Hi BP I live in Georgia and I am in the middle of deal I put under contract subject to with the seller who is in then process of a loan modification and I am selling it with a lease option with the buyer that I have under contract. The attorney's office just emailed me saying that they can close the loan assumption transaction with the me and the seller but, the lease/purchase agreement would need to be handled between myself and the new buyer. She asked if I would be needing a new payoff or if I would be using the mortgage statement provided by the seller. I emailed her back making it clear that I would not be assuming the loan as indicated in the contract that I would be taking it subject to the existing loan. I also, stated in the email that I would be using the statement. Not sure if that's the lingo they use instead of saying sub2 but, I wanted to make that clear. The title is clear only shows the existing mortgage. My questions are:
A. Is there any reason that the attorney can't close both transactions at the same time?
B. Should I put the property in a land trust when I do close with the seller? And should I wait until the loan modification is complete before going to closing so as not to trigger the DOS
C. Should I use a collection company when collecting payments?
I know this may be a lot but I want to make sure I understand what I'm doing and not make too many mistakes.
I'm nervous about your not being successful with the loan modification, what happens if the loan is not modified?
I would buy it "subject to" contingent upon the loan being modified
The lease purchase option part once you have title and once the loan is modified and perhaps you need another attorney
An Important aspect to lease purchase with subject to" to quickly get new tenant buyer a new loan like within six months or less
First, I am not an attorney, nor do I play one on TV. This is just one friend telling another what I have done in the past.
A Not all attorneys know what "sub to" is all about. They may not even know what you are talking about.
B I would wait to see what happens with the loan mod. And yes I would put the property in a land trust. Always a good idea. Of course, get all the documents that go with putting a property in a land trust: the deed, the trust document that does NOT get filed, limited power of attorney, release of information authorization, assignment of beneficial interest, and most importantly get the sellers NEW address and their phone number in case you need to contact them in the future.
C I have never used a servicing company to accept payments for my properties, but then again, I dont have that many. It is just not cost efficient at this time. When I have over 10, yes I will use a servicing company.
The are two separate, distinct transactions.
Transaction (1) involves transfer of title pursuant to an existing encumbrance. I doubt if an "assumption" is involved. As @Brian Gibbons shared his concern too, I'm wondering why you would attempt to complete transaction (1) before the current record owner/mortgagor has finalized their loan mod?
Typically, transaction (2) would be from you as wholesale buyer who lease/options YOUR property to end user.
Otherwise, I'm unclear how you would envision the a closing when the end user is not purchasing or acquiring title.
Let's clean all this up.
You should never attempt to purchase a property with a loan modification pending, never! Your seller who is the borrower will be executing documents as an owner occupied borrower extending the security agreement under those conditions and the terms of the loan as an extension of credit. If that borrower has a sale or even if they anticipate an immediate sale without disclosing it, that borrower is misrepresenting material facts which can constitute bank and mortgage fraud. You can be involved as well.
I suggest you put the deal on the back burner until the dust settles, the modification is completed and make a new contract with a later date and burn the other one. Officially, change your mind and reconsider later on.
If that attorney believes you are assuming the loan with the consent of that lender, they may be willing to close that transaction with the modification still pending, not a great idea, but could be done. If that attorney is closing the transaction while that loan modification is pending and knows there is no consent by the lender, I'd say they were walking on thin ice.
Your sale to a tenant buyer needs to be detailed as to those terms.
In a Sub-To, the underlying mortgage remains, it is an obligation between the lender and that borrower, it is a bi-lateral contract. That means the borrower may not assign their obligations, responsibilities or the debt created to another without the consent of that lender.
Where that leads yo is to that seller extending credit, as equity interest wrapping their loan up into a new agreement to finance to you. They are selling you their ownership interest subject to the lien which you agree to pay under the agreement that seller extends to you. The seller is, in essence, financing an amount they owe to that lender. It's a wash, they owe the lender, you owe the seller. Additionally, if you agree to pay more than what is owed under that existing lien, they are then financing equity as well.
The seller must take a security interest for your obligation, this is done by an "All Inclusive Deed Of Trust" or a Second Deed of Trust (or mortgage), this provides the seller with a security interest in the "loan" they extend to you.
Now, saying that you have a lease-option "BUYER" implies the tenant is buying the property under another agreement, like a rent to own or rent to buy. Dodd-Frank may not come into play you as an investor, but your buyer is not in that boat!
If you are in turn allowing your "buyer" to assume your debt, as with a Sub-To, you are financing as well, the debt extended by the lender to the original seller can't be assumed or passed on without consent, by both, that lender and the seller's obligation being agreed to by that seller. This is the mess you get can into by allowing the assumption of, or assigning obligations of, underlying loans with option or lease credits.
If you have indicated to that attorney that you have a "buyer" I can see why they would avoid anything to do with your second transaction.
And, a straight lease with an option to buy is not a transaction to close. These should be separate contracts, it's simply a lease agreement, that is not closed by an attorney or even a third party trustee. Neither is an option contract, it is simply an agreement to sell in the future at a specified price within a time period with consideration paid......there is no sale and therefore no "buyer". Communicating a buyer to your attorney is probably the issue.
As to the use of any Trust, that is simply a convoluted ploy pertaining to the due on sale, there is no liability protection really with a Revocable Trust, and, it wouldn't be for you to place in Trust but your seller to place it in Trust prior to a sale if staying under the radar was the goal. This is pretty much a useless ploy.
A loan modification has a big red blip on the radar screen of the lender or servicer, think of it as eyes in the sky watching over this problem loan. Yes, you should be rather paranoid about this transaction. Having the property transferred in short order to a Trust can come to the surface many ways; insurance changes, filing notices of transactions are sent out daily to subscribers with title companies, mortgages are audited at random, but problem loans take center stage in audits. Having any transfer period can send up red flags, not just with a Trust.
I suggest you take a lease with an option to buy, a straight option. Then sublet the lease to your tenant, a "master lease". Then assign your option. Buying this at this time with a loan modification is going on may well put you and your seller in a can of worms.
You didn't really need an attorney, but it's obvious you will be getting a bill and without experience, have the attorney look over the lease and option to buy with the assignment of the option. Straight up, don't mislead a lender in any lending process. Good luck :)
Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com
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