Posted by Phil (CO) on February 20, 2002 at 12:43:14:
J.P.,
I was afraid I might get a response like yours.
I’m sorry - I shouldn’t have generalized. Believe it or not, I have read hundreds of messages on this site, and I agree that there often are warnings about the risks. Joe Kaiser’s article on “Top 10 Ways to Get Creamed in REI” is case in point.
I should have kept my comment specific to this point on L/O. In dozens of posts on this same topic, the response is always the same - if it doesn’t work out with the first T/B, just keep his option money and find a new T/B. This is the first time that I’ve read a response from an experienced investor that says “it ain’t that simple!”
Again, sorry for the generalization. And since you chose to ignore the statement in my original post, I’ll say it again:
I think this site is awesome. I wouldn’t be starting REI without it.
Posted by ETalbert on February 19, 2002 at 23:24:57:
This question has been bugging my mind for some time, so here it is:
When you find a T/B, it’s most likely because they cannot get qualified for a traditional purchase…right?
Second, when the time comes to exercise the option to buy, why would they be qualified now? If they’re still not “qualifiable” you are pretty much SOL on the purchase and have nothing left but to find new tenants or extend the lease period…right? (good positive cash flow though)
My suggestion is, and please let me know if I’m crazy, have the T/B’s enroll or work on improving their credit during the lease…maybe as a part of the “agreement”
OK, let me know if I’m missing something here.
Thanks in advance, keep the posts coming and successful investing!
ETalbert
Posted by JoeKaiser on February 20, 2002 at 05:13:11:
Couple things . . .
Remember, where credit is concerned, time heals all. Given sufficient time, bad credit goes away. That’s why they may not qualify today but will in a year. Common for bankrupts to need a year or two under their belts before lenders will agree to finance.
And don’t forget . . . sometimes . . . I’d prefer they don’t exercise the darn thing (but don’t tell anyone, makes me look greedy). Whether or not they qualify is not something I’ll lose sleep over.
Finally, experience shows that the notion that if it doesn’t work out, “you get to keep their option money and just do it all over again,” ain’t likely. Tenants with multi-thousand dollar option fees invested rarely just walk away when that option period expires. More often than not, they’ll be looking to even the score. My most recent eviction a case in point.
T/B does not get a loan and cash you out, you got their option money and the monthly cash flow; and you get to get it all again with another T/B’er.
T/B does qualify for a loan and you get their option money and the monthly cash flow; and you get your back end profit you already calculated on the sales price.
Posted by Phil (CO) on February 20, 2002 at 12:00:11:
Joe,
Being a newbie, I sincerely appreciate your candid response about the T/B “looking to even the score”. More often than not, the REI strategies discussed on this board only talk about the up side. Rarely do you hear about reality. I think that probably stems from fears that a person may get branded as a “News Group Trasher” if they talk too much about the risks. Fortunately, the experienced and respected participants such as yourself can get away with comments like these every now and then.
I, for one, am extremely excited to be starting REI. And this board has been awesome. I now believe more than ever that these investment strategies will work. My only criticism is that it’s sometimes difficult to read through the hype and get a realistic picture of the risks.
My daily visits to this board have been extremely motivating. But it is great to get a real-world picture now and then.
Thanks again for pointing out one of the risks, it’s sincerely appreciated.
Re: Joe, Thanks for the Honesty - Posted by JohnBoy
Posted by JohnBoy on February 20, 2002 at 12:44:13:
There have been MANY of posts here that talk about the risks involved. I know myself that have said you can just get a new tenant/buyer and make more option money, but in the same token I talk a lot about the importance of setting that money aside for reserves should you have to have it to get a tenant/buyer out of the property and cover eviction costs, vacancies, repairs and advertising costs to find a new tenant/buyer.
If you type risk into the archives you will get over 1500 posts that come up.