seeking recommendation for sub 2 transaction
Member since 2022 · 88 posts · 29 votes
seeking recommendation for sub 2 transaction
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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
- 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Ed W.:
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.
sounds much like a escrow officer out west here when you have a closing with an elderly person they have to meet them in person or have their personal attorney involved.. We dont use attorneys for closings out this way. and we are NEVER ever all in the same room together.. Seller comes in first usually 2 to 5 days before closing buyer comes in 1 to 3 days before closing.. And for me I rarely go to closing I do everything as a mail away. With my subdivision I am building out I pre sign the warranty deeds to all 90 lots day one.. then the rest of my sellers docs come docusign.. unless there is a mandatory FHA doc that needs wet sigs. - Member since 2022 · 88 posts · 29 votes3y
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."
Hi Ed
1. Thank you for such a detailed response. i am going to try to work out this life insurance idea seems interesting.
2. my apologies for delayed response, i unfortunately had a health scare for last 6 weeks and didn't came to the website.
3. which question you wanted me to answer, please let me know, will be happy to answer
Thanks again
- Investor / Landlord · Columbus, OH · Member since 2015 · 276 posts · 174 votes3y
The question I was referring to was in the context of your original post. It wasn't posed exactly as a question: "suggest how you believe you can accomplish your goal" It could have been an actual question: "How do you believe you can accomplish your goal?" (this question being in the context of my reply and the replies of others)
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