All Forum Posts by: Andrew McGuire

Quote from @Andrew McGuire:

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.. 

Quote from @Andrew McGuire:

Quote from @Eric James:

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.

@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.

@Andrew McGuire

I am not here to promote or denounce your above method of choice. I'm not sure if you have been on Bigger Pockets for a long time or not. My first account that I had several years ago before I closed it I discovered that creative finance as for as Sub2 was frowned on by Bigger Pockets members. There's obviously reasons that such a method could be abused in the wrong hands. (Why in the world Bigger Pockets did a book with Pace Morby is totally oxymoron from the position they used to be at.??????)
With that being said, unless you’re trying to promote somebody’s Sub2 training or gather folks for your own training, there’s some things that you don’t come on Bigger Pockets bragging about. ( IMO)

I guess you see that now??  Just saying some times it’s best for people to avoid the bragging especially on certain topics.

Even if you did hold the golden key to success what would cause you to want to create your own competition unless you was trying to sell some program, mentorship, or some other benefit from doing so? If you’re not trying to sell this particular method for some personal gain, you would gain more by simply keeping some things to yourself. 

P.S I bought some properties over the years Sub2, but you don't see me on Bigger Pockets running my big mouth bragging about it. Lol.😂

Quote from @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? 

 Reply would be as appropriate for wholesaler as sub to, maybe more so.   

I have offered sub to, so I do not want to come across against sub to.   But the seller is taking on substantial risk compared to traditional sales.  If the buyer is starting with negative equity, the risk is even larger.  

Normally the buyer in these do not have significant risk, but in the case of negative equity if the loan gets called, the buyer is more screwed than normal.  There will be no way to finance at high percentage of what is owed due to in effect buying the sub to position.  Buyer either brings a large pot of money but to what end? Or they let foreclosure.  Buyer is out effort.  Seller is out house and credit impacted for years. 

Others means to start is OO FHA at 96.5% or non FHA at 95%. NACA another OO option. Or find good BRRRR that allows extraction of all or near all investment. There are options for those starting out other than over paying to purchase a sub to.

RE investors should strive to pay less than market price not greater than market price.  The goal is not to own units, the goal is to make money.  

Good luck

Here’s my take on subject to

1. Can be Legitimate method of purchasing property, especially when outside financing is expensive or unavailable

2. Easy to “abuse” placing seller in potential precarious position and buyer in precarious position if default occurs and seller takes legal action

3. With interest rates double rate on subject to loan, lenders have incentive to accelerate the note

4. With technology and on line county property records, lenders have the means to monitor deed transfers 

5. Most dangerous situation for sellers are buyers who are (1) inexperienced (2) undercapitalized and (3) over extended 

6. Buyer is not “helping” seller; a best this is a fair market transaction with both party operating in their own best interests.  Buyer is not Mother Teresa.

7. The whole transaction works better when property is commercial or investment and both parties are investors.  

IMO, the problem is not subject to per se; the problem is that there are now hordes of inexperienced, undercapitalized wanna be investors trying to buy homes “subject to “ with no idea or thought as to the consequences of a default. As a result we can expect legislative initiatives in the future that place curbs regardless of legitimacy of any individual transaction. 

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.

Quote from @Andrew McGuire:

Quote from @Chris Seveney:

I look at this and ok you overpay and are paying down $7200/year in principal

You take 3 years to break even but it’s really 6 years because of selling costs on a property.

I would not assume appreciation in homes with reports showing average pay increase of 3% and average prices increasing 5% (new York fed latest q1 release) and debts are at all time highs.

Original poster better not get into a cash crunch as if they do they will be in bankruptcy in a New York minute.

I have to count on appreciation, I live in Arizona, when I was a kid homes cost 30K and I'm not that old relatively. You think Arizona is not going to go up in price, have you seen how many jobs and people are moving here? Why would I file bankruptcy if all of my properties are cashflowing since I am buying them at 2 or 3% interest rate and gaining equity every month since I have a great principal pay down? Most of my deals I'm pulling all my cash out to wrap and get infinity return. The only ones I don't are the rentals I keep that cashflow. 

Andrew the issue is your counting on these wraps to pay like a government guaranteed debt instrument.. your wraps will fail thats a given.. the issue is now you have a non paying homeowner who you have to foreclose on whilst still making the mortgage payments tax's insurance etc. Not to mention the damage they do.. So while the wraps work .  you just have to make sure your ready willing and able to take them over while you bleed out negative cash flow during the period it takes you to get it back stabilized and either resold or rented. Seller carry wraps are normally folks that cant get a loan for various reasons so they are a credit risk/default risk.

Its the same with lease options .. in theory it all works till it doesn't.. So as you embark on this the point is you need more than average amounts of reserves and ability to refi.

I look at this and ok you overpay and are paying down $7200/year in principal

You take 3 years to break even but it’s really 6 years because of selling costs on a property.

I would not assume appreciation in homes with reports showing average pay increase of 3% and average prices increasing 5% (new York fed latest q1 release) and debts are at all time highs.

Original poster better not get into a cash crunch as if they do they will be in bankruptcy in a New York minute.