All Forum Posts by: Martin LaBelle

@Rick Pozos, I'm developing some content for which I'm doing a vulnerability analysis of Subject To and other types of deals. Its a side project I took on precisely because I'm looking to branch out from my standard operations, and thought I might learn something in going through the thought process of a "red team". I come from an Information Security background in the military which taught me to think of business architecture, operational design, and security as fundamentally intertwined.

@Andrew Postell great article! Concisely discusses how unlikely banks are to call the loan: It is expensive, bothersome, and ultimately makes their books look worse. I think that particular risk is well mitigated as Rick suggested, by having investments and scale sufficient to cover a certain percentage of your 'subject to' debt. Investment businesses at scale, should also be well positioned to make-whole or refinance any demanded loan through their network of investors and other financing.

I also wondered if I might get a logic check concerning the legality of "subject to" approach: 

Adversarial Logic:  A mortgage is a collateralized loan. That collateral is the basis for its security, and on that basis (and other compliance criteria) it is permitted to be traded in a federally regulated security market. By selling that collateral, you are undermining the composition of the security and evading the compliance criteria that allows the mortgage to be traded as a financial commodity. 

Mitigating Logic I once bought a foreclosure on a subject to property. As I recall the "subject to" deed  had a clause making it "subject to" the pre-existing mortgage (which it named with loan number), meaning that foreclosure on the primary mortgage would dissolve the title conveyed by the "subject to" deed. So I would argue that the integrity of mortgage was not violated (the collateral was still subjected to forced sale). 

So is compliance with finance and security regulations as simple as ensuring the correct "Subject To" wording in your deed?

Do VA loans have special prohibitions against this approach, designed to protect the integrity of the system that tracks VA entitlements?

I would strongly recommend against using email for any type of required notification. The reason is that most state laws I have encountered expect formal notification from the court to be delivered to the parties residence. An email is not a physical location and therefore cannot meet the requirement of having been delivered to a residence.

I'm more concerned about the no money down in a market that is almost certain to constrict in price in the 3-5 year range. I'm not accusing BOA of creating a predatory program under the guise of racial reparation, but many people could end up paying a ton of interest without much lowering their principal and then be left upside down in their mortgage should they wish to sell. No-Money down only makes sense if you are expecting steady appreciation, and they are specifically targeting communities that have been historically denied that appreciation. I suppose the thought might be that the program will help to upend that cycle and create wealth, but that seems a heck of a gamble.

Just finished the excellent Creative Financing podcast On the Market Ep 29 with Pace Morby. I have a tendency to think in adversarial terms (I'm working on it) but in this case I was thinking about the bank, and how I would react in their place to "subject to" sales.

Most everyone says that the "due on sale" clause means the bank "has the right, but not the obligation" to call the loan in full. They then explain that most banks are simply happy to have a performing loan, and ask no questions. 

I got to thinking, what would I do to maximize my position if I were a bank.

1.) I would have a process that automatically reviews insurance docs and other data subject to automated review to flag mortgages on properties that have been sold "Subject To".

2.) I would do nothing and go about my business, as long as the interest rate of the flagged loan was not way below the current rates that are available.

3) At some point, when/if the interest rates got high enough, I would direct a small amount of resources to identify the flagged loans where the juice would be worth the squeeze. These would be properties bought using "Subject To" by investors that I'd be able to force into either taking a loan at the current rate or paying in cash.

This step 3 seems likely to me if interest rates continue to rise because either route is likely a huge win for the banks. If the loan is closer to maturity, the investor will be more likely able to pay it off. However that is actually a major win, because the bulk of interest has already been paid, and I could lend out that cash at a higher interest rate with younger loans (more interest vs principal). On the other hand, if the investor is not able to pay in full, I can force them to take a loan on the (proven to be productive) property on terms more favorable to me.

I'm interested in counter opinions. Including factors that suggest that interest rate alone would not trigger such behavior by the banks. I don't use this strategy myself, but I'm interested in how those who do hedge against these dangers.  

In our market (NC), what you are talking about is called an "Appraisal Gap Addendum". They became popular because they allowed buyers go in hot and heavy with their earnest money to secure the deal, as well as reduce the seller's worry that the property won't appraise.

If you offer $250k with a $20k appraisal gap, it means that you are obligated to close at $250k, if they appraisal returns any value over $230k. If the property appraises below $230k, the buyer would have the right to terminate and recover their earnest money.

This helped a lot as our market experienced crazy appreciation over the past couple years, however some sellers would reject the contract because it took too long to establish for certain if the deal would close (until after appraisal, which had long lead times)

It became common for agents to suggest a secondary form of pre-payment in the form of the Due Diligence fee. The DD fee is typically non-refundable unless you can demonstrate the seller did some serious misrepresentation. You are paying the seller to take the property off the market. Precisely how much you offer, how much due-diligence fee, and how much in earnest money, is part of your competitive strategy; A great realtor will out-perform a less experience one  by hitting these numbers perfectly to make a great deal that entices the seller, and protects the buyer.

@Ryan Casady Hey! I can't make it this time. Taking the family away for a week. I'd love the chance to meet some fellow local investors though. Do you have any other upcoming events or recommend other local meet-ups?

 What did you like about Zillow? We list our rentals with them, and they have been underperforming recently. There interface is also awkward, I looked at their full management suite and came to the conclusion it would likely be a mess. How was your experience? 

@Joe Binkowski I think the industry is will not ultimately be known as "3D Printed housing" but as "Robotic Construction". The ability to print concrete into about any foundation shape you need, will simply be one of many robotic technologies that evolve into modern construction.

Concrete also has critical limitations that in traditional construction requires adding systems to introduce tension into the structure of the curing concrete (usually used in multi-level concrete structures). Obviously this could be adapted to robotics, but the process will be more complex that simply building a taller printer.

The robotic revolution will touch every aspect of our world, and spawn as yet undreamed wonders. That said,  I think we can continue to invest without the fear that our appreciation will vanish into a bottomless pit of cheap printable B+ housing. 

First, the law you are referring to is called "the Short-term rental act" from 2018. It explicitly says that local government and even HOAs (from my non-lawyer read) can pass rules prohibiting STR, however

- They have to specifically limit the stays (i.e. stays under 30 days prohibited)

- It only applies to new STR (after the effective date of the rule)

- the protection expires if you sell/transfer or stop acting as an STR for 30 months

- "Generally Commercial Activity" a phrase common to many restrictive covenants, IS NOT sufficient to limit STR

- Municipalities can require permits (details in the law, but this is likely license to dictate terms in any areas actively under zoning control)

I think you have to see this law for what it is, TN trying to attract investors.

Final disclaimer - Not a Lawyer 

 They are specific services for this type of clean-up involving blood and crime-scene processing.