Overwhelm - Posted by Naomi

Posted by B.L.Renfrow on October 26, 2003 at 11:30:23:

We do agree that subject to deals can be highly profitable if done correctly, and, as you state, “tremendously dangerous if not done properly.” The trouble for the newbie is that no matter how much they’ve read, there are plenty of pitfalls which aren’t addressed at all in most of the courses.

I think it’s also possible that when one gets to the level of success where cash in the bank and creditworthiness aren’t issues, it may be difficult to remember a time when one didn’t have enough money to place an ad in the paper…which is where many of these folks with no cash/credit are at.

Let’s face it: virtually everyone involved in real estate investing, whether creative or conventional, is involved for the money. Sure, one can rationalize that you like to help people, you enjoy negotiating, etc., but the bottom line is, you get into the field because it’s a way to generate cash in one form or another. To take a newbie, with no cash, no credit and no real-world experience and tell him to go take over someone’s loan and hope that nothing goes wrong, is a sure recipe for disaster.

Sure, you can have your sellers sign all the disclosures and CYAs in the world – and you should – but in the worst-case, multiple default scenario, it’s just not going to do you much good, and it’s going to look to the DA, judge, media and the public like you EXPECTED you would be unable to fulfill your promises to the sellers.

While you are fortunate if you can get sellers not in default to agree to make four additional payments, I think this is the exception, not the rule. In every subject to deal I’ve ever done, the sellers were financially motivated to one degree or another, and simply didn’t have the ability to do that. Sure, I got a few of them to make one or two additional payments, but four? No way.

Likewise, while your statement that “an overwhelming majority” of buyers can’t qualify for bank loans may be true in areas with skyrocketing prices and appreciation, it sure isn’t true in my area. Around here, if you can fog a mirror you can usually get a loan…which means the only people left over as T/Ber or owner finance candidates are for the most part the bottom of the barrel deadbeats.

If a newbie in this environment reads the courses and success stories, sure he can go into my town and get sellers to deed him their properties without too much trouble. Problem is, the exit is going to be MUCH more difficult than the courses say, and without experience, he’s not going to know that. Unless he has the cash reserves to carry the property for several months, or he has plenty of equity to allow a quick sale, he’s going to find himself in bankruptcy before he knows what hit him.

I can relate a couple stories similar to Gerald’s above, and I wasn’t a newbie. I also found myself in a multiple default situation, and I thought the odds of that happening were so remote as to be virtually impossible, so I do speak from experience.

Again, I’m not saying the newbie shouldn’t do any deals – they have to start somewhere. But they are far better off, and safer financially, doing flips and assignments to build cash reserves while getting some real-world experience until they know their local market inside out, and know how things differ from what their courses say.

Brian (NY)

Overwhelm - Posted by Naomi

Posted by Naomi on October 24, 2003 at 15:06:13:

The original way I wanted to start in RE isn’t panning out. I wanted to start by getting my feet wet wholesaling junkers to rehabbers. Problem is all the homes I’ve come across are not free & clear - they all have financing on them - way more than the numbers will allow to make them work.

Is there anything else that truly doesn’t require money? I’ve looked at short sales and then wholesaling them, but so often the banks you negotiate with won’t allow for the “and/or assigns” clause. I’ve also looked at lease-options but don’t have much confidence that I could do it.

Am I just selling myself short or am I really stuck?


Re: Overwhelm - Posted by E.Eka

Posted by E.Eka on October 25, 2003 at 12:21:04:

Read BL Renfrow’s and Gerald(tx)'s posts. They are seasoned investors and have a lot of valuable insight. They are also right with regards to what newbies should start with. Wholesaling, flipping, by subject to are better than trying with a lease option or Contract for Deed.

Re: Overwhelm - Posted by Rob FL

Posted by Rob FL on October 24, 2003 at 22:44:40:

Wholesaling is still the best way. All the other methods are alot more complicated and carry alot more risk.

Use multiple methods to generate leads. With wholesaling all that really matters is finding a property at a good enough price. The deals are out there, you just need to figure out how to locate them better. Finding deals is always the hardest part to this biz.

You gotta be kidding! - Posted by gerald(tx)

Posted by gerald(tx) on October 24, 2003 at 19:23:28:

I’m seeing people advising you to get into Sub2 investing because you don’t have money. Sub2 is not a no money down method! There are too many expenses and pitfalls.

I’ve done over a dozen Sub2s myself and I would not advise anyone to do his first one without at least $5k in cash and access to another $10 or 15k.

JohnBoy who is a season vet and poster here recommends having at least $25k in cash before thinking about Sub2s.

Some of the advice you get on this board is really the blind leading the blind. Newbies leading the newbies. Learn to discern them.

Re: Overwhelm - Posted by timeinvestor

Posted by timeinvestor on October 24, 2003 at 18:46:54:

He’s right. Subject2 or Lease Option sound like the only possibles on that scenerio. The way through this confidence issue is to learn more. I suggest the “Cash Flow Systems” by Ron LeGrand or “subject2” by John $cash$ Locke. LeGrand=ebay / Locke=google search.

good luck to you.

Re: Overwhelm - Posted by rm

Posted by rm on October 24, 2003 at 16:52:39:

Homes don’t have to be free and clear to be wholesaled.

Do more work on the lead generation side and you’ll find better opportunities.

Re: Overwhelm - Posted by David G.

Posted by David G. on October 24, 2003 at 15:12:39:

One method that is inexpensive and that doesnt require credit or money is buying SUBJECT 2.

You find sellers that just want out of their payment.
You can offer to take over their loan and take deed of property. You would then flip it via LO or CFD.

Dont give up! Everyone starts overwhelmed.

David G.

Really? - Posted by Scott Vorous

Posted by Scott Vorous on October 25, 2003 at 11:13:33:

Gerald, what school of S2 did you go to? Yes, you will need cash, but that’s for the education. I’ve done several S2s in the last few months and haven’t spent a dime of my own money. I’ve been investing for 13 years and very seldom do I ever spend my own cash. I’m not trying to “slam” your post, but a truly successful deal is dependent on how you structure the situation and ultimately how “motivated” your seller is. I would suggest that your dealing with the wrong clientele if your paying cash. My clients “pay me” to take their houses. S2s are a great way for the newby to get into this business as it is the least risky (with the proper tools and education).

Yes, Really!!! - Posted by gerald(tx)

Posted by gerald(tx) on October 25, 2003 at 20:58:04:

Some deals take little money to get in and you can often recoup this and more up front. But just when you think things are going great…

Up jumps the devil!

Here’s an example: I got into a home just for making up two back payments. Normally, I fill these fast with owner financing, but to my surpise this one took over 3 months to fill. Now I’m out 5 payments. The insurance co didn’t want to pay for the new policy out of escrow, so I pony up another $1200. The HOA files a lien I wasn’t aware of, here’s another $700 including atty fees. A maintenance problem, even tho covered under warranty had to be immediately taken care of, another $1500 until I was reimbursed.

By the time I got somebody in the house I was out over $11,000! And I am experienced and supposedly know what I am doing. I’ll eventually make a nice profit on the back end, but the up front was a killer. Now what would a newbie with no money have done? He would have been in deep doodoo, that’s what.

Every experienced Sub2 investor knows this, and if a person says you don’t need cash or reserves, then I say that person has not done many, ( or any?) Sub2s.

Re: Really? - Posted by B.L.Renfrow

Posted by B.L.Renfrow on October 25, 2003 at 11:49:53:

Gerald is absolutely correct.

You mean to say you have been doing subject to deals for 13 years and you have NEVER had:

*A T/Ber or land contract buyer stop paying?
*A tenant or buyer file bankruptcy while not paying?
*A tenant/buyer claim equitable interest while not paying?
*A property which you couldn’t move as quickly as expected, thereby incurring holding costs?
*Unexpected repairs which your tenant/buyer couldn’t or wouldn’t handle?
*A situation where you were overly optimistic about FMV or your ability to get above market rents?
*A seller develop “anmesia” and start screaming fraud and go running to a lawyer, causing you to spend money on your OWN attorney?
*A lender call a loan due because of DOS violation?

Yes, most of these situations can be anticipated and mitigated against. But if your tenant/buyer stops paying, for whatever reason, where do you think the underlying mortgage payment is going to come from in the meantime, realizing that it may be MONTHS, especially with a bankruptcy, before you can get the occupant evicted and find another paying occupant? If the investor doesn’t have the funds set aside to cover these expenses, and the loan goes unpaid and all of a sudden the original seller finds himself in foreclosure, after the investor promised to solve his problem, what do you think is going to happen?

If the investor in this predicament has no reserve funds, they are in big trouble. If they don’t have the ability to refinance or get their own loan because of bad credit, what will happen? If there is no room for a quick sale because of low/no equity, what will happen?

The investor will be screwed, and will be in big trouble, that’s what.

Think it couldn’t happen? Happens more than you’d think. And in a multiple default scenario – also not unheard of – the investor is likely to wind up in the local news media, if not the gray bar hotel, as a con man and public menace.

Advising newbies with no cash or credit to start out doing subject to deals is irresponsible. The ONLY way they should consider subject to is if they ONLY take on deals with plenty of equity and immediately sell for cash, not remain in the middle, until they are able to build the necessary cash reserves.

Brian (NY)

Valid Points… - Posted by Scott Vorous

Posted by Scott Vorous on October 25, 2003 at 13:23:25:

Sure, anything can happen… just like when I get into a car; I may not make it home. Whether you’re dealing with wholesaling or retailing, a newby is always facing some risk unless they’re guided. Let’s start over… these S2 deals can be tremendously dangerous if not done properly. If you get educated however, and do it right the first time, there are steps in dealing with all of these scenarios. First of all, I don’t make any promises (I can’t keep) to the sellers. When I take the deed and agree to make their payments, they know I’m doing my best to keep things in line. If they’re behind in payments, I’m up front and tell them, “I may not be able to save this from foreclosure. I’ll do my best to negotiate a short sale, forebearance, whatever!” If the seller’s loan is stable and they simply want to bail, I tell them up front that I’ll take over their payments and maintenance until their house is resold. I ask them to pay four additional monthly mortgage payments and I’ll take over from there as it will take time to find a qualified TB. We also mutually agree (in writing) that if I miss two or more consecutive payments because I haven’t found a TB, we can have the property redeeded back to them if they wish. Most sellers appreciate my blatent honesty, as I don’t want the risk. Regarding my TBs; I spend alot of time with these folks. 1) they get prescreened by my mortgage lender and work to clean up their credit. As a team, my TB and loan officer determine a time line for the payoff of the underlying mortgage and they stick to it. 2) My TBs pay no less than 5% (plus) as a nonrefundable option consideration to protect my interest. Sure, some walk away, but as LeGrand suggests, “oh well” where’s my next $5000 non refundable option consideration in the ailes.

Here’s another point. Some areas are selling houses like hotcakes using conventional bank financing. An overwhelming majority of folks now days can’t qualify for bank loans. Using these techniques, my TBs are grateful to get a house with no bank qualifying and owner financing. They generally stick to the deal.

Look, handing a newby a method (or system) to buy a house with only the most basic fundamentals is the “real” crime. Most new investors struggle for the first few years trying to find that “one” method that will guarantee them the best profitability. Problem is, it generally is never one method, but a combination of several. One thing is certain though, you must deal with motivated sellers in any circumstance to make the really big bucks in this business.

Whatever the newby focuses on, they must study with the experts and master their trade. I believe S2s are best because I believe you can literally eliminate all the risk if done properly.

You mention that investors can get into trouble… absolutely! Do what you know you can do and don’t make promises.

Regarding my 13 years as an investor. Most of it has been spent buying apartment buildings and SFR for tenants all over the country… I’ve been screwed so many times I have trouble breathing. The S2 business gets rid of these problems as I’m not dealing with renters who want a temporary home. I’m now dealing with motivated buyers who need to live in and buy this home. They want this house and they take care of it.

So, dispite your profound objection, I still would not hesitate to recommend S2s, shortsales, etc. to the newby. But, I always caution that they must work hard to understand their trade. There is no quick way to get rich in this business. Either you take the time to get educated or make lots of expensive mistakes.