Saturday, September 18, 2010

"Honey, I Found A Sub2 Sucker...!"

I've been offered some bizarre sub2 deals. One lady had several rentals to get rid of that she was ready to walk away from. I didn't know why she would walk away, but they were all over-financed by a large margin.

Sometimes, upside down deals can be worth "messing" with, if there's no time limit to refinance the loans, and the existing financing is stable. That is, the loans are not "neg ams" negative amortizations, interest only, or adjustable loans with high interest caps, and the like.

When the principal keeps going up, and the income doesn't...trouble happens. When the payment goes up and the value doesn't...trouble also happens. Anytime, the payment structure is unpredictable or likely to get out of control...trouble happens...for those that, without thinking things out, do these deals against all better judgment.

Well, when I found out what her payments were, I thought, "This was either the worst terms ever, or the best ones ever. She was $200,000 underwater (over-leveraged) with her loans, but her rents covered her payments.

Well, after talking with her I discovered the most amazing thing... And it wasn't what I expected...

She had pulled a quarter million out of these properties two years previous, then the market tanked, and finally she was left with a quarter million in the bank, and upside down by the same amount. Of course, I'm kidding... She didn't have squat in the bank...left. Like many amateur investors who accidentally "hit a jackpot" in real estate timing, she blew the money on...whatever...!

Okay, whats this have to do with "a Sub2 sucker deal"...?

Well, despite the common misconception, not every seller writes with crayons that gets themselves in a crack with real estate and is willing to do a Sub2 deal with us. Some sellers are quite sophisticated. Meantime, it's up to us to figure out which deals are worth a hoot, and which ones just make us "look" like we write with crayons in the aftermath of a deal gone terribly wrong.

That all said, let's take a look at a good deal and then compare with some bad ones...

Good deal...
  • Seller has one or two loans that total 90% loan-to-value, or less (or 10% equity remaining, or more).
  • Seller needs out of the payments/situation "yesterday"
  • Seller has "gone through" at least one failed escrow and perhaps two real estate agents.
  • Seller has a fully amortized, fixed rate, or reasonably-capped ARM loan, with no balloon payments coming due.
  • Seller needs to salvage/maintain/improve his credit.
  • Seller needs/wants to qualify to buy a cheaper/different home.
When the stars line up, we've got a good deal. Now, here's the anatomy of a "bad" deal from a "good" prospect.
  • Seller has one or two loans that total over 100% loan-to-value, or more (or no equity remaining).
  • Seller needs out of the payments/situation "yesterday" and can only short sale, default, or modify the financing .... and screw his credit...
  • Seller can't list his house conventionally, because he'll have to pay out of pocket for the closing and real estate costs..
  • Seller has a fully amortized ARM loan with higher interest payments, high cap on the interest and a balloon payment due (all of which will torpedo this deal).
  • Seller needs to salvage/maintain/improve his credit (He's screwed).
  • Seller needs/wants to qualify to buy a cheaper/different home ( His option used to be to, "buy and bail," until last year, when banks got wind of this tactic ). That is, the seller maintains his credit, buys another house, cheap, and then lets his old house "go back to the bank" (maybe the same one that made him the new loan...! heheheh.
To recap: Good deals:
  1. Motivated seller who writes with crayons (just kidding) and has burned through a couple agents and failed escrows.
  2. Low interest rate loans with no balloons or adjustments.
  3. At least 10% equity.
  4. Wants to buy another house immediately.
Bad deals:
  1. Motivates seller who writes with crayons (just kidding, again!)
  2. Teaser rates, high rates, negative amortizations, high interest caps, early payoff dates.
  3. No equity, or upside down.
  4. Dreams of buying another house sometime before the "rapture"


William Tingle said...

Good post Jay,

And I agree there are some sub2 suckers out there but there are also some sub2 DEALS out there as well. I am amazed at the number of people I meet who refuse to believe they exist anymore.

Keep after it,

William Tingle

Jay Palmquist said...

Thanks William...

You're so right about those who don't believe there's still deals! Hopefully more and more will quit while they're behind...and reduce my competition! hehehe

I think the ones who doubt that opportunities exist don't understand that opportunities are created, as much, or more, than than they are found...

I will keep after it!!! :D