Sub2/wraps during the crisis, key to jumping in?

Question

As a new investor, it is way too risky to invest my own or private money into certain deals with all the unknowns.

The banks are attractive if the rates stay low and prices drop, but I'm anticipating future opportunities.

Once the first of April comes, and possibly more so in may, I would expect people to have a hard time paying their mortgage if they had lost income. They may need to downsize, and for those already behind, subject to existing financing will become more likely their best solutions. Furthermore, if banks are tightening up, it could be opportune to create wrapped mortgages for those sub2's.

Could this be a key entry point to investing with low or no money down investments? Will it be more competitive with other investors attempting the same strategy? Is their more or less risk of doing this during a downturn?

My thoughts are that this could create a demand for both sides, ethical solutions and win win wins, and a great low risk investment for a newbie.

Pete Storseth · Answer

@Henry Derbes

I agree that the swell need for sub2 hasn't arrived yet, so I'm putting together my marketing in preparation for the stalled foreclosures to gush out once lifted.

I think that thought about landlords being underwater is a good point. All these threads and podcasts are talking about not over leveraging, but it's too late for that advice. Maybe sub2 would make sense for landlords with long vacancies leading up to now, knowing they may have problems renting for a few months.

But then, it would just transfer the debt and their problem to us unless we had tenant/buyers ready to go... more marketing to prepare?

Henry Derbes · Answer

As in, what kind of reserves would you have to have to weather the storm after picking up a property from an over leveraged investor? Several months of payments on the mortgage in case of vacancy, as well as cash to fix anything that needed to be done to entice tenants to move in.

Pete Storseth · Answer

@Henry Derbes

What kind of reserves? Just vacancy until you can find a tenant/buyer?

Henry Derbes · Answer

Correct, it would transfer the problem to us, and that's only advantageous if 1) we have the cash reserves to handle a vacant property at first while we find a tennant, and 2) if we can fix whatever the problem was that prevented the property from being rented out. If I couldn't identify a specific problem that I could fix to improve the situation, I wouldn't buy the property. Same thing with surgery, if I dont think there is something I can fix, I'm not going to commit myself and my patient to going to the operating room. If you're sitting on a bunch of cash reserves and are ready to go when people need subject to financing, then I think it makes sense to ramp up advertising now. Unfortunately, for me it doesnt make sense to advertise yet, because I dont yet have a solid process or team in place to make the process work, and I'm still building my cash reserve. At the moment I'm living vicariously through others with the intent of entering the game soon! Hope these thoughts and ramblings are helpful!

Henry Derbes · Answer

I've been thinking the same thing, and looking into this. I think that in general, bear markets may create unemployment in certain sectors which can lead to foreclosures and people needing subject-to financing if they fall behind and cant sell their property. However, in this particular case, the impetus for them to do this may take longer for a couple of reasons. First, there is currently a moratorium from evictions and foreclosures, so at least for the time being, the risk of being removed from your house is gone if you arent making your payments. Second, this is likely to be a temporary event, I estimate it will be totally over by June-July. I could be totally wrong... but that's what I think. If I'm right, then hopefully this means that people will be able to weather the storm as long as they were making reliable payments before the "quarentine".

So... My point is that if there is going to be a greater than usual opportunity to buy houses Subject-To, it probably wont be until after the pandemic has passed, and once the government removes the hold on evictions and foreclosures, a bunch will hit the market all of a sudden. I think the best thing to do now is to proceed with any deals we have already in process, while building up a cash base to be used when this opportunity arises.

One final thought might be that the people most impacted by this could be small investors with multiple rental properties. Theoretically the government will be sending people checks to help ride this out... but there is no guarantee, and there isnt yet a timeframe that I am aware of. If new investors dont have an emergency fund, and their tenants arent paying them, they could quickly find themselves in trouble (before June/July). Some of these investors may be looking to unload rentals.

Would love to hear others thoughts on this. This situation is a little unique, though of course I always have faith that good investment decisions make money in any market.