Are The Types Of Deals You Do Risky?
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“Are The Types Of Deals You Do Risky?”
Joe: Hey, it’s Joe. Got another question here. This one says, “Aren’t the types of deals you do pretty risky?” No. Not really. As a matter of fact, if you screw it up, if you’re doing the For Rent method, you get on the call with somebody and they say, “Would you sign this Lease Option Memo?” You get control of the property, now you’ve got control of the property, right? But it cost you nothing. You didn’t have your credit checked. I mean, you barely have your name on it. You have just enough to put you in control of that property. So you turn around and sell it.
Joe: So you go out and you try to find a seller. Let’s say you screwed it up and you didn’t get permission to put a sign in the yard. They wanted $1,500 a month and it’s only worth $1,000 a month on the rental. It’s not going to sell. So, now, you have the potential of losing that deal. So you’ve got this time that you put into it that you’re going to lose. But you’re not going to lose anything else.
Joe: All you do is give it back to the seller or, better yet, go back to the seller and say, “Look, it needs to be $1,000 a month. Let’s get it down there,” and if you can get them to come back down then you have the chance of making the money. But if they don’t want to sell it, they’re the ones that are making the monthly payment, they’re the ones that have the pain – not you. So that type of deal is not risky at all.
Joe: If you take a property that’s Subject To, that has a little bit more risk for you because you’re taking on somebody else’s mortgage. Now you’re not qualifying for that mortgage, you’re not going on the loan for that mortgage. Your name is on the deed but if you stop making the payments on it, then you’re not going to damage your credit. You are going to damage your reputation so you want to make sure that if you’re going to take a property that you’re going to be able to maintain it, that you’re going to be able to keep tenants in there, or lease option tenants in there, and that you’re going to be able to take any negative cash flow that might come from it.
Joe: If the taxes go up, if you have unforeseen circumstances and the house burns down or you’ve got to make sure you’re insured properly, you have to have those types of things. So that risk does go up. But that’s true with any rental property. You still have no name on the loan, you have no cash into the deal, zero cash into the deal, so the return on those deals are infinite. If you set up the Subject To’s the way that I do, in your documentation it says, “If this becomes unviable as an investment, I may give it back to you. But I promise to give it back to you where the payments are current and that it’s in at least as good of condition as when I got it.”
Joe: So if it becomes unviable, and I’ve had that happen to me a couple of times where a deal become unviable. Usually it was because something that wasn’t disclosed to me by the seller and then I give it back to them and say, “Hey, you didn’t tell me about this septic issue. We’re four months into this deal and the septic’s backing up and it’s going to cost $10,000 to fix it. Would you like to fix the septic or would you like the property back?” And so we give them the property back, in that situation at least.
Joe: So I didn’t have any credit on the line, I didn’t have any money into the deal. I had a lease option tenant in the property and we had to deal with that problem, but I just put them into another one of my properties instead and everybody was happy and they actually liked the new property better than the old one. So we didn’t have a problem at all.
Joe: As long as you pay attention to what’s going on, you can solve these problems with very little risk. If you go into these deals without trying to screw anybody, and you actually try to solve the problem for people, the likelihood is that people will like you and they’ll trust you and they’ll work with you and if you make a mistake and you apologize for it, most of the time they’ll be okay with that.
Joe: You don’t want to make mistakes, but I still make mistakes every once in a while and it’s humiliating. I hate it when it happens. But I go back to the people that I’m working with that might have lost some money and say, “Here’s what happened. I’m very sorry it happened. Where do you want to go from here? Is there something I can do to help you make it right?”
Joe: I can’t always make it right. I don’t always come up with money to make it right, but I try to do some kind of service to try to help them get back at least a little bit of dignity in the process so that they don’t feel so bad about losing whatever they lost.
Joe: All right. I hope that helps. Good luck.