I’m an experienced RE investor that is wanting to explore doing the Sub2 form of investing. I am interested in learning what clauses or contract insertions (if any) investors use to disclose their limited liability in the transaction and any CYA clauses that might be used as discussed by “Jim FL” in the following thread:
ALSO, I am interested in what recourse the investor gives the seller (if any). i.e. something to assure the seller that if the investor fails to make the payments then the investor agrees to deed the house back to the seller… or ??
Well, since you are referring to my posted explanation of sub2 and its mechanics, I’ll take a stab at your questions.
First, what clauses I use.
Frankly, I sell sample forms, which are copyrighted and shared by my attorney, so I cannot really quote them here.
However, suffice it to say, I tell the sellers right upfront, ultimately, they remain liable for the note, no matter what happens, because they signed for it.
I will perform, as that is my business, and it only makes sense to peform, or I will not profit.
In the paperwork, after explaining this to the sellers, I lay out how the transaction will work, using a land trust etc, the risks of due on sale, and the fact that if the loan goes into default for ANY reason, my entity is not liable…because ultimately its not, as explained when presenting the paperwork to them.
I also state in their that any person who I assigned to would hold the same position as me in the contract concerning all things, liability or lack thereof included.
Now, I won’t sign a contract I cannot perform under, that’s good business.
But, having something in writing to lay out disclosures may help disuade potential lawsuits should something horrifc and unforseen arrise.
This does not mean sellers cannot try to sue, but frankly, most will only make noise about, because lawyers are expensive.
And if they do, and you screwed up, well, time to pay the piper, which is only right anyway.
I just think its ethical to disclose, be prepared for worst case scenario as best as you can, but above all else, PERFORMANCE is the BEST risk avoidance strategy in the world, coupled with buying right in the first place.
Think about this, if you buy every new property into your portfolio for 50-75% of value (I hover between 60-70% myself), no matter the method for acquiring them, and something were to happen to financially kill your ability to keep them all…you still have too get out somehow, and make a nice cash profit FAST.
anyway, perhaps more than you were seeking, but I always feel a complete and full explanation is in order, since some folks look at CYA clauses as ‘weasle clauses’, and there is nothing further from the truth, especially when you invest with ethics and morals…the only way IMHO.
Next you asked about:
As for recourse in the contracts for the sellers?
Well, frankly, when I buy a house, I want to own it, and do with it as I want.
I don’t offer recourse language in contracts.
Two main reasons, and remember, I’m no lawyer, check with one if making your own contracts, and before using ANY in the real world.
Merely my opinions based on experience as an investor…anyway, enough cya for this post.
If your contract were to offer some recourse to the sellers, such as deeding the property back to the sellers upon some default on the investors part…it might still take a full blown foreclosure to make that happen.
If the language were to say something like, “Should investor default on monthly mortgage payments for more than 30 days, the investor agrees to deed the property back to the sellers within 30 days after that.”
See, IF that were to happen, a default that is, and the investor REFUSED, then what?
What does the seller have to do?
Still a mess.
Better in my opinion to just perform, and if the sellers want to sue you should you default, they can, no matter what the contract language states.
Again, just my laymans opinion.
I just don’t see any point in using recourse clauses, because they really have no merit.
Bottom line, if you cannot perform, don’t sign on the line in the first place.
And heck, if you follow my lead and buy for WELL under value, no matter what happens, you can always sell for more than what is owed, and make a nice minimum 5 figure payday.
Sorry if that as not too clear, I’m a multi-tasker, and am doing several things at the moment.
I’ll post here from time to time, as the operator is someone I think highly of, and has helped clear my head a few times discussing investing and other things related.
So, feel free to post more questions as they arrise. I’m not the worlds best sub2 investor, but I’ve certainly done my fair share, and continue to as my primary living.
I’m sure I’ve seen, been thru, or dealt with just about every question/situation that can arrise within this method.