A Serious Concern On Sub To Investing
Hello everyone.
I just went to my REI Club here in
Los Angeles and some concerns came about when the speaker talked about Sub to and lease purchase.
The speaker is a very well respected Investor who follows Real Estate trends and statistics specifically for California. His name is Bruce Norris. He mentioned that approximately by the year 2005, real estate in prices in california will start going down. He mentioned this will be a problem with people doing Sub to and Lease Purchase because homes are going to be worth less than the agreed price.
I could truly see that as a problem( I could be wrong) because how will buyers for these transactions qualify for a loan on a property at our original price, when the house is now worth significantly less?
I understand that no one has a crystal ball to predict these kind of things, but this man was right about his last prediction for the california market. You can read it on his book called "The Comeback of California Real Estate."
What if something like this were to happen? How would you guys handle such a situation?
All input is greatly appreciated.
I was at the REIC-Los Angeles too. Bruce Norris presented some very convincing data. I'm very much interested in strategies for the upcoming real estate investment cycles.
bigdreamsgary,
You will find Subject To investing works in up and down markets, I know because i have invested in both types of markets.
Here is a link to a gentleman's web site who has a handle on the real estate timing market and I believe I would listen to him before anyone else.
http://www.realestatetiming.com/
His name is Robert Campbell.
John $Cash$ Locke
Hello Mr. Locke. Thanks for the reply
I read the link that you gave me above and I didnt see how this could have a possitive affect to Sub-to inesting. Actually I saw all the opposite because in a down cycle, homes would depreciate signifcantly, so I bet that would make a lot of buyers pretty unhappy. Especially if they cannot refinance a house that is way too overleveraged.
I may have missed something and I apologize if I did.
I know you are the pro when it comes to the subject, and I really dont wanna sound like im questioning your expertise, but can you explain a little bit more on how to handle such a situation.
How will sub to investing change in a down cycle?
Thank you very much in advance.
bigdreamsgary,
If you buy properties with no equity then this could be a huge problem for you. It depends on what you feel comfortable with.
Some people have no problem taking no equity deals.
Some people do. I
would be leary in California but here in Michigan I don't think we will have the same downturn that Cali will have.
So buying at what LTV will keep you sleeping at night? That is if you buy low enough then you have more options to you.
Good Luck,
Tom
I agree with Tom completely. Why buy at full retail when there are properties that can be had for so much lower. Make your money when you buy. Realize your profits when you sell.
Jeff
You can make money in any market.
When the downturn does occur there will be some real deals to be had. It will be a market where the creative investor will have more properties than he can possibly handle.
Talk about sub-to opportunities?!?!?!?! It will be such an easy sell and you will be picking up todays interest rates. After a while the market starts back up. the equity reappears and just as paidly as in went down.
Down markets are good for the investor who has the staying power.
Although I am not an experienced enough investor to have had this to me personally, I think sub 2 WOULD work in a down market....
here's why...
If you are using the "france" method of getting the seller to pay you to give you their house, there will be motivated seller's everywhere! You will be able to negotiate better and better deals.
On the sell side, if someone is purchasing, it is a lot less risk for them to lease option where they can get the option where they can get the benefits of the market going up without the downside of a crash. Stock options are MORE valuable in a volatile market, not LESS!
For us, it would most likely mean that less people would exercise.....so what!!Just get another Option Consideration and do it again and again!!!
You just gotta see the glass as half full.
I can see how the option would be profitable (when T/B decide no to purchase and you can resell it) but don't know why they would do that because they already put down a substantial amount fo money just living there...
But for those who use the Land Contract Installment (with a 2 year balloon) I think you still can make your money:
1. the front end down payment collection
2. interest rate packing (interest rates are still 35 year low)
3. and the back end profit from refinancing from paying down the exsisting mortgage and/or the purchase price 2 years ago (depends on how the contract was formed).
BTW I wanted to find out more about the real estate timing...I bought the book $25 bucks only...maybe really worth it!
There are a few books that are an excellent read which may give you some ideas on where the market may be going in some counties. There are about 500 counties across the US that are great for investment potential. Send me an email and I will give you the author and the names of the two books. Not sure if I can mention them here yet (due to my status)
It's good to know, if you're serious about long term growth potential, and how trends have been and how they will be up until the year 2010.
The Austin example:
We went thru this a few years back here in Texas when the Austin bubble burst. We had had several years of appreciating prices, then the market dropped by 20%.
The only Sub2 investors who got hurt were those who bought into the guru's who were touting the theory that it was okay to pay full price for a property, then sell it owner financed for above market. When the market fell they found themselves with a bunch of overpriced properties. Their tenant/buyers bailed out because they could find better buys than the ones they had committed to.
Meanwhile, those of us who only bought properties with equity, below FMV weathered the storm and are still around in the REI game.
The lesson we learned was that buying homes at FMV, then inflating the prices to make a profit, is basing your business on hope. In a rising market it can work, but in a falling market --watch out. Hope is not a good business model.
There are so many deals out there to buy at wholesale, it is foolish to pay retail, IMO.
I remember in 1995 when the California market took a down turn. I was getting calls from people off my ad in the Las Vegas paper from these California people begging me to purchase their properties.
They paid $300K and were willing to sell to me for $150K, I thought not me. Today those same properties are selling for $800K to $1M. Hindsight tells me I should have bought all the properties I could have gotten my hands on.
In 1963 the market in Las Vegas was over built and a majority of the houses were going for $15 dollars down no credit check. I had a friend who bought about 100 of these houses, rented them out for sometimes less than the mortgage payments. The market turned upward as all markets do, he sold and it was all over but the shouting for him.
I don't think you find many houses Subject To that don't have equity, I mean the people who purchased put money down so there is an equity in the property.
What about the Landlords, money lenders, banks, mortgage companies, auto dealers etc. They all take a bath in a down market.
I hear all this talk about buying way under market and there are plenty of deals out there, sure there are I have found them along with the FMV deals in Subject To investing. You will find that there will be an average that works out to the Subject To investors best interest if they diligenty apply their knowledge.
Use common sense when buying, I am more concerned with the location of a property when buying than what the market will do. There are always signs of a market turn down and many factors that contribute to this.
A student was telling me about a factory that closed down in a city of about 19K, Wanted to know if he should buy there as there were plenty of deals way under market value. This kind of blows the buy under market hypothesis if there are no buyers to purchase the property after you buy it.
I have been in up and down markets always had an exit strategy in case I needed it, however I never had to use it.
Just the way I do Subject To investing.
John $Cash$ Locke
I can understand what your saying John. I definately agree with location, location, location.
I noticed that you mentioned how your friend cleaned up in LV during a down market. I can believe that anyone can weather a down cycle as long as they have enough money. I would be surprised that most people today doing no equity deals will have the money to weather the storms that may arise.
Tom[ Edited by tbelknap on Date 11/14/2003 ]
my best deal was in a down market cycle. I bought easy, was flat on cash flow for a bout a year, and then sold 4 years later when the market changed for 110K profit on a 15k investment
I live in a small community (for the present) 20% unemployment. Yet the houses are still selling and the deals are there.
I structured a deal last month that required $500 down, and a 80% LTV on the property that netted $7500 at closing with $100 postive cash flow each month from two tennants. NOt a big money maker but good enough.
I would be weary and leary of naysayers and negative thinkers. The world is full of them and most work 9 to 5
I could understand every thing is fine and dandy for the investor thats got the mula to pay a mortgage when there is no tenent buyer in there.
Im not that lucky. I dont think that I would be able to pay for a $2000 mortgage and hold the property untill the value goes back up.
I hate to sound closed minded, sorry if i do.
If you are holding the property then you should have someone in it paying you enough each month to cover those monthly bills.
Or if your'e a speculatiove sort of person then even a small negative cash flow is OK in some circumstances.
The point is you don't buy a place, let it sit empty for a few years and make the payments on it. At least that is not the plan anyway.
Hello Thomas.
I apologize, I was not clear.
What I was trying to say is, since no one will be crazy enough to want to pay for an overleveraged house (not to mention that the buyer's lender will not finance) you will most likely have a vacant house.
Sorry i was not clear.
Any responses?
Gary
I haven't read all the posts BUT I disagree with the statement that sub-2s would not work (so to say) in a down market.. Here is HOW it does and would work.
You buy sub-2. You NEVER have to worry about re-fi'ing or obtaining financing (i.e. lease/ops). The existing financing is in place and will remain in place NO matter what the market is like.
For the investor, an all too common for me scenario is buying a home (PFL) sub-2 (much of the time at full market value) and reselling the home to new buyers with ME (the owner) carrying on the new buyers in the form of Contract For Deed/Land Sales Contract with a term of 30 or 40 years..
I'm getting off topic and apologize, a market which might temporarily depreciate due to lack of demand for the homes for sale thus causing prices to drop would ONLY affect a lease option type of deal because the new financing which would be neccessary would lend based on the cma (comps.).
The real estate market will continually rise and always be in demand in any large metropolitan area/city.. Population in our nation continually multiplies with new generations and the demand for real estate only becomes greater.
My 2 cents is we have NOTHING to fear and nothing which can impact us financially if we're wise with our deals and structures..
Chris
Hello CKY.
I am not sure this makes sense to me.
(CKY)
"You NEVER have to worry about re-fi'ing or obtaining financing (i.e. lease/ops). The existing financing is in place and will remain in place NO matter what the market is like." (cky)
I understand the loan stays in place, but I also understand that when the new buyer has to refinance, he takes out a loan of his own.
(CKY)
"a market which might temporarily depreciate due to lack of demand for the homes for sale thus causing prices to drop would ONLY affect a lease option type of deal because the new financing which would be neccessary would lend based on the cma (comps.)" (CKY)
Same thing with Sub-to. Either method, when it comes time to refi, you have to take out a new loan.
I might be overlooking something. Sorry if I am.
Hi Gary,
I know we have spoken by private mail in the past.
I think the problem you may have here is time. Since all markets, no matter what kind (even real estate) run on cycles you have to adjust your buy and sell strategies so they co-inside with the market. You may have to hold longer or shorter depending upon what is happening in the market to make a profit. You might have to buy and sell more or less properties to make the same or more as you did last year. It is all a matter of adjustments. Nothing is black and white.
People will still need help, people will still need to move on with their lives whether in an up or down market, and if we can help them we should. We may just have to adjust the details on how we do it.
I guess they just call it life.
John (LV)