seeking recommendation for sub 2 transaction
Member since 2022 · 88 posts · 29 votes
seeking recommendation for sub 2 transaction
Most Popular Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesQuote from @James Wise:
Quote from @Ed W.:
@James Wise At a minimum, sub to deals require knowledge, highly ethical behavior, and an ability to perform.
I'm a person who believes in being honest and lawful and I believe my actions over many years strongly suggest that I have accomplished that goal.
I've never heard of a law - or anything else for the matter - that suggests that sub to's are illegal or in some way creating a fraud. I realize that real estate laws vary widely among the 50 states but could you please cite your source for them being fraudulent. Since we are both Ohio guys, a cite from the Ohio Revised Code would be helpful What you're aware of may or may not apply to me.
You and I know that the OP probably doesn't have the credentials to do his transactions but I don't like to make assumptions. I'm sure you understand the reasons for the questions I asked. There are many, many problems - some of them potentially very hurtful and harmful to the seller - when handled in incorrectly whether by lack of knowledge, lack of ethics, lack of money or other avoidable deficiencies. This thread has the potential to help newbies and experienced investors who almost certainly do not have sound (or any) understanding of the knowledge required, the necessary precautions and care that sub to deals require.
You've never heard of a due on sale clause that's in basically every mortgage?
Ed I have been preaching the same thing about sub 2 since day one on BP.. your correct highly risky to seller and fraught with potential landmines for all.. And not a beginner strategy by any means.
Being a lender myself and pretty familiar with most states debt instruments.. Alienation of title ( transferring title without formal assumption) does give the lender or beneficiary of the debt instrument the Right to accelerate the loan and call it due and payable and if not paid put it in foreclosure. But its a right to do so not an obligation.. Wrap transactions would never happen if it was mortgage fraud. Although Wraps are far better for the seller than a sub 2. In CA. there is a specific deed of trust called a All inclusive deed of trust that allows those transactions to go legally and give the seller the protection they need.. I suspect most states have followed suit at some level.
28 Replies
- 3yRemington LymanBusiness MemberReal Estate Agent · Columbus, OH · Member since 2017 · 6k+ posts · 7k+ votes
Quote from @Rashid Khalil:
- gearing up for 1st investment property in the Columbus area using sub 2, need recs for real estate attorney or any sub to service for guiding through paperwork/agreement etc.
will appreciate your help
Thanks
I can send you some referrals in Columbus, Ohio
- 3yJimmy LieuBusiness MemberReal Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes
Quote from @Rashid Khalil:
- gearing up for 1st investment property in the Columbus area using sub 2, need recs for real estate attorney or any sub to service for guiding through paperwork/agreement etc.
will appreciate your help
Thanks
Hi Rashid, I have worked with a lot of great real estate attorneys that charge reasonable rates and provide excellent service, and I would love to recommend them to you. As an investor and agent here in Columbus Ohio, let me know if you have any questions or want to connect!
Jimmy Lieu, Red 1 Realty4.9120 Reviews - Member since 2022 · 88 posts · 29 votes3y
Quote from @Remington Lyman:
Quote from @Rashid Khalil:
- gearing up for 1st investment property in the Columbus area using sub 2, need recs for real estate attorney or any sub to service for guiding through paperwork/agreement etc.
will appreciate your help
Thanks
I can send you some referrals in Columbus, Ohio
thanks, a lot
will appreciate your help
- Investor / Landlord · Columbus, OH · Member since 2015 · 276 posts · 174 votes3y
@Rashid Khalil@Rashid Khalil@Rashid Khalil For folks on this site to really provide you with quality assistance, it would be helpful if you are more specific.
Is this "1st investment property" your first ever or have you done many investment properties elsewhere and this is just the first in Columbus? Have you done any sub to deals? If so, how many and with what level of success?
What do you mean by "sub to service"?
- Member since 2022 · 88 posts · 29 votes3y
hi ED
yes, first ever investment property, never done any sub to deals
by sub to service, I mean an expert who knows the step and paper work to complete it successfully.
I have 2 locations that I am negotiating one in Toledo and other in Columbus oh
thanks
- Investor / Landlord · Columbus, OH · Member since 2015 · 276 posts · 174 votes3y
@Rashid Khalil Thank you for your candor.
Given your lack of experience (and even if you had some experience) getting professional assistance is critical. AFTER you close on the property(ies), what is your plan? Fix and flip, hold for rental, or ????
After you purchase the property, pay for closing fees and general costs of purchase, pay for your attorney, fix/upgrade the properties if needed, market for your sale or tenant, pay for holding costs till you reach your goal of sale or lease, and miscellaneous expenses, how much in CASH (not credit) reserves will you have if the property has surprises (it likely will). After all the initial costs, how in CASH reserves will you have to pay the seller's mortgage, taxes, and insurance?
How did you find the properties? Are you negotiating price and terms or is an agent or other third party?
I'll be unavailable until later today to reply.
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes3y
Quote from @Rashid Khalil:
- gearing up for 1st investment property in the Columbus area using sub 2, need recs for real estate attorney or any sub to service for guiding through paperwork/agreement etc.
will appreciate your help
Thanks
Sub2 is low key mortgage fraud. Don't listen to the guru hype. Pass on this deal. Pass on this "strategy".
- Investor / Landlord · Columbus, OH · Member since 2015 · 276 posts · 174 votes3y
@James Wise At a minimum, sub to deals require knowledge, highly ethical behavior, and an ability to perform.
I'm a person who believes in being honest and lawful and I believe my actions over many years strongly suggest that I have accomplished that goal.
I've never heard of a law - or anything else for the matter - that suggests that sub to's are illegal or in some way creating a fraud. I realize that real estate laws vary widely among the 50 states but could you please cite your source for them being fraudulent. Since we are both Ohio guys, a cite from the Ohio Revised Code would be helpful What you're aware of may or may not apply to me.
You and I know that the OP probably doesn't have the credentials to do his transactions but I don't like to make assumptions. I'm sure you understand the reasons for the questions I asked. There are many, many problems - some of them potentially very hurtful and harmful to the seller - when handled in incorrectly whether by lack of knowledge, lack of ethics, lack of money or other avoidable deficiencies. This thread has the potential to help newbies and experienced investors who almost certainly do not have sound (or any) understanding of the knowledge required, the necessary precautions and care that sub to deals require.
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes3y
Quote from @Ed W.:
@James Wise At a minimum, sub to deals require knowledge, highly ethical behavior, and an ability to perform.
I'm a person who believes in being honest and lawful and I believe my actions over many years strongly suggest that I have accomplished that goal.
I've never heard of a law - or anything else for the matter - that suggests that sub to's are illegal or in some way creating a fraud. I realize that real estate laws vary widely among the 50 states but could you please cite your source for them being fraudulent. Since we are both Ohio guys, a cite from the Ohio Revised Code would be helpful What you're aware of may or may not apply to me.
You and I know that the OP probably doesn't have the credentials to do his transactions but I don't like to make assumptions. I'm sure you understand the reasons for the questions I asked. There are many, many problems - some of them potentially very hurtful and harmful to the seller - when handled in incorrectly whether by lack of knowledge, lack of ethics, lack of money or other avoidable deficiencies. This thread has the potential to help newbies and experienced investors who almost certainly do not have sound (or any) understanding of the knowledge required, the necessary precautions and care that sub to deals require.
You've never heard of a due on sale clause that's in basically every mortgage?
- 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @James Wise:
Quote from @Ed W.:
@James Wise At a minimum, sub to deals require knowledge, highly ethical behavior, and an ability to perform.
I'm a person who believes in being honest and lawful and I believe my actions over many years strongly suggest that I have accomplished that goal.
I've never heard of a law - or anything else for the matter - that suggests that sub to's are illegal or in some way creating a fraud. I realize that real estate laws vary widely among the 50 states but could you please cite your source for them being fraudulent. Since we are both Ohio guys, a cite from the Ohio Revised Code would be helpful What you're aware of may or may not apply to me.
You and I know that the OP probably doesn't have the credentials to do his transactions but I don't like to make assumptions. I'm sure you understand the reasons for the questions I asked. There are many, many problems - some of them potentially very hurtful and harmful to the seller - when handled in incorrectly whether by lack of knowledge, lack of ethics, lack of money or other avoidable deficiencies. This thread has the potential to help newbies and experienced investors who almost certainly do not have sound (or any) understanding of the knowledge required, the necessary precautions and care that sub to deals require.
You've never heard of a due on sale clause that's in basically every mortgage?
Ed I have been preaching the same thing about sub 2 since day one on BP.. your correct highly risky to seller and fraught with potential landmines for all.. And not a beginner strategy by any means.
Being a lender myself and pretty familiar with most states debt instruments.. Alienation of title ( transferring title without formal assumption) does give the lender or beneficiary of the debt instrument the Right to accelerate the loan and call it due and payable and if not paid put it in foreclosure. But its a right to do so not an obligation.. Wrap transactions would never happen if it was mortgage fraud. Although Wraps are far better for the seller than a sub 2. In CA. there is a specific deed of trust called a All inclusive deed of trust that allows those transactions to go legally and give the seller the protection they need.. I suspect most states have followed suit at some level. - Investor / Landlord · Columbus, OH · Member since 2015 · 276 posts · 174 votes3y
I'm mostly retired but if someone brings me a deal I don't throw it away. I do no marketing. Jay, I'm certain I don't have your depth of knowledge and experience. The few posts of yours that I've read, have been very helpful to users of this site.
James, I'm not sure where I fit relative to you but I'm competent within the areas of real estate that I chose to pursue. That said, I accept that you have a ton of experience and very likely are a very competent guy. In reply to my request for something that would explain to me why sub to is considered fraud (a term under the law with a very specific definition within each state) you replied with "You've never heard of a due on sale clause that's in basically every mortgage?". I am very familiar with those clauses and have been for over 30 years. However, telling me that does not help me confirm your assertion. Please, just tell me where I can find the information, if it's true I'll change my thinking and my actions immediately and others on this site will benefit as well.
To both of you, there is no question that newbies aren't remotely competent to deal with sub to deals - too many moving parts and most attorneys don't know what is needed. As I stated above, I chose the approach I took with the OP to create a discussion that would likely lead to some valid and helpful conclusions. I didn't want a theoretical discussion, I wanted one based on actual facts. It makes it much more real for, in this case, the newbie.I want share with you both that I'm very familiar with the damage failing to perform within a sub to deal can inflict on a seller. Around the time of the crash (I can't remember the exact dates but in or before 2008) I was jealous of a competitor. I know that's a terrible emotion to have but it was galling to me that he was closing at least 5 times the number of properties than I was closing and I could not understand why that was. I knew he was a better marketer than I - but not that much better. Bottom line, at least 20 of his sub to deals ended up in foreclosure seriously harming the sellers who placed their trust and financial lives with the man and he also harmed other investors who were acting responsibly by tainting the profession. Both of you know the many bad consequences those sellers endured. Why did that happen? The deals were not economic, did not have the margins and cushions that investors need. How did he do so much more business than I did? He did deals I would not have even remotely considered doing. They were awful investments. The result, he caused a financial train wreck.
The following is not meant to pat myself on the back but to at least suggest to you there are some ways to do sub to deals that greatly minimize (but admittedly not eliminate) the risks to sellers. The following were standard practice for me:
I had an office and a secretary. Her subject to duties (duties I strongly emphasized to her that they must be followed by having her sign a document stressing their importance) included paying the mortgages at least 2 weeks early and then following up no later than the due date to confirm the payments had posted. We had one instance - my fault - where 2 checks (yes checks, it was that long ago) for 2 different lenders were sent to one lender and, of course, those are machine processed and the wrong bank name on the check was no impediment to the wrong lender depositing it. So, the account that was overpaid ended up with an extra payment of principal and the other account was credited with zero. When she did her due diligence she found that deficiency, we figured out the problem and immediately sent the check. Yes, it was posted by the bank after the first of the month but it was posted before the late payment was due (i.e., prior to the 15th) and never got remotely close to being over 30 days late. No harm was caused to the seller.
The following is in broad strokes with some details not mentioned. When people place their trust in me, I work very diligently to not worry them or disappoint them. One of the protections I gave the subject to sellers was to put in place a substantial life insurance policy. The beneficiary of that policy was trust held by a bank. Long story short, if I croaked one of two things would happen. The existing sub to notes would be paid in full OR if there were insufficient funds to do that, monthly payments on all of those accounts and would be made until my attorney disposed of the properties.
BTW, I've also done a lot seller financed deals. I know that even if they agree to accept payments over time, they are still anxious. I went to every closing of a property sold with seller financing with a check in my hand. At the end of the closing, I gave the seller that check explaining that it was the first monthly payment. That gesture almost always relaxed the seller and the apprehension largely disappeared.
- 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Ed W.:
I'm mostly retired but if someone brings me a deal I don't throw it away. I do no marketing. Jay, I'm certain I don't have your depth of knowledge and experience. The few posts of yours that I've read, have been very helpful to users of this site.
James, I'm not sure where I fit relative to you but I'm competent within the areas of real estate that I chose to pursue. That said, I accept that you have a ton of experience and very likely are a very competent guy. In reply to my request for something that would explain to me why sub to is considered fraud (a term under the law with a very specific definition within each state) you replied with "You've never heard of a due on sale clause that's in basically every mortgage?". I am very familiar with those clauses and have been for over 30 years. However, telling me that does not help me confirm your assertion. Please, just tell me where I can find the information, if it's true I'll change my thinking and my actions immediately and others on this site will benefit as well.
To both of you, there is no question that newbies aren't remotely competent to deal with sub to deals - too many moving parts and most attorneys don't know what is needed. As I stated above, I chose the approach I took with the OP to create a discussion that would likely lead to some valid and helpful conclusions. I didn't want a theoretical discussion, I wanted one based on actual facts. It makes it much more real for, in this case, the newbie.I want share with you both that I'm very familiar with the damage failing to perform within a sub to deal can inflict on a seller. Around the time of the crash (I can't remember the exact dates but in or before 2008) I was jealous of a competitor. I know that's a terrible emotion to have but it was galling to me that he was closing at least 5 times the number of properties than I was closing and I could not understand why that was. I knew he was a better marketer than I - but not that much better. Bottom line, at least 20 of his sub to deals ended up in foreclosure seriously harming the sellers who placed their trust and financial lives with the man and he also harmed other investors who were acting responsibly by tainting the profession. Both of you know the many bad consequences those sellers endured. Why did that happen? The deals were not economic, did not have the margins and cushions that investors need. How did he do so much more business than I did? He did deals I would not have even remotely considered doing. They were awful investments. The result, he caused a financial train wreck.
The following is not meant to pat myself on the back but to at least suggest to you there are some ways to do sub to deals that greatly minimize (but admittedly not eliminate) the risks to sellers. The following were standard practice for me:
I had an office and a secretary. Her subject to duties (duties I strongly emphasized to her that they must be followed by having her sign a document stressing their importance) included paying the mortgages at least 2 weeks early and then following up no later than the due date to confirm the payments had posted. We had one instance - my fault - where 2 checks (yes checks, it was that long ago) for 2 different lenders were sent to one lender and, of course, those are machine processed and the wrong bank name on the check was no impediment to the wrong lender depositing it. So, the account that was overpaid ended up with an extra payment of principal and the other account was credited with zero. When she did her due diligence she found that deficiency, we figured out the problem and immediately sent the check. Yes, it was posted by the bank after the first of the month but it was posted before the late payment was due (i.e., prior to the 15th) and never got remotely close to being over 30 days late. No harm was caused to the seller.
The following is in broad strokes with some details not mentioned. When people place their trust in me, I work very diligently to not worry them or disappoint them. One of the protections I gave the subject to sellers was to put in place a substantial life insurance policy. The beneficiary of that policy was trust held by a bank. Long story short, if I croaked one of two things would happen. The existing sub to notes would be paid in full OR if there were insufficient funds to do that, monthly payments on all of those accounts and would be made until my attorney disposed of the properties.
BTW, I've also done a lot seller financed deals. I know that even if they agree to accept payments over time, they are still anxious. I went to every closing of a property sold with seller financing with a check in my hand. At the end of the closing, I gave the seller that check explaining that it was the first monthly payment. That gesture almost always relaxed the seller and the apprehension largely disappeared.
sub to abuse by bad actors is real and I wont describe them here as to give the public any ideas.. But we have had very similar experiences.. I bailed out one small group who went to a sub to guru event in about 2006 stacked up 30 of them .. they all ended up in default I bought maybe half of them the rest were not capable of saving.. they got into some deep trouble including complaints to teh AG etc etc.. I have seen criminal acts with sub too also .. Got interviewed by FBI on one guy who ended up getting 5 years in prison.. ( at the time I had an active HML company ) And the guy was trying to take one of my loans sub too. - Member since 2022 · 88 posts · 29 votes3y
Quote from @Ed W.:
@Rashid Khalil Thank you for your candor.
Given your lack of experience (and even if you had some experience) getting professional assistance is critical. AFTER you close on the property(ies), what is your plan? Fix and flip, hold for rental, or ????
After you purchase the property, pay for closing fees and general costs of purchase, pay for your attorney, fix/upgrade the properties if needed, market for your sale or tenant, pay for holding costs till you reach your goal of sale or lease, and miscellaneous expenses, how much in CASH (not credit) reserves will you have if the property has surprises (it likely will). After all the initial costs, how in CASH reserves will you have to pay the seller's mortgage, taxes, and insurance?
How did you find the properties? Are you negotiating price and terms or is an agent or other third party?
I'll be unavailable until later today to reply.
yes, so the exit strategy!
1. need to do STR at least for the rest of the year to qualify for bonus depreciation to reduce taxable w2 income, may later transfer to PMC and LTR with a long-term hold
3. putting in around 30% (paying off seller equity), do have reserves for surprises, would want to refinance once rate drops to < 4.5 in few years (4-5) to take out equity and be able to hold the property at no to minimal cost.
now this is all wish list and probably far from reality (day dreaming)
- Member since 2022 · 88 posts · 29 votes3ygreat information, thanks a lot.
Quote from @Ed W.:
I'm mostly retired but if someone brings me a deal I don't throw it away. I do no marketing. Jay, I'm certain I don't have your depth of knowledge and experience. The few posts of yours that I've read, have been very helpful to users of this site.
James, I'm not sure where I fit relative to you but I'm competent within the areas of real estate that I chose to pursue. That said, I accept that you have a ton of experience and very likely are a very competent guy. In reply to my request for something that would explain to me why sub to is considered fraud (a term under the law with a very specific definition within each state) you replied with "You've never heard of a due on sale clause that's in basically every mortgage?". I am very familiar with those clauses and have been for over 30 years. However, telling me that does not help me confirm your assertion. Please, just tell me where I can find the information, if it's true I'll change my thinking and my actions immediately and others on this site will benefit as well.
To both of you, there is no question that newbies aren't remotely competent to deal with sub to deals - too many moving parts and most attorneys don't know what is needed. As I stated above, I chose the approach I took with the OP to create a discussion that would likely lead to some valid and helpful conclusions. I didn't want a theoretical discussion, I wanted one based on actual facts. It makes it much more real for, in this case, the newbie.I want share with you both that I'm very familiar with the damage failing to perform within a sub to deal can inflict on a seller. Around the time of the crash (I can't remember the exact dates but in or before 2008) I was jealous of a competitor. I know that's a terrible emotion to have but it was galling to me that he was closing at least 5 times the number of properties than I was closing and I could not understand why that was. I knew he was a better marketer than I - but not that much better. Bottom line, at least 20 of his sub to deals ended up in foreclosure seriously harming the sellers who placed their trust and financial lives with the man and he also harmed other investors who were acting responsibly by tainting the profession. Both of you know the many bad consequences those sellers endured. Why did that happen? The deals were not economic, did not have the margins and cushions that investors need. How did he do so much more business than I did? He did deals I would not have even remotely considered doing. They were awful investments. The result, he caused a financial train wreck.
The following is not meant to pat myself on the back but to at least suggest to you there are some ways to do sub to deals that greatly minimize (but admittedly not eliminate) the risks to sellers. The following were standard practice for me:
I had an office and a secretary. Her subject to duties (duties I strongly emphasized to her that they must be followed by having her sign a document stressing their importance) included paying the mortgages at least 2 weeks early and then following up no later than the due date to confirm the payments had posted. We had one instance - my fault - where 2 checks (yes checks, it was that long ago) for 2 different lenders were sent to one lender and, of course, those are machine processed and the wrong bank name on the check was no impediment to the wrong lender depositing it. So, the account that was overpaid ended up with an extra payment of principal and the other account was credited with zero. When she did her due diligence she found that deficiency, we figured out the problem and immediately sent the check. Yes, it was posted by the bank after the first of the month but it was posted before the late payment was due (i.e., prior to the 15th) and never got remotely close to being over 30 days late. No harm was caused to the seller.
The following is in broad strokes with some details not mentioned. When people place their trust in me, I work very diligently to not worry them or disappoint them. One of the protections I gave the subject to sellers was to put in place a substantial life insurance policy. The beneficiary of that policy was trust held by a bank. Long story short, if I croaked one of two things would happen. The existing sub to notes would be paid in full OR if there were insufficient funds to do that, monthly payments on all of those accounts and would be made until my attorney disposed of the properties.
BTW, I've also done a lot seller financed deals. I know that even if they agree to accept payments over time, they are still anxious. I went to every closing of a property sold with seller financing with a check in my hand. At the end of the closing, I gave the seller that check explaining that it was the first monthly payment. That gesture almost always relaxed the seller and the apprehension largely disappeared.
I didn't understand the life insurance part, how that work and comforts the seller. i can buy the property cash or finance it too, no issue about the loan qualification, but just don't think at todays hyped up prices 7% interest rate can work, - Investor / Landlord · Columbus, OH · Member since 2015 · 276 posts · 174 votes3y
Rashid, I've been in New York for the past 4 or 5 days and have to leave very shortly to head back to Ohio. I'll have the time to respond either this evening or tomorrow. In the meantime, it will be worth your time to consider the reservations of 3 very experienced investors (Jay, James, and me) and suggest how you believe you can accomplish your goal. What are your credentials for doing a subject to deal? The good news is that you seem to have the financial ability to protect the seller and a much better reason to use subject to than most newbies but, beyond that, what knowledge do you have to do this well?
- Investor / Landlord · Columbus, OH · Member since 2015 · 276 posts · 174 votes3y
Jay, we all have lives outside of BP so I haven't yet heard from James with the information I requested from him regarding his belief that subject to somehow how falls under the category of fraud. We all agree that it is a potentially dangerous procedure but, in your experience, have you run across any indication that it is considered fraud under any particular laws?
- Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes3y
If sub2 is fraud why is it on the HUD-1? (honest question)
- Investor / Landlord · Columbus, OH · Member since 2015 · 276 posts · 174 votes3y
@Rashid Khalil @James Wise @Jay Hinrichs
Rashid, you asked for more information related to the insurance arrangement I had for the sub to deals. First, the context - this is a condensed version to give you the general idea. At any one time, I would typically have 5 to no more than 10 SF houses purchased via sub to in my portfolio. Up until a few years ago, you could purchase a nice 2,000 sq ft house in a good school system for about $100/sf in the Columbus Metro market. They are typically double that or more today. So my sub-to's generally had ARV's in the $50k - $250k range. On rare occasions, higher. I have never paid more than the 70% of ARV minus repairs on any property except when there was something that offset the higher percentage (perhaps a lien on a second property, or a very good price on a second property or package of properties, etc.). All of my deals have made good financial sense and out of the hundreds I've purchased/controlled, I've lost very modest sums on only 2 (total loss for the 2 less than $10k). Part of my success had to do with the care I took to value properties. I can't speak to anywhere but where I've purchased but there are a lot of bad surprises that come from arriving at valuations based solely on 3 comps and considering nothing else (no, I won't take the time explain my process but look up the appraisal expression "adverse conditions" as a way to get started in the right direction).
So, insurance to keep the sellers of sub to properties needed to be $1.5 million. It actually could have been less considering that I almost always had properties across the entire range of $50k - $250k ARV (not what I paid for them) and none of the properties had debt that exceeded 70% of ARV (or had some compensating factor that allowed the sub to house to have more debt than 70%).
The policy was term life. As I originally stated, a trust controlled by a bank had a regularly updated list of the pertinent properties and the instructions I originally outlined above. Either the seller's debt would be paid in full from the insurance proceeds or, if that amount was insufficient, the instructions were to make monthly payments until the properties could be sold. The sellers were never left naked. The trust was between my corporation and the bank and, of course, on my death the net of the corporate assets after liquidation would go to my heirs including whatever insurance proceeds remained after satisfying the sub to obligations.
Rashid, I've given you a reasonable level of detail to answer your question. Please do me the courtesy of answering mine: "In the meantime, it will be worth your time to consider the reservations of 3 very experienced investors (Jay, James, and me) and suggest how you believe you can accomplish your goal."
- Investor / Landlord · Columbus, OH · Member since 2015 · 276 posts · 174 votes3y
@Account Closed
"If sub2 is fraud why is it on the HUD-1? (honest question)"
I am not an attorney but here is an educated guess based on fact - you can always purchase subject to debt with a lender's permission and it would need to be on the HUD for that reason. Of course, all of my sub to deals had the seller's debt placed there. That said, I'm still firmly in the camp that sub to does not constitute fraud but I've left open the possibility that I'm incorrect.
- 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
just because something is on the HUD does not make it legal or illegal on its face.. Just like when you see wholesaler getting paid a commission on the HUD in Ohio and we know thats not legal without a RE license.. - 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Ed W.:
@Rashid Khalil @James Wise @Jay Hinrichs
Rashid, you asked for more information related to the insurance arrangement I had for the sub to deals. First, the context - this is a condensed version to give you the general idea. At any one time, I would typically have 5 to no more than 10 SF houses purchased via sub to in my portfolio. Up until a few years ago, you could purchase a nice 2,000 sq ft house in a good school system for about $100/sf in the Columbus Metro market. They are typically double that or more today. So my sub-to's generally had ARV's in the $50k - $250k range. On rare occasions, higher. I have never paid more than the 70% of ARV minus repairs on any property except when there was something that offset the higher percentage (perhaps a lien on a second property, or a very good price on a second property or package of properties, etc.). All of my deals have made good financial sense and out of the hundreds I've purchased/controlled, I've lost very modest sums on only 2 (total loss for the 2 less than $10k). Part of my success had to do with the care I took to value properties. I can't speak to anywhere but where I've purchased but there are a lot of bad surprises that come from arriving at valuations based solely on 3 comps and considering nothing else (no, I won't take the time explain my process but look up the appraisal expression "adverse conditions" as a way to get started in the right direction).
So, insurance to keep the sellers of sub to properties needed to be $1.5 million. It actually could have been less considering that I almost always had properties across the entire range of $50k - $250k ARV (not what I paid for them) and none of the properties had debt that exceeded 70% of ARV (or had some compensating factor that allowed the sub to house to have more debt than 70%).
The policy was term life. As I originally stated, a trust controlled by a bank had a regularly updated list of the pertinent properties and the instructions I originally outlined above. Either the seller's debt would be paid in full from the insurance proceeds or, if that amount was insufficient, the instructions were to make monthly payments until the properties could be sold. The sellers were never left naked. The trust was between my corporation and the bank and, of course, on my death the net of the corporate assets after liquidation would go to my heirs including whatever insurance proceeds remained after satisfying the sub to obligations.
Rashid, I've given you a reasonable level of detail to answer your question. Please do me the courtesy of answering mine: "In the meantime, it will be worth your time to consider the reservations of 3 very experienced investors (Jay, James, and me) and suggest how you believe you can accomplish your goal."
in my years of doing sub 2 and a lot of wraps I never heard of or thought of life insurance like your describing .. I think back on a lot of my sellers and a good % of them would have a hard time grasping this intellectually IE would fly right over their heads.. And in many cases for me as it was foreclosure rescue the sellers were long gone once we close into the wind.. out of state never to be heard of again.. I can see this working for sophisticated sellers for sure and nice set up kudo's on that. - Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes3y
Quote from @Jay Hinrichs:
Quote from @Ed W.:
just because something is on the HUD does not make it legal or illegal on its face.. Just like when you see wholesaler getting paid a commission on the HUD in Ohio and we know thats not legal without a RE license..Having the Sub To on the HUD protects you. Escrow needs to know so they can prepare the HUD properly. It reduces fraud.
When you get audited by the IRS, they want to know how much you paid for a property, how much underlying debt the property had and whether you had a responsibility to make the payments, making you eligible for taking the interest deduction.
Subject To is not illegal. I had a case go to the US 9th District and since, as we pointed out to the judge, that the Due on Sale clause says “May call the debt Due” not “Must call the debt due” he ruled in our favor.
When done correctly, Subject To is a powerful tool like dynamite. But you must be careful and skilled. And sometimes they blow up.
Subject To is not for beginners or the faint of spirit. Problems don’t show up until a year or two later, long after you’ve forgotten about it. If you are not sophisticated, keep $50,000 in reserves for attorneys to handle your lawsuits.
Anyone who says Subject To is “safe” is either reckless or wants your money (a guru or mentor) or both.
- Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes3yBecuse nobody ever reads their Deed of Trust/Mortgage agreement here is what it says
Quote from @Account Closed:
Quote from @Jay Hinrichs:
Quote from @Ed W.:
just because something is on the HUD does not make it legal or illegal on its face.. Just like when you see wholesaler getting paid a commission on the HUD in Ohio and we know thats not legal without a RE license..Having the Sub To on the HUD protects you. Escrow needs to know so they can prepare the HUD properly. It reduces fraud.
When you get audited by the IRS, they want to know how much you paid for a property, how much underlying debt the property had and whether you had a responsibility to make the payments, making you eligible for taking the interest deduction.
Subject To is not illegal. I had a case go to the US 9th District and since, as we pointed out to the judge, that the Due on Sale clause says “May call the debt Due” not “Must call the debt due” he ruled in our favor.
When done correctly, Subject To is a powerful tool like dynamite. But you must be careful and skilled. And sometimes they blow up.
Subject To is not for beginners or the faint of spirit. Problems don’t show up until a year or two later, long after you’ve forgotten about it. If you are not sophisticated, keep $50,000 in reserves for attorneys to handle your lawsuits.
Anyone who says Subject To is “safe” is either reckless or wants your money (a guru or mentor) or both.
- 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Account Closed:
Becuse nobody ever reads their Deed of Trust/Mortgage agreement here is what it saysQuote from @Account Closed:
Quote from @Jay Hinrichs:
Quote from @Ed W.:
just because something is on the HUD does not make it legal or illegal on its face.. Just like when you see wholesaler getting paid a commission on the HUD in Ohio and we know thats not legal without a RE license..Having the Sub To on the HUD protects you. Escrow needs to know so they can prepare the HUD properly. It reduces fraud.
When you get audited by the IRS, they want to know how much you paid for a property, how much underlying debt the property had and whether you had a responsibility to make the payments, making you eligible for taking the interest deduction.
Subject To is not illegal. I had a case go to the US 9th District and since, as we pointed out to the judge, that the Due on Sale clause says “May call the debt Due” not “Must call the debt due” he ruled in our favor.
When done correctly, Subject To is a powerful tool like dynamite. But you must be careful and skilled. And sometimes they blow up.
Subject To is not for beginners or the faint of spirit. Problems don’t show up until a year or two later, long after you’ve forgotten about it. If you are not sophisticated, keep $50,000 in reserves for attorneys to handle your lawsuits.
Anyone who says Subject To is “safe” is either reckless or wants your money (a guru or mentor) or both.
in many deeds of trust or mortgages its under paragraph entitled Alienation Clause. - Investor / Landlord · Columbus, OH · Member since 2015 · 276 posts · 174 votes3y
Quote from @Jay Hinrichs:
I agree with you related to the general class of sub to sellers and that many of them wouldn't quite understand about the insurance but, in general, I told all of them that we had safeguards in place to make sure their notes were paid in a timely fashion and that if their credit scores were being hurt because of their payment history prior to the sale that it was likely that their credit scores would rise after the sale (all else being equal). Trusts make the eyes of most sellers glaze over but, if necessary, I had copy of the trust held by the bank in a 3-ring binder and some pages of the insurance policy naming the trust that often helped a lot in getting them to at least first base in terms of understanding. We also held most properties in separate trusts and having a binder for each of those helped sellers understand that side of it.
BTW, over 20 years ago I was looking for a new title agency. Coincident to that search I got a marketing piece from a smallish agency and went to have a discussion with the 2 owners (both attorneys). Long story short, the very first deal I did with them happened to be a sub to deal , something that they had never encountered. Prior to closing (and for the HUD) I met with them to discuss the docs, explain why it was legal, and make sure we were on the same page. They were pretty comfortable but remained somewhat skeptical between the sub to itself and working with a full time investor, something they rarely did. I wasn't expecting what happened at closing. The attorney who closed it started off by politely quizzing the sellers so that he could be certain they understood what they were agreeing to - they'd no longer be the owners, debt would stay in their name and would have some impact (possibly good, possibly bad) on their credit scores, etc. With every question he asked them they were able to demonstrate that I had informed them well (plus I had it in writing from them). The attorney was comfortable after that. After I was comfortable with the agency, I introduced them to our local REIA where they were very active for many years.
Jay, kudo's from you is very high praise in my book. I sincerely appreciate your comment.
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