Hey everyone, I am trying to finish up my first sub-2 deal…actually my first ever REI deal. My question is what forms are used in a sub-2 deal? Quit claim deed? warranty deed? Any suggestions would be very beneficial!
Please do not use a quit claim deed.
ok, so what should I use?
This is a cut/paste of a post I have made several places before, and thought perhaps this would help a bit.
However, there are tons of details to attend to with a sub2 deal, so getting a good course for reference would be advisable.
This is just for review/study etc.
Enjoy…
This is a breakdown of how to buy properties subject to the existing financing, or at least, what forms I use, and why/what they are…
Enjoy,
Jim FL
1.Purchase and sale agreement: This is the “Contract” that you and the seller sign, outlining the terms of your sale. I use a standard agreement, and an addendum which outlines how we will use a land trust, the possible risks involved with the due on sale clause, as well as language which states that IF the loan is called, I am not liable, nor any person who I may assign the deal to. (I NEVER assign these however.)
There is sometimes also language added stating that any arrears will not be made up until such a time when/if I find a buyer or tenant for the property. I now even state in my agreement that should I not find a buyer or tenant, the loan “May” go into default, or default further, causing the lender to foreclose, and I will not be held liable by the seller. Just standard C.Y.A. language. Not that I intend to have the loan default, but “just in case”, I at least have something to show that the seller was advised of ALL the risk involved.
2.Declaration of Trust. This is the actual land trust that will own the house (Hold title) when all is said and done. This will name you or a person of your choosing as the trustee. The trustee is the person who is directed by the beneficial interest holders of the trust (the trust owners), to handle all business relating to the house. You will own the trust when this deal is closed. Have the sellers signature notarized on this document.
When this is filled out, you will have a trustee of your choosing, and the sellers will be the beneficial interest, or owners of this trust, which will in turn own the house.
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Warranty Deed to Trustee. - this is the “Deed” which conveys title to the trust. This will have the seller as the “Grantor” and the trustee, name under a trust name xxx family trust, dated xx/xx/xxxx." as the “Grantee”.
Title is passed with this document from the seller to the trust.
This document needs to be notarized as well. And, this is THE ONLY document that will be recorded in public records. -
Assignment of beneficial interest in trust. - This is the document where the seller is assigning his “Beneficial interest in the trust” to you. (Ownership of the trust goes to you with this, and the trust owns the house, therefore you now own/control the house.) I get this notarized as well, just to make it more official.
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Letter to Insurance company.- this is a letter you will type up, and have the seller sign. This letter simply tells the insurance company that has the existing policy that the policy needs to be changed to a non-owner occupied policy, or landlords policy. It will also tell the insurance company that the home was placed into a trust, and to change the insured, or loss payee to the trust, trustee, and the “beneficiaries as they may appear”. (Do NOT include the beneficiaries’ names, just put what I wrote here.)
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Letter to lender(s).- Get one of these for each lender. This will have the sellers name, the address of the property on it, as well as the lender, the lender address, and the loan number.
This letter will simply state that the seller has placed the home into a land trust, and that all future correspondence for the loan needs to be sent to the trustee and the trustees address.
Frankly, I rarely send these in, I just keep them on file. When we collect statements and payment stubs from the sellers, we just fill out a change of address on them and have them sent to our office. Saves time, and lenders often lose the letters we sent in anyway.
You can open this mail when it comes in the sellers name, because of the next document. -
Limited power of attorney. - This is a document that the seller signs, and is notarized. This is where the seller will grant you “power of attorney” over all things related to the house, including the mortgage loans, accounts, taxes, insurance, etc.
This is something to keep, “just in case”. This will allow you to act as the seller. Rather than call the lender and lie that you are the seller (I’ve actually read a few investors stating that they do this at times, NOT something I condone or do!), requesting information, or the insurance company sends a check by mistake on a claim made out to the seller. You can now use the loan authorization to get info from the lender, as well as the POA if needed. You can also cash that check in the sellers name to do what is needed with the money, since you have a POA.
If anyone mistakenly will not give you info on the house, because the sellers name is still on the loan, this document gives you the same powers the seller had when they owned the house.
When you sell the house, if there are escrow overages from the lender, or insurance rebates, or balances owed, they may come made out to the seller. With the POA YOU can sign and cash these. -
Seller Disclosure. - This is a form that we use. This simply lays out the EXACT way you are taking title, makes it clear to the seller that there is the risk of the loan being called, (however rare that is anyway.), and makes it clear that the loan will remain in his name, and the taxes, etc. are now for you to deal with, because YOU own the house.
I go a step further in my form, and have it state that at no time am I promising to accept liability for the loan, qualify for it, nor make payments on it, until I get a buyer.
No promises are made at all.
The seller signs this to acknowledge it. I like to have it notarized to give this more credibility.
I also add an addendum to my agreement to buy the house, including this language. Just to re-iterate the point to the sellers. No seller is going to get away with saying later, “But he never told me this”, because I make them sign and acknowledge the risks in this and other places.
There is one other thing that we add to our seller disclosure letter as well. The seller must acknowledge, and promise by signing this that they will NOT contact, or make it known to the lender that title has transferred. This will not stop them from doing it, if they REALLY want to, but it should make it clear that IF they do, they are only trashing their credit.
9.Authorization to release loan info: This is simply a document that the seller signs, to the lender, along with the lender name, address, loan number, the sellers date of birth and social security number. This gives YOU the right to call the lender and manage the account. Something good to have BEFORE getting the rest of the docs complete, so you may verify all info regarding the loan, and it is good to have for later use as well.
Now that I’ve laid all this out, I’ll TRY to give you a short explanation as to “Why?” we do them this way.
In most modern day mortgages and deeds of trust, there is what is known as the “Due on sale clause”, or “Acceleration clause”.
These state that the “lender may at its option” call the entire balance of the loan due and payable, IF title is transferred with out the lenders prior written consent.
What this means is, if the lender finds out the seller gave you the title, and you do not qualify for the loan, the lender can call the loan. When you don’t pay them, they get the house back.
Now, be advised, this does happen. But, it is rare. If you do these right, you can MINIMIZE this risk. Not totally eliminate it, but reduce the chance of the loan being called.
There is federal law. (Garn St. Germain Fed. Dep. act. 1982), that states certain exemptions from the due on sale clause.
Things like deeding a house to your child, or spouse are not violations of the due on sale. The lender cannot per federal law call the loan under these circumstances.
Another exemption is to deed a property into a trust.
Now, when the beneficial assignment takes place, this is a violation, and the lender CAN call the loan due.
But, the lender first needs to know about this.
And since this is not a recorded document, and the ONLY copies remain PRIVATE, the lender will never know. The only things a lender can see without a court order are the insurance policy, which will only name the trust and trustee, so no finding out there, and the title search, which will reveal only that the home is in a trust. No finding out there either.
This is also NOT illegal, as many may claim.
If you look at a HUD-1 statement, which is a document printed and provided by the federal govt., look at line 203, and 503, I think those are the correct line numbers? They state, “Mortgages being taken subject to”.
If this was “illegal”, the federal government would NOT have put this on there form.
Simple!
So, you are using the land trust to convey the ownership of the house to you.
Once this is done, you own the house.
And, the good news is that, since you own the trust, and it is a flow thru entity, per the IRS, all the tax benefits of owning the house are yours.
One other benefit of the trust is that it somewhat protects the home from judgments you may get against you from attaching to the house. If you do this right, you will create an entity, like a corp, or LLC, and have that as the beneficial interest in the trust. This keeps you twice removed from the house. Harder to trace ownership for others this way.
I will often also fill out a HUD-1 statement for my sellers. This then gives them something to show any lenders in the future that they have sold their house. Like when applying for car loans, etc. later.
I know this seems like a lot, and it is. All docs need to be completed correctly, and you would be wise to gather them up, have them reviewed by a local competent RE attny.
They can make any changes needed for compliance etc.
HTH,
Jim FL
Jim,
Thanks for the response! It was very helpful.
Cknighter
What do you put as the purchase price on the purchase and sales agreement when subject-to?
John,
the purchase price in the contract, is the purchase price.
Most times, I’m buying for mortgage balance, which means the contract has that as the price.
Sometimes, not often mind you, the seller gets some cash from me, and I take the house subject to the existing mortgage balance.
Then, the price is the total of the two…mortgage balance plus the cash.
HTH,
Jim FL