Mechinic's of a Sub2. Who makes the actual Mgt Pymt?

[Kelly Welton]

Do you recommend setting up an escrow account to protect all parties? can this be done or how do you handle the age old question concerning the mortgage payment.

[Brad Simmons]

Jamie,

you have some details correct and some mixed up a bit - let me help.

There are 4 components to a property - let us use a single family home as an example.

There is the house - bricks and sticks.

There is the deed - who owns the property

There is usually a note and mortgage - the Note is the promise, the Mortgage Secures the promise

There is occupancy.

Most people think these are all in the same and sometimes they are - in our instance, they are not. 123 Main St is the physical address. Jamie owns the house (with a lien on it), Darrell holds the note and mortgage, Kelly lives there. OK, got all that? I am going to use you in the example if I may.

Now on to the Sub 2 deal:

Jamie is late on his house payment 30 days - he is in what we call Pre-NOD (Notice of Default). He goes, 30, 60, 90 days and on the 91st day, Darrell files a Lis Pendens (lawsuit pending). That document is filed in the Courthouse of the county where the property is. It is now public record.

Kentucky, where I am is at least a 6 month state - others are different, GA and TN are VERY fast, then there are bank back logs, sheriff backlogs, etc.

So anytime between the time that I was alerted via public record - when the LP was filed - and the date of sale, I can take the deed, make up the back payments, negotiate a short sale, list the house for sale, rent it out and collect rents, etc, etc. BTW, I also do not need a Real Estate License at this point, as I am not managing property for someone else, my company actually has the deed to the house - something to keep in mind.

UNLESS Jamie files for Bankruptcy Protection Chapters 11 or 7 typically for a person. Then it is illegal to transfer title/deed (that's where you were going with that). Even if you get a deed a day or a week ahead of the borrowers' filing, you run a risk of the BK Trustee reversing the transfer via Fraudulent Conveyance - in other words Jamie was just trying to "hide" his asset.

Something you want to stay far away from. Can you imagine getting a house sub2, unselling it - or even lease optioning it - with a promise that your people will own it someday - and the transfer get unwound in the BK - you got yourself in a mess that will cost you more blood, sweat and tears to fix - ALWAYS stay away from a sub2 with a potentially BK borrower.

OK, now all that stuff - not until after the gavel goes down at the Courthouse steps does the bank "own" the house. Up until that point, then lender simply has a lien on the property - and the borrower may do whatever he deems fit with the property.

Once the gavel goes down - assuming 91 days + 6 months in our example, then the Bank gets what is called a Trustee's Deed or Master Commissioner's Deed - which wipes out all debt - 2nds, 3rds, etc.

At that point, you are dealing with an REO (Real Estate Owned) or sometimes called OREO (Other Real Estate Owned) - and when you call the bank, you want the Special Assets Dept. - not Loss Mitigation. Sometimes you can get a better deal in the REO Dept than you can with a short sale - and it is usually a heck of a lot less work. :-)

I hope this helps -