Sorry if this is in the wrong section.
I am looking to do a “subject to existing loan” but I am having a h3ll of a time finding out the steps in getting the deed.
I understand that I have the homeowner sign a Quit Claim Deed Form.
Then whats next.
Take it to the court house?
Can someone list the steps to do a Deed.
Also, if you have any tips for the due on sale clause that would be helpful.
Just take your docs to a title company or closing attorney who are willing to do sub2’s and have them do the close - especially, if it’s your first one.
You want a general warranty deed, not a quit claim deed!
Raj
Funny, cause I just read that 1 sec ago and figured out the difference.
Is that signed at the same time as the purchase agreement or at “closing”
Truthfully Blue, there’s not much difference between a Sub2 deal and a standard deal. The only thing that you’re not doing is getting formal financing, but rather, taking the property over “subject to” the existing financing.
The simplest answer to your question is close on the property the way that you would normally buy one, ie, either through an attorney or title company depending on your state’s norms.
Routinely, the deed is not transferred until the close of the sale, so the purchase agreement is signed, you do your due diligence, close and you get the deed recorded in your name.
Raj
Raj,
When the deed is recorded would that not send red flags to the lender for DOSC? I’m curious,
Nate-WI
gordo,
Not sure exactly what you mean by “red flags” so I really don’t know how to respond. If you don’t record the deed, then you don’t own the property.
If the DOSC is something that bothers/scares you, then sub2 is probably not for you. Contrary to those advocating against sub2, but violating the DOSC is NOT illegal. All the the DOSC is gives the lender the right, but not the obligation, to call the loan due if they so desire. And contrary to those advocating against sub2, most lenders simply don’t call a performing note due. More so don’t call a note due that WASN’T performing and now it is because someone else took over the payments.
All that said, it’s still simply smart investing to be prepared IF the lender does call the note due. The simplest response to that is to refinance, which should be fairly easy since you now own the property. Actually what’s more likely to happen should the deed transfer become an issue is that the lender will require you to formally assume the loan, pay a loan modification and get an interest adjustment, if needed and the loan will continue on.
Hope it helps, Nate.
Raj
The DOSC does not scare me. I’m just trying to learn this part of creative investing that’s all. I’m just trying to get the process down. I’m in contact with my lawyer to see if he handles these types of transactions. I’m not trying to re-invent the wheel here but before I start marketing for these deals I want to know what I’m going to do and the legal way to do it (appropriate docs, terms, etc.)
Nate-WI
Also, consider this. If the owner of the property gives you a general warranty deed all you have to do is take it to the clerk and recorders office of your county pay a small fee and that’s it, done you own the property. Last one that I did I didn’t own the property but the trust that I put it into did and I controlled it as the trustee. You asked won’t the lender call it due when it is recorded triggering DOSC? By recording the deed with the county how would the lender ever know that you recorded the deed? I don’t believe that the county has any obligation, right, or ability to contact the mortgage company. It seems that many people have the misconception that once ownership is changed, magically something happens and the lender instantly knows what is going on.
From there all you need to do is give a change of address form to the servicing department of the lender where the mortgage statements are to be sent and now you can make the payments. Simple as that, I think?
Also helpful:
One of the things Sean said is very important. Get the address changed. I also think it is wise to get some kind of authorization form from the seller with their loan number to contact the lender…just in case you need to get the pay off amount when you go to sell the property, or need to make sure property taxes are included in the mortgage payment, etc.
The settlement statements/HUD1s in my area, and perhaps all over the country have a line for “Subject To” deals right on page one. It is line 503 in the Seller’s Column on Page 1 of a HUD1. “Existing loan(s) taken subject to”
I also agree with Raj. Have an attorney or a title company make sure you are getting the right kind of deed and have them make sure the paperwork is correct.
Early on in my investing career, I spent so much time trying to make sure everything was perfect…forms, etc. Then I came to the following conclusions very quickly:
I am not a plumber, hire a plumber.
I am not an attorney, hire an attorney.
I know the concepts, and that is the key. If I can explain the concept simply on a yellow legal pad, then the professionals can make sure it is correct. I used to spend countless hours trying to make sure I had the correct form, when all I would have had to do is pick up the phone, tell the attorney what the goals were and have them do the rest.
Now, I focus on making things simple for the buyer (me) and the seller…and presenting offers.
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.
Hello all, I am currently thinking of selling my house using the Sub2 method for two big reasons.
We do not NEED to sell our home in any way, we can easily afford the mortgage. It’s more of the desire to relocate a few miles closer to work and also live in a single family home rather than a condo. I’ve been reading the forums and articles about Sub2 deals and heard the praises that the investors have made. However, outside of alleviating the monthly mortgage payments, what does the seller benefit? The loan remains in our name, and I have to lie awake at night wondering if the person that had the deed to my old home and thereby owns it will pay my mortgage. Is there any way to protect ourselves from the buyer defaulting on the loan? What sort of guaranttes and protection does the seller have?
Although something can be put in the contract as to what happens in the case of default, the reality is you have little protection. There is risk for the seller. In all the cases where I’ve seen the new buyer default the only recourse taken by the seller is to bring suit against the buyer but the seller’s credit is still messed up.
It is a risky play for the seller to an extent, and most sellers who sell in this way that I have seen are either (a) in a jam financially with few options, often being in foreclosure or headed that way and (b) not saavy financially about their risks if they engage in a Sub2 sale with an unknown buyer who has not in some way been prequalified as to creditworthiness.
I have bought property from sellers using Sub2 when they did not have to use the Sub2 method but they knew my company and that we were sound and that we were doing it for a specific reason as I outlined in my earlier post. In other words, there are situations where it may be an acceptable risk for the seller but if you’re the seller and are going in eyes open, I would be leary of selling Sub2 without doing significant due diligence on any prospective buyer.
If you’re not in a jam, and if you do not wish to pay a realtor commission, I would suggest you consider marketing the property yourself. You might also consider a lease-to-own but very carefully screen your tenant-buyer and find an attorney to familiarize you with the ins and outs of lease-to-own (lease option) agreements (there are some downsides too) and also fair housing laws in your state and for the US. Of course, the your specific equity situation, time available, etc will determine what is truly the best course of action in your case.
Best of luck.
Sounds like Lease/Option would be better in your situation. Or you could sell it with owner financing. Owner financing, depending on your area, could get you more buyers then the normal good or average credit buyers. Bad things happen to good people and you might be the “knight in shining armor” a family needs to get back on track and in a house.
Owner financing may be a viable option indeed in your case. It will depend on whether or not you have a mortgage or deed of trust outstanding against your house in which case you need to be careful and check with a knowledgeable real estate attorney. As I understand it, in some states wrap around mortgages (where you sell and take a deed of trust or mortgage to secure your loan) may be prohibited by law.
You might be able to sell on a land contract (also known as contract for deed). Again, you need to verify what your state laws allow you to legally do and in the case of a land contract I would highly recommend a competent attorney be involved in drawing it up as it is essential the proper language be in place in the event of default. I am certain you will find a good amount of info in these forums on the land contract or contract for deed, but again get local counsel before pursuing if you choose to go that route.
I would not sell with seller financing on an unsecured basis under any circumstances, even if you own your house free and clear.
Best of luck.
RonDPate and REI Man thanks so much, I was really on the fence last night as my wife and I really like this house we had been interested in. After I left this post I searched around for hours on this site and had come to the same conclusions you have both just outlined. So thanks again, it’s good to know all the in’s and out’s and the Sub2 and the risk that the seller incurrs.
Cheers.
You are welcome. Glad to be of assistance. Best of luck.
Ron
Hi Ron,
I really enjoyed your answers, very thorough. Maybe you can help me out with a question.
I live in California and I run into preforeclosure properties that have little to no equity. Instead of doing a Short Sale, is it a good idea to do a Subject To deal instead even though what they owe is pretty much the same amount as the market value?
My exit strategy is to assign such a contract and are there investors that would handle such a scenario?
This is an interesting question. First, as a rule I don’t buy property with no equity. Many reasons, and I won’t go into all them here. Read the article I wrote a while back entitled “No Equity, No Problem.” You can find this article at www.keybi.com/articles.
There are investors that will buy property with little or no initial equity in areas where appreciation is strong, banking on appreciation to create equity where none originally exists. Personally I do NOT buy properties in this manner, but again, there might be a time and place where it makes some sense. I look at this as somewhat speculative and thus stay clear.
I view my initial equity position as a cushion. In no situation do I go in with less than a $10K cushion, or 10% of the FMV, whichever is greater. This is the bare minimum rule of thumb I use. And undertand it would have to be some pretty good reasons for me to go that thin on my initial equity.
I’ve initially looked at many properties with no equity and as you mentioned, have pursued the short sale route to get some margin in the deal. But as anyone who has done shortsales knows, it can be quite aggravating.
Remember that taking title Sub2 is still buying the property. It is yours and you own it and the underlying loan is still there.
In summary, I would NOT recommend buying with no equity unless there is some really really good reason to do so.
Ron, what would you consider no equity? We have been getting alot of calls with people who owe 95-100k on houses worth 120-130k. theres not enough equity to buy, rehab, carry and flip but there seems like enough equity to maybe take over on a subject 2 and do a lease-option. Or do you feel that it is not enough equity.
I am just bummed I am finally getting calls and they are all marginal equity. 