All Forum Posts by: Don Konipol

This is a story from my past that provides a perfect example as to why investing in tax liens at auction is so dangerous for any but the most experienced and knowledgable investors

20 years ago I purchased a SFR as a long term rental investment that sat on a double lot. The second lot had the remnants of a tennis court the original owner had built, but was now in disrepair. The seller has the two lots legally separated, but due to deed restriction imposed by the subdivision development, found that building a house on the "tennis court" lot was not allowable.

Do to an anomaly pertaining to the appraisal district, the total value of the two lots was divided equally between the lots instead of allocated by market value.  Hence the lot on which the house resided was taxed at a 45% discount based on actual value, while the tennis lot was taxed at about 4 times what it should have been by value. 

I purchased both as a package and for the next six years enjoyed great cash flow as I paid the tax on the house lot annually at about half of what it should have been and neglected to pay anything on the tennis court lot.  The law firm handling tax foreclosures for the county put the tennis court lot up for auction. Of course it probably wasn’t even worth the amount owed in taxes as nothing could be built on the lot. 

To add to the confusion, the party that had divided the lots had instead of distinguishing the lots by A and B, used A1 and A2.  The result was that a few maps had the lots reversed - in actuality A1 was the tennis court lot and A2 was the house, although intuitively one would expect the opposite.  Since both lots had the same mailing address, this was the address used by the foreclosure attorney when posting the sale.  Of course a visit to the county records office and -correct reading of the legal description would reveal that the tennis court lot was the one being sold.  A less then full investigation may result in one thinking that the house and or the house and tennis court lots were what was being sold.

As I later found out, a newbie tax lien investor thought they were getting a great bargain by outbidding other misinformed investors and paying the back taxes, legal fees, and an additional $34,000 (overage) which the county forwarded to me.  The buyer of course believing he had purchased the house paid a visit to the tenant, who of course called me.   when I informed the tax lien purchaser that he did not purchase the house, only the tennis court lot, he did not believe me.  He contacted an attorney, who finally got clarification from my attorney as well as the county recorder.  The investor “gave up” after numerous attempts to sell the lot or get a “refund” from the county proved unsuccessful.  The buyer had paid over $70,000.  The appraisal district shortly thereafter corrected the tax allotment “anomaly” between the two lots, but the investor never made a tax payment and eventually lost the lot to a tax foreclosure.  

I see that real estate agents and brokers are too negative on sub to deals……investors looking for low interest rates and or low down payments are too positive on the same.

As I stated the reality is somewhere in between, depending on individual circumstances.  

If you’re referring to the “newbies” with $10k to their name that watch a video by Pace and get excited and pay for joining, go out with their last $5k and do a sub to with a “desperate” homeowner without revealing all the possible consequences (because they are unaware of the consequences through lack of experience and lack of knowledge and or choose not to inform the seller) then I agree, it’s probably going to turn out badly for all concerned.

If on the other hand you’re referring to a seasoned investor with excellent credit, significant cash reserves, who wants to add a property to their portfolio without going through loan qualifying, and can pay enough to give the seller “walking away” money because of the low existing interest rates and or, and is dealing with a informed seller, then I find nothing wrong or negative about the transaction.  I purchased a number of properties this way, and sold a few too, with nary a problem arising. 

The “I helped the seller by a sub to purchase” and the “you screwed the seller by a sub to purchase” are both correct AND incorrect.

Because it depends on whether the seller was provided with a full disclosure of the ramifications and possible consequences of entering into a sub to transaction; whether the seller is mentally competent to understand the ramifications and consequences, and whether the transaction is accomplished without lying to the lender. Notice, I am NOT stating that the transaction needs to disclosed to the lender; just that a lender should not be given false information.  

Btw, the buyer is in no way at any criminal risk vis a vi the lender, he has no contract with the lender and therefore no obligation to the lender. Yes, he can be sued by the seller; anyone can sue for almost any real or imagined cause.  Which is a good reason for full disclosure of ramifications and consequences. I would also INSIST that the seller have independent legal representation before I entered into a contract with an owner occupant.  

There needs to be some structuring, for sure.  BUT, if one could solve some tough problems….

Look, I hear what posters are saying - and it might NOT be a fit for real estate.  But, selling “cash flow” works for other industries, such as oil and gas production, music royalties, tv syndication rights, and probably some more I’m not aware of.  

Here's a scenario where it might be beneficial to both parties. Property is cash flowing with a 3% interest rate loan for 50% LTV. Owner needs cash for some improvements, but if he refis interest rate is 11%. (This is a theoretical future). Meanwhile, bank money market paying 7.5%. An investor may be interested in investing what is equal to 15 - 20% of the property value for a 13 - 14% return. Borrower has the 3% loan in place for the duration, and 14% investor can be paid off with increased rent in say 18 months. Meanwhile investor is receiving almost twice return from money market, and probably 3 - 4 % greater than mortgage fund.

Once these type investments develop a history, I can see a market similar to peer to peer lending where default rates become standardized and known.  I realize a lot has to be worked out, but tokenization through blockchain eliminates a lot of legal documentation issues once established.  Is it too early?  Is there sufficient confidence in tokens?  Maybe not for my generation, or even a youngster like @Jay Hinrichs, but for the bitcoin investing/trading generation, it’s probably something they’ll have no problem going with.  

Hope it proves viable. 

Quote from @Shawn Questa:

A few times I've reached out to Cash Buyers and they would tell me that they are a part of an Investment Group and that they are ready to quickly Close Deals would be happy to work with me.

Later I would come to find out that they are actually a Group of Wholesalers, like me.

I guess I would prefer to Work directly with the Investor, Cash Buyer or Flipper. 

I feel like a Daisy-Chain would muck up my Timeline or even the whole Deal.

As long as everything is in writing and I get my Fee, does it matter?

Should I just add them to my 'Cash Buyer List' and move on?

It doesn’t matter who you work with or who you don’t work with.  Because the chances of successfully concluding a wholesale transaction when you lack experience, knowledge and capital are so infinitesimally small that you’d be better off playing the lottery. 

Quote from @Chris Seveney:

Over the past quarter, I have seen around $1B in defaulted fix and flip loans - many of these from new lenders since 2020 and more of a "tech platform".

As we all know, the intersection of tech and real estate investing has brought incredible innovation, especially in hard money lending. I continue to see new platforms promise ease of use, lightning-fast approvals, and streamlined processes. On the surface, it’s a game-changer. But as someone who’s been in the trenches of real estate investing for almost 30 years, I continue to see some flaws.

Some of the flaws I have witnessed are when tech-driven companies seem to lack backing from experienced underwriters or seasoned real estate professionals. Instead, they’re relying heavily on algorithms to make underwriting and valuation decisions. While algorithms can analyze data at scale, real estate isn’t just about numbers—it’s about nuances and the most important component of real estate is understanding its value, and that to me (maybe I am old school) but can only be done by physically visiting and walking the property.

So for me, factors like local market conditions, property inspections, and borrower credibility can’t be fully captured in a formula. Without a deep understanding of these elements, can you underwrite a deal via an algorithm ?

What are we seeing? Borrowers overleveraging, deals falling apart, and platforms absorbing starting to selll off these losers. 

Now do not get me wrong, tech has its place in real estate, but it’s not a replacement for expertise. For me - my two cents are no amount of innovation can replace sound underwriting and valuation practices.

Curious to others thoughts

I have nothing to say that you haven’t already most eloquently stated.  

Hold on while I get my popcorn………..

Quote from @Richard Volkov:

I came across a new idea in the real estate space that's worth discussing. It's not about buying whole properties or even shares in a REIT, but instead purchasing rights to the income a property generates.

Here’s how it works:

• - Property owners keep full ownership of their property but can sell a portion of the income rights (like rent or a share of appreciation when the property’s value increases).
• - Investors buy those income rights in small amounts, making it possible to invest in real estate without needing a ton of money upfront.
• - Payments to investors are automated, so rental income is distributed directly without much hassle.

What I found interesting is that this solves a couple of common issues:

• - Property owners can raise cash (for renovations as an example, or any other need) without giving up control of their property.
• - Investors get access to real estate cash flow with lower costs and no landlord responsibilities.
• - The whole process is simplified—no co-ownership legal headaches.

I’m curious about the pros and cons of something like this. For investors, would earning passive income through property cash flow (without actually owning the property) be appealing? For property owners, would selling off some of the property’s income rights (without losing ownership) make sense in certain scenarios?

Would love to hear the community’s thoughts—especially from experienced landlords, property investors, or those who’ve explored fractional real estate investing before! Do you see a model like this catching on?

I think it would require a major asset heavy backer to provide the confidence the investing public needs to scale to profitability.  Unless you wait for the next tech/ICO bubble, during which you could sell anything.  Of course your participation in those tulip bulb type speculative frenzies isn’t guaranteed since the asset/product you are proposing DOES have real value.  Which of course is actually a negative for participating in speculative madness. 

All kidding aside, I do believe you have the general sketch of a marketable SECURITY.  Tokenization of real estate assets can take numerous forms, but what you’re proposing is to separate the real estate “bundle of rights”, have the property owner sell one or more “rights” but not all of those rights, and represent the ownership of the rights that have been sold by tokenization utilizing block chain technology rather than the county “filing” systems currently in use.  Hope I live long enough to see your idea come to fruition.  Good luck! 

Quote from @Ram Gonzales:

I've done a lot of wraps and subtos and highly prefer the seller-finance strategy for a lot of reasons, including offering the opportunity of homeownership to those otherwise rejected by traditional banks. I want to create a fund that will allow me to purchase distressed homes, fix them up, and sell with owner financing (possibly including a 5 year balloon so as to be able to recapitalize periodically and give investors a shorter horizon). I've had a long career in community development and have a lot of bank contacts that would likely be interested in investing, but I'd need to prove the concept first with an initial fund (there are also a lot of other community development tools that could be leveraged to maximize and scale this). Here's my question. If I create a debt fund that offers 9% interest on first lien notes with a 5-7 year payout, would that be attractive to high net worth investors? My target for the first fund would be $5-10 million and I have a few HNW investors in my network but certainly not enough. Anyone have experience putting these kinds of opportunities in front of investors?

I don’t know what the costs would be to “scale” from the volume you do now to a volume you’re targeting, but it’s probably a reasonable investment.  Certainly from a capital raise perspective, $5 -10 million is a reasonable amount.
That being said, raising capital for a blind pool fund is much more difficult than raising capital for a syndication where the property is already identified and the potential investors know exactly where there money is being invested. It’s doable, just more difficult, time consuming, with a lot more “contacts” needed for each “sale”. 

I see a conflict of interest in your role as fund manager and principal in the “operating” company. As fund manager you owe your investors a fiduciary responsibility which I can foresee as a basis for lawsuits should the fund not perform as anticipated.  I would check this out with a seasoned securities attorney for their opinion/guidance.  

Most likely raising funds from passive investors would utilize a Reg D 506 b or c safe harbor exemption from registration.   Typical cost for the setup would be in the $15,000 range which would include production of the Private Placement Memorandum, Subscription Agreement, and Operating Agreement, Investor Qualification Forms, as well as filing Form D with the SEC, and state “Blue Sky” filings in those states where your investors reside. 

There are other ways to legally raise capital, however, they have some inherent disadvantages making them considerably less desirable for what you’re trying to do. 

Very creative but probably not doable

1. Won’t pass muster with governmental authorities
2. People interested in this type arrangement probably don’t have access to $150,000

3. No way to finance single room condo 

4. No established resale market 

5. These type living arrangements are primarily short term until user circumstances change