Love Austin Homes Investing Blog

I have a question.

A friend of mine and his brother live in a house that one of them bought a few years back. The owner of the home is wanting to move to a nicer house, and the renting brother is interested in buying the home from his brother.

To me it seems that they could cut down on closing costs significantly just by hiring an attorney to write up the contract (anyone know what that costs?).

I was also wondering what else they could do to make the transfer as painless and minimal cost as possible. I don’t think assuming the loan is something they would want to do, as it would probably hinder the credit of the owner making it harder to buy a nicer home.

Does you have any suggestions of what these two could do?

thanks
Andrew

ANSWER

Anyone can download contract at TREC, fill it out, negotiate an offer, and give it to a title company with some earnest money to “receipt” it. for their, the title company will sechule the rest and process the transaction with all parties. If you want copies of contracts, look at my links section at: http://www.loveaustinhomes.com/real_estate_investing_links

Now - keep in mind that this can get a little complicated, which is why most people hire realtors to handle everything. In general, realtors are like insurance - you really don’t need them unless something goes wrong, in which case they are priceless…

A few other ideas for doing this creatively…

The very cheapest simplest transaction would be for the one brother to simply sign a general warrantee deed giving the property to the other brother who would then simply continue making the payments on the loan indefinitely, or until sometime in the future when he refinances. This is sort of a “poor-man’s subject-to” transaction that can work for family to family transactions. The beauty of this is that the total cost of the transaction is just the $25 filing fee for the warrantee deed. The cons is that sometimes relatives don’t trust each other with each other’s loans.

The next slightly more complicated transaction would be for the first brother to sell the property to the second brother with owner financing. In other words, same as above, except the seller collects the loan payment from the buyer and makes sure the underlying loan is being paid. The pro here is that the seller is more protected and could even sell the home at a different price and interest rate than the existing loan. If that is done, it’s called wrapping the loan – “a wrap”. The con here is that the seller still needs to service the loan and the buyer has some risk that the underlying loan payments might not be made.

Either of these transactions could also be done at a title company to provide title insurance, further increasing the cost of the transaction, but providing insurance that the ownership and amount owed on the property is as expected.

Phill

I have a person whom is going through foreclosure, we agreed that
I will pay him walk away money and I will re-establish the mortgage
payments and he will in turn deed the property to me but he will remain in the
loan,possibly for 3 to 4 months while I find a buyer, I have never
done this before. Can anyone refer me to a title company or attorney who
can help me set up this transaction properly so my buyer and I can be
protected?

Regards,
J

ANSWER

Charlie Brown can be reached at 512-346-6000. He can sell you the paperwork necessary to buy this property “subject-to” the existing loan. He will probably charge you in excess of $1000, as this costs some $$ to develop, but don’t quote me.

In most cases, investors that buy properties this way, are more interested in protecting themselves, then the buyer, and thus the contracts are fairly one-sided. For example, the contract will basically say “I the buyer agree to make the mortgage payments if I can, but if I don’t, I’m not liable for anything that might happen to you the seller as a result.” In almost all cases in my experience the seller is fine with this. In other words, if their were better deals out there, they probably would have gone after those. That being said, when I buy a property “subject-to”­, I do go out of my way to make the seller feel more comfortable by giving them references, telling them a bit about my own financial situation (to show that I have the resources to make thair payments), and showing them other deals that I have done successfully.

Finally, one of the most troublesome transactions that less-reputable investors make is the subject-to deal where the investor takes the property and then lets it go into foreclosure.

In my opinion, when you buy a property ’subject-to’­, you have a moral obligation to not let that property go into foreclosure. If you are not sure you can ensure that, or if the deal is not good enough to make that happen, you should not do the deal.

Phill

Went to the RE club this past Tuesday. Learned that REICA’s position is not to do lease option but do a wrap. My question is how do you do a wrap if there is an existing loan on the property? Loan not assumable. Wouldn’t a wrap trigger ‘due on sale’? Thanks.

Rex

ANSWER

Rex,

Any title company can help you do a wrap. Just tell them the terms of the note, and their attorney will draw it up for you. Or you can use your own attorney.

When I do a wrap, I like to get a down payment (if possible) of 3-5% (or more, if possible), and ask for a balloon payment in 3-5 years (forcing them to refinance and pay me off). In most cases you are going to ask for a premium interest rate, perhaps 10-12%. You may also include terms that say that you have the option to renegotiate the terms if they do not refinance (this could include calling the note and/or foreclosing, changing the payment terms, etc.).

In most cases there IS an existing loan on the property. That’s why is called a wrap - you are ‘wrapping’ the new loan around the existing financing. It makes no difference if the existing loan in your own name or one in someone else’s name.

If the home and loan is in someone else’s name, you will almost certainly have to purchase the property ‘subject-to’. This is a technique where you take over the payments of a loan in exchange for getting the deed. This technique can be quite complex and beyond what I have time to explain here. With only a few exceptions, almost no loans are assumable, however virtually all homes can be purchased subject-to.

Regarding ‘due on sale’, yes, whenever you transfer ownership, which you are doing with a wrap, you risk having the underlying loan called. There are many advanced techniques to help reduce this risk. That being said, it would be an extremely rare (i.e. 1 in a 1000) event for a lender to actually call a loan in which the payments are being regularly made, regardless of what other terms of the note are violated. I have bought scores of homes subject-to, and never had a problem.

Phill

Phil:

I am writing to you directly for several reasons. I have been reading your posts for almost a year. My impression is that you are one of the most successful investors in Austin and your emails are always polite, articulate, very informative and to the point.

I moved to Austin last year and just made a verbal offer that was verbally accepted yesterday to a FSBO for a home that will be my residence. Unfortunately, the seller does not have any contracts, thus my reason for writing to you.

Since I have purchased many homes in other states, both for personal and investment reasons, I don’t think I need an attorney, but I do know I need the proper contracts. I have a copy of the Texas Real Estate Commission contract, but was wondering what specific contract and amendments you recommend and if you could share a copy of what you would use.

If I do need an attorney, Charles Brown was highly recommended. Is there another you would recommend? Also, I was planning on using Brett Reed or HomeCritic as my inspector. I noticed you use Eduardo Reash with Wells Fargo. Any other inspector, banker or mortgage broker you would recommend? Any other suggestions?

I know I am asking alot of questions of you this morning, and please know that I thank you in advance and appreciate your help greatly.

Sincerely,

Teresa

ANSWER

Theresa,
I only use the standard TREC contract. On some occasions, I use a subject-to contract (for assuming a loan) or other special purpose contracts depending on the situation. For your application the standard TREC contact sounds perfect.

As for addendums, you will need an HOA addendum if there is an HOA, and a 3rd party financing addendum, if you are getting a loan. There are other addendums also listed on the TREC contact that may or may not be of interest.

I always recommend you also have the owner fill out and complete a TREC seller’s disclosure form. It states what is and is not included, and what works and what does not work. It’s for both of your protection. It also requires the seller to list known problems and past inspections.

In general, a realtor will complete all of this for you. By not working with a realtor, you may miss a thing or two depending on your experience. In most cases there will be caught by the title company and/or lawyer. If you need a lawyer and a title company all in one, you might try Wally Tingley and Associates. I don’t use them, but a lot of investors in your situation do for exactly this sort of deal.

I also do my own inspections, but I’ve heard of Brett Reed and HomeCritic, and both are good.

As for lenders, Wells Fargo is great for this, but if you want to look at a larger variety of products, I would suggest a mortgage broker – Carrie Richards 512-258-4605. She can make any loan happen.

My only significant remaining concern for you on this is that you are paying the right price. FSBOs are notoriously miss-priced. Usually overpriced. Please make sure you get some advice as to what the home is worth in the event that you don’t have the expertise to determine this on your own.

Regards,
Phill Grove

Has anyone done a “find and assign”? If so, this is my question; Is
it necessary for the eventual buyer to know the price I purchased the
property for? I’m assuming that there is a simultaneous double
closing in which my option contract is taken by the title company and
processed along with my contract with the seller and I’m cut a check
for the difference and the buyer is none the wiser (as long as he’s
getting the property at a price he can live with).

ANSWER

In a simultaneous double closing, the end buyer IS NOT exposed to any of the terms of your purchase contract (other than when you closed), unless you allow them to be. In other words, you could purchase a home for $1 in the morning, and turn around and sell it for $100K in the afternoon, and you would receive the difference less some transfer costs (escrow and nuisance fees, and the delta in title insurance expense plus a title insurance transfer fee).

The problem is… most lenders will not fund this type of transaction, or if they do, they may ask to see the terms of the purchase contract (which you don’t have to provide), and in some cases, they may even have rules about how much profit, if any, you are allowed to take (typically <15%). So, if your end buyer is buying with a loan, these deals will get very tricky. There are work-arounds, but that is a very advanced topic…

If you do an assignment of contract, everything is transparent from the start. Essentially, the end buyer is putting their name on your contract and excepting ALL TERMS (not just price) of your contract. If you are taking an assignment fee, I recommend you document that fee in a separate contract/agreement. The assignment fee can then be transacted by the title company at the closing (with everything transparent)­, however, THIS TOO can (and probably will) trigger a red flag with the buyer’s lender, who may well not fund a deal that includes an assignment fee. The work-around here is to transact the assignment fee outside of closing. Unfortunately, this means it probably can’t be financed, which means many buyers won’t be able to pay it.

In the end, the easiest way to flip a house is always to a cash buyer… like me

Phill

I need some guidance on some deals that have been presented to me.
They basically look like this:

A small builder has a hard time getting enough credit from a lender to
get his project going as quickly as he would like.

Instead of using one bank and all his own credit, the builder offers a
profit-share to individual investors.

I, the investor, get a loan for construction of a home and the home
starts getting built.

Ideally, through the builder’s marketing efforts, the home is sold
before completion.

The builder and I split the profits. He is willing to do this because
we investors helped him get the project built much faster.

I know Maravilla in Austin has a program like this, and now I know of
an investor club that streamlines the process of hooking up investors
with builders.

Anyone have experience in this or can you tell me what pitfalls to
watch out for?

Thanks!

Andrew

ANSWER

Andrew,

Whereas this is probably a legitimate program with some builders, in general, I would say BEWARE of using your credit to help finance someone else’s project unless you really know what you are doing.

There are several scams going around where crooked investor-builders/­con-artists ask investor-civilians to ‘just use your good credit’ in order to ‘share in the profits’. This sounds great, but several things can go wrong:

1) The after repaired/after construction value is often over-estimated. In some cases, appraisers are in cahoots with the investor-builders. In other cases these deals involve difficult to appraise or highly subjective projects.

2) In some cases the builder will take his profit on the build and leave the investor with a home with zero or less equity.

3) Cost overruns can also leave the investor with zero or negative equity.

4) In some cases I have seem the investor-builder take cash out on the buy, or arrange a more complicated transaction where they are essentially flipping the home to the investor-civilian or taking an assignment fee on the sale of the home to the investor-civilian. Essentially, they are getting their $$ on the front end of the deal. After they get their $$, they have little or no incentive to hang around.

In one case I saw a woman from California finance an entire deal site-unseen. She got an inflated appraisal, inspection report done by the builder, and some pictures of the house. Compared to what she was paying for homes in CA, this home in Dallas looked like an awesome deal. She signed up and financed $350K for the home, only later to find out it was only worth about $280K on a good day. Net loss after resale - around $100K. Owch!

Phill

I’m representing both buyer and seller of a duplex in North Austin. He had mentioned to me at first that he was behind in his payments, but that his balance was $145k and that as long as he could “walk away” from the situation, he’d be happy.

There was enough room between $145k and market value to pay our commission and some repairs the property needs – we contracted at $159k.

We were to close this week, but after waiting 4 days for a payoff from Wells Fargo, we were told the guy is seriously delinquent and with late fees and other charges, his payoff is $158k.

At this price, the buyer walks and I find him something else, and the seller has his own fish to fry.

I know that it behooves me now to contact Wells Fargo’s “work out” department (anyone know what Wells Fargo calls it or have a contact there for this?); tell them that they basically can either let this deal go through and get the loan off their books OR they can continue trying to get blood from a stone, foreclose on the guy, and then get less money.

The buyers loan docs are already at title – literally, we could close in 24 hours. The bank would be wise to let the deal proceed.

So, in exchange for graciously allowing me to “re-gift” you a Fleming’s gift card I have sitting here in front of me, anyone able to help? J

Thanks - Robert

ANSWER

Robert,
Essentially, you are interested in doing a quick short-sale. Unfortunately, this is probably impossible.

You need to call Wells Fargo (the number is on the loan statement) and ask them to work out a short sale with you. With a willing buyer and seller and realtor, you have everything you need. They will tell you what you need to do. It will take 45-60 days or longer, in almost all cases, to get a response AFTER you turn in all of the documentation they require. You can beg and push for a faster response, and it will not matter.

During their review period, they will do their own appraisal. Depending on what that comes back at, and various other factors, they will tell you what they will accept for a payoff. It may or may not be less than what is owed.

Assuming you can keep everyone on the hook long enough to make this happen, you’ve got a shot. If you do represent both sides, I would recommend you put another realtor down representing the buyer (and work out a referral arrangement)­, because its is also likely that Wells Fargo will want to negotiate down your commission.

If this looks like something that won’t work for you, you can also refer this guy to me and we will take good care of him to ensure he does not get a foreclosure, and pay you a $500 referral fee.

Phill

Just wanted to be sure everyone was aware of this. Even Lonnie Scruggs
(of Deals on Wheels fame) was caught in this guy’s scams!
See
HYPERLINK “http://www.mobilehomeuniversity.com/forum/read.php?f=1&i=2433&t=2433″http://www.mobileho­meuniversity.­com/forum/­read.php?­f=1&i=2433&­t=2433
for more info.

ANSWER

I have personally run across a number of people that have been scammed, and left with nothing, through my short sale business. A few simple things to look out for are:

1) A deal that is too good to believe

2) A partner that asks you to put your name on a loan (because they can’t, for any of a number of different believable reasons)

3) The partner finds the house, and hires their own appraiser that says it’s worth $X, when it’s really worth < $X

How to protect yourself:

1) Get your own appraiser, or better yet, realtor, and possibly a contractor (people you know and trust) to help you determine the as-is value of something before you buy it.

2) Close your deals at a title company, and get the insurance.

3) Deals that seem too good to believe, probably are. Most scams rely on people’s greed. Always remember that pigs get fat, and hogs get slaughtered. Don’t be a hog…

You don’t have to cut corners to get rich in real estate.

Phill

What is the best way to find out how much was due on a loan after a
bank has foreclosed. I am looking at a foreclosure that is listed on
the mls but would like to know how much the bank is out so I know what
to offer. I was assuming the listing agent would not disclose this.

Braxton

ANSWER

Braxton,
Anyone can go down to the records office (off Airport for Travis), and look up the original deed of trust that will tell you the amount of the original loan. If you look at how old the loan is, you can estimate its current balance.

UPDATE: goto to the usefull links section of www.loveaustinhomes.com and you will find a link for searching Travis County liens on-line!

Of course, this amount is probably useless or irrelevant in a foreclosure situation, as any home that is foreclosed on, has had many missed payments increasing the amount owed. Additionally, taxes may not have been paid for a while, and insurance and penalties may have also been piled on by the lender.

But, more importantly, when a lender forecloses and resells the home as an REO, whatever was owed is irrelevant. The lender will in all cases simply list the home for market value (as determined by a realtor or BPO) and get what they can get for it regardless of the history.

Phill

I’ve got a question. I recently purchased a home and
initially I was going to ask that the seller pay all my closing cost
and try to haggle from there. But my mortgage broker told me that the
maximum amount the seller could pay is 3% for an owner occupant and 2%
for an investment property? Is this true??, or was it solely the
requirement of the loan provider? It was news to me, if anyone can
shed some light on the subject I would appreciate it.

ANSWER

I have seen sellers pay 6%. Your lender is limiting how much your seller can contribute. Various loans require the buyer to make specific contributions, and they sometime even make a buyer document where their down payment and/or closing costs funds are coming from, to ensure it’s not someone else’s money.

I have no idea why lenders do some of the kooky things that they do. I’m sure they are trying to avoid fraud, but much of it does not make sense.

Anyway, in most cases when a broker tells you something that does not sound right, it’s time to shop around for another broker so you can see if a better product/solution is available. It was not appropriate for you broker to imply that it’s not possible for a seller to contribute more, for example. Just about anything is possible…

For example, you can always explore supplementary transactions that take place outside of closing. This could be as simple as asking the seller to throw in furniture, appliances, or other improvements, or even asking for art, furniture, or automobiles. I have seen all of these negotiated through various creative deals. The only caution I will offer is that transactions outside of closing do not involve the lenders, realtors, or title companies, and are not insured with your title policy. Also, if you are getting a loan, the loan may stipulate that there are no other aspects to the transaction, and your contract may stipulate that it documents the deal in it’s entirety. In other words, you have to make sure you have some way to make sure the deal outside of closing is honored, legal, and possibly reversible if the sale is reversed or does not take place.

Phill