"Subject To" Real Estate Investing is Slimy. Prove me Wrong.

157 Replies

"Subject To" Real Estate Investing is as Slimy as it gets. There are ZERO situations where it makes any sense for a seller to sell their property in a "Subject To" deal. The only times these deals happen is when some slick talker straight out of a guru seminar convinces an uneducated seller to get rid of their only asset "The House", while sticking them with the liability "The Mortgage".

Prove me wrong. 

Originally posted by @James Wise:

"Subject To" Real Estate Investing is as Slimy as it gets. There are ZERO situations where it makes any sense for a seller to sell their property in a "Subject To" deal. The only times these deals happen is when some slick talker straight out of a guru seminar convinces an uneducated seller to get rid of their only asset "The House", while sticking them with the liability "The Mortgage".

Prove me wrong. 

Nothing.........? Figured this would have created a much more lively debate.

 

@James Wise - Here was a situation I used it.

I approached a couple that was 20 days away from the sheriff sale. They were 28k in arrears to the mortgage company. They also needed around 28k in repairs on the home. The wife was fighting to get disability approved and needed more time before they moved out. I brought the mortgage current and bought the home subject to. I gave her an extra 90 days to stay which was honestly stupid on my part but hey she was disabled.

It benefited me because I didn’t have to use hard money for the balance of the principal and now I had a 3.75% interest rate to flip a home. It benefited the seller because they got to stay longer, avoided foreclosure, and it helped their credit because of on time payments.

So I buy real estate subject to also and will provide you my most recent deal.

The seller bought the property in the 70's and recently let her son live in it. He is drug dealing out of the property and she wants him to go to rehab. So the property is probably worth $35k. 

debts owed:

$5,000 mortgage

$10,000 to the city

rather than us going the conventional route we bought the property within 7 days. Paid her $5000 and paid her mortgage off. This remediated Andy personal liability to her. For us we have a property with a squatter in it and got it at a discount

Originally posted by @Jared Forman :

So I buy real estate subject to also and will provide you my most recent deal.

The seller bought the property in the 70's and recently let her son live in it. He is drug dealing out of the property and she wants him to go to rehab. So the property is probably worth $35k. 

debts owed:

$5,000 mortgage

$10,000 to the city

rather than us going the conventional route we bought the property within 7 days. Paid her $5000 and paid her mortgage off. This remediated Andy personal liability to her. For us we have a property with a squatter in it and got it at a discount

You didn't buy the house "subject to" you paid off her mortgage. 

Originally posted by @Michael Thompson :

@James Wise - Here was a situation I used it.

I approached a couple that was 20 days away from the sheriff sale. They were 28k in arrears to the mortgage company. They also needed around 28k in repairs on the home. The wife was fighting to get disability approved and needed more time before they moved out. I brought the mortgage current and bought the home subject to. I gave her an extra 90 days to stay which was honestly stupid on my part but hey she was disabled.

It benefited me because I didn’t have to use hard money for the balance of the principal and now I had a 3.75% interest rate to flip a home. It benefited the seller because they got to stay longer, avoided foreclosure, and it helped their credit because of on time payments.

it does work well in foreclosure rescue i did a few hundred of them in Oregon and Washington like this.. But then both those states passed laws on foreclosure rescue that took all the motivation for an investor away so we stopped doing them.  And it really depends on the buyer.

I totally agree with Jim someone who is new limited capital etc.. this is about the worst thing a seller could do..

the idea of keeping a seller on the mortgage for years and years while you own the rental only benefits the buyer and is hugely risky to seller.

for short term rescue flips with well capitalized companies that have the ability to stroke a check if needed to pay the underlying off.. these reduce risks.

but hey that does not sell HOW TO BUY SUB TOO class's  right  its all about us the investor  LOL

 

Originally posted by @James Wise :
Originally posted by @Jared Forman:

So I buy real estate subject to also and will provide you my most recent deal.

The seller bought the property in the 70's and recently let her son live in it. He is drug dealing out of the property and she wants him to go to rehab. So the property is probably worth $35k. 

debts owed:

$5,000 mortgage

$10,000 to the city

rather than us going the conventional route we bought the property within 7 days. Paid her $5000 and paid her mortgage off. This remediated Andy personal liability to her. For us we have a property with a squatter in it and got it at a discount

You didn't buy the house "subject to" you paid off her mortgage.

I think we needed to define subject to: we still left debt against the property just not the city debt.

Subject to is attractive to myself since it allows me to buy the property then negotiate the debts. I do not ever want to pay market in debt

Scenario #1:  Recent widow/divorcee is now faced with making a mortgage, that he/she cannot afford. The payoff is 150K, however the home is in  need of many repairs/upgrades, thus the best offer that was received was 120K. He/she of course does not have the 30K in cash to pay off the note, and the bank is certainly not going to show them compassion. The only viable solution is to sub 2 this property to an experienced investor, that knows how to make this work. This saves the party from a foreclosure, which would be catastrophic to their credit, thus making a bad situation, worse. 

Scenario #2:  A family facing a foreclosure in a few short months, has the decision to sell their property sub 2, to save their credit, or destroy their credit by allowing the foreclosure to proceed. Late payments on credit are more forgivable and usually only take a few months of on-time payments to reverse, however a foreclosure is the atomic bomb of credit disasters. At best, it will take 7-10 years to reverse it's effect. 

As far as being slimy or not, let's be honest. The exact same thing can be said of landlords, those that this applies, are referred to as slum lords. 

Originally posted by @Jared Forman :
Originally posted by @James Wise:
Originally posted by @Jared Forman:

So I buy real estate subject to also and will provide you my most recent deal.

The seller bought the property in the 70's and recently let her son live in it. He is drug dealing out of the property and she wants him to go to rehab. So the property is probably worth $35k. 

debts owed:

$5,000 mortgage

$10,000 to the city

rather than us going the conventional route we bought the property within 7 days. Paid her $5000 and paid her mortgage off. This remediated Andy personal liability to her. For us we have a property with a squatter in it and got it at a discount

You didn't buy the house "subject to" you paid off her mortgage.

I think we needed to define subject to: we still left debt against the property just not the city debt.

Subject to is attractive to myself since it allows me to buy the property then negotiate the debts. I do not ever want to pay market in debt

Sub too in this context is a mortgage still in the sellers name.. Not code violations for ad valorum tax's etc.

 

Originally posted by @John K. :

Scenario #1:  Recent widow/divorcee is now faced with making a mortgage, that he/she cannot afford. The payoff is 150K, however the home is in  need of many repairs/upgrades, thus the best offer that was received was 120K. He/she of course does not have the 30K in cash to pay off the note, and the bank is certainly not going to show them compassion. The only viable solution is to sub 2 this property to an experienced investor, that knows how to make this work. This saves the party from a foreclosure, which would be catastrophic to their credit, thus making a bad situation, worse. 

Scenario #2:  A family facing a foreclosure in a few short months, has the decision to sell their property sub 2, to save their credit, or destroy their credit by allowing the foreclosure to proceed. Late payments on credit are more forgivable and usually only take a few months of on-time payments to reverse, however a foreclosure is the atomic bomb of credit disasters. At best, it will take 7-10 years to reverse it's effect. 

As far as being slimy or not, let's be honest. The exact same thing can be said of landlords, those that this applies, are referred to as slum lords. 

buying sub too without significant equity is a fools errand.. seen investors try it and its a cluster. 

foreclosure rescue I understand.. but their credit is shot if its a week from going to the steps.  that is one reason.. but the main reason in the few hundred deals i did was to not have to move right away and or keep kids in their same school etc.. or embarrassment .. Credit was far down the list of motivations.

@Jay Hinrichs

I have no doubt that there have been many investors that have failed at the low equity game, but I know several, that are killing it. Those that know how to do it, including myself, make substantially larger returns, than most rentals.  

I would be willing to bet that the number of failed LE investors, pale in comparison to the number of failed rental portfolio's. I don't track those numbers, but I wholesale/buy a lot of properties from rental portfolios, that are failing. 

Originally posted by @John K. :

Scenario #1:  Recent widow/divorcee is now faced with making a mortgage, that he/she cannot afford. The payoff is 150K, however the home is in  need of many repairs/upgrades, thus the best offer that was received was 120K. He/she of course does not have the 30K in cash to pay off the note, and the bank is certainly not going to show them compassion. The only viable solution is to sub 2 this property to an experienced investor, that knows how to make this work. This saves the party from a foreclosure, which would be catastrophic to their credit, thus making a bad situation, worse. 

Scenario #2:  A family facing a foreclosure in a few short months, has the decision to sell their property sub 2, to save their credit, or destroy their credit by allowing the foreclosure to proceed. Late payments on credit are more forgivable and usually only take a few months of on-time payments to reverse, however a foreclosure is the atomic bomb of credit disasters. At best, it will take 7-10 years to reverse it's effect. 

As far as being slimy or not, let's be honest. The exact same thing can be said of landlords, those that this applies, are referred to as slum lords. 

 In regards to your 1st scenario please elaborate on how you think an experienced investor would go in and do the deal and make it work.

As for your 2nd scenario the seller "saving their credit" is total fool's gold. In reality the seller has ZERO control over saving their credit. The seller has no control over whether or not the "Subject To" buyer continues to pay the mortgage or not and they've given up their ability to do anything about it if the "Subject To" buyer flakes as they no longer own the home.

@James Wise

The 2 strategies that I use against LE deals, are as follows:

1. My system alerts me to any property, that I identify as being in the GO ZONE. This is what I refer to as a neighborhood that has an historical record of consistently strong appreciation, over a period of time. For me, it's 10 years. Let's say that number is 8%, per year. In a little over 12 years, I would be looking at doubling my money. Even if I wanted to capitalize it in 10 years, I would still be doing very well. Since landlords are more concerned with cash flow, they wouldn't be looking at LE deals, thus never see this opportunity. 

2. The most lucrative strategy, is to wrap this into an OF deal. My deals are 9.5% interest, if I secure a sub 2 at 4-6%, I'm doing pretty well. The beauty of this strategy, i have ZERO expenses, and my cash flow is considerably more than $100-200 per month.

As far as the DOS clause, I don't lose any sleep over it. I know banks are known for doing some pretty dumb things, but if they are foolish enough to call a performing 4-6% note due, only to risk having to resell it at 3%, there is not much that can be said about that.

Yes, there are those people that think they make more money by taking advantage of a sub 2 and letting it foreclose, they make a few grand. However, those that do this to actually make real money, actually do help the seller. Our payments are always on time and it's the seller's credit that gets the benefit. 

Originally posted by @John K. :

@Jay Hinrichs

I have no doubt that there have been many investors that have failed at the low equity game, but I know several, that are killing it. Those that know how to do it, including myself, make substantially larger returns, than most rentals.  

I would be willing to bet that the number of failed LE investors, pale in comparison to the number of failed rental portfolio's. I don't track those numbers, but I wholesale/buy a lot of properties from rental portfolios, that are failing. 

NOOOO  cant be true land lords failing  no way..  its passive income everyone knows that.

 

@James Wise

I understand why the discussion comes into play but when the term slimy is used regarding strategies like this or wholesaling it still baffles me that people are judged when using creative strategies when most investors talk about buying properties off market for .60 on the dollar I don’t see how this is worse.

There are always bad actors in any arena of business but labeling the strategy with this kind of taboo seems silly. As long as the buyer fulfills their end of the contract, what does it matter?

Motivation is motivation - and if someone is open to an offer that gets them what they want (out of a problem property) why is this an issue?

Originally posted by @Cody Z. :

@James Wise

I understand why the discussion comes into play but when the term slimy is used regarding strategies like this or wholesaling it still baffles me that people are judged when using creative strategies when most investors talk about buying properties off market for .60 on the dollar I don’t see how this is worse.

There are always bad actors in any arena of business but labeling the strategy with this kind of taboo seems silly. As long as the buyer fulfills their end of the contract, what does it matter?

Motivation is motivation - and if someone is open to an offer that gets them what they want (out of a problem property) why is this an issue?

From my view point as someone who has done a lot of it and seen a lot of it over the years.. Its not that its slimmy.. its that is RISKY in a huge way to a seller who simply may not understand the repercusions if their sub too buyer defaults.  Thats the issue.. and of course as you state we are all out there trying to score real estate deals.. so most folks that would sit down with a civilian seller IE not sophisticated in the least are not going to point out all the RISK factors for them. they are just going to talk about the blue sky this is great for them factors.

Where these create trouble is

1. under capitalized investor thinking hey i can get into a proeprty with little down and no credit. Well what happens when this investor puts a tenant in there that stops paying.. and now they have to pay the mortgage and of course they never thought that far ahead and they simply dont have the means.. boom the original sellers mortgage goes into default. .and they could have had perfect credit and they are sunk.

2. Original seller stills has mortgage on their fico and cant get another loan becasue of it.. No one told them that part.

3. Nefarious folks do this in a predatory manner and really screw people get into title dont pay on the underlying and just rip the rents..

for quick turn around rescue resell retire the mortgage i get that..  but to couch this as some benefit to most sellers just BS. 

 

Originally posted by @Jay Hinrichs :
Originally posted by @Cody Z.:

@James Wise

I understand why the discussion comes into play but when the term slimy is used regarding strategies like this or wholesaling it still baffles me that people are judged when using creative strategies when most investors talk about buying properties off market for .60 on the dollar I don’t see how this is worse.

There are always bad actors in any arena of business but labeling the strategy with this kind of taboo seems silly. As long as the buyer fulfills their end of the contract, what does it matter?

Motivation is motivation - and if someone is open to an offer that gets them what they want (out of a problem property) why is this an issue?

From my view point as someone who has done a lot of it and seen a lot of it over the years.. Its not that its slimmy.. its that is RISKY in a huge way to a seller who simply may not understand the repercusions if their sub too buyer defaults.  Thats the issue.. and of course as you state we are all out there trying to score real estate deals.. so most folks that would sit down with a civilian seller IE not sophisticated in the least are not going to point out all the RISK factors for them. they are just going to talk about the blue sky this is great for them factors.

Where these create trouble is

1. under capitalized investor thinking hey i can get into a proeprty with little down and no credit. Well what happens when this investor puts a tenant in there that stops paying.. and now they have to pay the mortgage and of course they never thought that far ahead and they simply dont have the means.. boom the original sellers mortgage goes into default. .and they could have had perfect credit and they are sunk.

2. Original seller stills has mortgage on their fico and cant get another loan becasue of it.. No one told them that part.

3. Nefarious folks do this in a predatory manner and really screw people get into title dont pay on the underlying and just rip the rents..

for quick turn around rescue resell retire the mortgage i get that..  but to couch this as some benefit to most sellers just BS. 

There are "those" people in every strategy known in real estate. It's impossible to get away from. Thieves will be thieves. 

As far as your 2nd point. The likelihood they would qualify for a new loan, after having late payments on a mortgage, is pretty slim. Even if they did, they are not going to have the 20% or more down, to even think of buying a new home. If they had that much cash, the would not be in this situation. But yes, they should be informed that it's not likely they would get a 2nd mortgage, regardless. 

 

 

@John K.   keep in mind not all of these are done with sellers that have bad credit are are in default it depends on where we are at in the cycle..   

Originally posted by @Cody Z. :

@James Wise

I understand why the discussion comes into play but when the term slimy is used regarding strategies like this or wholesaling it still baffles me that people are judged when using creative strategies when most investors talk about buying properties off market for .60 on the dollar I don’t see how this is worse.

There are always bad actors in any arena of business but labeling the strategy with this kind of taboo seems silly. As long as the buyer fulfills their end of the contract, what does it matter?

Motivation is motivation - and if someone is open to an offer that gets them what they want (out of a problem property) why is this an issue?

Reason this strategy is so slimy is it removes all recourse from the seller in the event the buyer doesn't fulfill their end of the contract. No reasonably educated seller would do that. The strategy requires investors to target unsophisticated property owners to pull it off. In other transactions there is recourse if one party doesn't fulfill their end of the contract.

  • In an owner financed deal the seller can foreclose if the buyer stops paying.
  • In a landlord tenant situation the landlord can evict if the tenant stops paying.

In a "Subject To" situation the investor has removed all recourse from the seller. They took their only asset "house" and stuck them with a huge liability "mortgage". Honestly I don't see how this isn't illegal. Hell it may be. I'd imagine it toes a fine line near mortgage fraud.

 

Originally posted by @Michael Thompson :

@James Wise - Here was a situation I used it.

I approached a couple that was 20 days away from the sheriff sale. They were 28k in arrears to the mortgage company. They also needed around 28k in repairs on the home. The wife was fighting to get disability approved and needed more time before they moved out. I brought the mortgage current and bought the home subject to. I gave her an extra 90 days to stay which was honestly stupid on my part but hey she was disabled.

It benefited me because I didn’t have to use hard money for the balance of the principal and now I had a 3.75% interest rate to flip a home. It benefited the seller because they got to stay longer, avoided foreclosure, and it helped their credit because of on time payments.

I have helped homeowners the same way. 

@James Wise perhaps having the right servicing company and prepaying a year is the key.

Both parties need to know what they are getting into, and sign all agreements recorded at the county while consulting an attorney.  

Imagine the mortgage prepaid for a year, or even 6 months, and automatic mortgage statements sent to all parties for transparency. 

In fact, catching up the mortgage, and taking on the payment, allowing them to pay off other debts, will help their credit...AND...

Since it's hard for them to buy another home because of their DTI ratio...you have a new LO or Seller Finance buyer client!

That's how to turn two problems into money making making solutions where everyone is happy! 

There you go James...proved you wrong :)

 

@John K. @Cody Z.

OK let me give you guys a real life example of how this can spin out of control.

Guru came through Portland OR. pitching this  sub too Wrap or Sub too lease option.. this group ran out and paid market basically for houses. we were in a buyers market at the time.. they target LE deals so thousand down take over 2k down take over.. they got it done.. did about 40 of them.. then would sell on either lease option or wrap  same thing 2k down or so. and now they were making the delta of say 200 to 300 a month.. great in theory right..  Well right up to the point that their buyers started to default at first it was OK.. one default they could still make the mortgage and take the time to foreclose the new buyer out.. In our state lease options properly done need to be foreclosed. But even without that a eviction even if your RIGHT on top of it is 60 days and then you have to clean it up and release it or re sell it so say 4 months of negative cash flow.. Plus of course the 8k a month or so they were bringing in starting they were using those funds to pay overhead marketing their own rent etc.

So what happened by the time they came to me for help.. they had about 10 or 12 of these had gone turtle on them they did not have the money to pay everyone's first.. so they started defaulting.. and those folks that had the mortgages got VERY HOT VERY quick when they are getting default notices and have their credit trashed..

So I come in and slice and dice i think I saved maybe 15 of them  by taking them over and rectifying the situation .. And then worked hard to help them with sellers that were filing complaints at the AG's office.. etc.. they made it through but they got hammered..

there were others in our market that did the same thing and one even got jail time.

So its just a lot of risk if you are not properly capitalized..  Plus especially in Texas were they can get a default judgment on a owner occ loan.. doubly risky for the seller.

Originally posted by @Jay Hinrichs :

@John K.@Cody Z.

OK let me give you guys a real life example of how this can spin out of control.

Guru came through Portland OR. pitching this  sub too Wrap or Sub too lease option.. this group ran out and paid market basically for houses. we were in a buyers market at the time.. they target LE deals so thousand down take over 2k down take over.. they got it done.. did about 40 of them.. then would sell on either lease option or wrap  same thing 2k down or so. and now they were making the delta of say 200 to 300 a month.. great in theory right..  Well right up to the point that their buyers started to default at first it was OK.. one default they could still make the mortgage and take the time to foreclose the new buyer out.. In our state lease options properly done need to be foreclosed. But even without that a eviction even if your RIGHT on top of it is 60 days and then you have to clean it up and release it or re sell it so say 4 months of negative cash flow.. Plus of course the 8k a month or so they were bringing in starting they were using those funds to pay overhead marketing their own rent etc.

So what happened by the time they came to me for help.. they had about 10 or 12 of these had gone turtle on them they did not have the money to pay everyone's first.. so they started defaulting.. and those folks that had the mortgages got VERY HOT VERY quick when they are getting default notices and have their credit trashed..

So I come in and slice and dice i think I saved maybe 15 of them  by taking them over and rectifying the situation .. And then worked hard to help them with sellers that were filing complaints at the AG's office.. etc.. they made it through but they got hammered..

there were others in our market that did the same thing and one even got jail time.

So its just a lot of risk if you are not properly capitalized..  Plus especially in Texas were they can get a default judgment on a owner occ loan.. doubly risky for the seller.

I hear you. There are always those stories, in any strategy. 

My opinion, it failed because they treated OF and L20, as rentals. Getting only 2k down, after putting 2k down, is foolish. These are buyers, not renters. I accept no less than 8% down, period. I always collect more than I put down, so if it does go bad and I have to foreclose, I am using their money to do it. The mindset is completely different with my buyer, then that of a renter. My buyer has considerably more money at stake, not just first and last months rent. Let's be honest, that strategy offers very little security to anyone. I always say that collecting security deposits, just reduces your losses by that amount, when it does go bad. 

If the motivation is wrong, or if you are under funded (sub 2, especially) or you look at REI with rose colored glasses, bad things are going to happen.

 

Originally posted by @James Wise :

Reason this strategy is so slimy is it removes all recourse from the seller in the event the buyer doesn't fulfill their end of the contract. No reasonably educated seller would do that. The strategy requires investors to target unsophisticated property owners to pull it off. In other transactions there is recourse if one party doesn't fulfill their end of the contract.

  • In an owner financed deal the seller can foreclose if the buyer stops paying.
  • In a landlord tenant situation the landlord can evict if the tenant stops paying.

In a "Subject To" situation the investor has removed all recourse from the seller. They took their only asset "house" and stuck them with a huge liability "mortgage". Honestly I don't see how this isn't illegal. Hell it may be. I'd imagine it toes a fine line near mortgage fraud.

 

I think the big thing that you are missing is that there IS recourse in a sub2 deal.  A properly executed deal will have something like a Deed of Trust to Secure Performance, which allows the seller to foreclose on the sub2 buyer if the sub2 buyer fails to make the mortgage payments as he promised. 

You also mentioned that it is risky for the seller since saving their credit if they are in foreclosure isn't guaranteed.  For an action to be risky, there must first be something of value that could be lost.  In this case, their credit score is that something of value, however their credit score is already forfeit during the foreclosure process so their score is already toast unless they find a solution.  If a sub2 deal is the best (or only) offer that they have received, then it is not putting their credit at risk since their credit would have been ruined regardless.  The only two outcomes are the new buyer defaults in which case you are back to square one with your ruined credit, or the buyer does as he says and the sellers credit is saved and actually improves as these payments are continually reported to the credit bureaus.  So the seller is either back in the same situation he was previously in, or his situation improves.  

I am in the military, and my current focus is buying sub2 deals from other military members. Military people tend to move every 1-3 years and fairly often use 100% VA loan financing and wrap their closing costs into the deal. For these people it's not uncommon for them to not have built enough equity to cover the closing costs associated with selling a home so they are either stuck being unwanted long distance landlords, or they sell their home at a loss, or possibly break even. I offer them another option, one in which they are able to sell the home and still make a few grand.

One of the nice things about being a 14yr military member is that I have 6 more years until formal retirement. This means that for the next 6yrs, if for whatever reason I would try to default on my obligations, the seller would simply call my First Sergeant, and they would put my military paychecks on an involuntary allotment. If after my 6 yrs and I am no longer in the military, if I default at that point the seller simply forecloses on me, and does a little happy dance as they reclaim a property that has had 6yrs of mortgage paydown and 6 yrs of appreciation. If the home was bought using a VA loan, I have it written into my contract that IF ASKED, I will refinance out of their loan within 6 months of being formally notified in writing, so long as a minimum period of 3 years has lapsed since I bought the property. This allows them some leeway should they ever want to use their full VA loan entitlements again.

A typical scenario might be they bought a home for 200k, and with closing costs the loan was for 205k at 3.25% interest. Two years later they need to sell because they are moving and the home is now worth 210, and they now owe 201k on the loan. Assuming 6% agent fees, the seller will only make about 197.5k minus the other closing costs, which already puts them in the negative by 3-4 thousand bucks not counting the other closing costs. In this scenario I may offer them 2k cash, and take over their payments at 201k. The seller walks with a few grand, and I get control of a house for 2k with ridiculously low interest rates, as opposed to a traditional 25% down payment plus origination fees on a 210k home totaling 52k down payment with 5k loan origination, carrying 157k mortgage at 4.75% interest on a rental property. While buying the home sub2 means buying the property at a very high LTV which in many instances causes it to be considered a risky venture for me as the buyer, the reality is that the monthly mortgage payment is only about 50 bucks higher doing it this way than if I had payed a massive 25% down payment because the interest rates are so fantastic on VA loans. I keep my properties and don't wrap them so I don't have to worry about the next buyer in the chain defaulting. I keep more than enough reserves in liquid funds to cover any downturn.

As with anything in real estate, sub2 deals can be slimy.  But that is a function of the buyer, and not the process.  A slimy person can turn a traditional purchase sour by offering a decent price with low or no earnest money, and then countering with a ridiculously low offer after the inspection report.  Because of the amount of time that has already lapsed in the process, the seller may be desperate to now sell as they have likely found a new home to buy and that sale is contingent on the sale of their existing home which they thought they had a solid offer on.  Now they are forced to potentially back out of both sales, or take a significantly reduced price.  

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