The life and times of an Arizona Investor

This will be my personal journal to document my failures and successes during my real estate experiences in Arizona. All stories, thoughts, and successes will be documented..

Monday, February 28, 2005

Buying strategy of the Month - Sub to

What is the best way to buy many, many, houses without using any of your credit? You don't need much CASH, and you can close in a matter of hours or days!

Its one of the best techniques that savvy investors are using today. Its called buying properties sub to. More specifically, its buying a property subject to the existing financing. So, what does that mean? Let me explain.

The details: So Sally seller has a house that she owes 80k on an underlying loan. Its worth 100k. She is a motivated seller and can't make the double payments. She is willing to trade her equity in the house to get rid of the problem. You sign a purchase agreement to buy her property subject to her existing financing. So, she will deed (warranty deed) the house to you and in return you promise to make her payments for a finite time. The key here to understand is , your not cashing her out of her existing loan, you just taking over payments. Its as simple as that. There's several exit strategies for this type of transaction, but the most common is sell the property via a lease option (L/O) or land contract. Sally the seller will be cashed out in the future when the l/o tenant buyer is ready to purchase the home and gets new financing. In Arizona, L/O's are very popular. Land contracts are not..

The positives:

1) You now own the house because she deeded the property to you.

The negatives:

1) All new loans have a clause called the Due on Sale (DOS). This clause says basically that if you transfer the property to another person or entity, the banks have the right to call the loan due and payable immediately. So technically the banks could call Sally and say that she needs to pay the 80 k in 30 days. At first, this sounds scary to beginning investors, however, at this time the number of DOS being called is very low. Use your common sense, investors buy property every day across the united states using this technique, if banks are using the DOS, it would be plastered in every RE forum!!

Bottomline, with your first deal, use an RE attorney!

2) The gurus say that subo is less risky than a conventional loan because your name is not on the loan. However, understanding the mechanisms of subto , you don't have complete control of the situation, so the reality is subto is more risky IMHO. I can think of several examples that could screw up the deal. i.e. Sally gets impatient after two years and forgets how subto works so she calls her bank to see if the loan is paid off. She rubs the banks the wrong way, the DOS is called, and you have two pissed off parties (seller & tenant buyer) that want to sue you.

I've done sub to before and it worked great. I would like to do more, however, my criteria is 80-85 LTV so its been hard finding these.

Below shows a good description of what paper work in necessary to to a sub to. Note that the land trust is not mandatory, however, it the land trust provides an additional anonymity.

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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 CYA 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.

3. 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.

4. 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.

5. 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.)

6. 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.

7. 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.

8. 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 ad 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.

To fully understand any purchase method, I highly recommend buying a course that "absorbs" you in the process.

Although I don't own this course, its been highly recommended and its affordable. Check it out!

http://www.rementors.com/real-estate-investing-courses.shtml

Good investing!!
|| Bginvestor, 7:24 PM

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