I'm Buying Negative Equity Properties and I'm Excited About It

[Andrew McGuire]

I purchased 1 and UC for 2  properties this month two of which I'm keeping as Long term rental. 

The first 699 E Gold Dust, San Tan Valley AZ comps around 375K and I purchased for 393K so I'm lost about 18K equity by purchasing. The reason I'm okay with this and others I'm purchasing like it is that I took over a 3.25% interest rate which makes my payment all in $1611/month + HOA. Paid of solar and the average bill is $7/month. I plan on renting this as a Long Term Rental and market rents are 2200 in that area. So I might cashflow a little bit but big picture I have principal paydown over $600/month which will grow with that low interest rate. I plan on holding for 6-10 years and see where we are at and will refi or sell depending on equity and cashflow #'s. I have two other properties similar under contract where I am overpaying by 15-25K and putting only 10K down + closing cost.

I believe in real estate long term so am buying as many properties as I can now that pay for themselves, the goal is to get to 100 properties this way that all go up minimum of $100K in the next 5-10 years. To get the cash for down payments I am going to do a mortgage wrap on the low down payment purchases and collect a larger down payment from wrap buyer. 

[Scott Trench]

Quote from @Andrew McGuire:

So would you recommended just not buying property right now for those of us little guys that are not big Capital Partners? Sounds like an advertisement to not buy anything  at all so we have to invest with you on not have any control. 

Earlier in this thread, you claim to be buying 3 properties of this type in a month or so. That's easily $1M in purchase value, perhaps closer to $1.2-$1.5M. 

I've been doing this ten years, and have amassed a multi-million dollar portfolio that is beginning to approach 8-figures. I have never been on a shopping spree like yours in my time on that journey.

So, you are no longer a "little guy".

Now, let's address your statement that appears to infer that you are "helping people sell who have no other option." 

Here are ways to help a person in foreclosure: 

- Encourage them to contact an agent and get a market opinion of value

- Encourage them to look into various personal and HELOC financing options - if there is equity in the property, then a bridge loan like this can help them buy enough time to sell and realize that equity. A pure soul might even offer them a market loan product in second position personally.

- Let them list the property and make an offer in the context of the market. 

In most cases, this will be the right outcome for the seller. In my view at least.

The thing is - you are an agent! If you just approached people like this, you'd ACTUALLY help them out and probably get paid either way!

Now, IF we were to get into the world of a subject-to acquisition, the occasional ethical buyer might look like this:

- Extremely well-capitalized. Could easily pay off entire loan balance or inject a large amount of equity in order to refinance and still make the deal work.

- Puts material equity into the deal, in the form of cash. 

- 750+ credit score

- Pays legal fee for seller to have representation from lawyer to walk them through the terms of the subject-to deal, including making it very clear that there are extremely real, and potentially devastating risks in the event of buyer default.

Irresponsible/unethical Sub-to buyer looks like this:

- Poor/no credit 

- Would not qualify for the mortgage they are taking over payments for, much less a new mortgage if a forced refinance event happens.

- Is attempting to get 100 subject-to deals, but is not even capitalized to pay off or inject enough equity to refinance a single one of the acquired deals to have it qualify for refinance, much less a few dozen of them. 

Andrew - you have posted a thread with an attention-seeking headline making it seem like this is a good strategy. I feel it HAS to be called out as the opposite.

Are you a little guy? Not according to your own posts. 

Are you a responsible subject-to buyer? Sure doesn't seem like it to me.

I think you are creating tremendous risk for your sellers, who would be far better off facing foreclosure now, where they at least recover some of their equity, then risking an unknown buyer mismanaging their asset as part of a huge pool, creating the very real risk that they may still have to face foreclosure in the future, at or below the current asset value, and after they thought they had moved on from the deal.

And, to answer your question about what should the little guy do... though, as we've already established, you are attempting to get 100 of these deals... it seems like you have the means to purchase three deals in a matter of months. I think that you might find a better risk-adjusted return for you personally, and better for your sellers by far, to simply buy one deal instead, at a more conservative capitalization, with more money down. Having done this myself, I can say that this is still a very reasonable way to get rich over the next 10 years, but without putting yourself and others at incredible risk.

You can still be responsible. You haven't gone too far... yet. IF you stop here, fortify your position, terminate contracts on these two deals, and commit yourself to ensuring that the one seller who has already entrusted you with their credit and financial future for the next few decades is not let down. 

This conduct, in my view, is not something to brag about.