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. 

[Andrew McGuire]

Quote from @Jay Hinrichs:

Quote from @V.G Jason:

Quote from @Alan F.:

Quote from @V.G Jason:

Quote from @Scott Trench:

One more thing to consider. What are you going to do when your sellers begin declaring bankruptcy? 

Some huge percentage of sellers who are willing to sell subject-to are willing to do so because they are irresponsible and bad with money... that's why they are being foreclosed on. 

I am sure that every once in a while, someone selling their home Subject-To will magically transform into a responsible person, intelligently capable of forecasting their long-term financial future, and turning over a new page. 

But... that is likely to be a tiny minority. The majority of these deals are likely going to see the sellers go on to make terrible financial decisions, rack up debt, and some huge percentage of them WILL declare BK in the coming years. 

What's the plan to handle up to 30-50+ bankruptcies from your sellers all at once in the middle of a bad market? 

 Same logic with people who sell their house seller-finance to someone a bank won't approve? The logic just defies itself.

As for what will  happen, I'm thinking the fed is just going to hang tight until something breaks. Only pause with this view is the election.

And when things break, the chickens will come home to roost for all SF/subto/no cash in players or folks who bought into the FOMO without reserves. It doesn't need to be a 30-40% correction, but what usually happens is all those chickens come home to roost at the same time.

 Just spit balling but.....what if; % rates don't go down, inflation doesn't go down & unemployment ticks up, all over many years. Interested in your and others thoughts.

 So pretty much where we are except for the technical unemployment numbers? Continued stagflation and something will undeniably break. Likely the S&P companies that are just too levered. 

And I think the Fed will push it this way and the only doubt I have is the influence of the election. That doubt is strong though. 

I also have a very different view on if rates do come down. I think real estate has a lot more seasonality than folks given attention to. If rates come down end of Q1, any Q1, you'll see prices rip for the prompt 1-12 weeks then dip and in Q4 really correct of that year. If rates go down at any other point, you'll see prices go up quickly in the 4-6 week span then come down. I really feel the rates are the reason inventory is low and once rates come down, we'll see inventory change.

Look at the same cities previously mentioned

Arlington, Savannah, and Boston

Once rates go down, inventory will increase in the long(er) term. Prices may rip in the shorter term, but I think inventory will go up. And buying power will change.

rates go down inventory for sure will go up.. those that have been squatting on the current mortgages will now be more inclined to go ahead and sell .. and take on a new mortgage,, I know personally my wife wanted to move but I was not going to retire a 3 % mortgage and take on a 7%. Just not going to do it.. When rates first jumped we did lose half a dozen buyers that would have bought my new builds..

 Supply will go up but demand will go up to right? 

[Andrew McGuire]

Quote from @Alan F.:

Quote from @V.G Jason:

Quote from @Scott Trench:

One more thing to consider. What are you going to do when your sellers begin declaring bankruptcy? 

Some huge percentage of sellers who are willing to sell subject-to are willing to do so because they are irresponsible and bad with money... that's why they are being foreclosed on. 

I am sure that every once in a while, someone selling their home Subject-To will magically transform into a responsible person, intelligently capable of forecasting their long-term financial future, and turning over a new page. 

But... that is likely to be a tiny minority. The majority of these deals are likely going to see the sellers go on to make terrible financial decisions, rack up debt, and some huge percentage of them WILL declare BK in the coming years. 

What's the plan to handle up to 30-50+ bankruptcies from your sellers all at once in the middle of a bad market? 

 Same logic with people who sell their house seller-finance to someone a bank won't approve? The logic just defies itself.

As for what will  happen, I'm thinking the fed is just going to hang tight until something breaks. Only pause with this view is the election.

And when things break, the chickens will come home to roost for all SF/subto/no cash in players or folks who bought into the FOMO without reserves. It doesn't need to be a 30-40% correction, but what usually happens is all those chickens come home to roost at the same time.

 Just spit balling but.....what if; % rates don't go down, inflation doesn't go down & unemployment ticks up, all over many years. Interested in your and others thoughts.

 If that's the case a lot of the populations will not be able to afford property, those who already own property will get extremely wealthy and the government will start punishing landlords by taxing. 

[Andrew McGuire]

Quote from @Bruce Lynn:

So what are you doing to bridge the equity gap?  Paying cash?

Seems like anyone with 3.25% interest should have solid equity in most cases, so I'm surprised you can find people who want to do Subject2 on these, when it seems like they could sell, wipe out the loan and sell with equity.   

How often is it in AZ that people pay cash for solar panels?  In Texas it seems like 1 in 100.  So if you found one with paid off system, I guess that is a big bonus.  Does it have battery wall to power at night.  I would think in AZ that is a must, because summer heat and AC must run 24 hours a day.   As an investor how does $7/month electric help you?   Can you charge higher rent to make up for the power bill discount?  Do tenants seek those out?

Just remember it's all well and good until it isn't.  Have some cash set up for when things go south.  They will at some point and you don't want to get caught holding the bag.  When it goes south, everything seems to go south all at the same time.  Properties take longer to rent, rent stagnates or deflates, credit dries up, banks tighter on loan rules, credit cards decrease credit lines, your credit score drops because instead of 30% utilization you overnight go to 50-80-100% when they drop your credit line, hard money dries up for flips, stock market goes down and you don't want to take losses or can't use margin.   Real estate is cyclical, stay in long enough and you will go thru a cycle.  Have enough resources so you can hit the other side of the cycle.

See what is happening the CRE investors right now in may ncities.

 Surprisingly there are many sellers that bought or refinanced in the last couple of years that do not have equity, I've seen those sellers interest rates in the 2's on occasion. If there is equity I do a 2nd note on their equity that is paid monthly. 

Agree that we should have reserves but that is the case for all real estate, buying at lower interest rates lessens that risk in my opinion because you can lower the rents more than the buyer who purchased at 8% interest. 

[Andrew McGuire]

Quote from @V.G Jason:

Quote from @Scott Trench:

One more thing to consider. What are you going to do when your sellers begin declaring bankruptcy? 

Some huge percentage of sellers who are willing to sell subject-to are willing to do so because they are irresponsible and bad with money... that's why they are being foreclosed on. 

I am sure that every once in a while, someone selling their home Subject-To will magically transform into a responsible person, intelligently capable of forecasting their long-term financial future, and turning over a new page. 

But... that is likely to be a tiny minority. The majority of these deals are likely going to see the sellers go on to make terrible financial decisions, rack up debt, and some huge percentage of them WILL declare BK in the coming years. 

What's the plan to handle up to 30-50+ bankruptcies from your sellers all at once in the middle of a bad market? 

 Same logic with people who sell their house seller-finance to someone a bank won't approve? The logic just defies itself.

As for what will  happen, I'm thinking the fed is just going to hang tight until something breaks. Only pause with this view is the election.

And when things break, the chickens will come home to roost for all SF/subto/no cash in players or folks who bought into the FOMO without reserves. It doesn't need to be a 30-40% correction, but what usually happens is all those chickens come home to roost at the same time.

Historically what is the most rents have declined especially in a growing city? If prices come down 40% it doesn't matter if you can still cover payments. Equity Comes and equity goes but it doesn't matter as long as it cashflows. 

[Andrew McGuire]

Quote from @Jay Hinrichs:

Quote from @Scott Trench:

One more thing to consider. What are you going to do when your sellers begin declaring bankruptcy? 

Some huge percentage of sellers who are willing to sell subject-to are willing to do so because they are irresponsible and bad with money... that's why they are being foreclosed on. 

I am sure that every once in a while, someone selling their home Subject-To will magically transform into a responsible person, intelligently capable of forecasting their long-term financial future, and turning over a new page. 

But... that is likely to be a tiny minority. The majority of these deals are likely going to see the sellers go on to make terrible financial decisions, rack up debt, and some huge percentage of them WILL declare BK in the coming years. 

What's the plan to handle up to 30-50+ bankruptcies from your sellers all at once in the middle of a bad market? 

Scott, this is a valid point.. And that is why when this thread first started I mentioned I would never buy without 20% or more equity day one.. we did most of our sub 2 as foreclosure rescues but we also RARELY held them more that 9 to 18 months.  Or if we were going to keep them we moved them over to our LOC ..  That was part of the bargain with those we rescued IE we will pay your debt off so they can move on with no mortgage still on their fico..  

Bottom line trying to do these for LOOOONG term holds there is just too many things that can and will come up over time..

I don't have personal experience on this but the attorney's I've heard speak on say that is precisely why you want to buy Subject To instead of Agreement for Sale, Contract for Deed or the other 50 names it goes buy when the Deed does not move. If the original seller holds the Deed it is tougher to set that property aside in the event of seller bankruptcy. Subject To I understand you hold the Deed and it will be set aside in bankruptcy. 

[Andrew McGuire]

Quote from @Guy Gimenez:

Most everyone is excited about investing...until the realities hit them squarely in the face. I've seen this kind of stuff posted for more than two decades and still can't believe that folks think it's a good idea. I truly hope it works out for you. I am all but certain it won't. Way too many red flags that "excitement" won't fix. 

 Maybe you are right but maybe the old way is outdated.

[Guy Gimenez]

The "old way" (fundamentals) never go out of style. It's like saying buying at retail and trying to sell at high, high retail is a good idea because the old way is no longer applicable. I'm not trying to be argumentative...I've just seen many Andrews in my time who think they can use creativity to overcome the the basics (fundamentals). The horror stories are many but it's best to allow someone to get spanked financially because they learn better from their mistakes than from the mistakes of others. 

[Andrew McGuire]

Quote from @Guy Gimenez:

The "old way" (fundamentals) never go out of style. It's like saying buying at retail and trying to sell at high, high retail is a good idea because the old way is no longer applicable. I'm not trying to be argumentative...I've just seen many Andrews in my time who think they can use creativity to overcome the the basics (fundamentals). The horror stories are many but it's best to allow someone to get spanked financially because they learn better from their mistakes than from the mistakes of others. 

There were a lot of retail stores that thought that was fundamental until Amazon came and wiped them out as well. 

[Jay Hinrichs]

Quote from @Andrew McGuire:

Quote from @Guy Gimenez:

The "old way" (fundamentals) never go out of style. It's like saying buying at retail and trying to sell at high, high retail is a good idea because the old way is no longer applicable. I'm not trying to be argumentative...I've just seen many Andrews in my time who think they can use creativity to overcome the the basics (fundamentals). The horror stories are many but it's best to allow someone to get spanked financially because they learn better from their mistakes than from the mistakes of others. 

There were a lot of retail stores that thought that was fundamental until Amazon came and wiped them out as well. 

Thats apples to oranges.. does not really relate to RE investing.. there is nothing new about over paying for real estate that has been going on forever.  Its a personal decision for sure.
End of the day it will work or it wont..if it plays out the way you want it to or think it will then you will be the winner..  

If you have troubles and issues with both the market and the financing structure then you may look back and say well shoot that did not work !!..

There is NOTHING new in Real Estate basically that has not been done for the last 50 years.. My Dad was doing sub 2 in the 60s for instance.. And Wraps as well..  It seems like Morby has used the internet to blast this out and for him its worked big time.. Made Millions no doubt on selling his courses.. So now your going to have all these folks take these concepts and run with them.. But many will not have the 4 C's to succeed..  Capacity ( cash etc)  ( Credit) Cant refi if they get stuck and Collateral ( negative equity) and Character ( they just walk or rip rents on purpose and screw the sellers)

[Guy Gimenez]

Quote from @Andrew McGuire:

Quote from @Guy Gimenez:

The "old way" (fundamentals) never go out of style. It's like saying buying at retail and trying to sell at high, high retail is a good idea because the old way is no longer applicable. I'm not trying to be argumentative...I've just seen many Andrews in my time who think they can use creativity to overcome the the basics (fundamentals). The horror stories are many but it's best to allow someone to get spanked financially because they learn better from their mistakes than from the mistakes of others. 

There were a lot of retail stores that thought that was fundamental until Amazon came and wiped them out as well. 

Actually, those businesses that disregarded the fundamentals, including the need to adapt to changing market demands and technology advances, are the businesses that failed. With no disrepect meant, it's clear you believe you're smarter than the generations of investors before you and you have figured out the secret sauce to buying at retail, having little cash flow, but still making it a great real estate deal. I wish you much luck Sir.  

[David Avery]

Could do.a full 8 hour seminar on the subject. 

Application is King in Phoenix surrounding cities. 

My phone number is on my Bio.

Great Post.

David Avery 

[V.G Jason]

Quote from @Andrew McGuire:

Quote from @V.G Jason:

Quote from @Scott Trench:

One more thing to consider. What are you going to do when your sellers begin declaring bankruptcy? 

Some huge percentage of sellers who are willing to sell subject-to are willing to do so because they are irresponsible and bad with money... that's why they are being foreclosed on. 

I am sure that every once in a while, someone selling their home Subject-To will magically transform into a responsible person, intelligently capable of forecasting their long-term financial future, and turning over a new page. 

But... that is likely to be a tiny minority. The majority of these deals are likely going to see the sellers go on to make terrible financial decisions, rack up debt, and some huge percentage of them WILL declare BK in the coming years. 

What's the plan to handle up to 30-50+ bankruptcies from your sellers all at once in the middle of a bad market? 

 Same logic with people who sell their house seller-finance to someone a bank won't approve? The logic just defies itself.

As for what will  happen, I'm thinking the fed is just going to hang tight until something breaks. Only pause with this view is the election.

And when things break, the chickens will come home to roost for all SF/subto/no cash in players or folks who bought into the FOMO without reserves. It doesn't need to be a 30-40% correction, but what usually happens is all those chickens come home to roost at the same time.

Historically what is the most rents have declined especially in a growing city? If prices come down 40% it doesn't matter if you can still cover payments. Equity Comes and equity goes but it doesn't matter as long as it cashflows. 

 Completely missing the forest for the trees. Don't know where to start. Subto is exposed on the original owner & bank, the  landlording with debt is exposed to current renters making payment on a downturn. Way too many variables than saying oh well I got my rent, so I can survive. And even that isn't a given. The last sentence, the former is correct until the bank calls the loan due & the latter isn't guaranteed. You want to more or less work off a different premise:

fast solutions have slow problems

[V.G Jason]

Quote from @Andrew McGuire:

Quote from @V.G Jason:

Quote from @Bruce Lynn:

So what are you doing to bridge the equity gap?  Paying cash?

Seems like anyone with 3.25% interest should have solid equity in most cases, so I'm surprised you can find people who want to do Subject2 on these, when it seems like they could sell, wipe out the loan and sell with equity.   

How often is it in AZ that people pay cash for solar panels?  In Texas it seems like 1 in 100.  So if you found one with paid off system, I guess that is a big bonus.  Does it have battery wall to power at night.  I would think in AZ that is a must, because summer heat and AC must run 24 hours a day.   As an investor how does $7/month electric help you?   Can you charge higher rent to make up for the power bill discount?  Do tenants seek those out?

Just remember it's all well and good until it isn't.  Have some cash set up for when things go south.  They will at some point and you don't want to get caught holding the bag.  When it goes south, everything seems to go south all at the same time.  Properties take longer to rent, rent stagnates or deflates, credit dries up, banks tighter on loan rules, credit cards decrease credit lines, your credit score drops because instead of 30% utilization you overnight go to 50-80-100% when they drop your credit line, hard money dries up for flips, stock market goes down and you don't want to take losses or can't use margin.   Real estate is cyclical, stay in long enough and you will go thru a cycle.  Have enough resources so you can hit the other side of the cycle.

See what is happening the CRE investors right now in many cities.

 Bolded for truth. People evaluate risk as if only 10-25, maybe 33 percent of their portfolio can get hampered at once.No, just no. That **** comes at once, and it takes you straight down with it. 

There's no value at risk metric for real estate besides your fixed rate debt and obligatory physical expenses to maintain the house. These subto transactions from my understanding are pretty much paper assumptions, with little equity and a complete exposure to physical risk, original buyer risk, and lender risk. Why enter these? I get the rate to assume, it's very attractive. But not attractive enough to wear the risk. 

Not sure if I'm understanding how it would be any riskier than buying traditional route, the difference is these deals the renter pays for your expenses where if you buy traditional you'll be negative cashflow right now, traditional seems riskier. And not buying anything because it is to expensive is the riskiest. These properties will double in value and have a ton of equity with enough time as rents go up, as depriciation, as principal pay down at a much higher clip. 

 What happens when the renter cannot pay rent? And as that happens, your next renters can't too?

How you moving?

[Jay Hinrichs]

Quote from @V.G Jason:

Quote from @Andrew McGuire:

Quote from @V.G Jason:

Quote from @Bruce Lynn:

So what are you doing to bridge the equity gap?  Paying cash?

Seems like anyone with 3.25% interest should have solid equity in most cases, so I'm surprised you can find people who want to do Subject2 on these, when it seems like they could sell, wipe out the loan and sell with equity.   

How often is it in AZ that people pay cash for solar panels?  In Texas it seems like 1 in 100.  So if you found one with paid off system, I guess that is a big bonus.  Does it have battery wall to power at night.  I would think in AZ that is a must, because summer heat and AC must run 24 hours a day.   As an investor how does $7/month electric help you?   Can you charge higher rent to make up for the power bill discount?  Do tenants seek those out?

Just remember it's all well and good until it isn't.  Have some cash set up for when things go south.  They will at some point and you don't want to get caught holding the bag.  When it goes south, everything seems to go south all at the same time.  Properties take longer to rent, rent stagnates or deflates, credit dries up, banks tighter on loan rules, credit cards decrease credit lines, your credit score drops because instead of 30% utilization you overnight go to 50-80-100% when they drop your credit line, hard money dries up for flips, stock market goes down and you don't want to take losses or can't use margin.   Real estate is cyclical, stay in long enough and you will go thru a cycle.  Have enough resources so you can hit the other side of the cycle.

See what is happening the CRE investors right now in many cities.

 Bolded for truth. People evaluate risk as if only 10-25, maybe 33 percent of their portfolio can get hampered at once.No, just no. That **** comes at once, and it takes you straight down with it. 

There's no value at risk metric for real estate besides your fixed rate debt and obligatory physical expenses to maintain the house. These subto transactions from my understanding are pretty much paper assumptions, with little equity and a complete exposure to physical risk, original buyer risk, and lender risk. Why enter these? I get the rate to assume, it's very attractive. But not attractive enough to wear the risk. 

Not sure if I'm understanding how it would be any riskier than buying traditional route, the difference is these deals the renter pays for your expenses where if you buy traditional you'll be negative cashflow right now, traditional seems riskier. And not buying anything because it is to expensive is the riskiest. These properties will double in value and have a ton of equity with enough time as rents go up, as depriciation, as principal pay down at a much higher clip. 

 What happens when the renter cannot pay rent? And as that happens, your next renters can't too?

How you moving?

Sub 2 and rent is no different than having any other rental you evict and you make the payments same risks.. THE REAL RISK is when OP talk about wrapping these deals and sell on terms. Now you have given a glorified renter TITLE ownership to the home and your on the hook for the debt. And now you have 2 transfers of title that could come to light with the underlying mortgage and they move to foreclose.. and then you as the person who wrapped it has to also do a foreclosure to get your peeps out Now they file BK and so on and so forth..  But sub 2 and rent same risks as any rental with debt.

[Andrew McGuire]

Quote from @V.G Jason:

Quote from @Andrew McGuire:

Quote from @V.G Jason:

Quote from @Bruce Lynn:

So what are you doing to bridge the equity gap?  Paying cash?

Seems like anyone with 3.25% interest should have solid equity in most cases, so I'm surprised you can find people who want to do Subject2 on these, when it seems like they could sell, wipe out the loan and sell with equity.   

How often is it in AZ that people pay cash for solar panels?  In Texas it seems like 1 in 100.  So if you found one with paid off system, I guess that is a big bonus.  Does it have battery wall to power at night.  I would think in AZ that is a must, because summer heat and AC must run 24 hours a day.   As an investor how does $7/month electric help you?   Can you charge higher rent to make up for the power bill discount?  Do tenants seek those out?

Just remember it's all well and good until it isn't.  Have some cash set up for when things go south.  They will at some point and you don't want to get caught holding the bag.  When it goes south, everything seems to go south all at the same time.  Properties take longer to rent, rent stagnates or deflates, credit dries up, banks tighter on loan rules, credit cards decrease credit lines, your credit score drops because instead of 30% utilization you overnight go to 50-80-100% when they drop your credit line, hard money dries up for flips, stock market goes down and you don't want to take losses or can't use margin.   Real estate is cyclical, stay in long enough and you will go thru a cycle.  Have enough resources so you can hit the other side of the cycle.

See what is happening the CRE investors right now in many cities.

 Bolded for truth. People evaluate risk as if only 10-25, maybe 33 percent of their portfolio can get hampered at once.No, just no. That **** comes at once, and it takes you straight down with it. 

There's no value at risk metric for real estate besides your fixed rate debt and obligatory physical expenses to maintain the house. These subto transactions from my understanding are pretty much paper assumptions, with little equity and a complete exposure to physical risk, original buyer risk, and lender risk. Why enter these? I get the rate to assume, it's very attractive. But not attractive enough to wear the risk. 

Not sure if I'm understanding how it would be any riskier than buying traditional route, the difference is these deals the renter pays for your expenses where if you buy traditional you'll be negative cashflow right now, traditional seems riskier. And not buying anything because it is to expensive is the riskiest. These properties will double in value and have a ton of equity with enough time as rents go up, as depriciation, as principal pay down at a much higher clip. 

 What happens when the renter cannot pay rent? And as that happens, your next renters can't too?

How you moving?

I would have to sell the property or come out of pocket to pay for it. Same thing as if I bought the traditional way, not sure I get the point. If this is your mindset why invest in real estate at all? 

[Andrew McGuire]

Quote from @V.G Jason:

Quote from @Andrew McGuire:

Quote from @V.G Jason:

Quote from @Scott Trench:

One more thing to consider. What are you going to do when your sellers begin declaring bankruptcy? 

Some huge percentage of sellers who are willing to sell subject-to are willing to do so because they are irresponsible and bad with money... that's why they are being foreclosed on. 

I am sure that every once in a while, someone selling their home Subject-To will magically transform into a responsible person, intelligently capable of forecasting their long-term financial future, and turning over a new page. 

But... that is likely to be a tiny minority. The majority of these deals are likely going to see the sellers go on to make terrible financial decisions, rack up debt, and some huge percentage of them WILL declare BK in the coming years. 

What's the plan to handle up to 30-50+ bankruptcies from your sellers all at once in the middle of a bad market? 

 Same logic with people who sell their house seller-finance to someone a bank won't approve? The logic just defies itself.

As for what will  happen, I'm thinking the fed is just going to hang tight until something breaks. Only pause with this view is the election.

And when things break, the chickens will come home to roost for all SF/subto/no cash in players or folks who bought into the FOMO without reserves. It doesn't need to be a 30-40% correction, but what usually happens is all those chickens come home to roost at the same time.

Historically what is the most rents have declined especially in a growing city? If prices come down 40% it doesn't matter if you can still cover payments. Equity Comes and equity goes but it doesn't matter as long as it cashflows. 

 Completely missing the forest for the trees. Don't know where to start. Subto is exposed on the original owner & bank, the  landlording with debt is exposed to current renters making payment on a downturn. Way too many variables than saying oh well I got my rent, so I can survive. And even that isn't a given. The last sentence, the former is correct until the bank calls the loan due & the latter isn't guaranteed. You want to more or less work off a different premise:

fast solutions have slow problems

Have you had due on sale/acceleration called on you? I assume you’re speaking from experience. Prett simple maneuvering and couple thousand dollars and it was resolved.

[Andrew McGuire]

Quote from @Jay Hinrichs:

Quote from @Andrew McGuire:

Quote from @Guy Gimenez:

The "old way" (fundamentals) never go out of style. It's like saying buying at retail and trying to sell at high, high retail is a good idea because the old way is no longer applicable. I'm not trying to be argumentative...I've just seen many Andrews in my time who think they can use creativity to overcome the the basics (fundamentals). The horror stories are many but it's best to allow someone to get spanked financially because they learn better from their mistakes than from the mistakes of others. 

There were a lot of retail stores that thought that was fundamental until Amazon came and wiped them out as well. 

Thats apples to oranges.. does not really relate to RE investing.. there is nothing new about over paying for real estate that has been going on forever.  Its a personal decision for sure.
End of the day it will work or it wont..if it plays out the way you want it to or think it will then you will be the winner..  

If you have troubles and issues with both the market and the financing structure then you may look back and say well shoot that did not work !!..

There is NOTHING new in Real Estate basically that has not been done for the last 50 years.. My Dad was doing sub 2 in the 60s for instance.. And Wraps as well..  It seems like Morby has used the internet to blast this out and for him its worked big time.. Made Millions no doubt on selling his courses.. So now your going to have all these folks take these concepts and run with them.. But many will not have the 4 C's to succeed..  Capacity ( cash etc)  ( Credit) Cant refi if they get stuck and Collateral ( negative equity) and Character ( they just walk or rip rents on purpose and screw the seller 

The 4 C’s, oh man I’m definitely not playing with those old school rules that favor the capital partners. I’ve only been in real estate 4 years, not 40.

Old school out dated favors the big guys. Character I can get with but the last thing the big guys have is character in my opinion. 

[Jay Hinrichs]

Quote from @Andrew McGuire:

Quote from @Jay Hinrichs:

Quote from @Andrew McGuire:

Quote from @Guy Gimenez:

The "old way" (fundamentals) never go out of style. It's like saying buying at retail and trying to sell at high, high retail is a good idea because the old way is no longer applicable. I'm not trying to be argumentative...I've just seen many Andrews in my time who think they can use creativity to overcome the the basics (fundamentals). The horror stories are many but it's best to allow someone to get spanked financially because they learn better from their mistakes than from the mistakes of others. 

There were a lot of retail stores that thought that was fundamental until Amazon came and wiped them out as well. 

Thats apples to oranges.. does not really relate to RE investing.. there is nothing new about over paying for real estate that has been going on forever.  Its a personal decision for sure.
End of the day it will work or it wont..if it plays out the way you want it to or think it will then you will be the winner..  

If you have troubles and issues with both the market and the financing structure then you may look back and say well shoot that did not work !!..

There is NOTHING new in Real Estate basically that has not been done for the last 50 years.. My Dad was doing sub 2 in the 60s for instance.. And Wraps as well..  It seems like Morby has used the internet to blast this out and for him its worked big time.. Made Millions no doubt on selling his courses.. So now your going to have all these folks take these concepts and run with them.. But many will not have the 4 C's to succeed..  Capacity ( cash etc)  ( Credit) Cant refi if they get stuck and Collateral ( negative equity) and Character ( they just walk or rip rents on purpose and screw the seller 

The 4 C’s, oh man I’m definitely not playing with those old school rules that favor the capital partners. I’ve only been in real estate 4 years, not 40.

Old school out dated favors the big guys. Character I can get with but the last thing the big guys have is character in my opinion. 

well I get your newer and inexperienced at higher finance. You move up in the game and actually want or need to establish banking relationships for larger lines of credit and commercial debt..you will learn the 4 Cs and you will learn that to your commercial banker Character is number one.  

[Andrew McGuire]

Quote from @Jay Hinrichs:

Quote from @Andrew McGuire:

Quote from @Jay Hinrichs:

Quote from @Andrew McGuire:

Quote from @Guy Gimenez:

The "old way" (fundamentals) never go out of style. It's like saying buying at retail and trying to sell at high, high retail is a good idea because the old way is no longer applicable. I'm not trying to be argumentative...I've just seen many Andrews in my time who think they can use creativity to overcome the the basics (fundamentals). The horror stories are many but it's best to allow someone to get spanked financially because they learn better from their mistakes than from the mistakes of others. 

There were a lot of retail stores that thought that was fundamental until Amazon came and wiped them out as well. 

Thats apples to oranges.. does not really relate to RE investing.. there is nothing new about over paying for real estate that has been going on forever.  Its a personal decision for sure.
End of the day it will work or it wont..if it plays out the way you want it to or think it will then you will be the winner..  

If you have troubles and issues with both the market and the financing structure then you may look back and say well shoot that did not work !!..

There is NOTHING new in Real Estate basically that has not been done for the last 50 years.. My Dad was doing sub 2 in the 60s for instance.. And Wraps as well..  It seems like Morby has used the internet to blast this out and for him its worked big time.. Made Millions no doubt on selling his courses.. So now your going to have all these folks take these concepts and run with them.. But many will not have the 4 C's to succeed..  Capacity ( cash etc)  ( Credit) Cant refi if they get stuck and Collateral ( negative equity) and Character ( they just walk or rip rents on purpose and screw the seller 

The 4 C’s, oh man I’m definitely not playing with those old school rules that favor the capital partners. I’ve only been in real estate 4 years, not 40.

Old school out dated favors the big guys. Character I can get with but the last thing the big guys have is character in my opinion. 

well I get your newer and inexperienced at higher finance. You move up in the game and actually want or need to establish banking relationships for larger lines of credit and commercial debt..you will learn the 4 Cs and you will learn that to your commercial banker Character is number one.  

 That’s exactly what I’m doing.

[V.G Jason]

Quote from @Andrew McGuire:

Quote from @V.G Jason:

Quote from @Andrew McGuire:

Quote from @V.G Jason:

Quote from @Bruce Lynn:

So what are you doing to bridge the equity gap?  Paying cash?

Seems like anyone with 3.25% interest should have solid equity in most cases, so I'm surprised you can find people who want to do Subject2 on these, when it seems like they could sell, wipe out the loan and sell with equity.   

How often is it in AZ that people pay cash for solar panels?  In Texas it seems like 1 in 100.  So if you found one with paid off system, I guess that is a big bonus.  Does it have battery wall to power at night.  I would think in AZ that is a must, because summer heat and AC must run 24 hours a day.   As an investor how does $7/month electric help you?   Can you charge higher rent to make up for the power bill discount?  Do tenants seek those out?

Just remember it's all well and good until it isn't.  Have some cash set up for when things go south.  They will at some point and you don't want to get caught holding the bag.  When it goes south, everything seems to go south all at the same time.  Properties take longer to rent, rent stagnates or deflates, credit dries up, banks tighter on loan rules, credit cards decrease credit lines, your credit score drops because instead of 30% utilization you overnight go to 50-80-100% when they drop your credit line, hard money dries up for flips, stock market goes down and you don't want to take losses or can't use margin.   Real estate is cyclical, stay in long enough and you will go thru a cycle.  Have enough resources so you can hit the other side of the cycle.

See what is happening the CRE investors right now in many cities.

 Bolded for truth. People evaluate risk as if only 10-25, maybe 33 percent of their portfolio can get hampered at once.No, just no. That **** comes at once, and it takes you straight down with it. 

There's no value at risk metric for real estate besides your fixed rate debt and obligatory physical expenses to maintain the house. These subto transactions from my understanding are pretty much paper assumptions, with little equity and a complete exposure to physical risk, original buyer risk, and lender risk. Why enter these? I get the rate to assume, it's very attractive. But not attractive enough to wear the risk. 

Not sure if I'm understanding how it would be any riskier than buying traditional route, the difference is these deals the renter pays for your expenses where if you buy traditional you'll be negative cashflow right now, traditional seems riskier. And not buying anything because it is to expensive is the riskiest. These properties will double in value and have a ton of equity with enough time as rents go up, as depriciation, as principal pay down at a much higher clip. 

 What happens when the renter cannot pay rent? And as that happens, your next renters can't too?

How you moving?

I would have to sell the property or come out of pocket to pay for it. Same thing as if I bought the traditional way, not sure I get the point. If this is your mindset why invest in real estate at all? 

Let me clarify. If the market corrects 20% and your renters are struggling to pay rent how does your statement equity comes & goes, as long as it cash flows work then?

Again, the thinking process is when it comes down-- it all comes down. Not just 10-20% of people cannot pay, it's usually the inverse and that 80-90% cannot pay. 

In subto, how does your equity sit if the market corrects & you overpaid? And how does your cash flow sit when your renters don't make payment?

Compared to traditional, I think the latter is only the risk. The former is going to get a lot more attention for subto. Or am I off? @Jay Hinrichs

As for why I invest, I invest way more conservatively and don't take lender risk or original owner risk. Would never do that. I also bake in a healthy amount of reserves, your definition of healthy and mine I believe will differ.

[V.G Jason]

Quote from @Andrew McGuire:

Quote from @V.G Jason:

Quote from @Andrew McGuire:

Quote from @V.G Jason:

Quote from @Scott Trench:

One more thing to consider. What are you going to do when your sellers begin declaring bankruptcy? 

Some huge percentage of sellers who are willing to sell subject-to are willing to do so because they are irresponsible and bad with money... that's why they are being foreclosed on. 

I am sure that every once in a while, someone selling their home Subject-To will magically transform into a responsible person, intelligently capable of forecasting their long-term financial future, and turning over a new page. 

But... that is likely to be a tiny minority. The majority of these deals are likely going to see the sellers go on to make terrible financial decisions, rack up debt, and some huge percentage of them WILL declare BK in the coming years. 

What's the plan to handle up to 30-50+ bankruptcies from your sellers all at once in the middle of a bad market? 

 Same logic with people who sell their house seller-finance to someone a bank won't approve? The logic just defies itself.

As for what will  happen, I'm thinking the fed is just going to hang tight until something breaks. Only pause with this view is the election.

And when things break, the chickens will come home to roost for all SF/subto/no cash in players or folks who bought into the FOMO without reserves. It doesn't need to be a 30-40% correction, but what usually happens is all those chickens come home to roost at the same time.

Historically what is the most rents have declined especially in a growing city? If prices come down 40% it doesn't matter if you can still cover payments. Equity Comes and equity goes but it doesn't matter as long as it cashflows. 

 Completely missing the forest for the trees. Don't know where to start. Subto is exposed on the original owner & bank, the  landlording with debt is exposed to current renters making payment on a downturn. Way too many variables than saying oh well I got my rent, so I can survive. And even that isn't a given. The last sentence, the former is correct until the bank calls the loan due & the latter isn't guaranteed. You want to more or less work off a different premise:

fast solutions have slow problems

Have you had due on sale/acceleration called on you? I assume you’re speaking from experience. Prett simple maneuvering and couple thousand dollars and it was resolved.

I would never put myself in that position.

From my understanding in subto you're basically assuming one's mortgage and deviating from the lender. I don't play ball like that. I'm able to make things work without needing to do that. If I did that stuff and any of my few lenders or stuff heard that for my rep, it would be tarnished. I try to keep it going strong and not get cute. 

[Jay Hinrichs]

Quote from @V.G Jason:

Quote from @Andrew McGuire:

Quote from @V.G Jason:

Quote from @Andrew McGuire:

Quote from @V.G Jason:

Quote from @Bruce Lynn:

So what are you doing to bridge the equity gap?  Paying cash?

Seems like anyone with 3.25% interest should have solid equity in most cases, so I'm surprised you can find people who want to do Subject2 on these, when it seems like they could sell, wipe out the loan and sell with equity.   

How often is it in AZ that people pay cash for solar panels?  In Texas it seems like 1 in 100.  So if you found one with paid off system, I guess that is a big bonus.  Does it have battery wall to power at night.  I would think in AZ that is a must, because summer heat and AC must run 24 hours a day.   As an investor how does $7/month electric help you?   Can you charge higher rent to make up for the power bill discount?  Do tenants seek those out?

Just remember it's all well and good until it isn't.  Have some cash set up for when things go south.  They will at some point and you don't want to get caught holding the bag.  When it goes south, everything seems to go south all at the same time.  Properties take longer to rent, rent stagnates or deflates, credit dries up, banks tighter on loan rules, credit cards decrease credit lines, your credit score drops because instead of 30% utilization you overnight go to 50-80-100% when they drop your credit line, hard money dries up for flips, stock market goes down and you don't want to take losses or can't use margin.   Real estate is cyclical, stay in long enough and you will go thru a cycle.  Have enough resources so you can hit the other side of the cycle.

See what is happening the CRE investors right now in many cities.

 Bolded for truth. People evaluate risk as if only 10-25, maybe 33 percent of their portfolio can get hampered at once.No, just no. That **** comes at once, and it takes you straight down with it. 

There's no value at risk metric for real estate besides your fixed rate debt and obligatory physical expenses to maintain the house. These subto transactions from my understanding are pretty much paper assumptions, with little equity and a complete exposure to physical risk, original buyer risk, and lender risk. Why enter these? I get the rate to assume, it's very attractive. But not attractive enough to wear the risk. 

Not sure if I'm understanding how it would be any riskier than buying traditional route, the difference is these deals the renter pays for your expenses where if you buy traditional you'll be negative cashflow right now, traditional seems riskier. And not buying anything because it is to expensive is the riskiest. These properties will double in value and have a ton of equity with enough time as rents go up, as depriciation, as principal pay down at a much higher clip. 

 What happens when the renter cannot pay rent? And as that happens, your next renters can't too?

How you moving?

I would have to sell the property or come out of pocket to pay for it. Same thing as if I bought the traditional way, not sure I get the point. If this is your mindset why invest in real estate at all? 

Let me clarify. If the market corrects 20% and your renters are struggling to pay rent how does your statement equity comes & goes, as long as it cash flows work then?

Again, the thinking process is when it comes down-- it all comes down. Not just 10-20% of people cannot pay, it's usually the inverse and that 80-90% cannot pay. 

In subto, how does your equity sit if the market corrects & you overpaid? And how does your cash flow sit when your renters don't make payment?

Compared to traditional, I think the latter is only the risk. The former is going to get a lot more attention for subto. Or am I off? @Jay Hinrichs

As for why I invest, I invest way more conservatively and don't take lender risk or original owner risk. Would never do that. I also bake in a healthy amount of reserves, your definition of healthy and mine I believe will differ.

No question a sub 2 failure opens a big can of worms and can lead to all sorts of issues of the legal variety.. you start missing payments and your sellers credit gets trashed you are going to have issues.  if you fail on a mortgage in your own name then its just you and the bank plus in todays lending environment you most likely are not 120% Levered.. it gets even worse if you have sold the sub 2 on a wrap to a glorified tenant and now they have possession they have title and they are squatting.. risk all goes away if you simply have the reserves to pay off the underlying loan in cash then deal with the situation.. But if you dont and you cant make the payments on the original deal you put together there is going to be serious issues.. Keep in mind many that do Sub 2 do it because they know in the back of their mind their personal credit cant get ruined..And they think they can just walk away .. And in some cases that could be true but in many the person that sold the house is going to lawyer up and your off to the races.

[Minna Reid]

Just posting so I hopefully get an update on these "investments" in a few years...lol. Guessing things don't go quite as well as anticipated. 

[Shiloh Lundahl]

@Andrew McGuire It is possible to still find deals in Arizona today. So far I have purchased 5 or 6 properties this year. I’m holding most of them and flipping 1 or 2 of them.  

Here is the one I am flipping:

https://www.zillow.com/homedetails/23685-N-Desert-Agave-St-F...

I bought it for 235k and put about 25-30 into it. Plus I have held it for a few months with hard money. So my total into it is property around 275k. I plan to sell it for around 340k and make about 50k on the deal.

[Don Konipol]

Let’s step back for just a minute….

First, there is nothing illegal, unethical or immoral about purchasing a property subject to an existing loan.  A note holder can NOT stop the owner of a real property from selling the property.  Nor has the property owner promised the note holder that he would not sell the property without paying off the note.  Any deed of trust or mortgage document that had these restrictions would be in violation of basic constitutional rights.

All the mortgage instrument says is that IF a property is transferred, then the note holder has the right to accelerate the note.  

So, where do the problems, risks, and potential disasters come in? 
IMO, if both parties are fully informed of, and able to understand all risks, and potential problems, then the subject to transaction has met requirements for a fair, ethical, and “proper” transaction.

This means that if the buyer has little or no capital reserves, or has ownership of 10 properties all subject to, or if notes are called intends to walk away from the loan, then this information is disclosed to the seller.  Same if the buyer has the ability to pay off a called note for cash and would do so.  Once the seller is provided with COMPLETE information, and assuming the seller has the ability to evaluate the risks involved, then it is the seller’s decision as to what constitutes an acceptable risk; whether their willing to suffer the consequences should problems occur; and what are their alternative course(s) of action.  

I have been involved in a number of sub to deals, almost all of which were successful with few if any problems.  However, these transactions were almost all between investors; I’m not sure if most homeowners are really able to understand the total picture.  I would at least make sure to disclose all the negative possibility outcomes, and have them sign an acknowledgment.