Closed the first Sub2!

[Christopher Morin]

Whew!  After a hectic 3 weeks getting ready for my first ever sub2 purchase, we closed yesterday!  

I used) documents that a local lawyer put together for me.   Took 3 hours of his time to put them together (8 pages of discloses and agreements)  so about $675 in legal fees (reusable!) plus the standard closing costs...  the plan is to flip this proprety, but it's got great hold and rent potential so I feel like I'm in a good place.

I survived, but i wanted to know how in-depth does everyone go at closing over the legal documents?   The seller and I talked through everything prior, and she had plenty of time to review the documents...  but I found myself going item by item at closing,  which got ackward.  It was difficult for me to explain some indemnification clauses, that are necessary but sound sketch when saying something to the effect of "this is so you dont sue me."

Having fumbled through it myself,  I'm interested to hear how others handle the flow at closing. 

[Brian Gibbons]

@Christopher Morin

Congratulations on your subject to deal being completed and congratulations on investing in reusable documents from your attorney

Regards to closing I generally only do the deed signing at escrow and have the seller sign documents at a notary somewhere outside of escrow

I just tell the seller we are going to sign over everything except signing over the deed, and once we have all the other documents signed, we will set a time to go to the title company to finish the deal

I presume you're doing a title search and making sure the title is clear of liens?

@Bill Gulley

[Christopher Morin]

@Brian gibbons Yes, we conveyed via special warrantee deed and the title company provided title insurance in the amount of the adopted loan amount. 

  The interesting thing about this deal was that the numbers didn't work, until the seller agreed to bring 9k in a principle reduction payment in order to reduce the remaining loan amount.  The seller is current on payments also, and just wants nothing to do with this home anymore.  The loan has about 20 of the original 30 years left,  but interest rate is a little high (6.1%) so it may be worth it to refinance if we end up holding it.

[Bill Gulley]

Yes, congrats on your deal!

Sounded like you were trying to close the transaction, hope not. When I have off shoot deals, creative stuff, I get with the closing agent and go over things with them, they get it! They explain things in settlement. I may do that in negotiations, and I have closed transactions, but not when I have an interest in them, not a good idea.

A better breeze over with an indemnification agreements is saying "each of you agree to hold each other harmless with respect to further claims made by either one of you with respect to this agreement and agree to abide by the terms made" any good hold harmless agreement can't just be one sided, what's good for the goose is good for the gander.

Let you closing agent answer questions, they know how to handle objections and explain things simply, that's what you're paying them for too.

Again, congrats on your deal......the next one will be easier!  :) 

[Account Closed]

Great, congratulations. What documents did your lawyer suggest to use?

[Christopher Morin]

@Account Closed Not very many forms at all. The deed, the settlement statement, a few forms and affidavits the title company wanted for their own protection, plus my custom drafted 2 documents. First one was a set of disclosures, the second was the financing agreement. It took a fair amount of research to figure out what I needed to ask the attorney to draft for me, so I'll give a quick overview of the clauses if you are doing research yourself. This in no way constitutes legal advice, and is merely a summary of my process leading up to the closing. I'm open to feedback from some of the more experienced folks

The contract was a standard contract just had some special wording about how the deed was conveyed and a few details that ended up on the financing agreement. I can post more what I used if someone wants.

We handled the principle pay down after closing. I just logged onto her Wells Fargo account and made sure that there was a confirmed paydown of $8,814, and told her without that then I wouldn't start paying. We also handled insurance after closing, adding me as co-insured. I know some say this is a bad method, but the seller and I have a good relationship and I'll be placing a standard policy in a few months, with her being named additionally insured.

Financing agreement

1) Stated the document would survive closing and not be merged into the deed. We then names the mortgage by date, lender, original amount, and then the recording book #, page #, and date of recording.

2) The seller would reduce the remaining loan balance, per a payoff dated the same as the closing date, to 89,000.

3) the seller, at closing, would release all rights to the escrow account, and that any refunds must be turned over within 3 days.

4) the buyer would purchase hazard insurance, that insurance refunds in the seller's name would be turned over to the buyer, and that the insurance could be paid from the the seller's escrow account. Also that the seller consents to being named co-insured, additionally insured,

5) the buyer would pay the property tax every year

6) the buyer would pay principle and interest equal to XXX, due on the 1st of each month, directly to the lender or through a loan servicing company. The seller agrees that they may not claim any interest payments beyond closing date in the amount of ___ for the tax year 2015, and that they will forward all 1098s received within 10 days.

7) the buyer is under no obligation to pre-pay or refinance the existing loan in any circumstance.

8) seller agrees not to enter into any agreement with the lender dealing with payment of principle or interest

9) the seller releases all financial interest in the property, not limited to insurance payouts, refunds, escrow accounts, future sale of the property, etc...

10) that no part of the document will be construed as a personal liability to the lender, and doesn't modify the seller's obligation to the lender.

11)indemnifications, severability, governing bodies, heirs, singular and plural, voluntarily and knowingly, blah blah blah.

Disclosures

1) Defined the exact nature of the transaction, purchasing the property, not an assumption, lender does not consent, etc...

2) We stated that the lender WILL find out, and the risk was not in discovery, but if they decided to accelerate the loan.

3) That the buyer could lose all accumulated equity if unable to prevent foreclosure

4) That without a formal payoff that the Buyer is taking risks that the loan amount is what it appears.

5) That the seller's credit rating could be affected by a payment default

6) That, in the event of foreclosure, if the seller wanted to protect their interest in the property they would have to pay the full amount to the lender, that that a foreclosure by the lender would leave the seller with no recourse against the property.

7) That the seller may be held personally liable any moneies resulting from a deficiency judgment if the lender didn't recoop their entire balance at foreclosure sale

Along with some other legal mumbo.

@Bill G. Thanks! I think that would be a good method. To be honest though, this particular closing agent was a little weirded out by the process. I don't know if they would be comfortable going over that document at closing.  I think it would be worthwhile to find one who is.

[John Herrick]

You've done a good job of covering the basics.I use a lengthy and detailed 8 legal page agreement that I developed for use primarily as a seller when a sub2 was involved.  As a SELLER of an already sub2 property, you should cast the sub2 as a no-equity wraparound note and deed of trust, or get a separate guaranty secured by deed of trust. That way, any breach of the terms of the agreement allow you to immediately foreclose. It also locks in control over the jpayment servicing arangement so both buyer and seller can know that payments, taxes and insurance are being handled correctly. That can allow you to protect a prior seller/note maker in the event of default. 

You should obtain a power of attorney authorizing you to handle alll matters with the underlying lender if/when they discover. That protects you from an uncooperative mortgagor at some time in the future.

[Christopher Morin]

@John Herrick

I think you're right on the money John.  If I keep the lien in place when I sell, then a Wrap Agreement w/ security instrument is exactly what I'd use.  We didn't create any sort of security instrument for the seller in this case, but if I've heard @bill G. correctly on previous posts, this doesn't eliminate their ability to foreclose if I don't pay, just possibly lengthens it.  I assume the current seller would have to get a court judgment for breach of contract, and in the same ruling that foreclosure was a justified action to take?  Could they rule FJF in the same court, or would the seller have to get the contract judgment, and then apply to foreclose separately? 

The PoA for if/when the lender discovers the transfer is a good point.  I can only imagine the difficultly in a bank refusing to talk to me and I would be forced to heavily involve the seller, who's stress level would likely skyrocket.  I had tried to avoid it due to the conflicting interests argument, but maybe that's just a risk worth taking.

One concern the seller specifically had was what if something happened to me while I held the property.  I told them they could immediately seek to get the property back via foreclosure once the contract terms were breached, but the seller was a little anxious about this.  I suppose some sort of Trust would mitigate this concern for them, but I don't know if that is the route I'd want.

[Account Closed]

Thanks, great info. I will take note, I appreciate it.