Actually the concept isn’t too bad at all, and paper like that should be graded at subprime levels. The real hole in your program is the risk level. You are working on a too thin margin, on properties priced too low. A 10% margin on a $100,000 home gives you a lot more room for error than 10% on a $25,000 home.
If you have a cookie cutter program set up, and you are loaded, it might make a nice little cash flow engine, but it’s tight. Subprime lenders are working with huge reserves, thin spreads, and large fees. And they sell off a lot of the risk to bondholders.
As an individual, you need a higher spread, I think. Or less risk exposure. Investing with a reputable hard money lender is one way. Working with a private note broker is another. Both can earn you much better yields with much lower risks.
Of course that are many other techniques to work with, depending on the amount of active personal involvement you want to have in your investing activities. Sounds like you are a “hands-on” guy, so explore a lot more of the archives on this site, and you should be able to come up with some excellent devices for your objectives, with much improved Risk-Reward ratios.
I would appreciate any information regarding the following scenario and its feasiblity.
My idea is this…
Purchase low priced condo units ($20,000 - $30,000)at a minimum of 10% below market value through persistance and all cash offers.
Immediately offer the same units for sale at a slight premium to market due to my willingness to finance. The down payment would be %10 - %20 with a subprime interest rate. The higher interest rate would reflect banks unwillingess to make mortgages this small and the probable credit ratings of potential buyers.
Sell the notes at a break even level.
Repeat as necessary.
I welcome one and all to constructively blow holes in this idea. Perhaps I am being too optimistic or it would be too difficult to create notes at a high enough interest rate to break even after seasoning. Anyway, bombs away, I would rather lose face now than money later.
Posted by John Behle on April 18, 2000 at 11:37:25:
It’s a valid concept that has been around for 25-30 years - at least. It is called “backsiding” paper. Builders and developers have used it for years. It works well for condo conversions and is the heart of many real estate philosophies.
It is the same concept as in “Lonnie Deals”, “Split Wraps”, “Money Machine” deals, etc. It’s just a matter of margins, rates, terms, price, etc.
I started into paper investment by doing what I termed a “Nothing Down Wraparound”. It was similar in concept to a technique called a “Split Wrap”, so I used that term later on. Buying discounted properties or discounted rates (below market rates) and then selling again to get all or most of your cash out - while still having a cash flow is a great way to go.
We would need more information about rates, terms, etc. on your deals to say whether it is profitable enough, but no question the idea is sound. You just have to be real clear what you can both buy and sell properties for.