I have been investing in real estate for over two decades now and over the years have done many “Subject To” deals and offer the following additional points to the discussion, which I hope will prove helpful.
I agree wholeheartedly that a knowledgeable real estate attorney should conduct the closing (or title company in certain states). Subject To should be done with proper disclosure and the attorney will contact the lender to obtain payoff, which to a certain extent serves as notice of a pending sale. Additionally, I have my attorney send a note requesting an additional party be added to the loan, and also address change notification is sent (this he does after the deal closes). The seller of course has to authorize this. This way, as noted above, post closing my company can receive notification.
I strongly recommend that a company be used instead of individually investing in real estate. This goes for Subject to and every other type of real estate investment. This is something I almost learned the hard way many years back.
When we close, which goes very much like any other closing, except we get no new loan, we change the insurance to our company, of course with the lender being listed as the first loss payee. The lender will receive notice of the insurance change of course, but I have NEVER had a lender call a note because of this. As noted above, lenders like notes that perform.
Many suggest having the seller deed the property to a trust naming them as beneficiary. As I am not an attorney I am not going to go into the possible problems with this if done prior to closing, but just be on alert that intense efforts are underway in many states to look for fraudulent behavior and sometimes even if one is not doing anything untoward, if it appears as such life can get difficult if the powers that be aim their legal pistols at you. Therefore, we enter into the purchase agreement in the name of our LLC or Corp, then we get the insurance in the name of the LLC or Corp.
I do NOT do subject to loans with the intent of renting the properties out long term with the same financing in place. If we buy a property subject to it is typically for one of the following reasons: (a) it is a short term investment and we will resale quickly and buying Sub2 cuts our up front costs a good bit (no new loan costs, etc) or (b) we are buying long term to be able to close faster (can close as fast as the due diligence is complete and the attorney can do their thing), or (c) we’re buying subject to so that we can then refinance with a commercial lender on appraised (many commercial lenders will lend based on purchase price up front but will refi with no seasoning if you already own). If we are planning to keep the property for rental purposes, we refinance. As a rule of thumb we go into a subject to with the intent of cashing out the original loan in no more than 6 months.
Now, many will argue with me on Point #5, and more particularly that I suggest Sub2 as a short term financing strategy only. And that’s OK, you are welcome to argue, and indeed the experience of many who have been at it for five to ten years may be that no problems have resulted and if that’s the case, I congratulate you for your good fortune. I have seen too many well meaning investors have sellers become problems down the road when the try to get their credit cleaned up or buy another house and have the existing loan still out there. I’ve seen sellers come back and want “their” house back. Sellers come back and swear (although your docs of course explain CLEARLY the implications of their name remaining on the loan) that you never told them or that you bamboozled them, or whatever. And many other things. Sellers can be funny, esp those who have hard financial times as many are when you buy their house Sub2. Some well meaning investors in my own state who I know to be as honest as can be have been shut down by the legal powers in the state because of such seller issues.
Some will argue that buying Sub2 and renting is the only way they can build a rental portfolio as they don’t have good enough credit to borrow, or don’t have partners to help them borrow, or don’t have reserves, or whatever (note – several of the Sub2 gurus intentionally promote Sub2 as a way to buy real estate if you have no money, no credit, no financial intelligence whatsoever, and so on – ask me offline what I think of such promotions). To the people who cannot buy real estate except by Sub2 for credit or financial worthiness reasons I strongly suggest getting the financial ducks solidly in a row BEFORE working to build a long term rental portfolio. Building a long term portfolio is indeed one of the cornerstones to wealth creation in real estate but you must not get the cart before the proverbial horse.
With regard to using trusts in general, it is another barrier for the money hungry folks that sue and the attorneys that represent them to climb when trying to get at your assets. It thus has its place. But, regardless of what folks may argue, many of the methods being taught in mainstream circles for beginning investors which recommend putting in a trust BEFORE conveyance teach this strategy at least in part to help avoid the lender becoming aware of the sale. I’ve even heard one popular trainer brag about the fact that they teach to leave the previous seller’s insurance policy in place specifically so the lender will not be alerted to the sale. Keep in mind – the seller no longer owns the property. I suggest you talk to counsel at your state’s insurance commissioner’s office about someone having insurance on something they don’t own and see what they say. Plus suggesting that someone do something that is wrong puts you in the hotseat too. Be careful of using trusts in this manner and I STRONGLY suggest you get KNOWLEDGEABLE ATTORNEY advice on such and you might want more than one attorney’s recommendation. Check with your local real estate commission’s counsel who will advise you of their position (and they’ll be closely in touch with the AG on real estate matters too). They typically will not ask for your name. Remember, if you do something totally legal but someone in high up places thinks you’re trying to do things in a manner that is questionable they CAN make life difficult for you regardless. You don’t need that kind of hassle and risk.
We do use trusts sometimes on property we already own. As I understand it from our legal team conveying property you already own into trust for various reasons including estate planning, asset protection, reducing visibility of your company’s assets, etc. is perfectly OK and does not get you into hot water with regard to violation of lending rules etc. As with any legal matter, you should have at the ready competent and knowledgeable legal advice and you should not scrimp on the use thereof.
Did I say it yet? Having good insurance, good legal, and good tax advice from knowledgeable professionals is essential if you do this business for real.
One final note. I’ve lost track of the number of Sub2 deals I’ve done, but it’s in the hundreds. I only have ONE case where the lender said NO, DON’T DO IT to the attorney. In that case we put the brakes on, and got the lender to hold off on foreclosure (it was going into foreclosure as are many Sub2 deals) until we could get our alternative financing, which in this case took about 2 weeks. As noted in the thread earlier, it is always prudent to realize that the seller’s lender CAN call the note due even though I haven’t seen it done except very rarely. Thus, be sure you can resell the property, or that you have sufficient means to refinance or get a new loan, or pay off the previous loan should that unlikely event take place.
I hope the above helps. Best of luck with your investments.