Subject-to help with closing process

6 Replies

I'm trying to close my first subject-to deal and my title company is unfamiliar with the process. Being that it's my first one I'm not exactly sure how to explain it to them either. My understanding is that the property gets put into a land trust, and then the owners assign me beneficial interest into that land trust. Am I right so far?

The title company is asking me if the warranty deed goes into my name or into the name of the trust. I'm thinking it's the trust but figured I'd ask the experts at BP! 

Is there anyone out there that would care to explain the closing process to me, or help me to get a better understanding?

Thanks,

Alec

Originally posted by @Alec Anderson :

I'm trying to close my first subject-to deal and my title company is unfamiliar with the process. Being that it's my first one I'm not exactly sure how to explain it to them either. My understanding is that the property gets put into a land trust, and then the owners assign me beneficial interest into that land trust. Am I right so far?

The title company is asking me if the warranty deed goes into my name or into the name of the trust. I'm thinking it's the trust but figured I'd ask the experts at BP! 

Is there anyone out there that would care to explain the closing process to me, or help me to get a better understanding?

Thanks,

Alec

Subject To is generally taken to mean that you are simply taking over their loan. At closing the Sellers sign a Warranty Deed. I don't use Land Trusts for reasons too involved to get into here but some people have no problem using Land Trusts. I have the Warranty Deed signed over to my LLC. Keep in mind that this possibly violates the Due on Sale Clause of the loan. Your sellers should sign a disclosure that they are aware of this fact. It does not mean that the bank Will call the loan, just that the bank Can call the loan. You then start making payments on the loan. Make sure you have several months reserves to cover payments since anything you do will potentially affect their credit. Remember, they are still on the Loan even if they are not on the Deed.

Using a land trust in this situation is a trick to try to hide what you're doing from the lender.  It in no way avoids the due on sale clause.

What should happen is that the transaction, sans the land trust, looks just like an ordinary transaction, with one exception.  That exception is that the warranty deed and title insurance will include an exception for the loan being taken subject to.  Otherwise its the same as any other transaction.

Yes, you absolutely need a disclosure.  Don't in any way try to minimize the risk with the seller.  Your disclosure should say:

  • The loan remains in their name and missed payments will affect their credit.  
  • The loan may prevent them from getting future loans, especially another mortgage
  • If you default on the loan and the property is foreclosed their credit will be wrecked.
  • There is nothing short of suing you that they can do if you do wreck their credit.  They have no ability to foreclose or evict.
  • And it should say they fully understand the risks of this transaction and agree to accept those risks.

You probably want help from an attorney or someone who's done a transaction like this for that disclosure.

You also want a power of attorney from them for the property so you can deal with anything that might involve them in the future.

@Jon Holdman @Account Closed Care to elaborate on why you wouldn't use a land trust in a subject-to? I have all the proper paperwork and disclosures from another investor friend who's done a dozen subject-to's. I had just always heard this is a way to lower the odds of the lender calling the note due, but not 100% foolproof.

Use the trust if you want.  It adds complexity (and probably cost), and doesn't provide any real protection against the lender calling the loan.  And your title company is already having a hard time closing this deal.  The lender is unlikely to call the loan, with or without the trust.  But it can and does happen.  I've sat in a meeting room when a couple of hundred investors in a presentation discussing subject to when the speaker asked "has anyone had a loan called or know someone who has.  Several hands went up.

Originally posted by @Alec Anderson :
@Jon Holdman @Mike M.

Care to elaborate on why you wouldn't use a land trust in a subject-to? I have all the proper paperwork and disclosures from another investor friend who's done a dozen subject-to's. I had just always heard this is a way to lower the odds of the lender calling the note due, but not 100% foolproof.

 Putting Subject To's into a Trust doesn't make sense to me for a couple of reasons. First, it complicates things. 

Second, the time will probably come when interest rates rise enough for banks to want to locate any out of compliance loans to force them to refinance. Banks are not stupid and the concept of putting a property into a Trust, while legal, makes it far simpler for the bank to do a sort on their current loan portfolio for all loans with the word "Trust" in them and call them all due en masse or as groups, because the banks know they didn't lend to a Trust, they lent to an individual. 

just guru garbage and or parania  crowd  facilitates land trust.

sub to is very dangerous for the sellers.. as stated above

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you