"Subject To" Purchases

[Alan L Donald]

What happens with taxes and insurance in a "subject to" purchase? I assume the lender mostly doesn't care who the house belongs to, as long as the mortgage is being paid? 

What about the escrowing of taxes (new rate) and insurance (new insured). How do you deal with those without triggering the "due on sale" clause for the existing mortgage?
Thanks,

Alan

[Andrew Garcia]

Hi @Alan L Donald, most mortgages have taxes and insurance escrowed so it would continue to be included in the mortgage payment.

The new policy in your name would likely raise a red flag, however.

I am not sure how the sub2 crowd get around that.

[Curt Smith]

I have a free training doc that comes with all doc examples and process to close and post-close a sub-to. I like helping investors not screw up the best deal in REI buy and hold!!!

There's solutions for everything but you need to be educated AND have the docs to get each step done correctly.

#1 banks do NOT want real estate! They are happy with getting paid, so pay them. I set up auto pay with the bank using my POA to manage the mortgage. Banks are used to POAs and estate managers taking over. Its language they are used to "hi I'm the manager for the estate of Mr Smith, I have a POA I need to send in to be on file. Where do I send it?" ...

#2 get a 2nd POA to manage the insurance policy. Contact the agent, say I'm the new estate manager and need to cancel. Problem is the unused portion refund check will be made out to the borrower/seller. No solution other then to mail them a surprise "thank you" check. If you are on good terms offer to split it. Same problem with annual escrow re-balancing and overages. Those checks are in the borrowers name. But mailed to ME since I'm the manager via the POA and I change the mailing address for the loan. I enjoy ad-hoc mailing $$$ to the seller, who sold due to hard times etc. They can use the funds. Worst case I've had, the borrower has died. I toss those checks. I've tried to get the bank escrow dept to cancel the check and apply to next year. Some success some not.

#3, forgot to answer the OP's qquestion;  yes get NEW insurance for a rental with your favorite carrier, named insured is how you hold title.  I strongly suggest you get my doc and close in a land trust.  The named insured is the landtrust.  AND Additional party is the seller same name as is on the canceled home owners policy.   Lender is the same bank etc.  Then have your agent fax the new policy to the bank right after closing.  This triggers the insurance refund issue mentioned above..   

It all works smoothly.  Only a very very rare small local bank with one location and not very smart raise any flags.  The major lenders all know land trusts and POAs and "I'm the new estate manager" no problems.

Connect with me, then PM, I'll send my training doc.

[Robin F.]

@Curt Smith  I would be interested in your free training doc and examples on how to close a sub-to.  Thanks

[Crady Seymour]

Quote from @Alan L Donald:

What happens with taxes and insurance in a "subject to" purchase? I assume the lender mostly doesn't care who the house belongs to, as long as the mortgage is being paid? 

What about the escrowing of taxes (new rate) and insurance (new insured). How do you deal with those without triggering the "due on sale" clause for the existing mortgage?
Thanks,

Alan

Alan- there's a great podcast on creative financing with Pace Morby. In it he talks about two ways to handle the Due on Sale Clause. You can actually purchase insurance for that, but he has another creative way he learned from a banker. It's called 300 Doors ALL Through Creative Financing with Pace Morby.

;list=PLAePTb0s5IOXEjrpFYKm3T23QbrR7QuYu&index=3

[Curt Smith]

Quote from @Robin F.:

@Curt Smith  I would be interested in your free training doc and examples on how to close a sub-to.  Thanks

 I see I forgot to add above;  connect with me, then PM, then BP lets be send back a file. 

[Guillermo Vladimir Robles]

Quote from @Curt Smith:

Quote from @Robin F.:

@Curt Smith  I would be interested in your free training doc and examples on how to close a sub-to.  Thanks

 I see I forgot to add above;  connect with me, then PM, then BP lets be send back a file. 

[Eliot Vancil]

I've got questions as well.. As an investor, are you still able to write the interest off for tax purposes? It would seem that you could not take the interest deduction since it’s not your loan?? I would assume that you end up building the sellers credit profile in the process?

Seems like over time this would negatively impact the sellers debt to income ratio and the seller would want you to pay it off at some point when they get their credit back together? Finally, how does depreciation work? Can you still Cost Seg a Sub2 property and bonus depreciate? Sorry for all the newbie questions.. Great info in this thread!

[Alan L Donald]

Quote from @Crady Seymour:

Quote from @Alan L Donald:

What happens with taxes and insurance in a "subject to" purchase? I assume the lender mostly doesn't care who the house belongs to, as long as the mortgage is being paid? 

What about the escrowing of taxes (new rate) and insurance (new insured). How do you deal with those without triggering the "due on sale" clause for the existing mortgage?
Thanks,

Alan

Alan- there's a great podcast on creative financing with Pace Morby. In it he talks about two ways to handle the Due on Sale Clause. You can actually purchase insurance for that, but he has another creative way he learned from a banker. It's called 300 Doors ALL Through Creative Financing with Pace Morby.

;list=PLAePTb0s5IOXEjrpFYKm3T23QbrR7QuYu&index=3

 Thank you @Crady Seymour! 

[Curt Smith]

Quote from @Eliot Vancil:

I've got questions as well.. As an investor, are you still able to write the interest off for tax purposes? It would seem that you could not take the interest deduction since it’s not your loan?? I would assume that you end up building the sellers credit profile in the process?

Seems like over time this would negatively impact the sellers debt to income ratio and the seller would want you to pay it off at some point when they get their credit back together? Finally, how does depreciation work? Can you still Cost Seg a Sub2 property and bonus depreciate? Sorry for all the newbie questions.. Great info in this thread!

 You pay interest, you can deduct it.   You have every tax advantage of owning a rental.

Dodd Frank has a provision that if the sold house but debt is still in the sellers name is current for 12+ mo that debt does not count against the borrower (for a new mortgage).  BUT as any dusty corner of statute and regs its up to the lending banks underwriters to know this.  Its best to shop for a lender who's competent at hair ball closings.  I like swbc.com for rental and hairball borrowers.

I have NEVER had a seller contact me later to ask for help or complain that the debt is still in their name.

Sub to is my only focus right now. From now till who knows, several years, will be one of the best times ever to market to stressed owners to buy sub to. IE FSBO, Expireds (just failed an MLS listing), divorce, when these sceenarios are combined with low years of ownership (low equity) the sellers can't sell any other way but via an investor taking over their payments so they can move on. Every sub to I buy has some hair ball issues that prevent selling on MLS;

- low equity such that offers did not cover the debt + costs of selling (figure 10%).  = stuck

- they just hate agents due to bad experiences so they refuse to list and try FSBO. There are folks who just hate agents.

- Divorse and need to sell fast.  

- Probate sometimes has debt.  I only go after deals where the debt is over 70% of the value.  IE I don't want to put mjuch cash out to close.

- Pre forclosure.   FWIW this is a VERY VERY hard deal scenario.  I reco new folks stay away from pre forclosure.  So many leads above you don't need to approach these folks.

I have a sub to training doc complete with doc examples of how to close.   Connect then PM me.

[Khari F.]

Quote from @Curt Smith:

Quote from @Eliot Vancil:

I've got questions as well.. As an investor, are you still able to write the interest off for tax purposes? It would seem that you could not take the interest deduction since it’s not your loan?? I would assume that you end up building the sellers credit profile in the process?

Seems like over time this would negatively impact the sellers debt to income ratio and the seller would want you to pay it off at some point when they get their credit back together? Finally, how does depreciation work? Can you still Cost Seg a Sub2 property and bonus depreciate? Sorry for all the newbie questions.. Great info in this thread!

 You pay interest, you can deduct it.   You have every tax advantage of owning a rental.

Dodd Frank has a provision that if the sold house but debt is still in the sellers name is current for 12+ mo that debt does not count against the borrower (for a new mortgage).  BUT as any dusty corner of statute and regs its up to the lending banks underwriters to know this.  Its best to shop for a lender who's competent at hair ball closings.  I like swbc.com for rental and hairball borrowers.

I have NEVER had a seller contact me later to ask for help or complain that the debt is still in their name.

Sub to is my only focus right now. From now till who knows, several years, will be one of the best times ever to market to stressed owners to buy sub to. IE FSBO, Expireds (just failed an MLS listing), divorce, when these sceenarios are combined with low years of ownership (low equity) the sellers can't sell any other way but via an investor taking over their payments so they can move on. Every sub to I buy has some hair ball issues that prevent selling on MLS;

- low equity such that offers did not cover the debt + costs of selling (figure 10%).  = stuck

- they just hate agents due to bad experiences so they refuse to list and try FSBO. There are folks who just hate agents.

- Divorse and need to sell fast.  

- Probate sometimes has debt.  I only go after deals where the debt is over 70% of the value.  IE I don't want to put mjuch cash out to close.

- Pre forclosure.   FWIW this is a VERY VERY hard deal scenario.  I reco new folks stay away from pre forclosure.  So many leads above you don't need to approach these folks.

I have a sub to training doc complete with doc examples of how to close.   Connect then PM me.

Hello I would be interested in this doc. Do you have concerns for Due on Sale ?

[Brian Parker]

Quote from @Curt Smith:

I have a free training doc that comes with all doc examples and process to close and post-close a sub-to. I like helping investors not screw up the best deal in REI buy and hold!!!

There's solutions for everything but you need to be educated AND have the docs to get each step done correctly.

#1 banks do NOT want real estate! They are happy with getting paid, so pay them. I set up auto pay with the bank using my POA to manage the mortgage. Banks are used to POAs and estate managers taking over. Its language they are used to "hi I'm the manager for the estate of Mr Smith, I have a POA I need to send in to be on file. Where do I send it?" ...

#2 get a 2nd POA to manage the insurance policy. Contact the agent, say I'm the new estate manager and need to cancel. Problem is the unused portion refund check will be made out to the borrower/seller. No solution other then to mail them a surprise "thank you" check. If you are on good terms offer to split it. Same problem with annual escrow re-balancing and overages. Those checks are in the borrowers name. But mailed to ME since I'm the manager via the POA and I change the mailing address for the loan. I enjoy ad-hoc mailing $$$ to the seller, who sold due to hard times etc. They can use the funds. Worst case I've had, the borrower has died. I toss those checks. I've tried to get the bank escrow dept to cancel the check and apply to next year. Some success some not.

#3, forgot to answer the OP's qquestion;  yes get NEW insurance for a rental with your favorite carrier, named insured is how you hold title.  I strongly suggest you get my doc and close in a land trust.  The named insured is the landtrust.  AND Additional party is the seller same name as is on the canceled home owners policy.   Lender is the same bank etc.  Then have your agent fax the new policy to the bank right after closing.  This triggers the insurance refund issue mentioned above..   

It all works smoothly.  Only a very very rare small local bank with one location and not very smart raise any flags.  The major lenders all know land trusts and POAs and "I'm the new estate manager" no problems.

Connect with me, then PM, I'll send my training doc.

Curt,

Thanks for that post response.  I have always wondered how to get tall of the docs in order.  Do you recommend due on sale insurance?  I'd love a copy of training docs.

[Curt Smith]

Hi All,  zero worry about due on sale, espeically because of the way I close, in a trust, get POAs etc.  Zero worry!   Search here, and my network, heard of zero instances of this theoretical problem.  Banks learned they are really bad at managing real estate.  

[Eliot Vancil]

Quote from @Curt Smith:

Hi All,  zero worry about due on sale, espeically because of the way I close, in a trust, get POAs etc.  Zero worry!   Search here, and my network, heard of zero instances of this theoretical problem.  Banks learned they are really bad at managing real estate.  

 Thank you for the great response.  Good information!

[Shiela R.]

Cool thread @Alan L Donald!  Awesome info from @Curt Smith.  Only want to add that there is no "Due on Sale Jail".  My super smart attorney has summarized this for me several times: "Most lay people confuse civil liability with criminal liability. To be “illegal,” you must be in violation of a criminal law, code or statute. There is no federal or state law which makes it a crime to violate a due-on-sale clause. Now, if the lender discovers the transfer, it may at its option, call the loan due. If it is not paid, the lender has the option of beginning foreclosure proceedings." And, as already stated, banks don't want properties.  The likelihood of them calling the loan due on a performing note is slim.