kitchen table closing

General Real Estate Investing
1

Well it looks like I’m finally going to get my first RE deal. I managed to short sale the 2nd to 2k for their 45k position. The home is in a great nieghborhood and just needs a good cleaning. I should be able to rent it for a good deal more than the PITI. Its only got about 30k-35k equity when all is said and done but I want it for a long term rental anyway. Now I will pick up the first sub2.

My only RE education thus far has been this and two other sites. I think I’ve got the concept of what needs to be filled out for a “kitchen table closing”, but I keep reading that I should not do this the first time around. So my questions is, if I want to keep legal fees to a minimum, what is the best way to close on this property? I’ve got a signed RE sales contract, signed buyer and seller disclosure statement, notarized warranty deed and power of attorney and title has come up clean. What more will an attorney do to close? 99.9% I’ll use lawyer to close I just would like a heads up on what will be required.

I’m sure I’m missing some inportant things, just what are they? Thanks all

2

Get a title company to close it…it should cost you $200-300 in your area but they’ll do all the work. First time around, it’s probably well worth it…

Keith

3

Keith
I will call the title company that closed on the home last year to see if and how much they will do it for.
What about title insurance? The home was purchaced last December and I have a copy of the T.I. and my title search at the recorded of deeds showed no change in the property other than lis pendens being filed. Should I pay for new T.I.?

Are there any other documents you think I need to have the homeowner sign to make this transaction close smoothly. Thanks

4

The titile insurance is at your discretion…for its cost, it’s worth it for me - always.

Keith

5

Bovine,

What do you mean by a buyer and seller disclosure statement? COuld you provide an example? Thanks, and good luck finishing this one off!

-Brian

6

Its basically a document that spells out to the seller exactly what is occurring during this transaction. In other words the mortgage will still be in their names and although you will be paying it, ultimately are held accountable if you fail to make payments. If you do a search on this site for “CYA letter” you should find some good suggestions as to what to include. Also read this post: http://www.reiclub.com/forums/index.php?board=30;action=display;threadid=19875

7

I called one title company and got some shocking (to me) numbers. I was told that closing cost was $575 and title insurance was $855. I know title insurance is based on the price of the home but since this is a sub2 do you pay on the amount of the outstanding loan? In my case the loan I am picking up is for 170k, this is what I told the title company. Was that correct?

Another cost I had not anticipated was the city/county/state transfer tax. These taxes are again based upon sales price of the home. The title company came up with $1500 in taxes based on the 170k sales price.

This comes to nearly 3k to close on this home. I thought sub2 was a cheap way of acquiring properties. What am I missing here?

8

Just wanted to relate something funny. I called a lawyer today to ask if she could do a closing for my situation. You should have heard her tell me that what I am doing is board line illegal, and how she valued her license and freedom and would not want to get involved in this type of transaction. She then went on to relate to me how the government was cracking down on certain types of transactions. Just yesterday they charged a few bankruptcy lawyers and others with mortgage fraud here. Some of it involved equity stripping, which is a hot topic now.

I need to spell everything out to a lawyer but I hate being though of as a criminal. I know, I just need to find the right lawyer or I need to learn to close myself.

9

Before I state my case here, and to assure you that I didn’t just develop my thoughts on the “quick, easy, cheap” way of buying property Sub2 yesterday based on a quick one day or more intense three day boot camp, let me say that I’ve been involved in the acquisition and/or sale of over 1000 real estate parcels in the past 28 years, as a principal, as agent, as consultant, or as my dad’s young apprentice, that I’ve done many Sub2 transactions, and I have thoroughly and I do mean thoroughly researched this type transaction based on laws in my state, North Carolina. I have taken many courses out there, have been hired by numerous top trainers for some of the leading companies teaching real estate investing around the country, have assisted real estate attorneys, agents, and professionals in complex deals, and have had very open discussions with chief counsel of my own state’s real estate commission regarding Sub2 and the ways the legal industry is starting to view these transactions. Further I have been priivy to tricky situations well meaning, and in some case experienced, investors have found themselves in because of the risks of conducting this transaction in the wrong manner, especially in light of new legal actions that are popping up in the country regarding such transactions as “kitchen table closes”.

I have shared my viewpoints on this type transaction in other posts in this forum and you’re welcome to view those as well. I am NOT an attorney and don’t intend to offer any sort of legal advice and I don’t have a Sub2 course I’m promoting (unlike some past investors that now teach full time instead of doing what they teach, I invest full time and teach when I get the urge and usually in inexpensive small groups). There are many methods taught for conducting Sub2 transactions, many are, as explained to me by more than one competent knowledgeable attorney, morally, legally, and ethically OK, even some involving the use of trusts. But there are many ways being taught that push the envelope and some that clearly step over the line, at least clearly to anyone with more than a few years exposure in the trenches doing more than one type investment deal.

Then there is the question of risk. Business and investing go hand in hand with risk. The key is to know what does and does not constitute a risky position, and to learn to properly mitigate those risks. And many of the courses that promote the “kitchen table close” sell it as the easy, cheap way to buy real estate. In an ideal world that may be so. But we live in a world that is far from ideal and this is, in my opinion, the RISKIEST way to buy real estate. As the saying goes, CAVEAT EMPTOR.

A couple of thoughts based on my views and opinions related to Sub2…

  1. I don’t recommend doing a kitchen table close EVER. Period. Get a title company that KNOWS WHAT THEY’RE DOING or a real estate attorney – and I mean a REAL ESTATE attorney that knows what they’re doing and work with them. ALWAYS ALWAYS ALWAYS get a thorough title search performed by a professional before you consummate the deal. When you buy it it is yours and if you buy it Sub2 all the snakes and gremlins that might be attached will climb in YOUR pocket. There are some ways to protect yourself to some extent thru what I call back door exits but what folks fail to realize is that those exits can become blocked or slammed shut by the courts or other circumstances and you should figure going in that if you don’t get good due diligence up front, or have title insurance to cover the unknowns, you may inherit some real tough issues, even if you insulate yourself with trusts and corporate shields.

  2. DON’T just use forms out of the latest “Get Rich Buying Real Estate with No Money or Credit” course package. Get a COMPETENT real estate attorney THAT UNDERSTANDS SUB2 transactions to explain the proper disclosures required to you, understand the risks and proper disclosures and documentation thereof that you should complete, and BE SURE your forms disclose to the seller the issues that THEY are exposed to such as their name still being on the loan, etc etc.

If an attorney dismisses Sub2 out of hand as illegal, it is possible that that certain attorney is not thoroughly knowledgeable of real estate investment methods. If you find an attorney that handles and has handled a few closings per day for 20 or so years you’ll probably get a difference answer. They may look at what you’re proposing to do if you’ve just taken a course and used it’s methods without any proper investigation and tell you that the particular method you are using is illegal or crosses the line in your state, in which case you should listen and take note. Many attorneys may know that Sub2, if properly conducted, is not necessarily illegal, but may have seen so many shady ways of doing it, or have been approached by so many investors just graduated from the latest class whizzing thru town, that they simply don’t want to waste their time explaining all the gotchas and so forth. I’d say that over 80% of the methods I’ve seen taught DO cross the line in one way or another, or they skirt so close to the line that the investor might be slapped with a cease and desist by the DA or the attorney might have to get on the defense, and whether guilty or innocent of wrongdoing it costs money and time if that type issue arises.

I have seen now over a hundred well meaning investors that ended up toast in one way or another for not properly conducting Sub2 transactions and it irritates the mess out of me.

Sub2 can be less expensive to close on even if done properly but the biggest difference is going to be loan costs. Possibly appraisal fees if you have EXCELLENT PROFESSIONAL advice or you thoroughly understand how to evaluate an investment property for value, and you can avoid ordering a complete appraisal. If you’re NOT sure of value then get an appraisal.

If the deal at hand can’t justify a couple of thousand in up front costs to ensure things are properly lined up, then it might not be the right deal. If an investor can’t pay a few thousand to ensure a real estate deal is done properly, then real estate investing might not be the game to play. Unlike what one might think, it is surprisingly easy to buy real estate but if you don’t learn the right way to buy and have a decent understanding of what happens after you buy, whether you’re renting, reselling, rehabbing, whatever, then it can be a very expensive and potentially financially shattering experience.

Like any real, NOT pie in the sky, way to wealth, you must understand thoroughly what you’re doing, and be willing to incur the expenses associated with doing it right, to realize the wealth you may seek. Active investing in real estate is business and can be quite serious business and should not be approached with a “cut corners” mentality.

As for title insurance, I ALWAYS get it with NO exceptions. It’s cheap insurance for the value it brings. The quote noted in the post above seems high. I let my attorney get the title insurance lined up and yes, I have an attorney do due diligence, even in Sub2 transactions.

I care deeply about fellow investors and have seen issues arise that most are unprepared to deal with and I hope my comments will be taken in the positive light they are intended to be viewed in.

Best of luck with your present investment and future endeavors.

10

Advice well taken. Good looking out!!! :slight_smile:

11

RonDPate

Thanks for the feedback. I appreciate you taking the time to share. I’m definitley using an attorney for a first few transactions. But I am hoping that I will learn the procedures so that I can minimize my costs and keep control of the transactions.

If it possible I still want to know how to close myself. I have found that many things people feel are to complicated to do without a pro are in fact not that difficult once you understand the concepts, have the correct tools, ask questions and most importantly have the motivation. For example I was once given a car with a bad transmission. At the time I had more time than money so I researched and learned and completed the job. It ran for another 30k, which by rebuilt transmissions time is good. Another time I was in an accident and had to sue in court. Yes it was complicated but I managed to win in court over the insurance company. It took time at the county building, time at the law library and many motions to file but I did it.

My feeling is that this is same type of thing just on a different scale.
Feedback please.

12

It is certainly a good idea to learn and understand everything to do with the process. For example, sometime back I hired paralegals to go thru and teach me every step of the title search process. I still sometimes go thru the process in parallel with the attorney to ensure I understand it thoroughly. Once in a while when doing due diligence before making an offer I still may go to the courthouse.

I recommend you always have a settlement agent involved and that the closing be settled on a HUD-1 settlement statement even if no loan is involved (for requirements of this statement refer to RESPA – Real Estate Settlement Procedures Act). Also recognize if you draft trust documents, deeds, or other legal documents for a seller to sign and you’re not licensed as an attorney you could be practicting law unlicensed and as far as I know this is illegal in all 50 states and can create exposure for you that you might now want.

In general, in my case at least, I have too much going on to have to worry about attorney fees. The time I’d lose doing my own legal work I can make five or ten times that amount finding and taking down another investment opportunity. As long as they charge reasonable fees and do good work, I better leverage my time by letting them do what they do best and I do what I do – find and make deals. It’s a matter of focusing on what’s most important. Plus, some of my most attractive deals have come through attorneys who get all sorts of leads and pass them along to me whenever it does not violote attorney-client privilege. In fact I’d say that I’ve made 10 times the amount of profit off leads referred by my attorneys than I have paid the same attorneys for their services. Same lead opp goes for all professionals you employ, such as appraisers, surveyors, and inspectors.

So, I commend your desire to want to fully understand the process as this will serve you well, and you can certainly do some of it yourself, but talk to a knowledgeable attorney about what is and is not OK to do without being a licensed attorney. And once you’ve built your business to the extent where you understand and are able to create a pipeline of profitable investments, look at what the best use of your time is and focus on that.

Best of luck.

13

RonDPate

Again, thanks for all of the advice. I will most likely always use an attorney or title company to close. I just want to be sure they are earning my money. I wish I had enough deals comming my way to be able to say that my time is better spent doing other things besides trying to save a few $$ in closing cost. Right now I need to manage both incomming dollars with outgoing dollars.

BTW do you know how transfer taxes should be calculated? Here in Illinois it is based on the sales price. Since I am taking over payments how is this determined.

14

I can only speak about NC. In NC, any type of sale whether Sub2 requires taxes to be paid on the sale. In a Sub2, assuming you’re not paying any cash to the seller and are just assuming their loan, then your price would be the amount of the assumed mortgage (in a Sub2 you’re essentially assuming a mortgage whose contract terms give the lender the right to call the note due on transfer).

In NC for example the tax is calculated as $1 per $500 of value, so if you assumed a mortgage of $100,000 and paid nothing else to the seller then your tax would be $100,000 x (1 / 500) = $200. Each state may have a different transfer tax (also called tax stamps or revenue stamps).

I have seen attorneys not pay any tax stamps on the sale but in discussing with the NC Dept of Revenue, in NC the tax should be paid regardless of what the situation is with the loan – it’s the conveyance of title that triggers the sale tax.

I understand about having to economize and regardless of how much you have going watching expenses and finding ways to minimize is always prudent. Just be sure to always evaluate the total time you’re spending and focus on ensuring you spend your time consciously on the highest and best use. Just as with any parcel of real estate, finding the highest and best use of whatever resource you have is how to ultimately realize the greatest yields over time. Many entrepreneurs never get beyond the “swapping hours for dollars” model because they try to do everything themselves. Doing a few deals with hands on involvement is a good idea, but look at it from a strategic value standpoint rather than just a tactical value standpoint, and work to quickly grow your skills in the ways that can truly grow your revenues and profits so that you can then delegate those tasks to the professionals who specialize on them thus allowing you to realize greater returns in the future. The proper focus and balancing of the strategic and tactical actions in one’s daily schedule is what separates the merely successful business man from the wealthy and successful.

15

Ron,

I would suggest you re-word what actually happens with a Subject To transaction. The Loan Is Not assumed, the investor becomes responsible morally and ethically to make sure the payments are made, however the loan does not go in the investors name, only the deed is transferred.

I have not seen assumable loans in many a year, however I would not want a any investor to be misled thinking they have to assume the loan in a Subject To transaction. The transfer tax is based on the total amount paid for the property by the investor, which is shown on the Purchase Offer and Acceptance Agreement or similiar purchase agreement.

John $Cash$ Locke

16

Excellent point John – Thanks!

The loan is NOT formally assumed and it remains in the name of the original seller. The loan IS INFORMALLY assumed in that the buyer contractually agrees to be responsible for the loan payments and repayment obligation, and the buyer assumes the risk of collateral loss in the event of default.

In other words the buyer enters into a contractual obligation with the seller and original mortgagor instead of entering into a contractual agreement with the lender directly. The buyer also assumes the risk of loss from a collateral standpoint in that the original lien securing the seller’s loan remains in place to the benefit of the original lender, and the buyer buys the property subject to that lien (and other liens that may be attached to the property).

As the buyer IS assuming an obligation and IS assuming risk of loss of collateral, they’re just NOT formally assuming the obligation with the lender (and hence the loan doesn’t show on their credit and may not affect their credit in the event of default). Thus, I personally refer to this type transaction as an “informal assumption.”

As “assumption” has a specific meaning in general loan parlance, it is very important to understand the difference. Again, THANKS JOHN for pointing out this important distinction.

NOTE – There are some packages out there where the buyer puts “get out of jail free clauses” saying they’ll NOT be responsible for the loan in any way and that the ultimate responsibility remains that of the seller. In my opinion this is just WRONG and I do not operate, nor do I encourage anyone, to operate in this manner. I know of at least 2 cases in my own state of NC where well meaning investors used such forms straight “out of the box” stating in the purchase contract addenda that they would not ultimately be responsible and that, should they default, it would be the sellers’ problem. In the end, the investors got burned bigtime by the state legal authorities and as any experienced investor or business person knows, if you get the “powers that be” on your case whether you’re right or wrong you’re going to spend money and time that could better be spent elsewhere. I’m not sure how their credit was or was not affected but I know that in one case the investors were banned from investing in real estate in NC again. Frankly I’d rather have my credit served up well done than having a permanent injunction slapped on me!

The purchase price is indeed to match what’s on the contract. When I enter into a Sub2 sale I typically put that payment is in the form of my taking over the seller’s loan obligation balance (as discussed above, not by formal assumption with the lender), and if there are other monies I pay to the seller that is listed as well. Since I don’t know the exact balance as of the day of close (I can approximate from the payoff amount determined up front) I put a “not to exceed” amount and the attorney gets the exact payoff as of the day of close. Whatever the total purchase price it’ll always be equal to or greater than the loan taken Sub2. Again, this is how I was instructed by the NC Dept of Revenue. I cannot say for sure whether the same rules apply in all states, though I would assume this methodology is fairly similar in various states.

17

Ron,

I presume some of the Subject To investors are located in North Carolina that you know are doing quite a few deals.

Just out of curiosity are they using a Land Trust for their deals?

John $Cash$ Locke

18

Hi John,

Some investors are using land trusts, some are not. The use of trusts is certainly a legitimate method of property ownership and of property conveyance, if done the right way and for the right reasons.

As you are undoubtedly aware, there are numerous organizations promoting the use of land trusts to avoid the lender from receiving constructive notice that the property title has transferred. These same organizations will talk about keeping the existing insurance in place and updating the named insured on the policy to include the new buyer (as insurance change is one way lenders find out about property transfer). NOTE – For anyone looking to do this I recommend you call the commissioner of insurance and ask if the seller can legally be a named insured on a policy or for that matter have a policy in his or her name insuring a property that he or she no longer owns or of which he or she has no ownership interest. (This is one of the reasons some newer methods that have evolved allow the seller to retain some tiny interest in the property, such as 1%, etc. either on title or as benficial interest in the trust).

Some of these companies promoting their Sub2 wares, especially to the credit and financially challenged folks out there who have no other easy way to buy real estate, will stand up and swear all day long that their teaching of their trust method of Sub2 conveyance is in no way to help hide the fact that the title has transferred so that the lender will not exercise its due-on-sale clause but those of us who have been around the block more than few times know what’s up. I recall in one course teaser I attended in Raleigh where the presenter stated blatently that the methods taught with regard to the use of a trust agreement and change of insurance named beneficiaries were the “magic documents” that kept the “lender in the dark” so they wouldn’t call the loan due on sale.

I have learned thru experience, and by watching others get served up well done that it is best to conduct business in a way that can be viewed in the light of full disclosure with no questionable methods.

Thus, ALL of my Sub2 acquisitions are conducted in exactly the same manner as if I were buying using a new loan and paying off the previous loan. I buy in my LLC or Corp. name, change the insurance, send a payoff request letter (my attorney sends), then update the name on the loan to include my company name (the original seller’s name has to remain on the loan), and I change the address to my company address. Nothing is done to hide the transfer.

Only in one case (and I’ve done more Sub2’s than I can count) did the lender say “NO” and that occured prior to transfer and we simply bought for cash. We could just as easily have walked away from the deal if we couldn’t have closed. It has been my experience that lenders who have a loan in default (which is typical in buying Sub2), which loan then becomes current and paid timely, is not likely to call the loan due. The bottom line is performing loans are what lenders love.

As with anything one has to balance the risks of conducting business one way versus another. I would be careful using trusts to make sure no one could later build a convincing case that I used the vehicle as a way to prevent a lender, who has a right to know of conveyance, from realizing that same is occuring.

19

Ron,

Well done, we seem to be familiar with some of the same folks in NC.

http://www.reiclub.com/articles/nc-commission-answers

Have a good one.

John $Cash$ Locke

20

want to “bookmark” this thread. someone reply… ::slight_smile: