Just kind of curious. Rule of thumb for buying preforeclosures is <70-75% of FMV. But, I assume that you can be a little more aggressive purchasing subject to vs. other preforeclosure buying methods.
Is there a well known rule for subject 2’s or is the purchase- value ratio a little bit higher?
The only rule of thumb I know is to buy according to your business model…
When buying Subject to you have to understand where the money comes from…
You can buy low equity deals and resell for a profit on a land contract, seller wrap or L/O and make money in the beginning, during and at the end of the balloon or contract.
You can also buy high equity deals and flip, making a bucket load at resell and be done.
So it gets back to what you want to accomplish and what your market supports.
My Personal rule of thumb is high equity at the very least 25% and I have a difficult time getting excited about that… Especially with a devaluing market… But one of the Moderators here has made a fortune on the other method… So pick your model and stick to it…
Happy Investing
Michael Quarles
I think too many folks are looking for a one-size-fits-all formula and that is so untrue in REI.
For a property that is nearly new, needing little spruce up, in the right price range for owner financing, I have made good money off deals at over 80% – if I can take it over Sub2.
On the other hand, earlier in my career I bought some junkers at less than 50% ARV that I deeply regretted.
There’s a reason that lenders will let an REO (or a short sale) go dirt cheap if it is in bad need of repair. And why they will hold out for top dollar (around 80%) for a nice “pretty house.”
Know your own local market to see what works for you.
I agree with both posts and wanted to add a thought. I buy homes on lease options or subject to and will pay full price. Sound crazy? All I care about is cash flow so if the underlying financing is good enough I don’t care about the price.
This is obviously a long term strategy, I am not speculating on if and when the value of my properties will increase. I know that over time they will and in the mean time I am enjoying my cash flow and tax benefits.
Best of luck,
Kevin
Kevin, here’s some things you should serioiusly consider about when buying properties with no equity:
1- you have no alternative exit strategies, only one way out.
2- when you get a trashout, (and you will) you have only cash flow to pay for it.
3- if your property had more equity in it, you could get more income from it.
4- the big money in income property is to offer an option or owner financing. Those big backend checks can be reinvested in replacement properties with even more equity and more income. (most of my properties are paid for, or cash flow $500+) But this only works if you have equity in the property.
Think about #4. It can make you rich. It doesn’t take a lot of skill to buy properties at significant discounts in today’s market.
I learned long ago – no equity. no deal! Almost all experienced pros will tell you the same.