There are many investing strategies that the new investor may want to try. The ones I would like to comment about are wholesaling, lease options, rehabbing, subject-to, foreclosures, and buy and hold. There are others, but this list will do for our purposes.
What the new investor should keep in mind is where is the best place for him to start. In my previous article, Cash Poor Real Estate Investing, we took the first step on our investing journey.
Now, we are ready for the next step. It is not so much of a question of preference, but how can the new investor enter the market with the best chance of success. What I want to do is to take the list above and through the process of elimination discuss the listed strategies and point out the positives and negatives of each.
I want to begin with what I consider the least favorable techniques and work my way up to what I consider the top two investing strategies for the new investor. This will probably be discussed in four or five separate articles, since I want to cover each strategy in some detail.
The Subject To technique relies on the investor getting the deed from the homeowner, without taking on the responsibility of the mortgage(s). In most cases, the homeowner is probably having trouble making his mortgage payments. He has a pressing need to sell and sell quickly.
In today’s market, it is quite easy to find these homeowners. With all the homes near or in foreclosure, the properties are there for the picking. The homeowner is happy to get rid of the debt, since the investor promises to keep the mortgage current. This may be a challenge at first once the seller moves out and the home is empty. In most cases, the investor will rent or lease option the house to a tenant/buyer with the hope of a sale a few years down the road. On the surface, this seems like a good deal for the seller, however, it may not end well for him.
He will usually not be able to purchase a new home until this home is cashed out and his mortgage is paid in full. So, he becomes a renter, but in time he may be wondering when the investor will get his house sold. He probably took back a note for some of his equity to be paid when the house sells. At some point in the future he may need his cash. The investor on the other hand may be making a good positive cash flow and really may not want to give it up, especially if the back end profit from the sale is small. However, he has an agreement with the seller to get him cashed out according to the terms of the contract.
The investor may feel pressured. He must satisfy the seller in some way. If he can’t sell or refinance, he may have to come up with the money from other sources, like private funds or a hard money loan.
Due On Sale Clause
Then there is the concern of the “Due On Sales Clause”. This is a clause written into every loan. It protects lending institutions from the transference of ownership. Banks can call the loan due any time the deed is transferred. This is usually not a problem, especially in today’s market, but banks have been known to call loans due at any time.
The investor can hold the property long term while he builds equity and appreciation for a future sale, but there are no guarantees. The terms can be complicated and things can and do go wrong. The investor has to be honest and ethical and fulfill his responsibility to the seller.
One subject- To I did some years back put me in a difficult position. I has to deal with the seller quicker than I had anticipated. She wanted to purchase another home, but couldn’t due to her mortgage on the home she deeded to me. She was told by a lending institution that her debt to income ratio was to high due to her mortgage payment. I had to refinance the home and cash her out. Something that I really did not want to
Something that I really did not want to do. As I look back now I probably would have not taken the deed. The house did not cash flow like I thought it would. I still have it today.
Conclusion and Recommendation
My discussion of this strategy has only touched on the main points. Certainly, there is much more that could be discussed. There are many other resources that are available, however, it may seem to be an easy technique, especially since there are many houses in today’s market that qualify, but in my opinion it has a high level of risk. The investor puts himself in a difficult position if things do not go as planned. He also has obligations to the seller that may be difficult for him to fulfill.
Due to the risks and complexities involved, I don’t recommend this technique for the new investor. Buy the way, please take a minute and leave me a comment and let me know your thoughts. Thanks. In the next article, I will discuss the rehabbing strategy. I hope you can join me. I’ll talk to you then.
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