My Business Model of Sub To Investing...

[Rob J.]

I welcome any feedback and suggestions. My business model is broken and need to fix it quickly.

I've been investing for over 8 years and specifically Sub To for the past 3 years. I buy with a minium of $15,000 in equity and a $200 positive cash flow. I typically get between $5,000-$11,000 down (5-7%). However, by the time I make up a payment or two, do a few repairs, and make a payment or two, I'm into the deal about $4,000-$5,000. I can cover this with the downpayment, but that does not leave much front end profit. I'm finding more and more of the new buyers are not getting qualified to refinance. I have NOT been able to find a good mortgage broker to work with my buyers. My business hinges on them refinancing.

I have attempted to negotiate better upfront with the sellers, but I typically get all I can.

Any thoughts?

[Mike C]

Robj,

I am also a sub2 fan. I would suggest getting a min 20k spread net all in (money you put in if needed) between what I owe on the property and what my option price will be. This will depend on your market but I buy in the 150-250k range so is doable. In the 60k range, it may not be realistic but I don’t work in that area but you get the point.

Here are a couple of suggestions. First, I suggest that any monies you have to come up with to bring current be credited to you off your future purchase price (assume you already do this but maybe not). Remember this is a moving number. I also expect (and have in the contract) that I get the benefit of the principal pay down while I am waiting to get the tenant buyer to cash out, hence the reason I say it is a moving number. For example say the balance was 100k and it took three years to cash out. The principal balance now is maybe 96 or 97k (depending on the loan length, rate, time left and so on). This means that extra 3k at 97k is extra profit for me. Not everyone will agree to this, but it is just another negotiating point you can use to get concessions in another area be it a longer term, lower price and so on. Also, if I am bringing in cash to bring a loan current (that my tenant buyer is actually doing but I am fronting), I expect a better deal than on a current mortgage (though I am fighting for all I can get). I usually don’t take these deals unless I get some good equity. Remember, they need to sell, you don’t need to buy. Tell them it is a business decision for you and you can’t make their problem your problem.

Next problem I see is you shouldn’t be spending the NROC (option consideration) you got down from the tenant buyer IMHO. Put it in the bank to cover vacancies, evictions, repairs, attorney and accounting fees, signs, advertising, bandit signs, etc. or other problems that come up. If you get 11 k, sure you could spend maybe 1 or 2k. This also goes in the expenses reserve account. But I would save the rest. I also can usually get something from the seller (see other thread for how). The money I live on is the cash flow from the properties and any backend profits I get along the way. One of the keys to success is cash reserves. Stuff happens. This will lower your stress level considerably. Yes, it will take some time to build up your portfolio to the level of income you want, but once you do, your business is just maintaining what you have and occasionally picking up the occasional great deal to just add to your bottom line. As I said before, be selective and don’t make a seller’s problem (no equity, a high payment or whatever) your problem.

I consider the backend profits gravy and don’t ever expect a tenant buyer to cash out until they do so I am happy to get the chunk of cash. You have a lot of control over what your cash out rate is based on your tenant selection. A good mortgage broker is very important here. You need to find a good one. I would begin interviewing as many as possible until you find a good one. In the Atlanta area, you should have no problem finding one in a couple weeks to a month. You want to find a real pro and if you do a lot of business, will be begging for your business. No one gets in without being run by my mortgage broker. If your business hinges on them reifying, this is even more important. But if you set up your business better, your business will not hinge on this fact and life will be a lot easier because you never know who will or will not exercise. Stuff happens. I don’t even run credit myself, my broker does this.

You really need to work on getting bigger spreads with your sellers as well. Remember, you make your money when you BUY, not when you sell. Negotiating is the best part of this business. Remember, everything is negotiable. No deal is better than a bad or mediocre deal. Remember that. Be a reluctant buyer and they will be fighting for you to buy their home and you won’t have to fight them to sell it to you. Constantly look for reasons not to buy. The more they can’t have it, the more they want it (you to buy it). All your money is made negotiating. Learn to love it. I could go on and on but I think you get the idea.

Best of luck

Mike C