Quote from @Steve K.:
Quote from @Account Closed:
Quote from @Steve K.:
Quote from @Account Closed:
Quote from @Steve K.:
Quote from @Account Closed:
I assume when you say cash flow that all opex and capex are already factored in. In the scenario I described I’m making $1000/month while my cash flow is -$100. Im waiting 2 years to break even cash flow wise, but I’m clearing $1000/month in principle paydown from day 1. That’s $12k for the year. $12k+ on $25k every year is absolutely in my wheel house. My original investment is paid back entirely in just over 2 years.
Even using your best-possible-case scenario, there are many better ways to invest $25k IMO. And there is a lot that can go wrong here (opex and capex not accurately accounted for, property value or rents go down, tenant issues, seller files for bankruptcy, issues with loan servicer (I've experienced this one), insurance issues, mortgage company exercises their right to call the loan due on sale, title issues, judgements etc. there is a lot that can wrong with subto). I look at real estate through a risk vs. reward lens and would much rather put $25k elsewhere and make more money faster with less risk personally.
Most of those same risks outside of the DOSC apply to every other transaction. There are risks and there are rewards. They are asymmetrical IMHO. Don’t kid yourself though, deals where you can make your money back in 2 years without any sweat equity…well they don’t just grow on trees…otherwise everyone would do it.
A seller filing bankruptcy post-sale would not be an issue in a normal transaction whereas it could be a real nightmare with subto, and everything else I mentioned would be greatly exacerbated in a subto structured deal. That's the risk with subto: if you have insurance issues, loan servicer issues, title issues, etc. it gets a lot more complicated because the bank owns the property and the "buyer" is not on the loan. The bigger risk is to the seller and their credit of course, but there is also risk on the buy side that's often glossed over by gurus. Whenever risks are higher, returns should be as well that's my point. In this case the buyer should have $600k sitting liquid (or have very reliable financing available that they can fall back on and close in a few weeks) if the loan is called. That's an additional opportunity cost to cover the additional risk related to going subto.
If everything needs to go perfectly for the deal to make sense, you've got to create a matrix of paperwork and hope your contracts are really bulletproof, and pray the loan never gets called and nothing ever goes wrong and do mental gymnastics to justify it, then it's not a deal IMO.
Most people either refinance or move every 5-7 years so it would be rare to find someone in year 16, and even more rare for that person to choose to sell subto when in most cases they'd be better off selling retail. You're talking about a unicorn among unicorns IME.
Sure, but there are ways to mitigate all those risks as well. Bulletproof paperwork should be the standard, not the exception. I’m not advertising this strategy as being the safest, or the easiest. It’s simply not. The reward is proportionate to the risk as I mentioned. But is for sure one of the few where if properly structured, you can achieve 100% return within 2 years as I laid out without forcing appreciation or sweat equity.
If you’re going to call these unicorns, then I want my ribbon for being pretty good at catching unicorns. There is an entire generation of 60-80 who don’t move every 5-7 years. That same generation is keen on selling subto because that risk of the buyer destroying their credit significantly deteriorates when their credit is not longer critical to them.
Just curious how would you mitigate against a seller filing bankruptcy post sale, just to pick one example? Or a loan servicer randomly messing up the payments to pick another (I’ve seen this happen with a sub to deal, the loan servicer kept switching the payments back to the seller’s info, and the buyer ended up missing a few payments because of it, causing a lot of credit issues, stress and animosity for everyone, luckily the loan didn’t get called but this could happen). I don’t believe you can actually mitigate all the risks with sub to as you say, in my experience anyway. There’s always increased risk with sub to, is there not?
Yes, there are additional risks with subto. There are also additional rewards. To mitigate the risk of a seller filing bankruptcy you could
1. Vet their financials beforehand.
2. Hire a lawyer to include terms in your note outlining what happens to the property in the specific event of bankruptcy.
To mitigate the risk of the servicing company errors you could require the servicing company to provide records and statements for both mortgages monthly. You could monitor the taxes and insurance payments yourself. You could also overfund your escrow account and pay these items in full beforehand.
There are ALWAYS ways to reduce risk.
