Sub2 + Wrap = Good Idea?

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Sub2 + Wrap = Good Idea?

David Weiss

Investor · Dallas-Ft.Worth, TX · Member since 2013 · 74 posts · 18 votes

I have a question for investors who are experienced in both "Subject To" and "Wraparound Mortgage" deals.

I have a guy who wants to mentor me in the following investing strategy:

- Put a house under contract for a 90 day option to purchase subject to.

- Find a buyer interested in an owner-financed deal.

- Purchase the house Sub2.

- Sell the house via a wrap.

Mr. Potential Mentor says that because you're offering owner financing you can typically boost the sale price 10% and the interest 2% (assuming the original owner had an average flat rate) and collect 10% down, creating an early payday plus pretty good passive income.

If you can't find a buyer within your option period you walk away, making the risks comparable to wholesaling. It's the buyer's house so there are no landlord headaches. If the buyer defaults you can foreclose, rehab and resell or return title to the original owner, with reselling being preferable both ethically and financially (carry the costs and sell the house twice, doubling the DP's and extending the passive).

There are obviously several legal considerations, but the potential mentor's partner is an experienced and highly regarded RE attorney so I feel comfortable there.

Lastly, the potential mentor doesn't want any payment up front. His compensation will come in the form of profit-sharing.

It sounds like a pretty sweet deal....

My question to those of you who are experienced with these forms of creative financing is this:

Assuming I can avoid buying bad properties and assuming the lawyer competently covers the legal bases, are there any risks to this strategy not captured above? Or does this mentor and his strategy seem like a pretty good deal for a newbie investor?

Thanks so much for your time, insights and advice.

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Jon Holdman

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

13y

Originally posted by David Weiss:

Jon, could you please provide some detail around the risk associated with rising interest rates? Since the bank has no relationship with the new owner/occupant, I am not understanding how exactly the bank could force the o/o to refinance. And if they can, what would that do to the wrap?

They can't directly do any thing with the wrap. They can, however, call the original loan, the one you bought the property subject to. If they call the note, it will have to be paid off. If it can't be paid off, they will foreclose and they will take then house. That means your buyer will lose the house even if they are making all their payments.

Even though you're the one that bought it subject to, you cannot refinance - you don't own the house! Now, if you have cash, or can get cash, you could pay off the original lender. Then you could continue to hold the wrap note. But if you cannot then it will be up to the end buyer to refinance. That would allow them to pay off the wrap note to you and then you would use that money to pay off the underling loan.

The interest rate risk comes if rates pop up. The risk will depend on the rate on the underlying loan. If its at todays 3-4% rates, the risk is higher than if its at, say, 6% or 7%. Back when I first started looking at buying a house, about 1983-4, OO rates were, hold on to your hat, 15%. Even when we finally bought a house in 1987 we paid 9% on a owner carried 15 year note and thought we had a great rate. If rates jump up toward 9%, rest assured that banks will try to figure out how to get 3% loans off their books. Calling the notes on properties sold subject to is an easy and totally legal way to do that.

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Matt Devincenzo
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
13y
You're buyer is a retail buyer correct?

I don't know that I would be comfortable with passing on a potentially risky proposition of a sub2 to a retail buyer. As an investor it's one thing to take on a risk and understand the possible implications, as a retail buyer I think you'd be hard pressed to make the case to a judge in the event of something going wrong that they were fully aware of the potential for an issue to arise.

It sounds like maybe you would be the one holding the wrap and selling on a CFD or option of some sort so you are still in the transaction until the underlying wrap is paid off. If that's the case and you have the ability to pay the underlying note in the event of something going sideways, to protect your buyer then maybe it would be ok.

Hopefully someone with more experience in this will chime in. I'm wary of some of these type deals not because of the risk for you but for the retail buyer who doesn't fully understand what they're doing. As well as it's not the potential to lose an asset but to lose their home for them.
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Shannon Grace
Wholesaler · Austin, TX · Member since 2013 · 27 posts · 10 votes
13y
Before you do anything like this, contact a really good real estate attorney who's used to doing this, and pay them. Talk to them about what you are planning to do, and they will walk you through the pitfalls.

You might be able to avoid paying the mentor (sounds like something Phil Grove suggests) if you go that route. Phil's a decent guy, but in my (admittedly, I'm a tightwad) opinion he charges too much for his courses and mentoring. I guess the real thing is he charges too much for my comfort for the mentoring and courses, but having spoken with him about subject to's a while ago, the man certainly knows his stuff.

Still, I'd have a nice, long, professional conversation with an attorney before moving forward with this, especially since the SAFE act took place, which changes all kinds of rules around mortgage origination with retail properties.
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
13y
1) You and the end buyer have the risk of the underlying loan being called/defaulted on. Do you just say "oh well it didn't work out" to the end buyer, and keep his down payment? I don't think you have an out with the end buyer
2) If you buy sub2, and your end buyer defaults you don't get to just "give the title back" to the original seller.

There is a lot less risk and liability when you're just "splitting any potential profits", and telling people to go jump in sub2/wrap situations.

I have a similar mentoring program. I tell you which horses to go bet on, and if you win, we split the profits.
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David Weiss
OP
Investor · Dallas-Ft.Worth, TX · Member since 2013 · 74 posts · 18 votes
13y
Thank you everyone so far for your replies.

Matt Devincenzo,

1) You are correct that the proposed model sells the house to an owner/occupant. Your point about a judge's attitude towards this arrangement is well-taken. My prospective mentor's partner is an experienced RE attorney and I will investigate what measures are in place to help mitigate this risk before getting involved in this model.

2) I would remain in the middle of the arrangement and intend to set aside funds to deal with such situations. The possible mentor is also a hard money lender so access to funds will not be an issue. I will protect my clients; the only good business deal is one where both parties benefit.
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David Weiss
OP
Investor · Dallas-Ft.Worth, TX · Member since 2013 · 74 posts · 18 votes
13y
Shannon Grace,

1) Your point about the financial advantages associated with "going it alone" (after consulting with an attorney) is well-received. It is something I am considering. That said, the less success that comes out of a profit-sharing mentorship, the less it costs me. I kind of like the idea of having a mentor whose financial success from the arrangement is directly tied to my financial success. I haven't made a final decision yet. Phil Grove is not my potential mentor.

2) If you were in my shoes, would you still get an independent attorney's opinion, knowing that your potential mentor's business partner was a RE attorney and investor with over 25 years of experience? If so, why?
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David Weiss
OP
Investor · Dallas-Ft.Worth, TX · Member since 2013 · 74 posts · 18 votes
13y
Wayne Brooks,

1) The prospective mentor's agency has completed over 1500 sub2/wrap transactions and only 3 have had "Due on Sale" clauses called. We will have a loan servicing company handling the payments and if the buyer defaults our most likely course of action would be to carry the house and resell it since it's both ethical and financially advantageous. Full transparency around these matters will be provided prior to inking a deal. Could you share any further ways the deal could go sideways for the seller?

2) Can you explain why it would not be possible to deed the title back to the owner? Or did you simply mean it's not ethical? (For the record I happen to agree that in most situations it would be.)

3) I can see where a newbie investor like myself might be able to benefit from your program. However, the knowledge-sharing, access to an established brand, legal oversight and ready access to local advice and emergency funds associated with my current offer are significant non-financial considerations.
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
13y
David, when you buy the house sub2, you're obligated. The seller doesn't have to take the house back, and take you off the hook.
Your mentor may be/have access to a HML, but most are going to lend on a 90-95% LTV, which is what you'll need to get bailed out. Your mentor's attorney will be protecting the Mentor first, anyone else a distant second. If the mentor were actually going on title and also shared in the potential liabilities, Mabye it would be safer.
Absolutely spend a couple hundred bucks sitting down with a RE attorney.
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David Weiss
OP
Investor · Dallas-Ft.Worth, TX · Member since 2013 · 74 posts · 18 votes
13y
Wayne Brooks, thank you for taking the time to provide your follow-up.

I'm uncertain how to reconcile your statement about not having an exit strategy with my research into Sub2's. The defining characteristic of Sub2 financing is that the investor takes title while the seller retains liability. Specifically and explicitly, the investor has no legal liability for paying the debt.

If I were unable to take on those payments in the case of buyer default, I would argue that the ethical thing to do would be to deed the title back to the seller (for free). I wouldn't have to, but if I do nothing then the seller would be forced to either pay for a house he no longer had title to or not pay and get a foreclosure on his credit history. That's the worst-case scenario for him. If the house was deeded back to him he would be in a significantly better position, if not necessarily a good one.

Of course, the best thing to do is to make sure the above situation doesn't develop by keeping enough cash on hand to carry the house in case of default until it can be resold. That's the only way to really do right by the seller.

Thank you for sharing your perspective. Your comments about getting a second RE attorney to review the business model seem to be seconding Shannon's thoughts and both are pretty compelling. I will schedule some time with an attorney.
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David Weiss
OP
Investor · Dallas-Ft.Worth, TX · Member since 2013 · 74 posts · 18 votes
13y
PS: My potential mentor would have me doing business as an affiliate of his company for the duration of the mentorship. Any deal struck would be in the mentor's name; my financial upside comes from profit-sharing. Under a different scenario I would agree that there would be some serious concerns about the attorney's motivation level.
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Shannon Grace
Wholesaler · Austin, TX · Member since 2013 · 27 posts · 10 votes
13y
David, if I was in your shoes I'd pay for an hour or two of the attorney's time and talk to him on my own, and I'd also do some digging on said attorney- see if there are any complaints filed against him, check his standing with the local Bar association, etc.
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
13y
I think you need to seriously consider getting your own lawyer and having a discussion. Especially about the SAFE act, which I think would apply in these sort of deals.

The big risk I see is that interest rates start to rise. I don't know when that will be, but I just don't see rates staying this low forever. My first rental was at 7% and that was only 2008. Subject to deals appear to be rarely called at this time. But if rates go up and banks clear their backlog of foreclosures, I suspect we may well start seeing subject to deals called. That's the biggest risk I see with these deals.

If rates rise, and the loan gets called, your buyer has no choice but to refi. If they can't or don't want you (as far as they're concerned, they have a locked in loan), then they will lose the house with no fault of their own. You should have disclosures out the wazoo making it very clear this is a very real risk for the buyer.

You will need to be prepared to step in and make the payments if the buyer defaults. You're the one holding the wrap. If they default, you will need to foreclose. That may mean making payments for a few months while the process rolls on.
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David Weiss
OP
Investor · Dallas-Ft.Worth, TX · Member since 2013 · 74 posts · 18 votes
13y
Shannon Grace, I will check with a separate attorney. I have already researched the potential mentor and his partner the attorney and everything I turned up was positive.

Jon Holdman, the SAFE act does apply and deals are SAFE act compliant. I know the mentor's business has disclosures out the wazoo already in place for both the seller and the buyer. The need to have funds to foreclose, rehab and carry until resell is understood.

Jon, could you please provide some detail around the risk associated with rising interest rates? Since the bank has no relationship with the new owner/occupant, I am not understanding how exactly the bank could force the o/o to refinance. And if they can, what would that do to the wrap?

Thank you both for sharing your thoughts.
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
13y
Originally posted by David Weiss:

Jon, could you please provide some detail around the risk associated with rising interest rates? Since the bank has no relationship with the new owner/occupant, I am not understanding how exactly the bank could force the o/o to refinance. And if they can, what would that do to the wrap?

They can't directly do any thing with the wrap. They can, however, call the original loan, the one you bought the property subject to. If they call the note, it will have to be paid off. If it can't be paid off, they will foreclose and they will take then house. That means your buyer will lose the house even if they are making all their payments.

Even though you're the one that bought it subject to, you cannot refinance - you don't own the house! Now, if you have cash, or can get cash, you could pay off the original lender. Then you could continue to hold the wrap note. But if you cannot then it will be up to the end buyer to refinance. That would allow them to pay off the wrap note to you and then you would use that money to pay off the underling loan.

The interest rate risk comes if rates pop up. The risk will depend on the rate on the underlying loan. If its at todays 3-4% rates, the risk is higher than if its at, say, 6% or 7%. Back when I first started looking at buying a house, about 1983-4, OO rates were, hold on to your hat, 15%. Even when we finally bought a house in 1987 we paid 9% on a owner carried 15 year note and thought we had a great rate. If rates jump up toward 9%, rest assured that banks will try to figure out how to get 3% loans off their books. Calling the notes on properties sold subject to is an easy and totally legal way to do that.

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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
David, I had to hold off commenting here for a few minutes to cool off!

First, just because someone has a law degree and in good standing with any Bar Association absouletly does not mean that person is not a low life chiseling, greedy, unethical, scoundral using thier preceived expertise to guide others into acting for thier benefit. If what you say this "mentor" said is true, I believe you found just that sort.

Next, consider that with your lack of understandings this guy is in a position of influence over you and what he is telling you is "ehtically and financially" beneficial goes completly unchecked without challange as it plays on your basic desire to profit.

I do see where he can be insulated from what you may present to a seller and simply closing the transaction in his entity.

I can also see where his ability to finance or payoff an underlying mortgage can save his (and possibly your) tail if any loan is called due. I would suggest that his putting money out would only be done at his advantage and not so much at yours. If he decides the deal isn't that great, his exit is to walk away and dump the property back on the seller from what you mentioned.

This "mentor" according to what you say, is saying that it is ethical to lead a seller to believe that his property was sold, regardless of what you may disclose, the seller will assume he is out of the property and will rely on his buyer to perform, but that it is ethical to simply walk away from that seller. Then to say all you need to do is deed the property back is total quackery! The seller does not need to accept the deed, I'd sue for damages and I wouldn't care in the least bit that my buyer was an attorney, in fact, that would just fuel my cause for a seek and totally destroy mission against such a buyer! I've chewed'em up and spit'em out before.

In what world does a seller benefit from getting his property back that had tenants in it? Might be beneficial if you put down enough money to cover damages, but I really doubt that is the plan.

What I'm reading here is that you may be somewhat inticed by this offer and you appear to be defending this "opportunity", I am glad to see you say that you will get advise from another attorney, hopefully they will not know this mentor or have any affiliation with him, but don't expect an attorney to trash another attorney. I have an attorney in the DFW area if you need a name, he's a good RE/civil type.

You might think about this too, that if your business partner advocates just walking away from a deal if it doesn't work what keeps that partner from just walking away from you and dumping you in some deal? The fact that this guy is an attorney means he can probably clean your clock if it comes down to it.

I'd guess that what might be structured for these mentored transactions would be compliant, to a point. Texas doesn't like installment sales, keep that in mind. Contract For Deeds was mentioned above I believe, they are not allowed in Texas.

David, do you have any formal training in law and compliance issues? Who is saying that buying sub-2 and selling on a lease-option or other instament is compliant with the SAFE Act? It might be, but I doubt it as that Act includes "any transaction intended to circumvent" the intent of the Act, that is a very widely cast net. An attorney may have standing in his arguments as to complaince, I can tell you regulators don't care, they will be looking at the big picture and the intent behind the transactions, not so much to a sentence as a wiggle room ploy or some disclosure to avoid responsibility and again, he may be able to save his tail, but can you? The CFPB will be looking at the big picture as well.

I suggest you do some reading here on BP as to the issues of the due on sale and risks of seller financing and option arrangements. Sounds like you could be buying a load of trash talk to be a birddog.

My comments are based on your presentation of the methods or strategies to be employed, if they are correct my comments are cast in stone, if I'm under some misconception, please explain and we can address any issues.

Good luck! :)

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David Weiss
OP
Investor · Dallas-Ft.Worth, TX · Member since 2013 · 74 posts · 18 votes
13y
Jon Holdman, thank you for expanding on your thoughts. If anything I wonder if you aren't understating the risk. It is inevitable that rates will rise and it is equally inevitable that banks will eventually eliminate their shadow inventory. I agree that at that point banks will have a financial incentive to activate their Due on Sale clauses, because they're making no real return on a 3-4% interest loan.

This could be a deal-breaker for me. I will check to see if my potential mentor has considered this and if so what their response is. If it's "at that point we walk away" then I'm out. I'm an investor, not a predator.
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David Weiss
OP
Investor · Dallas-Ft.Worth, TX · Member since 2013 · 74 posts · 18 votes
13y
Bill Gulley, thank you for taking the time to write up your response. It is clear that you are highly motivated to help a newbie avoid mistakes, and I am very grateful for that.

I would welcome your recommendation for a DFW attorney.

I've spoken to the research I've spent investigating my potential mentor's firm, the numerous disclosures, the attention to compliance with SAFE and other regulations, and I'm not certain where you read that my mentor thinks it's ethical to mislead the buyer or seller. We can agree to disagree on these points. Contracts for deed are not involved.

I would be happy to explain why taking title back to the house if the owner/occupant (who is in no way a tenant) defaults and the investor can't make payments would be better than not taking title back. Without title, the original seller has no options but to suffer eventual foreclosure or make payments on a house they no longer have title to. With title, the seller could potentially avoid foreclosure by finding a different buyer, or refi the house, or deed the title back to the lender in lieu of foreclosure.

It is not my intention to "defend the deal". I am seeking additional insights from people with hands-on experience in Sub2 or Wrap deals (or at least a deep understanding of them) so that I can make an informed business decision about incorporating this strategy into my business. If I seem defensive from my habit of asking follow-up questions or responding to voiced concerns with additional information about the deal, my apologies. I value everyone's insight.

To refocus this conversation, if we assume the mentor is on the up-and-up and the deal is compliant with all regulations, in what other ways could a Sub2/Wrap deal go sideways, besides a buyer defaulting and the need to have access to funds to carry the house until a new buyer can be found? Jon Holdman's considerations are a great example of what I'm looking for.

Bill, I would be grateful if you sent me your attorney recommendation via PM. :)
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Account Closed
Real Estate Investor · Member since 2012 · 189 posts · 32 votes
13y
Originally posted by David Weiss:
Wayne Brooks,
1) The prospective mentor's agency has completed over 1500 sub2/wrap transactions and only 3 have had "Due on Sale" clauses called. We will have a loan servicing company handling the payments and if the buyer defaults our most likely course of action would be to carry the house and resell it since it's both ethical and financially advantageous. Full transparency around these matters will be provided prior to inking a deal. Could you share any further ways the deal could go sideways for the seller?

Hi David,

As part of your DD w/your potential mentor's company and credentials, have you had the opportunity to review the authenticity of these over 1500 sub2/wrap transactions as well as the circumstances for the 3 that had DOS called? Also, have you had the chance (and permission) to confirm and correlate any of the transactions (if even only to do a sample spot check) with the loan servicing companies that have handled those transactions that have gone on default?

I suspect that these types of claims can easily (and usually) go unchallenged by most when taking a "mentor" up on their offer to provide guidance.

While i'm not privy to the terms of this mentorship, I'd also be curious (if i were in your shoes) what's in it for him that he would spend the time to mentor you. However, if he's offering this mentorship on a 1:M (one to many) ratio to mentees, that would answer part of my question. Short of having a website and billboard or infomercial up to solicit his mentorship services, I'd definitely take into consideration exploring his motivations/benefits/risks from his side of the field. It can sometimes prove to be illuminating having an idea where the other guy is coming from - providing more leads and questions to consider for your DD on him/his company.
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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Kelvin, since this is an affiliate originator of deals for the other entity, I don't think it would be appropriate (nor allowed) for originators to be anywhere near closed files and servicing. My loan originators weren't unless 1. it was thier file that was originated and 2. there was a new business activity. There are dual control issues and reasons for the seperation of duties. Good idea, but I'm sure the mentor would baulk at such requests. Now, if David were to be an employee, in that office and active in the servicing side time could tell where things were at but that isn't where we are.

David, pretty much what Kelvin quoted you saying in his post is where I initially targeted the formation of my opinions, perhaps wrongly, but I'm not saying I'm incorrect in those assumptions. None of it was to imply that you were doing anything unethical or otherwise. It just put me in a bad mood thinking a mentor attorney was doing the old sell'em, kick'em out and repeat thing.

On to your interests, not so much to the mentor, who could be on the up and up.

You mentioned that you have ownership without the liability of the underlying mortgage, that the seller retains liability. This is guru mumbo jumbo, you do have an obligation to pay the amounts due to the seller. While some screwy agreement could be drafted to avoid requirements as to liability, if there were, such would not be customary and not being customary adds a predatory flavor. A sub-2 buyer is obligated to pay amounts due and that seller certainly has recourse for damages against a buyer who defaults.

The ethical attitude and approach to take is to agree to buy and do what is agreed, buy it! Next, selling on a future installment wrapping the sub-2 can be done. That buyer needs to be qualified to buy as well. If that buyer pays money down and later defaults and is found to be unqualified to reasonably perform, they certainly have standing to hold you liable under predatory issues. So, your liability can come from both ends of the deal. Your potential liability exists over the term of the contract and could extend several years beyond. The only way to get out of the woods is to make the deal work and actually close.

Consider your obligation to the end buyer when the due on sale issue surfaces, if not paid off by someone in the deal you are in default to your buyer.

You can not simply create a deed-in-lieu-of-foreclosure (DIL) or hold one and go down and file it and mail a letter to the seller note holder saying "We're out of the deal, we have you the property back"!
The DIL must be accepted by a lender to avoid liability, that lender has the right to seek foreclosure and seek damages. Damages in an installment sale can be avoided with respect to equity financed in the deal, but there can be other damages and the cash funded lender, the underlying mortgagee can seek damages against the maker of that loan, which in turn become damages they may seek against you arising from your default in paying.

Search here concerning seller financing, sub-2 and installment deals.

As to the attorney referrence, I'm calling him to get his permission, which I'm sure would be fine, but I should give him a heads up if I'm passing his name and number out. Contact me by pm as I won't be posting this in the forums. :)

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David Weiss
OP
Investor · Dallas-Ft.Worth, TX · Member since 2013 · 74 posts · 18 votes
13y
Kelvin K., thank you for sharing your thoughts. Your original idea for due diligence was one that I had not thought of, and if the deal on the table were different I would probably follow that advice. :) I'd actually prefer to discuss Sub2 issues rather than mentor issues, but since there is more interest in general about the mentoring offer, let me spell it out.

- I do not have to pay a dime for the mentoring out of pocket.

- Deals will not be in my name.

- I will get a cut of the down payment and possibly a cut of the passive for any deal in which I am involved.

- I will be involved in all deals I bring to the table via my own marketing efforts.

- He may toss me deals as well. For example, if he has too many leads to follow up on he may give me one to pursue. I will get the same cut from those deals as well.

- His LLC will be the entity contracted in both the Sub2 and the Wrap. I will be doing business under his banner.

- The contracts used are per his attorney partner who per my due diligence is a well-regarded RE attorney and investor with over 25 years of experience in DFW. My researche turned up nothing negative about either the potential mentor or the attorney.

- While all the above is going on, he will be teaching me the ropes, the legal considerations, how to use the contracts, etc.

- I will have to sign a non-disclose and non-compete with a two-year lifespan starting from the date of signature. I can do all the rehabs, wholesales, rentals and whatever else I want on my own with no obligation to the mentor whatsoever. The NDNC is specific to Sub2's. If I decide I don't like the model, I can walk away and do my own thing (as long as it doesn't involve Sub2's for 2 years).

The above is the deal on the table. I have not accepted yet and am still considering my options.

My mindset is that I am entitled to a cut for only those deals that my marketing efforts bring to the table, and am not counting on him sending any deals my way. To me, any deals he sends my way are just gravy.

To answer your question about the potential mentor's upside, that is easy: since the DP is just a small portion of the overall profit from a Wrap, I constitute relatively cheap labor. My marketing will also bring additional deals to his table, and he will be able to claim the lion's share of profits from them. He gets deals for $0 marketing dollars.

My upside is mentoring, access to legal docs already vetted by an experienced attorney, the legitimate ability to represent myself as an affiliate of a company with deep experience in these types of deals and the potential to start seeing profits before having to go through the cost and hassle of forming my own LLC or consulting with my own lawyers. Also, I have a mentor whose profits are directly tied to my success, which is a much better deal than most newbies who pay for classical mentoring get. And it is all for zero out-of-pocket cost.

Because I am not paying anything out of pocket for the mentoring and because I will not be a party in either the Sub2 or the Wrap, I do not see too many opportunities for the mentor or the lawyer to screw me over. Worst case scenario, I bring a deal to the table, he closes the deal and then fails to share the profits. If that's their game plan, it's pretty weak as far as cons go, and not even very profitable--they'd be better off financially giving me my cut so that I can continue bringing deals to the table for the remainder of the two years. Not only is there a financial downside to them by taking advantage of me, they're local, and since they also do hard money lending, etc. in the investor community, it would not behoove them for word to spread in DFW that they cheat their partners. My personal risk level in this deal is very acceptable to me.

I have not asked to review his books to determine if the 1500 deals are real, though it's an interesting idea. I have researched the attorney and confirmed his length of doing business. That is good enough for me under the circumstances. If the mentor were going to charge me $10,000 out of pocket for mentoring, I would probably want to review his books to make sure I was getting my money's worth. Since I'm paying him $0, I am content I am getting my money's worth already. ;)

If anyone has any remaining concerns about the mentor deal, please PM me. I appreciate the concern and am cognizant that someone might see something I do not.

That said, I'd like to get this thread focused on Sub2 + Wrap deals, not about mentoring deals. :) Does anyone have anything to add to Jon's thoughts about ways a Sub2+Wrap deal could go sideways? Thanks!
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Brian Fouts
Investor · Fall City, WA · Member since 2013 · 200 posts · 63 votes
13y
I am not certain as to whom you are partnering with, buy may have a pretty good idea. If so, I would agree with a lot of your assessment. The due on sale clause (DOSC) is a good concern, but there are ways to legally address is so that is cannot rear its head in the future (my understanding from the team I work with).

One thing I would check on it what happens when the original loan is sold to another financial entity and does that affect the DOSC. Not sure but a good question to ask.

If the end buyer defaults, you are responsible for the payment (or your partner is) of the original loan, so ensuring that you have the capital to cover that expense while marketing for another buyer is a necessity.

Be very clear with the seller so they understand the deal. They need to understand their ability to get another loan will be affected by their original loan staying in place. There are durations and such that they will want to be aware of. Dodd-Frank addresses some of these durations I believe.

Your way of getting into these types of deals is a lot less riskier that other ways (such as mine), but risk vs reward and all that.
0 Reply
David Weiss
OP
Investor · Dallas-Ft.Worth, TX · Member since 2013 · 74 posts · 18 votes
13y
Bill Gulley, thank you for clarifying that you don't take exception to my ethics. For the most part it has been clear to me that you were questioning the ethics of the mentor or his attorney partner, but the clarification helps.

I am unclear why the passage quoted by Kelvin K. would arouse your ire:
_____

The prospective mentor's agency has completed over 1500 sub2/wrap transactions and only 3 have had "Due on Sale" clauses called. We will have a loan servicing company handling the payments and if the buyer defaults our most likely course of action would be to carry the house and resell it since it's both ethical and financially advantageous. Full transparency around these matters will be provided prior to inking a deal.
_____

If an investor purchased a property Sub2 and sold it via Wrap and the owner/occupant defaulted on payments, why shouldn't the investor make the Sub2 payments out of pocket until a new o/o can be found? Since the Sub2 seller is protected from the default buyer's delinquency by the investor's out-of-pocket spending, in what way is that ethically reprehensible?

We may have to agree to disagree on whether a Sub2 legally obliges the investor to make payments. I have looked on BP to find a definitive answer and cannot find one. Here are two off-BP sites that do:

http://www.lonestarlandlaw.com/subject-to-transactions.html

and

http://www.cleverinvestor.com/education/investing-in-real-estate-creatively/subject-to-sub2/

The opening paragraph of each speaks to this issue. Please note that neither site is associated with my potential mentor or his lawyer.

To be clear I recognize a distinction between what is legal and what is moral. I believe an investor has a moral obligation to make the payments. I think it probably should be a legal obligation as well....

I will PM you for your attorney's contact information, if he/she would like the referral. Thanks!
0 Reply
Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Maybe I missed something, I'm now understanding that the mentor is not an attorney but has an attorney partner, that really plays alot on what I've said before, I had a couple attorney partners before and they were hardly involved at all, perhaps he's a money guy.... Geeez ;)

The "legal" aspect of making the payments to the seller is just as much a legal obligation to pay as the borrower/owner has in paying the bank/lender on the underlying mortgage. The down side to a sub=2 or any wrap type installment contract is that, depending on how payments are structured you may be liable to the seller for damages arising from your failure to pay, unlike a borrower to a lender.

I can't get to the links provided up there, sorry, I can assure you that any site that implies anything differently to what I just said is absolutely incorrect. I hate to be so infatic to put it that way.

David, that servicing company you mentioned, you are aware of what a servicing entity does then. I owned a mortgage company and servicing company and I had the only contract/loan guarantee program for private obligations in the country as far as we could find.

What I have seen is a seller suing a buyer who failed to perform as agreed for damages resulting in a foreclosure (I made the underlying secondary market loan) destroying the seller's credit and the seller was granted an award greater than twice the amount of the sale, a little over 200k! I didn't service the contract. In that matter there was also some rent skimming by the buyer for a few months with the buyer "walking away". I have also seen other cases where the buyer lost due to breach of contract issues, but not as severe as the one mentioned. It's what prompted my loan guarantee servicing program.

Do all sellers sue for breach of contract? No, my guess would be less than 10%, but they can and it is done and they have won damage awards. The risk certainly exists and the thing is, you don't know if it's the 3rd deal you do, the 300th deal or the 3,000th deal, or ever in your career.

Gurus, mentors, coaches and RE investors simply play down the risks saying deals are anywhere between risk free to minimal risk, IMO they don't have a clue as they have not been hammered (yet) or if they have the issue must be denied. Kinda hard to sell your RE program if you're telling others that there are risks and that consequencial damages can be assessed in contracts. Be very aware when a contract includes "loss, cost, expense, damage or judgment including reasonable attorney fees in the collection of same" type verbage and even if it is not recited, it can still be awarded.

As you gain greater insight to RE and the issues, you'll likely not disagree as you might now.

I don't mean to scare folks either, it's more like a glass of cold water tossed in the face to say wake up! If anyone thinks a judge or any jury does not impose thier moral convictions in a court of equity they must be asleep. :)
0 Reply
David Weiss
OP
Investor · Dallas-Ft.Worth, TX · Member since 2013 · 74 posts · 18 votes
13y
Brian Fouts, I would be very curious to hear how your team legally addresses Due on Sale to prevent it from being a future problem. Thanks!
0 Reply
David Weiss
OP
Investor · Dallas-Ft.Worth, TX · Member since 2013 · 74 posts · 18 votes
13y
Bill Gulley,

Apparently "Advanced Reply" is what I need to post active hyperlinks. Here you go:

http://www.lonestarlandlaw.com/subject-to-transactions.html

http://www.cleverinvestor.com/education/investing-in-real-estate-creatively/subject-to-sub2/

I think we may have been on the same page all along but were getting caught up in the terminology.

I acknowledge that an interruption in Sub2 payments exposes the investor to the risk of litigation, and I do not know to what extent good Sub2 documentation constitutes a strong defense.

A possibly useful parallel: adultery is not prima facie illegal in many U.S. states, but it nevertheless exposes you to the risk of being sued for divorce. The same distinction applies with failing to make Sub2 payments.

Anyone can be sued for anything in America, and being in compliance with all regulatory and contractual obligations does not guarantee a successful defense. The only proof against an unfavorable court ruling is to keep your business partners happy enough to not sue you.
0 Reply
Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
LOL, perhaps we are, if you miss payments on you loan to any lender, you don't volate law and go to jail, same with your sub-2 agreement. The best way to conduct business is to keep everyone happy and do what you say you will do, you're right.

You have the attorney's name and number, he's a good one, research the issues and good luck. :)
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