Is a BIG cash reserve needed for Sub2 Investing? - Posted by hoxie8232@sbcglobal.net

import · July 24, 2005, 1:09pm

Posted by george on July 24, 2005 at 16:24:31:

I agree on Eric’s rule of thumb of a minimum of 3 pymts per home until you are well established with a gross 25k.

My problem with the France’s course is twofold:

1- their hook is that people are going to pay you to take their properties. This may happen, but it is rare at least in my DFW area. Most Sub2 sellers are in desperate shape financially and have no money to pay you.

2- they think it is okay to buy homes with no equity. My experience is this is a receipe for problems galore.

Their style and course is okay, but a little too rosy for reality, IMO.

george

import · July 24, 2005, 1:09pm

Is a BIG cash reserve needed for Sub2 Investing? - Posted by hoxie8232@sbcglobal.net

Posted by hoxie8232@sbcglobal.net on July 24, 2005 at 13:09:40:

I am planning on purchasing the course offered on this site by Randy France and Bob Meister on subect-to investing in real estate. Is it necessary to have a sizeable cash reserve on hand just in case a large influx of cash is needed? This is the one main concern I have about obtaining property using this method.

Please share any suggestions. Anyone who has had experience with this course or would like to recommend another course for subject-to investing please feel free to do so.

import · July 25, 2005, 9:56am

Absolutely - Posted by Frank Chin

Posted by Frank Chin on July 25, 2005 at 09:56:53:

Hoxie:

There’s been plenty of discussion previously by folks doing sub2 with either NO or NOT enough cash to handle the business. This is because sub2’s are pushed as a way of doing REI with NO CASH DOWN. I would have six months cash on hand.

In fact, when this issue came up previously, Bronchick did a post saying NO CASH DOWN, does not mean NO CASH REQUIRED, i.e. a CASH RESERVE.

As a sub 2 investor, you are usually dealing with people with money problems putting their financial life in your hands. You have the legal and moral obligation to make payments and solve their problems.

In some reported cases, the sub2 investor is either unemployed or have financial problems of their own. They’ll do a LO with a tenant/buyer, then spend the money received on themselves rather than make payments on behalf of the seller.

It happened to someone who posted here under the name “John Doe” some time ago, and he was sued by the seller as well as the buyer. The seller for his inability to make payments, and further ruining the seller’s credit, and the buyer for losing his option payment, rent credits due to the possibility of bank foreclosure on the seller.

I beleive its an absolute moral obligation as an investor acting as a RESCUER that you have the cash when push comes to shove. If you can’t perform, what good are you???

I beleive its the inability of some investors who fail to perform that’s bringing about a rash of state regulations on various forms of “creative” investing.

Frank Chin

import · July 24, 2005, 4:34pm

Re: Is a BIG cash reserve needed for Sub2? - Posted by cash

Posted by cash on July 24, 2005 at 16:34:12:

Subject-to investing just means subject to existing financing.
Such as lease options, sandwich l/o’s, contract “assumptions”, wraps, etc.

If the existing lien has a Due-On-Sale clause that could be triggered, then you might need funds in order to pay it off or quickly secure a new mortgage should the lien-holder demand immediate full payment or else foreclose. This is particularly a threat with bank mortgages during times that interest rates are on the rise.

It is also wise to have sufficient funds on hand to cover for non-payment of the underlying mortgage/lien should any of your tenant/buyers default on their payments as well as for any damages, repairs, turnover costs, eviction costs, lawsuits, etc. Consider worst case scenarios: for instance, could you afford paying the underlying mortgage(s) for 10 months while also paying an attorney to fight a non-paying tenant/buyer in court? If you don’t have substantial reserve funds/credit/assets to cover a bad spot, I would not personally advise getting into subject-to type deals as there is potential for financial hardship all around. Remember anything that seems easy is usually carrying a big risk factor as well.

Not to scare you or stop you from buying a course but go to johntreed.com for his book on single family lease options to get the negative side of the story on lease options so you are at least aware of the pitfalls.

import · July 24, 2005, 3:37pm

Re: … - Posted by eric-fl

Posted by eric-fl on July 24, 2005 at 15:37:31:

I have the France course, as well as others. IMO, the France course paints far too optimistic a picture for sub-2, especially in this environment. In Indianapolis, where they live, you can still take over properties that are 3/2, 1500 sf, for 125k, all day long. Those nice, newer properties, in areas with good schools, and will cash flow all day long.

In an appreciating area like Florida, New York, New England, mid-atlantic states, or California, (where about 48% of the U.S. population live), that simply is not going to happen. Properties in median-priced areas, simply will not cash flow, on a lease/option, especially in such an easy-money environment. Anyone who has 3k down and $1200 a month, is going to BUY a property, TODAY, not lease it in the “hopes” of buying it in a year or two. Why should they? With all of the interest-only/ARM-financing available right now, even to sub-prime buyers, there is no reason to wait until rates go up. If anything, they may lose on their appreciation bet, but, so what? Right now, they’re losing on rent anyway, and they know it. Rental inflation in the areas described above has been flat, or even declining, for at least the last three years.

So, whether or not this style of investing will be profitable, is going to be HIGHLY dependent on your local market. Bob and Charlie will dispute this - but, they have courses to sell, and they live in Indianapolis.

All that being said, if you ARE in a middle level, “flyover country” market, their style of investing will probably work great. Think Indy, K.C., OK City, Dallas, etc. Middle, both figuratively, and literally.

The France course doesn’t really address cash reserve issues - but, in my, and many others opinion, you should have reserves, yes. The France course actually paints evictions like they are a GOOD thing, and maybe they are, in an 8 or 9% interest rate market (when you can refill quickly, and get another option fee). But, we are not in an 8 or 9% market, or anything close to it. IMO, 3 months payments per property, until you get about 20-25k, is a good rule of thumb.

import · July 25, 2005, 2:09pm

Good advice Frank… - Posted by Bill H

Posted by Bill H on July 25, 2005 at 14:09:44:

when greed and averice take over common sense goes out the window.

If the current trend continues…we may well see lots of states putting dampers on all sorts of creative investment techniques…due to a few rotten apples around.

Bill H