"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.

QUOTE:

"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 ...in 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 ...click below and watch this 22-minute Sub2 presentation I have for you...

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

"One Sub2 Ringy Dingy, Two Sub2 Ringy Dingy"

"Is this the party to whom I am speaking...?"

Unfiltered calls are the pits!

Last month I abandoned all heretofore protocols of mine and posted an unfiltered craigslist ad.

Why? I had a friend who had a friend who needed out of her small house yesterday. Frankly, I don't like doing low-end deals, especially, if I can't get the deed, and it's going to be lease/option deal --- and especially when the house isn't that nice.

That's nearly 3 strikes. The third strike would be trying to cover an adjustable loan, on an underwater house. Forget that.

However, my friend's friend needed help so I thought, "Well, if I owned an upside down rental, and needed a way to protect my credit, and I didn't know any way, and I found a guy like me to help me, he would be my hero." So I succumbed. I'm so desperate to be a hero.

I didn't have a buyer's list ready for either a lease/option house, or one this cheap. So I had to scramble to get things together. So, I experimented with the generic craigslist "lease option" ad, based on some proven ad copy I developed from earlier times. However, I left most of the qualifying information out of the ad to get the largest response, in my attempt to remind myself why highly tailored ads are critical to maintain --- and used to avoid having to wade through a bunch of trash calls.

My experimental ad copy worked, but I left out another important ingredient. Meantime, I got exactly what I advertised for...a pile of unfiltered buyers with no money for down payments. Whoops!

The real point of this, is that certain shotgun ads work. However, when it does, we'll be on the phone forever with "Looky Lou's!" who aren't serious (or ready) to actually buy our houses if we don't first say what we must have... Otherwise, we just get the just curious, and the tire kickers, that waste our time.

So what was the missing ingredient here, besides not qualifying with the ad copy?

Why, it was not using voice mail to capture and qualify leads. If we're not using a 3rd party lead capture, then what? It means that we're gonna have to do the screening in person.

In years past I was the "Marvin Milquetoast" of phone interviewers. I all, too often, operated from my heels. I rarely felt in control, or confident about how to cut to the chase. That was then. Not no mo.

Now, I've got one question that I ask every buyer before we get down to business...to see IF we can get down to business, so that I'm not wasting my time personally helping the curious weigh their options at my expense. And what is that "one question?"

You can find it in my creative real estate investing course I call, "Screw The Bank!"

It's my "no credit - no down payment - no hassle" real estate investing system that allows me to find the most anxious buyers and sellers in this market who will let me pocket $30k in 90 days."

The Big Sub2 Stick...

It has occurred to me that too many creative investors really aren't that "creative" at all, in the usual sense.

Once, creative investors defined themselves by looking beyond the obvious (thus creative) to find profitable ways to make money in real estate that traditional (non-creative) investors might look passed.

Subsequently, the creative investor found ways to make even more money during the holding time, that the average investor wouldn't consider. Let's look at "seller financing" as an exit strategy. "Ugh!, says the traditional investor, whose only exit strategy is buy/hold/sell for cash.

Yes, seller financing is considered the red-headed step-child of exit strategies for traditional investors. Nobody wants to look at it, or claim it as their own, because to the traditional wholesaler, flipper, or merchandiser, this represents a failure to perform...

That is, the objective of the traditional investor/flipper is to buy for cash and immediately sell higher for cash. So having to finance a sale, is like saying, “Mommy, I did a boo-boo, please spank me...” Okay, maybe that’s just me... :)

The old way of flipping works fine until there's a hiccup in financing, appraisals, or inspections that make the property unsellable for the "right price". Then "Plan B" goes into play...or, "Plan C'... or, "Plan D'..., or Oh, crap, not the "Last Resort Plan?" Yes, seller financing. This exit strategy just represents a "muck up" if you will of the original plan to “get out fast for cash.”

For the Sub2 investor whom isn't bound to traditional liquidation methods, "seller financing" is "Plan A", not the “Oh, crap!” plan." Before I go further, one of the biggest sticking points about the “Oh, crap!” plan of seller financing is the risk of default by a buyer.

The average investor fears the "liar loan squat." That is, the buyer stops paying and won't move, and forces the investor to cover the payments on his own investment situation. This is what the amateurs sweat, twitch over, and dread and dread, as if it were a diagnosis of terminal cancer, or permanent head injury (just to make it vivid).

Yawn...this only happens to amateurs who don’t know how to limit risk with the “Big Stick.”

For the professional Sub2 flipper, “liar loan squatters” are some faint anecdotal thing that happens to others. At the same time, those who inform themselves on how to limit the risk using the “Big Stick” make consistent, huge money in less time than the average investor does.

Meantime, the profits on a Sub2 deal, that appear at face-value to hover between "average and 'don't do it'," are substantial. And of course, the profits can be unbelievable on Sub2 deals that hover between "dreamy and heavenly".

However, limiting risk, is only the beginning of the profits. The juicy profits are in these five words: “Down Payments. Rinse And Repeat.” That just means knowing how to find buyers with down payments, and when/if a default occurs, elegantly moving in another buyer who can "hopefully pay", but nonetheless has ANOTHER down payment. Yay, for repeat seller financing and multiple down payments...!

Frankly, I'm only talking about seller financing of marketable homes that "everybody" would like to own...not the 45-year old, stucco boxes with one-car garages, gravel roofs, and wall heaters (I've owned many of those). Who wants to buy one of those and put up a bunch of money...? Nobody. That's why the government invented low-income, no down, HUD loans, so buyers with no taste (j/k) can buy these unmarketable, ugly, obsolete hovels that nobody wants (after making sellers do all sorts of retrogrades to make them "habitable" and financeable).

So, what is the “Big Stick?” you might ask...? Hmmm?

You can find the "Big Stick" in my Sub2 investing course I call... ( Click Here )

"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"
   

3 Steps To Sub2 Success...!

I responded to an email last night that I think you should read...

A newbie investor wanted advice on how to get into real estate investing...

I receive requests like this every week and a half.

Frankly, I used to lap up the opportunities, until I realized that the ones wanting my help didn't really know what they wanted. I discovered that unless I had a very clear, precise idea of where they wanted to go, it was a case of the blind leading the blind. No thanks. What really frosted my cake, was that none would follow my advice anyway, since they really weren't committed to their blind journey in the first place.

So, I decided I was done with that. Now, when anyone wants help, I have them do a little exercise (not little) before I waste time. Here's what I said to my future "mentee" last evening...

"John [name changed],

Size yourself up...
Evaluate yourself honestly and frankly...and ask...

• What are my skills?
• What are my strengths?
• What are my weaknesses?
• What have I set out by “faith” to accomplish, that seemed impossible, but succeeded in doing despite the obstacles? That is, how determined have I been at following through to the end of a difficult achievement...?
  

1. What is my most important, pressing, must-have, goal?
2. What is my absolute deadline that it must be achieved?
3. What is the consequence of it not being achieved other than my life will come to an end, and/or I’ll be embarrassed to the point of committing suicide, because I’ve told everyone in the world what I was going to do, and by what date so it MUST happen, or else?

Frankly, if you can answer the last 3 questions, I would love to help you further. However, if you’re not really sure about these yet, then I’m going to be a poor source of help.
Don’t feel bad, if this isn’t a solid situation for you yet. I understand.

However, nobody does squat, really, without knowing the answers to those three questions first, including me. So I just gave you some very important feedback that will set you ahead of the pack.

Meanwhile, read everything you can on real estate, and above all control your thoughts. Remain positive and thankful for everything you have, and completely STOP focusing on failures, doubt, worry, self-doubt, or what others might think of your goals, dreams, deadlines, or accountability to them.

Finally, I highly suggest you get a copy of both of Tony Robbin’s books, "Unlimited Power” and “Awaken The Giant Within”, and finally “Get The Edge.” You might not be ready for these yet. You have to be in the mindset of changing the way you think.

It may take something fairly traumatic to “get you there”. Meanwhile, the books are a lot to absorb, but “Get the Edge” is not hard, and is fun to listen to. However, if there’s a problem or challenge in your life right now, Tony Robbins has enormously helpful things to offer, that have changed my thinking habits 180 degrees."

Now, I'm waiting to see if John examines himself well enough to be open and clarified in his thinking to absorb and appreciate anything else I have to offer. We'll see.