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.