Subject To Investor Questions

Subject To Investor Questions

Real Estate Investor · Washington State · Member since 2013 · 50 posts · 16 votes

Hi BP!

After listening to podcast 70 and learning about "subject to" strategies I was provoked to hop on the forums to see if anyone on BP is doing this in WA state? I am interested in this strategy and have been reading everything I can find on the site, but still have questions:

1. Are WA state investors doing subject to deals getting DOS clauses called by the lenders? Do you see this increasing as interest rates rise? Is your experience similar to @Grant Kemp where only a very small fraction of the DOS clauses are being called? I know it's always a risk, just curious what is going on locally, presently.

2. For the investors that are doing this, are any of you doing wrap mortgages like Mr. Grant, thus making you the middle-man, or are you primarily fix/flipping, renting or wholesaling? If you are wrapping, at that point, being the middle-man, if the lender issues a DOS, are you responsible for the payment or is it still with the original seller who is still carrying the original mortgage?

3. After I complete a subject to with a seller, do you recommend doing a owner-finance with a QUALIFIED buyer or sticking to fix/flip, rental or wholesale?

4. Do you recommend taking over the deed as soon as you can (once you find a owner-occupied buyer, or renters if using the property for buy-hold)? Or do you wait for awhile? And once I find a buyer (if I decide to go this route) do I then sign the deed to them and I am just the creditor from then on out?

5. Let's say I find a distressed seller who owes 100k on a home worth 100k, but he would rather do a subject to deal so he can get out fast and avoid selling costs. I come in and do the subject to deal where I would take the deed under a 60 day option that would allow me to find a buyer looking for owner financing (if I can't find an exit I walk away). Because the buyer cannot qualify for traditional financing and needs to go the owner finance route, I decide that I am going to sell the house to them for 110k and add 2% interest on top of the monthly payment (I have read a lot about how sales prices can be higher for owner-finance deals, but have also read the contrary). I will also ask for let's say 10k in down payment so they buyer stays put. Now this is where things get confusing for me. Do I count the 10k down payment toward the extra 10k I am selling the property for and after that they just pay off the original loan plus my added 2% in interest? Or do I just extend the loan longer than what is actually due to the original lender and once they complete the original loan the payments to me are 100% in my pocket until the extra 10k is paid down? Mr. Kemp very briefly mentioned this scenario on the padcast and I wish he would have had more time to elaborate. In this same scenario, let's say there's 20 years left on the loan. Do I have to wait the entire 20 years plus however long it takes after that to make the extra 10k on the property? Or do I just create a deal from the beginning that would account for the higher sales price and I am slowly paid the extra 10k over time?

6. Taking the above scenario again, do I keep the deed in my name until my buyer pays off the loan? I assume no because we will close on the deal, but if so, how do taxes come into play? Does the "one" making the payments get the interest write-off come April? How about expenses (repairs, maintenance, cap-ex, ect.)... who pays those? I assume the buyer would pay those, but if they default and the house is still in my name or I take it back via foreclosure, I would be stuck with everything to pay for.

7. Can someone walk me through the process once I have found a buyer to wrap the mortgage with? It seems like all the forums don't get this far or only briefly touch on it.

8. Can anyone recommend an attorney in WA state who specializes in this type of creative financing?

9. Best books or detailed article/videos to learn about this (preferably after Dodd Frank was put into practice)?

Apologies for the long post. Just want to get this strait. I am sure I am a ways off here on many accounts.

Thanks so much!

Chris

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Real Estate Broker · Long Beach, CA · Member since 2013 · 81 posts · 28 votes
12y

Hi Christopher I not familiar with WA law but you can read my blog "how to beat the due on sale clause" which is for primarily California...At any rate here's a quick how I do it...

If the deed is not recorded i.e. it's held in escrow and certain safeguards are in place to protect the buyer and seller...Then you just do a vendor vendee transfer in other words your new buyer will step into your shoes of course he pays you for the privilege...

If the deed is recorded in your entities name preferably and LLC which by the way eliminates DF issues.. then you do a straight sale to the new buyer either he assumes your position with you holding a note etc... or goes to the bank for refining the loan..and pays everyone off..

Anytime you hold a note your at risk make sure all payment are made to the collectio company then you'll know if your buyer is late

I have been doing Subject to's for over twenty years and have never had a bank even look my way..Always use a third party collection company to service all the debt on the property this is common and arouses no suspicion on the banks side...

Any help write direct [email protected]

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  • Real Estate Broker · Long Beach, CA · Member since 2013 · 81 posts · 28 votes
    12y

    Hi Christopher I not familiar with WA law but you can read my blog "how to beat the due on sale clause" which is for primarily California...At any rate here's a quick how I do it...

    If the deed is not recorded i.e. it's held in escrow and certain safeguards are in place to protect the buyer and seller...Then you just do a vendor vendee transfer in other words your new buyer will step into your shoes of course he pays you for the privilege...

    If the deed is recorded in your entities name preferably and LLC which by the way eliminates DF issues.. then you do a straight sale to the new buyer either he assumes your position with you holding a note etc... or goes to the bank for refining the loan..and pays everyone off..

    Anytime you hold a note your at risk make sure all payment are made to the collectio company then you'll know if your buyer is late

    I have been doing Subject to's for over twenty years and have never had a bank even look my way..Always use a third party collection company to service all the debt on the property this is common and arouses no suspicion on the banks side...

    Any help write direct [email protected]

  • Real Estate Broker · Long Beach, CA · Member since 2013 · 81 posts · 28 votes
    12y

    Let's see if I can help with any of your questions:

    1. Don't know about Wa

    2. The seller is always responsible for the loan you can walk or negotiate with the bank.

    3. The best buyer would go get a new loan and pay off the old and you...In my prior post I should you how to sell.

    4. If your new buyer is not giving you much cash and your holding a note a land K would work but there's other ways to go...

    5. I'm a unclear with your question I'll get back to you on what it is your trying to accomplish ...

    6. No get your name off it if you can cash out...If your holding a note as I said risky I would not transfer the deed... Have deeds, everything held in escrow with releases in case of failure waiting for all parties performance ...The escrow or collection company will let you know if your new buyer is failing so you can step in and cure any defaults....If it's a sub to the original seller is always liable for everything...You or your new buyer will pay the interest, taxes etc and reap the benefits..It's yours or the new buyers home hopefully they will be better than renters and make all repairs etc...

    7. Like I said give me a shout

    8. Attorneys are deal killers if you can avoid them do so

    9. Eh..

  • Investor · Dallas, TX · Member since 2012 · 158 posts · 99 votes
    12y

    I agree with almost everything @Bill Jones said, however here are some caveats:

    1. the transaction between your seller and your LLC is exempt from the dodd-frank laws due to it being a "commercial loan", but ANY way you extend that credit to an owner occupant means that you are extending credit to an owner occupant, even if you're just assigning interests. Therefore, the transaction between you and your buyer is absolutely under dodd-frank and ability to repay compliance laws. In fact, even talking about terms like interest rates with your buyer is what starts the ball rolling as extending consumer credit. I can not stress enough that you'll need an RMLO to properly comply with this side of things.

    2. Recording is optional (at least in Texas and apparently in CA), but you'll need to verify that with local laws. Bill has a good idea, but it's another one of those where you'll want to weigh your options and see if you think you should record deed or not. For the record, we record every deal we do to help prevent future title issues.

    3. you absolutely need to get an attorney involved, to not do so is just asking for trouble. Again, everyone has their own risk threshold, and it's not like it's illegal to do the transaction without an attorney, but the way you do it without the attorney involved could very possibly be illegal. Very rarely do investors (even the most sophisticated ones) do their closings without an attorney involved.

    Outside of that, Bill I think it's awesome you've gone at this so creatively and had such long term successes with it!

  • Real Estate Broker · Long Beach, CA · Member since 2013 · 81 posts · 28 votes
    12y

    Hi Grant, Thanks...Also the seller has a one time exemption, and with an LLC guess how many exemptions you can come up with... At any rate a Loan originator is a good idea...On the other hand attorneys I still say No... If I could find a knowledgeable one...Ha.. I'd asked some questions but not get them involved. I'd opt for finding a knowledgeable escrow company.. If you find a good one they are much better and knowledgeable then lairs.. I mean lawyers

  • Investor · Dallas, TX · Member since 2012 · 158 posts · 99 votes
    12y

    lol fair enough Bill :-p that'll just be a difference in opinion for us. I definitely say include the attorney to close the property.

    And even as the LLC you technically only can originate 2 loans before you must comply with RESPA and 4 loans before you must comply with the SAFE act. That being said, there's no exemptions from Dodd-Frank and the ability to repay laws for you. The only exemption there is when you're selling your homestead.

  • Real Estate Agent · Milwaukee County, WI · Member since 2009 · 3k+ posts · 525 votes
    12y

    @Grant Kemp Quick questions : would this work

    for rental assistance / section 8 tenants ?

    If so, any experience you can mention ?

    Flip of the coin : owner occupied what your minimum requirements ?

    ( down payments, credit score, reference check, judgment issues,

    employment history, and etc )

  • Real Estate Investor · Washington State · Member since 2013 · 50 posts · 16 votes
    12y

    @Bill Jones Thanks for insights, Bill. I will reach out directly with more questions as they come up. In fact, although I am on the lookout for sub2 deals to purchase, I am actually in a place with my personal residence where I could make some money selling owner-financed because I have such a low interest rate on my loan. I might be able to make some nice interest on the monthly payments and sell the house a bit over FMV without having to pay RE agents. Any advice on this end?

    @Grant Kemp Appreciate your input as well. I really enjoyed your podcast. I have listened to it 3 times now. I am one of those question guys you touched on in the podcast. I find it's better to ask then make the mistake and learn the hard way. If you have any advice about the scenario of owner-financing my personal residents, I am all ears. If you don't mind I might shoot you some additional questions when they come up?

    Best,

    Chris

  • Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    12y
  • Real Estate Investor · Washington State · Member since 2013 · 50 posts · 16 votes
    12y

    @Brian Gibbons Thanks Brian! Do you have any experience working with this firm? Or know of others who have? Your timing is great because finding a great attorney is next on my list.

  • Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    12y

    He is focused on Seller Financing.

    Yes I know him.

  • Real Estate Investor · Washington State · Member since 2013 · 50 posts · 16 votes
    12y

    @Brian Gibbons Thanks. Is he focused on other avenues of RE investing as well? Lease contracts, wholesaling contracts?

    Also, what is his name?

  • Real Estate Investor · Washington State · Member since 2013 · 50 posts · 16 votes
    12y

    I'm assuming Robert Eckley?

  • Real Estate Investor · Kirkland, WA · Member since 2012 · 480 posts · 116 votes
    12y

    Hi @Christopher Bowen

    Will you be at the Snohomish meetup the end of the month?

    I have a few questions we may both benefit from and I will try to keep it short.

    Lease options, by the way, do not have the 180 day limit in WA such as they do in TX, as Grant mentioned in the Podcast.

    The wrap around mortgages and lease option sandwich seem to be very similar techniques with the investor in the middle.

    My question to those experienced with these, would you be in favor of one over the other and if so, why? How about taking into consideration compliance and regulatory issues. I'm hoping those experienced with these can shed some light on the pros and cons. Seems to me, the lease option would be less risky than the wrap around mortgage, however I would appreciate hearing from those of you who have some experience with these.

  • Real Estate Broker · Long Beach, CA · Member since 2013 · 81 posts · 28 votes
    12y

    HI Christoper

    Re selling your place...That's exactly what I do... here it is in a NUTSHELL..

    You can do the same thing with a Sub2..The down payment of course cos up with the value of the home....

    1. Purchase inexpensive homes $5000-$20000 (I have an inexhaustible supply of these kind of homes they are not junk they are totally livable and not in need of repairs. They are not in a war zone there in a good area of the country that I'm from and totally familiar with. with all cash we can close on these homes within days.)

    2. We, that is us the investment group resell the homes holding the first trust deed or a land contract...The return on investment is astounding... here's and example:

    Purchase Price $6000

    Sell Price $30000

    Down Payment $1000 (The reason we can sell at this price is the low down and low monthly payments..Cheaper than rent)
    Hold note for 10 years 120 months at 11%

    Payment $399.48

    Yield 95.88% (That's unbelievable)

    Months until return of initial investment 12.52
    Total payment $47,937.60
    Profit $42,937.60

    But here's the best part..If we want we can sell the note as follows:

    FULL SELL
    Yield 20%
    Sell price $20,671.06
    Discount $8,328.94
    Profit $15,671.06

    PARTIAL SELL
    Yield 30%
    Months 60
    Sell Price $15,223.54
    Remaining Balance $18,142.24
    Total Profit $34,192.74

    The financing possibilities are endless...

  • Real Estate Investor · Kirkland, WA · Member since 2012 · 480 posts · 116 votes
    12y
    Originally posted by @Gerald K.:
    Hi @Christopher Bowen
    Will you be at the Snohomish meetup the end of the month?
    I have a few questions we may both benefit from and I will try to keep it short.
    Lease options, by the way, do not have the 180 day limit in WA such as they do in TX, as Grant mentioned in the Podcast.
    The wrap around mortgages and lease option sandwich seem to be very similar techniques with the investor in the middle.

    My question to those experienced with these, would you be in favor of one over the other and if so, why? How about taking into consideration compliance and regulatory issues. I'm hoping those experienced with these can shed some light on the pros and cons. Seems to me, the lease option would be less risky than the wrap around mortgage, however I would appreciate hearing from those of you who have some experience with these.

    Just so this doesn't get lost in the mix. Questions above for you experts.

    @Grant Kemp

    @Bill Jones

    @Brian Gibbons

    Christopher is right. There are bits and pieces on the forums but seems a lot of stuff is left out. There's definitely a need for the ultimate guide on creative financing techniques.. hint hint @Brandon Turner

  • Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    12y

    Creative Finance gets a bad rap, especially from Realtors.

    Read Chapt 10 of Shift

    Talks about...

    Agents need to shift their listing presentation on how they talk to sellers about selling their home, and learn creative solutions for buyers.

    Here is the book's link:

    http://www.amazon.com/Shift-Estate-Agents-Tackle-Tough/dp/0071605266#reader_0071605266

    Now if you focus on

    • helping the seller sell their home and preserve their equity dollars by selling on terms rather than for cash at a discount,
    • you can get a
    • win for you as the investor or agent,
    • for the seller who is stuck, and
    • for the buyer that has good income but needs time to get a mortgage.

    The tools to acquire or control are:

    Sub2 without a note

    Sub2 with a note

    Wrap - AITD

    Lease Option (with intentions to sell your interests as opposed to sandwich)

    Land Trust Purchase

    Land Contract Purchase (Installment Sale)

    Private First Mortgages for free and clear houses

    The strongest possible transaction for a buy and hold is a sub2, where you get the deed. Wraps, lease options, land trusts, installment sales are not as strong as sub2.

    Links for discussion with creative financing

    http://en.wikipedia.org/wiki/Creative_financing

    http://en.wikipedia.org/wiki/Seller_financing

    Seller financing has changed a bit, but if you go through a RMLO and an attorney that gets the Dodd Frank and the SAFE Act, you do have options to sell on terms (lease option, seller financing, etc).

    @Gerald

    @Gerald K. undefined

    Dont expect to find it an easy task to find an attorney or RMLO that are qualified.

    The best ones I know of in the West are

    http://www.biggerpockets.com/blogs/3/blog_posts/37446-attorney-for-seller-financing---dodd-frank-info-in-ca-or-wa-and-az

  • Real Estate Investor · Kirkland, WA · Member since 2012 · 480 posts · 116 votes
    12y

    @Brian Gibbons

    Thanks for your response. I'll check out those resources. You mentioned:

    "Lease Option (with intentions to sell your interests as opposed to sandwich)"

    Isn't the sandwich ultimately to sell your interests? Get the house burden off the sellers back, put in a lease to own buyer that needs time to get financing in place. The sales price to the buyer trying to get financing in place would have to be what it would appraise for to be successful I would think, which should be the ultimate goal for it to be a win win.

  • Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    12y

    re: Sandwich Lease Options -

    You are on the hook if your sub lease and sub option tenant does not pay.

    Can you pay the seller regardless of sub tenant paying?

    Your liability for what happens in that property can be covered with insurance and cash reserves but...

    What if the tenant defaults?

    What if the the tenant sues?

    What if the tenant dies?

    What if the tenant does not get the mortgage?

    When credit is readily avail, Sandwiches have more appeal.

    Lease Option Assignments have less risk.

    @John Jackson might want to comment here.

  • Investor · North Richland Hills, TX · Member since 2011 · 789 posts · 403 votes
    12y

    @Brian Gibbons taught me back in 2002...back when I had hair..yikes!!!!

    SLO's are not for the faint of heart...and to be honest...neither are Sub-2's..

    LO assignments are essentially a no risk no brainier approach...

    What @Christopher Bowen was originally asking about was referring to DOS...which is such a mis understood thing....

    It's funny.....in TX...attorneys' tell people NOT to do a LO because of the DOS...yet they then sell a wrap package...uuuummm....hellooo..DOS!!!

    Understand the DOS is NOT a prohibitive clause of the Deed of Trust.

    IT's just the lender retaining their right to call the note due if the house is sold or lease purchased.

  • Real Estate Investor · Kirkland, WA · Member since 2012 · 480 posts · 116 votes
    12y
    Originally posted by @Brian Gibbons:
    re: Sandwich Lease Options -

    You are on the hook if your sub lease and sub option tenant does not pay.

    Can you pay the seller regardless of sub tenant paying?

    Your liability for what happens in that property can be covered with insurance and cash reserves but...

    What if the tenant defaults?

    What if the the tenant sues?

    What if the tenant dies?

    What if the tenant does not get the mortgage?

    When credit is readily avail, Sandwiches have more appeal.

    Lease Option Assignments have less risk.

    @John Jackson might want to comment here.

    That makes sense - assignments would assign the risks - at the loss of a period of rental income. Seems a mortgage wrap and a lease option sandwich have risks similar to a landlord. I was just thinking the option, not obligation, would provide an out if needed, but should be avoided for a win-win scenario. The option wouldn't have the DOS clause issue to deal with as with the wrap. If the tenant couldn't get the mortgage at all, had to move or something, I guess you would have to start over with a new tenant buyer. You might have to give some money back to the old tenant buyer that failed to get a mortgage so they behave when moving out. Maybe have a security deposit and possibly give back a portion of the option consideration like cash for keys if they move out with the place in good shape.

  • Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    12y

    A plan I like...

    1. Get 10 lease option assignments over the next 12 months

    Get $5K or more per house

    2. Market for free and clear houses, get 10, buy on private mortgage, payment under market rent, hold til free and clear.

    Income and long term equity build up.

  • Real Estate Broker · MO · Member since 2014 · 26 posts · 3 votes
    12y

    Hoping to elaborate on Brian's post and ask a few of my own questions while learning about sub2's. Let me preface this by saying, I am very, very new so any and all elaboration on the answers or even clarification on the questions is appreciated.

    1) In the rare case, when a due on sale clause is called, how long do you have to typically have to buy the property? And if you don't want to walk away (because you have a Lease Option - End Buyer in the home) what do to remedy?

    2)Do you make payments a certain way to the original mortgage to not raise any red flags that someone else is now paying for and may be in the property?

    3) Is it most beneficial for you to have original sellers put the property into a land trust or LLC for the properties that you buy via sub2?

    4)What happens if seller dies while original note still in place? Do you have or need anything in place to protect yourself after you have recorded the title?

    5)Can you do anything with the equity spread in the house, if applicable? (use for leverage)

    7) Are you asking sellers for proof of their balance and interest rate? Do you get a letter of authorization signed to contact the mortgage company directly?

    8)@Grant Kempmentioned paying a minimum option fee of $10 for 60 days to find a new buyer to contract in the podcast. Is this something that is state specific?

    Hoping that @Brian Gibbons @Bill Jones @Bill Gulley might chime in with some answers along with @Christopher Bowen if you have know also.

  • Real Estate Investor · Kirkland, WA · Member since 2012 · 480 posts · 116 votes
    12y

    I'm a little unclear on question #6 Chris had. on a subject-to with financing still in place with the original owner, the bank would send the original owner the statement of interest paid for filing year-end taxes. Seems only one person should be able to claim a tax writeoff. Not to mention other expenses. How is that handled?

    Something else not brought up would be property insurance and how to handle that. The existing insurance would be for the seller, most likely owner-occupant. But it's not anymore, so it would need to be under a landlord policy. And what about liability insurance? How is all that worked out?

  • Rental Property Investor · Columbus, OH · Member since 2014 · 340 posts · 111 votes
    12y

    @Gerald K. 

    These are good questions - hopefully one of the experts will answer.

  • Involved In Real Estate · Ocean View, NJ · Member since 2013 · 44 posts · 1 vote
    12y

    @Bill Jones you mentioned to use a third party to collection company to perform any debt collections to not arouse any suspicion. What kind of third party are you referring to and why would that cause it to not arouse any suspicion?

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