I welcome any feedback and suggestions. My business model is broken and need to fix it quickly.
I've been investing for over 8 years and specifically Sub To for the past 3 years. I buy with a minium of $15,000 in equity and a $200 positive cash flow. I typically get between $5,000-$11,000 down (5-7%). However, by the time I make up a payment or two, do a few repairs, and make a payment or two, I'm into the deal about $4,000-$5,000. I can cover this with the downpayment, but that does not leave much front end profit. I'm finding more and more of the new buyers are not getting qualified to refinance. I have NOT been able to find a good mortgage broker to work with my buyers. My business hinges on them refinancing.
I have attempted to negotiate better upfront with the sellers, but I typically get all I can.
Any thoughts?
Robj,
I am also a sub2 fan. I would suggest getting a min 20k spread net all in (money you put in if needed) between what I owe on the property and what my option price will be. This will depend on your market but I buy in the 150-250k range so is doable. In the 60k range, it may not be realistic but I don’t work in that area but you get the point.
Here are a couple of suggestions. First, I suggest that any monies you have to come up with to bring current be credited to you off your future purchase price (assume you already do this but maybe not). Remember this is a moving number. I also expect (and have in the contract) that I get the benefit of the principal pay down while I am waiting to get the tenant buyer to cash out, hence the reason I say it is a moving number. For example say the balance was 100k and it took three years to cash out. The principal balance now is maybe 96 or 97k (depending on the loan length, rate, time left and so on). This means that extra 3k at 97k is extra profit for me. Not everyone will agree to this, but it is just another negotiating point you can use to get concessions in another area be it a longer term, lower price and so on. Also, if I am bringing in cash to bring a loan current (that my tenant buyer is actually doing but I am fronting), I expect a better deal than on a current mortgage (though I am fighting for all I can get). I usually don’t take these deals unless I get some good equity. Remember, they need to sell, you don’t need to buy. Tell them it is a business decision for you and you can’t make their problem your problem.
Next problem I see is you shouldn’t be spending the NROC (option consideration) you got down from the tenant buyer IMHO. Put it in the bank to cover vacancies, evictions, repairs, attorney and accounting fees, signs, advertising, bandit signs, etc. or other problems that come up. If you get 11 k, sure you could spend maybe 1 or 2k. This also goes in the expenses reserve account. But I would save the rest. I also can usually get something from the seller (see other thread for how). The money I live on is the cash flow from the properties and any backend profits I get along the way. One of the keys to success is cash reserves. Stuff happens. This will lower your stress level considerably. Yes, it will take some time to build up your portfolio to the level of income you want, but once you do, your business is just maintaining what you have and occasionally picking up the occasional great deal to just add to your bottom line. As I said before, be selective and don’t make a seller’s problem (no equity, a high payment or whatever) your problem.
I consider the backend profits gravy and don’t ever expect a tenant buyer to cash out until they do so I am happy to get the chunk of cash. You have a lot of control over what your cash out rate is based on your tenant selection. A good mortgage broker is very important here. You need to find a good one. I would begin interviewing as many as possible until you find a good one. In the Atlanta area, you should have no problem finding one in a couple weeks to a month. You want to find a real pro and if you do a lot of business, will be begging for your business. No one gets in without being run by my mortgage broker. If your business hinges on them reifying, this is even more important. But if you set up your business better, your business will not hinge on this fact and life will be a lot easier because you never know who will or will not exercise. Stuff happens. I don’t even run credit myself, my broker does this.
You really need to work on getting bigger spreads with your sellers as well. Remember, you make your money when you BUY, not when you sell. Negotiating is the best part of this business. Remember, everything is negotiable. No deal is better than a bad or mediocre deal. Remember that. Be a reluctant buyer and they will be fighting for you to buy their home and you won’t have to fight them to sell it to you. Constantly look for reasons not to buy. The more they can’t have it, the more they want it (you to buy it). All your money is made negotiating. Learn to love it. I could go on and on but I think you get the idea.
Best of luck
Mike C
It sounds like you're paying too much for the properties.
Sub2s are one of my favorite ways to invest too. Before I read some of Jason Hanson's posts on them, I used to only do deals with at least $10K of equity. He presented a few strategies for doing sub2 deals on properties with little or no equity. I ran the numbers on some of those deals, bounced some of his ideas off a few other investors, and incorporated them with a few of my own tweaks.
You need to structure your deals with 1 or more of the following characteristics: 1) no repairs required, 2) defer those repairs to your buyer (like Nick Cifonie), 3) the amount for the repairs is less than the amount you'll collect for your deposit, or 4) lower your offer price by the amount for the repairs. Options 4 and 2 (in that order) are my favorites.
Nevertheless, you should be able to structure your sub2 deals so that you're getting 3 streams of income: 1) cash upfront, 2) positive cash-flow during the financing period, (which could also include an interest spread), and 3) some upside upon the sale. Plus, if you take the time to structure your notes the right way, then you might be able to sell them via the secondary market--provided there's an appetite for the notes you're creating.
Robj,
I am also a sub2 fan. I would suggest getting a min 20k spread net all in (money you put in if needed) between what I owe on the property and what my option price will be. This will depend on your market but I buy in the 150-250k range so is doable. In the 60k range, it may not be realistic but I don’t work in that area but you get the point.
Here are a couple of suggestions. First, I suggest that any monies you have to come up with to bring current be credited to you off your future purchase price (assume you already do this but maybe not). Remember this is a moving number. I also expect (and have in the contract) that I get the benefit of the principal pay down while I am waiting to get the tenant buyer to cash out, hence the reason I say it is a moving number. For example say the balance was 100k and it took three years to cash out. The principal balance now is maybe 96 or 97k (depending on the loan length, rate, time left and so on). This means that extra 3k at 97k is extra profit for me. Not everyone will agree to this, but it is just another negotiating point you can use to get concessions in another area be it a longer term, lower price and so on. Also, if I am bringing in cash to bring a loan current (that my tenant buyer is actually doing but I am fronting), I expect a better deal than on a current mortgage (though I am fighting for all I can get). I usually don’t take these deals unless I get some good equity. Remember, they need to sell, you don’t need to buy. Tell them it is a business decision for you and you can’t make their problem your problem.
Next problem I see is you shouldn’t be spending the NROC (option consideration) you got down from the tenant buyer IMHO. Put it in the bank to cover vacancies, evictions, repairs, attorney and accounting fees, signs, advertising, bandit signs, etc. or other problems that come up. If you get 11 k, sure you could spend maybe 1 or 2k. This also goes in the expenses reserve account. But I would save the rest. I also can usually get something from the seller (see other thread for how). The money I live on is the cash flow from the properties and any backend profits I get along the way. One of the keys to success is cash reserves. Stuff happens. This will lower your stress level considerably. Yes, it will take some time to build up your portfolio to the level of income you want, but once you do, your business is just maintaining what you have and occasionally picking up the occasional great deal to just add to your bottom line. As I said before, be selective and don’t make a seller’s problem (no equity, a high payment or whatever) your problem.
I consider the backend profits gravy and don’t ever expect a tenant buyer to cash out until they do so I am happy to get the chunk of cash. You have a lot of control over what your cash out rate is based on your tenant selection. A good mortgage broker is very important here. You need to find a good one. I would begin interviewing as many as possible until you find a good one. In the Atlanta area, you should have no problem finding one in a couple weeks to a month. You want to find a real pro and if you do a lot of business, will be begging for your business. No one gets in without being run by my mortgage broker. If your business hinges on them reifying, this is even more important. But if you set up your business better, your business will not hinge on this fact and life will be a lot easier because you never know who will or will not exercise. Stuff happens. I don’t even run credit myself, my broker does this.
You really need to work on getting bigger spreads with your sellers as well. Remember, you make your money when you BUY, not when you sell. Negotiating is the best part of this business. Remember, everything is negotiable. No deal is better than a bad or mediocre deal. Remember that. Be a reluctant buyer and they will be fighting for you to buy their home and you won’t have to fight them to sell it to you. Constantly look for reasons not to buy. The more they can’t have it, the more they want it (you to buy it). All your money is made negotiating. Learn to love it. I could go on and on but I think you get the idea.
Best of luck
Mike C
Hi, I agree with everything Mike said! Everything! Just to add to it, after your buyers are pre-qualified (and they won't be qualified or they would do something else) find out what they have to do to be qualified when the time comes.
If you want those future dollars, you may have to earn them. Hold their hand and assist them in their financial dealings until they get on track, then keep checking on them. I have required buyers to take a homeowners class and personal finance classes! It works as most all of my deals closed, 90% +! But then I was also in the mortgage business.
It's not hard to sell a property in three years for 10% more than you paid so for 20K it's in the 200K range as Mike was saying.
As Hakchinoy said, look for properties that need less repairs, pass the repairs on to your buyer (but they won't make them) if it's paint that's needed, paint it.
I have done these deals to the point I'd do them in my sleep. Every dollar you put out at contracting is a credit to you, it's your money getting the owner back to where they need to be! Every dollar to catch up payments, every dollar for repairs and clean up, plus interest on that money, as if the seller is borrowing the money to get the property ready to sell, that's what the seller is doing, selling it! When you get your buyer, you get your money first. Set funds aside for payments and upkeep, even though that money is to be yours, you are responsible to keep the deal together over the term. Bill
Thank you for all of the feedback. I very much appreciate the advice.
As far as buying, I only purchase Subject To which gives me ownership. My sellers are usually one payment behind and closing in on two. Payments are typically around $1,000. By the time I make two payments and a little closing cost, I'm into the property for around $2,300. The most I've ever given a seller is $500. Cash calls this "moving money". About 50% of the properties need paint, minor repairs, grass mowed, and pine straw. I can typically get this done for around $2,000. On average, I usually have between $4,000-$5,000 in the deal by the time it sells. That's if the house sells in 60 days. Several times I have sold the house quickly enough that no repairs were made. A few times it's taken a couple of months. I never buy a house Subject To if the repairs are more than I think I can get for a down payment from a buyer. Several investors have recommended that I get the sellers to cover the payments until it sells. By the time they call me, they can't make the current payment.
I have only sold on a wrap. I've never Lease Optioned any of the houses I bought Subject To. My typical house sells in the $150,000-$175,000. I usually get between $5,000-$11,000 down. Their payments run around $1,300. Typically around a $200 spread. My terms are to refinance in 35 months or less.
My plan is to increase my minium to $25,000 in equity and negotiate a larger downpayment. I think I will focus on buying newer homes which may help with the larger down payments. Maybe 1-10 yrs old.
Feel free to advise. Thanks again for everyone's help!!
Hello and good to meet you.
With Sub 2 there are two mind frames...
1) Buy equity
2) Buy non equity
If buying equity then you need in my opinion 52k per deal or 25% which ever is more and then flip that bad boy and turn and burn
If buying non equity then you need to adjust you resell price by 6% per year of your call date... SO if a value of 100k now and financing for 3 years my resell price is 118k.
I am always doing a wrap and adding 1.25% to the interest on my underlying loan.
Always getting 5-10% down
Doing this allows me to turn the no equity deal into profit four ways.
1) Down (keep 3 months of your payment in reserve)
2) monthly payment difference
3) Pay down difference unless your wrap loan is in the same year as your underlying
4) Difference between loan balance at beginning..
AND I am not certain you care if they buyer refinances... If they cant redo the deal sell it to someone else... I am certain you can talk them out of the home with a little encouragement from Benjamin Franklin
As for repairs Reduce the Phantom sales price by the cost of the repairs and require the buyer to either have some phantom sweat equity or let them hire the repairs...
Our buyers dont have options.... Who else is going to help them..
I think the bigger issue is for you to completely stay away from sub2 non equity deals and start doing some larger equity deals... Sounds like you're advertising to the wrong prospect group...
start tapping into free and clears all the way to 40% equity owners... The grass is real green there. And financing is already in place...
Happy hunting...
Michael. I was hoping you would join in. You were kind enough to talk with me at length on my marketing about a year ago.
Questions:
1. When you "turn and burn" are you keeping the down payment and selling to another investor?
2. Skip the repairs and painting and sell it as is?
I'm starting to lean towards the "free and clear". I've read some earlier post on them.
Thanks again!