Subject To Purchase ... How To Guide

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Subject To Purchase ... How To Guide

Sarah Jones
los angeles, CA · Member since 2009 · 223 posts · 4 votes

I'm in Los Angeles, CA trying to get a subject to done. I was wondering what are all the forms I need the seller to sign. I know i have to get a title company to check the title before I close but what are all the form I need to seller to sign because California may have different class.

-Standard Purchase and Sales Agreement (I couldnt find any that is subject to for California)
-Deed (Is there a link where I can go to get a print out of an blank deed so I can have the seller transfer that to me) They are ready to walk out of the house becauase they are behind on their payments.
-CYA letter (I have this)

is there anything else I need them to sign to get this done?
I don't think I need an agent becuase I am just taking over their payments and there isn't enough money to pay for an agent on this deal.. can I just use a title company instead?

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Michael Lauther
Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
14y

"Oh what a tangled web we weave when we first practice to deceive."

By the way yes Jon you of course are correct , Title companies do prepare the deed what I meant and should have been more specific they do not prepare most other types of legal documents although my title company has sent me samples of documents they have used from other investors in the past.

Sarah, your energy and drive and plain stubbornness in the face of criticism will probably net you success somewhere down the road, but honesty and your reputation are critical to long term success.

There is a reason many states require disclosure on a subject to transaction. Many unsophisticated property owners do not understand their liability and risk. Your seller apparently does understand and wants no part of it. You also say your seller is among a group you describe as friends. What will happen to your reputation when the seller feels cheated and you have to walk away from the property if everything falls apart and the lender calls the loan.

There is nothing illegal or immoral about subject to investments but care must be taken to protect all parties. Take the time you need to learn the process (as you are doing) but this deal is a non starter in my Humble opinion.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    Use the standard CA purchase agreement. Add an additional provision saying its subject to the existing loan. There should be a blank for adding provisions.

    The title company will prepare and record the deed.

    Your "CYA form" should be part of the closing package at the title company.

    The deed you get will be a standard deed but will include a provision about the loan that you're taking over. The title insurance will also include a provision about the loan you're taking over. You may have to do some searching to find a title company that will do this transaction. Some won't.

    It would be best if you could find an investor in your area that does subject to deals so you could have a look at their paperwork. Hopefully someone from LA can offer you a copy of their docs.

    1Reply
  • Sarah Jones
    OP
    los angeles, CA · Member since 2009 · 223 posts · 4 votes
    14y

    Jon you said the title company will prepare the deed at closing. This seller is ready to leave the house and I want to get the deed before closing, I have a form that says Warranty Deed.. can I use that for the seller to sign before closing.

    Also I want to put this into a trust and have them assign the deed as trustee to me so the loan company doesnt know that I got the title. What are the paperwork for this.. and is this done at closing or before.

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  • Sarah Jones
    OP
    los angeles, CA · Member since 2009 · 223 posts · 4 votes
    14y

    Also my purchase and sales agreement says title evidence given within 10 days after acceptance... they want to accept the offer now .. what form do i have them fill out if they are accepting my offer?

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    To make your offer, you fill out a purchase and sale agreement. Lacking anything else, use the CA standard one. There is a place for you to sign as buyer which makes the offer official. When the seller wants to accept your offer, there is a place for them to sign as seller. Once both of you have signed, its a legally binding contract.

    You need a lawyer to help you set up the trust and to prepare the deed. I have no idea if the particular "warranty deed" you have in hand is a good one or not.

    The proper procedure (I think, not a lawyer and haven't done this) would be for a trust to be set up with them as the beneficiary. They deed the house to the trust. That is, a warranty deed is created showing the sellers as grantor and the trust as grantee. Now the house "belongs to" the trust. Now, the beneficiary of the trust is changed from them to you. Now you effectively own the house. As far as all the details, I don't know. You need a lawyer.

    Putting this into a trust doesn't guarantee the lender will not find out title has been transferred. They're wise to this trick. There is no way you can guarantee the lender won't find out about the transfer.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    Maybe I'm lost but I don't see any trust involved. The trustee is that of the deed/ You need a Special Warranty Deed as the property can not be fully transferred under the General Warranty Deed with an existing encumbrance (loan). The process is as Jon mentioned and can be closed with any settlement agent. Title insurance should be obtained and it will exclude the existing encumbrance, the nature of the subject to transaction.

    It sounds as if you should run your agreements past an attorney, but if you use the standard sale contract, I'd go to the closing agent and get their take on the settlement issues first.

    I'm not sure what is in your "CYA" disclosure, if it is from guru I'd run that by your attorney as well, they are not all compliant nor sufficient.

    If the seller has addressed all disclosures required and you have basically told the seller of the pitfalls of a sub-2 transaction, you may be ready to clsoe.......ask the settlement agent.

    Evidence of good title in ten days is pretty standard stuff as after you contract for the purchase, you have time for a title search and if there are problems you have the opportunity to accept the defects (if they can not be cured) or to continue to purchase. Knowing that a seller can provide good title can not be made at the time the seller signs a contract, even in good faith as there could be unknown liens or encumrances against the property.

    Good luck with you deal....

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  • Sarah Jones
    OP
    los angeles, CA · Member since 2009 · 223 posts · 4 votes
    14y

    Jon you said " Putting this into a trust doesn't guarantee the lender will not find out title has been transferred. They're wise to this trick. There is no way you can guarantee the lender won't find out about the transfer."

    1/ How can they find out if it is under trustee if im the only one with the paper that says im the trustee?

    2. is there any other way we can make it so they don't find out.

    3. if they find out i know that COULD call the loan due but will they...? many people have been saying that they wont but will they if there is no line of credit or anything?

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    If you want absolute assurance the lender won't find out about your sub to deal and call the loan, then don't buy subject to. All this trust business might help hide your transaction, but that's all.

    What about insurance? If the place burns down and some insurance company cuts a check, you want to cash that, right? You need enough disclosure to be able to get an insurance settlement you can actually use.

    You want to be able to get mortgage paperwork and to be able to speak to the mortgage company if necessary, right?

    If you're the ONLY one with something indicating you're the beneficiary (not trustee) of the trust, then how can you be sure someone doesn't usurp your trust? Trustee is the person who manages the trust, typically a lawyer. Beneficiary is the person who benefits from the trust. That would be the seller initially, then you after you've bought the place.

    When you buy subject to, you need to be prepared to either refi or other wise pay off the property if the loan gets called. Or you need to be prepared to walk away if you can't. Which, since its going to wreck the seller's credit, you should expect a lawsuit from the seller.

    As long as interest rates are low, the payments are getting made, and the banks are backed up with the foreclosure mess, I think there's little risk of loans getting called. Just my opinion. But eventually the foreclosure backlog will get cleared away and interest rates will rise. If interest rates are 9% (that was considered a very good rate when I bought my first house) you can bet the banks will start trying to track down these low interest rate loans and start calling them. Or get you to refi into a higher rate loan.

    Personally I would never buy a property subject to if I planned to keep that loan in place long term. I might do it for a fix and flip or for a rehab property that I planned to quickly refinance. But long term? No way. Its just to risky for me.

    1Reply
  • Sarah Jones
    OP
    los angeles, CA · Member since 2009 · 223 posts · 4 votes
    14y

    If i buy a subject to house and the loan is in old owners name and i have the deed and the old owner dies .. what happens? any consequences for me if i keep making payments?

    0Reply
  • Rob Simpson
    Landlord · Pensacola, FL · Member since 2012 · 34 posts · 6 votes
    14y

    Perhaps I am just too new to this, but:

    Isn't this all dishonest and (possibly) fraudulent? The contract between the lender and lendee is a legal contract. Unless the lender is willing to release the lendee from a pay-in-full clause, transferring the deed "so the loan company doesnt know" sounds shady.

    I realize you have a "CYA" but how credible does it look to a 3rd party when you present them a paper shield, meant to be protection against recourse when you knew that what you were doing was not proper? Courts do not honor that sort of thing because they (often) judge "according to the spirit."

    Perhaps I do not know what I am talking about, but the way you phrase things, @Sarah Jones, sounds like you're up to something sneaky.

    0Reply
  • Sarah Jones
    OP
    los angeles, CA · Member since 2009 · 223 posts · 4 votes
    14y

    Subject to agreements are not new. They are done for decades..

    0Reply
  • Sarah Jones
    OP
    los angeles, CA · Member since 2009 · 223 posts · 4 votes
    14y

    It's just explaining everything to the client so they understand what the worst situation would be and they know and you are protected. Some clients have no option and desperate to avoid a foreclosure. Worst case they call the loan due.. which is a foreclosure which they have now..

    0Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    14y

    In answer to your question Rob:

    1- The lender has no say as to whether or not a property can be sold, i.e, a deed transferred. However, the lender has the option of calling the note if a transfer takes place without his consent. There is nothing fraudulent about this kind of transfer and there are no criminal legal issues involved.

    2- These types of transactions, as in many types of transactions, can result in a knowledgable party taking advantage of an unknowledgable one. The courts in many (not all, probably not most) jurisdictions, bend over backwards to give the benefit of the doubt to the consumer (less knowledgable) party. If a real estate investor has any doubt as to the ability of the other party to fully understand the transaction, it may be in the investors interest to insist that party obtain the services of an attorney. Courts have reversed transactions when one party has diminished mental capacity. Subject to sales are not inherently bad, the seller and buyer just have to understand the sometimes not insignificant risk involved.

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    1Reply
  • Sarah Jones
    OP
    los angeles, CA · Member since 2009 · 223 posts · 4 votes
    14y

    If the only thing wrong with the sale is they dont want to be on the loan for 30 years... and i want to keep it for a long time without selling it or refi is there anything you guys can think of that can get her to change her mind... to me staying on the loan is no big deal since I am saving them from short sale, paying taxes and foreclosure.. but she doesnt want to be on the loan.

    0Reply
  • Sarah Jones
    OP
    los angeles, CA · Member since 2009 · 223 posts · 4 votes
    14y

    I'm calling up title companies and trying to find someone to help me do subject to deals and title companies says they only issue title policies, they dont setup trust and they don't create agreements. Who do I can that setups the trust and does all the closing for subject to agreements? I want to have every ready so the next deal I put through can be done quickly..

    0Reply
  • Michael Lauther
    Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
    14y

    Sarah: you sure are persistent and that can be a good thing but in this case you are trying to string to put a deal together with several road blocks.

    First and foremost. Your seller has repeatedly made her wishes know, she does not want t be on the note for 30 years. This is clear. You can rationalize about how it is good for her but your reasons are not based in fact. There may be no tax due on a short sale, her credit troubles will only be prolonged if you fail and you may be faced with a lawsuit down the road.

    If you still want to proceed you further complicate the deal by inserting a trust to "hide" the transfer of title from the lender. Again this could benefit you but unless you use Legal zoom and try to do it yourself ( and I do not recommend that) you need to pay for an attorney.

    Perhaps you can find and experienced investors who has done a subject to in your area to give you a copy of his agreement.

    The title company will research the title and provide title insurance as well as record the deed. They do not create documents.

    I have talked to investors who have used LLC rather than a trust which I am told is easier to create but is expensive in some states.

    I have not done any subject to investing but for a first deal I believe there are too many loose ends and based on what I have read not a very good investment. Yes you are controlling an asset worth a few hundred thousand dollars for $8,000 but you appear to buying yourself a lot of trouble.

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    Beats me who creates document like deeds, then. I've done numerous transactions, both buying and selling and the documents always magically appeared at the title company. I didn't create them as either buyer or seller.

    Now, subject to specific documents, like your disclosure, may well be something you need to create yourself.

    You really need to find either an investor in your area who's willing to both help you with the docs and point you to a title company who will do a subject to deal or you need to find a lawyer and pay them to help you.

    0Reply
  • Monica Breckenridge
    Rental Property Investor · Colorado Springs, CO · Member since 2010 · 476 posts · 305 votes
    14y

    My subject to the existing loan contract is the Bill Bronchick contract. If the homeowner is behind on payments, in Colorado I have to use the Colorado Foreclosure Protection Act Contract with the seller warning and notice of cancellation. But this is only if seller is behind at least 1 payment. I wouldn't quit claim deed the property to you before the closing, because that would void the closing with the title company. If the house is already deeded to you the title company won't do a closing since it's already happened.

    I always buy my subject 2's in a trust. We make the person on the loan the beneficiary of the trust and then we assign the beneficial interest over to me. I get my own insurance on the property and i add the previous homeowner as an additional insured. I do send in the cancellation of insurance to the lender with the new insurance info. I haven't had a problem with the lender calling the loan due. It is a possibility, but is very unlikely.

    0Reply
  • Sarah Jones
    OP
    los angeles, CA · Member since 2009 · 223 posts · 4 votes
    14y

    1. If we put the subject to into a trust, and make the seller the beneficial interest.. no title company in California will insure it because they think you are trying to hide from the loan company. They will only insure titles if the property switches hands so the trust has to have a different person as beneficiary. And if you put a different person as beneficiary than the lender will know you transfer and can call the loan due. So how do you do it so the title company will insure you?

    2. Adding your name to the insurance affects the insurance.. which the title company sees every year so if ur name is on the insurnace they will see that and can call the loan due..

    what is the best way to do this without letting the lender know?

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    One more try. The is absolutely no way to be sure the lender doesn't find out about the transfer. None. Forget about trying to find a way, it does not exist.

    I have heard of a few situations where these loans have been called. At a seminar a while back, a presenter asked if anyone knew about a loan being called, and a couple of hands went up out of a few hundred people. So, it does happen. Its a risk you take when you go down this road. And if interest rates go up, the risk increases. You imply you want to keep this property 30 years. I think the risk is substantial the loan will be called if you leave it in place for decades.

    One alternative on the insurance is to leave the seller's policy in place and keep paying it. They buy a second policy in your own name. Provide the info about the seller's policy to the lender. They happy because its insured. But there's no way you're going to collect on that policy, even if you have a limited POA on the property. The second policy is in your name and that the one you use to make a claim.

    0Reply
  • Sarah Jones
    OP
    los angeles, CA · Member since 2009 · 223 posts · 4 votes
    14y

    Yes thats a good strategy about the insurance but expensive. If you add your name as additionally insured.. the lender will know about the change right becuase you are additionally insured..?

    And how about the title company. They wont provide title insurance if it is transfered to a trust with the seller as beneficiary..(because they say you are hiding from the lender) any advance about this?

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    Yes, I have some advice, that you probably won't take, it appears to me that you have been totally guruized, that you believe that a sub-2 has to be done in a trust and hide your transactions. It tells me your total goal is to do sneaky deals, and you have no clue what you're you're doing. When you come up with a startegy that is above board and honest with all parties concerned, I'll tell you how to get things done.....good luck!

    0Reply
  • Sarah Jones
    OP
    los angeles, CA · Member since 2009 · 223 posts · 4 votes
    14y

    What is the best way to do subject to deals than if not through a trust?

    0Reply
  • Michael Lauther
    Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
    14y

    "Oh what a tangled web we weave when we first practice to deceive."

    By the way yes Jon you of course are correct , Title companies do prepare the deed what I meant and should have been more specific they do not prepare most other types of legal documents although my title company has sent me samples of documents they have used from other investors in the past.

    Sarah, your energy and drive and plain stubbornness in the face of criticism will probably net you success somewhere down the road, but honesty and your reputation are critical to long term success.

    There is a reason many states require disclosure on a subject to transaction. Many unsophisticated property owners do not understand their liability and risk. Your seller apparently does understand and wants no part of it. You also say your seller is among a group you describe as friends. What will happen to your reputation when the seller feels cheated and you have to walk away from the property if everything falls apart and the lender calls the loan.

    There is nothing illegal or immoral about subject to investments but care must be taken to protect all parties. Take the time you need to learn the process (as you are doing) but this deal is a non starter in my Humble opinion.

    2Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    Good point Michael...

    Sarah, you need to do some reading here on Sub-2, just search for it. When I write I do so shortly, directly and don't mean to be personal, but I think you have been misguided to the point that starting over might be best.

    Have you ever spent time talking to a closing agent? Tell them you are interested in RE investing and you'd like an appointment with them to discuss what they do and what they want to close deals for you.

    I do wonder how you were advertising "a property" or "your business" where you spent 1000 bucks?

    This is no deal as others have mentioned.

    0Reply
  • Sarah Jones
    OP
    los angeles, CA · Member since 2009 · 223 posts · 4 votes
    14y

    Spent it on bandit signs. Closing agents.. is that the escrow agent?

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