the new owner is a legal waiver of the lender’s right to enforce the due on sale. And, before you ask, an institutional lender that accepts payments from a new owner does not waive his right to call the due on sale unless he has knowledge of the transfer; in this case, the private lender knew.

You are not alone! - Posted by Jim FL

Posted by Jim FL on January 27, 2002 at 23:18:49:

First, I understand you wanting to remain anonymous.
I also want to thank you for sharing some of the “Bad things” that can happen, especially when they are caused by making bad decisions, or circumstances that place us in a position where we may make a mistake.

Robbing peter to pay paul, this is something I can relate to.
Try losing a few hundred thousand in a divorce and ALL of your cash flow and savings. (Trust me, it stinks)
When in this position, many people here and elsewhere would advise you to wait to do deals. This is what some people told me.
They might say, "Get a job, save, and THEN do deals."
This is not always possible, and taking a few risks, knowing what rewards are likely can cloud our judgement sometimes.
As David said below, I know, been there, done that.

When I went thru my divorce and lost a TON of money, and basically had to begin again, with NOTHING, other than knowledge and experience, along with some networking contacts, I did a few marginal deals.
I admit it.
I took some risks. I did so knowing they were risks. I relied on my skills to pull me through, along with some luck.
The good news is that I knew my exit going into all the marginal deals, and frankly, created my own luck as a result.

There were quite a few good points brought up, and honestly, I do agree somewhat with the idea that this would not have happened, IF you had made the payments on time, and covered the taxes.
I also understand when this is not possible.
Trust me, I understand.

In fact, I’m NOT anonymous, and I’ll share a brief experience with you.
When my divorce first began, I learned that my then wife, the book keeper for our business at the time, had NOT been making all the payments, and was trashing the late payment notices. She was taking funds and hiding the details from me.(OUCH!)
I also learned that my ENTIRE savings was GONE, so I had no backup funds to rely on.
I did take a few risks, knowing full well that this is what they were. I felt that I had no choice, because the numbers involved simply prohibited me from just going out to get a J.O.B. and make things current again. I do not have skills other than REI where I could create enough income to cover SEVERAL thousand dollars in a VERY short amount of time.
So, I took a two pronged approach.

  1. Buy more properties.
  2. Juggle some funds coming in to stave off lenders foreclosing.
    Here is how I did this…
    I cranked up some marketing to attract more sellers.
    When the calls came in, which they did, thankfully, I bought several more houses.
    I also collected rents on several places, and offered to discount prices for MANY T/B’ers IF they would close within a short time.
    I took some of the rents and made up some of the arrears, and held off on making some of the payments that were current. I planned at the time to sell the new houses I bought with L/O’s, collect option money, and use that to make up ALL payments, along with the profits from closing deals.
    I knew that I HAD to get this all done within 30 days or less. This was the risk.
    What if I could not pull this off?
    Guess what?
    I was already in a BAD position, and figured, “I HAVE to make this work, there is NO ROOM FOR FAILURE!”

I tried to psyche myself up, which when going thru an unwanted divorce and finding out the level of betrayal, was not an easy task. There were days when I was almost totally paralysed by depression.

Why am I telling you this?
Because I do beleive you are for real, but to be totally honest, even if you are not, the lesson to be learned with your post here is VERY important for EVERYONE here to read and understand.

We MUST always remain in FULL CONTROL of our businesses, and should things unravel a bit, do what MUST be done to make things right.
Do not stop until it is.
Again, there is no room for failure.

All I can offer you here regarding your deal, or mess, if to keep your head up, and do not let this stop you from investing in the future.
Learn from it, and move on!
I did, and I gotta tell ya, the ride sure was nerve racking, but fun just the same.
and I’m fine now.

I’ve started my own business over twice.
Once during the mess my divorce created, and then again when I relocated to another state.
Each time, I dove in head first, kept my head up, and PLANNED my exits.

I do wish you good luck, and would appreciate, as I’m sure others will, you sharing the outcome.

Take care John,
Jim FL

I dont think so… - Posted by Shawn (MD)

Posted by Shawn (MD) on January 27, 2002 at 22:14:15:

Sorry, I just dont buy it. Your writing style is just too familiar and too lesson oriented. A person truly in the middle of what you claim is unlikely to be so unconcerned with how its going to play out and instead you seem to be reading from a storyline. There is also that very familiar disregard for reality and the seriousness of timely payments.

At any rate there is a simple way to prove it and still retain your anonymity on the internet. Email William Bronchick and identify yourself - he can confirm the details AND keep your identity confidential. Not only may he think of some other possible solutions to your situation but you can greatly increase the validity and educational value or your postings. I believe that if you are as you say you are this should not be a problem, however if you are a troll…

Re: Big Trouble w/ Subj-to: - Posted by Jay (TN)

Posted by Jay (TN) on January 27, 2002 at 22:12:28:

John Doe, at least you’re realizing the mistakes and admitting to fault. I’m opinionated and young (nickname: yung and stupid), but when someone sets me straight, I am not afraid to admit when I’m wrong.

I’m glad you posted about how a deal can go wrong. I’ve learned some lessons, and more importantly, you drilled home my established belief one MUST always have cash reserves handy. I call it my “saving for a rainy day” fund. I sleep better at night knowing my rear is covered.

Regards and best of luck,

THIS is the most important thread - Posted by William Bronchick

Posted by William Bronchick on January 27, 2002 at 21:11:36:

“Doe” (still waiting for him to contact me privately and verify he’s a real person) made a statement that is the MOST IMPORTANT OVERLOOKED POINT a beginner needs to realize - in Doe’s own words:

“But it’s a CLASSIC example, as many pointed out, of the major RISK of doing deals without adequate cash reserves”


You can buy “nothing down”/subject to every day of the week, BUT . . .

If you can’t handle the negative cash flow, vacancies, repairs, and oh yes, the 1 on 100,000 times a loan gets called, you LOSE!

Fact is, of all the things that can go wrong in a deal, the loan being called for a due on sale, is not even in the top 100 of potential risks. A non-paying tenant, bankruptcy, code violation, hot water heater breaking, drug bust and 100 other common pitfalls are the real things to worry about.

If you think the DOS being called is too big a risk, then stop whining and don’t do it! You can still get rich in real estate by plunking down 20% and getting a conventional bank loan. But, unless you’ve got a lot of cash and income, you’re not going to build an estate very fast with that approach.

You are better off keeping the 20% cash in a CD for emergencies, then buying 10 properties “subject to.”

So, it’s your choice, folks . . .

Great post… I’ve been there done that… - Posted by David Alexander

Posted by David Alexander on January 27, 2002 at 21:00:21:

Now lets talk real world solutions…

A part of what you said is completley true… and I disagree with some of what Johnboy and others say… every deal must stand on their own… although I do believe every deal must stand on their own… there is a complete difference between a business and Investing…

The way most of us run Real Estate is not investing but a business… and our business is our investment… we have to turn it over and create… businesses do not always have cash reserves… it would be nice if the world were black and white and like you I believe it is quite grey…

And I also agree that probably your underlying note holder is being motivated by greed and/or an attorney… but, I’m betting that once everything is current… the problems will go away no matter what they say… simply becuase then they can’t prove they were harmed… and a judge isnt going to rule in their favor if your paying…

Now real world solutions… Bring a partner… maybe a partner that puts up enough money to reduce the underlying loan amount to where you can get a hard money on the underlying for the balance…

Example: 100k property you owe 85k, bring a partner to put up 20-25k, and get loan at 65% to pay off underlying… of course the cash amount can be reduced if you get a higher loan amount… split the profit with partner.

See if you trade paper… some that has better terms… Use a third party to do this… maybe the guy just will decide not deal with the Headache.

Buy back the option from your buyers… Again use a third party… then proceed to evict for non payment… actually, I do this anyway… just went through this whole scenario recently with a not paying and getting a lawyer etc… It was a ruse… (we hadn’t paid the taxes, our choice)

Supposedly they were putting the money (payments) in escrow with there attorney… we started our forfieture(was a contract for deed) and when it came time for to go meet with there attorney they came in with the money… a cashiers check dated that day… a money order dated the day before… and some cash to finish it off… some escrow…

and the doozy… put the trust into a corp or LP, of course it was already in one… Right… and threaten bankruptcy…

Bottom line is… this is a business… and at times cashflow are tight… I know all about that… I got the bright idea to buy 20 gillion properties last year… thinking I was immortal… I’m here to tell you I’m not… sometimes you can become a Buy & Hold person whether you like it or not… then came September 11, and then the holidays…

Luckily we are pretty much through it… but, I got to you… it causes some real growth… and a few scars along the way…

David Alexander

You have legal rights… - Posted by David Krulac

Posted by David Krulac on January 27, 2002 at 20:42:13:

you might want to check your state laws. In Pa. there has been much legislation passed that protects the foreclosee, that’s you. Reinstatement rights were made law to prevent foreclosure on a whim. Here in Pa. the foreclosee has up until 1 hour before the sheriff sale to reinstate the mortgage, and this applies to institutions as well as individual mortgage holders. I knwo that CA also has strict laws protecting the rights of the foreclosee. Good Luck.

David Krulac

Bad advice - Posted by William Bronchick

Posted by William Bronchick on January 28, 2002 at 17:08:41:

Sorry, GL, but I don’t see how assuming liability for a loan would have solve Doe’s problem. The endless trust/lease-option/subject discussion below is really a red herrring. The issue, even by Doe’s admission, is that he didn’t have the cash reserve to handle carrying the property. He even said that the lender didn’t really care that ownership had changed hands. Let me quote Doe:

"Unfortunately, some major cash flow problems UNRELATED to this property caused me to be about two weeks late with the mortgage payments on a couple occasions. "

So, whether the tenant was a regular tenant or a lease/option tenant or the property was the residence of Doe, we would be in the same place.

By taking subject-to the existing loan, he has no personal liability here. Since the loan is not reported to the credit bureaus, the former owner is not hurt if Doe simply walks away from the deal. That’s the whole point of “subject-to”, the ability to walk away from a bad deal. If Doe assumed liability for this loan, he is personally on the hook for it. How does that help? Doe’s late payments caused the trouble here, nothing more, nothing less.

Re: Money, Credit, Discipline, Getting Started - Posted by Talia (NY)

Posted by Talia (NY) on January 28, 2002 at 14:51:58:

I, too have made changes to my lifestyle…not just for the purposes of REI, but for everyday life. Whether or not we want to come RE investors, we should be careful about our financial habits. A penny saved is a penny earned.

My credit history is bad because I was never taught about proper financial practices. During college, I spent spent spent and now have the credit history to prove that. Since, I am about to pay off 3 credit cards and move back in with my parents (one of the reasons being a family obligation and the other being that I won’t have to pay any rent). So if I get another job that pays the same that I am making right now, I can save $750 in rent/groceries. I am planning to go back to school, so I want to have all my debt eliminated except for my student loans. I hope to get started in real estate after paying off my obligations so that I don’t have to worry about credit cards and such. I realized that I will only be successful with large amounts of money if I am successful with small amounts!

Funny how it is the American way to spend more when you make more…

I hope all “newbies” are preparing themselves before “jumping” into REI! I realized that there are things I have to work on first before I get into it myself!

God bless and happy investing!

Live below your means! - Posted by Tim (ME)

Posted by Tim (ME) on January 28, 2002 at 11:43:36:

This post is so true.

My wife is from Indonesia. She came to this country a few years ago, and to tell you the truth, our 2 cultures clashed quite a bit with regard to finances. I am the typical twenty something who has student loans, credit card debt, and a car payment. And she comes with absolutely zero debt. She went to college just like me, but paid for it all before she graduated. It boggles my mind how she did it, but she did. Her dad owns a small auto shop business, and never carries any debt either. He taught her and her siblings to live below their means. Since we’ve been married, I have learned a great deal from her. We have sold our car (no more payment), and paid off credit cards. We scrutinize every purchase, compare prices, try to haggle with larger purchases (she taught me how to haggle, even when buying appliances & furniture). We are selling our house and will move into another one about half the price of this one. Life will be good then! Like Kiyosaki says, don’t buy doodads, buy assets.


Great post, thanks for sharing (NT) - Posted by Devon (NY)

Posted by Devon (NY) on January 28, 2002 at 10:30:56:


Re: Doe is a real guy . . . - Posted by Shawn (MD)

Posted by Shawn (MD) on January 28, 2002 at 13:14:25:

John Doe - Sorry I doubted you and thanks for sharing your situation and taking the steps necessary to confirm your story. I hope that it all works out well for you and hope that you will publish the outcome as well.

William Bronchick - Thanks for taking the time to confirm the story for the board.

Re: You are not alone! - Posted by MoniqueUSA

Posted by MoniqueUSA on February 03, 2002 at 18:23:38:


Thanks for sharing your experience here.
As you and many others have posted, managing cash flow and payments
when in a tough spot can indeed be a struggle.

Something ALOT of us can relate to!


Re: You are not alone! - Posted by Michel (TX)

Posted by Michel (TX) on January 28, 2002 at 08:05:16:

Been there, done that. But to admit it publicly, it’s another thing. Guess my ego is too strong. But there’s nothing like failure, to make me bounce back again. I lift you my hat, Jim(fl), for sharing! I’m always looking forward to read your postings. And for you, John Doe, as granma always said: Sometimes there’s rainy days, but sooner or later, the sun will pop out again". (Sorry, I had to translate it from French to English, and it’s not that easy, but you get the picture! HANG IN THERE! Sincerely. Michel

Re: I dont think so… - Posted by John Doe

Posted by John Doe on January 27, 2002 at 23:42:57:

Well, sorry to bust your bubble, but I HAVE e-mailed Bronchick privately. He of course can confirm or not as he sees fit.

“Unconcerned”? Hardly, but what would you have me do in order to demonstrate my concern over the 'net? Somehow, I can’t see where panic is going to be of any help here. Sorry, but I don’t owe you anything. If you don’t believe it, fine, skip the thread. As for “disregard for reality,” whatever. I’m happy for you your world is so black and white.

“John Doe”