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?
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.
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.
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.
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.
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.
Supply will go up but demand will go up to right?
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.
Agree
People are paying money to learn to overpay for real estate, put little to no money down and have no reserves and think it’s all good
Similar thing happened in the multifamily space with a certain guru teaching people to buy Mf and raise $ and how did that work at for those newbies?
Moment raised raised on this short term debt all those dreams were smashed, same is going to hold true in 18-24 months on residential side as well.
Boston, MA. It trades with way tighter bands.
Pre-covid was high 600s, right now it's high 700s. What's the anticipated free fall for this? It'll have way too much support to really tank.
Savannah, GA. Way more linear growth, and it's that way cause look at the barrier of entry. Half of two examples above and about 15-20% lower than national median.
For desirable cities, there'll always be demand. Add the fact in a low COL due to no real prime industry, what's the floor here? If you told me 10-15% sure. 30%? There'd be way too much support. Lots of capital steps out of other areas to invest in Savannah at $250k median price level.
Great data, I'm with you. I am bullish on my city and believe there is pent up demand. I think prices will go crazy again if rates ever come back down under 5.
I hear you on the commercial side, generally speaking way more people are moving here than homes being built. Yes we are all in trouble if people stop paying but if that's the case why would anyone invest in Real Estate at all. Part of what I'm doing is buying properties at low interest rates selling them at high interest rates (mortgage wrap), getting all of my down payment back and left with a cashflowing property. As many have warned I keep a healthy reserve, the likelihood all of my wrap buyers and renters stop paying by the masses is a risk I'm willing to accept since doing nothing is much riskier in my opinion. By doing nothing I mean not investing in RE at all like some of the buyers I work with who have been saying they want to buy a property for the last 3 years but nothing pencils out in our city with 7+ rates.
since we are having a nice dialogue here . this is a real scenario that actually happened to this company in Portland that I helped bail out. they did as I mentioned about 35 of these and of course there was little to no equity but unlike yours of negative equity theirs was just No equity basically and they figured 200.00 a month positive and boom they buy 50 and now they are living large on the 10k a month positive..
Well first one fails and of course they have transferred title or recorded the lease option. Being subprime these folks then squat they don't just hand the keys back. so now the first one is negative and well they can gut through that but the foreclosure is now 3 to 4k.. Bottom line it took 15% of their deals to go south for them to tip over.. they could not make any payments and had no cash left from the downpayments folks made.. so now there are lates going to the folks they bought from.. those people lawyer up and a few went to the AG.. That was about the time they found me. I helped them with the sellers ( got on the phone) and because some of them actually had equity day one I took those for my fee's.. bottom line though they got wiped out I basically kept them out of major litigation and potential real mess with the AG.. I know a few other folks that did this and it went very wrong and they got criminally indited and sent to prison.. Now i am not saying this would happen to you but you run that risk if you pocket the money and dont pay the underlying.
When i did sub too wraps keep in mind we were very well capitalize other wise i would never have done this.. I had a 5,000,000 unsecrued LOC and a 10,000,000 secured.. So could pay off the underlyings at anytime and then move them to my secured line while I stabilized and resold. There was no way I was going to buy 100 of these and take on 20 million of other peoples debt without clear cut back up plan that included instant paying of their mortgage while i worked it out..
Plus as I stated I never bought anything without at least 20% equity day one..
These are the risks to your plan.. if you have 100s of thousands liquid to take care of these thats one thing but once you sell on the wrap you just backed yourself into another corner you cant refi your only way to protect the seller is to pay their payment or if the bank calls the loan Cut a check to pay it off.. Are you able to cut a check to pay any of these off ?? thats the risk.
then like a few of these other actors if it goes bad and the sellers you bought from go ballistic you will get turned into the DRE and probably other agencies and you never know it they take an interest in you or just give you a pass.
If it was me and your not really well capitalized I would not be changing title to a wrap buyer and losing control this could end up very poorly for you.. Just like the sellers selling to you they take on a very huge risk that you can actually execute over the long haul very few can.
so anyway things to think about..
This all makes sense and can understand your experience on it, makes sense to me. Only think I can say is this is why I don't invest in Portland and most of the buyers I work with are coming from blue states. I've always thought as long as they cashflow or at minimum pay for themselves I'll be okay but if a large number of them stopped paying would be trouble. If one or two for now stopped I would force them out and resale the property, I don't want to do that of course.
I too want to continue accumulating rental real estate. But to continue getting financing that means my properties need to cover 30% above expenses. That means positive cash flow.is a must if I want to keep growing. I can't break even and just pay down the debt to increase my equity.
Yeah that's the tough thing wanting to invest right now, properties were lucky to cashflow a few years ago when rates were 3-4%, now that they are 7+ that has added an additional 30% or so expenses assuming your not putting 30% or more down. Deals don't make sense unless you do something crazy like put 8 students in a single family :)
Yes I spoke with my local bak loan officer the other day and he said they are doing zero loans to finance purchase of rentals right now because the numbers don't work.
I'm doing my own version of BRRR. Build (for 65% of value), Rent, Refinance and Repeat.
Man if you can build for 65% that seems like a deal to me. Congrats, lets do a deal.
@Andrew McGuire You have gotten some good feed back from experienced investors. I would encourage you to consider their feed back really well.
Buying properties over market value because you are able to have a low locked in interest rate may seem like a good idea because you may be able to cash flow a few hundred dollars right now. They are risks to this strategy that can be mitigated through education and capital reserves.
I would say doing this strategy though may be a slow process because you are missing out on one of the biggest money makers in real estate which is capital gains. You will just have to wait a long time before you can realize a significant gain from these properties. For instance, if you buy the property valued at 375k but you are buying it for 390k, even with a low interest rate, let's say you make $500 a month in cash flow. In a year, let's say the property is valued at 390k and you made $6000 in cash flow. So you would be about breaking even after the closing costs when you bought it. Over the next 2 years let's say you brought in about $12,000 in cash flow and the property has increased value to $415,000. If you wanted to sell it in 3 years, then the majority of your gain would go to paying the closing costs for the sale, so maybe you are $10,000 - $15,000 ahead. That is a lot of work for that amount of money.
What if you are able to buy the same house in San Tan Valley for $300,000 that needs about 20k in repairs to value at 375k. In 3 years, the property goes up to 415k but you only owe 320k and when you sell it you net around 70k. So even though you may not have cash flowed much on it, you were able to realize a 70k gain within a few years.
Shiloh,
I've seen and heard about your work being in the same city. I know you do great work and take care of people.
I agree with you 100% on making money on the gains, especially in our city. I am for clarity not banking on the cashflow, they barely make any money at all but at least they pay for themselves and have some pretty cool other benefits like great principal pay down and depreciation. My strategy is not to get wealthy through cashflow, it is to own many properties that pay for themselves and when prices go up as they will in a matter of time, I will make my money there.
I would love to do what you mention above and purchase under market value, I've tried BRRRR and buying fixers a couple of times and failed miserably, lost money on both deals. To me this is a way riskier strategy, but I know it is because of my own lack of skillset in that strategy. My skillset today is finding failed listings, who want little money down, that pay for themselves I keep or I wholesale/list and make some cash. I cherry pick the very best ones and started wrapping to create a positive cashflow stream. This is for now if rates go back down I will certainly buy/flip/hold the traditional way again.