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.