Will Subject-to’s, Preconstruction and Lease options create wealth in declining markets?
Subject-To’s, Lease-Options and Pre-Construction are a few of the ways to get extreme leverage. They do not create any wealth, per se, they just allow you to control a high valued asset (real estate) with little or no money in the deal.
If you’re tied up in Subject-To’s, Pre-Construction, and other high leverage situations in a DECLINING market, you will get clobbered, for two reasons:
1) Leverage itself is a double-edged sword. When the leveraged asset is declining in value, you lose equity but are stuck with the obligations/liabilities. A small drop in value can you put you underwater very quickly.
2) In declining markets, real estate becomes even more illiquid; buyers dry up and you can’t exit the deal easily.
With one exception, every wholesaler and flipper in a declining market I know “lost it all” or close to it in the last big crash… and wholesaling is far less ‘risky’ than Sub-2’s, etc. because of the much shorter invested time horizon compared to Sub-2s, Pre-Construction and Buy & Hold strategies.
Were you invested, using those or ANY REI tactics or strategies during the last crash?
If yes, you probably don’t need much more explanation.
The important point is that you don’t have to invest blindfolded to the market anymore. There are times in a market cycle when those strategies can work well, and other times when they simply will not work.