Southern California purchasing Subject to and selling with a wrap
Hemet, CA · Member since 2015 · 19 posts · 1 vote
Southern California purchasing Subject to and selling with a wrap
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Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
11yI used to run monthly and weekly real estate clubs here in SoCal. I've spoken at just about every other club in the state... At least the good ones. The most successful investors I know buy low and hold LONG term or get out quick and rip equity. A combination of both will get you very far. I have never met anyone in this state who said they are doing what you want to do successfully who also didn't have some educational opportunities for sale. It is too much work for not enough profit.
A friend of mine bought 10 houses a few months ago just from driving around writing down addresses and mailing letters to those property owners. That's 10 wholesale checks in one month versus being stuck in the middle of some toxic mess for who knows how many years.
Unless you are the party with the house you want to unload, I suggest looking for easier fish to fry. From my experience, and I've heard this exact question asked many times over the years, you think you have a deal because some burnt-out property owner is willing to give you the time of day. What he is really trying to do is have you replace him in the quicksand while you spin your wheels trying to figure out how to create a profit out of thin air. He wants to step on your head as he gets out. What you should be doing is looking for owners in the quicksand and offering to get them out by grabbing onto your magical equity stick. And that magical equity stick has the ability to cash them out of their mess and convert that equity into real money. It should also cost a premium to for them to grab it.
The key here though is that the property needs to actually have equity for them to even qualify to talk to you. Yes there are ways to make money even with houses that are upside down, but those "deals" are not worth chasing. It is only when I come across them while looking for something else that I might put one togetther. In other words, if I see a shiny quarter on the ground, I'll pick it up, but I'm much happier stepping over it to get to the wrinkled hundred dollar bill.
Never replace them in the quicksand.
43 Replies
- 11yBrandon TurnerPro MemberInvestor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes
Hey @James Clayton welcome to BiggerPockets! You've definitely come to the right place to learn more about investing. If you haven't yet, be sure to check out the The Ultimate Beginner's Guide to Real Estate Investing and The BiggerPockets Podcast. They are both great at learning the fundamentals.
Oh - and don't forget to set up your Keyword Alerts!
See you around the site!
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@James Clayton this model in my mind is an advanced scheme..
a lot can go wrong for the seller who many times does not realize what they have done until its too late.
And in the aggressive CA market no reason to sell without cashing out.. so I would suspect the homes you would get would be over-leveraged .. and then selling to someone on a wrap this person has no to little equity.. so the chance of a default and real harm to a seller are pretty great.
Now I know I am in the minority of those that think Sub too is not appropriate for most transactions.. IE most investors that are trying to do them have little resources so they look for the no to little money down then sell on wrap and make the delta. While in theory this is great but. the chances of default are high.. then you as the meat inside the wrap need to make payments to your seller while you prosecute the foreclosures. which with new laws you can't even start one for 120 days.. plus the 4 to 5 months to do that next thing you know your buyer sits in the house legally for 10 to 12 months while you make payments on the first..
So what happens is the one in the middle of the wrap finds themselves un able to financially meet their obligations and your seller is now placed into the position of going a year with no income and having to now make the payments lest their credit get trashed.
So If I was a seller or representing a seller who wanted to sell on contract and knowing that the buyer would then sell on a wrap I would want to see some very strong financial ability from the buyer.. other wise the risk is just too great for the seller .. I mean the seller could just rent his house or sell on contract to a user and skip selling to a middle man.
but of course many who do this will be like your typical wholesaler who may or may not let the seller know their true intentions.
I see seller finance to a wrap as a very advanced strategy for companies that have the wherewithal to handle the defaults and or payoff the underlying note if the lender gets wind and invokes the alienation clause.
So there are some other things to think about as you embark on this.
- Hemet, CA · Member since 2015 · 19 posts · 1 vote11y
@Jay Hinrichs Thank you for your reply and I agree with you. It is an advanced strategy. All of the potential risk you mentioned is real and should be considered.
I am looking to get into contact with someone in Southern California who already does it.
So maybe a better question is, what is the best way on bigger pockets to locate a local niche specific expert? I was assuming posting in the forum would notify them via keyword alerts.
- Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes11y
@James Clayton I think you just found an expert on it, and he's telling you basically Not to do it, unless you're willing to carry it through a default by your buyer, and have the funds to handle a Due On Sale situation since you'll be doing not one, but two, title transfers.
Otherwise, you're essentially walking into a double sided deal where, with the seller you're saying "I'm going to screw you if my unknown buyer screws me" and to the buyer "I'm going to screw you if the bank discovers what I did, and calls the loan".
- Hemet, CA · Member since 2015 · 19 posts · 1 vote11y
@Wayne Brooks Thank you for your reply, but please, if you are going to reply can you answer my two very specific questions that I asked. If not, then don't assume what I'm asking.
- Hemet, CA · Member since 2015 · 19 posts · 1 vote11y
to avoid confusion I want to restate my question.
Is there anyone who does or knows someone who currently does or has done a subject to purchase and then sold with a wrap IN MY AREA (Southern California)?
I am NOT asking how to do it and I am not asking for advice on this strategy either. I am not an expert and I don't claim to be. I just have a very specific purpose for this forum thread so if we could keep it on subject that would be great!
- Wholesaler · Las Vegas, NV · Member since 2014 · 47 posts · 22 votes11y
Hi @James Clayton I'm a wholesaler in Las Vegas Nevada and I have done a number of Wholesale deals successfully. I agree with @Jay Hinrichs on this one. There are a lot of problems that can arise when doing this type of deal and ultimately you have an obligation to structure a good deal for the seller and the buyer. If you don't trust me you will not last long in this industry.
The type of deal that your looking to do can be done but there are a lot of factors that have to be looked at and a lot of precautions that have to be considered. Most experienced wholesalers my self included shy away from putting together deals like that. One reason is there are a lot of factors that can go wrong and I make the same if not more money on easier deals that cost me less time.
On the bright side I do happen to know someone that does those types of deals. He has been in Real Estate for over 30 years and is experienced in these types of deals, but if you haven't done any type of specialty structured deal, he may not work with you. Let me tell you first hand these types of deals take a lot of prep work , planing and sorting because not every property is a deal that fits, but he does it in such a way that the seller is protected and this will involve you having some capital ready just in case its needed to put in.
Most doctors take 10 years of schooling to learn their trade and niche I say most because, some go for longer. The average Attorney is in school for a minimum of 8 years before they have their J.D and even then it takes them time before they start making money. I'm saying this because I would like to advise you that it takes a lot of prep work to learn this business and odds are your going to have to pay a lot of money for a short cut (which really won't be a short cut) or spend a lot of time researching and learning your craft.
Reach out to me and I will have some questions for your to see if I can put you in contact with him, but if this is your first ever deal and you haven't learned the basics of real estate investing or wholesaling and applied them already, this strategy is going to be a very difficult one for you to do and I would advise against it for someone who is just starting out.
Just my two cents and I wish you the Best of Luck
- Hemet, CA · Member since 2015 · 19 posts · 1 vote11y
@ Steven Thompson thanks for the reply I will be messaging you shortly!
- Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes11y
I'll never understand why someone says, "I want to do a deal and I want to do it this way."
It reminds me of a conversation I had with a homeless man in San Francisco down at Fisherman's Wharf. He was digging in trash so I bought a clam chowder bread bowl and brought it over to him. It was a typical SF cold and chilly day. I thought a nice hot bowl of clam chowder would be wonderful. I asked him if he wanted it. He looked at me and asked, "Is that white bread or wheat bread?" I dropped it in the trash and walked away.
Just think of all the delicious, hot cups of clam chowder you'll miss out on because you're only looking for the ones with bowls made out of wheat bread.
- Hemet, CA · Member since 2015 · 19 posts · 1 vote11y
@ Aaron Mazzrillo your comment is exactly why I'm asking people to please not post unless they can answer my question.
I'm sorry to be so rude but I'm serious about what I am doing and have come to a point where I now want to speak with someone local. Your input in this post only serves to drag it down because you are not offering value. All you have done is establish that you didn't read what I wrote and you wanted to jump on the band wagon of bashing newbies for asking questions. Don't mistake my lack of detail for a lack of knowledge.
I just want a simple answer to my specific question. So let me ask you, do you or do you know anyone that purchases properties subject to in Southern California?
- Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes11y
Originally posted by @James Clayton:
@ Aaron Mazzrillo your comment is exactly why I'm asking people to please not post unless they can answer my question.
I'm sorry to be so rude but I'm serious about what I am doing and have come to a point where I now want to speak with someone local. Your input in this post only serves to drag it down because you are not offering value. All you have done is establish that you didn't read what I wrote and you wanted to jump on the band wagon of bashing newbies for asking questions. Don't mistake my lack of detail for a lack of knowledge.
I just want a simple answer to my specific question. So let me ask you, do you or do you know anyone that purchases properties subject to in Southern California?
Yeah, I do. However, there is a disconnect between the title of your post and your actual post. In the title you are talking about buying sub2 and selling on a wrap. In your post, you leave out any information about the wrap part. As for dragging the post down, the post is incoherent so everyone who posted on here is doing our best to respond with some assemblage of information related to what we have to imagine you are attempting to do.
- Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes11y
Originally posted by @Jay Hinrichs:
@James Clayton this model in my mind is an advanced scheme..
a lot can go wrong for the seller who many times does not realize what they have done until its too late.
And in the aggressive CA market no reason to sell without cashing out.. so I would suspect the homes you would get would be over-leveraged .. and then selling to someone on a wrap this person has no to little equity.. so the chance of a default and real harm to a seller are pretty great.
Now I know I am in the minority of those that think Sub too is not appropriate for most transactions.. IE most investors that are trying to do them have little resources so they look for the no to little money down then sell on wrap and make the delta. While in theory this is great but. the chances of default are high.. then you as the meat inside the wrap need to make payments to your seller while you prosecute the foreclosures. which with new laws you can't even start one for 120 days.. plus the 4 to 5 months to do that next thing you know your buyer sits in the house legally for 10 to 12 months while you make payments on the first..
So what happens is the one in the middle of the wrap finds themselves un able to financially meet their obligations and your seller is now placed into the position of going a year with no income and having to now make the payments lest their credit get trashed.
So If I was a seller or representing a seller who wanted to sell on contract and knowing that the buyer would then sell on a wrap I would want to see some very strong financial ability from the buyer.. other wise the risk is just too great for the seller .. I mean the seller could just rent his house or sell on contract to a user and skip selling to a middle man.
but of course many who do this will be like your typical wholesaler who may or may not let the seller know their true intentions.
I see seller finance to a wrap as a very advanced strategy for companies that have the wherewithal to handle the defaults and or payoff the underlying note if the lender gets wind and invokes the alienation clause.
So there are some other things to think about as you embark on this.
Personally, I would never sell a house on a wrap in California. I buy sub2 and keep them. Once in a blue moon I'll wholesale a sub2 deal, but only to what I would call an accredited investor and by accredited, I mean that person has more money than me. I don't want that coming back to bite me.
As for selling on wraps, my last partner thought that would be a unique way to do business in California. He eventually lost all those houses to foreclosure, his house to foreclosure, was sued, filed BK, and his wife had to file BK as well. You want to do those kinds of deals, go to a state that doesn't have wild swings in value. Anything bought today has a great probability of being worth a lot less in 5 years. I actually paid $135K for a piece of crap, 90 year old 2 bedroom shack today that I fully expect to sell for $195K within the next few months. I can only wonder how much longer those prices are sustainable before all these buyers wake up and realize they've been had by the market again. Hopefully not until after I close escrow on the sale side and cash out!
So, I think Jay hit the nail square on the head when he wrote, "in the aggressive CA market no reason to sell without cashing out.. so I would suspect the homes you would get would be over-leveraged .. and then selling to someone on a wrap this person has no to little equity.. so the chance of a default and real harm to a seller are pretty great."
And that harm can very easily flow over to the investor putting together these horrible deals.
- Hemet, CA · Member since 2015 · 19 posts · 1 vote11y
@Aaron Mazzrillo Thanks for the reply I appreciate you taking the time. Forgive me for my "incoherent" post.
The Subject To is not an issue for you? Is that only in buy and hold situations or does it need over a specific percentage of equity for you to buy subject to?
Secondly, you feel that selling on a wrap is too risky because of fluctuations in the market value? Or is it because of the experience your partner had?
Also, I saw that you are based in Riverside, it seems that you feel the Inland Empire is due for another drop in prices soon. Are you getting out of your rentals?
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@James Clayton We were doing wraps in the 80's when the all inclusive deed of trust was created: as a way of protecting the buyer of the wrap.
And like Aaron I have seen many try to use this scheme of buying properties with little equity and selling to low down credit risk folks.. and make the delta maybe a few hunderd a month.. and the idea is you get a lot of them and you create cash flow Blah Blah Blah.
Well those are transactions that are ripe for failure and one can get in a mess of trouble with regulators if you have a bunch of them go bad on you and you have the sellers filing complaints against you, as they lose their homes or their credit.
I have done 100s of sub too's over the years not just a few but hundreds, however like Aaron and many others we kept them as rentals or then just sold them for profit down the line. its the resale on a wrap that gets very dicy.
In addition we were a mature company as we were doing this.. we could cut a check at any time to payoff a mortgage call ( rare but it does and has happened to me.)
For me personally I think this scheme needs to be regulated much more than it is.. Kind of like the new dodd frank rules.. IE are you qualified to take on a sub too.
So as long as you know the risks and you have the capital to cover yourself then its a viable scheme... if your just starting out in RE like it sounds like you are .. And listening to one of the many guru type pitches about how to acquire RE with little or no down and no credit etc etc.. then you need to know the other side of the coin as well.
@Aaron Mazzrillo San Fran homeless are a special breed.. In my day.. I used to pick up homeless at the Oznan center So of Market.. pay them 25 bucks to hand out my door hangers ( pre yellow letter days and much cheaper and more effective).. Any way one of my potential day laborers.. wants to read the door hanger first to make sure it aligns with his personal beliefs.. LOL I said next man in line.. I ran into a lot of crazy dudes in those days.. Had not thought about it in years this was late 70's .... Hell my van was a VW bus !!
- Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes11y
I train in subject to existing financing in California
You need excellent training and a good coach to do them well, and a really awesome contract attorney
and as @Jay Hinrichs and
@Aaron Mazzrillo who are unbelievably experienced you do need reserves and some experienced
Pm me
I have bought handfull of sub2 deals in San Bernardino/Riverside counties. I have never sold them on a wrap and agree with the logic of the others in this thread.
Getting a sub2 deal to the finish line propely is a lot of work in California. Why don't you just explain more of the specifics on here and you can get a more specific response.
- Hemet, CA · Member since 2015 · 19 posts · 1 vote11y
@Jay Hinrichs Thanks again. I appreciate you taking the time to help me out. Can I assume that you no longer sell on a wrap? And that you don't do deals down in my area?
- Hemet, CA · Member since 2015 · 19 posts · 1 vote11y
@Steve L. Thanks for the reply. The situation is such that the current owner is floating between being under water and 100% leveraged. The property is a 2/1 and as a rental it will not cashflow because of the area its in. The seller wants to just walk away.
Because the property will not cashflow, it leaves it to investors that are willing to park a larger down payment if not an outright purchase. From what I have learned regarding wraps, this would be a good scenario for one. The seller get what they want, to walk away. The first purchaser get what they want, a good deal from the down payment and cashflow from the difference in the interest rates. The second buyer gets what they want, a house that they could not get financing on usually because of poor credit. Also to mitigate the risk, the middle man would need market for "motivated buyers" people who have low credit but have cash reserves for a higher down payment. Also having cash reserves on hand to handle default and or the Due on Sale clause is obviously a smart and safe play.
I know what I'm describing is possible in theory (because it is done in other markets), I want to know if someone does that in reality in my area.
- Hemet, CA · Member since 2015 · 19 posts · 1 vote11y
@Brian Gibbons Thanks for the reply, working on PM you
James, a wrap is possible in this situation.
I am assuming the position of the "first purchaser" you describe is what you want to take?
Like everyone else that has suggested this, I would not really pursue this because for a low upside you take on a lot of risk and effort.
Now you seem very persistent on this deal, if I was forced to be involved, I would take a flat fee upfront from the Buyer for making the introduction instead of wrapping it and collecting a small monthly spread. That way the previous owner and the Buyer don't call you with all disputes, they can talk to each other.
You need to make sure you have a full paperwork package from the Seller. Limited Power of Attorney, Property Management Agreement, etc. etc. You need to disclose this loan will still be on the Sellers credit.
Your Buyer needs to know that technically the loan can be called due and in that scenario it would be the Buyers issue to remedy.
You also need to be ready in 2 or 3 years when the Seller's current pain is over, for them to call you and demand that you get the loan out of their name. How quickly people forget about their pain!
Good luck.
- Hemet, CA · Member since 2015 · 19 posts · 1 vote11y
@Steve L. Thats not a bad idea. But I'm not a licensed agent, I wonder if just charging a fee for the introduction would constitute brokerage?
Honestly I'm not looking to be the "first purchaser" I'm looking for someone else who already has a system in place who does it. Like I said, I know other markets have them. I just don't know if there is one in my area. If not, I'm not currently in the position to do it, so then the deal will just go by.
I understand risk and work, but I'm still looking for my first deal and it requires hustle and sweat. As far as risk goes, many investors face it and create systems to mitigate it. So I do not believe that we should not consider deals just because some people do not have a system in place for it.
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@James Clayton sub too is not a regional thing.. I did mine in the Bay Area and Portland Metro including vancouver WA... We had a company for years in CA called California Wrap before most even knew what a wrap was.. LOL
there is no magic to this that is area specific and this is not some big mystery of how to do them.. they are really quite simple... Just Highly RISKY for unknowlegable sellers who get hooked up with buyers with no real capital or ability to take care of a deal when they go sideways.. be it a renter holes up and you have to pay the payment for 6 to 8 months while going through and eviction and they do more damage than the equity in the house. Or your buyer on the wrap who defaults... this is the issue.
There are a lot of bad actors in this business who really don't have sellers best interest at heart..
- 11yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @James Clayton:
@Steve L. Thanks for the reply. The situation is such that the current owner is floating between being under water and 100% leveraged. The property is a 2/1 and as a rental it will not cashflow because of the area its in. The seller wants to just walk away.
Because the property will not cashflow, it leaves it to investors that are willing to park a larger down payment if not an outright purchase. From what I have learned regarding wraps, this would be a good scenario for one. The seller get what they want, to walk away. The first purchaser get what they want, a good deal from the down payment and cashflow from the difference in the interest rates. The second buyer gets what they want, a house that they could not get financing on usually because of poor credit. Also to mitigate the risk, the middle man would need market for "motivated buyers" people who have low credit but have cash reserves for a higher down payment. Also having cash reserves on hand to handle default and or the Due on Sale clause is obviously a smart and safe play.
I know what I'm describing is possible in theory (because it is done in other markets), I want to know if someone does that in reality in my area.
There you go your drinking the cool aid I thought so..... this is as ridiculous of a model as there can be.. but give it a go sounds like your sold on it .
- Hemet, CA · Member since 2015 · 19 posts · 1 vote11y
@Jay Hinrichs please enlighten the lowly kool-aid drinker. Why is the model ridiculous?
- Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes11y
I used to run monthly and weekly real estate clubs here in SoCal. I've spoken at just about every other club in the state... At least the good ones. The most successful investors I know buy low and hold LONG term or get out quick and rip equity. A combination of both will get you very far. I have never met anyone in this state who said they are doing what you want to do successfully who also didn't have some educational opportunities for sale. It is too much work for not enough profit.
A friend of mine bought 10 houses a few months ago just from driving around writing down addresses and mailing letters to those property owners. That's 10 wholesale checks in one month versus being stuck in the middle of some toxic mess for who knows how many years.
Unless you are the party with the house you want to unload, I suggest looking for easier fish to fry. From my experience, and I've heard this exact question asked many times over the years, you think you have a deal because some burnt-out property owner is willing to give you the time of day. What he is really trying to do is have you replace him in the quicksand while you spin your wheels trying to figure out how to create a profit out of thin air. He wants to step on your head as he gets out. What you should be doing is looking for owners in the quicksand and offering to get them out by grabbing onto your magical equity stick. And that magical equity stick has the ability to cash them out of their mess and convert that equity into real money. It should also cost a premium to for them to grab it.
The key here though is that the property needs to actually have equity for them to even qualify to talk to you. Yes there are ways to make money even with houses that are upside down, but those "deals" are not worth chasing. It is only when I come across them while looking for something else that I might put one togetther. In other words, if I see a shiny quarter on the ground, I'll pick it up, but I'm much happier stepping over it to get to the wrinkled hundred dollar bill.
Never replace them in the quicksand.
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