"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"
   

Pitching "all" the "Don't Wanters"

My first attempts at getting sellers to accept my offers were painful, embarrassing efforts. I had a poor pitching arm at the beginning.

I had almost no idea how to present an offer in an elegant, efficient and effective manner. What's worse I failed to understand why it's important to have all of the decision makers present while the offer was being presented, discussed and negotiated.

Few things give a negotiator more of a sinking feeling then to make a smooth presentation, work through tough negotiations, get agreement from all parties, ask them to sign --- only to be told that "Uncle Henry has to review your offer before we sign." "Uh, huh. 'Uncle Henry', you say?"

After a few minutes plummeting into a verbal debate over whether Uncle Henry really has any real authority, blah, blah, blah, I walk out the door with only a polite verbal promise under my arm that, "After Uncle Henry let's us know, we'll let you know --- for sure!"

"Yeah right.", I say to myself, adding, "Next!"

Today I refuse to make a presentation to the sellers until "all the decision makers are present during the presentation".

I get objections anyway that include: "My wife doesn't need to be present, because I make all these types of decisions anyway so just give it to me." [Yeah, sure Bud, whatever. I'll bet she chooses your clothes, too!"] Or, "My husband's out of town on business, so I just relay the offer to him over the phone. [Nah, you've never heard of the word amortization before tonight. I can't imagine how you'll explain "intestate" to him.] Or "I'm the only one on title, so my wife/husband doesn't need to be there". [Really and you've making making all the family decisions for how many days?"]

These are just disqualifying objections as far as I'm concerned. If the seller won't cooperate, then I just move on. I only want to negotiate with desperate anxious sellers that will follow my lead, because they don't know about any viable alternatives. Not ones that believe they have other options and want to weigh ALL of them at my expense.

Of the very most important things that I needed to know about making "hard sell" offers [low-ball offers, sub2, etc.] was that ALL of the decision makers had to be present; husband, wife, and Uncle Henry, or I would wait --- or walk. Without all the decision makers present, the trail that led the negotiations to a closing disappears, and the absent parties can never clearly translate how those negotiations progressed, or how each conclusion was reached, or "why" all the targeted elements of the transaction were satisfactory.

All Uncle Henry hears is that somehow the investor is equity-stripping his nephew and wife, because Uncle Henry didn't get to help "work for the deal" and wasn't led through the "assumed close" --- and didn't hear that the nephew had tried to sell the property through an agent three times in a row, and finally wasn't educated by the "yellow pad" analysis that his relatives were now upside down on the deal in the first place with all the repairs, real estate fees, and closing costs included. So Uncle Henry's operating with blinders on, and meanwhile offering uninformed feedback on the quality of the transaction.

Here's a incomplete list of reasons why all the decision makers must be present for the presentation/negotiations:

• There is no "higher authority" the seller can appeal to. Seller's will say they need to consult someone else, when in fact, they want to shop our offers by going back to Mr. Investor #4 and see if he'll pay more than us.
• We have about 40 minutes to make our presentation, analyze the numbers and look over the house and get the offer approved. If we leave without an accepted offer, we leave without a deal, and the likelihood of ever getting a deal signed is nil --- all because the seller was given the opportunity to consult the phantom higher authority, but in actuality was shopping our offer.
• We need the decision makers to fish or cut bait, because we can't be strung along with too many pending offers at the same time. We make offers on what we can do today, not what we might be able to do a week from today. Things change. Money gets spent. Opportunities rarely present themselves twice. So we need to know now.
• If the seller's insist on the need to think, I offer to go outside on the (back) porch, until they've reached a decision. Of course they want me to leave them alone, but I don't. Meanwhile, I don't go to the front porch, as they may decide never to open the door! j/k! Somehow sellers get a tad "itchy and scratchy" when some guy's out sitting on a lawn chair in their back yard waiting for an answer. This hurries things along in our favor --- either by disqualifying the seller, or seeing them cave to our terms.
  
• If the sellers insist on thinking about my offer overnight, and I know there's no other offers, I might allow this with the caveat that the offer expires at "x" o'clock that evening. And put doubt in their minds about whether I can extend my offer at the current price and terms --- since things change daily in my business.
• I don't want my offers shopped

So correctly "pitching don't wanters" includes making sure you pitch all of them at the same time. Otherwise, it's like pitching with a missing arm! :)