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. 

[Kristine Ann]

Let me rephrase: you're buying a home above market value by assuming a low interest rate mortgage? I like that you've taken over that lower interest rate mortgage and that you're comfortable with the numbers. Sounds like they are higher quality SFH's as well. Sounds awesome!

I would just caution you with getting too enthusiastic and overbuying and not having enough cash reserves per property. You need to think of your worst-case scenarios, like vacancies, rent decreasing, fines, fire/water damage, and getting sued.

[Andrew McGuire]

Quote from @Kristine Ann:

Let me rephrase: you're buying a home above market value by assuming a low interest rate mortgage? I like that you've taken over that lower interest rate mortgage and that you're comfortable with the numbers. Sounds like they are higher quality SFH's as well. Sounds awesome!

I would just caution you with getting too enthusiastic and overbuying and not having enough cash reserves per property. You need to think of your worst-case scenarios, like vacancies, rent decreasing, fines, fire/water damage, and getting sued.

Agree 100 on the reserves, lucklily on the wraps I will build my cash reserves since I’m buying at a lower down payment then the end buyer I’m wrapping to. The ratio I like is 1 hold to one wrap for now. 

[Jay Hinrichs]

Quote from @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. 

Sounds like an advertisement for the Sub too guys that got booted off of BP.. I can see the attraction but as someone who has bought many sub to's over the years I will only buy them if I have 15 to 20% equity day one not the reverse.. if for some reason you had to exit your in a tough spot.. and or if the loans get called your going to have a big cash call to refi etc etc..  I get the math though.

[Kristine Ann]

@Jay Hinrichs Ah, the sub to guys, yeah.  They are very cringe.  "Subject to" is more of a wholesaler thing preying on vulnerable populations, though, isn't it?  This sounds more above board.

I've actually started seeing assumable mortgages being marketed with normal listings recently. I was wondering how it worked in practice.  A 3-3.5% mortgage would be a huge selling point. 

[Jay Hinrichs]

Quote from @Kristine Ann:

@Jay Hinrichs Ah, the sub to guys, yeah.  They are very cringe.  "Subject to" is more of a wholesaler thing preying on vulnerable populations, though, isn't it?  This sounds more above board.

I've actually started seeing assumable mortgages being marketed with normal listings recently. I was wondering how it worked in practice.  A 3-3.5% mortgage would be a huge selling point. 

fully assumable is a far cry from sub 2 which is a clear violation of the alienation clause in the debt instrument.. so your always at a risk of a loan being called.. And or the seller figures out this was not the best thing for them and they start giving you a problem.

[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. 

[Andrew McGuire]

Quote from @Kristine Ann:

@Jay Hinrichs Ah, the sub to guys, yeah.  They are very cringe.  "Subject to" is more of a wholesaler thing preying on vulnerable populations, though, isn't it?  This sounds more above board.

I've actually started seeing assumable mortgages being marketed with normal listings recently. I was wondering how it worked in practice.  A 3-3.5% mortgage would be a huge selling point. 

So by preying you mean stopping foreclosures and helping people sell who have no other option that got sick, lost a job, have to sell for another reason? 

[Jay Hinrichs]

Quote from @Andrew McGuire:

Quote from @Kristine Ann:

Let me rephrase: you're buying a home above market value by assuming a low interest rate mortgage? I like that you've taken over that lower interest rate mortgage and that you're comfortable with the numbers. Sounds like they are higher quality SFH's as well. Sounds awesome!

I would just caution you with getting too enthusiastic and overbuying and not having enough cash reserves per property. You need to think of your worst-case scenarios, like vacancies, rent decreasing, fines, fire/water damage, and getting sued.

Agree 100 on the reserves, lucklily on the wraps I will build my cash reserves since I’m buying at a lower down payment then the end buyer I’m wrapping to. The ratio I like is 1 hold to one wrap for now. 

this all works in theory until the folks you sell to stop paying and squat.. I bailed out a company that did this on about 35 props..  once their wraps stopped paying which is going to happen since this is simply sub prime lending.. it just snowballed to the point they lost the entire portfolio.. u need massive cash reserves if your going to do this.. IE buy over leveraged assets..

[Jay Hinrichs]

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. 

LOL this site is to help people you have drunk the cool aid I get it.. I don't advertise for investors etc. just trying to help like I said i have seen this play before and unless your VERY well capitalized you take on a ton of risk you need 100% performance for this to work.. anyone with any experience in real estate and lending ( which you will be doing when U wrap) knows nothing is 100%.. So as long as you have a back up plan  IE 500 to 1 mil in cash so you can pay off a senior loan if needed or refi if need this works fine..  But if you think your going to roll 10k and have minimal reserves U are taking on a lot of risk your simply not aware of today.. And if you cant rescue these and they end up in default you ARE going to end up in legal trouble 95% of the time.. you ruin someones credit and they are not happy.. Even  for us which had the liquidity and ability to rescue these as I stated I would never pay market or over market you box yourself into a corner .

I am not a syndicator so my deals my clients are always in full control of their cash ALWAYS..

[Andrew McGuire]

Quote from @Jay Hinrichs:

Quote from @Andrew McGuire:

Quote from @Kristine Ann:

Let me rephrase: you're buying a home above market value by assuming a low interest rate mortgage? I like that you've taken over that lower interest rate mortgage and that you're comfortable with the numbers. Sounds like they are higher quality SFH's as well. Sounds awesome!

I would just caution you with getting too enthusiastic and overbuying and not having enough cash reserves per property. You need to think of your worst-case scenarios, like vacancies, rent decreasing, fines, fire/water damage, and getting sued.

Agree 100 on the reserves, lucklily on the wraps I will build my cash reserves since I’m buying at a lower down payment then the end buyer I’m wrapping to. The ratio I like is 1 hold to one wrap for now. 

this all works in theory until the folks you sell to stop paying and squat.. I bailed out a company that did this on about 35 props..  once their wraps stopped paying which is going to happen since this is simply sub prime lending.. it just snowballed to the point they lost the entire portfolio.. u need massive cash reserves if your going to do this.. IE buy over leveraged assets..

 I hear what your saying. I just think if you worried about people stopping paying you and don't have protocols in place to remedy if that happens you should not own rental properties at all, since in theory renters can stop paying you as well, the likelihood of many of them stopping paying you at once? I'm not saying don't have reserves at all. I just want to buy properties in my city (Phoenix) now and I have not seen anything that works in the last two years buying traditionally since rates are 7%+. My friends have waited years to buy a rental property and I've bought 7. Who is going to win when properties double in value? Not them since they have to pay twice as much. 

[Jay Hinrichs]

Quote from @Andrew McGuire:

Quote from @Jay Hinrichs:

Quote from @Andrew McGuire:

Quote from @Kristine Ann:

Let me rephrase: you're buying a home above market value by assuming a low interest rate mortgage? I like that you've taken over that lower interest rate mortgage and that you're comfortable with the numbers. Sounds like they are higher quality SFH's as well. Sounds awesome!

I would just caution you with getting too enthusiastic and overbuying and not having enough cash reserves per property. You need to think of your worst-case scenarios, like vacancies, rent decreasing, fines, fire/water damage, and getting sued.

Agree 100 on the reserves, lucklily on the wraps I will build my cash reserves since I’m buying at a lower down payment then the end buyer I’m wrapping to. The ratio I like is 1 hold to one wrap for now. 

this all works in theory until the folks you sell to stop paying and squat.. I bailed out a company that did this on about 35 props..  once their wraps stopped paying which is going to happen since this is simply sub prime lending.. it just snowballed to the point they lost the entire portfolio.. u need massive cash reserves if your going to do this.. IE buy over leveraged assets..

 I hear what your saying. I just think if you worried about people stopping paying you and don't have protocols in place to remedy if that happens you should not own rental properties at all, since in theory renters can stop paying you as well, the likelihood of many of them stopping paying you at once? I'm not saying don't have reserves at all. I just want to buy properties in my city (Phoenix) now and I have not seen anything that works in the last two years buying traditionally since rates are 7%+. My friends have waited years to buy a rental property and I've bought 7. Who is going to win when properties double in value? Not them since they have to pay twice as much. 

Not arguing with you.. just setting out some cautions.. take it for what it is.. real estate simply is not a linear line straight up.  Back in the GFC it was builders and sfr that was hammered today its the MF office and syndications that are hammered and us builder/developers of SFRs are doing pretty darn well..  my banker and I had lunch yesterday and thats what we were discussing commercial has ground to a halt because of rates.  Any way best of luck hope it all goes as you hope it will just remember its OK to be a little conservative so you dont stress yourself out if things change a bit.

[Andrew McGuire]

Quote from @Jay Hinrichs:

Quote from @Andrew McGuire:

Quote from @Jay Hinrichs:

Quote from @Andrew McGuire:

Quote from @Kristine Ann:

Let me rephrase: you're buying a home above market value by assuming a low interest rate mortgage? I like that you've taken over that lower interest rate mortgage and that you're comfortable with the numbers. Sounds like they are higher quality SFH's as well. Sounds awesome!

I would just caution you with getting too enthusiastic and overbuying and not having enough cash reserves per property. You need to think of your worst-case scenarios, like vacancies, rent decreasing, fines, fire/water damage, and getting sued.

Agree 100 on the reserves, lucklily on the wraps I will build my cash reserves since I’m buying at a lower down payment then the end buyer I’m wrapping to. The ratio I like is 1 hold to one wrap for now. 

this all works in theory until the folks you sell to stop paying and squat.. I bailed out a company that did this on about 35 props..  once their wraps stopped paying which is going to happen since this is simply sub prime lending.. it just snowballed to the point they lost the entire portfolio.. u need massive cash reserves if your going to do this.. IE buy over leveraged assets..

 I hear what your saying. I just think if you worried about people stopping paying you and don't have protocols in place to remedy if that happens you should not own rental properties at all, since in theory renters can stop paying you as well, the likelihood of many of them stopping paying you at once? I'm not saying don't have reserves at all. I just want to buy properties in my city (Phoenix) now and I have not seen anything that works in the last two years buying traditionally since rates are 7%+. My friends have waited years to buy a rental property and I've bought 7. Who is going to win when properties double in value? Not them since they have to pay twice as much. 

Not arguing with you.. just setting out some cautions.. take it for what it is.. real estate simply is not a linear line straight up.  Back in the GFC it was builders and sfr that was hammered today its the MF office and syndications that are hammered and us builder/developers of SFRs are doing pretty darn well..  my banker and I had lunch yesterday and thats what we were discussing commercial has ground to a halt because of rates.  Any way best of luck hope it all goes as you hope it will just remember its OK to be a little conservative so you dont stress yourself out if things change a bit.

 Agree, there is risk in everything you do right? There is also risk in doing nothing, I'll take my chances growing and acquiring while others at my level are not doing anything. Good luck to you. 

[Jay Hinrichs]

Quote from @Andrew McGuire:

Quote from @Jay Hinrichs:

Quote from @Andrew McGuire:

Quote from @Jay Hinrichs:

Quote from @Andrew McGuire:

Quote from @Kristine Ann:

Let me rephrase: you're buying a home above market value by assuming a low interest rate mortgage? I like that you've taken over that lower interest rate mortgage and that you're comfortable with the numbers. Sounds like they are higher quality SFH's as well. Sounds awesome!

I would just caution you with getting too enthusiastic and overbuying and not having enough cash reserves per property. You need to think of your worst-case scenarios, like vacancies, rent decreasing, fines, fire/water damage, and getting sued.

Agree 100 on the reserves, lucklily on the wraps I will build my cash reserves since I’m buying at a lower down payment then the end buyer I’m wrapping to. The ratio I like is 1 hold to one wrap for now. 

this all works in theory until the folks you sell to stop paying and squat.. I bailed out a company that did this on about 35 props..  once their wraps stopped paying which is going to happen since this is simply sub prime lending.. it just snowballed to the point they lost the entire portfolio.. u need massive cash reserves if your going to do this.. IE buy over leveraged assets..

 I hear what your saying. I just think if you worried about people stopping paying you and don't have protocols in place to remedy if that happens you should not own rental properties at all, since in theory renters can stop paying you as well, the likelihood of many of them stopping paying you at once? I'm not saying don't have reserves at all. I just want to buy properties in my city (Phoenix) now and I have not seen anything that works in the last two years buying traditionally since rates are 7%+. My friends have waited years to buy a rental property and I've bought 7. Who is going to win when properties double in value? Not them since they have to pay twice as much. 

Not arguing with you.. just setting out some cautions.. take it for what it is.. real estate simply is not a linear line straight up.  Back in the GFC it was builders and sfr that was hammered today its the MF office and syndications that are hammered and us builder/developers of SFRs are doing pretty darn well..  my banker and I had lunch yesterday and thats what we were discussing commercial has ground to a halt because of rates.  Any way best of luck hope it all goes as you hope it will just remember its OK to be a little conservative so you dont stress yourself out if things change a bit.

 Agree, there is risk in everything you do right? There is also risk in doing nothing, I'll take my chances growing and acquiring while others at my level are not doing anything. Good luck to you. 

the issue with sub 2 wrap goes deeper than just monetary loss.. your risking the people you bought the house from as well.. and I will say one more time.. if you buggar their credit because you cant refi if  gets called or cant make payments for them.. then this goes way past you lost a little money and it ends up with lawyer letters  complaints to the AG  etc etc.. So just know all the soft spots as you go into it so you dont risk more than not taking action or losing a few grand.

[Steve Vaughan]

Negative equity?  Sounds like a term car dealers use when you trade in your existing payment for a new one.  

Equity by definition is a positive number after the dust settles.  Can't be negative. 

Anyway, nobody checks back in after their enthusiastically shared idea fails, but I would wager this will. 

I get low DP, being creative and all that, but I bet skipping proper title DD on top of not knowing how to handle hazard or title insurance beneficiaries will blow you up. 

[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.

[Andrew McGuire]

Quote from @Jay Hinrichs:

Quote from @Andrew McGuire:

Quote from @Jay Hinrichs:

Quote from @Andrew McGuire:

Quote from @Jay Hinrichs:

Quote from @Andrew McGuire:

Quote from @Kristine Ann:

Let me rephrase: you're buying a home above market value by assuming a low interest rate mortgage? I like that you've taken over that lower interest rate mortgage and that you're comfortable with the numbers. Sounds like they are higher quality SFH's as well. Sounds awesome!

I would just caution you with getting too enthusiastic and overbuying and not having enough cash reserves per property. You need to think of your worst-case scenarios, like vacancies, rent decreasing, fines, fire/water damage, and getting sued.

Agree 100 on the reserves, lucklily on the wraps I will build my cash reserves since I’m buying at a lower down payment then the end buyer I’m wrapping to. The ratio I like is 1 hold to one wrap for now. 

this all works in theory until the folks you sell to stop paying and squat.. I bailed out a company that did this on about 35 props..  once their wraps stopped paying which is going to happen since this is simply sub prime lending.. it just snowballed to the point they lost the entire portfolio.. u need massive cash reserves if your going to do this.. IE buy over leveraged assets..

 I hear what your saying. I just think if you worried about people stopping paying you and don't have protocols in place to remedy if that happens you should not own rental properties at all, since in theory renters can stop paying you as well, the likelihood of many of them stopping paying you at once? I'm not saying don't have reserves at all. I just want to buy properties in my city (Phoenix) now and I have not seen anything that works in the last two years buying traditionally since rates are 7%+. My friends have waited years to buy a rental property and I've bought 7. Who is going to win when properties double in value? Not them since they have to pay twice as much. 

Not arguing with you.. just setting out some cautions.. take it for what it is.. real estate simply is not a linear line straight up.  Back in the GFC it was builders and sfr that was hammered today its the MF office and syndications that are hammered and us builder/developers of SFRs are doing pretty darn well..  my banker and I had lunch yesterday and thats what we were discussing commercial has ground to a halt because of rates.  Any way best of luck hope it all goes as you hope it will just remember its OK to be a little conservative so you dont stress yourself out if things change a bit.

 Agree, there is risk in everything you do right? There is also risk in doing nothing, I'll take my chances growing and acquiring while others at my level are not doing anything. Good luck to you. 

the issue with sub 2 wrap goes deeper than just monetary loss.. your risking the people you bought the house from as well.. and I will say one more time.. if you buggar their credit because you cant refi if  gets called or cant make payments for them.. then this goes way past you lost a little money and it ends up with lawyer letters  complaints to the AG  etc etc.. So just know all the soft spots as you go into it so you dont risk more than not taking action or losing a few grand.

 You've done a lot these, way more than I have from the sounds of that. You also know since that is the case that most of the sellers are headed to foreclosure, can't keep up payments, lost a job and usually have little to no equity. I think selling their house on terms is better than the alternative and my sellers in some cases have told me I saved their life. I've also been told other agents are untalented and couldn't offer them a solution and send me referrals and gifts. Depends on the situation but its about helping. 

[Andrew McGuire]

Quote from @Steve Vaughan:

Negative equity?  Sounds like a term car dealers use when you trade in your existing payment for a new one.  

Equity by definition is a positive number after the dust settles.  Can't be negative. 

Anyway, nobody checks back in after their enthusiastically shared idea fails, but I would wager this will. 

I get low DP, being creative and all that, but I bet skipping proper title DD on top of not knowing how to handle hazard or title insurance beneficiaries will blow you up. 

 I'll be out here building a portfolio and helping people out of tough situations while you sit there with your fingers crossed rooting for it. Stay small my friend. 

[Andrew McGuire]

Quote from @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 most 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.

Scott, 
First I'm a huge fan, read your first book many times beginning to end and referred to all my nephews and anyone who would listen. Respect the book and what you've done. Even though what you said about listening to music because its a waste of time, I couldn't get with that. 

Read my post again, I never said 3 a month, I said three this month. Big difference. 

Yes I am an agent, the first option is almost always sell traditional but we both know that is not an option for many right now. Do you know where San Tan Valley, Maricopa and Casa Grande in Arizona are? I see cancelled expired listings every day come from these markets and find out they have no equity. Situations of these sellers and limited options can be rough. 

I don't agree with you that this is not a good strategy. We are in a different time, for small investors which are most here you have to adapt. You built your portfolio in wealth at a different time, for you to tell investors now not to try to do adapt and try to get an advantage, as long as they are doing thing responsibly. I believe that is irresponsible. We are in different times, you guys who are all wealthy already I understand your take but I'm going to continue to buy as long as properties cashflow, which means I need to get better than todays interest rates. Once I've done that I will let the market do its thing and get wealthy like you. I want to finish but I'm getting yelled out to go sign this deal I'm going to wrap. Respect you thank you for you work and knowledge you've shared. 

[Scott Trench]

@Andrew McGuire

Thank you for the response. FWIW - I also hated my own line in Set For Life about listening to music being a waste of time, and ripped that out of the revised edition the first chance I got :). That chapter was completely redone.

I tried to throw a bone here that there is absolutely a use case for Subject To in certain situations. I'm not against Sub-To in all cases.

What scares me, for you, and for anyone else reading this post who thinks this is a good idea, isn't the Subject-To, it's the "All-In on Subject-To" approach. 

I think that if you were doing a one-off, and found a great deal like this, I'd be wary, but still supportive. I am sure that you could responsibly handle one person's mortgage over a few decades, and it could be a great outcome. Maybe as time passes and you have a well-capitalized position, you can do another, and another. Again, as your position enables you to safely exit the subject to mortgage either by paying it off, or refinancing it and still being able to hold onto the deal.

But, the fact that you are doing three at once, and looking for 97 more in short order is what rattles me. It's unclear if your position would enable you to refinance or pay off any of the mortgages. I strongly caution you to remember that the penny does not double forever. It is not linear. If you are all-in, not with just your own money and BofA's money, but also with 100 people who are not good with money (or just who are unlucky) and something hurts your market, or a few of your properties, then a chain reaction can wipe out and devastate many lives.

Losing "OPM" is not risk-free for the person leveraging OPM. Those OPM, if they experience huge losses or ruin at your hands, can turn into VAOP (I made this up - "Very Angry Other People" - like it?) who may chase you around the internet with a digital pitchfork. OR... in some cases, might turn up in real life.

Real Estate is not *just* about cash flow. It's also about all the other things that allow you to hold onto property throughout the market, property, and tenant lumps and bruises that get thrown at you over a long period of time. It's also about exit strategies - and this approach only as represented by your post only has one - attempt to hold on long enough for appreciation and amortization to create equity, giving you the option to sell. 

[Kristine Ann]

I need to read up on "subject to" verses assumable mortgage.  I was under the impression they were completely different.  I thought with an assumable mortgage, you go through the lender and replace the name on the mortgage.

@Scott Trench I was actually thinking that this would be great for regular, non-foreclosures.  You could offer someone with a 3.5% mortgage 25k over market value so they could use that 25k to cover the high interest rate on their next house.

[Scott Trench]

@Kristine Ann

Assumable mortgages are a totally different beast and very different than Subject-To. 

Assumable mortgages, in the 1-4 unit residential world, almost always mean that the buyer is going to occupy the property. Obviously, OP can't occupy 3 properties at once, so we know he was talking Sub-To. Exceptions to the occupancy requirement would be rare and likely almost always Non-QM mortgages.

The buyer, by definition, has to meet the lender's requirements to assume the mortgage, which typically require them to owner-occupy, and the mortgage is no longer held in the seller's name. 

I think that the assumable mortgage is the ultimate trump card for the house-hacker in today's market, and it is where I'd be looking if I was getting started in real estate today. Very supportive of investors using this tool, potentially for a few house hacks in the next few years.

Someone selling a property with an Assumable mortgage will probably know to market that assumable mortgage as a feature, if they have a good agent at least, and this will help them increase their pool of buyers.

I am worried that people are confusing themselves with this idea of "paying over market" - no. Do not pay more than you think the property is worth! Pay at or below what you think the property is worth, and finance it with the best tools available. 

[Kristine Ann]

Thanks @Scott Trench, very informative

[Jay Hinrichs]

Quote from @Andrew McGuire:

Quote from @Steve Vaughan:

Negative equity?  Sounds like a term car dealers use when you trade in your existing payment for a new one.  

Equity by definition is a positive number after the dust settles.  Can't be negative. 

Anyway, nobody checks back in after their enthusiastically shared idea fails, but I would wager this will. 

I get low DP, being creative and all that, but I bet skipping proper title DD on top of not knowing how to handle hazard or title insurance beneficiaries will blow you up. 

 I'll be out here building a portfolio and helping people out of tough situations while you sit there with your fingers crossed rooting for it. Stay small my friend. 

Andrew 

Steve is one of the smartest and most respected members on Bp. U owe him an apology.  

[Andrew McGuire]

Quote from @Jay Hinrichs:

Quote from @Andrew McGuire:

Quote from @Steve Vaughan:

Negative equity?  Sounds like a term car dealers use when you trade in your existing payment for a new one.  

Equity by definition is a positive number after the dust settles.  Can't be negative. 

Anyway, nobody checks back in after their enthusiastically shared idea fails, but I would wager this will. 

I get low DP, being creative and all that, but I bet skipping proper title DD on top of not knowing how to handle hazard or title insurance beneficiaries will blow you up. 

 I'll be out here building a portfolio and helping people out of tough situations while you sit there with your fingers crossed rooting for it. Stay small my friend. 

Andrew 

Steve is one of the smartest and most respected members on Bp. U owe him an apology.  

Never heard of him but sure I'll reach out and apologize. I'ts my natural response when someone roots for you to lose, as real estate investors we all know what is like and usually smart and successful people don't root for others to crash and burn even when they disagree. 

[Andrew McGuire]

Quote from @Scott Trench:

@Kristine Ann

Assumable mortgages are a totally different beast and very different than Subject-To. 

Assumable mortgages, in the 1-4 unit residential world, almost always mean that the buyer is going to occupy the property. Obviously, OP can't occupy 3 properties at once, so we know he was talking Sub-To. Exceptions to the occupancy requirement would be rare and likely almost always Non-QM mortgages.

The buyer, by definition, has to meet the lender's requirements to assume the mortgage, which typically require them to owner-occupy, and the mortgage is no longer held in the seller's name. 

I think that the assumable mortgage is the ultimate trump card for the house-hacker in today's market, and it is where I'd be looking if I was getting started in real estate today. Very supportive of investors using this tool, potentially for a few house hacks in the next few years.

Someone selling a property with an Assumable mortgage will probably know to market that assumable mortgage as a feature, if they have a good agent at least, and this will help them increase their pool of buyers.

I am worried that people are confusing themselves with this idea of "paying over market" - no. Do not pay more than you think the property is worth! Pay at or below what you think the property is worth, and finance it with the best tools available. 

 100% Scott, assumable mortgages are great when they apply. I'm still seeing a lot of these assumable mortgages go as cancelled/expired listings, I reach out to the seller directly as this is how I've built my Real Estate Agent business since quitting corporate just over 2 years ago. The feedback I usually get is that buyers wanted to assume the loan but the process was lengthy and complicated, and buyers eventually moved on leaving the seller with no equity and option to sell other than writing a fat check at the closing table since they had to continue to lower their price. I don't want to greatly overpay for properties but if they are within 5-7% I'm okay with it. I know with the lower payment I can hold the property for a while and it will eventually be in the black and ideally double in value when held long enough. I did this with 101 E Laurel Gilbert AZ. I bought this from a BP member at a great interest rate 2.75%, I purchased for 420K and it comped at 385K, that was just about 2 years ago. The property because of its location is now comping at close to 430K, I think I actually reset the market in the that condominium complex because I bought at 420, now they are all selling for at least that. In this case this will be an unbelievable deal because I can cashflow it as a LTR. I would have never been able to buy this if I didn't overpay.