A friend of ours is willing to sell us their home via sub2 but we have no idea what contracts we need and where to get them. Also, do we really need a lawyer or title co to close the deal? We have called several lawyers in our area, and even the largest escrow co in our area, and they are not willing to get involved in a sub2 deal.
This house will be used as our principal residence. No, we can not get traditional financing right now, and the house is underwater. Balance on the mortgage is approx. $160,000, with 24 years left on a 30 yr fixed mortgage with a 5.7% interest rate. The current market value is around $80,000. Yes, I know it sounds like a bad deal, but the house sits on a five acre lot that can be split into two 2.5 acre lots, or we could put a second home on the lot (potential income property) if we wanted to. Our friends are desperate to unload this home, as it is a rental prop and they just don’t want to be landlords anymore, and cannot afford two mortgage payments. They have no money to help with closing costs, and don’t want any down payment, just someone to take over the payments. They are fully aware that they will remain on the loan until we can refi or get a new loan, and they’re fine with that.
Also, since we are not reselling or flipping the home should we have the deed put in our name or not? And how would you go about claiming the mortgage interest deduction?
Thanks in advanced for your help. P.S. we live in a rural area of southen California.
I’d go to a nearby REIA meeting and ask for references to an investor-friendly closing attorney or title company. Yes you will definitely want to close this in front of an attorney…the key is finding one who knows about sub2 (most don’t, that’s why you go to a REIA to find one).
Absolutely have the deed put into your name, and preferably into a land trust with you as the beneficial interest. The lender can provide an interest statement, just make sure you get it and send it to your tax preparer.
Before buying that house I’d find out how much the spare land can sell for. The market value probably includes all that land and it’s still only $80k. Be careful!
The hard part is already done. You’ve found the seller and the deal.
Make payments through a note servicing company, not directly to the bank, or to the seller. You and the seller will have access to the payment information. Cost about $150 to set up and a few dollars a month. I use “notecollection” (dot) com out of Puyallup, WA. They will provide annual interest statements, too, and make insurance, tax payments on everyone’s behalf.
You need a letter from the seller giving you permission to get information on the loan. You’ll need the current online mortgage account password(s) and codes. Change them and share them with seller.
You need a “limited power of attorney to convey real estate.” This gives you the right to sign on behalf of the seller any document having to do with the property or the loan, etc.
Use a Land Trust, as nsu1197 suggested.
Get the deed.
Get a copy of the mortgage documents. Read them over. You NEED to know if there are any balloon payments coming up, or interest rate changes. You might discover the loan skyrockets to 11% in two years. What’cha gonna do then?
Get insurance on the property in your name. Add seller as additional insured. There’s no reason the bank would call this loan due, as long as the payments were made on time, so you won’t need to leave the seller’s policy in place, or change it to a landlord policy.
Get moved in.
It would be wise not to discuss or brag to the seller what you did/do with the property from this point forward. Nothing gets the greed glands all inflamed when a desperate seller sees us make a killing off them after the fact.
Good luck.
“uslegalforms” offers a good California Land Trust agreement (aka Illinois Land Trust).
Thanks, guys. One more question, if you don’t mind. What would happen, if down the line somewhere, the sellers file for bankruptcy? Would we loose the home, or would we be protected because we hold title? Can a lender foreclose on a home that someone else now holds title to?
The original borrower’s subsequent bankruptcy will have no bearing on your deal. The title has been transferred to you. It’s your property.
Yes, the lender can foreclose on a home that someone else now holds title to. This applies even when there is a partial transfer of equitable interest (ie: adding someone else’s name to the deed).
Frankly, this could include recorded lease options agreements, and sometimes 2nd/3rd mortgages recorded against the property.
However, banks don’t call loans due unless they can either make more money on interest on their money, or there’s been a default. If neither of these conditions exists, there is zero chance the bank will want to call the loan due. So, make sure the payment is made on time every month without exception, and you be fine.
After calling several local so called “real estate lawyers” that refused to do a sub2 transaction (they said it was too risky, isn’t that my decision to make?) and local escrow companies, I finally found the local office for Chicago Title, and they agreed to help. Yea!! I tried to find a local REI club, but that was a dead end. They were 45 min away,their website was terribly outdated, and on top of that they were charging $200 just to attend their meetings, which were held only once a month.
Is it ok to use a title company for this kind of deal, since they’ve been around for so long and have experience with these types of transactions. They said they could provide escrow services and a title policy for about $1700.
I truely value the opinions of those who post here, and hope to learn much from all who contribute to this forum.
What exactly do you need from the title company, or an attorney?
Otherwise, you don’t need either to do a sub2 deal. Both cost money, and defeats the “sub2” benefit (bypassing conventional overhead costs).
That all sadi, I’ve too found Chicago Title to be enormously friendly and helpful to me as an investor, both in the Sacramento, San Diego, and Riverside areas specificially. They train their reps very well.
I’ve used other title companies and they’ve been helpful, too, but not really as much as Chicago.
Maybe getting title insurance is fine on this deal, but it’s already upside down by $60k… I would just get a property profile and see what shows up. Then before anything else can be recorded, get your deed recorded. Then, if any liens/judgments show up, they’re not enforceable against you, or your property.
Otherwise, you don’t need title insurance, or an escrow service. You do need a notary. You need a Grant Deed (in CA) and you need the documents I suggested earlier.
If you REALLY don’t want to do the paperwork, then the title company can do your closing docs and recording and insurance.
However, you’ve got to bring the document I suggested earlier to have the seller notarize. Otherwise no title company has a clear idea of all the documents you really need to maintain your sub2 transaction after closing.