Love Austin Homes Investing Blog

I have a friend that would like to work together and
provide the necessary money for any subject to deals I
locate, and we then turn around and sell.

Any suggestions on how we should construct this
arrangement?

Thanks, for any and all assistance.

Barbara

ANSWER

I do these frequently with other investors. Partner find deals, I fund them, we split the profits.

I use a simple Limited Partnership Agreement that we customize for each deal. It defines the responsibilities of each party, what is considered as profit and expense, and how profits/losses are to be divided, etc. It also has other boilerplate needed in limited partnership agreements.

The actual buying and selling is generally done in the name of the person/company funding the deal, or in an LLC created to hold the property (if it will be held for a long time), or in an LP created to flip properties (this is what I use). Most people don’t care who’s name the property is in, they just want their fair share of the profits.

Phill

I have a situation where I think a “subject to” would be appropriate.
I have not, however, ever done this before.

Can someone out there direct me to a good resource for a sample
contract as well as the necessary steps I should take to protect my
interest (filing of deed, notices, etc.)

Your assistance would be greatly appreciated. Thanks

Robert

ANSWER

Robert,

You can pay an attorney, such as Charlie Brown, to draw up the necessary documents for you, or you might consider teaming up with an investor that’s done several of these before.

Whereas the contract itself it not overly complex, there are many many things to take into consideration when doing sub-to involving title, insurance, future bankruptcies or foreclosures, escrows, balloon payments and ARM verification, LLCs and/or land trusts, loan acceleration, etc. etc. Mistakes and short-sightedness can generate major headaches in these deals, if you don’t really know what you are doing…

Phill

Question to the “Subject to” guro…
My problem:
When you buy a property “Subject to”, hold the property for a few
months or several years, and then resell with the new buyer taking
out a new loan, any money held by the original finance company for
taxes &/or insurance in escrow is refunded to the original sellers,
(i.e. the persons you bought the property from), via a check from the
title company or closing company. This check is made out to the
original owners. The ones who originally took out the loan on the
property you bought “subject to”

In past years one could have stamped “For Deposit Only” on the check
along with the account number and deposited the check in any account.
No problems.

With new banking laws, both Bank of America, and Wells Fargo, have
told me that the check must be endorsed by the Payee.
I have a power of attorney, and a letter of instruction from the
original sellers, stating I have authority to handle all matters
concerning the property. The banks are telling me that they won’t
accept the power of attorney because, they don’t know that a
subsequent Power of attorney may be in effect that cancels the first
one.

Any suggestions on how you “subject to” gurus handle this problem
with the original purchase, to prevent this problem on resale?

Thank You
Philip

ANSWER

Philip,
Excellent question! This is one of those advanced sub-to topic that always seems to get glossed over in the how-to books.

There are a few ways to handle this.

1) Just deposit it into your account as though it were made out to you. Do it from an ATM. The odds are that no human will ever even look at the check and it will go though. After all, it is your $$ and you do have a POA.

2) Call the lender and ask them if you can apply some or of the escrow towards the principal. If necessary, tell them you are about the sell the home and ask if you can miss the last few payments and have the escrow cover those payments (make sure that the missed payments will not be charged the to borrowers credit).

3) Before you sell, tell the lender that you wish to close the escrow accounts (and pay the taxes and insurance yourself). If there is equity in the property, they will sometimes allow this. They will then almost always give you the option of getting a check (made to the original borrower) or applying the funds to the principal.

4) Ask the lender if you can use escrow funds as part of the loan payoff at closing. In other words, ask for a payoff that includes the escrow refund.

5) I suppose you could offer the original homeowner some of the proceeds to cash it for you…

6) You can refi or payoff the loan or time the close to just after when the taxes are paid and the escrow is near zero.

Phill

Another approach to avoiding a lender from calling a loan on a property that has been sold is to title the property into a land trust, and have your LLC be the beneficial interest of it. Titling a property into a land trust
> for estate planning purposes is a specific exception to the due on sale clause. The land trust itself does not technically isolate legally liability from you personally. The LT provides identity separation between you
and the property. If the beneficial interest of the LT is held by your LLC, the liability protection would be limited to the assets of it.
Lawrence

ANSWER

Lawrence,
Lands trusts don’t offer liability protection, only identify protection. Transferring the beneficial interest of a trust to an LLC will put you at risk with the due on sale clause, just as transferring ownership directly into the LLC would. That said, using a trust makes it more difficult for the lender to figure out what is going on. That being said, lenders almost never call performing loans due anyway…

All of these are fun tricks of the trade that learn about in RE books, but as a practical user of all of these techniques, I have come to also take into consideration the administration of such vehicles. The trust requires paperwork, a trustee, etc. The LLC requires articles, annual filings, possible tax filings, and, if you really want to get the liability protection, regular officer meetings – including documented meeting minutes, etc. Technically, you should even keep a separate set of books for each entity. Once you have 10-20-30 properties, and try to maintain all of this, it becomes overwhelming.

Another approach is to minimize your entities, and get a personal liability umbrella insurance policy for enough to more than cover your assets.

Phill

We have a house that we lived in that we want to turn into a rental and
transfer ownership to a limited liability corporation. I realize
that this an legally cause a due on sale event. From your experience, as
long as we continue to pay the mortgage, does the mortgage company ever care?

Thanks.
Jane

ANSWER

Jane,
As a practical matter, it is VERY UNUSUAL for a lender to call a loan that is being paid on time regardless of whether the home was sold or not. I can give numerous examples.

My only fear would be in the even that at some future date interest rates shoot up AND the foreclosure situation subsides. In the past, in this environment, loans have been called.

Phill

Do you agree that the best way to buy a property subject-to is to use a land trust?
The general idea is to form a trust, deed the property to the Trust,
assign benefical interest in the trust to you, along with POA to
access the necessary info to ensure you get all the payment details
from the bank to continue paying the existing mortgage.
Best regards,
Bruce

ANSWER

Bruce,
Keep in mind also that a trust offers nothing in the form of liability protection beyond making you, the new owner, a little more difficult to find.

In other words, when the tenant drops her baby down the stairs after tripping over a carpet thread that she will tell the jury should have been repaired, she will still sue you, the new owner, for every penny you ever earned and then some. And, when your sitting in front of your twelve piers looking at pictures of the dead child while talking to her attorney, I wonder how well received the “trust game” will be, when to a laymen, moving things around through assigning the beneficial interest in a trust might appear to be a mechanism to commit some form a fraud (even if it is indeed legal).

For this reason, I prefer to transfer ownership into an LLC or LP. You can also still use a trust to disguise the identity of the LLC, if you really want to go to town, or you may decide this is not necessary…

Phill

Does anyone know what forms I should use for a “subject to”
transaction? Also, in what way do I obtain the deed? Do I have the
homeowner quit claim it to me, or do I write a new warranty deed? If
so, where can I get that form? Answers to any one of these questions
would be helpful. Thanks in advance,
Mark

ANSWER

Mark,
Buying Subject-To is not as simple as just using the correct forms. Most people that do it, like myself, have paid hundred or thousands of dollars to lawyers to develop the contracts or for courses that include the paperwork. Once you obtain a subject-to contract, you need to know what provisions to add and how to handle things like escrow accounts, insurance, and long term access to the loan. You will also need to address liabilities, and may want to include a non-disclaimer. There are many additional optional forms that may be used. Then you will decide how you want to address this with the lender (if at all). Finally, you will need to decide how to hold the deed – for example: in a trust, in an LLC, in a DBA, or in your name. Then where to change the address for the loan to, and how to handle payments, and how to cash refund, escrow, or other checks from the lender. Then there are many other little details like how and if to do title insurance, what to record where and when, how to arrange to ultimately be able to pay off the loan, etc. etc. Oh yeah, and there are several critical things you want to find out about the loan before you take it subject-to… and, I recommend never using quit claims for this…

I don’t mean to say that this is rocket science, but it is advanced real estate investing if you want to do it correctly. If you just jump in and do it, there are many potential gotcha’s. I suggest you buy some books, hire a lawyer, or partner with someone that has experience in this area before just jumping in.

Phill Grove

Hello,
I am trying to purchase a home via a lease option. I understand that in Texas there is not a formalized contract for lease options buying. Is that true or am I just getting false info. Can anyone direct me to where I can get a good lease option contract. I am being told that to get one an attorney will need to draft up the document which will cost upwards of $400. This is prior to the seller even looking at the offer I am proposing. Doesn’t sound right!

I appreciate any help you can give.
Thanks,
Dean

ANSWER

Dean,
Most of the lease option contracts out there came from courses investors bought or lawyer’s investor paid.

All the ones I’ve seen are clearly more favorable to the investor and not necessarily something I would recommend for a purchaser that might have the opportunity to set terms.

Phill

UPDATE: Texas Senate Bill 629 has made lease/options virtually illegal in Texas. I don’t recommend this strategy. If you are going to try this type of transaction, contact me for information on how to do so legally.

Below is an interpretation of the SB629 lease/option law in Texas. This is an “investor interpretation” and not an analysis from a lawyer.

>
> If a lease/option is for 3 years or less, only certain provisions
> of the law
> apply to it. The changes are as follows:
>
> 1. You cannot impose a late fee that exceeds the lesser of :
>
> a. 8% of the monthly payment
>
> b. the actual administrative cost of processing the late payment.
>
> 2. No prepayment penalty for exercising the option early
>
> 3. cannot forfeit option money for a late payment
>
> 4. cannot increase price for requesting repairs
>
> 5. cannot make optionor waive rights to repairs or other liabilities
>
> 6. Tenant/buyer can cancel contract for improper platting and
> landlord/seller will have to give ALL monies back
>
> 7. Landlord Seller cannot have any liens against the property
> except:
> a) a lien due to conduct of tenant/buyer
>
> b) agreed to by tenant/buyer to improve property
>
> c) a lien placed on property prior to lease/option contract,
> only if it
> was used to purchase the property(does this exclude 2nd’s and home
> equityloans taken out prior to lease/option contract?), is
> attached only to the
> property being sold, is less than the amount due by the tenant/buyer
> (throughout the contract), where the lienholder does not prohibit the
> property from being encumbered by an executory contract (does this
> mean if
> they prohibit contract for deeds, I can’t execute a
> lease/option?), and the
> lienholder consents to verify the status of the loan on request of
the
> purchaser and to accept payments directly from the purchase if the
> sellerdefaults on the loan (I guess the means we need to give the
> tenant/buyer a
> signed ATRI form?).
>
> 8. If there is a lien against the property prior to contract, then
> landlord/seller must do the following or give ALL monies back
> (includingrents):
>
> a) 3 days BEFORE the lease/option contract can be signed, notify
> tenant/buyer with a written notice disclosing:
>
> 1) The name, address, and phone number of the lienholder
> or, if
> applicable, servicer of the loan;
>
> 2) The loan number and outstanding balance
>
> 3) monthly payments of the loan and the due date of those
> payments
> 4) in 14 pt. type: If the seller fails to make timely
> payments to
> the lienholder, the lienholder may attempt to collect the debt by
> foreclosing on the lien and selling the property at a foreclosure
> sale.
> b) Place the following covenants in the contract:
>
> 1) A covenant that obligates the seller to make timely
> payments on
> the loan and to give monthly statements to the purchaser
> reflecting the
> amount paid to the lienholder, the date the lienholder receives
> the payment,
> and the information described by the above written disclosure
> statement.
> 2) A covenant that obligates the seller, not later than
> the third
> day the seller receives or has actual knowledge of a document or
> an event
> described in this paragraph, to notify the purchaser in writing in
> 14-pt
> type that the seller has been sent a notice of default, notice of
> acceleration, or notice of foreclosure or has been sued in
> connection with a
> lien on the property and to attach a copy of all related documents
> receivedto the written notice
>
> 3) A covenant that warrants that if the seller does not
> make timely
> payment on the loan or any other indebtedness secured by the
> property, the
> purchase may, without notice, cure any deficiency with a
> lienholder directly
> and deduct form the total outstanding balance owed by the
> purchaser under
> the contract, without the necessity of judicial action, 150% of
> any amount
> paid to the lienholder.
>
> 9. Failure to perform means returning ALL monies paid (including
> rentpayments — tenant/buyer lives for free if you make a
> mistake… i.e. 12
> point type) PLUS the value of any improvements made by the
> tenant/buyer(with or without landlord/seller permission). So if
> your tenant/buyer built
> a fence without you knowing, and you mess up and make one small
> mistake…you just bought a fence!
>
> 10. Seller is not liable if a lien is placed on the property by
> someoneother than seller and seller takes all steps necessary to
> remove the lien
> has the lien removed from the property within 30 days of receiving
> notice of
> the lien.
>
> This applies to any and all contracts executed on or AFTER
> January 1, 2006

These are in effect on ALL lease/options including those less than
three years. If it is more than 3 years, then the entire bill takes effect
which even more bad news for the seller.

In that case, the tenant/buyer would have conversion rights meaning they
could, at any time, request the the lease/option be converted to a 30 year
fixed mortgage simply by delivering a promissory note that has their current
balance (price minus rent credits minus option consideration) amortized at
their current interest rate (0%). That’s right… If your lease/option is
more than 3 years, you just financed a home at 0% interest. You would be
required to give title at that time. If you don’t have title (lease/option
sandwich) then be prepared to pay all monies back. If the owner financed
sale triggers your due on sale clause, then pay off your note, or face
foreclosure (and the subsequent lawsuit and paying back all monies from your
tenant/buyer). Plus, there will be many more reporting requirements, such
as monthly reports showing your tenant/buyer how much interest they have
paid — $0.00. Failure to report is a $250.00 fine per month retroactive to
your last reporting date. So if you go 2 years without giving them a
report, or having a mistake in your report, you now owe your tenant/buyer
all monies paid PLUS you’ll owe the government a $4,800.00 fine. Nice, huh?
There are other reporting requirements, etc.

I guess you could take a home under a lease/option for longer than 3 years
and then take advantage of this law to force your seller into giving you all
your rent back or converting the lease/option into a 30 year fixed at 0%.
Seems pretty unethical, though. I’m sure also you would be tangled in a
legal battle as you are the “expert”.

But I’m pretty sure this law will create incentive for some unethical
investors to take advantage of sellers by signing long-term lease/option
contracts. Seems the legislature forgot that sometimes sellers are the
“consumers” needing protection as well.

Its not so much the reporting requirements that make this really difficult
for me to continue to do lease/options beyond this year, but rather the
problems this will create with the banks. The fact that I have to
essentially put my tenant/buyers in contact with my bank and disclose to the
bank what I am doing is enough to kill it for me. Especially when I own the
home sub2!!!!! I would essentially have to get the previous homeowner…
The person who’s name is on the loan… To sign an authorization to release
information for the tenant/buyer…. And each subsequent tenant/buyer.

I have a client who’d like to make an offer on a property in which the seller is attempting a short sale. The seller would like some language in the contract to protect against a 1099 and a deficiency judgment. Do you have any good language that I can add to my contract?

Darryl

ANSWER

Darryl,
A 1099, if one is issued, is issued by the lender. There is no way that a buyer can guarantee that the lender will not issue a 1099. I have heard of people putting such things into contracts, but I honestly can’t see what difference it would make given that the contract is still always between the buyer and seller and not with the lender, who is only agreeing to a reduced payoff.

It might be possible to ask the lender to sign a separate document stating that they will not issue a 1099 if the short sale offer is accepted. I would suggest not asking for this or telling the seller you would try to negotiate becasue this is risky because the lender will likely do whatever they want and such a request could gum up the rest of the deal.

Additionally, it is my experience that it is very unlikely and even unusual for a lender to go after a deficiency judgment even if they say that they will or might…

Phill