Hello to everyone pursuing wealth, I have a inquiry in regards to the dynamics of subject to the Existing Loan transactions. I think I have slightly grasped the dynamics involved in this process:
Obtain deed from seller
Obtain payment booklet from seller and obtain a change of address form
Obtain power of attorney
Notify the lender that you are making payments on behalf of seller
My questions are: If title is in your name or corporate entity due to receiving a deed from the seller, but mortgage remains in the seller name,
a) when loan is paid off, how are you entitled to profits if mortgage remains in seller’s name or
b) do you create some legal wording in your contract specifying that seller does not receive the profits upon sale on his home via the satisfaction of the mortgage? or
c) Does obtaining title from seller automatically entitles you from a legal standpoint to reap profits upon satisfaction of the loan and sale of the property?
d) Is item number 4 required?
I am not a Sub2 expert, but this is my understanding:
a- when you have the deed, you own the house. When the loan is paid off, the mortgage goes away. In a Sub2 transaction, you own the house, but the seller “owns” the mortgage. They are two separate things.
b- when you have the deed, you own the house. You don’t need any wording that states the seller is not entitled to profits from the sale of the house when the loan is paid. The house is no longer his!
c- when you have the deed, you own the house. See item “b”.
d- no. Just send the payments, and the lender will cash the checks. You have no obligation to tell the lender that you are making the payments.
You put the property in the Mr. & Mrs. Seller Family Trust.
You make the Trustee someone YOU trust. This paperwork gets recorded.
You then have Mr. & Mrs. Seller sign the beneficial rights of the trust over to your LLC. This is not recorded.
Have the sellers sigh over to you limited power of attorney and the other release forms. This is not recorded.
I have a question about sub2. Since the seller still owns the mortgage, will this show up as a liability on their credit report? Just wondering because that seems like it’d make it very hard for them to get financing for anything with a big mortgage on their report.
In almost all cases, that’s correct, Marcus335. Lenders will only allow a 75% credit for rental income to allow for maintenance, vacancies and all the other costs typically associated with landlording. I use a long term triple net lease that mitigates these factors for the seller/grantor, and he suffers no hickey on his debt to income ratio.
Thanks for the fast response Dave. I’m obviously new to this and trying to anticipate things sellers would ask. I don’t want to have to say a lot of “I don’t know’s” and appear like a complete idiot. To me, a large part of earning their trust is being able to answer their questions and remove an objections they have. I want to take away their reasons to say no.
I have read about triple net leases and they make sense.
Thanks for the additional feedback Arwen and IndyBruce.
Arwen, I understand now that it is not necessary to inform the lender that your LLC will be making payments on the seller’s behalf. Thanks for clarifying the deed process and the person(s) that are entitled to profits. IndyBruce, I sincerely appreciate that you provided the trust information as it relates to the LLC.
I hope both of you continued success in your investments for the new year and many years to come.
I’m also a newbie to real estate investing. Could someone please tell me that once the owner sign over the deed (warranty deed or a quick claim deed), does that make you the owner of the house? Without contacting the lender, When you start to make the payment to the lender, won’t they know that the house has a change of ownerbecause the insurance would be in different name? Would that make the lender call the due on sale clause, and the lender will call the loan to be paid in full in 30 days.
Is there a way to do this without having the lender to call the loan? PLease let me know if there is a way to do this?
You get the owner to agree to remain on the loan. I tell them that if they will remain on the loan, I will take complete responsiblity for payments, property taxes and maintenance and repairs.
You have him open a land trust in his own name and name a Trustee (hopefully a non-profit corporation). The Trustee takes equitable and legal title to the property and it is deeded to him by the owner/seller. This is legal under Federal law and does not affect the DOSC.
He then retains a 10% beneficiary interest and assigns you 90%. You are now also an owner of the trust. You can take title either as an individual, or for maximum protection, as an LLC. Triple net lease the property from him and the IRS entitles you to writeoff the taxes and interest.
You make the payments and the lender is prohibited from doing anything.
I understand you can put your property into a trust anywhere…no problem with that but
the part that I don’t understand about this trust being legal under federal law is this assignment of the seller’s beneficial interest. How can the seller assign any or all of his interest in the property without it being a transfer?
My next problem with this trust is if it is only being set up for asset protection/amenity and not an attempt to hide the transfer from a lender, which might be construed as lender fraud, then why does it have to be set up before the sale and not after???
“How can the seller assign any or all of his interest in the property without it being a transfer?”
In the scenario described, there is no transfer of property (realty), only a transfer of interest in the trust (of which the corpus is the property) considered personalty.
“…then why does it have to be set up before the sale and not after???”
There is no sale until culmination of the trust and only at the mutual direction of the owners (Beneficiaries) to the trustee to do so.
“…an attempt to hide the transfer from a lender, which might be construed as lender fraud,”
Refer to Garn-St. Germain which makes it unlawful for a lender to invoke the DOSC for transfer into a trust in which the borrower is a beneficiary.
I hope this helps with the confusion.
Thank you, David. As David said, the ONLY transfer of interest in the property occurs when you have created your trust and the property has been deeded to your Trustee. That transfer is legal, does not trigger the DOSC.
The land trust is a method of real estate ownership whereby a trustee holds legal title to real estate, while the trust’s beneficiary(s) have complete control over its management and the power to dispose of the property.
You now own personal property (a beneficial interest in the trust). A Beneficial Interest under the Land Trust is considered to be Personal Property, not Realty, therefore a Transfer of Interest need not be witnessed or notarized. In most real estate transactions the closing can be very complicated and time consuming. Not so with the transfer of a beneficial interest in a land trust. It is done as simply as transferring your stock certificates in your corporation - no closing costs, no documentary stamps or recording fees.
Good luck, BooBoo, and thanks for another profound contribution, Tony.
(8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property;
The way I see it, by the seller assigning any or all of his beneficial interest, as Gary states, he is transferring his rights of occupancy, which is in violation of the act. If this assignment is done to hide the transfer from the lender, I would think this would be lender fraud.
What happens to the new T/B if the seller wants to reoccupy the property?
(8) "a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; " The way you see it is incorrect. This clause is what makes the transfer legal. It is a simple placement of your property into a trust and deeding title to your Trustee. This is simply good asset management strategy and protected under Garn-St.Germain. THERE IS NOTHING IN THE TRUST DOCUMENT THAT ADDRESSES OCCUPANCY OR A TRANSFER OF OCCUPANCY RIGHTS!
You missed the entire point. Where has the seller transferred his right of occupancy? He hasn’t. There has been no violation of the act. The NARS Trust has been in use since 1984 without a successful challenge and it DOES NOT trigger a DOSC violation. The trust document makes no reference to occupancy.
Now, the seller owns PERSONAL PROPERTY. He assigns a beneficial interest in the trust to a tenant. They are now BOTH owners of the trust and entitled to occupancy. An occupancy agreement is drawn up between the parties (usually a triple net lease) that entitles the TB to reside there. The IRS considers them both to be owners of the property for tax purposes and he who makes the payment gets the tax writeoff.
I personally notified my lender when I did this on my own house because when I found my TB I converted my homeowners insurance to landlord insurance. I spoke with the manager and he confirmed that my actions were legal and protected and that he could not call the loan if he wanted.
Your question about what happens to the TB if the seller wants to reoccupy the property makes no sense. This cannot happen as the seller remains a beneficiary and is bound by the paperwork he himself signed as an owner of his trust. Sometimes we set it up where we share future profits with both the seller and buyer. Case closed.
You may be confused because another method of land trusts usually involves powers of attorney and the seller gives up his rights – not with this trust. Here the seller remains a beneficiary until his mortgage has been paid off and he has received all of his agreed upon equity.
I am in complete agreement with you that the PLACEMENT of the property is “simply good asset management strategy and protected under Garn-St.Germain”, no problem at all with this part of the process.
The next step is what I am having trouble dealing with and that is the assignment/transfer of any or all of the seller’s beneficial interest to you, which appears to me to be in violation of the act as this appears to me to be a way to transfer the property and hide this transfer from the lender.
Secondly; “THERE IS NOTHING IN THE TRUST DOCUMENT THAT ADDRESSES OCCUPANCY OR A TRANSFER OF OCCUPANCY RIGHTS!” what I was referring to was to the act, not the trust document.
“Your question about what happens to the TB if the seller wants to reoccupy the property makes no sense. This cannot happen as the seller remains a beneficiary and is bound by the paperwork he himself signed as an owner of his trust”. I was referring to the statement within the act itself “transfer of rights of occupancy in the property”, again not a statement within the trust document.
Perhaps a definition of “rights of occupancy” or “assignment of beneficial interest” might help clear this confusion.