Just as a review, buying property “subject to” means buying a property subject to the existing financing.
The seller’s original financing stays in place until either refinanced or sold to a third party. The investor/buyer takes title to the property while leaving the loan in the seller’s name. If we were to take over payments on a property worth $100K and the mortgage payoff is roughly $50K; our offer should be in the $80K range. That leaves a $30K equity payout to the seller. In the perfect world we would love for the seller to agree to accept that $30K when the property is refinanced or sold to a third party.
Assuming that the seller accepted these terms, the seller always is concerned about how they are protected. In these types of transactions we immediately notice that there really isn’t any way to force the investor to make on time payments on a seller’s loan. The seller generally has to trust that the investor/buyer is not going to let the payments go after a few months and leave their credit jacked. The seller realizes that if that happens then their equity payout due is in jeopardy.
So the question is: “How can the seller protect themselves from these types of situations?” The answer on the investor is “we don’t have to take title immediately.”
You may have heard of a Land Installment Contract. There is a pro-seller contract and a pro-buyer contract. In this case you would use a hybrid of the two to give the seller the most amount of comfort possible. In a gist, this agreement transfers the title of the property from the seller into escrow instead of it being transferred to the investor/buyer. Without title to the property the investor/buyer lacks the power of an actual owner and the only way to reap the full benefits of property ownership is to give the seller the equity payout in full via refinance or sale. Sellers love this. And the Land Installment Contract can totally be tailored to the situation. This will definitely help you close some of those home runs that turned sour.
Blessings to Your Real Estate Investing Successes,
Milton B. Yates
Related posts:
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- Real Estate Sellers: Be Aware of Property Disclosure Laws
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Article Author: Milton B. YatesMilton B. has written 11 articles for us.
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Joshua Dorkin
{ 8 comments… read them below or add one }
Wow! That is pretty messed up. Thanks for the advice.
Milton,
The one thing I can’t get past on “Subject to” deals is that most (if not all) mortgage notes require the lender to be notified upon transfer of deed of trust. It seems like during a period of rising interest rates, they would call the loan as soon as you notified them.
Thanks,
Michael
423 Chandler you’re right. Just about every loan that has been originated, whether it’s FHA, conventional, subprime or Alt-A has a due on sale clause. So any wrap like this triggers that clause. If the lender doesn’t know about it they won’t call the loan but if they do they will call it. Nevertheless, it’s fraud to do these transactions and not tell them.
Lindmark,
I agree with you. I happened to see a speaker on these “subject to” deals one time and he basically said that he just doesn’t notify the lender and hope the lenders hardly ever catch on. He didn’t really seem to think it was that big of a deal. I thought it was a little dumb for a guy to be up in front of 100 people explaining how he breaks the law when he does these transactions.
- “I thought it was a little dumb for a guy to be up in front of 100 people explaining how he breaks the law when he does these transactions.”
Saying he breaks the law sounds a bit like saying he robbed a bank. He’s violating a civil-law mortgage contract, subject to contract law, not violating a criminal law. No police officer can arrest him for not adhering to that clause of the contract (unless it was done with criminal intent to defraud). So long as the subject-to buyer has intention to make payments and satisfies all other clauses of the mortgage contract the bank cares most about getting its regular payments.
As a successful investor at a local club pointed out, this is a good reason to have deep pocket partners or hard money lenders available in case a loan is called. I think the investor at the meeting had one case of a loan called and worked with her option buyer to accelerate his purchase. She brought in a mortgage broker and got her option-buyer to close and paid off the subject-to mortgage that way. Her hard-money lender was available as a backup plan.
423-It’s pretty amazing what people will do without regard to the consequences. In Phoenix we have people advertising on Craigslist the sale of their home’s fixtures before the house gets turned over to the bank. They are ripping out kitchen cabinets, flooring, air conditioning units, ceiling fans, basically anything of value and selling it before the banks can get their hands on the property.
does the title stay in the current owners name while in escrow or does it get put in the investor/buyers’ name while in escrow?
Milton,
Thanks for this interesting piece of advice. In your own practice, how to you deal with the acceleration clause? It seems there are many techniques and many opinions — and I’ve read a lot but can’t really figure out how I would do it myself — but I’d like to hear from an actual practitioner.
Also, I generally understand that buying on a land contract puts the buyer in a weak position. I understand how in this case it’s a tradeoff for not having to front the cash to cover that equity; have you ever been “burned” using this technique?
You mentioned that you’re using a hyrid land contract. Could you possibly share it with us?
Regards,
Eric