subject to contracts

4 Replies

Hi everyone, I am about to structure my first subject to deal, and i am wondering where can I get a good subject to contract in order to make this deal happen? 

You can use a standard contract.

The contract should state in a financing section that the purchase is subject to the existing lien, state the mortgage, lender/note holder, date the note was made, the book and page of filing. You can initially say, with an estimated balance of__________.

Then you can state that a note is to be made for amounts owing to sellers, less any down payment if any.

If there is any difference and a note created state it is to be serviced by (state the loan servicer, select one) read up about loan servicing.

payments to the underlying mortgage to be made by buyer or loan servicer. 

Seller to convey by Special Warranty Deed subject to the existing lien mentioned.

Seller shall be named as a (pick one) co-insured/additional insured see you agent. If you're doing this under the radar with the seller's insurance, say the seller to execute an assignment of insured losses at settlement, see your` attorney or title company.

The rest should be in the standard contract, if these covenants contradict stated covenants, line out, with one single line through those parts that shall not apply, both buyers and sellers initial the beginning and end of those lines.

Turn it over to your closing/title agent, if they need anything else they will tell you.

If there is a note, it can be filed with a deed of trust/mortgage in second position. It can state it is subordinate to the first taken subject to payment of that obligation. Any default in payment of the superior lien is a default of this obligation allowing the holder to seek remedies under the security agreement made of even date herewith. Again, your attorney should do this.

There are wrap contracts, can be advantages but this is generally the easy way. Your title company can tell you what is customary. A wrap note is more difficult to describe. I use a partitioned note with two sections describing the furst and the excess equity financed, see your attorney.

I suggest you see an attorney, but I know everyone wants to be a DIY'er saving 300 bucks on an investment of tens or hundreds of thousands. You may not screw anything up that can't be fixed with a few thousand going to court later on.

If this is an investment for you, have the note preparer state "COMMERCIAL NOTE" on the note, this keeps questions about new note origination requirements being less of an issue later on.

If you have usury laws that apply, you'll have some math to do. if the interest is the same on the second as the first then you're good, if the 2nd is greater then you must compute the weighted average of the entire amounts financed, this is due to the fact the seller is actually financing to you under the contract, if the total amount of the first is 87% of the total amount financed the its rate is 87% of the blended rate for usury computations, the second rate would be 13% of that blended rate.

You are not assuming the underlying mortgage, only the note holder of that note can allow an assumption of that loan, you are assuming the obligations of the underlying mortgage together with payments required as obligated by that seller/borrower. Your agreement is with the seller, not the lender That is your assumption contract provision.

You might want to address the due on sale matter, provisions to obtain loan information under a special power of attorney as you should be entitled to information and have the ability to deal with the lender in the event of them calling the note for any reason. Again, your attorney. 

I suggest you not use any guru contract or one from any out of state investor, in fact, if the contract has not been used in your area it may not meet local custom. Again see your attorney.

Did I mention you should see an attorney? 

@Bill Gulley

Thanks for that walk through Bill. Sale subject to is something that I'm interested in. I'm trying to get all my ducks in a row about how to structure the deal/ contract before I go into it looking like and idiot.

Originally posted by @Joshua Foch:

Bill Gulley

Thanks for that walk through Bill. Sale subject to is something that I'm interested in. I'm trying to get all my ducks in a row about how to structure the deal/ contract before I go into it looking like and idiot.

Good idea! And, welcome, I see you're new here.

You can use bear contracts up there along with the bear disclosure, LOL

I can see that contractual obligations, structure, filing requirements, lien perfections and other issues need to be sliced out and explained in more detail, it's not really a form thread matter as there really are various and even more complex elements that should be better understood. I'll get to it as soon as I take care of world hunger, ISIS, stomp out guru fires and a better RE basic education curriculum for investors.

The concept of Sub-2 is pretty easy, protecting the buyer and seller, complying with financing requirements, setting up contingencies for a lender accelerating an underlying loan to maturity, addressing insurance issues having double coverage or who is in line first to receive loss proceeds, providing foreclosure strategies and doing so that these tactics can be uniformly applied, at least in most states, it's not so easy.

IMO, these really do need to become the better option for investors or homebuyers. The best under the seller financed umbrella is a note and deed of trust or mortgage giving good title, the second best is the Sub-2.

Contract for Deeds have had problems since inception, they evolved from straight installment agreements into the most popular. The death of these arrangements is the circumvention of foreclosure laws, it more of the last straw as there are many issues of not being in title and related restrictions. If you were to draft a modified CFD to avoid the deed issues in default, it would operate much like a lease-option, you can build those on steroids. Other partnership arrangements can also be used and a property held in an LLC can be transferred within the company by admitting members and the operating agreement with accounting setting aside equities. So, there really isn't any need to use the old CFD thinking under the current environment. The Sub-2 strategy is clearly better.

Going down the line of the most ideal installment transactions is the lease-option. Buyers have the least "control" under these arrangements as possession is under a lease. The advantage to the buyer is that they are not obligated to buy.

So, to end my rant, the Sub-2 should be mastered by investors as well as the straight seller financed note/mortgage when there are no existing liens. :)    

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