Super-Important Clauses for Your Subject-To Contract

4 min read
Jason Hanson Read More

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2751057303 af8806981d mThere are two things I love in life, real estate investing and the great outdoors. This week I’ll be in North Carolina doing some hiking in Asheville and then later in the week I’m heading to Charlotte. Hopefully as you’re reading this I’m deep in the mountains and maybe I’ve found a swimming hole or two (or maybe I’ll just disappear into the woods forever and live off the grid with the one member of my cult…yes, I’m still the only member of Jason’s cult…there was one guy who offered to join my cult if I’d murder his wife, but I decided to pass since our legal system frowns upon that type of behavior).

Make Sure You’re Using a Contract Specific to Subject-To

Anyways, recently I was doing consulting for someone who needed help with her first subject-to deal. She faxed over the contract she was going to use and as usual, it was a standard contract that could have come from Office Depot. Repeat after me: You need a specific contract for your subject-to deals. The best way to get this contact is to use a contract from one of the courses you’ve purchased. Then take that contract to your lawyer and have them look it over and improve it (and if you don’t have a lawyer, start treating this business seriously and get one). This will save you a lot of money because you won’t have to start from scratch and your lawyer will have a template to work from. So, as I promised last week here are some of the clauses and information from the contract I use (first, remember I’m not a lawyer, seek competent legal advice, these are just the clauses that I use, yadda, yadda, yadda).

  • A check in the amount of: Ten-Dollars ($10.00) shall be deposited into the Escrow Account of the Attorney for the Buyer, the receipt of which will be acknowledged by the Attorney for the Buyer (“The Deposit”)………alright, that clause is not sub-2 specific, however it should be in every contract you use. There is no need to put more than $10 because we are working only with motivated sellers.
  • This property is being purchased “Subject To” the existing First Mortgage- currently owned or collected by___________________……………list the name of the sellers mortgage company
  • The Seller represents that the principal balance of the First Mortgage as of date of settlement shall be no more than _________________________ Dollars ($______)…… will verify this amount using an authorization to release information.
  • This property is being purchased “Subject To” the existing Second Mortgage- currently owned or collected by_______________……….list the name of the second mortgage company
  • The Seller represents that the principal balance of the Second Mortgage as of date of settlement shall be no more than _________________________ Dollars ($______)……once again, you’ll verify this amount by calling the bank
  • In addition to purchasing the property subject to the First and Second Mortgage, Buyer shall pay the balance of the Purchase Price amounting to _____________________________ Dollars ($________) within 5 years of date of settlement. Seller will receive approximately $___________ dollars in cash or certified funds, on or before ___________________200___……..You only use this clause if you are giving the sellers money in addition to taking over their mortgage. For example, I never put money down on a subject-to. If the seller’s want money, I tell them I will give it to them usually in 5-10 years (and when my tenant/buyers purchase the property, then the seller’s get their cash).
  • The purchase price of this property is strictly predicated and contingent on the Buyer paying a total of no more than __________________________ Dollars, ($_______) for the property. Should there be any additional liens, mortgages, and/or judgments existing on the property as of the time of settlement, it shall be the responsibility of the seller to pay these amounts……just another CYA clause
  • There will be no cash due to seller at closing…..I never put any money down, if the seller’s have a lot of equity in the property they will get it in 5-10 years.
  • Buyer is talking over seller’s mortgage payments amounting to $________ Dollars a month. Buyer is only responsible for this amount for the first 5 years after settlement. If interest rates increase during the first 5 years, seller is required to cover any amount over the current monthly payment of $___________ a month. Should the interest rate increase on property, seller will immediately be notified in writing and will be required to cover the difference. If seller does not cover any increase above $__________ a month, then buyer has the option to stop making the mortgage payments and the property may be foreclosed on and the sellers credit may be severely damaged……..In case you took over an ARM that adjusts, you don’t want negative cash flow, so you make the seller’s responsible for the difference.
  • Seller will allow Purchaser to place a sign on the property prior to closing for prospective tenants or Purchasers. Purchaser may advertise or market said property in any means until settlement. This includes public auctions or any other means of advertisement……this clause should be in every one of your contracts
  • Purchaser is purchasing Property with the intent to rent, lease, trade or sell Property for a profit…..I always give the seller 100% full disclosure that I’m an investor and I plan to make money on the property.
  • With regard to the existing mortgage(s), if Buyer fails to make any payment on any such mortgage when such payment is due, and such failure continues for more than 30 days after the due date, then Seller shall have the right to require Buyer to convey Property back to the Seller upon written request. At settlement, the Parties shall execute and deliver to the settlement agent documents and funds sufficient to re-convey the Property to the Seller, together with an appropriate escrow agreement………..This is one of the most IMPORTANT clauses in my subject-to contract. This gives the seller’s “comfort” that in case you don’t make their mortgage payments, they can easily get the house back.

There you have it. Once again, talk to your lawyer before you use any of these clauses. And, get off your butt and start making a killing in this market from subject-to’s like I am!

Photo Credit: Linville Falls, Blue Ridge Mountains, NC by eseering