Monday, October 25, 2010

"Sub2 ...No Down, My Black Eye...!"

I was alerted to this article written about three years ago that still circulates about Sub2 investing. The author attempts to show that Sub2 was a viable investing strategy (which it is), but then floods the article with the worst advice and misunderstandings ever. Me in Blue.


"Of all the real estate investing strategies available to investors today, probably my favorite is what is called sub2 or subject to. Buying subject 2 basically means that you as the investor agree to buy a sellers home subject to the underlying financing on the property. One of the things that makes buying this way so effective is many times you can purchase homes without any money of your own, or putting your credit on the line, in other words real estate investing with no money down. You then can turn around and find a buyer of your own that you’ll sell to on a lease-option agreement.
  • Subject to– real estate investing with no money down
Probably 99% of the time when a person agrees to sell their home subject to they are a number of months behind in their mortgage payments and are seriously close to losing their home to foreclosure."
Uh, no. It may be that 99% of those behind in their payments WISH they could sell their home Sub2. However, few Sub2 investor buy houses that are behind in payments unless they are actually bargains.

Well, way under-priced houses rarely get sold using Sub2 financing, unless they're wrecks. In fact, the best candidates for Sub2 deals then, are newer homes with little, or no, equity that need ZERO work ...and the owner needs out yesterday, for any number of reasons --- and the need for a SURE closing.

Meantime, once a loan defaults, the lender will be all over that loan with investigations and profiling.  Banks may not immediately schedule a foreclosure auction, simply because the loan's in default... but by gawd they'll schedule the auction if the house isn't being maintained, is vacant, has 'enough equity,' AND there's been a change in ownership.
Meantime again, just because we can get the deed to a property, doesn't mean we should.  

If the loan was somehow brought current, and the bank didn't call the loan, we would still have to capture enough equity to overcome the arrears/fees, and/or get enough money from a subsequent buyer to make a profit.

Well, lease/options don't command very big 'considerations.'  Especially on houses that aren't bargains.  Maybe you'll get 2% down from a tenant/buyer, and that's if the house needs nothing.  That is unlikely enough to cover the costs of reinstatement of the defaulted loan(s).

So burying our tenant/buyer's consideration in loan reinstatement costs, and we've got nothing for our efforts, except maybe a promise of future equity. For that we must wait forever ...meantime no spending money.
"So when it comes to those payments in the arrears, someone must take care of them, either you as the investor-buyer or someone else. What you will obviously do is leave that to your lease-option buyer."
Oh, yes, Lease Option buyers always have enough money for us to make a profit, AND enough bring the loan current. Please.
"They will do this by giving you a down payment or what is called option consideration. This amount should be high enough to cover the back payments and any fees or penalties..."
Yes, it sure better bloody be enough. Fat chance.
"They then will take over the payments already in place on the home and then at a certain point, for example in 12 to 18 months, apply for a new loan during which time you will be “cashed out” of your position..."
Yes, that happens just like that a parallel universe. What actually happens is the tenant/buyer bails, and we sell the house twice, and get another $30,000 down. Yippee. That's the only saving grace for a deal like she's describing.
"There are a myriad of real estate investing strategies, anyone when utilized the right way can prove to be very profitable. But of the many investment strategies buying sub2 is still my favorite. Simply put, buying subject to allows for real estate investing with no money down and you don’t have to go through lender qualifying."
It may mean no money down for the investor, but it also means NO PROFIT anytime soon for him either.
"So for those credit-challenged individuals, that last part makes this one of the most valuable investment strategies, in fact not just for those starting out looking to learn real estate investing but also for seasoned professionals."
Anyone learning real estate investing from this author is doomed to a horrifying crash and burn.  Sub2 is NOT for those with no cash, or a way to buy properties that are months behind in payments.

It's suited more for sellers with a current loan, and who may not have sufficient equity to pay an agent to market their property, but it's not a good answer for a defaulted loan situation.

P.S. I'm supposed to give credit to the author here, but for the sake of the author, I'll just leave that part out. I don't want to expose her ignorance.
If you would like to know how to actually make a LOT of money in Sub2 without getting a black eye ...without rehabs or making back payments ...but find the sellers who are happy to give you their deeds ...without questions below and watch this 22-minute Sub2 presentation I have for you...

How to create huge, passive cashflow without the a black eye.

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