JPIPER going against the grain????????? - Posted by Gene S Hou, Tex

Posted by JPiper on January 30, 2000 at 02:03:57:


Allow me first to comment generally on your post. My advice to you would be that whenever you find yourself questioning the wisdom of the prevailing guru regarding some specific topic?..listen to yourself. Develop the ability to think for yourself. Develop the ability to trust what you think. Understand that at certain points nearly everyone will be wrong. Sometimes the best results will come from acting in ways that no one else agrees with. Contrariness is an attitude worth cultivating?..because it will allow you to look at the other side of things. And most of all, listen to that voice within yourself?.it?s worth all the gurus stacked end to end.

As to your specific question, to me there are only two ways to profit from a low-equity deal 1) assign the deal for an upfront profit or 2) hold the deal for an upfront profit plus a monthly cashflow. There isn?t going to be any backend profit. In light of this, situation #1 should be acquired in whatever manner is easier to remarket. It?s going to make absolutely no difference whether you have a deed or you control with a lease/option?.except to the extent that the buying public will prefer one over the other. Further, it isn?t going to make any difference to you from a risk standpoint, because you?re going to be out of the deal. (Assuming you have covered all your legal bases).

Situation #2 in my opinion would best be taken control of by lease/option, not deed. I say this because there is risk to holding a deed. One of the primary risks is that the value of the property might decline?.a situation that you will have no cushion against by virtue of the fact that there is low equity. Keep in mind that while you aren’t on the loan, you may be obligated to the seller in terms of making the payments. On the other hand, controlling with a lease/option, and writing your lease in one year increments with the right to extend, ONLY exposes you to one year of liability at a time. A drop in value as example will only cost the value of one year?s lease at MOST.

In either case, if this low equity property materializes to appreciate significantly (a fact that no one I know can prognosticate), then holding a lease/option will still enable you to participate in this appreciation (to the extent that you didn?t cut off all this appreciation through sandwiching the property). I see little advantage to holding a deed in this case?.when considering both risk and reward.

One of the factors that most people don?t look hard enough at in my opinion is risk?..but then again, risk becomes kind of a passe topic after years of steady real estate appreciation.


JPIPER going against the grain??? - Posted by Gene S Hou, Tex

Posted by Gene S Hou, Tex on January 30, 2000 at 24:02:01:

As a newbie all the gurus I’ve read say, “Get the deed whenever you can!” They tell us having the deed is always the best for us.In paragraph 9 of JPiper’s post of 01-27-00 he seems to defy this conventional wisdom. I wish he could have expanded more on the “disadvantage” of having the deed on a low equity deal.

Here is my dilemma. I have homes near me with the following characteristics.
New to 5 yrs old (Houston’s median price is $115,000)
Acquisition prices $125,000 to $200,000 with 95-97% loans
Expected appreciation @ 6% per yr less cosmetic repairs
Payments @ 1% & rental will barely cover debt service
Many GOOD sellers WITHOUT divorces & credit problems will
be needing to move.

I just can’t seem to get excited about the prospect of getting a “subject to” deed on these low equity, high payment houses. As a matter of fact, I dread the idea and feel burdened by it. Trust or no trust, subject to, LLC—
if any thing goes wrong I’m the one sitting in their house selling them on my deal & in Tex they shot gun name everybody in a suit! These sellers in this price range are no dummies! When I drive away from signing up the sellers I’ll be asking myself,“Did I do good or just saddle myself with a liability?” However, I still want to play & I CAN see getting some cash profit up front! I see none or a little negative c/f during the hold period. I see a little c/f on the back end depending on how much or how little cosmetic repairs I have to do in paint & carpet. The builders in these subdivisions also give a ton in financing concessions that they could “steal” my occupant once he is loan approved in the future.

It seemed to me like a lease purchase (a la Bronchick) for 6mos or 1 yr with a bunch of rights to extend would be more advantagous from a risk standpoint. But…who am I to go against the “get the deed whenever you can” bunch. Then I accidentally stumbled on to JPIPER’S post.

My question for MR JPIPER AND ALL OTHERS IS, “Would you do a lease purchase under the above circumstances even though you could get the deed with the same effort?” Getting the deed has been such a big deal that I’d probably feel like a wimp & not tell my fellow investors about this at the monthly meeting. Thanks for any responses!!!

P.S. I forgot to say that if I did go with the lease purchase I don’t think I would have any problem getting them to sign a PERFORMANCE DEED OF TRUST valued at $10000-15000. Any comments or advice is greatly appreciated.