Same Old Questions
I have read alot about SUB2 on this forum but still feel in the dark about what it is exactly and how it works.
Here's what I know.
With Sub2 you purchase a property subject to already existing financing. it is a way to put profit in a deal where the seller wants out of their home, but has no equity.
So, if this is true then what does it mean to purchase subject to already existing financing.
Also how do you make money if there is no equity.
Thanks
Raj,
That is a perfect response you have pulled it all together for me.
2 addition questions
1. How does this effect the Bank (sell trigger in contract) is there a specific method of implementing a Sub2 (EHT or LT)
2. Do you feel that Sub2 maybe dangerous considering there is a strong possibility that the market may drop 5%. And how would you protect your self from a recession on deflation
Sub2 example:
Property FMV = $100K, seller owes = $90K.
To sell conventionally thru an agent would be: 6% commission = $6K, negotiating loss = $3k, closing costs = $3k, holding costs = $4k (650x6mo) TOTAL = $16K to sell. Seller would owe $6k at closing.
Sub2 sell: Investor buys property subject to the existing financing. Gives owner $10 for 'equity' at the closing where title is transferred to the investor. The investor will then start making the $650 a month payment on the property.
How does investor make money?
Investor sells on a Contract for Deed or Lease-Purchase/Option on a 2yr deal. In 2 years the property should be worth about $106K (3% appreciation per year). So sells for $3K down, $800 month, balance due at term = $103K
Profit = Upfront $3K - $10 = $2,990; Thru term = $800 - 650 = $150 x 24 = $3.6K; backend = $103K - $90K = $13K
TOTAL PROFIT = approx $19.5K
This is simpilified, but should give you an idea.
Roger
If I may,
1) So long as payments are being made to the bank, the chances of the note being called are slim to none.
2) The sweet thing about the subject to is that all you have invested in the property is $10. The remainder of expenses are being paid by someone else. Therefore if the market drops you are still making rent/lease money.
very good reply, man! rajwarrior has really helped me understand concepts as well. thanks again for further help, here!
Yes, taking a property Sub2 does violate the due on sale clause of mortgages. Triggering the DOA is not illegal, immoral, unethical, etc. The DOA merely gives the lender the option to call the remaining balance due. They don't have to do it. And like Lethe said, as long as the payments are being made, most won't.
That said, always have a plan in place "just in case." Since you are the owner, it should be fairly easy to quickly refi if necessary. A good mortgage broker on your team could help both you and your future buyer.
Real estate investing as risks, just like any other type of investing. One possible risk is a market downturn. In the above example a 5% drop in market value would still have you selling at the 2 yr mark for $100K. FMV drops to 95K, still have $5K in profit.
Point is, it would have to be a severe drop to stop cutting into your pocket. If your market is that unstable (unlikely), I'd suggest finding another investment strategy besides real estate until it stablizes.
Roger
Or increase your monthly payments/cashflow if you are in a flat or more unstable economy...to compensate a little?
I have yet to buy my first house sub-to. Has anyone had success (getting started) with mobile homes? What's the catch, if any, if they are in nice neighborhoods without wheels - double wides, ranches, and manufactured homes?
Thanks,
Brian
Dear allcash - I think its a little more complicated than it sounds above.
(1) Typically lenders do catch the fact that title has changed. In a period of dropping interest rate – like the recent past years – they may or may not call the loans and if they choose not to, they may pretend that they didn’t notice. They have an incentive to let the old loan stay in place because it is paying more than market interest, and because it’s a pain to foreclose – but they know, because they get the new insurance policy with the new owners name – and also checks with the new owners name. When they choose to, they write very threatening letters. Often they do what they threaten they will do. People who have been in the market a short time may in good conscience not understand this – cause this is not a period when the banks benefit from calling the loans. But – such a period is right around the corner if interest rates start to recover.
You can play some tricks to try to hide title – like trusts – but now you are moving toward fraud and conspiracy. You probably won’t get caught unless things get worse and the loan defaults – worse yet many loans that have gone through your hands default – and you end up in prison as a friend of mine did.
In my opinion it is better to do it in the open and then try to negotiate with the lender if and when he jumps you.
(2) If you don’t fully disclose these conditions to your buyer you are guilty of fraud. You need to tell him that he could lose his position if you screw up the situation with the lender. Thus it is not practical to do anything except sell it quickly, or rent out or live in the house since someone fully informed of these risks will not buy it from you.
(3) Finally if you do not disclose to the old owner that his credit is on the line and that if you fail to pay and his credit goes down the tubes - and presuming you know enough to know these things - then you have committed fraud in your dealings with the old owner.
The point is that this is hyper sophisticated stuff - ok for old attorneys but not for beginners, in my opinion. Of course - I have been known to be wrong - so don’t take my opinion - ask an attorney.
Mr. Knox,
Yes, things are also a little more complicated than a simple 2 to 3 paragraph post. Whole books have been written on each method of real estate investing. The forums are here to provide help and information, not detailed how to books. Anyone interested in a particular method should become more educated on the subject.
To your numbered responses:
1) yes, lenders do usually know that the property has changed hands. And at their option, they can call the loan due. As far as them calling it when interest rates rise, it's possible but not very probable. This is the first scare tactic that real estate agents and other conventional thinkers usually use to try to dissuade other from creative ways.
Fact is, it costs lenders money to foreclose, alot of money. Interest rates would have to rise through the roof to make it beneficial moneywise for a lender to call due a performing mortgage. Add to that the fact that most houses come back to the lender in less than market condition, and you have even more money that the lender loses.
If the loan is called, the simple response is to have the property refinanced.
A land trust is not a trick, nor is it unethical or illegal. It is perfectly within the limits of the law to setup a land trust for any property. A responsible investor wouldn't let the loan default (read above about refinancing).
That said, I don't like land trusts, either. I think it justs adds to the costs. If the lender should call the loan due, it is very possible that they would want to negotiate, as it would cost them money to foreclose.
2)Correct. It is fraud if you do not fully inform the end buyer (using l/o, cfd, or other owner financing) of all the facts with the property like the underlying mortgage. This should be addressed in your contract.
"someone fully informed of these risks will not buy it from you" If it is sold outright, the sub2 is not an issue at all. Sold thru some form of owner financing would this even come up. Since, many investors have been selling many to "fully informed" buyers for a number of years now, I don't think that this statement holds much water.
3)Correct. again, not fully disclosing these facts to the seller is fraud and should again be laid out within your contract.
"hyper sophisticated stuff" Hardly. It's just a different way to buy property than the old conventional method. Old attorneys and real estate agents fear change and rarely imbrace it.
My suggestion is always find a good, open-minded attorney to review and update your contracts to your states standards.
Roger
another question on this topic.
from the sellers standpoint, they are trusting you to continue making the payments, correct? is thet just the chance they take to get out of their house with nothinh?if you get into trouble and stop, they get a foreclosure on their credit, right? also what if they plan on going out and buying another house but still show their old mortgage so they cant qualify for 2 mortgages?
Rereading the above I realize that I was not clear on (2) – lets try again
(2) If you plan to let the old loan stick around and don’t fully disclose these conditions to your buyer then that’s fraud. You need to tell him that he could lose his position if you screw up the situation with the lender. Thus it is not practical to do anything except sell it quickly to someone who will take out new financing, or rent it out or live in the house since someone fully informed of these risks probably will not buy it from you on terms where the old loan stays around.
If you go to the archives and search for “attorney general” you will find the very sad story of a family that took some of the advice offered by RE gurus on how to be creative.
I personally think it a sad commentary on how badly the US economy is screwed up, that eager honest young people are studying sharp practices to find ways to support themselves.
In fact it is not necessary to be dishonest to make good money in RE.
I've never done a L/O, but don't you normally agree on a sale price at the beginning? If so, aren't you in a sense "protected" from the potential market downturn in FMV? What I mean is this, at the end of the option period, one of 3 things will happen:
1. T/B purchases property at option price. If you're agreed upon price assumed a 5% appreciation over the two years, then you're getting over market value as the exercise price.
2. T/B decides NOT to purchase because agreed upon price is too high relative to current FMV at time option expires. This isn't so bad, because you've received rent (as mentioned above already) and the non-refundable down payment up front, but also, now you can have the current T/B move out and find another T/B, collecting another non-refundable option payment, hopefully get higher rent, and repeat the process. The FMV will eventually go back up, right?
3. You renegotiate the price at the end of the option period. As long as you have #2 above to fall back on, you're in a pretty strong bargaining position with the T/B.
Am I right on this, or is my thinking wrong? Again, I've not done L/O, as I'm a newbie, but trying to learn!
Take care, and good luck!
allcash4homes
Further thoughts – don’t listen to successful old RE investors. Obviously they have some ulterior motive where they want young people to fail. Instead listen to people who sell “Get Rich in RE” books. They and their supporters are really here for you.
Regarding the calling of loans. Some of the advice here may come from people who have not lived long enough to know how the system works. I bought my first house in 1957 and have owned RE continuously since then. Here are my observations. From 55 to 1980 interest rates went up. From 80 to now they have gone down. They are now at historic lows and it is reasonable to imagine that they will go up again. When they were going up lenders wanted fixed interest loans to be paid off, since they got to be less than the Fed Funds rate. I got letters from every lender with whom I had a fixed interest loan during that period – offering to pay me cash bonuses if I would refinance. Don’t think for a minute that if they had a loan on which they could call a DOS clause that they would not have done so.
Regarding questionable practices. Don’t feel comforted if someone tells you they have done X many times and not been in trouble. The problems come when the market collapses and many loans default. If your name is associated with a number of these bad loans, look for a visit from the FBI. This happens 4 or 5 years after the transaction. I know a guy – an ordained minister – sweet friendly honest guy – has a wife and a kid – who spent 5 years in prison. He was involved in transactions in the 80’s that went bad in the crash of the early 90’s.
When I say that this stuff is ultra sophisticated, I don’t mean that it is hard to do these deals. Any fool can do these deals – just find some guy down on his luck, get him to sign a quitclaim, and give him $1000 to move out. The question is: are you experienced enough to do these deals and not get in trouble. Don’t rely on Get Rich Quick Guys to help you here-since their motives do not align with yours. See an attorney – or better yet – wait till you know more than the attorneys – which will take some real experience in the field.
Don't do anything where you tell a regulated lender something that isn't so, or hide something from them that is so. It's a ticket to Eglin AFB.
As a matter of principle, don't do it to people who lack the ability to call in the FBI. They may call in a leg-breaker.
And if you really want to learn about sharp practices, search google for the terms "Huizenga" and "Testicles".
In reply to Mr. Knox's post.
There is nothing wrong with learning from "successful old RE investors," especially if they've kept up with the times (yes, I'm aware that you were trying sarcasm). The usual problem here is that the "old" investors only believe in the old ways, 20% down, long-term financed, rent and wait. Like you're doing, they scoff at any other way of buying RE, calling it unethical, illegal, immoral, etc.
Regarding the calling of loans. What you're describing is a period from 1955 to 1980. Yes, interest rates did rise and lenders did want loans refinanced. However, you talking about a 25 year span of time. With the above method, there is only a 2yr or less span of time. Very doubtful that rates will jump enough for a lender to consider calling a performing mortgage.
You say that a lender would have called a loan if they could during this period. However, there is no way to know this for sure since loans during that time period were fully assumable and had no DOS clause.
Exactly what questionable practices are you referring? You've mentioned your "guy" and his troubles in several of your previous posts. No offense, but you don't go to jail for doing things legally, which is all that we promote here. So either thru accident or design, your friend was probably involved in some illegal transactions to get 5 yrs.
Here's something we agree on. Books, courses, tapes, and advice from here and the "old RE investors" all should be used only as a quide to plan your career in REI. No one but you knows exactly what and how you want to accomplish your goals. And as always, a good attorney is key to your success in REI.
One final thought. Mr. Knox, I'm curious as to why you've posted some 80 times within the past 3 weeks on a site dedicated to creative REI, something that you so obviously disagree with.
Roger
Quote:
How does investor make money?
Investor sells on a Contract for Deed or Lease-Purchase/Option on a 2yr deal. In 2 years the property should be worth about $106K (3% appreciation per year). So sells for $3K down, $800 month, balance due at term = $103K
Profit = Upfront $3K - $10 = $2,990; Thru term = $800 - 650 = $150 x 24 = $3.6K; backend = $103K - $90K = $13K
TOTAL PROFIT = approx $19.5K
Ok, so on the option, do you pre-anticipate the market value...? so that when you do sell it...you can be at or near FMV? Or is there an easy way to have a contract that says, you rent from me for two years at 800$ a month, and then buy it at FMV...
I am a newbie when it comes to some of the neat ways you can work it, its all just a matter of how you put it on paper i guess, Im just curious kind of contract or option you would use, and even on a lease? would you have to figure out what you wanted to sell it for in two years right up front??
and a side note...since you own the place for two years? are you profits tax defered??
Roger - I believe in creative RE investing. Creative is using your imagination to think of new angles. Am I missing something? It seems kinda uncreative to dogmatically connect the word creative to some particular approach. If by creative you mean highly leveraged - I dont have a problem with that. I dont have a problem with ideas expressed here. I do have a problem with leading beginners into transactions that theyh dnt fuly understand than can hurt them. example - the family in trouble with the attorney general who posted a few weeks ago. Regarding my friend - he still believes he didnt break the law - go figure. He thinks he was being used to send a message - know what - he got hurt pretty bad.
Strange - I posted a reply that does not show up. Im not against creative anything. Im not against high leverage transactions. Buy a house with $1 down - its ok with me. I do have a problem with leading inexperienced people into situations where they can get hurt, or taking their money by luring them with Get Rich Quick Schemes. Regarding my friend - he still believes he did not break the law and that he was used to send a message and by prosecutors whose bosses needed to see someone pay. I suspect he did plea bargain rather than face very stiff charges - but in fact I really dont know the details.
peppy_steve,
i believe there are many ways to do lease options. i've seen some on this and other sites talk about option price at FMV, and i've seen others talk about at FMV plus an agreed upon yearly % increase in FMV. in either case, if both parties agree, this agreement can be changed at any time. an option is a unilateral agreement in that the tenant/buyer has the option to not purchase, while you have the contractual obligation to sell the property at the agreed upon price. i would recommend that you do some more reading on this. try the conti/finkel book "how to make big money in real estate: without tenants, banks, or rehab projects".
good luck!
allcash
Hey Dick,
I was wondering if you could post your freinds docket # or court info.
I would find it interesting to see what aspect of the deal sent him to prison, just so I don't make the same foolish mistake.
Court records are normally are not sealed especaily if the DA is sending a message.
I can not find a message in "I don't know the details" as you posted . I sure do not need to make any mistakes , more info would be a help.
Thanks David Browne
David - I would feel like I violated something personal if I did that - I doubt that when he told me he expected me to put his name and info on the internet. I can tell you the issue. It had to do with loan fraud and whether people who had bought property had accurately disclosed their finances. He was not the person who bought the property but he was a party to a number of transactions where the buyers had misrepresented their finances. The implication was that he had coached them to do this. Hope that helps. Didnt become an issue till years after the deals, at which time the market went south and the loans went bad. I believe the govt thretened very severe action and so he plea bargained and got 5 years.
Thank you Dick,
Now Ican rest at ease on that one. I never ask buyer credit questions, 7% down and then they are either OK with the payment or not.
I think the name of the game is disclosure,disclosure,disclosure, falsification is never an optoin.
Thanks David Browne
Gentlemen, gentlemen, Please,
Mr. Knox is of course correct in everything that he says, I mean he has the Fort to fall back on and I agree. But then you are all correct.
The only mortgage I have ever had called on Transfer of Title is a little old house I bought in England during the last large war. It had a 10 year due date mortgage on it and I bought. About six months latter I got this letter that resembled a similar letter from my tailor. I used to pay him once a year. So in comes this letter which suggest I might come up to London and visit with them. So I go. The bank is old and fuddy duddy , you know the way it gets when there is big old money around. He takes me into his office, insists I have a cup of tea. Then pulls out, I swear to god a hand made copy of my Deed. The penmanship was fantastic. All he wanted was to meet. So he could tie a face to the document. I stood up, spilled my tea and left. That was 1941.
In all my many strange and crazy transactions including the one where I named my cat as the new owner, damned feline died intestate. I have never been contacted reference a desire to Accelerate the due date on transfer of title. Yes it is there. There is also an old clause item 13 on the back of most Trust Deeds which talks about Substitution of Trustee and I have never been stopped from that yet.
So relax, Gentlemen, I have seen the market go up and down, it's the sideways motions that bother me. After all I did hold the mortgage on the Ark.
Cheers Lucius, fat,old,ugly,limping experienced, but still learning.....