No Cash Down SubTo Lenders - How Does This Work?

Question

I just watched a guy on youtube claim he bought a property with none of his own money. He said he did a SubTo, taking over the existing mortgage.

Then he says, to cover the money that he needed in order to complete the deal, he needed

• The cash      to give to the seller for their equity
• The money      to bring the loan current
• The money      to pay for late taxes
• The money      to pay the real estate agent and
• The money      for closing costs

He says he needed about $55,000 cash total

Here’s the part that confuses me:

So, To get the $55,000, he found 11 investors who each contributed $5,000 for a total of $55,000. He said each investor is making 10% on his money

• He then      says “so, I bought the property using none of my own money and I have one loan      on the property, the original loan”.

Is this a common SubTo set up?

Is this called “gator” lending?

Where do you find investors that will do this?

Where is the best place to do these? CA, AZ. TX, NC, GA?

Chris Seveney · Answer

Oh boy - no he doesn't have one loanlooks like he has 11 and if they are 11 then he just syndicated a deal

i woukd be $50,000 those investors lose all of their $ then be on sites wondering why they lost their money and how bad an experience it was

David Briscoe · Answer

It's possible, because those investors sound like they're apart of some investment group comprised of individual accredited investors. But it's my understanding, those group can be pretty costly to join. But I believe a simplier deal structure, that's lighter on the pocket book; maybe a document fee or two, but ususally they can be rolled into the loan depending on your relationship with the lender...and this would be a1. single source lender aka, a transactional lender to cover the down payment, with the seller carrying back roughly 30 to 40%, and you can qualify for a private money or dscr lender at roughly 65 to 70% ltv. This structure assures that the seller gets all of their money at closing.2. Another simple structure, and offers the fastest closing process and frankly, imo is the best structure, is a seller finance of 70 to 80% in the first position, if you can find an aggressive hard money lender with abbreviated underwriting, relies primarily on cap rates to assess value vs an appraisal or bpo and is asset based oriented or in essence, a dscr lender, with very little weight on credit. They would provide your downpayment money. End of story. The only slight problem with this solution is that they're rare birds. Any smart accedited investors out there?....lol

Rashodd Cawthon · Answer

I watched the same person and at the end its to sell you his services for 10 grand.

Ken M. · Answer

.I simply started racking up the complications with this deal in my mind and realized what a very foolish approach this is. Actually, it wasn't hard to see right away.One correction in the market and whoosh . . . disaster

• These 11 would be unsophisticated      investors, who likely wouldn't have $5,000 they could afford to lose      if things went bad.
• The unsophisticated investors couldn’t      possibly understand the risk
• It’s likely that the property is      now 100% levered or worse
• What      happens if the Due on Sale
     is called
• If any one of them next month      needed their money back for an emergency, how does that get paid
• These loans are presumably for the rest      of the length of the underlying loan, which could be 25 years
• The lead investor is in business      for very little money out of his pocket with a whale of a lot of      responsibility with a dozen people he doesn’t know
• There      are always, always, always  people      that misunderstand what you’ve told them and will likely get burned which      in turn will burn the lead investor’s reputation
• How are each of the loans secured
• Who makes sure everyone gets their      monthly payment
• Making sure each investor gets      their $50 every month is a pain in the a**
• Who is going to handle proper      reporting for tax purposes
• What happens if there is a vacancy,      no money coming in
• What happens when a new roof or      HVAC is required
• Who’s      name is the insurance
• Depending      on how it’s structured, there are other issues

It just seems like something from a Michael Mastro diary.

“Michael Mastro started his career in the real estate business in 1967, developing real estate projects worth at least $2 billion over 40 years, including commercial buildings and houses.

He was involved in hard money loans, mostly to desperate real estate developers, with second or third deeds of trust on projects as collateral.[11]

His company, Michael R. Mastro Properties, was well known in and around Seattle, the location of most of its projects and properties. “

He eventually went bankrupt and a lot of people got hurt.

No Cash Down SubTo Lenders - How Does This Work?

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