Wet Feet - Online Marketing and Real Estate Investing Blog

I got into a conversation with one of my friends why would someone buy a house from me Sub2. Let’s look at the deal like this: $5,327 down and take over payments of$1,307 per month, you will buy $14k worth of equity. Which in essence means, that you are taking over payments on a mortgage which stays in seller’s name, you paying $5k out of pocket for a house worth $163k with the loan balance of $144k.

So what other ways can you purchase this house? The conventional way would be to go to the bank and get a loan. But wait, there is more. With current situation in lending industry the best deal you will get will require you to put at least 10% down and your interest will be somewhere in 9-10% range. So you will need about $15k to put down and you monthly payment will be $1,140 just for principal and interest. Add taxes and insurance and you are looking at $1,400+ per month. So the conventional way you need more money to put down and your payment is higher.

Also you can go and borrow hard money. Hard money is called hard money, because there are hard rules. You will have to pay about 5 points which is 5% of the loan amount and you will be able to borrow about 70% LTV. LTV stand for loan to value. So if in this case the value is $163k, so LTV comes to about $115k. So you need to buy properties way bellow market value and it will cost you about $6k to get this loan. So in this case you need money up front and the payments are high and LTV is low.

So considering the 3 ways you can buy houses, the Sub2 way looks pretty darn good. You do not need to go to the bank and apply for a mortgage and you do not need to borrow hard money. Plus the monthly payment is usually lower and the mortgage is not showing up on your credit report. Once you get about 10 loans in your name you will see that it is very hard to get more.

So the moral of the story is that in current market, at least in Atlanta area, there are so many houses for sale that we do not buy any other way, but subject to existing loans.

Recently I had a discussion with a friend about differences of investing in stock market versus real estate. Buck for buck historically stock market wins, but there is a really big but. That big rear end is called leverage. Leveraged real estate outperforms any other kind of investment hands down.

Leverage is ability to use OPM - other people’s money. You can put 10% down on a house and borrow 90% of the purchase price to buy a house. Try going to the bank and borrowing some money to invest into stocks. I have not met anyone who has succeeded.

So lets look at a simple example. I have $100k in and John has $100k. I go out and buy 10 houses worth 100k putting 10% down on each. Now I have 10 houses worth 1 million. John goes out and buys $100k worth of stocks.

Lets say that John’s stock portfolio earns him a whopping 20% return on investment and after a year he has $120k. My real estate portfolio on other hand is not doing so well, it is growing at a pathetic 5% rate, but because of leverage my portfolio now is worth 1,050,000. So John made 20k and I have made 50k. But that is not the end of the story. My 10 houses have tenants in them, I am making modest positive cash flow every month of $50/mo times 10 houses = $500 per month, plus my tenants are paying down my mortgages and I am depreciating the properties to create a loss to lower my tax basis.

The moral of the story is that if you use OPM you create leverage to increase your gains.

Remember real estate created the most millionaires then any other investment strategy.

These three strange concepts are tightly related and may make or break your deal.

Chain of Title is the real estate property ownership history. You may think that only current state of title is important, but in reality last couple years of ownership are important because of two words: mortgage fraud.

Here is the most common scenario of mortgage fraud. A scammer, mortgage broker and crooked appraiser work together to pull this off. Let’s say a scammer buys a house worth 100k, appraisal is done to show that house is worth 150k, mortgage broker falsifies documents and buyer from behind the interstate overpass is brought to the closing to sign the papers. The homeless buyer gets his $100 for troubles and $50k get split up by the 3 scammers. New mortgage never gets a single payment made and the house goes into foreclosure.

Banks are not dumb, after couple hundred cases like this they instituted a new requirement – Title Seasoning. What they saw is when house gets sold 2-3 times in a short time period the loan goes bad in much higher number of cases versus the cases where houses where sold only once every 2-3 years. So if the buyer wants to get a loan to buy a home the present owner has to own the home for at least 12 month in most cases.

So if you just bought the home for 100k, put in 20k worth of renovations and now are trying to sell this same home 2 month later will you have a title seasoning issue? To the bank this looks very similar to the mortgage fraud. House was bought for 100k and being sold for 150k in 2 month period – red flag goes up.

So how can you overcome this little issue? The answer is Land Trust. Land trust in essence is just a bunch of papers. It is designed to own real property. For the Land Trust to exist there has to be 3 ingredients: Land (we have a piece of dirt with everything stuck to it in semi permanent way), trustee and the beneficiary. Beneficiary is the entity who will benefit from this trust and trustee acts on behalf of beneficiary. Conveying the property into a land trust does not break the chain of title. If you own the property for 2 month and the previous owner owned for 4 years, when the new lender will request a title binder from the closing attorney title seasoning will show 4 years and 2 months. The event of conveying property to the land trust will show, but not break the chain of title.

Here you have it. We buy all our properties now into a land trust. This has too very good side effects: limited privacy and limited liability. I will not go into details, but if you will be dragged into a courtroom that is where that limit will end.

And one quick note. Never, ever buy property on Quick Claim Deed. Always go the real estate attorney’s office (title company, escrow agent), order title, pay closing and get title insurance. To close on 200k home here in GA costs me around $700 and title insurance another $700. Considering how much money is at stake this is a small price to pay.

I wan to start with a little rant. How much do you think it costs to run a classified ad in a major newspaper like AJC? The ones we run set us back about $200 for two weekends. From such ads we get quite a number of “investors” calling us, wanting a free house…. Go and read my old post I want houses with 0 down and take over payments. Someone would think that a desperate homeowner would spend $200 to say to all metro Atlanta: “TAKE MY HOME”. Get real!

Ok. I am done ranting. Now really think, would a desperate person spend $200 to place a classified ad in the newspaper to give away their house? I do not think so. Here we have the very first mistake that most of real estate investors make - calling on classified ads in a newspaper where you need to pay for classified ads.

Second most common mistake I think is placing an ad “We buy houses” in the local newspaper. Have you looked how many these type of ads you see there. Last time I checked, I counted 13 “We buy houses” and 19 others with a different wording, but meaning exactly the same. Stop following the herd. Do something different.

Third most common mistake I see beginner real estate investors making is wrong approach to direct mail marketing. They either

1. select a very small area and mail them constantly
2. they mail the whole city one time.

In the first case investor would mail only to 1000 homes in a subdivision where about 10 homes get sold every month and they will continue mailing these same homeowners every month. This approach can not produce enough leads to have a deal to recoup marketing expenses.

In second case the area is too big and repetition too small. You need to mail at least 3 times to the same person to produce results.

So my advise would be select a big enough area and target your prospect sellers. Targeting means that you are looking for something specific. It can be landlords who just evicted their tenant, homeowners who can not make their mortgage payments or someone who listed their home 3 times and could not sell it. There are ways to get your hands on the list of such homes, you just have to spend some time or cash.

Be creative!

What is wholesaling? In short wholesaling is selling to a reseller, not an end user. So wholesaling real estate means that you are selling the property to someone else who will be selling it to the end user. Wholesaling can be done with deals for all cash, subject-to (sub2) or with financing.
Let’s look at some examples.
We went out and put a nice 4 bedroom home under contract to buy it subject to the existing loans with no money coming to the seller at closing. House is worth $230k on a bad day, existing loan balance is $202k. We marketed it as take over payments deal for only $6k plus closing costs, which makes purchase price $208k and leaves $22k in equity for whoever buys it. So you need $6,000 to get it and you make $22,000 profit at the closing table. That makes 366% return on investment (ROI) on this deal.

All three parties benefit in this situation. Obviously we benefited by 6k, the seller benefited, since they got rid of the house they did not want or can afford to keep and the buyer benefited by purchasing 22k of equity with 6k.

On one hand wholesaling is the great way to make a quick couple thousand, without taking possession of the property. All you need to do is to market to attract sellers, prescreen sellers, go out construct and present offers, negotiate, sign the contract and do the due diligence. Once you have the contract signed with the seller you must market to attract buyers, show them the property, etc.

On the other hand wholesaling is the great way to buy properties. You do not have to do any of the above! All you have to do is bring 6k to the closing and you own property without signing for debt or borrowing hard money and you made 22k. This is a great way to buy your rental properties, since now the lending industry is in big turmoil and it is almost impossible to get 100% financing for investment loans. Think about is, on the home worth 230k the bank will ask you to put down at least 10% which is 29k. You can buy 4-5 subject to wholesales with that kind of money.