All Forum Posts by: Ken M.

In the last two months I’ve bought 3 Subject Tos for less than 85% of ARV each.

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I found this 4 bedroom 3 bath property built in 2001 in Phoenix AZ through our normal marketing.

Then the key was to find the owner and ask the right questions.

I always introduce myself and mention why I’m calling. I say something to the effect of “Are you or anyone you know planning on selling a house in the near future and would you like an offer?”

Do I get screamed at and get hung up on? Yes, a lot. Do I hear some pretty interesting responses, some dirty, bad, nasty words? Yes. But, Do I care? Not really.

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When I finally found someone who was interested, I tried to come to a reasonable offer.

To figure out how much I would offer, I took the Zillow, Redfin and Realtor estimates of $401,000, $412,439, and $402,889 respectively – added them together and divided by 3 which gave me an average of $405,422. But, I never pay ARV or MLS, so I multiply by 85% and offered $344,608. It was accepted.

Zillow $401,000

Redfin $412,439

Realtor $402,889

Average $405,422

Average times 85% = Offer

$405,422 * 85% = $344,626

As I explained to the seller, there are no realtor fees of 6%, so that saves the seller $24,000. The sale is certain, it is now, and they have no repairs to make and no inspections to pass.

I showed my seller how I arrived at my offer and why. No serious repairs are needed on the house. It’s in a reasonable nice neighborhood.

Since it is a “Subject To”, I take over the 2.75% loan payment of $1,306 instead of having to pay for a new loan at 6.88% or $1,653 monthly for a difference of $347 a month. That saves me about $116,000 over the life of the loan. And I save about $6,000 in new loan origination fees. I have no real estate agent fees.

No loans, no new lenders, no 1031, no MLS sale,

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So, how did I handle the equity the seller had? He took $60,000 on a carry back (2nd) at zero percent interest (o% interest) for monthly payments of $177 for the remaining length of the term.

In this case, one of my students, who actually prefers to have me find the properties for him, bought this one from me. His cost was $369,626 “all in” on paper, (he didn’t actually need that much money or credit as you shall see) on a value of $405,422 for a savings of $35,796. It helps to know the right people. ;-)

Rents in the neighborhood are $2,300 a month for a cash flow of $2,300 minus $1,306 PI and $112 tax and $91 insurance, so he clears about $ 791 a month.

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How much cash did he need out of pocket to pull this off? (I don’t allow borrowed money.)

1st & 2nd month’s lender payment, $2,612, carry back payment to seller for two months $354, change door locks, $200, closing costs $3,500 (title, escrow, recording) house cleaning $500, yard care $500, my fee $25,000, pizza for a work crew for a day $100. Those are my requirements to allow him to buy the property.

It takes money to do “No Money Down Deals”. Don’t let the “gurus” fool you.

Borrowing that money is a recipe for disaster. Anyone who buys from me has to be able to prove ability to service the loan.

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So, This is how I locate properties for investors who are tired of faking it.

Places like AZ, ID, TX, GA, MidWest, Deep South are great markets for these, but Sorry, in CA, NY, Il, NJ, or other crazy states, the numbers just don’t work because of taxes and regulations.

So, realistically he needed about $32,766, Using a bank he would have needed 20% down or $80,000. Now, if he had done it himself, could he have saved some money? Sure, because he never would have done the deal. He’s just like you. Wishful thinking doesn’t buy you properties at great deals. 

Could he have negotiated such a sweet deal. Lol

Of course not. But, If you like sweet deals . . . 

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You really should read the documents you signed. If you don't understand them, have someone who does, go over then with you.

Generally, and this can vary by company, they set up an amount they will allow you to borrow, say $50,000. You use it like a credit card. You use your card or write a check for varying amounts, say $20,000 . You can pay it down this month and use it again next month.

You are charged interest only on the amount you borrow for the time you owe it until you pay it off.

What they will do, if the economy changes, or if your situation changes, they will immediately reduce the limit to the amount you have outstanding at that moment and will not let you borrow the full amount. So, a $50,000 limit becomes a $20,000 limit if you have borrowed $20,000. As you pay down the amount, they will reduce the limit further.

That means they can't really simply decide to make you repay all of it because they changed their minds, but they can reduce the cap on the amount you can borrow. 

That also means that if you have a HELOC with a $50,000 limit but you haven't borrowed anything, and a great deal comes along that you want to use the $50,000 on, if the market has shifted, they will not allow you to borrow the money they told you that you have access to.

A lot of people were surprised to have their HELOCs "turned off" when they needed it the most to get through the last downturn in the economy. Lending dried up and HELOCS were worthless.

(What? Me Worry?)

Nick Gerli, CEO and Founder of real estate analytics firm Reventure Consulting, has issued another troubling update on Florida's housing market—this time sounding the alarm about a collapse in demand across the Miami metro area. He described the plunge in sales as "breathtaking."

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Your comment: "seniors in particular, will not be able to afford the increasing HOAs and assessments, as insurance premiums are going through the roof"

Is what concerns me the most at the moment. I saw somewhere that property taxes have gone up an average of 29% across the country as well. There is absolutely no justification for this.

Municipalities say that money goes toward education and infrastructure, well both have gone downhill for 30 years with higher and higher taxes.

There is no connection between the two anymore.

It becomes a "slush fund" for the political class and until property taxation changes, homes are going to be lost as un-affordable by tax and by insurance.

I agree, San Diego is a beautiful area. We prefer Laguna Beach, but that's just a hop, skip and jump away.

I forgot to mention the mudslides. 

What concerns me about San Diego, or any beach city in Southern Cal is everything is in the way to get away from the coast. In a major event like a  huge earthquake, there are millions of people who want to leave the area at the same time. Looking for shelter, gas, food, safety. 

One bridge goes down, the whole thing stops. And no porta potties.
Once they outlaw running out of gas on the freeway, getting into an accident, or overheating waiting for the line to move, then you've got something. 

Meanwhile, it takes just one silly nilly to get on the freeway with an empty gas tank and when they run out, you're stuck behind them for good. It takes just one connector bridge to collapse and that route is no longer viable.

and there are very limited evacuation routes

Survival 101, always have an escape route . . .  and a backup
and don't drive around silly nilly Southern Californians

Oh? It's different this time? Lol

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Major repairs can now cost what previous generations paid for an entire house, and no, this isn't just inflation; it's the result of the decline of quality across the board and the gutting of labor skills to cut costs.

Here's the Case-Shiller Index of national housing prices. Housing Bubble #2 far exceeds the extremes of unaffordability reached in Housing Bubble #1: