Best Way To Seek A Profit With Low Equity Homes
What is the best way to go for a profit on homes having owners with low equity? Subject To seems to get full house payment and low profit due to a couple thousand dollars "U-Haul" money. Lease Option appears better, with a $1-10 Option fee. What says the Forum?
Alan
Sub 2 when done properly should net you 20 - 25K per deal on low equity homes. This would assume that average homes in your area are selling for at least 100K or so.
Thanks, Jeff. Can you please tell me how that is done?
Am I eventually selling the house for 20-25K more than the loan amount? Or not giving any "U-Haul" money (which of course seems too radical, but I guess it depends on the seller's circumstances)?
Alan[ Edited by fearnsa on Date 05/08/2004 ]
fernsa,
This link will help you.
http://www.thecreativeinvestor.com/modules.php?name=News&file=article&articleid=146
"U-Haul" money can be $10 or borrow a shopping cart from some where, it depends on the sellers situation. We try to make it a win/win for everyone, so I would not give a seller $10 if I knew the circumstances meant the seller would have no where to live or groceries for their family.
So do not assume that only Lease Option deals are $10 dollar down deals, this assumption is wrong.
Just the way I do business.
John $Cash$ Locke
Excellent advice John Locke, Each home owner is unique and should be dealt with as such. You need to find out what will work for the home owner and for you if you plan to make a living doing this. You can ruin your future if you screw people on deals. It may take a while for your rep to get around, but it will faster than you know. Like JL says, Win Win for everybody. That is how I approach my deals. If I cant do anything for them, I tell them and move on.
Good luck
Great. That's the way I see it.
So what is the "properly done" way described earlier by Jeff?
Alan
Now might be a good time to invest in some education about Sub2 investing. There are some excellent sources of information available on this site. Your questions can be answered simply by reading all you can on the subject both here on TCI in the Sub2 forum, and at your local public library, but the courses filter out all the mess, and give you the straight scoop on how to do things right. They do privide good value, and will pay for themselves in the first transaction you choose to use them.
[ Edited by jeff12002 on Date 05/10/2004 ]
Thanks for your feedback and advice, Jeff.
That's the way I see it. Invest, spring for some courses and learn more quickly and thoroughly. I have done so. I'm asking what Sub-To "done properly" means to you.
Where is the bulk of the profit coming from on Sub-To, for you. Do you have one or two favorite skills-inside-of-skills, (of Sub-To investing, for instance), possibly three?
Alan
I have yet to give more than $10 on a sub2 deal, and have always helped the owners find a place if needed. You can make a ton of money with a sub2.
*I noticed the mistake that I had made, and had to edit*[ Edited by miraclehomes on Date 05/11/2004 ]
miraclehomes! Hi! How many Sub-To deals have you done?!
Ten dollars does not seem, according to this thread and my thoughts, to be a price for seller's equity. Maybe $1,000 minimum, no? And we handle cleanup, repairs if needed, closing costs, insurance, etc.
Have you had multiple puchases with less than $10? Very desperate sellers?
Alan
I have done over 30. The most I have ever given is ten dollars, and that was just to make the contract
"legal" am not claiming to be a guru or anything, but I have just been doing it the way that I was taught. And yes, vey motivated sellers.
I have given as little as $1, but changed my contracts to ten for good measure. [ Edited by miraclehomes on Date 05/11/2004 ]
Fearnsa,
[ Edited by jeff12002 on Date 05/11/2004 ]
I generally focus on homes that are 2-5 years old. Most of the owners have little equity. Quite often that amount would be swallowed up in real estate commissions, closing costs and that new coat of paint etc that a real estate agent is going to recommend to get the place ready for sale. If they are falling behind, and have no solution to their problem, They would offer the property at less than retail in hopes to sell quickly. By the time they are done, they might even have to pay to sell their home the traditional way.
I use those factors to negotiate away most of the "paper" equity they have. (they have equity but won't be able to realize any of it the traditional way of selling), and offer them U-Haul money, and maybe a little more. If they say no, It's no deal! I'm not in business to be a charity, and they know and understand this. We come in and clean the place up, and paint when necessary, and sell the property on a contract for deed for full retail, usually at an interest rate about 2 points above the rate of the underlying financing.
I collect at least 3K more than I have into the property as down payment. make $200-$300 per month positive Cash flow on the difference of the payment amount of my financing, and the mortgage obligation for about 2 years, and collect the difference between the balance of the contract for deed and the mortgage at the time that my buyer brings new financing to the table. This will usually net me 20K to 25K per deal.
They have more in their pocket than if they sold through a Real Estate Agent, and can be on their way with their credit intact. I have a property that is a money maker. We both win!
That's three ways to get paid. 1)When you sell. 2) MonthlyCash Flow. 3) When your buyer refinances, and completes the terms of the Contract for Deed.
I hope that's what you're looking for. That's pretty muct the way I try to do things. I'm still a beginner, but that's the way I try to operate, when my emotions don't get in the way of my brain thinking things through.
Goodluck,
Jeff
Awesome method and answer.
Still a beginner? Hmmn. When you get good, I have to believe Bill Gates will sell his home to you 50% off. How many million will that be?
Thanks greatly, Jeff. Alan
Quote:
We come in and clean the place up, and paint when necessary, and sell the property on a contract for deed for full retail, usually at an interest rate about 2 points above the rate of the underlying financing.
<font size=-1>[ Edited by jeff12002 on Date 05/11/2004 ]</font>
Jeff, when you say you sell the contract for deed at an interest rate 2 points higher than underlying finacing, do you mean you finance the sale to your end buyer? I am currently concentrating on wholesaling, so I'm not too familiar with Sub2 deals. I was under the impression that on a Sub2 deal, the owner gives hands you the deed or control of property and you basically take over existing financing.
If you tack on 2 points, are you simply adding that to the existing monthly payment so you can cash flow?
Thanks,
Camilo
camilomachado,
You're pretty close to getting it. remember, I talked the what I called "paper equity" out of the deal. This could have reduced the price of the house.
Say as example 100k home when purchased 2 yrs ago. The seller put 3% down, and financed 97K at 7% Payments of about 650 P/mo, P&I Loan amount today is about 95K not counting back payments and penalties (If any). Over that 2 year period of time the house has appreciated at 6% to a Retail value of about 113K.
On paper it looks like they have about 18K in equity less any back payments and penalties. (if applicable)
take that 18K and reduce it by 6% of the house value for Real Estate Agent commissions (6,800) Cost to paint, and clean carpets, landscape (maybe) ($2200). Additional price reduction due to the fact that they are anxious to sell, say 5% for kicks, it could be 10% ($5600), and we're down to $98,400 If we go conventional sale, they will probably be making two more payments ($1300), and we haven't talked about closing costs.
Bottom line, if they sell conventionally, and sell right away, they would likely net less than 2K on the deal. My offer to them is 3K and take the property Sub2 the existing financing in a week, or as soon as they are ready to leave..
When I sell, I sell for full retail (113K) with owner financing with only 6K down. No official qualifying, (I will make the decision based on my belief in their ability to pay), (after due dilligence, of course) We finance $107K @ 9% for payments of $860.95 P&I per month. This produces a positive cash flow of $210 per month for two years.
In two years The end of the contract for deed, My buyers bring new financing to the table to fulfill the terms of the contract for deed
Balance of the 107K I financed in 2 years will have a balance of about $105,470.
Balance of Original loan that I took the property sub2 - $92,600
A difference of $12,870 Less closing costs etc.
This example nets
$3000 when I find a buyer
$210 Per Month for 24 Mo. ($5040)
$12,870 at closing
For a grand total of $20,910.
Keep in ming that there are costs that are not described here. I'd use a loan servicing company, which will charge me monthly, and there will be closing costs (like a normal sale) when the contract for deed is fulfilled Etc.
The example above is very basic, John Locke's course explains the details of how to conduct a sub2 purchase , talks about insurance, property taxes etc, and how to deal with all the "stuff" to keep you and me out of trouble. It really is worth the money he charges, in fact it's worth way more than he charges. It's that good!
I hope this helps to give you an idea of how powerful this technique can be with low equity properties.
Jeff