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Posted almost 5 years ago

TREC Contracts for Seller/Owner Financing and Subject-to

Below you’ll find the answer to a question from a subscriber on our YouTube channel where I answer questions from subscribers, share the tools, tactics, strategies, lessons I’ve learned and things that have helped me build a sizable rental portfolio in just a few years, and now manage that portfolio.

If you guys want to reach out to ask a question, please don't be shy. I know sometimes I can't immediately answer your question, but I will get to it when I can.

Note: I’m not an attorney and I don’t play one on the internet. I’m simply sharing what has worked for me and my company.

Abdul reached out about subject-to deals in Texas. And he said “I’m new to wholesaling, and I wanted to know how to fill out a TREC contract for a subject to deal.”

Great question, great strategy! The first property I bought was subject-to and the borrower recently paid the loan in full. It was a great payday!

There are two contracts to use when buying subject-to or with seller/owner financing, and thankfully both are provided by the Texas Real Estate Commission (TREC) – the seller financing addenda and the loan assumption addenda. You’re simply going to attach either of these addenda to the standard TREC purchase contract, I discuss the TREC contract in this post.

Since both addenda are standard TREC forms you can download the most recent versions from the TREC website here for free, there's no charge from TREC or anyone else!

Let’s walk through these two addenda really quickly, and I’ll give you a high level of how we fill these contracts out. If you get a chance, print out both forms from the TREC website and we'll walk through each of them.

The first one is going to be the seller/owner financing addendum and as of this time, the one that you can download off the website is version 11-2-2015.

  • The first part is simply filling out the property address property.
  • Letter A – Credit Documentation. This is basically here to establish the buyers credit worthiness. You want to have documents we always, always, always want to submit proof of funds, or some sort of credit rapport, salary or something to show the seller you're serious about this property. You’re telling the buyer “this is what I have so don't worry, I'm going to be able to make the payments”. That's always the biggest fear sellers have when they want to do a seller finances – how will they get paid. They get scared that you're not going to be able to make payments so we always submitted everything we could to help the seller feel comfortable with the decision to sell to us.
  • Letter B – Buyer’s Credit Approval. Basically, this states that you're allowed to terminate the contract if you don't provide the seller the documents in a timely manner.
  • Letter C – The Promissory Note. This is what the seller is going to sell you the property for and at what interest rate. Put the total amount of the loan, the interest rate, and then how you want to receive payments. We always do monthly installments or interest only payments (Number 2 and 3) for 360 months (30 years) but you can do any one of these three options for any length of time, whatever makes sense for both you and the seller. What I would look at is what makes the most sense for what I'm going to do with this property. If you're going to turn and flip it, it really doesn't matter whether you finance it for 20 years or 30 years because you're only going to make payments for a year or so. But if you're going to rent it, I would get my payments as low as possible. Right? Because that is going to help your cash flow. I would take it out as long as I could. I've even told sellers I will finance it for them for 40 years! If they're in their 50s and they think they're going to live to be 90 then I’ll make the term for 40 years. It reduces my monthly payment and the seller will have a payment coming in every single month until they’re 90!
  • Letter D – The Deed of Trust.
    • Number 1 – Property Transfer Rights. We always signed as consent is not required to leave us the maximum flexibility and sell it as we please. Sometimes the seller will not want to do that. They might want payment for 30 years. Then you're probably going to have to select Letter B which is consent required and get consent from seller when you want to sell.
    • Number 2 – Taxes and Insurance Escrow. We like to select escrow not required, which means we get to keep the monthly payments in our account throughout the year, and then we'll make the tax and insurance payments at the end of the year. If you're somebody who has trouble setting aside money for large expenses, you might want to select escrow required so you're paying the seller the tax and insurance payments every month.
  • Then you sign! That’s all there is to the TREC two-page seller financing addendum! I'm not an attorney, I'm just strictly showing you what we do when filling out the addenda.

We use the seller financing strategy when the seller owns the property free and clear but what if the seller still has a mortgage? Then we’re going to use the other addendum – the loan assumption or subject-to. You’ll hear people use the terminology interchangeably so be clear of what you’re trying to accomplish so that you're using the right agenda. Different states, title companies, etc. might have different requirements for which addenda they want to use. We’ve also used these strategies together, like assuming a loan then financing it to an end buyer (sometimes called a double wrap).

So, let’s cover the loan assumption (subject-to) addendum.

  • The first part is simply filling out the property address property.
  • Letter A – Credit Documentation and Letter B – Credit Approval are essentially the same as the Seller Financing Addendum.
  • Letter C – Assumption. This section you enter the information of the first and second liens (or mortgages). Simply put the unpaid principal balance of the first and second liens, who the seller is making payments to (whatever institution or person that is) and the total current monthly payment including principal, interest, taxes, insurance and any reserve in the accounts. Note the addenda states, “the buyer’s initial payment will the first payment do after closing”. If you close on the 20th of May, you're going to need to make your first payment to the seller on June 1st (assuming the payments are due on the first of every month).
  • The last part of Letter C determines how the balance will be adjusted if different from what was stated in the balance section in Letter C above. You can either come with cash at closing or adjust the loan price. Note it says that any discrepancy over $500 is rules for terminating the contract so try to get the loan amount as close as possible. Most banks will provide a balance you can see online or an amortization schedule where you can see the current and future balances.
  • Letter D – Loan Assumption Terms. If you want to pay the seller something in excess of the monthly payments, then that would be noted in this section either by a dollar amount (Number 1) or a percentage (Number 2).
  • Letter E - Consent by Noteholder. This simply states that if the noteholder fails to consent to the assumption of the loan, both the seller or buyer may terminate this contract by notice to the other party and the earnest money will be refunded to the buyer. I like this because it offers you protection when you're going to buy the property and the sellers lender says “no”. Then you're out of the contract and you get your earnest money back. This is way better than finding out the lender did not approve after you have already closed and the lender calls the note due (due on sale).
  • Letter F - Seller Liens. Section states that the seller will have a lien on the property, and it will be released when you (the buyer) fulfill your payments.
  • Letter G – Tax and Insurance Escrow. Any money that the seller has in an escrow account becomes yours as the buyer. If the seller is making monthly payments in escrow, you need to ensure you get those payments because at the end of the year you’ll be the one paying the taxes and insurance and you want to ensure you’re compensated your pro-rated amount. The title company should help you out with this.
  • The last two paragraphs are just notices talking about the ability to pay and the release of liability.
  • Then sign! That’s it!

One thing I want to mention about both contracts is you have some flexibility with the taxes and insurance escrow, the property transfers, etc. When you do this make sure that you do your best to fulfill on our promises to the seller. If you agree to payments for the next 10 or 15 years, then turn around and flip the property in a couple months, that’s not right. That kind of behavior doesn’t sit well with me. So be transparent and upfront about your intentions.

To summarize – Abdul, you can use these two addenda (seller financing and the loan assumption) in conjunction with the TREC purchase contract to buy a property creatively. You can find these contracts for free on the TREC website and you do NOT have to be an agent to use them.

Make sure you know which one you're going to use again, I've used both and some title companies/attorney’s prefer different things as the laws are always changing.

I hope I answered all your questions and I hope this will help you land a subject-to or owner/seller finance deal!



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