All Forum Posts by: Andrew McGuire

@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.😂

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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.

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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.

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Quote from @Jay Hinrichs:

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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. 

Thank you both, but not necessary.  I appreciate a chuckle.
I would wager this will lose, not root for it.  Don't care enough.
Address the lack of title DD and how to handle insurance if you want to increase success rate. 

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.