Question For John Locke & Derrick Ali:
I have read posts/articles from both of you detailing the benefits of no equity deals and i do see the advantages. i have gone back over some deals i turned down and seen profit when looking at them from your perspective.
I am curious to know the downside of these types of deals though. Would either of you be kind enough to help me see the downsides AND the preventive measures that can be taken to come out on top in a no equity deal please?
It seems that you two have a very good grasp on the concept while I have heard other investors tell me horror stories of how they got burned doing such deals. [ I guess they did not do it as you would have]
Any assistance you can give would be appreicated,
Thanks
Verb
Which articles did you read? I would like to read them PM me or post Urls Here
[addsig]
http://www.thecreativeinvestor.com/modules.php?name=News&file=article&sid=129
http://www.thecreativeinvestor.com/modules.php?name=News&file=article&sid=340
Hi Verb,
Since this is way past JL’s bedtime, I’ll try to answer to your satisfaction.
Example: You pick up a property FMV at $100,000 with a $100,000 loan for $500 that the seller bought 6 mths ago for that amount (seller’s down payment is being taken out of the equation) so there is no equity showing on the property. His payments are $599.55 per month PI at 6.0%.
You resell the property for sale for the following terms: Sales price $120,000 (additional SP amount is due to appreciation) NO QUAL with $10,000 down. Payments are now computed at 7.9% for added cash flow which equals to $726.81 PI. This equals about $125.00 per month in pocket pos cash flow for 24 months (our normal term to refi). Now when the buyer refinances in 2 years you get your back end.
So here is the profit breakdown from a no equity deal:
$10,000 down
$3,000 pack
$10,000 back end and in turn
$23,000 in pocket
Now add any additional equity from the seller and this can be a screamer…
And now I'm going to bed.
John (LV)
Thanks, that does make sense john, i have seen downpayment assistance programs that allow buyers to get in a home for $500 down. The benefit of your example over that is obviously the fact that you'll sell it for more, and the loan is not in your name.
What do you do when your t/b stops paying?
And what is $3000 pack in your previous example?
First of all we don’t have T/Brs; we only have buyers that have a “pride of ownership” and are not renting, so why would they quit paying on their purchase especially with the $$$ they put down? If this did happen and you need them to go bye bye, then buy them out, evict or foreclose as necessary.
The $3,000 pack is the difference in the interest rate charged by the seller’s bank on the underlying loan and the interest rate you charge your new buyer and put into your pocket. In this example it was app $125.00 per month equalling $300.00 over the 2 yr term.
John (LV)
[ Edited by jfmlv1950 on Date 12/09/2003 ]
Dear John,
Well put explained it fully. May work well in most markets but with a care.
In Calif in the medium priced market
$250,000 to $375,000 I see your transaction occur, but mostly with the type of person who will stay and perform for a few months, then out and gone as their financial instability continues.
Those that do not have this problem are most concerned with equity. They will go into a non equity position, but thery are certainly not going to give you the bumper you require a cash payment for the priviledge of going upside down.
They will go in as did you. Assume the liability of payments and live there. Of
course they hope that the great god of markets will make values go up. But the calculation of most is do not rely on a future promise or hope. This is California most people have experienced up market and down market.
See thats where it fails. There is a deviation on it that you can use, but that calls for a sophistication which the norm Investor may not possess. It is something like second intention in fencing. You sacrifice a present time position for a future advantage based on a future performance. A little esoteric but an excellent exit strategy if you cannot get a cash sum from your new renter/buyer. Yes, in many instances on this present market you cannot even get the increase interest from a wrap around and certainly not the increased payment you so describe. What to do.
As I said it is there right in front of your eyes but it does require a little sophistication.
As most exit strategies do there is an element of risk and against that you pit your ability to read people. If you are to play this game you must really be able to understand and read people.
In this segment of the population you are up against the highly skilled floaters who move from house to house. Pay a few months rent then conversation as they let it slide. Fight the foreclosure, fight the eviction and stay for a year at no rent. The game plan is to accumulate funds so that at end game they have enough to buy into a house and hold.
You and I know that it almost never happens, once you set upon this path you have moved sideways in society. Perhaps you should learn Romansk (Gypsy language) change your name to William or Adams (The names Gypsys use here in the USA) I think the record for non payment of rent and staying in premises is 24 months. Mr. Adams and extended, I mean really extended family. they did it. West Covina. I think they made him king.
I hate to be negative but if you are going to play this game you had better sharpen your people skills.
I think the time has come for an article on this I will start tomorrow just as soon as I serve a 60 day notice on that nice Mr. Adams whose wife tells really great fortunes.
Reminiscing, the day I liberated the camp with all the Gypses Lucius
Question: Why would someone pay that much over what the house is worth currently? Even at 5% appreciation its still 10K higher than normal. I just haven't figured out the whole pricing thing yet. Is it because we are giving them an easier way of getting into their new home or what?
Thanks!
And this is where I consider myself quite prepared for the onslaught, as I my roots are in good old California.
This is why I have made previous posts the way they have stated.
I know how a “normal???” Californian thinks and acts. I am familiar with how the old prop 13 people feel. I see how the EX Mr. Davis did things and what a challenge “Arnold” will have. I still have most of my family living under the regime there.
So yes, I am familiar with California.
Do I change my investing habits??? Of course I do, I add a couple of zeros and a couple of commas to my paperwork. No big deal. A MOTIVATED seller is the same here as anywhere else and a NON QUAL buyer still needs a house here like they need one anywhere else. Again only the numbers change.
The principles of a seller needs out and a buyer needs in doesn’t change just because the figures get bigger, only the way we do it. It is up to us, as CREATIVE investors to come up with a way to do the deal. So do we give up just because the numbers get too large for us to count on our fingertips or do we start to learn to use a comma and another zero or two??? I don’t think we should just give up. I think it is our responsibility to do what we can for our fellow man (and women) as there are a lot of people that need our help in California and in the other 49 states.
And if we can help them, then we should.
John (LV)
I appreciate you guys taking the time out to respond to my post, you dont know how much...
What do you all have to say about the sub 2 predator who knows the intended seller has no idea what he is up to? what do you say to him when they repeatedly tell him how they want to get a loan to build a new home on the little scrap of property he leaves them but they have no idea that he is not paying off the thing that is dinging their credit all up. They just want to sell their house and move on, and the sub2 vulture wants to steal it, and everything in it, and make them lease it from him for only 300 less a month then they pay now. What do you think about sub 2 guys who do this. And what do you say to them when they get busted by the home seller who becomes angry that he isnt really buying the house and land, he is just milking out the equity.
Abstractprone,
I'd say that you have some issues, and some misconceptions about subject 2 investing.
No-one on this website advocates misleading the seller the way you've described. If you don't understand something, just ask. Spewing like that is not constructive, and doesn't help anyone.
This is what i dont understand about lease option. Ive heard lots of people describe this method, but I havent seen the following questions answered.
, which is supposed to be one of the benefits to the buyer, so now he is gonna have to come up with another 15 or 20% to get conventional financing.
1) How long should my lease option be?
2) how much do i price the house for in 2 yrs(assuming 2 yr option)? In 2 years, do we guess and use present fmv x .07 x .07? (7%) Some people say you can price it at a premium because we are putting them in a house that they otherwise couldnt get into. I just dont see how that works because if its overvalued, they will never get financing to get out of the lease option.
3) The buyer puts down 4 to 7 percent as an option consideration. That money applies to the purchase price when he decides to exercise the option. We tell them we will help them get financing if they make their payments on time for a year... we can show that they have a year to 18 months of on time payments and thus help THEIR credit.
BUT, he still doesnt have enough equity to purchase the house through conventional financing (especially if we priced it at a "premium"
How can this be an attractive position for anyone , credit challenged or not?
cs2870,
Most investors have their own way of doing things and opinions. Sone things work in all markets while not everything works in every market. You have to take the time to learn what will work for you in yours.
The issues you mention are real ones and the only way this is a win/win for everyone is when you buy with enough equity to not have to inflate the price to 20% over market value to your buyer.
I buy my houses with equity. Enough equity where if my buyers don't pay, I can list and sell if I please and still make money.
I don't have to worry about the market tanking (ask investors in Austin who did no equity deals what they think about them) and having 50 no equity deals in my portfolio.
I can sell to a buyer at top, current market value and let them benefit from the appreciation that happens over the next couple of years.
I did my first few deals as little/no equity deals and while I did ok on them, the market here was in a better position. If I were holding a bunch of those right now, I would be concerned.
William Tingle
WilliamGA
Jeff,
abstractprone is detailing something that he previously mentioned had happened to him. I imagine I would be a little bitter and skeptical about subject to investing after a similar experience.
However, abstractprone, as Cash and I mentioned in another thread and Jeff mentioned above, the type of person you encountered (and described above) does not practice what we are discussing here. You wil never find any credible investors advocating, let alone, engaging in the practice of misleading the seller. As a matter of fact, most of the "gurus" preach full disclosure about a deal.
Moreover, credible investors do not commit to something that they know they cannot see through to end.
This method is a tool that is meant to create a win/win situation for everyone. Dishonest people abound and that is unfortunate. However, do not indict an entire class of investing based on your unfortunate experience.[ Edited by Rogue on Date 12/09/2003 ]
WilliamGA, thanks for your response. So i guess im not as clueless as I thought... these are real issues . Bill Barnett is on the Robert Allen CD's telling how he can make $xx from a no equity deal. I just dont see it.
You can make money on no equity deal.
The problem is if things go sour, what exit strategy do you have. If you want to sell it then you need to come out of pocket.
If the market goes south, you may have to take a negative cashflow until the market rebounds.
It is riskier to take no equity deals. You can make money at them though and a lot of people are.
AS William stated a lot people got burned by them as well. If you have the cash reserves or a partner with cash reserves than you can weather the storms better.
Tom