Seller Protection in a Sub2

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Seller Protection in a Sub2

Joseph Ziolkowski
Inspector · Alsip, IL · Member since 2008 · 361 posts · 75 votes

Hi all! My sister called a local investor to purchase a townhome that she is making payments on but not living in. There is little equity, and she just wants to be rid of it, and it sounds like he wants to take over payments and leave her name on the mortgage. My question is this. To protect her interests and make sure she doesn't get stuck with a non-paying investor attached to the property, would it be out of line to make it a contingency of the sale that the investor signs a quitclaim deed, put in escrow at the title company, that says that if he doesn't make payments for one month, two months, etc the quitclaim will be released out of escrow and he automatically is off of the property? How might that best be done? Also, would it be out of line to ask him to put x months worth of payment (in line with the quitclaim agreement) in escrow as well, all to be released to her if he defaults? It's the only way I know of to protect her in this. Also in a sub2, is it common to stipulate in the contract a certain time that the property will be sold/refinanced etc to get her name off of it? Sorry so many questions, but I'm a wholesaler, and know little of the ins and outs of sub2's. Thanks for any wisdom you all can offer. :cool:

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Nick J.
Residential Real Estate Broker · Payson, AZ · Member since 2009 · 3k+ posts · 1k+ votes
17y

Joseph, if your sister doesn't feel comfortable selling sub2 to this guy then give me a call LOL!!!

I know, it's a shameless plug but really. She has to be ok with giving ownership, the quitclaim means nothing. The actual OWNERSHIP will be transferred simply b/c it is an actual SALE of the home. Quitclaims aren't transferred when you buy a house the traditional way and it's certainly no different here other than the existing mortgage stays in place, that's all.

If she's not comfortable with that then have her sell it Lease/Option, Contract for deed or whatever...........

I never put up payments in advance but will always offer to include in the P/S contract that I will deed the property back to the mortgagee if I fall more than 30 days late on the mortgage.

this way, the seller knows that I'm in it for the money and if I don't perform they can have the house back. Guess how many times I've had to do that?......NONE

anyways, hope that helps ,feel free to hit me up. I know a thing or two about a thing or two when it comes to Subs

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  • Nick J.
    Residential Real Estate Broker · Payson, AZ · Member since 2009 · 3k+ posts · 1k+ votes
    17y

    Joseph, if your sister doesn't feel comfortable selling sub2 to this guy then give me a call LOL!!!

    I know, it's a shameless plug but really. She has to be ok with giving ownership, the quitclaim means nothing. The actual OWNERSHIP will be transferred simply b/c it is an actual SALE of the home. Quitclaims aren't transferred when you buy a house the traditional way and it's certainly no different here other than the existing mortgage stays in place, that's all.

    If she's not comfortable with that then have her sell it Lease/Option, Contract for deed or whatever...........

    I never put up payments in advance but will always offer to include in the P/S contract that I will deed the property back to the mortgagee if I fall more than 30 days late on the mortgage.

    this way, the seller knows that I'm in it for the money and if I don't perform they can have the house back. Guess how many times I've had to do that?......NONE

    anyways, hope that helps ,feel free to hit me up. I know a thing or two about a thing or two when it comes to Subs

    1Reply
  • Joseph Ziolkowski
    OP
    Inspector · Alsip, IL · Member since 2008 · 361 posts · 75 votes
    17y

    Ha! Thanks Nick, that was helpful. I wasn't sure if it would sound stupid to someone used to doing it. I trust the guy, but my parents (who will have a say in this) are really nervous about anything creative. So, if this guy puts in the purchase contract that he will deed it back if he falls behind 30 days, what is my sister's recourse then if he doesn't? She would have to take him to court, right? She can't afford that and doesn't need the hassle (in that worst case scenario) and I just thought the quitclaim would save her from having to do that. No dice though, huh? I actually heard that in a webinar a few months back. Thanks :cool:

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  • Joseph Ziolkowski
    OP
    Inspector · Alsip, IL · Member since 2008 · 361 posts · 75 votes
    17y

    Oh, and for the record, she's very ok with giving ownership. She wants that sucker gone. It's the fact that she is still ultimately responsible for the mortgage that is making everone nervous.

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  • Nick J.
    Residential Real Estate Broker · Payson, AZ · Member since 2009 · 3k+ posts · 1k+ votes
    17y

    whatever webinar you saw someone preaching the use of 'quit claims' for Sub2's are flat out retarded and I don't care who's offended by me saying.

    Unless you OWN the property via a Warranty/Grant Deed then it is NOT a Sub2.

    Make that investor prove he's got a few bucks. If you guys don't feel comfortable, give me a call, my number is listed below in my signature, maybe I might interested in taking it down Sub2

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    If you want to try that, don't use a quit claim. Use a warranty deed to give the ownership back from the investor to her.

    There are several other ways to do a deal like this besides sub 2. Sub 2 works with a DESPERATE seller who wants the property GONE in the worst way. If she's worried about being stuck holding the bag on a a mortgage for a house she no longer owns, she's not really that desperate. Honestly, I don't blame her. I wouldn't sell on sub 2, and I think most investors would not.

    A better alternative for her is a wrap. She creates a new mortgage and sells it to this investor with the new mortgage. He pays her, she pays her old mortgage. Or, use an escrow service. The wrap terms can mirror her existing loan. She gets a security interest (deed of trust or mortgage) from the investor. That gives her recourse if he doesn't pay.

    A land contract is another alternatives. She retains ownership, he makes payments and gets possession. When he completes the contract, he gets ownership.

    Lease/option is another alternative. This would really be best for here, since she gives up very little control.

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  • Joseph Ziolkowski
    OP
    Inspector · Alsip, IL · Member since 2008 · 361 posts · 75 votes
    17y

    Thanks guys! Jon, safe to say you could stand to forget more than some of us will ever know? :) Ok, so with a warranty deed, a wrap, or any of these suggestions, if something went awry, she would have to take him to court and sue him to regain her interest? Or foreclose?

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    At this point in life I'd rather avoid forgetting anything :-).

    Here's a quick summary of her options if he defaults, from a non-lawyer. This time they're in order from options that give her the strongest position to weakest.

    Lease/option - she evicts under the lease. She keeps any option money (probably zero, since there's no equity.)

    Land Contract - varies somewhat. May require a lawsuit to void the contract.

    Wrap - foreclosure. She's sold the house and is a creditor, and would foreclose based on her security interest.

    Subject to - lawsuit against the seller. She really has very limited options to get the property back. Most likely is that the lender will foreclose and take the house.

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  • Joseph Ziolkowski
    OP
    Inspector · Alsip, IL · Member since 2008 · 361 posts · 75 votes
    17y

    Thanks Jon! I see what you're saying about the lease option. And it makes a lot of sense. I guess what I'm not wrapping my head around yet is why the signed quitclaim in escrow wouldn't work. Only because it would be instant and totally out of his hands, you know? Is it just not an accepted practice, or is there something about it that I don't understand?

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  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    16y

    Jon spelled choices out nicely.

    One other concept that is not mentioned is a hybrid of a lease w option and a contract for deed.

    And a lawyer came up with this. :)

    Give the tenant:
    A 36 month lease
    A Contract for Option to purchase

    The "contract for option" states and restates that an option will be delivered in the future, after the specific performance on the lease and that no right title or interest is passed at the execution of the contract.

    This concept can be used with any lease, on any kind of property, of any value.

    This avoids "equitable interest" claims from the tenant.

    In a CFO or Contract for option to purchase, there is only a landlord and a tenant, not a "tenant buyer".

    Brian

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  • Joseph Ziolkowski
    OP
    Inspector · Alsip, IL · Member since 2008 · 361 posts · 75 votes
    16y

    That's an interesting twist on this. Thanks Brian, I'll tell her to look into that for sure!

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  • Joseph Ziolkowski
    OP
    Inspector · Alsip, IL · Member since 2008 · 361 posts · 75 votes
    16y

    Sorry dbl post

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  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    16y
    Originally posted by Jon Holdman:
    At this point in life I'd rather avoid forgetting anything :-).

    Here's a quick summary of her options if he defaults, from a non-lawyer. This time they're in order from options that give her the strongest position to weakest.

    Lease/option - she evicts under the lease. She keeps any option money (probably zero, since there's no equity.)

    Land Contract - varies somewhat. May require a lawsuit to void the contract.

    Wrap - foreclosure. She's sold the house and is a creditor, and would foreclose based on her security interest.

    Subject to - lawsuit against the seller. She really has very limited options to get the property back. Most likely is that the lender will foreclose and take the house.



    This is a great post and nicely documents options. Be careful with AITDs and lease/options in Texas. You need to know your local laws and how they apply to a transaction.

    In Texas, you can use a "Wally Wrap" to address most of the issues with protection if you sell sub-to.

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