Purchasing "subject to" protections for buyers and sellers

[James W.]

I’m looking at purchasing a property in Minnesota and it may be possible to buy it subject to the existing mortgage. I have done a bit of searching about this on here and have not been able to find a consolidated thread on the advantages/disadvantages and protections needed for both parties in the process.

The property is unique and I would plan to have it as a long term rental as it provides good cash flow and will be even better if I can add an additional unit as planned.

I am looking to possibly do this on a small multi family property.  The owner purchased it in 2006, has a 1st mortgage between 3-4%, and a high rate 2nd mortgage on the property.  The property is in pretty rough shape and the owner would be selling it to me for his existing obligations on the property at a loss of around $60k.  We discussed me paying off his second mortgage, compensating his realtor and taking over his 1st mortgage.  The owner is 80 years old and just wants to get rid of it without needing to bring cash to the table.  

I am qualified for conventional financing, but think sub 2 has the following advantages in this case

1. I would probably pay $20-25k less down for the property by paying off his second and taking over the existing financing.  The property needs repairs so it would be better if I could have less in to put more towards repairs.

2. The existing mortgage will probably save me over $30k in comparison with my new terms factoring in the remaining maturity with the existing financing and the rate I would pay with a similar maturity.

3. I would be able to avoid standard financing costs/closing costs for the deal-not a huge deal.

4. I could probably close faster

5. If I do not refinance down the road to conventional financing, it will eventually allow me to purchase one more property in this manner before hitting the limit of 10 with conventional financing.

I have never done a subject to deal before so I am not exactly sure how it will work on both ends.  Before getting too far in, I would validate the existing obligations and contact a local title insurance company to get a title policy on the property.  If things look ok, my thought is to proceed with the following to complete the transaction:

1. Contract for deed discussing the terms signed/notarized by both parties.  I am assuming I would file this with the county but would like to get thoughts on if I should file right away or not.  

2. I could possibly take over the insurance the seller uses, but he is paying too much so I would look at getting my own insurance with us both as insured parties and the bank as the loss payee.  Think there might be a problem with this if the bank gets the new insurance binder?

3. I would pay a local RE attorney to draft a contract protecting my interest in the transaction.  

4. I would look into getting a signed RE POA for the property so I can act on behalf of the current owner. Is this needed?

5. I would make the payments directly to the mortgage company and would either have the statements mailed to me or see what I would need to do to get online access to review the account.

In looking online, I see a few other strategies such as deeding the property to a land trust where the buyer would be the beneficiary and some people discussing the transaction with the bank and being open about it.  Below is an article that I thought covered some most of the bases, but I have no way of knowing if it is good advice or not since I have not done it.  

http://www.groco.com/readingroom/realestate_subjec...

Any advice on doing the deal subject to or can you think of anything else I should consider in relation to buying this way?

Does anyone have some example forms or documents I might want to use for this process if it works out?

Thanks!

James

[Robert Gilstrap]

@Franklin Romine  Being an "additional insured" is worthless if you own property on a  subject to. That only gives you legal protections in the event of a general liability claim. If the house burns to the ground you need to be a "named insured" on the insurance policy.  To do that you just need an insurance person who understands subject to's. Keeping a policy in the sellers name is not smart since it doesn't cover you the owner.  If you have trouble figuring out how to do insurance call me.