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#9 - "How to Sub-2 and Please Stay Away From The Darkside..."

Strategy #9 is Subject-2, a/k/a "Subject-to", a/k/a "sub2"

In short, it is taking over someone else's "headache".

That is taking over someone else's property, where they allow the underlying mortgage (debt obligation they have incurred) to stay in place. And the reason I say taking over someone else's headache is because the only person who would give the keys to their property and still remain on the mortgage would be someone who is clearly a highly motivated seller, who "just wants it gone". The technique is actually rather simple, despite the fact that my description of it may be complicated.

When a property is acquired, it is usually acquired with borrowed funds. The lender making the money available wants collateral, so the borrower and the lender agree to a mortgage. What the mortgage says is that the borrower will pay back the funds borrowed (with interest) and that the lender has a lien on the property as collateral, until such time as the loan is repaid. Now 99.99% of the mortgages out there do not prohibit the borrower (property owner) from selling the property while the loan is in place. However, 99.99% (or at least something close to it) of the mortgages out there say that if the Borrower (property owner) does sell the property, then the loan is "DUE ON SALE", meaning it must be paid off at the time the property is sold. To determine if the mortgage is in fact due-on-sale, you have to read the document. There is no law that requires a due on sale clause. In fact, this is why it is called a "clause", meaning it is term of a contract, and as we know from earlier blog posts, contracts are the specific arrangements between two (or more) parties - there is no State or municipal regulation that tells folks everything that MUST be in a contract.

So in short, when an investor buys a property "subject-2" what they are telling the seller is that they are taking the asset, but leaving them "on the hook" for the debt.

So who would fall into a category of sellers who would even think about doing this?

People who have lost a job, lost a loved one, inherited a property, have been relocated and are paying on two mortgages, got "right sized" and are now living with their mother, are going through a divorce, have come through a divorce, are planning a divorce. In other words, people who are experiencing this thing called "Life", and all the ups and downs it has to offer.

Subject-2 is another one of the great devices that investors use to get properties "Nothing Down", and it has great advantages for both the seller and the investor. But it has a "Dark-side" too.

Recently, a number of states have passed laws to prevent properties from being taken over "Subject-2", or more precisely, they have attacked some of the techniques used because they do not like the philosophy behind "Subject-2" deals. North Carolina is probably the most aggressive state going after Subject-2 deals. They have specifically gone after investors who use land trusts as a mechanism for transferring a property between an investor and seller whereby the deal is done "subject-2" the underlying mortgage.

So is Subject-2 Bad? NO! But some of the techniques used to make a subject-2 deal "work" Are!

In fact, there are a number of situations where having an investor come along and buy a property "subject-2" is the only way the property owner is going to get out from underneath their situation. There is nothing inherently wrong with Sub-2, either the concept or the strategy. However there may be issues with the manner in which it is executed. Anytime you hear a "guru" pitching "GET THE DEED", or "JUST HAVE THEM SIGN A LAND TRUST", you need to step back and really look at what is being "preached".

Specifically, investors who do not disclose to homeowners what the ramifications are of selling a property where they are still on the hook for the mortgage may be operating either unethically, or even illegally depending upon your state law. Investors who get people who are clearly distraught emotionally and mentally to sign documents that in essence have them signing away their biggest asset, may have a contract that is unenforceable. Investors who induce homeowners to commit fraud, may in fact be setting themselves up for jail time, or at least a big fine.

Again, while I do not believe there is anything inherently wrong with Subject-2, as with all things, there is a right way to do it, and a wrong way to do it. So, if you are going to do Subject-2 deals, you need to first figure out how to do it, and then make sure that what you are thinking of doing is legal and ethical. Do it the legal and ethical way, or don't do it all. This is true not only of "Subject-2" investing, but all investing. a) you don't want to have to explain to your momma why there is a picture of you on the front page of the Washington Post being led away in handcuffs, and b) when you hear the clang of the cell door behind you and Bubba, (or Bubbaette) asks "what are you in here for", you're not going to hold up well if you say, "Stealing people's houses".

Subject-2 is a great way to create win-win scenarios for both the seller and the investor. It is also an area that can be really abused. It is quite understandable why there are equal numbers of investors who rave about it, as well as those who say they "would not touch it with a 10 foot pole". It comes down to what techniques will you use to make "Subject-2" work for you, and how does this plan conform to state laws. Any strategy that emphasizes "getting the deed", or "land trusts" are naturally suspect and you need to make sure you are operating in the clear by discussing with your mentor, or the leadership of your REIA (assuming you belong to a good one) before moving "full throttle" with your Subject-2 strategy.

Sherman Ragland - Thank you for reading...

#8 - Lease Option a/k/a "Nothing Down"

As the name implies, "Lease/Option" is where you lease the property belonging to another with an option to buy.

It is the corner stone of every "Nothing Down" system out there.

The most basic lease/option play is the "Sandwich Lease/Option". In a sandwich lease/option an investor agrees to lease the property from a property owner, again with an option to buy and then turns around and leases the property to another giving them also the opportunity to purchase in the future. When the new "buyer" elects to purchase, the investor then exercises their option and makes a profit by structuring the deal in such a way that there is one.

That's it.

It's just that simple, and of course, just that complicated.

Complicated..?

As they say, "The devils in the details".

To be successful at this (or any other investing strategy) you need to focus on both the end result (a/k/a Desired Outcome) as well as the execution. To make even the most basic lease/option strategy perform correctly (as in making a profit without getting brain damaged) you need to have the right documents, the right marketplace and the right team around you.

Specifically, you need the right documents. Again, real estate is a local game (or at least regional). What works in Florida or New Jersey may or may not work in Maryland or DC, and might even get you in trouble in Texas! Having access to a good attorney who can not only draft an agreement that is enforceable, but can also share with you the wisdom of what they know works and doesn't from a business perspective is invaluable, particularly for the new investor.

Second, you need the right market. I don't mean an "up market" or a "down market". Even in the subcategory of lease/options there are sub, sub categories. As an example, Wendy Patton has become famous for her lease/option strategies focusing on higher-end homes in exclusive suburban communities around Detroit (where all the high paid auto-execs live). Her strategy is a beautiful one. She focuses in on people who do not "NEED THE MONEY", rather it is a hassle for them to own two high-end homes when they are transferred or retire. She also works through Realtors(r) and has a very long-term perspective to her "core" lease/option strategy. Minh Pham, a local investor in DC, and most recently Southwest Florida on the other hand focuses in on "blue collar, working class" neighborhoods. Neither strategy is "Right" or "Wrong", both WORK for the two investors who created them. Right here in the DC area there are MASSIVE layoffs taking place in and around an area known as Dulles, Virginia due to the "Right-Sizing" of AOL by its parent company Time-Warner. For many of these people a "viable" option is to take a job in Silicon Valley and COMMUTE! Yes, they hope on a plane (some doing it every day - insane) from Dulles Airport to San Jose, CA. They do it to "save their homes". Of course, after 2-3 months of this they will ultimately decide to move to San Jose, or get a new job. These are perfect candidates for lease/option strategies the way Wendy Patton teaches it!

Once you make the time to learn all the "ins and outs" of lease/options, you will see that there are multiple opportunities to put lease/options into play right where you live - today. So you do not have to go "Cross country" looking for the right market to do lease/options. You simply need to figure out which lease/option strategy is the correct one for each of the markets close to you, now.

Finally, you need to have the right team. Earlier I spoke about the right documents. Well the right documents come from the right attorney, so having a good real estate attorney on board early is crucial. Even if you get something out of a book, or course, you still want YOUR attorney to review it BEFORE you actually use it. In addition to the right attorney, if you are new to lease/options (and definitely if you are new to real estate) you will also want the right mentor - preferably someone with experience in your local market. Like everything else in this business, the more you focus the faster it will go, and the bigger the profit per deal you will make. In almost every area of the country today there are good real estate investor clubs. To get the list of clubs in your area go to http://www.NationalREIA.com and look up their member clubs. After you get the list, visit the clubs and ask the club leadership "who in your club seems to really do well with lease/options", then take them to lunch and interview them. If they wont do lunch and have a stellar reputation, offer to pay them $500.00 to sit in their car for a day and look over their shoulder. If they are any good at what they do (which is why you want to spend time with them) $500.00 is NOTHING to them, but it does indicate that you are at least 1/2 way serious and will get their attention. Since many people I know (some very well) are making at least $50,000 per transaction, if you get the name of their attorney and learn one or two things that day, the $500.00 is an easy decision.

The truly great thing about lease/options is that they tend to work best in slowing, or changing real estate markets. This is because the best candidates are usually people who attempted to sell their house for a specific price within a specific time frame but could not for some reason (usually because they are asking too much). Once they are completely frustrated and fire their agent, they are ready to "deal".

There is an unspoken rule in this business: "My price and your terms, or your price and my terms". Lease/Options are great for making a deal with people who are "hung up" on their price, and are now ready to work with someone else's terms.

Build a team, get the right documents and go out and make some money using lease/options. RIght now in most markets across the country the time is PERFECT for this strategy!

"I'm So Confused!" - Of Course You Are My Dear and For Good Reason...

Every day a new set of statistics comes out about the US housing market, and every day more and more people are standing around saying: "I Told You So!"

The problem is, of course that the people wagging their fingers in the air are on opposite sides of the argument (or so it seems) and are Both Right and, of course, Both Wrong!

HUH...?

It seems that over the last 5-7 years we seemed to have forgotten that real estate really is a "LOCAL BUSINESS". Well, sort of...

Over the past 5-7 years, the factors influencing residential real estate (from a Sellers Perspective) were so strong across the board and in every market, that we all got lulled into this stupid misconception that there is ONE BIG real estate market, and all you had to do was jump into the pool to get "filthy stinking rich".

Now here we are a few years later and "The Market" is not walking in lock-step. Well truthfully, it never did!

For a brief moment in time we saw what looked like one big market, but it wasn't.

It is true that the financing of real estate has become global, and therefore interest rates and any dramatic reduction in interest rates have an immediate impact across the entire country and across every price point in housing affordability. All be it, different areas of the country define their housing as "Affordable" at different price points. And over the past 10 years we have seen a significant increase in the production of houses across the country by Big National Home Builders who are financed by Wall Street money. This is different because historically home building was financed by local S&L's and built by local, or super regional home builders. But the story does not end here.

Despite all the media inspired mantra about "Location, Location, Location", the three core fundamentals of residential real estate are, and have always been: 1) Interest rates, 2) Supply versus demand, and 3) JOBS!

The "Supply" part of real estate has to do with who is building, and fixing up housing for any given market, and with the presence of large national homebuilders in every major market that supply can seem like a national issue. But in almost any market in the country the national home builders do not have more than a 25%-30% share of the market. Which, by the way can actually be good, because when they shut down production they tend to do it across the board and not just in markets that are "weak" vs "strong".

However, Job creation is most definitely a local thing, particularly in Major/Major cities like L.A. NYC, and of course Washington DC. In other words cities with either very diverse economies, or as in the case of DC, and economy that is not subject to downturns by local industry, like Detroit or Houston.

Right now, even in a marketplace as small as the Washington-Baltimore Corridor there is a huge discrepancy from one market segment to the next. While the Ladies sing the blues in Northern Virginia, Prince George's is still solid and every house we complete in Baltimore City (under $170,000) has sold well within 30 days of being completed and put on market.

So, what's up with this?

Simple, and getting back to the original point of this blog post: the residential real estate market has returned to "normal". While some markets are doing well, others are completely in the toilet. It is not strange that markets across the country (if not across town) are out of sync. What is strange is the number of supposed real estate investors who are "whining" about it! There are 10 fundamental strategies for acquiring and making money in this game and it is insane to believe that ALL 10 ARE SUPPOSE TO WORK ALL THE TIME!

Now maybe over the past 5 years they did, but that is the exception not the norm.

As any first year economist will tell you, the reason there is opportunity to make huge scads of money in real estate is because real estate operates in an "Imperfect Market". Definition: If you make the time to learn the biz and what really works you do better than the "average" investor who is always looking through a rearview mirror and as a result, usually winds up making "average" returns, or on the rocks.

If you are expecting to see the days when everything (regardless of location, or price point, or state of repair) goes up in lock-step - FO'GET ABOUT IT.

Now is the time when educated investors will profit, and everyone else go back to the 10% annual return on mutual funds, or simply make stupid mistakes based on "national data", or what some report had to say in a 30 second "snip-it" on the evening news.

However, those who choose to recognize that real estate is local, and to be smart about their investing, make the required adjustments and get educated will probably see the types of triple digit types of returns we are seeing right now in Baltimore City, and in Prince George's. But to get to triple digit returns, you have to do a little more homework and get a little more education (on your local market) then the folks who are content to play the mutual fund game, or only get a superficial knowledge of how real estate really works.

As for me and my team, putting in $5,000 and getting back $35,000 to $50,000 by working the right deals, at the right time in the right local markets is worth the little "extra" time it requires to figure this thing out, at a local level. And of course, all of this has absolutely little to nothing to do with commercial real estate - a topic for another blog, trust me.

But for those of you who simply want to buy a book at Borders(r) and put it under your pillow, or just respond to a "FREE" TICKET that shows up in your mailbox to attend the traveling real estate circus when it comes to town, and now believe after reading this that keeping up with this real estate thing is "too hard", Sorry. Please deposit your deeds on the way out...

Sherman Ragland - Thank you for reading...