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javipa

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Reply with quote  #1 
According to DSNEWS.com, 37% of homeowners in the United States have zero equity in their homes.  They're not necessarily upside down, they're just not above water ...yet.

Couple that with the fact that rental rates are at historical highs, and mortgage rates were at historical lows, this represents a high-leverage, buy/hold, cash-flow and appreciation opportunity not seen in years.  Moreover, these same 37% of homeowners are still having to come out of pocket to sell conventionally.

At the same time, a predictable percentage of these homeowners HAVE to sell, regardless.

These conditions naturally make 'sub2' offers attractive, since the sellers can walk without damaging their credit, or create a financial catastrophe for themselves, and even buy new homes. 

This is the beginning of a new opportunity for Sub2 investors.

Since the sellers have no equity, they don't expect to realize any on a sale.  That's one reason why 'sub2' investors can get in with little money.

Never mind, with no agent or bank fees, or title company fees (for those who know how to check a title), the closing costs can be negligible. 

Again, that means investors can get into a house for practically nothing.  However, the faster equity profits come, by taking the existing mortgage financing, and offering EZ financing to new buyers. 

Like a Rent-A-Center, sub2 financiers charge a premium price in return for EZ financing. 

Typically it's 25% of the home's retail value, realized over five years, with 10% paid on the front-end, along with a monthly payment spread, followed by the balance paid on the back end.


Feel the breeze?  Timing is everything.

__________________
"Obstacles are those frightful things you see when you take your eyes off your goals." --- Henry Ford

"149 Ways (Plus One) To Find Motivated Sellers and Get Them To Find You"
>>>Click To Download http://sub2marketdomination.com/how-to-find-motivated-sellers/
brycewheeler

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Reply with quote  #2 
javipa.  Thanks for excellent post.

However for those who may be as thick-headed as me,  would you be so kind as to spell out your last 4 paragraphs for me in much greater detail.   Please explain it as you would to a third grader.  Thanks in advance.

Bryce
javipa

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Reply with quote  #3 

I was trying to say that instead of simply investing in lo/no equity deals, sub2, the faster profits can be had by flipping the original financing to a new buyer. 

In this case, the investor:

* raises the price (based on a five year note, 20-25%),
* creates a spread on the interest rate (if possible),
* creates one note to encompass the existing loan balance and the investor's equity,
* puts the buyer's down payment in his pocket
* waits for the buyer to pay off the balance of the note.

This would be similar to the 'rent-a-center' model of merchandising, but for a house. 

The reason this can work, is that the investor:

* isn't limited by 3rd party financing approval;
* isn't tying up large amounts of cash;
* isn't qualifying for non-owner occupied financing;
* isn't paying agency, title, or loan fees;
* isn't paying high financing rates;
* IS giving the seller the ability to qualify for financing elsewhere, without listing the existing loans as a liability.

The issue is, getting in early on these no/lo equity homeowners BEFORE their LTV's upright themselves equity wise.     

-- Houses with LTV's at, or above, 110% are still conventionally unmarketable, unless the sellers can pay down the loan balance and cover the standard closing costs (which typically run between 8-11% of the sale price).

For now, offering a seller a 'no expense' exit strategy can be enormously attractive, especially when the seller has very little money and needs to sell yesterday.  A closing on a deal like this can theoretically happen as fast as takes to review the title chain, review the mortgage terms, draw up the paperwork, and line up a notary, if not get the seller's to the closing table. 

Hopefully that is more clear, if not more verbose... [wink]


__________________
"Obstacles are those frightful things you see when you take your eyes off your goals." --- Henry Ford

"149 Ways (Plus One) To Find Motivated Sellers and Get Them To Find You"
>>>Click To Download http://sub2marketdomination.com/how-to-find-motivated-sellers/
GeorgeB

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Reply with quote  #4 
What if the market tanks, the sub2 buyer decides it was a bad buy and walks (willing to lose his 10%), you're stuck with a property that's hard to sell, and a really upset original seller should this go to foreclosure?
javipa

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Reply with quote  #5 
Quote:
Originally Posted by GeorgeB


What if the market tanks, the sub2 buyer decides it was a bad buy and walks (willing to lose his 10%), you're stuck with a property that's hard to sell, and a really upset original seller should this go to foreclosure?



Okay, long answer:

The assumption that you would be stuck with a property in a down market, only really applies to conventional retailing.  When you offer EZ qualifying financing to someone who can't get a loan without putting up 20%, and you have a nice product, price is irrelevant to these clients.  It's the payments.  I mean you're not interested in marketing to bargain hunters...

Of course, demand in general does influence the velocity of a sale regardless of the financing offers, but... 


My assumption is that you're dealing with nice homes, not dog houses.  I mean why screw around with houses that are 'hard sells?' 

Meanwhile, if you're paying attention to your business, your theoretical scenario doesn't 'just happen' without warning, or time to adapt.

Which brings me to mention why you want 10% down.  It's so that the buyer 'can' more readily and easily refinance, even if his credit is rocky. 

This way you're not unnecessarily holding onto a risk of loss.  Never mind the buyer has a lot of incentive to refinance, if nothing else than to get a lower interest rate.


And never mind refinancing is 'way easier' than getting a new purchase money mortgage, especially if the buyer puts down 10%, which is more than necessary for a 'low-credit' low-down government-backed loan.  And ...there's a positive payment history that gives the bank even more reason to make a loan. 

Meantime, since you are acting as the bank, you can adjust the terms, in order to retain a client, and keep him from bailing.  Of course, that's outside the bounds of Dodd/Frank, but... who's gonna complain about cheaper financing?

Again, as far as a buyer bailing on his down payment if the market tanks ...there would have to be more going on than simply a market adjustment.  People establish themselves in communities and neighborhoods, make forever friends, and will work hard to keep what they have, including the house they own. 

We're not talking about renters that will skip on a deposit. 

That said, if you accept very little down, on a C-grade house, the risk is larger that the buyer will bail on you, regardless of the market conditions.  More reasons to stick with nice houses that higher-quality buyers want, and where you can command 10% down, and get it relatively easily.

>>> The real problem comes, not when the buyer moves out and leaves a turd, but when the buyer defaults, and won't move out of the turd.  That's when you threaten to use the velvet hammer of credit death.  This hammer includes a slew of things that will create a living hell for a defaulted buyer, that is considering squatting on your cash cow.  I'm not sharing publicly what I do here, because I'm not interested in giving any 'clients' a heads up. 

__________________
"Obstacles are those frightful things you see when you take your eyes off your goals." --- Henry Ford

"149 Ways (Plus One) To Find Motivated Sellers and Get Them To Find You"
>>>Click To Download http://sub2marketdomination.com/how-to-find-motivated-sellers/
GeorgeB

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Reply with quote  #6 
Thanks for the great answer Jay.
Thomaschavez

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