Basic Question: Seller Finance vs Sub2 or Lease Option

General Real Estate Investing
1

I know I could find this info if I search or if I were to go back to my Real Estate 101 books, but I need a brain refresh fast to go sign up this deal! :help

The seller is basically giving me the property, subject to the loan with no up front fees other than maybe a deposit. I will make the payments on it. But, they aren’t comfortable with Sub2, and they are nervous about a 5 year lease with option. They just called me and said they’ll do a land contract–because they’ve heard of that before–with a 5 year ballon. I would pay them about the same as I’d be paying if Sub2 or lease option.

Sooooo, my question is, what are the risks involved? With a lease option I could simply not exercise my option at the time and give them the property back if I can’t get it sold. I guess I could write something about them agreeing to take the property back after I transfer it back to them or something like that, rather than them foreclose me out for not performing on the balloon.

I guess my main question is this: I would do a lease with option. I would do Sub2. Should I do a land contract, and what are the risks involved? Thanks in advance!

Also, does anyone have a decent pro-buyer land contract form? Thanks!

2

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3

tjdean01, when you find yourself in this position with a seller, make sure you position yourself as the expert here. You are the professional, and you are giving them options out of their situation. As a Real Estate professional, it’s your job to make sure and understand their concerns and assure them.

For what you described, I like the Sub2 strategy, low risk, low out of pocket. But you’re going to have to explain to them exactly what it is, and why you beleive this is the best strategy for them, helping them get out of their situation.

Assure them everything will be done through a Title Company and everything is on the up and up.

4

I am with squidy in that taking over Subject to is the best.

However there are a lot of sellers that get nervous about this. If you can’t get them to do a sub2 then get them to do any other method where the deed transfers to you as you, with the least amount of cash outlay.

You will have the most leverage this way as they will need to foreclose in order to get the property back.

Lease option is probably the last way I would want to buy it (outside of a conventional mortgage) as the deed doesn’t transfer and the clock is ticking.

5

Deed does not transfer with contract for deed, either.

As a buyer, subject to is the best option since the deed transfers but the loan liability does not. You still have a contractual obligation to make the seller’s loan payments, but the seller remains legally liable to the lender. Your goal is to get the deed for the amount due on the seller’s loan. You have no money out of pocket other than what you might pay in closing costs and maybe a little bit more to help the seller move out.

Contract for Deed gives you equitable interest. The seller still retains title and if the seller defaults on his underlying mortgage, the property could still be taken by foreclosure. You get the home owner tax deductions. The seller may require up to 10% downpayment. Your contractual obligation is to complete a schedule of installment payments, perhaps with a balloon payment at the end, at which time you receive title to the property.

Lease Option carries the least risk for you. The seller retains title and operates the property as a rental with all the tax benefits that go with rental property ownership. Title transfers when you exercise your option to purchase. You are not obligated to purchase the property, but the seller is obligated to sell if you decide to exercise your purchase option. Your immediate out of pocket cost is whatever amount you negotiate with the seller as option consideration.

6

When I purchase “Subject to”, I don’t sign anything that says I am promising to make payments. It is strictly a moral obligation to the seller to do what I say I am going to do. If the deal is tight I tell them upfront that they may get it back, but that I am going to do my best to get a lease option buyer in the property for them.

I usually pick up “Subject to” with little or no money out of pocket, and use lease options only for selling properties, as there seems to be a larger outlay of cash required for the option consideration.

This is why I was referring to Subject to as the first way to take a property over, as the deed transfers and the mortgage obligation does not, Lease option as the last way I would do it, since eviction will force you out of the property quicker than a foreclosure.

With all that being said, I am guessing that there must be a few of you who buy on lease options, but put down very little for option consideration. I can see where this would make a lease option a much lower risk proposition.

For those of you buying this way, what is a typical amount you will put down to get into a deal using a Lease Option?

7

If your purchase agreement says you are purchasing the property “Subject To” the existing financing, then you have signed a contract that obligates you to pay the mortgage. That is what the “subject to” phrase implies.

Consult your attorney for clarification.

8

I will agree to a point on the sub2 contract requires you to pay the mortgage

It implies that you will not saying you will

But makes the seller think and belive you are going to

And it comes to a moral thing really

When you think about it people have been sued and lost big sums of money over less in real estate

But unless you tell the seller that you are going to for sure pay there mortgage

Then it is just a implied thing / but as moral thing you should use all your best to do so

I would say get there mortgage that you got with the property done and payed off out of the way asap in any way possible

Then there is no problem

9

I probably wasn’t being clear enough, I don’t sign a purchase and sale agreement with a subject to. We just meet at the title company and they property is deeded over to my LLC or land trust.

My attorney is the one who has me do it this way.

If they decide to pull out before the closing so be it. All I usually have in the deal at that point is a title search.

There is a moral obligation on my part to do what I say I am going to do.

But if it is a tight deal, and by tight I mean very little equity, and high monthly payments, I tell them that If I can’t make it work they may get the property back.

They are the ones who have gotten themselves in the situation they are in, so they understand this and are grateful for any help they get.

I am not ruthless of vindictive about it. I try to make it work for them as best I can. They understand that their next option outside of me is foreclosure, or another investor who may or may not take them on.

I have not yet given a property back to a seller, but wouldn’t hesitate to do so as long as I have spelled this possibility out to them and have tried my best

If I don’t sign anything promising to make payments, and let the sellers know that there is a possibility they will get it back. I don’t have any moral or legal obligation to continue on with a failing proposition, particularly one I didn’t originate.

I guess the difference in the way things can be done is what makes Investing in Real Estate so interesting.

10

When your attorney does the settlement, do you and the seller each get a HUD-1 which “documents” the transaction?

If so, then does the line on the HUD-1 show the amount of the seller’s Loan Taken Subject To ? If the answer is yes, then I would argue that you have an implied contract to make the seller’s mortgage payments since you both signed the HUD-1. By extension, you have a contractual obligation which is a legal obligation.

Let us know how your attorney responds to this question.

11

There is no HUD-1, as we are not going through a lender for anything. No Realtor involved either. Just a Deed, transfer return, limited POA, due on sale CYA letter, right to release, and a letter of intent from me to the seller if I need it.

I swear to you that no where is there anything legally binding me to make their payments.

In case you are worried about the character of the attorney I am using, he was the Attorney for the city for decades before I started using him. He is well known and respected in our area.

You are obviously an established Real Estate Professional, and I respect the fact that you are challenging me on this concept, so please understand that I don’t want my next statement to come off harshly. Please don’t take it that way.

Where we are at with this, it seems to me, is that you will either come to the conclusion that since you are not buying property this way there must be something wrong with it, or you will take it at face value, understanding that there is more than one “right” way to buy property.

12

YES

When you do sub2 why are you not doing a buy/sell contract ?

This iam thinking should be right there with your deed and right to give information papers

Other wise i just see a person handing over there property with no buying or selling in any way ?

And hey if there are people out there doing this pls i want to find and know them

I must be missing a point here some where as this sounds a bit not right and what i have thought of with sub2

Hey i know where is the expert on this sub2 ( cash )

May be he can clear the air on this ? As to all the paperwork that should be in a sub2 deal

And what you are doing in one

As i have said there is a implied thought when you take a home sub2

This being you are planning to some how pay the mortgage/pay all back payments up asap

Other wise in a lot of states you will be looking at real estate from the other side and iam sure you know what i am saying here

13

First of all I feel a moral and ethical responsibility to make sure the payments are made and on time on any Sub 2 deal I do. Also I do not take properties Subject To just to see if I can sell it, I know I can sell it when I purchase it or I do not buy it.

Every house I have purchased using the Sub 2 method of investing the Seller had to convince me to purchase their house, no exceptions. Always remember you are the Buyer, the one with the cash to purchase the house, albeit U-haul money.

I use a Buy Offer & Acceptance Agreement, within this Agreement it says I am purchasing the property Subject To the existing financing staying in place. Very simple no CYA letters that if you had to go to court the Sellers attorney can start picking apart and cause more problems than they are worth.

Anytime you purchase a house, car, etc., that is financed the lender has the option to repossess the item, should you not pay. No need to sue you for the return of the item as your contract will specify, no pay, no keep the item and the item is returned to the lender by legal methods involved.

Would the seller sue? We all know you can sue anyone for anything, however, since you returned the property, then what would the seller base the lawsuit on? The agreement you signed is no different than the one you sign when you purchase any item on time payments.

If you cannot pay for the Sub 2 house, then sign the Deed back over to the original owner. After all this is really no different than legally having it repossessed by the lender, in this case consider the seller as the lender and instead of going through court procedures you are voluntarily returning the property.

A while back a Seller sued me for the return of his house. The reason being the property values appreciated in the double digits. A far cry from when he was begging me to purchase his house because he could not afford the payments at that time. The Judge asked only one question “Whose name is the Deed in?” Where upon I presented a copy of the Deed in my company’s name, Case dismissed…

Because of the current market conditions, use caution when purchasing, do not take a deal just to take the deal. Do your homework using Demographics to make sure it is a wise decision. Not many investors saw the de-appreciation coming, in some areas the houses dropped up to 50% of value and if you owned one as a Sub 2 investor, chances are neither you nor the seller really wants the house.

John $Cash$ Locke

PS: I do not use and Attorney or Title company to close a Subject To deal when buying, I always check for liens and/or encumbrances, then if title is clear go ahead with the deal. I have closed deals at Taco Bell, My bank and even one time on the hood of a Mercedes. I use an Attorney or Title Company when my Buyer refinances and have never had a problem with my paperwork that my Seller and I signed.

14

CASH

Thank you for making the air very clear !! :beer

15

Thanks John.

16

John,

I have so very much enjoyed studying after you. You have taught me so very much. Thanks for all the time you so willingly give here.

Only recently, did I truly come to understand how powerful your presentation is. It is truly $golden$.

Ted_IL (A course tote’n student of John $Cash$ Locke and proud of it!)