How to Sub2

Question

So, I've got a perfect opportunity for a Sub2 deal (the seller is totally on board), but I don't know what I need to do to make it happen. My local REIA said go talk to a lawyer, so I've got a few calls out.

Everything I've read reminds me of the South Park episode with the Underparts Gnomes:

Step 1: underpants

Step 2: ???

Step 3: profit

I'd really appreciate it if someone could let me know what to expect and/or what to look out for since the process details are rarely explained. Thanks in advance!

-Dante

Jonathan Rexford · Answer

Here is a little checklist that I did put together for what I use.  Their are a number of ways to take these down. I am just giving you my way.  I have been using it this way since 2001.

JR’S KEYS TO THE KINGDOM

BUYING HOMES “SUBJECT TOO”

• Sign A      Contract With The Seller Subject Too The Existing Mortgages.
• Collect      payment coupon and copy of mortgage and note if the seller has it.  If seller doesn’t have a copy of it then      request a copy of the note from lender.
• Have      The Seller Sign The Seller Property Disclosure Statement.
• Have      The Seller Sign The Seller’s Affidavit. (Same Name Affidavit) If They Use      Initials For There Name.
• Have      Seller Sign A Power Of Attorney And Have Your Trustee “Trustee      Authorization” Regarding Insurance And Taxes.
• Seller      Then Signs Seller Mortgage Disclosure Statement (Due On Sale Disclosure      Notice).
• Seller      Signs Letter Appointing Management.
• Seller      Signs Management Contract.  (Just      Keep This In The File)
• Seller      Then Signs Letter To Lender “Notification Of Establishment Of Trust” Hold      This Letter In The File.
• Seller      cancel insurance policy and establish a new policy as a landlord policy      naming the trust, trustee and seller ATIMA
• Have      Seller Sign The “Change Of Address” Form From The Seller’s Mortgage      Company Statement.
• Now      The Seller Creates The Land Trust, Which Will Own The Property (through      attorney)
• Seller      Signs Appointment Of Trustee. (You Or Your Appointee)
• Seller      Signs Appointment Of Successor Trustee. (You Or Your Appointee)
• Seller      Signs “Declaration Of Trust And Land Trust Agreement Naming Seller As      Beneficiary.
• Have      The Seller Sign The “Standard Warranty Deed” Before A Notary.
• Seller      Signs “Assignment Of Beneficial Interest And Quit Claim Of Land Trust”      Assigning Their Beneficial Interest In The Trust To A Personal Property      Trust You Create For This Purpose Or Any Other Entity That You Choose To.
• Seller      Sign The Authorization to Release and The “Estoppel Letter” This Is To Be      Sent To The Mortgage Companies To Verify All Balances.
• Before      You Invest Any Money Paying A Seller Or Bringing A Loan Current, Always      Get A Title Search From An Insured Title Researcher.  Verify That The Sellers Are The Proper      Parties And That No Undisclosed Liens Exist.
• Record      The “Standard Warranty Deed” Along With The “Affidavit Of Land Trust” As      Soon As Possible.

Jonathan Rexford · Answer

@Dante We close all the deals at a title company, that is owned by the attorney.  My attorney is just wanting me to take it straight into the Land trust that he creates for my purposes instead of doing it for the seller.  We have a friendly argument every closing.  He is right and so am I.  You just have to get comfortable with your own paperwork and the way you operate.  This is why internet/GURU paperwork is dangerous using it without having your own legal council looking it over and changing it to meet your needs.

Jonathan Rexford · Answer

@Luke Ward I wish that I did type it this morning for you all.  It was a cut and paste that I use with other people.  Like I said, their are several ways to take these down. Explore what makes you comfortable.

Dante Nava · Answer

@Jonathan Rexford THANK YOU! This is the MOST complete explanation I have seen or been given of how these actually work. I'm sorry it's taken me so long to get back and thank you!

When you do these do you use a lawyer for all of the documents every time or is this something you can keep in a drawer (so to speak) and recycle every time you do one of these? I really appreciate you taking time out of your day to post the answer above, hopefully this isn't taking advantage now.  :)  Thanks in advance!

-Dante

Dante Nava · Answer

So I need to go talk to a Title company, not a lawyer? Would they also have the contract I give to the seller? I've heard I should get a power of attorney so that I can work with the mortgage company.

The seller is just walking away. I'm helping her move, that's about it. As far as work, there is a little patching, painting and I'm going to close off a wall to turn a 2/2 into a 3/2. Those sell for $10-$20k more in the area.

Jonathan H. · Answer

@Andrew Syrios

Meant to tag you in the previous post, sorry for the delay.

Just trying to figure out how the investor protects themselves in these sub2 deals. I appreciate the help.

Jonathan H. · Answer

Hypothetically, if the bank did choose to foreclose, how does the process proceed - Any excess would go to the original owner in which the bank signed the original contract with?

Any amount above amount owed will be returned to previous owner; but if the sales price is insufficient to pay off the balance, how does the investor get their money out?

Who would be responsible for the judgement for remaining balance if the bank chose to file one, the original owner or investor?

Andrew Syrios · Answer

One, you want to make sure you have found a title company willing and capable of doing a subject to. Then really, the big thing is that you put "subject to existing financing" in the contract. And you need to get the payment and loan information so you can pay the lender. Just remember, that these are usually only helpful for properties that you can buy very close to the loan amount and that if there are a lot of repairs, you obviously can't get the bank to finance any of that. And of course, by doing a subject to, you have triggered the 'due on sale' clause and the bank can foreclose. I've never seen this happen, but it can, so you need to be cognizant of that.

The big thing is getting someone to trust you enough (and being trustworthy enough) that they will allow you buy the house while leaving them on the mortgage.

Jonathan H. · Answer

I would also love to see a "step-by-step" guide to this if some more experienced members wouldn't mind sharing their techniques...

How to Sub2

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