Hello. I've been doing a ton of study on Sub2's recently and have a question.
Does a Sub2 include a written agreement that if I the investor were to not make payments on the original loan, then the seller has the right to foreclose on the investor? Is this a common agreement that gets put in place on a Sub2? If so, then I don't see why the references to FBI/AG and such would be a risk because that agreement would clearly show it's all on the up & up. In the various sources of info, the words "investor promises to make the payments to the seller" - do they mean verbally due to the mutual interest in keeping the financials healthy, or is this promise a written agreement? Thanks in advance.
The sub2 is not a private mortgage, you are getting the deed and morally promising to pay the underlying PITI for a period of time and then paying it off in full down the line.
There is no foreclosure by the seller. The seller can not repossess anything.
The BANK can call the loan due. If insurance is current and payments mortgage payments are current, there is little motivation for the lender to call the loan due.
If the Lender finds out the title has changed, the Lender may ask you to "financially qualify" to keep the mortgage arrangement instead of calling the loan due.
@Jay Hinrichs thought I would add you here.
Jay and I talk about sub2 and the pitfalls.
The FBI and the AG do not like folks taking advantage of home sellers, and
"Getting the Deed" through "Subject to Existing Financing" has been abused by Gurus as low money entry into get rich quick ideas and strategies.
I love Sub2, but always ask the following when I buy on Sub2.
1. If I buy this property, can I get private money or jv money to pay cash for the property or to refinance the property if the loan gets called?
2. Will I protect the seller and and have reserves of 2-3 months, have good insurance, etc., another words have a fiduciary duty toward the seller in case my tenant or owner finance buyer defaults on my agreement?
3. If I owner finance the buyer with a sub2, will I (post Dodd Frank) use a good RMLO to protect the Seller and myself in case the OO (Owner Occupant) Buyer gets and attorney and sues on the grounds that the owner did not follow the "ability to repay" rules?
4. Can I see owning this property if I need to get financing for it and own it? Do I love the location, the condition. the re saleability of it?
My BEST ADVICE is
-not to sell a sub2 acquisition on a wrap,
- but own it for a short time
-and re sell on a lease purchase to a retail buyer with reasonable credit financial means.
-This will get the existing financing paid off and develop a reputation with you the real estate investor as an ethical problem solver.
See my blog for sub2 info
Thanks @Brian Gibbons! It's all clear (well, one question down at the bottom). (On another thread I learned some good things on Sub2 from Jay). The only part of all this sub2 and wrap discussion that surprises me is that there's no written promise to the seller that we'll make the payments - I guess this is because that action would trigger the transaction to be something that requires a whole other level of formality that requires a license or whatever?
One small question - what do you mean by "the OO buyer sues because of ability to pay rules?" Again thank you.
@Brian Gibbons - another fast one: Do you just have an attorney work with you and the sellar to sign papers. No title company right? And do you get title insurance under the Special Warranty Deed to cover all but the original lien? Thx.
I should have @Bill G answer that :)
There is a long mortgage origination Dodd Frank summary here on my BP blog
Q: What is the penalty if I don’t comply with Dodd-Frank and I’m not exempt?
A: Any borrower on a consumer loan secured by real property has 3 years to bring suit against a lender for failing to consider the borrower’s ability to repay the loan.
If they succeed, the borrower is entitled to EVERYTHING THEY PAID THE LENDER FOR THE PREVIOUS 3 YEARS plus attorney fees, costs, etc.
At any time after the loan is made (3 years or not) the borrower may bring this as a defense in set off to any foreclosure action and recover the previous 3 years of payments!!
Hi Jon Quigley
Real Estate Is local.
Get your REIA president out to lunch
Ask him her for
2. Creative Real Estate attorney for sub2, trusts, lease options, partnerships, etc.
3. Great real estate broker
Are you licensed? I would be. Get referrals from other agents.
Thanks @Brian Gibbons. Yup I'm set for the RMLO/Attorney/RE Agent and will take RE classes in H2 of this year and am a member of local REI. But I'm also wanting to understand the low level mechanics of all these types of transactions (will have 3 day class on lease option soon).
For the #3 "OO sues" question I"m still a little confused. Are you saying that in case of a wrap this suit could happen? Because in a retail purchase by OO (end buyer OO) they would just get a traditional loan and that would wipe out the original lien. So I get what it is now, but now I'm not sure on the exact context of its application. Seems like it would apply only in a wrap scenario not a retail purchase.
Keep it simple
Buying terms whether it be lease option, wraparound mortgage, or subject to
Exit is generally lease to own.
You have a due on sale clause issue with the wrap or sub2 so sell it fast and get the OF retail buyer traditionally financed and original seller's loan paid off.
Dodd Frank has a penalty if you do not use an RMLO so use a RMLO and you are usually covered as to proving the ability to repay of the OF buyer. The penalty is severe as stated on my blog re Dodd Frank
All is clear. Your D-F blog was an excellent summary. Thx.
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