I remember a Joe Kaiser comment about getting into rentals. His comment was that you should have 20K in reserve. Subject to are not much more than easier rentals. The problem becomes when you spend the down payment. If you did like the PT says and keep 2 or 3 payments in a contingency fund administered by a third party you would not have as many problems that the less solvent investor has. Illiquidity is always a problem to a real estate investor and many other businesses. Because it is not addressed properly does not mean you want to lose control. The PT clause could be added to contracts or other landtrusts. Are you willing to keep several payments in the hands of at third party collection?
Perhaps by just giving the seller a performance mortgage would the way to go for you. This way instead of giving the seller an option to just buy the property back, the seller would have to foreclose just like a lender would. That would give you time to deal with buying some time before the foreclosure went through.
Oh, wait a second. You’re in Texas! Isn’t it only 21 days or something to foreclose on a property in Texas? Then wouldn’t a 60 day default clause giving the seller the option of buying the property back serve you better than having the seller have to foreclose to get the property back? That’s better than any bank would get you regardless of how much equity you have being in Texas! What more could you ask for?
But remember, the whole point behind this is to add protection for yourself to avoid any potential criminal charges being filed against you. It has nothing to do with civil matters. We have the use of Corps and LLC’s for that!
I agree with you that “cash flow crunches” can happen even in the best of times. In fact, I believe that they OFTEN happen to more “seasoned” investors during these times.
All of us have a tendency to stretch ourselves when we think the future looks bright and the present is “under control”. Perhaps misplaced optimism brings as many difficulties to investors as does poor economics.
A former Texas governor (long before your time) once said that “green grass has broken more ranchers than drought ever did”. He was absolutely right.
Bud,
I do understand and appreciate your comments. And yes, contingency funds held by third parties would greatly reduce the risks. However, I’m not just asking these questions for myself. What percentage of the folks that are attracted by the no money down, no credit required, get rich quicker seminars would be willing to do that, if they were even financially capable to do so? I’d guess not many.
I’ve been a landlord for seven years and I agree having reserves is critical. I’ve had to carry 5 vacancies (4 digit payments each) at one time before. I just don’t believe that many of the Sub2 operators are adequately prepared for becoming overextended, and that perhaps there are intermediate steps a REI could take to help reduce the risks should things head south.
I think people are going to do the Sub2’s regardless. Discussions like these recent threads can at least point out that there are risks that need to be considered, and failing to do so can include very real consequences. Agreed?
Posted by Stacy (AZ) on July 28, 2001 at 12:49:14:
…within the performance mortgage you state a time period that, upon passing, would allow a foreclosure to occur. For example, if payment on the 1st mortgage is 60 or 90 days late.
If you add-on the 40 days to complete a foreclosure in TX, you’re at 100 to 130 days to get the problem solved.
I?m not going to weigh in on the main topic of this discussion; I?ll let you venerable gentlemen thoroughly explore the various options of solving the dilemma. As an aside, I only wanted to point out that while, yes, Texas has an extremely fast track for the oreclosure process, the entire time frame is slightly longer than 21 days. The 21 days to which JohnBoy referred is the minimum time from public notice to trustee sale. However, the creditor must give the borrower a demand statement at least 20 days PRIOR TO the public notice. Therefore, the bare-bones minimum is 20 days plus 21 days for a total of 41 days. Keeping in mind that all Texas trustee sales must occur on the first Tuesday of the month, the actual time frame could be slightly longer unless the lender times its notices perfectly.
Even so, 41 days is a VERY short time frame if one is experiencing a major cash crunch.
So, in order to lessen the possibility of criminal charges, I record a performance mortgage in the seller’s favor? At the same time I have the seller sign a release of said document so that I’m able to sell the property when the time comes, without having to track them down again? Doesn’t that essentially invalidate the “intent” of the performance mortgage?
I suppose that scenario deserves some thought, but I dislike the idea of recording anything against the property (wrap or performance mortgage), especially if if may end up require tracking the seller down later. For instance, there was some minor issue with the release docs.
That’s the thing about this biz. The decisions we make today may not come to light as “poor” decisions until years down the road.
The only solution I’ve heard so far that makes good sense is the PT docs. Dang, I was hoping to get fully acquainted with the details later. Guess I need to some additional study. Thanks…
Posted by Stacy (AZ) on July 28, 2001 at 13:06:54:
Tim-
Regarding the performance mortgage having to be released before you can sell, I don’t think that’s an issue. A correctly worded performance mortgage is self-fulfilling when selling to a new-loan buyer. I’ve never had to get a performance mortgage released before I could sell a house. The title company reads the doc and knows it becomes fulfilled by selling and paying off the underlying mtg.
Maybe it’s different in TX. I think it’s the answer to your concerns regarding sub-to, and allowing recourse to a seller without endangering your position during short-term cash flow periods…if you really feel worried about it.
