A Quick Owner Financing Question.....

Murphyj2000 profile photo

If I buy a house Sub2 from a motivated seller and say I' ll do my best to make the payments (which is the truth), but my buyer vacates the home. Then I' m not able to make payments on the loan. What' s the worst case scenerio. (with a CYA letter)

Any help would be greatly appreciated,
Murphy

Comments(9)

  • dknj2328th June, 2004

    honesty, if you can't make the payments if your tenant buyer leaves then you shouldn't be in the business. you'll instantly get a rep as a person who is unprofessional and not trustworthy. nobody will come to deals with you period.

  • miraclehomes28th June, 2004

    The first reply is correct, but if you can't make the payments, and the contract is written correctly, the house can be deeded back to the original seller. This is something that you absolutely do not want to do , if you want to be in this business very long. You not only will give yourself a bad name, but all of the other honest investors out there a bad name as well. If you cannot afford to be in this business, start out bird dogging and get some money in the bank. Until next time.....................

  • Murphyj200028th June, 2004

    So what you are saying is that in order to do Sub2 deal, one must have cash on hand? About how much is required. What if I' m doing 8 deal a month, and all of sudden, 4 buyers vacate. I' m left with 4 morgage payment.

    Murphy[ Edited by Murphyj2000 on Date 06/28/2004 ]

  • MicahM28th June, 2004

    If you're doing 8 deals a month you should have money in the bank.

    You shouldn't go into this thinking "If my tenants move out I'll just give the place back to the original owners so there's no risk for me." That's very irresponsible and unprofessional.

    You should collect first/last month's rents from your tenants so that you can cover the mortgage (or keep some of the downpayment if doing a L/O, for this situation). It's a good idea to have 3-6 months of mortgage money in the bank so you don't get caught with your pants down. 1-2 months should be plenty of time to get a new tenant.

    You should also be getting a surplus on each month's rent from your tenant; put some of that money in the bank for this situation.

    Prepare for coming out on top of this scenario, not doing something that will harm your reputation. Chances are that your tenants WILL leave. If they were so good at paying bills, they probably wouldn't be renting.

  • jeff1200228th June, 2004

    If you're doing 8 deals a month, correctly, then you should be able to afford 4 mortgages for a month or two. You should be collecting at least twice what you've got invested when you get deposits from your buyers, and positive cash flow monthly.
    You may have to live lean for a bit, or Sell them outright. DO WHAT IT TAKES.
    Jeff

  • neutral28th June, 2004

    Murphy-

    If you are doing eight deals a month you should have plenty enough money to cover the mortgage payments. For example: lets say you got 5k down on all 8 properties. That would give you 40k in your pocket. From this money set aside enough to cover the at least 3 months payments on each loan. So if the payments are $600 each, you could put about 7k in away to cover your self from the worst case scenario.
    Eventually this account will get big enough so you wont have to make any more deposits into it..

    Makes sense?

    neutral

  • neutral28th June, 2004

    cant type fast enough!

  • Murphyj200028th June, 2004

    Jeff & Neutral,

    Thanks for your replys. You guys definitely make alot of sense..........That' s the way most investors (the ones who do multiple deal a month) handle Sub2 deals?

    Murphy

    [ Edited by Murphyj2000 on Date 06/28/2004 ]

  • arytkatz29th June, 2004

    Murphy:
    Yes, neutral's reply about banking reserves would be a good rule to follow.

    From my 6 mos. of learning in this business, there are a couple of foundations I've found running through the experienced investor's threads:
    1. This is a business--treat it like one. This shouldn't be a "run out and try to grab as much money as you can" thing. Figure out how you're going to invest and how much capital it's going to take and how much risk you can handle. Make a plan!

    2. Like your mom taught you: be honest, be fair, and don't be greedy.

    3. . Learn as much as you can, and plan your investment strategy all the way through: how to find them, how to buy them, how to sell them, and, what a lot of new investors forget, HAVE AN EXIT STRATEGY for all circumstances.

    Think of all the negatives that can happen in the deal and have a way out BEFORE you buy. For example, plan how are you going to handle:
    - can't sell for 6 - 8 months
    - house burns down before you get a buyer in
    - house burns down while your CFD or tenant/buyer is in there
    - CFD'er or tenant/buyer moves out or doesn't buy at the end of the term
    - lender invokes the DOS clause and wants their money NOW: do you have resources to cover this (getting your own loan for payoff, refinancing your CFD'ers early, selling immediately, etc.)

    This exercise is not to turn you off from investing in RE, but to build your business on a solid footing by being prepared.

    Your enthusiasm is your engine, but your plan is the vehicle that will carry you a long way...

    Andy[ Edited by arytkatz on Date 06/29/2004 ]

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