Posted by David Alexander on January 30, 2002 at 18:36:29:
I believe the deals are easier… because your going around anything conventional… so no hoops to jump through… You still have to deal with Cash intensity of running a business…
On the otherhand, doing rehabs, cashing out or borrowing out the money… keeps you flush with cash…
It all comes down to planning know matter what your desires…
David Alexander
I DONT GET IT! - Posted by Vince Blount
Posted by Vince Blount on January 30, 2002 at 13:51:07:
I am studying several courses right now and reading the Creonline archive, I am having a difficult time understanding how anyone can justify doing a Subject to deal.
I understand that it is rare for a loan to be called due, but if it is:
William Bronchick posts that ?If it gets called, you refi, pay it off, sell it, or deal with the consequences.?
http://www.creonline.com/wwwboard/messages/75012.html
First of all, in a lot of examples in the various courses I have seen, there is not even any equity in the homes being taken over. The whole premise in some deals is that you Lease option the home for higher than market value and are able to do that because you can get a buyer into a home even if they have bad credit etc. In almost all examples that I have seen, an acceptable ?Subject to? purchase price is higher than your cash offer would be because of the advantages of not having to come up with the cash and your ability to accept payment from your buyer until they can get a loan. If the worst does happen and you were to have to ?refi, or pay it off? it seems to me that you would really be in a bad position. Not only would you have to pay all the refi costs, the existing loan that is being called had better be for less than 80% (most examples that I have seen are more than that, up to near 100%) or you would also have to come up with cash at closing also, even if you were able to do that, it seems like you would lose most of your profit potential. It seems like unless you could put a conventional buyer in there who could get a loan and had a down payment, (in which case you would most likely have to sell for no more than market value) you would be stuck with a loan in your name and the only other exit would be to lease option it to someone until they can get a loan.
There is a Legrand example where a loan is taken over subject to from a very motivated seller and then sold to a buyer for 17k down. (10k in cash and 7 in installments). In the example, there is no attempt to make a monthly or backend. Just let the buyer take over that same loan subject to, then you?re out of the deal. That just seems beyond the realm of anything that ANY investor should ever do regardless of experience. To not be able to get a mortgage nowadays you have to really really have bad credit, If he is that bad off, the chances are so so high that he will pay late and the bank will call it due.
If the loan is called due, the buyer is out 10k immediately because he is not going to be able to pay it off, the whole reason he bought from you to begin with is that he can?t get a loan. He will lose the house when it is foreclosed and I would think that if he had a temper and a gun or a temper and a lawyer you would be in a mess. I could not put someone in this position. To me, even though you may be able to get by with it legally, it should not be done.
With all this talk, there must be people doing very well with Subject to?s. Please tell me why my thinking is wrong/what I am missing
who are you worrying about? - Posted by ken in sc
Posted by ken in sc on January 31, 2002 at 07:46:27:
If you are worried about yourself because you do not have the cash to refi if needed and want to live up to what you have told the seller - then don’t do subject- to deals. I can understand that.
However, if you do have the resources, you should know how to do subject-to deals. Often, that is the only way to HELP THE SELLER. If their is little equity but the seller WANTS YOUR HELP and you inform him/her that this is the only way because of their lack of equity, then if you are truely in the helping people business, you will want the option ofsubject-to when needed. Because if not, you just have to say “Sorry, I can’t help you.” and watch them get foreclosed.
Like you, I think these can be messy and I am not big on hiding things from a bank. So I use subject-to as a last resort. But I do like to help people who need it as long as it is good business for me. I explain it well and let them decide.
Ken
Re: I DONT GET IT! - Posted by Bill S. (Ohio)
Posted by Bill S. (Ohio) on January 31, 2002 at 07:21:53:
Vince, remember that a ‘subject to’ deal should be just one of the tools in your business. When someone calls and says they need help in getting out of a property, you should have several options for approaching the problem—including taking over subject to.
You’re right that they can be a mess, and I don’t like the idea very well either. However, I can see where this could be used…
For example, to take over a home where there is equity and with some repairs/cleaning/landscaping can be sold for a profit. With a subject to you can gain possession without any money out of pocket, do the repairs and then sell out making a profit.
You could also use the technique to gain possession of a property while you are trying to line up financing. I would guess quite a few of us have been in the position of working on purchasing a property where the down payment and closing costs will eat up our spare cash. Then, an oppourtunity comes along and how do you take advantage of it? Taking ‘subject to’ until the other deal is closed may just be the answer.
Anyway, that’s my two cents worth…
That’s why you… - Posted by David Alexander
Posted by David Alexander on January 30, 2002 at 16:16:49:
Paid the BIG BUCKS. For the RISKS Associated with doing the deals…
That’s why when you start, you need a plan… Although all plans can change, it’s always better to have a plan and goal in mind… And change to amke improvements as you go.
You should have partners lined up to do deals in various functions…
You should continue your education so you know how to deal with problems as they arrive…
This one is rom Kiyosaki’s latest book… you need expand your context, so as you would understand why you do a deal of that nature…
Now, for the most part I don’t deals where there is NO EQUITY… some deals where you pick them up and they ahve no equity but a 7% interest make a helluva cashflow… if your worried then put the cashflow, all of it back into the property and you’ll have spread in No time…
Example being… You buy a 100k property for 95k… but it has a 7% loan on it… giving you a payment of 632/month. You put someone at a loan or option price of 965/month which is about 110k at 10% or 102k t 11%.
The whole payment applied to the loan will get you down to 80% in about 24 short months if you take into consideration both loan paydown and approx. 5% appreciation.
Expand your context… drink frm a bigger glass… Or dont…
My opinion s these deals are a whole lot more fun than a rehab… even a minor one… In fact, nowadays we contemplate kicking holes in the walls… so we can call them fixer uppers… Pretty houses are easier to deal with…
Just make sure you have plan for when the negatives come, because that can and will happen…
David Alexander
Re: I DONT GET IT! - Posted by eric-fl
Posted by eric-fl on January 30, 2002 at 15:54:16:
First off, as many here will tell you, if this strategy makes you uncomfortable, then don’t do it. Simple. Just find another strategy that works for you. There’s lot’s of ways to make $$ in real estate, you don’t have to use this one if you don’t want to.
Second, to speak broadly to your points: The first being refinancing. IF the loan does get called, and IF you then have to refinance (note: even if a bank discovers a DOS violation, that doesn’t mean they will call the loan, especially if rates are lower, as they now are), that doesn’t “erase your profit potential”.
For example: Suppose I buy a house worth 100k FMV, for 90k, subject to the first (mortgage). It gets called due by the lender. I refi. I now own the house directly. I can still resell it either outright, or via land contract or l/o, or whatever I was planning on doing in the first place. Certainly this hasn’t wiped out my profit. Yes, I will be out a few thousand on the back end, due to my closing costs on the refi. Otherwise, all conditions are the same. I should still be able to sell the house on a land contract for $105 - $110k, with about 3-5k down, and net a $100-$200/mo positive cash flow until my buyer refi’s or sells. My point is, there’s still profit there.
As to your comment about the buyers for this type of deal, I can only tell you what I know from my own market. In my market, 9 times out of 10, the reason that buyers are considering a deal like this (owner-financed, l/o, land contract, etc.) is because they don’t have any cash. We all know that 3-5k cash on hand is not enough to buy a $100k house through conventional means. That will barely cover a down payment, if you can qualify for a 5% down loan. Then add in closing costs, moving costs, etc. People have done the math on this before calling; they understand why it’s good to get in light. There are plenty of people (again, at least in my market) who have average credit (notice I said average, not poor, not great), can afford the monthly payments, but who, like most people, are living paycheck to paycheck, and thus cannot save the 10k or more in cash that it takes just to buy a house. Unless they want to wait another 2-3 years while they scrimp and save, and why should they, if we can offer them an alternative, with all the same benefits, for just a little more on the back end, today?
Also, understand, I don’t think anyone here is enamored with the idea of assuming loans without telling the bank about it. BUT, federally insured loans used to be freely assumable, but are now just as tough to assume as conventional loans. The process is such that there is really no material benefit in terms of time or cost to assume a loan with qualifying; especially at today’s rates, might as well just get a new loan. Okay, so even that might be ok, BUT, in addition to that, you’re expected to personally sign for every property you buy like this, even if it’s for investment. I’ve got no problem with that, I honestly don’t, but then the same standards of accountability need to be applied to businesses as well. I wonder if the Enron scandal would have occurred if all the board members were held personally liable for any defaults in the company name? Right now, the laws, policies, or whatever are skewed in favor of the larger institutions. So the smaller investor/business find workarounds. This certainly isn’t the only business or endeavor where that occurs. And even if we accept all that, there is still the issue that, for non-occ, no-doc lender financing, you’re still looking at about 10-20% down, (most subject-to deals require less), and, most importantly, they’ll only let you do a certain amount before cutting you off. In theory, there is no such corresponding limit to subject-to deals. You can do as many as you can find.
Taking a loan subject to is neither illegal nor unethical (as long as you tell the seller the risks), it is merely a business strategy which, like all business strategies, has an inherent risk, and it’s a relatively small one at that, in comparison to, say, having all of your retirement savings in one stock, and then having that stock go bankrupt (sorry to harp on that, just trying to make a point.) Ultimately, if this strategy proves to have to much risk for you, then you should not implement it. I don’t think anyone here would argue that point.
God, not again… - Posted by Jim (SC)
Posted by Jim (SC) on January 30, 2002 at 15:16:39:
Please don’t keep rehashing old discussions. This has been discussed ad nauseum in the past and you are not raising any new points.
LOL; Good idea… - Posted by HR
Posted by HR on January 30, 2002 at 16:35:52:
David,
That’s a new twist to getting more potential buyers: when I finish one of my rehabs, I’ll kick in some sheetrock and then advertise as “handyman special”. LOL. It’s worth a try, right?
My impression is subject2s are indeed easier than rehabbing (speaking as a rehabber).
HR