Ridiculously profitable L/O strategy - and no sub2 - Posted by Lou Pohl

Real Estate Investing
#21

Only need a few… - Posted by Lou Pohl

Posted by Lou Pohl on September 27, 2003 at 22:01:28:

I agree that the “hardest” part of the whole thing will be finding nice properties to buy 20% below FMV. I’ve only been doing this stuff for 2 months, and just finishing up my first rehab right now. But it seems like I should be able to find at least 1 property every 1-2 months that I can buy at 80% of FMV no? That’s all it would take to make my scenario come true. I see signs all over the place offering houses on a “rent to own” basis … isn’t the “standard” to sell it at a price that reflects current FMV plus appreciation over the option period? So it seems reasonable to me that one could asking for a measly 5% over FMV which represents 1 year of appreciation or less. No?

#22

I could live with less… - Posted by Lou Pohl

Posted by Lou Pohl on September 27, 2003 at 22:03:55:

I could live with less option consideraton … I don’t necessarily need the money now. Even a few grand would be cool - I’ll wait for the rest when I refi or they excercise the option in 1 year, etc. I don’t know, it just seems like there should be enough people out there to allow me to do 5-10 of these a year. Someone who lost their job, was out of work for 6 months, and has recently got a new job, etc. They would be a perfect candidate. There are TONS of those people out there I figure …

#23

Re: Agreed… - Posted by Marcos

Posted by Marcos on September 29, 2003 at 08:58:05:

I think you’re missing Bill’s point. Dallas/Ft Worth area is quite similar to my area in Florida. A $40k house rents for $500-600. A $100k house rents for $900-1100. BUT, a $200k house DOES NOT rent for $2k It rents for $1300-1500 at max. And even better a $300k house rents for $1400-1800.

I suggest doing some research on properties for rent, and how much their FMV is versus rent. You’ll find the higher you go, the lower the rent. For example in my area, I can also rent a $800k oceanfront house for $3k a month.

I would be absolutely sure that you can rent the place for $2k a month. In my area we max out around $1200-1400/mo. Anything more, and they usually just buy. Although I like John Schaub’s idea about renting a house bigger than you could afford as long as the rents are lower than what you would pay to buy.

HTH,

Marcos

#24

How do you figure? - Posted by Redline

Posted by Redline on September 28, 2003 at 19:15:05:

So let me get this straight … once you do 10 or so you won’t buy ANY others until all 10 are sold? Cuz if you do then you’ll end up holding (at any given time) 10-20 properties.

Also you consider 10-20% equity? That is slim and can disappear very quickly. That’s no equity at all.

This stratgey is a quick way to the poor house for all but the MOST experienced and deep pocketed investors IMO.

RL

#25

Oh and also … - Posted by Lou Pohl

Posted by Lou Pohl on September 28, 2003 at 18:29:40:

Here in Texas sellers always pay for title insurance. That’s about 1%. So when a person lists their house with a realtor they automatically lose 7% right there. Plus they have to wait 3-6 months etc to sell. They call me off my bandit sign or whatever, and I tell them that I will pay 80% and close ASAP. So basically if they are even a little motivated and/or need to sell relatively quickly, all they have to do is give up an extra 13% to me for my trouble in return for solving their problem. Doesn’t seem too unrealistic to me … what do you think? If I use investor money to buy these, the seller will have no selling costs and be able to sell immediately. All that and they are only really “losing” 13%. Sounds fair to me and surely there are enough people out there that would benefit from this to allow me to just find 1 a month on average.

P.S. You once described in an old post how the average seller who lists with a realtor actually only nets around 72.9% of FMV, or something like that. I could even incorporate that speech into my pitch. =)

#26

Agreed, but… - Posted by Lou Pole

Posted by Lou Pole on September 28, 2003 at 17:06:37:

I agree this would be the most difficult part of the process, but surely one could find 6, 8 or 10 of them a year (depending on the FMV of the houses you were targetting and your income goals). Here in the Dallas, TX area even “good” houses are sitting on the market 3-6+ months right now and regardless, there are always people who need to sell in a hurry, etc. for one reason or another. Just out of curiosity, what kind of real estate investing do you focus on Brent?

#27

Re: What is your point … - Posted by Liz

Posted by Liz on September 28, 2003 at 12:41:09:

I commonly find sellers that give me their homes without compensation and I rent it back to them for more than they would pay anyone else.

My success is rooted in my belief that all home owners want to get less than market value just so I can continue on my path of self-indulgent delusion. I love nice people.

#28

Re: Ridiculously profitable L/O strategy - Posted by Lisa

Posted by Lisa on September 28, 2003 at 09:27:35:

Me too. I?ve done it that way for years. Those rich of diminished mental capacity jet setters have paid my way through elementary school twice.

#29

Refinance terms - Posted by Hank FL

Posted by Hank FL on September 28, 2003 at 11:27:20:

Refinance terms are so much sweeter than “new” financing.

So what gives you the creeps about sub2s ?

You’d only be using the old loan for a short time anyway.

#30

Re: Only need a few… - Posted by Kristine-CAq

Posted by Kristine-CAq on September 27, 2003 at 22:17:26:

From where I sit, the hardest part would definitely be finding properties at 80% of FMV that are not overfinanced and need no repairs. What kind of buyer would need you? What buyer has a great house, ready to go, isn’t over-financed and is willing to take 80% of FMV? I think this would be difficult to make happen anywhere. I think your l/o plan could work, depending on your area.

One of the reason subject-2 exists is that it fills a need. What need would you be filling?

Sincerely, Kristine

#31

Re: Agreed… - Posted by Lou Pohl

Posted by Lou Pohl on September 29, 2003 at 09:05:29:

You can rent a 800k house for $3k a month? That’s crazy. Not here! Rents follow the 1% rule pretty closely in my area all the way up to at least 300k and beyond - and that’s about as high as I’ll go with this strategy. After that I’m not exactly sure how much it drops off because I haven’t really researched it that far, but you definitely can NOT rent an 800k house for 3k. No way Jose! As far as renting my theoretical 200k house for 2k, luckily I don’t need to. My PITI is only about 1500 tops so all I need is around 1750-1850 tops. Other investors are L/O’ing houses all over DFW like crazy … it works great around here. I see more “Rent to Own” signs more often than “We Buy Houses” signs! (And they are new ones all the time, not the same signs for months on end =)

Thanks for the input though, much appreciated!

#32

Re: How do you figure? - Posted by Lou Pohl

Posted by Lou Pohl on September 28, 2003 at 19:26:47:

“So let me get this straight … once you do 10 or so you won’t buy ANY others until all 10 are sold? Cuz if you do then you’ll end up holding (at any given time) 10-20 properties.”

No that’s not what I said. What I mean is that every time a property is sold you simply replace it with another one. Once you get going you will have properties being sold on a regular basis, and you just keep replacing them with new ones.

To keep it simple, let’s say that if the T/B doesn’t excercise their option after 1 year, you’ve decided you will just sell the property retail. So bottom line you are only holding on to a particular property for about 1 year no matter what (add a few months if you need to sell retail, etc). Thus you should be able to do about 10 per year without ever holding more than 10 at a time. Make sense?

“Also you consider 10-20% equity? That is slim and can disappear very quickly. That’s no equity at all.”

20% is equity yes. I don’t recall saying anything about 10%. How is 20% going to disappear very quickly?

If FMV is 200k, and I find a motivated seller who is willing to sell to me right now for 160K, then I turn around and sell it on a L/O for 210k (a measly 5% over what it’s worth now), that’s at least 40-50k in profit for me in about a year depending on how quickly I get a t/b in place, whether they excercise their option or I sell it retail and have other selling costs, etc.

Are you saying that this 40-50k in potential profits could somehow be reduced to the point where doing this type of deal wouldn’t make sense? If so I’d like to hear about it.

I’m not trying to be argumentative, and I would really love to hear your comments …

#33

Re: Oh and also … - Posted by Brent_IL

Posted by Brent_IL on September 28, 2003 at 22:43:52:

I look to buy in the same percentage range to FNV that you are. I used to shoot for lower, but that doesn?t seam to be happening. When I make a purchase I usually keep the contract price at whatever they are asking for the property if there?s enough equity so I can mess around with the terms of the sale sufficiently to bring down the present value of the total financing arrangement into my buying range. It?s always subject-to, but if the equity is real thin, I just offer moving money.

In my area, there are not as many folks willing to jump at the chance to sell at 80% of market value. I have to razzle-dazzle sellers for me to get there. That?s the crux of your situation. Are the properties that you describe available? Since in your market they are, and the financing and resources are as described, try it. The worse that can happen is that you?ll have to try something else if this approach slows down.

I?ve never had a seller take the 72.9% of FMV right off the bat. I go through the speech to shock them into reality. By selling on my terms, they can get back up to their asking price. When you use this talk, wait until you have determined the seller?s equity. If he?s at 12% equity, modify the numbers, or let some categories out of the talk so you come up with something closer to 88% of value.

#34

Re: Oh and also … - Posted by Tom PA

Posted by Tom PA on September 28, 2003 at 22:20:47:

I would be interested in seeing the numers that get it down to 72.9% FMV.
I have worked it down to 78% without losing many brain cells but can’t make the rest of the trip to 72.9%.

#35

How will you use Private Money? - Posted by Tom (MI)

Posted by Tom (MI) on September 28, 2003 at 21:41:42:

“If I use investor money to buy these, the seller will have no selling costs and be able to sell immediately.”

What kind of rate will you be getting on this private money? If you give your private money investors an attractive rate and purchase it around 80% fmv it seems like you will more than likely have a negative cash flow.

#36

Re: Ridiculously profitable L/O strategy - Posted by Mamsup

Posted by Mamsup on September 28, 2003 at 09:39:36:

I purchase all properties at 20% of FMV. Where do you people make your money at the high prices you pay?

#37

Re: Refinance terms - Posted by Lou Pohl

Posted by Lou Pohl on September 28, 2003 at 11:39:42:

Thanks for the input Hank. I guess sub 2 just seems to “messy” - having to convince them to do it in the first place, trying to conceal what is going on from the lender, worrying about multiple lenders calling loans due at the same time (you would have to have good reserves to do this responsibly I think), etc.

But I like your idea so I will give it some more thought. Can you give me a ballpark idea of the kind of terms you’re thinking of, as opposed to new financing? I guess I just don’t know what to expect if I were to “refi” a house 6 months after taking it sub 2. I’ll start to look into this … thanks.

#38

Re: Only need a few… - Posted by Heather -Tx

Posted by Heather -Tx on September 27, 2003 at 22:40:46:

There are some situations that owners might jump at this, Relocating for a job, or divorce, or getting married and have to get rid of one of the spouses homes…

I could see this working pretty well. How many times though, with holding so many loans in your and your companies name… THAT might be an issue after you have a few. Or maybe I’m just tired :slight_smile:

Heather

#39

I suggest… - Posted by Marcos

Posted by Marcos on September 29, 2003 at 10:43:59:

I suggest that you do a little more research. I would look through the paper and find all the properties in your area that rent for $1500+ and then look for comparable sales near them. Or vice versa, look for all the properties for sale in your area, and then find rentals in the same subdivision.

From a quick check on your online newspaper, I only found 10 rentals of the 600+ advertised that rent for $1800 or more. I also looked at some of those ads. Most of them are 3000sf+ with a pool. Then I did a quick check on Realtor.com, and the best home I could find that matched that criteria was $270k. All the others were $325k+.

I’m not trying to shoot your idea down. I’m just asking you to be get real clear on what your rent values are. Of your current market of rentals, what’s the range of those rentals? What are your competitors renting? What’s the maximum possible rental price? The top I found in your area was $2500, and that was a brand new house.

I’m not saying you can’t get the thing done. But, I will tell you from experience in my market, no way in hell would I even think of trying to L/O a $300k house, most likely not even a $200k house. A $130-170k house might make a perfect L/O. However I tend to stick closer to the $100k house. And my real money makers are my $60k homes. I find the higher priced homes in my market take much longer to sell. And I would assume correspondingly longer to rent as well. You never want to be at the top end of the market, it’s too hard to cater to those buyers. You’re better off being in the bread and butter area so that you have a much higher chance of finding a match.

Just my opinion, I’m open to being wrong.

Marcos

#40

Re: How do you figure? - Posted by Redline

Posted by Redline on September 28, 2003 at 22:18:00:

“Are you saying that this 40-50k in potential profits could somehow be reduced to the point where doing this type of deal wouldn’t make sense? If so I’d like to hear about it”

That’s what I’m saying. I don’t think the markets are heading in the “right” direction right now and a serious correction could be just around the corner. That being said, I would NOT want to be holding onto 10 properties with not alot of equity.

You haven’t considered tenants who stop paying, who you’ll have to evict who’ll claim they’re not simply tenants. You haven’t considered repairs before you rent them and after when your tenants take everything that it’s nailed down. You haven’t considered the fact that rates are climbing along with the unemployment rate. You haven’t considered that we’re at war all over the globe and one more “Sept11” could throw this country into a spin.

All I’m saying is, it looks great on paper but personally I would not want to be in a long position on 10 properties with not alot of equity right now.

What the courses DON’T tell you is that L/O’s carry alot of risk. I don’t think you’re accounting for that risk.

This strategy 10 years ago would have you sitting pretty right now. What will it look like in 10 years? I don’t know. And I wouldn’t risk finding out but that’s just me.

RL