Hello All,
I have been reading many posts, books, blogs, watching many videos, and podcasts for the last year as I build my knowledge on Subject-To investing. I have my lawyer writting my subject-to purchase contract as we speak, and he is not familiar with them. He is partnered with the city attorney so, I figured the seller should be relatively protected in case I default here in Sierra Vista, AZ.
I am asking for expertise, understanding it is not legal advice and to consult a RE attorney etc. I have requested to setup my contracts to inform the seller of the negatives, and try to protect them and myself in the process. Please let me know if I am overlooking anything, or if you have any advice understanding it is not legal advice etc.
The homeowner does not need to be in pre-forclosure, but this would be our primary model. The due-on-sale clause may be exercised by the lender when my LLC or Trust records the deed. The homeowner must be informed of this if applicable in their note. One solution to this would be creating a Trust to record title under, with my LLC as being in control.
When insurance changes, this may also cause an issue. We would like a Special Power of Attorney document signed by the homeowner that gives us full control over the current insurance policy. If there were to be any future claims, we need to ensure the policy payouts go to my LLC since we have picked up payments on everything.
We may also need additional Special Power of Attorneys if we are overlooking something.
These precautions may reduce the chances of the lender exercising the due-on-sale clause.
The homeowner will not be tenants, they will exit the property prior to my LLC taking over payments, paying back taxes, and all penalties and fees if owed.
Another area the homeowner is vulnerable is ensuring payments are being made on their loan. We would like to have a type of escrow account either through the lawyer or title company that would allow the homeowner to view payments being made. Or we want monthly statements to be mailed to the homeowner demonstrating we are holding up our end of the deal.
We are thinking about having the first 6 or 12 months of future PITI payments in the escrow account to demonstrate funds are available and will be used to hold up our end of the deal.
Another issue for the seller is they may not be able to obtain another mortgage since their name already has a current mortgage attached. We would like at least 12 months of taking over their mortgage payments in their name with at least 6 months notice in writing if they want to buy another house in the future. That would give us enough time to refinance the property out of their name, and into ours.
The seller also should have as clear language as possible how to foreclosure on us if we fail to hold up the bargain.
To protect us, we want to be very clear that they will not pursue Bankruptcy protection as that will negatively affect our model. If they pursue Bankruptcy Protection, we again need at least 6 months of notice to give us an opportunity to refinance the property out of their name, and into ours. (Understandably, this is more of a courtesy and really unenforceable)
One of the driving factors for the seller to accept these terms is their credit is being ruined with late payments and being in pre-forclosure. We are providing a solution to pay back all penalties and fees, catch up their payments in order for them to exit the property without taking a foreclosure hit. This will end up improving their credit, so they will be able to buy another house with a mortgage much sooner.
We may offer a few thousand dollars to assist with them moving out of the property, and not requiring any repairs prior to us taking the property.
If you can think of other viable ways to mitigate risk for the seller or ourselves, let me know. Thank you everyone for your time.
